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 June 30, 2007

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

Libbey Inc.

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

300 Madison Avenue, Toledo, Ohio 43604
(Address of principal executive offices) (Zip Code)

419-325-2100
(Registrant’s telephone number, including area code)

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 — 14,532,666 shares at July 31, 2007.

 

 

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. Income Taxes

8. Pension and Nonpension Postretirement Benefits

9. Net Income per Share of Common Stock

10. Derivatives

11. Comprehensive Income (Loss)

12. Condensed Consolidated Guarantor Financial Statements

13. Segments

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-10.6

EX-10.7

EX-10.8

EX-10.9

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 (U.S. GAAP) 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 six-month periods ended June 30, 2007, are not necessarily indicative of the results that may be expected for the year ended December 31, 2007.

The balance sheet at December 31, 2006, 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. GAAP 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, 2006.

LIBBEY INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(dollars in thousands, except per-share amounts)

(unaudited)

		Three months ended June 30,
		2007				2006
Net sales		$	207,123			$	157,998
Freight billed to customers			549				926
Total revenues			207,672				158,924
Cost of sales			163,483				130,752
Gross profit			44,189				28,172
Selling, general and administrative expenses			23,667				19,696
Special charges			—				12,587
Income (loss) from operations			20,522				(4,111	)
Equity earnings — pretax			—				921
Other income (expense)			639				(907	)
Earnings (loss) before interest, income taxes and minority interest			21,161				(4,097	)
Interest expense			16,429				10,200
Income (loss) before income taxes and minority interest			4,732				(14,297	)
Provision (benefit) for income taxes			776				(4,720	)
Income (loss) before minority interest			3,956				(9,577	)
Minority interest			—				8
Net income (loss)		$	3,956			$	(9,569	)
Net income (loss) per share:
Basic		$	0.27			$	(0.68	)
Diluted		$	0.27			$	(0.68	)
Dividends per share		$	0.025			$	0.025

See accompanying notes

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

		Six months ended June 30,
		2007				2006
Net sales		$	386,619			$	292,864
Freight billed to customers			1,024				1,383
Total revenues			387,643				294,247
Cost of sales			311,039				243,929
Gross profit			76,604				50,318
Selling, general and administrative expenses			45,701				38,782
Special charges			—				12,587
Income (loss) from operations			30,903				(1,051	)
Equity earnings — pretax			—				1,986
Other income (expense)			2,484				(511	)
Earnings before interest, income taxes and minority interest			33,387				424
Interest expense			31,993				13,809
Income (loss) before income taxes and minority interest			1,394				(13,385	)
Benefit for income taxes			(808	)			(4,419	)
Income (loss) before minority interest			2,202				(8,966	)
Minority interest			—				(88	)
Net income (loss)		$	2,202			$	(9,054	)
Net income (loss) per share:
Basic		$	0.15			$	(0.64	)
Diluted		$	0.15			$	(0.64	)
Dividends per share		$	0.05			$	0.05

See accompanying notes

LIBBEY INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(dollars in thousands, except share amounts)

		June 30, 2007				December 31, 2006
		(unaudited)
ASSETS
Current assets:
Cash and equivalents		$	15,576			$	41,766
Accounts receivable — net			109,822				100,230
Inventories — net			175,169				159,123
Deferred taxes			4,120				4,120
Prepaid and other current assets			6,730				15,605
Total current assets			311,417				320,844
Other assets:
Repair parts inventories			13,467				9,279
Software — net			4,869				4,704
Deferred taxes			13,096				6,974
Other assets			14,002				17,717
Purchased intangible assets — net			30,842				31,492
Goodwill — net			175,782				174,880
Total other assets			252,058				245,046
Property, plant and equipment — net			317,979				312,241
Total assets		$	881,454			$	878,131
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Notes payable		$	1,381			$	226
Accounts payable			65,359				67,493
Salaries and wages			21,856				28,679
Accrued liabilities			52,570				47,622
Pension liability (current portion)			1,389				1,389
Nonpension postretirement benefits (current portion)			3,252				3,252
Derivative liability			2,038				4,132
Payable to Vitro			19,704				—
Long-term debt due within one year			794				794
Total current liabilities			168,343				153,587
Long-term debt			491,142				490,212
Pension liability			80,105				77,174
Nonpension postretirement benefits			37,839				38,495
Payable to Vitro			—				19,673
Other long-term liabilities			8,952				11,140
Total liabilities			786,381				790,281
Shareholders’ equity:
Common stock, par value $.01 per share, 50,000,000 shares authorized, 18,692,630 shares issued (18,689,710 in 2006)			187				187
Capital in excess of par value (includes warrants of $1,034, based on 485,309 shares as of June 30, 2007 and as of December 31, 2006)			291,965				303,381
Treasury stock, at cost, 4,164,681 shares (4,358,175 shares in 2006)			(114,893	)			(129,427	)
Retained deficit			(38,799	)			(40,282	)
Accumulated other comprehensive loss			(43,387	)			(46,009	)
Total shareholders’ equity			95,073				87,850
Total liabilities and shareholders’ equity		$	881,454			$	878,131

See accompanying notes

LIBBEY INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(dollars in thousands)

(unaudited)

		Three months ended June 30,
		2007				2006
Net income (loss)		$	3,956			$	(9,569	)
Adjustments to reconcile net income (loss) to net cash (used in) provided by operating activities:
Depreciation and amortization			10,710				8,206
Equity earnings — net of tax			—				(546	)
Gain on asset sales			(6	)			—
Change in accounts receivable			(10,064	)			(2,722	)
Change in inventories			(7,475	)			1,134
Change in accounts payable			1,514				(7,977	)
Special charges			18				19,788
Pension & nonpension postretirement benefits			(350	)			4,564
Income taxes			1,032				2,802
Other operating activities			5,027				(103	)
Net cash provided by operating activities			4,362				15,577
Investing activities:
Additions to property, plant and equipment			(12,833	)			(12,817	)
Proceeds from asset sales and other			(116	)			—
Business acquisition and related costs, less cash acquired			—				(77,571	)
Net cash used in investing activities			(12,949	)			(90,388	)
Financing activities:
Net revolving credit facility activity			—				(160,505	)
Net ABL credit facility activity			(5,170	)			43,038
Other net borrowings (repayments)			1,187				(72,995	)
Note payments			—				(100,000	)
Note proceeds			—				399,840
Debt financing fees			—				(14,356	)
Dividends			(360	)			(352	)
Other			—				195
Net cash (used in) provided by financing activities			(4,343	)			94,865
Effect of exchange rate fluctuations on cash			109				105
(Decrease) increase in cash			(12,821	)			20,159
Cash at beginning of period			28,397				6,502
Cash at end of period		$	15,576			$	26,661
Supplemental disclosure of cash flows information:
Cash paid during the period for interest		$	20,145			$	7,364
Cash paid (net of refunds received) during the period for income taxes		$	239			$	(417	)

See accompanying notes

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

		Six months ended June 30,
		2007				2006
Net income (loss)		$	2,202			$	(9,054	)
Adjustments to reconcile net income (loss) to net cash (used in) provided by operating activities:
Depreciation and amortization			19,926				16,541
Equity earnings — net of tax			—				(1,378	)
Gain on asset sales			(1,575	)			—
Change in accounts receivable			(7,660	)			4,516
Change in inventories			(15,378	)			2,922
Change in accounts payable			(2,755	)			(15,312	)
Special charges			(781	)			18,924
Pension & nonpension postretirement benefits			2,237				6,203
Income taxes			(3,513	)			(5,244	)
Other operating activities			11,622				2,257
Net cash provided by operating activities			4,325				20,375
Investing activities:
Additions to property, plant and equipment			(22,626	)			(34,256	)
Proceeds from asset sales and other			1,953				—
Business acquisition and related costs, less cash acquired			—				(77,571	)
Net cash used in investing activities			(20,673	)			(111,827	)
Financing activities:
Net revolving credit facility activity			—				(147,142	)
Net ABL credit facility activity			(30,578	)			43,038
Other net borrowings (repayments)			21,280				(66,106	)
Note payments			—				(100,000	)
Note proceeds			—				399,840
Debt financing fees			—				(14,356	)
Dividends			(719	)			(703	)
Other			—				195
Net cash (used in) provided by financing activities			(10,017	)			114,766
Effect of exchange rate fluctuations on cash			175				105
(Decrease) increase in cash			(26,190	)			23,419
Cash at beginning of period			41,766				3,242
Cash at end of period		$	15,576			$	26,661
Supplemental disclosure of cash flows information:
Cash paid during the period for interest		$	21,031			$	9,345
Cash paid (net of refunds received) during the period for income taxes		$	1,774			$	5,852

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 producer of glass tableware products in the Western Hemisphere, in addition to supplying to key markets throughout the world. With Libbey’s roots dating back to 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 own and operate two glass tableware manufacturing plants in the United States as well as glass tableware manufacturing plants in the Netherlands, Portugal, China and Mexico. 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 global 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 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, 2006 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). 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. All material intercompany accounts and transactions have been eliminated. The preparation of financial statements and related disclosures in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the Condensed Consolidated Financial Statements and accompanying notes. 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. Revenue is 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

Assets and liabilities of non-U.S. subsidiaries that operate in a local currency environment, where that local currency is the functional currency, are translated to U.S. dollars at exchange rates in effect at the balance sheet date, with the resulting translation adjustments directly recorded to a separate component of accumulated other comprehensive loss. Income and expense accounts are translated at average exchange rates during the year. Translation adjustments are recorded in other income (expense), where the U.S. dollar is the functional currency.

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 attribute 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 we conduct our operations or otherwise incur taxable income or losses. In the United States, we have recorded a net deferred tax asset. Losses before income taxes have been incurred in recent years and, though the risk of not realizing the net deferred tax asset exists, we believe it is more likely than not that the net deferred tax asset will be realized through loss carry backs and the effects of tax planning.

Stock-Based Compensation Expense

We account for stock-based compensation in accordance with SFAS No. 123-R, “Accounting for Stock-Based Compensation,” (“SFAS No. 123-R”). Share-based compensation cost is measured based on the fair value of the equity 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. Stock-based compensation expense charged to the Condensed Consolidated Statement of Operations for the three and six months ended June 30, 2007 was $1.0 million and $1.6 million, respectively. The stock-based compensation expense charged to the Condensed Consolidated Statement of Operations for the three and six months ended June 30, 2006 was $0.1 million and $0.3 million, respectively.

New Accounting Standards

In July 2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes, an Interpretation of FASB Statement No. 109,” (“FIN 48”). FIN 48 is effective for the first interim or annual reporting period for the first fiscal year beginning on or after December 15, 2006. On January 1, 2007, we adopted FIN 48. FIN 48 clarified the accounting for income taxes by prescribing a minimum recognition threshold a tax position is required to meet before being recognized in the financial statements. FIN 48 also provides guidance on derecognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure, and transition. FIN 48 applies to all tax positions for income taxes accounted for in accordance with SFAS No. 109, “Accounting for Income Taxes.” See Note 7 for the impact of applying the provisions of FIN 48.

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements. SFAS No. 157 defines fair value, establishes a framework for measuring fair value, and expands disclosure about fair value measurements. This statement clarifies how to measure fair value as permitted under other accounting pronouncements but does not require any new fair value measurements. However, for some companies, the application of this statement will change current practice. We will be required to adopt SFAS No. 157 as of January 1, 2008. We are currently evaluating the impact that SFAS No. 157 will have on our consolidated results of operations and financial condition.

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities – Including an Amendment of SFAS No. 115, which is effective for fiscal years beginning after November 15, 2007. This statement permits an entity to choose to measure many financial instruments and certain other items at fair value at specified election dates. Subsequent unrealized gains and losses on items for which the fair value option has been elected will be reported in earnings. We are currently evaluating the potential impact of this statement on our consolidated results of operations and financial condition.

Reclassifications

Certain amounts in the prior year’s 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:

		June 30, 2007				December 31, 2006
Accounts receivable:
Trade receivables		$	101,526			$	94,490
Other receivables			8,296				5,740
Total accounts receivable, less allowances of $11,857 and $11,507		$	109,822			$	100,230
Inventories:
Finished goods		$	164,279			$	147,423
Work in process			4,384				3,881
Raw materials			5,273				4,922
Operating supplies			1,233				2,897
Total inventories		$	175,169			$	159,123
Prepaid and other current assets:
Prepaid expenses		$	3,368			$	7,088
Prepaid income taxes			3,362				8,517
Total prepaid and other current assets		$	6,730			$	15,605
Other assets:
Deposits		$	813			$	1,069
Finance fees — net of amortization			12,800				14,275
Other			389				2,373
Total other assets		$	14,002			$	17,717
Accrued liabilities:
Accrued incentives		$	22,770			$	15,341
Workers compensation			9,298				10,008
Medical liabilities			2,395				2,539
Interest			3,631				5,519
Commissions payable			1,421				1,539
Accrued liabilities			13,055				12,676
Total accrued liabilities		$	52,570			$	47,622
Other long-term liabilities:
Deferred liability		$	1,232			$	754
Other			7,720				10,386
Total other long-term liabilities		$	8,952			$	11,140

4. Acquisitions

On June 16, 2006, we purchased from Vitro, S.A. de C.V. 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, that we did not previously own. The purchase price was $80.0 million in addition to $4.9 million of acquisition costs. In addition, we refinanced approximately $71.9 million of Crisa’s existing indebtedness, $23.0 million of which we guaranteed prior to our 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 $19.7 million 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. Crisa transferred to Vitro real estate (land and buildings) on which one of Crisa’s two manufacturing facilities is located, but Crisa retained the right to occupy the facility transferred to Vitro for up to three years. Concurrently, Vitro transferred to Crisa ownership of the land on which a leased, state-of-the-art distribution center is located, along

with racks and conveyors that Crisa leased from an affiliate of Vitro. Also, Vitro agreed not to compete with Crisa anywhere in the world (with limited exceptions) for five years.

Crisa is one of the largest glass tableware manufacturers in Latin America and has a significant percentage 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. The following is a summary of 51 percent of the assigned fair values of the assets acquired and liabilities assumed as of the date of acquisition.

Current assets and other assets		$	40,639
Property, plant and equipment			37,190
Intangible assets			21,675
Goodwill			56,115
Total assets acquired			155,619
Less liabilities assumed:
Current liabilities			42,181
Long-term liabilities			28,547
Total liabilities assumed			70,728
Cash purchase price, including acquisition costs			84,891
Less: Cash acquired			6,429
Cash purchase price, net of cash acquired		$	78,462

The purchase price allocation for the Crisa acquisition has been finalized during the second quarter 2007. The primary changes relate to the initial restructuring cost estimates and estimated tax receivables. The impact of these items did not materially change the initial purchase price allocation from December 31, 2006.

The following table is a summary of the goodwill associated with the excess of the purchase price over the fair value of assets acquired and liabilities assumed as a result of the 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, which is included in the North American Glass reporting segment:

Inferred Enterprise purchase price ($80.0 million divided by 51%)		$	156,863
Less: assets received/liabilities forgiven			(4,457	)
Add: acquisition costs			4,891
Add: adjustment to reflect 49% of inferred purchase price to actual			1,855
Aggregate enterprise purchase price			159,152
Add: fair value liabilities assumed			156,256
Less: fair value assets acquired			(189,946	)
Total enterprise goodwill		$	125,462

Intangible assets acquired of approximately $21.7 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 7.7 years. Amortization of these intangible assets was $0.3 million and $0.5 million for the three and six months ended June 30, 2007, respectively. Amortization of these intangible assets was not material for the period ended June 30, 2006. Trademarks and trade names are valued at approximately $8.9 million and are not subject to amortization.

Crisa’s results of operations are included in our Condensed 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.

In connection with the acquisition, we announced plans in June 2006 to consolidate Crisa’s two principal manufacturing facilities into a single facility in order to reduce fixed costs. As a result, we recognized charges of approximately $18.9 million in 2006, representing our existing 49 percent indirect ownership interest in the fixed assets related to the facility closed and the inventory related to product lines discontinued. For the additional 51 percent ownership interest acquired, the write down of the fixed assets and inventory was included in the purchase price allocation. In addition, a $3.2 million reserve for statutory severance for approximately 650 hourly employees of Crisa was recognized as additional acquisition cost in accordance with Emerging Issues Task Force No. 95-3, “Recognition of Liabilities in Connection with a Purchase Business Combination”.

The pro forma unaudited results of operations for the three month and six month periods ended June 30, 2006, assuming we consummated the acquisition of Crisa as of January 1, 2006, are as follows:

		Three months ended				Six months ended
		June 30, 2006				June 30, 2006
Net sales		$	191,291			$	366,936
Earnings before interest and taxes		$	1,263			$	12,125
Net income		$	(7,508	)		$	(4,331	)
Net income per share:
Basic		$	(0.53	)		$	(0.30	)
Diluted		$	(0.53	)		$	(0.30	)
Depreciation and amortization		$	10,849			$	22,238

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 $195.0 million, $100.0 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 €10.0 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, $306.0 million aggregate principal amount of floating rate senior secured notes (Senior Notes) and $102.0 million aggregate principal amount of 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 used immediately 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 $80.0 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.

Borrowings consist of the following:

										June 30,				December 31,
		Interest Rate				Maturity Date				2007				2006
Borrowings under ABL facility		floating				December 16, 2010				$	16,170			$	46,210
Senior notes		floating (1)				June 1, 2011					306,000				306,000
PIK notes (2)			16.00	%		December 1, 2011					118,238				109,480
Promissory note			6.00	%		July 2007 to September 2016					1,909				1,985
Notes payable		floating				July 2007					1,381				226
RMB loan contract		floating				July 2012 to January 2014					32,875				32,050
RMB working capital loan		floating				March 2010					6,575				—
Obligations under capital leases		floating				July 2007 to May 2009					1,238				1,548
BES Euro line		floating				January 2010 to January 2014					14,603				—
Other debt		floating				September 2009					1,650				1,954
Total borrowings											500,639				499,453
Less — unamortized discounts and warrants											7,322				8,221
Total borrowings — net											493,317				491,232
Less — current portion of borrowings											2,175				1,020
Total long-term portion of borrowings — net										$	491,142			$	490,212

(1)		See Interest Rate Protection Agreements below
(2)		Additional PIK notes were issued on June 1, 2007 in exchange for payment of the semi-annual interest. During the first three years, interest is payable by the issuance of additional PIK notes.

ABL Facility

The ABL Facility is with a group of six banks and provides for a revolving credit and swing line facility permitting borrowings for Libbey Glass and Libbey Europe up to an aggregate of $150.0 million, with Libbey Europe’s borrowings being limited to $75.0 million. Borrowings under the ABL Facility mature December 16, 2010. Swing line borrowings are limited to $15.0 million, with swing line borrowings for Libbey Europe 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 June 30, 2007. There were no Libbey Glass borrowings under the facility at June 30, 2007, while Libbey Europe had outstanding borrowings of $16.2 million at June 30, 2007, at an interest rate of 6.13 percent.

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 June 30, 2007. No compensating balances are required by the Agreement. The Agreement does not require compliance with restrictive financial covenants, unless aggregate unused availability falls below $25.0 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 percent of eligible accounts receivable, (b) the lesser of (i) 85 percent of the net orderly liquidation value (NOLV) of eligible inventory, (ii) 65 percent of eligible inventory, or (iii) $75.0 million and (c) the lesser of $25.0 million and the aggregate of (i) 75 percent of the NOLV of eligible equipment and (ii) 50 percent of the fair market value of eligible real property.

The available total borrowing base is offset by real estate and ERISA reserves totaling $8.0 million and mark-to-market reserves for natural gas and interest rate swaps of $2.1 million. The ABL Facility also provides for the issuance of $30.0 million of letters of credit, which are applied against the $150.0 million limit. At June 30, 2007, we had $8.4 million in letters of credit outstanding under the ABL Facility. Remaining unused availability on the ABL Facility was $84.0 million at June 30, 2007.

Senior Notes

Libbey Glass and Libbey Inc. entered into a purchase agreement pursuant to which Libbey Glass agreed to sell $306.0 million aggregate principal amount of floating rate senior secured notes due 2011 to the initial purchasers named in a private placement. The net proceeds, after deducting a discount and the estimated expenses and fees, were approximately $289.8 million. On February 15, 2007, we exchanged $306.0 million aggregate principal amount of our floating rate senior secured notes due 2011, which have been registered under the Securities Act of 1933, as amended (Senior Notes), for the notes sold in the private placement. 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 12.38 percent at June 30, 2007.

We have Interest Rate Protection Agreements (Rate Agreements) with respect to $200.0 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 June 30, 2007, 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 2.4 years at June 30, 2007. Total remaining Senior Notes not covered by the Rate Agreements have fluctuating interest rates with a weighted average rate of 12.38 percent per year at June 30, 2007. If the counterparties to these Rate Agreements were to fail to perform, these Rate Agreements would no longer protect us from interest rate fluctuations. However, we do not anticipate nonperformance by the counterparties. All counterparties’ credit ratings are rated A+ or better.

The fair market value for the Rate Agreements at June 30, 2007, was $.3 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 Note 12). The Senior Notes and related guarantees 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 ABL Facility. The Collateral does not include the assets of non-guarantor subsidiaries that 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, to a purchaser named in the private placement, units consisting of $102.0 million aggregate principal amount 16 percent senior subordinated secured pay-in-kind notes due 2011 (PIK Notes) and detachable warrants to purchase 485,309 shares of Libbey Inc. common stock (Warrants) exercisable on or after June 16, 2006 and expiring on December 1, 2011. The warrant holder does not have voting rights. The net proceeds, after deducting a discount and estimated expenses and fees, were approximately $97.0 million. The proceeds were allocated between the 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. Each Warrant is exercisable at $11.25. The PIK Notes 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.

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 Note 12). 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 June 30, 2007, and December 31, 2006, we had $1.9 million and $2.0 million, respectively, outstanding on the promissory note. Interest with respect to the promissory note is paid monthly.

Notes Payable

We have an overdraft line of credit for a maximum of €1.8 million. The $1.4 million outstanding at June 30, 2007, 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 (RMB Loan Contract) with China Construction Bank Corporation Langfang Economic Development Area Sub-Branch (CCB). Pursuant to the RMB Loan Contract, CCB agreed to lend to Libbey China RMB 250.0 million, or the equivalent of approximately $32.9 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 June 30, 2007, the annual interest rate was 6.10 percent. As of June 30, 2007, the outstanding balance was RMB 250.0 million

(approximately $32.9 million). Interest is payable quarterly. Payments of principal in the amount of RMB 30.0 million (approximately $3.9 million) and RMB 40.0 million (approximately $5.3 million) must be made on July 20, 2012, and December 20, 2012, respectively, and three payments of principal in the amount of RMB 60.0 million (approximately $7.9 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.

RMB Working Capital Loan

In March 2007, Libbey China entered into a 50.0 million RMB working capital loan with China Construction Bank. The 3-year term loan has a principal payment at maturity on March 14, 2010, has a current interest rate of 6.30 percent, and is secured by a Libbey Inc. guarantee. At June 30, 2007, the U.S. dollar equivalent on the line was $6.6 million.

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 June 30, 2007, are $630 for year one and $608 for years two and three.

BES Euro Line

In January 2007, Crisal entered into a seven year, €11.0 million line of credit (approximately $14.8 million) with BANCO ESPÍRITO SANTO, S.A. (BES). The $14.6 million outstanding at June 30, 2007, was the U.S. dollar equivalent under the line at an interest rate of 5.22 percent. Payment of principal in the amount of €1.1 million (approximately $1.5 million) is due in January 2010, payment of €1.6 million (approximately $2.2 million) is due in January 2011, payment of €2.2 million (approximately $3.0 million) is due in January 2012, payment of €2.8 million (approximately $3.8 million) is due in January 2013 and payment of €3.3 million (approximately $4.4 million) is due in January 2014. Interest with respect to the line is paid every six months.

Other Debt

The other debt of $1.7 million primarily consists of government-subsidized loans for equipment purchases at Crisal.

6. Special Charges

Crisa Restructuring

In June 2006, we 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. See Form 10-K for the year ended December 31, 2006, for further discussion.

As a result, we recorded the following non-recurring special charges within the North American Glass reporting segment:

		Three months ended June 30,								Six months ended June 30,
		2007				2006				2007				2006
Fixed asset related (included in Special charges)		$	—			$	12,587			$	—			$	12,587
Inventory write-down (included in Cost of sales)			—				2,543				—				2,543
Crisa restructuring		$	—			$	15,130			$	—			$	15,130

The following reflects the balance sheet activity related to the Crisa restructuring (see Note 4) for the six months ended June 30, 2007:

		Balance at				Cash				Non-cash				Balance at				Cash				Non-cash				Balance at
		December 31, 2006				payments				utilization				March 31, 2007				payments				utilization				June 30, 2007
Employee termination costs & other		$	1,163			$	(614	)		$	(68	)		$	481			$	—			$	73			$	554
Total		$	1,163			$	(614	)		$	(68	)		$	481			$	—			$	73			$	554

The employee termination costs and other of $0.6 million are included in the accrued liabilities on the Condensed Consolidated Balance Sheets.

Write-off of Finance Fees

In June 2006, we wrote off unamortized finance fees related to debt of Libbey and Crisa that was refinanced. See Form 10-K for the year ended December 31, 2006, for further discussion.

As a result, we recorded the following non-recurring special charges within the North American Glass reporting segment:

		Three months ended June 30,								Six months ended June 30,
		2007				2006				2007				2006
Write-off of finance fees		$	—			$	4,906			$	—			$	4,906
Included in interest expense		$	—			$	4,906			$	—			$	4,906

Summary of Special Charges

The following table summarizes the charges related to the Crisa restructuring and write-off of finance fees and their classifications on the Condensed Consolidated Statements of Operations:

		Three months ended June 30,								Six months ended June 30,
		2007				2006				2007				2006
Cost of sales		$	—			$	2,543			$	—			$	2,543
Special charges			—				12,587				—				12,587
Interest expense			—				4,906				—				4,906
Total Special charges		$	—			$	20,036			$	—			$	20,036

7. Income Taxes

In July 2006, the FASB issued FIN 48. FIN 48 addresses the determination of whether tax benefits claimed or expected to be claimed on a tax return should be recorded in the financial statements. Under FIN 48, we may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position should be measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement. FIN 48 also provides guidance on derecognition, classification, interest and penalties on income taxes and accounting in interim periods and requires increased disclosures.

We adopted the provisions of FIN 48 on January 1, 2007. As a result of the implementation of FIN 48, we recorded a $6.7 million decrease in the net tax asset for unrecognized tax benefits, offset by an increase in net deferred tax asset of $6.7 million, with no cumulative effect on retained earnings. The amount of unrecognized tax benefits at January 1, 2007 was $11.1 million, of which $4.4 million would impact our effective tax rate, if recognized. The amount of unrecognized tax benefits at June 30, 2007 is $11.3 million, of which $4.6 million would impact our effective tax rate, if recognized.

It is expected that the amount of the unrecognized tax benefits will change within the next twelve months; however, we do not expect the change to have a significant impact on our results of operations or our financial position.

We recognize accrued interest and penalties associated with uncertain tax positions as part of the tax provision. As of January 1, 2007, we had $3.0 million of accrued interest and penalties. The liability for the payment of interest and penalties did not materially change as of June 30, 2007.

We are not currently under audit by the Internal Revenue Service for any years. The statutes of limitation for our income tax returns after 2002 remain open for examination by the IRS. We have not been contacted by the IRS for examination for any of these years.

Foreign and U.S. state jurisdictions have statutes of limitations generally ranging from three to five years. The state impact of any federal changes remains subject to examination by various states for a period of up to one year after formal notification to the states. We have various foreign and state income tax returns in the process of examination, administrative appeals or litigation.

Years still open to examination by foreign tax authorities in major jurisdictions include Netherlands (2001 onward), Portugal (2002 onward), Mexico (2001 onward), and Canada (2004 onward).

8. Pension and Nonpension Postretirement Benefits

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. 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 the hourly and salaried U.S.-based employees of Libbey, hired before January 1, 2006. The non-U.S. pension plans cover the employees of our wholly owned subsidiaries, Royal Leerdam, Leerdam Crystal and Crisa. The Crisa plan is not funded.

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 June 30,		2007				2006				2007				2006				2007				2006
Service cost		$	1,436			$	1,633			$	482			$	209			$	1,918			$	1,842
Interest cost			3,609				3,515				957				415				4,566				3,930
Expected return on plan assets			(3,990	)			(3,881	)			(688	)			(565	)			(4,678	)			(4,446	)
Amortization of unrecognized:
Prior service cost			521				521				(11	)			(31	)			510				490
(Gain)/loss			515				809				75				10				590				819
Settlement			1,000				1,000				—				—				1,000				1,000
Pension expense (credit)		$	3,091			$	3,597			$	815			$	38			$	3,906			$	3,635

		U.S. Plans								Non-U.S. Plans								Total
Six months ended June 30,		2007				2006				2007				2006				2007				2006
Service cost		$	2,961			$	3,266			$	961			$	377			$	3,922			$	3,643
Interest cost			7,304				7,030				1,913				785				9,217				7,815
Expected return on plan assets			(8,020	)			(7,762	)			(1,375	)			(1,130	)			(9,395	)			(8,892	)
Amortization of unrecognized:
Prior service cost			1,043				1,042				(23	)			(117	)			1,020				925
(Gain)/loss			1,070				1,618				149				20				1,219				1,638
Settlement			1,000				1,000				—				—				1,000				1,000
Pension expense (credit)		$	5,358			$	6,194			$	1,625			$	(65	)		$	6,983			$	6,129

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. 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.

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

		U.S. Plans								Non-U.S. Plans								Total
Three months ended June 30,		2007				2006				2007				2006				2007				2006
Service cost		$	190			$	208			$	—			$	—			$	190			$	208
Interest cost			558				494				24				34				582				528
Amortization of unrecognized:
Prior service cost			(222	)			(220	)			—				—				(222	)			(220	)
(Gain)/loss			21				(8	)			(12	)			—				9				(8	)
Nonpension postretirement benefit expense		$	547			$	474			$	12			$	34			$	559			$	508

		U.S. Plans								Non-U.S. Plans								Total
Six months ended June 30,		2007				2006				2007				2006				2007				2006
Service cost		$	398			$	416			$	—			$	—			$	398			$	416
Interest cost			1,122				988				47				68				1,169				1,056
Amortization of unrecognized:
Prior service cost			(442	)			(440	)			—				—				(442	)			(440	)
(Gain)/loss			39				(16	)			(25	)			—				14				(16	)
Nonpension postretirement benefit expense		$	1,117			$	948			$	22			$	68			$	1,139			$	1,016

We expect to utilize $20.5 million to fund our pension plans and nonpension postretirement benefits in 2007 of which $4.8 million and $5.9 million was incurred for the three months and six months ended June 30, 2007, respectively.

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 June 30,								Six Months Ended June 30,
		2007				2006				2007				2006
Numerator for earnings per share — net income (loss) that is available to common shareholders		$	3,956			$	(9,569	)		$	2,202			$	(9,054	)
Denominator for basic earnings per share — weighted-average shares outstanding			14,435,975				14,123,647				14,398,997				14,080,796
Effect of dilutive securities – employee stock options, employee stock purchase plan (ESPP), warrants and restricted share units (1)			236,108				—				217,645				—
Denominator for diluted earnings per share – adjusted weighted-average shares and assumed conversions			14,672,083				14,123,647				14,616,642				14,080,796
Basic earnings (loss) per share		$	0.27			$	(0.68	)		$	0.15			$	(0.64	)
Diluted earnings (loss) per share		$	0.27			$	(0.68	)		$	0.15			$	(0.64	)

(1)		The effect of employee stock options, warrants and the employee stock purchase plan (ESPP), 388 shares for the three months ended June 30, 2006, and 193 shares for the six months ended June 30, 2006, were anti-dilutive and thus not included in the earnings per share calculation. These amounts are anti-dilutive due to the net loss.

Diluted shares outstanding include the dilutive impact of in-the-money employee stock options, the employee stock purchase plan (ESPP), warrants and restricted stock units, 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 hypothetically would be received from the exercise of all in-the-money options are assumed to be used to repurchase shares.

10. Derivatives

As of June 30, 2007, we had Interest Rate Protection Agreements for $200.0 million of our variable rate debt, commodity contracts for 2,865,000 million British Thermal Units (BTUs) of natural gas and a foreign currency contract for 212.0 million pesos for a contractual payment due to Vitro, related to the Crisa acquisition, in January 2008, with a fair value of $ (2.0) million, accounted for under Statement No. 133, “Accounting for Derivative Instruments and Hedging Activities” (Statement 133). At December 31, 2006, we had Interest Rate Protection Agreements for $200.0 million of variable rate debt and commodity contracts for 3,450,000 million BTUs of natural gas with a fair value of $(4.1) million. The fair value of these derivatives is included in derivative liability on the Condensed Consolidated Balance Sheets.

We do not believe we are exposed to more than a nominal amount of credit risk in our interest rate, natural gas and foreign currency hedges, as the counterparties are established financial institutions. All counterparties’ credit ratings are rated A+ or better.

All of our derivatives (except for the foreign currency contract) qualify and are designated as cash flow hedges at June 30, 2007. Hedge accounting is applied only when the derivative is deemed to be highly effective at offsetting changes in anticipated cash flows of the hedged item or transaction. The ineffective portion of the change in the fair value of a derivative designated as a cash flow hedge is recognized in current earnings. We recognized an immaterial loss in the three months and a gain of $ 0.7 million in the six months ended June 30, 2007, in other income on the Condensed Consolidated Statement of Operations. We recognized a loss of $ 0.9 million in the six months ended June 30, 2006.

11. Comprehensive Income (Loss)

Components of comprehensive income (loss) (net of tax) are as follows:

		Three months ended June 30,								Six months ended June 30,
		2007				2006				2007				2006
Net income (loss)		$	3,956			$	(9,569	)		$	2,202			$	(9,054	)
Pension and other postretirement benefit adjustments			(181	)			(118	)			24				(118	)
Change in fair value of derivative instruments (see detail below)			57				(968	)			816				(4,724	)
Effect of exchange rate fluctuation			2,851				(95	)			1,782				15
Comprehensive income (loss)		$	6,683			$	(10,750	)		$	4,824			$	(13,881	)

Accumulated other comprehensive loss (net of tax) includes:

		June 30, 2007				December 31, 2006
Pension and other postretirement benefit adjustments		$	(41,820	)		$	(41,844	)
Derivatives			(2,270	)			(3,086	)
Exchange rate fluctuation			703				(1,079	)
Total		$	(43,387	)		$	(46,009	)

The change in other comprehensive income (loss) for derivative instruments for the Company is as follows:

		Three months ended June 30,								Six months ended June 30,
		2007				2006				2007				2006
Change in fair value of derivative instruments		$	46			$	(1,484	)		$	1,159			$	(7,441	)
Less:
Income tax effect			(11	)			(516	)			343				(2,717	)
Other comprehensive income (loss) related to derivatives		$	57			$	(968	)		$	816			$	(4,724	)

We adopted the provisions of SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB statements No. 87, 88, 106 and 132 (R)” in December 2006. As a result of the adoption of this statement, accumulated other comprehensive income (loss) decreased by $21.8 million. The decrease was incorrectly recorded as a component of comprehensive loss in the 2006 Consolidated Statement of Shareholders’ Equity. Total comprehensive loss was incorrectly reported as $35.8 million and should have been reported as $14.0 million for the year ended December 31, 2006. The decrease due to the adoption of this statement should have been recorded as a direct adjustment to accumulated other comprehensive income (loss).

12. Condensed Consolidated Guarantor Financial Statements

Libbey Glass is a direct, 100 percent owned subsidiary of Libbey Inc. and the issuer of the Senior Notes and the PIK Notes. The obligations of Libbey Glass under the Senior Notes and the PIK Notes are fully and unconditionally and jointly and severally guaranteed by Libbey Inc. and by certain indirect, 100 percent owned domestic subsidiaries of Libbey Inc, as described below. All are related parties that are included in the Condensed Consolidated Financial Statements for the three month and six month periods ended June 30, 2007.

At June 30, 2007 and December 31, 2006, Libbey Inc.’s indirect, 100 percent owned domestic subsidiaries were Syracuse China Company, World Tableware Inc., LGA4 Corp., LGA3 Corp., The Drummond Glass Company, LGC Corp., Traex Company, Libbey.com LLC, LGFS Inc. and LGAC LLC (together with Crisa Industrial LLC, which became an indirect, 100 percent owned subsidiary of Libbey Inc. on June 16, 2006, the “Subsidiary Guarantors”). The following tables contain condensed consolidating financial statements of (a) the parent, Libbey Inc., (b) the issuer, Libbey Glass, (c) the Subsidiary Guarantors, (d) the indirect subsidiaries of Libbey Inc. that are not Subsidiary Guarantors (collectively, “Non-Guarantor Subsidiaries”), (e) the consolidating elimination entries, and (f) the consolidated totals.

Libbey Inc.
Condensed Consolidating Statement of Operations
(dollars in thousands) (unaudited)

Three months ended June 30, 2007
		Libbey				Libbey								Non-
		Inc.				Glass				Subsidiary				Guarantor
		(Parent)				(Issuer)				Guarantors				Subsidiaries				Eliminations				Consolidated
Net sales		$	—			$	106,371			$	30,492			$	82,587			$	(12,327	)		$	207,123
Freight billed to customers			—				118				367				64				—				549
Total revenues			—				106,489				30,859				82,651				(12,327	)			207,672
Cost of sales			—				81,928				24,012				69,870				(12,327	)			163,483
Gross profit			—				24,561				6,847				12,781				—				44,189
Selling, general and administrative expenses			—				12,195				1,948				9,524				—				23,667
Income from operations			—				12,366				4,899				3,257				—				20,522
Other income (expense)			—				406				66				167				—				639
Earnings (loss) before interest, income taxes and minority interest			—				12,772				4,965				3,424				—				21,161
Interest expense			—				14,800				1				1,628				—				16,429
Earnings (loss) before income taxes and minority interest			—				(2,028	)			4,964				1,796				—				4,732
Provision (benefit) for income taxes			—				10,843				(7,320	)			(2,747	)			—				776
Net income (loss) before minority interest			—				(12,871	)			12,284				4,543				—				3,956
Minority interest and equity in net income (loss) of subsidiaries			3,956				16,827				—				—				(20,783	)			—
Net income (loss)		$	3,956			$	3,956			$	12,284			$	4,543			$	(20,783	)		$	3,956

Libbey Inc.
Condensed Consolidating Statement of Operations
(dollars in thousands) (unaudited)

Three months ended June 30, 2006
		Libbey				Libbey								Non-
		Inc.				Glass				Subsidiary				Guarantor
		(Parent)				(Issuer)				Guarantors				Subsidiaries				Eliminations				Consolidated
Net sales		$	—			$	97,795			$	28,735			$	34,538			$	(3,070	)		$	157,998
Freight billed to customers			—				159				391				376				—				926
Total revenues			—				97,954				29,126				34,914				(3,070	)			158,924
Cost of sales			—				77,219				24,053				32,550				(3,070	)			130,752
Gross profit			—				20,735				5,073				2,364				—				28,172
Selling, general and administrative expenses			—				14,294				2,003				3,399				—				19,696
Special charges			—				—				—				12,587				—				12,587
Income (loss) from operations			—				6,441				3,070				(13,622	)			—				(4,111	)
Equity earnings (loss) — pretax			—				—				328				593				—				921
Other income (expense)			—				(331	)			185				(761	)			—				(907	)
Earnings (loss) before interest, income taxes and minority interest			—				6,110				3,583				(13,790	)			—				(4,097	)
Interest expense			—				7,984				1				2,215				—				10,200
Earnings (loss) before income taxes and minority interest			—				(1,874	)			3,582				(16,005	)			—				(14,297	)
Provision (benefit) for income taxes			—				(620	)			1,182				(5,282	)			—				(4,720	)
Net income (loss) before minority interest			—				(1,254	)			2,400				(10,723	)			—				(9,577	)
Minority interest and equity in net income (loss) of subsidiaries			(9,569	)			(8,315	)			—				8				17,884				8
Net income (loss)		$	(9,569	)		$	(9,569	)		$	2,400			$	(10,715	)		$	17,884			$	(9,569	)
The following represents the total special charges included in the above Statement of Operations (see Note 6 for further details):
Special charges included in:
Cost of sales		$	—			$	—			$	—			$	2,543			$	—			$	2,543
Special charges			—				—				—				12,587				—				12,587
Interest expense			—				3,490				—				1,416				—				4,906
Total pretax special charges		$	—			$	3,490			$	—			$	16,546			$	—			$	20,036

Libbey Inc.
Condensed Consolidating Statement of Operations
(dollars in thousands) (unaudited)

Six months ended June 30, 2007
		Libbey				Libbey								Non-
		Inc.				Glass				Subsidiary				Guarantor
		(Parent)				(Issuer)				Guarantors				Subsidiaries				Eliminations				Consolidated
Net sales		$	—			$	197,079			$	57,926			$	154,092			$	(22,478	)		$	386,619
Freight billed to customers			—				266				668				90				—				1,024
Total revenues			—				197,345				58,594				154,182				(22,478	)			387,643
Cost of sales			—				156,195				46,410				130,912				(22,478	)			311,039
Gross profit			—				41,150				12,184				23,270				—				76,604
Selling, general and administrative expenses			—				24,153				4,198				17,350				—				45,701
Income from operations			—				16,997				7,986				5,920				—				30,903
Other income (expense)			—				1,271				1,194				19				—				2,484
Earnings (loss) before interest, income taxes and minority interest			—				18,268				9,180				5,939				—				33,387
Interest expense			—				29,468				1				2,524				—				31,993
Earnings (loss) before income taxes and minority interest			—				(11,200	)			9,179				3,415				—				1,394
Provision (benefit) for income taxes			—				6,491				(5,320	)			(1,979	)			—				(808	)
Net income (loss) before minority interest			—				(17,691	)			14,499				5,394				—				2,202
Minority interest and equity in net income (loss) of subsidiaries			2,202				19,893				—				—				(22,095	)			—
Net income (loss)		$	2,202			$	2,202			$	14,499			$	5,394			$	(22,095	)		$	2,202

Libbey Inc.

Condensed Consolidating Statement of Operations

(dollars in thousands) (unaudited)

		Six months ended June 30, 2006
		Libbey				Libbey								Non-
		Inc.				Glass				Subsidiary				Guarantor
		(Parent)				(Issuer)				Guarantors				Subsidiaries				Eliminations				Consolidated
Net sales		$	—			$	182,430			$	55,559			$	58,134			$	(3,259	)		$	292,864
Freight billed to customers			—				308				691				384				—				1,383
Total revenues			—				182,738				56,250				58,518				(3,259	)			294,247
Cost of sales			—				147,992				48,576				50,620				(3,259	)			243,929
Gross profit			—				34,746				7,674				7,898				—				50,318
Selling, general and administrative expenses			—				29,007				3,442				6,333				—				38,782
Special charges			—				—				—				12,587				—				12,587
Income (loss) from operations			—				5,739				4,232				(11,022	)			—				(1,051	)
Equity earnings (loss) – pretax			—				—				612				1,374				—				1,986
Other income (expense)			—				247				58				(816	)			—				(511	)
Earnings (loss) before interest, income taxes and minority interest			—				5,986				4,902				(10,464	)			—				424
Interest expense			—				10,343				2				3,464				—				13,809
Earnings (loss) before income taxes and minority interest			—				(4,357	)			4,900				(13,928	)			—				(13,385	)
Provision (benefit) for income taxes			—				(1,440	)			1,617				(4,596	)			—				(4,419	)
Net income (loss) before minority interest			—				(2,917	)			3,283				(9,332	)			—				(8,966	)
Minority interest and equity in net income (loss) of subsidiaries			(9,054	)			(6,137	)			—				(88	)			15,191				(88	)
Net income (loss)		$	(9,054	)		$	(9,054	)		$	3,283			$	(9,420	)		$	15,191			$	(9,054	)
The following represents the total special charges included in the above Statement of Operations (see Note 6 for further details):
Special charges included in:
Cost of sales		$	—			$	—			$	—			$	2,543			$	—			$	2,543
Special charges			—				—				—				12,587				—				12,587
Interest expense			—				3,490				—				1,416				—				4,906
Total pretax special charges		$	—			$	3,490			$	—			$	16,546			$	—			$	20,036