Stock Options and Employee Stock Purchase Plan

j2 Global’s share-based compensation plans include the Second Amended and Restated 1997 Stock Option Plan (the “1997 Plan”), 2007 Stock Plan (the “2007 Plan”) and 2001 Employee Stock Purchase Plan (the “Purchase Plan”). Each plan is described below.

The 1997 Plan terminated in 2007. A total of 12,000,000 shares of common stock were authorized to be used for 1997 Plan purposes. An additional 840,000 shares were authorized for issuance upon exercise of options granted outside the 1997 Plan. As of June 30, 2012, 816,977 shares underlying options and 14,700 shares of restricted stock were outstanding under the 1997 Plan, all of which continue to be governed by the 1997 Plan.

The 2007 Plan provides for the granting of incentive stock options, nonqualified stock options, stock appreciation rights, restricted stock, restricted stock units and other share-based awards. 4,500,000 shares of common stock are authorized to be used for 2007 Plan purposes. Options under the 2007 Plan may be granted at exercise prices determined by the Board of Directors, provided that the exercise prices shall not be less than the fair market value of j2 Global’s common stock on the date of grant for incentive stock options and not less than 85% of the fair market value of j2 Global’s common stock on the date of grant for non-statutory stock options. As of June 30, 2012, 1,086,308 shares underlying options and 95,416 shares of restricted stock were outstanding under the 2007 Plan.

All stock option grants are approved by “outside directors” within the meaning of Internal Revenue Code Section 162(m).

Stock Options

The following table represents stock option activity for the six months ended June 30, 2012:



	Number of Shares		Weighted- Average Exercise Price		Weighted-Average Remaining Contractual Term (in years)	Aggregate Intrinsic Value
Outstanding at January 1, 2012	2,087,695		$	20.99
Granted	57,000		27.04
Exercised	(225,410	)	13.27
Canceled	(16,000	)	33.54
Outstanding at June 30, 2012	1,903,285		21.98		5.6	$	11,001,387
Exercisable at June 30, 2012	1,212,489		21.45		4.5	$	7,867,462
Vested and expected to vest at June 30, 2012	1,803,435		$	21.82	5.4	$	10,701,380

For the six months ended June 30, 2012, j2 Global granted 57,000 options to purchase shares of common stock pursuant to the 2007 Plan. These stock options vest 20% per year and expire 10 years from the date of grant.

The per share weighted-average grant-date fair values of stock options granted during the six months ended June 30, 2012 and 2011 were $7.88 and $13.12, respectively.

The aggregate intrinsic values of options exercised during the six months ended June 30, 2012 and 2011 were $3.2 million and $6.2 million, respectively.

As of June 30, 2012 and December 31, 2011, unrecognized stock compensation related to non-vested stock options granted under the 1997 Plan and the 2007 Plan approximated $6.8 million and $9.0 million, respectively. Unrecognized stock compensation expense related to non-vested stock options granted under these plans is expected to be recognized ratably over a weighted-average period of 2.4 years (i.e., the remaining requisite service period).

Fair Value Disclosure

j2 Global uses the Black-Scholes option pricing model to calculate the fair value of each option grant. The expected volatility for the six months ended June 30, 2012 is based on historical volatility of the Company’s common stock. Beginning in the first quarter 2012, the Company estimates the expected term based upon the historical exercise behavior of our employees. Previously, the Company elected to use the simplified method for estimating the expected term. Under the simplified method, the expected term is equal to the midpoint between the vesting period and the contractual term of the stock option. The risk-free interest rate is based on U.S. Treasury zero-coupon issues with a term equal to the expected term of the option assumed at the date of grant. Prior to the initial declaration of a cash dividend on August 1, 2011, the fair value of stock options, restricted stock and restricted stock units were measured based upon an expected dividend yield of 0.0% as the Company did not historically pay cash dividends on its common stock. For awards granted on or subsequent to August 1, 2011, the Company uses an annualized dividend yield based upon the per share dividends declared by its Board of Directors. Estimated forfeiture rates were 14.64% and 14.64% as of June 30, 2012 and 2011, respectively.

The weighted-average fair values of stock options granted have been estimated utilizing the following assumptions:



	Six Months Ended June 30,
	2012	2011
Risk-free interest rate	0.97%	2.39%
Expected term (in years)	5.7	6.5
Dividend yield	3.43%	—%
Expected volatility	41%	42%
Weighted-average volatility	41%	42%

Restricted Stock

j2 Global has awarded restricted stock and restricted stock units to its Board of Directors and senior staff pursuant to the 1997 Plan and the 2007 Plan. Compensation expense resulting from restricted stock and restricted unit grants is measured at fair value on the date of grant and is recognized as share-based compensation expense over a five-year vesting period. The Company recognized $1.1 million and $2.1 million of compensation expense in the three and six months ended June 30, 2012, respectively, related to restricted stock and restricted stock units. As of June 30, 2012 and December 31, 2011, the Company had unrecognized share-based compensation cost of approximately $12.7 million and $11.3 million, respectively, associated with these awards. This cost is expected to be recognized over a weighted-average period of 2.22 years for awards and 4.43 years for units.

Restricted stock award activity for the six months ended June 30, 2012 is set forth below:



	Shares		Weighted-Average Grant-Date Fair Value
Nonvested at January 1, 2012	742,683		$	20.87
Granted	88,544		25.47
Vested	(184,652	)	20.37
Canceled	(900	)	29.21
Nonvested at June 30, 2012	645,675		$	21.63

Restricted stock unit award activity for the six months ended June 30, 2012 is set forth below:



	Number of Shares		Weighted-Average Remaining Contractual Term (in years)	Aggregate Intrinsic Value
Outstanding at January 1, 2012	32,750
Granted	64,166
Vested	(1,500	)
Canceled	—
Outstanding at June 30, 2012	95,416		3.0	$	2,520,891
Vested and expected to vest at June 30, 2012	60,453		3.0	$	1,597,179

Share-Based Compensation Expense

The following table represents share-based compensation expense included in cost of revenues and operating expenses in the accompanying condensed consolidated statements of operations for the three and six months ended June 30, 2012 and 2011 (in thousands):



	Three Months Ended June 30,				Six Months Ended June 30,
	2012		2011		2012		2011
Cost of revenues	$	192	$	246	$	434	$	490
Operating expenses:
Sales and marketing	352		351		727		699
Research, development and engineering	117		110		233		257
General and administrative	1,494		1,524		3,054		2,990
Total	$	2,155	$	2,231	$	4,448	$	4,436

Employee Stock Purchase Plan

The Purchase Plan provides for the issuance of a maximum of two million shares of common stock. Under the Purchase Plan, eligible employees can have up to 15% of their earnings withheld, up to certain maximums, to be used to purchase shares of j2 Global’s common stock at certain plan-defined dates. The price of the common stock purchased under the Purchase Plan for the offering periods is equal to 95% of the fair market value of the common stock at the end of the offering period. For the six months ended June 30, 2012 and 2011, 2,432 and 2,840 shares were purchased under the plan, respectively. Cash received upon the issuance of common stock under the Purchase Plan was $61,000 and $77,000 for the six months ended June 30, 2012 and 2011, respectively. As of June 30, 2012, 1,648,966 shares were available under the Purchase Plan for future issuance.