UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

þ		QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2006

OR

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number 1-12084

Libbey Inc.

Delaware		34-1559357
(State or other		(IRS Employer
jurisdiction of		Identification No.)
incorporation or
organization)

300 Madison Avenue, Toledo, Ohio 43604

419-325-2100

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large Accelerated Filer o      Accelerated Filer þ      Non-Accelerated Filer o

Indicate by check mark whether the registrant is a shell company. Yes o No þ

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Common Stock, $.01 par value — 14,301,626 shares at Oct 31, 2006.

 

 

TABLE OF CONTENTS

Item 1. Financial Statements

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

CONDENSED CONSOLIDATED BALANCE SHEETS

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. Description of the Business

2. Significant Accounting Policies

3. Balance Sheet Details

4. Acquisitions

5. Borrowings

6. Special Charges

7. Pension

8. Nonpension Postretirement Benefits

9. Net Income per Share of Common Stock

10. Employee Stock Benefit Plans

11. Derivatives

12. Comprehensive Income

13. Guarantees

14. Condensed Consolidated Guarantor Financial Statements

15. Segments

16. Subsequent Event

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Item 3. Qualitative and Quantitative Disclosures about Market Risk

Item 4. Controls and Procedures

PART II — OTHER INFORMATION

Item 1A. Risk Factors

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Item 5. Other Information

Item 6. Exhibits

EXHIBIT INDEX

SIGNATURES

Certification

Certification

Certification

Certification

EX-31.1

EX-31.2

EX-32.1

EX-32.2

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

The accompanying unaudited condensed consolidated financial statements of Libbey Inc. and all majority-owned subsidiaries (collectively, Libbey or the Company) have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Item 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (including normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three-month and nine-month periods ended September 30, 2006, are not necessarily indicative of the results that may be expected for the year ended December 31, 2006.

The balance sheet at December 31, 2005, has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements.

For further information, refer to the consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2005.

LIBBEY INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(dollars in thousands, except per-share amounts)

(unaudited)

		Three months ended September 30,
		2006				2005
Net sales		$	183,256			$	135,573
Freight billed to customers			1,004				444
Total revenues			184,260				136,017
Cost of sales			152,692				108,750
Gross profit			31,568				27,267
Selling, general and administrative expenses			20,729				16,788
Special charges			—				487
Income from operations			10,839				9,992
Equity loss — pretax			—				(1,183	)
Other (loss) income			(1,733	)			923
Earnings before interest and income taxes and minority interest			9,106				9,732
Interest expense			15,551				3,398
(Loss) income before income taxes and minority interest			(6,445	)			6,334
(Credit) provision for income taxes			(3,116	)			2,090
(Loss) income before minority interest			(3,329	)			4,244
Minority interest			22				(77	)
Net (loss) income		$	(3,307	)		$	4,167
Net (loss) income per share:
Basic		$	(0.23	)		$	0.30
Diluted		$	(0.23	)		$	0.30
Dividends per share		$	0.025			$	0.10

See accompanying notes

LIBBEY INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(dollars in thousands, except per-share amounts)
(unaudited)

		Nine months ended September 30,
		2006				2005
Net sales		$	476,120			$	409,895
Freight billed to customers			2,387				1,422
Total revenues			478,507				411,317
Cost of sales			396,621				335,955
Gross profit			81,886				75,362
Selling, general and administrative expenses			59,511				55,109
Special charges			12,587				7,681
Income from operations			9,788				12,572
Equity earnings (loss) — pretax			1,986				(1,381	)
Other (loss) income			(2,244	)			1,655
Earnings before interest and income taxes and minority interest			9,530				12,846
Interest expense			29,360				10,240
(Loss) income before income taxes and minority interest			(19,830	)			2,606
(Credit) provision for income taxes			(7,535	)			860
(Loss) income before minority interest			(12,295	)			1,746
Minority interest			(66	)			(98	)
Net (loss) income		$	(12,361	)		$	1,648
Net (loss) income per share:
Basic		$	(0.87	)		$	0.12
Diluted		$	(0.87	)		$	0.12
Dividends per share		$	0.075			$	0.30

See accompanying notes

LIBBEY INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(dollars in thousands, except share amounts)

		September 30,				December 31,
		2006				2005
		(unaudited)
ASSETS
Current assets:
Cash		$	37,804			$	3,242
Accounts receivable — net			104,708				79,042
Inventories — net			167,859				122,572
Deferred taxes			3,529				8,270
Prepaid and other current assets			14,075				10,787
Total current assets			327,975				223,913
Other assets:
Repair parts inventories			12,514				6,322
Intangible pension asset			17,251				17,251
Software — net			4,587				4,561
Deferred taxes			—				952
Investments			—				76,657
Other assets			20,706				4,397
Purchased intangible assets — net			29,722				10,778
Goodwill — net			167,033				50,825
Total other assets			251,813				171,743
Property, plant and equipment — net			309,777				200,128
Total assets		$	889,565			$	595,784
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Notes payable		$	422			$	11,475
Accounts payable			73,559				47,020
Salaries and wages			22,289				16,043
Accrued liabilities			50,645				36,901
Derivative liability			4,374				67
Special charges reserve			3,509				2,002
Accrued income taxes			—				7,131
Long-term debt due within one year			825				825
Total current liabilities			155,623				121,464
Long-term debt—net			484,035				249,379
Pension liability			78,061				54,760
Nonpension postretirement benefits			43,673				45,081
Payable to Vitro			19,479				—
Other long-term liabilities			4,290				5,461
Total liabilities			785,161				476,145
Minority interest			100				34
Total liabilities including minority interest			785,261				476,179
Shareholders’ equity:
Common stock, par value $.01 per share, 50,000,000 shares authorized, 18,689,710 shares issued (18,689,710 shares issued in 2005)			187				187
Capital in excess of par value (includes warrants of $1,034, and 485,309 shares as of September 30, 2006 and no warrants at December 31, 2005)			302,479				301,025
Treasury stock, at cost, 4,405,509 shares (4,681,721 shares in 2005)			(129,968	)			(132,520	)
Retained deficit			(31,388	)			(17,966	)
Accumulated other comprehensive loss			(37,006	)			(31,121	)
Total shareholders’ equity			104,304				119,605
Total liabilities and shareholders’ equity		$	889,565			$	595,784

See accompanying notes

LIBBEY INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(dollars in thousands)

(unaudited)

		Three months ended September 30,
		2006				2005
Operating activities:
Net (loss) income		$	(3,307	)		$	4,167
Depreciation and amortization			10,671				9,160
Equity loss — net of tax			—				791
Change in accounts receivable			(2,624	)			(2,685	)
Change in inventories			(5,600	)			(11,773	)
Change in accounts payable			17,373				11,516
Change in derivative liability			3,812				(9,868	)
Special charges			(65	)			(2,356	)
Pension & nonpension postretirement			3,225				1,517
Income taxes			(12,241	)			979
Other operating activities			(95	)			(193	)
Net cash provided by operating activities			11,149				1,255
Investing activities:
Additions to property, plant and equipment			(20,301	)			(7,389	)
Business acquisition and related costs, less cash acquired			(424	)			—
Other			—				223
Net cash used in investing activities			(20,725	)			(7,166	)
Financing activities:
Net revolving credit facility activity			—				3,030
Net ABL credit facility activity			8,889				—
Other net (repayments) borrowings			(395	)			3,514
Other borrowings			12,542				—
Debt financing fees			(1,112	)			—
Dividends			(356	)			(1,394	)
Other			1,078				(537	)
Net cash provided by financing activities			20,646				4,613
Effect of exchange rate fluctuations on cash			73				—
Increase (decrease) in cash			11,143				(1,298	)
Cash at beginning of period			26,661				2,540
Cash at end of period		$	37,804			$	1,242
Supplemental disclosure of cash flows information:
Cash paid during the quarter for interest		$	389			$	2,448
Cash paid (net of refunds received) during the quarter for income taxes		$	918			$	(50	)

See accompanying notes

LIBBEY INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
(unaudited)

		Nine months ended September 30,
		2006				2005
Operating activities:
Net (loss) income		$	(12,361	)		$	1,648
Depreciation and amortization			27,212				25,611
Equity (earnings) loss — net of tax			(1,378	)			967
Change in accounts receivable			1,892				(4,382	)
Change in inventories			(2,678	)			(16,284	)
Change in accounts payable			2,061				3,630
Change in derivative liability			13,986				(14,289	)
Payable to Vito			(9,377	)			—
Special charges			18,859				1,156
Pension & nonpension postretirement			9,428				4,538
Income taxes			(16,979	)			(4,804	)
Other operating activities			859				14,955
Net cash provided by operating activities			31,524				12,746
Investing activities:
Additions to property, plant and equipment			(54,557	)			(26,503	)
Business acquisition and related costs, less cash acquired			(77,995	)			(28,990	)
Other			—				223
Net cash used in investing activities			(132,552	)			(55,270	)
Financing activities:
Net revolving credit facility activity			(147,142	)			35,910
Net ABL credit facility activity			51,927				—
Other net (repayments) borrowings			(81,455	)			6,227
Other borrowings			27,496				—
Note payments			(100,000	)			—
Note proceeds			399,840				—
Debt financing fees			(15,468	)			—
Dividends			(1,059	)			(4,162	)
Other			1,273				(453	)
Net cash provided by financing activities			135,412				37,522
Effect of exchange rate fluctuations on cash			178				—
Increase (decrease) in cash			34,562				(5,002	)
Cash at beginning of period			3,242				6,244
Cash at end of period		$	37,804			$	1,242
Supplemental disclosure of cash flows information:
Cash paid during the period for interest		$	9,734			$	8,726
Cash paid (net of refunds received) during the period for income taxes		$	6,770			$	5,198

See accompanying notes

LIBBEY INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Dollars in thousands, except per share data

(unaudited)

1. Description of the Business

Libbey is the leading supplier of tableware products in the Western Hemisphere, in addition to supplying to key export markets in the Eastern Hemisphere. Established in 1818, we have the largest manufacturing, distribution and service network among North American glass tableware manufacturers. We design and market an extensive line of high-quality glass tableware, ceramic dinnerware, metal flatware, hollowware and serveware, and plastic items to a broad group of customers in the foodservice, retail, business-to-business and industrial markets. We also import and distribute various products. Prior to June 16, 2006, we owned 49 percent of Vitrocrisa Holding, S. de R.L. de C.V. and related companies (Crisa), one of the largest glass tableware manufacturers in Mexico and Latin America, based in Monterrey, Mexico. On June 16, 2006, we acquired the remaining 51 percent interest of Crisa. See note 4 for additional details on the acquisition.

We own and operate two glass tableware manufacturing plants in the United States; glass tableware manufacturing plants in the Netherlands and in Portugal; and two glass tableware manufacturing plants in Mexico. In addition, we expect to begin production at our new green-meadow production facility in China in early 2007. We also own and operate a ceramic dinnerware plant in New York and a plastics plant in Wisconsin. In addition, we import products from overseas in order to complement our line of manufactured items. The combination of manufacturing and procurement allows us to compete in the tableware market by offering an extensive product line at competitive prices.

Our website can be found at www.libbey.com. We make available, free of charge, at this website all of our reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, including our annual report on Form 10-K, our quarterly reports on Form 10-Q, our Current Reports on Form 8-K, as well as amendments to those reports. These reports are made available on the website as soon as reasonably practicable after their filing with, or furnishing to, the Securities and Exchange Commission.

2. Significant Accounting Policies

See our Form 10-K for the year ended December 31, 2005, for a description of significant accounting policies not listed below.

Basis of Presentation

The Condensed Consolidated Financial Statements include Libbey Inc. and its majority-owned subsidiaries (collectively, Libbey or the Company). Our fiscal year end is December 31st. Prior to June 16, 2006, we recorded our 49 percent interest in Crisa using the equity method. On June 16, 2006, we acquired the remaining 51 percent of Crisa; as a result, effective that date Crisa’s results are included in the Condensed Consolidated Financial Statements. Prior to October 13, 2006, we owned 95 percent of Crisal-Cristalaria Automatica S.A. (Crisal). Our 95 percent controlling interest in Crisal that we owned prior to October 13, 2006 requires that Crisal’s operations be included in the Condensed Consolidated Financial Statements. The 5 percent equity interest of Crisal that we did not own prior to October 13, 2006 is shown as minority interest in the Condensed Consolidated Financial Statements. On October 13, 2006, we acquired the remaining 5 percent of Crisal (see footnote 16). All material intercompany accounts and transactions have been eliminated. The preparation of financial statements and related disclosures in conformity with United States generally accepted accounting principles (U.S. GAAP) requires management to make estimates and assumptions that affect the amounts reported in the Condensed Consolidated Financial Statements and accompanying notes. All material estimates and assumptions are normal and recurring in nature. Actual results could differ materially from management’s estimates.

Condensed Consolidated Statements of Operations

Net sales in our Condensed Consolidated Statements of Operations include revenue earned when products are shipped and title and risk of loss have passed to the customer. Sales are recorded net of returns, discounts and incentives offered to customers. Cost of sales includes cost to manufacture and/or purchase products, warehouse, shipping and delivery costs, royalty expense and other costs.

Foreign Currency Translation

Our European and Chinese foreign subsidiaries’ financial statements are translated at current exchange rates for the euro and the Chinese RMB, and any related translation adjustments are recorded directly in shareholders’ equity. Our Mexican subsidiary (Crisa) uses the U.S. dollar as the functional currency. As a result, Crisa’s financial statements have been remeasured from Mexican pesos into U.S. dollars using (i) current exchange rates for monetary asset and liability accounts, (ii) historical exchange rates for nonmonetary asset and liability accounts, (iii) historical exchange rates for revenues and expenses associated with nonmonetary assets and liabilities and (iv) the weighted average exchange rate of the reporting period for all other revenues and expenses. The resulting remeasurement gain (loss) is recorded in earnings before interest and income taxes.

Income Taxes

Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and tax credit carry-forwards. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled. FAS No. 109, “Accounting for Income Taxes,” requires that a valuation allowance be recorded when it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are determined separately for each tax jurisdiction in which the Company conducts its operations or otherwise incurs taxable income or losses. In the United States, the Company has recorded deferred tax assets, the largest of which relate to pension and nonpension postretirement benefits. The deferred tax assets are partially offset by deferred tax liabilities, the most significant of which relate to accelerated depreciation. Losses before income taxes have been incurred in recent years and though the risk of not realizing the deferred tax asset exists we believe it is more likely than not that the deferred tax asset will be realized through loss carrybacks and the effects of tax planning.

New Accounting Standards

In May 2005, the FASB issued Statement No. 154, “Accounting Changes and Error Corrections,” a replacement of APB Opinion No. 20, “Accounting Changes,” and Statement No. 3, “Reporting Accounting Changes in Interim Financial Statements”(Statement 154). Statement 154 changes the requirements for the accounting for and reporting of a change in accounting principle. Previously, most voluntary changes in accounting principles were required to be recognized via a cumulative effect adjustment within net income of the period of change. Statement 154 requires retrospective application to prior periods’ financial statements, unless it is impracticable to determine either the period-specific effects or the cumulative effect of the change. Statement 154 is effective for accounting changes made in fiscal years beginning after December 15, 2005. The adoption of Statement 154 had no effect on our consolidated financial position, results of operations or cash flows.

On September 29, 2006, the FASB issued Statement No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans,”(statement 158) which is an amendment to FASB Statement Nos. 86, 87, 106 and 132-R. Statement 158 requires an employer to recognize the overfunded or underfunded status of a defined benefit postretirement plan as an asset or liability in its statement of financial position and to recognize changes in that funded status in the year in which the changes occur through comprehensive income of a business entity. This statement also requires an employer to measure the funded status of a plan as of the date of its year-end statement of financial position. In previous standards, the employer was required to disclose the complete funded status of its plans only in the notes to the financial statements.

Statement 158 is effective for publicly held companies for fiscal years ending after December 15, 2006. Libbey will adopt the balance sheet recognition provisions of Statement 158 at December 31, 2006. The adoption of Statement 158 is expected to reduce Libbey’s stockholders’ equity at December 31, 2006 by approximately $20-25 million pre-tax. This Statement does not affect the results of operations.

Reclassifications

Certain amounts in prior years’ financial statements have been reclassified to conform to the presentation used in the current year financial statements.

3. Balance Sheet Details

The following table provides detail of selected balance sheet items:

		September 30, 2006				December 31, 2005
Accounts receivable:
Trade receivables		$	99,186			$	75,470
Other receivables			5,522				3,572
Total accounts receivable, less allowances of $11,329 and $8,342		$	104,708			$	79,042
Inventories:
Finished goods		$	156,414			$	112,058
Work in process			4,334				4,456
Raw materials			4,982				5,442
Operating supplies			2,129				616
Total inventories		$	167,859			$	122,572
Prepaid and other current assets:
Prepaid expenses		$	14,075			$	3,142
Derivative assets			—				7,645
Total prepaid and other current assets		$	14,075			$	10,787
Other assets:
Deposits		$	1,153			$	1,386
Finance fees — net of amortization			14,677				2,003
Other			4,876				1,008
Total other assets		$	20,706			$	4,397
Accrued liabilities:
Accrued incentives		$	12,823			$	14,306
Workers compensation			9,286				9,134
Medical liabilities			2,602				3,019
Interest			17,873				1,843
Commissions payable			1,183				858
Accrued non income taxes			1,254				432
Other			5,624				7,309
Total accrued liabilities		$	50,645			$	36,901
Other long-term liabilities:
Deferred liability		$	596			$	877
Guarantee of Crisa debt			—				421
Other			3,694				4,163
Total other long-term liabilities		$	4,290			$	5,461

4. Acquisitions

On June 16, 2006, we purchased the remaining 51 percent of the shares of Vitrocrisa Holding, S. de R.L. de C.V. and related companies (Crisa) located in Monterrey, Mexico, from Vitro, S.A. de C.V., bringing our ownership in Crisa to 100 percent. The purchase price of this acquisition was $84 million, including acquisition costs. In addition, we refinanced approximately $71.9 million of Crisa’s existing indebtedness, of which the Company guaranteed $23 million prior to the purchase of the remaining 51 percent of the shares of Crisa. In connection with the acquisition, Crisa transferred to Vitro the pension liability for Crisa employees who had retired as of the closing date. Vitro also agreed to forgive $0.4 million of net intercompany payables owed to it and to defer receipt of approximately $9.4 million of net intercompany payables until August 15, 2006, and approximately $19.5 million (212.9 million pesos) of net intercompany payables until January 15, 2008. In addition, Vitro waived its right to receive profit sharing payments of approximately $1.3 million from Libbey under the now-terminated distribution agreement. Vitro also transferred to Crisa ownership of racks and conveyors valued at approximately $3.0 million that Crisa leased from an affiliate of Vitro. Vitro agreed to provide transition services to Crisa for a period of three years and agreed to fix the charges for those services for the first two years at 2005 rates. In addition, Crisa is entitled to a credit against these charges in an amount equal to $0.63 million per year for the first two years.

Crisa is the largest glass tableware manufacturer in Latin America and has approximately 63 percent of the glass tableware market in Mexico. This acquisition is consistent with our strategy to expand our manufacturing platform into low-cost countries in order to become a more cost-competitive source of high-quality glass tableware.

In establishing the opening balance sheet under step acquisition accounting, we recorded 49 percent of the historical book value of the assets acquired and liabilities assumed of Crisa due to our existing 49 percent ownership of Crisa, and 51 percent of the fair values of the assets acquired and liabilities assumed as of the date of acquisition. These values represent preliminary estimates that will be finalized in the future when the final fair value of assets and liabilities are determined. The following is a summary of 51 percent of the preliminarily assigned fair values of the assets acquired and liabilities assumed as of the date of acquisition.

Current assets		$	37,017
Property, plant and equipment			46,673
Intangible assets			19,584
Other assets			3,454
Goodwill			47,601
Total assets acquired			154,329
Less liabilities assumed:
Current liabilities			63,386
Long-term liabilities			6,519
Total liabilities assumed			69,905
Cash purchase price			84,424
Less: Cash acquired			6,429
Cash purchase price, net of cash acquired		$	77,995

The following table is a summary of the preliminary goodwill created by the excess of the purchase price over the estimated fair value of assets acquired and liabilities assumed as a result of the preliminary purchase price allocation. This table provides the details for 100 percent of the goodwill created by the purchase of the remaining 51 percent interest in Crisa:

Inferred enterprise purchase price ($80 million divided by 51 percent)		$	156,863
Less: assets received/liabilities forgiven			(4,688	)
Add: estimated direct acquisition costs			4,424
Aggregate enterprise purchase price			156,599
Add: fair value liabilities assumed			155,593
Less: fair value assets acquired			(221,949	)
Inferred goodwill of 51 percent purchase			90,243
Equity interest acquired			51	%
Preliminary goodwill of 51 percent purchase			46,024
Adjustments to step acquisition accounting			1,577
Total goodwill of 51 percent purchase after adjustments			47,601
Add: goodwill recorded on existing 49 percent ownership interest			69,347
Enterprise goodwill		$	116,948

Intangible assets acquired of approximately $19.6 million consist of trademarks and trade names, patented technologies, customer lists, and non-compete covenants. The patented technologies, customer lists, and non-compete covenants are being amortized over an average life of 9.6 years. Amortization of these intangible assets was $0.3 million for the quarter and nine-month period ended September 30, 2006. Trademarks and trade names are valued at approximately $8.2 million and are not subject to amortization.

Crisa’s results of operations are included in our Consolidated Financial Statements starting June 16, 2006. Prior to June 16, 2006, 49 percent of Crisa’s earnings were accounted for under the equity method.

The proforma unaudited results of operations including Crisa for the three months ended September 30, 2006 and the nine months ended September 30, 2006, assuming the acquisition had been consummated as of January 1, 2006, along with comparative results for the three months ended September 30, 2005 and nine months ended September 30, 2005, are as follows:

		Three months ended									Nine months ended
		September 30,									September 30,
		2006				2005					2006				2005
Net sales		$	183,256			$	175,595				$	550,192			$	528,043
Earnings before interest and taxes		$	9,128			$	14,614				$	36,437			$	35,776
Net (loss) income from operations		$	(3,307	)		$	5,341				$	(10,740	)		$	6,855
Net (loss) income per share:
Basic		$	(0.23	)		$	0.38				$	(0.76	)		$	0.49
Diluted		$	(0.23	)		$	0.38				$	(0.76	)		$	0.49
Depreciation and amortization		$	11,060			$	11,537				$	33,298			$	35,224
Special charges included in the proforma table above are detailed below (see Note 6):
		Three months ended									Nine months ended
		September 30,									September 30,
		2006				2005					2006				2005
Total pretax special charges		$	—			$	487				$	20,036			$	9,895
Special charges net of tax		$	—			$	326				$	12,422			$	6,630

In June 2006, we announced plans to consolidate, Crisa’s two principal manufacturing facilities into a single facility, in order to reduce fixed costs. In connection with this consolidation, we recognized special charges of approximately $15.1 million in the second quarter of 2006 (additional charges could be recognized as we finalize the step acquisition accounting), which are described in Note 6. In addition, a $2.7 million reserve related to statutory severance for approximately 600 hourly employees of Crisa was established and is included in special charges reserve on the Condensed Consolidated Balance Sheets. We expect to experience a cost savings of $13 to $15 million associated with the consolidation.

5. Borrowings

Our borrowings, prior to the refinancing consummated on June 16, 2006, consisted of a revolving credit and swing line facility permitting borrowings up to an aggregate total of $195 million, $100 million of privately placed senior notes, a $2.7 million promissory note in connection with the purchase of our Laredo, Texas warehouse, a euro-based working capital line for a maximum of €10 million, and other borrowings including the RMB Loan Contract described below and other debt related to Crisal.

On June 16, 2006, Libbey Glass Inc. issued, pursuant to private offerings, $306 million aggregate principal amount of floating rate senior secured notes and $102 million aggregate principal amount of 16 percent senior subordinated secured pay-in-kind notes (PIK Notes) both due 2011. Concurrently, Libbey Glass Inc. entered into a new $150 million Asset Based Loan facility (ABL Facility), expiring in 2010.

Proceeds from these transactions were immediately used to repay existing bank and private placement indebtedness. In addition, proceeds were used for the acquisition of the remaining 51 percent equity interest in Crisa, for $80 million, bringing our ownership of Crisa to 100 percent; for repayment of existing Crisa indebtedness of approximately $71.9 million; and for related fees, expenses and redemption premiums of Libbey and Crisa. Unamortized finance fees in the amount of $4.9 million related to the refinanced debt of Libbey and Crisa were also written off in the second quarter of 2006 and classified as interest expense in the Condensed Consolidated Statements of Operations.

Borrowings consist of the following:

						September 30,				December 31,
		Interest Rate		Maturity Date		2006				2005
Borrowings under revolving credit facility		floating		June 24, 2009		$	—			$	143,814
Borrowings under ABL facility		floating		December 16, 2010			52,021				—
Senior notes		4.69%		March 31, 2008			—				25,000
Senior notes		6.08%		March 31, 2013			—				55,000
Senior notes		floating		March 31, 2010			—				20,000
		floating (see
		Interest rate
		protection
Senior secured notes		Agreements below)		June 1, 2011			306,000				—
PIK notes		16.00%		December 1, 2011			102,000				—
Promissory note		6.00%		October 2006 to September			2,022				2,131
				2016
Notes payable		floating		October 2006			422				11,475
RMB loan contract		floating		July 2012 to December 2012			27,852				—
Obligations under capital leases		floating		October 2006 to May 2007			1,644				2,203
Other debt		floating		September 2009			1,878				2,056
Total borrowings							493,839				261,679
Less — unamortized discounts and warrants							8,557				—
Total borrowings — net							485,282				261,679
Less — current portion of borrowings							1,247				12,300
Total long-term portion of borrowings — net						$	484,035			$	249,379

ABL Facility

The ABL Facility is with a group of banks and provides for a revolving credit and swing line facility permitting borrowings up to an aggregate of $150 million, with Libbey Europe B.V.’s borrowings being limited to $75 million. Borrowings under the ABL Facility mature December 16, 2010. Swing line borrowings are limited to $15 million, with swing line borrowings for Libbey Europe B.V. being limited to €7.5 million. Swing line U.S. dollar borrowings bear interest calculated at the prime rate plus the Applicable Rate for ABR (Alternate Base Rate) Loans, and euro-denominated swing line borrowings (Eurocurrency Loans) bear interest calculated at the Netherlands swing line rate, as defined in the ABL Facility. The Applicable Rates for ABR Loans and Eurocurrency Loans vary depending on our aggregate remaining availability. The Applicable Rates for ABR Loans and Eurocurrency Loans were 0 percent and 1.75 percent, respectively, at September 30, 2006. There were no Libbey Glass borrowings under the facility, while Libbey Europe B.V. had outstanding borrowings of €41.0 million at September 30, 2006. Interest with respect to the ABL facility is payable monthly.

All borrowings under the ABL Facility are secured by a first priority security interest in (i) substantially all assets of (a) Libbey Glass and (b) substantially all of Libbey Glass’s present and future direct and indirect domestic subsidiaries, (ii) (a) 100 percent of the stock of Libbey Glass, (b) 100 percent of the stock of substantially all of Libbey Glass’s present and future direct and indirect domestic subsidiaries, (c) 100 percent of the non-voting stock of substantially all of Libbey Glass’s first-tier present and future foreign subsidiaries and (d) 65 percent of the voting stock of substantially all of Libbey Glass’s first-tier present and future foreign subsidiaries, and (iii) substantially all proceeds and products of the property and assets described in clauses (i) and (ii) of this sentence. Additionally, borrowings by Libbey Europe under the ABL Facility are secured by a first priority security interest in (i) substantially all of the assets of Libbey Europe, the parent of Libbey Europe and certain of its subsidiaries, (ii) 100 percent of the stock of Libbey Europe and certain subsidiaries of Libbey Europe, and (iii) substantially all proceeds and products of the property and assets described in clauses (i) and (ii) of this sentence.

We pay a Commitment Fee, as defined by the ABL Facility, on the total credit provided under the Facility. The Commitment Fee varies depending on our aggregate availability. The Commitment Fee was 0.25 percent at September 30, 2006. No compensating balances are required by the Agreement. The Agreement does not require compliance with restrictive financial covenants, unless aggregate unused availability falls below $25 million.

The borrowing base under the ABL Facility is determined by a monthly analysis of the eligible accounts receivable, inventory and fixed assets. The borrowing base is the sum of (a) 85% of eligible accounts receivable, (b) the lesser of (i) 85% of the net orderly liquidation value (NOLV) of eligible inventory, (ii) 65% of eligible inventory, or (iii) $75 million and (c) the lesser of $25 million and the aggregate of (i) 75% of the NOLV of eligible equipment and (ii) 50% of the fair market value of eligible real property.

Offsetting the total borrowing base are real estate and ERISA reserves totaling $13 million and mark-to-market reserves for natural gas and interest rate swaps of $2.9 million. The ABL Facility also provides for the issuance of $30 million of letters of credit, which are applied against the $150 million limit. At September 30, 2006, we had $8.4 million in letters of credit outstanding under the Facility. Remaining unused availability on the ABL Facility was $36.7 million at September 30, 2006.

Senior Notes

Libbey Glass and Libbey Inc. entered into a purchase agreement pursuant to which Libbey Glass agreed to sell $306 million aggregate principal amount of floating rate senior secured notes due 2011 (Senior Notes) to the initial purchasers named in a private placement. The net proceeds, after deducting a discount and the estimated expenses and fees, were approximately $290.1 million. The Senior Notes bear interest at a rate equal to six-month LIBOR plus 7.0 percent and were offered at a discount of 2 percent of face value. Interest with respect to the Senior Notes is payable semiannually on June 1 and December 1. The interest rate was 12.44 percent at September 30, 2006.

We have Interest Rate Protection Agreements (Rate Agreements) with respect to $200 million of debt as a means to manage our exposure to fluctuating interest rates. The Rate Agreements effectively convert this portion of our long-term borrowings from variable rate debt to fixed-rate debt, thus reducing the impact of interest rate changes on future income. The fixed interest rate for our borrowings related to the Rate Agreements at September 30, 2006, excluding applicable fees, is 5.24 percent per year and the total interest rate, including applicable fees, is 12.24 percent per year. The average maturity of these Rate Agreements is 3.4 years at September 30, 2006. Total remaining Senior notes not covered by the Rate Agreements has fluctuating interest rates with a weighted average rate of 12.44 percent per year at September 30, 2006. If the counterparties to these Rate Agreements were to fail to perform, we would no longer be protected from interest rate fluctuations by these Rate Agreements. However, we do not anticipate nonperformance by the counterparties.

The fair market value for the Rate Agreements at September 30, 2006, was $(1.7) million. The fair value of the Rate Agreements is based on the market standard methodology of netting the discounted expected future variable cash receipts and the discounted future fixed cash payments. The variable cash receipts are based on an expectation of future interest rates derived from observed market interest rate forward curves. We do not expect to cancel these agreements and expect them to expire as originally contracted.

The Senior Notes are guaranteed by Libbey Inc. and all of Libbey Glass’s existing and future domestic subsidiaries that guarantee any of Libbey Glass’s debt or debt of any subsidiary guarantor (see footnote 14). The Senior Notes and related guarantees will have the benefit of a second-priority lien, subject to permitted liens, on collateral consisting of substantially all the tangible and intangible assets of Libbey Glass and its domestic subsidiary guarantors that secure all of the indebtedness under Libbey Glass’s new ABL Facility. The Collateral will not include the assets of non-guarantor subsidiaries that will secure the ABL Facility.

PIK Notes

Concurrently with the execution of the purchase agreement with respect to the Senior Notes, Libbey Glass and Libbey Inc. entered into a purchase agreement (Unit Purchase Agreement) pursuant to which Libbey Glass agreed to sell units consisting of $102 million aggregate principal amount 16 percent senior subordinated secured pay-in-kind notes due 2011 (PIK Notes) and Libbey Inc. issued detachable warrants to purchase 485,309 shares of Libbey Inc. common stock (Warrants), to a purchaser named in a private placement. The net proceeds, after deducting a discount and estimated expenses and fees, were approximately $97.0 million. The proceeds were allocated between warrants and the underlying debt based on their respective fair values at the time of issuance. The amount allocated to the warrants has been recorded in equity, with the offset recorded as a discount on the underlying debt. The PIK Notes bear interest at a rate of 16 percent, and were offered at a discount of 2 percent of face value. Interest is payable semiannually on June 1 and December 1, but during the first three years, interest is payable by issuance of additional PIK Notes. Each Warrant is exercisable at $11.25.

The obligations of Libbey Glass under the PIK Notes are guaranteed by Libbey Inc. and all of Libbey Glass’s existing and future domestic subsidiaries that guarantee any of Libbey Glass’s debt or debt of any subsidiary guarantor (see footnote 14). The PIK Notes and related guarantees are senior subordinated obligations of Libbey Glass and the guarantors of the PIK Notes and are entitled to the benefit of a third-priority lien, subject to permitted liens, on the collateral that secures the Senior Notes.

Promissory Note

In September 2001, we issued a $2.7 million promissory note in connection with the purchase of our Laredo, Texas warehouse facility. At September 30, 2006, and December 31, 2005, we had $2.0 million and $2.1 million, respectively, outstanding on the promissory note. Interest with respect to the promissory note is paid monthly.

Note Payable

We have an overdraft line of credit for a maximum of €1.75 million. The $0.4 million outstanding at September 30, 2006, was the U.S. dollar equivalent under the euro-based overdraft line and the interest rate was 3.14 percent. Interest with respect to the note payable is paid monthly.

RMB Loan Contract

On January 23, 2006, Libbey Glassware (China) Co., Ltd. (Libbey China), an indirect wholly owned subsidiary of Libbey Inc., entered into an RMB Loan Contract (Loan Contract) with China Construction Bank Corporation Langfang Economic Development Area Sub-Branch (CCB). Pursuant to the Loan Contract, CCB agreed to lend to Libbey China RMB 250 million, or the equivalent of approximately $31 million, for the construction of our production facility in China and the purchase of related equipment, materials and services. The loan has a term of eight years and bears interest at a variable rate as announced by the People’s Bank of China. As of the date of the initial advance under the Loan Contract, the annual interest rate was 5.51 percent, and as of September 30, 2006, the annual interest rate was 5.75 percent. As of September 30, 2006, the outstanding balance was RMB 220 million (approximately $27.9 million). Interest is payable quarterly. Payments of principal in the amount of RMB 30 million (approximately $3.8 million) and RMB 40 million (approximately $5.0 million) must be made on July 20, 2012, and December 20, 2012, respectively, and three payments of principal in the amount of RMB 60 million (approximately $7.5 million) each must be made on July 20, 2013, December 20, 2013, and January 20, 2014, respectively. The obligations of Libbey China are secured by a guarantee executed by Libbey Inc. for the benefit of CCB. Interest with respect to the RMB loan contract is paid monthly.

Obligations Under Capital Leases

We lease certain machinery and equipment under agreements that are classified as capital leases. These leases were assumed in the Crisal acquisition. The cost of the equipment under capital leases is included in the Condensed Consolidated Balance Sheet as property, plant and equipment and the related depreciation expense is included in the Condensed Consolidated Statements of Operations.

The future minimum lease payments required under the capital leases as of September 30, 2006, are as follows:

Payments Due by Period

						1				2-3				4-5
		Total				Year				Years				Years
Capital leases		$	1,644			$	620			$	1,024			$	—

Other Debt

The other debt of $1.9 million primarily consists of governmental subsidized loans for equipment purchases at Crisal.

6. Special Charges

Capacity Realignment

In August 2004, we announced that we were realigning our production capacity in order to improve our cost structure. In mid-February 2005, we ceased operations at our manufacturing facility in City of Industry, California, and realigned production among our other domestic glass manufacturing facilities. See Form 10-K for the year ended December 31, 2005, for further discussion.

As a result, we recorded the following special charges:

		Three months ended September 30,									Nine months ended September 30,
		2006				2005					2006				2005
Fixed asset related		$	—			$	130				$	—			$	650
Employee termination costs & other			—				357					—				3,681
Included in special charges		$	—			$	487				$	—			$	4,331

The following reflects the balance sheet activity related to the capacity realignment for the nine months ended September 30, 2006:

		Balance at				Cash				Balance at				Cash				Balance at
		December 31, 2005				payments				June 30, 2006				payments				September 30, 2006
Land sale gain		$	1,055			$	(674	)		$	381			$	(8	)		$	373
Employee termination costs & other			70				(28	)			42				—				42
Total		$	1,125			$	(702	)		$	423			$	(8	)		$	415

Balance sheet classification is as follows: $0.42 million is included in the line item special charges reserve on the Condensed Consolidated Balance Sheets.

Salaried Workforce Reduction Program

In the second quarter of 2005, we announced a ten percent reduction of our North American salaried workforce, or approximately 70 employees, in order to reduce our overall costs. See Form 10-K for the year ended December 31, 2005, for further discussion.

As a result, we recorded the following special charges:

		Three months ended September 30,									Nine months ended September 30,
		2006				2005					2006				2005
Pension & retiree welfare (included in Cost of Sales)		$	—			$	—				$	—			$	867
Pension & retiree welfare (included in Selling, general and administrative expenses)			—				—					—				1,347
Employee termination costs & other (included in Special Charges)			—				—					—				3,350
Pretax salary reduction program		$	—			$	—				$	—			$	5,564

The following reflects the balance sheet activity related to the salaried workforce reduction program for the nine months ended September 30, 2006:

		Balance at								Balance at								Balance at
		December 31,				Cash				June 30,				Cash				September 30,
		2005				payments				2006				payments				2006
Employee termination costs		$	877			$	(409	)		$	468			$	(58	)		$	410
Total		$	877			$	(409	)		$	468			$	(58	)		$	410

The employee termination costs of $0.41 million are included in the special charges reserve on the Condensed Consolidated Balance Sheet.

Crisa Restructuring

In June 2006, Libbey announced plans to consolidate Crisa’s two principal manufacturing facilities into one facility and to discontinue certain product lines in order to reduce fixed costs. As part of the consolidation plan, a $2.7 million severance reserve was established related to statutory severance obligations for approximately 600 employees.

As a result, we recorded the following special charges:

		Three months ended September 30,									Nine months ended September 30,
		2006				2005					2006				2005
Fixed asset related (included in Special Charges)		$	—			$	—				$	12,587			$	—
Inventory write-down (included in Cost of Sales)			—				—					2,543				—
Crisa restructuring		$	—			$	—				$	15,130			$	—

The following reflects the balance sheet activity related to the Crisa restructuring for the nine months ended September 30, 2006:

		Balance at				Cash				Non-cash				Balance at				Non-cash				Cash				Balance at
		December 31, 2005				payments				utilization				June 30, 2006				utilization				payments				September 30, 2006
Employee termination costs & other		$	—			$	—			$	2,617			$	2,617			$	67			$	—			$	2,684
Total		$	—			$	—			$	2,617			$	2,617			$	67			$	—			$	2,684

The employee termination costs and other of $2.7 million are included in the special charges reserve on the Condensed Consolidated Balance Sheet.

Write-off of Finance Fees

In June 2006, Libbey wrote off unamortized finance fees related to debt of Libbey and Crisa that was refinanced.

As a result, we recorded the following special charges:

		Three months ended September 30,									Nine months ended September 30,
		2006				2005					2006				2005
Write-off of finance fees		$	—			$	—				$	4,906			$	—
Included in interest expense		$	—			$	—				$	4,906			$	—

Summary of Special Charges

The following table summarizes the charges related to the capacity realignment, salary workforce reduction program, Crisa restructuring and write-off of finance fees and their classifications on the Condensed Consolidated Statements of Operations:

		Three months ended September 30,									Nine months ended September 30,
		2006				2005					2006				2005
Cost of sales		$	—			$	—				$	2,543			$	867
Selling, general and administrative expenses			—				—					—				1,347
Special charges			—				487					12,587				7,681
Interest expense			—				—					4,906				—
Total special charges		$	—			$	487				$	20,036			$	9,895

The following reflects the balance sheet activity with respect to the charges related to the capacity realignment, salary workforce reduction program, Crisa restructuring and write-off of finance fees for the nine months ended September 30, 2006:

		Balance at												Balance at												Balance at
		December 31,				Cash				Non-cash				June 30,				Non-cash				Cash				September 30,
		2005				payments				utilization				2006				utilization				payments				2006
Land sale gain		$	1,055			$	(674	)		$	—			$	381			$	—			$	(8	)		$	373
Employee termination costs & other			947				(437	)			2,617				3,127				67				(58	)			3,136
Total special charges reserve		$	2,002			$	(1,111	)		$	2,617			$	3,508			$	67			$	(66	)		$	3,509

7. Pension

We have pension plans covering the majority of our employees. Benefits generally are based on compensation and length of service for salaried employees and job grade and length of service for hourly employees. Excluding Crisa, our policy is to fund pension plans such that sufficient assets will be available to meet future benefit requirements for all members of the funded plans. Crisa, in Mexico, has an unfunded pension plan under which benefits will be funded as current amounts become due. In addition, we have a supplemental employee retirement plan (SERP) covering certain employees. The U.S. pension plans, including the SERP, which is an unfunded liability, cover salaried and non-union hourly (hired before January 1, 2006) and hourly U.S.-based employees of Libbey. The non-U.S. pension plans cover the employees of our wholly owned subsidiaries Royal Leerdam and Leerdam Crystal in the Netherlands and Crisa in Mexico.

Effect on Operations

The components of our net pension expense (credit), including the SERP, are as follows:

		U.S. Plans								Non-U.S. Plans								Total
Three months ended September 30,		2006				2005				2006				2005				2006				2005
Service cost		$	1,231			$	1,548			$	413			$	236			$	1,644			$	1,784
Interest cost			3,338				3,545				644				405				3,982				3,950
Expected return on plan assets			(4,037	)			(4,239	)			(565	)			(545	)			(4,602	)			(4,784	)
Amortization of unrecognized:
Prior service cost			518				410				241				(99	)			759				311
Gain			298				773				10				—				308				773
Curtailment			—				—				—				—				—				—
Settlement			1,000				—				—				—				1,000				—
Pension expense (credit)		$	2,348			$	2,037			$	743			$	(3	)		$	3,091			$	2,034

		U.S. Plans								Non-U.S. Plans								Total
Nine months ended September 30,		2006				2005				2006				2005				2006				2005
Service cost		$	4,497			$	4,897			$	790			$	708			$	5,287			$	5,605
Interest cost			10,368				10,680				1,429				1,218				11,797				11,898
Expected return on plan assets			(11,799	)			(12,781	)			(1,695	)			(1,635	)			(13,494	)			(14,416	)
Amortization of unrecognized:
Prior service cost			1,560				1,545				124				(297	)			1,684				1,248
Gain			1,916				2,046				30				—				1,946				2,046
Curtailment			—				1,614				—				—				—				1,614
Settlement			2,000				—				—				—				2,000				—
Pension expense (credit)		$	8,542			$	8,001			$	678			$	(6	)		$	9,220			$	7,995

In the third quarter of 2006, we incurred a pension settlement charge of $1.0 million as a result of projected excess lump sum distributions to be taken by employees retiring during 2006.

In the second quarter of 2005, we incurred a pension curtailment charge of $1.6 million as a result of a planned reduction in our North American salaried workforce of approximately 70 employees. Due to the reduction of the salaried workforce, the U.S. pension plans were revalued as of June 30, 2005. At that time, the discount rate was reduced from 5.75 percent to 5.00 percent. This revaluation resulted in additional net periodic benefit cost of $0.2 million in the second quarter of 2005, which is included in the above table. The normal measurement date of the U.S. and non-U.S. plans is December 31. The salary reduction plan is explained in further detail in Note 6.

With the purchase of the remaining 51 percent of Crisa (See Note 4), we assumed the pension liability of only the active employees of Crisa as of that date. Vitro assumed all pension liabilities with respect to retirees as of June 16, 2006. Crisa maintains an unfunded pension plan for its employees. The estimated amount of the unfunded liability for active employees as of the closing date was $12.9 million. The amount of expense included for the third quarter is $0.8 million.

We expect to contribute approximately $0.7 million to our U.S. pension plans and approximately $1.5 million to our plan in the Netherlands in 2006. Through the third quarter of 2006, there have been contributions of approximately $0.3 million to the U.S. plans and contributions of approximately $1.1 million for the plan in the Netherlands.

We have determined that the recently enacted Pension Protection Act of 2006 is expected to favorably impact projected 2007 cash flow by approximately $17 million.

On September 29, 2006, the FASB issued SFAS No. 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans (“SFAS 158”), which amends SFAS 87 and SFAS 106 to require recognition of the overfunded or underfunded status of pension and other postretirement benefit plans on the balance sheet. Under SFAS 158, gains and losses, prior service costs and credits, and any remaining transition amounts under SFAS 87 and SFAS 106 that have not yet been recognized through net periodic benefit cost will be recognized in accumulated other comprehensive income, net of tax effects, until they are amortized as a component of net periodic cost. SFAS 158 is effective for publicly-held companies for fiscal years ending after December 15, 2006. Libbey will adopt the balance sheet recognition provisions of SFAS 158 at December 31, 2006. The adoption of FAS 158 is expected to reduce Libbey’s stockholders’ equity at December 31, 2006 by approximately $20-25 million pre-tax. The Statement does not affect the results of operations.

8. Nonpension Postretirement Benefits

We provide certain retiree health care and life insurance benefits covering a majority of our salaried and non-union hourly (hired before January 1, 2004) and union hourly employees in the U.S. and Canada. Employees are generally eligible for benefits upon retirement and completion of a specified number of years of creditable service. Benefits for most hourly retirees are determined by collective bargaining. The U.S. nonpension postretirement plans cover the hourly and salaried U.S.-based employees of Libbey. The non-U.S. nonpension postretirement plans cover the retirees and active employees of Libbey who are located in Canada. Under a cross-indemnity agreement, Owens-Illinois, Inc. assumed liability for the nonpension postretirement benefits of Libbey retirees who had retired as of June 24, 1993.

Effect on Operations

The provision for our nonpension postretirement benefit expense consists of the following:

		U.S. Plans								Non-U.S. Plans								Total
Three months ended September 30,		2006				2005				2006				2005				2006				2005
Service cost		$	141			$	219			$	1			$	—			$	142			$	219
Interest cost			550				449				3				37				553				486
Amortization of unrecognized:
Prior service cost			(223	)			(223	)			—				—				(223	)			(223	)
Gain (loss)			50				(99	)			(48	)			(2	)			2				(101	)
Curtailment			—				—				—				—				—				—
Nonpension postretirement benefit expense (credit)		$	518			$	346			$	(44	)		$	35			$	474			$	381

		U.S. Plans								Non-U.S. Plans								Total
Nine months ended September 30,		2006				2005				2006				2005				2006				2005
Service cost		$	557			$	660			$	1			$	—			$	558			$	660
Interest cost			1,538				1,531				71				111				1,609				1,642
Amortization of unrecognized:
Prior service cost			(663	)			(663	)			—				—				(663	)			(663	)
Gain (loss)			34				(15	)			(48	)			(17	)			(14	)			(32	)
Curtailment			—				304				—				—				—				304
Nonpension postretirement benefit expense		$	1,466			$	1,817			$	24			$	94			$	1,490			$	1,911

In the second quarter of 2005, we incurred a nonpension postretirement curtailment charge of $0.3 million as a result of a planned reduction in our North American salaried workforce of approximately 70 employees. Due to the reduction of the salaried workforce, the

U.S. postretirement plans were revalued as of June 30, 2005. At that time, the discount rate was reduced from 5.75 percent to 5.00 percent. This revaluation resulted in additional net periodic benefit cost of $0.1 million in the second quarter of 2005. The normal measurement date of the U.S. and non-U.S. plans is December 31. The salary reduction plan is explained in further detail in Note 6.

9. Net Income per Share of Common Stock

The following table sets forth the computation of basic and diluted earnings per share:

		Three months ended September 30,									Nine months ended September 30,
		2006				2005					2006				2005
Numerator for earnings per share - net (loss) earnings that is available to common shareholders		$	(3,307	)		$	4,167				$	(12,361	)		$	1,648
Denominator for basic earnings per share — weighted-average shares outstanding			14,254,121				13,947,861					14,139,206				13,878,877
Effect of dilutive securities — employee stock options, employee stock purchase plan (ESPP) and warrants (1)			—				2,780					—				999
Denominator for diluted earnings per share — adjusted weighted-average shares and assumed conversions			14,254,121				13,950,641					14,139,206				13,879,876
Basic loss per share		$	(0.23	)		$	0.30				$	(0.87	)		$	0.12
Diluted loss per share		$	(0.23	)		$	0.30				$	(0.87	)		$	0.12

Diluted shares outstanding include the dilutive impact of employee stock options, the employee stock purchase plan (ESPP) and warrants, which are calculated based on the average share price for each fiscal period using the treasury stock method. Under the treasury stock method, the tax-effected proceeds that would be hypothetically received from the exercise of all in-the-money options are assumed to be used to repurchase shares.

10. Employee Stock Benefit Plans

We have three stock-based employee compensation plans. We also have an Employee Stock Purchase Plan (“ESPP”) under which eligible employees may purchase a limited number of shares of Libbey Inc. common stock at a discount. We also have issued restricted shares in the past. Restricted shares are issued at no cost to the recipient of the award. The market value of the restricted shares is charged to income ratably over the period during which these awards vest.

Prior to January 1, 2006, the Company accounted for stock-based awards under the intrinsic value method of Accounting Principles Board (APB) No. 25, “Accounting for Stock Issued to Employees” (APB No. 25). This method under APB No. 25 resulted in no expense being recorded for stock option grants for which the exercise price was equal to the fair value of the underlying stock on the date of grant, which had been the situation for all years prior to 2006. On January 1, 2006, the Company adopted Financial Accounting Standards Board (FASB) SFAS No. 123-R. SFAS No. 123-R requires that compensation cost relating to share-based payment transactions be recognized in the financial statements. Share-based compensation cost is measured based on the fair value of the equity or liability instruments issued. SFAS No. 123-R applies to all of our outstanding unvested share-based payment awards as of January 1, 2006, and all prospective awards using the modified prospective transition method without restatement of prior periods.

On December 6, 2005, the Company’s Board of Directors, acting as the Compensation Committee of the whole, accelerated the vesting of all outstanding and unvested nonqualified stock options granted through 2004 under the Company’s 1999 Equity Participation Plan and Amended and Restated 1999 Equity Participation Plan. As a result, options to purchase 258,731 shares of the Company’s common stock became exercisable on December 6, 2005. Of that amount, options that were granted through 2004 to the Company’s named executive officers became immediately exercisable. In the case of each of the stock options in question, the exercise price greatly exceeded the fair market value of the Company’s common stock on December 6, 2005. The decision to accelerate vesting of these options was made primarily to avoid recognition of compensation expense related to these underwater stock options in financial statements relating to future fiscal periods. By accelerating these underwater stock options, the Company estimates a reduction the stock option expense it otherwise would have been required to record by approximately $0.3 million in 2006, $0.1 milliion in 2007 and $0.03 million in 2008 on an after-tax basis.

Employee Stock Purchase Plan (“ESPP”)

We have an ESPP under which 650,000 shares of common stock have been reserved for issuance. Eligible employees may purchase a limited number of shares of common stock at a discount of up to 15 percent of the market value at certain plan-defined dates. The ESPP terminates on May 31, 2012. At December 31, 2005, 470,062 shares were available for issuance under the ESPP. At September 30, 2006, 474,900 shares were available for issuance under the ESPP. Starting in 2003, repurchased common stock is being used to fund the ESPP. A participant may elect to have payroll deductions made during the offering period in an amount not less than 2 percent and not more than 20 percent of the participant’s compensation during the option period. The option period starts on the offering date (June 1st) and ends on the exercise date (May 31st). In no event may the option price per share be less than the par value per share ($.01) of common stock. All options and rights to participate in the ESPP are nontransferable and subject to forfeiture in accordance with the ESPP guidelines. In the event of certain corporate transactions, each option outstanding under the ESPP will be assumed or the successor corporation or a parent or subsidiary of such successor corporation will substitute an equivalent option.

No ESPP awards were granted during the three months ending September 30, 2006, as ESPP grants generally occur annually on May 31st.

Equity Participation Plan Program Description

We have three equity participation plans: (1) the Libbey Inc. Amended and Restated Stock Option Plan for Key Employees, (2) the Amended and Restated 1999 Equity Participation Plan of Libbey Inc. and (3) the Libbey Inc. 2006 Omnibus Incentive Plan. Although options previously granted under the Libbey Inc. Amended and Restated Stock Option Plan for Key Employees and the Amended and Restated 1999 Equity Participation Plan of Libbey Inc. remain outstanding, no further grants of equity-based compensation may be made under those plans. However, up to a total of 1,500,000 shares of Libbey Inc. common stock are available for issuance as equity-based compensation under the Libbey Inc. 2006 Omnibus Incentive Plan. Under the Libbey Inc. 2006 Omnibus Incentive 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. There were no stock options or other equity-based awards granted in the third quarter of 2006. 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 outstanding as of September 30, 2006, is generally four (4) years. Stock options are amortized over the vesting period using the FASB Interpretation No. 28, “Accounting for Stock Appreciation Rights and Other Variable Stock Option or Award Plans, an interpretation of APB Opinions No. 15 and 25” (FIN 28) expense attribution methodology.

Prior Year Pro forma Information

With the adoption of SFAS No. 123-R on January 1, 2006, compensation expense for stock options is recorded based on the estimated fair value of the stock options using an option-pricing model. Compensation expense continues to be recorded for restricted stock grants over their vesting periods based on fair value, which is equal to the market price of our common stock on the date of grant. The estimated annual impact of applying the provisions of SFAS No. 123-R is an after-tax charge of $0.5 million for 2006.

The following table illustrates the effect on net income and earnings per share if we had applied the fair value recognition provision of SFAS No. 123, “Accounting for Stock-Based Compensation” (SFAS No. 123), to stock-based employee compensation. The table below shows the effect on our net loss and loss per share for the three months and nine months ended September 30, 2005:

		Three months ended				Nine months ended
		September 30,				September 30,
		2005				2005
Reported net income:		$	4,167			$	1,648
Less: Stock-based employee compensation expense determined under fair value-based method for all awards, net of related tax effects			181				611
Add: Stock-based employee compensation expense included in reported net income, net of related tax effects			—				32
Pro forma net income		$	3,986			$	1,069
Basic income per share:
Reported basic income per share		$	0.30			$	0.12
Pro forma basic income per share		$	0.29			$	0.08
Diluted income per share:
Reported diluted income per share		$	0.30			$	0.12
Pro forma diluted income per share		$	0.29			$	0.08