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, 2014, 224,708 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, 2014, 606,447 shares underlying options and 95,204 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, 2014:



	Number of Shares		Weighted- Average Exercise Price		Weighted-Average Remaining Contractual Term (in years)	Aggregate Intrinsic Value
Outstanding at January 1, 2014	1,175,657		$	21.21
Granted	—		—
Exercised	(424,706	)	15.59
Canceled	(15,000	)	31.07
Outstanding at September 30, 2014	735,951		24.25		4.1	$	18,476,543
Exercisable at September 30, 2014	623,739		23.72		3.7	$	15,991,979
Vested and expected to vest at September 30, 2014	721,497		$	24.19	4.1	$	18,163,534

The aggregate intrinsic values of options exercised during the nine months ended September 30, 2014 and 2013 were $14.5 million and $11.6 million, respectively.

As of September 30, 2014 and December 31, 2013, unrecognized stock compensation related to non-vested stock options granted under the 1997 Plan and the 2007 Plan approximated $1.0 million and $2.0 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 1.6 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, 2014 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 12.22% and 15.72% as of September 30, 2014 and 2013, respectively.

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 $1.9 million and $1.8 million of compensation expense for the three months ended September 30, 2014 and 2013, respectively, related to restricted stock and restricted stock units, and $5.5 million and $5.0 million of compensation expense for the nine months ended September 30, 2014 and 2013, respectively. As of September 30, 2014 and December 31, 2013, the Company had unrecognized share-based compensation cost of approximately $22.6 million and $20.2 million, respectively, associated with these awards. This cost is expected to be recognized over a weighted-average period of 3.1 years for awards and 3.3 years for units.

Restricted stock award activity for the nine months ended September 30, 2014 is set forth below:



	Shares		Weighted-Average Grant-Date Fair Value
Nonvested at January 1, 2014	1,178,371		$	18.17
Granted	176,864		44.65
Vested	(452,010	)	17.66
Canceled	(45,070	)	35.55
Nonvested at September 30, 2014	858,155		$	22.98

Restricted stock unit award activity for the nine months ended September 30, 2014 is set forth below:



	Number of Shares		Weighted-Average Remaining Contractual Term (in years)	Aggregate Intrinsic Value
Outstanding at January 1, 2014	109,725
Granted	16,737
Vested	(16,258	)
Canceled	(15,000	)
Outstanding at September 30, 2014	95,204		2.0	$	4,699,269
Vested and expected to vest at September 30, 2014	74,330		1.8	$	3,668,909

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, 2014 and 2013 (in thousands):



	Three Months Ended September 30,				Nine Months Ended September 30,
	2014		2013		2014		2013
Cost of revenues	$	82	$	162	$	263	$	581
Operating expenses:
Sales and marketing	443		465		1,360		1,315
Research, development and engineering	175		103		537		311
General and administrative	1,491		1,695		4,378		4,901
Total	$	2,191	$	2,425	$	6,538	$	7,108

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, 2014 and 2013, 4,463 and 4,416 shares were purchased under the plan, respectively. Cash received upon the issuance of common stock under the Purchase Plan was $199,000 and $161,000 for the nine months ended September 30, 2014 and 2013, respectively. As of September 30, 2014, 1,635,736 shares were available under the Purchase Plan for future issuance.