EQUITY AND STOCK-BASED COMPENSATION

2009 Incentive Stock Plan

The Company maintains the 2009 Incentive Stock Plan (the “2009 Plan”), which allows the Company to issue awards of stock options, stock grants or stock appreciation rights to employees and directors. As of December 31, 2012, 1,720,835 shares were authorized to be awarded pursuant to the 2009 Plan.

Stock Options – At December 31, 2012, the Company had 4,428,562 stock options outstanding to key employees and outside directors pursuant to the 2009 Plan. The Company typically uses authorized, unissued shares to provide shares for option exercises. The stock options have a term of 10 years from the date of grant and a vesting period of four years, except director stock options, which vest immediately.

In addition, the employee stock options include a retirement feature where certain employees vest immediately upon retirement. An employee who meets the requirements of the retirement feature will have the remaining original term to exercise their stock options after retirement. Employees who do not meet the retirement feature have an exercise period of one year after termination to exercise vested options.

The Company calculates the fair value of each option grant on the grant date using the Black-Scholes option-pricing model, which requires the Company to provide certain inputs as follows:


•	The risk-free interest rate utilized is the interest rate on U.S. Treasury Strips or Bonds having the same life as the estimated life of the Company’s option awards.


•	Expected life of the options granted is estimated based on historical data reflecting actual hold periods plus an estimated hold period for unexercised options outstanding.


•	Expected volatility is based on the historical volatility of the Company’s stock over a period equal to the estimated option life.


•	The assumed dividend yield is based on the Company’s expectation of an annual dividend rate for regular dividends over the estimated life of the option.

In 2012, there were no stock option grants. In 2011 and 2010, the Company computed the value of all stock options granted using the Black-Scholes option pricing model with the following assumptions and results:



	2011			2010
Assumptions
Risk-free interest rate	2.37		%	2.63		%
Assumed dividend yield	2.95		%	5.50		%
Assumed lives of option awards (in years)	5.3			5.4
Assumed volatility	0.653			0.642
Results
Weighted average fair value of options granted	$	3.90		$	2.68

The Company recognizes compensation expense using the straight-line method over the vesting period of the options, with the offset recognized in additional paid-in capital. During 2012, 2011 and 2010, approximately $310,000, $941,000 and $1.6 million, respectively, was recognized as compensation expense, before capitalization or income tax benefit, if any. In 2010, stock options of the former Chief Financial Officer were modified in connection with his retirement resulting in $110,000 in additional compensation expense.

The Company anticipates recognizing $410,000 in future compensation expense related to stock options outstanding at December 31, 2012, which will be recognized over a weighted average period of 1.8 years. During 2012, total cash proceeds from the exercise of options equaled $45,000. As of December 31, 2012, the intrinsic value of the options outstanding and exercisable was $243,000. The intrinsic value is calculated using the exercise prices of the options compared to the market value of the Company’s stock. At December 31, 2012 and 2011, the weighted-average contractual lives for the options outstanding and exercisable were 3.5 years and 3.3 years, respectively.

The following is a summary of stock option activity for the year ended December 31, 2012:



	Number of Options (000s)		Weighted Average Exercise Price Per Option
Outstanding, beginning of year	5,960		$	20.83
Exercised	(6	)	$	7.51
Forfeited/Expired	(1,525	)	$	18.16
Outstanding, end of year	4,429		$	21.76
Options exercisable at end of year	4,201		$	22.51

Stock Grants – The 2009 Plan provides for stock grants, which may be subject to specified performance and vesting requirements, and have historically been in the form of restricted stock. In 2012, the Company made stock grants of 470,306 shares, which vest ratably over three years. In 2011, the Company made stock grants of 214,206 shares, which vest ratably over three years, and 29,411 shares, which cliff vest three years from the date of grant. Stock grants awarded in 2010 also cliff vest three years from the date of grant. The remaining stock grants vest ratably over a four-year period. In 2012, the Company also granted 25,442 shares of stock to independent members of the board of directors which vested immediately on the grant date. All stock grants receive dividends and have voting rights during the vesting period. The Company records the restricted stock in common stock and additional paid-in capital at fair value on the grant date, with the offsetting deferred compensation also recorded in additional paid-in capital. The Company records compensation expense over the vesting period. Compensation expense related to restricted stock was approximately $1.8 million, $1.2 million and $747,000 in 2012, 2011 and 2010, respectively.

As of December 31, 2012, the Company had recorded $2.6 million of unrecognized compensation cost included in additional paid-in capital related to restricted stock, which will be recognized over a weighted average period of 1.9 years. The total fair value of the restricted stock which vested during 2012 was approximately $1.2 million. The following table summarizes restricted stock activity during 2012:



	Number of Shares (000s)		Weighted-Average Grant Date Fair Value
Non-vested restricted stock at beginning of year	439		$	7.83
Granted	470		$	7.45
Vested	(138	)	$	8.39
Forfeited	(130	)	$	7.48
Non-vested restricted stock at end of year	641		$	7.50

2005 Restricted Stock Unit Plan

The Company also maintains the 2005 Restricted Stock Unit Plan (the “RSU Plan”), as amended. An RSU is a right to receive a payment in cash equal to the fair market value, as defined, of one share of the Company’s stock on the vesting date. The Company records compensation expense for RSUs over the vesting period and adjusts the expense and related liability based upon the market value, as defined, of the Company’s common stock at each reporting period. The RSU Plan also has a retirement feature where employees who meet the requirements of the retirement feature vest fully in their RSUs outstanding upon retirement. The Company accelerates the vesting period for employees who will become eligible under this feature before the end of their original vesting period, even if the employee has not retired. The Company has issued performance- and non-performance-based RSUs. Each of these RSU awards is described as follows:

Regular RSUs. The Company’s non-performance-based RSUs (“Regular RSUs”) are granted to directors and key employees. In 2012, there were no Regular RSU grants. In 2011, the Company awarded 401 Regular RSUs to a new director and 56,845 Regular RSUs to employees, both of which cliff vest three years from the date of grant. In 2010, the Company granted 21,442 in Regular RSUs to directors, 20,368 of which have a three-year cliff vest. All other Regular RSU grants vest ratably over a four-year period. Regular RSU holders receive cash dividend payments for each Regular RSU held during the vesting period equal to the common dividends per share paid by the Company. These dividends are also recorded in compensation expense. The total cash paid for Regular RSU vesting and dividend payments in 2012 was approximately $294,000.

The following table summarizes Regular RSU activity for 2012 (in thousands):



Outstanding at beginning of year	143
Vested	(37	)
Forfeited	(15	)
Outstanding at end of year	91

2012 Performance-Based RSUs. During 2012, the Company awarded two types of performance-based RSUs to key employees. The first is based on the total stockholder return of the Company, as defined, as compared to the companies in the SNL US REIT Office index as of January 1, 2012 (“SNL RSUs”). The second is based on the ratio of cumulative funds from operations per share to targeted cumulative funds from operations per share (“FFO RSUs”). The performance period for both awards is January 1, 2012 to December 31, 2014, and the targeted number of SNL RSUs and FFO RSUs outstanding at December 31, 2012 is 137,609 and 86,060, respectively. The ultimate payout of these awards can range from 0% to 200% of the targeted number of units depending on the achievement of the performance metrics described above. The SNL RSUs and FFO RSUs cliff vest on February 14, 2015 and are dependent upon the attainment of required service and performance criteria. The number of RSUs vesting will be determined at that date, and the payout per unit will be equal to the average closing price on each trading day during the 30-day period ending on December 31, 2014. The Company expenses an estimate of the fair value of the SNL RSUs over the vesting period using a quarterly Monte Carlo valuation. The Company expenses the FFO RSUs over the vesting period using the fair market value of the Company’s stock at the reporting date multiplied by the anticipated number of units to be paid based on the current estimate of what the ratio is expected to be upon vesting. Dividend equivalents on the SNL RSUs and FFO RSUs will also be paid based upon the percentage vested. The dividend equivalent payments will equal the total cash dividends that would have been paid during the performance period, assuming dividends had been reinvested in Company stock.

In 2012, the Company also issued performance-based RSUs to the Chief Executive Officer. The targeted number of units outstanding at December 31, 2012 is 281,532. The payout of these awards can range from 0% to 150% of the targeted number of units depending on the Total Stockholder Return of the Company, as defined on an absolute basis, compared to the total stockholder return for the companies in the SNL US REIT Office Index. The performance period of the awards is from January 1, 2012 to December 31, 2016 with interim performance measurement dates at each of the third, fourth and fifth anniversaries. To the extent that the Company has attained the defined performance goals at the end each of these periods, one-third of the units may be credited after each of the third and fourth anniversaries, with the balance credited at the end of the fifth anniversary, and to be awarded subject to continuous employment on the fifth anniversary. This award is expensed using a quarterly Monte Carlo valuation over the vesting period. The number of RSUs vesting under this award will be determined at the fifth anniversary date of the grant, and the cash payout per unit will be equal to the average closing price on each trading day during the 30-day period ending with such date.

2011 Performance-Based RSUs. During 2011, the Company awarded two types of performance-based RSUs to key employees. The first is based on the total stockholder return of the Company, as defined, as compared to the companies in the SNL US REIT Office index as of January 1, 2011 (“SNL RSUs”). The second is based on the ratio of cumulative funds from operations per share to targeted cumulative funds from operations per share (“FFO RSUs”). The performance period for both awards is January 1, 2011 to December 31, 2013, and the targeted number of SNL RSUs and FFO RSUs outstanding at December 31, 2012 is 77,306 and 49,697, respectively. The ultimate payout of these awards can range from 0% to 200% of the targeted number of units depending on the achievement of the performance metrics described above. The SNL RSUs and FFO RSUs cliff vest on February 14, 2014 and are dependent upon the attainment of required service and performance criteria. The number of RSUs vesting will be determined at that date, and the payout per unit will be equal to the average closing price on each trading day during the 30-day period ending on December 31, 2013. The Company expenses an estimate of the fair value of the SNL RSUs over the vesting period using a quarterly Monte Carlo valuation. The Company expenses the FFO RSUs over the vesting period using the fair market value of the Company’s stock at the reporting date multiplied by the anticipated number of units to be paid based on the current estimate of what the ratio is expected to be upon vesting. Dividend equivalents on the SNL RSUs and FFO RSUs will also be paid based upon the percentage vested. The dividend equivalent payments will equal the total cash dividends that would have been paid during the performance period, assuming dividends had been reinvested in Company stock.

2010 Performance-Based RSUs. In 2010, the Company awarded two types of performance-based RSUs to key employees. The first RSU is based on total stockholder return of the Company, as defined, compared to the companies in the MSCI US REIT index as of January 1, 2010 (the “MSCI RSU”). The second RSU is based on the ratio of total debt, as defined, to the trailing 12-month calculation of earnings before interest, taxes, depreciation and amortization, as defined (the “EBITDA RSU”). The performance period for both RSUs is January 1, 2010 to December 31, 2012, and the target number of MSCI RSUs and EBITDA RSUs outstanding as of December 31, 2012 is 61,464 and 85,427, respectively. The ultimate payout of these awards can range from 0% to 200% of the target number of units depending on the achievement of the performance metrics described above and the attainment of certain service requirements. Both of these types of RSUs cliff vest on February 15, 2013. The number of each type of RSU to be issued will be determined upon vesting, and the payout per unit will be equal to the 30-day average closing price of the Company’s stock ending on December 31, 2012. The Company expenses an estimate of the fair value of the MSCI RSUs over the vesting period using a Monte Carlo valuation. The EBITDA RSUs are expensed over the vesting period using the Company’s stock price at the reporting period multiplied by the anticipated number of units to be paid based on the current estimate of the debt-to-EBITDA ratio upon vesting. Dividend equivalents on both the EBITDA and MSCI RSUs will be paid based upon the percentage vested. The dividend equivalent payments will equal the total dividends that would have been paid during the performance period, assuming the dividends had been reinvested in Company stock.

The following table summarizes the combined performance-based RSU activity for 2012 (in thousands):



Outstanding at beginning of year	344
Granted	546
Forfeited	(111	)
Outstanding at end of year	779

Combined RSU activity. The Company estimates future expense for all types of RSUs outstanding at December 31, 2012 to be approximately $4.7 million (using stock prices and estimated target percentages as of December 31, 2012), which will be recognized over a weighted-average period of 3 years.

During 2012, 2011 and 2010, approximately $2.5 million, $1.0 million and $1.4 million, respectively, was recognized as compensation expense related to RSUs for employees and directors.

Other Long-Term Compensation Information — In 2009, the Company granted an additional long-term incentive compensation award to key employees, which will be settled in cash if the Company’s stock price achieves a specified level of growth at the testing dates and the service requirement is met. This award is valued using the Monte Carlo method. The Company recognized $101,000 and $805,000 in compensation expense related to this plan in 2012 and 2010, respectively, and reversed approximately $767,000 in expense in 2011.This requires testing for vesting at specified dates in 2012, 2013 and 2014. As a result of this testing, no amounts vested in 2012. If the stock value growth condition has not been met as of the last possible testing date in 2014 or, except as described for a change in control, if the employee terminates employment before this vesting condition is met on a testing date, the award is automatically forfeited.

Other Stockholder Investment Information

Preferred Stock — At December 31, 2012, the Company had 2,993,090 shares outstanding of its 7.75% Series A Cumulative Redeemable Preferred Stock (liquidation preference of $25 per share), and 3,791,000 shares outstanding of its 7.50% Series B Cumulative Redeemable Preferred Stock (liquidation preference of $25 per share). The Series A preferred stock may be redeemed on or after July 24, 2008, and the Series B preferred stock may be redeemed on or after December 17, 2009, both at the Company’s option at $25 per share plus all accrued and unpaid dividends through the date of redemption. None of the Series A or Series B preferred stock has been redeemed as of December 31, 2012. Dividends on both the Series A and Series B preferred stock are payable quarterly in arrears on February 15, May 15, August 15 and November 15.

Director Fees — Outside directors may elect to receive some of their director fees in stock, based on 95% of the average market price on the date of service. Outside directors elected to receive 46,711, 30,005, and 35,040 shares of stock in lieu of cash for director fees in 2012, 2011 and 2010, respectively.

Ownership Limitations — In order to minimize the risk that the Company will not meet one of the requirements for qualification as a REIT, Cousins’ Articles of Incorporation include certain restrictions on the ownership of more than 3.9% of the Company’s total common and preferred stock.

Distribution of REIT Taxable Income — The following reconciles dividends paid and dividends applied in 2012, 2011 and 2010 to meet REIT distribution requirements (in thousands):



	2012			2011			2010
Common and preferred dividends paid	$	31,655		$	31,557		$	49,365
Dividends treated as taxable compensation	(147		)	(71		)	(79		)
Portion of dividends declared in current year, and paid in current year, which was applied to the prior year distribution requirements	—			(304		)	(1,606		)
Portion of dividends declared in subsequent year, and paid in subsequent year, which apply to current year distribution requirements	1,563			(10		)	304
Dividends applied to meet current year REIT distribution requirements	$	33,071		$	31,172		$	47,984

Tax Status of Dividends — The following summarizes the components of the taxability of the Company’s dividends for the years ended December 31, 2012, 2011 and 2010:



	Total Dividends Per Share		Ordinary Dividends		Long-Term Capital Gain		Unrecaptured Section 1250 Gain (A)
Common:
2012	$	0.180000	$	0.124724	$	0.055276	$	0.055276
2011	$	0.180000	$	0.067853	$	0.112147	$	0.042574
2010	$	0.360000	$	0.059447	$	0.300553	$	0.073937
Series A Preferred:
2012	$	1.937500	$	1.342220	$	0.595280	$	0.595280
2011	$	1.937500	$	0.730053	$	1.207447	$	0.458393
2010	$	1.937500	$	0.315868	$	1.621632	$	0.399714
Series B Preferred:
2012	$	1.875000	$	1.298222	$	0.576078	$	0.576078
2011	$	1.875000	$	0.706502	$	1.168498	$	0.443606
2010	$	1.875000	$	0.305678	$	1.569322	$	0.386819


(A)	Represents a portion of the dividend allocated to long-term capital gain.