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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark one)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Fiscal Year Ended October 26, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________ to ____________
Commission file number 0-15046
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WESTERBEKE CORPORATION
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(Exact name of registrant as specified in its charter)
Delaware 041925880
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(State or other jurisdiction of (I.R.S. Identification No.)
Employer incorporation or organization)
Myles Standish Industrial Park
Taunton, Massachusetts 02780 02780
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (508) 823 - 7677
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Securities registered pursuant to Section 12 (b) of the Act:
Name of each exchange on
Title of each class which registered
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None None
Securities registered pursuant to Section 12 (g) of the Act:
Common Stock,
$.01 par value
----------------
(Title of class)
Indicate by a check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15 (d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period as the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
Yes X No
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Indicate by a check mark if disclosure of delinquent filers, pursuant
to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K. [X]
State the aggregate market value of the voting stock held by non-
affiliates of the registrant. The aggregate market value shall be computed
by reference to the price at which the stock was sold, or the average bid
and asked prices of such stock, as of a specified date within 60 days prior
to the date of filing.
Aggregate market value as of January 6, 2003 $1,685,100
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Common Stock, $.01 par value, as of January 6, 2003 1,954,809
shares
DOCUMENTS INCORPORATED BY REFERENCE
None.
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PART I
ITEM 1. BUSINESS.
General
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The Company is primarily engaged in the business of designing,
manufacturing and marketing marine engine and air-conditioning products.
The Company was organized in 1932 and was re-incorporated in Delaware in
1986. The Company's marine products consist of diesel and gasoline engine-
driven electrical generator sets, inboard propulsion engines, self-
contained, reverse-cycle air-conditioners, and associated spare parts and
accessories. In addition, the Company manufactures and markets electrical
generator sets for use in non-marine applications. The Company markets its
products throughout the United States and internationally principally for
recreational marine applications. Accordingly, the market for the
Company's products is dependent on the market for recreational boats,
including auxiliary powered sailboats, powerboats, houseboats and other
pleasure boats. The market for recreational boats, and consequently the
Company's products, may be adversely affected by general economic
conditions.
Products
- --------
The Company's marine engine product line consists of 26 models of
electrical generator sets, 22 models of inboard propulsion engines, and
associated spare parts and accessories. The Company also offers 9 models
of non-marine generator sets.
The Company's diesel and gasoline engine-driven marine generator sets
are installed in powerboats, houseboats, large sailboats and other pleasure
and commercial boats to provide electricity for communication and
navigational equipment, lighting, refrigeration and other galley services,
and other safety, operating and convenience needs. The Company's present
line of generator sets produce from 3.8 to 95 kilowatts of electricity. A
generator set consists of an electrical generator and an attached diesel or
gasoline engine used to drive the generator. These engines are water-
cooled and range from one to six cylinders.
The Company's propulsion engines are inboard engines, generally
installed as auxiliary power systems for sailboats. The Company's
propulsion engines are water-cooled and range from one to six cylinders and
from 7 to 170 horsepower. Management believes that more than 90% of the
propulsion engines produced by the Company are installed in sailboats of up
to 50 feet in length. The Company's higher horsepower propulsion engines
are also installed in powerboats of up to approximately 30 feet in length
such as fishing boats, cruisers and workboats.
The Company's product line also includes marine auxiliary engines and
associated spare and replacement parts marketed under the Universal(R) name
and marine air-conditioning products marketed under the Rotary Aire(R) name.
The Company
3
manufactures and markets two sizes of self-contained, reverse-cycle air-
conditioning units and accessories under the Rotary Aire(R) name. These
units can be installed in powerboats, houseboats, sailboats and other
pleasure and commercial boats.
The Company's product line includes 9 models of non-marine electrical
generator sets which may be installed in fire trucks, rescue vehicles,
motor coaches, refrigerated trucks and other specialty vehicles to provide
electricity for lighting, refrigeration and other safety, operating and
convenience needs. These generators may also be used as stand-by or
secondary power sources in the event of power outages or in locations where
primary power is not readily available, such as construction sites, rural
areas and less developed countries.
The Company offers a complete line of spare parts and accessories for
its current product lines and for most discontinued models. The Company's
line of spare parts includes oil and fuel filters, belts, thermostats,
distributor caps, fuses, spark plugs, wiring, alternators, heat exchangers,
circuit breakers, water and fuel pumps, starter motors and fuel solenoids.
Many basic parts are packaged and sold as spare part kits. Accessories
offered by the Company include various control and instrument panels,
exhaust silencers and generator sound enclosures.
The Company provides all its customers with documentation covering
operation, maintenance and repair procedures for its products. Management
believes that the provision of current and comprehensive documentation
enhances the Company's marketing and competitive effectiveness. See
"Marketing and Sales" and "Competition" below.
Each of the Company's products is covered by a one-year limited
warranty covering parts and authorized labor. In addition, the Company
offers a five-year limited warranty on certain marine generator sets. Many
of the Company's suppliers also warrant their products for parts and labor.
Some of the Company's major suppliers warrant their products for the
duration of the Company's warranties. The Company believes it has made
adequate provisions for probable warranty claims. See Note 1 of Notes to
Consolidated Financial Statements included in "Item 8 - Financial
Statements and Supplementary Data." The Company's distributors are
generally responsible for administering the Company's warranties through
the dealer network. See "Marketing and Sales" below.
Governmental Regulation
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Many of the Company's products are subject to exhaust emission
standards pursuant to regulations promulgated by the Environmental
Protection Agency (the "EPA"), effective September 1, 1996, and by the
State of California, effective August 1, 1995. The emission standards are
intended to reduce the emissions of hydrocarbons, nitrogen oxides, carbon
monoxide, particulates and smoke. It is anticipated that by January 1,
2005, all of the Company's products will be subject to such regulations.
All of the regulations include manufacturer testing requirements, mandated
warranties on
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emissions related components, product labeling and reporting requirements.
Additionally, future regulations may include provisions for selective
enforcement audits and recall and repair requirements.
At this time, all of the Company's products, which are subject to
these emissions regulations, comply with the regulations. Achieving and
maintaining this compliance has been accomplished through significant
design and development expense. The emission standards established by the
regulations will become broader in scope and more stringent regarding
emissions levels each year. As a result, research and development
expenditures for emissions compliance will continue at a significant level
for the foreseeable future. Additionally, if at any time the Company
cannot effect the required modifications of its products to meet the
required emissions levels within the time frame allowed, the Company could
be materially adversely affected.
Design and Development
- ----------------------
The Company has an ongoing product improvement and development
program intended to enhance the reliability, performance and longevity of
existing products, and to develop new products. A significant portion of
the Company's senior management's time, as well as the efforts of the
Company's eleven-person product engineering department, is spent in this
area. As part of the Company's ongoing product development program, the
Company upgrades its engine products and periodically adds models to its
product line. For example, as and when improvements in component parts
allow, the Company may manufacture smaller or more lightweight versions of
existing models. In fiscal 2002, the product-engineering department
focused principally on the modernization of the Company's existing product
line and modifications, which the Company believes will be required as a
result of the emissions standards discussed above. In addition, the
Company expanded its engine product line by developing generator sets with
different kilowattage than its existing models. The Company intends to
introduce upgraded and new models as and when developed.
The Company's design and engineering focus is on reliability, ease of
maintenance, compactness, operating smoothness, safety and longevity, among
other technical and performance factors. The Company's technical and
performance specifications are utilized by the Company's suppliers in
producing certain component parts, metal and nonmetal fabrications and
other peripheral equipment that the Company manufactures and assembles into
finished products. Generally, the Company retains title to Company-
developed drawings, patterns and specifications used by these suppliers.
For the three fiscal years ended October 2002, the Company incurred
expenses of approximately $4,045,800 for design and development activities
as follows: 2002 - $1,098,500, 2001 - $1,445,800 and 2000 - $1,501,500.
All these activities were conducted and sponsored by the Company and the
major portion of these expenses was applied toward salaries and other
expenses of the Company's product design and engineering personnel.
5
Manufacturing and Sources of Supply
- -----------------------------------
The Company's manufacturing activities are conducted in an
approximately 110,000 square foot facility owned by the Company. See "Item
2 - Properties" below. The Company has approximately 46 persons employed
in various manufacturing and assembly functions. See "Employees" below.
The Company's engine products generally contain from 250 to 500
component parts and assemblies purchased from domestic and foreign
manufacturers and suppliers. Some of these component parts are
manufactured to Company specifications, while others are further machined
and assembled by the Company. The basic component of the Company's engine
products is a "long block" engine, which is a complete engine block and
head assembly without peripheral equipment. Peripheral equipment added by
the Company includes subassemblies (generators, transmissions, alternators,
carburetors, motors and pumps), machined castings (flywheels, bell
housings, manifolds, mounts, pulleys, brackets and couplings), sheet metal
fabrications (control and instrumentation panels), injection-molded plastic
and other non-metallic fabrications (belt guards, drip trays, belts, hoses
and panels) and various other component parts (mounts, switches and other
electrical devices).
The Company purchases "long block" engines from eight foreign
manufacturers. The Company currently purchases all of its requirements of
"long block" engines on a purchase order basis rather than pursuant to
long-term supply agreements. In certain cases, the Company has an
agreement with its "long block" engine manufacturers to supply these
component parts exclusively to the Company for marine products of the type
produced by the Company. Orders for "long block" engines are dollar-
denominated which protects the Company to some extent against foreign
currency exchange rate fluctuations, although fluctuations in the dollar
exchange rate have had and will continue to have an effect on the cost of
the Company's raw materials. See "Item 7 - Management's Discussion and
Analysis of Financial Condition and Results of Operations." The Company
believes that the purchase of "long block" engines on a purchase order
basis has become the more common industry practice. Interruption of the
supply of "long block" engines would have a material adverse effect on the
Company if the time to develop new sources of supply and replacement
products is longer than the time it takes to exhaust the Company's
inventory of existing "long block" engines. In addition, the Company does
not have long-term supply agreements with other manufacturers of other
component parts or peripheral equipment. The Company believes that it can
obtain these parts and equipment from a variety of sources on commercially
reasonable terms. However, the disruption of its supply of these parts,
equipment or "long block" engines would have a material adverse effect on
the Company's operations.
The lead-time between ordering and receipt of component parts varies
with the part involved, but generally ranges from a few weeks in the case
of unfinished products to three to six months in the case of "long block"
engines, generators and transmissions. The Company has not experienced any
difficulties in obtaining finished or unfinished components or peripheral
equipment on commercially reasonable terms.
6
Most of the Company's purchases of component parts and peripheral
equipment from Japanese ("long block" engines), Italian (generators) and
other foreign manufacturers are dollar-denominated. Fluctuations in
exchange rates have resulted, and may in the future result, in price
increases from some of the Company's suppliers. Management believes that
to varying degrees the Company's competitors in the engine product markets
have been and will be similarly affected since many of its competitors also
purchase component parts and peripheral equipment abroad. However, some of
the Company's principal competitors are divisions of large and diversified
multinational companies with extensive production facilities and sales and
marketing staffs and substantially greater financial resources than the
Company and therefore may be better situated to accommodate price increases
from suppliers due to fluctuations in exchange rates. The engine product
markets are price sensitive, and there can be no assurance that the Company
will be able to pass on price increases from its suppliers to its
customers.
The manufacturing of a particular engine product requires the
integration of a number of engineering, machining and assembly functions in
order to produce high quality components. Prior to final assembly, the
Company's manufacturing activities involve machining various metal and
nonmetal component parts on computer-controlled and conventional milling
machines, lathes, drill presses, welders and other machinery, modification
and assembly of electrical and mechanical subassemblies, calibration of
electrical devices and components, and testing for variances from
specifications and operating parameters. The Company has approximately 9
machine operators who satisfy approximately 95% of the Company's machining
needs. Independent contractors perform the remainder of the machining.
The Company has a final assembly line for its engine products where
component parts, subassemblies and peripheral equipment are assembled onto
"long-block" engines. Following final assembly, each generator set and
propulsion engine is tested at increasing loads up to full operating
capacity to verify performance and safety features. After product testing,
the product is pressure hot water washed, primed and painted, unpainted
components are attached, and the product is packed and shipped to the
customer, generally via common carrier freight collect.
The Company's air-conditioning products are produced on a separate
assembly line where component parts (compressors, evaporator and condensing
coils, fans, electrical components and plastic housings), purchased from
manufacturers and suppliers, are assembled into final units. The Company
does not have any long-term supply agreements with the manufacturers of
these component parts. However, the Company believes it can obtain most of
these parts from a variety of sources on commercially reasonable terms.
Following assembly, each air-conditioner is painted and tested for
performance, leakage and compliance with safety standards.
7
Quality Control and Computerization
- -----------------------------------
Management believes that maintaining high quality manufacturing
standards is important to its competitive position and also believes that
the Company has developed a reputation for high quality products. The
Company maintains quality control systems and procedures which it reviews
with its manufacturing personnel and which it modifies as appropriate.
The Company's quality control systems and procedures include the
testing of each fully assembled generator set and propulsion engine at
increasing loads up to full operating capacity to verify performance and
safety features. The checklist includes testing wiring and electrical
systems, all connections and fittings, fuel and oil systems, the fresh
water-cooling system and safety shutdown features. In the case of the
Company's generator sets, output current, voltage and frequency are also
tested. The results of the tests are recorded, and quality assurance
personnel approve each product before it leaves the testing area.
In line with its policy of updating and improving its manufacturing
operations, the Company utilizes a computerized manufacturing management
system, which integrates the Company's inventory control, sales and
financial functions with its manufacturing operations.
Marketing and Sales
- -------------------
The Company's marine engine and air-conditioning products are
marketed through a nationwide and international network of distributors and
dealers. The Company markets its non-marine engine products through a
sales representative and to distributors. In addition, the Company's sales
management and senior management devote a substantial amount of time to the
overall coordination of the Company's sales to distributors, as well as to
the Company's direct sales to boat and other manufacturers (OEMs). Direct
sales by the Company to OEMs accounted for approximately 30%, 43%, and 47%
of total sales for the fiscal years ended October 2002, 2001 and 2000,
respectively. The Company announced on April 19, 2002 that its exclusive
agreement with its largest OEM customer would not be extended. This
agreement expired on June 30, 2002. Sales to this OEM customer accounted
for approximately 16.2%, 26.4% and 25.8% of total sales for the fiscal
years ended October 26, 2002, October 27, 2001 and October 21, 2000,
respectively. The reduction in sales to OEMs as a percentage of total
sales in fiscal 2002 was attributable to the loss of this customer.
The Company's marine products are sold to distributors for resale to
manufacturers of powerboats, houseboats, sailboats and other pleasure and
commercial boats, and to boat dealers and marinas. Boat manufacturers
install the Company's products as original equipment. In addition, the
Company's distributors resell the Company's marine products to over 600
authorized dealers (including boatyards and marinas) located on or near
major navigable waterways throughout the world. These
8
dealers install the Company's generator sets, propulsion engines and air-
conditioners as either new or replacement equipment. In addition, many of
these dealers maintain inventories of spare parts and accessories in order
to maintain and repair the Company's marine products.
The Company's distributor network consists of 10 domestic and 57
foreign distributors. The Company's domestic distributors are located
along the East, West and Gulf Coasts and in the Great Lakes Region. The 57
foreign distributors service 70 countries worldwide and 14 islands in the
Caribbean. Of the 57 foreign distributors, 25 are located in Europe, the
Mid-East and Scandinavia, 12 in South, Central and North America, 9 in the
Far East, 7 in the Caribbean, and the remainder in Southern Africa,
Australia and New Zealand. Each distributor operates in a specified region
under a distribution agreement with the Company, which assigns to the
distributor the nonexclusive responsibility for sales and service of the
Company's products in its territory, including warranty administration,
accounts receivable collection and other customer related functions. Each
distributor maintains inventories of the Company's marine products,
including spare parts and accessories, in order to provide boat
manufacturers and dealers with prompt delivery of products. Typically, the
Company's distributors and dealers also distribute and sell other marine
accessories and products. Generally, however, the Company's distributors
do not sell products that compete with the Company's products.
Sales to international customers totaled $2,687,800 (10.5% of net
sales), $2,523,000 (8.8% of net sales) and $2,849,400 (8.3% of net sales)
for the fiscal years ended October 2002, 2001 and 2000, respectively. See
Note 2 of Notes to Consolidated Financial Statements included in "Item 8 -
Financial Statements and Supplementary Data" for additional information
concerning sales to international customers for the Company's three most
recent fiscal years. Management is not aware of any special tariffs,
importation quotas or any other restrictions imposed by the foreign
countries in which the Company sells its products. All of the Company's
international sales are dollar-denominated which protects the Company to
some extent against foreign currency exchange rate fluctuations, although
significant increases in the value of the dollar in relation to foreign
currencies may adversely impact the Company's ability to market its
products abroad. Management believes that, to varying degrees, the
Company's competitors in the marine product market are similarly affected
since many of its competitors also sell products abroad. However, some of
the Company's principal competitors are divisions of large and diversified
multinational companies with extensive production facilities and sales and
marketing staffs and substantially greater financial resources than the
Company and therefore may be better situated to accommodate fluctuations in
exchange rates. Management is not aware of any other unusual or special
risks associated with this aspect of the Company's business. The Company
considers international customers to be an important market for its marine
products.
An important aspect of the Company's marketing approach and
competitive position is the ability of its technical personnel and its
distributors to provide technical assistance to boat manufacturers and
dealers with a view to developing specifications and
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performance parameters for unit or serial production of its marine
products. To that end, the Company selects its distributors with great
care and continually monitors their technical expertise. In addition, at
times the Company conducts seminars in each distribution region. These
sessions are conducted by personnel from the Company and from its
distributors and are open to boat manufacturers, dealers and individual
boat owners. The Company occasionally sponsors service schools at its
manufacturing facility designed to upgrade a distributor's technical
expertise and to introduce product innovations and new products. See
"Competition" below.
The Company markets the Westerbeke(R), Universal(R) and Rotary Aire(R)
names and its marine products through various methods of advertising.
Certain advertising is accomplished under a cooperative system with the
Company's distributors. Under this system, the Company pays a portion of
the cost of and approves the advertising developed by its distributors.
Advertisements are placed in trade publications such as Passage Maker,
Boating, Sail, Power & Motor Yacht and Marlin. In addition, a substantial
amount of the Company's advertising is conducted through the distribution
of technical and sales literature and pamphlets, direct mailings and
sponsorship of exhibits at boat shows. During the fiscal years ended
October 2002, 2001 and 2000, the Company incurred advertising and
promotional expenses of $640,700, $668,500, and $684,600, respectively.
See Note 1 of Notes to Consolidated Financial Statements included in " Item
8 - Financial Statements and Supplementary Data."
For the fiscal year ended October 26, 2002, sales to Marysville
Marine Distributors, Inc., Sea Ray Boats, Inc. and Hansen Marine Distributors,
Inc., accounted for approximately 20.3%, 16.2% and 11.6%, respectively, of
the Company's total sales. See Note 2 of Notes to Consolidated Financial
Statements included in " Item 8 - Financial Statements and Supplementary
Data" and "Item 7 - Management's Discussion and Analysis of Financial
Condition and Results of Operations." The Company believes that, if
necessary, it could replace any of its distributors or sell the products
presently distributed by them directly to boat manufacturers and dealers.
However, the loss of these customers or the inability to replace these
distributors could have a material adverse effect on the Company. The
Company announced on April 19, 2002 that its exclusive agreement with its
largest OEM customer would not be extended. This agreement expired on June
30, 2002. Sales to this OEM customer accounted for approximately 16.2%,
26.4% and 25.8% of total sales for the fiscal years ended October 26, 2002,
October 27, 2001 and October 21, 2000, respectively.
The market for the Company's products is dependent on the market for
recreational boats, including auxiliary powered sailboats, powerboats,
houseboats and other pleasure boats. In addition, the recreational marine
boat business is seasonal in nature and accordingly, the Company's business
generally experiences some fluctuations in its business during the course
of the year. See Note 14 of Notes to Consolidated Financial Statements
included in "Item 8 - Financial Statements and Supplementary Data."
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Proprietary Rights
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Although the Company follows a policy of protecting its proprietary
rights to its marine engine products and designs, it does not believe that
its business, as a whole, is materially dependent upon such protection. The
Company has registered the names Westerbeke(R), Universal(R), Rotary Aire(R)
and Atomic Four(R) under Federal trademark law.
Backlog and Credit Terms
- ------------------------
The Company believes that because its production is based upon
cancelable purchase orders rather than long-term agreements, the amount of
its backlog is not an important indicator of future sales. The Company
extends credit to certain of its customers on terms, which it believes are
normal and customary in the marine industry.
Competition
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The business of manufacturing and supplying marine products is
extremely competitive. The Company faces competition from a number of
companies, including at least five significant competitors, some of which
are divisions of large and diversified multinational companies with
extensive production facilities and sales and marketing staffs and
substantially greater financial resources than the Company. Such
competitors may be better situated to accommodate price increases from
suppliers due to fluctuations in exchange rates. In addition, the Company
faces competition from similar companies as it expands its product line or
seeks other non-marine applications for its product line. Although price
is an important competitive factor, the Company believes that its pricing
is competitive.
The market for the Company's marine products is dependent on the
market for recreational boats, which may experience contracting sales as a
result of general economic conditions. A contracting market may result in
additional competition particularly for direct sales to large boat
manufacturers.
The Company believes that it can compete effectively with all of its
present competitors based upon the high quality, reliability, performance
and longevity of its products, the comprehensiveness of its line of
products, price, the effectiveness of its customer service, and the
technical expertise of its personnel and that of its distributors.
Employees
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At December 20, 2002, the Company had 79 full-time employees,
including officers and administrative personnel. None of the Company's
employees is covered by a collective bargaining agreement and the Company
considers its relationship with its employees to be excellent.
11
Directors and Executive Officers of the Company
- -----------------------------------------------
The directors and executive officers of the Company are as follows:
Name Position with the Company Age
- ---- ------------------------- ---
John H. Westerbeke, Jr. Chairman, President and 62
Director (Class C)
Gregory Haidemenos Principal Financial Officer 39
Gerald Bench Director (Class A) 61
Thomas M. Haythe Director (Class B) 63
James W. Storey Director (Class B) 68
John H. Westerbeke, Jr. has been President and a director of the
Company since 1976. In June 1986, Mr. Westerbeke assumed the additional
position of Chairman of the Company. Mr. Westerbeke has served in various
managerial capacities since joining the Company in 1966.
Gregory Haidemenos has been with the Company since 1996. From
December 1995 to September 1996, Mr. Haidemenos was an independent
consultant for Stanley Bostitch, a manufacturer of office and industrial
products. From August 1989 to December 1995, Mr. Haidemenos was the
Controller of Streetcars, Inc., a manufacturer of men's footwear.
Gerald Bench has been a director of the Company since June 1986. Mr.
Bench has been the Vice Chairman of TDG Aerospace, Inc. (manufacturer of
aircraft de-icing devices) since January 2001. From November 1996 to
January 2001, Mr. Bench was the President of BFT Holdings Co., Inc., a
company that invests in emerging growth businesses. Mr. Bench was the
President and Chief Executive Officer of Hadley Fruit Orchards, Inc. from
November 1996 to June 1999 and was a consultant from March 1995 to November
1996. Mr. Bench was a partner in ICAP Marine Group (consulting firm) from
November 1993 to February 1995. Mr. Bench was the Chairman and President
of TDG Aerospace, Inc. from October 1991 to November 1993. Mr. Bench was
the President of Thermion, Inc. (manufacturer of heaters for aircraft de-
icing devices) from April 1990 to September 1991. From July 1989 to March
1990, Mr. Bench was the general manager of Lermer Corporation (manufacturer
of airline galley equipment). Mr. Bench is the former Chairman of the
Board, President, Chief Executive Officer and director of E&B Marine Inc.
(marine supplies and accessories). Mr. Bench had held various executive
positions with E&B Marine Inc. for more than 30 years.
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Thomas M. Haythe has been a director of the Company since June 1986.
Mr. Haythe has been a business and legal consultant since February 2000.
From 1982 to January 2000, Mr. Haythe was a partner of the law firm of
Haythe & Curley (renamed Torys in 2000). Mr. Haythe is also a director of
Ramsay Youth Services, Inc. (provider of youth and educational services).
James W. Storey has been a director of the Company since June 1986.
Mr. Storey was the President of Wellingsley Corporation (private investment
management company) from December 1986 through December 1992. Mr. Storey
is currently an independent consultant. From 1982 to 1986, Mr. Storey was
the President and Chief Executive Officer of Codex Corporation, a
subsidiary of Motorola, Inc., and was a Vice President of Motorola, Inc.
Mr. Storey had held various managerial positions with Codex Corporation
since 1966.
ITEM 2. PROPERTIES.
The Company's executive and administrative offices and manufacturing
operations are located in Taunton, Massachusetts in an approximately
110,000 square foot facility owned by the Company. The lease on the
warehouse space located in Avon, Massachusetts expired during fiscal 2002.
Annual warehouse rent was approximately $78,700 in fiscal 2002 and $151,800
in fiscal 2001. See Note 10 of Notes to Consolidated Financial Statements
included in "Item 8 - Financial Statements and Supplementary Data."
ITEM 3. LEGAL PROCEEDINGS.
As previously announced, the award of damages in the Company's
arbitration against Daihatsu Motor Company, LTD for breach of contract and
other claims has been received and recorded as Other Income in the
accompanying financial statements. The net amount included in Other
Income is $4,433,900, which includes interest accrued on the award of
$713,200 and legal fees of $481,600. See Note 10 of Notes to Consolidated
Financial Statements included in " Item 8 - Financial Statements and
Supplementary Data" and "Item 7 - Management's Discussion and Analysis of
Financial Condition and Results of Operations."
In addition, from time to time, the Company is party to certain
claims, suits and complaints that arise in the ordinary course of business.
Currently, there are no such claims, suits or complaints, which, in the
opinion of management, would have a material adverse effect on the
Company's financial position.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
13
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS.
The Company's Common Stock is traded in the over-the-counter market
on the National Association of Securities Dealers Automated Quotation
System ("NASDAQ") under the symbol WTBK. On January 6, 2003, there were
approximately 319 shareholders of record. The following table sets forth
the range of high and low sales prices per share of the Company's Common
Stock from October 22, 2000 through October 26, 2002, on the NASDAQ.
Common Stock Prices
High Low
---- ---
FISCAL 2001
First Quarter (October 22, 2000 to
January 27, 2001) $3.125 $2.500
Second Quarter (January 28, 2001 to
April 28, 2001) 3.000 2.000
Third Quarter (April 29, 2001 to
July 28, 2001) 2.250 2.050
Fourth Quarter (July 29, 2001 to
October 27, 2001) 2.450 1.800
FISCAL 2002
First Quarter (October 28, 2001 to
January 26, 2002) $2.010 $1.310
Second Quarter (January 27, 2002 to
April 27, 2002) 1.950 1.450
Third Quarter (April 28, 2002 to
July 27, 2002) 1.500 1.070
Fourth Quarter (July 28, 2002 to
October 26, 2002) 1.790 1.050
On January 6, 2003, the last high and low sales prices for the
Company's Common Stock were $2.00 and $1.78, respectively.
14
No dividends have been paid or declared on the Common Stock of the
Company and the Company does not expect to pay any dividends on its Common
Stock in the foreseeable future.
ITEM 6. SELECTED FINANCIAL DATA.
Five-Year Comparison of Selected Financial Data
October 26, October 27, October 21, October 23, October 24,
2002 2001 2000 1999 1998
----------- ----------- ----------- ----------- -----------
For the Year: (In thousands, except for per share amount)
Net sales $25,526 $28,694 $34,528 $29,114 $26,202
Gross profit 5,559 6,461 7,752 6,563 5,966
Selling, general and administrative
Expense 4,996 4,436 5,756 4,359 3,684
Research and development expense 1,098 1,446 1,501 1,365 1,181
Income (loss) from operations (535) 1,132 494 839 1,100
Interest income (expense) (378) (618) (172) 60 (10)
Other income (expense) 4,444 10 (189) 387 -
Net income 2,886 319 228 796 644
Net income per share, diluted* 1.45 0.16 0.11 0.39 0.31
At end of year:
Total assets $23,090 $21,878 $24,839 $15,384 $14,670
Working capital 9,029 5,808 5,537 7,616 5,650
Long-term liabilities 4,430 4,770 5,030 647 893
Stockholders' equity 14,379 11,580 11,627 11,381 10,719
* See Note 1 of Notes to Consolidated Financial Statements.
15
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
Forward Looking Information
- ---------------------------
This Annual Report on Form 10-K contains forward-looking information about
the Company. In addition to the historical information contained herein,
the discussions in this document include statements that constitute
forward-looking statements under the Safe Harbor provisions of the Private
Securities Litigation Reform Act of 1995, including with respect to the
Company's expected cash flow from operations and borrowings under the
Credit Agreement, and its listing on Nasdaq. The Company is hereby setting
forth statements identifying important factors that may cause the Company's
actual results to differ materially from those set forth in any forward-
looking statements made by the Company. Some of the most significant
factors include: an unanticipated down-turn in the recreational boating
industry resulting in lower demand for the Company's products; the
unanticipated loss of, or decline in sales to, a major customer; the
inability to replace revenues and/or profits associated with the loss of
the exclusive agreement with its largest customer; the unanticipated loss
of a major supplier; the unanticipated required repayment in full of
outstanding amounts under the Company's demand credit facility; changes in
laws and regulations applicable to the Company; the impact of pending or
threatened litigation; the inability of the Company to effect required
modifications of its products to meet governmental regulations with respect
to emission standards; general economic and business conditions; financial
market volatility; and foreign currency fluctuations resulting in cost
increases to the Company for its foreign supplied components. Management
believes these forward-looking statements are reasonable. However, caution
should be taken not to place undue reliance on any such forward-looking
statements since such statements speak only as of the date when made.
Accordingly, there can be no assurances that any anticipated future results
will be achieved and the forward-looking statements contained herein should
not be relied upon as predictions of future results. Furthermore, the
Company undertakes no obligation to publicly update or revise any forward-
looking statements, whether as a result of new information, future events
or otherwise.
16
Results of Operations
- ---------------------
The following table sets forth, for the years indicated, the percentages
which the following items in the Consolidated Statements of Operations bear
to Net Sales.
Years Ended
-----------------------------------------
October 26, October 27, October 21,
2002 2001 2000
----------- ----------- -----------
Net sales 100.0% 100.0% 100.0%
Gross profit 21.8 22.5 22.5
Selling, general and administrative
expense 19.6 15.5 16.7
Research and development expense 4.3 5.0 4.3
Income (loss) from operations (2.1) 3.9 1.4
Interest income (expense), net (1.5) (2.2) (0.5)
Other income (expense) 17.4 - (0.5)
Provision for income (benefit) taxes 2.5 0.7 (0.3)
Net income 11.3 1.1 0.7
Fiscal 2002 compared to Fiscal 2001
- -----------------------------------
Net sales decreased $3,168,500 or 11.0% in fiscal 2002 as compared to
fiscal 2001. The decrease in net sales was attributable to general
business conditions in the domestic recreational marine market and, in
particular, a decrease in unit volume resulting from deceased demand for
new boats. In addition, as previously announced, the Company's exclusive
agreement with its largest customer was not extended. The agreement
expired June 30, 2002. International sales were $2,687,800 in 2002,
representing 10.5% of net sales, as compared to $2,523,000 in 2001 or 8.8%
of net sales.
Gross profit decreased $902,500 or 14.0% in fiscal 2002 as compared to
fiscal 2001. Gross profit as a percentage of sales was 21.8% in fiscal
2002 and 22.5% in fiscal 2001.
Selling, general and administrative expense increased $559,800 or 12.6% in
fiscal 2002 as compared to fiscal 2001. The increase was primarily the
result of increases in warranty costs, service costs related to the defined
benefit plan and bonuses paid to employees.
17
Research and development expense decreased $347,300 or 24.0% in fiscal 2002
as compared to fiscal 2001. The decrease in research and development
expenses was primarily attributable to a decrease in the utilization of
outside consultants and also a reduction in software maintenance costs.
Net interest expense was $378,000 in fiscal 2002 as compared to $618,200 in
fiscal 2001. The reduction in interest expense is related to lower levels
of outstanding debt and reduced borrowing costs.
Other income in fiscal 2002 is primarily from the receipt and recognition
of the arbitration award against one of the Company's former suppliers.
The amount included in other income from the arbitration award is
$4,433,900, which includes interest accrued on the award of $713,200 and
legal fees of $481,600.
The Company's net income was $2,886,000 in fiscal 2002 as compared to
$318,800 in fiscal 2001. The increase in net income was attributable to
the following: the receipt and recognition of the arbitration award against
one of the Company's former suppliers, the decrease in interest expense,
the reduction of income taxes resulting from the receipt of research and
developments credits and the decrease in research and development expenses
offset partially by the gross profit lost as a result of the decreased
sales volume and the increase in selling, general and administrative
expenses.
Fiscal 2001 compared to Fiscal 2000
- -----------------------------------
Net sales decreased $5,834,200 or 16.9% in fiscal 2001 as compared to
fiscal 2000. The decrease in net sales was attributable to general
business conditions in the domestic recreational marine market and, in
particular, deceased demand for new boats. International sales were
$2,523,000 in 2001, representing 8.8% of net sales, as compared to
$2,849,400 in 2000 or 8.3% of net sales.
Gross profit decreased $1,290,600 or 16.6% in fiscal 2001 as compared to
fiscal 2000. Gross profit as a percentage of sales remained constant at
22.5% in both fiscal 2001 and fiscal 2000.
Selling, general and administrative expense decreased $1,320,400 or 22.9%
in fiscal 2001 as compared to fiscal 2000. The decrease was primarily the
result of a decrease in legal costs associated with the arbitration and
related legal proceedings against the Company's former "long block"
supplier and a decrease in compensation expenses.
Research and development expense decreased $55,700 or 3.7% in fiscal 2001
as compared to fiscal 2000.
The gain on the sale of the facility in fiscal 2001, in the amount of
$552,800, was from the sale of the Company's property located in Avon,
Massachusetts.
18
Net interest expense was $618,200 in fiscal 2001 as compared to $171,700 in
fiscal 2000. The increase in interest expense was primarily due to the
mortgage on the Company's new Taunton facility and also higher outstanding
balances on the revolving loan balance.
Other income is the realized gain from the sale of certain investments
relating to the deferred compensation agreement (discussed below), which is
offset by an increase in selling, general and administrative expenses.
On May 17, 2001, the Board of Directors of the Company, at the request of
John H. Westerbeke, Jr., agreed to have the Company pay Mr. Westerbeke all
amounts previously deferred under an agreement, pursuant to which Mr.
Westerbeke had elected to defer the payment of certain amounts of salary
and bonuses awarded to him.
The Company's net income was $318,800 in fiscal 2001 as compared to
$228,300 in fiscal 2000. The increase is mainly attributable to the gain
on the sale of the Company's property located in Avon, Massachusetts.
Liquidity and Capital Resources
- -------------------------------
During fiscal 2002, net cash provided by operations was $7,491,000 as
compared to net cash provided by operations of $993,600 in fiscal 2001.
The increase in net cash provided by operations is primarily due to the
decrease in inventory, the increase in net income and the timing of
payments related to the split-dollar insurance agreement. The increase in
net income was primarily from the receipt and recognition in other income
of the arbitration award from one of the Company's former suppliers.
During fiscal 2002 and 2001, the Company purchased property, plant and
equipment of $270,700 and $1,440,600, respectively. On April 25, 2000, the
Company purchased a 110,000 square foot facility located in Taunton,
Massachusetts. This facility has enabled the Company to consolidate its
operations into one location. The MassDevelopment Financing Agency
approved the Company for a $5,000,000 tax-exempt industrial revenue bond,
which has been financed by GE Capital Public Finance. The real estate
portion of the industrial revenue bond is a 15-year mortgage loan, with
$4,106,400 outstanding at October 26, 2002. The loan agreement requires
monthly payments of $40,000. The equipment portion of the industrial
revenue bond is a 7-year term loan, with $277,300 outstanding at October
26, 2002. The term loan requires monthly payments of $5,900. The Company
also has an additional 7-year equipment loan, with $386,700 outstanding at
October 26, 2002. This loan agreement requires a monthly payment of
$7,900. The Company plans capital spending of approximately $300,000
during fiscal 2003.
On June 26, 2000, the Company entered into a $5,000,000 Credit Agreement
with Brown Brothers Harriman & Co. collateralized by inventories, accounts
receivable and general intangibles. The Credit Agreement was increased on
September 25, 2000 to a maximum availability of $6,000,000. The actual
amount available for borrowing is based on a calculation of eligible
accounts receivable and eligible inventory. Based on this calculation, at
October 26, 2002, the Company had approximately $4,038,000 available
19
for borrowing. At October 26, 2002, the Company had no outstanding
borrowings under the Credit Agreement and approximately $296,200 committed
to cover the Company's reimbursement obligations under certain letters of
credit and bankers' acceptances. The Credit Agreement does not have an
expiration date, but is payable on written demand.
Management believes cash flow from operations and borrowings available
under the Credit Agreement will provide for working capital needs,
principal payments on long-term debt, and capital and operating leases
through fiscal 2003.
Domestic inflation is not expected to have a major impact on the Company's
operations.
The costs of engine blocks and other components are subject to foreign
currency fluctuations (primarily the Japanese yen). The value of the U.S.
dollar relative to the yen had no material effect on the cost of the
Company's products in fiscal 2002.
New Accounting Pronouncements
- -----------------------------
In July 2001, the FASB issued SFAS No. 141, "Business Combinations", and
SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141
provides new guidance on the accounting for a business combination at the
date a business combination is completed. Specifically, it requires use of
the purchase method of accounting for all business combinations initiated
after June 30, 2001, thereby eliminating use of the pooling-of-interests
method. The provisions of SFAS No. 141 are effective immediately, except
with regard to business combinations initiated prior to June 30, 2001.
SFAS No. 142 is effective as of January 1, 2002. Goodwill and other
intangible assets determined to have an indefinite useful life that are
acquired in a business combination completed after July 1, 2001, will not
be amortized, but will continue to be evaluated for impairment in
accordance with appropriate pre-SFAS 142 accounting literature. Goodwill
and other intangible assets acquired in business combinations completed
before July 1, 2001 will continue to be amortized prior to the adoption of
SFAS No. 142. SFAS No. 142 establishes new guidance on how to account for
goodwill and intangible assets after a business combination is completed.
Among other things, it requires that goodwill and certain other intangible
assets will no longer be amortized and will be tested for impairment at
least annually and written down only when impaired. This statement will
apply to existing goodwill and intangible assets beginning with fiscal
years starting after December 15, 2001. The Company does not believe there
will be a material effect from the adoption of these new standards.
On August 16, 2001, FASB issued Statement No. 143, "Accounting for Asset
Retirement Obligations." The standard requires entities to record the fair
value of a liability for an asset retirement obligation in the period in
which it is incurred. When the liability is initially recorded, the entity
capitalizes a cost by increasing the carrying amount of the related long-
lived asset. Over time, the liability is accreted to its present value
each period, and the capitalized cost is depreciated over the useful life
of the related asset. Upon settlement of the liability, an entity either
settles the obligation for its recorded amount or incurs a gain or loss
upon settlement. The standard will apply to the Company
20
effective October 27, 2002. The Company does not believe there will be a
material effect from the adoption of this new standard.
On October 3, 2001, FASB issued Statement No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," that replaced FASB Statement
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-
Lived Assets To Be Disposed Of." The primary objectives of this project
were to develop one accounting model based on the framework established in
Statement No. 121 for long-lived assets to be disposed of by sale and to
address significant implementation issues. The accounting model for long-
lived assets to be disposed of by sale applies to all long-lived assets,
including discontinued operations, and replaces the provisions of APB
Opinion No. 30, Reporting Results of Operations-Reporting the Effects of
Disposal of a Segment of a Business, for the disposal of segments of a
business. Statement No. 144 requires that those long-lived assets be
measured at the lower of carrying amount or fair value less cost to sell,
whether reported in continuing operations or in discontinued operations.
Therefore, discontinued operations will no longer be measured at net
realizable value or include amounts for operating losses that have not yet
occurred. The provisions of Statement No. 144 will apply to the Company
effective October 27, 2002. The Company does not believe there will be a
material effect from the adoption of this new standard.
In June 2002, FASB issued Statement No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities". The standard addresses
financial accounting and reporting for costs associated with exit or
disposal activities and nullifies Emerging Issues Task Force (EITF) Issue
No. 94-3, "Liability Recognition for Certain Employee Termination Benefits
and Other Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring)." Statement No. 146 states that a liability for a cost
associated with an exit or disposal activity shall be recognized and
measured initially at its fair value in the period in which the liability
is incurred, except for a liability for one-time termination benefits that
are incurred over a period of time. The standard will apply to the Company
effective December 31, 2002. The Company does not believe there will be a
material effect from the adoption of this new standard.
On December 31, 2002, the Financial Accounting Standards Board (FASB) issued
SFAS No. 148, Accounting for Stock-Based Compensation-Transition and
Disclosure. SFAS No. 148 amends SFAS No. 123, Accounting for Stock-Based
Compensation. SFAS No. 148 requires accounting policy note disclosures to
provide the method of stock option accounting for each year presented in
the financial statements and, for each year until all years presented in
the financial statements recognize the fair value of stock-based
compensation. Also, SFAS No. 148 provides two additional transition
methods that eliminate the ramp-up effect resulting from applying the
expense recognition provisions of SFAS No. 123. The transition provisions
and annual statement disclosure requirements of SFAS No. 148 are effective
for fiscal years ending after December 15, 2002. The interim statement
disclosure requirements are effective for the first interim statement that
includes financial information after December 15, 2002. The Company does
not believe there will be a material effect from the adoption of this new
standard.
21
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company has not entered into any transactions using derivative
financial instruments or derivative commodity instruments and the Company
believes that its exposure to market risk associated with other financial
instruments (such as fixed and variable rate borrowings) is not material.
Most of the Company's purchases of component parts and peripheral equipment
from Japanese ("long block" engines), Italian (generators) and other
foreign manufacturers are dollar-denominated. Fluctuations in exchange
rates have resulted, and may in the future result, in price increases from
some of the Company's suppliers.
22
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
WESTERBEKE CORPORATION AND SUBSIDIARY
--------------------
CONSOLIDATED FINANCIAL STATEMENTS
For the years ended October 26, 2002,
October 27, 2001 and October 21, 2000
23
Sansiveri, Kimball & McNamee, L.L.P.
55 Dorrance Street Telephone 401-331-0500
Providence, RI 02903 Fax 401-331-9040
Independent Auditor's Report
----------------------------
To the Board of Directors and Shareholders of
Westerbeke Corporation and Subsidiary:
We have audited the accompanying consolidated balance sheet of Westerbeke
Corporation and Subsidiary as of October 26, 2002 and the related
consolidated statements of operations, shareholders' equity and
comprehensive income, and cash flows for the year ended October 26, 2002.
Our audit also included the financial statement schedule listed in Item
15(a) 2. These consolidated financial statements and financial statement
schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on the consolidated financial
statements and financial statement schedule based on our audit. The
consolidated financial statements of Westerbeke Corporation and Subsidiary
as of October 27, 2001 and for the years ended October 27, 2001 and October
21, 2000, were audited by other auditors whose report dated December 7,
2001 expressed an unqualified opinion.
We conducted our audit in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. An
audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements for the year ended
October 26, 2002, present fairly, in all material respects, the financial
position of Westerbeke Corporation and Subsidiary at October 26, 2002, and
the results of their operations and their cash flows for the year then
ended, in conformity with accounting principles generally accepted in the
United States of America. Also, in our opinion, the related financial
statement schedule, when considered in relation to the October 26, 2002
basic consolidated financial statements taken as a whole, presents fairly,
in all material respects, the information set forth therein.
By /s/ Sansiveri, Kimball & McNamee, L.L.P.
- -------------------------------------------
Providence, Rhode Island
January 9, 2003
24
KPMG LLP
99 High Street Telephone 617 988 1000
Boston, MA 02110-2371 Fax 617 988 0800
Independent Auditors' Report
----------------------------
To the Board of Directors and Stockholders of
Westerbeke Corporation:
We have audited the accompanying consolidated balance sheets of Westerbeke
Corporation and subsidiary as of October 27, 2001 and the related
consolidated statements of operations, stockholders' equity and
comprehensive income, and cash flows for each of the years in the two-
year period ended October 27, 2001. In connection with our audits of the
consolidated financial statements, we have also audited the financial
statement schedule as listed in Item 15(a) 2. These consolidated financial
statements and financial statement schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements and financial statement schedule based on
our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of
Westerbeke Corporation and subsidiary as of October 27, 2001 and the results
of their operations and their cash flows for each of the years in the
two-year period ended October 27, 2001, in conformity with accounting
principles generally accepted in the United States of America. Also in our
opinion, the related financial statement schedule, when considered in
relation to the basic consolidated financial statements taken as a whole,
presents fairly, in all material respects, the information set forth therein.
By /s/ KPMG LLP
---------------
Boston, Massachusetts
December 7, 2001
25
WESTERBEKE CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
October 26, October 27,
2002 2001
----------- -----------
ASSETS
Current assets:
Cash and cash equivalents $ 4,471,100 $ 40,300
Accounts receivable, net of allowance for doubtful
accounts and price allowances of $480,000 at
October 26, 2002 and $282,000 at October 27, 2001 (Note 2) 2,114,500 2,131,800
Inventories (Note 3) 5,048,300 7,566,800
Prepaid expenses and other assets 456,800 397,500
Prepaid income taxes 267,800 354,700
Deferred income taxes (Note 9) 951,700 844,200
----------- -----------
Total current assets 13,310,200 11,335,300
Property, plant and equipment, net (Notes 4,8 and 10) 8,348,600 8,862,400
Split dollar premiums (Note 5) 1,068,300 1,237,000
Other assets, net 170,300 190,200
Investments in marketable securities 109,900 109,200
Note receivable - related party (Note 6) 36,200 56,200
Deferred income taxes (Note 9) 46,400 87,400
----------- -----------
$23,089,900 $21,877,700
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt (Notes 8 and 10) $ 340,300 $ 317,900
Revolving demand note payable (Note 7) - 2,500,000
Accounts payable 1,385,600 2,164,300
Accrued expenses and other liabilities 1,237,400 545,200
Accrued income taxes (Note 9) 1,317,700
----------- -----------
Total current liabilities 4,281,000 5,527,400
----------- -----------
Long-term debt, net of current portion (Notes 8 and 10) 4,430,100 4,770,400
----------- -----------
Total Liabilities 8,711,100 10,297,800
----------- -----------
Stockholders' equity (Notes 11 and 12):
Preferred stock, $1.00 par value; authorized 1,000,000 shares;
none issued or outstanding at October 26, 2002 and October 27, 2001
Common stock, $.01 par value; authorized 5,000,000 shares; issued
2,244,682 shares in 2002 and 2,225,328 in 2001. 22,400 22,300
Additional paid-in-capital 6,126,700 6,105,100
Accumulated other comprehensive income (loss) (468,600) (359,800)
Retained earnings 9,505,600 6,619,600
----------- -----------
15,186,100 12,387,200
Less - Treasury shares at cost, 289,873 shares in 2002 and 2001 807,300 807,300
----------- -----------
Total stockholders' equity 14,378,800 11,579,900
----------- -----------
$23,089,900 $21,877,700
=========== ===========
The accompanying notes are an integral part of the consolidated financial
statements.
26
WESTERBEKE CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended
-----------------------------------------
October 26, October 27, October 21,
2002 2001 2000
----------- ----------- -----------
Net sales (Note 2) $25,525,700 $28,694,200 $34,528,400
Cost of sales 19,966,800 22,232,800 26,776,400
----------- ----------- -----------
Gross profit 5,558,900 6,461,400 7,752,000
Selling, general and administrative expense 4,995,700 4,435,900 5,756,300
Research and development expense 1,098,500 1,445,800 1,501,500
Gain on sale of facility - 552,800 -
----------- ----------- -----------
Income (loss) from operations (535,300) 1,132,500 494,200
----------- ----------- -----------
Other income (expense):
Interest income (expense), net (378,000) (618,200) (171,700)
Arbitration award (Note 10) 4,433,900 - -
Other income (expense) 10,000 9,700 (188,600)
----------- ----------- -----------
Other income (expense), net 4,065,900 (608,500) (360,300)
----------- ----------- -----------
Income before income taxes 3,530,600 524,000 133,900
Provision for income (benefit) taxes (Note 9) 644,600 205,200 (94,400)
----------- ----------- -----------
Net income $ 2,886,000 $ 318,800 $ 228,300
=========== =========== ===========
Income per common share, basic $ 1.48 $ .16 $ .12
=========== =========== ===========
Income per common share, diluted $ 1.45 $ .16 $ .11
=========== =========== ===========
Weighted average common shares, basic 1,949,066 1,941,391 1,920,147
=========== =========== ===========
Weighted average common shares, diluted 1,984,270 2,042,912 2,057,891
=========== =========== ===========
The accompanying notes are an integral part of the consolidated financial
statements.
27
WESTERBEKE CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME
For each of the years in the three years ended October 26, 2002
Accumulated
Common Additional Other
Stock Paid-in Comprehensive Retained Treasury Stockholders' Comprehensive
Amount Capital Income Earnings Stock Equity Income
------ ---------- ------------- -------- -------- ------------- -------------
October 23,1999 $21,900 $6,025,300 $ 16,900 $6,072,500 $(756,000) $11,380,600
Exercise of stock options 100 11,200 - - - 11,300
Tax benefit from the exercise of
stock options - 6,000 - - - 6,000
Unrealized gains on marketable
securities - - 900 - - 900 900
Net income - - - 228,300 - 228,300 228,300
------- ---------- --------- ---------- --------- ----------- ----------
October 21, 2000 22,000 6,042,500 17,800 6,300,800 (756,000) 11,627,100 229,200
----------
Exercise of stock options 300 46,000 - - - 46,300
Tax benefit from the exercise of
stock options - 16,600 - - - 16,600
Repurchase of 21,735 shares - - - - (51,300) (51,300)
Unrealized losses on marketable
securities - - (377,600) - - (377,600) (377,600)
Net income - - - 318,800 - 318,800 318,800
------- ---------- --------- ---------- --------- ----------- ----------
October 27,2001 22,300 6,105,100 (359,800) 6,619,600 (807,300) 11,579,900 (58,800)
Exercise of stock options 100 21,600 - - - 21,700
Unrealized losses on marketable
securities - - (108,800) - - (108,800) (108,800)
Net income - - - 2,886,000 - 2,886,000 2,886,000
------- ---------- --------- ---------- --------- ----------- ----------
October 26, 2002 $22,400 $6,126,700 $(468,600) $9,505,600 $(807,300) $14,378,800 $2,777,200
======= ========== ========= ========== ========= =========== ==========
The accompanying notes are an integral part of the consolidated financial
statements.
28
WESTERBEKE CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended
------------------------------------------
October 26, October 27, October 21,
2002 2001 2000
----------- ----------- -----------
Cash flows from operating activities:
Net income $ 2,886,000 $ 318,800 $ 228,300
Reconciliation of net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 804,300 774,100 509,200
Loss (gain) on disposal of fixed assets - (554,000) 53,900
Deferred income taxes 6,100 243,100 (358,600)
Changes in operating assets and liabilities:
Accounts receivable 17,300 437,900 (67,600)
Inventories 2,518,500 1,474,100 (3,400,700)
Prepaid expenses and other assets (59,300) 13,600 65,800
Split-dollar premiums - (344,500) (55,500)
Prepaid income taxes 86,900 (27,600) (268,900)
Other assets - 345,800 159,500
Accounts payable (778,700) (995,600) 911,200
Accrued expenses and other liabilities 692,200 (346,300) (22,400)
Deferred compensation - (345,800) (63,400)
Accrued income taxes payable 1,317,700
----------- ----------- -----------
Net cash provided by (used in) operating activities 7,491,000 993,600 (2,309,200)
----------- ----------- -----------
Cash flows from investing activities:
Purchase of property, plant and equipment (270,700) (1,440,600) (7,384,700)
Proceeds from sale of fixed assets including
former Avon facility - 1,241,200 -
Purchase of marketable securities (13,300) (4,600) (9,100)
Proceeds from payment of note receivable 20,000 18,600 18,600
----------- ----------- -----------
Net cash used in investing activities (264,000) (185,400) (7,375,200)
----------- ----------- -----------
Cash flows (used in) from financing activities:
Exercise of stock options 21,700 46,300 11,300
Net borrowings (repayments) under revolving
demand note (2,500,000) (1,350,000) 3,850,000
Purchase of treasury stock - (51,300) -
Proceeds from GE Capital - - 5,000,000
Proceeds from Massachusetts Development - 500,000 -
Principal payments on long-term debt and
capital lease obligations (317,900) (334,000) (495,100)
----------- ----------- -----------
Net cash (used in) provided by financing activities (2,796,200) (1,189,000) 8,366,200
----------- ----------- -----------
(Decrease) increase in cash and cash equivalents 4,430,800 (380,800) (1,318,200)
Cash and cash equivalents, beginning of year 40,300 421,100 1,739,300
----------- ----------- -----------
Cash and cash equivalents, end of year $ 4,471,100 $ 40,300 $ 421,100
=========== =========== ===========
Continued
29
WESTERBEKE CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS, Continued
Years Ended
------------------------------------------
October 26, October 27, October 21,
2002 2001 2000
----------- ----------- -----------
Supplemental cash flow disclosures:
Interest paid $ 436,800 $ 623,200 $ 185,100
Income taxes paid - 10,000 644,000
Supplemental disclosures of non-cash flow items:
Increase (decrease) in unrealized gains on
marketable securities, net of income taxes (7,500) 2,000 900
Unrealized loss in split-dollar life insurance
Investments, net of income taxes (101,300) (379,600) -
Supplemental disclosures of non-cash operating activities:
Tax benefit from the exercise of stock options - 16,000 6,000
The accompanying notes are an integral part of the consolidated financial
statements.
30
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
October 26, 2002, October 27, 2001 and October 21, 2000
1. Summary of Significant Accounting Policies:
The Company is primarily engaged in the business of designing,
manufacturing and marketing marine engine and air-conditioning products.
Items Affecting Comparability
Our fiscal year ends on the Saturday of the last full week of October and,
as a result, a fifty-third week is added every five or six years. The
fiscal year ended October 27, 2001 consisted of fifty-three weeks. The
fifty-third week increased 2001 net sales by an estimated $475,000 and
operating profits by an estimated $10,900.
Principles of Consolidation
The consolidated financial statements include the accounts of Westerbeke
Corporation (the "Company"), and its wholly owned subsidiary, Westerbeke
International, Inc. (a foreign sales corporation). All inter-company
accounts are eliminated in consolidation.
Use of Estimates
The preparation of consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses. Actual results could differ
from these estimates.
Cash Equivalents
All highly liquid investments with an original maturity of three months or
less are considered to be cash equivalents.
Investments in Marketable Securities
Marketable investment securities at October 26, 2002 and October 27, 2001
consist of equity securities in various mutual funds. The Company employs
the provisions of Statement of Financial Accounting Standards No. 115,
Accounting for Certain Investments in Debt and Equity Securities (Statement
115). Under Statement 115, the Company classifies its marketable
securities in one of two categories: trading or available-for-sale.
Trading and available-for-sale securities are recorded at fair value.
Unrealized holding gains and losses on trading securities are included in
earnings. Unrealized holding gains and losses on available-for-sale
securities are excluded from earnings and are reported as a separate
component of stockholders' equity until realized. Transfers of securities
between categories are recorded at fair value at the date of transfer.
Unrealized holding gains and losses are recognized in earnings for
transfers into trading securities.
A decline in the market value of any available-for-sale security below cost
that is deemed other than temporary is charged to earnings resulting in the
establishment of a new cost basis for the security.
Dividend and interest income are recognized when earned. Realized gains
and losses, if any, for securities classified as available-for-sale are
included in earnings with cost determined using the specific identification
method.
31
Marketable investment securities held in connection with the deferred
compensation arrangement are classified as trading securities. These
securities were sold during the year ended October 27, 2001. All other
marketable securities are classified as available-for-sale. Equity
securities are stated at the fair market value at October 26, 2002 and at
October 27, 2001. The total cost of the marketable securities at October
26, 2002 and October 27, 2001 was $65,300. Unrealized holding gains in
investment securities, net of income taxes, which is included in
accumulated other comprehensive income at October 26, 2002 and October 27,
2001 were $12,200 and $19,700, respectively.
Inventories
Inventories are valued at the lower of cost (determined on the last-in,
first-out method) or market.
Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of
The Company accounts for long-lived assets in accordance with the
provisions of SFAS No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets. This Statement requires that those long-lived assets be
measured at the lower of carrying amount or fair value less cost to sell.
Depreciation and Amortization
The Company computes depreciation and amortization expense on a straight-
line basis over the following estimated useful lives:
Asset Classification Estimated Useful Lives
- -------------------- ----------------------
Building and building improvements 15 - 40 years
Machinery and equipment 10 years
Patterns 5 years
Furniture and fixtures 5 - 10 years
Transportation equipment 3 - 5 years
Equipment under capital lease 5 - 10 years
Intangibles 3 - 17 years
Intangible assets, primarily acquired patents, are classified in other
assets. Maintenance and repairs are charged to expense in the period
incurred. The cost and accumulated depreciation of assets retired or sold
are removed from the accounts and any gain or loss is credited or charged
to income.
Leasehold improvements are amortized on a straight-line basis over the
shorter of the life of the lease or their estimated useful lives.
Revenue Recognition
Revenues and related cost of sales for all products are recognized when
products are shipped, as shipments are FOB shipping point and title and
risk of loss pass to the customer at that point. The Company expenses
price allowance obligations at the time of sale of the product. The
Company calculates price allowance reserves based upon actual rebates and
sales allowance credits issued in the current period.
Fair Value of Financial Instruments
Financial instruments of the Company consist of cash, cash equivalents,
accounts receivable, long-term and short-term debt, accounts payable and
accrued liabilities. The carrying value of these financial instruments
approximates their fair value because of the short maturity of these
instruments. Based upon borrowing rates currently available to the Company
for issuance of similar debt with similar terms and remaining maturities,
the estimated fair value of long-term debt approximates their carrying
amounts.
32
Product Warranty Cost
The anticipated costs related to product warranty are expensed at the time
of sale of the product. Accrued warranty expense of $430,000 is included in
accrued expenses and other liabilities at October 26, 2002 and $360,000 at
October 27, 2001. The Company calculates this reserve by comparing actual
reimbursed warranty expenses for the fiscal year as a percentage of sales
for the same period.
Advertising
Advertising and promotional expenditures are expensed as incurred. During
the fiscal years ended October 2002, 2001 and 2000, the Company incurred
advertising and promotional expenses of $640,700, $668,500, and $684,600,
respectively.
Income Taxes
The Company uses the asset and liability method of accounting for income
taxes. Under the asset and liability method, deferred income taxes are
recognized for the future tax consequences attributable to differences
between the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred taxes of a
change in tax rate is recognized in income in the period that includes the
enactment date.
Split-Dollar Premiums
The Company has a split dollar life insurance agreement with John H.
Westerbeke, Jr., Chairman, President and Chief Executive Officer of the
Company. The value reflected on the balance sheet is the lesser of the
fair value of the mutual funds in which the premiums are invested or the
cumulative value of the premiums paid. The Company accounts for this
arrangement in accordance with SFAS No. 115, Accounting for Certain
Investments in Debt and Equity Securities. The investments are classified
as available for sale and unrealized gains and losses are reflected as a
component of other comprehensive income net of tax. Pursuant to the
requirements of the Sarbanes-Oxley Act of 2002, the Company has stopped
paying premiums in connection with such agreement.
Net Income Per Share
Basic income per common share is computed by dividing income
available to common stockholders by the weighted average number of shares
outstanding for the period. Diluted income per share reflects the maximum
dilution that would have resulted from the exercise of stock options.
Diluted income per share is computed by dividing net income by the weighted
average number of common shares and all dilutive securities, except when
the effect would be antidilutive.
For the twelve months ended:
October 26, 2002 October 27, 2001 October 21, 2000
---------------------------------- --------------------------------- ---------------------------------
Income Net Income Net Income Net
per share Shares Income per share Shares Income per share Shares Income
--------- ------ ------ --------- ------ ------ --------- ------ ------
Basic $1.48 1,949,066 $2,886,000 $.16 1,941,391 $318,800 $.12 1,920,147 $228,300
Effect of
Stock options (.03) 35,204 - - 101,521 - (.01) 137,744
----- --------- ---------- ---- --------- -------- ---- --------- --------
Diluted $1.45 1,984,270 $2,886,000 $.16 2,042,912 $318,800 $.11 2,057,891 $228,300
33
At October 26, 2002, there were 183,300 exercisable options outstanding,
which were convertible into 183,300 common shares. Included in the 183,300
exercisable options outstanding are 33,300 options that have been excluded
from the earnings per share calculation, since their inclusion would have
been antidilutive.
The arbitrator's award, discussed under legal proceedings in Note 10,
increased earnings per share by $1.34 for the year ended October 26, 2002.
The gain on the sale of the Avon property increased earnings per share by
$0.17 for the year ended October 27, 2001.
2. Business Segment
The Company has one business segment; the designing, manufacturing and
marketing of marine engines and related products. The profitability of the
Company is directly tied to the marine industry. The industry is subject
to fluctuations in economic conditions that may adversely affect the
Company.
Net sales include export sales, primarily to customers in the Netherlands,
England, Italy, South Africa and Puerto Rico of approximately $2,687,800,
$2,523,000 and $2,849,400 for fiscal years ended October 26, 2002, October
27, 2001, and October 21, 2000, respectively. In fiscal 2002, three
customers each accounted for sales in excess of 10% of net sales as
follows: $5,710,700, $4,537,500 and $3,267,200. In fiscal 2001, three
customers each accounted for sales in excess of 10% of net sales as
follows: $7,948,000, $5,565,900 and $3,400,200. In fiscal 2000, two
customers each accounted for sales in excess of 10% of net sales as
follows: $8,896,200 and $6,166,700.
At October 26, 2002, four customers each accounted for trade accounts
receivable in excess of 10% of net accounts receivable as follows:
$473,300, $436,300, $433,800 and $297,800. At October 27, 2001, three
customers each accounted for trade accounts receivable in excess of 10% of
net accounts receivable as follows: $534,100, $397,900 and $304,700. The
Company performs ongoing credit evaluations of its customers and therefore
does not require collateralization of trade receivables.
3. Inventories
Inventories consist of the following:
October 26, 2002 October 27, 2001
---------------- ----------------
Raw materials $3,808,400 $5,734,300
Work-in-process 614,000 855,800
Finished goods 625,900 976,700
---------- ----------
$5,048,300 $7,566,800
========== ==========
The Company uses the last-in, first-out (LIFO) method to value inventories.
The Company believes the LIFO inventory method results in a better matching
of costs and revenues during periods of changing prices. Inventories would
have been $1,031,500 and $918,600 higher at October 26, 2002 and October
27, 2001, respectively, if the first-in, first-out (FIFO) method had been
used. In 2002 and 2001, inventory was reduced resulting in the liquidation
of LIFO inventory layers. Inventory cost determined on the FIFO method
approximates replacement or current cost.
The basic component of the Company's engine products is a "long block"
engine, which is a complete engine block and head assembly without
peripheral equipment. The Company purchases "long block" engines from five
foreign manufacturers. Interruption of the supply of "long block" engines
would have a material adverse effect on the Company if the time to develop
new sources of supply and replacement
34
products is longer than the time it takes to exhaust the Company's
inventory of existing "long block" engines.
4. Property, Plant and Equipment
Property, plant and equipment, at cost, consists of the following:
October 26, 2002 October 27, 2001
---------------- ----------------
Land $ 921,500 $ 921,500
Building and building improvements 5,658,300 5,630,200
Furniture and fixtures 711,300 706,800
Machinery, patterns and equipment 5,092,000 4,853,800
Transportation equipment 80,400 80,400
Leasehold improvements 20,400 20,400
Equipment under capital lease 769,200 769,200
----------- -----------
13,253,100 12,982,300
Less accumulated depreciation and amortization 4,904,500 4,119,900
----------- -----------
$ 8,348,600 $ 8,862,400
=========== ===========
The Company incurred depreciation expense of approximately $784,600,
$754,300, and $494,800, for fiscal years 2002, 2001, and 2000,
respectively.
5. Split-Dollar Premiums
The Company has a split-dollar life insurance arrangement with John H.
Westerbeke, Jr., the Chairman, President and Chief Executive Officer of the
Company, as part of his employment agreement (see note 10), pursuant to
which the Company pays the premium costs of certain life insurance
policies. This agreement allows the premiums paid to be invested in a
select group of mutual funds thereby subjecting the total cash value of
premiums paid to market risk. The cash proceeds the Company would receive
depends upon the method of termination. If termination is initiated by
death, the Company is entitled to repayment of an amount equal to the
cumulative premiums previously paid, with all remaining payments to be made
to the estate of Mr. Westerbeke or his beneficiaries. If the policy is
terminated for other reasons, the Company would receive the lesser of the
fair value of the mutual funds in which the premiums are invested or the
cumulative value of premiums paid. The Company accounts for this
arrangement in accordance with SFAS No. 115, Accounting for Certain
Investments in Debt and Equity Securities. The investments are classified
as available for sale and unrealized gains and losses are reflected as a
component of other comprehensive income net of tax. Included in other
assets at October 26, 2002 and October 27, 2001 is $1,068,300 and
$1,237,000, respectively, which represents the fair market value of
insurance premiums paid to date. At October 26, 2002, in connection with
the split-dollar insurance arrangement, the Company recorded an unrealized
loss of $168,700, net of taxes of $67,500, in other comprehensive income.
Pursuant to the requirements of the Sarbanes-Oxley Act of 2002, the Company
has stopped paying premiums in connection with such agreement.
6. Note Receivable and Lease-Related Party
The Company holds a note receivable from John H. Westerbeke, Jr., the
chairman, president and chief executive officer of the Company. The
principal amount of the secured loan at October 26, 2002 and October 27,
2001 was $36,200 and $56,200, respectively. The loan was used by Mr.
Westerbeke to purchase a 40-foot sailboat. The loan bears interest at 7-
3/4% per annum, is secured by a security interest in the sailboat and is
payable in monthly installments over a ten year period. The Company has
leased the sailboat from Mr. Westerbeke pursuant to a lease expiring in
July 2004 at a rental of $2,793 per month (see Note 10). The Company makes
use of the boat to evaluate the performance of its marine engines and
products and for other corporate matters.
35
7. Revolving Demand Note Payable
The Company has a $6,000,000 Credit Agreement with Brown Brothers Harriman
& Co., collateralized by inventory, accounts receivable and general
intangibles. The Company may choose the interest rate on the revolving
demand note of either LIBOR plus 250 basis points or the base rate. As of
October 26, 2002, the LIBOR rate was 1.86% and the base rate was 4.75%.
The Credit Agreement was entered into on June 26, 2000. The actual amount
available for borrowing is based on a calculation of eligible accounts
receivable and eligible inventory. Based on this calculation, at October
26, 2002, the Company had approximately $4,038,000 available for borrowing.
As of October 26, 2002, the Company had approximately $3,741,800 in unused
borrowing capacity under the Credit Agreement and approximately $296,200
committed to cover the Company's reimbursement obligations under certain
open letters of credit and bankers' acceptances. The Agreement does not
have an expiration date, but is payable on written demand. In connection
with this note payable, the Company is required to comply with certain
restrictive covenants requiring, among other things, the maintenance of
minimum working capital, minimum tangible net worth, minimum debt service
coverage ratio and maximum leverage ratio. As of October 26, 2002, the
Company was in compliance with such covenants.
8. Long-Term Debt
October 26, 2002 October 27, 2001
---------------- ----------------
Term Loan with an interest rate of 8.50%, with $ 386,700 $ 446,100
repayment terms through October 2007,
secured by certain equipment.
Term Loan with an interest rate of 6.46%, with 4,106,400 4,313,400
repayment terms through April 2015, secured
by the Company's facility located at 150 John
Hancock Road.
Term Loan with an interest rate of 6.46%, with 277,300 328,800
repayment terms through April 2007, secured
by certain equipment.
---------- ----------
4,770,400 5,088,300
Less current portion 340,300 317,900
---------- ----------
Long term debt net of current portion $4,430,100 $4,770,400
========== ==========
Aggregate maturities of long-term debt for each of the ensuing five years
are as follows:
Year Amount
---- ------
2003 $ 340,300
2004 364,300
2005 390,200
2006 417,800
2007 410,700
Thereafter 2,847,100
----------
$4,770,400
==========
36
9. Income Taxes
Income tax expense (benefit) consists of:
Years Ended
----------------------------------------------------------
October 26, 2002 October 27, 2001 October 21, 2000
---------------- ---------------- ----------------
Federal:
Current $ 656,000 $ (85,000) $ 217,200
Deferred (131,600) 270,000 (95,500)
--------- --------- ---------
524,400 185,000 121,700
--------- --------- ---------
State:
Current 55,000 47,100 47,500
Deferred 65,200 (26,900) (263,600)
--------- --------- ---------
120,200 20,200 (216,100)
--------- --------- ---------
Total $ 644,600 $ 205,200 $ (94,400)
========= ========= =========
The Company has approximately $176,000 of state tax credits, which are
available to offset future income taxes over a ten-year period. The state
tax credits began in fiscal 2001 and will expire in ten years.
Income tax (benefit) expense differed from the amounts computed by applying
the U.S. federal income tax rate of 34 percent to pretax income as a result
of the following:
Years Ended
--------------------------------------------------------
October 26, 2002 October 27, 2001 October 21, 2000
---------------- ---------------- ----------------
Provision at statutory rate $1,200,400 $178,200 $ 45,500
State tax provision,
net of federal tax benefit 79,300 13,300 (142,600)
Research and development tax credits
and suspended losses not booked
previously (606,700) - -
Other, net (28,400) 13,700 2,700
---------- -------- ---------
Total $ 644,600 $205,200 $ (94,400)
========== ======== =========
The income tax expense (benefit) was allocated as follows:
Years Ended
--------------------------------------------------------
October 26, 2002 October 27, 2001 October 21, 2000
---------------- ---------------- ----------------
Income taxes related to operations $644,600 $205,200 $ (94,400)
Stockholders' equity, for compensation
expense for tax purposes in excess of
amounts recognized for financial
reporting purposes - (16,600) (6,000)
-------- -------- ---------
Total $644,600 $188,600 $(100,400)
======== ======== =========
37
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at October
26, 2002 and October 27, 2001 are presented below.
October 26, 2002 October 27, 2001
---------------- ----------------
Deferred tax assets:
Accounts receivable $ 193,300 $ 97,400
Inventory 444,800 601,800
Accrued bonus 124,400 -
Warranty 173,200 145,000
Unrealized loss on split-dollar life insurance 319,600 239,900
Massachusetts net operating tax loss - 22,600
Massachusetts investment tax credit 116,300 183,100
Other 16,100 -
---------- ----------
Total gross deferred tax assets 1,387,700 1,289,800
---------- ----------
Deferred tax liabilities:
Fixed assets, principally due to
accelerated depreciation methods (389,600) (358,200)
---------- ----------
Total gross deferred tax liabilities (389,600) (358,200)
---------- ----------
Net deferred tax assets $ 998,100 $ 931,600
========== ==========
Management believes that the realization of deferred tax assets is more
likely than not because future operations of the Company are expected to
generate sufficient taxable income to utilize such deferred amounts.
10. Commitments and Contingencies
Lease Obligations
The Company has lease agreements for a warehouse and certain equipment (see
note 6) expiring at various dates through 2005. Rental expense under
operating leases was $115,500, $185,400, and $185,800 for the years ended
October 26, 2002, October 27, 2001 and October 21, 2000, respectively.
The future minimum lease payments required under operating leases that have
initial or remaining noncancelable lease terms in excess of one year are as
follows:
Year Operating
---- ---------
2003 $36,800
2004 36,800
2005 2,500
-------
Total future minimum lease payments $76,100
=======
Letters of Credit and Bankers' Acceptances
Certain foreign vendors require the Company to provide letters of credit at
the time purchase orders are placed. As of October 26, 2002, the Company
was contingently liable for open letters of credit and bankers' acceptances
of approximately $296,200 (see note 7).
Employment Agreements
In March of 1993, the Company entered into an Employment Agreement (the
"Agreement") with John H. Westerbeke, Jr., the Chairman of the Board,
President, and Chief Executive Officer of the Company. The Agreement
provides for Mr. Westerbeke to be paid an annual base salary, subject to
increases based upon the
38
Consumer Price Index and at the discretion of the Company. During fiscal
2002, Mr. Westerbeke's salary was $236,600. The Agreement also provides
for payment of a bonus at the discretion of the Board of Directors of the
Company. In March 2001, the Board of Directors extended for a period of
two years the incentive plan previously established in September 1996,
whereas Mr. Westerbeke has an annual bonus opportunity, based on net income
and increases in sales. In October 2002, the Board of Directors extended
the incentive plan for a further period of two years, through fiscal 2004.
Mr. Westerbeke may elect to have all or any part of his base salary or
bonus paid as deferred compensation in five annual installments commencing
upon his retirement or other termination of employment, or upon a change of
control of the Company, as defined in the Agreement. Amounts deferred by
Mr. Westerbeke are contributed by the Company to a trust established to
hold and invest these funds until such time as the amounts are payable to
Mr. Westerbeke. The Agreement also requires the Company to pay premiums
for certain life insurance policies on the life of Mr. Westerbeke.
Pursuant to the requirements of the Sarbanes-Oxley Act of 2002, the Company
has stopped paying premiums under the Company's split dollar life insurance
agreement with Mr. Westerbeke. In addition, in the event of a change in
control of the Company, Mr. Westerbeke may terminate his employment during
the one year period following such change in control, and in such event,
the Company is required to pay him a lump sum cash payment in an amount
equal to three times his average annual cash compensation during the most
recent five taxable years of the Company. In addition, in such
circumstances, the Company is required to continue to carry group life and
health insurance for Mr. Westerbeke for a three-year period and is required
to pay any premiums payable on the life insurance policies on his life for
a three-year period.
Legal Proceedings
On October 24, 2002, the Company received the award of damages in the
Company's arbitration against Daihatsu Motor Company, LTD for breach of
contract and other claims. This award has been recorded as Other Income
in the financial statements. The net amount included in Other Income is
$4,433,900, which includes interest accrued on the award of $713,200 and
legal fees of $481,600.
Concentrations
As of October 26, 2002, the Company had approximately $5,593,300 of cash
deposits, which exceeds the Federal Deposit Insurance Corporation (FDIC)
limit. The Company maintains such cash deposits in a high credit quality
financial institution.
11. Stockholders' Equity
In June 1986, the Board of Directors and the stockholders of the Company
adopted the Company's 1986 Stock Option Plan (the "Option Plan"), under
which 300,000 shares of common stock have been made available. The Company
has also reserved 250,000 shares of common stock for issuance in connection
with a Supplemental Stock Option Plan (the "Supplemental Plan"). The
Supplemental Plan permits acceleration of the exercisability of options in
the event of a change in control of the Company with the Company retaining
the right of first refusal with respect to shares issued under this plan.
In March 1996, the Board of Directors and the stockholders of the Company
adopted the Company's 1996 Stock Option Plan (the "1996 Option Plan"),
under which 150,000 shares of common stock have been made available. As of
October 26, 2002, there has been no activity under the 1996 Option Plan.
Options under the plans may be either nonqualified stock options or
incentive stock options. Options may be granted to eligible employees of
the Company and members of the board of directors.
The price at which the shares may be granted may not be less than the lower
of fair market value or tangible book value in the case of nonqualified
options, or 110% of the fair market value in the case of incentive stock
options. The options generally become exercisable in 20% annual increments
beginning on the date of the grant and expire at the end of ten years.
39
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards (SFAS) No. 123 in October 1995, which statement
establishes financial accounting and reporting standards for stock based
employee compensation plans. The Company has adopted the disclosure
requirements of SFAS No. 123 and continues to apply the accounting
provisions of Opinion No.25 of the Accounting Principles Board.
Information for fiscal years 2000, 2001 and 2002, with respect to the
"Option Plan", is as follows:
Weighted average
exercise price of
Shares shares under plan
------ -----------------
Balance outstanding at October 23, 1999 150,000 $1.125
Exercised (10,000) 1.125
-------
Balance outstanding at October 21, 2000 140,000 1.125
Exercised (19,278) 1.125
-------
Balance outstanding at October 27, 2001 120,722 1.125
Exercised (19,354) 1.125
Forfeited (26,368) 1.125
-------
Balance outstanding and exercisable at
October 26, 2002 75,000 $1.125
=======
The outstanding options expire on various dates through May 2003. Options
for 88,100 shares are available for future grant under the "Option Plan".
The following table summarizes information concerning currently outstanding
and exercisable options under the "Option Plan" as of October 26, 2002:
Weighted
average Weighted
Range of remaining average Weighted
exercise Number contractual outstanding Options average
prices outstanding life (years) option price exercisable exercise price
- -------- ----------- ------------ ------------ ----------- --------------
$1.125 75,000 0.4 $1.125 75,000 $1.125
Information for fiscal years 2000, 2001 and 2002, with respect to the
"Supplemental Plan", is as follows:
Weighted average
exercise price of
Shares shares under plan
------ -----------------
Balance outstanding at October 23, 1999 and
October 21, 2000 118,400 $1.631
Exercised (10,100) 0.875
-------
Balance outstanding and exercisable at
October 27, 2001 and October 26, 2002 108,300 $1.702
-------
The following table summarizes information concerning currently outstanding
and exercisable options under the "Supplemental Plan" as of October 26,
2002:
40
Weighted
average Weighted
Range of remaining average Weighted
exercise Number contractual outstanding Options average
prices outstanding life (years) option price exercisable exercise price
-------- ----------- ------------ ------------ ----------- --------------
$1.125 - $3.000 108,300 1.4 $1.702 108,300 $1.702
The outstanding options expire on various dates through June 2006. Options
for 41,300 shares are available for future grant under the "Supplemental
Plan".
The Company has adopted the disclosure requirements of SFAS No. 123 and the
Company continues to apply APB Opinion 25, Accounting for Stock Issued to
Employees, and related interpretations in accounting for its plans. Had
compensation cost for the Company's stock option plans been determined
based on the fair value at the grant dates for awards under those plans
consistent with the method of FASB Statement No. 123, the Company's net
income per share would have been adjusted to the pro forma amounts
indicated below:
2002 2001 2000
---- ---- ----
Net income As reported $2,886,000 $318,800 $228,300
Pro forma 2,886,000 318,800 227,300
Basic income per share As reported $ 1.48 $ 0.16 $ 0.12
Pro forma 1.48 0.16 0.12
Diluted income per share As reported $ 1.45 $ 0.16 $ 0.11
Pro forma 1.45 0.16 0.11
Preferred Stock
As of October 26, 2002 and October 27, 2001, 1,000,000 shares of $1.00 par
value Serial Preferred Stock were authorized; none were issued or
outstanding.
Comprehensive Income
Comprehensive income is defined as the change in equity of a business
enterprise during a period from transactions and other events and
circumstances from nonowner sources. It includes all changes in equity
during a period except those resulting from investments by owners and
distributions to owners. The components of total comprehensive income
(loss) resulting from unrealized gains or losses on marketable securities,
net of income taxes for the years ending October 26, 2002 and October 27,
2001 are as follows:
For the twelve months ended:
------------------------------------
October 26, 2002 October 27, 2001
---------------- ----------------
Net income $2,886,000 $ 318,800
Unrealized (losses) gains on marketable securities,
net of income taxes of $72,500 at October 26, 2002
and $251,800 at October 27, 2001 (108,800) (377,600)
---------- ---------
Comprehensive income (loss) $2,777,200 $ (58,800)
========== =========
41
12. 1986 Employee Stock Purchase Plan
In June 1986, the board of directors and the stockholders of the Company
adopted the Company's 1986 Employee Stock Purchase Plan (the "Purchase
Plan"). Under the Purchase Plan, an aggregate of 100,000 shares of common
stock are available for purchase by eligible employees of the Company,
including directors and officers, through payroll deductions over
successive six-month offering periods. The Purchase Plan will become
effective when so declared by the board of directors.
The Purchase Plan is intended to qualify as an "Employee Stock Purchase
Plan" within the meaning of Section 423 of the Internal Revenue Code. The
purchase price of the common stock under the Purchase Plan will be 85% of
the average of the closing high bid and last asked prices per share in the
over-the-counter market on either the first or last day of each six-month
offering period, whichever is less. As of October 26, 2002, there has been
no activity under the Purchase Plan.
13. Employee Benefit Plans
In 1994, the Company started an Employee Deferred Compensation Plan that
covers all employees over 21 years of age who have completed at least 3
months of service with the Company. Contributions by the Company are
discretionary and are determined by the Company's board of directors. The
Company's defined contribution plan, available to substantially all
salaried employees, contains a matched savings provision that permits both
pretax and after-tax employee contributions. Participants can contribute
up to 15% of their annual compensation and receive a 25% matching employer
contribution on up to 8% of their annual compensation. During fiscal 2002,
the Company temporarily ceased the 25% matching employer contribution. The
Company contributed $600, $41,000 and $46,600 for the fiscal years ended
October 26, 2002, October 27, 2001 and October 21, 2000, respectively.
On January 1, 2002, the Company started a defined benefit pension plan that
covers all employees. The Company follows Statement of Financial Accounting
Standards (SFAS) No. 132, "Employers' Disclosures About Pensions and Other
Post-Retirement Benefits". The following table sets forth the Company's
defined benefit plan's funded status and amounts recognized in the Company's
consolidated financial statements as of October 26, 2002.
Reconciliation of Funded Status at 10/26/2002:
Projected Benefit Obligation $(216,458)
Plan Assets at Fair Value 0
Funded Status (216,458)
---------
Total Balance Sheet Liability $(216,458)
=========
Disclosure of Net Periodic Pension Cost for the Period:
Service Cost $ 216,458
---------
Net Periodic Pension Cost $ 216,458
=========
Accumulation Benefit Obligation at 10/26/2002:
Vested ABO $ 0
Non-Vested ABO 194,356
---------
Total ABO $ 194,356
=========
Change in Projected Benefit Obligation:
Projected Benefit Obligation on 01/01/2002 $ 0
Service Cost 216,458
---------
Projected Benefit Obligation on 10/26/2002 $ 216,458
=========
42
Actuarial Methods and Assumptions:
6% Discount Rate (Interest Rate)
6% Expected Rate of Return on Assets
3% Salary Increase Rate
14. Quarterly Financial Data (Unaudited)
(In thousands, except per share amounts)
Selected quarterly financial data for the years ended October 26, 2002 and
October 27, 2001 is as follows:
Fiscal
Fiscal 2002: First Second Third Fourth Year
----- ------ ----- ------ ------
Net sales $4,674 $7,429 $7,784 $5,639 $25,526
Gross profit 955 1,707 1,831 1,066 5,559
Income (loss) from operations (444) 187 640 (918) (535)
Other income (loss) (104) (59) (89) 4,318 4,066
Net income (loss) (329) 390 371 2,454 2,886
Net income (loss) per share, diluted (0.17) 0.19 0.19 1.24 1.45
Fiscal
Fiscal 2001: First Second Third Fourth Year
----- ------ ----- ------ ------
Net sales $7,436 $8,173 $6,760 $6,325 $28,694
Gross profit 1,305 1,732 1,632 1,792 6,461
Income (loss) from operations (228) 642 258 460 1,132
Other income (loss) (176) (186) (119) (127) (608)
Net income (loss) (243) 274 83 205 319
*Net income (loss) per share, diluted (0.13) 0.13 0.04 0.10 0.16
* The amounts do not add because of the first quarter's loss effect on the
determination of the diluted weighted average common shares for that
period.
43
SCHEDULE II
WESTERBEKE CORPORATION AND SUBSIDIARY
VALUATION AND QUALIFYING ACCOUNT
For the years ended October 26, 2002, October 27, 2001
and October 21, 2000
Balance at Charged to Charged Balance
Beginning of Costs and To Other at End
Period Expenses Accounts Deductions of Year
------------ ---------- -------- ---------- -------
2000
Allowance for
Doubtful accounts $ 59,200 62,500 - 6,700 $115,000
2001
Allowance for
Doubtful accounts $115,000 - - - $115,000
2002
Allowance for
Doubtful accounts $115,000 (10,000) - - $105,000
44
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.
Not applicable.
45
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Certain biographical information concerning the directors of the
Company as of January 1, 2003 is set forth below. Such information was
furnished by them to the Company.
Certain
Name of Director Age Biographical Information
- ---------------- --- ------------------------
GERALD BENCH 61 Vice Chairman, TDG Aerospace, Inc. (manufacturer of aircraft de-icing
devices) since January 2001; President, BFT Holdings Co., Inc. (investor in
emerging growth businesses) from November 1996 to January 2001; President
and Chief Executive Officer, Hadley Fruit Orchards, Inc. from November 1996
to June 1999; Consultant, Hadley Fruit Orchards, Inc. from March 1995 to
November 1996; Partner, ICAP Marine Group (consulting firm) from November
1993 to February 1995; Chairman and President, TDG Aerospace, Inc. from
October 1991 to November 1993; President, Thermion, Inc. (manufacturer of
heaters for aircraft de-icing devices) from April 1990 to September 1991;
General Manager, Lermer Corporation (manufacturer of airline galley
equipment) from June 1989 through March 1990; former Chairman of the Board,
President, Chief Executive Officer and Director of E&B Marine Inc. (marine
supplies and accessories) from prior to 1988; Director of the Company since
June 1986
THOMAS M. HAYTHE 63 Business and Legal Consultant since February 2000: Partner, Haythe & Curley
(attorneys) (renamed Torys in 2000) from 1982 to January 2000; Director:
Novametrix Medical Systems Inc. (manufacturer of electronic medical instruments)
and Ramsay Youth Services, Inc. (provider of youth and educational services);
Director of the Company since June 1986.
46
Certain
Name of Director Age Biographical Information
- ---------------- --- ------------------------
JAMES W. STOREY 68 Consultant since January 1993; President, Wellingsley Corporation (private
investment management company) from December 1986 through December 1992;
President and Chief Executive Officer of Codex Corporation, a subsidiary of
Motorola, Inc. from 1982 to 1986; Vice President of Motorola, Inc. from 1982
to 1986; Director of the Company since June 1986.
JOHN H. WESTERBEKE, JR. 62 President of the Company since 1976; Director of the Company since 1976;
Chairman of the Board of Directors of the Company since June 1986.
For additional information concerning the management of the Company,
see "Item 1 - Business - Executive Officers" contained in Part I hereof.
The Board of Directors of the Company consists of three classes of
directors: Class A, Class B, and Class C. Directors in each class are
elected for a term of three years. The term of office of the Class B
directors will expire at the Annual Meeting of Stockholders to be held in
2003. Class C and Class A directors will be elected at the Annual Meetings
to be held in 2004 and 2005, respectively. Mr. Bench is a Class A
director, Messrs. Haythe and Storey are Class B directors and Mr.
Westerbeke is a Class C director.
The directors and officers of the Company other than Messrs. Bench,
Haythe, and Storey are active in the business on a day-to-day basis.
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's directors and executive officers, and persons who own more than
ten percent of the Company's Common Stock, to file with the SEC initial
reports of ownership and reports of changes in ownership of Common Stock.
Officers, directors and greater than ten percent stockholders are required
by SEC regulations to furnish the Company with copies of all Section 16 (a)
reports they file.
To the Company's knowledge, based solely on a review of the copies of
such reports furnished to the Company and representations that no other
reports were required, during the fiscal year ended October 26, 2002 all
Section 16 (a) filing requirements applicable to its officers, directors
and greater than ten percent beneficial owners were complied with.
47
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth information for the fiscal years ended
October 26, 2002, October 27, 2001 and October 21, 2000 concerning the
compensation paid or awarded to the Chief Executive Officer and the other
former executive officer of the Company.
SUMMARY COMPENSATION TABLE
Annual Compensation
----------------------------
Fiscal
Name and Year
Principal Ended All Other
Position October Salary Bonus Compensation
--------- ------- ------ ----- ------------
John H. Westerbeke, Jr. 2002 $236,646 $286,675 $53,976(3)
President, Chairman of the Board 2001 231,629 2,179 55,408(3)
of Directors and Class C Director 2000 228,359(1) 134,247(2) 38,549(3)
Carleton F. Bryant, III (4) 2002 $ 94,500 $ 58,240 -
Executive Vice President, 2001 94,500 58,240 -
Treasurer, Chief Operating 2000 94,500 60,633 -
Officer and Secretary
- --------------------
Includes $75,300 of salary earned in fiscal year 2000, payment
of which had been deferred. Payment was made in fiscal 2001.
Includes a $126,692 bonus earned in fiscal year 2000, payment
of which had been deferred. Payment was made in fiscal 2001.
Includes amounts ($40,500, $41,896 and $22,750 in fiscal 2002,
2001 and 2000, respectively) reflecting the current dollar
value of the benefit to Mr. Westerbeke of premiums paid by the
Company with respect to a split-dollar insurance arrangement
(see "Employment Agreements" below for a description of such
arrangement). Such benefit was determined by calculating the
time value of money (using the applicable federal rates) of the
premiums paid by the Company in the fiscal years ended October
26, 2002, October 27, 2001 and October 21, 2000 for the period
from the date on which each premium was paid until March 31,
2004 (which is the earliest date on which the Company could
terminate the agreement and request a refund of premiums paid).
Mr. Bryant was an executive officer of the Company until April
4, 2002.
The Company did not grant any stock options to the executive officers
named in the Summary Compensation Table during the fiscal year ended
October 26, 2002.
The following table sets forth the number and value of options held
by the executive officers named in the Summary Compensation Table during
the fiscal year ended October 26, 2002.
48
OPTION VALUES AT OCTOBER 26, 2002
Number of Value of Unexercised
Unexercised In-the-Money(1)
Options at Options at
October 26, 2002 October 26, 2002
----------------------------- -----------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
---- ----------- ------------- ----------- -------------
John H. Westerbeke, Jr. 150,000 - $56,250 -
- --------------------
In-the-money options are those where the fair market value of
the underlying Common Stock exceeds the exercise price of the
option. The value of in-the-money options is determined in
accordance with regulations of the Securities and Exchange
Commission by subtracting the aggregate exercise price of the
option from the aggregate year-end value of the underlying
Common Stock.
Employment Agreements
- ---------------------
The Company has an Employment Agreement (the "Agreement") with John
H. Westerbeke, Jr., the Chairman of the Board, President and Chief
Executive Officer of the Company, which provides for his employment by the
Company at an annual base salary, subject to increases based upon the
Consumer Price Index and at the discretion of the Company. During fiscal
2002, Mr. Westerbeke's salary was $236,600. The Agreement also provides
for payment of a bonus at the discretion of the Board of Directors of the
Company. In March 2001, the Board of Directors extended for a period of
two years the incentive plan established in September 1996, whereas Mr.
Westerbeke has an annual bonus opportunity, based on net income and
increases in sales. In October 2002, the Board of Directors of the Company
further extended the incentive plan for an additional two years, through
fiscal 2004. Mr. Westerbeke may elect to have all or any part of his base
salary or bonus paid as deferred compensation in five annual installments
commencing upon his retirement or other termination of employment, or upon
a change of control of the Company, as defined in the Agreement. Amounts
deferred by Mr. Westerbeke are contributed by the Company to a trust
established to hold and invest these funds until such time as the amounts
are payable to Mr. Westerbeke. The Agreement also requires the Company to
pay premiums for certain life insurance policies on the life of Mr.
Westerbeke as described below. Pursuant to the requirements of the
Sarbanes-Oxley Act of 2002, the Company has stopped paying premiums under
the split dollar life insurance arrangement between Mr. Westerbeke and the
Company. The Agreement may be terminated by the Company upon the
disability of Mr. Westerbeke, by the Company with or without cause, and by
Mr. Westerbeke in the event there has occurred a constructive termination
of employment by the Company. In addition, in the event of a change in
control of the Company, as defined in the Agreement, Mr. Westerbeke may
terminate his employment during the one year period following such change
in control, and in such event, the Company will be required to pay him a
lump sum cash payment in an amount equal to three times his annual cash
compensation during the most recent five taxable years of the Company, less
$1,000. In addition, in such circumstances, the Company is required to
continue to carry group life and health insurance for Mr. Westerbeke for a
three-year period and is required to pay any premiums payable on the split-
dollar life insurance policies on his life for a three-year period. Under
the Agreement, Mr.
49
Westerbeke has agreed not to compete with the Company for a period of one
year following termination of his employment.
The Company has entered into a split-dollar insurance arrangement
with Mr. Westerbeke, pursuant to which the Company will pay the premium
costs of certain life insurance policies that pay a death benefit of not
less than $6,150,000 in the aggregate upon the death of Mr. Westerbeke.
Upon surrender of the policies or payment of the death benefit thereunder,
the Company is entitled to repayment of an amount equal to the cumulative
premiums previously paid by the Company, with all remaining payments to be
made to Mr. Westerbeke or his beneficiaries. Pursuant to the requirements
of the Sarbanes-Oxley Act of 2002, the Company has stopped paying premiums
under the split dollar life insurance arrangement between Mr. Westerbeke
and the Company. See footnote (6) to the "Summary Compensation Table"
above for further information on premium payments made by the Company.
Compensation Committee Interlocks and Insider Participation
- -----------------------------------------------------------
During the Company's past fiscal year, Thomas M. Haythe, a director
of the Company and a member of the Compensation Committee, rendered legal
services to the Company. It is expected that Mr. Haythe will continue to
act as the Company's general counsel in the future.
Compensation of Directors
- -------------------------
The Company currently pays its directors a fee of $2,000 for
attending each meeting of the Board of Directors of the Company. In
addition, the Company pays the Chairman of the Audit Committee a quarterly
fee of $1,000.
Termination of Employment and Change of Control Arrangements
- ------------------------------------------------------------
See "Employment Agreements" above for information concerning certain
change of control arrangements with respect to John H. Westerbeke, Jr., the
Chairman of the Board, President and Chief Executive Officer of the
Company.
50
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED STOCKHOLDER MATTERS.
The shareholders (including any "group" as that term is used in
Section 13(d)(3) of the Securities Exchange Act of 1934) who, to the
knowledge of the Board of Directors of the Company, owned beneficially more
than five percent of any class of the outstanding voting securities of the
Company as of January 1, 2003, each director and each executive officer
named in the Summary Compensation Table of the Company who owned
beneficially shares of Common Stock and all directors and executive
officers of the Company as a group, and their respective shareholding as of
such date (according to information furnished by them to the Company), are
set forth in the following table. Except as indicated in the footnotes to
the table, all of such shares are owned with sole voting and investment
power.
Shares of Common Stock
Name and Address Owned Beneficially Percent of Class
- ---------------- ---------------------- ----------------
Marvin A. Gordon 100,000(1) 5.1%
750 Everett Street
Norwood, MA 02062
Gerald Bench 11,100(2) *
17 1/2 Passaic Avenue
Spring Lake, New Jersey 07762
Thomas M. Haythe 16,100(3) *
Myles Standish Industrial Park
Taunton, Massachusetts 02780
James W. Storey 20,100(4) 1.0%
3 Saddle Ridge Road
Dover, Massachusetts 02030
John H. Westerbeke, Jr. 1,248,250(5) 59.3%
Myles Standish Industrial Park
Taunton, Massachusetts 02780
Gregory Haidemenos - *
Myles Standish Industrial Park
Taunton, Massachusetts 02780
All Directors and Officers as a
Group (five persons) 1,295,550(2)(3)(4)(5) 60.6%
- --------------------
(*) Less than one percent.
51
Information as to these holdings is based upon a report on
Schedule 13D filed with the Securities and Exchange Commission
by Mr. Marvin A. Gordon. Such report indicates that Mr. Gordon
has sole voting and dispositive power with respect to 100,000
shares.
Consists of 11,100 shares issuable upon the exercise of
presently exercisable stock options held by Mr. Bench.
Includes 11,100 shares issuable upon the exercise of presently
exercisable stock options held by Mr. Haythe.
Includes 11,100 shares issuable upon the exercise of presently
exercisable stock options held by Mr. Storey.
Includes 150,000 shares issuable upon the exercise of presently
exercisable stock options held by Mr. Westerbeke.
To the Company's knowledge, there have been no significant changes in
stock ownership or control of the Company as set forth above since January
1, 2003.
The following table sets forth information required to be provided
under regulations of the Securities and Exchange Commission, as of October
26, 2002, with respect to compensation plans (including individual
compensation arrangements) under which equity securities of the registrant
are authorized for issuance:
EQUITY COMPENSATION INFORMATION
- -------------------------------------------------------------------------------------------------------------------------------
October 26, 2002 (a) (b) (c)
Number of securities
remaining available for
Number of securities to be future issuance under
issued upon exercise of Weighted-average exercise equity compensation plans
outstanding options, price of outstanding options, (excluding securities
Plan category warrants and rights warrants and rights reflected in column (a))
- ------------- -------------------------- ----------------------------- -------------------------
Equity compensation plans approved by
security holders 183,300 $1.47 129,400
------- ----- -------
Equity compensation plans not approved
by security holders N/A N/A N/A
------- ----- -------
Total 183,300 $1.47 129,400
------- ----- -------
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The Company leases a 40-foot sailboat from Mr. Westerbeke, the
Chairman of the Board, President and Chief Executive Officer of the
Company, pursuant to a lease expiring in July 2004. The Company pays an
annual rental to him of $33,500 and also pays approximately $10,000 to
$15,000 of annual expenses in connection with the operation and maintenance
of the sailboat. The Company makes use of the sailboat to evaluate the
performance of its marine engine products and for other corporate purposes.
In July 1994, Mr. Westerbeke executed a promissory note payable to the
Company in the principal amount
52
of $165,000. The proceeds of the loan were used by Mr. Westerbeke to
purchase the sailboat, which is leased, to the Company as described above.
The loan, which is due June 1, 2004, is payable in equal monthly
installments which commenced on July 1, 1994, together with interest at
7.75% per annum and is secured by the sailboat. Management of the Company
believes that the terms of the lease and of the secured loan are no less
favorable to the Company than it could obtain from an unrelated party.
During the Company's past fiscal year, Thomas M. Haythe, a Class B
director of the Company, rendered legal services to the Company. It is
expected that Mr. Haythe will continue to act as the Company's general
counsel in the future.
ITEM 14. CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures. Based on
their evaluation, as of a date within 90 days prior to the date of the
filing of this Form 10-K, of the effectiveness of the Company's disclosure
controls and procedures (as defined in Rules 13a-14(c) and 15d-14(c) of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), the
principal executive officer and the principal financial officer of the
Company have each concluded that such disclosure controls and procedures
are effective and sufficient to ensure that information required to be
disclosed by the Company in the reports that it files or submits under the
Exchange Act is recorded, processed, summarized and reported within the
time periods specified by the Securities and Exchange Commission's rules
and forms.
(b) Changes in internal controls. Subsequent to the date of their
evaluation, there have not been any significant changes in the Company's
internal controls or in other factors that could significantly affect these
controls, including any corrective action with regard to significant
deficiencies and material weaknesses.
53
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K.
(a) 1. Financial Statements:
Included in PART II of this report: Page
----
Reports of Independent Auditors 24-25
Consolidated Balance Sheets at October 26, 2002 and October 27, 2001 26
Consolidated Statements of Operations for the three years in the
period ended October 26, 2002 27
Consolidated Statements of Stockholders' Equity and Comprehensive
Income for the three years in the period ended October 26, 2002 28
Consolidated Statements of Cash Flow for the three years in the
period ended October 26, 2002 29-30
Notes to Consolidated Financial Statements 31-43
2. Financial Statement Schedule:
Included in PART II of this report:
Schedule II - Valuation and Qualifying Account for the three years
in the period ended October 26, 2002 44
Schedules other than those listed above are omitted because they are
not applicable, or the required information is shown in the Consolidated
Financial Statements or Notes thereto. Columns omitted from schedules
filed have been omitted because the information is not applicable.
54
3. Exhibits:
The exhibits required to be filed as part of this Annual Report on
Form 10-K are listed in the attached Index to Exhibits.
(b) Current Reports on Form 8-K:
During the fiscal quarter ended October 26, 2002, the Company did not
file any Current Reports on Form 8-K.
* * *
Copies of the exhibits filed with this Annual Report on Form 10-K or
incorporated by reference herein do not accompany copies hereof for
distribution to stockholders of the Company. The Company will furnish a
copy of any of such exhibits to any stockholder requesting the same for a
nominal charge to cover duplicating costs.
55
POWER OF ATTORNEY
The registrant and each person whose signature appears below hereby
appoint John H. Westerbeke, Jr. and Thomas M. Haythe as attorney-in-fact
with full power of substitution, severally, to execute in the name and on
behalf of the registrant and each such person, individually and in each
capacity stated below, one or more amendments to this Annual Report on Form
10-K, which amendments may make such changes in this Annual Report as the
attorney-in-fact acting in the premises deems appropriate and to file any
such amendment(s) to this Annual Report with the Securities and Exchange
Commission.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this Annual Report to
be signed on its behalf by the undersigned thereunto duly authorized.
Dated: January 23, 2003
WESTERBEKE CORPORATION
By /s/ John H. Westerbeke, Jr.
---------------------------
John H. Westerbeke, Jr.
Chairman of the Board
and President
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Annual Report has been signed below by the following persons on behalf
of the registrant and in the capacities and on the dates indicated.
Dated: January 23, 2003 By /s/ John H. Westerbeke, Jr.
---------------------------
John H. Westerbeke, Jr.
Chairman of the Board,
President and Principal
Executive Officer
Dated: January 23, 2003 By /s/ Gregory Haidemenos
----------------------
Gregory Haidemenos
Principal Financial
and Accounting Officer
56
Dated: January 23, 2003 By /s/ Gerald Bench
----------------
Gerald Bench
Director
Dated: January 23, 2003 By /s/ Thomas M. Haythe
--------------------
Thomas M. Haythe
Director
Dated: January 23, 2003 By /s/ James W. Storey
-------------------
James W. Storey
Director
57
CERTIFICATIONS
I, John H. Westerbeke, Jr., Chairman of the Board, President and
Chief Executive Officer, certify that:
l. I have reviewed this annual report on Form 10-K of Westerbeke
Corporation.
2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under
which such statements were made, not misleading with respect to the period
covered by this annual report;
3. Based on my knowledge, the financial statements, and other
financial information included in this annual report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
annual report;
4. The registrant's other certifying officers and I are responsible
for establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing
date of this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons performing
the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified
for the registrant's auditors any material weaknesses in internal controls;
and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated
in this annual report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant deficiencies
and material weaknesses.
58
Date: January 23, 2003
/s/ John H. Westerbeke, Jr.
---------------------------
John H. Westerbeke, Jr.
Principal Executive Officer
59
I, Gregory Haidemenos, Chief Financial Officer and Treasurer, certify
that:
1. I have reviewed this annual report on Form 10-K of Westerbeke
Corporation.
2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under
which such statements were made, not misleading with respect to the period
covered by this annual report;
3. Based on my knowledge, the financial statements, and other
financial information included in this annual report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
annual report;
4. The registrant's other certifying officers and I are responsible
for establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing
date of this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons performing
the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified
for the registrant's auditors any material weaknesses in internal controls;
and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated
in this annual report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant deficiencies
and material weaknesses.
Date: January 23, 2003
60
/s/ Gregory Haidemenos
----------------------
Gregory Haidemenos
Principal Financial Officer
61
Index to Exhibits
-----------------
Exhibit
No. Name of Exhibit Page
- ------- --------------- ----
2 Agreement and Plan of Merger between the Company
and J.H. Westerbeke Corporation, a Massachusetts
corporation (1)
3(a) Certificate of Incorporation of the Company (as
amended) (1)
3(b) By-Laws of the Company (4)
10(a) Agreement dated as of June 30, 1986 by and
between the Company and John H. Westerbeke, SR. (1)
10(b) 1986 Stock Option Plan of the Company as
amended on January 6, 1987 and on May 26, 1988 (4)
10(c) 1986 Employee Stock Purchase Plan of the
Company (1)
10(d) Supplemental Stock Option Plan of the
Company (4)
10(e) 1996 Stock Option Plan of the Company (2)
10(f) Agreement dated as of June 1, 1986 by and among
the Company, Ruth A. Westerbeke, John H.
Westerbeke, Jr., John H. Westerbeke, Sr. and
Ruth A. Westerbeke, as trustees (1)
10(g) Supplemental Medical Insurance Policy (1)
10(h) Employment Agreement dated March 24, 1993
between the Company and John H. Westerbeke, Jr.,
Chairman, President and Chief Executive Officer of
the Company (4)
62
10(i) Purchase and Sale Agreement dated March 1, 2000
between the Company and Dead River Company (5)
10(j) Real Estate Loan Agreement dated April 24, 2000
among the Company, 150 John Hancock LLP, GE
Capital Public Finance, Inc. and Massachusetts
Development Finance Agency (5)
10(k) Equipment Loan Agreement dated April 24, 2000
between the Company, GE Capital Public Finance, Inc.
and Massachusetts Development Finance Agency (5)
10(l) Mortgage Security Agreement, Assignment of Leases and
Rents and Fixture Filing dated April 24, 2000 between
the Company and GE Capital Public Finance, Inc. (5)
10(m) Loan and Security Agreement dated June 26, 2000
between the Company and Brown Brothers Harriman
& Co (6)
10(n) Revolving Credit Note dated June 26, 2000 between
the Company and Brown Brothers Harriman & Co. (6)
10(o) Amendment dated September 2000 to Loan and Security
Agreement dated June 26, 2000 between the Company
and Brown Brothers Harriman Co. (7)
10(p) Amendment dated September 2000 to Revolving Credit
Note dated June 26, 2000 between the Company and
Brown Brothers Harriman & Co. (7)
21 Subsidiary of the Company
23(a) Consent of Sansiveri, Kimball & McNamee, L.L.P.
23(b) Consent of KPMG LLP
63
24 Power of Attorney (See Page 56
of Annual
Report on
Form 10-K)
99.1 Certification of Chief Executive Officer pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002
99.2 Certification of Chief Financial Officer pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002
- --------------------
Incorporated by reference to Exhibits to Registration Statement
No. 33-6972 filed with the Securities and Exchange Commission.
Incorporated by reference to Exhibits to Registration Statement
No. 333-25687 filed with the Securities and Exchange
Commission.
Incorporated by reference to Exhibits to Quarterly Report on
Form 10-Q for fiscal quarter ended January 23, 1999.
Incorporated by reference to Exhibits to Annual Report on Form
10-K for fiscal year ended October 23, 1999.
Incorporated by reference to Exhibits to Quarterly Report on
Form 10-Q for fiscal quarter ended April 22, 2000.
Incorporated by reference to Exhibits to Quarterly Report on
Form 10-Q for fiscal quarter ended July 22, 2000.
Incorporated by reference to Exhibits to Annual Report on Form
10-K for fiscal year ended October 21, 2000.
64