Annual report pursuant to Section 13 and 15(d)

Compensation and Other Benefit Plans

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Compensation and Other Benefit Plans
 12 Months Ended
Dec. 31, 2011
Compensation and Other Benefit Plans [Abstract]  
Compensation and Other Benefit Plans
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

In 1998, the Company's stockholders approved the original ESPP which provides employees of the Company the opportunity to purchase shares of common stock through payroll deductions. Up to 233,333 shares of common stock are authorized for issuance under the ESPP. 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.

Effective January 1, 2005, the plan was amended to reduce future offering periods to three months and to change the purchase price per share to 95% of the closing price of XOMA shares on the exercise date.

In 2011, 2010, and 2009, employees purchased 30,044, 5,903 and 14,735 shares of common stock, respectively, under the ESPP. Net payroll deductions under the ESPP totaled $0.1 million, $41,000 and $0.1 million for 2011, 2010 and 2009, 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 2011 of $16,500 (or $22,000 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 $1.1 million, $1.0 million and $0.9 million for the years ended December 31, 2011, 2010 and 2009, 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, restricted stock units, 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 8,679,998 shares are authorized for issuance under the stock option plans. As of December 31, 2011, options covering 6,156,415 shares of common stock were outstanding under the stock option plans.

Stock Options

In October 2011, the Board of Directors of the Company approved a grant under the 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.

In December of 2010, the Board of Directors of the Company approved a company-wide grant of stock options under the Long Term Incentive Plan and, in the first quarter of 2011, the options for 1,430,840 shares became effective. 1,040,220 of these options were granted subject to stockholder approval of an increase in the number of shares available under the Long Term Incentive Plan. On May 26, 2011, stockholder approval was obtained at the Company's annual general meeting of shareholders. A portion of the 2011 annual options granted include immediate vesting terms with the remainder of the options vesting monthly over two years for employees and one year for directors.
 
In March of 2010, the Board of Directors of the Company approved a company-wide grant of an aggregate of 865,806 stock options. This grant included 856,006 options that were issued as part of the Company's annual incentive compensation review, of which 596,666 options were granted subject to stockholder approval of an increase in the number of shares available under the Company's existing stock option plans.  On July 21, 2010 stockholder approval was obtained at the Company's annual general meeting of shareholders. The options granted as part of this annual incentive compensation review will vest monthly over four years.

In February of 2009, the Board of Directors approved a company-wide grant of 315,333 stock options, of which 304,533 were issued as part of the Company's annual incentive compensation package. These options vest monthly over four years and include an acceleration clause based on meeting certain performance measures. In 2009 and 2010, management estimated the timing and probability of the achievement of the acceleration event, which occurred in December of 2010. The Company recognized compensation expense of $0.2 million and $0.1 million for the years ended December 31, 2010 and 2009, respectively, in connection with the accelerated awards.

Stock Option Plans Summary

A summary of the status of the Company's stock option plans as of December 31, 2011, 2010 and 2009, and changes during the years ended on those dates is presented below:

   
2011
    
2010
    
2009
  
Options:
  
Shares
    
Price*
    
Shares
    
Price*
    
Shares
    
Price*
  
Outstanding at beginning of year
     2,331,450     $ 25.36       1,520,102     $ 38.40       1,320,679     $ 48.60  
                                                 
Granted
     2,920,166       2.81       978,264       7.07       432,400       9.00  
Exercised
     -       -       (19 )     8.40       (2,056 )     8.40  
Forfeited, expired or cancelled
     (198,181 )     35.56       (166,897 )     37.26       (230,921 )     41.40  
                                                 
Outstanding at end of year
     5,053,435       12.55       2,331,450       25.36       1,520,102       38.40  
                                                 
Exercisable at end of year
     3,366,807     $ 16.33       1,259,272     $ 36.51       823,096     $ 49.05  
                                                                                                                                                              
* 
Weighted-average exercise price                                                                                                                                                                          
 
At December 31, 2011, there were 4,950,008 stock options vested and expected to vest with a weighted-average exercise price of $12.72. The weighted average remaining contractual term of outstanding stock options at December 31, 2011 was 6.9 years and there was no aggregate intrinsic value. The weighted average remaining contractual term of exercisable stock options at December 31, 2011 was 6.5 years and there was no intrinsic value.

Restricted Stock Units (“RSUs”)

In October 2011, the Board of Directors of the Company approved a company-wide grant under the 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, 2011 is summarized below:
 
         
Weighted-
  
    Number of    
Average Grant-
  
   
Shares
    
Date Fair Value
  
Unvested balance at December 31, 2010
     -     $ -  
Granted
     1,177,082       1.69  
Vested
     (272,439 )     1.69  
Forfeited
     (769 )     1.69  
Unvested balance at December 31, 2011
     903,874     $ 1.69  

The total grant-date fair value of RSUs that vested during the year ended December 31, 2011 was $0.5 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, 2011, 2010 and 2009:

   
Year Ended December 31,
  
   
2011
    
2010
    
2009
  
Dividend yield
     0 %     0 %     0 %
Expected volatility
     88 %     79 %     75 %
Risk-free interest rate
     1.48 %     1.67 %     2.00 %
Expected term
  
5.4 years
    
5.3 years
    
5.6 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 considers its historical experience of option forfeitures and terminations.
 
The following table shows total stock-based compensation expense included in the consolidated statements of operations for the years ended December 31, 2011, 2010 and 2009 (in thousands):

   
Year Ended December 31,
  
   
2011
    
2010
    
2009
  
Research and development
   $ 3,672     $ 2,302     $ 2,182  
Selling, general and administrative
     4,087       2,611       2,213  
Total stock-based compensation expense
   $ 7,759     $ 4,913     $ 4,395  


There was no capitalized stock-based compensation cost as of December 31, 2011 or 2010, and there were no recognized tax benefits related to the Company's stock-based compensation expense during the years ended December 31, 2011 or 2010.