SHAREHOLDERS’ EQUITY

Preferred Shares

The Company has 14.95 million of Series A LLC Preferred Shares issued and outstanding, which trade on the NYSE under the ticker symbol “KFN.PR”. 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 at a rate per annum equal to 7.375%.

Common Shares

Pursuant to the merger agreement, on the date of the Merger Transaction (i) each outstanding option to purchase a KFN common share was cancelled, as the exercise price per share applicable to all outstanding options exceeded the cash value of the number of KKR & Co. common units that a holder of one KFN common share was entitled to in the merger, (ii) each outstanding restricted KFN common share (other than those held by the Company’s Manager) was converted into 0.51 KKR & Co. common units having the same terms and conditions as applied immediately prior to the effective time, and (iii) each phantom share under KFN’s Non‑Employee Directors’ Deferred Compensation and Share Award Plan was converted into a phantom share in respect of 0.51 KKR & Co. common units and otherwise remained subject to the terms of the plan. On January 2, 2015, these phantom shares were converted to KKR & Co. common units and cash. In addition, on June 27, 2014, the Company’s board of directors approved a reverse stock split whereby the number of the Company’s issued and outstanding common shares was reduced to 100 common shares, all of which are held solely by the Parent. As such, disclosure related to common shares below pertains to the Predecessor Company.

On May 4, 2007, the Company adopted an amended and restated share incentive plan (the “2007 Share Incentive Plan”) that provided for the grant of qualified incentive common share options that met the requirements of Section 422 of the Code, non‑qualified common share options, share appreciation rights, restricted common shares and other share‑based awards. Share options and other share‑based awards could 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 could not be less than 100% of the fair market value of the common shares at the time the common share option was granted. Each option to acquire a common share must terminate no more than ten years from the date it was granted. As of April 30, 2014, the 2007 Share Incentive Plan authorized a total of 8,964,625 shares that could be used to satisfy awards under the 2007 Share Incentive Plan. The 2007 Share Incentive Plan was terminated in May 2015, but continued to govern unvested awards with respect to 37,214 restricted KKR common units as of December 31, 2015. All such remaining outstanding awards vested on March 1, 2016.

As of December 31, 2015, all restricted KFN common shares and KFN common share options outstanding at the time of the Merger Transaction (other than any restricted Company common shares held by the Manager) had been converted to grants in respect of KKR & Co. common units and there were no outstanding equity awards in respect of KFN common shares.

The following table summarizes the restricted common share transactions that occurred prior to the Merger Transaction:



	Predecessor Company
	Manager		Directors		Total
Unvested shares as of December 31, 2012	438,937		92,253		531,190
Issued	292,009		39,288		331,297
Vested	(146,312	)	(46,347	)	(192,659	)
Unvested shares as of December 31, 2013	584,634		85,194		669,828
Issued	—		—		—
Vested	(243,648	)	—		(243,648	)
Unvested shares as of April 30, 2014	340,986		85,194		426,180

The Company was 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 $11.54 per share and $12.19 per share at April 30, 2014 and December 31, 2013, respectively. There was $2.2 million and $3.4 million of total unrecognized compensation costs related to unvested restricted common shares granted as of April 30, 2014 and December 31, 2013, respectively. These costs were expected to be recognized through 2016.

The following table summarizes common share option transactions that occurred prior to the Merger Transaction:



	Predecessor Company
	Number of Options	Weighted Average Exercise Price
Outstanding as of December 31, 2012	1,932,279	$	20.00
Granted	—	—
Exercised	—	—
Forfeited	—	—
Outstanding as of December 31, 2013	1,932,279	$	20.00
Granted	—	—
Exercised	—	—
Forfeited	—	—
Outstanding as of April 30, 2014	1,932,279	$	20.00

As of April 30, 2014 and December 31, 2013, 1,932,279 common share options were fully vested and exercisable. In connection with the Merger Transaction, each outstanding option to purchase a KFN common share was cancelled, as the exercise price per share applicable to all outstanding options exceeded the cash value of the number of KKR & Co. common units that a holder of one KFN common share was entitled to receive in the merger.

The components of share-based compensation expense that existed prior to the Merger Transaction were as follows (amounts in thousands):



	Predecessor Company
	For the four months ended April 30, 2014		Year ended December 31, 2013
Restricted common shares granted to Manager	$	690	$	3,524
Restricted common shares granted to certain directors	328		1,035
Total share-based compensation expense	$	1,018	$	4,559