UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 
 FORM 10-K/A (Amendment No. 1) 
  x

          

          ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the fiscal year ended December 31, 2011  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 No. 814-00735 
 Kohlberg Capital Corporation (Exact name of Registrant as specified in its charter)  Delaware

          

          20-5951150(State or other jurisdiction of incorporation or organization)

          

          (I.R.S. EmployerIdentification Number)
 295 Madison Avenue, 6th Floor New York, New York 10017 (Address of principal executive offices) (212) 455-8300 (Registrants telephone number, including area code) 
 Securities registered pursuant to Section 12(b) of the Act:  Title of each class

          

          Name of exchange on which registeredCommon Shares, par value $0.01 per share

          

          The NASDAQ Global Select Market
 Securities registered pursuant to Section 12(g) of the Act: None 
 Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No x Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act.Yes o No x 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 (§232.405 of this chapter) 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrants knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act. (Check one):  Large accelerated filer o

          

          Accelerated filer x

          

          Non-accelerated filer o (Do not check if a smaller reporting company)

          

          Smaller Reporting Company o
 Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).Yes o No x The aggregate market value of the voting and non-voting common stock held by non-affiliates of the registrant as of June 30, 2011 was approximately $152 million based upon a closing price of $7.95 reported for such date by The NASDAQ Global Select Market. Common shares held by each executive officer and director and by each person who owns 5% or more of the outstanding common shares have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes. The number of outstanding shares of common stock of the registrant as of March 1, 2012 was 23,009,963.
     This Amendment No. 1 (this Amendment) is being filed to amend our Annual Report on Form 10-K for the fiscal year ended December 31, 2011, which Kohlberg Capital Corporation, a Delaware corporation (the Company or we), originally filed on March 15, 2012 (the Original 10-K). We are filing this Amendment solely for the purpose of correcting the date of the reports of Grant Thornton LLP, the Companys independent registered public accounting firm, set forth on pages F-2 and F-3 of the Original 10-K (the Reports), and to correct the date of the
Reports referred to in the consent of Grant Thornton LLP included as Exhibit 23.1 to the Original 10-K (the Consent). The Reports were signed by Grant Thornton LLP and dated March 15, 2012, but the dates included in the Original 10-K were inadvertently reflected as March 15, 2011 in the Reports (and March 14, 2012 in the Consent). All of the financial statements included in this Amendment are unchanged from those included in the Original 10-K. In connection with filing this Amendment, and pursuant to Rules 12b-15, 13a-14(a) and 13a-14(b) under the Securities Act of 1934, as amended (the Exchange Act), the Company is also filing a corrected copy of the consent of Grant Thornton LLP dated March 15, 2012 related to its reports with respect to the financial statements and internal control over financial reporting of the Company, a copy of the consent of Grant Thornton LLP dated March 15, 2012 related to its report with respect to the financial statements of Katonah Debt Advisors, L.L.C., and currently dated certifications of the Companys principal executive officer and
principal financial officer pursuant to Rules 13a-14(a) and 13a-14(b) under the Exchange Act. Except as described above, no other amendments are being made to the Original 10-K. This Amendment does not reflect events occurring after the filing of the Original 10-K or modify or update the disclosure contained therein in any way other than as required to reflect the amendments referred to above. This Amendment should be read in conjunction with the Original 10-K and the Companys other filings made with the Securities and Exchange Commission subsequent to the filing of the Original 10-K on March 15, 2012.
     PART II Item 8. Financial Statements and Supplementary Data Our financial statements are annexed to this Amendment beginning on page F-1.
     PART IV Item 15. Exhibits and Financial Statement Schedules (a)  Documents filed as part of this report: 1.  For a list of the consolidated financial information included herein, see Index to the Consolidated Financial Statements on page F-1. 2.  For a list of the other financial statements and financial statement schedules included herein, see Index to Other Financial Statements and Financial Statement Schedules on page S-1. 3.  For a list of other exhibits included herein, see Exhibit List on page E-1. (b)  Exhibits required by Item 601 of Regulation S-K.  Reference is made to the Exhibit List filed as a part of this report beginning on page E-1. Each of such exhibits is incorporated by reference herein. (c)  Other financial statements and financial statement schedules.  Reference is made to the Index to Other Financial Statements and Financial Statement Schedules on page S-1. Each of such documents is incorporated by reference herein.
     SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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.  Kohlberg Capital CorporationDate: March 22, 2012

          

          By/s/ Dayl W. PearsonDayl W. Pearson President and Chief Executive Officer
 4    INDEX TO FINANCIAL STATEMENTS  Reports of Independent Registered Public Accounting Firm





F-2Balance Sheets as of December 31, 2011 and December 31, 2010





F-4Statements of Operations for the years ended December 31, 2011, December 31, 2010 and December 31, 2009





F-5Statements of Changes in Net Assets for the years ended December 31, 2011, December 31, 2010, and December 31, 2009





F-6Statements of Cash Flows for the years ended December 31, 2011, December 31, 2010, and December 31, 2009





F-7Schedules of Investments as of December 31, 2011 and December 31, 2010





F-8Financial Highlights for the years ended December 31, 2011, December 31, 2010 and December 31, 2009





F-18Notes to Financial Statements





F-19
 F-1    REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Board of Directors and Stockholders ofKohlberg Capital Corporation We have audited the accompanying balance sheets, including the schedule of investments, of Kohlberg Capital Corporation and subsidiary (collectively, the Company) (a Delaware corporation) as of December 31, 2011 and 2010, and the related statements of operations, changes in net assets and cash flows for each of the three years in the period ended December 31, 2011 and financial highlights for each of the five years in the period ended December 31, 2011. These financial statements and financial highlights are the responsibility of the Companys management. Our responsibility is to express an opinion on the financial statements and
financial highlights based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. Our procedures included confirmation of investments owned as of
December 31, 2011 and 2010. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of Kohlberg Capital Corporation and subsidiary as of December 31, 2011 and 2010, and the results of their operations, changes in their net assets and their cash flows for each of the three years in the period ended December 31, 2011 and the financial highlights for each of the five years in the period ended December 31, 2011 in conformity with accounting principles generally accepted in the United States of America. We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Kohlberg Capital Corporation and subsidiarys internal control over financial reporting as of December 31, 2011, based on criteria established in Internal Control  Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated March 15, 2012 expressed an unqualified opinion. /s/ GRANT THORNTON LLP New York, New York March 15, 2012
 F-2    REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Board of Directors and Stockholders ofKohlberg Capital Corporation We have audited Kohlberg Capital Corporation and subsidiarys (collectively, the Company) (a Delaware Corporation) internal control over financial reporting as of December 31, 2011, based on criteria established in Internal Control  Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Companys management is responsible for maintaining effective internal control over financial reporting for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Managements Report on Internal Control Over
Financial Reporting. Our responsibility is to express an opinion on the Companys internal control over financial reporting based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances.
We believe that our audit provides a reasonable basis for our opinion. A companys internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A companys internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of
financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the companys assets that could have a material effect on the financial statements. Because of inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. In our opinion, Kohlberg Capital Corporation maintained, in all material respects, effective internal control over financial reporting as of December 31, 2011, based on criteria established in Internal Control  Integrated Framework issued by COSO. We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the accompanying balance sheets of the Company, including the schedule of investments as of December 31, 2011 and 2010, and the related statements of operations, changes in net assets, and cash flows for each of the three years in the period ended December 31, 2010 and financial highlights for each of the five years in the period ended December 31, 2011, and our report dated March 15, 2012 expressed an unqualified opinion. /s/ GRANT THORNTON LLP New York, New York March 15, 2012
 F-3    KOHLBERG CAPITAL CORPORATION   BALANCE SHEETS  As of December 31, 2011

          

          As of December 31, 2010ASSETSInvestments at fair value:Time deposits (cost: 2011  $229,152; 2010  $720,225)

          

          $

          229,152

          

          

          $

          720,225Money market account (cost: 2011  $31,622,134; 2010  $210,311)

          

          

          31,622,134

          

          

          

          210,311Debt securities (cost: 2011  $134,311,238; 2010  $126,545,510)

          

          

          114,673,506

          

          

          

          91,042,928CLO fund securities managed by non-affiliates (cost: 2011  $12,544,303; 2010  $15,690,983)

          

          

          2,732,000

          

          

          

          4,921,000CLO fund securities managed by affiliate (cost: 2011  $52,665,506; 2010  $52,589,217)

          

          

          43,680,000

          

          

          

          48,110,000Equity securities (cost: 2011  $16,559,610; 2010  $13,483,227)

          

          

          6,040,895

          

          

          

          4,688,832Asset manager affiliates (cost: 2011  $44,338,301; 2010  $44,532,329)

          

          

          40,814,000

          

          

          

          41,493,000Total Investments at fair value

          

          

          239,791,687

          

          

          

          191,186,296Cash

          

          

          2,555,259

          

          

          

          10,175,488Restricted cash

          

          

          

          

          

          

          67,023,170Interest and dividends receivable

          

          

          2,548,895

          

          

          

          2,574,115Receivable for open trades

          

          

          

          

          

          

          7,681,536Accounts Receivable

          

          

          859,156

          

          

          

          851,020Due from affiliates

          

          

          3,517

          

          

          

          Other assets

          

          

          2,375,147

          

          

          

          331,061Total assets

          

          $

          248,133,661

          

          

          $

          279,822,686LIABILITIESBorrowings

          

          $

          

          

          

          $

          86,746,582Convertible Senior Notes

          

          

          60,000,000

          

          

          

          Accounts payable and accrued expenses

          

          

          3,527,682

          

          

          

          2,337,767Dividend payable

          

          

          4,080,037

          

          

          

          3,812,670Total liabilities

          

          $

          67,607,719

          

          

          $

          92,897,019STOCKHOLDERS' EQUITYCommon stock, par value $0.01 per share, 100,000,000 common shares authorized; 22,992,211 and 22,767,130 common shares issued and outstanding at December 31, 2011 and December 31, 2010, respectively.

          

          $

          226,648

          

          

          $

          224,274Capital in excess of par value

          

          

          284,571,466

          

          

          

          282,794,025Accumulated undistributed net investment income

          

          

          1,008,783

          

          

          

          818,664Accumulated net realized losses

          

          

          (52,802,400

          )

          

          

          (34,325,792

          )Net unrealized depreciation on investments

          

          

          (52,478,555

          )

          

          

          (62,585,504

          )Total stockholders' equity

          

          $

          180,525,942

          

          

          $

          186,925,667Total liabilities and stockholders' equity

          

          $

          248,133,661

          

          

          $

          279,822,686NET ASSET VALUE PER COMMON SHARE

          

          $

          7.85

          

          

          $

          8.21
 See accompanying notes to financial statements.
 F-4    KOHLBERG CAPITAL CORPORATION   STATEMENTS OF OPERATIONS  For the Year Ended December 31,2011

          

          2010

          

          2009Investment Income:Interest from investments in debt securities

          

          $

          9,438,493

          

          

          $

          14,409,069

          

          

          $

          24,157,213Interest from cash and time deposits

          

          

          21,938

          

          

          

          21,531

          

          

          

          17,956Dividends from investments in CLO fund securities managed by non-affiliates

          

          

          1,984,177

          

          

          

          1,837,024

          

          

          

          1,296,349Dividends from investments in CLO fund securities managed by affiliate

          

          

          12,565,859

          

          

          

          8,371,007

          

          

          

          8,025,695Dividends from affiliate asset manager

          

          

          1,910,000

          

          

          

          4,500,000

          

          

          

          Capital structuring service fees

          

          

          86,057

          

          

          

          215,233

          

          

          

          399,338Other Income

          

          

          2,000,000

          

          

          

          

          

          

          

          Total investment income

          

          

          28,006,524

          

          

          

          29,353,864

          

          

          

          33,896,551Expenses:Interest and amortization of debt issuance costs

          

          

          4,588,482

          

          

          

          7,088,202

          

          

          

          9,276,563Compensation

          

          

          3,907,900

          

          

          

          3,322,895

          

          

          

          3,222,604Professional fees

          

          

          2,010,253

          

          

          

          5,411,499

          

          

          

          1,691,832Insurance

          

          

          493,305

          

          

          

          419,942

          

          

          

          359,062Administrative and other

          

          

          987,381

          

          

          

          1,214,207

          

          

          

          990,835Total expenses

          

          

          11,987,321

          

          

          

          17,456,745

          

          

          

          15,540,896Net Investment Income before Income Tax Expense

          

          

          16,019,203

          

          

          

          11,897,119

          

          

          

          18,355,655Excise taxes

          

          

          

          

          

          

          

          

          

          

          (25,000

          )Net Investment Income

          

          

          16,019,203

          

          

          

          11,897,119

          

          

          

          18,330,655Realized And Unrealized Gains (Losses) On Investments:Net realized gain loss from investment transactions

          

          

          (18,476,608

          )

          

          

          (17,862,984

          )

          

          

          (15,782,121

          )Net change in unrealized appreciation (depreciation) on:Debt securities

          

          

          15,864,850

          

          

          

          9,196,912

          

          

          

          25,300,586Equity securities

          

          

          (1,724,319

          )

          

          

          (1,142,038

          )

          

          

          (7,485,064

          )CLO fund securities managed by affiliate

          

          

          (4,506,289

          )

          

          

          3,079,974

          

          

          

          12,986,453CLO fund securities managed by non-affiliates

          

          

          957,680

          

          

          

          894,877

          

          

          

          (473,907

          )Affiliate asset manager investments

          

          

          (484,973

          )

          

          

          (20,352,537

          )

          

          

          1,526,668Net realized and unrealized appreciation (depreciation) on investments

          

          

          (8,369,659

          )

          

          

          (26,185,796

          )

          

          

          16,072,615Net Increase (Decrease) In Stockholders Equity Resulting From Operations

          

          $

          7,649,544

          

          

          $

          (14,288,677)

          

          

          $

          34,403,270Net Increase (Decrease) in Stockholders' Equity Resulting from Operations per Common Share:Basic:

          

          $

          0.33

          

          

          $

          (0.64

          )

          

          $

          1.56Diluted:

          

          $

          0.33

          

          

          $

          (0.64

          )

          

          $

          1.56Net Investment Income Per Common Share:Basic:

          

          $

          0.70

          

          

          $

          0.53

          

          

          $

          0.83Diluted:

          

          $

          0.70

          

          

          $

          0.53

          

          

          $

          0.83Weighted Average Shares of Common Stock Outstanding  Basic

          

          

          22,868,648

          

          

          

          22,283,088

          

          

          

          22,105,800Weighted Average Shares of Common Stock Outstanding  Diluted

          

          

          22,880,674

          

          

          

          22,283,088

          

          

          

          22,105,800
 See accompanying notes to financial statements.
 F-5    KOHLBERG CAPITAL CORPORATION   STATEMENTS OF CHANGES IN NET ASSETS  Year Ended December 31,2011

          

          2010

          

          2009Operations:Net investment income

          

          $

          16,019,203

          

          

          $

          11,897,119

          

          

          $

          18,330,655Net realized gain loss from investment transactions

          

          

          (18,476,608

          )

          

          

          (17,862,984

          )

          

          

          (15,782,121

          )Net change in unrealized gain (loss) on investments

          

          

          10,106,949

          

          

          

          (8,322,812

          )

          

          

          31,854,736Net increase (decrease) in net assets resulting from operations

          

          

          7,649,544

          

          

          

          (14,288,677

          )

          

          

          34,403,270Shareholder distributions:Dividends from net investment income to common stockholders

          

          

          (15,802,712

          )

          

          

          (11,897,119

          )

          

          

          (18,330,654

          )Dividends from net investment income to restricted stockholders

          

          

          (26,373

          )

          

          

          (55,404

          )

          

          

          (125,053

          )Common Stock Dividends in excess of net investment income

          

          

          

          

          

          

          (3,269,688

          )

          

          

          (1,747,018

          )Net decrease in net assets resulting from stockholder distributions

          

          

          (15,829,085

          )

          

          

          (15,222,211

          )

          

          

          (20,202,725

          )Capital share transactions:Issuance of common stock for:Dividend reinvestment plan

          

          

          1,006,205

          

          

          

          1,621,074

          

          

          

          2,218,818Vesting of restricted stock

          

          

          961

          

          

          

          647

          

          

          

          1,223Stock based compensation

          

          

          772,650

          

          

          

          919,111

          

          

          

          909,119Net increase in net assets resulting from capital share transactions

          

          

          1,779,816

          

          

          

          2,540,832

          

          

          

          3,129,160Net assets at beginning of period

          

          

          186,925,667

          

          

          

          213,895,723

          

          

          

          196,566,018Net assets at end of period (including accumulated undistributed net investment income of $1,008,783, $818,664, and $1,326,380 in 2011, 2010, and 2009, respectively.

          

          $

          180,525,942

          

          

          $

          186,925,667

          

          

          $

          213,895,723Net asset value per common share

          

          $

          7.85

          

          

          $

          8.21

          

          

          $

          9.56Common shares outstanding at end of period

          

          

          22,992,211

          

          

          

          22,767,130

          

          

          

          22,363,281
 See accompanying notes to financial statements.
 F-6    KOHLBERG CAPITAL CORPORATION   STATEMENTS OF CASH FLOWS  Year Ended December 31,2011

          

          2010

          

          2009OPERATING ACTIVITIES:Net increase (decrease) in stockholders equity resulting from operations

          

          $

          7,649,544

          

          

          $

          (14,288,677

          )

          

          $

          34,403,270Adjustments to reconcile net increase (decrease) in stockholders equity resulting from operations to net cash provided by operations:Net realized losses on investment transactions

          

          

          18,476,608

          

          

          

          17,862,984

          

          

          

          15,782,121Net change in unrealized (appreciation) depreciation on investments

          

          

          (10,106,949

          )

          

          

          8,322,812

          

          

          

          (31,854,736

          )Net accretion of discount on securities and loans

          

          

          (235,789

          )

          

          

          (466,826

          )

          

          

          (1,706,928

          )Amortization of debt issuance cost

          

          

          22,908

          

          

          

          595,614

          

          

          

          824,695Amortization of convertible notes offering cost

          

          

          375,597

          

          

          

          

          

          

          

          Purchases of investments

          

          

          (115,976,563

          )

          

          

          (12,018,942

          )

          

          

          (13,581,354

          )Capital contribution to (from) affiliate asset manager

          

          

          194,027

          

          

          

          (3,780,817

          )

          

          

          (3,600,016

          )Payment-in-kind interest income

          

          

          (469,329

          )

          

          

          (820,262

          )

          

          

          (3,801

          )Proceeds from sale and redemption of investments

          

          

          67,194,142

          

          

          

          204,092,344

          

          

          

          81,459,787Stock based compensation expense

          

          

          772,650

          

          

          

          919,112

          

          

          

          909,121Changes in operating assets and liabilities:Decrease in interest and dividends receivable

          

          

          25,219

          

          

          

          1,261,916

          

          

          

          332,567Increase in accounts receivable

          

          

          (8,135

          )

          

          

          

          

          

          

          (Increase) Decrease in other assets

          

          

          (72,137

          )

          

          

          (286,473

          )

          

          

          251,550(Increase) Decrease in due from affiliates

          

          

          (3,517

          )

          

          

          44,274

          

          

          

          346,315Increase (decrease) in accounts payable and accrued expenses

          

          

          1,189,915

          

          

          

          (1,570,996

          )

          

          

          (6,661

          )Net cash provided by (used in) operating activities

          

          

          (30,971,809

          )

          

          

          199,866,063

          

          

          

          83,555,930FINANCING ACTIVITIES:Issuance of stock (net of offering costs)

          

          

          

          

          

          

          647

          

          

          

          1,223Dividends paid in cash

          

          

          (14,554,554

          )

          

          

          (14,200,702

          )

          

          

          (19,451,339

          )Cash paid on repayment of debt

          

          

          (86,746,582

          )

          

          

          (131,303,781

          )

          

          

          (43,640,786

          )Convertible notes offering costs

          

          

          (2,370,454

          )

          

          

          

          

          

          

          Issuance of Convertible Senior Notes

          

          

          60,000,000

          

          

          

          

          

          

          

          (Increase) Decrease in restricted cash

          

          

          67,023,170

          

          

          

          (48,327,147

          )

          

          

          (16,576,032

          )Net cash provided by (used in) financing activities

          

          

          23,351,580

          

          

          

          (193,830,983

          )

          

          

          (79,666,934

          )CHANGE IN CASH

          

          

          (7,620,229

          )

          

          

          6,035,080

          

          

          

          3,888,996CASH, BEGINNING OF YEAR

          

          

          10,175,488

          

          

          

          4,140,408

          

          

          

          251,412CASH, END OF YEAR

          

          $

          2,555,259

          

          

          $

          10,175,488

          

          

          $

          4,140,408Supplemental Information:Interest paid during the year

          

          $

          2,745,968

          

          

          $

          7,195,181

          

          

          $

          8,297,586Non-cash dividends paid during the year under the dividend reinvestment plan

          

          $

          1,007,164

          

          

          $

          1,621,074

          

          

          $

          2,218,818
 See accompanying notes to financial statements.
 F-7    KOHLBERG CAPITAL CORPORATION   SCHEDULE OF INVESTMENTS As of December 31, 2011 Debt Securities Portfolio  Portfolio Company/Principal Business

          

          InvestmentInterest Rate(1)/Maturity

          

          Principal

          

          Cost

          

          Value(2)Advanced Lighting Technologies, Inc.Home and Office Furnishings, Housewares, and Durable Consumer Products

          

          

          Senior Secured Loan  Revolving Loan .5% Cash, Due 6/13

          

          

          $

          

          

          

          $

          

          

          

          $

          Advanced Lighting Technologies, Inc.Home and Office Furnishings, Housewares, and Durable Consumer Products

          

          

          Junior Secured Loan  Second Lien Term Loan Note 6.3% Cash, Due 6/14

          

          

          

          5,000,000

          

          

          

          4,997,622

          

          

          

          4,965,000Alaska Communications Systems Holdings, Inc.Telecommunications

          

          

          Senior Secured Loan  Term Loan5.5% Cash, Due 10/16

          

          

          

          2,970,000

          

          

          

          2,986,151

          

          

          

          2,776,950Avis Budget Car Rental, LLCPersonal Transportation

          

          

          Senior Secured Loan  Extended Term Loan 5.8% Cash, Due 4/14

          

          

          

          2,974,338

          

          

          

          2,993,092

          

          

          

          2,983,648Bankruptcy Management Solutions, Inc.Diversified/Conglomerate Service

          

          

          Junior Secured Loan  Loan (Second Lien)1.4% Cash, 7.0% PIK, Due 8/15

          

          

          

          1,291,447

          

          

          

          1,217,438

          

          

          

          39,822Bankruptcy Management Solutions, Inc.Diversified/Conglomerate Service

          

          

          Senior Secured Loan  Term Loan B 6.5% Cash, 1.0% PIK, Due 8/14

          

          

          

          1,442,478

          

          

          

          1,434,611

          

          

          

          331,777Bicent Power LLCUtilities

          

          

          Junior Secured Loan  Advance (Second Lien) 4.6% Cash, Due 12/14

          

          

          

          4,000,000

          

          

          

          4,000,000

          

          

          

          137,500Burger King CorporationPersonal, Food and Miscellaneous Services

          

          

          Senior Secured Loan  Tranche B Term Loan4.5% Cash, Due 10/16

          

          

          

          2,872,500

          

          

          

          2,872,500

          

          

          

          2,827,359Caribe Media Inc. (fka Caribe Information Investments Incorporated)Printing and Publishing

          

          

          Senior Secured Loan  Loan 10.0% Cash, Due 11/14

          

          

          

          684,774

          

          

          

          684,774

          

          

          

          684,774CoActive Technologies LLC (fka CoActive Technologies, Inc.)Machinery (Non-Agriculture, Non-Construction, Non-Electronic)

          

          

          Junior Secured Loan  Term Loan (Second Lien) 7.3% Cash, Due 1/15

          

          

          

          2,000,000

          

          

          

          1,983,174

          

          

          

          1,552,200Del Monte Foods CompanyBeverage, Food and Tobacco

          

          

          Senior Secured Loan  Initial Term Loan 4.5% Cash, Due 3/18

          

          

          

          2,985,000

          

          

          

          2,991,687

          

          

          

          2,843,212eInstruction CorporationHealthcare, Education and Childcare

          

          

          Junior Secured Loan  Term Loan (Second Lien)11.5% Cash, Due 7/14

          

          

          

          10,000,000

          

          

          

          10,000,000

          

          

          

          9,489,000Freescale Semiconductor, Inc.Electronics

          

          

          Senior Subordinated Bond   10.125%  12/2016  35687MAP210.3% Cash, Due 12/16

          

          

          

          3,000,000

          

          

          

          3,007,007

          

          

          

          3,135,000Ginn LA Conduit Lender, Inc.(8)Buildings and Real Estate(4)

          

          

          Senior Secured Loan  First Lien Tranche A Credit-Linked Deposit7.8% Cash, Due 6/11

          

          

          

          1,257,143

          

          

          

          1,224,101

          

          

          

          91,142Ginn LA Conduit Lender, Inc.(8)Buildings and Real Estate(4)

          

          

          Senior Secured Loan  First Lien Tranche B Term Loan 7.8% Cash, Due 6/11

          

          

          

          2,694,857

          

          

          

          2,624,028

          

          

          

          195,377Ginn LA Conduit Lender, Inc.(8)Buildings and Real Estate(4)

          

          

          Junior Secured Loan  Loan (Second Lien)11.8% Cash, Due 6/12

          

          

          

          3,000,000

          

          

          

          2,715,997

          

          

          

          15,000
 F-8    Portfolio Company/Principal Business

          

          InvestmentInterest Rate(1)/Maturity

          

          Principal

          

          Cost

          

          Value(2)HMSC Corporation (aka Swett and Crawford)Insurance

          

          

          Junior Secured Loan  Loan (Second Lien)5.8% Cash, Due 10/14

          

          

          $

          5,000,000

          

          

          $

          4,919,522

          

          

          $

          3,753,000Hunter Defense Technologies, Inc.Aerospace and Defense

          

          

          Junior Secured Loan  Term Loan (Second Lien)7.3% Cash, Due 2/15

          

          

          

          5,000,000

          

          

          

          4,916,872

          

          

          

          5,000,000Hunter Fan CompanyHome and Office Furnishings, Housewares, and Durable Consumer Products

          

          

          Junior Secured Loan  Loan (Second Lien)7.0% Cash, Due 10/14

          

          

          

          3,000,000

          

          

          

          3,000,000

          

          

          

          2,724,300International Architectural Products, Inc.(8)Mining, Steel, Iron and Non-Precious Metals

          

          

          Senior Secured Loan  Term Loan12.0% Cash, 3.3% PIK, Due 5/15

          

          

          

          530,803

          

          

          

          504,240

          

          

          

          437,913Jones Stephens Corp.Home and Office Furnishings, Housewares, and Durable Consumer Products

          

          

          Senior Secured Loan  Term Loan7.0% Cash, Due 9/15

          

          

          

          4,889,912

          

          

          

          4,889,912

          

          

          

          4,889,912Kaseman Holdings and Sallyport HoldingsAerospace and Defense

          

          

          Mezzanine Investment  Mezzanine Notes14.5% Cash, Due 6/17

          

          

          

          11,250,597

          

          

          

          10,931,428

          

          

          

          11,588,115KIK Custom Products Inc.Personal and Non Durable Consumer Products (Mfg. Only)

          

          

          Junior Secured Loan  Loan (Second Lien)5.3% Cash, Due 12/14

          

          

          

          5,000,000

          

          

          

          5,000,000

          

          

          

          3,250,000LBREP/L-Suncal Master I LLC(8)Buildings and Real Estate(4)

          

          

          Senior Secured Loan  Term Loan (First Lien)7.5% Cash, Due 1/10

          

          

          

          3,401,921

          

          

          

          3,401,921

          

          

          

          359,923Legacy Cabinets, Inc.Home and Office Furnishings, Housewares, and Durable Consumer Products

          

          

          Senior Secured Loan  Term Loan1.0% Cash, 6.3% PIK, Due 5/14

          

          

          

          492,944

          

          

          

          463,380

          

          

          

          253,817Merisant CompanyBeverage, Food and Tobacco

          

          

          Senior Secured Loan  Loan 7.5% Cash, Due 1/14

          

          

          

          5,049,291

          

          

          

          5,030,584

          

          

          

          5,043,232Metropolitan Health Networks, Inc.Healthcare, Education and Childcare

          

          

          Junior Secured Loan  Term Loan (Second Lien) 13.5% Cash, Due 10/17

          

          

          

          5,000,000

          

          

          

          4,903,929

          

          

          

          5,000,000Michael Foods Group, Inc. (f/k/a M-Foods Holdings, Inc.)Beverage, Food and Tobacco

          

          

          Senior Secured Loan  Term B Facility4.3% Cash, Due 2/18

          

          

          

          1,925,767

          

          

          

          1,870,004

          

          

          

          1,910,120Neiman Marcus Group Inc., TheRetail Stores

          

          

          Senior Secured Loan  Term Loan4.8% Cash, Due 5/18

          

          

          

          2,000,000

          

          

          

          1,885,086

          

          

          

          1,932,500Pegasus Solutions, Inc.Leisure, Amusement, Motion Pictures, Entertainment

          

          

          Senior Subordinated Bond  Senior Subordinated Second Lien PIK Notes 13.0% Cash, Due 4/14

          

          

          

          1,490,892

          

          

          

          1,490,892

          

          

          

          1,490,892Perseus Holding Corp.(6)Leisure, Amusement, Motion Pictures, Entertainment

          

          

          Preferred Stock  Preferred Stock14.0% PIK

          

          

          

          400,000

          

          

          

          400,000

          

          

          

          400,000Potters Holdings, II, L.P.Diversified/Conglomerate Manufacturing

          

          

          Junior Secured Loan  Term B Loan (Second Lien)10.3% Cash, Due 11/17

          

          

          

          7,000,000

          

          

          

          6,905,447

          

          

          

          7,000,000Trinseo Materials Operating S.C.A. (fka Styron S.A.R.L)(3)Chemicals, Plastics and Rubber

          

          

          Senior Secured Loan  Term Loan6.0% Cash, Due 8/17

          

          

          

          1,989,950

          

          

          

          1,824,534

          

          

          

          1,728,779TriZetto Group, Inc. (TZ Merger Sub, Inc.)Electronics

          

          

          Senior Secured Loan  Term Loan 4.8% Cash, Due 5/18

          

          

          

          1,979,757

          

          

          

          1,898,410

          

          

          

          1,950,554TUI University, LLCHealthcare, Education and Childcare

          

          

          Senior Secured Loan  Term Loan (First Lien) 3.5% Cash, Due 10/14

          

          

          

          3,040,242

          

          

          

          2,978,384

          

          

          

          2,626,161
 F-9    Portfolio Company/Principal Business

          

          InvestmentInterest Rate(1)/Maturity

          

          Principal

          

          Cost

          

          Value(2)Twin-Star International, Inc.Home and Office Furnishings, Housewares, and Durable Consumer Products

          

          

          Senior Subordinated Bond  Senior Subordinated Note 13.0% Cash, Due 4/14

          

          

          $

          5,500,000

          

          

          $

          5,500,000

          

          

          $

          5,500,000Univar Inc.Chemicals, Plastics and Rubber

          

          

          Senior Secured Loan  Term B Loan5.0% Cash, Due 6/17

          

          

          

          2,984,925

          

          

          

          2,984,925

          

          

          

          2,886,049Vantiv, LLC (fka Fifth Third Processing Solutions, LLC)Electronics

          

          

          Senior Secured Loan  Term B-1 Loan (First Lien)4.5% Cash, Due 11/16

          

          

          

          1,989,975

          

          

          

          1,992,299

          

          

          

          1,988,482Vertafore, Inc.Electronics

          

          

          Senior Secured Loan  Term Loan (First Lien) 5.3% Cash, Due 7/16

          

          

          

          1,989,956

          

          

          

          1,933,723

          

          

          

          1,952,147Walker Group Holdings LLCCargo Transport

          

          

          Junior Secured Loan  Term Loan B13.3% Cash, Due 12/13

          

          

          

          416,737

          

          

          

          416,737

          

          

          

          416,737Walker Group Holdings LLCCargo Transport

          

          

          Junior Secured Loan  Term Loan B13.3% Cash, Due 12/13

          

          

          

          3,957,614

          

          

          

          3,957,614

          

          

          

          3,957,614Warner Chilcott Company, LLCHealthcare, Education and Childcare

          

          

          Senior Secured Loan  Term B-2 Loan4.3% Cash, Due 3/18

          

          

          

          454,851

          

          

          

          455,921

          

          

          

          449,450Warner Chilcott CorporationHealthcare, Education and Childcare

          

          

          Senior Secured Loan  Term B-1 Loan4.3% Cash, Due 3/18

          

          

          

          909,703

          

          

          

          911,841

          

          

          

          898,900WC Luxco S.A.R.L. (Warner Chilcott)(3)Healthcare, Education and Childcare

          

          

          Senior Secured Loan  Term B-3 Loan4.3% Cash, Due 3/18

          

          

          

          625,421

          

          

          

          626,891

          

          

          

          617,994Wesco Aircraft Hardware Corp.Aerospace and Defense

          

          

          Senior Secured Loan  Tranche B Term Loan4.3% Cash, Due 4/17

          

          

          

          2,590,244

          

          

          

          2,584,560

          

          

          

          2,599,154Total Investment in Debt Securities (64% of net asset value at fair value)

          

          

          

          

          

          $

          136,034,039

          

          

          $

          134,311,238

          

          

          $

          114,673,506
 Equity Portfolio  Portfolio Company/Principal Business

          

          Investment

          

          Percentage Interest/Shares

          

          Cost

          

          Value(2)Aerostructures Holdings L.P.(6)Aerospace and Defense

          

          

          Partnership Interests

          

          

          

          1.2

          %

          

          $

          1,000,000

          

          

          $

          1,000Aerostructures Holdings L.P.(6)Aerospace and Defense

          

          

          Series A Preferred Interests

          

          

          

          1.2

          %

          

          

          250,961

          

          

          

          250,961Bankruptcy Management Solutions, Inc.(6)Diversified/Conglomerate Service

          

          

          Common Stock

          

          

          

          1.2

          %

          

          

          218,592

          

          

          

          1,005Bankruptcy Management Solutions, Inc.(6)Diversified/Conglomerate Service

          

          

          Warrants

          

          

          

          0.1

          %

          

          

          

          

          

          

          Coastal Concrete Holding II, LLC(6)Buildings and Real Estate(4)

          

          

          Class A Units

          

          

          

          10.8

          %

          

          

          8,625,626

          

          

          

          1,000eInstruction Acquisition, LLC(6)Healthcare, Education and Childcare

          

          

          Membership Units

          

          

          

          1.1

          %

          

          

          1,079,617

          

          

          

          442,319FP WRCA Coinvestment Fund VII, Ltd.(3),(6)Machinery (Non-Agriculture, Non-Construction, Non-Electronic)

          

          

          Class A Shares

          

          

          

          1,500

          

          

          $

          1,500,000

          

          

          

          2,339,700International Architectural Products, Inc.(6)Mining, Steel, Iron and Non-Precious Metals

          

          

          Common

          

          

          

          2.5

          %

          

          

          292,851

          

          

          

          1,000Legacy Cabinets, Inc.(6)Home and Office Furnishings, Housewares, and Durable Consumer Products

          

          

          Equity

          

          

          

          4.0

          %

          

          

          115,580

          

          

          

          1,000
 F-10    Portfolio Company/Principal Business

          

          Investment

          

          Percentage Interest/Shares

          

          Cost

          

          Value(2)Perseus Holding Corp.(6)Leisure, Amusement, Motion Pictures, Entertainment

          

          

          Common

          

          

          

          0.2

          %

          

          $

          400,000

          

          

          $

          193,120Plumbing Holdings Corporation(6)Home and Office Furnishings, Housewares, and Durable Consumer Products

          

          

          Common

          

          

          

          7.8

          %

          

          

          

          

          

          

          Plumbing Holdings Corporation(6)Home and Office Furnishings, Housewares, and Durable Consumer Products

          

          

          Preferred Stock

          

          

          

          9.0

          %

          

          

          2,716,618

          

          

          

          2,270,821Caribe Media Inc. (fka Caribe Information Investments Incorporated)(6)

          

          

          Common

          

          

          

          1.3

          %

          

          

          359,765

          

          

          

          538,969Total Investment in Equity Securities (3% of net asset value at fair value)

          

          

          

          

          

          

          

          

          

          $

          16,559,610

          

          

          $

          6,040,895
 CLO Fund Securities CLO Equity Investments  Portfolio Company

          

          Investment

          

          Percentage Interest

          

          Cost

          

          Value(2)Grant Grove CLO, Ltd.(3),(10)

          

          

          Subordinated Securities

          

          

          

          22.2

          %

          

          $

          4,724,303

          

          

          $

          2,730,000Katonah III, Ltd.(3),(10)

          

          

          Preferred Shares

          

          

          

          23.1

          %

          

          

          4,500,000

          

          

          

          1,000Katonah V, Ltd.(3),(10),(11)

          

          

          Preferred Shares

          

          

          

          26.7

          %

          

          

          3,320,000

          

          

          

          1,000Katonah VII CLO Ltd.(3),(7),(10)

          

          

          Subordinated Securities

          

          

          

          16.4

          %

          

          

          4,500,000

          

          

          

          2,210,000Katonah VIII CLO Ltd(3),(7),(10)

          

          

          Subordinated Securities

          

          

          

          10.3

          %

          

          

          3,400,000

          

          

          

          1,800,000Katonah IX CLO Ltd(3),(7),(10)

          

          

          Preferred Shares

          

          

          

          6.9

          %

          

          

          2,000,000

          

          

          

          1,240,000Katonah X CLO Ltd(3),(7),(10)

          

          

          Subordinated Securities

          

          

          

          33.3

          %

          

          

          11,631,226

          

          

          

          8,320,000Katonah 2007-I CLO Ltd.(3),(7),(10)

          

          

          Preferred Shares

          

          

          

          100.0

          %

          

          

          30,027,384

          

          

          

          23,540,000Total Investment in CLO Equity Securities

          

          

          

          

          

          

          

          

          

          $

          64,102,913

          

          

          $

          39,842,000
 CLO Rated-Note Investment  Portfolio Company

          

          Investment

          

          Percentage Interest

          

          Cost

          

          Value(2)Katonah 2007-I CLO Ltd.(3),(7),(10)

          

          

          Class B-2L Notes Par Value of $10,500,000 100.0%, Due 4/22

          

          

          

          100.0

          %

          

          $

          1,106,896

          

          

          $

          6,570,000Total Investment in CLO Rated-Note

          

          

          

          

          

          

          

          

          

          $

          1,106,896

          

          

          $

          6,570,000Total Investment in CLO Fund Securities (26% of net asset value at fair value)

          

          

          

          

          

          

          

          

          

          $

          65,209,809

          

          

          $

          46,412,000
 Asset Manager Affiliate  Portfolio Company/Principal Business

          

          Investment

          

          Percentage Interest

          

          Cost

          

          Value(2)Katonah Debt Advisors

          

          

          Asset Management Company

          

          

          

          100.0

          %

          

          $

          44,338,301

          

          

          $

          40,814,000Total Investment in Asset Manager Affiliate (23% of net asset value at fair value)

          

          

          

          

          

          

          

          

          

          $

          44,338,301

          

          

          $

          40,814,000
 F-11    Time Deposits and Money Market Account  Time Deposits and Money Market Account

          

          Investment

          

          Yield

          

          Par/Cost

          

          Value(2)JP Morgan Asset Account

          

          

          Time Deposit

          

          

          

          0.0

          %

          

          $

          229,152

          

          

          $

          229,152JP Morgan Business Money Market Account(9)

          

          

          Money Market Account

          

          

          

          0.2

          %

          

          

          164,573

          

          

          

          164,573US Bank Money Market Account

          

          

          Money Market Account

          

          

          

          0.4

          %

          

          

          31,457,561

          

          

          

          31,457,561Total Investment in Time Deposit and Money Market Accounts(18% of net asset value at fair value)

          

          

          

          

          

          

          

          

          

          $

          31,851,286

          

          

          $

          31,851,286Total Investments(5)(133% of net asset value at fair value)

          

          

          

          

          

          

          

          

          

          $

          292,270,244

          

          

          $

          239,791,687
  (1)

          A majority of the variable rate loans to the Companys portfolio companies bear interest at a rate that may be determined by reference to either LIBOR or an alternate Base Rate (commonly based on the Federal Funds Rate or the Prime Rate), which typically resets semi-annually, quarterly, or monthly. For each such loan, the Company has provided the weighted average annual stated interest rate in effect at December 31, 2011. (2)

          Reflects the fair market value of all existing investments as of December 31, 2011, as determined by the Companys Board of Directors. (3)

          Non-U.S. company or principal place of business outside the U.S. (4)

          Buildings and real estate relate to real estate ownership, builders, managers and developers and excludes mortgage debt investments and mortgage lenders or originators. As of December 31, 2011, the Company had no exposure to mortgage securities (residential mortgage bonds, commercial mortgage backed securities, or related asset backed securities), companies providing mortgage lending or emerging markets investments either directly or through the Companys investments in CLO funds. (5)

          The aggregate cost of investments for federal income tax purposes is approximately $292 million. The aggregate gross unrealized appreciation is approximately $8 million, the aggregate gross unrealized depreciation is approximately $60 million, and the net unrealized depreciation is approximately $52 million. (6)

          Non-income producing. (7)

          An affiliate CLO Fund managed by Katonah Debt Advisors, L.L.C. or its affiliate. (8)

          Loan or debt security is on non-accrual status and therefore is considered non-income producing. (9)

          Money market account holding restricted cash for employee flexible spending accounts. (10)

          These securities were acquired in a transaction that was exempt from the registration requirements of the Securities Act of 1933, as amended (the Securities Act), pursuant to Rule 144A thereunder. These securities may be resold only in transactions that are exempt from the registration requirements of the Securities Act, normally to qualified institutional buyers. (11)

          As of December 31, 2011, this CLO Fund Security was not providing a dividend distribution.
 F-12    KOHLBERG CAPITAL CORPORATION   SCHEDULE OF INVESTMENTS As of December 31, 2010 Debt Securities Portfolio  Portfolio Company/Principal Business

          

          Investment Interest Rate(1)/Maturity

          

          Principal

          

          Cost

          

          Value(2)Advanced Lighting Technologies, Inc.Home and Office Furnishings, Housewares, and Durable Consumer Products

          

          

          Senior Secured Loan  Revolving Loan3.7% Cash, Due 6/13

          

          

          $

          1,080,000

          

          

          $

          1,075,943

          

          

          $

          979,452Advanced Lighting Technologies, Inc.(6)Home and Office Furnishings, Housewares, and Durable Consumer Products

          

          

          Junior Secured Loan  Second Lien Term Loan Note 6.3% Cash, Due 6/14

          

          

          

          5,000,000

          

          

          

          5,000,000

          

          

          

          5,000,000Awesome Acquisition Company (CiCi's Pizza)(6)Personal, Food and Miscellaneous Services

          

          

          Junior Secured Loan  Term Loan (Second Lien) 5.3% Cash, Due 6/14

          

          

          

          4,000,000

          

          

          

          3,985,854

          

          

          

          3,840,000Bankruptcy Management Solutions, Inc.(6)Diversified/Conglomerate Service

          

          

          Junior Secured Loan  Second Lien Facility1.3% Cash, 7.0% PIK, Due 8/15

          

          

          

          1,217,438

          

          

          

          1,217,438

          

          

          

          95,368Bankruptcy Management Solutions, Inc.(6)Diversified/Conglomerate Service

          

          

          Senior Secured Loan  Term Loan B7.5% Cash, Due 8/14

          

          

          

          1,438,720

          

          

          

          1,448,006

          

          

          

          719,360Bicent Power LLC(6)Utilities

          

          

          Junior Secured Loan  Advance (Second Lien) 4.3% Cash, Due 12/14

          

          

          

          4,000,000

          

          

          

          4,000,000

          

          

          

          2,367,600BP Metals, LLC (fka Constellation Enterprises)(6)Mining, Steel, Iron and Non-Precious Metals

          

          

          Senior Secured Loan  Term Loan 12.0% Cash, Due 6/13

          

          

          

          3,982,143

          

          

          

          3,982,143

          

          

          

          4,002,054Caribe Information Investments Incorporated(6)Printing and Publishing

          

          

          Senior Secured Loan  Term Loan2.5% Cash, Due 3/13

          

          

          

          1,611,045

          

          

          

          1,608,021

          

          

          

          1,273,692Charlie Acquisition Corp.(9)Personal, Food and Miscellaneous Services

          

          

          Mezzanine Investment  Senior Subordinated Notes 17.5% Cash, Due 6/13

          

          

          

          14,261,996

          

          

          

          10,744,496

          

          

          

          250,000CoActive Technologies LLC (fka CoActive Technologies, Inc.)(6)Machinery (Non-Agriculture, Non-Construction, Non-Electronic)

          

          

          Junior Secured Loan  Term Loan (Second Lien)7.1% Cash, Due 1/15

          

          

          

          2,000,000

          

          

          

          1,977,696

          

          

          

          1,464,600eInstruction Corporation(6)Healthcare, Education and Childcare

          

          

          Junior Secured Loan  Term Loan (Second Lien)7.8% Cash, Due 7/14

          

          

          

          10,000,000

          

          

          

          10,000,000

          

          

          

          10,000,000Freescale Semiconductor, Inc.Electronics

          

          

          Senior Subordinated Bond  10.125%  12/2016   35687MAP210.1% Cash, Due 12/16

          

          

          

          3,000,000

          

          

          

          3,006,137

          

          

          

          3,176,250Ginn LA Conduit Lender, Inc.(9)Buildings and Real Estate(4)

          

          

          Senior Secured Loan  First Lien Tranche A Credit-Linked Deposit 7.8% Cash, Due 6/11

          

          

          

          1,257,143

          

          

          

          1,224,101

          

          

          

          72,286Ginn LA Conduit Lender, Inc.(9)Buildings and Real Estate(4)

          

          

          Senior Secured Loan  First Lien Tranche B Term Loan 7.8% Cash, Due 6/11

          

          

          

          2,694,857

          

          

          

          2,624,028

          

          

          

          154,954Ginn LA Conduit Lender, Inc.(9)Buildings and Real Estate(4)

          

          

          Junior Secured Loan  Loan (Second Lien)11.8% Cash, Due 6/12

          

          

          

          3,000,000

          

          

          

          2,715,997

          

          

          

          15,000HMSC Corporation (aka Swett and Crawford)(6)Insurance

          

          

          Junior Secured Loan  Loan (Second Lien)5.8% Cash, Due 10/14

          

          

          

          5,000,000

          

          

          

          4,890,322

          

          

          

          4,049,000
 F-13    Portfolio Company/Principal Business

          

          Investment Interest Rate(1)/Maturity

          

          Principal

          

          Cost

          

          Value(2)Hunter Fan Company(6)Home and Office Furnishings, Housewares, and Durable Consumer Products

          

          

          Junior Secured Loan  Loan (Second Lien)7.0% Cash, Due 10/14

          

          

          $

          3,000,000

          

          

          $

          3,000,000

          

          

          $

          2,682,900International Architectural Products, Inc.(6),(9)Mining, Steel, Iron and Non-Precious Metals

          

          

          Senior Secured Loan  Term Loan8.8% Cash, 3.3% PIK, Due 5/15

          

          

          

          967,622

          

          

          

          948,809

          

          

          

          929,498Intrapac Corporation/Corona Holdco(6)Containers, Packaging and Glass

          

          

          Junior Secured Loan  Term Loans (Second Lien)7.8% Cash, Due 5/13

          

          

          

          3,000,000

          

          

          

          3,009,682

          

          

          

          3,000,000Jones Stephens Corp.(6),(9)Buildings and Real Estate(4)

          

          

          Senior Secured Loan  Term Loan (2006)7.8% Cash, Due 9/12

          

          

          

          9,541,180

          

          

          

          9,527,522

          

          

          

          6,364,921KIK Custom Products Inc.(6)Personal and Non Durable Consumer Products (Mfg. Only)

          

          

          Junior Secured Loan  Loan (Second Lien)5.3% Cash, Due 12/14

          

          

          

          5,000,000

          

          

          

          5,000,000

          

          

          

          3,435,000LBREP/L-Suncal Master I LLC(9)Buildings and Real Estate(4)

          

          

          Junior Secured Loan  Term Loan (Third Lien) 15.0% Cash, Due 2/12

          

          

          

          2,332,868

          

          

          

          2,332,868

          

          

          

          933LBREP/L-Suncal Master I LLC(6),(9)Buildings and Real Estate(4)

          

          

          Senior Secured Loan  Term Loan (First Lien) 7.5% Cash, Due 1/10

          

          

          

          3,875,156

          

          

          

          3,875,156

          

          

          

          58,127LBREP/L-Suncal Master I LLC(6),(9)Buildings and Real Estate(4)

          

          

          Junior Secured Loan  Term Loan (Second Lien)9.5% Cash, Due 1/11

          

          

          

          2,000,000

          

          

          

          1,920,211

          

          

          

          7,600Legacy Cabinets, Inc.(6)Home and Office Furnishings, Housewares, and Durable Consumer Products

          

          

          Senior Secured Loan  Term Loan7.3% Cash, Due 5/14

          

          

          

          463,380

          

          

          

          463,380

          

          

          

          92,676MCCI Group Holdings, LLC(6)Healthcare, Education and Childcare

          

          

          Junior Secured Loan  Term Loan (Second Lien)7.5% Cash, Due 6/13

          

          

          

          1,000,000

          

          

          

          1,000,000

          

          

          

          1,000,000Pegasus Solutions, Inc.(12)Leisure, Amusement, Motion Pictures, Entertainment

          

          

          Senior Subordinated Bond  Senior Subordinated Second Lien PIK Notes13.0% Cash, Due 4/14

          

          

          

          1,314,459

          

          

          

          1,314,459

          

          

          

          1,314,459Perseus Holding Corp.(7)Leisure, Amusement, Motion Pictures, Entertainment

          

          

          Preferred Stock  Preferred Stock14.0% Cash

          

          

          

          400,000

          

          

          

          400,000

          

          

          

          356,960QA Direct Holdings, LLC(6)Printing and Publishing

          

          

          Senior Secured Loan  Term Loan8.3% Cash, Due 8/14

          

          

          

          4,396,024

          

          

          

          4,372,508

          

          

          

          4,396,024Resco Products, Inc.Mining, Steel, Iron and Non-Precious Metals

          

          

          Junior Secured Loan  Term Loan (Second Lien)12.0% Cash, 8.0% PIK, Due 6/14

          

          

          

          2,078,079

          

          

          

          2,078,079

          

          

          

          2,078,079Resco Products, Inc.(6)Mining, Steel, Iron and Non-Precious Metals

          

          

          Junior Secured Loan  Term Loan (Second Lien)12.0% Cash, 8.0% PIK, Due 6/14

          

          

          

          7,193,458

          

          

          

          7,079,981

          

          

          

          7,193,458Specialized Technology Resources, Inc.(6)Diversified/Conglomerate Service

          

          

          Junior Secured Loan  Loan (Second Lien)7.3% Cash, Due 12/14

          

          

          

          7,500,000

          

          

          

          7,500,000

          

          

          

          7,500,000TUI University, LLC(6)Healthcare, Education and Childcare

          

          

          Senior Secured Loan  Term Loan (First Lien)3.3% Cash, Due 10/14

          

          

          

          3,119,818

          

          

          

          3,033,934

          

          

          

          2,958,212Walker Group Holdings LLCCargo Transport

          

          

          Junior Secured Loan  Term Loan B13.3% Cash, Due 12/13

          

          

          

          470,643

          

          

          

          470,643

          

          

          

          470,643Walker Group Holdings LLC(6)Cargo Transport

          

          

          Junior Secured Loan  Term Loan B13.3% Cash, Due 12/13

          

          

          

          4,469,539

          

          

          

          4,469,539

          

          

          

          4,469,539
 F-14    Portfolio Company/Principal Business

          

          Investment Interest Rate(1)/Maturity

          

          Principal

          

          Cost

          

          Value(2)Wesco Aircraft Hardware Corp.Aerospace and Defense

          

          

          Junior Secured Loan  Loan (Second Lien)6.0% Cash, Due 3/14

          

          

          $

          1,720,000

          

          

          $

          1,679,298

          

          

          $

          1,720,000Wesco Aircraft Hardware Corp.(6)Aerospace and Defense

          

          

          Junior Secured Loan  Loan (Second Lien)6.0% Cash, Due 3/14

          

          

          

          3,554,283

          

          

          

          3,569,258

          

          

          

          3,554,283Total Investment in Debt Securities (49% of net asset value at fair value)

          

          

          

          

          

          $

          130,939,851

          

          

          $

          126,545,510

          

          

          $

          91,042,928
 Equity Portfolio  Portfolio Company/Principal Business

          

          Investment

          

          Percentage Interest/Shares

          

          Cost

          

          Value(2)Aerostructures Holdings L.P.(7)Aerospace and Defense

          

          

          Partnership Interests

          

          

          

          1.2

          %

          

          $

          1,000,000

          

          

          $

          88,600Aerostructures Holdings L.P.(7)Aerospace and Defense

          

          

          Series A Preferred Interests

          

          

          

          1.2

          %

          

          

          250,961

          

          

          

          250,961Bankruptcy Management Solutions, Inc.(6),(7)Diversified/Conglomerate Service

          

          

          Warrants

          

          

          

          0.1

          %

          

          

          

          

          

          

          Coastal Concrete Holding II, LLC(7)Buildings and Real Estate(4)

          

          

          Class A Units

          

          

          

          10.8

          %

          

          

          8,625,626

          

          

          

          250,143eInstruction Acquisition, LLC(7)Healthcare, Education and Childcare

          

          

          Membership Units

          

          

          

          1.1

          %

          

          

          1,079,617

          

          

          

          1,079,724FP WRCA Coinvestment Fund VII, Ltd.(3),(7)Machinery (Non-Agriculture, Non-Construction, Non-Electronic)

          

          

          Class A Shares

          

          

          

          1,500

          

          

          

          1,500,000

          

          

          

          2,400,000International Architectural Products, Inc.(6),(7)Mining, Steel, Iron and Non-Precious Metals

          

          

          Common

          

          

          

          2.5

          %

          

          

          292,851

          

          

          

          227,223Legacy Cabinets, Inc.(6),(7)Home and Office Furnishings, Housewares, and Durable Consumer Products

          

          

          Equity

          

          

          

          4.0

          %

          

          

          115,580

          

          

          

          49,422Perseus Holding Corp.(7)Leisure, Amusement, Motion Pictures, Entertainment

          

          

          Common

          

          

          

          0.2

          %

          

          

          400,000

          

          

          

          312,200Bankruptcy Management Solutions, Inc.(6),(7)Diversified/Conglomerate Service

          

          

          Common Stock

          

          

          

          1.2

          %

          

          

          218,592

          

          

          

          30,559Total Investment in Equity Securities (3% of net asset value at fair value)

          

          

          

          

          

          

          

          

          

          $

          13,483,227

          

          

          $

          4,688,832
 CLO Fund Securities CLO Equity Investments  Portfolio Company

          

          Investment

          

          Percentage Interest

          

          Cost

          

          Value(2)Grant Grove CLO, Ltd.(3),(12)

          

          

          Subordinated Securities

          

          

          

          22.2

          %

          

          $

          4,720,982

          

          

          $

          3,150,000Katonah III, Ltd.(3),(12)

          

          

          Preferred Shares

          

          

          

          23.1

          %

          

          

          4,500,000

          

          

          

          470,000Katonah IV, Ltd.(3),(12)

          

          

          Preferred Shares

          

          

          

          17.1

          %

          

          

          3,150,000

          

          

          

          1,300,000Katonah V, Ltd.(3),(12),(13)

          

          

          Preferred Shares

          

          

          

          26.7

          %

          

          

          3,320,000

          

          

          

          1,000Katonah VII CLO Ltd.(3),(8),(12)

          

          

          Subordinated Securities

          

          

          

          16.4

          %

          

          

          4,500,000

          

          

          

          2,090,000Katonah VIII CLO Ltd(3),(8),(12)

          

          

          Subordinated Securities

          

          

          

          10.3

          %

          

          

          3,400,000

          

          

          

          1,690,000Katonah IX CLO Ltd(3),(8),(12)

          

          

          Preferred Shares

          

          

          

          6.9

          %

          

          

          2,000,000

          

          

          

          1,300,000Katonah X CLO Ltd (3),(8),(12)

          

          

          Subordinated Securities

          

          

          

          33.3

          %

          

          

          11,612,677

          

          

          

          8,820,000Katonah 2007-I CLO Ltd.(3),(8),(12)

          

          

          Preferred Shares

          

          

          

          100.0

          %

          

          

          29,987,959

          

          

          

          26,200,000Total Investment in CLO Equity Securities

          

          

          

          

          

          

          

          

          

          $

          67,191,618

          

          

          $

          45,021,000
 F-15    CLO Rated-Note Investment  Portfolio Company

          

          Investment

          

          Percentage Interest

          

          Cost

          

          Value(2)Katonah 2007-I CLO Ltd.(3),(8),(12)

          

          

          Class B-2L NotesPar Value of $44,674 5.2%, Due 1/00

          

          

          

          100.0

          %

          

          $

          1,088,582

          

          

          $

          8,010,000Total Investment in CLO Rated-Note

          

          

          

          

          

          

          

          

          

          $

          1,088,582

          

          

          $

          8,010,000Total Investment in CLO Fund Securities (28% of net asset value at fair value)

          

          

          

          

          

          

          

          

          

          $

          68,280,200

          

          

          $

          53,031,000
 Asset Manager Affiliate  Portfolio Company / Principal Business

          

          Investment

          

          Percentage Interest

          

          Cost

          

          Value(2)Katonah Debt Advisors

          

          

          Asset Management Company

          

          

          

          100.0

          %

          

          $

          44,532,329

          

          

          $

          41,493,000Total Investment in Asset Manager Affiliate (22% of net asset value at fair value)

          

          

          

          

          

          

          

          

          

          $

          44,532,329

          

          

          $

          41,493,000
 Time Deposits and Money Market Account  Time Deposits and Money Market Account

          

          Investment

          

          Yield

          

          Par / Cost

          

          Value(2)JP Morgan Asset Account

          

          

          Time Deposit

          

          

          

          0.03

          %

          

          $

          720,225

          

          

          $

          720,225JP Morgan Business Money Market Account(11)

          

          

          Money Market Account

          

          

          

          0.2

          %

          

          

          210,311

          

          

          

          210,311Total Investment in Time Deposit and Money Market Accounts (0% of net asset value at fair value)

          

          

          

          

          

          

          

          

          

          $

          930,536

          

          

          $

          930,536Total Investments(5)(102% of net asset value at fair value)

          

          

          

          

          

          

          

          

          

          $

          253,771,802

          

          

          $

          191,186,296
  (1)

          A majority of the variable rate loans to the Companys portfolio companies bear interest at a rate that may be determined by reference to either LIBOR or an alternate Base Rate (commonly based on the Federal Funds Rate or the Prime Rate), which typically resets semi-annually, quarterly, or monthly. For each such loan, the Company has provided the weighted average annual stated interest rate in effect at December 31, 2010. (2)

          Reflects the fair market value of all existing investments as of December 31, 2010, as determined by the Companys Board of Directors. (3)

          Non-U.S. company or principal place of business outside the U.S. (4)

          Buildings and real estate relate to real estate ownership, builders, managers and developers and excludes mortgage debt investments and mortgage lenders or originators. As of December 31, 2010, the Company had no exposure to mortgage securities (residential mortgage bonds, commercial mortgage backed securities, or related asset backed securities), companies providing mortgage lending or emerging markets investments either directly or through the Companys investments in CLO funds. (5)

          The aggregate cost of investments for federal income tax purposes is approximately $254 million. The aggregate gross unrealized appreciation is approximately $8 million, the aggregate gross unrealized depreciation is approximately $71 million, and the net unrealized depreciation is approximately $63 million. (6)

          Pledged as collateral for the secured revolving credit facility (see Note 6 to the financial statements). (7)

          Non-income producing. (8)

          An affiliate CLO Fund managed by Katonah Debt Advisors L.L.C. or its affiliate. (9)

          Loan or debt security is on non-accrual status and therefore is considered non-income producing. (10)

          Time deposit investment partially restricted under terms of the secured credit facility (see Note 6 to financial statements).
 F-16    (11)

          Money market account holding restricted cash for employee flexible spending accounts. (12)

          These securities were acquired in a transaction that was exempt from the registration requirements of the Securities Act of 1933, as amended (the Securities Act), pursuant to Rule 144A thereunder. These securities may be resold only in transactions that are exempt from the registration requirements of the Securities Act, normally to qualified institutional buyers. (13)

          As of December 31, 2010, this CLO Fund securities were not providing a dividend distribution.
 F-17    KOHLBERG CAPITAL CORPORATION   FINANCIAL HIGHLIGHTS ($ per share)  For the Year Ended December 31,2011

          

          2010

          

          2009

          

          2008

          

          2007Per Share Data:Net asset value, at beginning of year

          

          $

          8.21

          

          

          $

          9.56

          

          

          $

          9.03

          

          

          $

          14.38

          

          

          $

          14.29Net investment income(1)

          

          

          0.70

          

          

          

          0.53

          

          

          

          0.83

          

          

          

          1.50

          

          

          

          1.27Net realized losses(1)

          

          

          (0.81

          )

          

          

          (0.79

          )

          

          

          (0.71

          )

          

          

          (0.03

          )

          

          

          0.01Net change in unrealized appreciation/depreciation on investments(1)

          

          

          0.37

          

          

          

          (0.54

          )

          

          

          1.19

          

          

          

          (6.80

          )

          

          

          0.12Net income

          

          

          0.26

          

          

          

          (0.80

          )

          

          

          1.31

          

          

          

          (5.33

          )

          

          

          1.40Net decrease in net assets resulting from distributionsFrom net investment income

          

          

          (0.69

          )

          

          

          (0.52

          )

          

          

          (0.84

          )

          

          

          (1.43

          )

          

          

          (1.36

          )In excess of net investment income

          

          

          

          

          

          

          (0.14

          )

          

          

          (0.08

          )

          

          

          (0.01

          )

          

          

          (0.04

          )Net decrease in net assets resulting from distributions

          

          

          (0.69

          )

          

          

          (0.66

          )

          

          

          (0.92

          )

          

          

          (1.44

          )

          

          

          (1.40

          )Net increase in net assets relating to stock-based transactionsIssuance of common stock (not including DRIP)

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          1.26

          

          

          

          Issuance of common stock under dividend reinvestment plan

          

          

          0.04

          

          

          

          0.07

          

          

          

          0.10

          

          

          

          0.12

          

          

          

          0.06Stock based compensation expense

          

          

          0.03

          

          

          

          0.04

          

          

          

          0.04

          

          

          

          0.04

          

          

          

          0.03Net increase in net assets relating to stock-based transactions

          

          

          0.07

          

          

          

          0.11

          

          

          

          0.14

          

          

          

          1.42

          

          

          

          0.09Net asset value, end of year

          

          $

          7.85

          

          

          $

          8.21

          

          

          $

          9.56

          

          

          $

          9.03

          

          

          $

          14.38Total net asset value return(2)

          

          

          4.0

          %

          

          

          (7.1

          )%

          

          

          16.0

          %

          

          

          (27.2

          )%

          

          

          10.4

          %Ratio/Supplemental Data:Per share market value at beginning of year

          

          $

          6.97

          

          

          $

          4.56

          

          

          $

          3.64

          

          

          $

          12.00

          

          

          $

          17.30Per share market value at end of year

          

          $

          6.31

          

          

          $

          6.97

          

          

          $

          4.56

          

          

          $

          3.64

          

          

          $

          12.00Total market return(3)

          

          

          0.4

          %

          

          

          67.6

          %

          

          

          50.5

          %

          

          

          (57.7

          )%

          

          

          (22.5

          )%Shares outstanding at end of year

          

          

          22,992,211

          

          

          

          22,767,130

          

          

          

          22,363,281

          

          

          

          21,771,186

          

          

          

          18,017,699Net assets at end of year

          

          $

          180,525,942

          

          

          $

          186,925,667

          

          

          $

          213,895,724

          

          

          $

          196,566,018

          

          

          $

          259,068,164Portfolio turnover rate

          

          

          24.5

          %

          

          

          3.4

          %

          

          

          3.2

          %

          

          

          14.4

          %

          

          

          24.7

          %Average debt outstanding

          

          $

          53,974,098

          

          

          $

          154,952,070

          

          

          $

          236,184,703

          

          

          $

          248,300,441

          

          

          $

          105,616,438Average debt outstanding per share

          

          $

          2.35

          

          

          $

          6.81

          

          

          $

          10.56

          

          

          $

          11.41

          

          

          $

          5.86Asset coverage ratio

          

          

          401

          %

          

          

          315

          %

          

          

          198

          %

          

          

          175

          %

          

          

          202

          %Ratio of net investment income to average net assets

          

          

          8.1

          %

          

          

          5.8

          %

          

          

          8.7

          %

          

          

          12.0

          %

          

          

          8.6

          %Ratio of total expenses to average net assets

          

          

          6.0

          %

          

          

          8.5

          %

          

          

          7.4

          %

          

          

          7.2

          %

          

          

          5.9

          %Ratio of interest expense to average net assets

          

          

          2.3

          %

          

          

          3.4

          %

          

          

          4.4

          %

          

          

          4.3

          %

          

          

          2.7

          %Ratio of non-interest expenses to average net assets

          

          

          3.7

          %

          

          

          5.0

          %

          

          

          3.0

          %

          

          

          3.0

          %

          

          

          3.2

          %
  (1)

          Based on weighted average number of common shares outstanding for the period. (2)

          Total net asset value return (not annualized) equals the change in the net asset value per share over the beginning of period net asset value per share plus dividends, divided by the beginning net asset value per share. (3)

          Total market return equals the change in the ending market price over the beginning of period price per share plus dividends, divided by the beginning price.
 F-18    KOHLBERG CAPITAL CORPORATION   NOTES TO FINANCIAL STATEMENTS 1. ORGANIZATION Kohlberg Capital Corporation (Kohlberg Capital or the Company) is an internally managed, non-diversified closed-end investment company that is regulated as a business development company (BDC) under the Investment Company Act of 1940. The Company originates, structures, and invests in senior secured term loans, mezzanine debt and selected equity securities primarily in privately-held middle market companies. The Company defines the middle market as comprising companies with earnings before interest, taxes, depreciation and amortization (EBITDA), of $10 million to $50 million
and/or total debt of $25 million to $150 million. The Company was formed as a Delaware limited liability company on August 8, 2006 and, prior to the issuance of shares of the Companys common stock in its initial public offering (IPO), converted to a corporation incorporated in Delaware on December 11, 2006. Prior to its IPO, the Company did not have material operations. The Companys IPO of 14,462,000 shares of common stock raised net proceeds of approximately $200 million. Prior to the IPO, the Company issued 3,484,333 shares to affiliates of Kohlberg & Co., L.L.C. (Kohlberg & Co.), a leading middle market private equity firm, in exchange for the contribution to the Company of their ownership interests in Katonah Debt Advisors, L.L.C., and related affiliates controlled by the Company (collectively, Katonah Debt Advisors) and in securities issued by collateralized loan obligation funds (CLO Funds) managed by Katonah
Debt Advisors and two other asset managers. As of December 31, 2011, Katonah Debt Advisors had approximately $1.9 billion of assets under management. The Companys investment objective is to generate current income and capital appreciation from investments made in senior secured term loans, mezzanine debt and selected equity investments in privately-held middle market companies. The Company also expects to continue to receive distributions of recurring fee income and to generate capital appreciation from its investment in the asset management business of Katonah Debt Advisors. Katonah Debt Advisors manages CLO Funds which invest in broadly syndicated loans, high-yield bonds and other credit instruments. The Companys investment portfolio as well as the investment portfolios of the CLO
Funds in which it has invested and the investment portfolios of the CLO Funds managed by Katonah Debt Advisors consist exclusively of credit instruments and other securities issued by corporations and do not include any asset-backed securities secured by commercial mortgages, residential mortgages or other consumer borrowings. The Company has elected to be treated as a regulated investment company (RIC) under Subchapter M of the Internal Revenue Code of 1986, as amended (the Code). To qualify as a RIC, the Company must, among other things, meet certain source-of-income and asset diversification requirements. As a RIC, the Company generally will not have to pay corporate-level taxes on any income that it distributes in a timely manner to its stockholders. 2. SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation The accompanying financial statements have been prepared on the accrual basis of accounting in conformity with accounting principles generally accepted in the United States of America (GAAP). The financial statements reflect all adjustments, both normal and recurring which, in the opinion of management, are necessary for the fair presentation of the Companys results of operations and financial condition for the periods presented. Furthermore, the preparation of the financial statements requires management to make significant estimates and assumptions including the fair value of investments that do not have a readily available market value. Actual results could differ from those estimates, and the differences could be material. The results of operations for the interim periods presented are not necessarily indicative of the operating
results to be expected for the full year.
 F-19    KOHLBERG CAPITAL CORPORATION   NOTES TO FINANCIAL STATEMENTS 2. SIGNIFICANT ACCOUNTING POLICIES   (continued) In accordance with Article 6 of Regulation S-X under the Securities Act of 1933, as amended (the Securities Act), and the Securities Exchange Act of 1934, as amended (the Exchange Act), the Company does not consolidate portfolio company investments, including those in which it has a controlling interest (Katonah Debt Advisors, including related affiliates, is currently the only company in which the Company has a controlling interest). Effective January 1, 2010, Katonah Debt Advisors adopted guidance encompassed in Accounting Standards Codification Topic 810, Consolidation. Although the Company cannot consolidate
portfolio company investments, the adoption of this new guidance had an impact on the required disclosures relating to Katonah Debt Advisors, as it requires Katonah Debt Advisors to consolidate its managed CLO Funds that were not previously consolidated. As a result of the consolidation of these CLO Funds into Katonah Debt Advisors, Katonah Debt Advisors qualifies as a significant subsidiary and, as a result, the Company is required to include additional disclosure regarding Katonah Debt Advisors in its filings. The additional disclosures regarding Katonah Debt Advisors do not directly impact the financial operations or results of the Company. Accounting Standards Codification.  In June 2009, the Financial Accounting Standards Board (FASB) issued a pronouncement establishing the FASB Accounting Standards Codification (ASC) as the source of authoritative accounting principles recognized by the FASB to be applied in the preparation of financial statements in conformity with GAAP. The ASC reorganized existing U.S. accounting and reporting standards issued by the FASB and other related private sector standard setters into a single source of authoritative accounting principles arranged by topic. The standard explicitly recognizes rules and interpretive
releases of the Commission under federal securities laws as authoritative GAAP for SEC registrants. The ASC supersedes all existing U.S. accounting standards; all other accounting literature not included in the ASC (other than SEC guidance for publicly-traded companies) is considered non-authoritative. The ASC was effective on a prospective basis for interim and annual reporting periods ending after September 15, 2009. The adoption of the ASC changed the Companys references to U.S. GAAP accounting standards but did not impact its results of operations, financial position or liquidity. Investments Investment transactions are recorded on the applicable trade date. Realized gains or losses are determined using the specific identification method. Valuation of Portfolio Investments.  The Companys Board of Directors is ultimately and solely responsible for making a good faith determination of the fair value of portfolio investments on a quarterly basis. Debt and equity securities for which market quotations are readily available are generally valued at such market quotations. Debt and equity securities that are not publicly traded or whose market price is not readily available are valued by the Board of Directors based on detailed analyses prepared by management, the Valuation Committee of the Board of Directors, and, in certain circumstances, third parties with valuation
expertise. Valuations are conducted by management on 100% of the investment portfolio at the end of each quarter. The Company follows the provisions of ASC Fair Value Measurements and Disclosures (Fair Value Measurements and Disclosures). This standard defines fair value, establishes a framework for measuring fair value, and expands disclosures about assets and liabilities measured at fair value. Fair Value Measurements and Disclosures 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. Subsequent to the adoption of Fair Value Measurements and Disclosures, the FASB has issued various staff positions clarifying the initial standard as noted below. In January 2010, the FASB issued guidance that clarifies and requires new disclosures about fair value measurements. The clarifications and requirement to disclose the amounts and reasons for significant transfers between Level 1 and Level 2, as well as significant transfers in and out of Level 3 of the fair value hierarchy, were adopted by the Company in the first quarter of 2010. Note 4 below reflects the amended disclosure requirements. The new guidance also requires that purchases, sales, issuances and settlements be presented
 F-20    KOHLBERG CAPITAL CORPORATION   NOTES TO FINANCIAL STATEMENTS 2. SIGNIFICANT ACCOUNTING POLICIES   (continued) gross in the Level III reconciliation and that requirement is effective for fiscal years beginning after December 15, 2010 and for interim periods within those years. The Company is evaluating the increased disclosure requirements for implementation by the effective date. Since this new guidance only amends the disclosures requirements, it did not impact our statements of financial position, statements of operations, or cash flow statements. Fair Value Measurements and Disclosures requires the disclosure in interim and annual periods of the inputs and valuation techniques used to measure fair value and a discussion of changes in valuation techniques and related inputs, if any, during the period. In 2011 and 2010, the Company engaged an independent valuation firm, to provide a third-party review of our CLO fair value model relative to its functionality, model inputs and calculations as a reasonable method to determine CLO fair values, in the absence of Level 1 or Level 2 trading activity or observable market inputs. The independent valuation firm concluded that the Companys CLO model appropriately factors in all the necessary inputs required to build a CLO equity cash flow for fair value purposes and that the inputs were being employed correctly. Beginning with the period ending June 30, 2011, the Company has engaged an independent valuation firm to provide third party valuation consulting services to the Companys Board of Directors. Each quarter, the independent valuation firm will perform third party valuations on the Companys investments on illiquid securities such that they are reviewed at least once during a trailing 12 month period. Third party valuations were performed on approximately 8% of investments at fair value as of December 31, 2011. These third party valuation estimates were considered as one of the relevant data inputs in the Companys determination of fair
value. The Board of Directors intends to continue to engage an independent valuation firm in the future to provide certain valuation services, including the review of certain portfolio assets, as part of the quarterly and annual year-end valuation process. The Board of Directors may consider other methods of valuation than those set forth above to determine the fair value of Level III investments as appropriate in conformity with GAAP. Due to the inherent uncertainty of determining the fair value of investments that do not have a readily available market value, the fair value of the Companys investments may differ materially from the values that would have been used had a ready market existed for such investments. Further, such investments may be generally subject to legal and other restrictions on resale or otherwise be less liquid than publicly traded securities. In addition, changes in the
market environment and other events may occur over the life of the investments that may cause the value realized on such investments to be different from the currently assigned valuations. The Companys valuation methodology and procedures are as follows: 1)

          Each portfolio company or investment is cross-referenced to an independent pricing service to determine if a current market quote is available. The nature and quality of such quote is reviewed to determine reliability and relevance of the quote. Factors considered in this determination include whether the quote is from a transaction or is a broker quote, the date and aging of such quote, whether the transaction is arms-length, whether it is of a liquidation or distressed nature and certain other factors judged to be relevant by management within the framework of Fair Value Measurements and Disclosures. 2)

          If an investment does not have a market quotation on either a broad market exchange or from an independent pricing service, the investment is initially valued by the Companys investment professionals responsible for the portfolio investment in conjunction with the portfolio management team. 3)

          Preliminary valuation conclusions are discussed and documented by management.
 F-21    KOHLBERG CAPITAL CORPORATION   NOTES TO FINANCIAL STATEMENTS 2. SIGNIFICANT ACCOUNTING POLICIES   (continued) 4)

          Illiquid loans, junior and mezzanine securities, equity investments, CLO Fund securities and Katonah Debt Advisors may be selected for review by an independent valuation firm, which is engaged by the Companys Board of Directors. Such independent valuation firm reviews managements preliminary valuations and makes their own independent valuation assessment. 5)

          The Valuation Committee of the Board of Directors reviews the portfolio valuations, as well as the input and report of such independent valuation firm, as applicable. 6)

          Upon approval of the investment valuations by the Valuation Committee of the Board of Directors, the Audit Committee of the Board of Directors reviews the results for inclusion in the Companys quarterly and annual financial statements, as applicable. 7)

          The Board of Directors discusses the valuations and determines in good faith that the fair values of each investment in the portfolio is reasonable based upon any applicable independent pricing service, input of management, estimates from independent valuation firms (if any) and the recommendations of the Valuation Committee of the Board of Directors. The majority of the Companys investment portfolio is composed of debt and equity securities with unique contract terms and conditions and/or complexity that requires a valuation of each individual investment that considers multiple levels of market and asset specific inputs, including historical and forecasted financial and operational performance of the individual investment, projected cash flows, market multiples, comparable market transactions, the priority of the security compared with those of other securities for such issuers, credit risk, interest rates, and independent valuations and reviews. Loans and Debt Securities.  To the extent that the Companys investments are exchange traded and are priced or have sufficient price indications from normal course trading at or around the valuation date (financial reporting date), such pricing will determine fair value. Pricing service marks from third party pricing services may be used as an indication of fair value, depending on the volume and reliability of the marks, sufficient and reasonable correlation of bid and ask quotes, and, most importantly, the level of actual trading activity. However, most of the Companys investments are illiquid investments with little or
no trading activity. Further, the Company has been unable to identify directly comparable market indices or other market guidance that correlate directly to the types of investments the Company owns. As a result, for most of its assets, the Company determines fair value using alternative methodologies using available market data, as adjusted, to reflect the types of assets the Company owns, their structure, qualitative and credit attributes and other asset specific characteristics. The Company derives fair value for its illiquid investments that do not have indicative fair values based upon active trades primarily by using a present value technique that discounts the estimated contractual cash flows for the underlying assets with discount rates imputed by broad market indices, bond spreads and yields for comparable issuers relative to the subject assets (the Market Yield Approach) and also considers recent loan amendments or other activity specific to the subject asset. Discount rates applied to estimated contractual cash flows for an underlying asset vary by specific investment, industry, priority and nature of the
debt security (such as the seniority or security interest of the debt security) and are assessed relative to two indices, a leveraged loan index and a high-yield bond index, at the valuation date. The Company has identified these two indices as benchmarks for broad market information related to its loan and debt investments. Because the Company has not identified any market index that directly correlates to the loan and debt investments held by the Company and therefore uses the two benchmark indices, these market indices may require significant adjustment to better correlate such market data for the calculation of fair value of the investment under the Market Yield Approach. Such adjustments require judgment and may be material to the calculation of fair value. Further adjustments to the discount rate may be applied to reflect other market conditions or the perceived credit risk of the borrower. When broad market indices are used as part of the valuation methodology, their use is
subject to adjustment for many factors, including priority, collateral used as security, structure,
 F-22    KOHLBERG CAPITAL CORPORATION   NOTES TO FINANCIAL STATEMENTS 2. SIGNIFICANT ACCOUNTING POLICIES   (continued) performance and other quantitative and qualitative attributes of the asset being valued. The resulting present value determination is then weighted along with any quotes from observable transactions and broker/pricing quotes. If such quotes are indicative of actual transactions with reasonable trading volume at or near the valuation date that are not liquidation or distressed sales, relatively more reliance will be put on such quotes to determine fair value. If such quotes are not indicative of market transactions or are insufficient as to volume, reliability, consistency or other relevant factors, such quotes will be compared with other fair value
indications and given relatively less weight based on their relevancy. Other significant assumptions, such as coupon and maturity, are asset-specific and are noted for each investment in the Schedules of Investments. Equity and Equity-Related Securities.  The Companys equity and equity-related securities in portfolio companies for which there is no liquid public market are carried at fair value based on the enterprise value of the portfolio company, which is determined using various factors, including EBITDA and cash flows from operations less capital expenditures and other pertinent factors, such as recent offers to purchase a portfolio companys securities or other liquidation events. The determined fair values are generally discounted to account for restrictions on resale and minority ownership positions. The values of the
Companys equity and equity-related securities in public companies for which market quotations are readily available are based upon the closing public market prices on the balance sheet date. Securities that carry certain restrictions on sale are typically valued at a discount from the public market value of the security. The significant inputs used to determine the fair value of equity and equity-related securities include prices, earnings, EBITDA and cash flows after capital expenditures for similar peer comparables and the investment entity itself. Equity and equity related securities are classified as Level III, as described in Note 4 below, when there is limited activity or less transparency around inputs to the valuation given the lack of information related to such equity investments held in nonpublic companies. Significant assumptions observed for comparable companies are applied to relevant financial data for the specific investment. Such assumptions, such as
model discount rates or price/earnings multiples, vary by the specific investment, equity position and industry and incorporate adjustments for risk premiums, liquidity and company specific attributes. Such adjustments require judgment and may be material to the calculation of fair value. Affiliate Asset Manager.  The Companys investment in its wholly-owned asset management company, Katonah Debt Advisors, is carried at fair value, which is determined after taking into consideration a percentage of assets under management and a discounted cash flow model incorporating different levels of discount rates depending on the hierarchy of fees earned (including the likelihood of realization of senior, subordinate and incentive fees) and prospective modeled performance. Such valuation includes an analysis of comparable asset management companies. Katonah Debt Advisors is classified as a Level III investment (as described
below). Any change in value from period to period is recognized as net change in unrealized appreciation or depreciation. CLO Fund Securities.  The Company typically makes a minority investment in the most junior class of securities of CLO Funds raised and managed by Katonah Debt Advisors and may selectively invest in securities issued by funds managed by other asset management companies (collectively CLO Fund securities). The Companys CLO Fund securities relate exclusively to credit instruments issued by corporations and do not include any asset-backed securities secured by commercial mortgages, residential mortgages, or consumer borrowings. The Companys investments in CLO Fund securities are carried at fair value, which is based either on (i) the present value of the net expected cash inflows for interest income and principal repayments from underlying assets and cash outflows for interest expense, debt paydown and other fund costs for the CLO Funds that are approaching or past the end of their reinvestment period and therefore are selling assets and/or using principal repayments to pay down CLO Fund debt (or will begin to do so shortly), and for which there continue to be net cash distributions to the class of securities owned by the Company, or (ii) a discounted cash flow model
for more recent CLO Funds that utilizes prepayment and loss assumptions based on historical
 F-23    KOHLBERG CAPITAL CORPORATION   NOTES TO FINANCIAL STATEMENTS 2. SIGNIFICANT ACCOUNTING POLICIES   (continued) experience and projected performance, economic factors, the characteristics of the underlying cash flow and comparable yields for similar securities or preferred shares to those in which the Company has invested. The Company recognizes unrealized appreciation or depreciation on the Companys investments in CLO Fund securities as comparable yields in the market change and/or based on changes in NAVs or estimated cash flows resulting from changes in prepayment or loss assumptions in the underlying collateral pool. As each investment in CLO Fund securities ages, the expected amount of losses and the expected timing of recognition of such losses in
the underlying collateral pool are updated and the revised cash flows are used in determining the fair value of the CLO Fund investment. The Company determines the fair value of its investments in CLO Fund securities on an individual security-by-security basis. Due to the individual attributes of each CLO Fund security, they are classified as a Level III investment unless specific trading activity can be identified at or near the valuation date. When available, observable market information will be identified, evaluated and weighted accordingly in the application of such data to the present value models and fair value determination. Significant assumptions to the present value calculations include default rates, recovery rates, prepayment rates, investment/reinvestment rates and spreads and the discount rate by which to value the resulting underlying cash flows. Such assumptions can vary significantly,
depending on market data sources which often vary in depth and level of analysis, understanding of the CLO market, detailed or broad characterization of the CLO market and the application of such data to an appropriate framework for analysis. The application of data points are based on the specific attributes of each individual CLO Fund securitys underlying assets, historic, current and prospective performance, vintage, and other quantitative and qualitative factors that would be evaluated by market participants. The Company evaluates the source of market data for reliability as an indicative market input, consistency amongst other inputs and results and also the context in which such data is presented. For bond rated tranches of CLO Fund securities (those above the junior class) without transactions to support a fair value for the specific CLO Fund and tranche, fair value is based on discounting estimated bond payments at current market yields, which may reflect the adjusted yield on the leveraged loan index for similarly rated tranches, as well as prices for similar tranches for other CLO Funds and also other factors such as the default and recovery rates of underlying assets in the CLO Fund, as may be applicable. Such model assumptions may vary and incorporate adjustments for risk premiums and CLO Fund specific attributes. Such adjustments
require judgment and may be material to the calculation of fair value. Cash.  The Company defines cash as demand deposits. The Company places its cash with financial institutions and, at times, cash held in checking accounts may exceed the Federal Deposit Insurance Corporation insured limit. Restricted Cash.  Restricted cash at December 31, 2010 consisted mostly of cash held in an operating account pursuant to the Companys secured credit facility agreement with its lender. As the Company paid off its secured credit facility as of January 31, 2011, no such restricted cash balances were needed. Time Deposits and Money Market Accounts.  Time deposits primarily represent investments of cash held in non-demand deposit accounts. Money market accounts primarily represent short term interest-bearing deposit accounts including an account that contains restricted cash held for employee flexible spending accounts. Interest Income.  Interest income, including the amortization of premium and accretion of discount, is recorded on the accrual basis to the extent that such amounts are expected to be collected. The Company generally places a loan or security on non-accrual status and ceases recognizing cash interest income on such loan or security when a loan or security becomes 90 days or more past due or if the Company otherwise does not expect the debtor to be able to service its debt obligations. Non-accrual loans remain in such status until
 F-24    KOHLBERG CAPITAL CORPORATION   NOTES TO FINANCIAL STATEMENTS 2. SIGNIFICANT ACCOUNTING POLICIES   (continued) the borrower has demonstrated the ability and intent to pay contractual amounts due or such loans become current. As of December 31, 2011, three issuers representing less than 1% of total investments at fair value were considered in default. Dividends from Affiliate Asset Manager.  The Company records dividend income from its affiliate asset manager on the declaration date, which represents the ex-dividend date. Dividend Income from CLO Fund Securities.  The Company generates dividend income from its investments in the most junior class of securities of CLO Funds (typically preferred shares or subordinated securities) managed by Katonah Debt Advisors and selective investments in securities issued by funds managed by other asset management companies. The Companys CLO Fund junior class securities are subordinated to senior bond holders who typically receive a fixed rate of return on their investment. The CLO Funds are leveraged funds and any excess cash flow or excess spread (interest earned by the underlying
securities in the fund less payments made to senior bond holders and less fund expenses and management fees) is paid to the holders of the CLO Funds subordinated securities or preferred shares. The Company makes estimated interim accruals of such dividend income based on recent historical distributions and CLO Fund performance and adjusts such accruals on a quarterly basis to reflect actual distributions. For non-junior class CLO Fund securities, such as the Companys investment in the Class B-2L Notes of the Katonah 2007-1 CLO, interest is earned at a fixed spread relative to the LIBOR index. Capital Structuring Service Fees.  The Company may earn ancillary structuring and other fees related to the origination, investment, disposition or liquidation of debt and investment securities. Generally, the Company will capitalize loan origination fees, then amortize these fees into interest income over the term of the loan using the effective interest rate method, recognizes prepayment and liquidation fees upon receipt and equity structuring fees as earned, which generally occurs when an investment transaction closes. Debt Issuance Costs.  Debt issuance costs represent fees and other direct costs incurred in connection with the Companys borrowings. These amounts are capitalized and amortized ratably over the contractual term of the borrowing. In January 31, 2011, the Company fully repaid its outstanding secured credit borrowing facility which had a balance of $86.7 million as of December 31, 2010 and, at repayment, all related debt issuance costs were fully amortized. During March 2011, the Company issued $60 million of convertible senior notes (the Convertible Senior Notes) and incurred debt issuance costs of
approximately $2.4 million which will be amortized over a five-year period. At December 31, 2011, there was an unamortized debt issuance cost of approximately $2.0 million included in other assets in the accompanying balance sheet. Amortization expense for the year ended December 31, 2011 and 2010 was approximately $353,000 and $596,000, respectively. Expenses.  The Company is internally managed and expenses costs, as incurred, with regard to the running of its operations. Primary operating expenses include employee salaries and benefits, the costs of identifying, evaluating, negotiating, closing, monitoring and servicing the Companys investments and related overhead charges and expenses, including rental expense, and any interest expense incurred in connection with borrowings. The Company and its asset manager affiliates share office space and certain other operating expenses. The Company has entered into an Overhead Allocation Agreement with its asset manager
affiliates which provides for the sharing of such expenses based on an equal sharing of office lease costs and the ratable usage of other shared resources. The aggregate net payments of such expenses under the Overhead Allocation Agreement are not material. Dividends.  Dividends and distributions to common stockholders are recorded on the ex-dividend date. The amount to be paid out as a dividend is determined by the Board of Directors each quarter and is generally based upon the earnings estimated by management for the period and year.
 F-25    KOHLBERG CAPITAL CORPORATION   NOTES TO FINANCIAL STATEMENTS 2. SIGNIFICANT ACCOUNTING POLICIES   (continued) The Company has adopted a dividend reinvestment plan that provides for reinvestment of its distributions on behalf of its stockholders, unless a stockholder opts out of the plan to receive cash in lieu of having their cash dividends automatically reinvested in additional shares of the Companys common stock. Recent Accounting Pronouncements Improved Disclosures Regarding Fair Value Measurements.  In January 2010, the FASB issued Accounting Standards Update No. 2010-06, Fair Value Measurements and Improving Disclosures About Fair Value Measurements (Topic 820), which provides for improving disclosures about fair value measurements, primarily significant transfers in and out of Levels I and II, and activity in Level III fair value measurements. The new disclosures and clarifications of existing disclosures are effective for the interim and annual reporting periods beginning after December 15, 2009, while the disclosures about the purchases, sales, issuances, and
settlements in the roll forward activity in Level 3 fair value measurements are effective for fiscal years beginning after December 15, 2010 and for the interim periods within those fiscal years. Except for certain detailed Level III disclosures, which are effective for fiscal years beginning after December 15, 2010 and interim periods within those years, the new guidance became effective for the Companys fiscal 2010 second quarter. The adoption of this disclosure-only guidance is included in Note 4  Portfolio Investments and did not have a material impact on the Companys financial results. In May 2011, the FASB issued FASB Accounting Standards Update (ASU) 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS. The amendments in this ASU generally represent clarifications of Topic 820, but also include some instances where a particular principle or requirement for measuring fair value or disclosing information about fair value measurements has changed. This ASU results in common principles and requirements for measuring fair value and for disclosing information about fair value measurements in accordance with U.S. GAAP and IFRS. The
amendments in this ASU are to be applied prospectively and are effective during interim and annual periods beginning after December 15, 2011. Management currently believes that the adoption of this ASU will not have a material impact on the Companys operating results, financial position or cash flows. 3. EARNINGS (LOSSES) PER SHARE The following information sets forth the computation of basic and diluted net increase (decrease) in stockholders equity per share for the years ended December 31, 2011, 2010, and 2009:  For the Years ended December 31,2011

          

          2010

          

          2009Net increase (decrease) in net assets from operations

          

          $

          7,649,544

          

          

          $

          (14,288,677

          )

          

          $

          34,403,270Net increase (decrease) in net assets available to common stockholders

          

          

          7,649,544

          

          

          

          (14,288,677

          )

          

          

          34,403,270Weighted average number of common shares outstanding for basic shares computation

          

          

          22,868,647

          

          

          

          22,598,185

          

          

          

          22,105,800Effect of dilutive securities  stock options

          

          

          

          

          

          

          

          

          

          

          Weighted average number of common and common stock equivalent shares outstanding for diluted shares computation

          

          

          22,868,647

          

          

          

          22,598,185

          

          

          

          22,105,800Net increase (decrease) in net assets per basic common shares:Net increase (decrease) in Net assets from operations(1)

          

          

          0.33

          

          

          

          (0.63

          )

          

          

          1.56
 F-26    KOHLBERG CAPITAL CORPORATION   NOTES TO FINANCIAL STATEMENTS 3. EARNINGS (LOSSES) PER SHARE   (continued) Share-based awards that contain nonforfeitable rights to dividends or dividend equivalents, whether paid or unpaid, are participating securities and included in the computation of both basic and diluted earnings per share. Grants of restricted stock awards to our employees and directors are considered participating securities when there are earnings in the period and the earnings per share calculations include outstanding unvested restricted stock awards in the basic weighted average shares outstanding calculation. Included in the weighted average shares outstanding for the year ended December 31, 2011 are 305,221 shares of unvested restricted stock,
which were deemed to be participating securities. Options to purchase 20,000 shares were included in the computation of diluted earnings per share for the year ended December 31, 2011. For the year ended December 31, 2010, options to purchase 40,000 shares were not included in the computation of diluted earnings per share because the effect would be antidilutive as the exercise prices exceeded the average market price of the common shares. The Companys Convertible Senior Notes are included in the computation of the diluted net increase or decrease in net assets resulting from operations per share in accordance with ASC 261-10-45-40-b by application of the if-converted method. Under the if-converted method, interest charges applicable to the convertible debt for the period are added to the reported net increase or decrease in net assets resulting from operations and the full amount of shares (pro-rata if not outstanding for the full period) that would be issued are added to weighted average basic shares. Convertible debt is considered anti-dilutive only when its
interest per share upon conversion exceeds the basic net increase or decrease in net assets resulting from operations per share. For the year ended December 31, 2011, the convertible debt is anti-dilutive. The if-converted method of computing the dilutive effects on convertible debt assumes a conversion even if the contracted conversion price exceeds the market value of the shares. The Companys Convertible Senior Notes have a conversion price of $8.44 per share which was above the Companys net asset value per share at the time of issuance. Upon conversion, the Company would issue the full amount of common stock upon conversion and retire the full amount of debt outstanding. On February 29, 2012, the Company completed the acquisition of Trimaran Advisors, L.L.C. (Trimaran) through a newly-formed, wholly-owned subsidiary of the Company. The aggregate consideration paid for all of the outstanding equity interests in Trimaran consisted of $13.0 million in cash and 3,600,000 shares of common stock, par value $0.01 per share, of the Company. The change in the number of common shares outstanding at December 31, 2011 as if this acquisition had closed prior to year end would be an increase of 3,600,000 common shares to a total outstanding share amount of 26,367,130.
 F-27    KOHLBERG CAPITAL CORPORATION   NOTES TO FINANCIAL STATEMENTS 4. INVESTMENTS The Company invests in senior secured loans and mezzanine debt and, to a lesser extent, equity capital of middle market companies in a variety of industries. The Company generally targets companies that generate positive cash flows because the Company looks to cash flows as the primary source for servicing debt. However, the Company may invest in other industries if it is presented with attractive opportunities. The following table shows the Companys portfolio by security type at December 31, 2011 and December 31, 2010:  December 31, 2011

          

          December 31, 2010Security Type

          

          Cost

          

          Fair Value

          

          %

          

          Cost

          

          Fair Value

          

          %Time Deposits

          

          $

          229,152

          

          

          $

          229,152

          

          

          

          

          %

          

          $

          720,225

          

          

          $

          720,225

          

          

          

          

          %Money Market Account

          

          

          31,622,134

          

          

          

          31,622,134

          

          

          

          18

          

          

          

          210,311

          

          

          

          210,311

          

          

          

          Senior Secured Loan

          

          

          54,045,184

          

          

          

          45,259,328

          

          

          

          25

          

          

          

          34,183,551

          

          

          

          22,001,256

          

          

          

          12Junior Secured Loan

          

          

          58,936,728

          

          

          

          47,300,172

          

          

          

          26

          

          

          

          76,896,867

          

          

          

          63,944,003

          

          

          

          34Mezzanine Investment

          

          

          10,931,428

          

          

          

          11,588,115

          

          

          

          6

          

          

          

          10,744,496

          

          

          

          250,000

          

          

          

          Senior Subordinated Bond

          

          

          9,997,898

          

          

          

          10,125,891

          

          

          

          6

          

          

          

          4,320,596

          

          

          

          4,490,709

          

          

          

          3CLO Fund Securities

          

          

          65,209,809

          

          

          

          46,412,000

          

          

          

          26

          

          

          

          68,280,200

          

          

          

          53,031,000

          

          

          

          28Equity Securities

          

          

          16,559,610

          

          

          

          6,040,895

          

          

          

          3

          

          

          

          13,232,266

          

          

          

          4,437,871

          

          

          

          3Preferred

          

          

          400,000

          

          

          

          400,000

          

          

          

          

          

          

          

          650,961

          

          

          

          607,921

          

          

          

          Affiliate Asset Managers

          

          

          44,338,301

          

          

          

          40,814,000

          

          

          

          23

          

          

          

          44,532,329

          

          

          

          41,493,000

          

          

          

          22Total

          

          $

          292,270,244

          

          

          $

          239,791,687

          

          

          

          133

          %

          

          $

          253,771,802

          

          

          $

          191,186,296

          

          

          

          102

          %
  (1)

          Calculated as a percentage of net asset value
 F-28    KOHLBERG CAPITAL CORPORATION   NOTES TO FINANCIAL STATEMENTS 4. INVESTMENTS   (continued) The industry concentrations, based on the fair value of the Companys investment portfolio as of December 31, 2011 and December 31, 2010, were as follows:  December 31, 2011

          

          December 31, 2010Industry Classification

          

          Cost

          

          Fair Value

          

          %(1)

          

          Cost

          

          Fair Value

          

          %(1)Aerospace and Defense

          

          $

          19,683,821

          

          

          $

          19,439,230

          

          

          

          10

          %

          

          $

          6,499,518

          

          

          $

          5,613,844

          

          

          

          3

          %Asset Management Company(2)

          

          

          44,338,301

          

          

          

          40,814,000

          

          

          

          23

          

          

          

          44,532,329

          

          

          

          41,493,000

          

          

          

          22Beverage, Food and Tobacco

          

          

          9,892,274

          

          

          

          9,796,565

          

          

          

          5

          

          

          

          

          

          

          

          

          

          

          

          Broadcasting and Entertainment(3)

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          Buildings and Real Estate

          

          

          18,591,674

          

          

          

          662,443

          

          

          

          

          

          

          

          32,845,509

          

          

          

          6,923,964

          

          

          

          4Cargo Transport

          

          

          4,374,350

          

          

          

          4,374,351

          

          

          

          2

          

          

          

          4,940,182

          

          

          

          4,940,182

          

          

          

          3Chemicals, Plastics and Rubber

          

          

          4,809,459

          

          

          

          4,614,828

          

          

          

          3

          

          

          

          

          

          

          

          

          

          

          

          CLO Fund Securities

          

          

          65,209,809

          

          

          

          46,412,000

          

          

          

          26

          

          

          

          68,280,200

          

          

          

          53,031,000

          

          

          

          28Containers, Packaging and Glass

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          3,009,682

          

          

          

          3,000,000

          

          

          

          2Diversified/Conglomerate Manufacturing

          

          

          6,905,447

          

          

          

          7,000,000

          

          

          

          4

          

          

          

          

          

          

          

          

          

          

          

          Diversified/Conglomerate Service

          

          

          2,870,642

          

          

          

          372,599

          

          

          

          

          

          

          

          10,384,036

          

          

          

          8,345,287

          

          

          

          4Electronics

          

          

          8,831,440

          

          

          

          9,026,186

          

          

          

          5

          

          

          

          3,006,137

          

          

          

          3,176,250

          

          

          

          2Healthcare, Education and Childcare

          

          

          20,956,582

          

          

          

          19,523,824

          

          

          

          11

          

          

          

          15,113,551

          

          

          

          15,037,936

          

          

          

          8Home and Office Furnishings, Housewares, and Durable Consumer Products

          

          

          21,683,112

          

          

          

          20,604,850

          

          

          

          11

          

          

          

          9,654,903

          

          

          

          8,804,450

          

          

          

          5Insurance

          

          

          4,919,522

          

          

          

          3,753,000

          

          

          

          2

          

          

          

          4,890,322

          

          

          

          4,049,000

          

          

          

          2Leisure, Amusement, Motion Pictures, Entertainment

          

          

          2,290,892

          

          

          

          2,084,012

          

          

          

          1

          

          

          

          2,114,458

          

          

          

          1,983,619

          

          

          

          1Machinery (Non-Agriculture, Non-Construction, Non-Electronic)

          

          

          3,483,174

          

          

          

          3,891,900

          

          

          

          2

          

          

          

          3,477,696

          

          

          

          3,864,600

          

          

          

          2Mining, Steel, Iron and Non-Precious Metals

          

          

          797,091

          

          

          

          438,913

          

          

          

          

          

          

          

          14,381,863

          

          

          

          14,430,312

          

          

          

          8Personal and Non Durable Consumer Products (Mfg. Only)

          

          

          5,000,000

          

          

          

          3,250,000

          

          

          

          2

          

          

          

          5,000,000

          

          

          

          3,435,000

          

          

          

          2Personal, Food and Miscellaneous Services

          

          

          2,872,500

          

          

          

          2,827,359

          

          

          

          2

          

          

          

          14,730,350

          

          

          

          4,090,000

          

          

          

          2Personal Transportation

          

          

          2,993,092

          

          

          

          2,983,648

          

          

          

          2

          

          

          

          

          

          

          

          

          

          

          

          Printing and Publishing

          

          

          1,044,539

          

          

          

          1,223,743

          

          

          

          1

          

          

          

          5,980,529

          

          

          

          5,669,716

          

          

          

          3Retail Stores

          

          

          1,885,086

          

          

          

          1,932,500

          

          

          

          1

          

          

          

          

          

          

          

          

          

          

          

          Telecommunications

          

          

          2,986,151

          

          

          

          2,776,950

          

          

          

          2

          

          

          

          

          

          

          

          

          

          

          

          Time Deposit and Money Market Accounts

          

          

          31,851,286

          

          

          

          31,851,286

          

          

          

          18

          

          

          

          930,537

          

          

          

          930,536

          

          

          

          Utilities

          

          

          4,000,000

          

          

          

          137,500

          

          

          

          

          

          

          

          4,000,000

          

          

          

          2,367,600

          

          

          

          1Total

          

          $

          292,270,244

          

          

          $

          239,791,687

          

          

          

          133

          %

          

          $

          253,771,802

          

          

          $

          191,186,296

          

          

          

          102

          %
  (1)

          Calculated as a percentage of net asset value. (2)

          Represents Katonah Debt Advisors and related asset manager affiliates. (3)

          Buildings and real estate relate to real estate ownership, builders, managers and developers and excludes mortgage debt investments and mortgage lenders or originators. As of December 31, 2011 and December 31, 2010, the Company had no exposure to mortgage securities (residential mortgage bonds, commercial mortgage backed securities, or related asset backed securities) or companies providing mortgage lending.
 F-29    KOHLBERG CAPITAL CORPORATION   NOTES TO FINANCIAL STATEMENTS 4. INVESTMENTS   (continued) The Company may invest up to 30% of the investment portfolio in opportunistic investments in high-yield bonds, debt and equity securities of CLO Funds, distressed debt or equity securities of public companies. However, the Companys investment strategy is to limit the value of its investments in debt or equity securities issued by CLO Funds to not more than 15% of the value of its total investment portfolio at the time of investment. The Company expects that these public companies generally will have debt that is non-investment grade. The Company also may invest in debt of middle market companies located outside of the United States, which
investments (excluding the Companys investments in CLO Funds) are generally not anticipated to be in excess of 10% of the investment portfolio at the time such investments are made. The Company is generally prohibited from buying or selling any security from or to any portfolio company of a private equity fund managed by Kohlberg & Co. without the prior approval of the SEC. In addition, the Company may co-invest on a concurrent basis with Kohlberg & Co. or any of its affiliates, subject to compliance with existing regulatory guidance, applicable regulations and its allocation procedures. Certain types of negotiated co-investments may be made only if the Company receives an order from the SEC permitting it to do so. There can be no assurance that any such order will be applied for or, if applied for, obtained. At December 31, 2011 and December 31, 2010, approximately 21% and 29% of the Companys investments were foreign assets (including the Companys investments in CLO Funds, which are typically domiciled outside the U.S. and represented approximately 19% and 28% of its portfolio on such dates), respectively. At December 31, 2011, no foreign assets were in U.S. dollar denominated over-night time Eurodollar deposits which revert to cash each business morning. At December 31, 2011 and December 31, 2010, the Companys ten largest portfolio companies represented approximately 62% and 65%, respectively, of the total fair value of its investments. The Companys largest investment, Katonah Debt Advisors which is its wholly-owned asset manager affiliate, represented 17% and 22% of the total fair value of the Companys investments at December 31, 2011 and December 31, 2010, respectively. Excluding Katonah Debt Advisors and CLO Fund securities, the Companys ten largest portfolio companies represented approximately 26% and 30% of the total fair value of the Companys investments at
December 31, 2011 and December 31, 2010, respectively. Investment in CLO Fund Securities The Company typically makes a minority investment in the most junior class of securities of CLO Funds (typically preferred shares or subordinated securities) managed by Katonah Debt Advisors and may selectively invest in securities issued by funds managed by other asset management companies. However, as noted above, the Companys investment strategy is to limit the value of its investments in the debt or equity securities issued by CLO Funds to not more than 15% of the value of its total investment portfolio at the time of investment. Preferred shares or subordinated securities issued by CLO Funds are entitled to recurring dividend distributions
which generally equal the net remaining cash flow of the payments made by the underlying CLO Funds securities less contractual payments to senior bond holders and CLO Fund expenses. CLO Funds managed by Katonah Debt Advisors (CLO fund securities managed by affiliate) invest primarily in broadly syndicated non-investment grade loans, high-yield bonds and other credit instruments of corporate issuers. The underlying assets in each of the CLO Funds in which the Company has an investment are generally diversified secured or unsecured corporate debt and exclude mortgage pools or mortgage securities (residential mortgage bonds, commercial mortgage backed securities, or related asset-backed securities), debt to companies providing mortgage lending and emerging markets investments. The CLO Funds are leveraged funds and any excess cash flow or excess spread (interest earned by the underlying securities in the fund less payments made to senior bond holders, fund
expenses and management fees) is paid to the holders of the CLO Funds subordinated securities or preferred shares.
 F-30    KOHLBERG CAPITAL CORPORATION   NOTES TO FINANCIAL STATEMENTS 4. INVESTMENTS   (continued) The subordinated securities and preferred share securities are considered equity positions in the CLO Funds and, as of December 31, 2011 and December 31, 2010, the Company had approximately $40 million and $45 million, respectively, of such CLO equity investments at fair value. The cost basis of the Companys investment in CLO Fund equity securities as of December 31, 2011 was approximately $64 million and aggregate unrealized depreciation on the CLO Fund securities totaled approximately $24 million. The cost basis of the Companys investment in CLO Fund equity securities as of December 31, 2010, was approximately $67 million and aggregate
unrealized depreciation on the CLO Fund securities totaled approximately $22 million. In May, 2009 the Company purchased the class B-2L notes of the Katonah 2007-1 CLO investment managed by Katonah Debt Advisors (Katonah 2007-1 B-2L). The Company purchased the Katonah 2007-1 B-2L for 10% of the par value. The fair value, cost basis, and aggregate unrealized appreciation of the Katonah 2007-1 B-2L investment as of December 31, 2011 were approximately $7 million, $1 million, and $6 million, respectively, and at December 31, 2010, the fair value, cost basis, and aggregate unrealized appreciation of the Katonah 2007-1 B-2L investment were $8 million, $1 million, and $7 million, respectively. Both the B-2L notes and preferred
shares of Katonah 2007-1 are owned 100% by the Company and are making their required quarterly distributions. All CLO Funds managed by Katonah Debt Advisors are currently making quarterly dividend distributions to the Company and are paying all senior and subordinate management fees to Katonah Debt Advisors. With the exception of the Katonah V, Ltd. CLO Fund, all third-party managed CLO Funds held as investments are making quarterly dividend distributions to the Company. Fair Value Measurements The Company follows the provisions of Fair Value Measurements and Disclosures, which among other matters, requires enhanced disclosures about investments that are measured and reported at fair value. This standard defines fair value and establishes a hierarchal disclosure framework which prioritizes and ranks the level of market price observability used in measuring investments at fair value and expands disclosures about assets and liabilities measured at fair value. Fair Value Measurements and Disclosures 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 an exit price in the principal, or most advantageous market, and prioritizes, within a measurement of fair value, the use of market-based inputs (which may be weighted or adjusted for relevance, reliability and specific attributes relative to the subject investment) over entity-specific inputs. Market price observability is affected by a number of factors, including the type of investment and the characteristics specific to the investment. Investments with readily available active quoted prices or for which fair value can be measured from actively quoted prices generally will have a higher degree of market price observability and a lesser degree of judgment used in measuring fair value. Subsequent to the adoption of Fair Value Measurements and Disclosures, the FASB has issued various staff positions clarifying the initial standard (see Note 2. Significant Accounting
Policies  Investments). Fair Value Measurements and Disclosures 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: Level I  Unadjusted quoted prices are available in active markets for identical investments as of the reporting date. The type of investments included in Level I include listed equities and listed securities. As required by Fair Value Measurements and Disclosures, the Company does not adjust the quoted price for these investments, even in situations where the Company holds a large position and a sale could reasonably affect the quoted price.
 F-31    KOHLBERG CAPITAL CORPORATION   NOTES TO FINANCIAL STATEMENTS 4. INVESTMENTS   (continued) Level II  Pricing inputs are other than quoted prices in active markets, which are either directly or indirectly observable as of the reporting date. Such inputs may be quoted prices for similar assets or liabilities, quoted markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full character of the financial instrument, or inputs that are derived principally from, or corroborated by, observable market information. Investments which are generally included in this category include illiquid corporate loans and bonds and less liquid, privately held or
restricted equity securities for which some level of recent trading activity has been observed. Level III  Pricing inputs are unobservable for the investment and includes situations where there is little, if any, market activity for the investment. The inputs may be based on the Companys own assumptions about how market participants would price the asset or liability or may use Level II inputs, as adjusted, to reflect specific investment attributes relative to a broader market assumption. These inputs into the determination of fair value may require significant management judgment or estimation. Even if observable market data for comparable performance or valuation measures (earnings multiples, discount rates, other
financial/valuation ratios, etc.) are available, such investments are grouped as Level III if any significant data point that is not also market observable (private company earnings, cash flows, etc.) is used in the valuation methodology. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, an investments level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. The Companys assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and the Company considers factors specific to the investment. Substantially all of the Companys investments are classified as Level III. The Company evaluates the source of inputs, including any markets in which its investments are
trading, in determining fair value. Inputs that are backed by actual transactions, those that are highly correlated to the specific investment being valued and those derived from reliable or knowledgeable sources will tend to have a higher weighting in determining fair value. Ongoing reviews by the Companys investment analysts, Chief Investment Officer, Valuation Committee and independent valuation firms (if engaged) are based on an assessment of each underlying investment, its current and prospective operating and financial performance, consideration of financing and sale transactions with third parties, expected cash flows and market-based information, including comparable transactions, performance factors, and other investment or industry specific market data, among other factors. The following table summarizes the fair value of investments by the above Fair Value Measurements and Disclosures fair value hierarchy levels as of December 31, 2011 and December 31, 2010, respectively:  As of December, 31 2011Level I

          

          Level II

          

          Level III

          

          TotalTime deposit and money market account

          

          $

          

          

          

          $

          31,851,286

          

          

          $

          

          

          

          $

          31,851,286Debt securities

          

          

          

          

          

          

          31,578,832

          

          

          

          83,094,674

          

          

          

          114,673,506CLO fund securities

          

          

          

          

          

          

          

          

          

          

          46,412,000

          

          

          

          46,412,000Equity securities

          

          

          

          

          

          

          

          

          

          

          6,040,895

          

          

          

          6,040,895Asset manager affiliate

          

          

          

          

          

          

          

          

          

          

          40,814,000

          

          

          

          40,814,000
  As of December, 31 2010Level I

          

          Level II

          

          Level III

          

          TotalTime deposit and money market account

          

          $

          

          

          

          $

          930,536

          

          

          $

          

          

          

          $

          930,536Debt securities

          

          

          

          

          

          

          

          

          

          

          91,042,928

          

          

          

          91,042,928CLO fund securities

          

          

          

          

          

          

          

          

          

          

          53,031,000

          

          

          

          53,031,000Equity securities

          

          

          

          

          

          

          

          

          

          

          4,688,832

          

          

          

          4,688,832Asset manager affiliate

          

          

          

          

          

          

          

          

          

          

          41,493,000

          

          

          

          41,493,000
 F-32    KOHLBERG CAPITAL CORPORATION   NOTES TO FINANCIAL STATEMENTS 4. INVESTMENTS   (continued) As a BDC, it is required that the Company invest primarily in the debt and equity of non-public companies for which there is little, if any, market-observable information. As a result, most, if not all, of the Companys investments at any given time will most likely be deemed Level III investments. The Company believes that investments classified as Level III for Fair Value Measurements and Disclosures have a further hierarchal framework which prioritizes and ranks such valuations based on the degree of independent and observable inputs, objectivity of data and models and the level of judgment required to adjust comparable data. The
hierarchy of such methodologies are presented in the above table and discussed below in descending rank. Investment values derived by a third party pricing service are deemed Level III values since such values are not traded on an active public exchange and may represent a traded or broker quote on an asset that is infrequently traded. The Company derives fair value for its illiquid investments that do not have indicative fair values based upon active trades primarily by using the Market Yield Approach and also considers recent loan amendments or other activity specific to the subject asset. Discount rates applied to estimated contractual cash flows for an underlying asset vary by specific investment, industry, priority and nature of the debt security (such as the seniority or security interest of the debt security) and are assessed relative to two indices, a leveraged loan index and a high-yield bond index, at the valuation date. The Company has identified these two indices as
benchmarks for broad market information related to its loan and debt investments. Because the Company has not identified any market index that directly correlates to the loan and debt investments held by the Company and therefore uses the two benchmark indices, these market indices may require significant adjustment to better correlate such market data for the calculation of fair value of the investment under the Market Yield Approach. Such adjustments require judgment and may be material to the calculation of fair value. Further adjustments to the discount rate may be applied to reflect other market conditions or the perceived credit risk of the borrower. When broad market indices are used as part of the valuation methodology, their use is subject to adjustment for many factors, including priority, collateral used as security, structure, performance and other quantitative and qualitative attributes of the asset being valued. The resulting present value determination is then weighted
along with any quotes from observable transactions and broker/pricing quotes. If such quotes are indicative of actual transactions with reasonable trading volume at or near the valuation date that are not liquidation or distressed sales, relatively more reliance will be put on such quotes to determine fair value. If such quotes are not indicative of market transactions or are insufficient as to volume, reliability, consistency or other relevant factors, such quotes will be compared with other fair value indications and given relatively less weight based on their relevancy. The appropriateness of specific valuation methods and techniques may change as market conditions and available data change. In 2011 and 2010, the Company engaged an independent valuation firm, to provide a third-party review of our CLO fair value model relative to its functionality, model inputs and calculations as a reasonable method to determine CLO fair values, in the absence of Level 1 or Level 2 trading activity or observable market inputs. The independent valuation firm concluded that the Companys CLO model appropriately factors in all the necessary inputs required to build a CLO equity cash flow for fair value purposes and that the inputs were being employed correctly.
 F-33    KOHLBERG CAPITAL CORPORATION   NOTES TO FINANCIAL STATEMENTS 4. INVESTMENTS   (continued) Beginning with the period ending June 30, 2011, the Company has engaged an independent valuation firm to provide third party valuation consulting services to the Companys Board of Directors. Each quarter, the independent valuation firm will perform third party valuations on the Companys investments on illiquid securities such that they are reviewed at least once during a trailing 12 month period. Third party valuations were performed on approximately 8% of investments at fair value as of December 31, 2011. These third party valuation estimates were considered as one of the relevant data inputs in the Companys determination of fair
value. The Board of Directors intends to continue to engage an independent valuation firm in the future to provide certain valuation services, including the review of certain portfolio assets, as part of the quarterly and annual year-end valuation process. Values derived for debt securities using public/private company comparables generally utilize market-observable data from such comparables and specific, non-public and non-observable financial measures (such as earnings or cash flows) for the private, underlying company/issuer. Such non-observable company/issuer data is typically provided on a monthly basis, is certified as correct by the management of the company/issuer and/or audited by an independent accounting firm on an annual basis. Since such private company/issuer data is not publicly available it is not deemed market-observable data and, as a result, such investment values are grouped as
Level III assets. Values derived for asset manager affiliates using public/private company comparables generally utilize market-observable data from such comparables and specific, non-public and non-observable financial measures (such as assets under management, historical and prospective earnings) for the asset manager affiliate. The Company recognizes that comparable asset managers may not be fully comparable to its asset manager affiliates and typically identifies a range of performance measures and/or adjustments within the comparable population with which to determine value. Since any such ranges and adjustments are entity specific they are not considered
market-observable data and thus require a Level III grouping. Illiquid investments that have values derived through the use of discounted cash flow models and residual enterprise value models are grouped as Level III assets.
 F-34    KOHLBERG CAPITAL CORPORATION   NOTES TO FINANCIAL STATEMENTS 4. INVESTMENTS   (continued) The changes in investments measured at fair value for which the Company has used unobservable inputs to determine fair value are as follows:  Year Ended December 31, 2011Debt Securities

          

          CLO Fund Securities

          

          Equity Securities

          

          Asset Manager Affiliates

          

          TotalBalance, December 31, 2010

          

          $

          91,042,928

          

          

          $

          53,031,000

          

          

          $

          4,688,832

          

          

          $

          41,493,000

          

          

          $

          190,255,760Transfers out of Level III(1)

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          Net accretion of discount

          

          

          156,180

          

          

          

          79,609

          

          

          

          

          

          

          

          

          

          

          

          235,789Purchases

          

          

          81,815,921

          

          

          

          

          

          

          

          3,218,151

          

          

          

          (194,027

          )

          

          

          84,840,045Sales

          

          

          (56,944,765

          )

          

          

          (1,935,000

          )

          

          

          (141,769

          )

          

          

          

          

          

          

          (59,021,534

          )Total loss realized and unrealized included in earnings

          

          

          (1,396,758

          )

          

          

          (4,763,609

          )

          

          

          (1,724,319

          )

          

          

          (484,973

          )

          

          

          (8,369,659

          )Balance, December 31, 2011

          

          $

          114,673,506

          

          

          $

          46,412,000

          

          

          $

          6,040,895

          

          

          $

          40,814,000

          

          

          $

          207,940,401Changes in unrealized gains (losses) included in earnings related to investments still held at reporting date

          

          $

          (2,344,027

          )

          

          

          (4,198,609

          )

          

          

          (1,724,321

          )

          

          

          (1,703,973

          )

          

          

          (9,970,930

          )
  Year Ended December 31, 2010Debt Securities

          

          CLO Fund Securities

          

          Equity Securities

          

          Asset Manager Affiliates

          

          TotalBalance, December 31, 2009

          

          $

          297,356,529

          

          

          $

          48,971,000

          

          

          $

          4,713,246

          

          

          $

          58,064,720

          

          

          $

          409,105,495Transfers out of Level III(1)

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          Net accretion of discount

          

          

          381,677

          

          

          

          85,149

          

          

          

          

          

          

          

          

          

          

          

          466,826Purchases

          

          

          9,981,426

          

          

          

          

          

          

          

          1,927,366

          

          

          

          3,780,817

          

          

          

          15,689,609Sales

          

          

          (208,820,374

          )

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          (208,820,374

          )Total gain (loss) realized and unrealized included in earnings

          

          

          (7,856,330

          )

          

          

          3,974,851

          

          

          

          (1,951,780

          )

          

          

          (20,352,537

          )

          

          

          (26,185,796

          )Balance, December 31, 2010

          

          $

          91,042,928

          

          

          $

          53,031,000

          

          

          $

          4,688,832

          

          

          $

          41,493,000

          

          

          $

          190,255,760Changes in unrealized gains (losses) included in earnings related to investments still held at reporting date

          

          $

          (5,623,079

          )

          

          $

          3,974,851

          

          

          $

          (1,142,038

          )

          

          $

          (20,352,537

          )

          

          $

          (23,142,803

          )
  (1)

          Transfers out of Level III represent a transfer of $0 relating to debt securities for which pricing inputs, other than their quoted prices in active markets were observable as of Dec 31, 2011 5. AFFILIATE ASSET MANAGERS Wholly-Owned Asset Manager Katonah Debt Advisors is a wholly-owned portfolio company. Katonah Debt Advisors manages CLO Funds primarily for third party investors that invest in broadly syndicated loans, high yield bonds and other credit instruments issued by corporations. These CLO Funds do not invest in asset-backed securities secured by commercial mortgages, residential mortgages or other consumer borrowings. At December 31, 2011, Katonah Debt Advisors had approximately $1.9 billion of par value of assets under management, and the Companys 100% equity interest in Katonah Debt Advisors was valued at approximately $41 million.
 F-35    KOHLBERG CAPITAL CORPORATION   NOTES TO FINANCIAL STATEMENTS 5. AFFILIATE ASSET MANAGERS   (continued) As a manager of the CLO Funds, Katonah Debt Advisors receives contractual and recurring management fees and may receive a one-time structuring fee from the CLO Funds for its management and advisory services. The annual fees which Katonah Debt Advisors receives are generally based on a fixed percentage of assets under management (at par value and not subject to changes in market value), and Katonah Debt Advisors generates annual operating income equal to the amount by which its fee income exceeds it operating expenses. The annual management fees Katonah Debt Advisors receives have two components  a senior management fee and a
subordinated management fee. Currently, all CLO Funds managed by Katonah Debt Advisors are paying both their senior and subordinated management fees on a current basis. During 2009, certain CLO funds managed by Katonah Debt Advisors were restricted from currently paying their subordinated management fees as a result of the failure by those CLO Funds to satisfy certain restrictive covenants contained in their indenture agreements. At such time, those subordinated management fees continued to be accrued by the applicable CLO Fund to become payable to Katonah Debt Advisors when such CLO Fund becomes compliant with the applicable covenants. During the year ended December 31, 2010, all those CLO Funds which deferred payment of their subordinated management fees regained compliance with all applicable covenants in order
to pay current subordinated management fees as well as a portion of previously accrued subordinated management fees. During the year ended December 31, 2010, approximately $5 million of deferred subordinated management fees had been paid. In future years, Katonah Debt Advisors may receive accrued incentive fees upon the liquidation of CLO Funds it manages, provided such CLO Funds have achieved a minimum investment return to holders of their subordinated securities or preferred shares. On January 2, 2008, the Katonah Debt Advisors platform acquired substantially all of the assets of Scotts Cove Capital Management LLC (Scotts Cove), an asset manager focused on an event-driven credit long short investment strategy. On February 4, 2011, Katonah Debt Advisors entered to an Asset Purchase Agreement with a third-party buyer controlled by a former Katonah Debt Advisors employee to sell substantially all of the Scotts Cove assets for a purchase price of $25,000. The transaction closed on February 28, 2011. At closing, Katonah Debt Advisors and the buyer entered into a Services Agreement, pursuant to which the
buyer paid to Katonah Debt Advisors $225,000 for certain transitional services to be provided by Katonah Debt Advisors (including access to office space, secretarial services and information technology support) and agreed to pay an additional amount of $75,000 on each of the first and second anniversaries of the closing date (subject to, in the case of the first payment, deferment for up to one year under certain circumstances). Katonah Debt Advisors obligation to provide transitional services under the Services Agreement continued through June 30, 2011. At closing, Katonah Debt Advisors and the employees that formerly managed the Scotts Cove assets also entered into employee termination agreements, whereby they agreed to terminate their employment with Katonah Debt Advisors and to relinquish all claims against Katonah Debt Advisors or its affiliates. The revenue that Katonah Debt Advisors generates through the fees it receives for managing CLO Funds and after paying the expenses associated with its operations, including compensation of its employees, may be distributed to the Company. Any distributions of Katonah Debt Advisors net income are recorded as dividends from affiliate asset manager are recorded as declared (where declaration date represents ex-dividend date) by Katonah Debt Advisors as income on our statement of operations. For the year ended December 31, 2011, Katonah Debt Advisors made distributions of $1.9 million to the Company. Dividends are recorded as declared (where
declaration date represents ex-dividend date) by Katonah Debt Advisors as income on our statement of operations. The declared fourth quarter dividend of $750,000 by Katonah Debt Advisors was recorded as a dividend receivable as of December 31, 2011.
 F-36    KOHLBERG CAPITAL CORPORATION   NOTES TO FINANCIAL STATEMENTS 5. AFFILIATE ASSET MANAGERS   (continued) As with all other investments, Katonah Debt Advisors fair value is periodically determined. The valuation is primarily based on an analysis of both a percentage of its assets under management and Katonah Debt Advisors estimated operating income. Any change in value from period to period is recognized as unrealized gain or loss. See Note 2, Significant Accounting Policies and Note 4, Investments for further information relating to the Companys valuation methodology. For the year ended December 31, 2011 Katonah Debt Advisors had a decrease in fair value of approximately $679,000. As a separately regarded entity for tax purposes, Katonah Debt Advisors is taxed at normal corporate rates. For tax purposes, any distributions of taxable net income earned by Katonah Debt Advisors to the Company would generally need to be distributed to the Companys shareholders. Generally, such distributions of Katonah Debt Advisors income to the Companys shareholders will be considered as qualified dividends for tax purposes. Katonah Debt Advisors taxable net income will differ from GAAP net income because of deferred tax timing adjustments and permanent tax adjustments. Deferred tax timing adjustments may include
differences for the recognition and timing of depreciation, bonuses to employees and stock option expense. Permanent differences may include adjustments, limitations or disallowances for meals and entertainment expenses, penalties, tax goodwill amortization and net operating loss carryforward. Goodwill amortization for tax purposes was created upon the purchase of 100% of the equity interests in Katonah Debt Advisors prior to the Companys IPO in exchange for shares of the Companys stock valued at $33 million. Although this transaction was a stock transaction rather than an asset purchase and thus no goodwill was recognized for GAAP purposes, such exchange was considered an asset purchase under Section 351(a) of the Code. At the time of the transfer, Katonah Debt Advisors had equity of approximately $1 million resulting in tax goodwill of approximately $32 million which will be amortized for tax purposes on a straight-line basis
over 15 years, which accounts for an annual difference between GAAP income and taxable income by approximately $2 million per year over such period. At December 31, 2011 and December 31, 2010 there were no intercompany balances with our affiliates. 6. BORROWINGS The Companys debt obligations consist of the following:  As of December 31, 2011

          

          As of December 31, 2010Convertible Senior Notes, due March 15, 2016

          

          $

          60,000,000

          

          

          $

          Secured credit facility, due February 28, 2011(1)

          

          $

          

          

          

          $

          86,746,582
  (1)

          February 28, 2011 was the maturity date as established by a Forbearance and Settlement Agreement dated September 20, 2010 Secured Credit Facility At December 31, 2010, the Company had a secured credit facility with an outstanding balance of $86,746,582. On January 31, 2011, the Company repaid in full the outstanding balance under this facility, resulting in the lenders release to the Company of approximately $73 million of collateral previously securing the facility and their payment of a $2 million cash settlement to the Company.
 F-37    KOHLBERG CAPITAL CORPORATION   NOTES TO FINANCIAL STATEMENTS 6. BORROWINGS   (continued) Convertible Senior Notes On March 16, 2011, the Company issued $55 million in aggregate principal amount of unsecured 8.75% convertible senior notes due 2016 (Convertible Senior Notes). On March 23, 2011, pursuant to an over-allotment option, the Company issued an additional $5 million of such Convertible Senior Notes for a total of $60 million in aggregate principal amount. The net proceeds for the Convertible Senior Notes, following underwriting expenses, were approximately $57.7 million. Interest on the Convertible Senior Notes is paid semi-annually in arrears on March 15 and September 15, at a rate of 8.75%, commencing September 15, 2011. The Notes mature on
March 15, 2016 unless converted earlier. The Convertible Senior Notes are senior unsecured obligations of the Company. The Convertible Senior Notes are convertible into shares of Companys common stock based on an initial conversion rate of 118.5255 shares of common stock per $1,000 principal amount of Convertible Senior Notes, which is equivalent to an initial conversion price of approximately $8.44 per share of common stock. The conversion rate will be subject to adjustment upon certain events. Upon conversion, unless a holder converts after a record date for an interest payment but prior to the corresponding interest payment date, the holder will receive a separate cash payment with respect to the Convertible Senior Notes surrendered for conversion representing accrued and unpaid interest to, but not including the conversion date. Any such payment will be made on the settlement date applicable to the relevant conversion on the Convertible Senior Notes. No holder of Convertible Senior Notes will be entitled to receive shares of the Companys common stock upon conversion to the extent (but only to the extent) that such receipt would cause such converting holder to become, directly or indirectly, a beneficial owner (within the meaning of Section 13(d) of the Securities Exchange Act of 1934 and the rules and regulations promulgated thereunder) of more than 5.0% of the shares of the Companys common stock outstanding at such time. The 5.0% limitation shall no longer apply following the effective date of any fundamental change. The Company will not issue any shares in connection with the
conversion or redemption of the Convertible Senior Notes which would equal or exceed 20% of the shares outstanding at the time of the transaction in accordance with NASDAQ rules. Subject to certain exceptions, holders may require us to repurchase, for cash, all or part of their Convertible Senior Notes upon a fundamental change at a price equal to 100% of the principal amount of the Convertible Senior Notes being repurchased plus any accrued and unpaid interest up to, but excluding, the fundamental change repurchase date.. In addition, in the case of certain fundamental changes and without duplication of the foregoing amount, the Company will also pay holders an amount in cash (or, in certain circumstances, shares of the Companys common stock) equal to the present value of the remaining interest payments on such notes
through, and including, the maturity date. In connection with the issuance of the Convertible Senior Notes, the Company incurred approximately $2.4 million of debt offering costs which are being amortized over the term of the facility on a straight-line basis, which approximates the effective yield method, of which approximately $2.0 million remains to be amortized. The Convertible Senior Notes have been analyzed for any features that would require its accounting to be bifurcated. There are no features that require accounting to be bifurcated, and as a result, they are recorded as a liability at their contractual amounts. For the period from March 11, 2011 (the date of issuance of the notes) to December 31, 2011, the Company recorded approximately $4.5 million of interest costs and amortization of financing costs as interest expense.
 F-38    KOHLBERG CAPITAL CORPORATION   NOTES TO FINANCIAL STATEMENTS 6. BORROWINGS   (continued) Fair Value of Convertible Senior Notes.  The Company carries the Convertible Senior Notes at cost. The Convertible Senior Notes were issued in a private placement and there is no active trading of these notes. The fair value of the Companys outstanding Convertible Senior Notes was approximately $55.2 million at December 31, 2011. The fair value was determined based on the average of indicative bid and offer pricing for the Convertible Senior Notes. 7. DISTRIBUTABLE TAX INCOME Effective December 11, 2006, the Company elected to be treated as a RIC under the Code and adopted a December 31 calendar year end. As a RIC, the Company is not subject to federal income tax on the portion of its taxable income and gains distributed currently to its stockholders as a dividend. The Companys quarterly dividends, if any, are determined by the Board of Directors. The Company anticipates distributing at least 90% of its taxable income and gains, within the Subchapter M rules, and thus the Company anticipates that it will not incur any federal or state income tax at the RIC level. As a RIC, the Company is also subject to a federal
excise tax based on distributive requirements of its taxable income on a calendar year basis (e.g., calendar year 2011). Depending on the level of taxable income earned in a tax year, the Company may choose to carry forward taxable income in excess of current year distributions into the next tax year and pay a 4% excise tax on such income, to the extent required. The Company anticipates timely distribution of its taxable income within the tax rules, and the Company anticipates that it will not incur a US federal excise tax for the calendar year 2011. The following reconciles net decrease in shareholders equity resulting from operations to taxable income for the year ended December 31, 2011:  Year Ended December 31,2011

          

          2010Net increase (decrease) in stockholders' equity resulting from operations

          

          $

          7,649,544

          

          

          $

          (14,288,677

          )Net change in unrealized (appreciation) depreciation from investments

          

          

          (10,106,949

          )

          

          

          8,322,812Excess capital losses over capital gains

          

          

          18,476,608

          

          

          

          17,862,984Income not on GAAP books currently taxable

          

          

          85,608

          

          

          

          241,110Income not currently taxable

          

          

          (89,793

          )

          

          

          (76,990

          )Expenses not currently deductible

          

          

          (120,240

          )

          

          

          347,883Expenses not on GAAP books currently deductible

          

          

          (3,978

          )

          

          

          (3,978

          )Taxable income before deductions for distributions

          

          $

          15,890,800

          

          

          $

          12,405,144Taxable income before deductions for distributions per weighted average shares for the period

          

          $

          0.69

          

          

          $

          0.55
 Taxable income differs from net increase (decrease) in stockholders equity resulting from operations primarily due to: (1) unrealized appreciation (depreciation) on investments, as investment gains and losses are not included in taxable income until they are realized; (2) amortization of discount on CLO Fund Securities; (3) amortization of organizational costs; (4) non-deductible expenses; (5) stock compensation expense that is not currently deductible for tax purposes; (6) excess of capital losses over capital gains; and (7) recognition of interest income on certain loans.
 F-39    KOHLBERG CAPITAL CORPORATION   NOTES TO FINANCIAL STATEMENTS 7. DISTRIBUTABLE TAX INCOME   (continued) Distributions which exceed tax distributable income (tax net investment income and realized gains, if any) are reported as distributions of paid-in capital (i.e., return of capital). The tax character of distributions paid during the years ended December 31, 2011, 2010, and 2009 was as follows:  Year Ended December 31,2011

          

          2010

          

          2009Distributions paid from:Ordinary income

          

          $

          15,890,800

          

          

          $

          12,405,144

          

          

          $

          19,869,70815,890,800

          

          

          

          12,405,144

          

          

          

          19,869,708(Under distribution) Return of Capital

          

          

          (114,461

          )

          

          

          2,817,067

          

          

          

          333,017$

          15,776,339

          

          

          $

          15,222,211

          

          

          $

          20,202,725
 As of December 31, 2011 and 2010, the components of accumulated earnings on a tax basis were as follows:  Year Ended December 31,2011

          

          2010Distributable ordinary income

          

          $

          947,068

          

          

          $

          818,664Capital loss carryforward

          

          

          (50,501,419

          )

          

          

          (32,024,811

          )Net unrealized depreciation

          

          

          (52,478,555

          )

          

          

          (62,585,504

          )
 At December 31, 2011, the Company had a net capital loss carryforward of $51 million to offset net capital gains, to the extent provided by federal tax law. The capital loss carryforward will begin to expire in the tax year ending December 31, 2015. The Company adopted Financial Accounting Standards Board ASC Topic 740 Accounting for Uncertainty in Income Taxes (ASC 740) as of January 1, 2007. ASC 740 provides guidance for how uncertain tax positions should be recognized, measured, presented, and disclosed in the financial statements. ASC 740 requires the evaluation of tax positions taken or expected to be taken in the course of preparing the Companys tax returns to determine whether the tax positions are more-likely-than-not of being sustained by the applicable tax authority. The Company recognizes the tax benefits of uncertain tax positions only where the position
is more likely than not to be sustained assuming examination by tax authorities. Management has analyzed the Companys tax positions, and has concluded that no liability for unrecognized tax benefits should be recorded related to uncertain tax positions taken on returns filed for open tax years (the last three fiscal years) or expected to be taken in the Companys current year tax return. The Company identifies its major tax jurisdictions as U.S. Federal and New York State, and the Company is not aware of any tax positions for which it is reasonably possible that the total amounts of unrecognized tax benefits will change materially in the next 12 months. The adoption of ASC 740 did not have an effect on the financial position or results of operations of the Company as there was no liability for unrecognized tax benefits and no change to the beginning capital of the Company. Managements determinations regarding ASC 740 may be subject to review and adjustment
at a later date based upon factors including, but not limited to, an ongoing analysis of tax laws, regulations and interpretations thereof. 8. COMMITMENTS AND CONTINGENCIES The Company is a party to financial instruments with off-balance sheet risk in the normal course of business in order to meet the needs of the Companys investment in portfolio companies. Such instruments include commitments to extend credit and may involve, in varying degrees, elements of credit risk in excess of amounts recognized on the Companys balance sheet. Prior to extending such credit, the Company attempts to limit its credit risk by conducting extensive due diligence, obtaining collateral where necessary and negotiating appropriate financial covenants. As of both December 31, 2011 and December 31, 2010, the Company had committed
to make a total of approximately $2 million of investments in various revolving senior secured
 F-40    KOHLBERG CAPITAL CORPORATION   NOTES TO FINANCIAL STATEMENTS 8. COMMITMENTS AND CONTINGENCIES   (continued) loans, of which approximately $0 had been funded as of December 31, 2011 and $1 million had been funded as of December 31, 2010. As of December 31, 2011 and December 31, 2010, the Company had committed to make no investments in delayed draw senior secured loans. The Company and certain directors and officers were named as defendants in three putative class actions pending in the Southern District of New York brought by stockholders of the Company and filed in December 2009 and January 2010. The complaints in these three actions alleged violations of Sections 10 and 20 of the Exchange Act based on the Companys disclosures of its year-end 2008 and first- and second-quarter 2009 financial statements. The federal court consolidated the three lawsuits and appointed a lead plaintiff under the Private Securities Litigation Reform Act on March 21, 2011, and lead plaintiff filed a consolidated amended complaint
on May 11, 2011. The Company moved to dismiss the consolidated amended complaint. On July 28, 2011, the Court granted that motion and dismissed the consolidated amended complaint, giving the plaintiff until August 22, 2011 to file any further amended complaint. Lead plaintiff filed a second amended consolidated class action complaint on August 22, 2011, which defendants moved to dismiss. The Court dismissed that complaint with prejudice on October 7, 2011. The time for that Lead plaintiff to appeal the dismissal has now passed. In addition, the Company and certain directors and officers were also named as defendants in a derivative action filed on March 2, 2010 in the Supreme Court of New York, County of New York. The complaint in this action purported to state causes of action for breaches of fiduciary duties, unjust enrichment, abuse of control, gross mismanagement, and corporate waste. On October 20, 2010, the court dismissed the complaint, and found, among other things, that the plaintiff had not alleged that any of the Companys directors knowingly misrepresented or permitted others to misrepresent KCAPs financial condition, or that
the directors were confronted with red flags sufficient to put them on notice of potential problems with KCAPs investment valuations so as to excuse plaintiffs requirement under Delaware law to make a demand on KCAPs board before filing suit. On January 12, 2011, the court entered the final judgment dismissing the complaint. While plaintiff filed a timely notice of appeal, the time to perfect that appeal expired in November. On January 11, 2010, the staff of the SECs Division of Enforcement informed the Company that it was conducting an informal inquiry. The focus of the inquiry concerns the valuation methodology and procedures used by the Company to value its investments. On April 30, 2010, the SEC Staff advised the Company that a formal order of private investigation had been issued and that the informal inquiry was now a formal investigation. A subpoena has been issued to the Company in connection with the formal investigation. The subpoena requests that the Company produce documents that primarily relate to the valuation methodology and procedures used by the
Company to value its investments. Since January 2010, the Company has been providing documents in response to the informal inquiry and the subpoena, and the SEC Staff has taken testimony from Company representatives. The Company is cooperating fully with the SEC Staffs investigation. The Company cannot predict the outcome of, or the time frame for, the conclusion of this investigation. 9. STOCKHOLDERS EQUITY On April 28, 2008 the Company completed a rights offering which resulted in the issuance of 3.1 million common shares and net proceeds of approximately $27 million. During the year ended December 31, 2011 and December 31, 2010, the Company issued 141,278 and 301,663 shares, respectively, of common stock under its dividend reinvestment plan. For the year ended December 31, 2011, the Company issued 90,805 shares of restricted stock for which 3,668 shares were forfeited and 96,122 shares were converted to common stock during the year due to vesting. The total number of shares issued and outstanding as of December 31, 2011 was and 22,992,211,
respectively and shares issued and outstanding as of December 31, 2010 was 22,767,130.
 F-41    KOHLBERG CAPITAL CORPORATION   NOTES TO FINANCIAL STATEMENTS 10. EQUITY INCENTIVE PLAN During 2006 and as amended in 2008, the Company established an equity incentive plan (the Plan) and reserved 2,000,000 shares of common stock for issuance under the Plan. The purpose of the Plan is to provide officers and prospective employees of the Company with additional incentives and align the interests of its employees with those of its shareholders. Options granted under the Plan are exercisable at a price equal to the fair market value (market closing price) of the shares on the day the option is granted. Restricted stock granted under the Plan is granted at a price equal to the fair market value (market closing price) of the
shares on the day such restricted stock is granted. Stock Options During the years ended December 31, 2009, and December 31, 2010, 20,000 options per year were granted to non-employee directors as partial annual compensation for their services as director. Each of these annual options grants have a vesting period by which 50% of such options vest on the grant date and 50% vest on the first grant date anniversary. The exercise price of these grants and other characteristics of these grants are as follows:  Options granted for the year ended:

          

          Exercise Price

          

          Exercise Period (years)

          

          Risk Free Rate

          

          Volatility Rate

          

          Weighted Average Grant Date Fair Value per ShareDecember 31, 2009

          

          $

          4.93

          

          

          

          10

          

          

          

          4.3

          %

          

          

          41

          %

          

          $

          0.90December 31, 2010

          

          $

          4.83

          

          

          

          10

          

          

          

          3.1

          %

          

          

          59

          %

          

          $

          1.46
 On June 10, 2011, the Companys shareholders approved the Amended and Restated Non-Employee Director Plan. Accordingly, the previous annual grant of 20,000 options to non-employee directors was discontinued and replaced with an annual grant of 4,000 shares of restricted stock as partial annual compensation for the services of the non-employee directors. Information with respect to options granted, exercised and forfeited under the Plan for the period January 1, 2010 through December 31, 2011 is as follows:  Shares

          

          Weighted Average Exercise Price per Share

          

          Weighted Average Contractual Remaining Term (years)

          

          Aggregate Intrinsic Value(1)Options outstanding at January 1, 2010

          

          

          40,000

          

          

          $

          8.45Granted

          

          

          20,000

          

          

          $

          4.83Exercised

          

          

          

          

          

          $

          Forfeited

          

          

          

          

          

          $

          Options outstanding at December 31, 2010

          

          

          60,000

          

          

          $

          7.24Granted

          

          

          

          

          

          $

          Exercised

          

          

          

          

          

          $

          Forfeited

          

          

          

          

          

          $

          Outstanding at December 31, 2011

          

          

          60,000

          

          

          $

          7.24

          

          

          

          7.5

          

          

          $

          57,200Total vested at December 31, 2011

          

          

          60,000

          

          

          $

          7.24

          

          

          

          7.5
  (1)

          Represents the difference between the market value of shares of the Company upon exercise of the options at December 31, 2011 and the cost for the option holders to exercise the options.
 F-42    KOHLBERG CAPITAL CORPORATION   NOTES TO FINANCIAL STATEMENTS 10. EQUITY INCENTIVE PLAN   (continued) For the year ended December 31, 2011, 20,000 options with a weighted average grant date fair value of $4.88 vested during the period and 50,000 options issued at a weighted average grant date fair value of $7.73 remained unvested. For the year ended December 31, 2010, 10,000 options with a weighted average grant date fair value of $4.83 vested during the period and 60,000 options issued at a grant date fair value of $7.24 weighted average remained unvested. The Company uses a Binary Option Pricing Model (American, call option) to establish the expected value of all stock option grants. For the year ended December 31, 2011, the Company recognized non-cash compensation expense related to stock options of approximately $8,000. For the year ended December 31, 2010, the Company recognized non-cash compensation expense related to stock options of approximately $25,000. For the year ended December 31, 2009, the Company recognized non-cash compensation expense related to stock options of approximately $21,000. At December 31, 2011, the Company had no remaining compensation cost related to unvested stock-based
awards. Restricted Stock On June 13, 2008, the Companys shareholders approved the Plan, as amended and the Board of Directors approved the grant of awards of 100,250 shares of restricted stock to certain executive officers of the Company. On October 7, 2011 and July 22, 2010, the Board of Directors approved the grant of an additional 86,805 and 103,519 shares of restricted stock, respectively, to a certain executive officer of the Company. Such awards of restricted stock will vest as to 50% of the shares on the third anniversary of the grant date and the remaining 50% of the shares on the fourth anniversary of the grant date. On June 13, 2008, the Companys Board of Directors authorized the Company to allow employees who agree to cancel options that they hold to receive shares of the Company's common stock to receive 1 share of restricted stock for every 5 options so cancelled. The shares of restricted stock received by employees through any such transaction will vest annually generally over the remaining vesting schedule as was applicable to the cancelled options. Subsequently, employees holding options to purchase 1,295,000 shares individually entered into agreements to cancel such options and to receive 259,000 shares of restricted stock. As of December 31, 2011,
233,998 of such shares were vested and converted to common shares. The remaining 25,002 shares have been forfeited. On June 10, 2011, the Companys shareholders approved the Amended and Restated Non-Employee Director Plan, and the Board of Directors approved the grant of awards of 4,000 shares of restricted stock to the non-employee directors of the Company as partial annual compensation for their services as director. Such awards of restricted stock will vest as to 50% of the shares on the grant date and the remaining 50% of the shares on the first anniversary of the grant date.
 F-43    KOHLBERG CAPITAL CORPORATION   NOTES TO FINANCIAL STATEMENTS 10. EQUITY INCENTIVE PLAN   (continued) During the year ended December 31, 2011, 96,122 shares of restricted stock were vested and converted to common shares. As of December 31, 2011, after giving effect to these option cancellations and restricted stock awards, there were options to purchase 60,000 shares of common stock outstanding and there were 327,339 shares of restricted stock outstanding. Information with respect to restricted stock granted, exercised and forfeited under the Plan for the period January 1, 2009 through December 31, 2011 is as follows:  Non-Vested Restricted Shares

          

          Weighted Average Exercise Price per ShareNon-vested shares outstanding at December 31, 2009

          

          

          302,139

          

          

          $

          9.63Granted

          

          

          103,519

          

          

          $

          4.83Vested

          

          

          (64,667

          )

          

          $

          10.39Forfeited

          

          

          (4,667

          )

          

          $

          9.82Non-vested shares outstanding at December 31, 2010

          

          

          336,324

          

          

          $

          8.01Granted

          

          

          90,805

          

          

          $

          8.11Vested

          

          

          (96,122

          )

          

          $

          11.16Forfeited

          

          

          (3,668

          )

          

          $

          9.67Outstanding at December 31, 2011

          

          

          327,339

          

          

          $

          6.46Total non-vested shares at December 31, 2011

          

          

          327,339

          

          

          $

          6.46
 For the year ended December 31, 2011, non-cash compensation expense related to restricted stock was approximately $766,000; of this amount approximately $677,000 was expensed at the Company and approximately $89,000 was a reimbursable expense allocated to Katonah Debt Advisors. For the year ended December 31, 2010, non-cash compensation expense related to restricted stock was approximately $894,000; of this amount approximately $654,000 was expensed at the Company and approximately $240,000 was a reimbursable expense allocated to Katonah Debt Advisors. For the year ended December 31, 2009 non-cash compensation expense related to restricted stock was
approximately $890,000; of this amount approximately $609,000 was expensed at the Company and approximately $281,000 was a reimbursable expense allocated to Katonah Debt Advisors. Dividends are paid on all outstanding shares of restricted stock, whether or not vested. In general, shares of unvested restricted stock are forfeited upon the recipients termination of employment. At December 31, 2011, the Company had approximately $1 million of total unrecognized compensation cost related to nonvested share-based awards. That cost is expected to be recognized over a weighted average period of 2.3 years. 11. OTHER EMPLOYEE COMPENSATION The Company adopted a 401(k) plan (401K Plan) effective January 1, 2007. The 401K Plan is open to all full time employees. The Plan permits an employee to defer a portion of their total annual compensation up to the Internal Revenue Service annual maximum based on age and eligibility. The Company makes contributions to the 401K Plan of up to 2.67% of the employees first 74.9% of maximum eligible compensation, which fully vest at the time of contribution. For the years ended December 31, 2011 and 2010, the Company made contributions to the 401K Plan of approximately $23,000 and $29,000, respectively. The Company has also adopted a deferred compensation plan (Profit-Sharing Plan) effective January 1, 2007. Employees are eligible for the Profit-Sharing Plan provided that they are employed and working with the Company for at least 100 days during the year and remain employed as of the last day of the year. Employees do not make contributions to the Profit-Sharing Plan. On behalf of the employee, the Company may contribute to the Profit-Sharing Plan 1) up to 8.0% of all compensation up to the Internal Revenue Service annual maximum and 2) up to 5.7% excess contributions on any incremental amounts above the social security wage base
limitation and up to the Internal Revenue Service annual maximum. Employees vest 100%
 F-44    KOHLBERG CAPITAL CORPORATION   NOTES TO FINANCIAL STATEMENTS 11. OTHER EMPLOYEE COMPENSATION   (continued) in the Profit-Sharing Plan after five years of service. For the year ended December 31, 2011, the Company made contributions of approximately $139,000 to the Profit-Sharing Plan. 12. IMPACT OF NEW ACCOUNTING STANDARDS In May 2011, the FASB issued Accounting Standards Update 2011-04, Fair Value Measurements: Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements (ASU 2011-04). ASU 2011-04 amends Topic 820 to clarify existing fair value measurement disclosures to (1) specifically provide quantitative information about the significant unobservable inputs used for all level 3 measurements and (2) disclose any transfers between levels 1 and 2 of the fair value hierarchy, not just significant transfers. ASU 2011-04 also requires a number of additional disclosures regarding fair value measurements. Specifically, ASU 2011-04 requires
entities to disclose: (1) a qualitative discussion about the sensitivity of recurring level 3 measurements to changes in the unobservable inputs disclosed, including the interrelationship between inputs; (2) a description of the Companys valuation processes surrounding level 3 measurements; (3) information about when the current use of a non-financial asset measured at fair value differs from its highest and best use; and (4) the hierarchy classification for items whose fair value is not recorded on the balance sheet but is disclosed in the notes. ASU 2011-04 amends Topic 820 to change the fair value measurement of financial instruments and the application of premiums and discounts in a fair value measurement. ASU 2011-04 also clarifies existing fair value measurement regarding the concepts of valuation premise, the application of the highest and best use, and the fair value measurement of an instrument classified in an entitys shareholders equity. The adoption of ASU
2011-04 is not expected to have an effect on the Companys current fair value measurements but is expected to have a significant impact on the Companys disclosures related to the assets and liabilities of its consolidated investment products that are classified as level 3 assets within the fair value hierarchy. The amendments to Topic 820 made by ASU 2011-04 are effective for interim and annual periods beginning on or after December 15, 2011. As such, these disclosure changes will be required in the Companys Form 10-Q for the three months ended March 31, 2012. 13. SELECTED QUARTERLY DATA (Unaudited)  Q1 2011

          

          Q2 2011

          

          Q3 2011

          

          Q4 2011Total interest and related portfolio income

          

          $

          7,346,660

          

          

          $

          6,293,311

          

          

          $

          7,260,030

          

          

          $

          7,106,522Net investment income

          

          $

          5,007,602

          

          

          $

          2,900,004

          

          

          $

          4,047,546

          

          

          $

          4,064,052Net increase (decrease) in net assets resulting from operations

          

          $

          9,604,633

          

          

          $

          873,829

          

          

          $

          (1,485,255

          )

          

          $

          (1,343,663

          )Net increase (decrease) in net assets resulting from operations per share  basic

          

          $

          0.43

          

          

          $

          0.04

          

          

          $

          (0.07

          )

          

          $

          (0.06

          )Net increase (decrease) in net assets resulting from operations per share  diluted

          

          $

          0.43

          

          

          $

          0.04

          

          

          $

          (0.07

          )

          

          $

          (0.06

          )Net investment income per share  basic

          

          $

          0.22

          

          

          $

          0.13

          

          

          $

          0.18

          

          

          $

          0.18Net investment income per share  diluted

          

          $

          0.22

          

          

          $

          0.13

          

          

          $

          0.18

          

          

          $

          0.18
 F-45    KOHLBERG CAPITAL CORPORATION   NOTES TO FINANCIAL STATEMENTS 13. SELECTED QUARTERLY DATA (Unaudited)   (continued)  Q1 2010

          

          Q2 2010

          

          Q3 2010

          

          Q4 2010Total interest and related portfolio income

          

          $

          6,963,826

          

          

          $

          7,382,805

          

          

          $

          8,091,217

          

          

          $

          6,916,015Net investment income

          

          $

          2,578,494

          

          

          $

          297,198

          

          

          $

          3,831,270

          

          

          $

          5,190,156Net increase (decrease) in net assets resulting from operations

          

          $

          1,594,909

          

          

          $

          (5,690,916

          )

          

          $

          (3,319,312

          )

          

          $

          (6,873,359

          )Net increase (decrease) in net assets resulting from operations per share  basic and diluted

          

          $

          0.07

          

          

          $

          (0.26

          )

          

          $

          (0.15

          )

          

          $

          (0.31

          )Net increase (decrease) in net assets resulting from operations per share  diluted

          

          $

          0.07

          

          

          $

          (0.26

          )

          

          $

          (0.15

          )

          

          $

          (0.31

          )Net investment income per share  basic

          

          $

          0.12

          

          

          $

          0.01

          

          

          $

          0.17

          

          

          $

          0.23Net investment income per share  diluted

          

          $

          0.12

          

          

          $

          0.01

          

          

          $

          0.17

          

          

          $

          0.23
 14. SUBSEQUENT EVENTS On February 24, 2012, the Company entered into a Note Purchase Agreement (the Note Purchase Agreement) with Credit Suisse AG, Cayman Islands Branch (CS), Credit Suisse Securities (USA) LLC, as arranger, The Bank of New York Mellon Trust Company, National Association, as collateral administrator and collateral agent (BNYM), and KCAP Funding, a special-purpose bankruptcy remote wholly-owned subsidiary of the Company (KCAP Funding), whereby KCAP Funding purchased a portfolio of senior secured term loans (the Collateral Debt Obligations), the purchase of which was financed by the issuance of (a)
a senior note in an aggregate principal amount of $30.0 million, issued to CS in exchange for $30.0 million in cash and (b) a junior note in an aggregate principal amount of $12.5 million, issued to the Company in exchange for the sale by the Company to KCAP Funding of the Collateral Debt Obligations. Pursuant to the Note Purchase Agreement, the Company has agreed to act as Portfolio Manager on behalf of KCAP Funding and CS of the Collateral Debt Obligations, and has granted a security interest to KCAP Funding in all of the Companys right to receive certain management fees, and KCAP Funding granted to CS a security interest in, among other things, the Collateral Debt Obligations and its rights to receive the management fees pledged to it by the Company. In its capacity as Portfolio Manager, the Company also entered into a Collateral Administration Agreement, dated as of February 24, 2012, with KCAP Funding, CS and BNYM, as collateral administrator and collateral agent, whereby
BNYM will, among other things, hold the collateral on behalf of CS, as secured party, administer the Collateral Debt Obligations and perform certain other administrative obligations. On February 29, 2012, the Company completed the acquisition of Trimaran Advisors, L.L.C. (Trimaran) through a newly-formed, wholly-owned subsidiary of the Company. The aggregate consideration paid for all of the outstanding equity interests in Trimaran consisted of $13.0 million in cash and 3,600,000 shares of common stock, par value $0.01 per share, of the Company. Trimaran manages four CLO Funds with aggregate assets under management of approximately $1.5 billion. Contemporaneously with the acquisition, the Company also acquired the subordinated or preferred share interests in certain CLO Funds managed by Trimaran for an aggregate cash
purchase price of $12.0 million.
 F-46    OTHER FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
 S-1    REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS Member ofKatonah Debt Advisors Katonah Debt Advisors, L.L.C. We have audited the accompanying combined balance sheets of Katonah Debt Advisors, L.L.C., and affiliates, Katonah Management Holding, LLC, Katonah X Management LLC, Katonah 2007-I Management LLC, Katonah Scotts Cove Capital Management LLC, Katonah VII CLO Ltd., Katonah VIII CLO Ltd., Katonah IX CLO Ltd., Katonah X CLO Ltd., and Katonah 2007-I CLO, Ltd., (a Delaware corporation) (collectively, the Company) as of December 31, 2011 and 2010, and the related combined statements of operations, changes in members equity, and cash flows for the years then ended. These financial statements are the responsibility of the Companys
management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America established by the American Institute of Certified Public Accountants. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Companys internal control over financial reporting. Accordingly,
we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the combined financial statements referred to above present fairly, in all material respects, the financial position of Katonah Debt Advisory, L.L.C. and affiliates as of December 31, 2011 and 2010, and the results of their operations, changes in members equity and their cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America. /s/ GRANT THORNTON LLP New York, New York March 15, 2012
 S-2    KATONAH DEBT ADVISORS, L.L.C.   COMBINED BALANCE SHEETS  As of December 31, 2011

          

          As of December 31, 2010ASSETSInvestments of CLO Funds at fair value

          

          $

          1,768,088,977

          

          

          $

          1,741,497,876Cash

          

          

          6,364,939

          

          

          

          4,497,282Restricted cash of CLO Funds

          

          

          71,888,141

          

          

          

          137,546,770Accrued management fees receivable

          

          

          

          

          

          

          198,521Accrued interest receivable

          

          

          8,065,586

          

          

          

          7,968,701Deferred tax asset

          

          

          383,348

          

          

          

          Other assets

          

          

          722,440

          

          

          

          2,874,698Total assets

          

          $

          1,855,513,431

          

          

          $

          1,894,583,848LIABILITIESCLO Fund liabilities at fair value

          

          $

          1,727,560,760

          

          

          $

          1,717,378,071Accrued interest expense

          

          

          7,676,896

          

          

          

          6,231,024Payable for open trades

          

          

          15,454,626

          

          

          

          32,235,824Accounts payable and accrued expenses

          

          

          2,749,899

          

          

          

          2,481,610Deferred tax liability

          

          

          

          

          

          

          182,585Total liabilities

          

          $

          1,753,442,181

          

          

          $

          1,758,509,114MEMBER'S EQUITYMember's contributions

          

          $

          12,933,258

          

          

          $

          12,112,655Accumulated earnings (deficit)

          

          

          (6,707,276

          )

          

          

          (5,548,487

          )Total Katonah Debt Advisors L.L.C. equity

          

          

          6,225,982

          

          

          

          6,564,168Appropriated retained earnings of Consolidated Variable Interest Entities

          

          

          95,845,268

          

          

          

          129,510,566Total member's equity

          

          

          102,071,250

          

          

          

          136,074,734Total liabilities and member's equity

          

          $

          1,855,513,431

          

          

          $

          1,894,583,848
 See accompanying notes to combined financial statements.
 S-3    KATONAH DEBT ADVISORS, L.L.C.   COMBINED STATEMENTS OF OPERATIONS  For the Year Ended December 31,2011

          

          2010

          

          2009(unaudited)IncomeInterest income  investments of CLO Funds

          

          $

          68,772,354

          

          

          $

          63,504,932

          

          

          $

          Interest income  cash and time deposits

          

          

          72,372

          

          

          

          81,297

          

          

          

          17,617Management and incentive fees

          

          

          448,790

          

          

          

          1,376,108

          

          

          

          10,158,056Fee income  investments of CLO Funds

          

          

          3,769,889

          

          

          

          2,318,083

          

          

          

          Other income

          

          

          7,231

          

          

          

          24,244

          

          

          

          6,897Total income

          

          

          73,070,636

          

          

          

          67,304,664

          

          

          

          10,182,570ExpensesInterest expense of CLO Fund liabilities

          

          

          55,650,280

          

          

          

          36,043,196

          

          

          

          Compensation

          

          

          5,399,450

          

          

          

          6,557,730

          

          

          

          6,497,776Insurance

          

          

          469,089

          

          

          

          403,171

          

          

          

          372,531Professional fees

          

          

          990,307

          

          

          

          2,262,786

          

          

          

          382,506Administrative and other

          

          

          1,429,837

          

          

          

          1,609,358

          

          

          

          1,110,023Trustee fees

          

          

          540,683

          

          

          

          545,326

          

          

          

          Total expenses

          

          

          64,479,646

          

          

          

          47,421,567

          

          

          

          8,362,836Net realized and unrealized gain (loss)

          

          

          (41,726,392

          )

          

          

          (29,488,314

          )

          

          

          Net income (loss) before tax

          

          

          (33,135,402

          )

          

          

          (9,605,217

          )

          

          

          1,819,734Income tax expense (benefit)

          

          

          (221,315

          )

          

          

          873,901

          

          

          

          1,228,518Net income (loss)

          

          

          (32,914,087

          )

          

          

          (10,479,118

          )

          

          

          591,216Net income (loss) attributable to noncontrolling interests in consolidated Variable Interest Entities

          

          

          (33,665,298

          )

          

          

          (11,002,220

          )

          

          

          Net income (loss) attributable to Katonah Debt Advisors, L.L.C.

          

          $

          751,211

          

          

          $

          523,102

          

          

          $

          591,216
 See accompanying notes to combined financial statements.
 S-4    KATONAH DEBT ADVISORS, L.L.C.   COMBINED STATEMENTS OF CHANGES IN MEMBER'S EQUITY  Member's Contributions

          

          Accumulated Earnings (Deficit)

          

          Appropriated Retained Earnings of Variable Interest Entities

          

          Total Member's EquityTotal at January 1, 2009 (unaudited)

          

          $

          4,748,421

          

          

          $

          (2,162,805)

          

          

          $

          

          

          

          $

          2,585,616Net income (loss) (unaudited)

          

          

          

          

          

          

          591,216

          

          

          

          

          

          

          

          591,216Contributions (unaudited)

          

          

          3,600,016

          

          

          

          

          

          

          

          

          

          

          

          3,600,016Total at December 31, 2009 (unaudited)

          

          

          8,348,437

          

          

          

          (1,571,589)

          

          

          

          

          

          

          

          6,776,848Adoption of guidance now encompassed in ASC Topic 810

          

          

          

          

          

          

          

          

          

          

          140,512,786

          

          

          

          140,512,786January 1, 2010, as adjusted

          

          

          8,348,437

          

          

          

          (1,571,589

          )

          

          

          140,512,786

          

          

          

          147,289,634Net income (loss)

          

          

          

          

          

          

          523,102

          

          

          

          

          

          

          

          523,102Contributions

          

          

          3,764,218

          

          

          

          

          

          

          

          

          

          

          

          3,764,218Distributions

          

          

          

          

          

          

          (4,500,000

          )

          

          

          

          

          

          

          (4,500,000

          )Net income (loss) classified as appropriated retained earnings

          

          

          

          

          

          

          

          

          

          

          (11,002,220

          )

          

          

          (11,002,220

          )Total at December 31, 2010

          

          

          12,112,655

          

          

          

          (5,548,487)

          

          

          

          129,510,566

          

          

          

          136,074,734Net income (loss)

          

          

          

          

          

          

          751,211

          

          

          

          

          

          

          

          751,211Distributions

          

          

          (34,640

          )

          

          

          (1,910,000

          )

          

          

          

          

          

          

          (1,944,640

          )Contributions

          

          

          855,243

          

          

          

          

          

          

          

          

          

          

          

          855,243Net income (loss) classified as appropriated retained earnings

          

          

          

          

          

          

          

          

          

          

          (33,665,298

          )

          

          

          (33,665,298

          )Total at December 31, 2011

          

          $

          12,933,258

          

          

          $

          (6,707,276)

          

          

          $

          95,845,268

          

          

          $

          102,071,250
 See accompanying notes to combined financial statements.
 S-5    KATONAH DEBT ADVISORS, L.L.C.   COMBINED STATEMENTS OF CASH FLOWS  Year Ended December 31,2011

          

          2010

          

          2009 (unaudited)Katonah Debt Advisors, L.L.C. cash

          

          Katonah Debt Advisors CLO Restricted Cash

          

          Katonah Debt Advisors, L.L.C. cash

          

          Katonah Debt Advisors CLO Restricted Cash

          

          Katonah Debt Advisors, L.L.C. cash

          

          Katonah Debt Advisors CLO Restricted CashOPERATING ACTIVITIES:Net income (loss) attributable to Katonah Debt Advisors

          

          $

          751,211

          

          

          

          

          

          

          $

          523,102

          

          

          

          

          

          

          $

          591,216

          

          

          

          Net income (loss) attributable to Variable Interest Entities

          

          

          

          

          

          $

          (33,665,298

          )

          

          

          

          

          

          $

          (11,002,220

          )

          

          

          

          

          

          

          Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:Net change in deferred tax assets

          

          

          (565,933

          )

          

          

          

          

          

          

          620,648

          

          

          

          

          

          

          

          (63,285

          )

          

          

          Net realized and unrealized loss

          

          

          1,808,520

          

          

          

          39,917,872

          

          

          

          

          

          

          

          29,488,314

          

          

          

          

          

          

          

          Changes in operating assets and liabilities:Decrease (increase) in accrued management fees receivable

          

          

          190,826

          

          

          

          7,694

          

          

          

          3,849,962

          

          

          

          (3,878,142

          )

          

          

          (2,265,122

          )

          

          

          Decrease (increase) in accrued interest receivable

          

          

          (13

          )

          

          

          (96,872

          )

          

          

          3

          

          

          

          (2,348,135

          )

          

          

          243

          

          

          

          Decrease receivable for open trades

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          1,855,000

          

          

          

          

          

          

          

          Decrease (increase) in other assets

          

          

          78,190

          

          

          

          (131,130

          )

          

          

          283,247

          

          

          

          9,039

          

          

          

          510,312

          

          

          

          Increase (decrease) in accounts payable and accrued expenses

          

          

          444,253

          

          

          

          (29,284

          )

          

          

          (369,846

          )

          

          

          (31,487

          )

          

          

          (4,639,838

          )

          

          

          Increase (decrease) in payable for open trades

          

          

          

          

          

          

          (16,781,198

          )

          

          

          

          

          

          

          13,508,283

          

          

          

          

          

          

          

          Increase (decrease) in accrued interest expense

          

          

          

          

          

          

          1,445,871

          

          

          

          

          

          

          

          2,503,203

          

          

          

          

          

          

          

          Net cash provided by (used in) operating activities

          

          

          2,707,054

          

          

          

          (9,332,345

          )

          

          

          4,907,116

          

          

          

          30,103,855

          

          

          

          (5,866,474

          )

          

          

          Investing activities:Change in Investments:Purchase of investments

          

          

          

          

          

          

          (836,925,087

          )

          

          

          

          

          

          

          (646,646,273

          )

          

          

          

          

          

          

          Sale of investments

          

          

          

          

          

          

          77,790,466

          

          

          

          

          

          

          

          117,530,020

          

          

          

          

          

          

          

          Proceeds from sale and redemption of investments

          

          

          250,000

          

          

          

          704,008,337

          

          

          

          

          

          

          

          532,448,082

          

          

          

          

          

          

          

          Net cash provided by (used in) investing activities

          

          

          250,000

          

          

          

          (55,126,284

          )

          

          

          

          

          

          

          3,331,829

          

          

          

          

          

          

          

          Financing Activities:Members contributions

          

          

          855,243

          

          

          

          

          

          

          

          3,764,218

          

          

          

          

          

          

          

          3,600,016

          

          

          

          Members distributions

          

          

          (34,640

          )

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          

          Dividends paid in cash

          

          

          (1,910,000

          )

          

          

          

          

          

          

          (4,500,000

          )

          

          

          

          

          

          

          

          

          

          

          Repayments of Debt

          

          

          

          

          

          

          (1,200,000

          )

          

          

          

          

          

          

          (9,821,734

          )

          

          

          

          

          

          

          Net cash provided by (used in) financing activities

          

          

          (1,089,397

          )

          

          

          (1,200,000

          )

          

          

          (735,782

          )

          

          

          (9,821,734

          )

          

          

          3,600,016

          

          

          

          CHANGE IN CASH

          

          

          1,867,657

          

          

          

          (65,658,629

          )

          

          

          4,171,334

          

          

          

          23,613,950

          

          

          

          (2,266,458

          )

          

          

          CASH, BEGINNING OF YEAR

          

          

          4,497,282

          

          

          

          137,546,770

          

          

          

          325,948

          

          

          

          113,932,820

          

          

          

          2,592,406

          

          

          

          CASH, END OF YEAR

          

          $

          6,364,939

          

          

          $

          71,888,141

          

          

          $

          4,497,282

          

          

          $

          137,546,770

          

          

          $

          325,948

          

          

          

          Supplemental Information:Cash paid for interest

          

          

          

          

          

          $

          54,204,409

          

          

          

          

          

          

          $

          33,539,993

          

          

          

          Cash paid for taxes

          

          $

          40,500

          

          

          

          

          

          

          $

          477,904

          

          

          

          

          

          

          $

          579,944
 See accompanying notes to combined financial statements.
 S-6    KATONAH DEBT ADVISORS, L.L.C.   NOTES TO COMBINED FINANCIAL STATEMENTS 1. ORGANIZATION Katonah Debt Advisors, L.L.C., and affiliates, Katonah Management Holding, LLC, Katonah X Management LLC, Katonah 2007-I Management LLC, Katonah Scotts Cove Capital Management LLC, Katonah VII CLO Ltd., Katonah VIII CLO Ltd., Katonah IX CLO Ltd., Katonah X CLO Ltd., and Katonah 2007-I CLO, Ltd. (collectively with its affiliates, Katonah Debt Advisors) manages collateralized loan obligation funds (CLO Funds) which invest in broadly syndicated loans, high-yield bonds and other credit instruments. Katonah Debt Advisors is wholly owned by Kohlberg Capital Corporation (Kohlberg Capital) which is an internally
managed, non-diversified closed-end publically traded investment company that is regulated as a business development company (BDC) under the Investment Company Act of 1940. Katonah Debt Advisors does not have any investment interests in the CLO Funds it manages; however, Kohlberg Capital holds investments in a portion of the bonds issued by the CLO Funds managed by Katonah Debt Advisors. Katonah Debt Advisors provides investment management services to CLO Funds, making day-to-day investment decisions concerning the assets of the CLO Funds. The CLO Funds managed by Katonah Debt Advisors consist exclusively of credit instruments and other securities issued by corporations and do not include any asset-backed securities secured by commercial mortgages, residential mortgages or other consumer borrowings. As of December 31, 2011, Katonah Debt Advisors had approximately $1.9 billion of assets under management in five CLO Funds.  The five CLO funds managed by Katonah Debt Advisors are considered to be variable interest entities (VIEs) for which Katonah Debt Advisors is the primary beneficiary are consolidated into the financial statements of Katonah Debt Advisors as discussed in Note 3  CLO Funds. On January 2, 2008, the Katonah Debt Advisors platform acquired substantially all of the assets of Scotts Cove Capital Management LLC (Scotts Cove), an asset manager focused on an event-driven credit long short investment strategy. On February 28, 2011, Katonah Debt Advisors sold its interest in Scotts Cove to a third-party buyer controlled by a former Katonah Debt Advisors employee for a purchase price of $25,000 and the buyer entered into a Services Agreement, pursuant to which the buyer paid to Katonah Debt Advisors $225,000 for certain transitional services to be provided by Katonah Debt Advisors and agreed to pay an
additional amount of $75,000 on each of the first and second anniversaries of the closing date (subject to, in the case of the first payment, deferment for up to one year under certain circumstances). During the year ended December 31, 2011, Katonah Debt Advisors recognized a loss of $1.8 million on the sale of Scotts Cove which is included in net realized and unrealized gain (loss) on the combined statements of operations. 2. SIGNIFICANT ACCOUNTING POLICIES Basis of Accounting and Combination In the opinion of management, the combined financial statements reflect all adjustments, consisting of normal recurring accruals, which are necessary for the fair presentation of the financial condition and results of operations for the periods presented. All significant intercompany transactions, balances, revenues and expenses are eliminated upon combination. Use of Estimates The preparation of the financial statements requires management to make significant estimates and assumptions that affect reported revenues, expenses, assets and liabilities and disclosure of contingent liabilities, including the fair value of CLO fund investments and CLO fund liabilities that do not have a readily available market value. Actual results could differ from those estimates, and the differences could be material. The combined financial statements have been prepared in accordance with U.S. GAAP and include the financial statements of Katonah Debt Advisors and any VIEs required to be consolidated. A VIE is an entity that does not have sufficient equity to finance its operations without additional subordinated financial support, or an entity for which the risks and rewards of ownership are not directly linked to voting interests. Control is deemed to be present when the Parent holds a majority voting interest or otherwise has the power to govern
 S-7    KATONAH DEBT ADVISORS, L.L.C.   NOTES TO COMBINED FINANCIAL STATEMENTS 2. SIGNIFICANT ACCOUNTING POLICIES   (continued) the financial and operating policies of the subsidiary or VIE so as to obtain the benefits from its activities. Katonah Debt Advisors provides investment management services to CLO Funds, making day-to-day investment decisions concerning the assets of the CLO Funds. All of the CLO Funds are considered to be VIEs as discussed in Note 3  CLO Funds. Although Katonah Debt Advisors has no ownership interests in the CLO Funds it manages, Katonah Debt Advisors follows the provisions of Accounting Standards Codification (ASC) Topic 810, Consolidation, when accounting for VIEs further detailed below. For CLO Funds, if Katonah Debt Advisors is deemed to have the power to direct the activities of the CLO that most significantly impact the CLOs economic performance, and the obligation to absorb losses/right to receive benefits (management fees and potential incentive fees) from the CLO that could potentially be significant to the CLO, then Katonah Debt Advisors is deemed to be the CLOs primary beneficiary and is required to consolidate the CLO. All of the investments held and notes issued by CLO Funds considered to be VIEs are presented at fair value in Katonah Debt Advisors Combined Balance Sheet and interest income and expense of consolidated CLO Funds are presented in Katonah Debt Advisors Combined Statement of Operations. The surplus of consolidated CLO assets over CLO liabilities is reflected in Katonah Debt Advisors Combined Balance Sheets as retained earnings appropriated for investors in consolidated variable interest entities. Current period gains (losses) attributable to investors in consolidated CLOs are included in gains (losses) attributable to non-controlling
interests in consolidated variable interest entities in the Combined Statement of Operations and in appropriated retained earnings of consolidated variable interest entities in the Consolidated Balance Sheets, as they are considered non-controlling interests of Katonah Debt Advisors. Accounting Standards Codification.  In June 2009, the Financial Accounting Standards Board (FASB) issued a pronouncement establishing the FASB Accounting Standards Codification (ASC) as the source of authoritative accounting principles recognized by the FASB to be applied in the preparation of financial statements in conformity with GAAP. The ASC reorganized existing U.S. accounting and reporting standards issued by the FASB and other related private sector standard setters into a single source of authoritative accounting principles arranged by topic. The standard explicitly recognizes rules and interpretive
releases of the Commission under federal securities laws as authoritative GAAP for SEC registrants. The ASC supersedes all existing U.S. accounting standards; all other accounting literature not included in the ASC (other than SEC guidance for publicly-traded companies) is considered non-authoritative. The ASC was effective on a prospective basis for interim and annual reporting periods ending after September 15, 2009. The adoption of the ASC changed the references to U.S. GAAP accounting standards but did not impact its results of operations, financial position or liquidity. Investments of CLO Funds at Fair Value.Investment transactions are recorded on the applicable trade date. Realized gains or losses are determined using the specific identification method. Investments held by the CLO Funds are stated at fair value. ASC 820-10, Fair Value Measurements and Disclosures (ASC 820-10), requires among other things, disclosures about assets and liabilities that are measured and reported at fair value. Hierarchy of Fair Value Inputs.  The provisions of ASC 820-10 establish a hierarchy that prioritizes inputs to valuation techniques used to measure fair value and require companies to disclose the fair value of their financial instruments according to the fair value hierarchy (i.e., Level 1, 2 and 3 inputs, as defined). The fair value hierarchy gives the highest priority to quoted prices (unadjusted) in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. Additionally, companies are required to provide additional disclosure regarding instruments in the Level 3 category (which have inputs
to the valuation techniques that are unobservable and require significant management judgment), including a reconciliation of the beginning and ending balances separately for each major category of assets and liabilities.
 S-8    KATONAH DEBT ADVISORS, L.L.C.   NOTES TO COMBINED FINANCIAL STATEMENTS 2. SIGNIFICANT ACCOUNTING POLICIES   (continued) Assets and liabilities measured and reported at fair value are classified and disclosed in one of the following categories: Level 1 Inputs: Quoted prices (unadjusted) in active markets for identical assets or liabilities at the reporting date. 

          Level 1 assets may include listed mutual funds (including those accounted for under the equity method of accounting as these mutual funds are investment companies, that have publicly available NAVs which in accordance with GAAP are calculated under fair value measures and are equal to the earnings of such funds), ETFs, equities and certain derivatives. Level 2 Inputs: Quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities that are not active; quotes from pricing services or brokers, for which Katonah Debt Advisors can determine that orderly transactions took place at the quoted price or that the inputs used to arrive at the price were observable; and inputs other than quoted prices that are observable, such as models or other valuation methodologies. 

          Level 2 assets in this category may include debt securities, bank loans, short-term floating rate notes and asset-backed securities, restricted public securities valued at a discount, as well as over the counter derivatives, including interest and inflation rate swaps and foreign currency exchange contracts that have inputs to the valuations that generally can be corroborated by observable market data. Level 3 Inputs: Unobservable inputs for the valuation of the asset or liability, which may include non-binding broker quotes. Level 3 assets include investments for which there is little, if any, market activity. These inputs require significant management judgment or estimation. 

          Level 3 assets in this category may include general and limited partnership interests in private equity funds, funds of private equity funds, real estate funds, hedge funds, and funds of hedge funds, direct private equity investments held within consolidated funds, bank loans, bonds issued by CLO Funds and certain held for sale real estate disposal assets.  

          Level 3 liabilities included in this category include borrowings of consolidated collateralized loan obligations valued based upon non-binding broker quotes or discounted cash flow model based on a discount margin calculation. Significance of Inputs: Katonah Debt Advisors assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the financial instrument. Valuation of Portfolio Investments.  Debt and equity securities for which market quotations are readily available are generally valued at such market quotations. Debt and equity securities that are not publicly traded or whose market price is not readily available are valued based on detailed analyses prepared by management, and, in certain circumstances, may utilize third parties with valuation expertise. Katonah Debt Advisors follows the provisions of ASC 820-10. This standard defines fair value, establishes a framework for measuring fair value, and expands disclosures about assets and liabilities measured at fair value. Fair Value
Measurements and Disclosures 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. Subsequent to the adoption of ASC 820-10, the FASB has issued various staff positions clarifying the initial standard as noted below.
 S-9    KATONAH DEBT ADVISORS, L.L.C.   NOTES TO COMBINED FINANCIAL STATEMENTS 2. SIGNIFICANT ACCOUNTING POLICIES   (continued) In January 2010, the FASB issued guidance that clarifies and requires new disclosures about fair value measurements. The clarifications and requirement to disclose the amounts and reasons for significant transfers between Level 1 and Level 2, as well as significant transfers in and out of Level 3 of the fair value hierarchy, were adopted by Katonah Debt Advisors in 2010. Fair Value Measurements and Disclosures requires the disclosure of the inputs and valuation techniques used to measure fair value and a discussion of changes in valuation techniques and related inputs, if any, during the period. Katonah Debt Advisors valuation methodology and procedures for investments held by the CLO Funds are generally as follows: 1.

          For any asset which is also held by Kohlberg Capital on the applicable date, the Kohlberg Capital fair value mark as of such applicable date is used. 2.

          Each portfolio company or investment is cross-referenced to an independent pricing service to determine if a current market quote is available. The nature and quality of such quote is reviewed to determine reliability and relevance of the quote. Factors considered in this determination include whether the quote is from a transaction or is a broker quote, the date and aging of such quote, whether the transaction is arms-length, whether it is of a liquidation or distressed nature and certain other factors judged to be relevant by management within the framework of ASC 820-10. 3.

          If an investment does not have a market quotation on either a broad market exchange or from an independent pricing service, the investment is initially valued by Katonah Debt Advisors investment professionals responsible for the portfolio investment in conjunction with the portfolio management team. Generally, such fair values are determined by reference to public market or private transactions or valuations for comparable companies or assets in the relevant asset class and or industry when such amounts are available. Generally these valuations are derived by multiplying a key performance metric of the investee company or asset (e.g., EBITDA) by the relevant valuation multiple observed for comparable companies or transactions, adjusted by management for differences between the investment and the referenced comparable. If the fair value of such investments cannot be valued by reference to observable valuation measures for comparable
companies, then the primary analytical method used to estimate the fair value is a discounted cash flow method and/or cap rate analysis. A sensitivity analysis is applied to the estimated future cash flows using various factors depending on the investment, including assumed growth rates (in cash flows), capitalization rates (for determining terminal values) and appropriate discount rates to determine a range of reasonable values or to compute projected return on investment. 4.

          Preliminary valuation conclusions are discussed and documented by management. 5.

          Illiquid loans, junior and mezzanine securities and investments in other CLO bonds are fair valued using models developed by management with applicable market assumptions. 6.

          Management discusses the valuations and determines in good faith that the fair values of each investment in the portfolio is reasonable based upon any applicable independent pricing service, input of management, and estimates from independent valuation firms (if any). Debt Securities.  Most of the CLO Funds investment portfolio is composed of broadly syndicated debt securities for which an independent pricing service quote is available. To the extent that the investments are exchange traded and are priced or have sufficient price indications from normal course trading at or around the valuation date (financial reporting date), such pricing will determine fair value. Pricing service marks from third party pricing services may be used as an indication of fair value, depending on the volume and reliability of the marks, sufficient and reasonable correlation of bid and ask quotes, and, most
importantly, the level of actual trading activity.
 S-10    KATONAH DEBT ADVISORS, L.L.C.   NOTES TO COMBINED FINANCIAL STATEMENTS 2. SIGNIFICANT ACCOUNTING POLICIES   (continued) CLO Fund Securities.The CLO Funds managed by Katonah Debt Advisors may selectively invest in securities issued by funds managed by other asset management companies. For bond rated tranches of CLO Funds (those above the junior class) without transactions to support a fair value for the specific CLO Fund and tranche, fair value is based on discounting estimated bond payments at current market yields, which may reflect the adjusted yield on the leveraged loan index for similarly rated tranches, as well as prices for similar tranches for other CLO Funds and also other factors such as the default and recovery rates of underlying assets
in the CLO Fund, as may be applicable. Such model assumptions may vary and incorporate adjustments for risk premiums and CLO Fund specific attributes. Such adjustments require judgment and may be material to the calculation of fair value. Cash.  Katonah Debt Advisors defines cash as demand deposits. Katonah Debt Advisors places its cash with financial institutions and, at times, cash held in checking accounts may exceed the Federal Deposit Insurance Corporation insured limit. Restricted Cash of CLO Funds.  Restricted cash consist of cash held for reinvestment, quarterly interest and principal distributions (if any) to holders of CLO Fund liabilities, and payment of CLO Fund expenses. CLO Fund Liabilities at Fair Value.  Katonah Debt Advisors has no debt; however the CLO Funds it manages and that are consolidated herein, have issued rated and unrated bonds to finance their operations. Debt is presented at fair value. Interest Income.  Interest income is recorded on the accrual basis on interest-bearing assets. The CLO Funds generally places a loan or security on non-accrual status and ceases recognizing cash interest income on such loan or security when a loan or security becomes 90 days or more past due or if Katonah Debt Advisors otherwise does not expect the debtor to be able to service its debt obligations. Non-accrual loans represented 0.23% and 0.63% of Investments of CLO Funds at fair value as of December 31, 2011 and December 31, 2010, respectively. The aggregate unpaid principal value of loans past due as of December 31, 2011 was
approximately $28.0 million and the difference between fair value and the unpaid principal balance was approximately $24.1 million. The aggregate unpaid principal value of loans past due as of December 31, 2010 was approximately $47.9 million and the difference between fair value and the unpaid principal balance was approximately $36.9 million.  Management and Incentive Fees.  As a manager of CLO Funds and the Scotts Cove Funds, Katonah Debt Advisors receives management fees and incentive fees, which are contractual interests that Katonah Debt Advisors earns based on assets under management, and a percentage of net profits (Scotts Cove Funds) and residual cash flows, subject to a specified relative and/or absolute investment (CLO Funds), respectively. Incentive fees may be earned by Katonah Debt Advisors upon exceeding specified relative and/or absolute investment return thresholds. Such fees are recorded upon completion of the measurement period which varies by CLO
Fund. If incentive fees are paid upon reaching such investment return thresholds, they are not subject to claw-back provisions. At December 31, 2011, and December 31, 2010, Katonah Debt Advisors has not earned any incentive fees from the CLO Funds. For the year ended December 31, 2009, Kohlberg Debt Advisors earned management fees of $10.2 million. For the years ended December 31, 2011 and 2010, Katonah Debt Advisors earned management fees and incentive fees from the Scotts Cove Funds of $500 thousand and $1.4 million respectively. The management fees Katonah Debt Advisors receives from the CLO Funds, which have two components  a senior management fee and a subordinated management fee  have been eliminated in consolidation for the years ended December 31, 2011 and 2010. Fee Income.  Fee income is earned upon the completion of transactions involving collateral assets in our CLO Funds and include, but are not limited to, restructuring fees, delayed closing fees, commitment fees and consent fees, which are recorded in the combined Financial Statements on the date the transactions are legally closed.
 S-11    KATONAH DEBT ADVISORS, L.L.C.   NOTES TO COMBINED FINANCIAL STATEMENTS 2. SIGNIFICANT ACCOUNTING POLICIES   (continued) Dividends to Member.  Dividends payable to Katonah Debt Advisors sole member are recognized on the declaration date. Generally, dividends are declared and paid on a quarterly basis. Expenses.  Katonah Debt Advisors is internally managed and expenses costs, as incurred, with regard to the running of its operations. Primary operating expenses include employee salaries and benefits, the costs of identifying, evaluating, monitoring and servicing the CLO Fund investments managed Katonah Debt Advisors and related overhead charges and expenses, including rental expense. Katonah Debt Advisors and its asset manager affiliates share office space and certain other operating expenses. Katonah Debt Advisors has entered into an Overhead Allocation Agreement with its sole member, Kohlberg Capital, which provides
for the sharing of such expenses based on an equal sharing of office lease costs and the ratable usage of other shared resources. The aggregate net payments of such expenses under the Overhead Allocation Agreement are settled quarterly. Katonah Debt Advisors accounts for its operating leases, which may include escalations, in accordance with ASC 840-10, Leases, and expenses the lease payments associated with operating leases evenly during the lease term (including rent-free periods), beginning on the commencement of the lease term. Interest Expenses.  Katonah Debt Advisors has no debt; however the CLO Funds it manages and that are consolidated herein, have issued rated and unrated bonds to finance their operations. Interest on CLO Fund liabilities is calculated by the third party trustee of the CLO Funds. Interest is accrued and generally paid quarterly. Trustee Fees.  Each CLO Fund has a third party trustee that is the custodian for all investments of the CLO Funds and receives and disburses all cash in accordance to the trustee and custodial agreements. Trustee fees are accrued and paid quarterly by the CLO Funds. Income Taxes.  Katonah Debt Advisors accounts for income taxes under the asset and liability method prescribed by ASC 740-10, Income Taxes (ASC 740-10). Deferred income tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases using currently enacted tax rates in effect for the year in which the differences are expected to reverse. The effect of a change in tax rates on deferred income tax assets and liabilities is recognized in income in the period
that includes the enactment date. Management periodically assesses the recoverability of its deferred income tax assets based upon expected future earnings, taxable income in prior carryback years, future deductibility of the asset, changes in applicable tax laws and other factors. If management determines that it is not more likely than not that the deferred tax asset will be fully recoverable in the future, a valuation allowance will be established for the difference between the asset balance and the amount expected to be recoverable in the future. This allowance will result in a charge to income tax expense on the combined statements of income. Katonah Debt Advisors records its
income taxes receivable and payable based upon its estimated income tax liability. ASC 740-10 clarifies the accounting for uncertainty in income taxes recognized in a companys financial statements by prescribing a threshold for measurement and recognition in the financial statements of an asset or liability resulting from a tax position taken or expected to be taken in an income tax return. ASC 740-10 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition.
 S-12    KATONAH DEBT ADVISORS, L.L.C.   NOTES TO COMBINED FINANCIAL STATEMENTS 2. SIGNIFICANT ACCOUNTING POLICIES   (continued) Accounting Policies Adopted in the Year Ended December 31, 2010 New Consolidation Guidance for Variable Interest Entities In June 2009, the Financial Accounting Standards Board (FASB) issued ASU 2009-17, which amended the consolidation guidance for VIEs. The amendments include: (1) the elimination of the exemption from consolidation for qualifying special purpose entities, (2) a new approach for determining the primary beneficiary of a VIE, which requires that the primary beneficiary have both (i) the power to control the most significant activities of the VIE and (ii) either the obligation to absorb losses or the right to receive benefits that potentially could be significant to the VIE, and (3) the requirement to continually reassess the primary
beneficiary of a VIE. On January 1, 2010, upon the adoption of the forgoing guidance now encompassed in ASC 810, Katonah Debt Advisors determined it was the primary beneficiary of all five of the CLO Funds it manages as it has the power to direct the activities of the CLO Funds that most significantly impact the CLO Funds economic performance, and the obligation to absorb losses/right to receive benefits (in the form of senior and subordinate management fees as well as the potential to earn an incentive fee) from the CLO Funds that could potentially be significant to the CLO Funds. As a result, these CLO Funds are consolidated into the combined financial statements
of Katonah Debt Advisors. Fair Value Option Upon consolidation of the CLO Funds, the assets and liabilities of the consolidated CLOs were measured at fair value, as the determination of carrying amounts was not practicable. Katonah Debt Advisors has elected the fair value option under ASC Topic 825-10-25 to measure the assets and liabilities of all consolidated CLOs at fair value subsequent to the date of initial adoption of this additional guidance to mitigate accounting mismatches between the carrying value of the assets and liabilities and to achieve operational simplifications. The cumulative effect adjustment upon adoption at January 1, 2010 resulted in an appropriation of retained earnings of $140.5 million. Improved Disclosures Regarding Fair Value Measurements. In January 2010, the FASB issued Accounting Standards Update 2010-06, Improving Disclosures about Fair Value Measurements (ASU 2010-06). ASU 2010-06 amends Topic 820 to require a number of additional disclosures regarding fair value measurements. Specifically, ASU 2010-06 requires entities to disclose: (1) the amount of significant transfers between Level 1 and Level 2 of the fair value hierarchy and the reasons for these transfers; (2) the reasons for any transfers in or out of Level 3; and (3) information in the reconciliation of recurring Level 3 measurements about purchases, sales, issuances and settlements on a gross basis. ASU
2010-06 also clarifies existing fair value disclosures about the appropriate level of disaggregation and about inputs and valuation techniques for both recurring and nonrecurring fair value measurements that fall in either Level 2 or Level 3. The new disclosures and clarifications of existing disclosures are effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances, and settlements in the rollforward of activity in Level 3 fair value measurements, which are effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. The additional disclosure requirements with respect to rollforward activity did not have a significant impact on the Companys disclosures. In May 2011, the FASB issued Accounting Standards Update 2011-04, Fair Value Measurements: Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements (ASU 2011-04). ASU 2011-04 amends Topic 820 to clarify existing fair value measurement disclosures to (1) specifically provide quantitative information about the significant unobservable inputs used for all level 3 measurements and (2) disclose any transfers between levels 1 and 2 of the fair value hierarchy, not just significant transfers. ASU 2011-04 also requires a number of additional disclosures regarding fair value measurements. Specifically,
 S-13    KATONAH DEBT ADVISORS, L.L.C.   NOTES TO COMBINED FINANCIAL STATEMENTS 2. SIGNIFICANT ACCOUNTING POLICIES   (continued) ASU 2011-04 requires entities to disclose: (1) a qualitative discussion about the sensitivity of recurring level 3 measurements to changes in the unobservable inputs disclosed, including the interrelationship between inputs; (2) a description of the Companys valuation processes surrounding level 3 measurements; (3) information about when the current use of a non-financial asset measured at fair value differs from its highest and best use; and (4) the hierarchy classification for items whose fair value is not recorded on the balance sheet but is disclosed in the notes. ASU 2011-04 amends Topic 820 to change the fair value measurement of financial
instruments and the application of premiums and discounts in a fair value measurement. ASU 2011-04 also clarifies existing fair value measurement regarding the concepts of valuation premise, the application of the highest and best use, and the fair value measurement of an instrument classified in an entitys shareholders equity. The adoption of ASU 2011-04 is not expected to have an effect on the Companys current fair value measurements but is expected to have a significant impact on the Companys disclosures related to the assets and liabilities of its consolidated investment products that are classified as level 3 assets within the fair value hierarchy. The amendments to Topic 820 made by ASU 2011-04 are effective for interim and annual periods beginning on or after December 15, 2011. 3. CLO FUNDS A CLO Fund generally refers to a special purpose vehicle that owns a portfolio of investments and issues various tranches of debt and subordinated note securities to finance the purchase of those investments. Investments purchased by the CLO Funds are governed by extensive investment guidelines, including limits on exposure to any single industry or issuer and limits on the ratings of the CLO Funds assets. The CLO Funds managed by Katonah Debt Advisors have a defined investment period during which they are allowed to make investments or reinvest capital as it becomes available. Katonah Debt Advisors manages five CLO Funds primarily for third party investors that invest in broadly syndicated loans, high yield bonds and other credit instruments issued by corporations. These CLO Funds do not invest in asset-backed securities secured by commercial mortgages, residential mortgages or other consumer borrowings. At December 31, 2011 and 2010, Katonah Debt Advisors had approximately $1.9 billion of par value of assets under management in these CLO Funds.  CLO Funds typically issue multiple tranches of debt and subordinated note securities with varying ratings and levels of subordination to finance the purchase their underlying investments. Interest and principal payments (net of designated CLO Fund expenses) from the CLO Fund are paid to each issued security in accordance with an agreed upon priority of payments, commonly referred to as the waterfall. The most senior notes, generally rated AAA/Aaa, commonly represent the majority of the total liabilities of the CLO Fund. AAA/Aaa notes are issued at a specified spread over LIBOR and normally have the first claim on the earnings on the CLO
Funds investments after payment of certain fees and expenses. Lower subordinated mezzanine tranches of rated notes generally have ratings ranging from AA/Aa to BB/Ba and are usually issued at a specified spread over LIBOR with higher spreads paid on the tranches with lower ratings. Each tranche is typically only entitled to a share of the earnings on the CLO Funds investments if the required interest and principal payments have been made on the more senior tranches in the waterfall. The most junior tranche can take the form of either subordinated notes or preferred shares. The subordinated notes or preferred shares generally do not have a stated coupon but are entitled to residual cash flows from the CLO Funds investments after all of the other tranches of notes and certain other fees and expenses are paid. The CLO Funds are primarily financed via capital contributed by equity and debt holders. Katonah Debt Advisors risk with respect to each investment in the CLO Funds it manages is limited to any uncollected management fees (as Katonah Debt Advisors has no investment in the CLO Funds and it has no exposure or benefits in the ownership of the CLO Funds bonds). Therefore, the gains or losses of the CLO Funds have not had a significant impact on Katonah Debt Advisors financial position, results of operations or cash flows. Katonah Debt Advisors has no right to the benefits from, nor does it bear the risks associated with, these investments,
beyond the management fees generated from the CLO Funds. If Katonah Debt Advisors were to
 S-14    KATONAH DEBT ADVISORS, L.L.C.   NOTES TO COMBINED FINANCIAL STATEMENTS 3. CLO FUNDS   (continued) liquidate, these investments would not be available to any general creditors of Katonah Debt Advisors. Additionally, the collateral assets of consolidated CLO Funds are held solely to satisfy the obligations of the CLO Funds, and the investors in the consolidated CLO Funds have no recourse to the general credit of Katonah Debt Advisors for the notes issued by the CLO Funds. CLO Funds are investment vehicles created for the sole purpose of issuing collateralized loan instruments that offer investors the opportunity for returns that vary with the risk level of their investment. The notes issued by the CLO Funds are backed by diversified collateral asset portfolios consisting primarily of loans or structured debt. For managing the collateral for the CLO Fund entities, Katonah Debt Advisors earns investment management fees, including subordinated management fees, as well as contingent incentive fees. Katonah Debt Advisors has no investment in the CLO Funds it manages. However, its sole shareholder, Kohlberg Capital, has
invested in certain of the CLO Funds, generally taking a portion of the unrated, junior subordinated position (generally subordinated to other interests in the entities and entitle Kohlberg Capital and other subordinated tranche investors to receive the residual cash flows, if any, from the entities). Upon adoption of guidance encompassed in ASC Topic 810, Katonah Debt Advisors determined that it was the primary beneficiary of these CLO Funds, as it has the power to direct the activities of the CLO Funds that most significantly impact the CLO Funds economic performance, and the obligation to absorb losses/right to receive benefits (in the form of senior and subordinate management fees as well as the potential to earn an incentive fee) from the CLO Funds that could potentially be significant to the CLO Funds. The primary beneficiary assessment includes an analysis of the rights of Katonah Debt Advisors in its capacity as investment manager.
In certain CLOs, Katonah Debt Advisors role as investment manager provides that Katonah Debt Advisors contractually has the power, as defined in ASC Topic 810, to direct the activities of the CLO Funds that most significantly impact the CLO Funds economic performance, such as managing the collateral portfolio and its credit risk. Additionally, the primary beneficiary assessment includes an analysis of Katonah Debt Advisors rights to receive benefits and obligations to absorb losses associated with its management/incentive fees. As a manager of the CLO Funds, Katonah Debt Advisors receives contractual and recurring management fees and may receive a one-time structuring fee from the CLO Funds for its management and advisory services. The annual fees which Katonah Debt Advisors receives are generally based on a fixed percentage of assets under management (at par value and not subject to changes in market value), and Katonah Debt Advisors generates annual operating income equal to the amount by which its fee income exceeds it operating expenses. The annual management fees Katonah Debt Advisors receives have two components  a senior management fee and a
subordinated management fee. At December 31, 2011, Katonah Debt Advisors continued to receive all senior and subordinated management fees payable by the CLO Funds managed by it. During 2009, certain CLO funds managed by Katonah Debt Advisors were restricted from currently paying their subordinated management fees as a result of the failure by those CLO Funds to satisfy certain restrictive covenants contained in their indenture agreements. At such time, those subordinated management fees continued to be accrued by the applicable CLO Fund to become payable to Katonah Debt Advisors if and when such CLO Fund becomes compliant with the applicable covenants. During the year ended December 31, 2010, all those CLO Funds which deferred payment of their subordinated management fees regained compliance with all applicable covenants in
order to pay current subordinated management fees as well as a portion of previously accrued subordinated management fees. Currently, all CLO Funds managed by Katonah Debt Advisors are paying both their senior and subordinated management fees on a current basis. In future years, Katonah Debt Advisors may receive accrued incentive fees upon the liquidation of CLO Funds it manages, provided such CLO Funds have achieved a minimum investment return to holders of their subordinated securities or preferred shares.
 S-15    KATONAH DEBT ADVISORS, L.L.C.   NOTES TO COMBINED FINANCIAL STATEMENTS 3. CLO FUNDS   (continued) Fair value of consolidated CLO Funds The investments held by consolidated CLO Funds are primarily invested in senior secured bank loans (typically syndicated by banks), bonds, equity securities, and other CLOs and structured finance securities. Bank loan investments, which comprise the majority of consolidated CLO Fund portfolio collateral, are senior secured corporate loans from a variety of industries, including but not limited to the aerospace and defense, broadcasting, technology, utilities, household products, healthcare, oil and gas, and finance industries. Bank loan investments mature at various dates between 2012 and 2019, pay interest at Libor plus a spread of up to 8.5%, and
typically range in credit rating categories from BBB down to unrated. At December 31, 2011, the unpaid par principal balance exceeded the fair value of the senior secured bank loans and bonds by approximately $211 million. At December 31, 2010, the unpaid par principal balance exceeded the fair value of the senior secured bank loans and bonds by approximately $239 million. Less than 0.23% and 0.63% of the collateral assets at fair value are in default as of December 31, 2011 and December 31, 2010, respectively. Substantially all the CLO Fund investments are valued based on price quotations provided by an independent third-party pricing source which are indicative of traded prices and/or dealer price quotations. In the event that a third-party pricing source is unable to price an investment, other relevant factors, data and information are considered, including: i) information relating to the market for the investment, including price quotations for and trading in the investment and
interest in similar investments and the market environment and investor attitudes towards the investment and interests in similar investments; ii) the characteristics of and fundamental analytical data relating to the investment, including the cost, size, current interest rate, period until next interest rate reset, maturity and base lending rate, the terms and conditions of the loan and any related agreements, and the position of the loan in the issuers debt structure; iii) the nature, adequacy and value of the senior secured corporate loans collateral, including the CLOs rights, remedies and interests with respect to the collateral; iv) the creditworthiness of the borrower, based on an evaluation of its financial condition, financial statements and information about the business, cash flows, capital structure and future prospects; v) the reputation and financial condition of the agent and any intermediate participants in the senior secured corporate loan; and vi)
general economic and market conditions affecting the fair value of the senior secured corporate loan. CLO Fund liabilities issued by consolidated CLO Funds have a legal maturity at various dates between 2013 and 2022 and have a weighted average maturity of 7.6 years. The CLO Fund liabilities are issued in various tranches with different risk profiles and ratings. The interest rates are generally variable rates based on Libor plus a pre-defined spread, which varies from 0.225% for the more senior tranches to 5.00% for the more subordinated tranches. At December 31, 2011 and 2010, the outstanding balance on the CLO Fund liabilities issued by consolidated CLO Funds exceeds their fair value by approximately $252 million and $263 million, respectively.
The investors in the CLO Fund liabilities have no recourse to the general credit of Katonah Debt Advisors. CLO Fund liabilities are recorded at fair value using an income approach, driven by cash flows expected to be received from the portfolio collateral assets. Fair value is determined using current information, notably market yields and projected cash flows of collateral assets based on forecasted default and recovery rates that a market participant would use in determining the current fair value of the liabilities, taking into account the overall credit quality of the issuers and Katonah Debt Advisors past experience in managing similar securities. Market yields, default rates and recovery rates used in Katonah Debt Advisors estimate of fair value vary based on the nature of the investments in the underlying collateral pools. In periods of rising market yields, default rates and lower debt recovery rates, the fair value, and therefore the carrying value, of the
liabilities may be adversely affected. Once the undiscounted cash flows of the collateral assets have been determined, Katonah Debt Advisors applies appropriate discount rates that a market participant would use, to determine the discounted cash flow valuation of the liabilities.
 S-16    KATONAH DEBT ADVISORS, L.L.C.   NOTES TO COMBINED FINANCIAL STATEMENTS 3. CLO FUNDS   (continued) The following table presents the fair value hierarchy levels of the CLO investments held and CLO Fund liabilities issued by the CLO Funds, which are measured at fair value as of December 31, 2011 and December 31, 2010:  December 31, 2011($ in millions)

          

          Fair Value

          

          Quoted Prices in Active Markets for Identical Assets (Level 1)

          

          Significant Other Observable Inputs (Level 2)

          

          Significant Unobservable Inputs(Level 3)Assets:Investments of CLO Funds

          

          

          1,768.1

          

          

          

          

          

          

          

          1,562.7

          

          

          

          205.4Liabilities:CLO Fund Liabilities

          

          

          1,727.6

          

          

          

          

          

          

          

          

          

          

          

          1,727.6
  December 31, 2010($ in millions)

          

          Fair Value

          

          Quoted Prices in Active Markets for Identical Assets (Level 1)

          

          Significant Other Observable Inputs (Level 2)

          

          Significant Unobservable Inputs(Level 3)Assets:Investments of CLO Funds

          

          

          1,741.5

          

          

          

          

          

          

          

          1,625.0

          

          

          

          116.5Liabilities:CLO Fund Liabilities

          

          

          1,717.4

          

          

          

          

          

          

          

          

          

          

          

          1,717.4
 The following table shows a reconciliation of the beginning and ending fair value measurements for Level 3 assets using significant unobservable inputs:  For the year ended December 31,($ in millions)

          

          2011

          

          2010Beginning balance

          

          

          116.5

          

          

          

          235.1Transfers to Level 3

          

          

          13.0

          

          

          

          5.0Transfers from Level 3

          

          

          (7.0

          )

          

          

          (115.6

          )Purchase of investments

          

          

          104.9

          

          

          

          30.4Sale of investments

          

          

          (5.0

          )

          

          

          (6.3

          )Proceeds from paydown and redemption of investments

          

          

          (7.8

          )

          

          

          (40.0

          )Realized and unrealized gains / (losses), net

          

          

          (9.2

          )

          

          

          8.0Ending balance

          

          

          205.4

          

          

          

          116.6Changes in unrealized appreciation (depreciation) included in net realized and unrealized loss related to investments still held at the reporting date

          

          

          4.0

          

          

          

          (10.8

          )
 S-17    KATONAH DEBT ADVISORS, L.L.C.   NOTES TO COMBINED FINANCIAL STATEMENTS 3. CLO FUNDS   (continued) The following table shows a reconciliation of the beginning and ending fair value measurements for Level 3 liabilities using significant unobservable inputs:  For the year ended December 31,($ in millions)

          

          2011

          

          2010Beginning balance

          

          

          1,717.4

          

          

          

          1,618.0Repayment of debt

          

          

          (1.2

          )

          

          

          (9.8

          )Unrealized appreciation/(depreciation)

          

          

          11.4

          

          

          

          109.2Ending balance

          

          

          1,727.6

          

          

          

          1,717.4Changes in unrealized appreciation (depreciation) included in net realized and unrealized loss related to liabilities still held at the reporting date

          

          

          11.4

          

          

          

          109.2
 All transfers into and out of Level 3 represent transfers between Level 3 and Level 2. There were no transfers in or out of Level 1 for the periods presented. All Level 1, 2, and 3 transfers are recognized at the beginning of each accounting period, the actual date of the event, or change in circumstance that caused the transfer, or at the end of the accounting period. 4. UNCONSOLIDATED VIEs Katonah Debt Advisors deems the funds managed by Scotts Cove (Scotts Cove Funds) to be VIEs for which Katonah Debt Advisors is not the primary beneficiary and thus the Scotts Cove Funds are not consolidated into the financial statements of Katonah Debt Advisors. A primary beneficiary is one that absorbs a majority of the entitys expected losses, receives a majority of the entitys residual returns or both. Katonah Debt Advisors has no obligation to absorb any of the entitys expected losses. In addition, Katonah Debt Advisors does not receive the majority of the entitys expected residual returns. As a result,
Katonah Debt Advisors does not consolidate the Scotts Cove Funds. Katonah Debt Advisors maximum exposure to loss as a result of it involvement in the Scotts Cove Funds is limited to any uncollected management fees due from the funds it manages. At December 31, 2010 Katonah Debt Advisors had a $67,000 investment interest in the Scotts Cove Funds and no investment interest in the Scotts Cove Funds at December 31, 2011 due to the sale of Scotts Cove on February 28, 2011, as discussed in Note 1. 5. INCOME TAXES As a separately regarded entity for tax purposes, Katonah Debt Advisors is taxed at normal corporate rates. The CLO Funds are not taxed. For tax purposes, Katonah Debt Advisors taxable net income will differ from GAAP net income because of deferred tax timing adjustments and permanent tax adjustments. Deferred tax timing adjustments may include differences for the recognition and timing of depreciation, bonuses to employees and stock option expense. Permanent differences may include adjustments, limitations or disallowances for meals and entertainment expenses, penalties and tax goodwill amortization. Goodwill amortization for tax purposes was created upon the purchase of 100% of the equity interests in Katonah Debt Advisors by its sole member, Kohlberg Capital, in exchange for shares of the Kohlberg Capitals stock valued at $33 million. Although this transaction was a stock transaction rather than an asset purchase and thus no goodwill was recognized for GAAP purposes, such exchange was considered an asset purchase under Section 351(a) of the Code. At the time of the transfer, Katonah Debt Advisors had equity of approximately $1 million resulting in tax goodwill of approximately $32 million which will be amortized for tax purposes on a
straight-line basis over 15 years, which accounts for an annual difference between GAAP income and taxable income by approximately $2 million per year over such period.
 S-18    KATONAH DEBT ADVISORS, L.L.C.   NOTES TO COMBINED FINANCIAL STATEMENTS 5. INCOME TAXES   (continued) Any distributions of taxable net income earned by Katonah Debt Advisors to Kohlberg Capital would generally need to be distributed to the Kohlberg Capitals shareholders. Generally, such distributions of Katonah Debt Advisors income to the Kohlberg Capitals shareholders will be considered as qualified dividends for tax purposes. The components of income tax expense (benefit) for the years ended December 31, 2011, 2010 and 2009 are as follows:  For the year ended December 31,($ in millions)

          

          2011

          

          2010

          

          2009Current income tax expense:Federal

          

          

          84,821

          

          

          

          290,622

          

          

          

          191,846State & local

          

          

          259,797

          

          

          

          (39,719

          )

          

          

          (24,115

          )Total current income tax expense

          

          

          344,618

          

          

          

          250,903

          

          

          

          167,731Deferred income tax expense (benefit):Federal

          

          

          (350,459

          )

          

          

          (39,639

          )

          

          

          1,205,433State & local

          

          

          (215,474

          )

          

          

          662,637

          

          

          

          (144,646

          )Total deferred income tax expense (benefit)

          

          

          (565,933

          )

          

          

          622,998

          

          

          

          1,060,787Total income tax expense

          

          

          (221,315

          )

          

          

          873,901

          

          

          

          1,228,518
 The Companys effective income tax rate and pre-tax book income was 0.7%, -9.1% and 67.5% for tax years 2011, 2010 and 2009, respectively. The difference between the Companys reported provision for income taxes and the U.S. federal statutory rate of 35% is primarily due to tax goodwill amortization and the CLO funds having no tax consequences. Deferred income taxes are provided for the effects of temporary differences between the tax basis of an asset or liability and its reported amount in the consolidated financial statements. These temporary differences result in taxable or deductible amounts in future years. The components of deferred income tax assets and liabilities are shown below:  For the year ended December 31,($ in millions)

          

          2011

          

          2010Deferred income tax assets:Net operating loss and tax credit carryforward

          

          

          3,912,080

          

          

          

          3,671,698Restricted stock

          

          

          327,886

          

          

          

          242,533Other

          

          

          21,490

          

          

          

          231,359Less: Valuation allowance

          

          

          (3,878,108

          )

          

          

          (3,623,183

          )Total deferred tax assets

          

          

          383,348

          

          

          

          (522,407

          )Deferred income tax liabilities:Fixed asset and intangible depreciation/amortization

          

          

          

          

          

          

          (704,992

          )Total deferred tax liabilities

          

          

          383,348

          

          

          

          (182,585

          )Net deferred tax assets

          

          

          383,348

          

          

          

          (887,577

          )
 The ultimate realization of deferred income tax assets is dependent upon the generation of future taxable income during the periods in which the temporary differences become deductible. If it is not more likely than not that some portion or all of the gross deferred income tax assets will be realized in future years, a valuation allowance is recorded.
 S-19    KATONAH DEBT ADVISORS, L.L.C.   NOTES TO COMBINED FINANCIAL STATEMENTS 5. INCOME TAXES   (continued) At December 31, 2011 the Company had federal and state net loss carryovers of $8.7 million and $8.3 million available to offset future taxable income. At December 31, 2010, federal and state net loss carryovers were $7.7 million and $8.1 million, respectively. The net loss carryovers expire in the years 2022 to 2029. At December 31, 2011, the federal and state net operating loss carryovers made up $3.0 million and $0.9 million of the deferred tax asset, respectively. At the present time, the Company believes it is more likely than not that the deferred tax assets related to net operating loss carryovers will not be recognized. Accordingly, the
Company has provided a full valuation allowance against such carryovers. Katonah Debt Advisors adopted Financial Accounting Standards Board ASC Topic 740 Accounting for Uncertainty in Income Taxes (ASC 740) as of January 1, 2009. ASC 740 provides guidance for how uncertain tax positions should be recognized, measured, presented, and disclosed in the financial statements. ASC 740 requires the evaluation of tax positions taken or expected to be taken in the course of preparing the tax returns to determine whether the tax positions are more-likely-than-not of being sustained by the applicable tax authority. Tax positions not deemed to meet the more-likely-than-not threshold are recorded as a tax
benefit or expense in the current year. Adoption of ASC 740 was applied to all open taxable years (the last three fiscal years) as of the effective date. The adoption of ASC 740 did not have an effect on the financial position or results of operations of the Company as there was no liability for unrecognized tax benefits and no change to the beginning capital of the Company. Managements determinations regarding ASC 740 may be subject to review and adjustment at a later date based upon factors including, but not limited to, an ongoing analysis of tax laws, regulations and interpretations thereof. With a few exceptions, the Company is no longer subject to U.S. federal, state and local tax examinations by tax authorities for years prior to 2008. 6. COMMITMENTS AND CONTINGENCIES Katonah Debt Advisors has no direct commitments and contingencies; however, the CLO Funds have purchase commitments to fund approximately $326,000 and $6 million of investments as of December 31, 2011 and December 2010, respectively. Rent expense was approximately $295,459, $341,441 and $322,256 for the years ended December 31, 2011, 2010 and 2009, respectively. The following table summarizes our future minimum lease payments as of December 31, 2011:  Contractual Obligations

          

          2012

          

          2013

          

          2014

          

          2015

          

          2016

          

          More than 5 yearsOperating lease obligations

          

          $

          335,445

          

          

          $

          342,611

          

          

          $

          361,177

          

          

          $

          369,432

          

          

          $

          369,432

          

          

          $

          2,893,884
 7. MEMBERS EQUITY The member interest of Katonah Debt Advisors is held solely by Kohlberg Capital. Kohlberg Capital owns 100 common units (no par or stated value) of Katonah Debt Advisors. 8. OTHER EMPLOYEE COMPENSATION Katonah Debt Advisors adopted a 401(k) plan (401K Plan) effective January 1, 2007 that it shares with its sole shareholder, Kohlberg Capital. The 401K Plan is open to all full time employees. The Plan permits an employee to defer a portion of their total annual compensation up to the Internal Revenue Service annual maximum based on age and eligibility. Katonah Debt Advisors makes contributions to the 401K Plan of up to 2.67% of the employees first 74.9% of maximum eligible compensation, which fully vest at the time of contribution. For the years ended December 31, 2011 and 2010, Katonah Debt Advisors made contributions to the 401K
Plan of approximately $41,000 and $66,000, respectively.
 S-20    KATONAH DEBT ADVISORS, L.L.C.   NOTES TO COMBINED FINANCIAL STATEMENTS 8. OTHER EMPLOYEE COMPENSATION   (continued) Certain employees of Katonah Debt Advisors may receive restricted stock grants in the stock of Katonah Debt Advisors sole member, Kohlberg Capital. On October 7, 2011 and July 22, 2010, the Board of Directors approved the grant of an additional 86,805 and 103,519 shares of restricted stock, respectively, to a certain executive officer of the Katonah Debt Advisors. Such awards of restricted stock will vest as to 50% of the shares on the third anniversary of the grant date and the remaining 50% of the shares on the fourth anniversary of the grant date. For the years ended December 31, 2011, December 31, 2010, and December 31, 2009, non-cash compensation expense of $89,000, $240,000, $281,000 respectively, was expensed at Katonah Debt Advisors related to an allocated reimbursable expense for a grant of restricted stock of Kohlberg Capital. 9. SUBSEQUENT EVENTS Katonah Debt Advisors has evaluated events or transactions that have occurred since December 31, 2011 through March 15, 2012 the date the financial statements were available for issuance. KDA has determined that there are no material events that would require the disclosure in the financial statements other than the following. On February 29, 2012, Katonah Debt Advisors acquired 100% of the equity interest of Trimaran Advisors, L.L.C. (Trimaran). The aggregate consideration paid for all of the outstanding equity interests in Trimaran consisted of $13.0 million in cash and 3,600,000 shares of common stock, par value $0.01 per share, of Kohlberg Capital. Trimaran manages four CLO Funds with aggregate assets under management of approximately $1.5 billion. Contemporaneously with the acquisition, Kohlberg Capital also acquired the subordinated or preferred share interests in certain CLO Funds managed by Trimaran for an aggregate cash purchase price of $12.0 million.
An estimate of the financial effects of this acquisition has not been fully quantified pending the final determination of financial information up to the closing date of Trimaran.
 S-21    EXHIBIT INDEX  Exhibit Number

          

          Description2.1

          

          Purchase and Sale Agreement, dated February 29, 2012, by and among Kohlberg Capital Corporation (the Company), Commodore Holdings, L.L.C., Trimaran Advisors, L.L.C., HBK Caravelle, L.L.C., Trimaran Fund Management, L.L.C., Jay R. Bloom, and Dean C. Kehler.(1)2.2

          

          Escrow Agreement, dated February 29. 2012, by and among Commodore Holdings, L.L.C., Trimaran Fund Management, L.L.C., HBK Caravelle, L.L.C. and The Bank of New York Mellon, as escrow agent.(2)3.1

          

          Form of Certificate of Incorporation of the Company.(3)3.2

          

          Form of Bylaws of the Company, as amended and restated effective February 29, 2012.(4)4.1

          

          Specimen certificate of the Companys common stock, par value $0.01 per share.(3)4.2

          

          Form of Registration Rights Agreement.(5)4.3

          

          Form of Dividend Reinvestment Plan.(5)4.4

          

          Indenture dated as of March 16, 2011, by and between the Company and U.S. Bank National Association, as trustee.(6)4.5

          

          Form of 8.75% Convertible Senior Note Due 2016 (included as part of Exhibit 4.4).10.1

          

          Form of the Amended and Restated 2006 Equity Incentive Plan.(7)*10.2

          

          Form of Company Non-Qualified Stock Option Certificate.(5)*10.3

          

          Form of Custodian Agreement by and among Kohlberg Capital Corporation and U.S. Bank National Association.(5)10.4

          

          Form of License and Referral Agreement between the Company and Kohlberg & Company, L.L.C.(3)10.5

          

          Form of Overhead Allocation Agreement between the Company and Katonah Debt Advisors, L.L.C.(5)10.6

          

          Form of Employment Agreement between the Company and Dayl W. Pearson.(5)*10.7

          

          Form of Employment Agreement between the Company and Michael I. Wirth.(5)*10.8

          

          Form of Employment Agreement between the Company and R. Jon Corless.(5)*10.9

          

          Form of Employment Agreement between the Company and E.A. Kratzman.(5)*10.10

          

          Form of Employment Agreement between Katonah Debt Advisors and E.A. Kratzman.(5)*10.11

          

          Letter Agreement, dated December 10, 2010, between the Company and John M. Stack.(8)*10.12

          

          Consulting Agreement, dated December 10, 2010, between Katonah Debt Advisors, L.L.C. and John M. Stack.(9)*10.13

          

          Form of Employment Agreement between Katonah Debt Advisors and Daniel P. Gilligan.(10)*10.14

          

          Form of Indemnification Agreement for Officers and Directors of the Company.(11)10.19

          

          Forebearance and Settlement Agreement, dated as of September 20, 2010, by and among the Company, BMO Capital Markets Corp. and the other lender parties thereto.(12)10.20

          

          Amended and Restated Non-Employee Director Plan.(13)*10.21

          

          Note Purchase Agreement, dated as of February 24, 2012, by and among the Company, Credit Suisse AG, Cayman Islands Branch, Credit Suisse Securities (USA) LLC, as arranger, The Bank of New York Mellon Trust Company, National Association, as collateral administrator and collateral agent, and KCAP Funding.(14)
     Exhibit Number

          

          Description10.22

          

          Collateral Administration Agreement, dated as of February 24, 2012, by and among the Company, KCAP Funding, Credit Suisse AG, Cayman Islands Branch, The Bank of New York Mellon Trust Company, National Association, as collateral administrator and collateral agent.(15)10.23

          

          Employment Agreement, dated February 29, 2012, by and among, Jay R. Bloom and Trimaran Advisors, L.L.C., and, solely as to the last three sentences of Section 1(a) and Section 2(d), the Company.(16)*10.24

          

          Employment Agreement, dated February 29, 2012,by and among, Dean C. Kehler and Trimaran Advisors, L.L.C., and, solely as to the last three sentences of Section 1(a) and Section 2(d), the Company.(17)*21.1

          

          List of Subsidiaries(18)23.1

          

          Consent of Grant Thornton LLP, Independent Registered Public Accounting Firm.23.2

          

          Consent of Grant Thornton LLP, Independent Certified Public Accountants31.1

          

          Chief Executive Officer Certification Pursuant to Rule 13a-14 of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.31.2

          

          Chief Financial Officer Certification Pursuant to Rule 13a-14 of the Securities Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.32.1

          

          Chief Executive Officer Certification pursuant to Section 1350, Chapter 63 of Title 18, United States Code, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.32.2

          

          Chief Financial Officer Certification pursuant to Section 1350, Chapter 63 of Title 18, United States Code, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
  (1)

          Incorporated by reference to Exhibit 2.1 of the Current Report on Form 8-K, as filed on March 1, 2012 (File No. 814-00735). (2)

          Incorporated by reference to Exhibit 2.2 of the Current Report on Form 8-K, as filed on March 1, 2012 (File No. 814-00735). (3)

          Incorporated by reference to the exhibit included in Pre-Effective Amendment No. 1 on Form N-2, as filed on October 6, 2006 (File No. 333-136714). (4)

          Incorporated by reference to Exhibit 3.1 of the Current Report on Form 8-K, as filed on March 1, 2012 (File No. 814-00735). (5)

          Incorporated by reference to the exhibit included in Pre-Effective Amendment No. 2 on Form N-2, as filed on November 20, 2006 (File No. 333-136714). (6)

          Incorporated by reference to Exhibit 4.1 of the Current Report on Form 8-K, as filed on March 16, 2011 (File No. 814-00735). (7)

          Incorporated by reference to Exhibit 10.1 of the Current Report on Form 8-K, as filed on June 19, 2008 (File No. 814-00735). (8)

          Incorporated by reference to Exhibit 10.11 of the Annual Report on Form 10-K, as filed on March 15, 2011 (File No. 814-00735). (9)

          Incorporated by reference to Exhibit 10.12 of the Annual Report on Form 10-K, as filed on March 15, 2011 (File No. 814-00735). (10)

          Incorporated by reference to Exhibit 10.13 of the Annual Report on Form 10-K, as filed on March 15, 2011 (File No. 814-00735). (11)

          Incorporated by reference to the exhibit included in Pre-Effective Amendment No. 3 on Form N-2, as filed on November 24, 2006 (File No. 333-136714). (12)

          Incorporated by reference to Exhibit 10.1 of the Quarterly Report on Form 10-Q, as filed on November 8, 2010 (File No. 333-814-00735). (13)

          Incorporated by reference to Exhibit 4.1 included in the Registration Statement on form S-8, as filed on July 28, 2011 (File No. 333-175838).
     (14)

          Incorporated by reference to Exhibit 10.1 of the Current Report on Form 8-K, as filed on March 1, 2012 (File No. 814-00735). (15)

          Incorporated by reference to Exhibit 10.2 of the Current Report on Form 8-K, as filed on March 1, 2012 (File No. 814-00735). (16)

          Incorporated by reference to Exhibit 10.3 of the Current Report on Form 8-K, as filed on March 1, 2012 (File No. 814-00735). (17)

          Incorporated by reference to Exhibit 10.4 of the Current Report on Form 8-K, as filed on March 1, 2012 (File No. 814-00735). (18)

          Incorporated by reference to Exhibit 21.1 of the Annual Report on Form 10-K, as filed on March 15, 2012 (File No. 814-00735).  *

          Indicates a management contract or compensatory plan, contract or agreement.