UNITED STATES


SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549


FORM 10-Q


(Mark One)


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


For the quarterly period ended March 31, 2014


OR


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


For the transition period from ______ to ______


___________________


Commission file number 0-33377


MCG CAPITAL CORPORATION


(Exact name of registrant as specified in its charter)


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


(703) 247-7500


(Registrant's telephone number, including area code)





None


(Former name, former address and former fiscal year, if changed since last report)


Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes x No o


Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes o No o


Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):


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


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


As of April 23, 2014, there were 64,994,149 shares of the registrant’s $0.01 par value Common Stock outstanding.







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MCG CAPITAL CORPORATION


FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 2014


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)10REVIEW REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM29ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS30ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK50ITEM 4. CONTROLS AND PROCEDURES51PART II. OTHER INFORMATION52ITEM 1. LEGAL PROCEEDINGS52ITEM 1A. RISK FACTORS52ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS52ITEM 3. DEFAULTS UPON SENIOR SECURITIES53ITEM 4. MINE SAFETY DISCLOSURES53ITEM 5. OTHER INFORMATION53ITEM 6. EXHIBITS54SIGNATURES55







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PART I. FINANCIAL INFORMATION


ITEM 1.  FINANCIAL STATEMENTS


MCG Capital Corporation


Consolidated Balance Sheets


(in thousands, except per share amounts)March 31, 2014December 31, 2013(unaudited)AssetsCash and cash equivalents$83,351$91,598Cash, restricted32,79733,895Cash, securitization accounts—13,906Investments at fair valueNon-affiliate investments (cost of$419,928and $444,217, respectively)247,131268,173Affiliate investments (cost of$59,744and $59,470, respectively)41,55656,792Control investments (cost of$62,841and$62,751, respectively)37,61143,908Total investments (cost of$542,513and $566,438, respectively)326,298368,873Interest receivable2,7762,087Other assets3,3393,634Total assets$448,561$513,993LiabilitiesBorrowings (maturing within one year of$0and $25,172, respectively)$150,000$175,172Interest payable5972,345Other liabilities1,9172,522Total liabilities152,514180,039Stockholders’ equityPreferred stock, par value $0.01, authorized 1 share, none issued and outstanding——Common stock, par value $0.01, authorized 200,000 shares on March 31, 2014 and December 31, 2013,67,745issued and outstanding on March 31, 2014 and 70,510issued and outstanding on December 31, 2013677705Paid-in capital970,676980,930Distributions in excess of earnings(458,773)(449,915)Net unrealized depreciation on investments(216,533)(197,766)Total stockholders’ equity296,047333,954Total liabilities and stockholders’ equity$448,561$513,993Net asset value per common share at end of period$4.37$4.74





The accompanying notes are an integral part of these Condensed Consolidated Financial Statements
 1


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MCG Capital Corporation


Consolidated Statements of Operations


(unaudited)


Three months endedMarch 31(in thousands, except per share amounts)20142013RevenueInterest and dividend incomeNon-affiliate investments (less than 5% owned)$7,738$9,848Affiliate investments (5% to 25% owned)8131,627Control investments (more than 25% owned)7041,301Total interest and dividend income9,25512,776Advisory fees and other incomeNon-affiliate investments (less than 5% owned)78458Control investments (more than 25% owned)1312Total advisory fees and other income91470Total revenue9,34613,246Operating expenseInterest expense1,9902,382Employee compensationSalaries and benefits1,0881,407Amortization of employee restricted stock awards306375Total employee compensation1,3941,782General and administrative expense1,6391,032Restructuring expense—7Total operating expense5,0235,203Net operating income before net investment loss and income tax provision4,3238,043Net realized gain (loss) on investmentsNon-affiliate investments (less than 5% owned)(4,488)(497)Affiliate investments (5% to 25% owned)—(3,424)Control investments (more than 25% owned)—(110)Total net realized loss on investments(4,488)(4,031)Net unrealized (depreciation) appreciation on investmentsNon-affiliate investments (less than 5% owned)3,247(5,095)Affiliate investments (5% to 25% owned)(15,510)9,107Control investments (more than 25% owned)(6,387)(214)Other fair value adjustments(117)—Total net unrealized (depreciation) appreciation on investments(18,767)3,798Net investment loss before income tax provision(23,255)(233)Income tax provision458Net (loss) income$(18,936)$7,752Income per basic and diluted common share$(0.27)$0.11Cash distributions declared per common share$0.125$0.125Weighted-average common shares outstanding—basic and diluted69,39571,507


The accompanying notes are an integral part of these Condensed Consolidated Financial Statements
 2


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MCG Capital Corporation


Consolidated Statements of Changes in Net Assets


(unaudited)


Three months endedMarch 31(in thousands, except per share amounts)20142013Increase (decrease) in net assets from operationsNet operating income before net investment loss and income tax provision$4,323$8,043Net realized loss on investments(4,488)(4,031)Net unrealized (depreciation) appreciation on investments(18,767)3,798Income tax provision(4)(58)Net (loss) income(18,936)7,752Distributions to stockholdersDistributions declared(8,689)(8,902)Net decrease in net assets resulting from stockholder distributions(8,689)(8,902)Capital share transactionsRepurchase of common stock(10,589)(2,272)Amortization of restricted stock awardsEmployee awards accounted for as employee compensation306375Non-employee director awards accounted for as general and administrative expense1714Common stock withheld to pay taxes applicable to the vesting of restricted stock(16)(23)Net decrease in net assets resulting from capital share transactions(10,282)(1,906)Total decrease in net assets(37,907)(3,056)Net assetsBeginning of period333,954371,728End of period$296,047$368,672Net asset value per common share at end of period$4.37$5.18Common shares outstanding at end of period67,74571,212





The accompanying notes are an integral part of these Condensed Consolidated Financial Statements
 3


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MCG Capital Corporation


Consolidated Statements of Cash Flows


(unaudited)


Three months endedMarch 31(in thousands)20142013Cash flows from operating activitiesNet (loss) income$(18,936)$7,752Adjustments to reconcile net (loss) income to net cash provided by operating activitiesInvestments in portfolio companies(5,193)(14,406)Principal collections related to investment repayments or sales24,18383,015Increase in interest receivable, accrued payment-in-kind interest and dividends(360)(1,673)Amortization of restricted stock awardsEmployee306375Non-employee director1714Decrease in cash—securitization accounts from interest collections1,399664Decrease (increase) in restricted cash—escrow accounts(1,124)192Depreciation and amortization294365Decrease in other assets2102Decrease in other liabilities(2,353)(5,739)Realized loss on investments4,4884,031Net unrealized depreciation (appreciation) on investments18,767(3,798)Net cash provided by operating activities21,49070,894Cash flows from financing activitiesRepurchase of common stock(10,589)(2,272)Payments on borrowings(25,172)(15,038)Decrease (increase) in cash in restricted and securitization accountsSecuritization accounts for repayment of principal on debt12,479(16,828)Restricted cash2,250(2,525)Distributions paid(8,689)(8,902)Common stock withheld to pay taxes applicable to the vesting of restricted stock(16)(23)Net cash used in financing activities(29,737)(45,588)Net (decrease) increase in cash and cash equivalents(8,247)25,306Cash and cash equivalentsBeginning balance91,59873,588Ending balance$83,351$98,894Supplemental disclosure of cash flow informationInterest paid$3,452$3,672Income taxes paid (received)—(53)Paid-in-kind interest accrued1,6451,246Paid-in-kind interest collected2,0601,959Dividend income collected183244


The accompanying notes are an integral part of these Condensed Consolidated Financial Statements
 4


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MCG Capital CorporationConsolidated Schedule of InvestmentsMarch 31, 2014 (unaudited)(dollars in thousands)Interest Rate(8)Fair ValuePortfolio CompanyIndustryInvestmentCurrentPIKTotalPrincipalCostControl Investments(4):GMC Television Broadcasting, LLC(2)BroadcastingSenior Debt (Due 12/16)4.2%—4.2%$13,327$10,971$12,212Subordinated Debt (Due 12/16)(6)2.5%—2.5%11,6656,975—Class B Voting Units (8.0%, 86,700 units)(5)9,071—Jet Plastica Investors, LLC(2)Plastic ProductsSenior Debt A (Due 3/15)(1)(6)2.2%7.0%9.2%5,4193,897—RadioPharmacy  Investors, LLC(2)HealthcareSenior Debt (Due 12/16)7.5%—7.5%7,6407,6407,640Subordinated Debt (Due 12/16)12.0%3.0%15.0%10,92610,92310,923Preferred LLC Interest (19.7%, 70,000 units)(5)13,3646,836Total control investments (represents 11.5% of total investments at fair value)62,84137,611Affiliate Investments(3):C7 Data Centers, Inc.Business ServicesSenior Debt (Due 9/17)(1)9.5%—9.5%17,35017,11217,112Series B Preferred Stock (7,142,857 shares)(5)2,0003,275Education Management, Inc.EducationSenior Debt (Due 5/14 to 12/15)(6)3.3%8.5%11.8%20,65119,8564,879Series C Preferred Stock (9.0%, 16,910 shares)(5)5,000—IDOC, LLCHealthcareSenior Debt (Due 8/17)(1)9.8%—9.8%15,00014,77714,777Limited Partner Interests(1)(2)(5)9991,513Total affiliate investments (represents 12.7% of total investments at fair value)59,74441,556Non-Affiliate Investments (less than 5% owned):Accurate Group Holdings, Inc.(2)Business ServicesSubordinated Unsecured Debt (Due 8/18)(1)12.5%—12.5%10,0009,8319,831Series A Preferred Stock (974,805 shares)(5)2,0001,229Advanced Sleep  Concepts, Inc.(2)Home FurnishingsSenior Debt (Due 8/14 to 12/15)(1)(6)10.3%—10.3%7,3096,9074,494Subordinated Debt (Due 12/15)(6)12.0%3.0%15.0%3,7993,352—Broadview Networks Holdings, Inc.(10)CommunicationsCommon Stock (132,779 shares)(5)159,579475Series A-1 Warrant to purchase Common Stock (expire 11/20)(5)——Series A-2 Warrant to purchase Common Stock (expire 11/20)(5)——Community Investors, Inc.Business ServicesSenior Debt (Due 5/18)(1)9.8%—9.8%13,96713,72613,726Preferred Stock (10.0%, 271,169 shares)(1)295295Series A-1 Preferred Stock (10.0%, 47,413 shares)(1)112112Common Stock (2,564 shares)(1)(5)3110Cruz Bay Publishing, Inc.PublishingSubordinated Debt (Due 3/15)5.0%7.2%12.2%21,91121,87721,877Dorsey School of Business Holdings, Inc.EducationSenior Debt (Due 6/18)(1)9.5%—9.5%9,7509,6249,492Golden Knight II CLO, Ltd.(9)Diversified Financial ServicesIncome Notes (Due 4/19)2,3633,384Hammond's Candies Since 1920 II, LLCManufacturingSubordinated Debt (Due 9/18)(1)10.0%4.0%14.0%9,4739,3219,321Huron Inc.ManufacturingSubordinated Unsecured Debt (Due 8/18)(1)10.0%4.0%14.0%13,31913,10013,100Industrial Safety Technologies, LLCManufacturingSubordinated Debt (Due 6/19)9.5%2.0%11.5%10,0859,9439,943Intrafusion Holding Corp.HealthcareSubordinated Debt (Due 6/18)(1)11.8%—11.8%11,50011,30011,300Legacy Cabinets Holdings II, Inc.Home FurnishingsClass B-1 Common Stock (2,000 shares)(5)2,185324Mailsouth, Inc.PublishingSenior Debt (Due 12/16)6.8%—6.8%3,9213,8913,754Maverick HealthcareEquity, LLCHealthcarePreferred Units (10.0%, 1,250,000 units)(5)2,021700Class A Common Units (1,250,000 units)(5)——


The accompanying notes are an integral part of these Condensed Consolidated Financial Statements
 5


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MCG Capital CorporationConsolidated Schedule of InvestmentsMarch 31, 2014 (unaudited)(dollars in thousands)Interest Rate(8)Fair ValuePortfolio CompanyIndustryInvestmentCurrentPIKTotalPrincipalCostMidwest Technical Institute, Inc.EducationSenior Debt (Due 10/17)(1)9.5%—9.5%13,37513,15713,221Miles Media Group, LLCBusiness ServicesSenior Debt (Due 6/16)(1)12.5%—12.5%18,76218,64018,640Oceans Acquisition, Inc.HealthcareSenior Debt (Due 12/17)(1)10.8%—10.8%14,29514,06214,062Rita’s Water Ice Franchise Company, LLCRestaurantsSenior Debt (Due 11/16)(1)14.0%—14.0%9,3759,3249,324SC Academy Holdings, Inc.EducationSubordinated Debt (Due 7/16)(1)—%14.0%14.0%15,15915,10115,101South Bay Mental Health Center, Inc.HealthcareSubordinated Debt (Due 10/17)(1)12.0%2.5%14.5%11,83511,66311,663Summit Business Media Parent Holding Company LLCInformation ServicesClass E Series I Units (636 units)(5)4,120563Class E Series II Units (276 units)(5)1,78867TCFI CP LLCManufacturingSubordinated Unsecured Debt (Due 4/19)(1)10.0%3.0%13.0%20,16019,83119,831Ted's Café Escondido Holdings, Inc.RestaurantsSenior Debt (Due 12/18)(1)9.5%—9.5%14,30014,00514,005The e-Media Club I, LLCInvestment FundLLC Interest (74 units)(5)88—Visant CorporationConsumer ProductsSenior Debt (Due 12/16)5.3%—5.3%4,7114,7114,681West World Media, LLCInformation ServicesSenior Debt (Due 9/15)(1)11.0%3.0%14.0%11,49411,18311,231Class A Membership Units (25,000 units)(1)(5)1350Warrant to purchase Class A Membership Units (expire 9/15)(1)(5)324382Xpressdocs Holdings, Inc.Business ServicesSeries A Preferred Stock (161,870 shares)(5)500543Total non-affiliate investments (represents 75.8% of total investments at fair value)419,928247,131Total Investments$542,513$326,298








The accompanying notes are an integral part of these Condensed Consolidated Financial Statements
 6


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MCG Capital CorporationConsolidated Schedule of InvestmentsDecember 31, 2013(dollars in thousands)Interest Rate(8)Fair ValuePortfolio CompanyIndustryInvestmentCurrentPIKTotalPrincipalCostControl Investments(4):GMC Television Broadcasting, LLC(2)BroadcastingSenior Debt (Due 12/16)(1)4.3%—4.3%$13,329$10,963$12,252Subordinated Debt (Due 12/16)(6)2.5%—2.5%11,5936,975—Class B Voting Units (8.0%, 86,700 units)(5)9,071—Jet Plastica Investors, LLC(2)Plastic ProductsSenior Debt A (Due 3/15)(1)(6)2.4%7.5%9.9%5,3263,897—RadioPharmacy  Investors, LLC(2)HealthcareSenior Debt (Due 12/16)(1)7.5%—7.5%7,6407,6407,640Subordinated Debt (Due 12/16)(1)12.0%3.0%15.0%10,84510,84110,841Preferred LLC Interest (19.7%, 70,000 units)(5)13,36413,175Total control investments (represents 11.9% of total investments at fair value)62,75143,908Affiliate Investments(3):C7 Data Centers, Inc.Business ServicesSenior Debt (Due 9/17)(1)9.5%—9.5%17,35017,09217,092Series B Preferred Stock (7,142,857 shares)(5)2,0003,482Education Management, Inc.EducationSenior Debt (Due 12/15)(1)3.0%8.7%11.7%19,72319,61719,617Series C Preferred Stock (9.0%, 16,910 shares)(5)5,000174IDOC, LLCHealthcareSenior Debt (Due 8/17)(1)9.8%—9.8%15,00014,76214,762Limited Partner Interests(1)(2)(5)9991,665Total affiliate investments (represents 15.4% of total investments at fair value)59,47056,792Non-Affiliate Investments (less than 5% owned):Accurate Group Holdings, Inc.(2)Business ServicesSubordinated Unsecured Debt (Due 8/18)(1)12.5%—12.5%10,0009,8279,827Series A Preferred Stock (974,805 shares)(5)2,0001,731Advanced Sleep  Concepts, Inc.(2)Home FurnishingsSenior Debt (Due 1/14 to 8/14)(1)(6)10.3%—10.3%7,4097,2044,493Subordinated Debt (Due 1/14)(6)—%10.0%10.0%3,7713,352—Broadview Networks Holdings, Inc.(10)CommunicationsCommon Stock (132,779 shares)(5)159,579761Series A-1 Warrant to purchase Common Stock (expire 11/20)(5)——Series A-2 Warrant to purchase Common Stock (expire 11/20)(5)——Community Investors, Inc.Business ServicesSenior Debt (Due 5/18)(1)9.8%—9.8%12,30012,07912,079Preferred Stock (10.0%, 297,436 shares)(1)317317Common Stock (2,564 shares)(1)(5)3124Cruz Bay Publishing, Inc.PublishingSubordinated Debt (Due 3/15)(1)5.0%7.3%12.3%21,52121,48321,483Dorsey School of Business Holdings, Inc.EducationSenior Debt (Due 6/18)(1)9.5%—9.5%10,0009,8679,867G&L Investment Holdings, LLC(2)InsuranceSubordinated Debt (Due 5/14)(1)11.2%4.3%15.5%19,48419,42319,423Series A Preferred Shares (14.0%, 5,000,000 shares)(5)8,1914,196Class C Shares (621,907 shares)(5)529—Golden Knight II CLO, Ltd.(9)Diversified Financial ServicesIncome Notes (Due 4/19)2,4913,298Hammond's Candies Since 1920 II, LLCManufacturingSubordinated Debt (Due 9/18)(1)10.0%4.0%14.0%9,3799,2219,221Huron Inc.ManufacturingSubordinated Unsecured Debt (Due 8/18)(1)10.0%4.0%14.0%13,18712,95812,958Industrial Safety Technologies, LLCManufacturingSubordinated Debt (Due 6/19)9.7%2.0%11.7%10,0359,8889,888Intrafusion Holding Corp.HealthcareSubordinated Debt (Due 6/18)(1)11.9%—11.9%11,50011,29011,290Legacy Cabinets Holdings II, Inc.Home FurnishingsClass B-1 Common Stock (2,000 shares)(5)2,185237Mailsouth, Inc.PublishingSenior Debt (Due 12/16)(1)6.8%—6.8%3,9213,8883,830


The accompanying notes are an integral part of these Condensed Consolidated Financial Statements
 7


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MCG Capital CorporationConsolidated Schedule of InvestmentsDecember 31, 2013(dollars in thousands)Interest Rate(8)Fair ValuePortfolio CompanyIndustryInvestmentCurrentPIKTotalPrincipalCostMaverick HealthcareEquity, LLCHealthcarePreferred Units (10.0%, 1,250,000 units)(5)2,0211,474Class A Common Units (1,250,000 units)(5)——Midwest Technical Institute, Inc.EducationSenior Debt (Due 10/17)(1)9.5%—9.5%13,81313,57513,670Miles Media Group, LLCBusiness ServicesSenior Debt (Due 6/16)(1)12.5%—12.5%19,06318,91318,913Oceans Acquisition, Inc.HealthcareSenior Debt (Due 12/17)(1)10.8%—10.8%12,71012,46012,460Rita’s Water Ice Franchise Company, LLCRestaurantsSenior Debt (Due 11/16)(1)14.0%—14.0%9,3759,3209,320SC Academy Holdings, Inc.EducationSubordinated Debt (Due 7/16)(1)—%14.0%14.0%14,64114,57714,577South Bay Mental Health Center, Inc.HealthcareSubordinated Debt (Due 10/17)(1)12.0%2.5%14.5%11,76111,58111,614Summit Business Media Parent Holding Company LLCInformation ServicesClass E Series I Units (636 units)(1)(5)4,120563Class E Series II Units (276 units)(1)(5)1,78867TCFI CP LLCManufacturingSubordinated Unsecured Debt (Due 4/19)(1)10.0%3.0%13.0%20,01019,66719,667Ted's Café Escondido Holdings, Inc.RestaurantsSenior Debt (Due 12/18)(1)9.5%—9.5%14,00013,69113,691The e-Media Club I, LLCInvestment FundLLC Interest (74 units)(5)8811Visant CorporationConsumer ProductsSenior Debt (Due 12/16)(1)5.3%—5.3%4,7114,7114,657West World Media, LLCInformation ServicesSenior Debt (Due 9/15)(1)11.0%3.0%14.0%11,46711,10511,182Class A Membership Units (25,000 units)(1)(5)1362Warrant to purchase Class A Membership Units (expire 9/15)(1)(5)324379Xpressdocs Holdings, Inc.Business ServicesSeries A Preferred Stock (161,870 shares)(5)500543Total non-affiliate investments (represents 72.7% of total investments at fair value)444,217268,173Total Investments$566,438$368,873








The accompanying notes are an integral part of these Condensed Consolidated Financial Statements
 8


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MCG Capital Corporation


Consolidated Schedule of Investments





|    |                                                                                                                                                                                                                                                 
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|(1) | Some or all of this security is held by our SBIC subsidiary or one of our other financing subsidiaries and may have been pledged as collateral in connection therewith.  SeeNote 5—Borrowingsto the Condensed Consolidated Financial Statements.

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|(2) | Includes securities issued by one or more of the portfolio company’s affiliates.

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|(3) | Affiliate investments represent companies in which we own at least 5%, but not more than 25% of the portfolio company’s voting securities.

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|(4) | Control investments represent companies in which we own more than 25% of the portfolio company’s voting securities.

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|(5) | Equity security is non-income producing at period-end.

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|(6) | Loan or debt security is on non-accrual status.

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|(7) | We did not recognize paid-in-kind, or PIK, interest or accretion income because the fair value of our investment was below its cost basis.  However, we continue to accrue interest that is receivable in cash from the portfolio company.

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|(8) | 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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|(9) | Investment is not a qualifying asset under section 55(a) of the Investment Company Act of 1940, as amended. Qualifying assets must represent at least 70% of total assets at the time of acquisition of any additional non-qualifying assets.

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|(10) | Broadview Networks Holdings, Inc.’s financial statements are currently publicly available and may be accessed on-line using either the Company’s website (www.broadviewnet.com) or using the EDGAR System available on the SEC’s website (www.sec.gov)







The accompanying notes are an integral part of these Condensed Consolidated Financial Statements
 9


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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.


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:


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


Taxable Subsidiaries — We currently qualify as a regulated investment company, or RIC, for federal income tax purposes and, therefore, are not required to pay corporate income taxes on any income or gains that we distribute to our stockholders.  We have certain wholly owned taxable subsidiaries, or Taxable Subsidiaries, each of which holds one or more portfolio investments listed on our Consolidated Schedules of Investments .  The purpose of these Taxable Subsidiaries is to permit us to hold portfolio companies organized as limited liability companies, or LLCs, or other forms of pass-through entities and still satisfy the RIC tax requirement that at least 90% of our gross revenue for income tax purposes must consist of investment income.  Absent the Taxable Subsidiaries, a portion of the gross income of any LLC or other pass-through entity portfolio investment would flow through directly to us, 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 .


Wholly Owned Special-Purpose Financing Subsidiary —This subsidiary was a bankruptcy remote, special-purpose entity to which we transfered certain loans.  The financing subsidiary, in turn, transfered 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 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 and conform to Regulation S-X under the Securities  Exchange Act of 1934 , as amended.  We believe we have made all necessary adjustments so that the financial statements are presented fairly and that all such adjustments are of a normal recurring nature.  We eliminated all significant intercompany balances.  In accordance with Article 6 of Regulation S-X of the Securities Act of 1933 , as amended, and the Securities Exchange Act of 1934 , as amended, we do not consolidate portfolio company investments, including those in which we have a controlling interest.  Further, in connection with the preparation of these Condensed Consolidated Financial Statements , we have evaluated subsequent events that occurred after the balance sheet date as of March 31, 2014 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


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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, 2013 .


Recent Accounting Pronouncement


In June 2013, the Financial Accounting Standards Board, issued Accounting Standards Update No. 2013-08, Financial Services—Investment Companies (Topic 946): Amendments to the Scope, Measurement, and Disclosure Requirements, or ASU 2013-08.  This update changes the approach to the assessment of whether a company is an investment company, clarifies the characteristics of an investment company, provides comprehensive guidance for the investment company assessment and contains certain disclosure requirements.  ASU 2013-08 is effective for interim and annual reporting periods in fiscal years that begin after December 15, 2013.  Earlier application is prohibited.  We adopted this standard update beginning January 1, 2014.  The implementation of this standard update did not have a material impact on our consolidated financial statements.


NOTE 2—INVESTMENT PORTFOLIO


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


COST BASISFAIR VALUE BASISMarch 31, 2014December 31, 2013March 31, 2014December 31, 2013(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$193,48335.7%$190,78333.7%$173,25153.1%$185,52450.3%Subordinated debtSecured100,45518.5118,63220.990,12727.6108,33829.4Unsecured42,7617.942,4527.542,76113.142,45211.5Total debt investments336,69962.1351,86762.1306,13993.8336,31491.2Equity investmentsPreferred36,7286.744,9568.016,3755.028,3907.7Common/common equivalents169,08631.2169,61529.93,7841.24,1691.1Total equity investments205,81437.9214,57137.920,1596.232,5598.8Total investments$542,513100.0%$566,438100.0%$326,298100.0%$368,873100.0%


Our debt instruments bear contractual interest rates ranging from 2.5% to 15.0% , a portion of which may be in the form of paid-in-kind interest, or PIK.  As of March 31, 2014 , approximately 67.5% of the fair value of our loan portfolio had variable interest rates, based on a London Interbank Offer Rate, or LIBOR, benchmark or the prime rate, and 32.5% of the fair value of our loan portfolio had fixed interest rates.  As of March 31, 2014 , approximately 55.9% of our loan portfolio, at fair value, had LIBOR floors between 1.0% and 3.0% on a LIBOR-based index or prime floors between 2.5% and 6.0% .  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.


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The following table summarizes the cost and fair value of loans more than 90 days past due and loans on non-accrual status.  For the quarter ended March 31, 2014, we put Education Management, Inc. on non-accrual status (cost basis $19.9 million and fair value basis $4.9 million).


COST BASISFAIR VALUE BASISMarch 31, 2014December 31, 2013March 31, 2014December 31, 2013(dollars in thousands)Investments at Cost% of Loan PortfolioInvestments at Cost% of Loan PortfolioInvestments at Fair Value% of Loan PortfolioInvestments at Fair Value% of Loan PortfolioLoans greater than 90 days past dueOn non-accrual status$3,8971.16%$3,8971.11%$——%$——%Not on non-accrual status————————Total loans greater than 90 days past due$3,8971.16%$3,8971.11%$——%$——%Loans on non-accrual status0 to 90 days past due$37,09011.01%$17,5314.98%$9,3733.06%$4,4931.34%Greater than 90 days past due3,8971.163,8971.11————Total loans on non-accrual status$40,98712.17%$21,4286.09%$9,3733.06%$4,4931.34%


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


March 31, 2014December 31, 2013(dollars in thousands)Investments at Fair ValuePercent of Total PortfolioInvestments at Fair ValuePercent of Total PortfolioHealthcare$79,41324.3%$84,92223.0%Business services64,87419.964,10817.4Manufacturing52,19416.051,73514.0Education42,69313.157,90515.7Publishing25,6317.925,3126.9Restaurants23,3307.223,0106.2Information services12,5933.912,5523.4Broadcasting12,2123.712,2523.3Home furnishings4,8181.54,7301.3Consumer products4,6811.44,6571.3Diversified financial services3,3841.03,2980.9Insurance——23,6206.4Other(a)4750.17720.2Total$326,298100.0%$368,873100.0%______________________(a)No individual industry within this category exceeds 1%.


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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.  The following table shows our significant originations and advances:


(in thousands)Three months endedMarch 31, 2014CompanyOriginationsDraws/ AdvancesPIK Advances/ DividendsTotalDebtOceans Acquisition, Inc.$—$2,333$—$2,333Community Investors, Inc.—1,667—1,667Other (< $1 million)—8001,6452,445Total debt—4,8001,6456,445EquityOther (< $1 million)—111150261Total Equity—111150261Total originations and advances$—$4,911$1,795$6,706


As of March 31, 2014 , we have commitments to invest an additional $13.5 million to our portfolio companies.  See Note 10—Contingencies and Commitments.


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.


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Assets Measured at Fair Value on a Recurring Basis


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


March 31, 2014(in thousands)Internal Models with SignificantTotal Fair Value  Reported in  Consolidated  Balance SheetObservable Market Parameters(Level 2)Unobservable  Market Parameters(Level 3)Non-affiliate investmentsSenior secured debt$8,435$108,196$116,631Subordinated secured debt—79,20579,205Unsecured subordinated debt—42,76142,761Preferred equity3,3842,8806,264Common/common equivalents—2,2712,271Total non-affiliate investments11,819235,313247,132Affiliate investmentsSenior secured debt—36,76936,769Subordinated secured debt———Preferred equity—3,2753,275Common/common equivalents—1,5131,513Total affiliate investments—41,55741,557Control investmentsSenior secured debt—19,85119,851Subordinated secured debt—10,92210,922Preferred equity—6,8366,836Total control investments—37,60937,609Total assets at fair value$11,819$314,479$326,298


As of March 31, 2014 , we had no investments that had quoted market prices in active markets which we would categorize as Level 1 investments under ASC 820.  Cash and cash equivalents are carried at cost which approximates fair value and are Level 1 assets.  Interest receivable is carried at cost which approximates fair value.


Valuation Methodologies and Procedures


As required by the 1940 Act, we classify our investments by level of control.  Control investments include both majority-owned control investments and non-majority owned control investments.  A majority-owned control investment represents a security in which we own more than 50% of the voting interest of the portfolio company and generally control its board of directors.  A non-majority owned control investment represents a security in which we own 25% to 50% of the portfolio company’s voting equity.  As of each of March 31, 2014 and December 31, 2013 , our portfolio contained zero 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—Majority-owned control investments comprise11.5%of our investment portfolio as ofMarch 31, 2014.  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—Non-control investments comprise88.5%of our investment portfolio as ofMarch 31, 2014.  Quoted prices are not available for95.9%of our non-control investments as ofMarch 31, 2014.  For our non-control equity investments, we use the same market and income approaches used to value our control investments.  For non-control debt investments for which no quoted prices are available, we estimate fair value using a market-yield approach based on the expected future cash flows discounted at the loans’ effective interest rates, based on our estimate of current market rates.  We may adjust discounted cash flow calculations to reflect other market conditions or the perceived credit risk of the borrower.  In the event the fair value of a non-control debt investment, as determined by the same market or income approach used to value our control investments, is below our cost, we estimate the fair value using the market or income approach.

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|• | Thinly Traded and Over-the-Counter Securities—Generally, we value securities that are traded in the over-the-counter market or on a stock exchange at the average of the prevailing bid and ask prices on the date of the relevant period end.  However, we may apply a discount to the market value of restricted or thinly-traded public securities to reflect the impact that these restrictions have on the value of these securities.  We review factors, including the trading volume, total securities outstanding and our percentage ownership of securities to determine whether the trading levels are active (Level 1) or inactive (Level 2).  As ofMarch 31, 2014, these securities represented3.6%of our investment portfolio.  We utilize independent pricing services to arrive at certain of our fair value estimates.  The majority of our level 2 investments are senior debt investments that are secured and collateralized.  To corroborate “bid/ask” quotes from independent pricing services we perform a market-yield approach to validate prices obtained or obtain other evidence.

Our valuation analyses incorporate the impact that key events could have on the securities’ values, including public and private mergers and acquisitions, purchase transactions, public offerings, letters of intent and subsequent debt or equity sales.  Our valuation analyses also include key external data, such as market changes and industry valuation benchmarks.  We also engage independent valuation firms to provide additional data points for our quarterly valuation analyses.  Our general practice is to obtain an independent valuation or review of valuation at least once per year for each portfolio investment that had a fair value in excess of $5.0 million, unless the fair value has otherwise been derived through a sale of some or all of our investment in the portfolio company or is a new investment made within the last twelve months.  In total, as of March 31, 2014 , we either obtained a valuation or review from an independent firm, considered new investments made or used market quotes in the preceding twelve-month period to calculate 99.2% of our investment portfolio, calculated on a fair value basis.


The majority of the valuations performed by the independent valuation firms utilize proprietary models and inputs.  We have used, and intend to continue to use, independent valuation firms to provide additional support for our internal analyses.


Our board of directors sets our valuation policies and procedures and determines the fair value of our investments.  The investment and valuation committee of our board of directors meets at least quarterly with our executive management to review management’s recommendations of fair value of our investments.  Our board of directors considers our valuations, as well as the independent valuations and reviews, in its determination of the fair value of our investments.


Due to the uncertainty inherent in the valuation process, such estimates of fair value may differ significantly from the values that would have been used had a ready market for the securities existed, and such differences could be material.  In addition, changes in the market environment and other events that may occur over the life of the investments may cause the gains or losses ultimately realized on these investments to differ from the valuations currently assigned.


Changes in Level 3 Fair Value Measurements


We classify securities in the Level 3 valuation hierarchy based on the significance of the unobservable factors to the overall fair value measurement.  Our fair value approach for Level 3 securities primarily uses unobservable inputs, but may also include observable, actively quoted components derived from external sources.  Accordingly, the gains and losses in the table below include fair value changes due, in part, to observable factors.  Additionally, we transfer investments in and out of Level 1, 2 and 3 securities as of the ending balance sheet date, based on changes in the use of observable and unobservable inputs utilized to perform the valuation for the period.  During the three months ended March 31, 2014 and 2013 , there were no transfers in or out of Level 1, 2 or 3.


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


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


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


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The following table provides a reconciliation of fair value changes during the three -month period ended March 31, 2013 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 December 31, 2012Senior secured debt$163,125$48,060$23,376$234,561Subordinated secured debt96,5857,88010,518114,983Unsecured subordinated debt26,274——26,274Preferred equity16,5616,03816,11238,711Common/common equivalents equity3,048101—3,149Total fair value December 31, 2012305,59362,07950,006417,678Realized/unrealized gain (loss)Senior secured debt1,070146—1,216Subordinated secured debt(55)185—130Preferred equity(460)600(215)(75)Common/common equivalents equity741,245—1,319Total realized/unrealized gain (loss)6292,176(215)2,590IssuancesSenior secured debt8,4857778,569Subordinated secured debt5,95080786,108Unsecured subordinated debt12,811——12,811Preferred equity4769566682Total issuances27,29322665128,170SettlementsSenior secured debt(65,524)(7,724)—(73,248)Subordinated secured debt(9,410)(10)—(9,420)Common/common equivalents equity(500)——(500)Total settlements(75,434)(7,734)—(83,168)SalesSenior secured debt(7,350)——(7,350)Preferred equity(3,109)——(3,109)Common/common equivalents equity(3)——(3)Total sales(10,462)——(10,462)Fair value as of March 31, 2013Senior secured debt99,80640,55923,383163,748Subordinated secured debt93,0708,13510,596111,801Unsecured subordinated debt39,085——39,085Preferred equity13,0396,70716,46336,209Common/common equivalents equity2,6191,346—3,965Total fair value as of March 31, 2013$247,619$56,747$50,442$354,808


There were no purchases or sales of level 3 investments during the three months ended March 31, 2013 .


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Unrealized (Depreciation) Appreciation of Level 3 Investments


The following table summarizes the unrealized appreciation (depreciation) that we recognized on those investments for which we determined fair value using unobservable inputs (Level 3) for the three months ended March 31, 2014 and 2013 :


Three months ended March 31, 2014Three months ended March 31, 2013(in thousands)Non-affiliate InvestmentsAffiliate InvestmentsControl InvestmentsTotalNon-affiliate InvestmentsAffiliate InvestmentsControl InvestmentsTotalChange in unrealized appreciation (depreciation)Senior secured debt$106$(14,976)$(49)$(14,919)$1,070$147$—$1,217Subordinated secured debt(33)——(33)1,978185—2,163Preferred equity2,719(381)(6,339)(4,001)(366)598(215)17Common/common equivalents equity297(152)—1451,2771,246—2,523Total change in unrealized appreciation (depreciation) on Level 3 investments$3,089$(15,509)$(6,388)$(18,808)$3,959$2,176$(215)$5,920





Significant Unobservable Inputs


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


The following table summarizes the significant unobservable inputs in the fair value measurements of our level 3 investments by category of investment and valuation technique as of March 31, 2014 :


($ in thousands)Fair ValueValuation TechniquesUnobservable InputsRangeWeighted AverageMinimumMaximumSenior debt$164,816Discounted cash flowMarket interest rate7.2%11.7%8.6%Pending transactions/Letters of intentDiscount—%—%—%Market comparable companiesEBITDA multiple(a)5.0x6.0x5.4%Subordinated debt132,888Discounted cash flowMarket interest rate7.7%14.5%12.6%Pending transactions/Letters of intentDiscount—%—%—%Market comparable companiesEBITDA multiple(a)6.0x6.0x6.0xPreferred and common equity16,775Market comparable companiesEBITDA multiple(a)4.4x10.0x7.0xDiscount for minority interest—%25.0%4.5%Residual assetsDiscount rate100.0%100.0%100.0%$314,479


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|(a) | EBITDA may include proforma adjustments and/or other addbacks based on specific circumstances related to each investment.

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NOTE 4—CONCENTRATIONS OF INVESTMENT RISK


During the three months ended March 31, 2014 , we had concentrations in certain industries, including the healthcare, business services, manufacturing and education industries.  The following table summarizes our fair value and revenue concentrations in each of those industries:


Investments at fair valueRevenue for the three months endedMarch 31, 2014December 31, 2013March 31, 2014March 31, 2013(dollars in thousands)Amount% of Total PortfolioAmount% of Total PortfolioAmount% of Total RevenueAmount% of Total RevenueIndustryHealthcare$79,41324.3%$84,92223.0%$2,13122.8%$3,05323.0%Business services64,87419.964,10817.41,71518.41,80113.6Manufacturing52,19416.051,73514.01,76718.91,1518.7Education42,69313.157,90515.71,12412.01,56411.8Total$239,17473.3$258,67070.1$6,73772.1$7,56957.1


NOTE 5—BORROWINGS


As of March 31, 2014 , we reported $150.0 million of borrowings on our Consolidated Balance Sheets at cost.  The following table summarizes our borrowing facilities, the facility amounts and amounts outstanding.


March 31, 2014December 31, 2013(dollars in thousands)Maturity DateTotal Facility/ ProgramAmount OutstandingTotal Facility/ ProgramAmount OutstandingSBIC2008-10BSeptember 2018$2,600$2,600$2,600$2,6002009-10AMarch 201912,00012,00012,00012,0002009-10BSeptember 201913,00013,00013,00013,0002010-10BSeptember 202027,50027,50027,50027,5002011-10AMarch 202153,50053,50053,50053,5002012-10AMarch 202241,40041,40041,40041,400MCG Commercial Loan Trust 2006-1Series 2006-1 Class D Notes(a)April 2018——40,01625,172Bank of America Unsecured RevolverUnsecured Revolving NoteNovember 201420,000—20,000—Total borrowings$170,000$150,000$210,016$175,172__________(a)In January 2014, the Class D Notes were repaid in full.


We estimate that the fair value of these borrowings as of March 31, 2014 was approximately $156.3 million, based on  a market-yield approach (level 3).


On April 21, 2014, based on our assessment of our excess liquidity, we terminated our undrawn Bank of America Unsecured Revolver.  See Note 13—Subsequent Events.


As a BDC, we are not permitted to incur indebtedness or issue senior securities, including preferred stock, unless immediately after such borrowing we have an asset coverage for total borrowings (excluding borrowings by our SBIC facility) of at least 200%.  In addition, we may not be permitted to declare any cash dividend or other distribution on our outstanding common shares, or purchase any such shares, unless, at the time of such declaration or purchase, we have an asset coverage ratio of at least 200% after deducting the amount of such dividend, distribution or purchase price.  If we are unable to meet this asset coverage requirement, we may not be able to incur additional debt.  In October 2008, we received exemptive relief from the SEC which allows us to exclude debt issued by Solutions Capital from the calculation of our consolidated BDC asset coverage ratio.  As of March 31, 2014 , there were no senior securities outstanding other than our debt issued by Solutions Capital.


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Each of our borrowing facilities has certain financial covenants and non-financial covenants.  We were in compliance with the covenants as of March 31, 2014 and December 31, 2013 .


We had funded our secured borrowing debt facility through a bankruptcy remote, special-purpose, wholly owned subsidiary.  Therefore, this subsidiary’s assets were not be available to our creditors.  We continued to service those portfolio investments that we used as collateral in our secured borrowing facility.


The following table summarizes repayments of our borrowings based on the final legal maturity or the contractual principal collections of the outstanding loans that comprise the collateral, where applicable.  Actual repayments could differ significantly due to future prepayments by our borrowers, modifications of our borrowers’ existing loan agreements, and monetizations.


(in thousands)March 31, 20142014$—2015—2016—2017—20182,600Thereafter147,400Total$150,000


SBIC Debentures


In December 2004, we formed a wholly owned subsidiary, Solutions Capital.  Solutions Capital has a license from the SBA to operate as an SBIC under the SBIC Act.  The license permits Solutions Capital to borrow up to $150.0 million from the SBA, which is the maximum amount of outstanding leverage available to single-license SBIC companies.


To realize the full $150.0 million in borrowings for which we have received approval under the SBIC program, we have funded a total of $75.0 million to Solutions Capital.  As of each of March 31, 2014 and December 31, 2013 , Solutions Capital had borrowed $150.0 million.  We are permitted to use these funds to provide debt and equity capital to qualifying small businesses.  However, we may not use these borrowings to provide additional financing to certain companies that are currently in our portfolio without SBA approval.  In addition, we may not use these funds to provide working capital to MCG, Solutions Capital's parent company.


As of March 31, 2014 and December 31, 2013 , we had $210.4 million and $207.0 million, respectively, of investments in Solutions Capital and we had $30.4 million and $32.5 million, respectively, of restricted cash to be used for additional investments in Solutions Capital.


As of March 31, 2014 , Solutions Capital had borrowings outstanding as summarized in the following table:


Amount Outstanding(dollars in thousands)March 31, 2014December 31, 2013RateTranche2008-10B$2,600$2,6006.44%Fixed2009-10A12,00012,0005.34%Fixed2009-10B13,00013,0004.95%Fixed2010-10B27,50027,5003.93%Fixed2011-10A53,50053,5004.80%Fixed2012-10A41,40041,4003.38%FixedTotal$150,000$150,0004.33%


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


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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, or the Bank of America Unsecured Revolver.  The Bank of America Unsecured Revolver will expire in November 2014.  In August 2013, we executed an amendment to the Bank of America Unsecured Revolver that requires that we maintain a zero balance for a period of at least five consecutive days during the six-month period immediately preceding June 30th and December 31st of each year, the testing of which was previously required quarterly.  In the event we borrow under the Bank of America Unsecured Revolver, we agreed to increase the interest rate on such advances from LIBOR plus 3.5% to LIBOR plus 4.0%.  As of March 31, 2014 , there were no borrowings outstanding on the Bank of America Unsecured Revolver.  On April 21, 2014, we terminated our Bank of America Unsecured Revolver.  See Note 13—Subsequent Events.


The Bank of America Unsecured Revolver is subject to certain collateral requirements and financial covenants.  Included among them are requirements that we maintain a ratio of all unencumbered assets to outstanding amounts under the Bank of America Unsecured Revolver of at least four-to-one, as well as a ratio of unencumbered cash and senior portfolio loans to outstanding amounts under the Bank of America Unsecured Revolver of at least three-to-one.  The Bank of America Unsecured Revolver may be prepaid at any time.


MCG Commercial Loan Trust 2006-1


In April 2006, we completed a $500.0 million debt securitization through the MCG Commercial Loan Trust 2006-1, or 2006-1 Trust, a wholly owned subsidiary.  The 2006-1 Trust issued six classes of notes with interest rates ranging from LIBOR plus 0.33% to LIBOR plus 2.25%.  The reinvestment period for the 2006-1 Trust ended on July 20, 2011 and all subsequent principal collections or monetization proceeds that we received from collateral used to securitize this 2006-1 Trust were applied to the outstanding balance of that facility.  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.


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 REPURCHASE PROGRAM


On January 17, 2012, our board of directors authorized a stock repurchase program of up to $35.0 million, which was terminated after we effected repurchases totaling approximately $29.4 million.  On October 25, 2013, our board of directors authorized an additional stock repurchase program of up to $25.0 million.  On February 28, 2014, our board of directors increased the stock repurchase program to $35.0 million.  Under the program, we are authorized to repurchase shares of our common stock in open market transactions, including through block purchases, depending on prevailing market conditions and other factors.  The repurchase program may be extended, modified or discontinued at any time for any reason.  The program does not obligate us to acquire any specific number of shares, and all repurchases will be made in accordance with SEC Rule 10b-18, which sets certain restrictions on the method, timing, price and volume of stock repurchases.  During the three months ended March 31, 2014 , we repurchased 2,759,267 shares of our common stock at a weighted average purchase price of $3.84 per share, which was a 19.0% discount from our December 31, 2013 net asset value per share.  On April 25, 2014, our board of directors terminated our existing stock repurchase program effective as of May 2, 2014 and authorized a new stock repurchase program of up to $50.0 million effective as of May 5, 2014.  See Note 13—Subsequent Events.


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


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outstanding common stock at the time of such issuance less the total number of shares previously issued, in the aggregate, pursuant to all compensatory plans.  Although as of March 31, 2014 , 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, 2013:


Date DeclaredRecord DatePayment DateAmountApril 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


NOTE 7—SHARE-BASED COMPENSATION


EMPLOYEE SHARE-BASED COMPENSATION


Third Amended and Restated 2006 Employee Restricted Stock Plan


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


During each of the three months ended March 31, 2014 and 2013 , no shares of restricted stock were issued under the 2006 Plan.


During each of the three months ended March 31, 2014 and 2013 , we recognized $0.3 million and $0.4 million, respectively, of compensation expense related to share-based compensation awards.  As of March 31, 2014 , all the restricted share awards for which forfeiture provisions had not lapsed carried non-forfeitable dividend rights to the holder of the restricted shares.  As of March 31, 2014 , we had $2.0 million of unrecognized compensation cost related to restricted common stock awarded to employees.  We expect to accelerate $0.7 million of compensation costs in the quarter ending June 30, 2014 associated with the retirement of our CEO and to recognize the remaining costs over the remaining weighted-average requisite service period of 1.89 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 the three months ended March 31, 2014 and 2013 , no shares of restricted stock were issued to non-employee directors.  Our board of directors waived its right to the award of 7,500 shares of restricted stock at the beginning of each three-year term of service on the board.  During the three months ended March 31, 2014 and 2013 , we recognized less than $0.1  million of compensation costs related to share-based awards to non-employee directors.  We include this compensation cost in general and administrative expense on our Consolidated Statements of Operations .  As of March 31, 2014 , we had $0.1 million of unrecognized compensation cost related to restricted common


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stock awarded to non-employee directors, which we expect to recognize over the remaining weighted-average requisite service period of 1.7 years.


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


The following table summarizes our restricted stock award activity during the three months ended March 31, 2014 :


SharesWeighted-Average Grant Date Fair Value per ShareSubject to forfeiture provisions as of December 31, 2013895,740$4.55Awarded—$—Forfeiture provision satisfied(24,610)$5.87Forfeited(1,805)$6.97Subject to forfeiture provisions as of March 31, 2014869,325$4.51


NOTE 8—INCOME TAXES


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


We use the asset and liability method to account for our Taxable Subsidiaries' income taxes.  Using this method, we recognize deferred tax assets and liabilities for the estimated future tax effects attributable to temporary differences between financial reporting and the tax 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 each of the three months ended March 31, 2014 and 2013 , we recorded income tax provisions of less than $0.1 million, which were primarily attributable to flow-through taxable income on certain investments held by our subsidiaries.


From December 2001 through March 31, 2014 , we declared aggregate per share distributions of $14.01 .  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 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.  If we determined the tax attributes of our distributions as of March 31, 2014 , 60% would be from ordinary income and 40% would be a return of capital.  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.


On December 22, 2010, the Regulated Investment Company Modernization Act of 2010 , or the Modernization Act, was enacted, which changed various technical rules governing the tax treatment of RICs.  The changes are generally effective for taxable years beginning after the date of enactment.  One of the more prominent changes addresses capital loss carryforwards.  Under the Modernization Act, each RIC will be permitted to carry forward capital losses incurred in taxable years beginning after the date of enactment for an unlimited period.  However, any losses incurred during those subsequent taxable years will be required to be utilized prior to the losses incurred in pre-enactment taxable years, which carry an expiration date.  As a result of this ordering rule, pre-enactment capital loss carryforwards may be more likely to expire unused.  Additionally, post-enactment capital loss carryforwards will retain their character as either short-term or long-term capital losses rather than being considered all short-term as permitted under previous regulation.  For the tax years ended December  31, 2013, 2012 and 2011, we have total net capital losses of


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$120.8  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.


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


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


NOTE 9—EARNINGS PER SHARE


The following table sets forth the computation of basic and diluted income per common share for the three months ended March 31, 2014 and 2013 :


(dollars in thousands, except per share amounts)Three months ended March 31,20142013Numerator for basic and diluted earnings per shareNet (loss) income$(18,936)$7,752Less: Dividends declared—common and restricted shares(8,689)(8,902)Undistributed loss(27,625)(1,150)Percentage allocated to common shares(a)100.0%98.4%Undistributed earnings—common shares(27,625)(1,132)Add: Dividends declared—common shares8,6898,760Numerator for common shares outstanding excluding participating shares(18,936)7,628Numerator for participating unvested shares only—124Numerator for basic and diluted earnings per share—total$(18,936)$7,752Denominator for basic and diluted weighted-average shares outstandingCommon shares outstanding69,39570,365Participating unvested shares—1,142Basic and diluted weighted-average common shares outstanding—total69,39571,507Earnings (loss) per share—basic and dilutedExcluding participating unvested shares$(0.27)$0.11Including participating unvested shares$(0.27)$0.11(a)Basic and diluted weighted-average common shares:Weighted-average common shares outstanding69,39570,365Weighted-average restricted shares—1,142Total basic and diluted weighted-average common shares69,39571,507Percentage allocated to common shares100.0%98.4%(b)For the three months ended March 31, 2014, we excluded 895 weighted-average shares of restricted common stock from the calculation of diluted loss per share because the inclusion of these shares would have had an anti-dilutive impact on the calculation of loss per share.


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


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NOTE 10—CONTINGENCIES AND COMMITMENTS


LEGAL PROCEEDINGS


We are a party to certain legal proceedings incidental to the normal course of our business, including the enforcement of our rights under contracts with our portfolio companies.  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.


FINANCIAL INSTRUMENTS


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


We do not report the unused portions of these commitments on our Consolidated Balance Sheets .  As of March 31, 2014 and December 31, 2013 , we had $13.5 million and $18.1 million, respectively, of outstanding unused loan commitments.  We estimate that as of each of March 31, 2014 and December 31, 2013 , the fair value of these commitments was $0.1 million based on the fees that we currently charge to enter into similar arrangements, taking into account the creditworthiness of the counterparties.  As of March 31, 2014 and December 31, 2013 , we had no outstanding guarantees or standby letters of credit.


LEASE OBLIGATIONS


The lease on our headquarters in Arlington, Virginia has a term from October 2012 through November 2014 with a base rent of $0.4 million per year.  The base rent will not increase during the term of the lease.  In February 2014, we entered into a new lease for our headquarters in Arlington, Virginia which has a term from December 2014 through December 2015.  We have an option to extend the new lease for one additional one year period.  The base rent for the new 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 new lease.  As of March 31, 2014 , our obligations for the remaining term of the lease is $0.8 million , of which $0.3 million will be payable during the next twelve months.


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NOTE 11—FINANCIAL HIGHLIGHTS


The following schedule summarizes our financial highlights for the three months ended March 31, 2014 and 2013 : Three months ended(in thousands, except per share amounts)March 3120142013Per share dataNet asset value at beginning of period(a)$4.74$5.18Net income(b)Net operating income before net investment loss and income tax provision0.060.11Net realized gain (loss) on investments(0.06)(0.06)Net unrealized (depreciation) appreciation on investments(0.27)0.06Income tax provision——Net (loss) income(0.27)0.11Net decrease in net assets resulting from distributions(0.13)(0.13)Net increase in net assets relating to stock-based transactionsRepurchase of common stock0.020.01Net increase in stockholders’ equity from restricted stock amortization0.010.01Net increase in net assets relating to stock-based transactions0.030.02Net asset value at end of period(a)4.375.18Market price per shareBeginning of period$4.26$4.60End of period$3.79$4.78Total Return(c)-8.10%6.63%Shares of Common Stock OutstandingWeighted-average—basic and diluted69,39571,507End of period67,74571,212Net assetsAverage$325,898$372,574End of period$296,047$368,672Ratios (annualized)Operating expenses to average net assets6.25%5.68%Net operating income to average net assets5.38%8.78%General and administrative expense to average net assets2.04%1.13%Return on average equity-23.56%8.46%__________________(a)Based on total number of shares outstanding.(b)Based on weighted-average number of shares outstanding.(c)Total return = [(ending market price per share–beginning market price per share+dividends paid per share)/beginning market price per share].


NOTE 12—SIGNIFICANT SUBSIDIARY


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


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RadioPharmacy is a nuclear compounding pharmacy for regional hospitals and imaging centers.  During the three months ended March 31, 2014 , we recognized $0.6 million of total revenue from our investment in RadioPharmacy.  The following table sets forth summarized balance sheet information for RadioPharmacy as of March 31, 2014 and December 31, 2013 .


(in thousands)March 31, 2014December 31, 2013(unaudited)(unaudited)Assets:Total current assets$6,553$6,126Total non-current assets19,71319,270Total assets$26,266$25,396Liabilities and Stockholders' Equity:Current liabilities$4,167$3,349Long-term liabilities19,72819,645Preferred stock11Other stockholders' equity2,3702,401Total liabilities and stockholders' equity$26,266$25,396


The following table sets forth summarized income statement information for RadioPharmacy for the three months ended March 31, 2014 and 2013.


Three months ended March 31,(in thousands)20142013(unaudited)(unaudited)Sales$6,470$6,592Gross margin$3,737$3,799Net income (loss)$25$146


NOTE 13—SUBSEQUENT EVENTS


RETIREMENT OF CHIEF EXECUTIVE OFFICER


On April 21, 2014, or the Effective Date, we announced that B. Hagen Saville retired, effective as of the Effective Date, and will no longer serve as our Chief Executive Officer or a member of our board of directors or its committees.  In connection with Mr. Saville’s departure, on the Effective Date we and Mr. Saville entered into a letter agreement, or the Letter Agreement, setting forth the terms of his separation from MCG in accordance with his pre-existing employment agreement with us, including the agreement by us to treat Mr. Saville’s resignation as a termination by us other than for cause for purposes of such agreement.  Consistent with his employment agreement and other plans of MCG, Mr. Saville will receive (i) his accrued and unpaid base salary and unreimbursed business expenses, in each case accrued through the Effective Date and (ii) full and immediate vesting and/or lapsing of forfeiture conditions of 308,250 shares of time-vesting restricted stock.  Mr. Saville will also receive a severance amount of $2,100,000, representing an amount equal to two times the sum of his current base salary and his target annual bonus, payable in installments over the 24-month period following the Effective Date.  We will also pay the employer’s portion of the insurance benefits for continuation of Mr. Saville’s participation in our group medical, dental and hospitalization plans for a period following the Effective Date.


APPOINTMENT OF CHIEF EXECUTIVE OFFICER AND CLASS I DIRECTOR


On April 21, 2014, the Board of Directors of the Company appointed Mr. Keith Kennedy, our President as Chief Executive Officer, a member of our Board of Directors as a Class I director and as a member of the investment and valuation committee.


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TERMINATION OF BANK OF AMERICA UNSECURED REVOVLER


On April 21, 2014, we terminated our Bank of America Unsecured Revolver.  As of April 21, 2014, there were no borrowings outstanding on the Bank of America Unsecured Revolver.


STOCK REPURCHASE PROGRAM


On April 25, 2014, our board of directors authorized a stock repurchase program of up to $50.0 million effective as of May 5, 2014 and terminated, effective as of May 2, 2014, the $35.0 million stock repurchase program initially approved on October 25, 2013 and increased on February 28, 2014.


Under the program, MCG management is authorized to repurchase shares in open market transactions, including through block purchases, depending on prevailing market conditions and other factors.  The repurchase program may be extended, modified or discontinued at any time for any reason.  The program does not obligate MCG to acquire any specific number of shares, and all repurchases will be made in accordance with SEC Rule 10b-18, which sets certain restrictions on the method, timing, price and volume of stock repurchases.





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Review Report of Independent Registered Public Accounting Firm


The Board of Directors and Stockholders


MCG Capital Corporation


We have reviewed the accompanying consolidated balance sheet of MCG Capital Corporation, including the consolidated schedule of investments, as of March 31, 2014 , the related consolidated statements of operations for the three- month periods ended March 31, 2014 and 2013 , and the related consolidated statements of changes in net assets, cash flows and financial highlights for the three -month periods ended March 31, 2014 and 2013 .  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, 2013 , 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 5, 2014.  In our opinion, the accompanying consolidated balance sheet as of December 31, 2013 , including the consolidated schedule of investments, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.


/s/ ERNST & YOUNG LLP


McLean, Virginia


April 28, 2014





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


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


This Quarterly Report on Form 10-Q, including Management's Discussion and Analysis of Financial Condition and Results of Operations, contains forward-looking statements that involve substantial risks and uncertainties. These forward-looking statements are not historical facts, but rather are based on current expectations, estimates, forecasts, projections, intentions, goals, strategies, plans, prospects and the beliefs and assumptions of our management including, without limitation: our expectations regarding our results of operations, including revenues, net operating income, net investment losses and general and administrative expenses and the factors that may affect such results; our intentions to repurchase shares of our common stock under our stock repurchase program; our expectations regarding future compensation costs associated with severance arrangements, deferred financing costs and litigation expenses; our expectations regarding the full use before expiration of certain financial instruments, including loans, participations in loans, guarantees, letters of credit and other financial commitments; our expectations regarding future monetizations; our expectations with regard to projected originations and investment decisions in relation to our stock repurchase program; the sufficiency of liquidity to meet 2014 operating requirements, as well as new origination opportunities and potential dividend distributions; our decisions to make dividend distributions after taking into account our distribution requirements as a RIC, together with an assessment of gains and losses recognized or to be recognized for tax purposes, portfolio transactional events, liquidity, cash earnings and our asset coverage ratio; the use of our available liquidity to pay dividends to our stockholders and to repurchase our common stock in the open market under our stock repurchase program; estimated liquidity for repayment of our borrowing facilities from a number of sources, including cash on-hand, the maturity or monetization of our investment portfolio, equity issuances, and from other borrowing arrangements; 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; general market conditions; the state of the economy and other factors.  Forward-looking statements can be identified by terminology such as “anticipate,” “believe,” “could,” “could increase the likelihood,” “hope,” “target,” “project,” “goals,” “potential,” “predict,” “might,” “estimate,” “expect,” “intend,” “is planned,” “may,” “should,” “will,” “will enable,” “would be expected,” “look forward,” “may provide,” “would” or similar terms, variations of such terms or the negative of those terms. These statements are not guarantees of future performance and are subject to risks, uncertainties, and other factors, some of which are beyond our control and difficult to predict. Important factors could cause our actual results to differ materially from those indicated or implied by forward-looking statements. Such factors that could cause or contribute to such differences include those risk factors discussed in Item IA of Part II of this Quarterly Report on Form 10-Q.


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


DESCRIPTION OF BUSINESS


We are a solutions-focused commercial finance company that provides capital and advisory services to lower middle-market companies throughout the United States.  Generally, our portfolio companies use our capital investment to finance acquisitions, recapitalizations, refinance existing debt, buyouts, organic growth, working capital and other general corporate purposes.


We are an internally managed, non-diversified, closed-end investment company that has elected to be regulated as a business development company, or BDC, under the Investment Company Act of 1940, as amended , or the 1940 Act.  As a BDC we must meet various regulatory tests, which include investing at least 70% of our total assets in private or thinly traded public U.S.-based companies and limitations on our ability to incur indebtedness unless immediately after such borrowing we have an asset coverage for total borrowings (excluding small business investment company, or SBIC, debt) of at least 200% (i.e., the amount of debt generally may not exceed 50% of the value of our assets).


We also make investments in qualifying small businesses through our wholly owned subsidiary licensed by the United States Small Business Administration, or the SBA, to operate as a SBIC under the Small Business Investment Act of 1958 , as amended, or the SBIC Act.  An SBIC is subject to a variety of regulations concerning, among other things, the size and nature of the companies in which it may invest and the structure of those investments.


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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 — Q1 2014


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|• | Originations and Advances— We made $6.7 million in advances to existing portfolio companies.

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|• | Loan Monetizations— We received $21.9 million in loan payoffs and amortization payments, including $19.6 million from the monetization, at par, of our loan to G&L Investment Holdings, LLC.

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|• | Equity Monetizations and Realizations —We received $4.5 million in proceeds from the sale of equity investments, principally the sale of securities in G&L Investment Holdings, LLC.  We recognized a realized loss of $4.5 million on the sale of G&L Investment Holdings, which was offset by a reversal of previously recorded unrealized depreciation of $4.5 million.

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|• | Loans on Non-Accrual —Loans on non-accrual were $41.0 million at cost (12.2% of the total loan portfolio), and $9.4 million at fair value (3.1% of the total loan portfolio).  We put Education Management, Inc. on non-accrual this quarter.

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|• | Unrealized Depreciation —We recorded $23.3 million of unrealized depreciation on our loan and equity portfolio, principally from two investments.  We recorded $15.2 million of unrealized depreciation on our investment in Education Management, Inc. to reflect operational, financial and business challenges facing the company.  Furthermore, we reduced our valuation multiple for RadioPharmacy Investors, LLC and recorded $6.3 million of unrealized depreciation based on volume, pricing and supply-cost challenges facing the company's core business.

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|• | Open-Market Purchases of Our Stock —We repurchased 2,759,267 shares of our common stock at a weighted average purchase price of $3.84.  We acquired these shares from sellers in open market transactions.  We retire these shares upon settlement, thereby reducing the number of shares issued and outstanding.  From January 1, 2014 through April 24, 2014, we repurchased6,641,888shares of our common stock at a weighted average purchase price of$3.78.  On April 25, 2014, our board of directors terminated our existing stock repurchase program effective as of May 2, 2014 and authorized a new stock repurchase program of up to $50.0 million effective as of May 5, 2014.

|  |                                                                                                                                                                                                                                                                                                                               
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|• | Operating Costs— Our total operating costs, excluding interest expense, were $3.0 million, or 0.67% of total assets of $448.6 million.  We incurred $0.5 million in general and administrative costs related to the Color Star Growers of Colorado, Inc. litigation and severance, which we included in total operating costs.

|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|• | Reduced Leverage— On January 21, 2014, we terminated our MCG Commercial Loan Trust 2006-1 and accelerated $0.1 million of deferred financing costs that we included in interest expense.  On April 21, 2014, based on our assessment of our excess liquidity, we terminated our undrawn Bank of America unsecured revolver that was set to expire in November 2014.  We expect the termination of the revolver to result in the acceleration of $0.1 million of deferred financing costs in the quarter ending June 30, 2014.

|  |                                                                                                                                                                                                                                                                                                                                                                                                 
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|• | Effective April 21, 2014, Keith Kennedy, MCG's President, was elected as Chief Executive Officer, as a member of our board of directors as a Class I director and as a member of the investment and valuation committee.  Mr. Kennedy succeeded B. Hagen Saville who retired after 16 years of leadership at MCG, including as the Chief Executive Officer and member of our board of directors.

OUTLOOK


We continue to evaluate market conditions. We expect monetizations to continue to accelerate as several of our borrowers are accessing the senior loan market at very attractive rates and with favorable returns.


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We intend to make investments in support of our portfolio companies.  For new investments, we intend to evaluate the risk-reward relative to buying our stock, particularly given current market conditions.  To that end, on April 25, 2014 our Board of Directors authorized a new stock repurchase program of up to $50.0 million which will commence on May 5, 2014.


During the second quarter of 2014, we expect to record $3.6 million, or approximately $0.06 per share, related to employee terminations, including $2.5 million of severance costs included in general and administrative expense and $1.1 million of accelerated amortization of restricted stock included in employee compensation expense.  In addition during the second quarter of 2014, we expect to record $0.3 million of additional general and administrative expense related to the Color Star Growers of Colorado, Inc. litigation.


Based on our assessment of current market conditions, the unpredictable nature of portfolio monetizations and the near-term recommendation of our new leadership team to primarily focus on stabilizing the investment portfolio and repurchasing the Company's stock in the open market, we do not anticipate providing forward looking guidance relative to our net operating income, origination volumes, expense levels or other operating metrics.  Any previous guidance should no longer be relied upon.  We believe this change allows management to concentrate on our portfolio and our long-term strategies.


On April 25, 2014, our board of directors declared a $0.07 per share dividend payable May 30, 2014 to shareholders of record as of May 9, 2014.


ACCESS TO CAPITAL AND LIQUIDITY


At March 31, 2014 , we had $83.4 million of cash and cash equivalents available for general corporate purposes, as well as $30.4 million of cash in restricted accounts related to our SBIC that we may use to fund new investments in the SBIC and $2.4 million of restricted cash held in escrow.


At March 31, 2014 , $150.0 million of SBA borrowings were outstanding, the maximum available under our current SBIC license.


On January 21, 2014, we repaid and terminated our MCG Commercial Loan Trust 2006-1, or 2006-1 Trust.  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.  Upon termination, the assets of the 2006-1 Trust were transferred to MCG, the parent.


PORTFOLIO COMPOSITION AND INVESTMENT ACTIVITY


As of March 31, 2014 , the fair value of our investment portfolio was $326.3 million , which represents a $42.6 million , or 11.5% , decrease from the $368.9 million fair value as of December 31, 2013 .  The following sections describe the composition of our investment portfolio as of March 31, 2014 and key changes in our portfolio during the three months ended March 31, 2014 .


Portfolio Composition


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


March 31, 2014December 31, 2013(dollars in thousands)Investments at Fair ValuePercent of Total PortfolioInvestments at Fair ValuePercent of Total PortfolioDebt investmentsSenior secured debt$173,25153.1%$185,52450.3%Subordinated debtSecured90,12727.6108,33829.4Unsecured42,76113.142,45211.5Total debt investments306,13993.8336,31491.2Equity investmentsPreferred equity16,3755.028,3907.7Common/common equivalents equity3,7841.24,1691.1Total equity investments20,1596.232,5598.8Total investments$326,298100.0%$368,873100.0%


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Our debt instruments bear contractual interest rates ranging from 2.5% to 15.0% , a portion of which may be in the form of paid-in-kind interest, or PIK.  As of March 31, 2014 , approximately 67.5% of the fair value of our loan portfolio had variable interest rates, based on either the London Interbank Offer Rate, or LIBOR, or the prime rate, and 32.5% of the fair value of our loan portfolio had fixed interest rates.  As of March 31, 2014 , approximately 55.9% of our loan portfolio, at fair value, had LIBOR floors between 1.0% and 3.0% on a LIBOR-based index or prime floors between 2.5% and 6.0% .  At origination, our loans generally have four- to six-year stated maturities.  Borrowers typically pay an origination fee based on a percentage of the total commitment and a fee on undrawn commitments.


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


March 31, 2014December 31, 2013(dollars in thousands)Investments at Fair ValuePercent of Total PortfolioInvestments at Fair ValuePercent of Total PortfolioHealthcare$79,41324.3%$84,92223%Business services64,87419.964,10817.4Manufacturing52,19416.051,73514.0Education42,69313.157,90515.7Publishing25,6317.925,3126.9Restaurants23,3307.223,0106.2Information services12,5933.912,5523.4Broadcasting12,2123.712,2523.3Home furnishings4,8181.54,7301.3Consumer products4,6811.44,6571.3Diversified financial services3,3841.03,2980.9Insurance——23,6206.4Other(a)4750.17720.2Total$326,298100.0%$368,873100.0%______________________(a)No individual industry within this category exceeds 1%.


As of March 31, 2014 , our ten largest portfolio companies represented approximately 55.1% of the total fair value of our investments.  These ten companies accounted for 53.0% of our total revenue during the three months ended March 31, 2014 .


During the three months ended March 31, 2014 , we had concentrations in certain industries, including the healthcare, business services, manufacturing and education industries.  The following table summarizes our fair value and revenue concentrations in each of those industries:


Investments at fair valueRevenue for the three months endedMarch 31, 2014December 31, 2013March 31, 2014March 31, 2013(dollars in thousands)Amount% of Total PortfolioAmount% of Total PortfolioAmount% of Total RevenueAmount% of Total RevenueIndustryHealthcare$79,41324.3%$84,92223.0%$2,13122.8%$3,05323.0%Business services64,87419.964,10817.41,71518.41,80113.6Manufacturing52,19416.051,73514.01,76718.91,1518.7Education42,69313.157,90515.71,12412.01,56411.8Total$239,17473.3$258,67070.1$6,73772.1$7,56957.1


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Changes in Investment Portfolio


During the three months ended March 31, 2014 , we completed $6.7 million of originations and advances compared to $15.9 million of originations and advances during the three months ended March 31, 2013 .  The following table summarizes our total portfolio investment activity during the three months ended March 31, 2014 and 2013 :


Three months ended(in thousands)March 3120142013Beginning investment portfolio$368,873$477,724Originations and advances6,70615,894Gross payments, reductions and sales of securities(26,426)(85,218)Net realized loss(4,488)(3,832)Unrealized depreciation(23,173)15Reversals of unrealized depreciation4,5243,783Origination fees and amortization of unearned income282656Ending investment portfolio$326,298$409,022


Originations and Advances


The following table shows our originations and advances during the three months ended March 31, 2014 and 2013 by security type:


Three months ended March 31,20142013(dollars in thousands)Amount% of TotalAmount% of TotalDebt investmentsSenior secured debt$4,88072.8%$9455.9%Subordinated debtSecured1,28319.19966.3Unsecured2824.213,05582.1Total debt investments6,44596.114,99694.3Equity investmentsPreferred equity2613.98985.7Common/common equivalents equity————Total equity investments2613.98985.7Total originations and advances$6,706100.0%$15,894100.0%


The following table shows our significant originations and advances:


(in thousands)Three months endedMarch 31, 2014CompanyOriginationsDraws/ AdvancesPIK Advances/ DividendsTotalDebtOceans Acquisition, Inc.$—$2,333$—$2,333Community Investors, Inc.—1,667—1,667Other (< $1 million)—8001,6452,445Total debt—4,8001,6456,445EquityOther (< $1 million)—111150261Total Equity—111150261Total originations and advances$—$4,911$1,795$6,706


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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 three months ended March 31, 2014 and 2013 by security type:


Three months ended March 31,20142013(dollars in thousands)Amount% of TotalAmount% of TotalDebt investmentsSenior secured debt$2,3358.8%$77,24090.6%Subordinated debtSecured19,56074.04,5005.3Unsecured————Total debt investments21,89582.881,74095.9Equity investmentsPreferred equity4,53117.23,4754.1Common/common equivalents equity——3—Total equity investments4,53117.23,4784.1Total gross payments, reductions and sales of securities$26,426100.0%$85,218100.0%


During the three months ended March 31, 2014 and 2013 , our gross payments, reductions and sales of securities by transaction type included:


Three months ended March 31,(in thousands)20142013Principal repayments, reductions and loan sales$17,500$63,011Sale of equity investments4,3483,234Scheduled principal amortization2,33516,770Collection of accrued paid-in-kind interest and dividends2,2432,203Total gross payments, reductions and sales of securities$26,426$85,218


As shown in the following table, during the three months ended March 31, 2014 , we monetized 1 portfolio investment with proceeds totaling $23.8 million:


Three months endedMarch 31, 2014(in thousands)Principal Repayments and Proceeds from Loan SalesSale or Settlement of Equity InvestmentsPIK Interest and Dividend PrepaymentsTotalMonetizationsG&L Investment Holdings, LLC$17,500$4,196$2,060$23,756Total monetizations17,5004,1962,06023,756Other scheduled payments2,3351521832,670Total gross payments, sales and other reductions of investment portfolio$19,835$4,348$2,243$26,426


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


The following table shows the distribution of our investments on our 1 to 5 investment rating scale at fair value as of March 31, 2014 and December 31, 2013 :


(dollars in thousands)March 31, 2014December 31, 2013Investment RatingInvestments at Fair Value% of Total PortfolioInvestments at Fair Value% of Total  Portfolio1(a)$62,88419.3%$104,65728.4%2128,26539.3137,58637.3393,70528.794,10225.5429,9429.225,9767.0511,5023.56,5521.8Total$326,298100.0%$368,873100.0%


_________________________


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|(a) | As ofMarch 31, 2014andDecember 31, 2013, Investment Rating “1” included $56.8 million and $83.4 million, respectively, of loans to companies in which we also hold equity securities.

When one of our loans becomes more than 90 days past due, or if we otherwise do not expect the customer to be able to service its debt and other obligations, we will, as a general matter, place 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.


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


COST BASISFAIR VALUE BASISMarch 31, 2014December 31, 2013March 31, 2014December 31, 2013(dollars in thousands)Investments at Cost% of Loan PortfolioInvestments at Cost% of Loan PortfolioInvestments at Fair Value% of Loan PortfolioInvestments at Fair Value% of Loan PortfolioLoans greater than 90 days past dueOn non-accrual status$3,8971.16%$3,8971.11%$——%$——%Total loans greater than 90 days past due$3,8971.16%$3,8971.11%$——%$——%Loans on non-accrual status0 to 90 days past due$37,09011.01%$17,5314.98%$9,3733.06%$4,4931.34%Greater than 90 days past due3,8971.163,8971.11————Total loans on non-accrual status$40,98712.17%$21,4286.09%$9,3733.06%$4,4931.34%


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The following table summarizes the changes in the cost and fair value of the loans on non-accrual status from December 31, 2013 through March 31, 2014 :


Three months endedMarch 31, 2014(In thousands)CostFair ValueNon-accrual loan balance as of December 31, 2013$21,428$4,493Additional loan on non-accrual status - Education Management, Inc.19,8564,879Change in unrealized gain (loss) on non-accrual loans—298Payments received from loans on non-accrual status(297)(297)Total change in non-accrual loans19,5594,880Non-accrual loan balance as of March 31, 2014$40,987$9,373











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Results of Operations


The following section compares our results of operations for the three months ended March 31, 2014 to the three months ended March 31, 2013 .


COMPARISON OF THE THREE MONTHS ENDED MARCH 31, 2014 AND 2013


The following table summarizes the components of our net income for the three months ended March 31, 2014 and 2013 :


Three months ended March 31,Variance(dollars in thousands)20142013$PercentageRevenueInterest and dividend incomeInterest income$8,752$11,085$(2,333)(21.0)%Dividend income151898(747)(83.2)Loan fees352793(441)(55.6)Total interest and dividend income9,25512,776(3,521)(27.6)Advisory fees and other income91470(379)(80.6)Total revenue9,34613,246(3,900)(29.4)Operating expensesInterest expense1,9902,382(392)(16.5)Employee compensationSalaries and benefits1,0881,407(319)(22.7)Amortization of employee restricted stock306375(69)(18.4)Total employee compensation1,3941,782(388)(21.8)General and administrative expense1,6391,03260758.8Restructuring expense—7(7)(100.0)Total operating expense5,0235,203(180)(3.5)Net operating income before net investment loss and income tax provision4,3238,043(3,720)(46.3)Net investment loss before income tax provision(23,255)(233)(23,022)NMIncome tax provision458(54)(93.1)Net (loss) income$(18,936)$7,752$(26,688)NMNM=Not Meaningful


TOTAL REVENUE


Total revenue includes interest and dividend income, loan fees, advisory fees and other income.  The following sections describe the reasons for the variances in each major component of our revenue during the three months ended March 31, 2014 from the three months ended March 31, 2013 .


INTEREST INCOME


The level of interest income that we earn depends upon the level of interest-bearing investments outstanding during the period, as well as the weighted-average yield on these investments.  During the three months ended March 31, 2014 , the total yield on our average debt portfolio at fair value was 11.4% compared to 12.1% during the three months ended March 31, 2013 .  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.


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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 March 31, 2014 and 2013 :


Three months ended March 31,20142013Average 90-day LIBOR0.2%0.3%Spread to average LIBOR on average loan portfolio12.111.7Impact of fee accelerations of unearned fees on paid/restructured loans—0.1Impact of non-accrual loans(0.9)—Total yield on average loan portfolio11.4%12.1%


During the three months ended March 31, 2014 , interest income was $8.8 million , compared to $11.1 million during the three months ended March 31, 2013 , which represented a $2.3 million , or 21.0% , decrease .  This decrease reflected a $2.0 million decrease in interest income resulting from a 18.7% decrease in our average loan balance, a decrease of $0.8 million resulting from loans that were on non-accrual status during the three months ended March 31, 2014 , but that had been accruing interest during the three months ended March 31, 2013 , and a $0.1 million decrease related to the decrease in LIBOR, partially offset by a $0.6 million increase in interest income attributable to a 0.4% increase in our spread to LIBOR.


PIK Income


Interest income includes certain amounts that we have not received in cash, such as PIK interest.  PIK interest represents contractually deferred interest that is added to the principal balance of the loan and compounded if not paid on a current basis.  Borrowers may, in some instances, be required to prepay PIK because of certain contractual provisions or they may choose to prepay; however, more typically, PIK is paid at the end of the loan term.  The following table shows the PIK-related activity for the three months ended March 31, 2014 and 2013 , at cost :


Three months ended March 31,(in thousands)20142013Beginning PIK loan balance$12,132$9,043PIK interest earned during the period1,6451,246Payments received from PIK loans(2,060)(1,959)Realized loss—(357)Ending PIK loan balance$11,717$7,973


As of March 31, 2014 , we were not accruing interest on $1.0 million of the PIK loans, at cost, shown in the preceding table and as of March 31, 2013 , all of our PIK loans were accruing interest.  During three months ended March 31, 2014 , we received $2.1 million in PIK loan repayment related to the repayment in full of our loan to G&L Investment Holdings, LLC.  During the three months ended March 31, 2013 , the payments received from PIK loans included $1.0 million collected in conjunction with the partial repayment of our investment in Education Management, Inc., as well as $0.8 million collected in conjunction with the repayment in full of our investment in NDSSI Holdings, LLC.


DIVIDEND INCOME


We accrete dividends on equity investments with stated dividend rates as they are earned, to the extent that we believe the dividends will be paid ultimately and the associated portfolio company has sufficient value to support the accretion.  We recognize dividends on other equity investments when we receive the dividend payment.  Our dividend income varies from period to period because of changes in the size and composition of our equity investments, the yield from the investments in our equity portfolio and the ability of the portfolio companies to declare and pay dividends.  During the three months ended March 31, 2014 and 2013 , we recognized dividend income of $0.2 million and $0.9 million , respectively.  In addition, during each of the three months ended March 31, 2014 and 2013 , we received payments on accrued dividends of $0.2 million.  As of March 31, 2014 , the balance of accrued dividends was $7.7 million.


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 March 31, 2014 , we earned $0.1 million of advisory fees and other income, which represented a $0.4 million , or 80.6% , decrease from the three months ended March 31, 2013 .  This decrease resulted principally from a decrease in prepayment fees related to a loan prepayment in the first quarter of 2013.


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


During the three months ended March 31, 2014 , we incurred $2.0 million of interest expense, which represented a $0.4 million , or 16.5% , decrease from the same period in 2013 .  Interest expense for the three month period ended March 31, 2014 includes $0.2 million of interest and deferred financing costs associated with our 2006-1 Trust, which we terminated in January 2014.  During these respective periods, our average cost to borrow increased to 5.2% from 4.0% , principally due to the repayment of securitized debt in our 2006-1 Trust which carried interest rates ranging from L+0.33% to L+2.25%.


During the three months ended March 31, 2014 , our average borrowings declined to approximately $154.3 million from an average of approximately $235.6 million for the same period in 2013 , which accounted for a $0.9 million reduction in our interest expense.  In addition, interest expense decreased by $0.1 million related to decreased amortization of debt issuance costs.  These decreases were offset by $0.6 million attributable to the spread to LIBOR increasing from approximately 3.17% to 4.19% .


EMPLOYEE COMPENSATION


Employee compensation expense includes base salaries and benefits, variable annual incentive compensation and amortization of employee stock awards.  During the three months ended March 31, 2014 , our employee compensation expense was $1.4 million , which represented a $0.4 million , or 21.8% , decrease from the same period in March 31, 2013 .  Our salaries and benefits decrease d by $0.3 million , or 22.7% , due to a $0.2 million decrease in salaries and benefits and a $0.1 million decrease in incentive compensation.  As of March 31, 2014 , we had 15 employees compared to 20 employees as of March 31, 2013 .


GENERAL AND ADMINISTRATIVE


During the three months ended March 31, 2014 , general and administrative expense was $1.6 million , which represented a $0.6 million , or 58.8% , increase compared to the same period in 2013 .  General and administrative expense increase resulted primarily from a $0.3 million increase in legal fees related to portfolio litigation and a $0.2 million increase in severance costs related to employee terminations in the first quarter of 2014.


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NET INVESTMENT LOSS BEFORE INCOME TAX PROVISION


During the three months ended March 31, 2014 , we recorded $23.3 million of net investment loss before income tax provision, compared to $0.2 million of net investment loss during the same period in 2013 .  These amounts represent the total of net realized gains and losses, net unrealized appreciation (depreciation), and reversals of unrealized (appreciation) depreciation.  We reverse unrealized (appreciation) depreciation at the time that we realize the gain or loss.  The following table summarizes our realized and unrealized gain and (loss) on investments and changes in our unrealized appreciation and depreciation on investments for the three months ended March 31, 2014 :


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


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

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

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

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


The following table summarizes our realized and unrealized (loss) and gain on investments and changes in our unrealized appreciation and depreciation on investments for the three months ended March 31, 2013 :


Three months ended March 31, 2013(in thousands)IndustryTypeRealized Gain/(Loss)Unrealized (Depreciation)/ AppreciationReversal of Unrealized Depreciation/ (Appreciation)Net (Loss)/ GainPortfolio CompanyVirtual Radiologic CorporationHealthcareNon-Affiliate$—$(2,531)$—$(2,531)Miles Media Group, LLCBusiness ServicesAffiliate—1,192—1,192Advanced Sleep Concepts, Inc.Home FurnishingsAffiliate(3,424)103,249(165)Other (< $1 million net gain (loss))(607)1,3455331,271Total$(4,031)$16$3,782$(233)


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|• | In the first quarter of 2013, we recorded $2.5 million of unrealized depreciation on our investment in Virtual Radiologic Corporation to reflect a decrease in the indicated market price for that security.

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|• | We also recorded $1.2 million of unrealized appreciation on our investment in Miles Media Group, LLC to reflect an improvement in that portfolio company's operating performance.

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|• | In addition, during the three months ended March 31, 2013, we wrote off our preferred and common equity investments in Advanced Sleep Concepts, Inc., resulting in a realized loss of $3.4 million and a reversal of previously recorded unrealized depreciation of $3.2 million.

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INCOME TAX (BENEFIT) PROVISION


During the three months ended March 31, 2014 , we incurred a $4,000 income tax provision compared to a $58,000 income tax provision during the three months ended March 31, 2013 .  The income tax provision for both periods was primarily attributable to flow-through taxable income on certain investments held by our subsidiaries.


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 and to repurchase our common stock in the open market under our stock repurchase program.  For the three months ended March 31, 2014 , we declared 12.5 cents per share in dividends and paid $8.7 million in total dividends.  We also repurchased 2,759,267 shares of our common stock for $10.6 million at a weighted average price of $3.84 per share.


For the three months ended March 31, 2014 , we earned 11.4% on our average loan portfolio at fair value of $324.2 million and our weighted average cost to borrow was 5.2% on average borrowings of $154.3 million .  Including dividend income and fee income, we earned $4.3 million of net operating income.


At March 31, 2014 , we had $83.4 million in cash and cash equivalents available for general corporate purposes, $30.4 million of cash in restricted accounts related to our SBIC, that we may use to fund new investments in the SBIC, and $2.4 million of restricted cash held in escrow. On April 21, 2014, based on our assessment of our excess liquidity, we terminated our undrawn Bank of America Unsecured Revolver that was set to expire in November 2014.


Although there can be no assurance, we believe we have sufficient liquidity to meet our operating requirements for the remainder of 2014, as well as liquidity for new origination opportunities and potential dividend distributions.


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


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


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|• | Cash and cash equivalentsrepresent unrestricted cash, including checking accounts, interest bearing deposits collateralized by marketable debt securities and highly liquid investments with original maturities of 90 days or less.  As ofMarch 31, 2014andDecember 31, 2013, we had$83.4 millionand $91.6 million, respectively, in cash and cash equivalents.  As ofMarch 31, 2014, our cash and cash equivalents included$57.9 millionheld in interest-bearing accounts.

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|• | Cash, restrictedincludes cash held for regulatory purposes and cash held in escrow.  The largest component of restricted cash was represented by cash held by Solutions Capital I, L.P., or Solutions Capital, a wholly owned subsidiary licensed as an SBIC under the SBIC Act, which generally is restricted to the origination of new loans by Solutions Capital.  As ofMarch 31, 2014andDecember 31, 2013, we had$32.8 millionand $33.9 million, respectively, of restricted cash.

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|• | Cash, securitization accountsincluded principal and interest payments received on securitized loans, which, were held in designated bank accounts until monthly or quarterly disbursements were made from the securitization trusts.  We were generally required to use a portion of these amounts to pay interest expense, reduce borrowings or pay other amounts in accordance with the related securitization agreements.  Cash in securitization accounts had a negative impact on our earnings since the interest we paid on borrowings typically exceeded the rate of return that we were able to earn on temporary cash investments.  As of December 31, 2013, we had $13.9 million in cash, securitization accounts.  On January 21, 2014, we terminated our MCG Commercial Loan Trust 2006-1 and the securitized cash was used to repay principal and interest due on the notes including the notes owned by MCG Capital, the parent.

During the three months ended March 31, 2014 , our operating activities provided $21.5 million of cash and cash equivalents, and our financing activities used $29.7 million of cash and cash equivalents.


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LIQUIDITY AND CAPITAL RESOURCES—BORROWINGS


As of March 31, 2014 , we reported $150.0 million of borrowings on our Consolidated Balance Sheets at cost.  The following table summarizes our borrowing facilities, the facility amounts and the amounts outstanding.


March 31, 2014December 31, 2013(dollars in thousands)Maturity DateTotal Facility/ ProgramAmount OutstandingTotal Facility/ ProgramAmount OutstandingSBIC2008-10BSeptember 2018$2,600$2,600$2,600$2,6002009-10AMarch 201912,00012,00012,00012,0002009-10BSeptember 201913,00013,00013,00013,0002010-10BSeptember 202027,50027,50027,50027,5002011-10AMarch 202153,50053,50053,50053,5002012-10AMarch 202241,40041,40041,40041,400MCG Commercial Loan Trust 2006-1Series 2006-1 Class D Notes(a)April 2018——40,01625,172Bank of America Unsecured RevolverUnsecured Revolving NoteNovember 201420,000—20,000—Total borrowings$170,000$150,000$210,016$175,172__________(a)In January 2014, the Class D Notes were repaid in full.


In October 2008, we received exemptive relief from the SEC which allows us to exclude our SBIC debt from the calculation of our consolidated BDC asset coverage ratio.  As of March 31, 2014 , there were no senior securities outstanding other than our debt issued by Solutions Capital.


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


As our borrowing facilities mature, it is important that we have sufficient liquidity available to repay our borrowing obligations.  We may obtain the liquidity for repayment of our borrowing facilities from a number of sources, including cash on-hand, the maturity or monetization of our investment portfolio, equity issuances, and from other borrowing arrangements.


We had funded our secured borrowing debt facility through a bankruptcy remote, special-purpose, wholly owned subsidiary.  Therefore, this subsidiary’s assets were not available to our creditors.  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.


On April 21, 2014, based on our assessment of our excess liquidity, we terminated our undrawn Bank of America Unsecured Revolver.


SBIC DEBENTURES


In December 2004, we formed a wholly owned subsidiary, Solutions Capital.  Solutions Capital has a license from the SBA to operate as an SBIC under the SBIC Act.  The license enabled Solutions Capital to borrow up to $150.0 million from the SBA, which is the maximum amount of outstanding leverage available to single-license SBIC companies.


To realize the full $150.0 million borrowing for which we have received approval under the SBIC program, we have funded a total of $75.0 million to Solutions Capital.  As of each of March 31, 2014 and December 31, 2013 , Solutions Capital had borrowed the full $150.0 million.  We are permitted to use these funds to provide debt and equity capital to qualifying small businesses.  However, we may not use these borrowings to provide additional financing to certain companies that are currently in our portfolio without SBA approval.  In addition, we may not use these funds for MCG’s, the parent company’s, working capital.


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


The following table sets forth the maturity of Solutions Capital debentures, as well as the maturity of the investments and the current balance of restricted cash in Solutions Capital as of March 31, 2014 .


Maturities(in thousands)TotalLess than 1 year1-3 years4-5 yearsAfter 5 yearsBorrowings$150,000$—$—$14,600$135,400CollateralFair value of debt investments207,629—38,819148,97919,831Fair value of equity investments(a)2,763———2,763Cash, restricted account30,38330,383———Total collateral$240,775$30,383$38,819$148,979$22,594


____________


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


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.  Advances under the Bank of America Unsecured Revolver bore interest at LIBOR plus 4.0% per annum and will expire in November 2014.  As of March 31, 2014 , there were no borrowings outstanding on the Bank of America Unsecured Revolver.  On April 21, 2014, based on our assessment of our excess liquidity, we terminated our undrawn Bank of America Unsecured Revolver.


The Bank of America Unsecured Revolver was subject to certain collateral requirements and financial covenants.  Included among them were requirements that we maintain a ratio of all unencumbered assets to outstanding amounts under the Bank of America Unsecured Revolver of at least four-to-one, as well as a ratio of unencumbered cash and senior portfolio loans to outstanding amounts under the Bank of America Unsecured Revolver of at least three-to-one.  The Bank of America Unsecured Revolver required that we maintain a zero balance for a period of at least five consecutive days during the six-month period immediately preceding June 30th and December 31st of each year.  The Bank of America Unsecured Revolver could be prepaid at any time.


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.


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WEIGHTED-AVERAGE BORROWINGS AND COST OF FUNDS


The following table shows our weighted-average borrowings, the weighted-average interest rate on all of our borrowings, including amortization of deferred debt issuance costs and commitment fees, the average LIBOR, and the average spread to LIBOR for 2014 and 2013 :


Three months ended March 31,(dollars in thousands)20142013Weighted-average borrowings$154,335$235,605Average LIBOR0.24%0.29%Average spread to LIBOR, excluding amortization of deferred debt issuance costs4.193.17Impact of amortization of deferred debt issuance costs0.730.59Total cost of funds5.16%4.05%


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.


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 an additional stock repurchase program of up to $25.0 million.  On February 28, 2014, our board of directors increased the stock repurchase program to $35.0 million.  During the three months ended March 31, 2014 , we repurchased 2,759,267 shares of our common stock at a weighted average purchase price of $3.84 per share, which was a 19.0% discount from our December 31, 2013 net asset value per share.  On April 25, 2013, our board of directors terminated our existing stock repurchase program effective as of May 2, 2014 and authorized a new stock repurchase program of up to $50.0 million effective as of May 5, 2014.  Under the new program, we are authorized to repurchase shares of our common stock in open market transactions, including through block purchases, depending on prevailing market conditions and other factors.  The repurchase program may be extended, modified or discontinued at any time for any reason.  The program does not obligate us to acquire any specific number of shares, and all repurchases will be made in accordance with SEC Rule 10b-18, which sets certain restrictions on the method, timing, price and volume of stock repurchases.


We requested and received the assurance of the staff of the Division of Investment Management that it would not recommend enforcement action to the SEC under the 1940 Act or Rule 17d-1 thereunder if we engage in a stock repurchase program and agree not to issue additional restricted stock under any compensation plan unless such issuance, together with all restricted stock outstanding under all compensation plans, does not exceed 10% of our outstanding common stock at the time of such issuance less the total number of shares previously issued, in the aggregate, pursuant to all compensatory plans.  Although as of March 31, 2014 , 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 the10% 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


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arrangements, or similar transactions.  Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee by the counterparty.  Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements.


We do not report the unused portions of these commitments on our Consolidated Balance Sheets.  As of March 31, 2014 , we had $13.5 million of outstanding unused loan commitments.  We believe that our operations, monetizations, revolving credit facility and unrestricted cash will provide sufficient liquidity to fund, as necessary, requests to draw on these unfunded commitments.  We estimate that the fair value of these commitments was $0.1 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 March 31, 2014 , we had no outstanding guarantees or standby letters of credit.


CONTRACTUAL OBLIGATIONS


The following table shows our contractual obligations as of March 31, 2014 :


(in thousands)Payments Due by PeriodContractual Obligations(a)TotalLess than 1 year1-3 years4-5 yearsAfter 5 yearsBorrowingsSBIC150,000——14,600135,400Interest payments on borrowings(b)43,7166,50313,00612,92211,285Operating leases838325513——Severance obligations(c)2,3101,1351,175——Total contractual obligations$196,864$7,963$14,694$27,522$146,685


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|(a) | Excludes the unused commitments to extend credit to our customers of$13.5 millionas discussed above.

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

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|(c) | Represents remaining severance payments and employer taxes that we are obligated to pay stemming from the resignations of our former chief executive officer and chief financial officer.

DISTRIBUTIONS


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


We may not be able to achieve operating results that will allow us to make distributions at a specific level or to increase the amount of these distributions.  In addition, we may be limited in our ability to make distributions due to the BDC asset coverage test for borrowings applicable to us as a BDC under the 1940 Act and due to provisions in our credit facilities and SBA regulations.  If we do not distribute a certain percentage of our income annually, we will suffer adverse tax consequences, including possible loss of favorable RIC tax treatment.  We cannot assure stockholders that they will receive any distributions, or distributions at a particular level.  We may make distributions to our stockholders of certain net capital gains.  Since December 2001, we have declared aggregate per share distributions of $14.01 .


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The following table summarizes the distributions that we declared since January 1, 2012:


Date DeclaredRecord DatePayable DateDividends per ShareApril 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$0.125October 26, 2012November 16, 2012November 30, 2012$0.125July 27, 2012August 17, 2012August 31, 2012$0.140April 27, 2012June 13, 2012July 13, 2012$0.140February 24, 2012April 13, 2012May 15, 2012$0.170


If we determined the tax attributes of our distributions as of March 31, 2014 , 60% would be from ordinary income and 40% would be a return of capital.  A return of capital is a return of stockholder investment, rather than a return of earnings or gains derived from our investment activities.  While not immediately taxable to the extent of a stockholder's basis in its shares, a stockholder's basis in the investment will be reduced by the nontaxable amount, which will result in additional gain or a lower loss when the shares are sold.  However, actual determinations of the tax attributes of our distributions, including determinations of return of capital, are made annually as of the end of our fiscal year based upon our taxable income and distributions paid for the full year.  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.


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, 2013 .


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.


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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.


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—Majority-owned control investments comprise11.5%of our investment portfolio at fair value.  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

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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—Non-control investments comprise88.5%of our investment portfolio at fair value.  Quoted prices are not available for95.9%of our non-control investments at fair value.  For our non-control equity investments, we use the same market and income approaches used to value our control investments.  For non-control debt investments for which no quoted prices are available, we estimate fair value using a market-yield approach based on the expected future cash flows discounted at the loans’ effective interest rates, based on our estimate of current market rates.  We may adjust discounted cash flow calculations to reflect other market conditions or the perceived credit risk of the borrower.  In the event the fair value of a non-control debt investment, as determined by the same market or income approach used to value our control investments, is below our cost, we estimate the fair value using the market or income approach.

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|• | Thinly-Traded and Over-the-Counter Securities—Generally, we value securities that are traded in the over-the-counter market or on a stock exchange at the average of the prevailing bid and ask prices on the date of the relevant period end.  However, we may apply a discount to the market value of restricted or thinly-traded public securities to reflect the impact that these restrictions have on the value of these securities.  We review factors, including the trading volume, total securities outstanding and our percentage ownership of securities to determine whether the trading levels are active (Level 1) or inactive (Level 2).  As ofMarch 31, 2014, these securities represented3.6%of our investment portfolio at fair value.  We utilize independent pricing services to arrive at certain of our fair value estimates.  The majority of our level 2 investments are senior debt investments that are secured and collateralized.  To corroborate “bid/ask” quotes from independent pricing services we perform a market-yield approach to validate prices obtained or obtain other evidence.

Our valuation analyses incorporate the impact that key events could have on the securities’ values, including public and private mergers and acquisitions, purchase transactions, public offerings, letters of intent and subsequent debt or equity sales.  Our valuation analyses also include key external data, such as market changes and industry valuation benchmarks.  We also engage independent valuation firms to provide additional data points for our quarterly valuation analyses.  Our general practice is to obtain an independent valuation or review of valuation at least once per year for each portfolio investment that had a fair value in excess of $5.0 million, unless the fair value has otherwise been derived through a sale of some or all of our investment in the portfolio company or is a new investment made within the last twelve months.  In total, as of March 31, 2014 , we either obtained a valuation or review from an independent firm, considered new investments made or used market quotes in the preceding twelve month period to calculate 99.2% of the fair value of our investment portfolio.


The majority of the valuations performed by the independent valuation firms utilize proprietary models and inputs.  We have used, and intend to continue to use, independent valuation firms to provide additional support for our internal analyses.


Our board of directors sets our valuation policies and procedures and determines the fair value of our investments.  The investment and valuation committee of our board of directors meets at least quarterly with our executive management to review management’s recommendations of fair value of our investments.  Our board of directors considers our valuations, as well as the independent valuations and reviews, in its determination of the fair value of our investments.


Due to the uncertainty inherent in the valuation process, such fair value estimates may differ significantly from the values that would have been used had a ready market for the securities existed, and the differences could be material.  In addition, changes in the market environment and other events that may occur over the life of the investments may cause the gains or losses that we ultimately realize on these investments to differ from the valuations currently assigned.


Significant Unobservable Inputs


Our investment portfolio is not composed of homogeneous debt and equity securities that can be valued with a small number of inputs.  Instead, the majority of our investment portfolio is composed of complex debt and equity securities with distinct contract terms and conditions.  As such, our valuation of each investment in our portfolio is unique and


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complex, often factoring in numerous different inputs, including the historical and forecasted financial and operational performance of the portfolio company, projected cash flows, market multiples, comparable market transactions, the priority of our securities compared with those of other investors, credit risk, interest rates, independent valuations and reviews and other inputs too numerous to list quantitatively herein.


The following table summarizes the significant unobservable inputs in the fair value measurements of our level 3 investments by category of investment and valuation technique as of March 31, 2014 .


($ in thousands)Fair ValueValuation TechniquesUnobservable InputsRangeWeighted AverageMinimumMaximumSenior debt$164,816Discounted cash flowMarket interest rate7.2%11.7%8.6%Pending transactions/Letters of intentDiscount—%—%—%Market comparable companiesEBITDA multiple(a)5.0x6.0x5.4%Subordinated debt132,888Discounted cash flowMarket interest rate7.7%14.5%12.6%Pending transactions/Letters of intentDiscount———Market comparable companiesEBITDA multiple(a)6.0x6.0x6.0xPreferred and common equity16,775Market comparable companiesEBITDA multiple(a)4.4x10.0x7.0xDiscount for minority interest—%25.0%4.5%Residual assetsDiscount rate100.0%100.0%100.0%$314,479


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|(a) | EBITDA may include proforma adjustments and/or other addbacks based on specific circumstances related to each investment.

RECENT ACCOUNTING PRONOUNCEMENT


In June 2013, the Financial Accounting Standards Board, issued Accounting Standards Update No. 2013-08, Financial Services—Investment Companies (Topic 946): Amendments to the Scope, Measurement, and Disclosure Requirements, or ASU 2013-08.  This update changes the approach to the assessment of whether a company is an investment company, clarifies the characteristics of an investment company, provides comprehensive guidance for the investment company assessment and contains certain disclosure requirements.  ASU 2013-08 is effective for interim and annual reporting periods in fiscal years that begin after December 15, 2013.  Earlier application is prohibited.  We adopted this standard update beginning January 1, 2014.  The implementation of this standard update did not have a material impact 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 middle-market companies in our portfolio could be affected adversely, which ultimately could lead to difficulty in their meeting debt service requirements and an increase in defaults.


Interest rate sensitivity refers to the change in earnings that may result from changes in the level of interest rates.  Our net interest income is affected by changes in various interest rates, including LIBOR, prime rates and commercial paper rates.  As of March 31, 2014 , approximately 67.5% of our loan portfolio, at fair value, bore interest at a spread to either the LIBOR or the  prime rate, and 32.5% at a fixed interest rate.  As of March 31, 2014 , approximately 55.9% of our loan portfolio, at fair value, had LIBOR floors between 1.0% and 3.0% on a LIBOR-base index or prime floors between 2.5% and 6.0% .  The three-month weighted-average LIBOR interest rate was 0.24% as of March 31, 2014 .  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.


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Based on this review, we determine whether or not any hedging transactions are necessary to mitigate exposure to changes in interest rates.


The following table shows a comparison of the interest rate base for our interest-bearing cash, outstanding commercial loans, at cost, and our outstanding borrowings as of March 31, 2014 and December 31, 2013 :


March 31, 2014December 31, 2013(in thousands)Interest Bearing Cash and Commercial LoansBorrowingsInterest Bearing Cash and Commercial LoansBorrowingsMoney market rate$57,857$—$56,685$—Prime rate113———LIBOR30-day48,511—57,725—60-day————90-day176,772—194,13325,172180-day984———Fixed rate110,319150,000100,009150,000Total$394,556$150,000$408,552$175,172


Based on our March 31, 2014 balance sheet, the following table shows the impact to net income of hypothetical base rate increases in interest rates, assuming no changes in our investment and borrowing structure.  The impact to net income of hypothetical base rate decreases in interest rates is not shown in the following table because as of March 31, 2014 , the quarterly average LIBOR was 0.24% and a 100-basis point decrease could not occur:


(dollars in thousands)Basis Point ChangeInterest IncomeInterest ExpenseNet Income100$1,007$—$1,0072002,960—2,9603005,640—5,640


ITEM 4.  CONTROLS AND PROCEDURES


DISCLOSURE CONTROLS AND PROCEDURES


Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of March 31, 2014 .  The term “disclosure controls and procedures” (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms.  Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure.


Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures.  Based on the foregoing evaluation of our disclosure controls and procedures as of March 31, 2014 , 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.


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INTERNAL CONTROL OVER FINANCIAL REPORTING


No change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act), occurred during the fiscal quarter ended March 31, 2014 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.


PART II.  OTHER INFORMATION


ITEM 1.  LEGAL PROCEEDINGS.


From time to time, we are a party to certain legal proceedings incidental to the normal course of our business, including the enforcement of our rights under contracts with our portfolio companies.  While we cannot predict the outcome of these legal proceedings with certainty, we do not expect that these proceedings will have a material effect on our financial condition or results of operations.  During the quarter ended March 31, 2014 , 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, 2013 , which could materially affect our business, financial condition and/or operating results.  The risks described in our Annual Report on Form 10-K are not the only risks facing our Company.  Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially and adversely affect our business, financial condition and/or operating results.


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, 2013 , 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.


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


STOCK REPURCHASE PROGRAM


On January 17, 2012, our board of directors authorized a stock repurchase program of up to $35.0 million, which was terminated after we effected repurchases totaling approximately $29.4 million.  On October 25, 2013, our board of directors authorized an additional stock repurchase program of up to $25.0 million.  On February 28, 2014, our board of directors increased the stock repurchase program to $35.0 million.  During the three months ended March 31, 2014 , we repurchased 2,759,267 shares of our common stock at a weighted average purchase price of $3.84 per share, which was a 19.0% discount from our December 31, 2013 net asset value per share.  On April 25, 2013, our board of directors terminated our existing stock repurchase program effective as of May 2, 2014 and authorized a new stock repurchase program of up to $50.0 million effective as of May 5, 2014.  Under the new program, we are authorized to repurchase shares of our common stock in open market transactions, including through block purchases, depending on prevailing market conditions and other factors.  The repurchase program may be extended, modified or discontinued at any time for any reason.  The program does not obligate us to acquire any specific number of shares, and all repurchases will be made in accordance with SEC Rule 10b-18, which sets certain restrictions on the method, timing, price and volume of stock repurchases.


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NET ISSUANCE OF RESTRICTED STOCK


For certain employees, we may be deemed to have purchased through the net issuance of shares, a portion of the shares of restricted stock previously issued under the 2006 Plan for which the forfeiture provisions have lapsed to satisfy the applicable employee’s income tax withholding obligations.  We retire immediately all such shares of common stock that we purchase in connection with such net issuance to employees.


DIVIDEND REINVESTMENT PLAN


As part of our dividend reinvestment plan for our common stockholders, we may direct the plan administrator to purchase shares of our common stock on the open market to satisfy dividend reinvestment requests related to dividends that we pay on outstanding shares of our common stock.


The following table summarizes the shares of common stock that we have purchased during the three months ended March 31, 2014 :


Period/PurposeTotal number  of sharesAverage Price Paid per ShareTotal Number of Shares Purchased as Part of Publicly Announced Plans or ProgramsMaximum Number (or Approximate Dollar Value) of Shares that May Yet Be Purchased Under the Plans or ProgramsJanuary 1 – 31, 2014Stock repurchase program(a)40,747$4.4140,747$22,399,008February 1 – 28, 2014Stock repurchase program(a)288,911$4.41288,911$31,125,999March 1 – 31, 2014Stock repurchase program(a)2,429,609$3.762,429,609$21,989,362Dividend reinvestment requirements(b)1,812$3.85(c)n/an/aRestricted stock vesting(d)4,134$3.79(e)n/an/aTotal March 1 – 31, 20142,435,555$3.762,429,609$21,989,362Total2,765,213$3.842,759,267$21,989,362





|    |                                                                                                                                                                     
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a) | On October 25, 2013, our board of directors authorized a stock repurchase program of up to $25.0 million, which was increased on February 28, 2014 to $35.0 million.

|    |                                                                                         
|--- | ----------------------------------------------------------------------------------------
|(b) | Represents stock purchased on the open market to satisfy dividend reinvestment requests.

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

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

|    |                                                                                                                             
|--- | ----------------------------------------------------------------------------------------------------------------------------
|(e) | 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.


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ITEM 6.  EXHIBITS.


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


Incorporated by ReferenceExhibit No.DescriptionForm and SEC File No.Filing Date with SECExhibit No.Filed with this 10-Q15.1Letter regarding unaudited interim financial information from Ernst & Young LLP, independent registered public accounting firm*31.1Certification of Chief Executive Officer pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002*31.2Certification of Chief Financial Officer pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002*32.1Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002†32.2Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002†*Filed herewith.†Furnished herewith.





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SIGNATURES


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





MCG Capital CorporationDate:April 28, 2014By:/s/KEITH KENNEDYKeith KennedyChief Executive Officer(Principal Executive Officer)Date:April 28, 2014By:/s/BEVERLY JANE ALLEYBeverly Jane AlleyInterim Chief Financial Officer(Principal Financial and Accounting Officer)





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