Stock Options and Employee Stock Purchase Plan

j2 Global’s share-based compensation plans include the 2007 Stock Plan, the 2015 Stock Plan and the 2001 Employee Stock Purchase Plan. Each plan is described below.


(a)	The 2007 Stock Option Plan and the 2015 Stock Option Plan

In October 2007, j2 Global’s Board of Directors adopted the j2 Global, Inc. 2007 Stock Option 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. The 2007 Plan terminated on February 14, 2017.

In May 2015, j2 Global’s Board of Directors adopted the j2 Global, Inc. 2015 Stock Option Plan (the “2015 Plan”). The 2015 Plan provides for the grant of incentive stock options, nonqualified stock options, stock appreciation rights, restricted stock, restricted stock units, performance shares, performance share units and other share-based awards and is intended as a successor plan to the 2007 Stock Plan since no further grants will be made under the 2007 Stock Plan. 4,200,000 shares of common stock are authorized to be used for 2015 Plan purposes. Options under the 2015 Plan may be granted at exercise prices determined by the Board of Directors, provided that the exercise prices shall not be less than the higher of the par value or 100% of the fair market value of j2 Global’s common stock subject to the option on the date the option is granted.

At December 31, 2018, 2017 and 2016, options to purchase 298,577, 361,875 and 353,258 shares of common stock were exercisable under and outside of the 2015 Plan and the 2007 Plan combined, at weighted average exercise prices of $32.15, $29.92, and $26.10, 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, 2018, 2017 and 2016 is summarized as follows:



	Number of Shares		Weighted-Average Exercise Price		Weighted-Average Remaining Contractual Life (In Years)	Aggregate Intrinsic Value
Options outstanding at January 1, 2016	566,428		$	29.74
Granted	—		—
Exercised	(142,870	)	26.04
Canceled	(9,700	)	26.92
Options outstanding at December 31, 2016	413,858		$	31.09
Granted	—		—
Exercised	(38,183	)	29.03
Canceled	—		—
Options outstanding at December 31, 2017	375,675		$	31.30
Granted	400,000		75.03
Exercised	(67,898	)	22.68
Canceled	—		—
Options outstanding at December 31, 2018	707,777		$	56.84	5.8	$11,136,166
Exercisable at December 31, 2018	298,577		$	32.15	1.5	$11,117,490
Vested and expected to vest at December 31, 2018	575,851		$	52.68	5.1	$11,134,316

For the years ended December 31, 2018, 2017 and 2016, j2 Global granted 400,000, zero and zero options, respectively, to purchase shares of common stock pursuant to the 2015 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 period ended December 31, 2018 was $19.39. There were no stock options granted during the years 2017 and 2016.

The total intrinsic values of options exercised during the years ended December 31, 2018, 2017 and 2016 was $3.8 million,$2.1 million, and $5.6 million, respectively. The total fair value of options vested during the years ended December 31, 2018, 2017 and 2016 was $0.1 million, $0.6 million and $0.6 million, respectively.

Cash received from options exercised under all share-based payment arrangements for the years ended December 31, 2018, 2017 and 2016 was $1.5 million, $1.1 million and $3.6 million, respectively. The actual tax benefit realized for the tax deductions from option exercises under the share-based payment arrangements totaled $0.9 million, $0.7 million and $1.9 million, respectively, for the years ended December 31, 2018, 2017 and 2016.

The following table summarizes information concerning outstanding and exercisable options as of December 31, 2018:



	Options Outstanding				Exercisable Options
Range of Exercise Prices	Number Outstanding December 31, 2018	Weighted Average Remaining Contractual Life	Weighted Average Exercise Price		Number Exercisable December 31, 2018	Weighted Average Exercise Price
$17.19	20,000	0.18 years	$	17.19	20,000	$	17.19
21.67	50,040	0.35 years	21.67		50,040	21.67
22.92	84,092	1.35 years	22.92		84,092	22.92
25.09	2,600	3.36 years	25.09		2,600	25.09
29.34	75,585	2.36 years	29.34		75,585	29.34
29.53	9,710	3.17 years	29.53		9,710	29.53
31.07	3,750	2.82 years	31.07		3,750	31.07
67.35	62,000	2.51 years	67.35		52,800	67.35
75.03	400,000	9.00 years	75.03		—	—
$17.19 - $75.03	707,777	5.82 years	$	56.84	298,577	$	32.15

As discussed in Note 13, “Stockholders’ Equity”, the Company provided holders of j2 Series B Stock an exchange right in which j2 Series B Stock may be exchanged for j2 common stock during specified exchange periods. The Company determined that such exchange right represents a grant under the 2007 Plan for the year ended December 31, 2014, and accordingly, reduced the awards available under the 2007 Plan. At December 31, 2018, there were 2,270,716 additional shares underlying options, shares of restricted stock and other share-based awards available for grant under the 2015 Plan, and no additional shares are available for grant under or outside of the 2007 Plan.

The Company recognized $0.9 million, $0.4 million and $0.4 million of compensation expense related to stock options for the years ended December 31, 2018, 2017 and 2016, respectively. As of December 31, 2018, there was $6.9 million of total unrecognized compensation expense related to nonvested share-based compensation options granted under the 2015 Plan and the 2007 Plan. That expense is expected to be recognized ratably over a weighted average period of 6.87 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. 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 11.8%, 14.3% and 12.7% as of December 31, 2018, 2017 and 2016, respectively.

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



	Years Ended December 31,
	2018	2017	2016
Risk-free interest rate	2.4%	—%	—%
Expected term (in years)	6.7	0.0	0.0
Dividend yield	2.2%	—%	—%
Expected volatility	29.2%	—%	—%
Weighted average volatility	29.2%	—%	—%

Restricted Stock and Restricted Stock Units

j2 Global has awarded restricted stock and restricted stock units to its Board of Directors and senior staff pursuant to the 2007 Plan and the 2015 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 850,300, 300,330 and 317,914 shares of restricted stock and restricted units during the years ended December 31, 2018, 2017 and 2016, respectively, and recognized $26.4 million, $22.2 million and $13.2 million, respectively of related compensation expense. As of December 31, 2018, the Company had unrecognized share-based compensation cost of $61.6 million associated with these awards. This cost is expected to be recognized over a weighted-average period of 5.5 years for awards and 3.3 years for units. The total fair value of restricted stock and restricted stock units vested during the years ended December 31, 2018, 2017 and 2016 was $9.7 million, $15.1 million and $8.0 million, respectively. The actual tax benefit realized for the tax deductions from the vesting of restricted stock awards and units totaled $2.4 million, $2.3 million and $3.5 million, respectively, for the years ended December 31, 2018, 2017 and 2016. 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 $0.1 million, $0.1 million and $0.1 million for the years ended December 31, 2018, 2017 and 2016, respectively.

During the year ended December 31, 2017, the Company accelerated the vesting of certain shares held by employees which were surrendered to the Company to satisfy tax withholding obligations in connection with such employees’ restricted stock. The Company recognized share-based compensation of $1.4 million during the year ended December 31, 2017 due to this vesting acceleration.

In connection with Nehemia Zucker’s resignation as Chief Executive Officer effective as of December 31, 2017, all of his outstanding and unvested stock options and time-based restricted shares, along with the tranche of performance-vesting restricted shares that was then next scheduled to vest, vested in full on December 29, 2017. As a result, the Company accelerated the recognition of share-based compensation expense associated with these awards which impacted 2017 by approximately $5.1 million.

Restricted Stock - Awards with Market Conditions

j2 Global has awarded certain key employees market-based restricted stock awards pursuant to the 2015 Plan. The market-based awards have vesting conditions that are based on specified stock price targets of the Company’s common stock. Market conditions were factored into the grant date fair value using a Monte Carlo valuation model, which utilized multiple input variables to determine the probability of the Company achieving the specified stock price targets with a 20-day and 30-day lookback (trading days). Stock-based compensation expense related to an award with a market condition will be recognized over the requisite service period using the graded-vesting method regardless of whether the market condition is satisfied, provided that the requisite service period has been completed. During the years ended December 31, 2018, 2017, and 2016 the Company awarded 473,501, 85,825, and 106,780 market-based restricted stock awards, respectively. The per share weighted average grant-date fair values of the market-based restricted stock awards granted during the years ended December 31, 2018, 2017 and 2016 were $52.95, $72.20 and $44.67, respectively.

The weighted-average fair values of market-based restricted stock awards granted have been estimated utilizing the following assumptions:



	December 31, 2018			December 31, 2017			December 31, 2016
Underlying stock price at valuation date	$	82.11		$	91.17		$	63.73
Expected volatility	28.4		%	29		%	29.8		%
Risk-free interest rate	2.89		%	2.17		%	1.51		%

Restricted stock award activity for the years ended December 31, 2018, 2017 and 2016 is set forth below:



	Shares		Weighted-Average Grant-Date Fair Value
Nonvested at January 1, 2016	704,804		$	39.08
Granted	296,414		41.27
Vested	(255,503	)	31.27
Canceled	(40,700	)	63.95
Nonvested at December 31, 2016	705,015		$	41.40
Granted	289,230		61.34
Vested	(381,411	)	39.71
Canceled	(7,268	)	76.08
Nonvested at December 31, 2017	605,566		$	51.57
Granted	830,256		63.55
Vested	(157,972	)	61.29
Canceled	(70,839	)	74.84
Nonvested at December 31, 2018	1,207,011		$	64.82

Restricted stock unit activity for the years ended December 31, 2018, 2017 and 2016 is set forth below:



	Number of Shares		Weighted-Average Remaining Contractual Life (in Years)	Aggregate Intrinsic Value
Outstanding at January 1, 2016	56,245
Granted	21,500
Vested	(14,595	)
Canceled	(11,200	)
Outstanding at December 31, 2016	51,950
Granted	11,100
Vested	(16,370	)
Canceled	(8,280	)
Outstanding at December 31, 2017	38,400
Granted	20,044
Vested	(11,540	)
Canceled	(5,673	)
Outstanding at December 31, 2018	41,231		2.0	$	2,860,607
Vested and expected to vest at December 31, 2018	32,809		1.7	$	2,276,290

Employee Stock Purchase Plan (“ESPP”)

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.

On February 2, 2018, the Company approved an amendment to the Company’s Amended and Restated 2001 Employee Stock Purchase Plan, to be effective May 1, 2018, such that (i) the purchase price for each offering period shall be 85% of the lesser of the fair market value of a share of common stock of the Company (a “Share”) on the beginning or the end of the offering period, rather than 95% of the fair market value of a Share at the end of the offering period, and (ii) each offering period will be six months, rather than three months.

j2 Global performed an analysis of the Amendment terms and determined that a plan provision exists which allows for the more favorable of two exercise prices, commonly referred to as a “look-back” feature. The purchase price discount and the look-back feature cause the Purchase Plan to be compensatory and the Company to recognize compensation expense. The compensation cost is recognized on a straight-line basis over the requisite service period. The Company recognized $0.7 million, zero and zero of compensation expense related to the Purchase Plan for the years ended December 31, 2018, 2017 and 2016, respectively. The Company used the Black-Scholes option pricing model to calculate the estimated fair value of the purchase right issued under the ESPP. The expected volatility is based on historical volatility of the Company’s common stock. 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 1.96% as of December 31, 2018.

During 2018, 2017 and 2016, 33,262, 3,283 and 3,918 shares, respectively were purchased under the Purchase Plan at price ranging from $61.91 to $75.99 per share during 2018. As of December 31, 2018, 1,589,981 shares were available under the Purchase Plan for future issuance.