Stock Options and Employee Stock Purchase Plan

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


(a)	Second Amended and Restated 1997 Stock Option Plan and 2007 Stock Plan

In November 1997, j2 Global's Board of Directors adopted the j2 Global Communications, Inc. 1997 Stock Option Plan, which was twice amended and restated (the “1997 Plan”). The 1997 Plan terminated in 2007, although stock options and restricted stock issued under the 1997 Plan continue to be governed by it. 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.

In October 2007, j2 Global's Board of Directors adopted the j2 Global, Inc. 2007 Stock Plan (the “2007 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. The number of authorized shares of common stock that may be used for 2007 Plan purposes is 4,500,000. 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.

At December 31, 2012, 2011 and 2010, options to purchase 1,132,365, 1,155,335 and 2,647,130 shares of common stock were exercisable under and outside of the 2007 Plan and the 1997 Plan combined, at weighted average exercise prices of $21.94, $19.80 and $11.31, respectively. Stock options generally expire after 10 years and vest over a 5-year period.

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

Stock Options

Stock option activity for the years ended December 31, 2012, 2011 and 2010 is summarized as follows:



	Number of Shares		Weighted-Average Exercise Price	Weighted-Average Remaining Contractual Life (In Years)	Aggregate Intrinsic Value
Options outstanding at December 31, 2009	4,480,591		$13.17
Granted	167,967		$23.13
Exercised	(816,552	)	$9.18
Canceled	(37,612	)	$20.26
Options outstanding at December 31, 2010	3,794,394		$14.40
Granted	163,319		$29.42
Exercised	(1,820,678	)	$7.92
Canceled	(49,340	)	$24.76
Options outstanding at December 31, 2011	2,087,695		$20.99
Granted	67,000		$27.26
Exercised	(357,234	)	$15.81
Canceled	(32,000	)	$31.34
Options outstanding at December 31, 2012	1,765,461		$22.08	5.1	$15,684,163
Exercisable at December 31, 2012	1,132,365		$21.94	4.0	$10,451,569
Vested and expected to vest at December 31, 2012	1,664,406		$21.95	4.9	$15,042,947

For the year ended December 31, 2012, j2 Global granted 67,000 options to purchase shares of common stock pursuant to the 2007 Plan to newly hired and existing members of management and Board members. 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 options granted during the years 2012, 2011 and 2010 were $7.92, $12.54 and $11.00, respectively.

The total intrinsic values of options exercised during the years ended December 31, 2012, 2011 and 2010 were $4.5 million, $41.4 million and $13.2 million, respectively. The total fair value of options vested during the years ended December 31, 2012, 2011 and 2010 was $4.7 million, $4.6 million and $8.8 million, respectively.

Cash received from options exercised under all share-based payment arrangements for the years ended December 31, 2012, 2011 and 2010 was $5.6 million, $7.1 million and $7.5 million, respectively. The actual tax benefit realized for the tax deductions from option exercises under the share-based payment arrangements totaled $1.6 million, $14.2 million and $1.5 million, respectively, for the years ended December 31, 2012, 2011 and 2010.

At December 31, 2012, the exercise prices of options granted under and outside the 2007 Plan and the 1997 Plan ranged from $8.09 to $34.73, with a weighted-average remaining contractual life of 5.07 years years.

The following table summarizes information concerning outstanding and exercisable options as of December 31, 2012:



	Options Outstanding			Exercisable Options
Range of Exercise Prices	Number Outstanding December 31, 2012	Weighted Average Remaining Contractual Life	Weighted Average Exercise Price	Number Exercisable December 31, 2012	Weighted Average Exercise Price
8.09	2,439	0.44 years	8.09	2,439	8.09
9.55	200,000	1.23 years	9.55	200,000	9.55
11.43 - 15.65	17,956	2.70 years	14.30	13,956	14.47
17.19	309,280	6.18 years	17.19	77,800	17.19
18.77	239,000	2.67 years	18.77	239,000	18.77
20.15 - 21.67	240,301	5.80 years	21.12	145,712	21.07
21.88 - 25.09	179,666	7.41 years	23.34	57,790	22.86
25.93 - 29.34	262,319	6.63 years	28.53	124,168	28.56
29.53 - 32.45	194,500	5.67 years	31.92	151,500	32.41
33.51 - 34.73	120,000	4.46 years	33.66	120,000	33.66
$8.09 - $34.73	1,765,461	5.07 years	22.08	1,132,365	21.94

At December 31, 2012, there were 1,595,880 additional shares underlying options, shares of restricted stock and other share-based awards available for grant under the 2007 Plan, and no additional shares available for grant under or outside of the 1997 Plan.

As of December 31, 2012, there was $5.0 million of total unrecognized compensation expense related to nonvested share-based compensation awards granted under the 2007 Plan and the 1997 Plan. That expense is expected to be recognized ratably over a weighted average period of 2.03 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 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 14.6%, 14.9% and 14.5% as of December 31, 2012, 2011 and 2010, respectively.

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



	Year Ended December 31,
	2012	2011	2010
Risk-free interest rate	1.1%	2.3%	2.6%
Expected term (in years)	5.7	6.5	6.5
Dividend yield	3.2%	2.6%	—	%
Expected volatility	41.6%	41.8%	44.7%

Share-Based Compensation Expense

The following table represents share-based compensation expense included in cost of revenues and operating expenses in the consolidated statements of income for the years ended December 31, 2012, 2011 and 2010 (in thousands):



	Year Ended December 31,
	2012		2011		2010
Cost of revenues	$	844	$	982	$	1,217
Operating expenses:
Sales and marketing	1,543		1,431		1,826
Research, development and engineering	459		477		815
General and administrative	6,286		6,103		7,079
	$	9,132	$	8,993	$	10,937

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 the applicable vesting period. Beginning in fiscal year 2012 vesting periods are approximately one year for awards to members of the Company's Board of Directors and five years for senior staff. The Company granted 390,210, 130,212 and 101,082 shares of restricted stock and restricted units during the years ended December 31, 2012, 2011 and 2010, respectively, and recognized $5.2 million, $3.9 million and $4.0 million, respectively of related compensation expense. As of December 31, 2012, the Company had unrecognized share-based compensation cost of $16.0 million associated with these awards. This cost is expected to be recognized over a weighted-average period of 2.5 years for awards and 4.2 years for units. The total fair value of restricted stock and restricted stock units vested during the years ended December 31, 2012, 2011 and 2010 was $4.3 million, $3.2 million and $3.8 million, respectively. The actual tax benefit realized for the tax deductions from the vesting of restricted stock awards and units totaled $0.3 million, $0.3 million and $1.2 million, respectively, for the years ended December 31, 2012, 2011 and 2010. In accordance with ASC 718, share-based compensation is recognized on dividends paid related to nonvested restricted stock not expected to vest, which amounted to approximately $49,000 for the year ended December 31, 2012.

Restricted stock award activity for the year ended December 31, 2012 is set forth below:



	Shares		Weighted-Average Grant-Date Fair Value
Nonvested at January 1, 2012	742,683		$	20.87
Granted	299,044		27.68
Vested	(202,352	)	21.34
Canceled	(10,900	)	30.92
Nonvested at December 31, 2012	828,475		$	23.08

Restricted stock unit activity for the year ended December 31, 2012 is set forth below:



	Number of Shares		Weighted-Average Remaining Contractual Life (in Years)	Aggregate Intrinsic Value
Outstanding at January 1, 2011	17,500
Granted	17,000
Vested	(1,750	)
Canceled	—
Outstanding at December 31, 2011	32,750
Granted	91,166
Vested	(1,700	)
Canceled	(6,750	)
Outstanding at December 31, 2012	115,466		2.7	$	3,533,260
Vested and expected to vest at December 31, 2012	76,459		2.4	$	2,339,659

Ziff Davis, Inc. Equity Incentive Plan

In November 2012, Ziff Davis, Inc. ("Ziff Davis") established the Ziff Davis, Inc. 2012 Equity Incentive Plan (the "Ziff Davis Plan"), providing incentives to selected directors, officers, employees and consultants. The Ziff Davis 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. The number of authorized shares of common stock that may be used for the Ziff Davis Plan purposes is 15,000,000. In addition, certain stockholders have put rights under certain circumstances in which the stockholder may elect to cause Ziff Davis to purchase any or all of the shares of common stock (to the extent vested pursuant to the terms of the Ziff Davis Plan) and preferred stock owned by such stockholder. Ziff Davis also has the option to call under certain circumstances the common stock issued pursuant to the Ziff Davis Plan (to the extent vested pursuant to the terms of the Ziff Davis Plan) and shares of preferred stock. Management has determined that the circumstances in which the put right held by the stockholder is exercisable are within the control of the Company. Accordingly, management determined that liability classification is not required.

Ziff Davis granted 13,035,000 shares of restricted stock during the year ended December 31, 2012 to its senior staff pursuant to the Ziff Davis Plan, which shares vest evenly over a 5 year period. Based upon the terms of the Ziff Davis Series A Stock discussed in Note 9 - Mandatorily Redeemable Financial Instrument, the Company determined at the relevant grant date that the fair value of the Ziff Davis restricted stock was zero. Accordingly, no compensation expense was recorded for the Ziff Davis restricted stock for the year ended December 31, 2012.

Employee Stock Purchase Plan

In May of 2001, j2 Global established the j2 Global, Inc. 2001 Employee Stock Purchase Plan, as amended (the “Purchase Plan”), which provides for the issuance of a maximum of 2,000,000 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. During 2012, 2011 and 2010, 5,797, 5,235 and 4,894 shares, respectively were purchased under the Purchase Plan at price ranging from $28.54 to $24.54 per share. As of December 31, 2012, 1,645,601 shares were available under the Purchase Plan for future issuance.