STOCK-BASED COMPENSATION

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, 2015, 2,426,451 shares were authorized to be awarded pursuant to the 2009 Plan. The Company also maintains the 2005 Restricted Stock Unit ("RSU")Plan, as amended, which allows the Company to issue awards to employees that are paid in cash on the vesting date in an amount equal to the fair market value, as defined, of one share of the Company’s stock. The Company has granted stock options, restricted stock, and restricted stock units to employees as discussed below.

Stock Options

At December 31, 2015, the Company had 1,763,316 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 ten years from the date of grant and have a vesting period of four years, except director stock options, which vest immediately.

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 a term equal to 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 2015, 2014, and 2013, there were no stock option grants.

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 2015, 2014, and 2013, $15,000, $140,000 and $226,000, respectively, was recognized as compensation expense.

The Company does not anticipate recognizing any future compensation expense related to stock options outstanding at December 31, 2015. During 2015, total cash proceeds from the exercise of options equaled $185,000. As of December 31, 2015, the intrinsic value of the options outstanding and exercisable was $888,000. 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, 2015 and 2014, the weighted-average contractual lives for the options outstanding and exercisable were 2.3 years and 2.8 years, respectively.

The following is a summary of stock option activity for the years ended December 31, 2015, 2014, and 2013:



	Number of Options (000s)		Weighted Average Exercise Price Per Option
Outstanding at December 31, 2012	4,437		$	21.74
Exercised	(283	)	8.12
Forfeited/Expired	(1,076	)	21.98
Outstanding at December 31, 2013	3,078		22.90
Exercised	(206	)	8.26
Forfeited/Expired	(661	)	28.18
Outstanding at December 31, 2014	2,211		22.69
Exercised	(23	)	8.02
Forfeited/Expired	(425	)	26.13
Outstanding at December 31, 2015	1,763		22.05
Options Exercisable at December 31, 2015	1,763		$	22.05

Restricted Stock

In 2015, 2014, and 2013, the Company issued 165,922, 137,591, and 159,782 shares of restricted stock to employees, which vest ratably over three years from the issuance date. In 2015, 2014, and 2013, the Company also issued 78,985, 55,293, and 50,085 shares of stock to independent members of the board of directors which vested immediately on the issuance date. All shares of restricted stock receive dividends and have voting rights during the vesting period. The Company records 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 $1.5 million, $1.8 million, and $1.8 million in 2015, 2014, and 2013, respectively.

As of December 31, 2015, the Company had recorded $1.8 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 1.8 years. The total fair value of the restricted stock which vested during 2015 was $2.0 million. The following table summarizes restricted stock activity for the years ended December 31, 2015, 2014, and 2013:



	Number of Shares (000s)		Weighted-Average Grant Date Fair Value
Non-vested restricted stock at December 31, 2012	703		$	7.55
Granted	160		8.91
Vested	(361	)	7.50
Forfeited	(52	)	8.24
Non-vested restricted stock at December 31, 2013	450		8.00
Granted	138		10.75
Vested	(236	)	8.00
Forfeited	(10	)	9.48
Non-vested restricted stock at December 31, 2014	342		9.08
Granted	166		11.06
Vested	(210	)	8.41
Forfeited	(5	)	10.68
Non-vested restricted stock at December 31, 2015	293		$	10.65

Restricted Stock Units

During 2015, 2014, and 2013, the Company awarded two types of performance-based RSUs to key employees: one based on the total stockholder return of the Company, as defined, relative to that of office peers included in the SNL US Office REIT Index (the "TSR RSUs") and the other based on the ratio of cumulative funds from operations per share to targeted cumulative funds from operations per share (the “FFO RSUs”). The performance period for these awards is three years and 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. Both of these RSUs are to be settled in cash with payment dependent upon the attainment of required service, market, and performance criteria. The Company expenses an estimate of the fair value of the TSR RSUs over the performance 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 TSR RSUs and FFO RSUs will also be paid based upon the percentage vested. The targeted number of performance-based RSUs outstanding at December 31, 2015 are 241,370, 159,745, and 160,107 related to the 2015, 2014, and 2013 grants, respectively.

In 2012, the Company also issued 281,532 performance-based RSUs to the Chief Executive Officer. 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, as compared to that of a peer group of companies. The performance period of the awards is five years 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 in cash subject to continuous employment on the fifth anniversary. This award is expensed using a quarterly Monte Carlo valuation over the vesting period.

The following table summarizes the performance-based RSU activity as of December 31, 2015, 2014, and 2013 (in thousands):




Outstanding at December 31, 2012	782
Granted	196
Exercised	(94	)
Forfeited	(129	)
Outstanding at December 31, 2013	755
Granted	205
Exercised	(150	)
Forfeited	(14	)
Outstanding at December 31, 2014	796
Granted	244
Exercised	(191	)
Forfeited	(6	)
Outstanding at December 31, 2015	843

The Company estimates future expense for all types of RSUs outstanding at December 31, 2015 to be $2.0 million (using stock prices and estimated target percentages as of December 31, 2015), which will be recognized over a weighted-average period of 1.2 years. During 2015, total cash paid for all types of RSUs and related dividend payments was $4.4 million.

During 2015, 2014, and 2013, $67,000, $5.4 million, and $5.3 million, respectively, was recognized as compensation expense related to RSUs for employees and directors.

Other Long-Term Compensation

In 2009, the Company granted a long-term incentive compensation award to key employees to be settled in cash if the Company’s stock price achieved a specified level of growth at the testing dates and a service requirement is met. This award was valued using the Monte Carlo method. The Company reversed $28,000 and $286,000 in compensation expense related to this plan in 2014 and 2013, respectively. This award expired in 2014 with no amounts paid to key employees thereunder.