NOTE 11. SHAREHOLDERS’ EQUITY

Preferred Shares

On January 17, 2013, the Company issued 14.95 million of Series A LLC Preferred Shares for gross proceeds of $373.8 million, and net proceeds of $362.0 million. The Series A LLC Preferred Shares trade on the New York Stock Exchange (“NYSE”) under the ticker symbol “KFN.PR” and began trading on January 28, 2013. Distributions on the Series A LLC Preferred Shares are cumulative and are payable, when, as, and if declared by the Company’s board of directors, quarterly on January 15, April 15, July 15 and October 15 of each year, beginning April 15, 2013, at a rate per annum equal to 7.375%.

Common Shares

On May 4, 2007, the Company adopted an amended and restated share incentive plan (the “2007 Share Incentive Plan”) that provides for the grant of qualified incentive common share options that meet the requirements of Section 422 of the Code, non-qualified common share options, share appreciation rights, restricted common shares and other share-based awards. The Compensation Committee of the board of directors administers the plan. Share options and other share-based awards may be granted to the Manager, directors, officers and any key employees of the Manager and to any other individual or entity performing services for the Company.

The exercise price for any share option granted under the 2007 Share Incentive Plan may not be less than 100% of the fair market value of the common shares at the time the common share option is granted. Each option to acquire a common share must terminate no more than ten years from the date it is granted. As of March 31, 2013, the 2007 Share Incentive Plan authorizes a total of 8,839,625 shares that may be used to satisfy awards under the 2007 Share Incentive Plan. On February 14, 2013, the Compensation Committee of the board of directors granted the Manager 292,009 restricted common shares subject to graded vesting over three years with the final vesting date of March 1, 2016.

The following table summarizes restricted common share transactions:

	Manager		Directors	Total
Unvested shares as of January 1, 2013	438,937		92,253	531,190
Issued	292,009		—	292,009
Vested	(146,312	)	—	(146,312	)
Forfeited	—		—	—
Unvested shares as of March 31, 2013	584,634		92,253	676,887

The Company is required to value any unvested restricted common shares granted to the Manager at the current market price. The Company valued the unvested restricted common shares granted to the Manager at $11.07 and $9.21 per share at March 31, 2013 and 2012, respectively. There were $5.3 million and $3.9 million of total unrecognized compensation costs related to unvested restricted common shares granted as of March 31, 2013 and 2012, respectively. These costs are expected to be recognized through 2016.

The following table summarizes common share option transactions:

	Number of Options	Weighted Average Exercise Price
Outstanding as of January 1, 2013	1,932,279	$	20.00
Granted	—	—
Exercised	—	—
Forfeited	—	—
Outstanding as of March 31, 2013	1,932,279	$	20.00

As of March 31, 2013 and 2012, 1,932,279 common share options were exercisable. As of March 31, 2013, the common share options were fully vested and expire in August 2014.

For the three months ended March 31, 2013 and 2012, the components of share-based compensation expense are as follows (amounts in thousands):

	For the three months ended March 31, 2013		For the three months ended March 31, 2012
Restricted shares granted to Manager	$	719	$	383
Restricted shares granted to certain directors	261		231
Total share-based compensation expense	$	980	$	614