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, 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.

(Exact name of registrant as specified in its charter)

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

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 Filerþ     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 — 14,242,693 shares at July 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
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 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits
EXHIBIT INDEX
SIGNATURES
Certification
Certification
Certification
Certification
EX-10.1
EX-10.2
EX-10.3
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 six-month periods ended June 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 June 30,
		2006				2005
Revenues:
Net sales		$	157,998			$	144,538
Freight billed to customers			926				481
Total revenues			158,924				145,019
Cost of sales			130,752				117,963
Gross profit			28,172				27,056
Selling, general and administrative expenses			19,696				20,367
Special charges			12,587				4,197
(Loss) income from operations			(4,111	)			2,492
Equity earnings (loss) — pretax			921				(752	)
Other (expense) income			(907	)			431
(Loss) earnings before interest and income taxes and minority interest			(4,097	)			2,171
Interest expense			10,200				3,464
Loss before income taxes and minority interest			(14,297	)			(1,293	)
Credit for income taxes			(4,720	)			(427	)
Loss before minority interest			(9,577	)			(866	)
Minority interest			8				(4	)
Net loss		$	(9,569	)		$	(870	)
Net loss per share:
Basic		$	(0.68	)		$	(0.06	)
Diluted		$	(0.68	)		$	(0.06	)
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)

		Six months ended June 30,
		2006				2005
Revenues:
Net sales		$	292,864			$	274,322
Freight billed to customers			1,383				978
Total revenues			294,247				275,300
Cost of sales			243,929				227,205
Gross profit			50,318				48,095
Selling, general and administrative expenses			38,782				38,321
Special charges			12,587				7,194
(Loss) income from operations			(1,051	)			2,580
Equity earnings (loss) — pretax			1,986				(198	)
Other (expense) income			(511	)			732
Earnings before interest and income taxes and minority interest			424				3,114
Interest expense			13,809				6,842
Loss before income taxes and minority interest			(13,385	)			(3,728	)
Credit for income taxes			(4,419	)			(1,230	)
Loss before minority interest			(8,966	)			(2,498	)
Minority interest			(88	)			(21	)
Net loss		$	(9,054	)		$	(2,519	)
Net loss per share:
Basic		$	(0.64	)		$	(0.18	)
Diluted		$	(0.64	)		$	(0.18	)
Dividends per share		$	0.05			$	0.20

See accompanying notes

LIBBEY INC.

CONDENSED CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except share amounts)

		June 30,				December 31,
		2006				2005
		(unaudited)
ASSETS
Current assets:
Cash		$	26,661			$	3,242
Accounts receivable — net			112,195				79,042
Inventories — net			161,827				122,572
Deferred taxes			4,239				8,270
Prepaid and other current assets			4,807				10,787
Total current assets			309,729				223,913
Other assets:
Repair parts inventories			12,067				6,322
Intangible pension asset			17,251				17,251
Software — net			4,563				4,561
Deferred taxes			—				952
Other assets			16,878				4,397
Investments			—				76,657
Purchased intangible assets — net			30,175				10,778
Goodwill — net			170,449				50,825
Total other assets			251,383				171,743
Property, plant and equipment — net			295,153				200,128
Total assets		$	856,265			$	595,784
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Notes payable		$	1,546			$	11,475
Accounts payable			59,447				47,020
Payable to Vitro			7,184				—
Salaries and wages			17,275				16,043
Accrued liabilities			50,353				36,968
Special charges reserve			3,508				2,002
Accrued income taxes			—				7,131
Long-term debt due within one year			825				825
Total current liabilities			140,138				121,464
Long-term debt			462,774				249,379
Pension liability			73,994				54,760
Nonpension postretirement benefits			44,533				45,081
Payable to Vitro			19,900				—
Other long-term liabilities			6,452				5,461
Total liabilities			747,791				476,145
Minority interest			129				34
Total liabilities including minority interest			747,920				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 $1,026, and 485,309 shares as of June 30, 2006 and no warrants at December 31, 2005.)			302,339				301,025
Treasury stock, at cost, 4,475,910 shares (4,681,721 shares in 2005)			(130,510	)			(132,520	)
Retained deficit			(27,723	)			(17,966	)
Accumulated other comprehensive loss			(35,948	)			(31,121	)
Total shareholders’ equity			108,345				119,605
Total liabilities and shareholders’ equity		$	856,265			$	595,784

See accompanying notes

LIBBEY INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(dollars in thousands)
(unaudited)

		Three months ended June 30,
		2006				2005
Operating activities:
Net loss		$	(9,569	)		$	(870	)
Depreciation and amortization			8,206				8,066
Equity (earnings) loss — net of tax			(546	)			444
Minority interest			(8	)			4
Change in accounts receivable			(2,722	)			197
Change in inventories			1,134				(791	)
Change in accounts payable			(7,977	)			3,748
Special charges			19,788				2,256
Pension & nonpension postretirement			4,564				1,972
Income taxes			2,802				(1,772	)
Other operating activities			(95	)			9,388
Net cash provided by operating activities			15,577				22,642
Investing activities:
Additions to property, plant and equipment			(12,817	)			(8,709	)
Business acquisition and related costs, less cash acquired			(77,571	)			(42	)
Net cash used in investing activities			(90,388	)			(8,751	)
Financing activities:
Net revolving credit facility activity			(160,505	)			(8,756	)
Net ABL credit facility activity			43,038				—
Other net repayments			(80,480	)			(3,429	)
Other borrowings			7,485				—
Note payments			(100,000	)			—
Note proceeds			399,840				—
Debt financing fees			(14,356	)			—
Dividends			(352	)			(1,386	)
Other			195				25
Net cash provided by (used in) financing activities			94,865				(13,546	)
Effect of exchange rate fluctuations on cash			105				—
Increase in cash			20,159				345
Cash at beginning of period			6,502				2,195
Cash at end of period		$	26,661			$	2,540
Supplemental disclosure of cash flows information:
Cash paid during the quarter for interest		$	7,364			$	4,175
Cash paid (net of refunds received) during the quarter for income taxes		$	(417	)		$	142

See accompanying notes

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

		Six months ended June 30,
		2006				2005
Operating activities:
Net loss		$	(9,054	)		$	(2,519	)
Depreciation and amortization			16,541				16,451
Equity (earnings) loss — net of tax			(1,378	)			29
Minority interest			88				21
Change in accounts receivable			4,516				(1,697	)
Change in inventories			2,922				(4,511	)
Change in accounts payable			(15,312	)			(7,886	)
Special charges			18,924				3,512
Pension & nonpension postretirement			6,203				3,559
Income taxes			(5,244	)			(6,878	)
Other operating activities			2,169				11,410
Net cash provided by operating activities			20,375				11,491
Investing activities:
Additions to property, plant and equipment			(34,256	)			(19,114	)
Business acquisition and related costs, less cash acquired			(77,571	)			(28,990	)
Net cash used in investing activities			(111,827	)			(48,104	)
Financing activities:
Net revolving credit facility activity			(147,142	)			32,880
Net ABL credit facility activity			43,038				—
Other net (repayments) borrowings			(81,060	)			2,713
Other borrowings			14,954				—
Note payments			(100,000	)			—
Note proceeds			399,840				—
Debt financing fees			(14,356	)			—
Stock options exercised			—				99
Dividends			(703	)			(2,768	)
Other			195				(15	)
Net cash provided by financing activities			114,766				32,909
Effect of exchange rate fluctuations on cash			105				—
Increase (decrease) in cash			23,419				(3,704	)
Cash at beginning of period			3,242				6,244
Cash at end of period		$	26,661			$	2,540
Supplemental disclosure of cash flows information:
Cash paid during the period for interest		$	9,345			$	5,993
Cash paid (net of refunds received) during the period for income taxes		$	5,852			$	5,248

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. We operate in one business segment: tableware products. 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. We own 95 percent of Crisal-Cristalaria Automatica S.A. (Crisal). Our 95 percent controlling interest requires that Crisal’s operations be included in the Condensed Consolidated Financial Statements. The 5 percent equity interest of Crisal that we do not own is shown as minority interest in the Condensed Consolidated Financial Statements. 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. 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

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. In addition, foreign currency transaction gains and losses resulting from U.S. dollar-denominated transactions are eliminated. The resulting remeasurement gain (loss) is recorded in results of operations.

New Accounting Standards

In December 2004, the FASB issued SFAS No. 123 (revised 2004), “Share-Based Payment” (SFAS No. 123-R), which amends and replaces SFAS No. 123, “Accounting for Stock-Based Compensation” (SFAS No. 123), supersedes APB No. 25 and requires share-based compensation transactions to be accounted for using a fair-value-based method and the resulting cost recognized in our financial statements. This new standard is effective for interim and annual periods beginning January 1, 2006. On January 1, 2006, we adopted SFAS No. 123-R. 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. The estimated annual impact of applying the provisions of SFAS No. 123-R is an after-tax charge of $0.5 million for 2006. See Note 10.

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 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.

Reclassifications

Certain amounts in prior years’ financial statements have been reclassified to conform to the presentation used in the quarter and six months ended June 30, 2006.

3. Balance Sheet Details

The following table provides detail of selected balance sheet items:

		June 30, 2006				December 31, 2005
Accounts receivable:
Trade receivables		$	95,995			$	75,470
Other receivables			16,200				3,572
Total accounts receivable, less allowances of $6,963 and $8,342		$	112,195			$	79,042
Inventories:
Finished goods		$	150,997			$	112,058
Work in process			4,601				4,456
Raw materials			4,365				5,442
Operating supplies			1,864				616
Total inventories		$	161,827			$	122,572
Prepaid and other current assets:
Prepaid expenses		$	4,807			$	3,142
Derivative assets			—				7,645
Total prepaid and other current assets		$	4,807			$	10,787
Other assets:
Deposits		$	1,767			$	1,386
Finance fees — net of amortization			14,236				2,003
Other			875				1,008
Total other assets		$	16,878			$	4,397
Accrued liabilities:
Accrued incentives		$	22,078			$	14,306
Derivative liabilities			562				67
Workers compensation			9,669				9,134
Medical liabilities			2,859				3,019
Interest			2,371				1,843
Commissions payable			944				858
Accrued taxes			4,571				432
Other			7,299				7,309
Total accrued liabilities		$	50,353			$	36,968
Other long-term liabilities:
Deferred liability		$	703				877
Guarantee of Crisa debt			—				421
Other			5,749				4,163
Total other long-term liabilities		$	6,452			$	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 for $23 million prior to the purchase of the remaining 51 percent of the shares in 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 $7 million of net intercompany payables until August 15, 2006, and approximately $19.9 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. 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 yeas 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 60 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 fair values of the assets acquired and liabilities assumed as of the date of acquisition.

Current assets		$	43,971
Property, plant and equipment			43,844
Intangible assets			19,584
Goodwill			50,170
Total assets acquired			157,569
Less liabilities assumed:
Current liabilities			67,507
Long-term liabilities			6,062
Total liabilities assumed			73,569
Cash purchase price			84,000
Less: Cash acquired			6,429
Cash purchase price, net of cash acquired		$	77,571

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 divided by 51 percent)		$	156,863
Less: assets received/liabilities forgiven			(4,693	)
Add: estimated direct acquisition costs			4,000
Aggregate enterprise purchase price			156,170
Add: fair value liabilities assumed			155,593
Less: fair value assets acquired			(221,949	)
Inferred goodwill of 51 percent purchase			89,814
Equity interest acquired			51	%
Preliminary goodwill of 51 percent purchase			45,805
Adjustments to step acquisition accounting			4,365
Add: goodwill recorded on existing 49 percent ownership interest			69,419
Enterprise goodwill		$	119,589

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 not material for the period ended June 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.

In June 2006, we announced plans to consolidate, over a three-year period, 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 $2.6 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.

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 included 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:

						June 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			43,929				—
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
Senior secured notes		floating		June 1, 2011			306,000				—
PIK notes		16.00%		December 1, 2011			102,000				—

						June 30,				December 31,
		Interest Rate		Maturity Date		2006				2005
Promissory note		6.00%		July 2006 to September 2016			2,058				2,131
Notes payable		floating		July 2006			1,546				11,475
RMB loan contract		floating		July 2012 to December 2012			15,024				—
Obligations under capital leases		floating		July 2006 to May 2007			1,781				2,203
Other debt		floating		September 2009			1,927				2,056
Total borrowings							474,265				261,679
Less — unamortized discounts and warrants							9,120				—
Total borrowings — net							465,145				261,679
Less — current portion of borrowings							2,371				12,300
Total long-term portion of borrowings — net						$	462,774			$	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 total 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 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, 2006. There were no Libbey Glass borrowings under the facility, while Libbey Europe B.V. had outstanding borrowings of €35 million at June 30, 2006.

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’ 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’ present and future direct and indirect domestic subsidiaries, (C) 100 percent of the non-voting stock of substantially all of Libbey Glass’ first-tier present and future foreign subsidiaries and (D) 65 percent of the voting stock of substantially all of Libbey Glass’ 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, 2006. No compensating balances are required by the Agreement. The Agreement does not require compliance with restrictive financial covenants, unless aggregate availability falls below $25,000,000.

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 $10 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 June 30, 2006, we had $8.4 million in letters of credit outstanding under the Facility. Remaining availability on the ABL Facility was $44.8 million at 6/30/06.

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 $290.7 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. The interest rate was 12.44 percent at June 30, 2006.

The Senior Notes are guaranteed by Libbey and all of Libbey Glass’ existing and future domestic subsidiaries that guarantee any of Libbey Glass’ debt or debt of any subsidiary guarantor. 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’ 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 $97.2 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 amount at June 30, 2006 of approximately $1.0 million is included in long-term debt on the Condensed Consolidated Balance Sheets. 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, 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’ existing and future domestic subsidiaries that guarantee any of Libbey Glass’ debt or debt of any subsidiary guarantor. 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, 2006, and December 31, 2005, we had $2,058 and $2,131, respectively, outstanding on the promissory note.

Notes Payable

We have an overdraft line of credit for a maximum of €1.75 million. The $1.5 million outstanding at June 30, 2006, was the U.S. dollar equivalent under the euro-based overdraft line and the interest rate was 3.90 percent.

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 the production facility and 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, 2006, the annual interest rate was 5.75 percent. As of June 30, 2006, the outstanding balance was RMB 120 million (approximately $15 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.

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, 2006, are as follows:

Payments Due by Period

						1				2-3				4-5
		Total				Year				Years				Years
Capital leases		$	1,781			$	616			$	1,165				—

Other Debt

The other debt of $1,927 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 June 30,									Six months ended June 30,
		2006				2005					2006				2005
Fixed asset related		$	—			$	372				$	—			$	520
Severance & benefits			—				—					—				2,019
Miscellaneous			—				475					—				1,305
Included in special charges		$	—			$	847				$	—			$	3,844

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

		Balance at								Balance at								Balance at
		December 31,				Cash				March 31,				Cash				June 30,
		2005				payments				2006				payments				2006
Land sale gain		$	1,055			$	(530	)		$	525			$	(144	)		$	381
Employee termination costs & other			70				(28	)			42				—				42
Total		$	1,125			$	(558	)		$	567			$	(144	)		$	423

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

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

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

		Balance at								Balance at								Balance at
		December 31,				Cash				March 31,				Cash				June 30,
		2005				payments				2005				payments				2006
Employee termination costs		$	877			$	(306	)		$	571			$	(103	)		$	468
Total		$	877			$	(306	)		$	571			$	(103	)		$	468

The employee termination costs of $0.47 million are included in the special charges reserve on the Condensed Consolidated Balance Sheets.

Crisa Restructuring

In June 2006, Libbey announced plans to consolidate, over a three-year period, 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 $2.6 million severance reserve was established related to statutory severance obligations for approximately 600 hourly employees.

As a result, we recorded the following special charges:

		Three months ended June 30,									Six months ended June 30,
		2006				2005					2006				2005
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 for the six months ended June 30, 2006:

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

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 June 30,								Six months ended June 30,
		2006				2005				2006				2005
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 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 June 30,									Six months ended June 30,
		2006				2005					2006				2005
Cost of sales		$	2,543			$	867				$	2,543			$	867
Selling, general and administrative expenses			—				1,347					—				1,347
Special charges			12,587				4,197					12,587				7,194
Interest expense			4,906				—					4,906				—
Total special charges		$	20,036			$	6,411				$	20,036			$	9,408

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 six months ended June 30, 2006:

		Balance at								Balance at												Balance at
		December 31,				Cash				March 31,				Non-cash				Cash				June 30,
		2005				payments				2006				utilization				payments				2006
Land sale gain		$	1,055			$	(530	)		$	525				—			$	(144	)		$	381
Employee termination costs & other			947				(334	)			613				2,617				(103	)			3,127
Total special charges reserve		$	2,002			$	(864	)		$	1,138			$	2,617			$	(247	)		$	3,508

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. Our newly acquired company 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 June 30,		2006				2005				2006				2005				2006				2005
Service cost		$	1,633			$	1,676			$	209			$	236			$	1,842			$	1,912
Interest cost			3,515				3,514				415				408				3,930				3,922
Expected return on plan assets			(3,881	)			(4,209	)			(565	)			(545	)			(4,446	)			(4,754	)
Amortization of unrecognized:
Prior service cost			521				570				(31	)			(99	)			490				471
Gain			809				755				10				—				819				755
Curtailment			—				1,614				—				—				—				1,614
Settlement			1,000				—				—				—				1,000				—
Pension expense		$	3,597			$	3,920			$	38			$	0			$	3,635			$	3,920

		U.S. Plans								Non-U.S. Plans								Total
Six months ended June 30,		2006				2005				2006				2005				2006				2005
Service cost		$	3,266			$	3,349			$	377			$	472			$	3,643			$	3,821
Interest cost			7,030				7,135				785				813				7,815				7,948
Expected return on plan assets			(7,762	)			(8,542	)			(1,130	)			(1,090	)			(8,892	)			(9,632	)
Amortization of unrecognized:
Prior service cost			1,042				1,135				(117	)			(198	)			925				937
Gain			1,618				1,273				20				—				1,638				1,273
Curtailment			—				1,614				—				—				—				1,614
Settlement			1,000				—				—				—				1,000				—
Pension expense (credit)		$	6,194			$	5,964			$	(65	)		$	(3	)		$	6,129			$	5,961

In the second 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 only of the active employees of Crisa as of that date. Vitro assumed all the pension liabilities with respect to retirees as of that date. 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 fifteen days of Libbey ownership of Crisa is $0.1 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. The contribution to Crisa’s plan in 2006 is expected to be approximately $0.05 million. Through the second quarter of 2006, there have been contributions of approximately $0.05 million to the U.S. plans and contributions totaling approximately $1.0 million for the plan in the Netherlands. No contributions have been made for June 16, 2006 through June 30, 2006 for the plan in Mexico.

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 June 30,		2006				2005				2006				2005				2006				2005
Service cost		$	208			$	224			$	—			$	—			$	208			$	224
Interest cost			494				538				34				37				528				575
Amortization of unrecognized:
Prior service cost			(220	)			(220	)			—				—				(220	)			(220	)
(Loss) gain			(8	)			60				—				(13	)			(8	)			47
Curtailment			—				304				—				—				—				304
Nonpension postretirement benefit expense		$	474			$	906			$	34			$	24			$	508			$	930

		U.S. Plans								Non-U.S. Plans								Total
Six months ended June 30,		2006				2005				2006				2005				2006				2005
Service cost		$	416			$	441			$	—			$	—			$	416			$	441
Interest cost			988				1,082				68				74				1,056				1,156
Amortization of unrecognized:
Prior service cost			(440	)			(440	)			—				—				(440	)			(440	)
(Loss) gain			(16	)			84				—				(15	)			(16	)			69
Curtailment			—				304				—				—				—				304
Nonpension postretirement benefit expense		$	948			$	1,471			$	68			$	59			$	1,016			$	1,530

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 this time, the discount rate was reduced from 5.75 percent to 5.00 percent. This revaluation resulted in additional net periodic benefit cost included in the above table, 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 June 30,									Six months ended June 30,
		2006				2005					2006				2005
Numerator for earnings per share — net loss that is available to common shareholders		$	(9,569	)		$	(870	)		$	(9,054	)		$	(2,519	)
Denominator for basic earnings per share — weighted-average shares outstanding			14,123,647				13,868,957				14,080,796				13,843,813
Effect of dilutive securities — employee stock options, employee stock purchase plan (ESPP) and warrants (1)			—				—				—				—
Denominator for diluted earnings per share — adjusted weighted-average shares and assumed conversions			14,123,647				13,868,957				14,080,796				13,843,813
Basic loss per share		$	(0.68	)		$	(0.06	)		$	(0.64	)		$	(0.18	)
Diluted loss per share		$	(0.68	)		$	(0.06	)		$	(0.64	)		$	(0.18	)

(1)		The effect of the employee stock purchase plan (ESPP) of 388 shares for the quarter ended June 30, 2006, was anti-dilutive. The effect of the ESPP of 193 shares for the six month period ended June 30, 2006 was anti-dilutive. The effect of the employee stock purchase plan (ESPP) of 181 shares for the quarter ended June 30, 2005, was anti-dilutive. The effect of the employee stock options and the ESPP of 1,715 shares for the six month period ended June 30, 2005 was anti-dilutive. These anti-dilutive shares were not included in the earnings per share calculations due to the net losses reported. All other employee stock options and warrants were excluded from the diluted weighted average shares calculations as they were not in-the-money as of June 30, 2006.

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.

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 June 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.

During the three months ending June 30, 2006, 95,162 shares were issued under the ESPP, as ESPP grants generally occur annually on May 31st. The following are weighted-average assumptions used for ESPP grants in the three months ended June 30, 2006:

For the quarter ended June 30, 2006
Risk-free interest rate		4.99%
Expected term		12 months
Expected volatility		58.26%
Expected dividend yield		2.29%

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 share 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 second 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 June 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.

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 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 six months ended June 30, 2005:

		Three months ended				Six months ended
		June 30,				June 30,
		2005				2005
Net loss:
Reported net loss		$	(870	)		$	(2,519	)
Less: Stock-based employee compensation expense determined under fair value-based method for all awards, net of related tax effects			229				430
Add: Stock-based employee compensation expense included in reported net loss, net of related tax effects			16				32
Pro forma net loss		$	(1,083	)		$	(2,917	)
Basic loss per share:
Reported basic loss per share		$	(0.06	)		$	(0.18	)
Pro forma basic loss per share		$	(0.08	)		$	(0.21	)
Diluted loss per share:
Reported diluted loss per share		$	(0.06	)		$	(0.18	)
Pro forma diluted loss per share		$	(0.08	)		$	(0.21	)

General Stock Option Information

Stock option compensation expense of $0.3 million is included in selling, general and administrative expenses in the Condensed Consolidated Statements of Operations for the six months ended June 30, 2006. The total income tax benefit recognized in the Condensed Consolidated Statements of Operations for share-based payment transactions is $0.09 million for the six months ended June 30, 2006.

The Black-Scholes option pricing model was developed for use in estimating the value of traded options that have no vesting restrictions and are fully transferable. There were no stock option grants made during the three months ended June 30, 2006. Under the Black-Scholes option pricing model, the weighted-average grant-date fair value of options granted during the six months ended June 30, 2006 is $3.31. The fair value of each option is estimated on the date of grant with the following weighted-average assumptions used for grants in the three months ended and six months ended June 30, 2006 and 2005, respectively:

		Three months ended June 30,									Six months ended June 30,
		2006				2005				2006				2005
Stock option grants:
Risk-free interest rate			N/A				4.29	%			4.57	%			4.29	%
Expected term (years)			N/A				6.1				6.1				6.1
Expected volatility			N/A				34.6	%			38.56	%			34.6	%
Expected dividend yield			N/A				2.3	%			3.19	%			2.3	%

•		The risk-free interest rate is based on the U.S. Treasury yield curve at the time of grant and has a term equal to the expected life. The rate for the period within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the grant date.
•		The expected term represents the period of time the options are expected to be outstanding and is based on historical trends. Additionally, we use historical data to estimate option exercises and employee forfeitures. We review the actual and estimated forfeitures on an annual basis and record an adjustment, if necessary. Employees’ expected exercises and post-vesting employment termination behavior was also incorporated into the fair value of an option. We project the expected life of our stock options based upon historical and other economic data trended into future years. The Company uses the Simplified Method defined by the SEC Staff Accounting Bulletin No. 107, “Share-Based Payment” (SAB 107) to estimate the expected term of the option, representing the period of time that options granted are expected to be outstanding.
•		The expected volatility was developed considering our historical experience. The range of expected volatilities used is 33.34 percent-38.56 percent, and the average expected volatility is 34.55 percent. We use projected data for expected volatility of our stock options based on the average of daily, weekly and monthly historical volatilities of our stock price over the expected life of the option and other economic data trended into future years.
•		The dividend yield is calculated as the ratio based on our most recent historical dividend payments per share of common stock at the grant date to the stock price on the date of grant.

There were no significant modifications that occurred during the second quarter of 2006. The policy for issuing shares upon exercise is for the shares to be issued from Treasury in order to fulfill exercises. We currently have a sufficient number of treasury shares on hand to fund equity-based awards under the Libbey Inc. 2006 Omnibus Incentive Plan and to fund purchases under the ESPP in future offering periods.

Information with respect to the stock options at June 30, 2006 is as follows:

										Weighted
						Weighted average				average				Aggregate
						exercise price (per				remaining				Intrinsic
		Shares				share)				contractual life				Value
Balance at December 31, 2005			1,555,556			$	28.04				5.76			$	—
Options granted			10,000				10.20
Options exercised			—				—
Options cancelled			(47,900	)			31.53
Balance at March 31, 2006			1,517,656			$	27.81				5.85				—
Exercisable at March 31, 2006			1,236,356			$	30.00							$	—