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 September 30, 2013, 509,367 shares underlying options and zero 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 grant 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 September 30, 2013, 673,321 shares underlying options and 99,025 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 nine months ended September 30, 2013:



	Number of Shares		Weighted- Average Exercise Price		Weighted-Average Remaining Contractual Term (in years)	Aggregate Intrinsic Value
Outstanding at January 1, 2013	1,765,461		$	22.08
Granted	—		—
Exercised	(562,173	)	24.04
Canceled	(20,600	)	21.79
Outstanding at September 30, 2013	1,182,688		21.16		4.3	$	33,542,013
Exercisable at September 30, 2013	836,229		20.25		3.3	$	24,476,289
Vested and expected to vest at September 30, 2013	1,127,602		$	20.94	4.1	$	32,231,627

The per share weighted-average grant-date fair values of stock options granted during the nine months ended September 30, 2013 and 2012 were zero and $7.92, respectively.

The aggregate intrinsic values of options exercised during the nine months ended September 30, 2013 and 2012 were $11.6 million and $4.0 million, respectively.

As of September 30, 2013 and December 31, 2012, unrecognized stock compensation related to non-vested stock options granted under the 1997 Plan and the 2007 Plan approximated $2.6 million and $5.0 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 1.7 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 nine months ended September 30, 2013 is based on historical volatility of the Company’s common stock. The Company estimates the expected term based upon the historical exercise behavior of our employees. 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. The Company uses an annualized dividend yield based upon the per share dividends declared by its Board of Directors. Estimated forfeiture rates were 15.72% and 14.68% as of September 30, 2013 and 2012, respectively.

The weighted-average fair values of stock options granted have been estimated utilizing the following assumptions, no stock options were granted during the nine month period ended September 30, 2013:



		Nine Months Ended September 30,
		2012
Risk-free interest rate		0.91%
Expected term (in years)		5.7
Dividend yield		3.09%
Expected volatility		41%
Weighted-average volatility		41%

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 recognized $1.8 million and $1.6 million of compensation expense for the three months ended September 30, 2013 and 2012, respectively, related to restricted stock and restricted stock units, and $5.0 million and $3.7 million for the nine month period ended September 30, 2013 and 2012, respectively. As of September 30, 2013 and December 31, 2012, the Company had unrecognized share-based compensation cost of approximately $18.5 million and $16.0 million, respectively, associated with these awards. This cost is expected to be recognized over a weighted-average period of 2.6 years for awards and 3.7 years for units.

Restricted stock award activity for the nine months ended September 30, 2013 is set forth below:



	Shares		Weighted-Average Grant-Date Fair Value
Nonvested at January 1, 2013	828,475		$	23.08
Granted	178,430		38.40
Vested	(291,841	)	21.33
Canceled	(43,900	)	24.46
Nonvested at September 30, 2013	671,164		$	27.82

Restricted stock unit award activity for the nine months ended September 30, 2013 is set forth below:



	Number of Shares		Weighted-Average Remaining Contractual Term (in years)	Aggregate Intrinsic Value
Outstanding at January 1, 2013	115,466
Granted	26,675
Vested	(10,116	)
Canceled	(33,000	)
Outstanding at September 30, 2013	99,025		2.3	$	4,903,718
Vested and expected to vest at September 30, 2013	67,640		2.0	$	3,349,522

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 income for the three and nine months ended September 30, 2013 and 2012 (in thousands):



	Three Months Ended September 30,				Nine Months Ended September 30,
	2013		2012		2013		2012
Cost of revenues	$	162	$	199	$	581	$	633
Operating expenses:
Sales and marketing	465		390		1,315		1,117
Research, development and engineering	103		111		311		344
General and administrative	1,695		1,703		4,901		4,757
Total	$	2,425	$	2,403	$	7,108	$	6,851

Ziff Davis, Inc. Equity Incentive Plan

In November 2012, 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 purposes of the Ziff Davis Plan 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. The put right held by the stockholder is exercisable only in cases where the Company unilaterally changes the terms of such stockholder's employment relationship or requires such stockholder to relocate his residence a specific distance. As each circumstance is completely within the Company's control, 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. No restricted stock awards were granted for the nine months ended September 30, 2013.

Employee Stock Purchase Plan

The Purchase Plan provides for the issuance of a maximum of two million shares of the Company's 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 nine months ended September 30, 2013 and 2012, 4,416 and 4,115 shares were purchased under the plan, respectively. Cash received upon the issuance of common stock under the Purchase Plan was $161,000 and $109,000 for the nine months ended September 30, 2013 and 2012, respectively. As of September 30, 2013, 1,641,185 shares were available under the Purchase Plan for future issuance.