Cousins Properties Incorporated 2006 Annual Report - SNL Financial

COUSINS PROPERTIES INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Stock Options — At December 31, 2006, 6,117,402 stock options awarded to key employees and outside
directors pursuant to both the 1999 Plan and the Predecessor Plans were outstanding. The Company typically uses
authorized, unissued shares to provide shares for option exercises. All stock options have a term of 10 years from the
date of grant. Key employee stock options granted prior to December 28, 2000 had a vesting period of five years
under both the 1999 Plan and the Predecessor Plans. Options granted on or after December 28, 2000 have a vesting
period of four years. Outside director stock options are fully vested on the date of grant under the 1999 Plan but had
a vesting period of one year under the Predecessor Plans.
In 2006, the Company amended the stock option certificates to add a retirement feature. Employees who meet
the requirements of the retirement feature vest immediately in their stock options outstanding, and the vesting
periods for shares outstanding were also changed to reflect accelerated expense for employees who become
retirement-eligible within the next four years. The Company recognized additional compensation expense of
$716,000, before any capitalization to projects under development or income tax benefit, in 2006 related to this
modification. In addition, for all grants after December 11, 2006, an employee who meets the requirements of the
retirement feature will have the remaining original term to exercise their stock options after retirement. The
certificates currently allow for an exercise period of one year after termination, which remains in force for grants
prior to December 11, 2006 for retirement-eligible employees and for all other employees. Also in 2006, the stock
option certificates for grants after December 11, 2006 were amended to include a stock appreciation right. A stock
appreciation right permits an employee to waive his or her right to exercise the stock option and to instead receive
the value of the option, net of the exercise price and tax withholding, in stock, without requiring the payment of the
exercise.
The Company estimates the fair value of each option grant on the date of grant using the Black-Scholes optionpricing
model. The risk free interest rate utilized in the Black-Scholes calculation is the interest rate on
U.S. Treasury Strips having the same life as the estimated life of the Company’s option awards. The assumed
dividend yield is based on the annual dividend rate for regular dividends at the time of grant. Expected life of the
options granted was computed using historical data for certain grant years reflecting actual hold periods plus an
estimated hold period for unexercised options outstanding using the mid-point between 2006 and the expiration
date. Expected volatility is based on the historical volatility of the Company’s stock over a period relevant to the
related stock option grant. For grants occurring after adoption of SFAS 123R, the Company expenses stock options
with graded vesting using the straight line method over the vesting period.
For purposes of the 2005 and 2004 pro forma disclosures shown in Note 2 required by SFAS No. 123 and
SFAS No. 148, “Accounting for Stock-Based Compensation — Transition and Disclosure,” and for SFAS 123R
expense recognition in 2006, the Company has computed the value of all stock options granted using the Black-
Scholes option pricing model with the following assumptions and results:
2006 2005 2004
Assumptions
Risk-free interest rate ..................................... 4.47% 4.53% 4.06%
Assumed dividend yield ................................... 4.58% 5.16% 4.69%
Assumed lives of option awards (in years) . . . ................... 6.61 6.74 8.00
Assumed volatility ....................................... 0.193 0.203 0.195
Results
Weighted average fair value of options granted .................. $ 4.93 $ 3.68 $ 4.09
As of December 31, 2006, there was $5.6 million of total unrecognized compensation cost included in
additional paid-in capital related to stock options, which will be recognized over a weighted average period of
3.2 years. The total intrinsic value of options exercised during 2006 was $22.5 million. The intrinsic value of a stock
option is the amount by which the market value of the underlying stock exceeds the exercise price of the option. In
2006, cash received from the exercise of options equaled $21.1 million.
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