Employee Stock Benefit Plans

We have a stock-based employee compensation plan. We account for stock-based compensation in accordance with FASB ASC Topic 718, “Compensation - Stock Compensation” and FASB ASC Topic 505-50, “Equity - Equity Based Payment to Non-Employees”, which requires the measurement and recognition of compensation expense for all share-based awards to our employees and directors. Share-based compensation cost is measured based on the fair value of the equity or liability instruments issued. FASB ASC 718 and FASB ASC 505-50 apply to all of our outstanding unvested share-based payment awards.

Equity Participation Plan Program Description

We have an equity participation plan, the Amended and Restated Libbey Inc. 2006 Omnibus Incentive Plan, which we refer to as the Omnibus Plan. Up to a total of 2,960,000 shares of Libbey Inc. common stock are authorized for issuance as equity-based compensation under the Omnibus Plan. Under the Omnibus Plan, grants of equity-based compensation may take the form of stock options, stock appreciation rights, performance shares or units, restricted stock or restricted stock units or other stock-based awards. Employees and directors are eligible for awards under this plan. During 2012, there were grants of 163,042 stock options, 215,180 restricted stock units and 3,000 stock appreciation rights. During 2011, there were grants of 168,939 stock options, 165,253 restricted stock units and 2,500 stock appreciation rights. All option grants have an exercise price equal to the fair market value of the underlying stock on the grant date. The vesting period of options, stock appreciation rights and restricted stock units outstanding as of December 31, 2012, is four years. These instruments do not participate in dividends. All grants of equity-based compensation are amortized over the vesting period in accordance FASB ASC 718 expense attribution methodology. The impact of applying the provisions of FASB ASC 718 is a pre-tax compensation expense of $3.3 million, $5.0 million and $3.5 million in selling, general and administrative expenses in the Consolidated Statements of Operations for 2012, 2011 and 2010, respectively. The third quarter of 2011 included non-cash compensation charges of $1.7 million related to accelerated vesting of previously issued equity compensation.

Non-Qualified Stock Option Information

The Black-Scholes option-pricing model was developed for use in estimating the value of traded options that have no vesting restrictions and are fully transferable. The Black-Scholes option-pricing model was used to estimate the grant-date fair value. The following table summarizes non-qualified stock option disclosures for 2012, 2011 and 2010:



Year ended December 31, (dollars in thousands, except options and assumptions)	2012		2011		2010
Stock options granted	163,042		168,939		220,007
Stock option compensation expense included in the Consolidated Statements of Operations	$	1,443	$	2,189	$	988
Weighted-average grant-date fair value of options granted using the Black-Scholes model	$	9.33	$	12.58	$	8.33
Weighted average assumptions for stock option grants:
Risk-free interest	1.08%		2.74%		2.86%
Expected term	6.3 years		6.3 years		6.3 years
Expected volatility	77.94%		88.15%		87.21%
Dividend yield	0.00%		0.00%		0.00%


•	The risk-free interest rate is based on the U.S. Treasury yield curve at the time of grant and has a term equal to the expected life.

•

The expected term represents the period of time the options are expected to be outstanding. Additionally, we use historical data to estimate option exercises and employee forfeitures. We use the Simplified Method defined by the SEC Staff Accounting Bulletin No. 107, “Share-Based Payment” (SAB 107), to estimate the expected term of the option, representing the period of time that options granted are expected to be outstanding.

•

Prior to June 2012, the expected volatility was developed based on historic stock prices commensurate with the expected term of the option. We use projected data for expected volatility of our stock options based on the average of daily, weekly and monthly historical volatilities of our stock price over the expected term of the option and other economic data trended into future years. As a result of our May debt refinancing, we changed our method for determining expected volatility. Expected volatility is calculated based on a rolling average of the daily stock closing prices of a peer group of companies with a period equal to the expected life of the award. The peer group was used due to the Company having a period of history when we were more highly leveraged which is not relevant in evaluating expected volatility. The peer group was established using the criteria of similar industry, size, leverage and length of history. The impact of this change was immaterial.


•	The dividend yield is calculated as the ratio based on our most recent historical dividend payments per share of common stock at the grant date to the stock price on the date of grant.

Information with respect to our stock option activity for 2012, 2011 and 2010 is as follows:



Options	Shares		Weighted-Average Exercise Price per Share		Weighted-Average Remaining Contractual Life (In Years)	Aggregate Intrinsic Value (in thousands)
Outstanding balance at January 1, 2010	1,644,167		$	17.18	6	$	2,258
Granted	220,007		$	11.10
Exercised	(9,279	)	$	14.50		$	84
Canceled	(139,961	)	$	28.05
Outstanding balance at December 31, 2010	1,714,934		$	15.58	6	$	6,710
Granted	168,939		$	16.72
Exercised	(69,327	)	$	6.95		$	681
Canceled	(188,840	)	$	27.90
Outstanding balance at December 31, 2011	1,625,706		$	14.63	4	$	3,957
Granted	163,042		$	13.96
Exercised	(223,382	)	$	5.52		$	2,694
Canceled	(253,732	)	$	22.75
Outstanding balance at December 31, 2012	1,311,634		$	14.47	4	$	7,651
Exercisable at December 31, 2012	964,043		$	15.06		$	5,391

Intrinsic value for share-based instruments is defined as the difference between the current market value and the exercise price. FASB ASC Topic 718 requires the benefits of tax deductions in excess of the compensation cost recognized for those stock options (excess tax benefit) to be classified as financing cash flows.

The aggregate intrinsic value in the preceding table represents the total pretax intrinsic value, based on the Libbey Inc. closing stock price of $19.35 as of December 31, 2012, which would have been received by the option holders had all option holders exercised their options as of that date. The number of outstanding options exercisable and weighted average exercise price is as follows:



December 31,	2012		2011		2010
Outstanding options exercisable	964,043		1,202,949		1,164,814
Weighted average exercise price	$	15.06	$	16.14	$	19.48

As of December 31, 2012, $1.4 million of total unrecognized compensation expense related to nonvested stock options is expected to be recognized within the next 2.6 years on a weighted-average basis. The total fair value of shares vested during 2012 is $1.2 million. Shares issued for exercised options are issued from newly issued stock.

The following table summarizes our nonvested stock option activity for 2012, 2011 and 2010:



	Shares		Weighted-Average Value (per Share)
Nonvested at January 1, 2010	573,369		$	3.74
Granted	220,007		$	8.33
Vested	(221,065	)	$	5.57
Forfeited	(22,191	)	$	4.26
Nonvested at December 31, 2010	550,120		$	4.81
Granted	168,939		$	12.58
Vested	(283,185	)	$	6.87
Forfeited	(13,117	)	$	7.02
Nonvested at December 31, 2011	422,757		$	7.53
Granted	163,042		$	9.33
Vested	(202,115	)	$	5.76
Forfeited	(36,093	)	$	10.40
Nonvested at December 31, 2012	347,591		$	9.11

Performance Share Information

Under the Omnibus Plan, prior to 2009, we granted select executives and key employees performance shares. The number of performance shares granted to an executive was determined by dividing the value to be transferred to the executive, expressed in U.S. dollars and determined as a percentage of the executive's long-term incentive target (which in turn is a percentage of the executive's base salary on January 1 of the year in which the performance shares are granted), by the average closing price of Libbey Inc. common stock over a period of consecutive trading days ending on the date of the grant. Beginning in 2009, awards under this portion of the Incentive Plan were changed to cash awards. In 2010, participants earned performance shares that were granted in 2008 with respect to a 3-year performance cycle that began on January 1, 2008.

The performance shares are settled by issuance to the executive of one share of Libbey Inc. common stock for each performance share earned. Performance shares are earned only if and to the extent we achieve certain company-wide performance goals over performance cycles of between 1 and 3 years. Shares issued for performance share awards are issued from treasury stock and newly issued stock.

A summary of the activity for performance shares under the Omnibus Plan for 2012, 2011 and 2010 is presented below:



Year ended December 31, (dollars in thousands, except share amounts)	2012		2011			2010
Beginning share balance	—		123,826			171,861
Granted	—		—			—
Issued	—		(61,658		)	(48,035		)
Canceled	—		(62,168		)	—
Ending share balance	—		—			123,826

Performance share compensation (income) expense	$	—	$	(129	)	$	481

Stock and Restricted Stock Unit Information

Under the Omnibus Plan, we grant non-employee members of our Board of Directors shares of unrestricted stock. The shares granted to Directors are immediately vested and all compensation expense is recognized in our Consolidated Statements of Operations in the year the grants are made. In addition, we grant restricted stock units to select executives, and we grant shares of restricted stock to key employees. The restricted stock units granted to select executives vest over four years. The restricted stock units granted to key employees generally vest on the first anniversary of the grant date.

A summary of the activity for restricted stock units under the Omnibus Plan for 2012, 2011 and 2010 is presented below:



Year ended December 31, (dollars in thousands, except share amounts)	2012			2011			2010
Beginning nonvested balance	245,359			404,415			292,728
Granted	215,180			165,253			226,667
Vested	(152,340		)	(301,308		)	(111,480		)
Forfeited	(45,018		)	(23,001		)	(3,500		)
Ending nonvested balance	263,181			245,359			404,415

Weighted-average grant-date fair value per restricted stock unit	$	13.99		$	16.44		$	13.85

Compensation expense	$	1,878		$	2,956		$	2,027

As of December 31, 2012, there was $1.6 million of total unrecognized compensation cost related to nonvested restricted stock units granted. That cost is expected to be recognized over a weighted average period of 1.9 years. Shares issued for restricted stock unit awards are issued from treasury stock or newly issued shares.

Employee 401(k) Plan Retirement Fund and Non-Qualified Deferred Executive Compensation Plans

We sponsor the Libbey Inc. salary and hourly 401(k) plans (the Plan) to provide retirement benefits for our U.S. employees. As allowed under Section 401(k) of the Internal Revenue Code, the Plan provides tax-deferred salary contributions for eligible employees.

For the Salary Plan, employees can contribute from 1 percent to 50 percent of their annual salary on a pre-tax basis, up to the annual IRS limits. Through December 31, 2012, we matched 100 percent on the first 1 percent and matched 50 percent on the next five percent of pretax contributions to a maximum of 3.5 percent of compensation. Effective January 1, 2013, we will match 100 percent on the first 6 percent of eligible compensation. For the Hourly Plan, employees can contribute from 1 percent to 25 percent of their annual pay up to the annual IRS limits. We match 50 percent of the first 6 percent of eligible earnings that are contributed by employees on a pretax basis. Therefore, the maximum matching contribution that we may allocate to each participant's account did not exceed $8,750 for the Salary Plan or $7,500 for the Hourly Plan for the 2012 calendar year due to the $250,000 annual limit on eligible earnings imposed by the Internal Revenue Code. All matching contributions are made in cash and vest immediately.

At the end of 2008, the non-qualified Executive Savings Plan (ESP) was frozen. The ESP was for those employees whose salary exceeded the IRS limit. Libbey matched employee contributions under the ESP in the same manner as we provided matching contributions under our 401(k) Salary Plan.

Effective January 1, 2009, we have a non-qualified Executive Deferred Compensation Plan (EDCP). Under the EDCP, executives and other members of senior management may elect to defer base salary (including vacation pay and holiday pay), cash incentive and bonus compensation and equity-based compensation. We provide matching contributions on excess contributions in the same manner as we provide matching contributions under our 401(k) plan.

Our matching contributions to all Plans totaled $2.3 million, $2.4 million and $2.4 million in 2012, 2011 and 2010, respectively.