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 June 30, 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 July 24, 2015, there were 37,073,602 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 JUNE 30, 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 FIRM23ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS24ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK43ITEM 4. CONTROLS AND PROCEDURES45PART II. OTHER INFORMATION45ITEM 1. LEGAL PROCEEDINGS45ITEM 1A. RISK FACTORS45ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS47ITEM 3. DEFAULTS UPON SENIOR SECURITIES48ITEM 4. MINE SAFETY DISCLOSURES48ITEM 5. OTHER INFORMATION48ITEM 6. EXHIBITS48SIGNATURES49







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PART I. FINANCIAL INFORMATION


ITEM 1.  FINANCIAL STATEMENTS


MCG Capital Corporation


Consolidated Balance Sheets


(in thousands, except per share amounts)June 30, 2015December 31, 2014(unaudited)AssetsCash and cash equivalents$148,823$105,826Cash, restricted2101,408Investments at fair valueNon-affiliate investments (cost of$27,956and $204,084, respectively)29,33246,096Control investments (cost of$0and$30,556, respectively)—29,236Total investments (cost of$27,956and $234,640, respectively)29,33275,332Interest receivable318396Other assets468835Total assets$179,151$183,797Liabilities$3,014$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 June 30, 2015 and December 31, 2014,37,074issued and outstanding on June 30, 2015 and 38,136issued and outstanding on December 31, 2014371381Paid-in capital858,570862,472Distributions in excess of earnings(684,180)(524,644)Net unrealized appreciation (depreciation) on investments1,376(159,308)Total stockholders’ equity176,137178,901Total liabilities and stockholders’ equity$179,151$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 endedSix months endedJuneJune(in thousands, except per share amounts)2015201420152014RevenueInterest and dividend incomeNon-affiliate investments (less than 5% owned)$1,290$6,985$2,601$14,723Affiliate investments (5% to 25% owned)—1,076—1,889Control investments (more than 25% owned)—7024091,406Total interest and dividend income1,2908,7633,01018,018Advisory fees and other incomeNon-affiliate investments (less than 5% owned)343750577828Control investments (more than 25% owned)—12—25Total advisory fees and other income343762577853Total revenue1,6339,5253,58718,871Operating expenseInterest expense—1,866—3,856Employee compensationSalaries and benefits4431,7731,7502,861Amortization of employee restricted stock awards1451,2482491,554Total employee compensation5883,0211,9994,415General and administrative expense1,2224,0872,0525,726Total operating expense1,8108,9744,05113,997Net operating (loss) income before net investment gain (loss) and income tax provision (benefit)(177)551(464)4,874Net realized gain (loss) on investmentsNon-affiliate investments (less than 5% owned)(159,344)(4,346)(159,109)(8,834)Control investments (more than 25% owned)—11436114Total net realized gain (loss) on investments(159,344)(4,232)(159,073)(8,720)Net unrealized appreciation (depreciation) on investmentsNon-affiliate investments (less than 5% owned)159,372(1,127)159,3652,120Affiliate investments (5% to 25% owned)—(834)—(16,344)Control investments (more than 25% owned)—3591,320(6,028)Other fair value adjustments—15—(102)Total net unrealized appreciation (depreciation) on investments159,372(1,587)160,685(20,354)Net investment gain (loss) before income tax provision (benefit)28(5,819)1,612(29,074)Income tax provision (benefit)1—(1)4Net (loss) income$(150)$(5,268)$1,149$(24,204)Income (loss) per basic and diluted common share$—$(0.09)$0.03$(0.37)Cash distributions declared per common share$—$0.07$—$0.195Weighted-average common shares outstanding—basic and diluted36,71861,22137,21065,286


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)


Six months endedJune(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)$(464)$4,874Net realized (loss) on investments(159,073)(8,720)Net unrealized appreciation (depreciation) on investments160,685(20,354)Income tax benefit (provision)1(4)Net income (loss)1,149(24,204)Distributions to stockholdersDistributions declared from net operating income—(8,578)Distributions declared in excess of net operating income—(4,513)Net decrease in net assets resulting from stockholder distributions—(13,091)Capital share transactionsRepurchase of common stock(4,175)(57,818)Amortization of restricted stock awardsEmployee awards accounted for as employee compensation2491,554Non-employee director awards accounted for as general and administrative expense1828Common stock withheld to pay taxes applicable to the vesting of restricted stock(5)(634)Net decrease in net assets resulting from capital share transactions(3,913)(56,870)Total decrease in net assets(2,764)(94,165)Net assetsBeginning of period178,901333,954End of period$176,137$239,789Net asset value per common share at end of period$4.75$4.42Common shares outstanding at end of period37,07454,252





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)


Six months endedJune(in thousands)20152014Cash flows from operating activitiesNet income (loss)$1,149$(24,204)Adjustments to reconcile net income (loss) to net cash provided by operating activitiesInvestments in portfolio companies(1,056)(8,008)Principal collections related to investment repayments or sales42,162143,788Decrease in interest receivable, accrued payment-in-kind interest and dividends6,5849,023Amortization of restricted stock awardsEmployee2491,554Non-employee director1828Decrease in cash—securitization accounts from interest collections—1,399Decrease (increase) in restricted cash—escrow accounts1,065(934)Depreciation and amortization16523Decrease in other assets351130(Decrease) increase in other liabilities(1,882)1,905Realized loss on investments159,0738,720Net unrealized (appreciation) depreciation on investments(160,685)20,354Net cash provided by operating activities47,044154,278Cash flows from financing activitiesRepurchase of common stock(4,175)(57,818)Payments on borrowings—(25,172)Proceeds from borrowings—4,513Decrease (increase) in cash in restricted and securitization accountsSecuritization accounts for repayment of principal on debt—12,479Restricted cash133(96,774)Distributions paid—(13,091)Common stock withheld to pay taxes applicable to the vesting of restricted stock(5)(634)Net cash used in financing activities(4,047)(176,497)Net increase (decrease) in cash and cash equivalents42,997(22,219)Cash and cash equivalentsBeginning balance105,82691,598Ending balance$148,823$69,379Supplemental disclosure of cash flow informationInterest paid$—$3,522Income taxes paid117—Paid-in-kind interest accrued136881Paid-in-kind interest collected24210,473Dividend income collected6,401326


The accompanying notes are an integral part of these Condensed Consolidated Financial Statements
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MCG Capital CorporationConsolidated Schedule of InvestmentsJune 30, 2015(dollars in thousands)Interest Rate(4)Fair ValuePortfolio CompanyIndustryInvestmentCurrentPIKTotalPrincipalCostNon-Affiliate Investments (less than 5% owned):GMC Television Broadcasting, LLC(1)BroadcastingSenior Debt (Due 12/16)4.3%—4.3%3,7021,4002,776Pharmalogic Holdings Corp.HealthcareSenior Debt (Due 12/17)8.5%—8.5%17,50017,50017,500South Bay Mental Health Center, Inc.HealthcareSubordinated Debt (Due 10/17)(5)12.0%2.5%14.5%9,1459,0569,056Total Investments$27,956$29,332


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.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) | In July 2015, South Bay repaid in full our subordinated loan.




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 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, subject to the satisfaction of the conditions to closing.


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 June 30, 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, 2017, 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 BASISJune 30, 2015December 31, 2014June 30, 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$18,90067.6%$39,23716.7%$20,27669.1%$40,56253.8%Subordinated secured debt9,05632.422,4609.69,05630.922,46029.8Total debt investments27,956100.061,69726.329,332100.063,02283.6Equity investmentsPreferred——13,3645.7——12,04416.0Common/common equivalents——159,57968.0——2660.4Total equity investments——172,94373.7——12,31016.4Total investments$27,956100.0%$234,640100.0%$29,332100.0%$75,332100.0%


As of June 30, 2015 , our portfolio consisted of debt investments in three companies as described below.


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|• | GMC Television Broadcasting, LLC, or GMC, is a broadcasting company.  Our senior debt investment in GMC carried a 4.3% interest rate that varied based on the LIBOR benchmark or the prime rate.

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|• | Pharmalogic Holdings Corp., or Pharmalogic, is a healthcare company.  Our senior debt investment in Pharmalogic carried an 8.5% interest rate that varied based on the LIBOR benchmark or the prime rate.  The interest rate had LIBOR and prime rate floors of 2.0%.

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|• | South Bay Mental Health Center, Inc., or South Bay, is a healthcare company.  Our subordinated secured debt investment in South Bay carried a 14.5% interest rate comprised of a 12.0% current pay interest and 2.5% paid-in-kind, or PIK, interest.  In July 2015, South Bay repaid in full.

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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 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 June 30, 2015 and December 31, 2014 , our portfolio contained no loans that were more than 90 days past due or on non-accrual status.


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 six months ended June 30, 2015 , we made advances to our portfolio companies of $0.8 million and no originations.


As of June 30, 2015 , we have commitments to invest an additional $1.0 million to our portfolio companies.  See Note 10—Commitments and Contingencies.


NOTE 3—FAIR VALUE MEASUREMENT


We account for our investments in portfolio companies under Accounting Standard Codification Topic 820—Fair Value Measurements and Disclosures, or ASC 820.  ASC 820 defines fair value, establishes a framework for measuring fair value and expands disclosures about assets and liabilities measured at fair value.  ASC 820 defines “fair value” as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.  This fair value definition focuses on exit price in the principal, or most advantageous, market and prioritizes, within a measurement of fair value, the use of market-based inputs over entity-specific inputs.


Fair Value Hierarchy


ASC 820 establishes the following three-level hierarchy, based upon the transparency of inputs to the fair value measurement of an asset or liability as of the measurement date:


ASC 820 Fair Value 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


As of June 30, 2015 , our entire portfolio of investments were Level 3 assets under ASC 820.  Cash and cash equivalents were carried at cost which approximates fair value and were Level 1 assets.  Interest receivable was carried at cost which approximated fair value.


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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 June 30, 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 ofJune 30, 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 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 ofJune 30, 2015, our entire investment portfolio was comprised of non-control investments.  Quoted prices were not available for our non-control investments as ofJune 30, 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—As ofJune 30, 2015, we had no thinly traded or 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).  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 June 30, 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.


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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 the 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 and six months ended June 30, 2015 , there were no transfers in or out of Level 1, 2 or 3.  During the three and six months ended June 30, 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 June 30, 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 InvestmentsTotalFair value as of March 31, 2015Senior secured debt$40,908$40,908Subordinated secured debt8,9918,991Total fair value as of March 31, 201549,89949,899Realized/unrealized gain (loss)Senior secured debt2828Total realized/unrealized gain2828IssuancesSenior secured debt532532Subordinated secured debt6565Total issuances597597SettlementsSenior secured debt(21,192)(21,192)Total settlements(21,192)(21,192)Fair value as of June 30, 2015Senior secured debt20,27620,276Subordinated secured debt9,0569,056Total fair value as of June 30, 2015$29,332$29,332


There were no purchases of level 3 investments during the three months ended June 30, 2015 .


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The following table provides a reconciliation of fair value changes during the three -month period ended June 30, 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 March 31, 2014Senior secured debt$108,196$36,769$19,851$164,816Subordinated 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, 2014235,31341,55737,609314,479Realized/unrealized gain (loss)Senior secured debt(1,278)(833)13(2,098)Subordinated secured debt(4,037)——(4,037)Preferred equity51—347398Common/common equivalents equity202(1)—201Total realized/unrealized gain (loss)(5,062)(834)360(5,536)IssuancesSenior secured debt2,19750172,264Subordinated secured debt554—83637Unsecured subordinated debt607——607Preferred equity201——201Total issuances3,559501003,709SettlementsSenior secured debt(13,942)(2,336)(3,144)(19,422)Subordinated secured debt(23,804)——(23,804)Unsecured subordinated debt(20,547)——(20,547)Total settlements(58,293)(2,336)(3,144)(63,773)SalesSenior secured debt(45,492)——(45,492)Subordinated secured debt(9,534)——(9,534)Preferred equity(543)——(543)Common/common equivalents equity(406)——(406)Total sales(55,975)——(55,975)TransfersCommon/common equivalents equity(475)——(475)Total transfers(475)——(475)Fair value as of June 30, 2014Senior secured debt49,68133,65016,737100,068Subordinated secured debt42,384—11,00553,389Unsecured subordinated debt22,821——22,821Preferred equity2,5893,2757,18313,047Common/common equivalents equity1,5921,512—3,104Total fair value as of June 30, 2014$119,067$38,437$34,925$192,429


There were no purchases of level 3 investments during the three months ended June 30, 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 June 30, 2015 and 2014 :


Three months ended June 30, 2015Three months ended June 30, 2014(in thousands)Non-affiliate InvestmentsAffiliate InvestmentsControl InvestmentsTotalNon-affiliate InvestmentsAffiliate InvestmentsControl InvestmentsTotalChange in unrealized appreciation (depreciation)Senior secured debt$28$—$—$28$(1,452)$(833)$12$(2,273)Subordinated secured debt————————Preferred equity————9—347356Common/common equivalents equity————209(1)—208Total change in unrealized appreciation (depreciation) on Level 3 investments$28$—$—$28$(1,234)$(834)$359$(1,709)


The following table provides a reconciliation of fair value changes during the six months ended June 30, 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 debt186—186Subordinated secured debt100—100Preferred equity—1,3571,357Total realized/unrealized gain2861,3571,643IssuancesSenior secured debt18,047(17,192)855Subordinated secured debt337—337Total issuances18,384(17,192)1,192SettlementsSenior secured debt(21,327)—(21,327)Subordinated secured debt(13,841)—(13,841)Total settlements(35,168)—(35,168)SalesPreferred equity—(13,401)(13,401)Total sales—(13,401)(13,401)Fair value as of June 30, 2015Senior secured debt20,276—20,276Subordinated secured debt9,056—9,056Total fair value as of June 30, 2015$29,332$—$29,332


There were no purchases of level 3 investments during the six months ended June 30, 2015 .


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The following table provides a reconciliation of fair value changes during the six months ended June 30, 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 debt(1,172)(15,809)(36)(17,017)Subordinated secured debt(4,070)——(4,070)Preferred equity(1,190)(381)(5,992)(7,563)Common/common equivalents equity(31)(153)—(184)Total realized/unrealized gain (loss)(6,463)(16,343)(6,028)(28,834)IssuancesSenior secured debt6,699570277,296Subordinated secured debt1,856—1642,020Unsecured subordinated debt916——916Preferred equity321——321Total issuances9,79257019110,553SettlementsSenior secured debt(16,028)(2,582)(3,146)(21,756)Subordinated secured debt(43,365)——(43,365)Unsecured subordinated debt(20,547)——(20,547)Preferred equity(64)——(64)Total settlements(80,004)(2,582)(3,146)(85,732)SalesSenior secured debt(45,492)——(45,492)Subordinated secured debt(9,534)——(9,534)Preferred equity(4,739)——(4,739)Common/common equivalents equity(406)——(406)Total sales(60,171)——(60,171)TransfersCommon/common equivalents equity(475)——(475)Total transfers(475)——(475)Fair value as of June 30, 2014Senior secured debt49,68133,65016,737100,068Subordinated secured debt42,384—11,00553,389Unsecured subordinated debt22,821——22,821Preferred equity2,5893,2757,18313,047Common/common equivalents equity1,5921,512—3,104Total fair value as of June 30, 2014$119,067$38,437$34,925$192,429


There were no purchases of level 3 investments during the six months ended June 30, 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 six months ended June 30, 2015 and 2014 :


Six months ended June 30, 2015Six months ended June 30, 2014(in thousands)Non-affiliate InvestmentsAffiliate InvestmentsControl InvestmentsTotalNon-affiliate InvestmentsAffiliate InvestmentsControl InvestmentsTotalChange in unrealized appreciation (depreciation)Senior secured debt$51$—$—$51$(1,346)$(15,809)$(37)$(17,192)Subordinated secured debt————(33)——(33)Preferred equity——1,3201,3202,728(381)(5,992)(3,645)Common/common equivalents equity————506(153)—353Total change in unrealized appreciation (depreciation) on Level 3 investments$51$—$1,320$1,371$1,855$(16,343)$(6,029)$(20,517)


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, our investment portfolio is composed of complex debt 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 June 30, 2015 :


($ in thousands)Fair ValueValuation TechniquesUnobservable InputsRangeWeighted AverageMinimumMaximumSenior debt$20,276Discounted Cash FlowMarket Interest Rate6.5%6.5%6.5%Pending TransactionsPending TransactionsN/AN/AN/ASubordinated debt9,056Discounted Cash FlowMarket Interest Rate14.5%14.5%14.5%$29,332


NOTE 4—CONCENTRATIONS OF INVESTMENT RISK


As of June 30, 2015 , $26.6 million , or 90.5% , of our portfolio at fair value was invested in companies in the healthcare industry.  As of June 30, 2015 , our total assets were $179.2 million .  Investments at fair value in the healthcare industry were 14.8% of our total assets.


NOTE 5—BORROWINGS


As of June 30, 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 six months ended June 30, 2014 , we had the following borrowing facilities:


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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 six months ended June 30, 2015 .


Six months ended June 30, 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 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


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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 June 30, 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 six months ended June 30, 2015 and 2014 , no shares of restricted stock were issued under the 2006 Plan.


During each of the six months ended June 30, 2015 and 2014 , we recognized $0.2 million and $1.6 million, respectively, of compensation expense related to share-based compensation awards.  As of June 30, 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 June 30, 2015 , we had $0.3 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 0.75 years.


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 six months ended June 30, 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 six months ended June 30, 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 June 30, 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 0.75 years.


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Summary of Employee and Non-Employee Director Share-Based Compensation


The forfeiture provisions for the restricted stock will lapse on the earliest of a change of control or March 2016.  The following table summarizes our restricted stock award activity during the six months ended June 30, 2015 :


SharesWeighted-Average Grant Date Fair Value per ShareSubject to forfeiture provisions as of December 31, 2014368,120$4.45Awarded—$—Forfeiture provision satisfied(13,120)$4.89Forfeited—$—Subject to forfeiture provisions as of June 30, 2015355,000$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 six months ended June 30, 2015 , we recorded an income tax benefit of less than $0.1 million, which was primarily attributable to refunds received by one of our Taxable Subsidiaries.  During the six months ended June 30, 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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|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.”

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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 Internal Revenue 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 June 30, 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 June 30, 2015 .  As of June 30, 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 six months ended June 30, 2015 and for the tax years ended December  31, 2014, 2013, 2012 and 2011, we have total net capital losses of $267.9  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.


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NOTE 9—EARNINGS PER SHARE


The following table sets forth the computation of basic and diluted income per common share for the three and six months ended June 30, 2015 and 2014 :


(dollars in thousands, except per share amounts)Three months ended June 30,Six months ended June 30,2015201420152014Numerator for basic and diluted earnings per shareNet (loss) income$(150)$(5,268)$1,149$(24,204)Less: Dividends declared—common and restricted shares—(4,402)—(13,091)Undistributed (loss) income(150)(9,670)1,149(37,295)Percentage allocated to common shares(a)100.0%100.0%99.0%100.0%Undistributed earnings—common shares(150)(9,670)1,138(37,295)Add: Dividends declared—common shares—4,402—13,091Numerator for common shares outstanding excluding participating shares(150)(5,268)1,138(24,204)Numerator for participating unvested shares only——11—Numerator for basic and diluted earnings per share—total$(150)$(5,268)$1,149$(24,204)Denominator for basic and diluted weighted-average shares outstandingCommon shares outstanding36,71861,22136,84865,286Participating unvested shares(b)——362—Basic and diluted weighted-average common shares outstanding—total36,71861,22137,21065,286Earnings (loss) per share—basic and dilutedExcluding participating unvested shares$—$(0.09)$0.03$(0.37)Including participating unvested shares$—$(0.09)$0.03$(0.37)(a)Basic and diluted weighted-average common shares:Weighted-average common shares outstanding36,71861,22136,84865,286Weighted-average restricted shares(b)——362—Total basic and diluted weighted-average common shares36,71861,22137,21065,286Percentage allocated to common shares100.0%100.0%99.0%100.0%(b)For the three months ended June 30, 2015 and the three and six months ended June 30, 2014, we excluded 357, 510 and 702 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.


In connection with our proposed merger with PennantPark, we are a party to a consolidated class action stockholder lawsuit.  Six complaints were filed by stockholders challenging the merger between May 6, 2015, and May 18, 2015, in the Delaware Court of Chancery.  The complaints were consolidated and on June 10, 2015, a consolidated class action complaint was filed.  The consolidated complaint alleges that MCG’s directors violated their fiduciary duties by, among other things, not protecting against their supposed conflicts of interest and failing to take steps to maximize the consideration to be received by MCG’s stockholders in the Merger.  The consolidated complaint also alleges that PennantPark and its affiliated entities have aided and abetted the MCG directors’ purported breach of fiduciary duties.


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The complaint demands, among other things, a preliminary and permanent injunction against the Merger and rescission of the transaction to the extent that it has been implemented.  MCG believes that the consolidated complaint is without merit.


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 June 30, 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 June 30, 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 June 30, 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 June 30, 2015 , our obligation for the remaining term of the lease is $0.3 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 six months ended June 30, 2015 and 2014 : Six months ended(in thousands, except per share amounts)June20152014Per 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)0.07Net realized loss on investments(4.28)(0.13)Net unrealized appreciation (depreciation) on investments4.32(0.31)Net income (loss)0.03(0.37)Net decrease in net assets resulting from distributionsDistributions declared from net operating income—(0.13)Distributions declared in excess of net operating income—(0.07)Net decrease in net assets resulting from distributions—(0.20)Net increase in net assets relating to stock-based transactionsRepurchase of common stock(b)0.020.20Net increase in stockholders’ equity from restricted stock amortization(b)0.010.02Net increase in stockholders’ equity from other stock transactions(b)—0.03Net increase in net assets relating to stock-based transactions0.030.25Net asset value at end of period(a)4.754.42Market price per shareBeginning of period$3.83$4.26End of period$4.56$3.92Total Return(c)19.06%-3.40%Shares of Common Stock OutstandingWeighted-average—basic and diluted37,21065,286End of period37,07454,252Net assetsAverage$176,012$296,338End of period$176,137$239,789Ratios (annualized)Operating expenses to average net assets4.64%9.52%Net operating income to average net assets-0.53%3.32%General and administrative expense to average net assets2.35%3.90%Return on average equity1.32%-16.48%__________________(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 six months ended June 30, 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 was a nuclear compounding pharmacy for regional hospitals and imaging centers.  During the six months ended June 30, 2014 , we recognized $1.1 million of total revenue from our investment in RadioPharmacy.  The following table sets forth summarized balance sheet information for RadioPharmacy as of June 30, 2014 .


(in thousands)June 30, 2014(unaudited)Assets:Total current assets$6,431Total non-current assets19,677Total assets$26,108Liabilities and Stockholders' Equity:Current liabilities$3,612Long-term liabilities19,806Preferred stock1Other stockholders' equity2,689Total liabilities and stockholders' equity$26,108


The following table sets forth summarized income statement information for RadioPharmacy for the six months ended June 30, 2014 .


Six months ended June 30,(in thousands)2014(unaudited)Sales$13,467Gross margin$8,062Net income$470





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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 June 30, 2015 , the related consolidated statements of operations, for the three- and six -month periods ended June 30, 2015 and 2014 , and the related consolidated statements of changes in net assets, cash flows and financial highlights for the six -month periods ended June 30, 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


July 28, 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; the ability of the parties to consummate the transaction with PennantPark on the expected timeline (or at all); the failure of PennantPark or MCG stockholders to approve the proposed merger; the ability to realize the anticipated benefits of the transaction; the effects of disruption on the companies’ business from the proposed merger; the actual premium to adjusted net asset value paid in the merger, if any; the actual market capitalization of the combined company; the effect that the announcement or consummation of the merger may have on the trading price of the common stock of PennantPark or MCG; the combined company’s plans, expectations, objectives, performance, operations and intentions; the amount or timing of any dividends that may be paid by the combined company; the proposal made by HC2 Holdings, Inc. (“HC2”); any regulatory action which may or may not be taken with respect to the proposed merger or the proposal made by HC2; any decision by MCG to pursue continued operations, a liquidation or an alternative transaction upon the termination of any merger agreement; changes in MCG’s net asset value in the future; fees and expenses incurred by MCG in connection with a liquidation; the value of MCG’s assets in a liquidation; the timeline to complete a liquidation; any changes to MCG’s listing, registration, management or board of directors in a liquidation; the outcome of any stockholder litigation relating to the transaction or any other litigation to which MCG is a party; any other alternative proposed transactions and any potential termination of the merger agreement; the actions of MCG stockholders with respect to any proposed transactions; 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


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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.


RECENT DEVELOPMENTS — Q2 2015


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|• | Originations and Advances- We made $0.4 million in advances to existing portfolio companies, which were repaid in the second quarter of 2015.

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|• | Loan Monetizations- We received $21.2 million in loan payoffs and amortization payments, principally from the $14.1 million monetization of C7 Data Centers, Inc. and a $6.5 million pay-down of GMC Television Broadcasting, LLC, or GMC.  In addition, South Bay Mental Health Center, Inc., or South Bay, repaid in full our subordinated loan in July 2015 and we received indications from Pharmalogic Holdings Corp., or Pharmalogic, of their intention to repay their loan in full in the third quarter of 2015.

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|• | Exit of Equity Investment- We sold our last equity investment, Broadview Networks Holdings, Inc. for $0.2 million, an amount equal to our prior valuation.

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|• | Asset Quality -As of June 30, 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).

MERGER TRANSACTION


On April 28, 2015, following an auction process, we and PennantPark Floating Rate Capital Ltd., or PennantPark, two of its wholly-owned subsidiaries and, solely for limited purposes, its investment advisor, entered into a definitive merger agreement under which PennantPark will acquire MCG in a stock and cash transaction currently valued at approximately $175 million, or approximately $4.75 per MCG common share.


If the merger is completed, holders of MCG common stock will have the right to receive $4.521 in shares of PennantPark common stock for each share of MCG common stock held immediately prior to the merger, as well as $0.226 in cash consideration (subject to upward adjustment based on the market price of PennantPark common stock).


The PennantPark offer price of $4.75 per MCG share represents a 57% premium to MCG"s 52-week low, 25% premium from the date MCG announced an intention to explore strategic alternatives and 15.8% premium to MCG's closing stock price of $4.10 the day before the merger announcement.


A special meeting of stockholders is scheduled to be held on August 14, 2015 at which MCG stockholders will be asked to vote on the merger.


The merger agreement 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 June 30, 2015 , we had $148.8 million of cash and cash equivalents available for general corporate purposes and $0.2 million of restricted cash held in escrow.  We expect our cash per share to increase in 2015 as investments monetize.


In July 2015, South Bay repaid in full our subordinated loan.  In addition, based on conversations with Pharmalogic, we expect to monetize our investment at par in the quarter ended September 30, 2015.


PORTFOLIO COMPOSITION AND INVESTMENT ACTIVITY


As of June 30, 2015 , the fair value of our investment portfolio was $29.3 million , which represents a $46.0 million , or 61.1% , 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 June 30, 2015 and key changes in our portfolio during the six months ended June 30, 2015 .


Portfolio Composition


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


June 30, 2015December 31, 2014(dollars in thousands)Investments at Fair ValuePercent of Total PortfolioInvestments at Fair ValuePercent of Total PortfolioDebt investmentsSenior secured debt$20,27669.1%$40,56253.8%Subordinated secured debt9,05630.922,46029.8Total debt investments29,332100.063,02283.6Equity investmentsPreferred equity——12,04416.0Common/common equivalents equity——2660.4Total equity investments——12,31016.4Total investments$29,332100.0%$75,332100.0%


As of June 30, 2015 , our portfolio consisted of debt investments in three companies as described below.


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|• | GMC is a broadcasting company.  Our senior debt investment in GMC carried a 4.3% interest rate that varied based on the LIBOR benchmark or the prime rate.

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|• | Pharmalogic is a healthcare company.  Our senior debt investment in Pharmalogic carried an 8.5% interest rate that varied based on the LIBOR benchmark or the prime rate.  The interest rate had LIBOR and prime rate floors of 2.0%.

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|• | South Bay is a healthcare company.  Our subordinated secured debt investment in South Bay carried a 14.5% interest rate comprised of a 12.0% current pay interest and 2.5% paid-in-kind, or PIK, interest.  In July 2015, South Bay repaid in full.

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.


As of June 30, 2015 , $26.6 million , or 90.5% , of our portfolio at fair value was invested in companies in the healthcare industry.  As of June 30, 2015 , our total assets were $179.2 million .  Investments at fair value in the healthcare industry were 14.8% of our total assets.


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Changes in Investment Portfolio


The following table summarizes our total portfolio investment activity during the six months ended June 30, 2015 and 2014 :


Six months ended(in thousands)June20152014Beginning investment portfolio$75,332$368,873Originations and advances7919,366Gross payments, reductions and sales of securities(48,805)(154,587)Net realized gain (loss)(159,073)(8,719)Unrealized depreciation21(24,949)Reversals of unrealized depreciation160,6644,698Origination fees and amortization of unearned income4021,393Ending investment portfolio$29,332$196,075


Originations and Advances


The following table shows our originations and advances during the six months ended June 30, 2015 and 2014 by security type:


Six months ended June 30,20152014(dollars in thousands)Amount% of TotalAmount% of TotalDebt investmentsSenior secured debt$65482.7%$6,45168.9%Subordinated debtSecured13717.31,85419.8Unsecured——5385.8Total debt investments791100.08,84394.5Equity investmentsPreferred equity——5235.5Total equity investments——5235.5Total originations and advances$791100.0%$9,366100.0%


Additionally, in connection with the sale of Pharmalogic, 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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Repayments, Sales and Other Reductions of Investment Portfolio


The following table shows our gross payments, reductions and sales of securities during the six months ended June 30, 2015 and 2014 by security type:


Six months ended June 30,20152014(dollars in thousands)Amount% of TotalAmount% of TotalDebt investmentsSenior secured debt$21,32743.7%$75,44848.8%Subordinated debtSecured13,84228.452,89834.2Unsecured——20,54713.3Total debt investments35,16972.1148,89396.3Equity investmentsPreferred equity13,40127.45,2883.4Common/common equivalents equity2350.54060.3Total equity investments13,63627.95,6943.7Total gross payments, reductions and sales of securities$48,805100.0%$154,587100.0%


During the six months ended June 30, 2015 and 2014 , our gross payments, reductions and sales of securities by transaction type included:


Six months ended June 30,(in thousands)20152014Principal repayments, reductions and loan sales$27,578$128,658Sale of equity investments7,2355,369Scheduled principal amortization7,3499,761Collection of accrued paid-in-kind interest and dividends6,64310,799Total gross payments, reductions and sales of securities$48,805$154,587


As shown in the following table, during the six months ended June 30, 2015 , we monetized 5 portfolio investments with proceeds totaling $41.5 million:


Six months endedJune 30, 2015(in thousands)Principal Repayments and Proceeds from Loan SalesSale or Settlement of Equity InvestmentsPIK Interest and Dividend PrepaymentsTotalMonetizationsC7 Data Centers, Inc.$14,078$—$—$14,078RadioPharmacy Investors, LLC—7,0006,40113,401Industrial Safety Technologies, LLC7,000—2427,242Intrafusion Holdings, Inc.6,500——6,500Broadview Networks Holdings, Inc.—235—235Total monetizations27,5787,2356,64341,456Other scheduled payments7,349——7,349Total gross payments, sales and other reductions of investment portfolio$34,927$7,235$6,643$48,805


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


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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


As of June 30, 2015 , all three of our investments had an investment rating of 3.  In July 2015, South Bay repaid in full our subordinated loan.  In addition, based on conversations with Pharmalogic, we expect to monetize our investment at par in the quarter ended September 30, 2015.


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 June 30, 2015 and December 31, 2014 , our portfolio contained no loans that were more than 90 days past due or on non-accrual status.


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Results of Operations


The following section compares our results of operations for the three months ended June 30, 2015 to the three months ended June 30, 2014 .


COMPARISON OF THE THREE MONTHS ENDED JUNE 30, 2015 AND 2014


The following table summarizes the components of our net income for the three months ended June 30, 2015 and 2014 :


Three months ended June 30,Variance(dollars in thousands)20152014$PercentageRevenueInterest and dividend incomeInterest income$1,098$7,562$(6,464)(85.5)%Dividend income—75(75)(100.0)Loan fees1921,126(934)(82.9)Total interest and dividend income1,2908,763(7,473)(85.3)Advisory fees and other income343762(419)(55.0)Total revenue1,6339,525(7,892)(82.9)Operating expensesInterest expense—1,866(1,866)(100.0)Employee compensationSalaries and benefits4431,773(1,330)(75.0)Amortization of employee restricted stock1451,248(1,103)(88.4)Total employee compensation5883,021(2,433)(80.5)General and administrative expense1,2224,087(2,865)(70.1)Total operating expense1,8108,974(7,164)(79.8)Net operating (loss) income before net investment gain (loss) and income tax provision (benefit)(177)551(728)NMNet investment gain (loss) before income tax provision (benefit)28(5,819)5,847NMIncome tax provision (benefit)1—1NMNet (loss) income$(150)$(5,268)$5,118NMNM=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 June 30, 2015 from the three months ended June 30, 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 June 30, 2015 , the total yield on our average debt portfolio at fair value was 11.4% compared to 12.4% during the three months ended June 30, 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.


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The following table shows the various components of the total yield on our average debt portfolio at fair value for the three months ended June 30, 2015 and 2014 :


Three months ended June 30,20152014Average 90-day LIBOR0.3%0.2%Spread to average LIBOR on average loan portfolio9.611.6Impact of fee accelerations of unearned fees on paid/restructured loans1.51.0Impact of non-accrual loans—(0.4)Total yield on average loan portfolio11.4%12.4%


During the three months ended June 30, 2015 , interest income was $1.1 million , compared to $7.6 million during the three months ended June 30, 2014 , which represented a $6.5 million , or 85.5% , decrease .  This decrease reflected a $5.7 million decrease in interest income resulting from an 83.8% decrease in our average loan balance and a $0.9 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 June 30, 2015 and 2014 , at cost :


Three months ended June 30,(in thousands)20152014Beginning PIK loan balance$1,544$11,717PIK interest earned during the period57881Payments received from PIK loans—(8,413)Realized loss—(129)Ending PIK loan balance$1,601$4,056


As of June 30, 2015 , all of our PIK loans were accruing interest and as of June 30, 2014 , we were not accruing interest on $1.0 million of the PIK loans, at cost, shown in the preceding table.  During the three months ended June 30, 2014 , the payments received from PIK loans included $5.3 million collected in conjunction with the repayment of our loan to Cruz Bay Publishing, Inc., $1.5 million collected in conjunction with the sale of our loan to SC Academy Holdings, Inc. and $0.9 million collected in conjunction with the repayment of our loan to West World Media, LLC.


In July 2015, South Bay repaid in full our subordinated loan including $0.4 million of PIK loan.  In addition, based on conversations with Pharmalogic, we expect to monetize our investment at par in the quarter ended September 30, 2015, which we expect to result in the payoff of the outstanding PIK loan balance.


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 June 30, 2015 , we recognized no dividend income.  During the three months ended June 30, 2014 , we recognized $0.1 million of dividend income.  As of June 30, 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


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services provided.  During the three months ended June 30, 2015 , we earned $0.3 million of advisory fees and other income, which represented a $0.4 million , or 55.0% , decrease from the three months ended June 30, 2014 .  This decrease resulted principally from fewer loan prepayment fees in the second 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 June 30, 2015 and December 31, 2014 , we had no outstanding borrowings or borrowing facilities.  During the three months ended June 30, 2014 , we incurred $1.9 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.  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%.


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 June 30, 2015 , our employee compensation expense was $0.6 million , which represented an 80.5%  decrease from the same period in June 30, 2014 .  Our salaries and benefits expense decrease d by $1.3 million , or 75.0% , due to a $1.0 million decrease in incentive compensation and a $0.3 million decrease in base salaries and benefits.  As of June 30, 2015 , we had five employees compared to 13 employees as of June 30, 2014 .  Amortization of employee stock awards decreased $1.1 million , or 88.4% .  Amortization of employee stock awards for the three months ended June 30, 2014 included $1.1 million of accelerated amortization related to the retirement of our former chief executive officer and other employee terminations.


GENERAL AND ADMINISTRATIVE


During the three months ended June 30, 2015 , general and administrative expense was $1.2 million , which represented a $2.9 million , or 70.1% , decrease compared to the same period in 2014 .


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|• | General and administrative expense decreased $2.3 million due to a decrease in severance costs related to employee terminations.  General and administrative expense for thethree months ended June 30, 2014included $2.5 million in severance related to the retirement of our former chief executive officer and other employee terminations.

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|• | General and administrative expense decreased $0.5 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.

|  |                                                                                                                                                                                                    
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|• | General and administrative expense also decreased $0.2 million due to decreases in audit and accounting fees and tax and licensing costs offset by a $0.1 million increase in corporate legal fees.

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NET INVESTMENT GAIN (LOSS) BEFORE INCOME TAX PROVISION


During the three months ended June 30, 2015 , we recorded $28,000 of net investment gain before income tax provision (benefit), compared to $5.8 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 June 30, 2015 :


Three months ended June 30, 2015(in thousands)IndustryTypeRealized Gain/(Loss)Unrealized (Depreciation)/ AppreciationReversal of Unrealized Depreciation/ (Appreciation)Net (Loss)/ GainPortfolio CompanyBroadview Networks Holdings, Inc.CommunicationsNon-Affiliate$(159,344)$—$159,344$—Other (< $1.0 million net gain (loss))—28—28Total$(159,344)$28$159,344$28


In April, 2015, we sold our equity investments in Broadview Networks Holdings, Inc. for $235 thousand resulting in a realized loss of $159.3 million and a reversal of previously recorded unrealized depreciation of $159.3 million.


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 June 30, 2014 :


Three months ended June 30, 2014(in thousands)IndustryTypeRealized Gain/(Loss)Unrealized (Depreciation)/ AppreciationReversal of Unrealized Depreciation/ (Appreciation)Net (Loss)/ GainPortfolio CompanySC Academy Holdings, Inc.EducationNon-Affiliate$(4,037)$—$—$(4,037)Oceans Acquisition, Inc.HealthcareNon-Affiliate—(1,491)—(1,491)Other (< $1.0 million net gain (loss)(195)(270)174(291)Total$(4,232)$(1,761)$174$(5,819)


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|• | In the second quarter of 2014, we sold our subordinated debt investment in SC Academy Holdings, Inc. for net proceeds of $11.1 million resulting in a realized loss of $4.0 million.

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|• | We also recorded $1.5 million of unrealized depreciation on our investment in Oceans Acquisition, Inc. to reflect a decrease in that portfolio company's operating performance.

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COMPARISON OF THE SIX MONTHS ENDED JUNE 30, 2015 AND 2014


The following table summarizes the components of our net income for the six months ended June 30, 2015 and 2014 :


Six months ended June 30,Variance(dollars in thousands)20152014$PercentageRevenueInterest and dividend incomeInterest income$2,605$16,315$(13,710)(84.0)%Dividend income—225(225)(100.0)Loan fees4051,478(1,073)(72.6)Total interest and dividend income3,01018,018(15,008)(83.3)Advisory fees and other income577853(276)(32.4)Total revenue3,58718,871(15,284)(81.0)Operating expensesInterest expense—3,856(3,856)(100.0)Employee compensationSalaries and benefits1,7502,861(1,111)(38.8)Amortization of employee restricted stock2491,554(1,305)(84.0)Total employee compensation1,9994,415(2,416)(54.7)General and administrative expense2,0525,726(3,674)(64.2)Total operating expense4,05113,997(9,946)(71.1)Net operating income before net investment (loss) gain and income tax provision(464)4,874(5,338)NMNet investment (loss) gain before income tax provision1,612(29,074)30,686NMIncome tax provision (benefit)(1)4(5)NMNet (loss) income$1,149$(24,204)$25,353NMNM=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 six months ended June 30, 2015 from the six months ended June 30, 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 six months ended June 30, 2015 , the total yield on our average debt portfolio at fair value was 11.6% compared to 11.9% during the six months ended June 30, 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, fee 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 six months ended June 30, 2015 and 2014 :


Six months ended June 30,20152014Average 90-day LIBOR0.3%0.2%Spread to average LIBOR on average loan portfolio9.911.9Impact of fee accelerations of unearned fees on paid/restructured loans1.40.5Impact of non-accrual loans—(0.7)Total yield on average loan portfolio11.6%11.9%


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During the six months ended June 30, 2015 , interest income was $2.6 million , compared to $16.3 million during the six months ended June 30, 2014 , which represented a $13.7 million , or 84.0% , decrease .  This decrease reflected a $12.4 million decrease in interest income resulting from an 82.6% decrease in our average loan balance and a $1.4 million decrease in interest income attributable to a decrease in our net spread to LIBOR.


PIK Income


The following table shows the PIK-related activity for the six months ended June 30, 2015 and 2014 , at cost :


Six months ended June 30,(in thousands)20152014Beginning PIK loan balance$1,707$12,132PIK interest earned during the period1362,526Payments received from PIK loans(242)(10,473)Realized loss—(129)Ending PIK loan balance$1,601$4,056


During six months ended June 30, 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 six months ended June 30, 2014 , the payments received from PIK loans included $5.3 million collected in conjunction with the repayment of our loan to Cruz Bay Publishing, Inc., $2.1 million related to the repayment in full of our loan to G&L Investment Holdings, LLC, $1.5 million collected in conjunction with the sale of our loan to SC Academy Holdings, Inc. and $0.9 million collected in conjunction with the repayment of our loan to West World Media, LLC.


In July 2015, South Bay repaid in full our subordinated loan including $0.4 million of PIK loan.  In addition, based on conversations with Pharmalogic, we expect to monetize our investment at par in the quarter ended September 30, 2015, which we expect to result in the payoff of the outstanding PIK loan balance.


DIVIDEND INCOME


During the six months ended June 30, 2015 , we recognized no dividend income.  During the six months ended June 30, 2014 , we recognized $0.2 million of dividend income.  In addition, during the six months ended June 30, 2015 , we received payments on accrued dividends of $6.4 million from RadioPharmacy Investors, LLC representing all outstanding accrued dividends.  As of June 30, 2015 , we had no accrued dividends.


ADVISORY FEES AND OTHER INCOME


During the six months ended June 30, 2015 , we earned $0.6 million of advisory fees and other income, which represented a $0.3 million , or 32.4% , decrease from the six months ended June 30, 2014 .  This decrease resulted principally from fewer prepayment fees related to loan prepayments in the first half 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 June 30, 2015 and December 31, 2014 , we had no outstanding borrowings or borrowing facilities.  During the six months ended June 30, 2014 , we incurred $3.9 million of interest expense related to our $150.0 million of SBIC debentures owed to the SBA by Solutions Capital and our notes outstanding under the MCG Commercial Loan Trust 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.


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EMPLOYEE COMPENSATION


Employee compensation expense includes base salaries and benefits, variable annual incentive compensation and amortization of employee stock awards.  During the six months ended June 30, 2015 , our employee compensation expense was $2.0 million , which represented a $2.4 million , or 54.7% , decrease from the same period in 2014 .  Our salaries and benefits decrease d by $1.1 million , or 38.8% , due to a $0.8 million decrease in base salaries and benefits and a $0.3 million decrease in incentive compensation.  As of June 30, 2015 , we had 5 employees compared to 13 employees as of June 30, 2014 .  Amortization of employee stock awards decrease d $1.3 million , or 84.0% .  Amortization of employee stock awards for the six months ended June 30, 2014 included $1.1 million of accelerated amortization related to the retirement of our former chief executive officer and other employee terminations.


GENERAL AND ADMINISTRATIVE


During the six months ended June 30, 2015 , general and administrative expense was $2.1 million , which represented a $3.7 million , or 64.2% , decrease compared to the same period in 2014 .


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|• | General and administrative expense decreased $2.4 million due to a decrease in severance costs related to employee terminations.  General and administrative expense for thesix months ended June 30, 2014included $2.6 million in severance related to the retirement of our former chief executive officer and other employee terminations.

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|• | General and administrative expense decreased $0.7 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 also decreased $0.5 million due to decreases in audit and accounting fees, employee recruiting costs, tax and licensing and travel costs.

NET INVESTMENT LOSS BEFORE INCOME TAX PROVISION


During the six months ended June 30, 2015 , we recorded $1.6 million of net investment gain before income tax provision (benefit), compared to $29.1 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 six months ended June 30, 2015 :


Six months ended June 30, 2015(in thousands)IndustryTypeRealized Gain/(Loss)Unrealized (Depreciation)/ AppreciationReversal of Unrealized Depreciation/ (Appreciation)Net (Loss)/ GainPortfolio CompanyRadioPharmacy Investors, LLCHealthcareControl$36$—$1,320$1,356Broadview Networks Holdings, Inc.CommunicationsNon-Affiliate(159,344)(31)159,344(31)Other (< $1.0 million net gain (loss))23552—287Total$(159,073)$21$160,664$1,612


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|• | 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 Investor LLC’s subsidiary, Pharmalogic, 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.

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|• | In April, 2015, we sold our equity investments in Broadview Networks Holdings, Inc. for $235 thousand resulting in a realized loss of $159.3 million and a reversal of previously recorded unrealized depreciation of $159.3 million.

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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 six months ended June 30, 2014 :


Six months ended June 30, 2014(in thousands)IndustryTypeRealized Gain/(Loss)Unrealized (Depreciation)/ AppreciationReversal of Unrealized Depreciation/ (Appreciation)Net (Loss)/ GainPortfolio CompanyEducation Management, Inc.EducationAffiliate$—$(15,984)$—$(15,984)RadioPharmacy Investors, LLCHealthcareControl—(5,993)—(5,993)SC Academy Holdings, Inc.EducationNon-Affiliate(4,037)——(4,037)Oceans Acquisition, Inc.HealthcareNon-Affiliate—(1,491)—(1,491)G&L Investment Holdings, LLCInsuranceNon-Affiliate(4,416)—4,523107Other (< $1.0 million net gain (loss))(267)(1,584)175(1,676)Total$(8,720)$(25,052)$4,698$(29,074)


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|• | During 2014, we recorded $16.0 million of unrealized depreciation on our investment in Education Management, Inc. to reflect operational, financial and business challenges facing the company and the expected sales price of our senior debt and preferred stock investments.

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|• | Furthermore, we reduced our valuation multiple for RadioPharmacy Investors, LLC and recorded $6.0 million of unrealized depreciation based on volume, pricing and supply-cost challenges facing the company's core business.

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|• | In the second quarter of 2014, we sold our subordinated debt investment in SC Academy Holdings, Inc. for net proceeds of $11.1 million resulting in a realized loss of $4.0 million.

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|• | We also recorded $1.5 million of unrealized depreciation on our investment in Oceans Acquisition, Inc. to reflect a decrease in that portfolio company's operating performance.

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|• | In addition, in the first quarter of2014, we sold our preferred and common equity investments in G&L Investment Holdings, LLC resulting in a realized loss of $4.4 million and a reversal of previously recorded unrealized depreciation of $4.5 million.

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 June 30, 2015 , we had $148.8 million in cash and cash equivalents available for general corporate purposes and $0.2 million of restricted cash held in escrow.


As of June 30, 2015 , our cash and cash equivalents included $139.6 million held in interest-bearing accounts.  During the six months ended June 30, 2015 , our operating activities provided $47.0 million of cash and cash equivalents, and our financing activities used $4.0 million of cash and cash equivalents.


For the six months ended June 30, 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 six months ended June 30, 2015 , we earned 11.6% on our average loan portfolio at fair value of $52.5 million .


In July 2015, South Bay repaid in full our subordinated loan.  In addition, based on conversations with Pharmalogic, we expect to monetize our investment at par in the quarter ended September 30, 2015.


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.





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LIQUIDITY AND CAPITAL RESOURCES—BORROWINGS


As of June 30, 2015 , we had no outstanding borrowings or borrowing facilities.  During the six months ended June 30, 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.


STOCK REPURCHASE PROGRAMS


The following table summarizes our stock repurchases under our stock repurchase programs for the six months ended June 30, 2015 .


Six months ended June 30, 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 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.


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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 June 30, 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 June 30, 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.  From time to time, we provide guarantees or standby letters of credit on behalf of our portfolio companies.  As of June 30, 2015 , we had no outstanding guarantees or standby letters of credit.


CONTRACTUAL OBLIGATIONS


The following table shows our contractual obligations as of June 30, 2015 :


(in thousands)Payments Due by PeriodContractual Obligations(a)TotalLess than 1 year1-3 years4-5 yearsAfter 5 yearsOperating leases$342$342$—$—$—Severance obligations(b)806806———Total contractual obligations$1,148$1,148$—$—$—


_______________


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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


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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 June 30, 2015 .  As of June 30, 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 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.


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.


In connection with our proposed merger with PennantPark, we are a party to a consolidated class action stockholder lawsuit.  Six complaints were filed by stockholders challenging the merger between May 6, 2015, and May 18, 2015, in the Delaware Court of Chancery.  The complaints were consolidated and on June 10, 2015, a consolidated class action complaint was filed.  The consolidated complaint alleges that MCG’s directors violated their fiduciary duties by, among other things, not protecting against their supposed conflicts of interest and failing to take steps to maximize the consideration to be received by MCG’s stockholders in the Merger.  The consolidated complaint also alleges that PennantPark and its affiliated entities have aided and abetted the MCG directors’ purported breach of fiduciary duties. The complaint demands, among other things, a preliminary and permanent injunction against the Merger and rescission of the transaction to the extent that it has been implemented.  MCG believes that the consolidated complaint is without merit.


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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; 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.


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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 ofJune 30, 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 ofJune 30, 2015, all of our investment portfolio is comprised of non-control investments.  Quoted prices are not available for 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—As ofJune 30, 2015, we had no thinly traded or 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).  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 June 30, 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 the fair value of our investment portfolio.


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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, our investment portfolio is composed of complex debt 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 June 30, 2015 .


($ in thousands)Fair ValueValuation TechniquesUnobservable InputsRangeWeighted AverageMinimumMaximumSenior debt$20,276Discounted Cash FlowMarket Interest Rate6.5%6.5%6.5%Pending TransactionsPending TransactionsN/AN/AN/ASubordinated debt9,056Discounted Cash FlowMarket Interest Rate14.5%14.5%14.5%$29,332


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, 2017, 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.


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


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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 June 30, 2015 , our portfolio consisted of debt investments in three companies.  Two of our debt investments bore interest at a spread to either the LIBOR or the prime rate and one of our debt investments had floors on the LIBOR-base index or prime rate.  The three-month weighted-average LIBOR interest rate was 0.28% as of June 30, 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 June 30, 2015 and December 31, 2014 :


June 30, 2015December 31, 2014(in thousands)Interest Bearing Cash and Commercial LoansBorrowingsInterest Bearing Cash and Commercial LoansBorrowingsMoney market rate$139,799$—$77,392$—LIBOR90-day18,900—52,771—Fixed rate9,056—8,926—Total$167,755$—$139,089$—


In addition, as of June 30, 2015 , we had $9.2 million of non-interest-bearing cash and cash equivalents.


Based on our June 30, 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 June 30, 2015 , the quarterly average LIBOR was 0.28% and a 100-basis point decrease could not occur:


(dollars in thousands)Basis Point ChangeInterest IncomeInterest ExpenseNet Income100$1,412$—$1,4122002,867—2,8673004,454—4,454


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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 June 30, 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 June 30, 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 June 30, 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.


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.


In connection with our proposed merger with PennantPark, we are a party to a consolidated class action stockholder lawsuit.  Six complaints were filed by stockholders challenging the merger between May 6, 2015, and May 18, 2015, in the Delaware Court of Chancery.  The complaints were consolidated and on June 10, 2015, a consolidated class action complaint was filed.  The consolidated complaint alleges that MCG’s directors violated their fiduciary duties by, among other things, not protecting against their supposed conflicts of interest and failing to take steps to maximize the consideration to be received by MCG’s stockholders in the Merger.  The consolidated complaint also alleges that PennantPark and its affiliated entities have aided and abetted the MCG directors’ purported breach of fiduciary duties. The complaint demands, among other things, a preliminary and permanent injunction against the Merger and rescission of the transaction to the extent that it has been implemented.  MCG believes that the consolidated complaint is without merit.


During the quarter ended June 30, 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


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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 following new risk factors to the risk factors included in our annual report on Form 10-K for the fiscal year ended December 31, 2014 :


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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.


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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.


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.


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 minimum income tax withholding obligations.  We retire immediately all such shares of common stock that we purchase in connection with such net issuance to employees.


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The following table summarizes the shares of common stock that we have purchased during the three months ended June 30, 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 ProgramsJune 1 – 30, 2015Restricted stock vesting(a)515$4.56(b)n/an/aTotal515$4.56—$—


__________________


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|(a) | Represents shares repurchased from our employees in connection with the net issuance of shares to satisfy employee's minimum tax withholding obligations in connection with the vesting of restricted stock.

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|(b) | 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-Q2.1Agreement and plan of merger8-K(0-33377)April 29, 20152.115.1Letter 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:July 28, 2015By:/s/KEITH KENNEDYKeith KennedyChief Executive Officer(Principal Executive Officer)Date:July 28, 2015By:/s/BEVERLY JANE ALLEYBeverly Jane AlleyChief Financial Officer(Principal Financial and Accounting Officer)





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