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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
þ
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2016
OR
o
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                     
Commission file number: 001-11312
COUSINS PROPERTIES INCORPORATED
(Exact name of registrant as specified in its charter)
GEORGIA
(State or other jurisdiction of
incorporation or organization)
58-0869052
(I.R.S. Employer
Identification No.)
191 Peachtree Street, Suite 500, Atlanta, Georgia
(Address of principal executive offices)
30303-1740
(Zip Code)
(404) 407-1000
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer þ
Accelerated filer o
Non-accelerated filer o
Smaller reporting company o
 
 
(Do not check if a smaller reporting company)
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o No þ
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Class
 
Outstanding at July 22, 2016
Common Stock, $1 par value per share
 
210,169,742 shares


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FORWARD-LOOKING STATEMENTS

Certain matters contained in this report are “forward-looking statements” within the meaning of the federal securities laws and are subject to uncertainties and risks, as itemized in Item 1A included in the Annual Report on Form 10-K for the year ended December 31, 2015 and as itemized herein. These forward-looking statements include information about possible or assumed future results of the business and our financial condition, liquidity, results of operations, plans, and objectives. They also include, among other things, statements regarding subjects that are forward-looking by their nature, such as:
our business and financial strategy;
our ability to obtain future financing arrangements;
future acquisitions and future dispositions of operating assets;
future acquisitions of land;
future development and redevelopment opportunities;
future dispositions of land and other non-core assets;
future repurchases of common stock;
projected operating results;
market and industry trends;
future distributions;
projected capital expenditures; 
interest rates;
statements about the benefits of the proposed transactions involving us and Parkway Properties, Inc. ("Parkway"), including future financial and operating results, plans, objectives, expectations and intentions;
all statements that address operating performance, events or developments that we expect or anticipate will occur in the future — including statements relating to creating value for stockholders;
benefits of the proposed transactions with Parkway to tenants, employees, stockholders and other constituents of the combined company;
integrating Parkway with us; and
the expected timetable for completing the proposed transactions with Parkway.
Any forward-looking statements are based upon management's beliefs, assumptions, and expectations of our future performance, taking into account information currently available. These beliefs, assumptions, and expectations may change as a result of possible events or factors, not all of which are known. If a change occurs, our business, financial condition, liquidity, and results of operations may vary materially from those expressed in forward-looking statements. Actual results may vary from forward-looking statements due to, but not limited to, the following:
the availability and terms of capital and financing;
the ability to refinance or repay indebtedness as it matures;
the failure of purchase, sale, or other contracts to ultimately close;
the failure to achieve anticipated benefits from acquisitions and investments or from dispositions;
the potential dilutive effect of common stock offerings;
the failure to achieve benefits from the repurchase of common stock;
the availability of buyers and pricing with respect to the disposition of assets;
risks and uncertainties related to national and local economic conditions, the real estate industry in general, and the commercial real estate markets in particular;
changes to our strategy with regard to land and other non-core holdings that require impairment losses to be recognized;
leasing risks, including the ability to obtain new tenants or renew expiring tenants, the ability to lease newly developed and/or recently acquired space, and the risk of declining leasing rates;
the adverse change in the financial condition of one or more of our major tenants;
volatility in interest rates and insurance rates;
competition from other developers or investors;
the risks associated with real estate developments (such as zoning approval, receipt of required permits, construction delays, cost overruns, and leasing risk);
the loss of key personnel;
the potential liability for uninsured losses, condemnation, or environmental issues;
the potential liability for a failure to meet regulatory requirements;
the financial condition and liquidity of, or disputes with, joint venture partners;
any failure to comply with debt covenants under credit agreements;
any failure to continue to qualify for taxation as a real estate investment trust and meet regulatory requirements;
risks associated with the ability to consummate the proposed transactions with Parkway and the timing of the closing of the proposed transactions with Parkway;

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risks associated with the ability to consummate the proposed spin-off of Parkway, Inc., a company holding the Houston assets of the Company and Parkway, and the timing of the closing of the proposed spin-off;
risks associated with the ability to list the common stock of Parkway, Inc. on the New York Stock Exchange following the proposed spin-off;
risks associated with the ability to consummate certain asset sales contemplated by Parkway and the timing of the closing of such proposed asset sales;
risks associated with the ability to consummate the proposed reorganization of certain assets and liabilities of Cousins and Parkway, including the contemplated structuring of the Company and Parkway, Inc. as “UPREITs” following the consummation of the proposed transactions with Parkway;
the failure to obtain any debt financing arrangements in connection with the proposed transactions with Parkway;
the ability to secure favorable interest rates on any borrowings incurred in connection with the proposed transactions with Parkway;
the impact of such indebtedness incurred in connection with the proposed transactions with Parkway;
the ability to successfully integrate our operations and employees in connection with the proposed transaction with Parkway;
the ability to realize anticipated benefits and synergies of the proposed transactions with Parkway;
material changes in the dividend rates on securities or the ability to pay dividends on common shares or other securities;
potential changes to tax legislation;
changes in demand for properties;
risks associated with the acquisition, development, expansion, leasing and management of properties;
risks associated with the geographic concentration of the Company, Parkway, or Parkway, Inc.;
the potential impact of announcement of the proposed transactions with Parkway or consummation of the proposed transactions with Parkway on relationships, including with tenants, employees, customers, and competitors;
the unfavorable outcome of any legal proceedings that have been or may be instituted against the Company, Parkway, Parkway, Inc. or any of its affiliates;
significant costs related to uninsured losses, condemnation, or environmental issues;
the amount of the costs, fees, expenses and charges related to the proposed transactions with Parkway and the actual terms of the financings that may be obtained in connection with the proposed transactions with Parkway; and
those additional risks and factors discussed in reports filed with the Securities and Exchange Commission (“SEC”) by the Company, Parkway, and Parkway, Inc.
The words “believes,” “expects,” “anticipates,” “estimates,” “plans,” “may,” “intend,” “will,” or similar expressions are intended to identify forward-looking statements. Although we believe that our plans, intentions, and expectations reflected in any forward-looking statements are reasonable, we can give no assurance that such plans, intentions, or expectations will be achieved. We undertake no obligation to publicly update or revise any forward-looking statement, whether as a result of future events, new information, or otherwise, except as required under U.S. federal securities laws.

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PART I — FINANCIAL INFORMATION
Item 1.    Financial Statements.
COUSINS PROPERTIES INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)
 
June 30, 2016
 
December 31, 2015
 
(unaudited)
 
 
Assets:
 
 
 
Real estate assets:
 
 
 
Operating properties, net of accumulated depreciation of $403,283 and $352,350 in 2016 and 2015, respectively
$
2,186,770

 
$
2,194,781

Projects under development
62,567

 
27,890

Land
17,768

 
17,829

 
2,267,105

 
2,240,500

Real estate assets and other assets held for sale, net of accumulated depreciation and amortization of $7,200 in 2015

 
7,246

 
 
 
 
Cash and cash equivalents
946

 
2,003

Restricted cash
5,180

 
4,304

Notes and accounts receivable, net of allowance for doubtful accounts of $1,097 and $1,353 in 2016 and 2015, respectively
13,656

 
10,828

Deferred rents receivable
74,224

 
67,258

Investment in unconsolidated joint ventures
114,455

 
102,577

Intangible assets, net of accumulated amortization of $115,792 and $103,458 in 2016 and 2015, respectively
111,266

 
124,615

Other assets
36,163

 
35,989

Total assets
$
2,622,995

 
$
2,595,320

Liabilities:


 


Notes payable
$
777,485

 
$
718,810

Accounts payable and accrued expenses
56,971

 
71,739

Deferred income
34,158

 
29,788

Intangible liabilities, net of accumulated amortization of $31,473 and $26,890 in 2016 and 2015, respectively
55,009

 
59,592

Other liabilities
30,242

 
30,629

Liabilities of real estate assets held for sale

 
1,347

Total liabilities
953,865

 
911,905

Commitments and contingencies

 

Equity:
 
 
 
Stockholders' investment:
 
 
 
Preferred stock, $1 par value, 20,000,000 shares authorized, -0- shares issued and outstanding in 2016 and 2015

 

Common stock, $1 par value, 350,000,000 shares authorized, 220,500,503 and 220,255,676 shares issued in 2016 and 2015, respectively
220,501

 
220,256

Additional paid-in capital
1,723,131

 
1,722,224

Treasury stock at cost, 10,329,082 and 8,742,181 shares in 2016 and 2015, respectively
(148,373
)
 
(134,630
)
Distributions in excess of cumulative net income
(127,602
)
 
(124,435
)
Total stockholders' investment
1,667,657

 
1,683,415

Nonredeemable noncontrolling interests
1,473

 

Total equity
1,669,130

 
1,683,415

Total liabilities and equity
$
2,622,995

 
$
2,595,320

 
 
 
 
See accompanying notes.
 
 
 

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COUSINS PROPERTIES INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited, in thousands, except per share amounts)


 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2016
 
2015
 
2016
 
2015
Revenues:
 
 
 
 
 
 
 
Rental property revenues
$
90,735

 
$
96,177

 
$
179,211

 
$
186,216

Fee income
1,824

 
1,704

 
4,023

 
3,520

Other
129

 
22

 
705

 
143

 
92,688

 
97,903

 
183,939

 
189,879

Costs and expenses:
 

 
 

 
 
 
 
Rental property operating expenses
38,681

 
41,387

 
74,290

 
79,340

Reimbursed expenses
798

 
717

 
1,668

 
1,828

General and administrative expenses
4,691

 
5,936

 
13,183

 
9,533

Interest expense
7,334

 
7,869

 
14,748

 
15,546

Depreciation and amortization
32,381

 
34,879

 
64,350

 
71,026

Acquisition and merger costs
2,424

 
2

 
2,443

 
85

Other
152

 
341

 
258

 
698

 
86,461

 
91,131

 
170,940

 
178,056

Income from continuing operations before taxes, unconsolidated joint ventures, and sale of investment properties
6,227

 
6,772

 
12,999

 
11,823

Income from unconsolidated joint ventures
1,784

 
1,761

 
3,618

 
3,372

Income from continuing operations before gain on sale of investment properties
8,011

 
8,533

 
16,617

 
15,195

Gain (loss) on sale of investment properties
(246
)
 
(576
)
 
13,944

 
530

Income from continuing operations
7,765

 
7,957

 
30,561

 
15,725

Loss from discontinued operations:
 

 
 

 
 
 
 
Loss from discontinued operations

 
(6
)
 

 
(19
)
Loss on sale from discontinued operations

 

 

 
(551
)
 

 
(6
)
 

 
(570
)
Net income
$
7,765

 
$
7,951

 
$
30,561

 
$
15,155

Per common share information — basic and diluted:
 

 
 

 
 
 
 
Income from continuing operations
$
0.04

 
$
0.04

 
$
0.15

 
$
0.07

Income from discontinued operations

 

 

 

Net income
$
0.04

 
$
0.04

 
$
0.15

 
$
0.07

Weighted average shares — basic
210,129

 
216,630

 
210,516

 
216,599

Weighted average shares — diluted
210,362

 
216,766

 
210,687

 
216,753

Dividends declared per common share
$
0.080

 
$
0.080

 
$
0.160

 
$
0.160


See accompanying notes.

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COUSINS PROPERTIES INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY
Six Months Ended June 30, 2016 and 2015
(unaudited, in thousands)


 
 
Common
Stock
 
Additional
Paid-In
Capital
 
Treasury
Stock
 
Distributions in
Excess of
Net Income
 
Stockholders’
Investment
 
Nonredeemable
Noncontrolling
Interests
 
Total
Equity
Balance December 31, 2015
 
$
220,256

 
$
1,722,224

 
$
(134,630
)
 
$
(124,435
)
 
$
1,683,415

 
$

 
$
1,683,415

Net income
 

 

 


 
30,561

 
30,561

 

 
30,561

Common stock issued pursuant to stock based compensation
 
258

 
81

 

 

 
339

 

 
339

Amortization of stock options and restricted stock, net of forfeitures
 
(13
)
 
826

 

 

 
813

 

 
813

Contributions from nonredeemable noncontrolling interests
 

 

 

 

 

 
1,473

 
1,473

Repurchase of common stock
 

 

 
(13,743
)
 

 
(13,743
)
 

 
(13,743
)
Common dividends ($0.16 per share)
 

 

 

 
(33,728
)
 
(33,728
)
 

 
(33,728
)
Balance June 30, 2016
 
$
220,501

 
$
1,723,131

 
$
(148,373
)
 
$
(127,602
)
 
$
1,667,657

 
$
1,473

 
$
1,669,130

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance December 31, 2014
 
$
220,083

 
$
1,720,972

 
$
(86,840
)
 
$
(180,757
)
 
$
1,673,458

 
$

 
$
1,673,458

Net income
 

 

 

 
15,155

 
15,155

 

 
15,155

Common stock issued pursuant to stock based compensation
 
173

 
(244
)
 

 

 
(71
)
 

 
(71
)
Amortization of stock options and restricted stock, net of forfeitures
 

 
808

 

 

 
808

 

 
808

Common dividends ($0.16 per share)
 

 

 

 
(34,677
)
 
(34,677
)
 

 
(34,677
)
Other
 

 
24

 

 

 
24

 

 
24

Balance June 30, 2015
 
$
220,256

 
$
1,721,560

 
$
(86,840
)
 
$
(200,279
)
 
$
1,654,697

 
$

 
$
1,654,697

See accompanying notes.

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COUSINS PROPERTIES INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited, in thousands)


 
Six Months Ended June 30,
 
2016
 
2015
Cash flows from operating activities:
 
 
 
Net income
$
30,561

 
$
15,155

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
(Gain) loss on sale of investment properties, including discontinued operations
(13,944
)
 
21

Depreciation and amortization, including discontinued operations
64,350

 
70,381

Amortization of deferred financing costs
699

 
716

Stock-based compensation expense, net of forfeitures
1,153

 
808

Effect of certain non-cash adjustments to rental revenues
(9,656
)
 
(15,047
)
Income from unconsolidated joint ventures
(3,618
)
 
(3,372
)
Operating distributions from unconsolidated joint ventures
4,209

 
1,820

Changes in other operating assets and liabilities:
 
 
 
Change in other receivables and other assets, net
(5,188
)
 
(10,106
)
Change in operating liabilities
(8,472
)
 
(15,311
)
Net cash provided by operating activities
60,094

 
45,065

Cash flows from investing activities:
 
 
 
Proceeds from investment property sales
21,088

 
9,164

Property acquisition, development, and tenant asset expenditures
(75,594
)
 
(73,344
)
Investment in unconsolidated joint ventures
(22,281
)
 
(3,443
)
Distributions from unconsolidated joint ventures
4,099

 
1,649

Change in notes receivable and other assets

 
772

Change in restricted cash
(876
)
 
(652
)
Net cash used in investing activities
(73,564
)
 
(65,854
)
Cash flows from financing activities:
 
 
 
Proceeds from credit facility
163,700

 
114,100

Repayment of credit facility
(100,700
)
 
(52,300
)
Repayment of notes payable
(4,589
)
 
(4,371
)
Common stock issued, net of expenses

 
9

Contributions from noncontrolling interests
1,473

 

Repurchase of common stock
(13,743
)
 

Common dividends paid
(33,728
)
 
(34,677
)
Net cash provided by financing activities
12,413

 
22,761

Net increase in cash and cash equivalents
(1,057
)
 
1,972

Cash and cash equivalents at beginning of period
2,003

 

Cash and cash equivalents at end of period
$
946

 
$
1,972

 
 
 
 
Interest paid, net of amounts capitalized
$
14,131

 
$
15,477

 
 
 
 
Significant non-cash transactions:
 
 
 

Change in accrued property acquisition, development, and tenant asset expenditures
$
3,891

 
$
416

Transfer from investment in unconsolidated joint ventures to projects under development
5,880

 

Transfer from operating properties to real estate assets and other assets held for sale

 
86,775

Transfer from operating properties to liabilities of real estate assets held for sale

 
3,132


See accompanying notes.

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COUSINS PROPERTIES INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2016
(Unaudited)
1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
Cousins Properties Incorporated (“Cousins”), a Georgia corporation, is a self-administered and self-managed real estate investment trust (“REIT”). Cousins TRS Services LLC ("CTRS") is a taxable entity wholly owned by and consolidated with Cousins. CTRS owns and manages its own real estate portfolio and performs certain real estate related services for other parties. All of the entities included in the condensed consolidated financial statements are hereinafter referred to collectively as the "Company."
The Company develops, acquires, leases, manages, and owns primarily Class A office assets and opportunistic mixed-use properties in Sunbelt markets with a focus on Georgia, Texas, and North Carolina. Cousins has elected to be taxed as a real estate investment trust (“REIT”) and intends to, among other things, distribute 90% of its net taxable income to stockholders, thereby eliminating any liability for federal income taxes under current law. Therefore, the results included herein do not include a federal income tax provision for Cousins.
The condensed consolidated financial statements are unaudited and were prepared by the Company in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and in accordance with the rules and regulations of the Securities and Exchange Commission (“SEC”). In the opinion of management, these financial statements reflect all adjustments necessary (which adjustments are of a normal and recurring nature) for the fair presentation of the Company's financial position as of June 30, 2016 and the results of operations for the three and six months ended June 30, 2016 and 2015. The results of operations for the three and six months ended June 30, 2016 are not necessarily indicative of results expected for the full year. Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to the rules and regulations of the SEC. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2015. The accounting policies employed are substantially the same as those shown in note 2 to the consolidated financial statements included in such Form 10-K.
For the three and six months ended June 30, 2016 and 2015, there were no items of other comprehensive income. Therefore, no presentation of comprehensive income is required.
The Company evaluates all partnerships, joint ventures and other arrangements with variable interests to determine if the entity or arrangement qualifies as a variable interest entity (“VIE”), as defined in the Financial Accounting Standards Board's ("FASB") Accounting Standards Codification ("ASC"). If the entity or arrangement qualifies as a VIE and the Company is determined to be the primary beneficiary, the Company is required to consolidate the assets, liabilities, and results of operations of the VIE. In the first quarter of 2016, the Company adopted Accounting Standards Update ("ASU") 2015-02, "Amendments to the Consolidation Analysis." There were no changes to the accounting treatment of joint ventures or other arrangements as a result of the new guidance.
In March 2016, the FASB issued ASU 2016-09, "Improvements to Employee Share-Based Payment Accounting." Under this ASU, the additional paid-in capital pool is eliminated, and an entity recognizes all excess tax benefits and tax deficiencies as income tax expense or benefit in the income statement. This ASU also eliminated the requirement to defer recognition of an excess tax benefit until all benefits are realized through a reduction to taxes payable. This ASU also changes the treatment of excess tax benefits as operating cash flows in the statement of cash flows. This ASU is effective for fiscal years beginning after December 15, 2016 with early adoption permitted. The Company expects to adopt this guidance effective January 1, 2017, and is currently assessing the potential impact of adopting the new guidance.
In February 2016, the Financial Accounting Standards Board issued ASU 2016-02, "Leases," which amends the existing standards for lease accounting by requiring lessees to recognize most leases on their balance sheets and making targeted changes to lessor accounting and reporting. The new standard will require lessees to record a right-of-use asset and a lease liability for all leases with a term of greater than 12 months and classify such leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase of the leased asset by the lessee. This classification will determine whether the lease expense is recognized based on an effective interest method (finance leases) or on a straight-line basis over the term of the lease (operating leases). Leases with a term of 12 months or less will be accounted for similar to existing guidance for operating leases. The new standard requires lessors to account for leases using an approach that is substantially equivalent to existing guidance for sales-type leases, direct financing leases and operating leases. ASU 2016-02 supersedes previous leasing standards.  The guidance is effective for the fiscal years beginning after December 15, 2018 with early adoption permitted. The Company expects to adopt this guidance effective January 1, 2019, and is currently assessing the potential impact of adopting the

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new guidance. The impact of the adoption of this new guidance, if any, will be recorded retrospectively to all financial statements presented.
In May 2014, the FASB issued ASU 2014-09, "Revenue from Contracts with Customers." Under the new guidance, companies will recognize revenue when the seller satisfies a performance obligation, which would be when the buyer takes control of the good or service. This new guidance could result in different amounts of revenue being recognized and could result in revenue being recognized in different reporting periods than under the current guidance. The new guidance specifically excludes revenue associated with lease contracts. ASU 2015-14, "Revenue from Contracts with Customers," was subsequently issued modifying the effective date to periods beginning after December 15, 2017, with early adoption permitted for periods beginning after December 15, 2016. The standard allows for either "full retrospective" adoption, meaning the standard is applied to all of the periods presented, or "modified retrospective" adoption, meaning the standard is applied only to the most recent period presented in the financial statements. The Company is currently assessing this guidance for future implementation and potential impact of adoption. The Company expects to adopt this guidance effective January 1, 2018.
In the first quarter of 2016, the Company adopted ASU 2015-03, "Simplifying the Presentation of Debt Costs" ("ASU 2015-03"). In accordance with ASU 2015-03, the Company began recording deferred financing costs related to its mortgage notes payable as a reduction in the carrying amount of its notes payable on the condensed consolidated balance sheets. The Company reclassified $2.5 million in deferred financing costs from other assets to notes payable in its December 31, 2015 consolidated balance sheet to conform to the current period's presentation. Deferred financing costs related to the Company’s unsecured revolving credit facility continue to be included in other assets within the Company’s balance sheets in accordance with ASU 2015-15 "Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements."
Certain prior year amounts have been reclassified to conform with current year presentation on the condensed consolidated statements of operations and the condensed consolidated statements of equity. Separation expenses on the condensed consolidated statements of operations are now included in general and administrative expenses. On the condensed consolidated statements of equity, all components of common stock issued pursuant to stock based compensation are aggregated into one line item. These changes do not affect the previously reported condensed consolidated statements of operations or the condensed consolidated statements of equity for any period.
2. MERGER WITH PARKWAY PROPERTIES, INC.

On April 28, 2016, the Company and Parkway Properties, Inc. (“Parkway”) entered into an Agreement and Plan of Merger (the “Merger Agreement”), pursuant to which Parkway will merge with and into Clinic Sub Inc., a wholly owned subsidiary of the Company (the “Merger”). In addition, the Merger Agreement provides that the Company will separate the portion of the combined businesses relating to the ownership of real properties in Houston (the "Spin-Off") from the remainder of the combined business by distributing pro rata to its stockholders all of the outstanding shares of common stock to Parkway, Inc. The Company will retain all of the shares of a class of non-voting preferred stock of Parkway, Inc. upon the terms and subject to the conditions of the Merger Agreement. The Company expects that the Spin-Off will be treated for tax purposes as a distribution to the Company’s stockholders equal to the fair market value of the distributed Parkway, Inc. shares. After the Spin-Off, Parkway, Inc. will be a separate, publicly-traded entity, and both the Company and Parkway, Inc. intend to operate prospectively as umbrella partnership real estate investment trusts (“UPREITs”).     

Pursuant to the Merger Agreement, upon closing of the Merger, each share of Parkway common stock issued and outstanding will convert into the right to receive 1.63 (the “Exchange Ratio”) shares of newly issued shares of common stock, par value $1 per share, of the Company. In addition, each share of Parkway limited voting stock will be converted into the right to receive a number of newly issued shares of limited voting preferred stock of the Company, equal to the Exchange Ratio, having terms materially unchanged from the terms of the Parkway limited voting stock prior to the Merger. Each share of Parkway equity-based compensation awards will also be converted at the Exchange Ratio into equity awards of the Company. Limited partnership units of Parkway LP, Parkway’s umbrella partnership, will be entitled to redeem or exchange their partnership interest for the Company’s common stock at the Exchange Ratio.

The respective boards of directors (the “Board of Directors”) of the Company and Parkway have unanimously approved the Merger Agreement and have recommended that their respective stockholders approve the Merger.

The closing of the Merger is subject to certain conditions, including: (1) the receipt of Parkway Stockholder Approval; (2) the receipt of Company Stockholder Approval; (3) the Spin-Off being fully ready to be consummated contemporaneously with the Merger; (4) approval for listing on the New York Stock Exchange (“NYSE”) of the Company common stock to be issued in the Merger or reserved for issuance in connection therewith; (5) no injunction or law prohibiting the Merger; (6) accuracy of each party’s representations, subject in most cases to materiality or material adverse effect qualifications; (7) material compliance with each party’s covenants; (8) receipt by each of the Company and Parkway of an opinion to the effect that the Merger will qualify as a “reorganization” within the meaning of Section 368(a) of the Internal Revenue Code of 1986, as amended (the

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“Code”), and of an opinion that each of the Company and Parkway will qualify as a real estate investment trust (“REIT”) under the Code; and (9) effectiveness of the registration statement that will contain the joint proxy statement/prospectus sent to Company and Parkway stockholders.

The Merger Agreement contains customary representations and warranties by each party. The Company and Parkway have also agreed to various customary covenants and agreements, including, among others, to conduct their business in the ordinary course consistent with past practice during the period between the execution of the Merger Agreement and the date of closing, and to not engage in certain kinds of transactions during this period and to maintain REIT status. The parties are subject to a customary “no-shop” provision that requires them to cease discussions or solicitations with respect to alternate transactions and subjects them to certain restrictions in considering and negotiating alternate transactions.

Additionally, Parkway has agreed to use commercially reasonable efforts to sell certain of its properties prior to the closing date, upon the terms and subject to the conditions of the Merger Agreement. The Company and Parkway have also agreed that, prior to the closing, each may continue to pay their regular quarterly dividends, but may not increase the amounts, except to the extent required to maintain REIT status. The parties will coordinate record and payment dates for all pre-closing dividends.

The Merger Agreement provides that, at the effective time of the Merger, the Board of Directors of the Company will consist of nine members, including five individuals to be selected by the current members of the Board of Directors of the Company and four individuals to be selected by the current members of the Board of Directors of Parkway. One of Parkway’s four directors will be selected by TPG Pantera VI (“TPG”) and TPG Management (collectively with TPG, the “TPG Parties”), pursuant to the TPG Parties’ stockholders agreement entered into with the Company.
The Merger Agreement contains certain termination rights for the Company and Parkway. The Merger Agreement can be terminated by either party (1) by mutual written consent; (2) if the Merger has not been consummated by an outside date of December 31, 2016 (which either party may extend to March 31, 2017 if the only closing condition that has not been met is that related to the readiness of the Spin-Off ); (3) if there is a permanent, non-appealable injunction or law restraining or prohibiting the consummation of the Merger; (4) if either party’s stockholders fail to approve the transactions; (5) if the other party’s Board of Directors changes its recommendation in favor of the transactions; (6) if the other party has materially breached its non-solicit covenant, subject to a cure period; (7) in order to enter into a superior proposal (as defined in the Merger Agreement, subject to compliance with certain terms and conditions included in the Merger Agreement); or (8) if the other party has breached its representations or covenants in a way that prevents satisfaction of a closing condition, subject to a cure period.
If the Merger Agreement is terminated because (1) a party’s Board of Directors changes its recommendation in favor of the transactions contemplated by the Merger Agreement; (2) a party terminates the agreement to enter into a superior proposal; (3) a party breaches its non-solicit covenant; or (4) a party consummates or enters into an agreement for an alternative transaction within twelve months following termination under certain circumstances, such party must pay a termination fee of the lesser of $65 million or the maximum amount that could be paid to the other party without causing it to fail to meet the REIT requirements for such year. The Merger Agreement also provides that a party must pay the other party an expense reimbursement of the lesser of $20 million and the maximum amount that can be paid to the other party without causing it to fail to meet the REIT requirements for such year, if the Merger Agreement is terminated because such party’s stockholders vote against the transactions contemplated by the Merger Agreement. Any unpaid amount of the foregoing fees (due to limitations of REIT requirements) will be escrowed and paid out over a five-year period. The expense reimbursement will be set off against the termination fee if the termination fee later becomes payable.
In connection with the proposed transaction, Cousins has filed an amended registration statement on Form S-4 (File No. 333-211849), declared effective by the SEC on July 22, 2016, that includes a joint proxy statement of Cousins and Parkway that also constitutes a prospectus of Cousins.
The Merger and Spin-Off are currently anticipated to close in the fourth quarter of 2016. During the three months ended June 30, 2016, the Company incurred $2.4 million in merger-related expenses.
3. REAL ESTATE TRANSACTIONS

During the first quarter of 2016, the Company sold 100 North Point Center East, a 129,000 square foot office building in Atlanta, Georgia for a gross sales price of $22.0 million.
4. INVESTMENT IN UNCONSOLIDATED JOINT VENTURES

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The Company describes its investments in unconsolidated joint ventures in note 5 of notes to consolidated financial statements in its Annual Report on Form 10-K for the year ended December 31, 2015. The following table summarizes balance sheet data of the Company's unconsolidated joint ventures as of June 30, 2016 and December 31, 2015 (in thousands):
 
Total Assets
 
Total Debt
 
Total Equity
 
Company’s Investment
 
SUMMARY OF FINANCIAL POSITION:
2016
 
2015
 
2016
 
2015
 
2016
 
2015
 
2016
 
2015
 
Terminus Office Holdings
$
273,890

 
$
277,444

 
$
209,588

 
$
211,216

 
$
51,466

 
$
56,369

 
$
26,631

 
$
29,110

 
EP I LLC
81,838

 
83,115

 
58,030

 
58,029

 
21,716

 
24,172

 
20,218

 
21,502

 
EP II LLC
68,926

 
70,704

 
44,494

 
40,910

 
22,913

 
24,331

 
18,144

 
19,118

 
Carolina Square Holdings LP
34,386

 
15,729

 

 

 
27,890

 
12,085

 
16,874

 
6,782

 
Charlotte Gateway Village, LLC
121,452

 
123,531

 
8,099

 
17,536

 
110,502

 
104,336

 
11,190

 
11,190

 
HICO Victory Center LP
13,661

 
13,532

 

 

 
13,656

 
13,229

 
9,365

 
9,138

 
DC Charlotte Plaza LLLP
14,293

 

 

 

 
13,754

 

 
7,376

 

 
CL Realty, L.L.C.
7,829

 
7,872

 

 

 
7,726

 
7,662

 
3,560

 
3,515

 
Temco Associates, LLC
5,311

 
5,284

 

 

 
5,192

 
5,133

 
1,097

 
977

 
Wildwood Associates
16,337

 
16,419

 

 

 
16,298

 
16,354

 
(1,150
)
(1)
(1,122
)
(1)
Crawford Long - CPI, LLC
29,405

 
29,143

 
73,561

 
74,286

 
(46,516
)
 
(46,238
)
 
(22,160
)
(1)
(22,021
)
(1)
Other

 
2,107

 

 

 

 
1,646

 

 
1,245

 
 
$
667,328

 
$
644,880

 
$
393,772

 
$
401,977

 
$
244,597

 
$
219,079

 
$
91,145

 
$
79,434

 
(1) Negative balances are included in deferred income on the balance sheets.
The following table summarizes statement of operations information of the Company's unconsolidated joint ventures for the six months ended June 30, 2016 and 2015 (in thousands):
 
Total Revenues
 
Net Income (Loss)
 
Company's Share of Income (Loss)
SUMMARY OF OPERATIONS:
2016
 
2015
 
2016
 
2015
 
2016
 
2015
Terminus Office Holdings
$
20,978

 
$
19,638

 
$
2,597

 
$
1,139

 
$
1,298

 
$
570

EP I LLC
5,991

 
6,218

 
1,168

 
1,480

 
951

 
1,112

EP II LLC
2,044

 

 
(1,018
)
 

 
(823
)
 

Charlotte Gateway Village, LLC
17,477

 
16,913

 
7,263

 
6,225

 
987

 
589

HICO Victory Center LP
169

 

 
162

 

 
81

 

CL Realty, L.L.C.
246

 
469

 
64

 
243

 
44

 
130

DC Charlotte Plaza LLLP

 

 
33

 

 
18

 

Temco Associates, LLC
147

 
1,144

 
79

 
435

 
119

 
242

Wildwood Associates

 

 
(56
)
 
(58
)
 
(28
)
 
(30
)
Crawford Long - CPI, LLC
6,028

 
6,139

 
1,346

 
1,446

 
673

 
728

Other

 
12

 

 
(181
)
 
298

 
31

 
$
53,080

 
$
50,533

 
$
11,638

 
$
10,729

 
$
3,618

 
$
3,372

On March 29, 2016, a 50-50 joint venture named DC Charlotte Plaza LLLP was formed between the Company and Dimensional Fund Advisors ("DFA") for the purpose of developing and constructing DFA's 229,000 square foot regional headquarters building in Charlotte, North Carolina. Each partner contributed $6.6 million in pre-development costs upon formation of the venture.
5. INTANGIBLE ASSETS
Intangible assets on the balance sheets as of June 30, 2016 and December 31, 2015 included the following (in thousands):
 
 
June 30, 2016
 
December 31, 2015
In-place leases, net of accumulated amortization of $100,111 and $88,035 in 2016 and 2015, respectively
 
$
100,648

 
$
112,937

Above-market tenant leases, net of accumulated amortization of $15,681 and $15,423 in 2016 and 2015, respectively
 
6,992

 
8,031

Goodwill
 
3,626

 
3,647

 
 
$
111,266

 
$
124,615


The following is a summary of goodwill activity for the six months ended June 30, 2016 and 2015 (in thousands):

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Six Months Ended June 30,
 
2016
 
2015
Beginning balance
$
3,647

 
$
3,867

Allocated to property sales
(21
)
 

Ending balance
$
3,626

 
$
3,867

6. OTHER ASSETS
Other assets on the balance sheets as of June 30, 2016 and December 31, 2015 included the following (in thousands):
 
 
June 30, 2016
 
December 31, 2015
Furniture, fixtures and equipment, deferred direct operating expenses, and leasehold improvements, net of accumulated depreciation of $24,168 and $22,572 in 2016 and 2015, respectively
 
$
14,087

 
$
13,523

Lease inducements, net of accumulated amortization of $7,637 and $6,865 in 2016 and 2015, respectively
 
12,519

 
13,306

Prepaid expenses and other assets
 
6,690

 
4,408

Line of credit deferred financing costs, net of accumulated amortization of $1,815 and $1,380 in 2016 and 2015, respectively
 
2,537

 
2,972

Predevelopment costs and earnest money
 
330

 
1,780

 
 
$
36,163

 
$
35,989


7. NOTES PAYABLE
The following table summarizes the Company's note payable balance at June 30, 2016 and December 31, 2015 ($ in thousands):
 
 
June 30, 2016
 
December 31, 2015
Notes payable
 
$
779,704

 
$
721,293

Less: deferred financing costs of mortgage debt, net of accumulated amortization of $2,272 and $2,008 in 2016 and 2015, respectively.
 
(2,219
)
 
(2,483
)
 
 
$
777,485

 
$
718,810

The following table details the terms and amounts of the Company’s outstanding notes payable at June 30, 2016 and December 31, 2015 ($ in thousands):
Description
 
Interest Rate
 
Maturity
 
June 30, 2016
 
December 31, 2015
Post Oak Central mortgage note
 
4.26
%
 
2020
 
$
180,046

 
$
181,770

Credit Facility, unsecured
 
1.54
%
 
2019
 
155,000

 
92,000

The American Cancer Society Center mortgage note
 
6.45
%
 
2017
 
128,440

 
129,342

Promenade mortgage note
 
4.27
%
 
2022
 
106,787

 
108,203

191 Peachtree Tower mortgage note
 
3.35
%
 
2018
 
99,677

 
100,000

816 Congress mortgage note
 
3.75
%
 
2024
 
85,000

 
85,000

Meridian Mark Plaza mortgage note
 
6.00
%
 
2020
 
24,754

 
24,978

 
 
 
 
 
 
$
779,704

 
$
721,293


Fair Value
At June 30, 2016 and December 31, 2015, the aggregate estimated fair values of the Company's notes payable were $807.5 million and $738.1 million, respectively, calculated by discounting the debt's remaining contractual cash flows at estimated rates at which similar loans could have been obtained at those respective dates. The estimate of the current market rate, which is the most significant input in the discounted cash flow calculation, is intended to replicate debt of similar maturity and loan-to-value

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relationship. These fair value calculations are considered to be Level 2 under the guidelines as set forth in ASC 820, "Fair Value Measurement," as the Company utilizes market rates for similar type loans from third-party brokers.
Other Information
For the three and six months ended June 30, 2016 and 2015, interest expense was as follows (in thousands):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2016
 
2015
 
2016
 
2015
 
Total interest incurred
$
8,350

 
$
8,683

 
$
16,506

 
$
17,263

 
Interest capitalized
(1,016
)
 
(814
)
 
(1,758
)
 
(1,717
)
 
Total interest expense
$
7,334

 
$
7,869

 
$
14,748

 
$
15,546

 
The real estate and other assets of The American Cancer Society Center (the “ACS Center”) are restricted under the ACS Center loan agreement as they are not available to settle debts of the Company. However, provided that the ACS Center loan has not incurred any uncured event of default, as defined in the loan agreement, the cash flows from the ACS Center, after payments of debt service, operating expenses, and reserves, are available for distribution to the Company.
8. COMMITMENTS AND CONTINGENCIES

Commitments
At June 30, 2016, the Company had outstanding letters of credit and performance bonds totaling $1.9 million. As a lessor, the Company had $79.5 million in future obligations under leases to fund tenant improvements as of June 30, 2016. As a lessee, the Company had future obligations under ground and office leases of $144.0 million as of June 30, 2016.
Litigation
The Company is subject to various legal proceedings, claims and administrative proceedings arising in the ordinary course of business, some of which are expected to be covered by liability insurance. Management makes assumptions and estimates concerning the likelihood and amount of any potential loss relating to these matters using the latest information available. The Company records a liability for litigation if an unfavorable outcome is probable and the amount of loss or range of loss can be reasonably estimated. If an unfavorable outcome is probable and a reasonable estimate of the loss is a range, the Company accrues the best estimate within the range. If no amount within the range is a better estimate than any other amount, the Company accrues the minimum amount within the range. If an unfavorable outcome is probable but the amount of the loss cannot be reasonably estimated, the Company discloses the nature of the litigation and indicates that an estimate of the loss or range of loss cannot be made. If an unfavorable outcome is reasonably possible and the estimated loss is material, the Company discloses the nature and estimate of the possible loss of the litigation. The Company does not disclose information with respect to litigation where an unfavorable outcome is considered to be remote or where the estimated loss would not be material. Based on current expectations, such matters, both individually and in the aggregate, are not expected to have a material adverse effect on the liquidity, results of operations, business or financial condition of the Company.

9.    STOCKHOLDERS' EQUITY
In 2015, the Board of Directors of the Company authorized the repurchase of up to $100 million of its outstanding common shares. The plan expires on September 8, 2017. The repurchases may be executed in the open market, through private negotiations, or in other transactions permitted under applicable law. The timing, manner, price, and amount of any repurchases will be determined by the Company in its discretion and will be subject to economic and market conditions, stock price, applicable legal requirements, and other factors. In March 2016, the program was suspended due to the pending merger with Parkway.
Under this plan, the Company repurchased 6.8 million shares of its common stock for a total cost of $61.5 million, including broker commissions. No shares were repurchased during the three months ended June 30, 2016. The share repurchases were funded from cash on hand, borrowings under the Company's Credit Facility, and proceeds from the sale of assets. The repurchased shares were recorded as treasury shares on the consolidated balance sheet.

10. STOCK-BASED COMPENSATION

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The Company has several types of stock-based compensation - stock options, restricted stock, and restricted stock units (“RSUs”) - which are described in note 12 of notes to consolidated financial statements in the Company's Annual Report on Form 10-K for the year ended December 31, 2015. The expense related to a portion of the stock-based compensation awards is fixed. The expense related to other stock-based compensation awards fluctuates from period to period dependent, in part, on the Company's stock price and stock performance relative to its peers. The Company recorded stock-based compensation expense, net of forfeitures, of $340,000 and $2.0 million for the three months ended June 30, 2016 and 2015, respectively, and $4.6 million and $1.9 million for the six months ended June 30, 2016 and 2015, respectively.
The Company maintains the 2009 Incentive Stock Plan (the "2009 Plan") and the 2005 Restricted Stock Unit Plan (the “RSU Plan”). Under the 2009 Plan, the Company made restricted stock grants in 2016 of 234,965 shares to key employees, which vest ratably over a three-year period. Under the RSU Plan, the Company awarded two types of performance-based RSUs to key employees based on the following metrics: (1) Total Stockholder Return of the Company, as defined in the RSU Plan, as compared to the companies in the SNL US REIT Office index (“TSR RSUs”), and (2) the ratio of cumulative funds from operations per share to targeted cumulative funds from operations per share (“FFO RSUs”) as defined in the RSU Plan. The performance period for both awards is January 1, 2016 to December 31, 2018, and the targeted units awarded of TSR RSUs and FFO RSUs is 214,151 and 97,797, 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 market and performance metrics described above. Both of these RSUs cliff vest on January 29, 2019 and are to be settled in cash with payment dependent on upon attainment of required service, market, 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, 2018. The Company expenses an estimate of the fair value of the TSR RSUs over the performance period using a quarterly Monte Carlo valuation. The FFO RSUs are expensed 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 the FFO RSUs will also be paid based upon the percentage vested.
In addition, during the three months ended June 30, 2016, the Company issued 72,771 shares of common stock at fair value to members of its board of directors in lieu of fees, and recorded $765,000 in general and administrative expense in the three months ended June 30, 2016 related to the issuances.
11. EARNINGS PER SHARE
Net income per share-basic is calculated as net income available to common stockholders divided by the weighted average number of common shares outstanding during the period, including nonvested restricted stock which has nonforfeitable dividend rights. Net income per share-diluted is calculated as net income available to common stockholders divided by the diluted weighted average number of common shares outstanding during the period. Diluted weighted average number of common shares uses the same weighted average share number as in the basic calculation and adds the potential dilution, if any, that would occur if stock options (or any other contracts to issue common stock) were exercised and resulted in additional common shares outstanding, calculated using the treasury stock method. Weighted average shares-basic and diluted for the three and six months ended June 30, 2016 and 2015, respectively, are as follows (in thousands):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2016
 
2015
 
2016
 
2015
 
Weighted average shares — basic
210,129

 
216,630

 
210,516

 
216,599

 
Dilutive potential common shares — stock options
233

 
136

 
171

 
154

 
Weighted average shares — diluted
210,362

 
216,766

 
210,687

 
216,753

 
Weighted average anti-dilutive stock options
1,129

 
1,553

 
1,131

 
1,553

 
Stock options are dilutive when the average market price of the Company's stock during the period exceeds the option exercise price. In periods where the Company is in a net loss position, the dilutive effect of stock options is not included in the diluted weighted average shares total.
Anti-dilutive stock options represent stock options which are outstanding but which are not exercisable during the period because the exercise price exceeded the average market value of the Company's stock. These anti-dilutive stock options are not included in the current calculation of dilutive weighted average shares but could be dilutive in the future.

12. REPORTABLE SEGMENTS
The Company's segments are based on the Company's method of internal reporting which classifies operations by property type and geographical area. The segments by property type are: Office, Mixed Use, and Other. The segments by geographical

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region are: Atlanta, Houston, Austin, Charlotte, and Other. These reportable segments represent an aggregation of operating segments reported to the Chief Operating Decision Maker based on similar economic characteristics that include the type of property and the geographical location. Prior period information has been revised to reflect the change in segment reporting as described in the Annual Report on Form 10-K for the year ended December 31, 2015. Each segment includes both consolidated operations and the Company's share of joint venture operations.
Company management evaluates the performance of its reportable segments in part based on net operating income (“NOI”). NOI represents rental property revenues less rental property operating expenses. NOI is not a measure of cash flows or operating results as measured by GAAP, is not indicative of cash available to fund cash needs and should not be considered an alternative to cash flows as a measure of liquidity. All companies may not calculate NOI in the same manner. The Company considers NOI to be an appropriate supplemental measure to net income as it helps both management and investors understand the core operations of the Company's operating assets. NOI excludes corporate general and administrative expenses, interest expense, depreciation and amortization, impairments, gains/loss on sales of real estate, and other non-operating items.
Segment net income, amount of capital expenditures, and total assets are not presented in the following tables because management does not utilize these measures when analyzing its segments or when making resource allocation decisions. Information on the Company's segments along with a reconciliation of NOI to net income available to common stockholders is as follows (in thousands):
Three Months Ended June 30, 2016
 
Office
 
Mixed-Use
 
Other
 
Total
Net Operating Income:
 
 
 
 
 
 
 
 
Houston
 
$
25,125

 
$

 
$

 
$
25,125

Atlanta
 
21,572

 
1,742

 

 
23,314

Austin
 
5,763

 

 

 
5,763

Charlotte
 
4,819

 

 

 
4,819

Other
 
(4
)
 

 
(9
)
 
(13
)
Total Net Operating Income (Loss)
 
$
57,275

 
$
1,742

 
$
(9
)
 
$
59,008

 
 
 
 
 
 
 
 
 
Net operating income from unconsolidated joint ventures
 
 
 
 
 
 
 
(6,954
)
Fee income
 
 
 
 
 
 
 
1,824

Other income
 
 
 
 
 
 
 
129

Reimbursed expenses
 
 
 
 
 
 
 
(798
)
General and administrative expenses
 
 
 
 
 
 
 
(4,691
)
Interest expense
 
 
 
 
 
 
 
(7,334
)
Depreciation and amortization
 
 
 
 
 
 
 
(32,381
)
Other expenses
 
 
 
 
 
 
 
(2,576
)
Income from unconsolidated joint ventures
 
 
 
 
 
 
 
1,784

Loss on sale of investment properties
 
 
 
 
 
 
 
(246
)
Net income
 
 
 
 
 
 
 
$
7,765




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Three Months Ended June 30, 2015
 
Office
 
Mixed-Use
 
Other
 
Total
Net Operating Income:
 
 
 
 
 
 
 
 
Houston
 
$
25,432

 
$

 
$

 
$
25,432

Atlanta
 
23,272

 
1,499

 
6

 
24,777

Austin
 
3,914

 

 

 
3,914

Charlotte
 
4,011

 

 

 
4,011

Other
 
2,640

 

 

 
2,640

Total Net Operating Income
 
$
59,269

 
$
1,499

 
$
6

 
60,774

 
 
 
 
 
 
 
 
 
Net operating income from unconsolidated joint ventures
 
 
 
 
 
 
 
(5,984
)
Fee income
 
 
 
 
 
 
 
1,704

Other income
 
 
 
 
 
 
 
22

Reimbursed expenses
 
 
 
 
 
 
 
(717
)
General and administrative expenses
 
 
 
 
 
 
 
(5,936
)
Interest expense
 
 
 
 
 
 
 
(7,869
)
Depreciation and amortization
 
 
 
 
 
 
 
(34,879
)
Other expenses
 
 
 
 
 
 
 
(343
)
Income from unconsolidated joint ventures
 
 
 
 
 
 
 
1,761

Loss from discontinued operations
 
 
 
 
 
 
 
(6
)
Loss on sale of investment properties
 
 
 
 
 
 
 
(576
)
Net income
 
 
 
 
 
 
 
$
7,951


Six Months Ended June 30, 2016
 
Office
 
Mixed-Use
 
Other
 
Total
Net Operating Income:
 
 
 
 
 
 
 
 
Houston
 
$
50,443

 
$

 
$

 
$
50,443

Atlanta
 
44,178

 
3,348

 

 
47,526

Austin
 
10,955

 

 

 
10,955

Charlotte
 
9,574

 

 

 
9,574

Other
 
8

 

 
15

 
23

Total Net Operating Income
 
$
115,158

 
$
3,348

 
$
15

 
118,521

 
 
 
 
 
 
 
 
 
Net operating income from unconsolidated joint ventures
 
 
 
 
 
 
 
(13,600
)
Fee income
 
 
 
 
 
 
 
4,023

Other income
 
 
 
 
 
 
 
705

Reimbursed expenses
 
 
 
 
 
 
 
(1,668
)
General and administrative expenses
 
 
 
 
 
 
 
(13,183
)
Interest expense
 
 
 
 
 
 
 
(14,748
)
Depreciation and amortization
 
 
 
 
 
 
 
(64,350
)
Other expenses
 
 
 
 
 
 
 
(2,701
)
Income from unconsolidated joint ventures
 
 
 
 
 
 
 
3,618

Gain on sale of investment properties
 
 
 
 
 
 
 
13,944

Net income
 
 
 
 
 
 
 
$
30,561




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Table of Contents


Six Months Ended June 30, 2015
 
Office
 
Mixed-Use
 
Other
 
Total
Net Operating Income:
 
 
 
 
 
 
 
 
Houston
 
$
50,510

 
$

 
$

 
$
50,510

Atlanta
 
46,635

 
2,851

 
6

 
49,492

Austin
 
6,100

 

 

 
6,100

Charlotte
 
7,954

 

 

 
7,954

Other
 
4,796

 

 
(25
)
 
4,771

Total Net Operating Income
 
$
115,995

 
$
2,851

 
$
(19
)
 
118,827

 
 
 
 
 
 
 
 
 
Net operating income from unconsolidated joint ventures
 
 
 
 
 
 
 
(11,970
)
Fee income
 
 
 
 
 
 
 
3,520

Other income
 
 
 
 
 
 
 
143

Reimbursed expenses
 
 
 
 
 
 
 
(1,828
)
General and administrative expenses
 
 
 
 
 
 
 
(9,533
)
Interest expense
 
 
 
 
 
 
 
(15,546
)
Depreciation and amortization
 
 
 
 
 
 
 
(71,026
)
Other expenses
 
 
 
 
 
 
 
(783
)
Income from unconsolidated joint ventures
 
 
 
 
 
 
 
3,372

Loss from sale of discontinued operations
 
 
 
 
 
 
 
(551
)
Gain on sale of investment properties
 
 
 
 
 
 
 
530

Net income
 
 
 
 
 
 
 
$
15,155


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Item 2.    Management's Discussion and Analysis of Financial Condition and Results of Operations
Overview:
Cousins Properties Incorporated (and collectively, with its subsidiaries, the "Company," "we," "our," or "us") is a self-administered and self-managed real estate investment trust, or REIT. Our core focus is on the acquisition, development, leasing, management, and ownership of Class-A office assets and opportunistic mixed-use properties in Sunbelt markets with a focus on Georgia, Texas, and North Carolina. As of June 30, 2016, our portfolio of real estate assets consisted of interests in 15 operating office properties containing 14.6 million square feet of space, two operating mixed-use properties containing 786,000 square feet of space, and three projects (two office and one mixed-use) under active development. We have a comprehensive strategy in place based on a simple platform, trophy assets and opportunist investments. This streamlined approach enables us to maintain a targeted, asset specific approach to investing where we seek to leverage our development skills, relationships, market knowledge, and operational expertise. We intend to generate returns and create value for stockholders through the continued lease up of our portfolio, through the execution of our development pipeline, and through opportunistic investments in office and mixed-use projects within our core markets.
We leased or renewed 402,213 square feet of office space during the second quarter of 2016. The weighted average net effective rent of these leases, representing base rent less operating expense reimbursements and leasing costs, was $15.65 per square foot. For those leases that were previously occupied within the past year, net effective rent increased 17.2%. Same property net operating income increased by 1.4% between the three months ended June 30, 2016 and 2015.
On April 28, 2016, we entered into a merger agreement with Parkway Properties, Inc. (“Parkway”) whereby we will combine the operations of our two companies and simultaneously spin-off the operations of our combined Houston properties into a separate public company.  We believe that these transactions will result in a high quality portfolio of Class A office towers in the high growth Sun Belt markets.  These transactions will result in a more diversified portfolio both geographically and in our customer base and will position us to enhance our flexibility to meet customer space needs and allow us to attract and retain quality local market talent that, over time, will drive customer retention and occupancy.  In addition, by creating two independent public real estate companies with differentiated assets and strategies, we believe that investors will realize greater transparency into the assets and operations of each company.  We expect the transactions to close in the fourth quarter of 2016.

Results of Operations
The following is based on our condensed consolidated statements of operations for the three and six months ended June 30, 2016 and 2015:
Rental Property Revenues and Rental Property Operating Expenses
The following results include the performance of our Same Property portfolio. Our Same Property portfolio includes office properties that have been fully operational in each of the comparable reporting periods. A fully operational property is one that has achieved 90% economic occupancy for each of the periods presented or has been substantially complete and owned by us for each of the periods presented. Same Property amounts for the 2016 versus 2015 comparison are from properties that have been owned since January 1, 2015 through the end of the current reporting period, excluding dispositions. This information includes revenues and expenses of only consolidated properties.
Rental property revenues and rental property operating expenses changed as follows:

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Three Months Ended June 30,
 
Six Months Ended June 30,
 
2016
 
2015
 
$ Change
 
% Change
 
2016
 
2015
 
$ Change
 
% Change
Rental Property Revenues
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Same Property
$
69,817

 
$
70,198

 
$
(381
)
 
(0.5
)%
 
$
138,442

 
$
137,280

 
$
1,162

 
0.8
 %
Non-Same Property
20,918

 
25,979

 
(5,061
)
 
(19.5
)%
 
40,769

 
48,936

 
(8,167
)
 
(16.7
)%
Total Rental Property Revenues
$
90,735

 
$
96,177

 
$
(5,442
)
 
(5.7
)%
 
$
179,211

 
$
186,216

 
$
(7,005
)
 
(3.8
)%
 
 
 
 
 
 
 

 
 
 
 
 
 
 
 
Rental Property Operating Expenses
 
 
 
 
 
 

 
 
 
 
 
 
 
 
Same Property
$
30,396

 
$
30,849

 
$
(453
)
 
(1.5
)%
 
$
58,762

 
$
59,337

 
$
(575
)
 
(1.0
)%
Non-Same Property
8,285

 
10,538

 
(2,253
)
 
(21.4
)%
 
15,528

 
20,003

 
(4,475
)
 
(22.4
)%
Total Rental Property Operating Expenses
$
38,681

 
$
41,387

 
$
(2,706
)
 
(6.5
)%
 
$
74,290

 
$
79,340

 
$
(5,050
)
 
(6.4
)%
 
 
 
 
 
 
 

 
 
 
 
 
 
 
 
Same Property, net
$
39,421


$
39,349

 
$
72

 
0.2
 %
 
$
79,680

 
$
77,943

 
$
1,737

 
2.2
 %
Non-Same Property, net
12,633


15,441

 
(2,808
)
 
(18.2
)%
 
25,241

 
28,933

 
(3,692
)
 
(12.8
)%
Total, net
$
52,054


$
54,790

 
$
(2,736
)
 
(5.0
)%
 
$
104,921

 
$
106,876

 
$
(1,955
)
 
(1.8
)%
Same property revenues increased between the six months ended June 30, 2016 and 2015 periods due to increased occupancy rates at 816 Congress and increased rental revenues at 191 Peachtree Tower. Non-same property revenues and expenses decreased between the six months ended June 30, 2016 and 2015 periods due to the sales of 2100 Ross, The Points at Waterview, and the North Point Center East buildings.
General and Administrative Expenses
General and administrative expenses decreased $1.2 million (21%) between the three month periods, and increased $3.7 million (38%) between the six month periods. Long-term incentive compensation expense decreased $1.6 million in the three month period and increased $2.8 million in the six month period due to fluctuations in our common stock price relative to our office peers included in the SNL US Office REIT Index. These differences were offset by an increase in expense resulting from a decrease in capitalized salaries in each of the three and six month periods.
Interest Expense
Interest expense, net of amounts capitalized, decreased $535,000 and $798,000 between the three and six months ended June 30, 2016 and 2015, respectively, primarily due an increase in interest capitalized to projects under development and to the repayment of The Points at Waterview mortgage loan in October 2015.
Depreciation and Amortization
Depreciation and amortization decreased $2.5 million (7%) and $6.7 million (9%) between the three and six month 2016 and 2015 periods, respectively. The decreases related to the dispositions of 2100 Ross, The Points at Waterview, and three North Point Center East buildings in the second half of 2015. In addition, there were decreases related to extensions of useful lives of tenant assets as a result of lease modifications at Greenway Plaza, 816 Congress, and Northpark. These decreases were offset by an increase in depreciation expense at Colorado Tower which commenced operations in 2015.
Acquisition and Merger Costs
Acquisition and merger costs increased $2.4 million in both the three and six month 2016 and 2015 periods due to costs related to the pending merger with Parkway Properties, Inc.
Income from Unconsolidated Joint Ventures
Income from unconsolidated joint ventures consisted of the following during the three and six month periods as follows (in thousands):

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Three Months Ended June 30,
 
Six Months Ended June 30,
 
2016
 
2015
 
$ Change
 
2016
 
2015
 
$ Change
Property operations, net
$
6,954

 
$
5,984

 
$
970

 
$
13,600

 
$
11,970

 
1,630

Other income, net
87

 
376

 
(289
)
 
541

 
566

 
(25
)
Depreciation and amortization
(3,231
)
 
(2,772
)
 
(459
)
 
(6,490
)
 
(5,515
)
 
(975
)
Interest expense
(2,026
)
 
(1,827
)
 
(199
)
 
(4,033
)
 
(3,649
)
 
(384
)
Income from unconsolidated joint ventures
$
1,784

 
$
1,761

 
$
23

 
$
3,618

 
$
3,372

 
$
246

 
 
 
 
 
 
 
 
 
 
 
 
Rental property revenues less rental property operating expenses from unconsolidated joint ventures increased between the three and six month 2016 and 2015 periods primarily due to increased occupancy at Terminus 100 and increased parking revenue at Gateway Village. The increase in depreciation and amortization is due to the commencement of operations at Emory Point II during the third quarter of 2015.
Gain on Sale of Investment Properties
Gain on sale of investment properties increased $13.4 million between the six month 2016 and 2015 periods. This increase is primarily due to $14.2 million gain recognized on the sale of 100 North Point Center East in the first quarter of 2016.
Discontinued Operations
In April 2014, the Financial Accounting Standards Board issued new guidance on discontinued operations. Under the new guidance, only assets held for sale and disposals representing a major strategic shift in operations will be presented as discontinued operations. We adopted this new standard in the second quarter of 2014. Therefore, the properties sold subsequently are not reflected as discontinued operations in our condensed consolidated statements of operations.
Funds From Operations
The table below shows Funds from Operations (“FFO”) and the related reconciliation to our net income available to common stockholders. We calculate FFO in accordance with the National Association of Real Estate Investment Trusts’ (“NAREIT”) definition, which is net income available to common stockholders (computed in accordance with GAAP), excluding extraordinary items, cumulative effect of change in accounting principle and gains on sale or impairment losses on depreciable property, plus depreciation and amortization of real estate assets, and after adjustments for unconsolidated partnerships and joint ventures to reflect FFO on the same basis.
FFO is used by industry analysts and investors as a supplemental measure of a REIT’s operating performance. Historical cost accounting for real estate assets implicitly assumes that the value of real estate assets diminishes predictably over time. Since real estate values instead have historically risen or fallen with market conditions, many industry investors and analysts have considered presentation of operating results for real estate companies that use historical cost accounting to be insufficient by themselves. Thus, NAREIT created FFO as a supplemental measure of REIT operating performance that excludes historical cost depreciation, among other items, from GAAP net income. The use of FFO, combined with the required primary GAAP presentations, has been fundamentally beneficial, improving the understanding of operating results of REITs among the investing public and making comparisons of REIT operating results more meaningful. Company management evaluates operating performance in part based on FFO. Additionally, we use FFO, along with other measures, to assess performance in connection with evaluating and granting incentive compensation to its officers and other key employees. The reconciliation of net income available to common stockholders to FFO is as follows for the three and six months ended June 30, 2016 and 2015 (in thousands, except per share information):

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Table of Contents


 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2016
 
2015
 
2016
 
2015
Net Income
$
7,765

 
$
7,951

 
$
30,561

 
$
15,155

Depreciation and amortization of real estate assets:
 
 
 
 

 

Consolidated properties
32,046

 
34,505

 
63,638

 
70,228

Share of unconsolidated joint ventures
3,231

 
2,772

 
6,490

 
5,515

(Gain) loss on sale of depreciated properties:
 
 
 
 
 
 
 
Consolidated properties
246

 
10

 
(13,944
)
 
(276
)
Discontinued properties

 

 

 
551

Funds From Operations
$
43,288

 
$
45,238

 
$
86,745

 
$
91,173

Per Common Share — Basic and Diluted:
 
 
 
 

 

Net Income Available
$
0.04

 
$
0.04

 
$
0.15

 
$
0.07

Funds From Operations
$
0.21

 
$
0.21

 
$
0.41

 
$
0.42

Weighted Average Shares — Basic
210,129

 
216,630

 
210,516

 
216,599

Weighted Average Shares — Diluted
210,362

 
216,766

 
210,687

 
216,753



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Table of Contents


Liquidity and Capital Resources
Our primary short-term and long-term liquidity needs include the following:
property acquisitions;
expenditures on development projects;
building improvements, tenant improvements, and leasing costs;
principal and interest payments on indebtedness;
repurchase of our common stock; and
common stock dividends.
We may satisfy these needs with one or more of the following:
net cash from operations;
sales of assets;
borrowings under our Credit Facility;
proceeds from mortgage notes payable;
proceeds from construction loans;
proceeds from offerings of debt or equity securities; and
joint venture formations.

As of June 30, 2016, we had $155.0 million drawn under our Credit Facility and $1.0 million drawn under our letters of credit, with the ability to borrow an additional $344.0 million under our Credit Facility.
During the first quarter of 2016, we commenced development of an office project and continued development on two other projects. No new development projects were commenced in the second quarter of 2016. In the first quarter of 2016, we repurchased 1.6 million shares of common stock under our stock repurchase program for an aggregate total price of $13.7 million. There were no repurchases of common stock in the second quarter 2016, and the program was suspended in March 2016 due to the pending merger with Parkway. The repurchased shares are recorded as treasury shares on the condensed consolidated balance sheets. We funded these activities with cash from operations, proceeds from asset sales and through borrowings under our Credit Facility.

Merger with Parkway Properties, Inc.

On April 28, 2016, the Company and Parkway Properties, Inc. (“Parkway”) entered into an Agreement and Plan of Merger (the “Merger Agreement”), pursuant to which Parkway will merge with and into Clinic Sub Inc., a wholly owned subsidiary of the Company (the “Merger”). In addition, the Merger Agreement provides that the Company will separate the portion of the combined businesses relating to the ownership of real properties in Houston (the "Spin-Off") from the remainder of the combined business by distributing pro rata to its stockholders all of the outstanding shares of common stock to Parkway, Inc. The Company will retain all of the shares of a class of non-voting preferred stock of Parkway, Inc. upon the terms and subject to the conditions of the Merger Agreement. The Company expects that the Spin-Off will be treated for tax purposes as a distribution to the Company’s stockholders equal to the fair market value of the distributed Parkway, Inc. shares. After the Spin-Off, Parkway, Inc. will be a separate, publicly-traded entity, and both the Company and Parkway, Inc. intend to operate prospectively as umbrella partnership real estate investment trusts (“UPREITs”).     

Pursuant to the Merger Agreement, upon closing of the Merger, each share of Parkway common stock issued and outstanding will convert into the right to receive 1.63 (the “Exchange Ratio”) shares of newly issued shares of common stock, par value $1 per share, of the Company. In addition, each share of Parkway limited voting stock, par value issued will be converted into the right to receive a number of newly issued shares of limited voting preferred stock of the Company, equal to the Exchange Ratio, having terms materially unchanged from the terms of the Parkway limited voting stock prior to the Merger. Each share of Parkway equity-based compensation awards will also be converted at the Exchange Ratio into equity awards of the Company. Limited partnership units of Parkway LP, Parkway’s umbrella partnership, will be entitled to redeem or exchange their partnership interest for the Company’s common stock at the Exchange Ratio.

The respective boards of directors (the “Board of Directors”) of the Company and Parkway have unanimously approved the Merger Agreement and have recommended that their respective stockholders approve the Merger.

The closing of the Merger is subject to certain conditions, including: (1) the receipt of Parkway Stockholder Approval; (2) the receipt of Company Stockholder Approval; (3) the Spin-Off being fully ready to be consummated contemporaneously with the Merger; (4) approval for listing on the New York Stock Exchange (“NYSE”) of the Company common stock to be issued in the Merger or reserved for issuance in connection therewith; (5) no injunction or law prohibiting the Merger; (6) accuracy of each party’s representations, subject in most cases to materiality or material adverse effect qualifications; (7) material compliance with each party’s covenants; (8) receipt by each of the Company and Parkway of an opinion to the effect that the Merger will

22

Table of Contents


qualify as a “reorganization” within the meaning of Section 368(a) of the Internal Revenue Code of 1986, as amended (the “Code”), and of an opinion that each of the Company and Parkway will qualify as a real estate investment trust (“REIT”) under the Code; and (9) effectiveness of the registration statement that will contain the joint proxy statement/prospectus sent to Company and Parkway stockholders.

The Merger Agreement contains customary representations and warranties by each party. The Company and Parkway have also agreed to various customary covenants and agreements, including, among others, to conduct their business in the ordinary course consistent with past practice during the period between the execution of the Merger Agreement and the date of closing, to not engage in certain kinds of transactions during this period and to maintain REIT status. The parties are subject to a customary “no-shop” provision that requires them to cease discussions or solicitations with respect to alternate transactions and subjects them to certain restrictions in considering and negotiating alternate transactions.

Additionally, Parkway has agreed to use commercially reasonable efforts to sell certain of its properties prior to the closing date, upon the terms and subject to the conditions of the Merger Agreement. The Company and Parkway have also agreed that, prior to the closing, each may continue to pay their regular quarterly dividends, but may not increase the amounts, except to the extent required to maintain REIT status. The parties will coordinate record and payment dates for all pre-closing dividends.

The Merger Agreement provides that, at the effective time of the Merger, the Board of Directors of the Company will consist of nine members, including five individuals to be selected by the current members of the Board of Directors of the Company and four individuals to be selected by the current members of the Board of Directors of Parkway. One of Parkway’s four directors will be selected by TPG Pantera VI (“TPG”) and TPG Management (collectively with TPG, the “TPG Parties”), pursuant to the TPG Parties’ stockholders agreement entered into with the Company.
The Merger Agreement contains certain termination rights for the Company and Parkway. The Merger Agreement can be terminated by either party (1) by mutual written consent; (2) if the Merger has not been consummated by an outside date of December 31, 2016 (which either party may extend to March 31, 2017 if the only closing condition that has not been met is that related to the readiness of the Spin-Off ); (3) if there is a permanent, non-appealable injunction or law restraining or prohibiting the consummation of the Merger; (4) if either party’s stockholders fail to approve the transactions; (5) if the other party’s Board of Directors changes its recommendation in favor of the transactions; (6) if the other party has materially breached its non-solicit covenant, subject to a cure period; (7) in order to enter into a superior proposal (as defined in the Merger Agreement, subject to compliance with certain terms and conditions included in the Merger Agreement); or (8) if the other party has breached its representations or covenants in a way that prevents satisfaction of a closing condition, subject to a cure period.
If the Merger Agreement is terminated because (1) a party’s Board of Directors changes its recommendation in favor of the transactions contemplated by the Merger Agreement; (2) a party terminates the agreement to enter into a superior proposal; (3) a party breaches its non-solicit covenant; or (4) a party consummates or enters into an agreement for an alternative transaction within twelve months following termination under certain circumstances, such party must pay a termination fee of the lesser of $65 million or the maximum amount that could be paid to the other party without causing it to fail to meet the REIT requirements for such year. The Merger Agreement also provides that a party must pay the other party an expense reimbursement of the lesser of $20 million and the maximum amount that can be paid to the other party without causing it to fail to meet the REIT requirements for such year, if the Merger Agreement is terminated because such party’s stockholders vote against the transactions contemplated by the Merger Agreement. Any unpaid amount of the foregoing fees (due to limitations of REIT requirements) will be escrowed and paid out over a five-year period. The expense reimbursement will be set off against the termination fee if the termination fee later becomes payable.
In connection with the proposed transaction, Cousins has filed an amended registration statement on Form S-4 (File No. 333-211849), declared effective by the SEC on July 22, 2016, that includes a joint proxy statement of Cousins and Parkway that also constitutes a prospectus of Cousins.
The Merger and Spin-Off are currently anticipated to close in the fourth quarter of 2016. During the three months ended June 30, 2016, the Company incurred $2.4 million in merger-related expenses.
Contractual Obligations and Commitments
The following table sets forth information as of June 30, 2016 with respect to our outstanding contractual obligations and commitments (in thousands):

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Table of Contents


 
 
Total
 
Less than 1 Year
 
1-3 Years
 
3-5 Years
 
More than 5 years
Contractual Obligations:
 
 
 
 
 
 
 
 
 
 
Company debt: