XOMA Corporation Annual report pursuant to Section 13 and 15(d)

Annual report pursuant to Section 13 and 15(d)

Compensation and Other Benefit Plans

Compensation and Other Benefit Plans

12 Months Ended

Dec. 31, 2013

Compensation and Other Benefit Plans [Abstract]

9.	Compensation and Other Benefit Plans

The Company grants qualified and non-qualified stock options, restricted stock units (“RSUs”), common stock and other stock-based awards under various plans to directors, officers, employees and other individuals. Stock options are granted at exercise prices of not less than the fair market value of the Company’s common stock on the date of grant. Generally, stock options granted to employees fully vest four years from the grant date and expire ten years from the date of the grant or three months from the date of termination of employment (longer in case of death or certain retirements). However, certain options granted to employees vest monthly or immediately, certain options granted to directors vest monthly over one year or three years and certain options may fully vest upon a change of control of the Company or may accelerate based on performance-driven measures. Additionally, the Company has an Amended and Restated Employee Stock Purchase Plan (“ESPP”) that allows employees to purchase Company shares at a purchase price equal to 95% of the closing price on the exercise date.

Employee Stock Purchase Plan

Under the ESPP plan approved by the Company’s stockholders, the Company is authorized to issue up to 233,333 shares of common stock to employees through payroll deductions at a purchase price per share equal to 95% of the closing price of XOMA shares on the exercise date. An employee may elect to have payroll deductions made under the ESPP for the purchase of shares in an amount not to exceed 15% of the employee’s compensation.

In 2013, 2012, and 2011, employees purchased 15,262, 17,054, and 30,044 shares of common stock, respectively, under the ESPP. Net payroll deductions under the ESPP totaled $60,000, $46,000 and $54,000 for 2013, 2012, and 2011, respectively.

Deferred Savings Plan

Under section 401(k) of the Internal Revenue Code of 1986, the Board of Directors adopted, effective June 1, 1987, a tax-qualified deferred compensation plan for employees of the Company. Participants may make contributions which defer up to 50% of their eligible compensation per payroll period, up to a maximum for 2013 of $17,500 (or $23,000 for employees over 50 years of age). The Company may, at its sole discretion, make contributions each plan year, in cash or in shares of the Company’s common stock, in amounts which match up to 50% of the salary deferred by the participants. The expense related to these contributions was $0.9 million, $0.8 million and $1.1 million for the years ended December 31, 2013, 2012, and 2011, respectively, and 100% was paid in common stock in each year.

Stock Option Plans

Historically, option grants intended as long-term incentive compensation have been made pursuant to the Company’s 1981 Share Option Plan (the “Option Plan”) and Restricted Share Plan (the “Restricted Plan”). In May of 2010, the Compensation Committee and the full Board adopted, and in July of 2010 the Company’s stockholders approved, a new equity-based compensation plan, the 2010 Long Term Incentive and Share Award Plan, which has since been amended and restated as the Amended and Restated 2010 Long Term Incentive and Stock Award Plan (the “Long Term Incentive Plan”). The Long Term Incentive Plan is intended to consolidate the Company’s long-term incentive compensation under a single plan, by replacing the Option Plan, the Restricted Plan and the 1992 Directors Share Option Plan (the “Directors Plan”) going forward, and to provide a more current set of terms pursuant to which to provide this type of compensation.

The Long Term Incentive Plan grants stock options, RSUs, and other stock-based awards to eligible employees, consultants and directors. No further grants or awards will be made under the Option Plan, the Restricted Share Plan or the Directors Plan. Shares underlying options previously issued under the Option Plan, the Restricted Share Plan or the Directors Plan that are currently outstanding will, upon forfeiture, cancellation, surrender or other termination, become available under the Long Term Incentive Plan. Stock-based awards granted under the Long Term Incentive Plan may be exercised when vested and generally expire ten years from the date of the grant or three to six months from the date of termination of employment (longer in case of death or certain retirements). Vesting periods vary based on awards granted, however, certain stock-based awards may vest immediately or may accelerate based on performance-driven measures.

Up to 15,753,331 shares are authorized for issuance under the stock option plans. As of December 31, 2013, options and RSUs covering 9,184,913 shares of common stock were outstanding under the stock option plans.

Stock Options

In 2013, the Board of Directors of the Company approved grants under the Company’s Amended and Restated 2010 Long Term Incentive Plan for an aggregate of 1,168,203 stock options to certain employees and the directors of the Company. The stock options vest monthly over four years for employees and one year for directors.

In 2012, the Board of Directors of the Company approved grants under the Company’s Amended and Restated 2010 Long Term Incentive Plan for an aggregate of 2,351,445 stock options to certain employees and the directors of the Company. The stock options vest monthly over four years for employees and one year for directors.

In October 2011, the Board of Directors of the Company approved a grant under the Amended and Restated 2010 Long Term Incentive Plan for an aggregate of 1,097,926 stock options to certain employees of the Company. These stock options include immediate vesting in an amount equal to each employee's percentage of outstanding options that are exercisable immediately prior to this grant. The remaining portion will vest monthly over two years.

On August 31, 2011, the Company announced that Steven B. Engle resigned as Chairman of the Board, Chief Executive Officer and President of the Company. In the third quarter of 2011, the Company incurred a stock-based compensation charge of approximately $0.7 million, due to a modification to Mr. Engle’s stock options as a result of his resignation.

Stock Option Plans Summary

A summary of the status of the Company’s stock option plans as of December 31, 2013, 2012, and 2011, and changes during the years ended on those dates is presented below:

	2013					2012					2011
Options:	Shares			Price*		Shares			Price*		Shares			Price*
Outstanding at beginning of year		6,788,383		$	8.99		5,053,435		$	12.55		2,331,450		$	25.36

Granted		1,168,203		$	3.13		2,351,445		$	2.59		2,920,166		$	2.81
Exercised		(589,355	)	$	2.26		(90,252	)	$	1.68		-		$	-
Forfeited, expired or cancelled		(151,190	)	$	17.46		(526,245	)	$	15.84		(198,181	)	$	35.56

Outstanding at end of year		7,216,041		$	8.42		6,788,383		$	8.99		5,053,435		$	12.55

Exercisable at end of year		4,814,926		$	11.14		4,276,834		$	12.42		3,366,807		$	16.33

*	Weighted-average exercise price

At December 31, 2013, there were 6,972,744 stock options vested and expected to vest with a weighted-average exercise price per share of $8.61. The weighted average remaining contractual term of outstanding stock options at December 31, 2013 was 6.5 years and there was an aggregate intrinsic value of $18.2 million. The weighted average remaining contractual term of exercisable stock options at December 31, 2013 was 5.6 years and there was an aggregate intrinsic value of $9.2 million.

Restricted Stock Units

In 2013, the Board of Directors of the Company approved grants under the Amended and Restated 2010 Long Term Incentive Plan for an aggregate of 958,385 RSUs to certain employees and directors of the Company. The RSUs vest annually over three years in equal increments.

In 2012, the Board of Directors of the Company approved grants under the Amended and Restated 2010 Long Term Incentive Plan for an aggregate of 1,292,923 RSUs to certain employees and directors of the Company. The RSUs vest annually over three years in equal increments.

In October 2011, the Board of Directors of the Company approved a company-wide grant under the Amended and Restated 2010 Long Term Incentive Plan for an aggregate of 1,177,082 RSUs. The RSUs vest annually over three years in equal increments.

RSUs held by employees who qualify for retirement age (defined as employees that are a minimum of 55 years of age and the sum of their age plus years of full-time employment with the Company exceeds 70 years) vest immediately.

Unvested RSU activity for the year ended December 31, 2013 is summarized below:

	Number of Shares			Weighted- Average Grant- Date Fair Value
Unvested balance at December 31, 2012		1,459,853		$	2.75
Granted		958,385		$	2.96
Vested		(637,034	)	$	2.57
Forfeited		(43,167	)	$	2.08
Unvested balance at December 31, 2013		1,738,037		$	2.73

The total grant-date fair value of RSUs that vested during the year ended December 31, 2013 was $1.6 million.

Stock-based Compensation Expense

The Company recognizes compensation expense for all stock-based payment awards made to the Company’s employees, consultants and directors based on estimated fair values. The valuation of stock option awards is determined at the date of grant using the Black-Scholes option pricing model. This model requires inputs such as the expected term of the option, expected volatility and risk-free interest rate. To establish an estimate of expected term, the Company considers the vesting period and contractual period of the award and its historical experience of stock option exercises, post-vesting cancellations and volatility. The estimate of expected volatility is based on the Company’s historical volatility. The risk-free rate is based on the yield available on United States Treasury zero-coupon issues. To establish an estimate of forfeiture rate, the Company considers its historical experience of option forfeitures and terminations.

The fair value of stock option awards was estimated using the Black-Scholes model with the following weighted average assumptions for the years ended December 31, 2013, 2012, and 2011:

	Year Ended December 31,
	2013			2012			2011
Dividend yield		0	%		0	%		0	%
Expected volatility		92	%		92	%		88	%
Risk-free interest rate		0.89	%		0.82	%		1.48	%
Expected term	5.6 years			5.6 years			5.4 years

The valuation of RSUs is determined at the date of grant using the closing stock price. The forfeiture rate impacts the amount of aggregate compensation for both stock options and RSUs. To establish an estimate of forfeiture rate, the Company used an independent third party to consider the Company’s historical experience of option forfeitures and terminations.

The following table shows total stock-based compensation expense included in the consolidated statements of comprehensive loss for the years ended December 31, 2013, 2012, and 2011 (in thousands):

	Year Ended December 31,
	2013		2012		2011
Research and development	$	2,358	$	2,391	$	3,672
Selling, general and administrative		2,741		1,893		4,087
Total stock-based compensation expense	$	5,099	$	4,284	$	7,759

There was no capitalized stock-based compensation cost as of December 31, 2013 or 2012, and there were no recognized tax benefits related to the Company’s stock-based compensation expense during the years ended December 31, 2013 or 2012.

- Definition

The entire disclosure for compensation-related costs for equity-based compensation, which may include disclosure of policies, compensation plan details, allocation of equity compensation, incentive distributions, equity-based arrangements to obtain goods and services, deferred compensation arrangements, employee stock ownership plan details and employee stock purchase plan details.

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