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As filed with the Securities and Exchange Commission on July 26, 2005March 29, 2006

Registration No. 333-124824333-132480



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DCD.C. 20549


Amendment No. 21
to
FORM S-1
REGISTRATION STATEMENT
Under the Securities Act ofUNDER THE SECURITIES ACT OF 1933


RBC BEARINGS INCORPORATED

(Exact Name of Registrant as Specified in its Charter)


Delaware
(State or other jurisdiction of
incorporation or organization)

3562
(Primary Standard Industrial
Classification Code number)

95-4372080
(I.R.S. Employer
Identification No.)

One Tribology Center
Oxford, CT 06478
Telephone: (203) 267-7001

(Address, Including Zip Code, and Telephone Number, Including
Area Code, of Registrant's Principal Executive Offices)



Corporation Service Company
2711 Centerville Road
Suite 400
Wilmington, DE 19808
Telephone: (800) 927-9800
(Name, Address, Including Zip Code, and Telephone Number,
Including Area Code, of Agent for Service)

One Tribology Center
Oxford, CT 06478
Telephone: (203) 267-7001

(Address, Including Zip Code, and Telephone Number, Including Area Code, of Registrant's Principal Executive Offices)


Corporation Service Company
2711 Centerville Road
Suite 400
Wilmington, DE 19808
Telephone: (800) 927-9800

(Name, Address, Including Zip Code, and Telephone Number, Including Area Code, of Agent for Service)


Copies to:



Copies to:
Joshua N. Korff, Esq.
Kirkland & Ellis LLP
Citigroup Center
153 East 53rd Street
New York, New York 10022-4611
(212) 446-4800
 Valerie Ford Jacob, Esq.
Stuart H. Gelfond, Esq.
Fried, Frank, Harris, Shriver & Jacobson LLP
One New York Plaza
New York, New York 10004
(212) 859-8000

Approximate date of commencement of proposed sale to the public:
As soon as practicable after this Registration Statement becomes effective.


        If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933 check the following box: box.    o

        If this Form is filed to registered additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.    o

        If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.    o

        If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.    o

        If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box.    o


CALCULATION OF REGISTRATION FEE


Title of Each Class of
Securities to be Registered

 Proposed Maximum
Aggregate
Offering Price(1)

 Amount of
Registration Fee(1)

 Proposed Maximum
Aggregate
Offering Price(1)

 Amount of
Registration Fee(1)


Common Stock, par value $0.01 per share(2) $152,499,200 $17,949.16(3) $159,859,074 $17,104.92(3)

(1)
Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457(o) under the Securities Act of 1933, as amended.

(2)
Includes amount attributable to shares of Common Stock that may be purchased by the underwriters under an option to purchase additional shares.

(3)
Previously paid $17,700.10.paid.


        The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, as amended, or until this Registration Statement shall become effective on such date as the Commission, acting pursuant to such Section 8(a), may determine.




The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.

Subject to Completion
Preliminary Prospectus dated July 26, 2005
March 29, 2006

PROSPECTUS

8,288,0007,067,000 Shares

GRAPHICGRAPHIC

Common Stock


        This is RBC Bearings Incorporated's initial public offering. RBC Bearings Incorporated isWe are selling 6,273,0001,071,471 shares and certain of our stockholders are selling 2,015,0005,995,529 shares.

        We expect the public offering price to be between $14.00 and $16.00 per share. Currently, no public market exists for the shares. Our common stock has been approved for quotationshares are quoted on the Nasdaq National Market under the symbol "ROLL." On March 28, 2006, the last sale price of our shares as reported on the Nasdaq National Market was $20.74 per share.

        Investing in the common stock involves risks that are described in the "Risk Factors" section beginning on page 109 of this prospectus.


 
 Per Share
 Total
Public offering price $ $
Underwriting discount $ $
Proceeds, before expenses, to us $ $
Proceeds, before expenses, to the selling stockholders $ $

        The underwriters may also purchase up to an additional 761,5161,060,050 shares from us and up to an additional 481,684 shares from the selling stockholders, at the public offering price, less the underwriting discount, within 30 days from the date of this prospectus to cover overallotments.

        Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

        The shares will be ready for delivery on or about                        , 2005.2006.


Merrill Lynch & Co.
Sole Book-Running Manager
 

 

KeyBanc Capital Markets

Co-Lead Manager

 

JefferiesRobert W. Baird & Company, Inc.

Co.

The date of this prospectus is                        , 2005.2006.


GRAPHICGRAPHIC


GRAPHICGRAPHIC


GRAPHICGRAPHIC



TABLE OF CONTENTS

 
 Page
Prospectus Summary 1
Risk Factors 109
Disclosure Regarding Forward-Looking Statements 2320
Use of Proceeds 2522
Industry and Market Data 2623
Price Range of Our Common Stock23
Dividend Policy 26
Pre-Offering Transactions2623
Capitalization 28
Dilution29
Unaudited Pro Forma Condensed Consolidated Financial Statements3124
Selected Consolidated Historical Financial Data 3825
Management's Discussion and Analysis of Financial Condition and Results of Operations 4128
Business 6555
Management 7667
Related Party Transactions 8779
Principal and Selling Stockholders 9283
Description of Capital Stock 9585
Description of Certain Indebtedness 9787
Shares Eligible for Future Sale 10090
Material U.S. Federal Income Tax Considerations for Non-U.S. Holders 10292
Underwriting 10696
Legal Matters 109100
Experts 109100
Where You Can Find Additional Information 110101

        You should rely only on the information contained in this prospectus. We have not, and the underwriters have not, authorized any other person to provide you with different information. If anyone provides you with different or inconsistent information, you should not rely on it. We are not, and the underwriters are not, making an offer to sell these securities in any jurisdiction where the offer or sale is not permitted. You should assume that the information appearing in this prospectus is accurate only as of the date on the front cover of this prospectus. Our business, financial condition, results of operations and prospects may have changed since that date.


        In this prospectus, unless the context otherwise requires, "Company," "RBCI," "we," "our" and "us" refer to RBC Bearings Incorporated and our subsidiaries; "RBCA" refers to Roller Bearing Company of America, Inc., our wholly-owned subsidiary and principal operating company; and "Whitney" refers to Whitney & Co., LLC, our principal equity sponsor.LLC. Our fiscal year consists of 52 or 53 weeks, ending on the Saturday closest to March 31; therefore, references to "fiscal 2005," "fiscal 2004," "fiscal 2003," "fiscal 2002" and "fiscal 2001" refer to our fiscal years ended April 2, 2005, April 3, 2004, March 29, 2003, March 30, 2002 and March 31, 2001, respectively. The term Senior Credit Facility refers, collectively, to our existing $55.0 million revolving credit facility, referred to as our Revolving Credit Facility, and our $150.0 million term loan, referred to as our Term Loan.

        This prospectus contains our registered and unregistered trademarks, service marks and trade names including: "Aerocres," "Heim," "Pitchlign," "Quadlube," "RBC Bearings," "RBC Roller," "RBC Southwest Products," "Schaublin" and "Unibal." This prospectus also contains trademarks, service marks, copyrights and trade names of other companies.

i



PROSPECTUS SUMMARY

        This summary highlights information contained elsewhere in this prospectus. As a result, it does not contain all of the information that you should consider before investing in our common stock. You should read this entire prospectus, especially the section entitled "Risk Factors" and the consolidated financial statements and the related notes.


RBC Bearings Incorporated

        We are a well known international manufacturer and marketer of highly engineered precision plain, roller and ball bearings. Bearings, which are integral to the manufacture and operation of most machines and mechanical systems, reduce wear to moving parts, facilitate proper power transmission and reduce damage and energy loss caused by friction. While we manufacture products in all major bearing categories, we focus primarily on highly technical or regulated bearing products for specialized markets that require sophisticated design, testing and manufacturing capabilities. We believe our unique expertise has enabled us to garner leading positions in many of the product markets in which we primarily compete. We estimate that over one-fourth of our net sales are derived from products for which we are the sole supplier and the only manufacturer able to provide the required bearing solution. We believe that being the sole supplier for these products provides us with a competitive advantage due to the lengthy and rigorous certification processes and/or approvals required by a majority of these customers or government agencies, which typically take anywhere from six months to six years to complete, and due to our long track record with most of these customers of delivering high quality and uniquely designed and engineered products in a timely manner. We estimate that approximately two-thirds of our net sales during fiscal 2005 and during the nine month period ended December 31, 2005 were generated by products for which we hold the number one or two market position. We have been providing bearing solutions to our customers since 1919. Over the past ten years, under the leadership of our current management team, we have significantly broadened our end markets, products, customer base and geographic reach. We currently operate 16 manufacturing facilities in three countries.

        We design, manufacture and market a broad portfolio of bearing products. The following table provides a summary of our product segments:

Segment

 FY 2005 Sales
 Representative Applications
Plain Bearings $93,250 Aircraft engine controls and landing gear
   (38%) Helicopter rotors and missile launchers
     Mining and construction equipment



Roller Bearings

 

$

92,281

 


Aircraft hydraulics
   (38%) Military and commercial truck chassis
     Packaging machinery and gear pumps



Ball Bearings

 

$

41,881

 


Radar and night vision systems
   (17%) Airframe control and actuation
     Semiconductor equipment



Other

 

 

$15,604
(7%)

 


Precision ground ball screws for robotic handling and missile guidance
     Collets for machine tools
Segment

Net Sales for the
Nine Month Period Ended
December 31, 2005

Representative Applications

Plain Bearings$82,078
(41%)
•  Aircraft engine controls and landing gear
•  Helicopter rotors and missile launchers
•  Mining and construction equipment







Roller Bearings


$71,193
(36%)


•  Aircraft hydraulics
•  Military and commercial truck chassis
•  Packaging machinery and gear pumps







Ball Bearings


$33,239
(17%)


•  Radar and night vision systems
•  Airframe control and actuation
•  Semiconductor equipment







Other


$12,248
(6%)


•  Precision ground ball screws for robotic handling and missile guidance
•  Collets for machine tools

Our End Markets

        We serve a broad range of end markets where we can add value with our specialty, precision bearing applications. We classify our customers into threetwo principal categories: diversified industrial and aerospace and defense.

        Diversified Industrial (64%(55% of fiscal 2005 net sales)sales for the nine month period ended December 31, 2005).    We manufacture bearing products for a wide range of diversified industrial markets, including construction and mining, oil and natural resource extraction, heavy truck, packaging and semiconductor machinery. Our diversified industrial products target specialized market applications in which our engineering and manufacturing capabilities provide us with unique competitive advantages. We believe opportunities exist for growth and margin expansion in this market as a result of increasing demand for industrial machinery, the introduction of new products and the expansion of aftermarket sales.

        Aerospace (28%and Defense (45% of fiscal 2005 net sales)sales for the nine month period ended December 31, 2005).    We manufacture bearing products for a wide range of aerospace applications, including commercial airframes, commercial aircraft engines and private aircraft applications. We supply bearings for many of the commercial aircraft currently operating world-wide and are the primary supplier for many of our product lines. Many of our aerospace bearing products are designed and certified during the original development of the aircraft being served, which often makes us the primary bearing supplier for the life of the aircraft. We believe that growth and margin expansion in this segment will be driven primarily by expanding our international presence, new aircraft builds and the refurbishment and maintenance of existing commercial aircraft.

        Defense (8% of fiscal 2005 net sales).    We In addition, we manufacture bearing products used by the U.S. Department of Defense and certain foreign governments for use in fighter jets, troop transports, naval vessels, helicopters, gas turbine engines, armored vehicles, guided weaponry and satellites. Our bearing products are manufactured to conform to U.S. military specifications and are typically custom designed during the original product design phase which often makes us the sole or primary bearing supplier for the life of the product. We believe that our current installed base of bearing products and our sophisticated engineering and manufacturing capabilities position us to benefit from growing replacement part demand caused by increased equipment utilization as well as the introduction of new weapons and transport systems.

Our Competitive Strengths

        Leading Market Positions.    We compete in specialized markets where we believe we are often the only supplier with the manufacturing expertise, business plan and engineering resources required to provide the required bearing solution. We estimate that approximately two-thirds of our net sales during fiscal 2005 and during the nine month period ended December 31, 2005 were generated by products for which we hold the number one or two market position.

        Diversified Revenue Base.    We sell a wide array of bearing products to customers across many diverse end markets, each of which is influenced by different fundamental economic factors. Our products are sold to more than 6,1006,700 customers, including original equipment manufacturers, or OEMs, and aftermarket distributors and service providers.

        Large Installed Product Base with Recurring Aftermarket Revenue Stream.    We provide bearings to a large and growing number of applications for which our products have been tested and certified. Our bearing products are approved for over 32,000 applications, many of which are part of aerospace, defense and industrial platforms that can be in service for as long as several decades, thereby requiring continuing aftermarket support. Aftermarket sales of replacement parts for existing equipment platforms represented approximately 56% of our net sales for fiscal 2005.



        Proprietary Design and Manufacturing Capabilities.    We believe that our design and manufacturing capabilities will allow us to maintain a leadership position as our customers continue to rely on us to develop new bearing solutions that can be manufactured cost effectively.

        Disciplined Acquisition Program with History of Successful Integration.    We have demonstrated expertise in acquiring and integrating bearing and precision-engineered component manufacturers that have complementary products or distribution channels and provide significant potential for margin enhancement. Since October 1992 we have completed 1213 acquisitions which have significantly broadened our end markets, products, customer base and geographic reach. Most recently, in September 2005, we acquired the Southwest Products Company, a manufacturer of spherical bearings, journal bearings and push-pull controls for military weapon systems and military and commercial aerospace applications.

        Experienced Management Team.    Our management team possesses extensive managerial experience in the bearing industry, with our top five operating executives averaging over 20 years of bearing industry experience. We intend to retain and attract experienced professionals by leveraging our reputation as a premier provider of precision bearing solutions.

Our Growth Strategy

        We intend to grow our business while continuing to focus on specialized markets for highly engineered bearing solutions. Key elements of our growth strategy include:

        Continue to Develop Innovative Bearing Solutions.    We intend to leverage our design and manufacturing expertise and our extensive customer relationships to continue to develop new products for markets where we believe there are substantial growth opportunities. Our ability to develop new custom engineered products strengthens existing customer relationships and creates new business opportunities for us.

        Expand Customer Base and Penetrate End Markets.    We continually seek opportunities to penetrate new customers, geographic locations and bearing platforms with existing products or profitable new product opportunities. We intend to continue to expand our sales force, customer base and end markets and have identified a number of attractive growth opportunities domestically and abroad, including current projects in semiconductor machinery, airframe controls and missile guidance systems. In addition, our OEM relationships, coupled with our design expertise, provide us with extensive cross-selling opportunities on platforms that we do not currently supply.

        Increase Aftermarket Sales.    We intend to increase the percentage of our revenues derived from the replacement market by continuing to implement several initiatives. First, we will continue to seek opportunities to increase our sales to key existing distributors as well as expand our base of third party customers. Second, our new product and new end market initiatives are focused on high-growth platforms, such as 300 millimeter semiconductor manufacturing systems and the U.S. government's Joint Strike Fighter program that we expect will be in service for long periods and therefore create significant demand for replacement parts. Additionally, we will seek opportunities to develop new products that can be used as replacement parts for existing platforms. We believe that increasing our aftermarket sales of replacement parts will further enhance the continuity and predictability of our revenues and increase our profitability.

        Pursue Selective Acquisitions.    We believe that there will continue to be consolidation within the bearing industry that may present us with acquisition opportunities, particularly within the industrial and aerospace markets. We regularly evaluate opportunities to acquire bearing and precision-engineered component manufacturers which have complementary products, customers or distribution



channels, provide significant potential for margin enhancement and further expand the breadth of our product portfolio.



Whitney & Co., LLC

        Whitney & Co., LLC is our major equity sponsor and provides financial consulting and management advisory services to us. Whitney was established in 1946 by John Hay Whitney as one of the first U.S. firms involved in the development of the private equity industry. Today, Whitney remains a private firm owned by investing professionals, and its main activities are to provide private equity and debt capital for middle market growth companies. Whitney manages approximately $4 billion of assets for endowments, foundations and pension plans and is currently investing its fifth outside equity fund, Whitney V, L.P., a fund with committed capital of $1.1 billion.

Our Corporate Profile

        RBC Bearings Incorporated is a Delaware corporation, and our principal executive offices are located at One Tribology Center, Oxford, CT 06478. Our telephone number is (203) 267-7001. Our website address iswww.rbcbearings.com. Information on our website is not deemed to be a part of this prospectus.


Amendment or Replacement of Our Senior Credit Facility

        In connection with this offering we expect to amend or replace our Senior Credit Facility to provide for lower borrowing costs. The amendment or replacement of the Senior Credit Facility is contingent upon the consummation of the primary portion of this offering, but this offering is not contingent upon the amendment or replacement of the Senior Credit Facility. We are in discussions with multiple lenders regarding alternatives for reducing borrowing costs under our Senior Credit Facility, including replacing or amending the facility. Based on discussions with lenders, we expect that after giving effect to the amendment or replacement of the Senior Credit Facility, we will reduce the interest rate on our LIBOR loans by at least 125 basis points. See "Description of Certain Indebtedness—Senior Credit Facility."



The Offering


Common stock offered:

 



 
 
By us

 

6,273,0001,071,471 shares
 
By the selling stockholders

 

2,015,0005,995,529 shares

Common stock outstanding after the offering

 

15,458,83318,405,969 shares

Use of proceeds

 

We estimate that ourthe net proceeds to us from this offering without exercise of the overallotment option will be approximately $85.7$20.0 million. We intend to use these net proceeds, together with the net proceeds of approximately $38.3 million from an increase in our term loanthis offering to prepay outstanding balances under our amended and restated senior credit facility, for:




repayment of certain indebtedness, including:





all of our $38.6 million in aggregate principal amount 13% Senior Subordinated Discount Debentures due 2009 plus redemption premium;





all of our outstanding indebtedness, plus prepayment fee,Term Loan under our $45.0 million Second Lien Term Loan; and




redemption of all of our Class C preferred stock, including any accrued and unpaid dividends, for $30.5 million, and repurchase of 50% of our Class D preferred stock for $4.0 million.



Any excess proceeds will be used to reduce outstanding indebtedness or for general corporate purposes.Senior Credit Facility. We will not receive any of the proceeds from the sale of the shares of common stock by the selling stockholders, including the exercise of options and warrants by them pursuant to a net share settlement.stockholders. See "Use of Proceeds," "Pre-Offering Transactions" and "Related Party Transactions.Proceeds."

Risk factors

 

See "Risk Factors" and other information included in this prospectus for a discussion of factors you should carefully consider before deciding to invest in shares of the common stock.

Nasdaq National Market symbol

 

"ROLL"

        The number of shares of our common stock that will be outstanding after this offering as shown above is based on the number of16,976,381 shares outstanding after givingon March 29, 2006, adjusted to give effect to the Pre-Offering Transactions, the exercise of options and warrants for cash by certain selling stockholders pursuant to a net share settlement and this offering, and excludes:



        Unless otherwise specifically stated or the context otherwise requires, the information in this prospectus:

stock. See "Use of Proceeds" and "Pre-Offering Transactions.Proceeds."



Summary Financial Data

        The summary financial data for the fiscal years ended March 29, 2003, April 3, 2004 and April 2, 2005 have been derived from our historical consolidated financial statements audited by Ernst & Young LLP, independent auditors.registered public accounting firm. The summary financial data for the nine month periods ended January 1, 2005 and December 31, 2005 have been derived from our unaudited consolidated financial statements included elsewhere in this prospectus, which in our opinion contain all adjustments necessary for a fair presentation of the consolidated financial data. Results for interim periods are not necessarily indicative of results that may be expected for a full fiscal year. Historical results are not necessarily indicative of the results expected in the future. See "Use of Proceeds" and "Prospectus Summary—The Offering."

You should read the data presented below together with, and qualified by reference to, "Selected Consolidated Historical Financial Data," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our consolidated financial statements included elsewhere in this prospectus.

 
 Fiscal Year Ended
 
 
 March 29,
2003

 April 3,
2004

 April 2,
2005

 
 
  
  
 (Restated)(3)

 
 
 (in thousands, except share and per share amounts)

 
Statement of Operations Data:          
 Net sales(1)  $172,860  $187,331  $243,016 
 Cost of sales  124,086  135,433  174,602 
  
 
 
 
  Gross margin  48,774  51,898  68,414 
 Selling, general and administrative  26,647  28,107  32,749 
 Other, net  1,424  1,662  3,526 
  
 
 
 
  Operating income  20,703  22,129  32,139 
 Interest expense, net  21,023  20,380  19,669 
 Loss (gain) on early extinguishment of debt(2)  (780)   6,950 
 Other non-operating expense (income)  298  16  (355)
  
 
 
 
  Income before income taxes  162  1,733  5,875 
 Provision for (benefit from) income taxes  113  1,070  (1,385)
  
 
 
 
  Net income  49  663  7,260 
 Preferred stock dividends  (1,313) (2,144) (2,280)
 Participation rights of preferred stock in undistributed earnings      (1,142)
  
 
 
 
  Net income (loss) available to common stockholders  $(1,264) $(1,481) $3,838 
  
 
 
 
 Net income (loss) per common share:          
  Basic:          
   Class A common stock  $(0.20) $(0.24) $0.62 
   Class B common stock  $(0.20) $(0.24) $0.62 
  Diluted:          
   Class A common stock  $(0.20) $(0.24) $0.40 
   Class B common stock  $(0.20) $(0.24) $0.00 
 Weighted average number of common and common equivalent shares outstanding:          
  Basic:          
   Class A common stock  6,188,653  6,188,653  6,202,365 
   Class B common stock  250  250  250 
  Diluted:          
   Class A common stock  6,188,653  6,188,653  9,552,579 
   Class B common stock  250  250  1,302,005 
 
 Fiscal Year Ended
 Nine Months Ended
 
 
 March 29,
2003

 April 3,
2004

 April 2,
2005

 January 1,
2005

 December 31,
2005(6)

 
 
 (in thousands, except share and per share amounts)

 
Statement of Operations Data:              
 Net sales(1)  $172,860  $187,331  $243,016  $170,731  $198,758 
 Cost of sales  124,086  135,433 174,602  123,325 139,134 
  
 
 
 
 
 
  Gross margin  48,774  51,898 68,414  47,406 59,624 
 Selling, general and administrative(2)  26,647  28,107 32,749  23,261 32,325 
 Other, net  1,424  1,662 3,526  2,464 1,020 
  
 
 
 
 
 
  Operating income  20,703  22,129 32,139  21,681 26,279 
 Interest expense, net  21,023  20,380 19,669  14,335 12,582 
 Loss (gain) on early extinguishment of debt(3)  (780)  6,950  6,956 3,771 
 Other non-operating expense (income)  298  16 (355) (98) 
  
 
 
 
 
 
  Income before income taxes  162  1,733 5,875  488 9,926 
 Provision for (benefit from) income taxes  113  1,070 (1,385) 180 3,442 
  
 
 
 
 
 
  Net income  49  663 7,260  308 6,484 
 Preferred stock dividends  (1,313) (2,144)(2,280) (1,693)(893)
 Participation rights of preferred stock in undistributed earnings     (1,142) (687)(630)
  
 
 
 
 
 
  Net income (loss) available to common stockholders  $(1,264) $(1,481)$    3,838  $(2,072)$    4,961 
  
 
 
 
 
 
 
Net income (loss) per common share:(4)

 

 

 

 

 

 

 

 

 

 

 

 

 

 
  Basic  $(0.20) $(0.24)$      0.62  $(0.33)$      0.43 
  Diluted  $(0.20) $(0.24)$      0.35  $(0.33)$      0.37 
 Weighted average common shares:(4)              
  Basic  6,188,903  6,188,903 6,202,615  6,188,903 11,649,073 
  Diluted  6,188,903  6,188,903 10,854,584  6,188,903 13,307,181 

Other Financial Data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 
 EBITDA(5)  $29,224  $31,295 $  41,279  $29,123 $  33,417 
 Capital expenditures  6,522  4,951 9,526  6,604 7,772 

 
 Fiscal Year Ended
 
 March 29,
2003

 April 3,
2004

 April 2,
2005

 
 (in thousands, except share and per share amounts)

Pro Forma Data:(4)        
 Pro forma net income          $10,765
 Pro forma net income per common share:        
  Basic       $    0.70
  Diluted       $    0.62
 Pro forma weighted average number of common and common equivalent shares outstanding:        
  Basic       15,458,833
  Diluted       17,421,506

Other Financial Data:

 

 

 

 

 

 

 

 
 EBITDA(5)    $29,224    $31,295    $41,279
 Capital expenditures  6,522  4,951 9,526
 
 As of April 2, 2005
 
 Actual
 Pro Forma(4)
 
 (in thousands)

Balance Sheet Data:      
 Cash $2,635 $6,802
 Working capital  120,656  130,325
 Total assets  250,169  261,481
 Total debt  220,079  177,130
 Total stockholders' equity (deficit)  (7,759) 46,502
 
 As of December 31, 2005(6)
 
 Actual
 As Adjusted
 
 (in thousands)

Balance Sheet Data:      
 Cash $10,312 $10,312
 Working capital  148,386  148,386
 Total assets  271,424  271,424
 Total debt  169,030  148,868
 Total stockholders' equity  61,972  82,134

(1)
Net sales were $243.0 million in fiscal 2005 compared to $187.3 million in fiscal 2004, an increase of $55.7 million. Net sales in the compared periods included net sales of $19.3 million in fiscal 2005 and $6.1 million in fiscal 2004 for RBC-API, which was acquired in December 2003.

(2)
Selling, general and administrative expense for the nine months ended December 31, 2005 included non-recurring compensation expense of $5.2 million. See "Related Party Transactions—Dr. Hartnett Settlement Bonus."

(3)
Loss on early extinguishment of debt of $7.0 million in fiscal 2005 included $4.3 million for non-cash write-off of deferred financing fees associated with retired debt, $1.8 million of redemption premium and $0.9 million of accrued interest for the 30 day30-day call period related to the early extinguishment of $110.0 million of 95/8% senior subordinated notes in July 2004.

(3)
As more fully disclosed Loss on early extinguishment of debt of $3.8 million in Note 21 to the consolidated financial statements, certain amountsnine months ended December 31, 2005 included $1.6 million for fiscal 2005 have been restated to reflect a changenon-cash write-off of deferred financing fees and unamortized bond discount associated with respect toretired debt, $1.3 million of redemption premium associated with the fiscal 2005 stock-based compensation expense calculation. The impact of the restatement on net income was to increase net income for fiscal 2005 from $7,083 to $7,260, or 2.5%.

(4)
Assumes the following transactions were effected as of April 4, 2004 with respect to the Pro Forma Statement of Operations Data, and as of April 2, 2005 with respect to the Pro Forma Balance Sheet Data, presented above: (1) the Pre-Offering Transactions, (2) the sale by us of 6,273,000 shares in this offering at an assumed initial public offering price of $15.00 per share, (3) the repaymentretirement of all of our $38.613% discount debentures in September 2005, $0.5 million of prepayment fees related to the prepayment of all of the outstanding balance under our second lien term loan in August 2005 and $0.4 million in aggregate principal amountinterest expense for the 30-day call period related to the early extinguishment of our 13% Senior Subordinated Discount Debentures due 2009, discount debentures.

(4) the repayment
Amounts shown for periods prior to August 15, 2005 include shares of both class A common stock and class B common stock, all outstanding indebtedness underof which were reclassified into common stock on a one-for-one basis in connection with our $45.0 million Second Lien Term Loan; and (5) the Refinancing Transaction. In addition, pro forma amounts have been adjusted to reflect the exerciseinitial public offering as of options and warrants by some of the selling stockholders with respect to shares to be sold in the offering. These selling stockholders will exercise these options or warrants through a net share settlement. See "Unaudited Pro Forma Condensed Consolidated Financial Statements," "Pre-Offering Transactions," "Use of Proceeds" and "Prospectus Summary—The Offering."such date.

(5)
EBITDA consists of net income (loss), plus interest expense, net, loss (gain) on early extinguishment of debt, provision for (benefit from) income taxes and depreciation and amortization. EBITDA is not a measure of operating performance under generally accepted accounting principles in the United States, or GAAP, and should not be considered as an alternative or substitute for GAAP profitability measures such as operating earnings (loss) from continuing operations, discontinued operations, extraordinary items and net income (loss). EBITDA as an operating performance measure has material limitations since it excludes, among other things, the statement of operations impact of depreciation and

 
 Fiscal Year Ended
 
 
 March 31,
2001

 March 30,
2002

 March 29,
2003

 April 3,
2004

 April 2,
2005

 
 
 (in thousands)

 
Net income $3,615 $1,669 $49 $663 $7,260 
Add:                
 Provision for (benefit from) income taxes  2,326  2,052  113  1,070  (1,385)
 Interest expense, net  23,335  23,440  21,023  20,380  19,669 
 Loss (gain) on early extinguishment of debt      (780)   6,950 
 Depreciation and amortization  8,641  9,105  8,819  9,182  8,785 
  
 
 
 
 
 
EBITDA $37,917 $36,266 $29,224 $31,295 $41,279 
  
 
 
 
 
 

 
 Fiscal Year Ended
 Nine Months Ended
 
 March 31,
2001

 March 30,
2002

 March 29,
2003

 April 3,
2004

 April 2,
2005

 January 1,
2005

 December 31,
2005

 
 (in thousands)

Net income $3,615 $1,669 $49 $663 $7,260 $308 $6,484
Add:                     
 Provision for (benefit from) income taxes  2,326  2,052  113  1,070  (1,385) 180  3,442
 Interest expense, net  23,335  23,440  21,023  20,380  19,669  14,335  12,582
 Loss (gain) on early extinguishment of debt      (780)   6,950  6,956  3,771
 Depreciation and amortization  8,641  9,105  8,819  9,182  8,785  7,344  7,138
  
 
 
 
 
 
 
EBITDA $37,917 $36,266 $29,224 $31,295 $41,279 $29,123 $33,417
  
 
 
 
 
 
 
(6)
Amounts for the nine month period ended December 31, 2005 reflect the consummation of our initial public offering in August 2005, which included: (1) the sale by us of 7,034,516 shares at the offering price of $14.50 per share, (2) the repayment of all of our $38.6 million in aggregate principal amount of 13% senior subordinated discount debentures due 2009, (3) the repayment of all outstanding indebtedness under our $45.0 million second lien term loan, (4) the addition of $40.0 million to our Term Loan and (5) the redemption of all of our then outstanding Class C and Class D preferred stock for an aggregate redemption price of $38.6 million. As adjusted amounts as of December 31, 2005 reflect this offering and the use of proceeds therefrom. See "Use of Proceeds" and "Capitalization."


MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

        The following discussion should be read in conjunction with the "Selected Consolidated Historical Financial Data," "Description of Certain Indebtedness" and our consolidated financial statements and the related notes included elsewhere in this prospectus. This prospectus contains, in addition to historical information, forward-looking statements that include risks, uncertainties and assumptions. See "Disclosure Regarding Forward-Looking Statements" for information about our presentation of forward-looking information in this prospectus. Factors that could cause such differences include those described under "Risk Factors."

Overview

        We are a well known international manufacturer of highly engineered precision plain, roller and ball bearings. Our precision solutions are integral to the manufacture and operation of most machines and mechanical systems, reduce wear to moving parts, facilitate proper power transmission and reduce damage and energy loss caused by friction. While we manufacture products in all major bearing categories, we focus primarily on the higher end of the bearing market where we believe our value added manufacturing and engineering capabilities enable us to differentiate ourselves from our competitors and enhance profitability. We estimate that approximately two-thirds of our net sales during fiscal 2005 and during the nine month period ended December 31, 2005 were generated by products for which we hold the number one or two market position. We have been providing bearing solutions to our customers since 1919. Over the past ten years, under the leadership of our current management team, we have significantly broadened our end markets, products, customer base and geographic reach. We currently operate 16 manufacturing facilities in three countries.

        Demand for bearings generally follows the market for products in which bearings are incorporated and the economy as a whole. Purchasers of bearings include industrial equipment and machinery manufacturers, producers of commercial and military aerospace equipment such as missiles and radar systems, agricultural machinery manufacturers, construction and specialized equipment manufacturers and automotive and commercial truck manufacturers. The markets for our products are cyclical, and general market conditions could negatively impact our operating results. We have endeavored to mitigate the cyclicality of our product markets by entering into sole-source relationships and long-term purchase orders, through diversification across multiple market segments within the aerospace and defense and diversified industrial segments, by increasing sales to the aftermarket and by focusing on developing highly customized solutions.

        During fiscal 2005 and through the first nine months of fiscal 2006, the world economy continued to emerge from the slowdown experienced from 2000 to 2003, and we experienced favorable conditions across our threetwo major markets: diversified industrial and aerospace and defense. In particular the economy of our diversified industrial market has been driven by strong requirements in non-residential construction, mining and the oil and gas sectors. These conditions have resulted in robust demand for bearings for both OEM and replacement markets. In the aerospace market a very strong recovery began, and we believe it is at its early stages.to mid-stages. Expansion of the commercial aircraft sector, in response to increased passenger demand and the need of the carriers to upgrade the worldwide fleet, drove increased build schedules at Boeing and Airbus. In addition, demand for corporate aircraft remained strong.strong in fiscal 2005 and through the first nine months of fiscal 2006. The defense sector continued to replace and develop its weapons and cargo platforms. This sector demonstrated increased requirements for replacement bearings for combat systems strained by extensive use in harsh environments over the past 31/24 years. For fiscal yearthe nine month period ended December 31, 2005, approximately one-fifth21% of our revenues were derived from sales directly or indirectly outside the U.S. We expect this component of our business to increase in response to our emphasis on continued penetration of foreign markets, particularly those in aerospace and defense. These factors have resulted in favorable customer order volume resulting in total order bookings for fiscal 2005 of $281.8 million, an increase of $91.3 million, or 47.9%, compared to $190.5 million for the


comparable period last year. Excluding our RBC-API unit acquired from The Timken Company in December 2003, total order bookings for fiscal 2005, were $256.2 million, an increase of $68.0 million, or 36.1%, compared to $188.2 million for fiscal 2004.

        Approximately 30% of our costs are attributable to raw materials, a majority of which are related to steel and related products. During the past 24 months,two years, steel prices have increased to historically high levels, responding to unprecedented levels of world demand. To date, we have generally been able to pass through these costs to our customers through price increases and the assessment of surcharges, although there can be a time lag of up to 12 weeks.weeks or more.

        Competition in specialized bearing markets is based on engineering design, brand, lead times and reliability of product and service. These markets are generally not as price sensitive as the markets for standard bearings.

        We have demonstrated expertise in acquiring and integrating bearing and precision-engineered component manufacturers that have complementary products or distribution channels and provide significant potential for margin enhancement. We have consistently increased the profitability of acquired businesses through a process of methods and systems improvement coupled with the introduction of complementary and proprietary new products. Since October 1992 we have completed 1213 acquisitions which have significantly broadened our end markets, products, customer base and geographic reach.

Sources of Revenue

        Revenue is generated primarily from sales of bearings to the diversified industrial market and the aerospace market and the defense market.markets. Sales are often made pursuant to sole-source relationships, long-term agreements and purchase orders with our clients. We recognize revenues principally from the sale of products at the point of passage of title, which is at the time of shipment. In certain instances, however, we recognize revenues under the contract method of accounting.

        Sales to the diversified industrial market accounted for 64%55% of our net sales for fiscalthe nine month period ended December 31, 2005. Sales to the aerospace and defense markets accounted for 36%45% of our net sales for the same period. We anticipate that sales to the aerospace and defense markets will increase as a percentage of our net sales.

        Aftermarket sales of replacement parts for existing equipment platforms represented approximately 56% of our net sales for fiscal 2005. We continue to develop our OEM relationships which have established us as a leading supplier on many important aerospace and defense platforms. Over the past several years, we have experienced increased demand from the replacement parts market, particularly within the aerospace and defense sectors; one of our business strategies has been to increase the proportion of sales derived from this segment. We believe these activities increase the stability of our revenue base, strengthen our brand identity and provide multiple paths for revenue growth.

        Approximately one-fifth21% of our net sales were derived from sales directly or indirectly outside the U.S. for fiscal 2005 and for the first nine months of fiscal 2006, an increase from 19% infrom fiscal 2004. We expect that this proportion will increase as we seek to increase our penetration of foreign markets, particularly within the aerospace and defense sectors. In fiscal 2005 and for the nine month period ended December 31, 2005, our top ten customers, sixfour of which were OEMs and the remaining foursix were distributors, generated 32% and 34% of our net sales.sales, respectively. Out of the 32%34% of net sales generated by our top ten customers during fiscalthe nine month period ended December 31, 2005, 19%22% of net sales was generated by our top four customers. No single customer was responsible for generating more than 5%6% of our net sales for the same period.

Cost of Revenues

        Cost of sales includes employee compensation and benefits, materials, outside processing, depreciation of manufacturing machinery and equipment, supplies and manufacturing overhead.



        During fiscal 2005 and during the first nine months of fiscal 2006, our gross margin was impacted by rising raw material prices, in particular, steel and related products. In response, we have, to date, managed to pass on the majority of these price increases of raw materials to our customers through steel surcharges assessed on, or price increases of, our bearing products. However, we have from time to time experienced a time lag of up to 12 weeks or more in our ability to pass through steel surcharges to our customers, which has negatively impacted our gross margin. We will continue to pass on raw material price increases as competitive conditions allow.

        We have not been significantly impacted by recent increases in energy prices because energy costs, the most significant component of which is natural gas used in heat treating operations, represent less than 4% of our overall costs.

        We monitor gross margin performance through a process of monthly operation management reviews. We will develop new products to target certain markets allied to our strategies by first understanding volume levels and product pricing and then constructing manufacturing strategies to achieve defined margin objectives. We only pursue product lines where we believe that the developed manufacturing process will yield the targeted margins. Management monitors gross margins of all product lines on a monthly basis to determine which manufacturing processes or prices should be adjusted.

Selling, General and Administrative Expenses

        Selling, general and administrative, or SG&A, expenses relate primarily to the compensation and associated costs of selling, general and administrative personnel, professional fees, insurance, facility costs and information technology. We expect SG&A expenses will increase in absolute terms as we increase our sales efforts and incur increased costs related to the anticipated growth of our business and the additional costs associated with operating as a public company.

Results of Operations

        The following table sets forth the various components of our consolidated statements of operations, expressed as a percentage of net sales, for the periods indicated that are used in connection with the discussion herein.herein:


 Fiscal Year Ended
  Fiscal Year Ended
 Nine Months Ended
 

 March 29,
2003

 April 3,
2004

 April 2,
2005

  March 29,
2003

 April 3,
2004

 April 2,
2005

 January 1,
2005

 December 31,
2005

 
Statement of Operations Data:                  
Net sales 100.0%100.0%100.0% 100.0%100.0%100.0%100.0%100.0%
Gross margin 28.2 27.7 28.2  28.2 27.7 28.2 27.8 30.0 
Selling, general and administrative 15.4 15.0 13.5  15.4 15.0 13.5 13.6 16.3 
Other, net 0.8 0.9 1.5  0.8 0.9 1.5 1.5 0.5 
 
 
 
  
 
 
 
 
 
Operating income 12.0 11.8 13.2  12.0 11.8 13.2 12.7 13.2 

Interest expense, net

 

12.2

 

10.9

 

8.1

 
 12.2 10.9 8.1 8.4 6.3 
Loss (gain) on early extinguishment of debt (0.5) 2.9  (0.5) 2.9 4.1 1.9 
Other non-operating expense (income) 0.2 0.0 (0.2) 0.2 0.0 (0.2)(0.1) 
 
 
 
  
 
 
 
 
 
Income before income taxes 0.1 0.9 2.4  0.1 0.9 2.4 0.3 5.0 
Provision for (benefit from) income taxes 0.1 0.6 (0.6) 0.1 0.6 (0.6)0.1 1.7 
 
 
 
  
 
 
 
 
 
Net income 0.0 0.3 3.0  0.0 0.3 3.0 0.2 3.3 
 
 
 
  
 
 
 
 
 

        We have four reportable product segments: Plain Bearings, Roller Bearings, Ball Bearings and Other. Other consists primarily of precision ball screws and machine tool collets. The following table shows our net sales and operating income with respect to each of our reporting segments plus Corporate for the last three fiscal years:years and for the nine months ended January 1, 2005 and December 31, 2005:



 Fiscal Year Ended
 
 Fiscal Year Ended
 Nine Months Ended
 


 March 29, 2003
 April 3, 2004
 April 2, 2005
 
 March 29,
2003

 April 3,
2004

 April 2,
2005

 January 1,
2005

 December 31,
2005

 


 (in thousands)

 
 (in thousands)

 
Net External SalesNet External Sales       Net External Sales           
Plain $67,448 $77,578 $93,250 Plain $67,448 $77,578 $93,250 $66,650 $82,078 
Roller 60,788 63,106 92,281 Roller 60,788 63,106 92,281 64,643 71,193 
Ball 34,038 35,801 41,881 Ball 34,038 35,801 41,881 28,357 33,239 
Other 10,586 10,846 15,604 Other 10,586 10,846 15,604 11,081 12,248 
 
 
 
   
 
 
 
 
 
Total $172,860 $187,331 $243,016 Total $172,860 $187,331 $243,016 $170,731 $198,758 
 
 
 
   
 
 
 
 
 
Operating IncomeOperating Income       Operating Income           
Plain $16,782 $18,573 $22,647 Plain $16,782 $18,573 $22,647 $16,278 $21,441 
Roller 8,459 11,259 17,030 Roller 8,459 11,259 17,030 10,550 16,660 
Ball 7,009 6,676 9,070 Ball 7,009 6,676 9,070 5,619 7,747 
Other 1,779 378 797 Other 1,779 378 797 860 1,232 
Corporate (13,326) (14,757) (17,405)Corporate (13,326) (14,757) (17,405) (11,626) (20,801)
 
 
 
   
 
 
 
 
 
Total $20,703 $22,129 $32,139 Total $20,703 $22,129 $32,139 $21,681 $26,279 
 
 
 
   
 
 
 
 
 

        The following table summarizes our net sales, by destination, for the periods shown:

 
 Fiscal Year Ended
 
 March 29, 2003
 April 3, 2004
 April 2, 2005
 
 (in thousands)

Geographic Revenues         
 Domestic $155,579 $166,763 $215,381
 Foreign  17,281  20,568  27,635
  
 
 
 Total $172,860 $187,331 $243,016
  
 
 
 
 Fiscal Year Ended
 Nine Months Ended
 
 March 29,
2003

 April 3,
2004

 April 2,
2005

 January 1,
2005

 December 31,
2005

 
 (in thousands)

Geographic Revenues               
 Domestic $155,579 $166,763 $215,381 $151,158 $177,003
 Foreign  17,281  20,568  27,635  19,573  21,755
  
 
 
 
 
 Total $172,860 $187,331 $243,016 $170,731 $198,758
  
 
 
 
 

        For additional information concerning our business segments, see note 10 to our interim unaudited financial statements for the quarterly period ended December 31, 2005 and Note 20 to our Consolidated Financial Statements.Statements for the fiscal year ended April 2, 2005.

        Net Sales.    Net sales for the nine month period ended December 31, 2005 were $198.8 million, an increase of $28.1 million, or 16.5%, compared to $170.7 million for the comparable period in fiscal 2005. During the nine month period ended December 31, 2005, we experienced net sales growth in each of our four segments, driven by strong demand across end markets as well as continued efforts to supply new products to existing and new customers. Overall, net sales to diversified industrial customers grew 8.1% in the nine month period of fiscal 2006 compared to the same period last year. This was principally driven by aftermarket and OEM demand in construction, mining, semiconductor and general


industrial applications. Net sales to aerospace and defense customers grew 28.8% in the nine month period of fiscal 2006 compared to the same period last year, driven mainly by commercial and military aerospace aftermarket and OEM demand.

        Our Plain Bearing segment achieved net sales of $82.1 million for the nine month period ended December 31, 2005, an increase of $15.4 million, or 23.1%, compared to $66.7 million for the comparable period in the prior year. Net sales to diversified industrial customers accounted for $6.3 million of the increase, driven primarily by strong demand in the construction and mining heavy equipment sectors, general industrial applications and strong aftermarket demand. The commercial and military aerospace market accounted for $9.1 million of the increase due to an increase in airframe and aerospace bearing shipments to aircraft manufacturers and continued demand for aftermarket product.

        Our Roller Bearing segment achieved net sales of $71.2 million for the nine month period ended December 31, 2005, an increase of $6.6 million, or 10.2%, compared to $64.6 million for the comparable period in the prior year. $1.9 million of this increase was attributable to sales to customers in the industrial market and from strong demand from mining, construction equipment and general industrial applications. The aerospace and defense market accounted for the remaining $4.7 million of the increase, driven primarily by increasing build rates and maintenance requirements for commercial and military aircraft.

        Our Ball Bearing segment achieved net sales of $33.2 million for the nine month period ended December 31, 2005, an increase of $4.8 million, or 16.9%, compared to $28.4 million for the comparable period in the prior year. The increase was driven principally by increased demand from airframe, electro-optical, and satellite and communications applications and increased penetration of the airframe market. Sales to our customers in the industrial market were flat year over year.

        Our Other segment, which is focused mainly on the sale of precision ball screws and machine tool collets, achieved net sales of $12.2 million for the nine month period ended December 31, 2005, an increase of $1.1 million, or 9.9%, compared to $11.1 million for the same period last year. This increase was primarily due to increased sales of machine tool collets as a result of increased penetration of the U.S. machine tool collets market and due to increasing overall market demand, both in Europe and the U.S.

        Gross Margin.    Gross margin was $59.6 million, or 30.0% of net sales, for the nine month period ended December 31, 2005, versus $47.4 million, or 27.8% of net sales, for the comparable period in fiscal 2005. The increase in our gross margin as a percentage of net sales was primarily the result of an overall increase in volume, slightly higher prices and increased manufacturing efficiency.

        Selling, General and Administrative.    SG&A expenses increased by $9.0 million, or 38.6%, to $32.3 million for the nine month period ended December 31, 2005 compared to $23.3 million for the same period in fiscal 2005. The $9.0 million increase was primarily due to non-recurring compensation expense of $5.2 million, stock option compensation expense of $0.2 million, professional service fees associated with the implementation of Sarbanes-Oxley 404 of $0.3 million, an increase in personnel necessary to support increased volume, higher professional service fees and additional costs associated with being a public company. As a percentage of net sales, SG&A was 16.2% for the nine month period ended December 31, 2005 compared to 13.6% for the comparable period in fiscal 2005. SG&A, excluding non-recurring compensation expense of $5.2 million and stock option compensation expense of $0.2 million, was 13.5% of net sales for the nine month period ended December 31, 2005 compared to 13.4% for the comparable period in fiscal 2005.

        Other, net.    Other, net for the nine month period ended December 31, 2005 was $1.0 million compared to $2.5 million for the comparable period in fiscal 2005. For the nine month period ended December 31, 2005, other, net included amortization of intangibles of $0.5 million, $0.2 million of non-recurring management fees and $0.3 million of bad debt expense. For the nine month period



ended January 1, 2005, other, net consisted of amortization of intangibles of $0.3 million, $0.3 million of management fees, losses on fixed asset disposals of $1.8 million and $0.1 million of other expenses.

        Operating Income.    Operating income was $26.3 million, or 13.2% of net sales, for the nine month period ended December 31, 2005 compared to $21.7 million, or 12.7% of net sales, for the nine month period ended January 1, 2005. Operating income excluding stock option expense of $0.2 million, non-recurring compensation expense of $5.2 million, and non-recurring management fees of $0.2 million was $31.9 million or 16.0% of net sales. Operating income for the Plain Bearing segment was $21.4 million for the nine month period ended December 31, 2005, or 26.1% of net sales, compared to $16.3 million for the same period last year, or 24.4% of net sales. The Roller Bearing segment achieved an operating income for the nine month period ended December 31, 2005 of $16.7 million, or 23.5% of net sales, compared to $10.6 million, or 16.4% of net sales, for the nine month period ended January 1, 2005. The Ball Bearing segment achieved an operating income of $7.7 million, or 23.2% of net sales, for the nine month period ended December 31, 2005, compared to $5.6 million, or 19.7% of net sales, for the comparable period in fiscal 2005. The Other segment achieved an operating income of $1.2 million, or 9.8% of net sales, for the nine month period ended December 31, 2005, compared to $0.9 million or 8.1% of net sales, for the comparable period in fiscal 2005. The increase in operating income in each of the segments was driven primarily by an increase in net sales. In addition, operating income as a percentage of net sales increased for each of the segments primarily as a result of leveraging fixed cost base over higher net sales.

        Interest Expense, net.    Interest expense, net decreased by $1.7 million to $12.6 million for the nine month period ended December 31, 2005, compared to $14.3 million for the nine month period ended January 1, 2005. Amortization of deferred financing costs and debt discount are recorded as a component of net interest expense. Amortization expenses included in interest expense, net were $0.6 million for the nine month period ended December 31, 2005 compared to $0.9 million for the nine month period ended January 1, 2005.

        Loss on Early Extinguishment of Debt.    For the nine month period ended December 31, 2005, loss on early extinguishment of debt of $3.8 million included $1.6 million for non-cash write-off of deferred financing fees and unamortized bond discount associated with retired debt, $1.3 million of redemption premium associated with the redemption of all of our 13% discount debentures in September 2005, $0.5 million prepayment fees related to the prepayment of all of the outstanding balance under our second lien term loan in August 2005 and $0.4 million in interest expense for the 30-day call period related to the early extinguishment of our 13% discount debentures. For the nine month period ended January 1, 2005, loss on early extinguishment of debt of $7.0 million included $4.3 million for non-cash write-off of deferred financing fees associated with retired debt, $1.8 million of redemption premium and $0.9 million in interest expense for the 30-day call period related to the early extinguishment of our $110.0 million of 95/8% senior subordinated notes in July 2004.

        Income Before Income Taxes.    Income before taxes was $9.9 million for the nine month period ended December 31, 2005 compared to income before taxes of $0.5 million for the nine month period ended January 1, 2005.

        Income Taxes.    Income tax expense for the nine month period ended December 31, 2005 was $3.4 million compared to an expense of $0.2 million for the nine month period ended January 1, 2005. The effective income tax rate for the nine month period ended December 31, 2005 was 34.7% compared to an income tax rate of 36.9% for the nine month period ended January 1, 2005. The change in the effective income tax rates from period to period is mostly due to changes in the allocation between domestic and foreign earnings, primarily the result of the loss on early extinguishment of debt and the one-time compensation payment.



        Net Income.    Net income was $6.5 million for the nine month period ended December 31, 2005 compared to net income of $0.3 million for the nine month period ended January 1, 2005.

        Net Sales.    Our net sales for fiscal 2005 were $243.0 million, an increase of $55.7 million, or 29.7%, compared to $187.3 million for fiscal 2004. During fiscal 2005, we experienced net sales growth in each of our four segments, driven by strong demand across our end markets as well as our continued efforts to supply new products to existing and new customers. Overall, we experienced significant growth in net sales to our diversified industrial and aerospace customers, driven principally by increased build rates of industrial machinery and commercial and military aircraft, respectively. We believe these trends will continue for the near future and we believe opportunities exist for our expansion within each of these markets. In particular, we expect to benefit from the current acceleration in aerospace build rates and anticipate that net sales from the aerospace market will represent a larger percentage of our overall net sales going forward.


        Our Plain Bearing segment achieved net sales of $93.3 million for fiscal 2005, an increase of $15.7 million, or 20.2%, compared to $77.6 million for the prior year. Net sales to our diversified industrial customers accounted for $9.0 million of the increase, driven primarily by strong demand in the construction and mining heavy equipment sectors, strong aftermarket demand for rail products, and several new product introductions we made during the year targeted at both existing and new customers. The commercial and military aerospace market accounted for $8.2 million of the increase due to an increase in airframe and aerospace engine bearing shipments resulting from better penetration of existing customers and a number of new contract wins as well as recovering build rates and maintenance requirements for commercial aircraft. Direct sales to the defense market decreased by $1.5 million due to exceptionally strong demand in the last six months of fiscal 2004 compared to the same period for fiscal 2005.

        Our Roller Bearing segment achieved net sales of $92.3 million for fiscal 2005, an increase of $29.2 million, or 46.2%, compared to $63.1 million for the prior year. $13.2 million of the increase was attributable to the inclusion of a full year of results for the RBC-API business unit which was purchased in December 2003. Excluding RBC-API, net sales for the Roller Bearing segment were $73.0 million for fiscal 2005, an increase of $16.0 million, or 28.1%, compared to $57.0 million for fiscal 2004. $14.8 million of this increase was attributable to sales to our customers in the industrial market, where we have selectively increased our penetration of the class 8 truck market, and benefited from strong demand from mining, construction equipment and general industrial applications. The aerospace market accounted for the remaining $1.2 million of the increase, driven primarily by increasing build rates and maintenance requirements for military aircraft.

        Our Ball Bearing segment achieved net sales of $41.9 million for fiscal 2005, an increase of $6.1 million, or 17.0%, compared to $35.8 million for the prior year. $3.4 million of the increase was attributable to sales to our customers in the industrial market, driven primarily by increased demand from semiconductor applications and by increased demand from industrial distributors for aftermarket parts. Commercial and military aerospace accounted for the remaining $2.7 million of the increase, driven principally by increased demand from airframe, electro-optical, and satellite and communications applications and our increased penetration of the airframe market.

        Our Other segment, which is focused mainly on the sale of precision ball screws and machine tool collets, achieved net sales of $15.6 million, an increase of $4.8 million, or 43.9%, compared to $10.8 million for the same period last year. This increase was primarily due to increased sales of our machine tool collets as a result of our increased penetration of the U.S. machine tool collet market and due to increasing overall market demand.



        Gross Margin.    Our gross margin was $68.4 million, or 28.2% of net sales, for fiscal 2005, versus $51.9 million, or 27.7% of net sales, for fiscal 2004. The increase in our gross margin as a percentage of net sales was primarily the result of an overall increase in volume, slightly higher prices, and a shift in mix toward higher margin products, partially offset by increased raw material and labor costs which negatively impacted gross margin by 4.0%. We were able to grow our gross margin percentage through price increases and raw material surcharges to customers which offset the impact of raw material price increases of up to 40%.

��        Selling, General and Administrative.    Our SG&A expenses increased by $4.6 million, or 16.5%, to $32.7 million for fiscal 2005 compared to $28.1 million for fiscal 2004. Excluding the RBC-API acquisition, SG&A increased by $4.1 million in fiscal 2005, or 14.7%, compared to fiscal 2004. The $4.1 million increase was primarily due to an increase in personnel necessary to support our increased volume, higher professional service fees and $0.4 million of compensation expense recorded for the intrinsic value of options issued during fiscal 2005. As a percentage of net sales, SG&A declined to 13.5% for fiscal 2005 compared to 15.0% for fiscal 2004. The decline was primarily due to continued control of fixed costs and controlled expansion of headcount. We expect our SG&A to remain relatively



constant as a percentage of net sales over the next few years, including the anticipated costs associated with operating as a public company.

        Other, net.    Other, net for fiscal 2005 was $3.5 million compared to $1.7 million for fiscal 2004. For fiscal 2005, other, net included an expense of $2.0 million for the disposal of manufacturing fixed assets, $0.5 million of Whitney management fees, $0.5 million of bad debt expense and $0.6 million of other expenses. For fiscal 2004, other, net consisted of $0.5 million of Whitney management fees, fixed asset disposals of $0.2 million, $0.4 million of acquisition costs and $0.5 million of other expenses.

        Operating Income.    Operating income was $32.1 million, or 13.2% of net sales, for fiscal 2005 compared to $22.1 million, or 11.8% of net sales for fiscal 2004. Operating income for the Plain Bearing segment was $22.6 million, or 24.3% of net sales, compared to the prior year's $18.6 million, or 23.9% of net sales. Our Roller Bearing segment achieved an operating income of $17.0 million, or 18.5% of net sales, compared to $11.3 million, or 17.8% of net sales, for the prior year, owing primarily to the full year inclusion of RBC-API. Our Ball Bearing segment achieved an operating income of $9.1 million, or 21.7% of net sales, for fiscal 2005, compared to $6.7 million, or 18.6% of net sales, for fiscal 2004. Our Other segment achieved an operating income of $0.8 million, or 5.1% of net sales, for fiscal 2005, compared to $0.4 million, or 3.5% of net sales, for fiscal 2004. The increase in operating income in each of our segments was driven primarily by an increase in net sales. In addition, our operating income as a percentage of net sales increased for each of our segments primarily as a result of leveraging our fixed cost base over higher net sales.

        Interest Expense, net.    Interest expense, net decreased by $0.7 million to $19.7 million for fiscal 2005 compared to $20.4 million for fiscal 2004. Amortization of deferred financing costs and debt discount are recorded as a component of net interest expense. Amortization expenses included in interest expense, net were $1.1 million for fiscal 2005 compared to $1.6 million for fiscal 2004.

        Loss on Early Extinguishment of Debt.    For fiscal 2005, loss on early extinguishment of debt of $7.0 million included $4.3 million for non-cash write-off of deferred financing fees associated with retired debt, $1.8 million of redemption premium and $0.9 million in interest expense for the 30 day30-day call period related to the early extinguishment of our $110.0 million of 95/8% senior subordinated notes in July of 2004.

        Income Before Income Taxes.    Income before taxes increased by $4.2 million, to $5.9 million in fiscal 2005 compared to $1.7 million in fiscal 2004 primarily as a result of higher gross margin, partially offset by higher operating expenses, disposal of manufacturing fixed assets, and loss on extinguishment of debt.



        Income Taxes.    Income tax for fiscal 2005 provided a benefit of $1.4 million compared to an expense of $1.1 million for fiscal 2004. Our effective income tax rate for fiscal 2005 was a benefit of 23.6% compared to an effective rate of 61.7% for fiscal 2004. In fiscal 2005, the income tax benefit was impacted predominantly by the reduction of income tax expense by $3.8 million for the undistributed earnings of our foreign subsidiaries on which income taxes were previously recorded. We have reassessed our needs internationally and have determined that our undistributed foreign earnings of approximately $18.0 million as of April 2, 2005 will be re-invested indefinitely as further described in Note 15 to our consolidated financial statements. Additionally, our effective tax rate for fiscal 2005 was impacted by a foreign tax rate differential of $0.4 million and adjustments of taxes to correspond to tax returns as filed of $0.8 million. Our effective tax rate for fiscal 2004 was impacted predominantly by the adjustments of taxes to correspond to tax returns as filed and other miscellaneous permanent differences. As of April 2, 2005, net operating loss carry forwards were approximately $5.5 million (federal) and $7.0 million (state) to offset future income taxes, which expire at various dates through 2024. Alternative minimum tax credit carry forwards totaled approximately $1.9 million as of April 2, 2005.



        Net Income.    Net income increased by $6.6 million to $7.3 million for fiscal 2005 compared to $0.7 million for fiscal 2004.

        Net sales.Sales.    Our net sales for fiscal 2004 were $187.3 million, an increase of $14.4 million, or 8.4%, compared to $172.9 million for fiscal 2003. We acquired RBC-API in December 2003, which contributed $6.1 million to the Roller Bearing segment in fiscal 2004. Overall we began experiencing increased demand from our diversified industrial and aerospace customers in the fourth quarter of fiscal 2004.

        Our Plain Bearing segment achieved net sales of $77.6 million for fiscal 2004, an increase of $10.1 million, or 15.0%, compared to $67.4 million in fiscal 2003. $6.4 million of this increase was due to the inclusion of a full year of net sales for the RBC France business unit which was acquired in December 2002. Net sales to our commercial and military aerospace customers accounted for $4.2 million of the increase due to an increase in aerospace engine bearing shipments, mainly for military applications. Net sales to our diversified industrial customers declined $0.5 million, driven mainly by low industrial activity in the first nine months of the year.

        Our Roller Bearing segment achieved net sales of $63.1 million for fiscal 2004, an increase of $2.3 million, or 3.8%, compared to $60.8 million for fiscal 2003. Included in fiscal 2004 were net sales for the RBC-API business unit which was acquired in December 2003. Excluding RBC-API, net sales for the Roller Bearing segment decreased by $3.8 million in fiscal 2004 due principally to the continued contraction in the industrial and heavy truck markets for these bearings in the first nine months of the fiscal year.

        Our Ball Bearing segment achieved net sales of $35.8 million for fiscal 2004, an increase of $1.8 million, or 5.2%, compared to $34.0 million for fiscal year 2003. Net sales to our diversified industrial customers accounted for $1.0 million of the increase, driven by increased demand from industrial distributors for aftermarket parts and increased penetration of the industrial distributor market. The remaining $0.8 million of the increase was driven by increased demand for airframe applications.

        Our Other segment achieved net sales of $10.8 million for fiscal 2004, an increase of $0.2 million, or 2.5%, compared to $10.6 million for fiscal year 2003. This increase was primarily due to increased sales of our machine tool collets to the machine tool industry.


        Gross Margin.    Our gross margin was $51.9 million in fiscal 2004, or 27.7% of net sales, versus $48.8 million, or 28.2% of net sales, for fiscal 2003. Gross margins for fiscal 2004 and fiscal 2003 reflected one-time expenses associated with the start-up of our Mexican manufacturing operations, the reengineering of manufacturing operations at our Tyson facility, and the relocation of our Bremen, Indiana manufacturing facility to Plymouth, Indiana. These charges totaled $1.7 million in fiscal 2004 and $2.3 million in fiscal 2003. Excluding these costs, and the additive gross margin in fiscal 2004 from our RBC-API acquisition, our gross margin decreased $0.5 million, primarily the result of a shift in mix toward lower margin products.

        Selling, General and Administrative Expenses.    SG&A expenses increased by approximately 5.5%, or $1.5 million, to $28.1 million in fiscal 2004 from $26.6 million in fiscal 2003. The increase of $1.5 million was mainly due to the addition of RBC-API in December 2003. Excluding the effects of the RBC-API acquisition in fiscal year 2004, SG&A expenses increased $0.7 million, or 2.6%. As a percentage of net sales, SG&A expenses were 15.0% for fiscal 2004 compared to 15.4% for fiscal 2003.

        Other, net.    Other, net for fiscal 2004 was $1.7 million compared to $1.4 million for fiscal 2003. Fiscal 2004 expenses consisted of Whitney management fees of $0.5 million, fixed asset disposals of $0.2 million, acquisition expenses of $0.4 million and $0.6 million of other expenses. Fiscal 2003 expenses included Whitney management fees of $0.4 million, fixed asset disposals of $0.9 million



associated with the relocation of our Bremen, Indiana manufacturing facility and $0.2 million of other expenses.

        Operating Income.    Operating income was $22.1 million, or 11.8% of net sales, for fiscal 2004 compared to $20.7 million, or 12.0% of net sales in fiscal 2003. Operating income for the Plain Bearing segment was $18.6 million, or 23.9% of net sales, compared to the prior year's $16.8 million, or 24.9% of net sales. Our Roller Bearing segment achieved an operating income of $11.3 million, or 17.8% of net sales, compared to the prior year's $8.5 million, or 13.9% of net sales. Our Ball Bearing segment achieved an operating income of $6.7 million, or 18.6% of net sales, compared to the prior year's $7.0 million, or 20.6% of net sales. Our Other segment achieved an operating income of $0.4 million, or 3.5% of net sales, compared to the prior year's $1.8 million, or 16.8% of net sales. Changes in operating income in our Plain Bearing and Roller Bearing segments were driven primarily by changes in net sales. Changes in operating income in our Ball Bearing and Other segments were driven by changes in net sales, offset by increased SG&A expenses and a shift in mix toward lower margin products.

        Interest Expense, net.    Interest expense, net decreased by $0.6 million to $20.4 million in fiscal 2004 as compared to $21.0 million in fiscal 2003. Amortization of deferred financing costs and debt discount are recorded as a component of net interest expense. Amortization expenses included in interest expense, net were $1.6 million in fiscal 2004 and $3.3 million in fiscal 2003. Excluding the amortization of deferred financing costs and debt discount, interest expense, net increased by $1.1 million.

        Gain on Early Extinguishment of Debt.    In fiscal 2003 we retired early $28.8 million of debentures which resulted in a gain of $0.8 million.

        Income Before Income Taxes.    Income before income taxes increased by $1.5 million to $1.7 million in fiscal 2004 from $0.2 million in fiscal 2003. This increase was primarily due to fiscal 2004 higher operating income of $1.4 million.

        Income Taxes.    Income tax expense was $1.1 million for fiscal 2004 as compared to $0.1 million for the comparable period last year. As a percentage of pre-tax income, the fiscal 2004 effective tax rate was 61.7% compared to 69.8% for fiscal year 2003. For fiscal 2004, the difference between the statutory and effective tax rates was primarily due to the adjustment of taxes to correspond to tax returns filed and other miscellaneous permanent differences. For fiscal 2003 the rate differential related to various



minor permanent differences. As of April 3, 2004, we had net operating loss carryforwards of approximately $14.7$9.9 million to offset future federal and state income taxes, which expire at various dates through 2024. In addition, we had an alternative minimum tax credit carryforwards of approximately $1.6 million as of April 3, 2004.

        Net Income.    Net income increased $0.6 million in fiscal 2004 to $0.7 million compared to $0.1 million in fiscal 2003.

Liquidity and Capital Resources

        Our business is capital intensive. Our capital requirements include manufacturing equipment and materials. In addition, we have historically fueled our growth in part through acquisitions. We have historically met our working capital, capital expenditure requirements and acquisition funding needs through our net cash flows provided by operations, various debt arrangements and sale of equity to private investors.

        On June 29, 2004, we entered into the $165.0 million Senior Credit Facility, comprised of a $55.0 million Revolving Credit Facility and a $110.0 million Term Loan. In addition, on June 29, 2004,August 15, 2005, we entered into a $45.0Fifth Amended and Restated Credit Agreement (the "Senior Credit Facility"), among RBCA; the other Credit Parties signatory thereto; General Electric Capital Corporation, a Delaware corporation, for itself, as lender, and as agent for the lenders, concurrently with the closing of our initial public offering. Pursuant to the Senior Credit Facility, we increased our term loan borrowings by approximately $40.0 million Second Lienfrom $110.0 million under the term loan portion of the Senior Credit Facility. The Senior Credit Facility provides a $55.0 million revolving credit agreement (the "Revolving Credit Facility") and a $150.0 million term loan (the "Term Loan"). The principal amount of the Term Loan.Loan shall be repaid in twenty-five (25) consecutive quarterly installments commencing December 31, 2005. As of December 31, 2005, we had repaid $2,375 of principal on the Senior Credit Facility. Each loan is secured by a lien against substantially all of our assets and subjects us to standard affirmative and negative covenants, as well as financial leverage tests. As of April 2,December 31, 2005, we were in compliance with all such covenants andcovenants.


leverage tests.        The Second LienRevolving Credit Facility bears interest at a floating rate of either the higher of the base rate on corporate loans or the federal funds rate plus 50 basis points, plus 1.25%; or LIBOR plus 2.50%. We have the right to elect the applicable interest rate on the Revolving Credit Facility. The Term Loan also containsbears interest at a covenant that limits our capital expenditures to $10.0 million per annum and requires that a portionfloating rate of either the higher of the proceeds from this offering is usedbase rate on corporate loans or the federal rate plus 50 basis points, plus 1.50%; or LIBOR plus 2.75%. We have the right to repay outstanding indebtedness underelect the Second Lienapplicable interest rate on the Term Loan. TheAs of December 31, 2005, the weighted average interest rate on the outstanding Senior Credit Facility was 7.04%.

        Approximately $20.6 million of the Revolving Credit Facility is being utilized to provide letters of credit to secure RBCA's obligations relating to certain Industrial Development Revenue Bonds and the Second Lien Term Loan bear interest at floating rates.insurance programs. As of April 2, 2005, the blended interest rate for the Senior Credit Facility and the Second Lien Term Loan was equal to 7.6%. As of April 2,December 31, 2005, we had outstanding borrowings of $5.0 million and outstanding letters of credit of $20.3the ability to borrow up to an additional $34.4 million under the Revolving Credit FacilityFacility.

        Voluntary prepayment and borrowing availabilitycommitment reductions are permitted in whole or in part, without premium or penalty, subject to minimum prepayment or reduction requirements, provided that voluntary prepayments of $26.1 million. See "Description of Certain Indebtedness—Senior Credit Facility."

        Mandatory prepayments in respectLIBOR loans on a date other than the last day of the Term Loan or permanent reductionsrelevant interest period will be subject to the commitmentspayment of customary breakage costs, if any.

        In addition, the lenders under the Revolving Credit Facility as applicable, are required in an amountentitled to be paid a fee on unused commitments under that facility at a rate equal to (a) 100%0.50% per annum, payable monthly in arrears. With respect to the letter of credit subfacility, an additional fee, equal to the product of the net cashaverage daily undrawn face amount of all letters of credit issued, guaranteed or supported by risk participation agreements multiplied by a per annum rate equal to the applicable margin applied to LIBOR rate



loans, i.e., 3.0%, is payable monthly in arrears together with any fees and charges incurred by the administrative agent to a letter of credit issuer.

        The proceeds from all asset sales and dispositions by RBCI and its subsidiaries, subject to certain exceptions, (b) 100% of the net cash proceeds from extraordinary receipts (including, without limitation, proceeds from certain key-man life policies)initial public offering and (c) 100% of the net cash proceeds from equity issuances by us and our subsidiaries, subject to certain exceptions; provided that in the event of certain qualified public offerings of equity securities by us, net cash proceeds thereof shall be used first to repay our outstanding 13% Senior Subordinated Discount Debentures, or Discount Debentures, until paid in full, second 50% of any remaining proceeds must beadditional Term Loan borrowings were used to repay our Second Lien Term Loan and third, any remaining proceeds, up to 50% may be used to make restricted payments, including redemptionsredeem outstanding debt and all of our commonthen outstanding Class C and Class D preferred stock,stock. Concurrently with the funding, we issued a notice of redemption to the note holders of the 13% senior subordinated discount debentures due June 15, 2009. The requisite funds, approximately $40.2 million, were irrevocably put on deposit with the trustee, Bank of New York, for redemption on September 13, 2005. This amount included a redemption premium of $1.3 million and up to 50% may be used to repayinterest expense for the call period of $0.4 million. These amounts along with $0.9 million of unamortized deferred financing fees and debt discount associated with this debt were recorded as a loss on early extinguishment of debt. We also repaid approximately $45.5 million on our Second Lien Term Loan and any remaining unused balance may be used for general corporate purposes.second lien term loan. This offering will constituteamount included a qualified public offeringprepayment fee of $0.5 million. These amounts along with $0.8 million of unamortized deferred financing fees associated with the second lien term loan debt were recorded as defined undera loss on early extinguishment of debt. Deferred financing fees of $1.3 million were capitalized associated with the Senior Credit Facility. Accordingly, all of the outstanding Discount Debentures will be paid in full out of the proceeds from this offering. In addition, a change of control will result in a default under the Senior Credit Facility and the Second Lien Term Loan. Because this offering is a qualified public offering, as defined in the Senior Credit Facility and the Second Lien Term Loan, this offering will not constitute a change of control under either of these agreements.

        On December 8, 2003, Schaublin entered into a bank credit facility, or Swiss Credit Facility, with Credit Suisse providing for 10.0 million Swiss Francs, or approximately $8.0$7.6 million, of term loan, or Swiss Term Loan, and up to 2.0 million Swiss Francs, or approximately $1.6$1.5 million, of revolving credit loans and letters of credit, or the Swiss Revolver. The credit agreement for the Swiss Credit Facility contains affirmative and negative covenants regarding the Schaublin financial position and results of operations and other terms customary to such financings. As of April 2,December 31, 2005, we were in compliance with all such covenants. On November 8, 2004, we amended the Swiss Credit Facility to increase the Swiss Revolver to 4.0 million Swiss Francs, or approximately $3.5$3.0 million. As of April 2,December 31, 2005, $6.2$4.8 million was outstanding under the Swiss Term Loan, and no loans or letters of credit were outstanding under the Swiss Revolver.

        In connection with this offering and the Refinancing Transaction, we expect to amend and restateor replace our Senior Credit Facility to provide for additional borrowingslower borrowing costs. We expect that the amended or replaced Senior Credit Facility will contain similar amortization schedules, financial covenants, events of default, negative and affirmative covenants and representations and warranties. The amendment or replacement of the Senior Credit Facility is contingent upon the consummation of the primary portion of this offering, but this offering is not contingent upon the amendment or replacement of the Senior Credit Facility. We are in discussions with multiple lenders regarding alternatives for reducing borrowing costs under our Term LoanSenior Credit Facility, including replacing or amending the facility. Based on discussions with lenders, we expect that after giving effect to the amendment or replacement of the Senior Credit Facility, we will reduce the interest rate on our LIBOR loans by at least 125 basis points. There can be no assurances, however, that capital markets will permit us to replace or amend the facility or that we will be able to achieve such savings. In March 2006, we obtained an amendment to our Senior Credit Facility such that the sale of shares by the selling stockholders pursuant to this offering does not result in an amountevent of $40.0 million. See "Pre-Offering Transactions—Refinancing Transaction."

        We will be required to make a cash payment of $5.2 million to our CEO in the first half of fiscal 2006 in connection with the payment of the settlement bonus as described under the heading "Related Party Transactions—Dr. Hartnett Settlement Bonus." We will fund this payment with either cash on hand or borrowingsdefault under our RevolvingSenior Credit Facility.


See "Description of Certain Indebtedness—Senior Credit Facility."

        We believe that after giving effect to this offering and the Refinancing Transaction,amendment or replacement of our Senior Credit Facility, our cash and cash equivalents, cash flow from operations and capacity under the Revolving Credit Facility and Swiss Revolver will provide adequate cash to fund our working capital, capital expenditure, debt service and other cash requirements for our existing businesses for the foreseeable future. Our ability to meet future working capital, capital expenditure and debt service requirements will depend on our future financial performance, which will be affected by a range of economic, competitive and business factors, particularly interest rates, cyclical changes in our end markets and prices for steel and our ability to pass through price increases on a timely basis, many of which are outside of our control. In addition, future acquisitions could have a significant impact on our liquidity position and our need for additional funds.



        From time to time we evaluate our existing facilities and operations and their strategic importance to us. If we determine that a given facility or operation does not have future strategic importance, we may sell, partially or completely, relocate production lines, consolidate or otherwise dispose of those operations. Although we believe our operations would not be materially impaired by such dispositions, relocations or consolidations, we could incur significant cash or non-cash charges in connection with them.

        In the nine month period ended December 31, 2005, we generated cash of $13.2 million from operating activities compared to $4.7 million for the nine month period ended January 1, 2005. The increase of $8.5 million was mainly a result of an increase of $6.2 million in net income, reduced by $2.2 million representing the net effect of non-cash charges such as deferred taxes, loss on early extinguishment of debt and loss on disposal of assets, plus a change in working capital investment of $4.5 million.

        Cash used for investing activities for the nine month period ended December 31, 2005 included $7.8 million relating to capital expenditures compared to $6.6 million for the nine month period ended January 1, 2005. Investing activities also included $2.6 million relating to the acquisition of the RBC Southwest Products business.

        In the nine month period ended December 31, 2005, we decreased borrowings under the Revolving Credit Facility by $5.0 million, received proceeds from the sale of stock of $92.1 million, used $30.6 million to redeem Class C redeemable preferred stock, used $4.0 million to redeem Class D preferred stock, received $0.3 million from the exercise of stock options and warrants, retired term loans of $45.0 million, retired the 13% senior secured discount debentures of $38.6 million, increased our bank term loan by $41.1 million, made payments on term loans of $3.7 million, used $0.2 million of funds for capital lease obligations and paid $1.3 million of financing fees in connection with our amendment to the Senior Credit Facility.

        In fiscal 2005, we generated cash of $9.9 million from operating activities compared to $7.5 million for fiscal 2004. The increase of $2.4 million was mainly a result of an increase of $6.7 million in net income, net of non-cash charges over fiscal 2004, offset by a change in working capital investment of $4.4 million over fiscal 2004. The change in working capital investment was primarily the result of an increase in accounts receivable due to strong fourth quarter net sales and a build in inventory in the fourth quarter to service increasing demand.

        Cash flow from investing activities in fiscal 2005 was in-line with fiscal 2004. Cash required for acquisitions decreased by $5.2 million due to the impact of the RBC-API acquisition in fiscal 2004. Capital expenditures increased $4.6 million in fiscal 2005 compared to fiscal 2004 due to increased investment in manufacturing assets to expand capacity and improvements in leaseholds.

        Financing activities used $0.3 million in fiscal 2005 and provided $2.9 million in fiscal 2004, both related to debt refinancing transactions.

        In fiscal 2004, we generated cash of $7.5 million from operating activities compared to $4.0 million for fiscal 2003. The increase of $3.5 million was mainly driven by a decrease in working capital investment of $3.0 million as a result of a decrease in inventory investment of approximately $8.8


$8.8 million and a decrease in prepaids and other assets of approximately $1.3 million offset by an increase of $5.5 million in accounts receivable due to strong fourth quarter net sales and an increase in accounts payable and accrued liabilities of approximately $7.6 million.

        Cash flow from investing activities in fiscal 2004 increased by $2.6 million due to higher investment in acquisitions, the RBC-API transaction, over fiscal 2003. Capital expenditures decreased by $1.6 million in fiscal 2004 compared to fiscal 2003.

        Financing activities used approximately $1.0 million more in fiscal 2004 than in fiscal 2003 mainly to finance the acquisition of RBC-API.



        We expect to make capital expenditures of approximately $12.0 million during fiscal 2006 in connection with our existing business. We intendhave funded our fiscal 2006 capital expenditures, and expect to fund our fiscal 20062007 capital expenditures, principally through existing cash, internally generated funds and borrowings under our Revolving Credit Facility. We generally expect capital expenditures for fiscal 2007 to remain at highersimilar levels thanto those in fiscal 2005 as we invest in new manufacturing capability.2006. We may also make substantial additional capital expenditures in connection with acquisitions. Although there are no present understandings, commitments or agreements with respect to the acquisition of any other businesses, we do evaluate acquisition opportunities regularly.

Obligations and Commitments

        The following tables outlinetable outlines what we regard as our significant contractual obligations and commercial commitments as of April 2, 2005, on (a) an actual basis and (b) a pro forma basis after giving effect to this offering, the Pre-Offering Transactions and repayments of indebtedness using the proceeds thereof.December 31, 2005. The tables dotable does not represent all of our contractual obligations and commercial commitments that we have entered into.


Actual

 
 Payments Due By Period
Significant Contractual Obligations

 Total
 Less than
1 Year

 1 to 3
Years

 3 to 5
Years

 More than
5 Years

 
 (in thousands)

Total debt(1) $220,079 $8,245 $5,315 $41,188 $165,331
Capital lease obligations  431  226  205    
Operating leases  13,033  2,863  4,727  2,438  3,005
Interest payments(2)  110,451  19,782  38,904  34,542  17,223
Pension and post-retirement benefits(3)  8,293  1,948  3,208  1,354  1,783
  
 
 
 
 
Total significant contractual cash obligations $352,287 $33,064 $52,359 $79,522 $187,342
  
 
 
 
 


Pro Forma


 Payments Due By Period
 Payments Due By Period
Significant Contractual Obligations

 Total
 Less than
1 Year

 1 to 3
Years

 3 to 5
Years

 More than
5 Years

 Total
 Less than
1 Year

 1 to
3 Years

 3 to
5 Years

 More than
5 Years


 (in thousands)

 (in thousands)

Total debt(4)(1) $177,130 $8,645 $6,115 $4,039 $158,331 $169,030 $3,390 $6,740 $4,580 $154,320
Capital lease obligations 431 226 205   466 174 233 46 13
Operating leases(2) 13,033 2,863 4,727 2,438 3,005 13,033 2,863 4,727 2,438 3,005
Interest payments(2)(3) 65,659 10,774 20,846 20,190 13,849 67,465 11,964 23,307 22,657 9,537
Pension and post-retirement benefits(3) 8,293 1,948 3,208 1,354 1,783
Pension and postretirement benefits(2) 8,293 1,948 3,208 1,354 1,783
 
 
 
 
 
 
 
 
 
 
Total significant contractual cash obligations $264,546 $24,456 $35,101 $28,021 $176,968 $258,287 $20,339 $38,215 $31,075 $168,658
 
 
 
 
 
 
 
 
 
 

(1)
Includes (a) the $147.6 million Term Loan under our Senior Credit Facility including $5.0 million outstanding under the Revolving Credit Facility, excluding amounts drawn under our letter of credit subfacility, (b) the Second Lien Term Loan, (c) Discount Debentures and (d) other senior debt consisting of the Swiss Term Loan, industrial revenue bonds and other debt of $23.0totaling $21.4 million.

(2)
Operating leases and pension and postretirement benefits are estimated as unchanged from fiscal year end 2005.

(3)
Interest payments are calculated based on beginning of period debt balances that reflect contractual debt amortization over the term of the instruments and assume a constant LIBOR rate of 3.4%4.39%. On a pro forma basis, interest payments reflect a reduction in interest rates of 1.00% under our amended and restated Senior Credit Facility.

(3)
Includes minimum cash contribution to pension plans and post-retirement health care benefit payments. See Notes 13 and 14 to our Consolidated Financial Statements.

(4)
Reflects repayment of all of our outstanding Discount Debentures and the Second Lien Term Loan and the increase in our borrowings under our Senior Credit Facility resulting from the Refinancing Transaction. See "Pre-Offering Transactions—Refinancing Transaction."

Quarterly Results of Operations



 Quarter Ended

 Quarter Ended


 June 28,
2003

 Sept 27,
2003

 Dec 27,
2003

 April 3,
2004

 July 3,
2004

 Oct 2,
2004

 Jan 1,
2005

 April 2,
2005


 June 28,
2003

 Sept. 27,
2003

 Dec. 27,
2003

 April 3,
2004

 July 3,
2004

 Oct. 2,
2004

 Jan. 1,
2005

 April 2,
2005

 July 2,
2005

 Oct. 1,
2005

 Dec. 31,
2005



 (in thousands, except per share data)


 (in thousands, except per share data)

Net salesNet sales $39,737 $42,449 $42,901 $62,244 $56,195 $56,391 $58,145 $72,285Net sales $39,737 $42,449 $42,901 $62,244 $56,195 $56,391 $58,145 $72,285 $66,001 $65,367 $67,390
Gross marginGross margin  10,966  11,708  11,668  17,556  15,293  15,381  16,732  21,008Gross margin  10,966  11,708  11,668  17,556  15,293  15,381  16,732  21,008  19,276  19,987  20,361
Operating income(1)Operating income(1)  4,572  5,107  4,185  8,265  5,916  7,360  8,405  10,458Operating income(1)  4,572  5,107  4,185  8,265  5,916  7,360  8,405  10,458  10,398  5,093  10,788
Net income (loss)Net income (loss) $(185)$(40)$(720)$1,608 $(3,822)$1,668 $2,462 $6,952Net income (loss) $(185)$(40)$(720)$1,608 $(3,822)$1,668 $2,462 $6,952 $3,345 $(1,960)$5,099
Net income (loss) per common share:Net income (loss) per common share:                        Net income (loss) per common share:                                 
Basic:(2)(3)                        Basic(1)(2) $(0.11)$(0.09)$(0.20)$0.13 $(0.71)$0.14 $0.23 $0.77 $0.34 $(0.18)$0.31
 Class A common stock $(0.11)$(0.09)$(0.20)$0.13 $(0.71)$0.14 $0.23 $0.77Diluted(1)(2) $(0.11)$(0.09)$(0.20)$0.08 $(0.71)$0.08 $0.13 $0.71 $0.22 $(0.18)$0.29
 Class B common stock $(0.11)$(0.09)$(0.20)$0.13 $(0.71)$0.14 $0.23 $0.77
Diluted:(2)(3)                        
 Class A common stock $(0.11)$(0.09)$(0.20)$0.09 $(0.71)$0.09 $0.15 $0.71
 Class B common stock $(0.11)$(0.09)$(0.20)$0.00 $(0.71)$0.00 $0.00 $0.00

(1)
Amounts relating to quarters ended July 3, 2004, October 2, 2004 and January 1, 2005 have been restated to reflect the recording of compensation expense of $82, $63 and $187, respectively, as discussed in Note 16 to the Consolidated Financial Statements.

(2)
See Note 2 to the Consolidated Financial Statements for a discussion of net income (loss) per common share.

(3)(2)
Net income (loss) per common share is computed independently for each of the quarters presented. Therefore, the sum of the quarterly earnings per share may not necessarily equal the total for the year.

Recent Accounting Pronouncements

        In November 2004, the FASB issued SFAS No. 151, "Inventory Costs, an amendment of ARB No. 43, Chapter 4." The amendments made by SFAS No. 151 clarify that abnormal amounts of idle facility expense, freight, handling costs and wasted materials (spoilage) should be recognized as current-period charges and require the allocation of fixed production overheads to inventory based on the normal capacity of the production facilities. The guidance is effective for inventory costs incurred during fiscal years beginning after June 15, 2005. It is not believed that the adoption of SFAS No. 151 will have a material impact on our consolidated financial position, results of operations or cash flows.

        In December 2004, the FASB issued SFAS No. 123 (revised 2004), "Share-Based Payment." SFAS No. 123(R) that will require that the compensation cost relating to share-based payment transactions be recognized in financial statements. That cost will be measured based on the fair value of the equity or liability instruments issued. SEAS No. 123(R) covers a wide range of share-based compensation arrangements including share options, restricted share plans, performance-based awards, share appreciation rights and employee share purchase plans. SFAS No. 123(R) replaces FASB Statement No. 123, "Accounting for Stock-Based Compensation", and supersedes APB Opinion No. 25, "Accounting for Stock Issued to Employees." SFAS No. 123, as originally issued in 1995, established as preferable a fair value-based method of accounting for share-based payment transactions with employees. However, that Statement permitted entities the option of continuing to apply the guidance in APB Opinion No. 25 as long as the footnotes to financial statements disclosed what net income would have been had the preferable fair value-based method been used. Public entities will be required



to apply SFAS No. 123(R) as of the beginning of the first fiscal year beginning after June 15, 2005. SFAS No. 123(R) permits public companies to adopt its requirements using one of two methods:


        We are required to adopt the pronouncement in fiscal 2007 and have decided to use the "modified prospective" method in applying SFAS No. 123(R). We are currently evaluating these transition methods and determining theits effect on our consolidated results of operations and whether the adoption will result in amounts that are similar to the current pro forma disclosures under SFAS No. 123. For fiscal 2005,2006, we will continue to disclose stock-based compensation information in accordance with SFAS No. 148, "Accounting for Stock-BasedStock Based Compensation—TransitionTransitions and Disclosure—an Amendment of FASB Statement No. 123," and SFAS No. 123.

Critical Accounting Policies

        Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including those related to product returns, bad debts, inventories, recoverability of intangible assets, income taxes, financing operations, pensions and other post-retirement benefits and contingencies and litigation. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

        We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our consolidated financial statements.

        Revenue Recognition.    We recognize revenue in accordance with SEC Staff Accounting Bulletin 101 "Revenue Recognition in Financial Statements as amended by Staff Accounting Bulletin 104. The SEC requires that the following four basic criteria must be met before the Company recognizeswe recognize revenue:

        We recognizes revenue upon the passage of title on the sale of manufactured goods, which is at time of shipment, and under the units-of-delivery method in a limited number of aerospace long-term projects.

        Accounts Receivable.    We are required to estimate the collectability of our accounts receivable, which requires a considerable amount of judgment in assessing the ultimate realization of these



receivables, including the current credit-worthiness of each customer. Changes in required reserves may occur in the future as conditions in the marketplace change.

        Inventory.    Inventories are stated at the lower of cost or market value. Cost is principally determined by the first-in, first-out method. We account for inventory under a full absorption method. We record adjustments to the value of inventory based upon past sales history and forecasted plans to sell our inventories. The physical condition, including age and quality, of the inventories is also considered in establishing its valuation. These adjustments are estimates, which could vary significantly, either favorably or unfavorably, from actual requirements if future economic conditions, customer inventory levels or competitive conditions differ from our expectations.



        Goodwill and Intangible Assets.    We adopted the provisions of SFAS No. 141, "Business Combinations," and Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets," ("SFAS No. 142") at the beginning of fiscal 2003. These standards require that all business combinations be accounted for using the purchase method and that goodwill (representing the excess of the amount paid to acquire a company over the estimated fair value of the net assets acquired) and intangible assets with indefinite useful lives not be amortized but instead be tested for impairment annually (performed by us during the fourth quarter of each fiscal year), or when events or circumstances indicate that its value may have declined. This determination of any goodwill impairment is made at the reporting unit level and consists of two steps. First, we determine the fair value of a reporting unit and compare it to our carrying amount. Second, if the carrying amount of the reporting unit exceeds its fair value, an impairment loss is recognized for any excess of the carrying amount of the reporting unit's goodwill over the goodwill's implied fair value. The fair value of our reporting units is calculated by comparing the weighted average of the net present value of future cash flows and a market approach based on our reporting units' carrying value. We utilized a discount rate of 12.1% based on a weighted average cost of capital. The discount rate was derived using an analysis of similar companies which we believe have a comparable level of risk. Although no changes are expected, if the assumptions management makes regarding estimated cash flows are less favorable than expected, we may be required to record an impairment charge in the future. Goodwill had been amortized by the straight-line method over a 40-year period through March 30, 2002. Effective with fiscal 2003, goodwill amortization was suspended in conjunction with the adoption of SFAS No. 142. The determination of impairment for intangible assets with indefinite useful lives is based on a comparison of the fair value of the intangible asset with its carrying value.

        Definite-lived intangible assets are being amortized over their useful lives of 5 to 15 years. Also included in intangible assets is an asset relating to our minimum pension liability.

        Income Taxes.    As part of the process of preparing the consolidated financial statements, we are required to estimate the income taxes in each jurisdiction in which we operate. This process involves estimating the actual current tax liabilities together with assessing temporary differences resulting from the differing treatment of items for tax and financial reporting purposes. These differences result in deferred tax assets and liabilities, which are included in the Consolidated Balance Sheet. We must then assess the likelihood that the deferred tax assets will be recovered, and to the extent that we believe that recovery is not more than likely, we are required to establish a valuation allowance. If a valuation allowance is established or increased during any period, we are required to include this amount as an expense within the tax provision in the Consolidated Statements of Operations. Significant judgment is required in determining our provision for income taxes, deferred tax assets and liabilities and any valuation allowance recognized against net deferred tax assets.

        We have determined that a valuation allowance against deferred tax assets is not necessary based on our estimates of taxable income in the jurisdictions that we operate and over the period in which the deferred tax assets will be recoverable. We estimate that we will need to generate approximately $13.2$23.1 million of taxable income in the future to fully realize our net deferred tax asset.



        Pension Plans and Post-retirement Health Care.    We have noncontributory defined benefit pension plans covering union employees in our Heim division plant in Fairfield, Connecticut, in our Nice subsidiary plant in Kulpsville, Pennsylvania, in our Bremen subsidiary plant in Plymouth, Indiana and in our Tyson subsidiary plant in Glasgow, Kentucky. Our funding policy is to make the minimum annual contribution required by the Employee Retirement Income Security Act of 1974. Plan obligations and annual pension expense are determined by independent actuaries using a number of assumptions provided by us including assumptions about employee demographics, retirement age, compensation levels, pay rates, turnover, expected long-term rate of return on plan assets, discount rate and the amount and timing of claims. Each plan assumption reflects our best estimate of the plan's future experience. The most sensitive assumption in the determination of plan obligations for pensions is the



discount rate. The discount rate used in determining the funded status as of April 2, 2005 and April 3, 2004 was 5.9% and 6.25%, respectively. In developing the overall expected long-term rate of return on plan assets assumption, a building block approach was used in which rates of return in excess of inflation were considered separately for equity securities and debt securities. The excess returns were weighted by the representative target allocation and added along with an appropriate rate of inflation to develop the overall expected long-term rate of return on plan assets assumption.

        The discount rate that we use for determining future pension obligations is based on a review of long-term bonds that receive one of the two highest ratings given by a recognized rating agency. The discount rate determined on this basis has decreased from 6.50% at March 29, 2003 to 6.25% at April 3, 2004, and to 5.90% at April 2, 2005.

        Lowering the expected long-term rate of return on the assets of our pension plans by 1.00% (from 9.00% to 8.00%) would have increased our pension expense for fiscal 2005 by approximately $108,000. Increasing the expected long-term rate of return on the assets of our pension plans by 1.00% (from 9.00% to 10.00%) would have reduced our pension expense for fiscal 2005 by approximately $108,000.

        Lowering the discount rate assumption used to determine net periodic pension cost by 1.00% (from 6.25% to 5.25%) would have increased our pension expense for fiscal 2005 by approximately $205,000. Increasing the discount rate assumption used to determine net periodic pension cost by 1.00% (from 6.25% to 7.25%) would have reduced our pension expense for fiscal 2005 by approximately $165,000.

        Lowering the discount rate assumption used to determine the funded status as of April 2, 2005 by 1.00% (from 5.90% to 4.90%) would have increased the projected benefit obligation of our pension plans by approximately $2.1 million. Increasing the discount rate assumption used to determine the funded status as of April 2, 2005 by 1.00% (from 5.90% to 6.90%) would have reduced the projected benefit obligation of our pension plans by approximately $1.8 million.

        We recorded a minimum pension liability of $3.4 million and $4.6 million as of April 2, 2005 and April 3, 2004, respectively. This liability represented the amount by which the accumulated benefit obligation exceeded the sum of the fair market value of plan assets. The additional minimum pension liability as of April 2, 2005 and April 3, 2004 of $3.3 million and $4.0 million, respectively, was offset by an intangible asset to the extent of previously unrecognized prior service cost. The intangible assets of $0.6 million and $0.6 million as of April 2, 2005 and April 3, 2004, respectively, were included on the line item entitled "Intangible assets" in our consolidated balance sheet. The remaining amounts of $1.7 million and $2.0 million, net of deferred income taxes of $1.0 million and $1.4 million, respectively, were recorded as a component of stockholders' deficit on the line item titled "Accumulated other comprehensive loss" in our consolidated balance sheet as of April 2, 2005 and April 3, 2004, respectively. The intangible asset in 2005 and 2004 was greater than the unrecognized prior service cost because two of our plans had an unrecognized negative prior service cost.

        Our investment program objective is to achieve a rate of return on plan assets which will fund the plan liabilities and provide for required benefits while avoiding undue exposure to risk to the plan and



increases in funding requirements. Our target allocation of plan assets was 100 percent equity investments as of April 2, 2005 and April 3, 2004.

        For the benefit of employees at our Heim, West Trenton, Nice, Tyson and Bremen facilities, we sponsor contributory defined benefit health care plans that provide post-retirement medical and life insurance benefits to union employees who have attained certain age and/or service requirements while employed by us. The plans are unfunded and costs are paid as incurred. Post-retirement benefit obligations as of April 2, 2005 and April 3, 2004 were $3.7 million and $4.2 million, respectively, and are included in "Other non-current liabilities" in our consolidated balance sheet.



        We use a March 31 measurement date for our plans. We expect to contribute approximately $0.3 million to our post-retirement benefit plans in fiscal year 2006.

        On December 8, 2003, the Medicare Prescription Drug Improvement and Modernization Act of 2003 (the "Act") was signed into law. Our prescription drug benefit for all post-retirement plans is capped at a set amount each month, which is paid to the retirees so they can obtain prescription drug coverage. As such, we are not self-insured for prescription drugs, and the Act has no impact on the recorded obligation.

        During fiscal 2004, the plans were amended to contractually limit the benefit to be provided for certain groups of current and future retirees. As a result, there is no health care trend associated with these groups. The discount rate used in determining the accumulated post-retirement benefit obligation was 5.9% as of April 2, 2005 and 6.25% as of April 3, 2004. The discount rate used in determining the net periodic benefit cost was 6.25% for fiscal 2005, 6.50% for fiscal 2004 and 7.25% for fiscal 2003.

        The discount rate that we use for determining net periodic benefit cost for these benefits is based on a review of long-term bonds that receive one of the two highest ratings given by a recognized rating agency. The discount rate determined on this basis has decreased from 6.50% at March 31, 2003 to 6.25% at April 3, 2004, and to 5.90% at April 2, 2005.

        Lowering the discount rate assumption used to determine net periodic benefit cost by 1.00% (from 6.25% to 5.25%) would have increased our post-retirement expense for fiscal 2005 by approximately $25,000. Increasing the discount rate assumption used to determine net periodic benefit cost by 1.00% (from 6.25% to 7.25%) would have reduced our post-retirement expense for fiscal 2005 by approximately $28,000.

        Lowering the discount rate assumption used to determine the accumulated post-retirement benefit obligation as of April 2, 2005 by 1.00% (from 5.90% to 4.90%) would have increased the accumulated post-retirement benefit obligation of our post-retirement plans by approximately $425,000. Increasing the discount rate assumption used to determine the accumulated post-retirement benefit obligation, as of April 2, 2005 by 1.00% (from 5.90% to 6.90%) would have reduced the accumulated post-retirement benefit obligation of our post-retirement plans by approximately $357,000.

        Stock-Based Compensation.    We account for our stock compensation arrangements with employees under the provisions of Accounting Principles Board (APB) Opinion No. 25 "Accounting for Stock Issued to Employees."

        We have granted to our employees options and warrants to purchase our common stock at exercise prices determined by our management and board of directors. We record stock-based compensation as necessary to the extent that the deemed value of the stock at the date of grant exceeds the exercise price of the option. These valuations depend upon our determination of the fair value of our stock and can vary based upon the value of our company and liquidity assumptions over time. In the event we issue options at below fair value, we would be required to record an additional charge.

        Management employed the intrinsic value method pursuant to APB No. 25 under which compensation cost is recognized only if the exercise price of grants issued is below the fair value of our



common stock at the date of grant as determined by the board of directors. Had compensation cost for option grants and warrant grants to employees been determined based on the fair value at the grant



dates consistent with SFAS No. 123, "Accounting for Stock-Based Compensation," our net income would have been reduced to the following pro forma amounts:



 Fiscal Year Ended
 
 Fiscal Year Ended
 Nine Months Ended
 


 March 29,
2003

 April 3,
2004

 April 2,
2005

 
 March 29,
2003

 April 3,
2004

 April 2,
2005

 January 1,
2005

 December 31,
2005

 
Net income, as reportedNet income, as reported $49 $663 $7,260 Net income, as reported $49 $663 $7,260 $308 $6,484 
Plus: stock-based compensation expense included in reported net income, net of the tax (see further discussion below)Plus: stock-based compensation expense included in reported net income, net of the tax (see further discussion below)   264 Plus: stock-based compensation expense included in reported net income, net of the tax (see further discussion below)   264 209 136 
Less: stock-based compensation expense determined under fair value method, net of taxLess: stock-based compensation expense determined under fair value method, net of tax (56) (131) (540)Less: stock-based compensation expense determined under fair value method, net of tax (56) (131) (540) (131) (1,547)
 
 
 
   
 
 
 
 
 
Pro forma net income (loss)Pro forma net income (loss) $(7)$532 $6,984 Pro forma net income (loss) $(7)$532 $6,984 $386 $5,073 
 
 
 
   
 
 
 
 
 
Net income (loss) per common share, as reported:Net income (loss) per common share, as reported:       Net income (loss) per common share, as reported:           
Basic:       Basic $(0.20)$(0.24)$0.62 $(0.33)$0.43 
 Class A common stock $(0.20)$(0.24)$0.62 Diluted $(0.20)$(0.24)$0.35 $(0.33)$0.37 
 Class B common stock $(0.20)$(0.24)$0.62 
Diluted:       
 Class A common stock $(0.20)$(0.24)$0.40 
 Class B common stock $(0.20)$(0.24)$0.00 
Net income (loss) per common share, pro forma:Net income (loss) per common share, pro forma:       Net income (loss) per common share, pro forma:           
Basic:       Basic $(0.21)$(0.26)$0.57 $(0.32)$0.30 
 Class A common stock $(0.21)$(0.26)$0.57 Diluted $(0.21)$(0.26)$0.33 $(0.32)$0.27 
 Class B common stock $(0.21)$(0.26)$0.57 
Diluted:       
 Class A common stock $(0.21)$(0.26)$0.37 
 Class B common stock $(0.21)$(0.26)$0.00 

        For purposes of the pro forma disclosures, the estimated fair value of the options and warrants is amortized to be expensed over the service period that generally is the option or warrant vesting period. The weighted average fair value per share of options and warrants granted was $8.17 in fiscal 2005, $1.58 in fiscal 2004, and $1.18 in fiscal 2003.2003, and $5.99 and $8.17, respectively, for the nine months ended December 31, 2005 and January 1, 2005.

        The fair value for our options and warrants was estimated at the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions:


 Fiscal Year Ended
  Fiscal Year Ended
 Nine Months Ended
 

 March 29, 2003
 April 3, 2004
 April 2, 2005
  March 29,
2003

 April 3,
2004

 April 2,
2005

 January 1,
2005

 December 31,
2005

 
Dividend yield 0.0%0.0%0.0% 0.0%0.0%0.0%0.0%0.0%
Expected weighted average life 3.0 3.0 3.0  3.0 3.0 3.0 3.0 7.0 
Risk-free interest rate 3.5%3.5%3.5% 3.5%3.5%3.5%3.5%3.5%
Expected volatility 0.1%0.1%0.4% 0.1%0.1%0.4%0.1%0.3%

        The Black-Scholes option pricing model was developed for use in estimating the fair value of traded options and warrants which have no vesting restrictions and are fully transferable. In addition, option and warrant valuation models require the input of highly subjective assumptions, including the expected stock price volatility. Because our options and warrants have characteristics significantly different from those of traded options and warrants, and because changes in the subjective input assumptions can materially affect the fair value estimate, the existing models do not necessarily provide a reliable single measure of the fair value of our options and warrants.



        On March 29, 2006, we accelerated the vesting of 523,585 stock options whose exercise prices were below our closing stock price on the date the vesting of the options was accelerated. As a result, a charge of approximately $73,000 dollars, net of tax, will be recorded in fiscal 2006. The accelerated vesting of these stock options is intended to eliminate a possible compensation expense associated with these options in future periods due to the adoption of SFAS No. 123(R), "Share-Based Payment."

        We awarded 179,575 options to purchase common stock at an exercise price of $8.00 per share during the fiscal year ended April 2, 2005. Contemporaneous with the first option grant on April 4,



2004, we performed a valuation analysis to estimate the fair value of our common stock. We considered each of the valuation methodologies outlined in the AICPA Technical Practice Aid "Valuation of Privately-Held-Company Equity Securities Issued as Compensation" and determined that the market-multiple approach was the most relevant method to use for our company. We employed this approach by focusing on multiples of enterprise value to EBITDA for comparable public companies at the time of the April 4, 2004 grant date. This methodology resulted in an estimate of our enterprise value, from which we subtracted the book value of our outstanding indebtedness and the estimated redemption value of our preferred stock, in order to arrive at an estimate of the value of our common stock. We then estimated a 17% lack of marketability discount to reflect the illiquid nature of private company equity securities such as our common stock. The resulting valuation approximated $8.00 per share and provided the basis for our board's approval of the April 4, 2004 option grant at an exercise price of $8.00 per share. At each of the subsequent seven option grant dates during fiscal year 2005, we relied on the valuation analysis performed as of April 4, 2004 as the basis for our establishing an exercise price of $8.00 per share for each such option grant because management believed the business continued to perform in line with its projections.

        In connection with the preparation of our audited financial statements for fiscal year 2005 in anticipation of thisour initial public offering in August 2005, and solely for the purposes of accounting for employee stock-based compensation, we considered whether the stock options granted during fiscal year 2005 had compensatory elements that should be reflected in our financial statements. This review resulted in our determination that the fair value of our common stock as of each of the option grant dates during fiscal year 2005 was likely higher than the $8.00 per share exercise price established for all such options. As a result, we decided to retrospectively estimate the fair value of our common stock as of each option grant date during fiscal year 2005.

        In conducting our retrospective analysis, we considered the valuation methodologies that investment banking firms were discussing with us in connection with our preparations for thisour initial public offering. We also considered the likelihood of our proceeding with thisour initial public offering and the changes in our business and capital structure during the course of fiscal 2005. Based on such considerations, we determined that the contemporaneous analysis we performed as of April 4, 2004 should be modified as follows in order to more accurately apply the market-multiple approach in arriving at an estimated fair value of our common stock as of each grant date:


        We incorporated these adjustments to the market-multiple approach and performed a retrospective analysis initially as of the April 2004 option grant date, and we determined that the fair value of our common stock approximated $15.00 per share. Given that our annual planning and budgeting cycle


concludes during our fiscal fourth quarter, our financial projections for fiscal years 2005 and 2006 had been recently completed as of the April 2004 option grant date. As of each subsequent option grant


date, we concluded that our actual and expected financial performance as of each such date was in line with our financial projections and that the outlook for our future financial performance had not changed since we originally established our financial projections. As a result, we determined that, as of each option grant date, there was no need to modify our financial projections for fiscal 2005 and 2006. Therefore, any changes in our estimated fair value between option grant dates were driven by changing market factors, including, principally, the valuation multiples for the group of comparable companies and short-term interest rates. During the course of fiscal 2005, the average of the net income based valuation multiples for our group of comparable companies increased modestly. At the same time, short-term interest rates also increased, resulting in an increase in our projected interest expense due to the fact that a high percentage of our debt bears interest at floating rates. This resulted in a corresponding decrease to our projected net earnings. These two market factors largely offset each other and therefore resulted in minimal changes in our estimated fair value between option grant dates. As a result, we determined to use the same fair value of our common stock, $15.00 per share, as of each grant date during fiscal year 2005.

        In July 2005, we reviewed our retrospective analysis and further considered whether it met all of the guidelines set forth by the AICPA Technical Practice Aid. Noting the Practice Aid's recommendation to engage an unrelated valuation specialist, we decided to retain Valuation Research Corporation, or VRC, as an independent third party to perform a valuation of our common stock as of each of the option grant dates during fiscal 2005. VRC's independent valuation of our common stock determined that the fair value of our common stock as of each of the option grant dates during fiscal year 2005 exceeded the $8.00 per share as determined in our contemporaneous analysis, but was less than the $15.00 per share as determined in our initial retrospective determination. For purposes of its analysis, VRC used our financial projections for fiscal 2005 and 2006 which, as previously noted, we determined did not need to be modified as of each option grant date. As a result, the different fair value estimates calculated by VRC resulted from VRC employing different methodologies and assumptions compared to those employed by us in our prior analyses, including the following: