-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, SZ9erEdy2WlLRCqsJ523WZ2H0FNGdwCgdbh3FLcMZWGDkVyleygWsWRkZ7z5kHWf ixjvPB595CipeeRcgwx8fA== 0000950152-99-002878.txt : 19990402 0000950152-99-002878.hdr.sgml : 19990402 ACCESSION NUMBER: 0000950152-99-002878 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990331 FILER: COMPANY DATA: COMPANY CONFORMED NAME: LIBBEY INC CENTRAL INDEX KEY: 0000902274 STANDARD INDUSTRIAL CLASSIFICATION: GLASS, GLASSWARE, PRESSED OR BLOWN [3220] IRS NUMBER: 341559357 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 001-12084 FILM NUMBER: 99581746 BUSINESS ADDRESS: STREET 1: 300 MADISON AVE STREET 2: PO BOX 10060 CITY: TOLEDO STATE: OH ZIP: 43604 BUSINESS PHONE: 4193252100 MAIL ADDRESS: STREET 1: PO BOX 10060 CITY: TOLEDO STATE: OH ZIP: 43699-0060 10-K405 1 LIBBEY INC. 10-K405 1 SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 FORM 10-K (Mark One) [X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended December 31, 1998 or [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 LIBBEY INC. (Exact name of registrant as specified in its charter) Delaware 1-12084 34-1559357 (State or other jurisdiction of (Commission (IRS Employer incorporation or organization) file number) Identification No.) 300 Madison Avenue, Toledo, Ohio 43604 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (419)325-2100 Securities registered pursuant to Section 12(b) of the Act: Name of each exchange on Title of each class which registered ------------------- ---------------- Common Stock, $.01 par value New York Stock Exchange Securities registered pursuant to Section 12(g) of the Act: None 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 X No ----- ----- (Cover page 1 of 2 pages) 2 Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] The aggregate market value (based on the consolidated tape closing price on March 15, 1999) of the voting stock beneficially held by non-affiliates of the registrant was approximately $517,897,004. For the sole purpose of making this calculation, the term "non-affiliate" has been interpreted to exclude directors and executive officers of the registrant. Such interpretation is not intended to be, and should not be construed to be, an admission by the registrant or such directors or executive officers that any such persons are "affiliates" of the registrant, as that term is defined under the Securities Act of 1934. The number of shares of common stock, $.01 par value, of the registrant outstanding as of March 15, 1999 was 16,245,770. DOCUMENTS INCORPORATED BY REFERENCE Certain information required by Items 10, 11, 12 and 13 of Form 10-K is incorporated by reference into Part III hereof from the registrant's Proxy Statement for The Annual Meeting of Shareholders to be held Thursday, May 6, 1999 ("Proxy Statement"). (Cover page 2 of 2 pages) 3 TABLE OF CONTENTS ================= PART I ITEM 1. BUSINESS...................................................... 1 ITEM 2. PROPERTIES.................................................... 10 ITEM 3. LEGAL PROCEEDINGS............................................. 11 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS........... 11 EXECUTIVE OFFICERS OF THE REGISTRANT.................................... 11 PART II ITEM 5. MARKET FOR COMMON STOCK AND RELATED SHAREHOLDER MATTERS....................................................... 13 ITEM 6. SELECTED FINANCIAL DATA....................................... 14 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS........................... 15 ITEM 7a. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK................................................... 22 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA................... 25 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE........................... 48 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT............ 48 ITEMS 11. and 13. EXECUTIVE COMPENSATION AND CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS........................ 48 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT................................................ 48 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE, AND REPORTS ON FORM 8-K................................................... 49 SIGNATURES.............................................................. 50 INDEX TO FINANCIAL STATEMENT SCHEDULE................................... 52 EXHIBIT INDEX.......................................................... E-1 4 PART I ITEM 1. BUSINESS GENERAL Libbey is a leading supplier of tabletop products in the U.S. and Canada. The products are also exported to more than 100 countries. Libbey designs, and markets, under the LIBBEY(R) brand name, an extensive line of high-quality, glass tableware, ceramic dinnerware and metal flatware. Libbey also manufactures and markets ceramic dinnerware under the Syracuse China(R) brand name through its subsidiary Syracuse China. Through its World Tableware subsidiary, Libbey also imports and sells flatware, holloware and ceramic dinnerware. In late August 1997 Libbey completed a series of transactions that included: - - investing as a joint venture partner in Vitrocrisa, the largest glass tableware manufacturer in Mexico; - - establishing reciprocal distribution agreements giving Libbey exclusive distribution rights for Vitrocrisa's glass tableware products in the U.S. and Canada, and Vitrocrisa the exclusive distribution rights for Libbey's glass tableware products in Latin America; and - - acquiring World Tableware, a major importer of metal flatware and holloware and ceramic dinnerware. On December 31, 1998, Libbey's Board of Directors approved a capacity realignment plan, that includes reallocating a portion of the current production of Libbey's Wallaceburg, Ontario facility to its glassware facilities in the United States to improve its cost structure and more fully utilize available capacity. A portion of Wallaceburg's production will also be absorbed by Vitrocrisa. Libbey will service its Canadian glass tableware customers from its remaining manufacturing and distribution network, which includes locations in Toledo, Ohio; Shreveport, Louisiana and City of Industry, California. Libbey also announced that it will exit the production of bottleware, a niche, low-margin business. The Wallaceburg facility is expected to cease production on or about May 31, 1999, and the warehouse operations will terminate later in 1999. PRODUCTS Libbey's tabletop products consist of glass tableware, ceramic dinnerware, metal flatware and metal holloware. Libbey's glass tableware includes tumblers, 1 5 stemware, mugs, plates, bowls, ashtrays, bud vases, salt and pepper shakers, canisters, candle holders and various other items. Vitrocrisa's product assortment includes, in addition to the product types produced by Libbey, glass bakeware and hand-made glass tableware, which are additional product categories which Libbey now offers. In addition, Vitrocrisa products include glass coffee pots, blender jars, meter covers and other industrial glassware sold principally to original equipment manufacturers. Through its Syracuse China and World Tableware subsidiaries, Libbey sells a wide-range of ceramic dinnerware products. These include plates, bowls, platters, cups, saucers and other tabletop accessories. Through its World Tableware subsidiary, Libbey sells an extensive selection of metal flatware. These include knives, forks, spoons and serving utensils. In addition, World Tableware sells metal holloware, which includes serving trays, chafing dishes, pitchers and other metal tabletop accessories. DOMESTIC SALES Approximately 88% of Libbey's sales are to domestic customers, and are sold domestically for a broad range of uses. Libbey sells both directly to end-users of the product and through networks of distributors. Libbey utilizes both a direct sales force and manufacturers' representatives to sell its product. Libbey has the largest manufacturing, distribution and service network among North American glass tableware manufacturers. Libbey defines the U.S. glass tableware market to include glass beverageware, ovenware, cookware, dinnerware, serveware, floral items, items used for specialized packaging, specialized bottles, handmade glassware and lead crystal valued at less than $5 per piece. Libbey has, according to management estimates, the leading market share in glass tableware sales in U.S. food- service applications and glass beverageware sales in retail. The majority of Libbey's tabletop sales to foodservice end-users are made through a network of approximately 500 independent foodservice distributors. The distributors, in turn, sell to a wide variety of foodservice establishments, including national and regional hotel chains, national restaurant chains, individually owned bars, restaurants and casinos. 2 6 Syracuse China and World Tableware are recognized as long established suppliers of high quality ceramic dinnerware and flatware, respectively. They are both among the leading suppliers of their respective product categories to foodservice end-users. Libbey's retail customers were principally mass merchants and discount stores. In recent years Libbey has been able to increase its total sales by increasing its sales to traditional department stores and specialty housewares stores. With this expanded retail representation, Libbey is better positioned to successfully introduce profitable new products. During 1998, Libbey began selling imported dinnerware and metal flatware to retailers in the United States and Canada under the LIBBEY(R) brand name. Libbey sources this ceramic dinnerware and metal flatware by leveraging the relationships it has with its existing suppliers for the World Tableware foodservice products. Libbey announced in early 1998 a plan to exit the business of operating stores in factory outlet malls and closed its remaining 15 mall stores in 1998. Libbey continues to operate four factory outlet stores located at or near each of its United States manufacturing locations. Libbey is one of the leading suppliers of glassware for industrial applications in the U.S., according to management estimates. Industrial uses include candle and gift packaging, floral purposes and lighting. The craft industries and gourmet food packing companies are also industrial consumers of glassware. Libbey has expanded its sales to industrial users by offering ceramic items. Libbey believes that its success with industrial applications is based on its extensive manufacturing and distribution network, which enables it to provide superior service, and its broad product offering, which allows Libbey to meet its customers' desire for differentiated glassware products. The production capabilities and broad product portfolio of Vitrocrisa enabled Libbey to expand its product offering for its industrial customers. Another application of Libbey's products is for use as a premium. Major gasoline retailers and fast-food restaurant chains use glassware as incentives or premiums. Libbey believes that its success with premium customers is dependent upon custom design, varied production capabilities, and the ability to produce large quantities of product in a short period of time. 3 7 Libbey also sells its tabletop products to supermarket chains for continuity programs. In 1998, Libbey sold tabletop products through continuity programs to over 4,800 supermarkets in the U.S. and Canada. INTERNATIONAL EXPANSION AND EXPORT SALES Libbey exports its products through independent agents and distributors to over 100 countries throughout the world, competing in the tabletop markets of Latin America, Asia and Europe. Through its export operation, Libbey sells its tabletop product to foodservice, retail and premium customers internationally. Libbey's share of glass tableware foodservice in Canada is estimated by management at 70%. Libbey's export sales, which include sales to Libbey's customers in Canada, represent approximately 11.9% of total sales in 1998. Libbey believes that export sales represent a growth opportunity for the future. Libbey currently has technical assistance agreements with companies covering operations in numerous countries. In 1998, Libbey performed services for licensees in ten countries. These agreements, which cover areas ranging from manufacturing and engineering assistance to support in functions such as marketing, sales and administration, allow Libbey to participate in the worldwide growth of the glass tableware industry and to keep abreast of potential sales and marketing opportunities in those countries. During 1998, Libbey's technical assistance agreements produced royalties of $3.0 million. Libbey also sells machinery, primarily glass-forming machinery, to certain parties with which it has technical assistance agreements. MANUFACTURING Libbey owns and operates three glass tableware manufacturing plants in the United States located in Toledo, Ohio; Shreveport, Louisiana and City of Industry, California. Libbey also operates a glass tableware manufacturing plant in Wallaceburg, Ontario, Canada, which, as stated above, will be closed on or around May 31, 1999. Libbey owns and operates a ceramic dinnerware plant in Syracuse, New York. Libbey operates distribution centers located at or near each of its manufacturing facilities. See "Properties." In addition, Libbey operates distribution centers for its Vitrocrisa-supplied products in Laredo, Texas and World Tableware products near Chicago, Illinois. The glass tableware manufacturing and distribution centers are strategically located (geographically) to enable Libbey to supply significant quantities of its product to virtually all of its customers in a short period of time. Libbey is the only 4 8 glass tableware producer operating more than two manufacturing facilities in the United States. The manufacture of Libbey's glass tableware products involves the use of automated processes and technologies. Much of Libbey's glass tableware production machinery was designed by Libbey and has evolved and been continuously refined to incorporate technology advancements. In addition, Libbey has installed robotics technology in certain of its labor-intensive manufacturing processes. Libbey believes that its production machinery and equipment continue to be adequate for its needs in the foreseeable future. Libbey's glass tableware products are generally produced using one of two manufacturing methods or, in the case of certain stemware, a combination of such methods. Most of Libbey's tumblers and stemware and certain other glass tableware products are produced by forming molten glass in molds with the use of compressed air and are known as "blown" glass products. Libbey's other glass tableware products and the stems of certain of its stemware are "pressware" products which are produced by pressing molten glass into the desired product shape. Ceramic dinnerware is also produced through the forming of raw materials into the desired product shape and is either manufactured at Libbey's Syracuse, New York production facility or imported by World Tableware from primarily Thailand, China and Indonesia. All metal flatware and metal holloware are sourced by Libbey's World Tableware subsidiary primarily from Japan, Korea and China. Libbey employs a team of engineers whose responsibilities include continuing efforts to improve and upgrade Libbey's manufacturing facilities, equipment and processes. In addition, they provide engineering required to manufacture new products and implement the large number of innovative changes continuously being made to Libbey's product designs, sizes and shapes. All of the raw materials used by Libbey, principally sand, lime, soda ash and clay, have historically been available in adequate supply from multiple sources. However, for certain raw materials, there may be temporary shortages due to weather or other factors, including disruptions in supply caused by raw material transportation or production delays. Such shortages have not previously had and are not expected to have a material adverse effect on Libbey's operations in the future. SALES AND MARKETING Libbey has its own sales representatives located strategically throughout the U.S. and Canada who call on customers and distributors. The majority of Libbey's tabletop sales to foodservice end-users are made through 5 9 approximately 500 independent distributors, who serve a vital function in the distribution of Libbey's products and with whom Libbey works closely in connection with marketing and selling efforts. Most of Libbey's retail, industrial and premium market sales are made directly by Libbey's sales force. Libbey also has a marketing staff located at its corporate headquarters in Toledo, Ohio engaged in developing strategies relating to product development, pricing, distribution, advertising and sales promotion. CUSTOMERS The customers for Libbey's tabletop products include approximately 500 foodservice distributors. In addition, Libbey sells to mass merchants, department stores, national retail chains and specialty housewares stores, supermarkets and industrial companies and others who use Libbey's products for promotional and other private uses. No single customer or group of customers accounts for 10% or more of Libbey's sales, although the loss of any of Libbey's major customers could have a material effect on Libbey. Sales for premium applications tend to be more unpredictable from year to year and Libbey is less dependent on such business than it is on the foodservice, retail and industrial sales, but in some years premium customers have been among Libbey's ten largest customers. COMPETITORS Libbey's business is highly competitive, with the principal competitive factors being price, brand name, product quality, delivery time and customer service. Principal competitors in domestic glass tableware are Anchor Hocking (a unit of Newell Co.), a supplier of glass beverageware and one of the leading suppliers of glass bakeware to retail markets in the U.S.; Durand International, a private French company, which Libbey believes is the second leading supplier of glass beverageware in the U.S.; Indiana Glass Company (a unit of Lancaster Colony Corporation), which participates in various aspects of the U.S. market; and Oneida, LTD., which expanded its glassware offering in 1998 through an import arrangement. The principal competitors in U.S. ceramic dinnerware are Homer Laughlin (a private U. S. company) and Rego China and Buffalo China (units of Oneida, LTD.). The principal competitors in metal flatware are Oneida, LTD. and Delco. Some of Libbey's competitors have substantially greater financial and other resources than Libbey. In recent years, Libbey has experienced increasing competition from foreign manufacturers, including Durand International (France) and Kedaung (Indonesia), principally in retail. Libbey's joint venture investment in, 6 10 and distribution agreement with, Vitrocrisa are expected to enhance Libbey's ability to compete against foreign competitors. PATENTS, TRADEMARKS AND LICENSES Based upon market research and market surveys, Libbey believes its Libbey trade name as well as product shapes and styles enjoy a high degree of consumer recognition and are valuable assets. Libbey believes that the Libbey, Syracuse China and World Tableware trade names are material to its business. Libbey has rights under a number of patents which relate to a variety of products and processes. Libbey does not consider that any patent or group of patents relating to a particular product or process is of material importance to its business as a whole. SEASONALITY Due primarily to the impact of consumer buying patterns and production activity, Libbey's profits tend to be strongest in the third quarter and weakest in the first quarter of each year. As a consequence, with the exception of 1998, profits typically range between 37% and 42% in the first half of each year and 58% to 63% in the second half of the year. 7 11 ENVIRONMENTAL MATTERS Libbey's operations, in common with those of industry generally, are subject to numerous existing and proposed laws and governmental regulations designed to protect the environment, particularly regarding plant wastes and emissions and solid waste disposal. Libbey has shipped, and continues to ship, waste materials for off-site disposal. Although Libbey is not named as a potentially responsible party in any waste disposal site matters pending prior to June 24, 1993, the date of Libbey's initial public offering and separation from Owens-Illinois, Owens-Illinois has been named as a potentially responsible party or other participant in connection with certain waste disposal sites to which Libbey may also have shipped wastes and bears some responsibility. Owens-Illinois has agreed to defend and hold harmless Libbey in connection with any such matters identified and pending as of June 24, 1993 and to indemnify it against any resulting costs and liabilities from such matters in excess of $3 million. Libbey believes that if it is necessary to draw upon this indemnification, collection is probable. Pursuant to the indemnification agreement Owens-Illinois is defending Libbey in a suit instituted by the Board of Lucas County Ohio Commissioners on January 4, 1999 against Owens-Illinois, Libbey and numerous other defendants (59 companies have been named in the complaint as potentially responsible parties) in the United States District Court for the Northern District of Ohio seeking to recover past and future costs incurred in response to the release or threatened release of hazardous substances at the King Road landfill. Owens-Illinois also defended Libbey in certain other similar matters including the Dura Landfill, which was settled in 1998 with Libbey's share estimated to be between $150,000 and $300,000. Subsequent to June 24, 1993, Libbey has been named a potentially responsible party at three sites all of which have been settled for immaterial amounts. No further sums are expected to be paid with respect to these sites unless unusual and unanticipated contingencies occur.In addition, as further described below, Libbey's Syracuse China subsidiary has been named a potentially responsible party with respect to certain property adjoining its plant. Through its Syracuse China subsidiary, Libbey acquired on October 10, 1995 from The Pfaltzgraff Co. and certain of its subsidiaries the assets operated as Syracuse China. The Pfaltzgraff Co. entered into an order of consent effective November 1, 1994 with the New York State Department of Environmental Conservation (NYSDEC) which requires Pfaltzgraff to prepare a Remedial Investigation and Feasibility Study (RI/FS) to develop a remedial action plan for a site in Syracuse, New York (which includes among other items a landfill and wastewater and sludge ponds and adjacent wetlands located on the property purchased by Syracuse China Company) and to remediate the site. As part of the Asset Purchase Agreement the Syracuse China Company agreed to share a part of the remediation and related expense up to a maximum of fifty percent of such costs with a maximum limit for Syracuse China Company of 8 12 $1,350,000. Notwithstanding the foregoing, Syracuse China Company is not a party to the decree. The RI/FS is complete. A contract has been awarded for the design of the remediation project. It is anticipated that in 1999 the design will be completed and approved by the NYSDEC and that construction of the approved remedy will begin. In addition, Syracuse China Company has been named as a potentially responsible party with respect to certain property adjoining its plant which has been designated a sub-site of a superfund site. Libbey believes that any contamination of such sub-site was caused by and will be remediated by other parties at no cost to Syracuse China. In any event, any expense with respect to such sub-site for which Syracuse China may be deemed responsible would likely be shared with Pfaltzgraff pursuant to the Asset Purchase Agreement. Libbey regularly reviews the facts and circumstances of the various environmental matters affecting Libbey, including those which are covered by indemnification. Although not free of uncertainties, Libbey believes that its share of the remediation costs at the various sites, based upon the number of parties involved at the sites and the estimated cost of undisputed work necessary for remediation based upon known technology and the experience of others, will not be material to Libbey. There can be no assurance, however, that Libbey's future expenditures in such regard will not have a material adverse effect on Libbey's financial position or results of operations. In addition, occasionally the federal government and various state authorities have investigated possible health issues that may arise from the use of lead or other ingredients in enamels such as those used by Libbey on the exterior surface of its decorated products. Capital expenditures for property, plant and equipment for environmental control activities were not material during 1998. Libbey believes that it is in material compliance with all federal, state and local environmental laws, and Libbey is not aware of any regulatory initiatives that would be expected to have a material effect on Libbey's products or operations. NUMBER OF EMPLOYEES Libbey employed approximately 3,820 persons at December 31, 1998. A majority of the glass tableware employees are U.S.-based hourly workers covered by six collective bargaining agreements which were entered into in the fourth quarter of 1998 and expire at various times during the fourth quarter of 2001. As a result of the capacity realignment plan, Libbey will terminate the employment of most of the approximately 560 Canadian based employees during 1999. The ceramic dinnerware hourly employees are covered by a collective bargaining agreement which expired in March 1999 and has subsequently been renegotiated to expire in March 2002. Libbey considers its employee relations to be good. 9 13 ITEM 2. PROPERTIES The following table sets forth the location of the Company's principal manufacturing and distribution facilities at December 31, 1998. The Company also operates distribution facilities at or near each of its manufacturing facilities as well as at the distribution centers set forth below: Manufacturing Facilities ------------------------ Syracuse, New York Toledo, Ohio Shreveport, Louisiana City of Industry, California Wallaceburg, Ontario, Canada Distribution Centers -------------------- Vitrocrisa - Laredo, Texas World Tableware - West Chicago, Illinois The Company's headquarters, the World Tableware offices, some warehouses, sales offices and outlet stores are located in leased space. All of the Company's operating properties are currently being utilized for their intended purpose and are owned in fee. The Company believes that its facilities are well maintained and adequate for its planned production requirements at those facilities over the next three to five years. 10 14 ITEM 3. LEGAL PROCEEDINGS The Company is involved in various routine legal proceedings arising in the ordinary course of its business. The Company is not engaged in any legal proceeding which would be deemed to be material to the Company. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. EXECUTIVE OFFICERS OF THE REGISTRANT Set forth below are the names and the ages, positions and offices held (as of the date hereof), and a brief account of the business experience of each executive officer of the Company.
Name Age Position - ---- --- -------- John F. Meier 51 Chairman of the Board and Chief Executive Officer since June Chairman and Chief 1993; Executive Vice President and General Manager from December Executive Officer 1990 to June 1993 Richard I. Reynolds 52 Executive Vice President and Chief Operating Officer since Executive Vice President and Chief November 1995; Vice President and Chief Financial Officer from Operating Officer June 1993 to November 1995; Vice President and Director of Finance and Administration from January 1989 to June 1993. L. Frederick Ashton 58 Vice President, General Sales Manager since November 1990 Vice President, General Sales Manager Arthur H. Smith 63 Vice President, General Counsel and Secretary since June 1993; Vice President, General Secretary of the Company since 1987 and Senior Counsel and Counsel and Secretary Assistant Secretary of Owens-Illinois, Inc. from 1987 to June 1993.
11 15
Name Age Position - ---- --- -------- Kenneth G. Wilkes 41 Vice President, Chief Financial Officer and Treasurer since Vice President, Chief Financial Officer November 1995; Vice President and Treasurer since August 1993. and Treasurer Previously employed as Senior Corporate Banker, Vice President with The First National Bank of Chicago from 1981. John A. Zarb 47 Vice President , Chief Information Officer since April 1996. Vice President, Chief Information Officer Previously from 1991 to April 1996 employed by Allied Signal, Inc. in Information Technology management positions. Daniel P. Ibele 38 Vice President, Marketing and Specialty Operations since Vice President, Marketing and Specialty September 1997; Vice President and Director of Marketing at Operations Libbey since 1995. From 1983 to 1995 held various marketing and sales positions. Timothy T. Paige 41 Vice President, Director of Human Resources since January 1997; Vice President, Director of Director of Human Resources from May 1995 to January 1997. Human Resources From 1991 to May 1995 employed by Frito-Lay, Inc. in Human Resources management positions.
12 16 PART II ITEM 5. MARKET FOR COMMON STOCK AND RELATED SHAREHOLDER MATTERS Libbey Inc. common stock is listed for trading on the New York Stock Exchange under the symbol LBY. The price range for the Company's common stock on the New York Stock Exchange as reported by the New York Stock Exchange was as follows:
- ---------------------------------------------------------------------------- 1998 1997 High Low High Low - ---------------------------------------------------------------------------- First Quarter $39 1/4 $32 1/4 $33 1/2 $26 3/4 Second Quarter $39 1/2 $35 3/4 $35 1/2 $28 Third Quarter $38 7/16 $28 1/4 $39 3/8 $32 1/2 Fourth Quarter $33 5/8 $28 3/8 $42 1/4 $35 3/8 - ----------------------------------------------------------------------------
On March 1, 1999, there were 1,168 registered common shareholders of record. The Company has paid a regular quarterly cash dividend of $.075 per share beginning with the fourth quarter of 1993. The declaration of future dividends is within the discretion of the Board of Directors of the Company and will depend upon, among other things, business conditions, earnings and the financial condition of the Company. 13 17 ITEM 6. SELECTED FINANCIAL DATA
Dollars in thousands, except per-share data 1998 1997(a) 1996 1995 1994 - ---------------------------------------------------------- ------------------------------------------- OPERATING RESULTS Net sales $436,522 $411,966 $397,656 $357,546 $333,988 Total revenues 439,548 415,053 400,354 360,082 335,880 Cost of sales 321,949 295,009 288,538 257,945 238,885 Selling, general and administrative expenses 54,191 49,585 44,620 38,953 37,772 Capacity realignment charge 20,046 -- -- -- -- Income from operations 43,362 70,459 67,196 63,184 59,223 Equity earnings 8,880 3,570 -- -- -- Other income (expenses) -- net 1,493 (732) 1,302 499 (230) Earnings before interest and income taxes 53,735 73,297 68,498 63,683 58,993 Interest expense -- net 12,674 14,840 14,962 13,974 13,797 Income before income taxes 41,061 58,457 53,536 49,709 45,196 Provision for income taxes 15,618 22,331 20,986 19,685 18,509 Net income 25,443 36,126 32,550 30,024 26,687 PER-SHARE DATA: Basic net income 1.45 2.33 2.16 2.00 1.78 Diluted net income 1.42 2.27 2.12 1.97 1.76 Dividends paid 0.30 0.30 0.30 0.30 0.30 OTHER INFORMATION EBIT 53,735 73,297 68,498 63,683 58,993 EBITDA 73,241 93,193 89,983 81,841 75,269 Depreciation 15,852 16,826 19,275 16,885 15,077 Amortization 3,654 3,070 2,210 1,273 1,199 Capital expenditures 17,486 18,408 15,386 20,198 17,361 Dividends paid 5,253 4,550 4,511 4,501 4,500 Employees (average) 3,969 4,136 4,110 3,870 3,463 BALANCE SHEET DATA Total assets 439,671 449,600 315,733 321,815 255,981 Working capital (b) 75,930 89,942 65,823 74,795 41,263 Long-term debt 176,300 200,350 202,851 248,721 213,999 Shareholders' equity (deficit) 94,860 99,989 (18,447) (47,116) (73,073) (a) Includes the results of the Vitro Transactions beginning in September. (b) Current assets less current liabilities excluding short-term debt.
14 18 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION Historical Financial Data - ------------------------- The following table presents certain results of operations data for Libbey for the periods indicated:
Year ended December 31 (Dollars in thousands) 1998 1997 1996 - -------------------------------------------------------------------------------------------------------------- Net sales $436,522 $411,966 $397,656 Gross profit $114,573 $116,957 109,118 As a percentage of sales 26.2% 28.4% 27.4% Income from operations -excluding capacity realignment charge $ 63,408 $ 70,459 $ 67,196 As a percentage of sales 14.5% 17.1% 16.9% Income from operations - after capacity realignment charge $ 43,362 $ 70,459 $ 67,196 As a percentage of sales 9.9% 17.1% 16.9% Earnings before interest and income taxes $ 53,735 $ 73,297 $ 68,498 As a percentage of sales 12.3% 17.8% 17.2% Net income $ 25,443 $ 36,126 $ 32,550 As a percentage of sales 5.8% 8.8% 8.2% - ---------------------------------------------------------------------------------------------------------------
Management is not aware of any events or uncertainties that are likely to have a material impact on the Company's prospective results of operations or financial condition. The modest rate of inflation experienced over the last three years has not had a significant effect on the Company's financial results. Significant increases in inflation in the future could have a material impact on the Company's financial results if it is not able to raise prices to its customers. RESULTS OF OPERATIONS COMPARISON OF 1998 WITH 1997 Net sales for 1998 of $436.5 million were 6.0% higher than the net sales of $412.0 million reported in 1997. The primary contributing factor to the increase was the inclusion of sales of World Tableware and sales associated with the Company's distribution agreement with Vitrocrisa for the full year. These businesses were acquired on August 29, 1997, and 1997 results reflect only four months of operation. Sales of the Company's glassware products were approximately the same as last year, as the inclusion of a full year's sales of glassware pursuant to the Vitrocrisa distribution agreement offset declines in the Company's sales to export, retail and foodservice customers. The Company experienced higher unit sales in glassware, which were offset by lower average unit selling prices. Sales at Syracuse China were higher because of higher average unit 15 19 sales prices resulting from a change in sales mix to larger dinnerware items. Libbey's export sales, which include sales to Libbey's customers in Canada, decreased to $51.9 million from $57.5 million in 1997. The decrease was partly the result of lower sales to customers in the Far East and South America primarily due to increases in prices resulting from the strength of the U.S. dollar. GROSS PROFIT decreased 2.0% to $114.6 in 1998 from $117.0 million in 1997 and declined as a percentage of sales to 26.2% from 28.4% over this period. Gross margins declined because of higher manufacturing expenses, the impact of lower production levels to reduce inventories and the inclusion of the sales for a full year of glassware pursuant to the Vitrocrisa distribution agreement and World Tableware, both of which experience gross margins less than the Company's average. Expense increases were partly attributable to higher maintenance expenses and the write off of redundant assets late in the year. INCOME FROM OPERATIONS was $43.4 million in 1998 compared with $70.5 million in 1997 and declined as a percentage of net sales to 9.9% from 17.1% in the year-ago period. Lower gross profit margins and the impact of a $20.0 million capacity realignment charge in the fourth quarter were factors contributing to the decrease in the margin. Before this charge, income from operations as a percentage of sales was 14.5%. In addition, the decrease is attributable to higher selling, general and administrative expenses partly related to the inclusion of the expenses of World Tableware for a full year. CAPACITY REALIGNMENT CHARGE On December 31, 1998 the Board of Directors of the Company approved a capacity realignment plan, which includes reallocating a portion of the current production of the Company's Wallaceburg, Ontario facility to its glassware facilities in the United States to improve its cost structure and more fully utilize available capacity. A portion of Wallaceburg's production will be absorbed by the Company's joint venture, Vitrocrisa. The Company will service its Canadian glass tableware customers from its remaining manufacturing and distribution network, which includes locations in Toledo, Ohio; Shreveport, Louisiana and City of Industry, California. The Company also announced that it will exit the production of bottleware, a niche, low-margin business for the Company. In connection with this plan, the Company recorded a capacity realignment charge in the fourth quarter of 1998 of $20.0 million which includes $10.0 million for severance and related employee costs, $7.6 million for write off of fixed assets (primarily equipment) and $2.4 million for supply inventories, repair parts and other costs. The Wallaceburg facility is expected to cease production on or around May 31, 1999, and the warehouse operations will terminate later in 1999. The fixed assets, supply inventories and repair parts not being transferred have been written down to a nominal amount. The Wallaceburg facility is presently held for sale; however, if a buyer is not located, it will be abandoned. The Company will terminate the employment of virtually all of its 560 salary and hourly employees and included severance and related employee costs in its capacity realignment charge based on benefits known by the employees. These severance and 16 20 related employee costs will be paid primarily when production ceases. The Company may incur an additional $2.0 million of severance and related employee costs in 1999 as a result of enhanced benefits for the salary employees. The capacity realignment offers promise in reducing the Company's cost structure and improving its profitability by adding an expected $4.5 to $5.0 million to operating income in 1999, or 16 to 18 cents per share after tax. Productivity improvements at its glassware facilities, opportunities to improve profitability at these facilities by better leveraging existing infrastructure and the availability of capacity at the Company's joint venture enable these changes. In addition, this decision tightens the Company's focus on its key glass tableware customers while exiting the manufacturing of niche glass containers. EARNINGS BEFORE INTEREST AND INCOME TAXES (EBIT) were $53.7 million in 1998, compared with $73.3 million in 1997, and declined as a percentage of net sales to 12.3% from 17.8% in the year-ago period. Excluding the impact of the $20.0 million capacity realignment charge, EBIT as a percentage of net sales would have been 16.9%. The reduction is attributable to the lower income from operations as a percentage of sales, which more than offset an increase in equity earnings to $8.9 million from $3.6 million in 1997. The higher equity earnings resulted primarily from the inclusion of a full year of earnings from the Company's investment in Vitrocrisa, which occurred on August 29, 1997. NET INCOME was $25.4 million, compared with $36.1 million in 1997 and declined as a percentage of net sales to 5.8% from 8.8% in the year-ago period. The decline is attributable to lower income from operations as a percentage of sales, which more than offset lower interest expenses and a lower effective tax rate of 38.0% compared with 38.2% in the year-ago period. The reduction in the Company's effective tax rate is primarily attributable to an increase in tax credits. COMPARISON OF 1997 WITH 1996 Net sales for 1997 of $412.0 million were 3.6% higher than the net sales of $397.7 million reported in 1996. The primary contributing factor to the increase was the inclusion of sales of World Tableware and sales associated with the Company's distribution agreement with Vitrocrisa since August 29, 1997. Sales increased at Syracuse China in 1997. Sales of the Company's glassware products were down slightly because of lower unit shipments. Sales at Syracuse China were higher due to higher unit shipments. Libbey's export sales, which includes sales to customers in Canada, decreased to $57.5 million in 1997 from $59.4 million in 1996. GROSS PROFIT increased 7.2% to $117.0 million in 1997 from $109.1 million in 1996 and increased as a percentage of sales to 28.4% from 27.4% over this same period. Gross margins improved primarily because the mix of glassware products sold had a higher profitability, which offset increased warehouse and shipping expenses and the inclusion of the acquired businesses, which had a lower profit margin than the Company's average. Increases in warehouse and shipping expenses are primarily attributable to increased 17 21 warehouse space requirements due to higher inventory levels and the relocation of certain warehouse operations to improve efficiencies. INCOME FROM OPERATIONS increased 4.9% to $70.5 million from $67.2 million in 1996 and increased as a percentage of net sales to 17.1% from 16.9% in the year-ago period. The increase in the income from operations margin in 1997 was primarily attributable to increases in the profitability of the Company's glassware sales, principally due to improved sales mix only partially offset by the inclusion of the acquired businesses, which operated at a lower profit margin than the Company's average. The Company announced plans in January 1998 to increase its profitability through personnel reductions and elimination of redundant warehouse space through improved inventory management. In addition, it announced plans to close its remaining factory outlet mall stores, which operated at a loss in 1997 and numbered 15 at December 31, 1997. EARNINGS BEFORE INTEREST AND INCOME TAXES increased 7.0% to $73.3 million from $68.5 million in 1996 and improved as a percentage of net sales to 17.8% from 17.2% in the year-ago period. The increase is the result of higher income from operations and the inclusion of equity earnings from the Company's joint venture investment in Mexico since August 29, 1997, only partially offset by a reserve established in the fourth quarter of $865,000 to cover future expenses associated with the closure of the Company's factory outlet mall store business. NET INCOME increased 11.0% to $36.1 million from $32.5 million in 1996 and increased as a percentage of net sales to 8.8% from 8.2% in the year-ago period. The increase is principally attributable to higher revenues and earnings before interest and income taxes and a reduction in the Company's effective tax rate to 38.2% from 39.2% in the year-ago period. The reduction in the Company's effective tax rate is primarily attributable to lower state income taxes. CAPITAL RESOURCES AND LIQUIDITY Libbey's financial condition at year-end 1998 reflects the effects of the Company's improved cash flow, share repurchases and the capacity realignment reserve. Net cash provided by operating activities increased to $51.3 million from $38.6 million in 1997. Lower net income was more than offset by the $20.0 million non-cash capacity realignment charge and lower inventories and receivables. Reductions in inventories were experienced primarily in the Company's glassware operations and are attributable to the Company's efforts to improve asset utilization. Capital expenditures were $17.5 million in 1998 compared with $18.4 million in 1997 and included scheduled maintenance and investment in higher-productivity machinery and equipment, including glass-processing equipment and new equipment to improve production efficiency at Syracuse China. Capital expenditures for 1999 are expected to be in the range of $17.0 to $19.0 million. Cash of $27.3 million was used by the Company to repurchase 875,000 shares of its common stock. 18 22 Libbey had total debt of $191.2 million at December 31, 1998, compared with $210.7 million at December 31, 1997. The decrease was primarily attributable to the net cash provided from operations and a dividend of $14.2 million received by the Company from its joint venture in Mexico. Libbey had additional debt capacity of $198.4 million at December 31, 1998, under the Bank Credit Agreement. Libbey has entered into interest rate protection agreements with respect to $100.0 million of its debt. The average interest rate for the Company's borrowings related to the interest rate protection agreements is 6.48% with an average maturity of 2.7 years at December 31, 1998. Of Libbey's outstanding indebtedness, $91.2 million is subject to fluctuating interest rates at December 31, 1998. A change of one percentage point in such rates would result in a change in interest expense of approximately $0.9 million on an annual basis. On August 29, 1997, the Company completed a series of transactions with Vitro S.A. (collectively the "Vitro Transactions") for a cash purchase price of approximately $104.4 million and the assumption of certain liabilities, financed through borrowings under the Bank Credit Agreement. The primary components of the Vitro Transactions included the Company becoming: (i) a 49% equity owner in Vitrocrisa; (ii) the exclusive distributor of Vitrocrisa's glass tableware products in the U.S. and Canada and Vitrocrisa becoming the exclusive distributor of Libbey's glass tableware products in Latin America; (iii) the owner of substantially all of the assets and certain liabilities of the business formerly known as WorldCrisa, renamed World Tableware; and (iv) the owner of a 49% interest in the business of Crisa Industrial, L.L.C., which distributes industrial glassware in the U.S. and Canada for Vitrocrisa. As a result of the Vitro Transactions, the Company consolidates the financial results of World Tableware and includes in its financial results sales of Vitrocrisa's glass tableware in the U.S. and Canada pursuant to the distribution agreement. On November 12, 1997, the Company closed on a public offering of 2.3 million shares of common stock, including all 300,000 shares of common stock sold pursuant to the option granted to the underwriters to cover over allotments, at a price to the public of $37.875 per share, pursuant to the Company's $100 million shelf registration statement dated June 19, 1997. The Company used the net proceeds from the common stock offering of $82.6 million to repay certain indebtedness outstanding under its Bank Credit Agreement. The Company is not aware of any trends, demands, commitments or uncertainties that will result or that are reasonably likely to result in a material change in Libbey's liquidity. The Company believes that its cash from operations and available borrowings under the Bank Credit Agreement will be sufficient to fund its operating requirements, capital expenditures and all other obligations (including debt service and dividends) throughout the remaining term of the Bank Credit Agreement. In addition, the Company anticipates refinancing the Bank Credit Agreement at or prior to the maturity date of May 1, 2002, to meet the Company's longer-term funding requirements. 19 23 YEAR 2000 Libbey has developed and initiated its plans to address the possible exposures related to the impact of the Year 2000 on its computer systems, equipment, business and operations. The Company has recognized that the Year 2000 problem may cause many of its systems to fail or perform incorrectly because they will not properly recognize a year beginning with "20" instead of the familiar "19". If a computer system, software application or other operational or manufacturing system used by the Company or by a third party dealing with the Company fails because of the inability of the system to properly read the year "2000", this failure could have a material adverse effect on the Company. Organizational Effort Since August 1997, a corporate committee comprised of key information systems, financial and operations managers meet bimonthly to review the state of readiness of the Company's systems for the year 2000. The Company has appointed the Chief Information Officer (CIO), reporting to and with the full support of the Chairman and Chief Executive Officer, to provide oversight to the implementation of the Year 2000 compliance program. The CIO has appointed a Year 2000 project manager, who has been engaged in determining compliance and remediation requirements Company-wide since 1997. Key financial and operational systems have been assessed and detailed plans have been implemented to address modifications required prior to December 31, 1999. The Company's Year 2000 compliance and remediation efforts have not resulted in the deferral of any projects material to the operation of the business. Independent Review In addition, the Company has engaged an independent consultant to assist in assessing Year 2000 readiness and remediation plans at its manufacturing facilities. The independent consultant is validating the Company's Year 2000 compliance process and findings to-date, utilizing its Year 2000 review process and systems. The review has been completed at one of the Company's manufacturing facilities and no material compliance issues were reported. Contingency Plans Each of the Company's manufacturing facilities and other operations material to the functioning of the business has established Year 2000 compliance steering committees to address the issue. Each committee is establishing contingency plans should the Company experience business interruption due to the Year 2000 issue. Target date for completion of contingency plans is May 15, 1999. State of Readiness The Company is monitoring the Year 2000 issue in four phases, including assessment, remediation, testing and implementation. The state of readiness in each of these areas as well as the definition of each phase are presented below: 20 24
Project Assessment Remediation Testing Implementation - ------- ---------- ----------- ------- -------------- Segment - ------- IT areas: Mainframe 100% complete 95% complete 50% complete 95% complete Other 100% complete 90% complete 75% complete 80% complete Non-IT areas 100% complete 90% complete 75% complete 80% complete Suppliers 100% complete 60% complete - -
Assessment = an inventory of Information Technology (IT), non-IT and third-party reliance affected by the Year 2000 issue. Remediation = the changes to the code, obtaining compliant vendor software or obtaining reliance from third parties that the Year 2000 issue has been addressed. Testing = the test of the changes to internally developed and vendor-upgraded software. Implementation = the rollout of tested or vendor-certified Year 2000 compliant software into production. Further testing is anticipated with respect to implemented software that has been certified by the vendor to be Year 2000 compliant but has not yet been independently tested. The estimated percentage of completion is based upon the level of effort spent to date on the task compared with the anticipated level of effort to complete the task except with respect to suppliers. The anticipated level of effort to complete the task may change as the Year 2000 compliance program proceeds. The level of effort with respect to suppliers is based upon their replies to the Company's inquiries. Major portions of the Company's information technology are currently on Year 2000 compliant software. In 1998, the Company upgraded its enterprise resource planning system to a version certified by the vendor as Year 2000 compliant. In addition, the main computer systems supporting the Company's Syracuse China and World Tableware operations, which were acquired in 1995 and 1997, respectively, have been also converted to the upgraded software. The remaining portions of the Company's other systems are planned to be migrated or converted by mid-year 1999. Financial Impact The financial impact of making the required changes, excluding the cost of internal Company employee time and the costs required to upgrade and replace systems and equipment in the 21 25 normal course of business, is expected to be less than $500,000, representing a small portion of the budget for information technology expenses, and has been and will be charged to expense as incurred and funded from internally generated cash flow. To-date, approximately $145,000 has been expensed. Additionally, approximately $1.7 million has been spent in capital on upgrades to the Company's enterprise resource planning system and laptop computers that also achieved Year 2000 compliance. Suppliers The Company has communicated with its significant suppliers and 40% responded they are currently Year 2000 compliant, 55% expected compliance by December 31, 1999, and 5% have not yet replied. Management of the Company believes it has an effective program in place to resolve the Year 2000 issue in a timely manner. As noted, contingency plans are being developed to cover any major failures of suppliers, customers and/or systems. However, certain risk factors may affect the Company's ability to be fully Year 2000 compliant by December 31, 1999, and its information systems to operate properly into the next century. These risk factors include, but are not limited to, the availability of necessary resources, both internal and external, to install new purchased software or reprogram existing systems and complete the necessary testing. In addition, the Company cannot predict the ability of its suppliers and customers to achieve Year 2000 compliance by the end of 1999, nor the impact of either on the future operating results of the Company. The Company is dependent upon the availability of electricity, natural gas, certain raw materials, including sand and soda ash for glassware and clay for ceramic dinnerware manufacturing, to operate its factories. In addition, to operate its business, the Company is dependent upon the availability of transportation services and packaging. Any interruptions in the availability of these or other key materials or services could have a material impact on the Company. ITEM 7a. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK The Company is exposed to market risks due to changes in currency values, although the majority of the Company's revenues and expenses are denominated in the U.S. dollar. The currency market risks include devaluations and other major currency fluctuations relative to the U.S. dollar that could reduce the cost competitiveness of the Company's products compared to foreign competition and the effect of exchange rate changes to the value of the Mexican peso relative to the U.S. dollar and the impact of those changes on the earnings and cash flow of the Company's joint venture in Mexico, Vitrocrisa, expressed under U.S. GAAP. 22 26 The Company is exposed to market risk associated with changes in interest rates in the U.S. However, the Company has entered into Interest Rate Protection Agreements ("Rate Agreements") with respect to $100.0 million of debt as a means to manage its exposure to fluctuating interest rates. The Rate Agreements effectively convert this portion of the Company's borrowings from variable rate debt to a fixed-rate basis, thus reducing the impact of interest rate changes on future income. The average interest rate for the Company's borrowings related to the Rate Agreements at December 31, 1998, was 6.48% for an average remaining period of 2.7 years. Total remaining debt not covered by the Rate Agreements has fluctuating interest rates with a weighted average rate of 5.34% at December 31, 1998. The Company had $91.2 million of debt subject to fluctuating interest rates at December 31, 1998. A change of one percentage point in such rates would result in a change in interest expense of approximately $.9 million on an annual basis. The interest rate differential to be received or paid under the Rate Agreements is being recognized over the life of the Rate Agreements as an adjustment to interest expense. If the counterparts to these Rate Agreements fail to perform, the Company would no longer be protected from interest rate fluctuations by these Rate Agreements. However, the Company does not anticipate nonperformance by the counterparts. At December 31, 1998, the carrying value of the long-term debt approximates its fair value based on the Company's current incremental borrowing rates. There was a negative fair market value for the Company's Interest Rate Protection Agreements at December 31, 1998 of $2.6 million. The fair value of long-term debt is estimated based on borrowing rates currently available to the Company for loans with similar terms and maturities. The fair value of the Company's Rate Agreements is based on quotes from brokers for comparable contracts. The Company does not expect to cancel these agreements and expects them to expire as originally contracted. OTHER INFORMATION This document and supporting schedules contain "forward-looking" statements as defined in the Private Securities Litigation Reform Act of 1995. Such statements only reflect the Company's best assessment at this time, and are indicated by words or phrases such as "expects," " believes," "will," "estimates," "anticipates," or similar phrases. Investors are cautioned that forward-looking statements involve risks and uncertainty, that actual results may differ materially from such statements, and that investors should not place undue reliance on such statements. Important factors potentially affecting performance include devaluations and other major currency fluctuations relative to the U.S. dollar that could reduce the cost-competitiveness of the Company's products compared to foreign competition; the effect of high inflation in Mexico and exchange rate changes to the value of the Mexican peso and the earnings and cash flow of the Company's joint venture in Mexico, Vitrocrisa, expressed under U.S. GAAP; the inability to achieve savings and profit improvements at targeted levels in the Company's glassware sales from its capacity realignment efforts and re-engineering programs, or within 23 27 the intended time periods; inability to achieve targeted manufacturing efficiencies at Syracuse China and cost synergies between World Tableware and the Company's other operations; significant increases in interest rates that increase the Company's borrowing costs and per unit increases in the costs for natural gas, corrugated packaging, and other purchased materials; protracted work stoppages related to collective bargaining agreements; increased competition from foreign suppliers endeavoring to sell glass tableware in the United States; major slowdowns in the retail, travel or entertainment industries in the United States or Canada; and whether the Company completes any significant acquisition, and whether such acquisitions can operate profitably. 24 28 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Page ---- Report of Independent Auditors 26 Consolidated Balance Sheets at December 31, 1998 and 1997 27 For the years ended December 31, 1998, 1997 and 1996: Consolidated Statements of Income 29 Consolidated Statements of Shareholders' Equity 30 Consolidated Statements of Cash Flows 31 Notes to Consolidated Financial Statements 32 Selected Quarterly Financial Data 48 25 29 REPORT OF INDEPENDENT AUDITORS THE BOARD OF DIRECTORS AND SHAREHOLDERS LIBBEY INC. We have audited the accompanying consolidated balance sheets of Libbey Inc. as of December 31, 1998 and 1997, and the related consolidated statements of income, shareholders' equity, and cash flows for each of the three years in the period ended December 31, 1998. Our audits also included the financial statement schedule listed in the index at Item 14(a). These financial statements and schedule are the responsibility of the company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We did not audit the 1998 financial statements of Vitrocrisa, S.A. DE C.V., a corporation in which the Company has a 49% equity interest which statements reflect total assets of $193.4 million. Those statements were audited by other auditors whose report has been furnished to us, and our opinion, insofar as it relates to data included for Vitrocrisa, S.A. DE C.V.,is based solely on the report of the other auditors. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, based on our audits and the report of other auditors, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Libbey Inc. at December 31, 1998 and 1997, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, present fairly in all material respects the information set forth therein. ERNST & YOUNG LLP Toledo, Ohio January 30, 1999 26 30
LIBBEY INC. CONSOLIDATED BALANCE SHEETS ============================================================================================= December 31, Dollars in thousands 1998 1997 - --------------------------------------------------------------------------------------------- ASSETS Current assets: Cash $ 3,312 $ 2,634 Accounts receivable: Trade, less allowances of $3,636 and $3,103 48,474 49,982 Other 1,323 1,975 - --------------------------------------------------------------------------------------------- 49,797 51,957 Inventories: Finished goods 81,770 91,897 Work in process 5,763 5,056 Raw materials 3,134 3,545 Operating supplies 695 800 - --------------------------------------------------------------------------------------------- 91,362 101,298 Prepaid expenses and deferred taxes 11,108 5,575 - --------------------------------------------------------------------------------------------- Total current assets 155,579 161,464 Other assets: Repair parts inventories 8,633 7,148 Intangibles, net of accumulated amortization of $2,343 and $2,039 9,862 10,202 Pension assets 10,701 8,805 Deferred software, net of accumulated amortization of $3,974 and $2,153 6,299 6,027 Other assets 754 1,136 Equity investments 80,437 85,789 Goodwill, net of accumulated amortization of $13,126 and $11,635 47,935 48,828 - --------------------------------------------------------------------------------------------- 164,621 167,935 Property, plant and equipment at cost 235,713 236,427 Less accumulated depreciation 116,242 116,226 - --------------------------------------------------------------------------------------------- Net property, plant and equipment 119,471 120,201 - --------------------------------------------------------------------------------------------- Total assets $439,671 $449,600 ============================================================================================= See accompanying notes
27 31
LIBBEY INC. CONSOLIDATED BALANCE SHEETS (Continued) ============================================================================================= December 31, Dollars in thousands 1998 1997 - --------------------------------------------------------------------------------------------- LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Notes payable $ 14,932 $ 10,385 Accounts payable 22,605 29,472 Salaries and wages 14,413 10,808 Capacity realignment reserve 19,929 -- Accrued liabilities 22,702 28,031 Income taxes -- 3,211 - --------------------------------------------------------------------------------------------- Total current liabilities 94,581 81,907 Long-term debt 176,300 200,350 Deferred taxes 16,184 9,659 Other long-term liabilities 6,689 5,221 Nonpension retirement benefits 51,057 52,474 Shareholders' equity: Common stock, par value $.01 per share, 50,000,000 shares authorized, 17,707,570 shares issued and outstanding, less 875,000 treasury shares (17,580,931 shares issued and outstanding in 1997) 168 175 Capital in excess of par value 281,956 279,208 Treasury stock (27,250) -- Deficit (158,602) (178,792) Accumulated other comprehensive loss (1,412) (602) - --------------------------------------------------------------------------------------------- Total shareholders' equity 94,860 99,989 - --------------------------------------------------------------------------------------------- Total liabilities and shareholders' equity $439,671 $449,600 ============================================================================================= See accompanying notes.
28 32
LIBBEY INC. CONSOLIDATED STATEMENTS OF INCOME ============================================================================================= Year ended December 31, Dollars in thousands, except per-share amounts 1998 1997 1996 - ---------------------------------------------------------------------------------------------- REVENUES Net sales $436,522 $411,966 $397,656 Royalties and net technical assistance income 3,026 3,087 2,698 - ---------------------------------------------------------------------------------------------- Total revenues 439,548 415,053 400,354 Costs and expenses: Cost of sales 321,949 295,009 288,538 Selling, general and administrative expenses 54,191 49,585 44,620 Capacity realignment charge 20,046 -- -- - ---------------------------------------------------------------------------------------------- 396,186 344,594 333,158 - ---------------------------------------------------------------------------------------------- INCOME FROM OPERATIONS 43,362 70,459 67,196 Other income (expense): Equity earnings 8,880 3,570 -- Other - net 1,493 (732) 1,302 - ---------------------------------------------------------------------------------------------- 10,373 2,838 1,302 - ---------------------------------------------------------------------------------------------- Earnings before interest and income taxes 53,735 73,297 68,498 Interest expense - net (12,674) (14,840) (14,962) - ---------------------------------------------------------------------------------------------- Income before income taxes 41,061 58,457 53,536 Provision for income taxes 15,618 22,331 20,986 - ---------------------------------------------------------------------------------------------- NET INCOME $ 25,443 $ 36,126 $ 32,550 ============================================================================================= NET INCOME PER SHARE Basic $ 1.45 $ 2.33 $ 2.16 Diluted $ 1.42 $ 2.27 $ 2.12 ============================================================================================= See accompanying notes
29 33 LIBBEY INC. CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
================================================================================================================================== Accumulated Common Capital in Other Dollars in thousands, except Stock Excess of Treasury Comprehensive per-share data Shares Amount Par Value Stock Deficit Loss Total - ---------------------------------------------------------------------------------------------------------------------------------- Balance January 1, 1996 15,023,500 $150 $191,226 $(238,407) $(85) $ (47,116) Net income 32,550 32,550 Effect of exchange rate fluctuation (54) (54) ----------- Comprehensive income 32,496 Stock options exercised 37,731 1 683 684 Dividend -- $0.30 per share (4,511) (4,511) - ---------------------------------------------------------------------------------------------------------------------------------- Balance December 31, 1996 15,061,231 151 191,909 (210,368) (139) (18,447) Net income 36,126 36,126 Effect of exchange rate fluctuation (463) (463) ----------- Comprehensive income 35,663 Stock options exercised 219,700 1 4,704 4,705 Stock offering net of $573 expenses 2,300,000 23 82,595 82,618 Dividend -- $0.30 per share (4,550) (4,550) - ---------------------------------------------------------------------------------------------------------------------------------- Balance December 31, 1997 17,580,931 175 279,208 (178,792) (602) 99,989 Net income 25,443 25,443 Effect of exchange rate fluctuation (810) (810) ----------- Comprehensive income 24,633 Stock options exercised 126,639 1 2,748 2,749 Purchase of shares for treasury (875,000) (8) (27,250) (27,258) Dividend -- $0.30 per share (5,253) (5,253) - ---------------------------------------------------------------------------------------------------------------------------------- Balance December 31, 1998 16,832,570 $168 $281,956 ($27,250) $(158,602) $(1,412) $94,860 ================================================================================================================================== See accompanying notes
30 34
LIBBEY INC. CONSOLIDATED STATEMENTS OF CASH FLOWS ================================================================================================================= Year ended December 31, Dollars in thousands 1998 1997 1996 - ----------------------------------------------------------------------------------------------------------------- OPERATING ACTIVITIES Net income $ 25,443 $ 36,126 $ 32,550 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 15,852 16,826 19,275 Amortization 3,654 3,070 2,210 Equity earnings (8,880) (3,570) -- Capacity realignment charge 20,046 -- -- Nonpension retirement benefit cost in excess of payments (1,417) 1,309 2,220 Deferred income taxes 498 2,028 (201) Other 1,468 316 (177) Changes in operating assets and liabilities: Accounts receivable 1,566 (5,226) (1,786) Inventories 8,693 (9,558) 2,731 Prepaid expenses 9 (506) (573) Other assets (5,126) (3,534) (4,800) Accounts payable (2,859) 647 2,463 Accrued liabilities (5,499) 2,274 311 Other liabilities (2,171) (1,586) 5,990 - ----------------------------------------------------------------------------------------------------------------- Net cash provided by operating activities 51,277 38,616 60,213 INVESTING ACTIVITIES Additions to property, plant and equipment (17,486) (18,408) (15,386) Vitro acquisition and equity investments -- (106,750) -- Dividends received from equity investments 14,232 -- -- Other 1,639 654 170 - ----------------------------------------------------------------------------------------------------------------- Net cash used in investing activities (1,615) (124,504) (15,216) FINANCING ACTIVITIES Net bank credit facility activity (23,751) (2,097) (45,801) Other net borrowings 4,547 5,860 4,525 Stock offering -- 82,618 -- Stock options exercised 2,749 4,705 684 Treasury shares purchased (27,258) -- -- Dividends (5,253) (4,550) (4,511) - ----------------------------------------------------------------------------------------------------------------- Net cash provided by (used in) financing activities (48,966) 86,536 (45,103) Effect of exchange rate fluctuations on cash (18) (4) 1 - ----------------------------------------------------------------------------------------------------------------- Increase (decrease) in cash 678 644 (105) Cash at beginning of year 2,634 1,990 2,095 - ----------------------------------------------------------------------------------------------------------------- CASH AT END OF YEAR $ 3,312 $ 2,634 $ 1,990 ================================================================================================================= See accompanying notes
31 35 LIBBEY INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) 1. BASIS OF PRESENTATION The consolidated financial statements include the accounts of Libbey Inc. and all wholly owned subsidiaries ("the Company"). The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. 2. SIGNIFICANT ACCOUNTING POLICIES Business The Company operates in one business segment, tableware products. The Company designs, manufactures and markets an extensive line of high-quality, machine-made glass beverageware, other glass tableware and ceramic dinnerware to a broad group of customers in the foodservice, retail, industrial and premium areas. Most of the Company's sales are to customers in North America. Through a 1997 acquisition and equity investments, the Company also imports and distributes ceramic dinnerware and flatware and has a 49% interest in a glass tableware manufacturer in Mexico. INVENTORY VALUATION The Company uses the last-in, first-out (LIFO) cost method of inventory valuation for over 70% of its inventories. If inventories valued on the LIFO method had been valued at standard or average costs, which approximate current costs, inventories would be higher than reported by $11,203, $11,720 and $10,978 at December 31, 1998, 1997 and 1996, respectively. The remaining inventories are valued at either standard or average cost which approximate current costs. GOODWILL Goodwill, which resulted from the excess of purchase cost over net assets acquired, is being amortized over 40 years. The Company periodically reviews goodwill to assess recoverability, generally based upon expectations of nondiscounted cash flows and operating income. INTANGIBLES Intangibles, which resulted from valuations assigned by independent appraisers for future revenues from technical assistance agreements and trademarks acquired, are amortized over 40 years. The Company periodically reviews intangibles to assess recoverability, generally based upon expectations of nondiscounted cash flows. DEFERRED SOFTWARE Deferred software is the cost of software packages purchased and the cost associated with the installation of the software. This cost is amortized over 5 years. 32 36 The Company periodically reviews the software to assess plans to replace the existing programs before the 5 years. PROPERTY, PLANT AND EQUIPMENT Depreciation is provided on the straight-line method over the estimated useful lives of the assets, generally 3 to 10 years for equipment and furnishings and 20 to 40 years for buildings and improvements. STOCK OPTIONS The Company accounts for employee stock options in accordance with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees." INCOME TAXES Deferred income taxes are determined based on temporary differences between financial reporting and tax bases of assets and liabilities and are measured using the tax rates and laws that are expected to be in effect when the differences are expected to reverse. ROYALTIES AND NET TECHNICAL ASSISTANCE Royalties and net technical assistance income are accrued based on the terms of the respective agreements, which typically specify that a percentage of the licensee's sales be paid to the Company monthly, quarterly or semi-annually in exchange for the Company's assistance with manufacturing and engineering and support in functions such as marketing, sales and administration. FOREIGN CURRENCY TRANSLATION The assets and liabilities of the wholly owned foreign subsidiary are translated at current exchange rates and any related translation adjustments are recorded directly in shareholders' equity. The 49% investment in Vitrocrisa is accounted for using the equity method with the U.S. dollar being the functional currency. OTHER COMPREHENSIVE INCOME In 1998, the Company adopted Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" which requires that comprehensive income or loss, the total of net income and other comprehensive loss, to be reported in the financial statements. Other comprehensive loss for the Company consists of foreign currency translation adjustment. Disclosure of comprehensive loss is incorporated into the Statement of Shareholders' Equity for all years presented. NEW ACCOUNTING STANDARDS In June 1998, the Financial Accounting Standards Board issued Statement No.133, "Accounting for Derivative Instruments and Hedging Activities" (Statement 133) which establishes new procedures for accounting for derivatives and hedging activities and supersedes and amends a number of existing standards. Statement 133 is effective for fiscal years beginning after June 15, 1999, and the Company has not determined its impact. 33 37 INCOME PER SHARE OF COMMON STOCK The following table sets forth the computation of basic and diluted earnings per share:
- -------------------------------------------------------------------------------------------------- 1998 1997 1996 - -------------------------------------------------------------------------------------------------- Numerator for diluted earnings per share -- net income that is available to common stockholders $25,443 $36,126 $32,550 ------------------------------------------------- Denominator for basic earnings per share -- weighted-average shares outstanding 17,523,564 15,479,704 15,037,453 Effect of dilutive securities -- employee stock options 392,132 457,353 324,030 Denominator for diluted earnings per share -- adjusted weighted-average shares and assumed conversions 17,915,696 15,937,057 15,361,483 ------------------------------------------------- Basic earnings per share $ 1.45 $ 2.33 $ 2.16 ------------------------------------------------- Diluted earnings per share $ 1.42 $ 2.27 $ 2.12 -------------------------------------------------
2. ACQUISITION AND EQUITY INVESTMENTS On August 29, 1997, the Company completed a series of transactions with Vitro S.A. (collectively the "Vitro Transactions") for a cash purchase price of approximately $104.4 million and the assumption of certain liabilities, financed through borrowings under the Bank Credit Agreement. The primary components of the Vitro Transactions included the Company becoming: (i) a 49% equity owner in Vitrocrisa; (ii) the exclusive distributor of Vitrocrisa's glass tableware products in the U.S. and Canada and Vitrocrisa becoming the exclusive distributor of Libbey glass tableware products in Latin America; (iii) the owner of substantially all of the assets and certain liabilities of the business formerly known as WorldCrisa, renamed World Tableware; and (iv) the owner of a 49% interest in the business of Crisa Industrial, L.L.C., which distributes industrial glassware in the U.S. and Canada for Vitrocrisa. As a result of the Vitro Transactions, the Company consolidates the financial results of World Tableware and includes in its financial results sales of Vitrocrisa's glass tableware in the U.S. and Canada pursuant to the distribution agreement. The equity interests in Vitrocrisa and Crisa Industrial, L.L.C. were recorded as equity investments of $82.2 million, which exceeded the underlying equity in net assets by approximately $66.0 million. This amount is being amortized over 40 years as a charge to equity earnings. The acquisition of World Tableware was accounted for under the purchase method of accounting for financial reporting purposes, and an allocation of the purchase price to the underlying net assets acquired has been made. The excess of the aggregate purchase price over the fair value of assets acquired of approximately $11.8 million was recorded as goodwill. The operating results of World Tableware and the equity earnings of 34 38 Vitrocrisa and Crisa Industrial, L.L.C. have been included in the consolidated financial statements since the date of acquisition. The following unaudited pro forma results of operations assume the acquisition and equity investments occurred as of January 1, 1996 (in thousands, except per-share amounts):
Year ended December 31, 1997 1996 - -------------------------------------------------------------------------------- Net revenues $455,453 $460,419 Net income $ 36,901 $ 32,528 Net income per share Basic $ 2.38 $ 2.16 Diluted $ 2.32 $ 2.12
The pro forma financial information is not necessarily indicative of the operating results that would have occurred had the Vitro Transactions been consummated as of January 1, 1996, nor are they necessarily indicative of future operating results. Summarized combined financial information for equity investments beginning at the date of investment is as follows:
December 31, 1998 1997 - --------------------------------------------------------------------------------------------------- Current assets $ 61,457 $ 65,540 Non-current assets 134,208 129,960 --------------- -------------- Total assets 195,665 195,500 Current liabilities 90,037 78,849 Other liabilities and deferred items 96,068 79,703 --------------- -------------- Total liabilities and deferred items 186,105 158,552 --------------- -------------- Net assets $ 9,560 $ 36,948 =================================================================================================== Year ended December 31, 1998 1997 - --------------------------------------------------------------------------------------------------- Net sales $ 183,886 $ 71,413 Gross profit $ 69,504 $ 27,241 Net income $ 21,586 $ 8,440 ===================================================================================================
35 39
4. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment consists of the following: December 31, 1998 1997 - ------------------------------------------------------------------------------ Land $ 15,184 $ 15,364 Buildings 31,495 33,097 Machinery and equipment 169,249 167,574 Furniture and fixtures 11,961 11,449 Construction in progress 7,824 8,943 - ------------------------------------------------------------------------------ 235,713 236,427 Less accumulated depreciation 116,242 116,226 - ------------------------------------------------------------------------------ Net property, plant and equipment $119,471 $120,201 ==============================================================================
5. OTHER ACCRUED LIABILITIES Other accrued liabilities include accruals for insurance of $6,109 and $5,733 and various incentive programs of $11,865 and $9,537 at December 31, 1998 and 1997 respectively. 6. INCOME TAXES The provision(credit) for income taxes consists of the following: - -------------------------------------------------------------------------------- Year ended December 31, 1998 1997 1996 - -------------------------------------------------------------------------------- Current: Federal $ 11,383 $ 15,906 $ 16,567 Foreign 3,330 2,345 1,878 State and local 1,403 2,052 2,742 - -------------------------------------------------------------------------------- 16,116 20,303 21,187 - -------------------------------------------------------------------------------- Deferred: Federal 5,874 1,500 (644) Foreign (7,049) 368 385 State and local 677 160 58 - -------------------------------------------------------------------------------- (498) 2,028 (201) - -------------------------------------------------------------------------------- Total: Federal 17,257 17,406 15,923 Foreign (3,719) 2,713 2,263 State and local 2,080 2,212 2,800 - -------------------------------------------------------------------------------- $ 15,618 $ 22,331 $ 20,986 - -------------------------------------------------------------------------------- 36 40 The provision for income taxes was calculated based on the following components of earnings (loss) before income taxes:
1998 1997 1996 - -------------------------------------------------------------------------------- Domestic $ 52,091 $ 50,734 $ 46,101 Foreign (11,030) 7,723 7,435 - -------------------------------------------------------------------------------- $ 41,061 $ 58,457 $ 53,536 ================================================================================
A reconciliation from the statutory U.S. federal tax rate of 35% to the consolidated effective tax rate is as follows:
1998 1997 1996 - -------------------------------------------------------------------------------- Statutory U.S. federal tax rate 35.0% 35.0% 35.0% Increase in rate due to: State and local income taxes, net of related federal taxes 3.3 2.5 3.4 Amortization of goodwill 2.0 0.9 0.7 Other (2.3) (0.2) 0.1 - -------------------------------------------------------------------------------- Consolidated effective tax rate 38.0% 38.2% 39.2% ================================================================================
Income taxes paid in cash amounted to $17,078, $16,570 and $18,727 for the years ended December 31, 1998, 1997 and 1996, respectively.
Significant components of the Company's deferred tax liabilities and assets are as follows: December 31, 1998 1997 - -------------------------------------------------------------------------------- Deferred tax liabilities: Property, plant and equipment $22,600 $20,042 Inventories 4,105 2,784 Pension 3,531 2,988 Intangibles and other assets 12,125 7,448 - -------------------------------------------------------------------------------- Total deferred tax liabilities 42,361 33,262 Deferred tax assets: Accrued nonpension retirement benefits 19,206 19,986 Other accrued liabilities 6,611 6,452 Receivables 321 -- Capacity realignment reserve 7,451 -- Other 523 328 - -------------------------------------------------------------------------------- Total deferred tax assets 34,112 26,766 - -------------------------------------------------------------------------------- Net deferred tax liabilities $ 8,249 $ 6,496 ================================================================================
37 41
Net deferred tax liabilities are included in the consolidated balance sheets as follows: December 31, 1998 1997 - -------------------------------------------------------------------------------- Noncurrent deferred taxes $ 16,184 $ 9,659 Prepaid expenses (7,935) (3,163) - -------------------------------------------------------------------------------- Net deferred tax liabilities $ 8,249 $ 6,496 ================================================================================
7. PENSION PLANS AND NONPENSION RETIREMENT BENEFITS In 1998, the Company adopted Statement of Financial Accounting Standards No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits" (Statement 132) for all years presented which supersedes the disclosure requirements of Statement Nos. 87, 88 and 106. Statement 132 addresses disclosure issues only and does not change the measurement or recognition specified in Statement Nos. 87, 88 and 106. The Company has pension plans covering substantially all employees. Benefits generally are based on compensation for salaried employees and length of service for hourly employees. The Company's policy is to fund pension plans such that sufficient assets will be available to meet future benefit requirements. The components of the benefit obligation, plan assets and funded status of the plans are as follows:
December 31, ------------ 1998 1997 ---- ---- Change in benefit obligation: Benefit obligation, beginning of year $ 162,526 $ 143,683 Service cost 3,799 3,373 Interest cost 11,395 11,479 Plan amendments 6,793 (1,141) Actuarial (gain) loss (2,748) 17,050 Benefits paid (13,199) (11,918) ----------------------- Benefit obligation, end of year $ 168,566 $ 162,526 ----------------------- Change in plan assets: Fair value of plan assets, beginning of year $ 201,424 $ 180,039 Actual return on plan assets 31,210 33,304 Benefits paid (13,199) (11,919) ----------------------- Fair value of plan asset, end of year $ 219,435 $ 201,424 ----------------------- Funded status of plan: $ 50,869 $ 38,898 Unrecognized net gain (45,728) (29,026) Unrecognized prior year service cost 5,560 (1,067) ----------------------- Prepaid pension benefit cost $ 10,701 $ 8,805 -----------------------
38 42 The actuarial present value of benefit obligations is based on a discount rate of 7.0% in 1998 and 7.25% in 1997. The expected long-term rate of return on assets is 10% in 1998 and 1997. A salary growth rate of 4.5% was used in 1998 and 1997. Future benefits are assumed to increase in a manner consistent with past experience. Plan assets primarily include marketable equity securities and government and corporate debt securities. The components of the net pension expense are as follows:
Year ended December 31, 1998 1997 1996 - ------------------------------------------------------------------------------------------------------- Service cost (benefits earned during the period) $ 3,799 $ 3,373 $ 3,812 Interest cost on projected benefit obligation 11,395 11,479 11,177 Expected return on plan assets (17,256) (16,013) (15,217) Prior service cost amortization 166 (75) (28) Actuarial gain recognized -- (275) -- - ------------------------------------------------------------------------------------------------------- Net pension credit $ (1,896) $ (1,511) $ (256) =======================================================================================================
The Company also sponsors certain other employee retirement benefit plans which in the aggregate resulted in an expense of $1,977, $1,975 and $1,768 in 1998, 1997 and 1996, respectively. The Company also provides certain retiree health care and life insurance benefits covering substantially all salaried and 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. Under a cross-indemnity agreement, Owens-Illinois assumed liability for the nonpension retirement benefits of Company retirees who had retired as of June 18, 1993. 39 43 The components of the nonpension retirement benefit obligation and amounts accrued are as follows:
December 31, ------------ 1998 1997 ---- ---- Change in accumulated postretirement benefit obligation: Benefit obligation, beginning of year $ 30,699 $ 32,592 Service cost 698 1,236 Interest cost 1,485 2,408 Plan amendments (12,413) 0 Actuarial gain (2,124) (4,635) Benefits paid (874) (902) ---------------------- Benefit obligation, end of year $ 17,471 $ 30,699 ====================== Funded status of plan $(17,471) $(30,699) Unrecognized actuarial gain (16,464) (14,288) Unrecognized prior year service cost (17,122) (7,487) ---------------------- Prepaid (accrued) benefit cost $(51,057) $(52,474) ======================
The provision for nonpension retirement benefit costs consists of the following:
Year ended December 31, - ---------------------------------------------------------------------------------------------------------- 1998 1997 1996 - ---------------------------------------------------------------------------------------------------------- Service cost (benefits earned during the period) $ 698 $ 1,236 $ 1,463 Amortization (2,517) (1,639) (1,276) Interest cost on nonpension retirement benefit obligation 1,485 2,408 2,484 - ---------------------------------------------------------------------------------------------------------- Net nonpension retirement benefit cost (credit) $ (334) $ 2,005 $ 2,671 ==========================================================================================================
Assumed health care cost inflation is based on a gradual decrease to an ultimate rate of 5%. A one percentage point increase in these rates would have increased the nonpension retirement benefit obligation by $575. A one percentage point decrease in these rates would have decreased the net nonpension retirement benefit obligation by $542. The assumed discount rate used in determining the accumulated nonpension retirement benefit obligation was 7.0% for 1998 and 7.25% for 1997. The reduction in the accumulated postretirement benefit obligation related to plan amendments which provided for retiree contributions and annual cost limits. The Company continues to fund these nonpension retirement benefit obligations as claims are incurred. The Company provides retiree health care benefits to certain union hourly employees through participation in a multiemployer retiree health care benefit plan. Approximately $443, $388 and $357 was charged to expense for the years ended December 31, 1998, 1997 and 1996, respectively. 40 44 8. LONG-TERM DEBT The Company and its Canadian subsidiary have an unsecured agreement ("Bank Credit Agreement" or "Agreement") with a group of banks that provides for a Revolving Credit and Swing Line Facility ("Facility") permitting borrowings up to an aggregate total of $380.0 million, maturing May 1, 2002. Swing Line borrowings are limited to $25.0 million with interest calculated at the prime rate minus the Commitment Fee Percentage. Revolving Credit borrowings bear interest at the Company's option at either the prime rate minus the Commitment Fee Percentage, or a Eurodollar rate plus the Applicable Eurodollar Margin. The Commitment Fee Percentage and Applicable Eurodollar Margin vary depending on the Company's performance against certain financial ratios. The Commitment Fee Percentage and the Applicable Eurodollar Margin were .125% and .225%, respectively, at December 31, 1998. The Company may also elect to borrow up to a maximum of $190.0 million under a Bid Rate loan alternative of the Facility at floating rates of interest. The Company had $176.3 and $200.4 million outstanding under the Facility at December 31, 1998 and 1997, respectively. The Facility also provides for the issuance of $38.0 million of letters of credit, with such usage applied against the $380.0 million limit. At December 31, 1998, the Company had $5.3 million in letters of credit outstanding under the Facility. The Company has entered into Interest Rate Protection Agreements ("Rate Agreements") with respect to $100.0 million of debt as a means to manage its exposure to fluctuating interest rates. The Rate Agreements effectively convert this portion of the Company's borrowings from variable rate debt to a fixed-rate basis, thus reducing the impact of interest rate changes on future income. The average interest rate for the Company's borrowings related to the Rate Agreements at December 31, 1998, was 6.48% for an average remaining period of 2.7 years. Total remaining debt not covered by the Rate Agreements has fluctuating interest rates with a weighted average rate of 5.34% at December 31, 1998. The interest rate differential to be received or paid under the Rate Agreements is being recognized over the life of the Rate Agreements as an adjustment to interest expense. If the counterparts to these Rate Agreements fail to perform, the Company would no longer be protected from interest rate fluctuations by these Rate Agreements. However, the Company does not anticipate nonperformance by the counterparts. The Company must pay a commitment fee ("Commitment Fee Percentage") on the total credit provided under the Bank Credit Agreement. No compensating balances are required by the Agreement. The Agreement requires the maintenance of certain financial ratios, restricts the incurrence of indebtedness and other contingent financial obligations and restricts certain types of business activities and investments. Annual maturities for all the Company's long-term debt through 2002 are as follows: 1999 through 2001 - none; 2002 - $176.3 million. At December 31, 1998, the carrying value of the long-term debt approximates its fair value based on the Company's current incremental borrowing rates. There was a negative fair 41 45 market value for the Company's Interest Rate Protection Agreements at December 31, 1998 of $2.6 million. The fair value of long-term debt is estimated based on borrowing rates currently available to the Company for loans with similar terms and maturities. The fair value of the Company's Rate Agreements is based on quotes from brokers for comparable contracts. The Company does not expect to cancel these agreements and expects them to expire as originally contracted. Interest paid in cash amounted to $12,392, $14,337 and $14,362 for the years ended December 31, 1998, 1997 and 1996. 9. STOCK OPTIONS The Company sponsors a stock option plan for key employees. The plan provides for the granting of Incentive Stock Options and Nonqualified Options to purchase 1,800,000 shares of the Company's common stock to key employees at a price not less than the fair market value on the date the option is granted. Options become exercisable as determined at the date of grant by a committee of the Board of Directors. Unless an earlier expiration date is set at the time of the grant or results from termination of an optionee's employment or a merger, consolidation, acquisition, liquidation or dissolution of the Company, Incentive Stock Options expire ten years after the date of grant and Nonqualified Options expire ten years and a day after date of grant. The Company has elected to follow APB No. 25, "Accounting for Stock Issued to Employees," in accounting for employee stock options. The alternative fair value accounting provided for under FASB No. 123, "Accounting for Stock-Based Compensation," requires use of option valuation models that were not developed for use in valuing employee stock options. Under APB No. 25 no compensation expense is recognized because the exercise price of the Company's employee stock options equals the market price of the underlying stock at the date of grant. In the opinion of management, the existing fair-value models do not provide a reliable measure of the value of employee stock options. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. The Company's employee stock options have characteristics significantly different from those of traded options. In addition, option valuation models require highly subjective assumptions including the expected stock price volatility. Changes in these assumptions can materially affect the fair value estimate. Pro forma information regarding net income and earnings per share is required by Statement 123, which also requires that the information be determined as if the Company has accounted for its employee stock options granted subsequent to December 31, 1994 under the fair-value method of that Statement. The fair value for these options was estimated at 42 46 the date of grant using a Black-Scholes option pricing model with the following weighted-average assumptions by year:
Assumption 1998 1997 1996 - ---------- ---- ---- ---- Risk-free interest rates 5.5% 5.8% 6.0% Dividend yield 0.8% 0.8% 1.1% Volatility .29 .26 .27
The weighted average fair value of options granted in 1998, 1997 and 1996 was $15.22, $13.59 and $9.90, respectively. For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period. The Company's pro forma information follows (in thousands, except earnings per-share information):
1998 1997 1996 - -------------------------------------------------------------------------------- Net Income: Reported $ 25,443 $ 36,126 $ 32,550 Pro forma $ 24,435 $ 35,466 $ 32,080 Earnings per share: Basic Reported $ 1.45 $ 2.33 $ 2.16 Pro forma $ 1.39 $ 2.29 $ 2.13 Diluted Reported $ 1.42 $ 2.27 $ 2.12 Pro forma $ 1.36 $ 2.23 $ 2.09 - --------------------------------------------------------------------------------
Pro forma effect on net income for 1998, 1997 and 1996 is not representative of the pro forma effect on net income in future years because it does not take into consideration pro forma compensation expense related to grants made prior to 1995. 43 47 Stock option activity is as follows:
- ------------------------------------------------------------------------------------------ Weighted-Average Price Range Number of Shares Exercise Price Per Share - ------------------------------------------------------------------------------------------ January 1, 1997 Outstanding 1,529,939 $15.29 $13.00--$26.875 Exercisable 1,025,683 13.62 Granted 63,216 35.99 Canceled 22,170 24.29 Exercised 219,700 13.18 - ------------------------------------------------------------------------------------------ December 31, 1997 Outstanding 1,351,285 16.45 $13.00--$36.625 Exercisable 1,151,809 14.45 Granted 159,200 38.33 Canceled 500 38.44 Exercised 126,639 14.17 - ------------------------------------------------------------------------------------------ DECEMBER 31, 1998 OUTSTANDING 1,383,346 19.17 $13.00--$38.4375 EXERCISABLE 1,112,447 15.46 ==========================================================================================
The following information is as of December 31, 1998
Options with an Options with an exercise price of exercise price of greater than $13.00 per share $13.00 per share - -------------------------------------------------------------------------------- Options outstanding 806,235 577,111 Weighted-average exercise price $ 13.00 $ 27.79 Remaining contractual life 4.4 7.5 Options exercisable 806,235 306,212 Weighted-average exercise price $ 13.00 $ 21.93 - --------------------------------------------------------------------------------
10. SHAREHOLDERS' RIGHTS PLAN The Company has a Shareholders' Rights Plan designed to ensure that all of the Company's shareholders receive fair and equal treatment in the event of any proposal to acquire control of the Company. The Plan defines Existing Holder to mean Baron Capital Group, Inc. together with all of its Affiliates and Associates (including without limitation, Ronald Baron, BAMCO, Inc, Baron Capital Management, Inc. and Baron Asset Fund). Under the Plan, the Company's Board of Directors declared a distribution of one right for each outstanding common share of the Company. Each right will entitle shareholders to buy 1/100th of a 44 48 share of newly created Series A Junior Participating Preferred Stock at an exercise price of $55 per right. The rights will not be exercisable until a person acquires beneficial ownership of 20% (or in the case of an Existing Holder, 25%) of the Company's common shares or makes a tender offer for at least 20% (or in the case of an Existing Holder, 25%) of its common shares. After the time that a person acquires beneficial ownership of 20% (or in the case of an Existing Holder, 25%) of the Company's common shares, the holders of the rights may be permitted to exercise such rights to receive the Company's common shares having market value of twice the exercise price. The rights are redeemable at $0.001 per right at any time before the tenth day after a person has acquired 20% (or in the case of an Existing Holder, 25%) or more of the outstanding common shares. The redemption period may be extended under certain circumstances. If at any time after the rights become exercisable and not redeemed, the Company is acquired in a merger or other business combination transaction in which the Company is not the surviving party, the rights will entitle a holder to buy a number of shares of common stock of the acquiring company having a market value of twice the exercise price of each right. 11. OPERATING LEASES Rental expense for all operating leases, primarily for warehouses, was $5,684, $5,983 and $4,670 for the years ended December 31, 1998, 1997 and 1996, respectively. Future minimum rentals under operating leases are as follows: 1999--$5,197; 2000--$3,661; 2001--$2,991; 2002--$2,474 ; 2003--$1,875 and 2004 and thereafter--$6,819. 12. CAPACITY REALIGNMENT CHARGE On December 31, 1998 the Board of Directors of the Company approved a capacity realignment plan, which includes reallocating a portion of the current production of the Company's Wallaceburg, Ontario facility to its glassware facilities in the United States to improve its cost structure and more fully utilize available capacity. A portion of Wallaceburg's production will be absorbed by the Company's joint venture, Vitrocrisa. The Company will service its Canadian glass tableware customers from its remaining manufacturing and distribution network, which includes locations in Toledo, Ohio; Shreveport, Louisiana and City of Industry, California. The Company also announced that it will exit the production of bottleware, a niche, low-margin business for the Company. In connection with this plan, the Company recorded a capacity realignment charge in the fourth quarter of 1998 of $20.0 million which includes $10.0 million for severance and related employee costs, $7.6 million for write off of fixed assets (primarily equipment) and $2.4 million for supply inventories, repair parts and other costs. The Wallaceburg facility is expected to cease production on or around May 31, 1999, and the warehouse operations will terminate later in 1999. The fixed assets, supply inventories and repair parts not being transferred have been written down to a nominal amount. The Wallaceburg facility is presently held for sale; however if a buyer is not located it will be abandoned. The Company will terminate the employment of virtually all of its 560 salary and 45 49 hourly employees and included severance and related employee costs in its capacity realignment charge based on benefits known by the employees. These severance and related employee costs will be paid primarily when production ceases. 13. INDUSTRY SEGMENT INFORMATION Effective the fourth quarter of 1998, the Company adopted Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information" (Statement 131) which superseded Statement No. 14, "Financial Reporting for Segments of a Business Enterprise." Statement 131 establishes standards for the way that public business enterprises report information about operating segments in annual financial statements and requires that those enterprises report selected information about operating segments in interim and annual financial reports. Statement 131 also establishes standards for related disclosures about products and services, geographic areas and major customers. The adoption of Statement 131 did not affect results of operations or financial position. The Company's revenues from external customers are derived from tabletop products. The Company does not have any customers who represent 10% or more of total sales. The Company's operations by geographic areas for 1998, 1997 and 1996 are presented below. Intercompany sales to affiliates represent products that are transferred between geographic areas on a basis intended to reflect as nearly as possible the market value of the products. The long-lived assets include net fixed assets, goodwill and equity investments. 46 50
United States Foreign Eliminations Consolidated ------ ------- ------------ ------------ 1998 Net sales: Customers $384,664 $51,858 $ 436,522 Intercompany 25,429 12,853 (38,282) -- ==================================================== Total 410,093 64,711 (38,282) 436,522 Long-lived assets 161,105 86,738 247,843 1997 Net sales: Customers 354,501 57,465 411,966 Intercompany 26,291 15,530 (41,821) -- ---------------------------------------------------- Total 380,792 72,995 (41,821) 411,966 Long-lived assets 161,256 93,562 254,818 1996 Net sales: Customers 338,214 59,442 397,656 Intercompany 22,435 15,707 (38,142) -- ---------------------------------------------------- Total 360,649 75,149 (38,142) 397,656 Long-lived assets 147,196 9,905 157,101
47 51 SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED) The following tables present selected quarterly financial data for the years ended December 31, 1998 and 1997:
First Second Third Fourth 1998 Quarter Quarter Quarter Quarter - ----------------------------------------------------------------------------------------------- Dollars in thousands, except per-share data Net sales $90,088 $113,673 $ 109,604 $ 123,157 Cost of sales 67,360 79,569 76,801 98,219 Gross profit 22,728 34,104 32,803 24,938 Earnings (loss) before interest and income taxes(1) 13,351 25,612 26,247 (11,475) Net income (loss)(1) 6,105 13,747 14,254 (8,663) - ----------------------------------------------------------------------------------------------- Net income per share Basic $ 0.35 $ 0.78 $ 0.81 $ (0.50) Diluted $ 0.34 $ 0.76 $ 0.79 $ (0.49) =============================================================================================== (1) In the fourth quarter of 1998, the Company recorded a capacity realignment charge of $20.0 million pre-tax and $12.4 million after-tax.
First Second Third Fourth 1998 Quarter Quarter Quarter Quarter - ----------------------------------------------------------------------------------------------- Dollars in thousands, except per-share data Net sales $78,479 $103,954 $ 104,824 $ 124,709 Cost of sales 56,775 71,894 71,959 94,381 Gross profit 21,704 32,060 32,865 30,328 Earnings before interest and income taxes 10,942 20,029 22,845 19,481 Net income 4,646 10,132 11,555 9,793 - ----------------------------------------------------------------------------------------------- Net income per share Basic $ 0.31 $ 0.67 $ 0.76 $ 0.59 Diluted $ 0.30 $ 0.65 $ 0.74 $ 0.58 ===============================================================================================
48 52 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Information with respect to executive officers is set forth herein immediately following Item 4 of Part I. Information with respect to non-officer directors is included in the Proxy Statement in the section entitled "Election of Directors" and such information is incorporated herein by this reference. The section in the Proxy Statement entitled "General Information - Compliance with Section 16(a) of the Exchange Act" is also incorporated herein by this reference. ITEMS 11. and 13. EXECUTIVE COMPENSATION AND CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The sections entitled "Election of Directors," exclusive of the subsection entitled "Board Meetings and Committees of the Board," and "Executive Compensation," exclusive of the subsections entitled "Compensation Committee Report" and "Performance Graph," which are included in the Proxy Statement, are incorporated herein by this reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The section entitled "Security Ownership of Certain Beneficial Owners and Management" which is included in the Proxy Statement is incorporated herein by this reference. 49 53 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K a) Index of Financial Statements and Financial Statement Schedule Covered by Report of Independent Auditors. Page ---- Report of Independent Auditors 26 Consolidated Balance Sheets at December 31, 1998 and 1997 27 For the years ended December 31, 1998, 1997 and 1996: Consolidated Statements of Income 29 Consolidated Statements of Shareholders' Equity 30 Consolidated Statements of Cash Flows 31 Notes to Consolidated Financial Statements 32 Selected Quarterly Financial Data 48 Financial statement schedule for the years ended December 31, 1998, 1997 and 1996: II - Valuation and Qualifying Accounts (Consolidated) S-1 All other schedules have been omitted since the required information is not present or not present in amounts sufficient to require submission of the schedule or because the information required is included in the consolidated financial statements or the accompanying notes. The accompanying Exhibit Index is hereby incorporated herein by this reference. The exhibits listed in the accompanying Exhibit Index are filed or incorporated by reference as part of this report. 50 54 b) A form 8-K was filed during the fourth quarter, dated December 15, 1998 with respect to the press release announcing the authorization to repurchase up to 875,000 shares of the Company's common stock in open market and negotiated purchases. d) Vitrocrisa, S.A. DE C.V. Financial Statements as of December 31, 1998 and 1997 and for the years ended December 31, 1998, 1997 and 1996 and Independent Auditors' Report are filed as a part of this Annual Report pursuant to Rule 3.09 of Regulation S-X. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. LIBBEY INC. by: /s/ Kenneth G. Wilkes ------------------------------ Kenneth G. Wilkes Vice President, Chief Financial Officer and Treasurer Date: March 31, 1999 51 55 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of Libbey Inc. and in the capacities and on the dates indicated. Signature Title - --------- ----- William A. Foley Director Peter C. McC. Howell Director Gary L. Moreau Director Terence P. Stewart Director Carol B. Morerdyk Director Richard I. Reynolds Director, Executive Vice President, Chief Operating Officer John F. Meier Chairman of the Board of Directors, Chief Executive Officer By: /s/ Kenneth G. Wilkes -------------------------- Kenneth G. Wilkes Attorney-In-Fact /s/ Kenneth G. Wilkes - ---------------------------- Kenneth G. Wilkes Vice President, Chief Financial Officer and Treasurer, (Principal Accounting Officer) Date: March 31, 1999 52 56 INDEX TO FINANCIAL STATEMENT SCHEDULE AND SEPARATE FINANCIAL STATEMENTS OF AFFILIATE Page ---- Financial Statement Schedule of Libbey Inc. for the years ended December 31, 1998 1997, and 1996: II Valuation and Qualifying Accounts (Consolidated) S-1 Vitrocrisa, S.A. DE C.V. Financial Statements as of December 31, 1998 and 1997 and for the years ended December 31, 1998, 1997 and 1996 and Independent Auditors' Report S-2 53 57 LIBBEY INC. SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS (Consolidated) Years ended December 31, 1998, 1997 and 1996 (Dollars in thousands)
Additions Charged Balance at (Credited) to Beginning Costs and Other Deductions Balance at Of Year Expenses (Note 1) (Note 2) End of Year ------- -------- -------- -------- ----------- Allowances for Losses and Discounts on Receivables: 1998 $3,103 $1,212 $ 132 $ 811 $3,636 1997 $2,279 $ 439 $ 551 $ 166 $3,103 1996 $3,289 $ (206) $ 35 $ 839 $2,279
(1) The amounts in "Other" represent recoveries of accounts previously charged off as uncollectible and in 1997 amounts established through purchase price accounting for acquisition of World Tableware for Allowances for Losses and Discounts on Receivables. (2) Deductions from allowances for losses and discounts on receivables represent uncollectible notes and accounts written off. S-1 58 DELOITTE & TOUCHE [LOGO] GALAZ, GOMEZ MORFIN, CHAVERO, YAMAZAKI, S.C. VITROCRISA, S.A. DE C.V. Financial Statements as of December 31, 1998 and 1997 and for the years ended December 31, 1998, 1997 and 1996 and Independent Auditors' Report S-2 DELOITTE TOUCHE TOHMATSU 59 DELOITTE & TOUCHE [LOGO] GALAZ, GOMEZ MORFIN, CHAVERO, YAMAZAKI, S.C. [LETTERHEAD] INDEPENDENT AUDITORS' REPORT To the Board of Directors and Stockholders of Vitrocrisa, S.A. de C.V. Monterrey, N.L. We have audited the accompanying balance sheets of Vitrocrisa, S.A. de C.V. as of December 31, 1998 and 1997, and the related statements of income, changes in stockholders' equity and changes in financial position for each of the three years in the period ended December 31, 1998, all expressed in thousands of constant Mexican pesos as of December 31, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in Mexico, which are substantially the same as those followed in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement and that they are prepared in accordance with accounting principles generally accepted in Mexico. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Vitrocrisa, S.A. de C.V. as of December 31, 1998 and 1997, and the results of its operations, changes in its stockholders' equity and changes in its financial position for the years ended December 31, 1998, 1997 and 1996, in conformity with accounting principles generally accepted in Mexico. Accounting principles generally accepted in Mexico differ in certain significant respects from accounting principles generally accepted in the United States. The application of the latter would have affected the determination of net income for the years ended December 31, 1998, 1997 and 1996 and the determination of stockholders' equity at December 31, 1998 and 1997 to the extent summarized in note 14. The accompanying financial statements and the independent auditors' report have been translated into English language for the convenience of readers. /s/ DELOITTE & TOUCHE February 26, 1999 DELOITTE TOUCHE TOHMATSU S-3 60
VITROCRISA, S.A. DE C.V. BALANCE SHEETS (Thousands of constant Mexican pesos as of December 31, 1998) - ---------------------------------------------------------------------------------------------------------------------- December 31, 1998 December 31, 1997 ----------------- ----------------- ASSETS Cash and cash equivalents Ps. 14,584 Ps. 14,279 Trade receivables, net of allowance for doubtful accounts of Ps. 14,327 and Ps. 14,265 at December 31, 1998 and 1997, respectively 229,443 242,787 Other receivables 24,052 23,617 Accounts receivable from affiliates 5,973 29,064 Notes receivable from affiliates 12,161 8,316 Inventories (note 3) 195,163 175,029 ------------ ------------- Current assets 481,376 493,092 Investment in shares 9,310 11,043 Deferred income tax and profit sharing to workers 134,286 128,416 Land and buildings (note 4) 354,401 373,234 Machinery and equipment (note 4) 842,525 784,431 Construction in progress 5,782 8,506 Intangible seniority premium and pension asset 84,144 76,029 Other assets 2,402 255 ------------ ------------- Total assets Ps.1,914,226 Ps. 1,875,006 ============ ============= LIABILITIES Short-term debt Ps. 64,326 Current portion of long-term debt 79,170 Ps. 4,371 Trade payables 134,210 118,816 Notes payable to affiliates 97,349 182,845 Accounts payable to affiliates 19,324 18,783 Accrued expenses 85,935 34,046 Dividends payable 100,671 Other current liabilities 32,695 46,696 ------------ ------------- Current liabilities 513,009 506,228 ------------ ------------- Long-term debt (note 5) 814,932 666,140 Seniority premium and pension plans (note 6) 134,560 95,039 ------------ ------------- Long-term liabilities 949,492 761,179 ------------ ------------- Total liabilities 1,462,501 1,267,407 ------------ ------------- STOCKHOLDERS' EQUITY Capital stock: 1,000,000 shares issued and outstanding at December 31, 1998 and 1997 2,382,987 2,382,987 Paid-in capital 80,532 80,532 Shortfall in restatement of capital (2,226,889) (2,195,090) Minimum pension liability adjustment (21,918) Retained earnings 32,834 Net income for the year 204,179 339,170 ------------- ------------- Stockholders' equity (note 8) 451,725 607,599 ------------- ------------- Total liabilities and stockholders' equity Ps. 1,914,226 Ps. 1,875,006 ============= ============= The accompanying notes are an integral part of these financial statements.
ING. SALVADOR MINARRO LIC. CARLOS NAVARRO LEAL Administrative Director Manager of comptrollership S-4 61
VITROCRISA, S.A. DE C.V. STATEMENTS OF INCOME (Thousands of constant Mexican pesos as of December 31, 1998 ) - ---------------------------------------------------------------------------------------------------------------------- Year ended Year ended Year ended December 31, 1998 December 31, 1997 December 31, 1996 ----------------- ----------------- ----------------- Net sales Ps. 1,680,519 Ps. 1,727,845 Ps. 1,675,757 Cost of sales 1,020,627 1,027,178 1,082,975 General, administrative and selling expenses 290,596 306,825 296,141 --------------- -------------- --------------- Operating income 369,296 393,842 296,641 --------------- -------------- --------------- Interest expense 130,544 161,465 317,810 Interest income (4,549) (3,498) (7,317) Exchange loss, net (note 7-c) 209,948 22,863 16,759 Gain from monetary position (175,894) (147,113) (346,032) --------------- -------------- --------------- Total financing cost (benefit), net 160,049 33,717 (18,780) --------------- -------------- --------------- Income after financing 209,247 360,125 315,421 Severance payments (22,736) Other income, net 493 502 5,525 --------------- -------------- --------------- Income before income tax, profit sharing to workers and extraordinary item 209,740 360,627 298,210 Income and asset tax (note 10) 62,185 120,773 104,327 Profit sharing to workers 9,473 11,646 955 Income before extraordinary item 138,082 228,208 192,928 Extraordinary item (note 11) 66,097 110,962 101,430 --------------- -------------- --------------- Net income Ps. 204,179 Ps. 339,170 Ps. 294,358 =============== ============== ===============
The accompanying notes are an integral part of these financial statements. S-5 62
VITROCRISA, S.A. DE C.V. STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (Thousands of constant Mexican pesos as of December 31, 1998 except per share amounts) - ---------------------------------------------------------------------------------------------------------------------------------- Minimum (Accumulated Shortfall in pension deficit) Paid-in restatement liability Retained Capital stock capital of capital adjustment earnings ------------- ---------- ------------- ----------- ------------- Balance at December 31, 1995 Ps. 2,668,294 Ps. 80,532 Ps.(1,597,203) Ps.(15,455) Ps. (823,712) Appropriation of net loss from prior year (128,387) Merger 366,840 (469,315) 107,090 Loss from holding non-monetary assets (81,602) Minimum pension liability adjustment (952) Net income ------------- ---------- ------------- ----------- ------------- Balance at December 31, 1996 3,035,134 80,532 (2,148,120) (16,407) (845,009) Appropriation of net income from prior year 294,358 Recapitalization (550,651) 550,651 Capital stock redemption (101,496) Loss from holding non-monetary assets (46,970) Minimum pension liability adjustment 16,407 Net income ------------- ---------- ------------- ----------- ------------- Balance at December 31, 1997 2,382,987 80,532 (2,195,090) Appropriation of net income from prior year 339,170 Dividends (Ps. 306.34 per share) (306,336) Loss from holding non-monetary assets (31,799) Minimum pension liability adjustment (21,918) Net income ------------- ---------- ------------- ----------- ------------- Balance at December 31, 1998 Ps. 2,382,987 Ps. 80,532 Ps.(2,226,889) Ps. (21,918) Ps. 32,834 ============= ========== ============= =========== =============
Stockholders' Net income equity ------------ ------------ Balance at December 31, 1995 Ps.(128,387) Ps. 184,069 Appropriation of net loss from prior year 128,387 Merger 4,615 Loss from holding non-monetary assets (81,602) Minimum pension liability adjustment (952) Net income 294,358 294,358 ------------ ------------ Balance at December 31, 1996 294,358 400,488 Appropriation of net income from prior year (294,358) Recapitalization Capital stock redemption (101,496) Loss from holding non-monetary assets (46,970) Minimum pension liability adjustment 16,407 Net income 339,170 339,170 ------------ ------------ Balance at December 31, 1997 339,170 607,599 Appropriation of net income from prior year (339,170) Dividends (Ps. 306.34 per share) (306,336) Loss from holding non-monetary assets (31,799) Minimum pension liability adjustment (21,918) Net income 204,179 204,179 ------------ ------------ Balance at December 31, 1998 Ps. 204,179 Ps. 451,725 ============ ============
The accompanying notes are an integral part of these financial statements. S-6 63
VITROCRISA, S.A. DE C.V. STATEMENTS OF CHANGES IN FINANCIAL POSITION (Thousands of constant Mexican pesos as of December 31, 1998) - ------------------------------------------------------------------------------------------------------------------------ Year ended Year ended Year ended December 31, December 31, December 31, 1998 1997 1996 ------------ ----------- ----------- OPERATING ACTIVITIES: Net income Ps. 204,179 Ps.339,170 Ps.294,358 Add (deduct) non-cash items: Depreciation and amortization 104,278 84,261 114,823 Provision for seniority premium and pension plans 9,489 5,377 (22,480) (Gain) loss from sale of fixed assets (11,875) 533 (3,591) Deferred income tax and profit sharing to workers (6,138) 8,401 3,318 ------------ ----------- ----------- 299,933 437,742 386,428 Increase (decrease) in trade payables 15,394 (6,048) 15,100 Decrease (increase) in trade and receivables from affiliates 36,435 (15,238) 71,005 Increase in inventories (50,550) (8,162) 18,227 Other current assets and liabilities, net 34,149 (36,035) (70,989) Effect of merger in operating activities (79,227) ------------ ----------- ----------- Resources generated from operations 335,361 372,259 340,544 ------------ ----------- ----------- FINANCING ACTIVITIES: Short-term debt 82,338 27,617 Notes payable to affiliates (53,522) (72,553) (29,581) Long-term debt 701,274 191,217 69,761 Monetary effect on liabilities with financing cost (188,763) (154,175) (297,409) Payment of short-term loans (144,537) Payment of long-term debt (338,906) (312,775) (141,299) Dividends (407,007) 100,671 Capital stock redemption (101,497) Effect of merger in financing activities 91,004 ------------ ----------- ----------- Resources used in financing activities (204,586) (349,112) (424,444) ------------ ----------- ----------- INVESTMENT ACTIVITIES: Investment in shares (14) (982) (4,992) Sales of fixed assets 18,161 830 120,299 Investment in land, buildings, machinery and (146,399) (27,324) (15,312) equipment Other (2,218) 5,275 1,935 Effect of merger in investment activities (11,777) ------------ ----------- ----------- Resources (used in) generated from investment activities (130,470) (22,201) 90,153 ------------ ----------- ----------- Net increase in cash and cash equivalents 305 946 6,253 Cash and cash equivalents at beginning of year 14,279 13,333 7,080 ------------ ----------- ----------- Cash and cash equivalents at end of year Ps. 14,584 Ps. 14,279 Ps. 13,333 ============ =========== =========== The accompanying notes are an integral part of these financial statements.
S-7 64 VITROCRISA, S.A. DE C.V. NOTES TO FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 (Thousands of constant Mexican pesos as of December 31, 1998) - -------------------------------------------------------------------------------- 1. ACTIVITIES OF THE COMPANY AND BASIS OF PRESENTATION: a) Activities of the Company Vitrocrisa, S.A. de C.V. (the "Company"), a wholly-owned subsidiary of Vitrocrisa Holding, S.A. de C.V. which is 51% owned by Vitro, S.A. de C.V. ("Vitro") and 49% by Libbey Inc. ("Libbey"), is a company whose activity is the manufacture and distribution of glass articles. Prior to August 29, 1997, the Company was a wholly-owned subsidiary of Vitro. b) Basis of presentation The financial statements presented herein are expressed in thousands of constant Mexican pesos as of December 31, 1998. 2. PRINCIPAL ACCOUNTING POLICIES: a) Accounting method for the treatment of the effects of inflation The financial statements of the Company have been prepared in accordance with Bulletin B-10, "Recognition of the Effects of Inflation in the Financial Information", as amended, issued by the Mexican Institute of Public Accountants ("IMCP"), which recognizes the effects of inflation. The Third Amendment to Bulletin B-10, requires the restatement of all comparative financial statements to constant pesos as of the date of the most recent balance sheet presented. For that purpose, the Company uses the "Indice Nacional de Precios al Consumidor" (Mexican National Consumer Price Index: "INPC"), published by Banco de Mexico. Bulletin B-12 sets the rules related to the statement of changes in financial position. This statement presents the sources and uses of funds during the period measured as the differences, in constant pesos, between the beginning and ending balances of balance sheet items adjusted by the excess (shortfall) in restatement of capital. As regulated by Bulletin B-12, the monetary effect and the effect of changes in exchange rates are not considered non-cash items in the determination of funds generated from operations due to the fact they affect the purchasing power of the entity. The following is a description of the items that have been restated and of the methods used: * Inventories and cost of sales Inventories are valued at the price of the last purchase made during the period, or at standard cost, without exceeding the net realizable value. Cost of sales is determined by using the standard cost at the time of sale. S-8 65 * Land, buildings, machinery and equipment Investments in land, buildings, machinery and equipment (collectively "fixed assets"), including expenditures for renewals and improvements which extend useful lives, are capitalized. The Company has followed the principles of the fifth Amendment to Bulletin B-10, issued by the IMCP and which became effective on January 1, 1997 under which, fixed assets are restated under the method of consumer price index adjustment, using the INPC. The starting balance to apply the INPC is the net replacement value as of December 31, 1996. For machinery and equipment purchased in a foreign country, the restatement is based on a general price index from the country of origin and the exchange rate at the end of each period. Depreciation is calculated using the straight-line method, taking into consideration the useful life of the asset, in order to depreciate the original cost and the revaluation. The depreciation begins in the month in which the asset comes into service. The useful lives of the assets are as follows: Years ----- Buildings 24 Machinery and equipment 3 to 13 * Investment in shares The investment in shares in which the Company hold less than 10% of the capital stock, are accounted for at their acquisition cost. * Shortfall in restatement of capital This item, which is an element of stockholders' equity, reflects the accumulated effect of holding non-monetary assets and the effect of the initial monetary position gain or loss. The accumulated effect of holding non-monetary assets represents the increase in the specific values of non-monetary assets in excess of or below the increase attributable to general inflation as measured by the INPC. * Restatement of capital stock and retained earnings Capital stock and retained earnings are restated using the INPC from the respective dates such capital was contributed or income generated to the date of the most recent balance sheet presented. * Exchange fluctuations Exchange gains or losses included in the cost of financing are calculated by translating monetary assets and liabilities denominated in foreign currencies at the exchange rate in effect at the end of each month. * Gain (loss) from monetary position The monetary position reflects the result of holding monetary assets and liabilities during periods of inflation. Values stated in current monetary units represent a decreasing purchasing power as time goes by. This means that losses are incurred by holding monetary assets over time, whereas gains are realized by maintaining monetary liabilities. The net effect is presented in the statement of income for the year as part of the total financing cost. S-9 66 b) Cash and cash equivalents. Highly liquid short-term investment with original maturities of ninety days or less, consisting primarily of Mexican Government Treasury Bonds and money market instruments, are classified as cash equivalents. c) Maintenance expenses Maintenance and repair expenses are recorded as costs and expenses in the period when they are incurred. d) Seniority premiums, pension plans and severance payments Statutory seniority premiums and pension plans for all personnel are considered as costs in the periods in which services are rendered. Periodic costs are calculated in accordance with the accounting pronouncement Bulletin D-3, issued by the IMCP and the actuarial computations were made by independent actuaries using estimates of the salaries that will be in effect at the time of payment. Personnel not yet eligible for seniority premiums are also taken into account, with any necessary adjustments made in accordance with the probability of their acquiring the required seniority. The cost of past service is amortized over the average period required for workers to reach their retirement age. The actuarial method used is the projected unit credit. e) Income tax and profit sharing to workers Income tax and profit sharing to workers expense are computed in accordance with the partial liability method, as required by Bulletin D-4 issued by the IMCP, under which deferred taxes are provided for identifiable, non-recurring timing differences and that are expected to reverse over a definite period of time, at the tax rates in effect at the end of each period. f) Use of estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of these financial statements and its disclosures. Actual results could differ from those estimated. 3. INVENTORIES: The breakdown is summarized as follows:
December 31, -------------------------------------- 1998 1997 --------------- --------------- Finished products Ps. 174,115 Ps. 149,050 Raw materials 6,457 5,609 Packaging materials 5,798 2,450 --------------- --------------- 186,370 157,109 Spare parts 3,722 4,184 Refractory 5,071 13,736 --------------- --------------- Ps. 195,163 Ps. 175,029 =============== ===============
S-10 67 4. LAND, BUILDINGS, MACHINERY AND EQUIPMENT: Land, buildings, machinery and equipment are summarized as follows:
December 31, -------------------------------------- 1998 1997 --------------- --------------- Land Ps. 122,081 Ps. 124,426 Buildings 465,639 480,787 Accumulated depreciation (233,319) (231,979) --------------- --------------- Ps. 354,401 Ps. 373,234 =============== =============== Machinery and equipment Ps. 2,397,883 Ps. 2,231,001 Accumulated depreciation (1,555,358) (1,446,570) --------------- --------------- Ps. 842,525 Ps. 784,431 =============== ===============
As mentioned in note 2a), machinery and equipment purchased in a foreign country, in the amount of Ps 503,409, was restated using the index of inflation of the country of origin and translated into Mexican pesos using the corresponding exchange rate at December 31, 1998. 5. LONG TERM DEBT: Long-term debt consists of the following notes payable to banks, net of their respective current maturities:
December 31, ----------------------------------- 1998 1997 ---------------- -------------- Unsecured loan guaranteed by Vitro, in U.S. dollars, semiannual interest based on LIBOR plus 1.5 points, principal payable in 2000. Ps. 29,689 Ps. 23,722 Unsecured loan guaranteed by Vitro in Mexican pesos, interest based on the Investments Units (UDIS) plus 8.75 points payable monthly, principal payable in several installments through 2006. 72,709 73,034 Unsecured loan guaranteed by Vitro in US dollars, semiannual interest based on LIBOR plus 2.25 points, principal payable in 296,889 23,922 several installments through 2001. 296,889 23,922 Unsecured loan guaranteed by Vitro in US dollars, semiannual interest based on LIBOR plus 1.25 points, principal payable in several installments through 2001. 415,645 545,462 ------------ ------------ Ps. 814,932 Ps. 666,140 ============ ============
S-11 68 Maturity of long-term debt is as follows: December 31, Year 1998 ------- ---------------- 2000 Ps. 228,827 2001 536,623 2002 12,118 2003 12,118 2004 12,118 2005 12,118 2006 1,010 ---------------- Ps. 814,932 ================ As of December 31, 1998, short-term bank loans in the amount of US $ 3 million used to finance export sales of the Company have been reclassified as long-term debt, because the Company expects to obtain similar financing in the future to finance export sales. In addition, the Company has a committed long-term standby credit line with certain commercial banks available to finance such export sales. In some of the Company's long-term debt agreements certain restrictions and covenants are set forth that require the maintenance of various financial ratios, which were fulfilled. 6. SENIORITY PREMIUM AND PENSION PLANS: The disclosures relating to the Company's seniority premium and pension plans required by Bulletin D-3, issued by IMCP, calculated as described in note 2d), together with certain actuarial assumptions utilized are presented below as of December 31, 1998 and 1997.
December 31, --------------------------------------- 1998 1997 ---------------- ---------------- Accumulated benefit obligation Ps. 134,560 Ps. 95,039 Projected benefit obligation 137,606 102,572 Unrecognized transition obligation 72,285 81,222 Unrecognized net (gain) or loss 36,823 Projected net liability 28,498 21,350 Additional minimum liability 106,062 76,028 Net periodic cost 21,254 15,495 Assumptions: Discount rate 5% 5% Compensation increase 1% 1%
7. FOREIGN CURRENCY BALANCES AND OPERATIONS: a) Assets and liabilities denominated in foreign currency consist of the following: S-12 69
Thousands of US dollars Mexican pesos December 31, December 31, 1998 1998 ------------ ------------- Monetary assets $ 6,555.1 Ps. 64,870.9 Fixed assets 50,868.4 503,409.1 Monetary liabilities-short term 23,407.4 231,646.7 Inventories 1,665.5 16,482.2 Monetary liabilities-long term 75,000.0 742,222.5 b) Foreign operations during the year of 1998. Exports $ 58,785.0 Ps. 581,754.0 Imports 20,271.2 187,333.3 Interest expense, net 7,482.1 69,339.1
c) The exchange rates used for purposes of these financial statements were: Ps 9.8963 per one US dollar at December 31, 1998 and Ps 8.0681 per one US dollar at December 31, 1997. On February 26, 1999, date of issuance of these financial statements, the exchange rate was Ps. 9.94 per one U.S. dollar. 8. STOCKHOLDERS' EQUITY: a) At the stockholders' meeting held on August 31, 1998 it was agreed to declare dividends in the amount of Ps. 271,658 (thousands of nominal pesos). b) At the stockholders' meeting held on August 8, 1997 the following was agreed: 1) To increase the variable portion of the capital stock by Ps 443,662 (thousands of nominal pesos) through the capitalization of restatement of capital stock. 2) To offset the accumulated deficit in the amount of Ps 443,662 (thousands of nominal pesos) by reducing the capital stock in the same amount. 3) To declare dividends in the amount of US $ 10,520 (thousands) from the restatement of capital stock. For accounting purposes this dividend was treated as a capital stock redemption. c) At the extraordinary stockholders' meeting held on August 14, 1997 it was agreed to change the capital stock of the Company from 166,682,900 nominal common shares with a par value of one peso each to 1,000,000 nominal common shares, without par value, divided into the following:
Fixed Capital Variable Capital Total ------------- ---------------- ---------- Series "C" shares 35,900 35,900 Series "C" shares 964,000 964,000 Series "A" shares 51 51 Series "B" shares 49 49 ------------- ---------------- ---------- 35,900 964,100 1,000,000
S-13 70 d) Stockholders' equity includes accrued profits and results from the restating of assets which, in case of distribution, will be subject, under certain circumstances, to the payment of income tax by the Company. Effective January 1, 1999, after a change made to the Income Tax Law in Mexico, the taxable rate for those distributions will be 35% ; and in all cases, when dividends are paid to individuals or foreign residents, an additional 5% withholding tax will be paid. 9. UNAMORTIZED TAX LOSSES At December 31, 1998 the Company had tax loss carry forwards in the amount of Ps. 8,970 and asset tax to be recovered in the future in the amount of Ps. 58,476. The income tax benefit resulting from their utilization will be recognized in the period in which they are utilized. The maturities are as follows:
Tax loss Year carry Asset of Expiration forwards Tax ------------- -------------- ----------- 1999 Ps. 6,758 2000 4,963 2001 6,758 2002 4,963 2003 6,759 2004 4,963 2005 Ps. 8,970 4,467 2006 8,293 2007 6,084 2008 4,468 -------------- ----------- Ps. 8,970 Ps. 58,476 ============== ===========
10. INCOME AND ASSET TAX : a) The income and asset tax included in the results are:
Year ended December 31, --------------------------------------------------------------- 1998 1997 1996 ----------------- --------------- ----------------- Tax benefit that results from the utilization of tax loss carry forwards Ps. 66,097 Ps. 110,962 Ps. 101,430 Deferred income tax: Provision of furnace repair (11,801) (233) (6,858) Benefit from the deduction of inventories held on December 31, 1986 3,417 3,570 3,248 Asset tax 4,472 6,474 6,507 ----------------- --------------- ----------------- Ps. 62,185 Ps. 120,773 Ps. 104,327
b) At December 31, 1998, there were Ps 195,163 of previously deducted inventories and Ps. 28,498 of non-deductible provisions related to seniority premium and pension payments for which no deferred taxes have been provided in accordance with generally accepted accounting principles. S-14 71 c) The reconciliation between the company's effective income tax rate and the statutory income tax rate is as follows:
Year ended Year ended Year ended December 31, December 31, December 31, 1998 1997 1996 ------------ ------------ ------------ Effective income tax rate 29.65% 33.49% 34.98% Add (deduct) quantity corresponding to: Purchase deductions 7.72 (6.85) (1.04) Difference between tax and financial accounting for depreciation .31 (2.68) (0.74) Difference between tax and financial accounting for monetary gain 3.89 6.35 4.92 Provisions (8.20) Other .63 3.69 (4.12) ------------ ------------ ------------ Statutory income tax rate 34.00% 34.00% 34.00% ============ ============ ============
d) Effective January 1, 1999, the Mexican income tax law was changed in several respects. In addition to the changes described in note 8 d), the overall tax rate increased from 34% to 35%; however, in 1999 income taxes will be currently payable based on a 32% rate and the remaining 3% will be paid when such amounts are paid out as dividends. The 32% rate will decrease to 30% effective January 1, 2000 and the remaining 5% will be paid when such amounts are paid out as dividends. Tax payers have the option to pay 35% currently rather than deferring a remainder until dividends are paid. 11. EXTRAORDINARY ITEM: The extraordinary item in 1998, 1997 and 1996 is the tax benefit that resulted from the utilization of tax loss carry forwards. 12. BALANCES AND TRANSACTIONS WITH AFFILIATED COMPANIES: The main balances and transactions with affiliated companies not shown separately in the financial statements are as follows:
As of and for the As of and for the As of and for the year ended year ended year ended December 31, 1998 December 31, 1997 December 31, 1996 ----------------- ----------------- ----------------- Cash equivalents Ps. 344 Ps. 1,178 Unsecured long-term loan payable 72,708 96,956 Net sales 241,747 263,624 328,413 Other income 2,585 13,114 31,020 Purchases of inventory 13,014 12,907 32,201 Operating expenses 39,151 36,639 32,821 Interest expense 92,447 52,895 6,121
S-15 72 The balances of cash equivalents and unsecured long-term loan payable disclosed above result from deposits and loan transactions with subsidiaries of Grupo Financiero Serfin, S.A. (GFS), a Mexican financial group, in which Vitro holds an equity interest. Interest expense relates to loan transactions with GFS and Vitro's subsidiaries. Net sales disclosed above were primarily to Crisa Corporation, a US corporation owned 100% by Vitro, and to Crisa Industrial L.L.C., a US Corporation owned 51% by Vitro and 49% by Libbey, for purposes of facilitating export sales. Other income, purchases of inventory and operating expenses, as well as the balances due to/from affiliates reflected separately in the financial statements, all consist of transactions with subsidiaries of Vitro and are of a normal and recurring nature. 13. YEAR 2000 During 1997 the Company began a project to identify and correct the systems applications affected by the year 2000 compliance issue. As part of such project the Company is working with vendors, suppliers, banks and other institutions to determine their status with respect to this issue. Although the Company is planning to finish this project by the end of March 1999, using the remaining of the year for testing and minor adjustments, no assurance can be made of the final outcome. The Company has incurred approximately Ps. 4,919 and Ps. 2,914 in 1998 and 1997, respectively, in connection with this project. Costs relating to achieving Year 2000 compliance are expensed as incurred. 14. DIFFERENCES BETWEEN MEXICAN AND UNITED STATES ACCOUNTING PRINCIPLES: The Company's statements are prepared in accordance with Mexican GAAP, which vary in certain significant respects from accounting principles generally accepted in the United States (U.S. GAAP). The principal differences between Mexican GAAP and U.S. GAAP and their effects on net income and total stockholders' equity are presented below with an explanation of the adjustments: Reconciliation of net income
Year ended Year ended Year ended December 31, December 31, December 31, 1998 1997 1996 -------------- -------------- ------------- Net income under Mexican GAAP Ps. 204,179 Ps. 339,170 Ps. 294,358 U.S. GAAP adjustments for: Effects of inflationary accounting (104,092) (115,319) (188,696) Deferred income taxes (51,258) (60,248) (17,630) Deferred employees' profit sharing 4,732 (12,542) 28,120 Effects of merger (7,406) -------------- -------------- ------------- Net income under U.S. GAAP Ps. 53,561 Ps. 151,061 Ps. 108,746 ============== ============== ==============
Adjustments for pension costs and accrued vacation cost were not material individually or in the aggregate, for any of the periods presented. S-16 73
Reconciliation of stockholders' equity Year ended Year ended Year ended December 31, 1998 December 31, 1997 December 31, 1996 ----------------- ----------------- ----------------- Total stockholders' equity reported under Mexican GAAP Ps. 451,725 Ps. 607,599 Ps. 400,488 U.S. GAAP adjustments for: Effects of inflationary accounting (951,861) (917,685) (861,504) Deferred income tax 96,395 147,653 207,901 Deferred employees' profit sharing 34,469 29,737 42,279 ----------------- ----------------- ----------------- Stockholders' equity (deficiency in assets) under U.S. GAAP Ps. (369,272) Ps. (132,696) Ps. (210,836) ================= ================= =================
Adjustments for pension costs and accrued vacation cost were not material individually or in the aggregate, for any of the periods presented. a) Effects of inflationary accounting A significant difference between Mexican and U.S. GAAP relates to the formal adoption in Mexico of inflationary accounting, which mitigates the effects of inflation on financial information. Under Mexican GAAP, all basic financial statements (including those of prior years) and related notes are presented in pesos of purchasing power at the end of the latest period presented. Inventories are valued at replacement cost and fixed assets are restated under the method of consumer price index adjustment, using the INPC. Stockholders' equity components are restated by applying INPC growth factors from the date on which the component was contributed or generated. b) Deferred Income Tax: Under Mexican GAAP, deferred taxes are provided only for identifiable, nonrecurring timing differences which are expected to reverse over a definite period of time. For U.S. GAAP purposes, the Company has applied Statement of Financial Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes". Under SFAS No. 109, deferred tax assets and liabilities are recognized for future tax consequences of temporary differences between the financial statement carrying amounts of assets and liabilities and their tax bases. Deferred tax assets are also recognized for the estimated future effects of tax loss carry forwards. Deferred tax assets are reduced by any tax benefits that are not expected to be realized. S-17 74 The significant components of the deferred tax assets for purposes of U.S. GAAP reconciliation are as follows:
December 31, December 31, December 31, 1998 1997 1996 --------------- --------------- --------------- DEFERRED TAX ASSETS Reserves Ps. 39,278 Ps. 22,278 Ps. 18,680 Tax loss carry forwards 3,140 63,619 141,728 Inventories 10,585 19,025 19,128 Seniority premium and pension plans 9,975 5,450 3,377 Tax on assets 58,476 45,533 34,919 Fixed assets 33,491 37,106 35,063 Other 1,194 --------------- --------------- --------------- Total deferred tax assets Ps. 154,945 Ps. 193,011 Ps. 254,089 =============== =============== ===============
c) Deferred employees' profit sharing The Company calculates a deferred employees' profit sharing asset for U.S. GAAP purposes based on temporary differences between the financial reporting bases and employees' profit sharing bases of assets and liabilities. Under U.S. GAAP, employee profit sharing expense would be considered as a component of operating expenses. The significant components of the deferred employees' profit sharing for purposes of U.S. GAAP reconciliation are as follows:
December 31, December 31, December 31, 1998 1997 1996 --------------- --------------- --------------- Inventories Ps. 3,025 Ps. 5,595 Ps. 5,626 Exchange fluctuation 32,973 31,402 43,961 Reserves 11,222 6,552 5,494 Fixed assets (8,260) (7,581) (5,986) Seniority premium and pension plans 2,850 1,603 993 Other 352 --------------- --------------- --------------- Net deferred profit sharing assets Ps. 41,810 Ps. 37,571 Ps. 50,440 =============== =============== ===============
d) Effects of merge For U.S. GAAP purposes the business combination of Proveedora del Hogar, S.A. de C.V. was accounted for as an enterprise under common control similar to a pooling of interest and the financial information is consolidated as of January 1, 1996. e) Other Differences and Supplemental U.S. GAAP Disclosures S-18 75 1) Extraordinary Items.- Mexican GAAP requires that utilization of tax loss carry forwards be classified as extraordinary items in the statement of income, whereas U.S. GAAP requires the benefit from utilization of tax loss carry forwards to be classified as a component of income tax expense attributable to continuing operations. The benefits from utilization of tax loss carry forwards in constant peso terms were Ps. 66,096 for the year ended December 31, 1998 and Ps. 110,962 for the year ended December 31, 1997. For U.S. GAAP purposes, such amounts, in thousands of nominal pesos, were Ps. 66,096 and Ps. 93,553, respectively. 2) Post-retirement Benefits.- Under U.S. GAAP, SFAS No. 106, "Employer's Accounting for Post-retirement Benefits Other Than Pensions" requires accrual of post-retirement benefits other than pensions (such as health care benefits) during the years an employee provides services. The Company does not and is not required to provide post-retirement benefits. 3) Pension Disclosures.- The Company maintains pension plans and seniority premium plans and has adopted Bulletin D-3 issued by the IMCP. The accounting treatment for pensions set forth in this Bulletin is substantially the same as those set forth in SFAS No. 87 "Employer's Accounting For Pensions". The Company records the pension cost determined by actuarial computations, as described in notes 2d) and 6. The differences between principles applied by the Company under Mexican GAAP and requirements of SFAS No. 87 are not material. For purposes of determining pension and seniority premium cost under U.S. GAAP the Company applies SFAS No. 87. The disclosures under SFAS No. 132, "Employers' Disclosures about Pensions and Other Post-retirement Benefits", are presented below.
1998 1997 1996 ------------- ------------- ------------ Change in benefit obligation: Benefit obligation at beginning of year Ps. 80,128 Ps. 34,583 Ps. 41,409 Service cost 4,277 2,075 1,966 Interest cost 6,281 3,937 7,997 Net amortization and deferral 10,696 7,052 1,867 Intangible asset 20,045 51,404 (684) Minimum pension liability adjustment 21,918 (11,954) 694 Benefits paid (8,785) (6,969) (18,664) ------------- ------------- ------------ Benefit obligation at end of year Ps. 134,560 Ps. 80,128 Ps. 34,585 ============= ============= ============ Amounts recognized in the balance sheet consists of: Projected net liability Ps. 28,498 Ps. 16,028 Ps. 9,935 Intangible asset 84,144 64,100 12,696 Minimum pension liability adjustment 21,918 0 11,954 ------------- ------------- ------------ Ps. 134,560 Ps. 80,128 Ps. 34,585 ============= ============= ============
S-19 76
Pension and seniority premium costs are summarized below: Year ended Year ended Year ended December 31, 1998 December 31, 1997 December 31, 1996 ----------------- ----------------- ----------------- Service costs Ps. 4,277 Ps. 2,075 Ps. 1,966 Interest cost 6,281 3,937 7,997 Net amortization and deferral 10,696 7,052 1,867 ----------------- ----------------- ----------------- Net period pension cost Ps. 21,254 Ps. 13,064 Ps. 11,830 ================= ================= =================
4) Weighted Average Interest Rates - The weighted average interest rates on short-term debt and short-term accounts payable to affiliates outstanding as of December 31, 1998 and 1997 were approximately 8.5% and 21.10%, respectively. 5) Supplement Cash flow Information Required by U.S. GAAP
Year ended Year ended Year ended December 31, December 31, December 31, 1998 1997 1996 --------------- -------------- -------------- Netcash provided by operating activities reflects net cash payments of interest and income taxes as follows: Interest Ps. 80,832 Ps. 89,744 Ps. 200,518 Income taxes, net 4,078 4,817 4,506
Under Mexican GAAP the financial statements of the Company are prepared in accordance with Bulletin B-10, which requires the recognition of the effects of inflation in a comprehensive manner. The statement of changes in financial position is prepared in accordance with Bulletin B-12 and is in constant pesos, which means pesos of the same purchasing power as of the date of the last balance sheet presented. Therefore all the resources generated or used are measured in constant pesos. Additionally, the monetary effect and the effect of changes in exchange rates are considered as cash items for purposes of this statement because these items do affect the purchasing power of the entity. U.S. GAAP requires a statement of cash flows prepared in accordance with SFAS No. 95, "Statement of Cash Flows". In order to reconcile to U.S. GAAP, the exchange loss and the monetary gain of all monetary assets and liabilities must be excluded from resources generated from operations and resources generated from financing activities. The Company has presented a cash flow statement in a manner that comprehensively segregates the effects of inflation currency devaluation from the cash flows from operating, investing and financing activities as follows: S-20 77
NDENSED STATEMENTS OF CASH FLOWS US GAAP BASIS Year ended Year ended Year ended December 31, December 31, December 31, OPERATING ACTIVITIES: 1998 1997 1996 ------------- -------------- -------------- Net income Ps. 53,561 Ps. 151,061 Ps. 108,746 Add (deduct) non-cash items: Depreciation and amortization 32,042 12,995 11,390 Provision for seniority premium and pension plans 12,495 6,095 (6,834) (Gain) loss from sale of fixed assets (16,479) 306 (87,201) Deferred income tax and profit sharing to workers 33,827 73,947 (13,607) ------------- -------------- -------------- 115,446 244,404 12,494 Increase (decrease) in trade payables 34,036 9,200 35,237 Decrease (increase) in trade and receivables from affiliates (6,217) (42,235) (46,815) (Increase) decrease in inventories (46,188) (18,954) (25,920) Other current assets and liabilities, net 44,752 (18,513) 4,835 ------------- -------------- -------------- Cash generated (used in) from operations 141,829 173,902 (20,169) ------------- -------------- -------------- FINANCING ACTIVITIES: Short-term debt 64,326 (31,012) Notes payable to affiliates (56,809) (57,880) 31,203 Long-term debt 639,171 152,866 47,380 Payment of long-term debt (310,381) (251,011) (99,793) Dividends (356,534) 84,876 Capital stock redemption (84,876) ------------- -------------- -------------- Cash used in financing activities (20,227) (156,025) (52,222) ------------- -------------- -------------- INVESTMENT ACTIVITIES: Investment in shares (3,554) Sales of fixed assets 16,816 769 87,654 Investment in land, buildings, machinery and equipment (133,685) (19,758) (7,336) Other (2,187) 3,437 1,301 ------------- -------------- -------------- Cash (used in) generated from investment activities (119,056) (15,552) 78,065 ------------- -------------- -------------- Net increase in cash and cash equivalents 2,546 2,325 5,674 Cash and cash equivalents at beginning of year 12,038 9,713 4,039 ------------- -------------- -------------- Cash and cash equivalents at end of year Ps. 14,584 Ps. 12,038 Ps. 9,713 ============= ============== ==============
S-21 78 6) Fair value of financial instruments.- SFAS No. 107, "Disclosures about Fair Value of Financial Instruments", requires disclosure of the estimated fair values of certain financial instruments. The estimated fair value amounts have been determined using available market information or other appropriate valuation methodologies that require considerable judgment in interpreting market data and developing estimates. Accordingly, the estimates presented herein are not necessarily indicative of the amounts that the Company could realize in a current market exchange. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts. The carrying amount of the Company's financial instruments approximate their estimated fair values. The fair value information presented herein is based on information available to management as of December 31, 1998 and 1997. Although management is not aware of any factors that would significantly affect the estimated fair value amounts, such amounts have not been comprehensively revalued for purposes of these financial statements since that date and, therefore, the current estimates of fair value may differ significantly form the amounts presented herein. 7) Comprehensive income - Under US GAAP, SFAS No. 130, "Reporting Comprehensive Income", establishes standards for reporting and display of comprehensive income and its components. The Company's only item of other comprehensive income is minimum pension liability adjustment. Additional required disclosures under SFAS No. 130 are as follows: Disclosure of accumulated other comprehensive income balances: Minimum Pension Liability Adjustment ------------- Balance at December 31, 1995 Ps. 11,260 Change for the year 694 ------------- Balance at December 31, 1996 11,954 Change for the year (11,954) ------------- Balance at December 31, 1997 0 Change for the year 21,918 ------------- Balance at December 31, 1998 Ps. 21,918 ============= There were no reclassification adjustments for any of the periods presented. 8) Derivative instruments and hedging activities - SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities", which will become effective in 1999, addresses both the accounting for and disclosures related to the use of derivatives and hedging activities. Since the Company has not historically used derivative instruments or participated in hedging activities, its financial statements are not expected to be impacted significantly by SFAS No. 133. * * * * * S-22 79 EXHIBIT INDEX S-K Item 601No. Document - -------------------------------------------------------------------------------- 2.0 -- Asset Purchase Agreement dated as of September 22, 1995 by and among The Pfaltzgraff Co., The Pfaltzgraff Outlet Co., Syracuse China Company of Canada Ltd., LG Acquisition Corp. and Libbey Canada Inc., Acquisition of Syracuse China Company (filed as Exhibit 2.0 to the Registrant's Current Report on Form 8-K dated September 22, 1995 and incorporated herein by reference). 2.1 -- Master Investment Agreement, dated to be effective as of August 15, 1997, entered into by and between Libbey Inc., Libbey Glass Inc., LGA2 Corp., LGA3 Corp., LGA4 Corp., Vitro, S.A., Vitrocrisa Holding, S.A. de C.V., Vitro Corporativo, S.A., Vitrocrisa S.A. de C.V. Crisa Corporation, and WorldCrisa Corporation (filed as Exhibit 2.1 to the Registrant's Current Report on Form 8-K dated August 29, 1997 and incorporated herein by reference). 3.1 -- Restated Certificate of Incorporation of Libbey Inc. (filed as Exhibit 3.1 to Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1993 and incorporated herein by reference). 3.2 -- Amended and Restated By-Laws of Libbey Inc. (filed as Exhibit 3.2 to Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1993 and incorporated herein by reference). 4.1 -- Restated Certificate of Incorporation of Libbey Inc. (incorporated by reference herein as Exhibit 3.1). 4.2 -- Amended and Restated By-Laws of Libbey Inc. (incorporated by reference herein as Exhibit 3.2). 4.3 -- Rights Agreement, dated January 5, 1995, between Libbey Inc. and The Bank of New York, which includes the form of Certificate of Designations of the Series A Junior Participating Preferred Stock of Libbey Inc. as Exhibit A, the form of Right Certificate as Exhibit B and the Summary of Rights to Purchase Preferred Shares as Exhibit C, (filed as Exhibit 1 to Registrant's Registration Statement on Form 8-A dated January 20, 1995 and incorporated herein by reference). E-1 80 EXHIBIT INDEX S-K Item 601No. Document - -------------------------------------------------------------------------------- 4.4 -- First Amendment to Rights Agreement, dated February 3, 1999, between Libbey Inc. and The Bank of New York (filed herewith) 10.1 -- Management Services Agreement dated as of June 24, 1993 between Owens-Illinois General Inc. and Libbey Glass Inc. (filed as Exhibit 10.2 to Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1993 and incorporated herein by reference). 10.2 -- Tax Allocation and Indemnification Agreement dated as of May 18, 1993 by and among Owens-Illinois, Inc., Owens-Illinois Group, Inc. and Libbey Inc. (filed as Exhibit 10.3 to Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1993 and incorporated herein by reference). *10.3 -- Pension and Savings Plan Agreement dated as of June 17, 1993 between Owens-Illinois, Inc. and Libbey Inc. (filed as Exhibit 10.4 to Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1993 and incorporated herein by reference). 10.4 -- Cross-Indemnity Agreement dated as of June 24, 1993 between Owens-Illinois, Inc. and Libbey Inc. (filed as Exhibit 10.5 to Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1993 and incorporated herein by reference). *10.5 -- Employment Agreements dated as of June 24, 1993 between Libbey Inc. and its then Executive Officers (filed as Exhibit 10.6 to Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1993 and incorporated herein by reference). E-2 81 EXHIBIT INDEX S-K Item 601No. Document - -------------------------------------------------------------------------------- *10.5 (a) -- Employment Agreement dated as of August 1, 1993 between Libbey Inc. and Kenneth G. Wilkes (filed as an Exhibit 10.6(a) to Registrant's Annual Report on Form 10-K for the year ended December 31, 1993 and incorporated herein by reference). *10.6 -- Form of Non-Qualified Stock Option Agreement between Libbey Inc. and certain key employees participating in the Libbey Inc. Stock Option Plan for Key Employees (filed as Exhibit 10.8 to Registrant's Annual Report on Form 10-K for the year ended December 31, 1993 and incorporated herein by reference). *10.7 -- Description of Libbey Inc. Senior Executive Life Insurance Plan (filed as Exhibit 10.9 to Registrant's Annual Report on Form 10-K for the year ended December 31, 1993 and incorporated herein by reference). *10.8 -- Libbey Inc. Senior Management Incentive Plan (filed as Exhibit 10.10 to Registrant's Annual Report on Form 10-K for the year ended December 31, 1993 and incorporated herein by reference). *10.9 -- Libbey Inc. Deferred Compensation Plan for Outside Directors (filed as Exhibit 10.11 to Registrant's Annual Report on Form 10-K for the year ended December 31, 1993 and incorporated herein by reference). E-3 82 EXHIBIT INDEX ------------- S-K Item 601No. Document - -------------------------------------------------------------------------------- *10.10 -- Libbey Inc. Executive Savings Plan (filed as Exhibit 10.13 to Registrant's Annual Report on Form 10-K for the year ended December 31, 1994 and incorporated herein by reference). *10.11 -- The Amended and Restated Libbey Inc. Stock Option Plan for Key Employees (filed as Exhibit 10.14 to Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1995 and incorporated herein by reference). *10.12 -- Form of Non-qualified Stock Option Agreement between Libbey Inc. and Charles S. Goodman under Amended and Restated Libbey Inc. Stock Option Plan for Key Employees (filed as Exhibit 10.16 to the Registrant's current Report on Form 8-K dated October 10, 1995 and incorporated herein by reference). 10.13 -- Libbey Inc. Guarantee dated as of October 10, 1995 in favor of The Pfaltzgraff Co., The Pfaltzgraff Outlet Co. and Syracuse China Company of Canada Ltd. guaranteeing certain obligations of LG Acquisition Corp. and Libbey Canada Inc. under the Asset Purchase Agreement for the Acquisition of Syracuse China (Exhibit 2.0) in the event certain contingencies occur (filed as Exhibit 10.17 to the Registrant's Current Report on Form 8-K dated October 10, 1995 and incorporated herein by reference). 10.14 -- Susquehanna Pfaltzgraff Co. Guarantee dated as of October 10, 1995 in favor of LG Acquisition Corp. and Libbey Canada Inc. guaranteeing certain obligations of The Pfaltzgraff Co., The Pfaltzgraff Outlet Co. and Syracuse China Company of Canada, Ltd. under the Asset Purchase Agreement for the Acquisition of Syracuse China (Exhibit 2.0) in the event certain contingencies occur (filed as Exhibit 10.18 to the Registrant's Current Report on Form 8-K dated October 10, 1995 and incorporated herein by reference). E-4 83 EXHIBIT INDEX ------------- S-K Item 601No. Document - -------------------------------------------------------------------------------- 10.15 -- Letter Agreement dated as of October 10, 1995 by and between The Pfaltzgraff Co., The Pfaltzgraff Outlet Co., Syracuse China Company of Canada Ltd., LG Acquisition Corp. and Libbey Canada Inc. amending the Letter Agreement dated September 22, 1995 filed as part of the Asset Purchase Agreement for the Acquisition of Syracuse China (Exhibit 2.0) (filed as Exhibit 10.19 to the Registrant's Current Report on Form 8-K dated October 10, 1995 and incorporated herein by reference). *10.16 -- Employment Agreement dated as of April 1, 1996 between Libbey Inc. and John A. Zarb (filed as Exhibit 10.21 to Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 1996 and incorporated herein by reference). *10.17 -- The Amended and Restated Libbey Inc. Senior Management Incentive Plan (filed as Exhibit 10.22 to Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1996 and incorporated herein by reference). *10.18 -- First Amended and Restated Libbey Inc. Executive Savings Plan (filed as Exhibit 10.23 to Registrant's Annual Report on Form 10-K for the year ended December 31, 1996 and incorporated herein by reference). E-5 84 EXHIBIT INDEX S-K Item 601No. Document - -------------------------------------------------------------------------------- *10.19 -- Employment Agreement dated as of January 1, 1997 between Libbey Inc. and Timothy T. Paige (filed as Exhibit 10.24 to Registrant's Annual Report on Form 10-K for the year ended December 31, 1996 and incorporated herein by reference). 10.20 -- The Second Amended and Restated Credit Agreement dated as of April 23, 1997 to the First Amended and Restated Credit Agreement dated as of July 17, 1995 among Libbey Glass Inc. and Libbey Canada Inc. as Borrowers, the lenders listed therein, The Bank of Nova Scotia, as Canadian Agent, The First National Bank of Chicago, as Syndication Agents, NationsBank, N.A., as Documentation Agent, The Bank of New York, The Bank of Nova Scotia, Caisse National De Credit Agricole, Fleet Bank, N.A. and Keybank National Association, as Co-Agents and Bankers Trust Company, as Administrative Agent (filed as Exhibit 10.25 to Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1997 and incorporated herein by reference). . 10.26 -- Amended and Restated Distribution Agreement dated to be effective as of August 29, 1997, by and among Vitro, S.A., Vitrocrisa, S.A. de C.V., Libbey Inc. and Libbey Glass Inc. whereby Libbey Glass Inc. will distribute certain products (filed as Exhibit 10.26 to Registrant's Current Report on Form 8-K/A dated August 29, 1997 Amendment No. 1 and incorporated herein by reference). 10.21 -- Amended and Restated Distribution Agreement dated to be effective as of August 29, 1997, by and among Vitro, S.A., Vitrocrisa, S.A. de C.V., Libbey Inc. and Libbey Glass Inc. whereby Vitrocrisa, S.A. de C.V. will distribute certain products (filed as Exhibit 10.27 to Registrant's Current Report on Form 8-K /A dated August 29, 1997 Amendment No. 1 and incorporated herein by reference). 10.22 -- Vitrocrisa, S.A. de C.V. Shareholders Agreement dated to be effective as of August 29,1997 by and among Libbey Inc., LGA3 Corp., Vitro, S.A., Vitrocrisa Holding, S.A. de C.V. and Vitrocrisa, S.A. de C.V. (filed as Exhibit 10.28 to Registrant's Current Report on Form 8-K /A dated August 29, 1997 Amendment No. 1 and incorporated herein by reference). E-6 85 EXHIBIT INDEX S-K Item 601No. Document - -------------------------------------------------------------------------------- 10.23 -- Vitrocrisa Holding, S.A. de C.V. Shareholders Agreement dated to be effective as of August 29,1997 by and among Libbey Inc., LGA3 Corp., Vitro, S.A. and Vitrocrisa Holding, S.A. de C.V. (filed as Exhibit 10.29 to Registrant's Current Report on Form 8-K /A dated August 29, 1997 Amendment No. 1 and incorporated herein by reference). 10.24 -- Amended and Restated Covenant Not to Compete dated to be effective as of August 29, 1997 by and between Libbey Inc. and Vitro, S.A. (filed as Exhibit 10.30 to Registrant's Current Report on Form 8-K /A dated August 29, 1997 Amendment No. 1 and incorporated herein by reference). 10.25 -- Crisa Libbey, S.A. de C.V. Shareholders Agreement dated to be effective as of August 29,1997 by and among Libbey Inc., LGA3 Corp., Vitro, S.A. and Crisa Libbey, S.A. de C.V. (filed as Exhibit 10.31 to Registrant's Current Report on Form 8-K /A dated August 29, 1997 Amendment No. 1 and incorporated herein by reference). 10.26 -- Limited Liability Company Agreement of Crisa Industrial, L.L.C. dated to be effective as of August 29, 1997 by and among Crisa Corporation, LGA4 Corp., Vitro, S.A. and Libbey Inc. (filed as Exhibit 10.32 to Registrant's Current Report on Form 8-K /A dated August 29, 1997 Amendment No. 1 and incorporated herein by reference). 10.27 -- Management Services Agreement dated to be effective August 29, 1997 by and between Libbey Inc. and Vitrocrisa, S. A. de C.V. for services to be provided by one or more subsidiary corporations of Libbey Inc. (filed as Exhibit 10.33 to Registrant's Current Report on Form 8-K /A dated August 29, 1997 Amendment No. 1 and incorporated herein by reference). *10.28 -- Employment Agreement dated as of September 1, 1997 between Libbey Inc. and Daniel P. Ibele (filed as Exhibit 10.34 to Registrant's Current Report on Form 8-K /A dated August 29, 1997 Amendment No. 1 and incorporated herein by reference). *10.29 -- Change of Control Agreement dated as of May 27, 1998 between Libbey Inc. and L. Frederick Ashton (filed as Exhibit 10.35 to Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1998 and incorporated herein by reference). E-7 86 EXHIBIT INDEX S-K Item 601No. Document - -------------------------------------------------------------------------------- *10.30 -- Change of Control Agreement dated as of May 27, 1998 between Libbey Inc. and Kenneth A. Boerger (filed as Exhibit 10.36 to Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1998 and incorporated herein by reference). *10.31 -- Change of Control Agreement dated as of May 27, 1998 between Libbey Inc. and Dave F. Brown (filed as Exhibit 10.37 to Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1998 and incorporated herein by reference). *10.32 -- Change of Control Agreement dated as of May 27, 1998 between Libbey Inc. and Rob A. Bules (filed as Exhibit 10.38 to Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1998 and incorporated herein by reference). *10.33 -- Change of Control Agreement dated as of May 27, 1998 between Libbey Inc. and Robert A. Dunton (filed as Exhibit 10.39 to Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1998 and incorporated herein by reference). *10.34 -- Change of Control Agreement dated as of May 27, 1998 between Libbey Inc. and Terry E. Hartman (filed as Exhibit 10.40 to Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1998 and incorporated herein by reference). *10.35 -- Change of Control Agreement dated as of May 27, 1998 between Libbey Inc. and William M. Herb (filed as Exhibit 10.41 to Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1998 and incorporated herein by reference). *10.36 -- Change of Control Agreement dated as of May 27, 1998 between Libbey Inc. and Daniel P. Ibele (filed as Exhibit 10.42 to Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1998 and incorporated herein by reference). *10.37 -- Change of Control Agreement dated as of May 27, 1998 between Libbey Inc. and Pete D. Kasper (filed as Exhibit 10.43 to Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1998 and incorporated herein by reference). E-8 87 *10.38 -- Change of Control Agreement dated as of May 27, 1998 between Libbey Inc. and John F. Meier (filed as Exhibit 10.44 to Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1998 and incorporated herein by reference). *10.39 -- Change of Control Agreement dated as of May 27, 1998 between Libbey Inc. and Timothy T. Paige (filed as Exhibit 10.45 to Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1998 and incorporated herein by reference). *10.40 -- Change of Control Agreement dated as of May 27, 1998 between Libbey Inc. and John P. Pranckun (filed as Exhibit 10.46 to Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1998 and incorporated herein by reference). *10.41 -- Change of Control Agreement dated as of May 27, 1998 between Libbey Inc. and Willie B. Purvis (filed as Exhibit 10.47 to Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1998 and incorporated herein by reference). *10.42 -- Change of Control Agreement dated as of May 27, 1998 between Libbey Inc. and Richard I. Reynolds (filed as Exhibit 10.48 to Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1998 and incorporated herein by reference). *10.43 -- Change of Control Agreement dated as of May 27, 1998 between Libbey Inc. and Scott M. Sellick (filed as Exhibit 10.49 to Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1998 and incorporated herein by reference). *10.44 -- Change of Control Agreement dated as of May 27, 1998 between Libbey Inc. and Arthur H. Smith (filed as Exhibit 10.50 to Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1998 and incorporated herein by reference). *10.45 -- Change of Control Agreement dated as of May 27, 1998 between Libbey Inc. and Kenneth G. Wilkes (filed as Exhibit 10.51 to Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1998 and incorporated herein by reference). E-9 88 *10.46 -- Change of Control Agreement dated as of May 27, 1998 between Libbey Inc. and John A. Zarb (filed as Exhibit 10.52 to Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1998 and incorporated herein by reference). *10.47 -- Change of Control Agreement dated as of May 27, 1998 between Libbey Inc. and Wayne J. Zitkus (filed as Exhibit 10.53 to Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1998 and incorporated herein by reference). 13 -- 1998 Annual Report to Shareholders for the year ended December 31, 1998. Except for the information that is expressly incorporated herein by reference, this exhibit is furnished for the information of the Securities and Exchange Commission and is not deemed to be filed as part of this report. 22 -- Subsidiaries of the Registrant (filed herewith). 23 -- Consent of Independent Auditors (filed herewith). 25 -- Power of Attorney (filed herewith). 27 -- Financial Data Schedule -- year 1998 (filed herewith) 99 -- Safe harbor provisions of the Private Securities Litigation Reform Act of 1995 (filed herewith). * Management Contract or Compensation Plan or Arrangement. E-10 EX-4.4 2 EXHIBIT 4.4 1 EXHIBIT 4.4 FIRST AMENDMENT TO RIGHTS AGREEMENT FIRST AMENDMENT, dated as of February 3, 1999 ("First Amendment"), to Rights Agreement dated as of January 5, 1995 (the "Rights Agreement"), between Libbey Inc., a Delaware corporation (the "Company"), and The Bank of New York (the "Rights Agent"). Capitalized terms used but not otherwise defined herein shall have the meanings ascribed to them in the Rights Agreement. WHEREAS, the Company and the Rights Agent previously entered into the Rights Agreement; and WHEREAS, pursuant to Section 26 of the Rights Agreement, the Company and the Rights Agent may from time to time supplement or amend any provision of the Rights Agreement in accordance with the terms of such Section 26. NOW, THEREFORE, in consideration of the foregoing premises and mutual agreements set forth in this Amendment, the parties hereby amend the Rights Agreement as follows: 1. Section 1.1 of the Rights Agreement is hereby amended as follows: (a) the following two sentences are added immediately after the first sentence: "Acquiring Person" shall also not include any Existing Holder, unless and until such time as such Existing Holder shall become the Beneficial Owner of 25% or more of the Common Shares of the Company then outstanding. "Existing Holder" shall mean Baron Capital Group, Inc., together with all of its Affiliates and Associates (including, without limitation, Ronald Baron, BAMCO, Inc., Baron Capital Management, Inc. and Baron Asset Fund)." (b) the penultimate sentence is amended to add the parenthetical "(or, in the case of an Existing Holder, 25%)" after each of the two references to "20%". 2. Section 1.7 of the Rights Agreement is hereby deleted in its entirety. 3. The second sentence of Section 1.11 of the Rights Agreement is hereby amended to (a) add the parenthetical "(or, in the case of an Existing Holder, 25%)" after the reference to "20%," (b) add the words "prior to the time that any Person has become an Acquiring Person and" after the word "determines," and before the word "after" and (c) delete the words "; PROVIDED, HOWEVER, that there must be Continuing Directors then in office and any such determination shall require the concurrence of a majority of such Continuing Directors". 4. Section 3.1 of the Rights Agreement is hereby amended by (a) amending the second sentence thereof to replace the words "beyond the earlier of the dates set forth in such preceding sentence; provided, however, there must be Continuing Directors then in office 2 and any such postponement shall require the approval of at least a majority of such Continuing Directors" with the words: "specified as a result of an event described in clause (ii) beyond the date set forth in such clause (ii)" and (b) adding as the third sentence thereof "Nothing herein shall permit such a postponement of a Distribution Date after a Person becomes an Acquiring Person." 5. The first sentence of Section 11.1.2 is hereby amended to (a) delete the parenthetical "(or, if applicable, the Continuing Directors)" and (b) delete the words "or to extend the period during which the Rights may be redeemed pursuant to Section 23.1". 6. The last sentence of Section 11.4.1 of the Rights Agreement and the penultimate sentence of Section 11.4.2 of the Rights Agreement are hereby amended, in each case, by deleting the words ", by a majority of the Continuing Directors then in office, or if there are no Continuing Directors". 7. The second sentence of Section 22 of the Rights Agreement is hereby amended and restated in its entirety as follows: "In addition, in connection with the issuance or sale of Common Shares following the Distribution Date and prior to the redemption, exchange, termination or expiration of the Rights, the Company shall, with respect to Common Shares so issued or sold pursuant to the exercise of stock options or under any employee plan or arrangement, granted or awarded, or upon exercise, conversion or exchange of securities hereinafter issued by the Company, in each case existing prior to the Distribution Date, issue Right Certificates representing the appropriate number of Rights in connection with such issuance or sale; PROVIDED, HOWEVER, that (i) no such Right Certificate shall be issued if, and to the extent that, the Company shall be advised by counsel that such issuance would create a significant risk of material adverse tax consequences to the Company or the Person to whom such Right Certificate would be issued and (ii) no such Right Certificate shall be issued if, and to the extent that, appropriate adjustment shall otherwise have been made in lieu of the issuance thereof." 8. Section 23.1 of the Rights Agreement is hereby amended and restated in its entirety as follows: "23.1 Right to Redeem. The Board of Directors of the Company may, at its option, at any time prior to a Trigger Event, redeem all but not less than all of the then outstanding Rights at a redemption price of $.01 per Right, appropriately adjusted to reflect any stock split, stock dividend, recapitalization or similar transaction occurring after the date hereof (such redemption price being hereinafter referred to as the "Redemption Price"), and the Company may, at its option, pay the Redemption Price in Common Shares (based on the "current per share market price," determined pursuant to Section 11.4, of the Common Shares at the time of redemption), cash or any other form of consideration deemed 2 3 appropriate by the Board of Directors. The redemption of the Rights by the Board of Directors may be made effective at such time, on such basis and subject to such conditions as the Board of Directors in its sole discretion may establish." 9. Section 26 of the Rights Agreement is hereby amended by deleting clause (ii) of the second sentence thereof in its entirety, renumbering clause (iii) of the second sentence to (ii), adding the word "or" immediately prior to the new clause (ii), and deleting the words "or Redemption Date" and substituting therefor the words "pursuant to the second sentence of Section 3(a)" in the proviso. 10. The fourth paragraph of Exhibit B to the Rights Agreement ("Form of Right Certificate) is hereby amended and restated in its entirety as follows: "Subject to the provisions of the Agreement, the Board of Directors may, at its option, (i) redeem the Rights evidenced by this Right Certificate at a redemption price of $.001 per Right or (ii) exchange Common Shares for the Rights evidenced by this Certificate, in whole or in part." 11. The second paragraph of Exhibit C to the Rights Agreement (SUMMARY OF RIGHTS TO PURCHASE PREFERRED SHARES) is hereby amended to add the parenthetical "(or, in the case of an Existing Holder, 25%)" after the first reference to "20%" therein. 12. The third paragraph of Exhibit C to the Rights Agreement (SUMMARY OF RIGHTS TO PURCHASE PREFERRED SHARES) is hereby amended to delete the words "the Board of Directors, with the concurrence of a majority of the Continuing Directors (as defined below), may postpone the Distribution Date and that." 13. The seventh paragraph of Exhibit C to the Rights Agreement (SUMMARY OF RIGHTS TO PURCHASE PREFERRED SHARES) is hereby amended to add the parenthetical "(or, in the case of an Existing Holder, 25%) after the reference to "20%" in the first sentence thereof. 14. The eleventh paragraph of Exhibit C to the Rights Plan (SUMMARY OF RIGHTS TO PURCHASE PREFERRED SHARES) is hereby deleted in its entirety. 15. The thirteenth paragraph of Exhibit C to the Rights Plan (SUMMARY OF RIGHTS TO PURCHASE PREFERRED SHARES) is hereby amended to delete the words ", to shorten or lengthen any time period under the Rights Agreement (so long as, under certain circumstances, a majority of Continuing Directors approve such shortening or lengthening)" in the second sentence thereof. 16. This First Amendment shall be effective as of the date hereof and, except as expressly set forth herein, the Rights Agreement shall remain in full force and effect and be otherwise unaffected hereby. 3 4 17. This First Amendment may be executed in any number of counterparts, each of which, when executed, shall be deemed to be an original and all such counterparts shall together constitute one and the same document. 4 5 IN WITNESS WHEREOF, the parties have executed this First Amendment as of the date first written above. LIBBEY INC. By: /s/ Arthur H. Smith ------------------------------- Name: Arthur H. Smith Title: Vice President, General Counsel and Secretary THE BANK OF NEW YORK By: /s/ Jeffery Grosse ------------------------------- Name: Jeffery Grosse Title: Vice President 5 EX-22 3 EXHIBIT 22 1 EXHIBIT 22 SUBSIDIARIES OF REGISTRANT Syracuse China Company - Incorporated in Delaware World Tableware Inc. - Incorporated in Delaware LGA4 Corp. - Incorporated in Delaware LGA3 Corp. - Incorporated in Delaware The Drummond Glass Company - Incorporated in Delaware Libbey Canada Inc. - Incorporated in Ontario, Canada Libbey Foreign Sales Corporation - Incorporated in Barbados Libbey Glass Inc. - Incorporated in Delaware LGFE Inc. - Incorporated in Delaware L1, Inc. - Incorporated in Delaware EX-23 4 EXHIBIT 23 1 EXHIBIT 23 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in the Registration Statement (Form S-3 No. 333-28735) of Libbey Inc. and the related Prospectus, in the Registration Statement (Form S-8 No. 33-64726) of Libbey Inc. pertaining to the Libbey Inc. Stock Purchase and Savings Program and the Libbey Inc. Supplemental Retirement Plan, in the Registration Statement (Form S-8 No. 33-80448) pertaining to the Libbey Inc. Stock Option Plan for Key Employees, in the Registration Statement (Form S-8 No. 33-98234) pertaining to the Libbey Inc. Amended and Restated Stock Option Plan For Key Employees and in the Registration Statement (Form S-8 No. 333-19459) pertaining to the Libbey Inc. Long-Term Savings Plan & Trust of our report dated January 30, 1999, with respect to the consolidated financial statements and schedule of Libbey Inc., included in the Annual Report (Form 10-K) for the year ended December 31, 1998. Ernst & Young LLP Toledo, Ohio March 30, 1999 EX-25 5 EXHIBIT 25 1 EXHIBIT 25 POWER OF ATTORNEY ----------------- KNOW ALL MEN BY THESE PRESENTS, that each of the undersigned, being a director or officer, or both, of LIBBEY INC., a Delaware corporation (the "Company"), hereby does constitute and appoint JOHN F. MEIER, RICHARD I. REYNOLDS, ARTHUR H. SMITH and KENNETH G. WILKES, with full power to each of them to act alone, as the true and lawful attorneys and agents of the undersigned, with full power of substitution and resubstitution to each of said attorneys, to execute, file or deliver any and all instruments and to do any and all acts and things which said attorneys and agents, or any of them, deem advisable to enable the Company to comply with the Securities Exchange Act of 1934, as amended, and any requirements of the Securities and Exchange Commission in respect thereto, relating to annual reports on Form 10-K, including specifically, but without limitation of the general authority hereby granted, the power and authority to sign his or her name in the name and on behalf of the Company or as a director or officer, or both, of the Company, as indicated below opposite his or her signature to annual reports on Form 10-K for the year ending December 31, 1998 or any amendment or papers supplemental thereto; and each of the undersigned hereby does fully ratify and confirm all that said attorneys and agents, or any of them, or the substitute of any of them, shall do or cause to be done by virtue hereof. IN WITNESS WHEREOF, each of the undersigned has subscribed these presents as of this 5th day of March, 1999. /s/ John F. Meir - -------------------------------- Director, Chairman of the Board and John F. Meier Chief Executive Officer /s/ Richard I. Reynolds - -------------------------------- Director, Executive Vice President and Chief Richard I. Reynolds Operating Officer /s/ Kenneth G. Wilkes - -------------------------------- Vice President, Chief Financial Officer Kenneth G. Wilkes and Treasurer /s/ William A. Foley - -------------------------------- William A. Foley Director /s/ Peter C. McC. Howell - -------------------------------- Peter C. McC. Howell Director /s/ Carol B. Moerdyk - -------------------------------- Carol B. Moerdyk Director /s/ Gary L. Moreau - -------------------------------- Gary L. Moreau Director /s/ Terence P. Stewart - -------------------------------- Terence P. Stewart Director EX-27 6 EXHIBIT 27
5 1,000 12-MOS DEC-31-1998 JAN-01-1998 DEC-31-1998 3,312 0 49,797 0 91,362 155,579 235,713 116,242 439,671 94,581 0 0 0 168 94,692 439,671 436,522 439,548 321,949 396,186 (1,493) 0 12,674 41,061 15,618 25,443 0 0 0 25,443 1.45 1.42
EX-99 7 EXHIBIT 99 1 EXHIBIT 99 SAFE HARBOR PROVISION OF THE PRIVATE SECURITIES LITIGATION ---------------------------------------------------------- REFORM ACT OF 1995 ------------------ Libbey desires to take advantage of the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995. Libbey wishes to caution readers that the following important factors, among others, could affect Libbey's actual results and could cause Libbey's actual consolidated results to differ materially from those expressed in any forward-looking statements made by, or on behalf of, Libbey. The Company is exposed to market risks due to changes in currency values, although the majority of the Company's revenues and expenses are denominated in the U.S. dollar. The currency market risks include devaluations and other major currency fluctuations relative to the U.S. dollar that could reduce the cost competitiveness of the Company's products compared to foreign competition and the effect of exchange rate changes to the value of the Mexican peso relative to the U.S. dollar and the impact of those changes on the earnings and cash flow of the Company's joint venture in Mexico, Vitrocrisa, expressed under U.S. GAAP. The Company is exposed to market risk associated with changes in interest rates in the U.S. However, the Company has entered into Interest Rate Protection Agreements ("Rate Agreements") with respect to $100.0 million of debt as a means to manage its exposure to fluctuating interest rates. The Rate Agreements effectively convert this portion of the Company's borrowings from variable rate debt to a fixed-rate basis, thus reducing the impact of interest rate changes on future income. The average interest rate for the Company's borrowings related to the Rate Agreements at December 31, 1998, was 6.48% for an average remaining period of 2.7 years. Total remaining debt not covered by the Rate Agreements has fluctuating interest rates with a weighted average rate of 5.34% at December 31, 1998. The Company had $91.2 million of debt subject to fluctuating interest rates at December 31, 1998. A change of one percentage point in such rates would result in a change in interest expense of approximately $.9 million on an annual basis. The interest rate differential to be received or paid under the Rate Agreements is being recognized over the life of the Rate Agreements as an adjustment to interest expense. If the counterparts to these Rate Agreements fail to perform, the Company would no longer be protected from interest rate fluctuations by these Rate Agreements. However, the Company does not anticipate nonperformance by the counterparts. At December 31, 1998, the 2 carrying value of the long-term debt approximates its fair value based on the Company's current incremental borrowing rates. There was a negative fair market value for the Company's Interest Rate Protection Agreements at December 31, 1998 of $2.6 million. The fair value of long-term debt is estimated based on borrowing rates currently available to the Company for loans with similar terms and maturities. The fair value of the Company's Rate Agreements is based on quotes from brokers for comparable contracts. The Company does not expect to cancel these agreements and expects them to expire as originally contracted. Other important factors potentially affecting performance include devaluations and other major currency fluctuations relative to the U.S. dollar that could reduce the cost-competitiveness of the Company's products compared to foreign competition; the inability to achieve savings and profit improvements at targeted levels in the Company's glassware sales from its capacity realignment efforts and re-engineering programs, or within the intended time periods; inability to achieve targeted manufacturing efficiencies at Syracuse China and cost synergies between World Tableware and the Company's other operations and per unit increases in the costs for natural gas, corrugated packaging, and other purchased materials; protracted work stoppages related to collective bargaining agreements; increased competition from foreign suppliers endeavoring to sell glass tableware in the United States; major slowdowns in the retail, travel or entertainment industries in the United States or Canada; and whether the Company completes any significant acquisition, and whether such acquisitions can operate profitably. Management of the Company believes it has an effective program in place to resolve the Year 2000 issue in a timely manner. Contingency plans are being developed to cover any major failures of suppliers, customers and/or systems. However, certain risk factors may affect the Company's ability to be fully Year 2000 compliant by December 31, 1999, and its information systems to operate properly into the next century. These risk factors include, but are not limited to, the availability of necessary resources, both internal and external, to install new purchased software or reprogram existing systems and complete the necessary testing. In addition, the Company cannot predict the ability of its suppliers and customers to achieve Year 2000 compliance by the end of 1999, nor the impact of either on the future operating results of the Company. The Company is dependent upon the availability of electricity, natural gas, certain raw materials, including sand and soda ash for glassware and clay for ceramic dinnerware manufacturing, to operate its factories. In addition, to operate its business, the Company is dependent upon the availability of transportation services and packaging. Any interruptions in the availability of these or other key materials or services could have a material impact on the Company. -----END PRIVACY-ENHANCED MESSAGE-----