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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 25, 2003
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 Employer (I.R.S. Identification No.)
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 5, 2004 $2,783,800
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 5, 2004 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.
On May 5, 2003, the Company announced that it had entered into an
Agreement and Plan of Merger (the "Merger Agreement") with Westerbeke
Acquisition Corporation ("Acquisition Corporation"), a corporation wholly-
owned by John H. Westerbeke, Jr., the Chairman, President and Chief
Executive Officer of the Company, pursuant to which the Company would merge
with and into Acquisition Corporation (the "Merger"). Under the terms of the
Merger Agreement, each of the approximately 850,000 shares of common stock
of the Company not owned by Acquisition Corporation would be converted upon
completion of the Merger into the right to receive $3.00 per share in cash.
On December 16, 2003, the Company and Acquisition Corporation entered into
an amendment to the Merger Agreement, which increased the merger
consideration from $3.00 to $3.26 per share in cash. Completion of the
Merger is subject to the satisfaction or waiver of a number of conditions
and there can be no assurance that the Merger will be completed. A special
meeting of the stockholders of the Company has been scheduled for February
5, 2004 in order to consider and vote on the adoption of the Merger
Agreement. Definitive proxy materials relating to the Merger were mailed to
the Company's stockholders on December 29, 2003. If the Merger is completed,
the Company will become a private company of which John H. Westerbeke, Jr.
will beneficially own 100% of the outstanding common stock.
Products
- --------
The Company's marine engine product line consists of 28 models of
electrical generator sets, 22 models of inboard propulsion engines, and
associated spare parts and accessories. The Company also offers 10 models of
non-marine generator sets.
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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 3.0 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 11 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 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 10 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.
4
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 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
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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
nine-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 2003, the product-engineering department focused principally on the
modernization of the Company's existing product line and modifications,
which the Company believes will be
5
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 2003, the Company incurred
expenses of approximately $3,782,200 for design and development activities
as follows: 2003 - $1,237,900, 2002 - $1,098,500 and 2001 - $1,445,800. 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.
Manufacturing and Sources of Supply
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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 43 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 seven 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
6
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.
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 8
machine operators who satisfy approximately 95% of the Company's machining
needs. Independent contractors perform the remainder of the machining.
7
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.
Quality Control and Computerization
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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
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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 its 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
8
sales to boat and other manufacturers (OEMs). Direct sales by the Company to
OEMs accounted for approximately 15%, 30%, and 43% of total sales for the
fiscal years ended October 2003, 2002 and 2001, 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 0.1%, 16.2% and 26.4%
of total sales for the fiscal years ended October 25, 2003, October 26, 2002
and October 27, 2001, respectively. The reduction in sales to OEMs as a
percentage of total sales in fiscal years 2002 and 2003 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 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 58
foreign distributors. The Company's domestic distributors are located along
the East, West and Gulf Coasts and in the Great Lakes Region. The 58 foreign
distributors service 70 countries worldwide and 14 islands in the Caribbean.
Of the 58 foreign distributors, 25 are located in Europe, the Mid-East and
Scandinavia, 12 in South, Central and North America, 9 in the Far East, 8 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 $2,651,800 (13.3% of net
sales), $2,687,800 (10.5% of net sales) and $2,523,000 (8.8% of net sales)
for the fiscal years ended October 2003, 2002 and 2001, 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
9
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 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(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
2003, 2002 and 2001, the Company incurred advertising and promotional
expenses of $637,100, $640,700, and $668,500, 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 25, 2003, sales to Marysville Marine
Distributors, Inc., Hansen Marine Distributors, Inc. and R.B. Grove, Inc.,
accounted for approximately 23.8%, 13.4% and 11.5%, 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
10
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 0.1%, 16.2% and 26.4% of total sales for the
fiscal years ended October 25, 2003, October 26, 2002 and October 27, 2001,
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."
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
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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 that 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.
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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 January 5, 2004, the Company had 71 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.
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 63
Director (Class C)
Gregory Haidemenos Principal Financial Officer 40
Gerald Bench Director (Class A) 62
Thomas M. Haythe Director (Class B) 64
James W. Storey Director (Class B) 69
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
12
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.
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).
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. See Note 10 of Notes to
Consolidated Financial Statements included in "Item 8 - Financial Statements
and Supplementary Data."
ITEM 3. LEGAL PROCEEDINGS.
On May 5, 2003, the Company announced that it had entered into an
Agreement and Plan of Merger (the "Merger Agreement") with Westerbeke
Acquisition Corporation ("Acquisition Corporation"), a corporation wholly-
owned by John H. Westerbeke, Jr., the Chairman, President and Chief
Executive Officer of the Company, pursuant to which the Company would merge
with and into Acquisition Corporation (the "Merger"). Under the terms of the
Merger Agreement, each of the approximately 850,000 shares of common stock
of the Company not owned by Acquisition Corporation would be converted upon
completion of the Merger into the right to receive $3.00 per share in cash.
On December 16, 2003, the Company and Acquisition Corporation entered into
an amendment to the Merger Agreement, which increased the merger
consideration from $3.00 to $3.26 per share in cash. Completion of the
Merger is subject to the satisfaction or waiver of a
13
number of conditions and there can be no assurance that the Merger will be
completed. A special meeting of the stockholders of the Company has been
scheduled for February 5, 2004 in order to consider and vote on the approval
of the Merger. Definitive proxy materials relating to the Merger were mailed
to the Company's stockholders on December 29, 2003. If the Merger is
completed, the Company will become a private company of which John H.
Westerbeke, Jr. will beneficially own 100% of the outstanding common stock.
In May 2003, a class action lawsuit was filed in the Court of Chancery
of the State of Delaware relating to the proposed Merger naming the Company
and its directors as defendants. The complaint alleged, among other things,
that the Merger was being advanced through unfair procedures, and that the
merger consideration offered in the Merger was grossly unfair, inadequate
and provided value to our stockholders substantially below the fair or
inherent value of our company and did not constitute maximization of
stockholder value. The complaint also alleged breaches by the defendants of
their fiduciary duties to our stockholders in connection with the proposed
Merger. The lawsuit sought to enjoin the proposed Merger or, if it was
completed, to recover damages. We and the other defendants filed an answer
to the complaint and discovery proceeded.
In December 2004, the parties in the class action lawsuit entered into
a Stipulation of Settlement with respect to a proposed settlement of the
lawsuit. In connection with the proposed settlement, the consideration
payable under the Merger Agreement was increased from $3.00 to $3.26 cash
per share. Completion of the settlement is subject to certain additional
conditions, including court approval and completion of the Merger. There can
be no assurance that the settlement will be completed or that the Merger
will be completed.
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 for the fiscal year ended October 26,
2002. 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.
There were no submissions of matters to a vote of security holders
during the fiscal quarter ended October 25, 2003.
14
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 5, 2004, there were
approximately 300 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 28, 2001 through October 25, 2003, on the NASDAQ.
Common Stock Prices
High Low
---- ---
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
FISCAL 2003
First Quarter (October 27, 2002 to
January 25, 2003) $3.450 $1.500
Second Quarter (January 26, 2003 to
April 26, 2003) 2.540 1.140
Third Quarter (April 27, 2003 to
July 26, 2003) 3.400 1.760
Fourth Quarter (July 27, 2003 to
October 25, 2003) 3.380 2.900
On January 5, 2004, the high and low sales prices for the Company's
Common Stock were $3.26 and $3.21, respectively.
15
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 25, October 26, October 27, October 21, October 23,
2003 2002 2001 2000 1999
-----------------------------------------------------------------------
For the Year: (In thousands, except for per share amount)
Net sales $19,954 $25,526 $28,694 $34,528 $29,114
Gross profit 4,475 5,559 6,461 7,752 6,563
Selling, general and administrative
expense 4,542 4,996 4,436 5,756 4,359
Research and development expense 1,238 1,098 1,446 1,501 1,365
Income (loss) from operations (1,305) (535) 1,132 494 839
Interest income (expense), net (275) (378) (618) (172) 60
Other income (expense) 10 4,444 10 (189) 387
Net income, (loss) (1,062) 2,886 319 228 796
Net income (loss) per share, diluted* (0.54) 1.45 0.16 0.11 0.39
At end of year:
Total assets $19,782 $23,090 $21,878 $24,839 $15,384
Working capital 8,106 9,029 5,808 5,537 7,616
Long-term liabilities 4,066 4,430 4,770 5,030 647
Stockholders' equity 13,405 14,379 11,580 11,627 11,381
* See Note 1 of Notes to Consolidated Financial Statements.
16
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 continued 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
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; foreign currency fluctuations resulting in cost
increases to the Company for its foreign supplied components; and the
inability to consummate the proposed Merger or that the proposed settlement
of litigation relating to the Merger will be effected. 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.
17
Results of Operations
- ---------------------
The following table sets forth, for the years indicated, the percentages
that the following items in the Consolidated Statements of Operations bear
to Net Sales.
Years Ended
-----------------------------------------
October 25, October 26, October 27,
2003 2002 2001
-----------------------------------------
Net sales 100.0% 100.0% 100.0%
Gross profit 22.4 21.8 22.5
Selling, general and administrative
expense 22.8 19.6 15.5
Research and development expense 6.2 4.3 5.0
Income (loss) from operations (6.5) (2.1) 3.9
Interest income (expense), net (1.4) (1.5) (2.2)
Other income (expense) 0.1 17.4 -
Provision for income (benefit) taxes (2.5) 2.5 0.7
Net income (loss) (5.3) 11.3 1.1
Fiscal 2003 compared to Fiscal 2002
- -----------------------------------
Net sales decreased $5,571,300 or 21.8% in fiscal 2003 as compared to fiscal
2002. The decrease in net sales resulted primarily from the loss of the
Company's exclusive agreement with its major customer, as announced on April
19, 2002. The agreement with this customer expired on June 30, 2002.
International sales were $2,651,800 in 2003, representing 13.3% of net
sales, as compared to $2,687,800 in 2002 or 10.5% of net sales.
Gross profit decreased $1,084,200 or 19.5% in fiscal 2003 as compared to
fiscal 2002. Gross profit as a percentage of sales was 22.4% in fiscal 2003
and 21.8% in fiscal 2002.
Selling, general and administrative expense (SGA) decreased $454,100 or 9.1%
in fiscal 2003 as compared to fiscal 2002. The decrease was primarily the
result of decreases in warranty costs. In addition, there were no bonuses
paid in fiscal 2003 as compared to fiscal 2002. The Company has incurred
$670,300 of costs to date associated with the proposed Merger of the Company
with and into Westerbeke Acquisition Corporation, as
18
announced on May 5, 2003. Due to uncertainty as to whether the proposed
Merger transaction will ultimately be completed, the costs incurred to date
have been expensed in SGA.
Research and development expense increased $139,400 or 12.7% in fiscal 2003
as compared to fiscal 2002. The increase in research and development
expenses was primarily attributable to an increase in the utilization of
outside consultants and also an increase in supplies. The Company does not
allocate research and development costs to specific projects, but rather
pools all costs together for the entire department.
Net interest expense was $275,100 in fiscal 2003 as compared to $378,000 in
fiscal 2002. The reduction in interest expense is related to lower levels of
outstanding debt and reduced borrowing costs.
Other income was $10,000 in fiscal 2003. Other income in fiscal 2002,
primarily from the receipt and recognition of the arbitration award against
one of the Company's former suppliers, is $4,433,900, which includes
interest accrued on the award of $713,200 and legal fees of $481,600.
The Company reported a net loss of $1,061,500 in fiscal 2003 as compared to
net income of $2,886,000 in fiscal 2002. The net loss in fiscal 2003 was
primarily attributable to the gross profit lost as a result of the decreased
sales volume and also the $670,300 of costs expensed relating to the
proposed merger. The net income in fiscal 2002 was primarily attributable to
the receipt and recognition of the arbitration award against one of the
Company's former suppliers.
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 announced on April 19, 2002, the Company's exclusive agreement
with its largest customer was not extended. The agreement expired on 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.
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
19
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
development 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.
Liquidity and Capital Resources
- -------------------------------
During fiscal 2003, net cash used by operations was $2,612,600 as compared
to net cash provided by operations of $7,491,000 in fiscal 2002. The
decrease in net cash provided by operations is primarily due to the change
in inventory, the decrease in net income and the payment of income taxes.
During fiscal 2003 and 2002, the Company purchased property, plant and
equipment of $157,300 and $270,700, 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 (GE). The real estate portion of
the industrial revenue bond is a 15-year mortgage loan, with $3,885,500
outstanding at October 25, 2003. The loan agreement requires monthly
payments of $40,000. The equipment portion of the industrial revenue bond is
a 7-year term loan, with $222,400 outstanding at October 25, 2003. The term
loan requires monthly payments of $5,900. In connection with the loan
agreements with GE, 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 25, 2003, the
Company was in default with one of the loan covenants. GE has since given
the Company a waiver for this covenant. In November 2003, the Company
entered into an agreement with GE to provide a reduction in the interest
rates on both the real estate and equipment loans. The interest rate on the
real estate loan is an adjustable rate based on a non-GE 30-day non-
20
financial commercial paper rate. The rate at October 25, 2003 was 3.45%. The
rate for the equipment loan is fixed at 3.85%.
The Company also has an additional 7-year equipment loan, with $322,100
outstanding at October 25, 2003. This loan agreement requires a monthly
payment of $7,900. The Company plans capital spending of approximately
$300,000 during fiscal 2004.
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 25, 2003, the Company had approximately $3,676,800 available for
borrowing. At October 25, 2003, the Company had no outstanding borrowings
under the Credit Agreement and approximately $26,000 committed to cover the
Company's reimbursement obligations under certain letters of credit and
bankers' acceptances. 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 25, 2003, the Company was in compliance with such covenants. 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
2004.
Inflation
- ---------
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 2003.
Off-Balance Sheet Arrangements
- ------------------------------
None.
Critical Accounting Policies
- ----------------------------
The preparation of financial statements in accordance with generally
accepted accounting principles requires judgment on the part of management
to arrive at estimates and assumptions on matters that are inherently
uncertain. These estimates may affect the amounts of assets, liabilities,
revenues, and expenses reported in a given period. Estimates and assumptions
are periodically evaluated and may be adjusted in future periods.
21
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.
Accounts Receivable
The Company carries its accounts receivable at cost less an allowance for
doubtful accounts and a reserve for price allowances. On a periodic basis,
the Company evaluates its accounts receivable and establishes an allowance
for doubtful accounts, based on a history of past write-offs and collections
and current credit conditions. The reserve for price allowances is based on
a history of past price allowances paid and current sales incentive programs
in place.
Product Warranty Costs
The Company calculates this reserve by comparing actual reimbursed warranty
expenses for the fiscal year as a percentage of sales for the same period.
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.
Inventories
Inventories are valued at the lower of cost (determined on the last-in,
first-out method) or market.
22
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.
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 applies to existing goodwill and
intangible assets beginning with fiscal years starting after December 15,
2001. The adoption of this standard did not have a material effect on the
Company's financial statements.
23
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 applied to the Company effective October 27, 2002.
The adoption of this standard did not have a material effect on the
Company's financial statements.
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 provisions of this standard were adopted
October 27, 2002 and did not have a material effect on the Company's
financial statements.
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. This standard was adopted December 31, 2002 and
did not have a material effect on the Company's financial statements.
In November 2002, the Financial Accounting Standards Board (FASB) issued
FASB Interpretation No. 45 (FIN 45), "Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness
of Others." This Interpretation elaborates on the disclosures to be made by
a guarantor in its interim and annual financial statements about its
obligations under certain guarantees that it has issued. It also clarifies
that a guarantor is required to recognize, at the inception of a guarantee, a
24
liability for the fair value of the obligation undertaken in issuing the
guarantee. The initial recognition and measurement provisions of this
Interpretation are applicable on a prospective basis to guarantees issued or
modified after December 31, 2002. The disclosure requirements of FIN 45 are
effective for financial statement periods ending after December 15, 2002.
The Company adopted FIN 45 effective as of its first quarter of fiscal 2003,
which did not have a material effect on the Company's results of operations
or financial position.
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 were effective for the first interim statement that includes
financial information after December 15, 2002. The Company adopted the
provisions of this standard effective December 15, 2002 and they did not
have a material effect on the Company's financial statements.
In January 2003, the FASB issued FASB Interpretation No. 46 (FIN 46),
"Consolidation of Variable Interest Entities". This Interpretation clarifies
the application of Accounting Research Bulletin No. 51, "Consolidated
Financial Statements", to certain entities in which equity investors do not
have the characteristics of a controlling financial interest or do not have
sufficient equity at risk for the entity to finance its activities without
additional subordinated financial support from other parties. FIN 46
requires an enterprise to consolidate a variable interest entity if that
enterprise will absorb a majority of the entity's expected losses, is
entitled to receive a majority of the entity's expected residual returns, or
both. FIN 46 also requires disclosures about unconsolidated variable
interest entities in which an enterprise holds a significant variable
interest. FIN 46 is currently effective for variable interest entities
created or entered into after January 31, 2003. FASB Staff Position 46-6,
which was issued in October 2003, delayed the effective date of FIN 46 to
the first reporting period ending after December 15, 2003 for variable
interest entities in which an enterprise holds a variable interest that it
acquired before February 1, 2003. The Company does not expect the adoption
of FIN 46 to have a material effect on its results of operations or
financial position.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities". This Statement clarifies
under what circumstances a contract with an initial net investment meets the
characteristics of a derivative, clarifies when a derivative contains a
financing component, amends the language used in FIN 45, and amends certain
other existing pronouncements. The provisions of SFAS No. 149 are effective
for contracts entered into or modified after June
25
30, 2003. The adoption of SFAS No. 149 did not have a material effect on the
Company's results of operations or financial position.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity". This
Statement establishes standards for how an issuer classifies and measures
certain financial instruments with characteristics of both liabilities and
equity. SFAS No. 150 requires that an issuer classify a financial instrument
that is within its scope as a liability (or an asset in some circumstances),
which, under previous guidance, may have been classified as equity. The
provisions of SFAS No. 150 are effective for financial instruments entered
into or modified after May 31, 2003 and otherwise shall generally be
effective at the beginning of the first interim period beginning after June
15, 2003. The adoption of SFAS No. 150 did not have a material effect on the
Company's results of operations or financial position.
26
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.
27
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
WESTERBEKE CORPORATION AND SUBSIDIARY
--------------------
CONSOLIDATED FINANCIAL STATEMENTS
For the years ended October 25, 2003,
October 26, 2002 and October 27, 2001
28
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 25, 2003 and October 26, 2002 and
the related consolidated statements of operations, shareholders' equity and
comprehensive income, and cash flows for the years ended October 25, 2003
and October 26, 2002. Our audits 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 audits.
The consolidated financial statements of Westerbeke Corporation and
Subsidiary as of October 27, 2001 and for the year ended October 27, 2001,
were audited by other auditors whose report dated December 7, 2001 expressed
an unqualified opinion.
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
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 audits provide a reasonable
basis for our opinion.
In our opinion, the consolidated financial statements for the years ended
October 25, 2003 and October 26, 2002, present fairly, in all material
respects, the financial position of Westerbeke Corporation and Subsidiary at
October 25, 2003 and October 26, 2002, and the results of their operations
and their cash flows for the years 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 25, 2003 and 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
December 19, 2003
29
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 statements of operations,
stockholders' equity and comprehensive income, and cash flows of Westerbeke
Corporation and subsidiary for the year ended October 27, 2001. In
connection with our audit 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 audit.
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
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
audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the results of operations of
Westerbeke Corporation and subsidiary and their cash flows for the year
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
30
WESTERBEKE CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
October 25, October 26,
2003 2002
----------- -----------
ASSETS
Current assets:
Cash and cash equivalents $ 1,387,700 $ 4,471,100
Accounts receivable, net of allowance for doubtful
accounts and price allowances of $531,200 at
October 25, 2003 and $480,000 at October 26, 2002 (Note 2) 1,863,300 2,114,500
Inventories (Note 3) 5,495,800 5,048,300
Prepaid expenses and other assets 457,200 456,800
Refundable income taxes 315,300 267,800
Deferred income taxes (Note 9) 898,100 951,700
----------- -----------
Total current assets 10,417,400 13,310,200
Property, plant and equipment, net (Notes 4,8 and 10) 7,746,400 8,348,600
Split dollar premiums (Note 5) 1,225,300 1,068,300
Other assets, net 150,500 170,300
Investments in marketable securities 104,300 109,900
Note receivable - related party (Note 6) 14,600 36,200
Deferred income taxes (Note 9) 123,500 46,400
----------- -----------
$19,782,000 $23,089,900
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt (Notes 8 and 10) $ 364,300 $ 340,300
Accounts payable 1,111,700 1,385,600
Accrued expenses and other liabilities 201,900 807,400
Accrued product warranty costs 408,000 430,000
Accrued income taxes (Note 9) 225,000 1,317,700
----------- -----------
Total current liabilities 2,310,900 4,281,000
----------- -----------
Long-term debt, net of current portion (Notes 8 and 10) 4,065,700 4,430,100
----------- -----------
Total Liabilities 6,376,600 8,711,100
----------- -----------
Stockholders' equity (Notes 11 and 12):
Preferred stock, $1.00 par value; authorized 1,000,000 shares;
none issued or outstanding at October 25, 2003 and October 26, 2002
Common stock, $.01 par value; authorized 5,000,000 shares; issued
2,244,682 shares in 2003 and 2002. 22,400 22,400
Additional paid-in-capital 6,126,700 6,126,700
Accumulated other comprehensive loss (380,500) (468,600)
Retained earnings 8,444,100 9,505,600
----------- -----------
14,212,700 15,186,100
Less - Treasury shares at cost, 289,873 shares in 2003 and 2002 807,300 807,300
----------- -----------
Total stockholders' equity 13,405,400 14,378,800
----------- -----------
$19,782,000 $23,089,900
=========== ===========
The accompanying notes are an integral part of the consolidated financial
statements.
31
WESTERBEKE CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended
-------------------------------------------
October 25, October 26, October 27,
2003 2002 2001
----------- ----------- -----------
Net sales (Note 2) $19,954,400 $25,525,700 $28,694,200
Cost of sales 15,479,700 19,966,800 22,232,800
----------- ----------- -----------
Gross profit 4,474,700 5,558,900 6,461,400
Selling, general and administrative expense 4,541,600 4,995,700 4,435,900
Research and development expense 1,237,900 1,098,500 1,445,800
Gain on sale of facility - - 552,800
----------- ----------- -----------
Income (loss) from operations (1,304,800) (535,300) 1,132,500
----------- ----------- -----------
Other income (expense):
Interest income (expense), net (275,100) (378,000) (618,200)
Arbitration award (Note 10) - 4,433,900 -
Other income (expense) 10,000 10,000 9,700
----------- ----------- -----------
Other income (expense), net (265,100) 4,065,900 (608,500)
----------- ----------- -----------
Income (loss) before income taxes (1,569,900) 3,530,600 524,000
Provision (credit) for income taxes (Note 9) (508,400) 644,600 205,200
----------- ----------- -----------
Net income, (loss) $(1,061,500) $ 2,886,000 $ 318,800
=========== =========== ===========
Income, (loss) per common share, basic $ (0.54) $ 1.48 $ 0.16
=========== =========== ===========
Income, (loss) per common share, diluted $ (0.54) $ 1.45 $ 0.16
=========== =========== ===========
Weighted average common shares, basic 1,954,809 1,949,066 1,941,391
=========== =========== ===========
Weighted average common shares, diluted 1,954,809 1,984,270 2,042,912
=========== =========== ===========
The accompanying notes are an integral part of the consolidated financial
statements.
32
WESTERBEKE CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME
For each of the years in the three years ended October 25, 2003
Accumulated
Common Additional Other
Stock Paid-in Comprehensive Retained Treasury Stockholders' Comprehensive
Amount Capital Income (loss) Earnings Stock Equity Income (loss)
------ ---------- ------------- -------- -------- ------------- -------------
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
-----------
Unrealized gains on marketable
securities - - 88,100 - - 88,100 88,100
Net loss - - - (1,061,500) - (1,061,500) (1,061,500)
----------------------------------------------------------------------------------------------
October 25, 2003 $22,400 $6,126,700 $(380,500) $8,444,100 $(807,300) $13,405,400 $ (973,400)
==============================================================================================
The accompanying notes are an integral part of the consolidated financial
statements.
33
WESTERBEKE CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended
-------------------------------------------
October 25, October 26, October 27,
2003 2002 2001
----------- ----------- -----------
Cash flows from operating activities:
Net income (loss) $(1,061,500) $ 2,886,000 $ 318,800
Reconciliation of net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 779,400 804,300 774,100
Gain on disposal of fixed assets (10,000) - (554,000)
Deferred income taxes (80,000) 6,100 243,100
Changes in operating assets and liabilities:
Accounts receivable 251,200 17,300 437,900
Inventories (447,500) 2,518,500 1,474,100
Prepaid expenses and other assets (400) (59,300) 13,600
Split-dollar premiums - - (344,500)
Refundable income taxes (47,500) 86,900 (27,600)
Other assets - - 345,800
Accounts payable (273,900) (778,700) (995,600)
Accrued expenses and other liabilities (629,700) 692,200 (346,300)
Deferred compensation - - (345,800)
Accrued income taxes (1,092,700) 1,317,700 -
----------- ----------- -----------
Net cash provided by (used in) operating activities (2,612,600) 7,491,000 993,600
----------- ----------- -----------
Cash flows from investing activities:
Purchase of property, plant and equipment (157,300) (270,700) (1,440,600)
Proceeds from sale of fixed assets including
former Avon facility 10,000 - 1,241,200
Purchase of marketable securities (4,700) (13,300) (4,600)
Proceeds from payment of note receivable 21,600 20,000 18,600
----------- ----------- -----------
Net cash used in investing activities (130,400) (264,000) (185,400)
----------- ----------- -----------
Cash flows from financing activities:
Exercise of stock options - 21,700 46,300
Net repayments under revolving demand
note - (2,500,000) (1,350,000)
Purchase of treasury stock - - (51,300)
Proceeds from Massachusetts Development - - 500,000
Principal payments on long-term debt and
capital lease obligations (340,400) (317,900) (334,000)
----------- ----------- -----------
Net cash used in financing activities (340,400) (2,796,200) (1,189,000)
----------- ----------- -----------
(Decrease) increase in cash and cash equivalents (3,083,400) 4,430,800 (380,800)
Cash and cash equivalents, beginning of year 4,471,100 40,300 421,100
----------- ----------- -----------
Cash and cash equivalents, end of year $ 1,387,700 $ 4,471,100 $ 40,300
=========== =========== ===========
Continued
34
WESTERBEKE CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS, Continued
Years Ended
-------------------------------------------
October 25, October 26, October 27,
2003 2002 2001
----------- ----------- -----------
Supplemental cash flow disclosures:
Interest paid $ 306,500 $ 436,800 $ 623,200
Income taxes paid 1,362,500 - 10,000
Supplemental disclosures of non-cash flow items:
Increase (decrease) in unrealized gains on
marketable securities, net of income taxes (6,100) (7,500) 2,000
Unrealized gain (loss) in split-dollar life insurance
Investments, net of income taxes 94,200 (101,300) (379,600)
Supplemental disclosures of non-cash operating activities:
Tax benefit from the exercise of stock options - - 16,000
The accompanying notes are an integral part of the consolidated financial
statements.
35
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
October 25, 2003, October 26, 2002 and October 27, 2001
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 25, 2003 and October 26, 2002
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 (SFAS 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.
36
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 fair value at October 25, 2003 and at October 26,
2002. The total cost of the marketable securities at October 25, 2003 and
October 26, 2002 was $65,300. Unrealized holding gains in investment
securities, net of income taxes, which is included in accumulated other
comprehensive income (loss) at October 25, 2003 and October 26, 2002 were
$6,100 and $12,200, respectively.
Accounts Receivable
The Company carries its accounts receivable at cost less an allowance for
doubtful accounts and a reserve for price allowances. On a periodic basis,
the Company evaluates its accounts receivable and establishes an allowance
for doubtful accounts, based on a history of past write-offs and collections
and current credit conditions. The reserve for price allowances is based on
a history of past price allowances paid and current sales incentive programs
in place.
Inventories
Inventories are valued at the lower of cost (determined on the last-in,
first-out method) or market.
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.
Shipping and Handling Costs
The Company classifies shipping and handling costs as a component of cost of
sales.
37
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.
Product Warranty Costs
The anticipated costs related to product warranty are expensed at the time
of sale of the product. Accrued warranty expense of $408,000 is included in
accrued expenses and other liabilities at October 25, 2003 and $430,000 at
October 26, 2002. 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 2003, 2002 and 2001, the Company incurred
advertising and promotional expenses of $637,100, $640,700, and $668,500,
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 (Loss) Per Share
Basic income (loss) per common share is computed by dividing income (loss)
available to common stockholders by the weighted average number of shares
outstanding for the period. Diluted income (loss) per share reflects the
maximum dilution that would have resulted from the exercise of stock
options. Diluted income (loss) per share is computed by dividing net income
(loss) by the weighted average number of common shares and all dilutive
securities, except when the effect would be antidilutive.
38
For the twelve months ended:
October 25, 2003 October 26, 2002 October 27, 2001
------------------------------------- ------------------------------------ ----------------------------------
Loss Net Income Net Income Net
per share Shares Loss per share Shares Income per share Shares Income
--------- ------ ---- --------- ------ ------ --------- ------ ------
Basic $(0.54) 1,954,809 $(1,061,500) $1.48 1,949,066 $2,886,000 $.16 1,941,391 $318,800
Effect of
Stock options - - - (.03) 35,204 - - 101,521 -
------ --------- ----------- ----- --------- ---------- ---- --------- --------
Diluted $(0.54) 1,954,809 $(1,061,500) $1.45 1,984,270 $2,886,000 $.16 2,042,912 $318,800
At October 25, 2003, there were 33,300 exercisable options outstanding,
which were convertible into 33,300 common shares. Included in the 33,300
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.
Reclassifications
Certain amounts reported in the fiscal 2002 consolidated financial
statements have been reclassified to conform to the fiscal 2003
presentation.
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 applies to existing goodwill and
intangible assets beginning with fiscal years starting after December 15,
2001. The adoption of this standard did not have a material effect on the
Company's financial statements.
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 applied to the Company effective October 27, 2002.
The adoption of this standard did not have a material effect on the
Company's financial statements.
39
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 this standard were adopted October 27, 2002 and
did not have a material effect on the Company's financial statements.
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. This standard was adopted December 31, 2002
and did not have a material effect on the Company's financial statements.
In November 2002, the Financial Accounting Standards Board (FASB) issued
FASB Interpretation No. 45 (FIN 45), "Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness
of Others." This Interpretation elaborates on the disclosures to be made by
a guarantor in its interim and annual financial statements about its
obligations under certain guarantees that it has issued. It also clarifies
that a guarantor is required to recognize, at the inception of a guarantee,
a liability for the fair value of the obligation undertaken in issuing the
guarantee. The initial recognition and measurement provisions of this
Interpretation are applicable on a prospective basis to guarantees issued or
modified after December 31, 2002. The disclosure requirements of FIN 45 are
effective for financial statement periods ending after December 15, 2002.
The Company adopted FIN 45 effective as of its first quarter of fiscal 2003,
which did not have a material effect on the Company's results of operations
or financial position.
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 were effective for the first interim statement that includes
financial information after December 15, 2002. The Company adopted the
provisions of this standard effective December 15, 2002 and they did not
have a material effect on the Company's financial statements.
In January 2003, the FASB issued FASB Interpretation No. 46 (FIN 46),
"Consolidation of Variable Interest Entities". This Interpretation clarifies
the application of Accounting Research Bulletin No. 51, "Consolidated
Financial Statements", to certain entities in which equity investors do not
have the characteristics of a controlling financial interest or do not have
sufficient equity at risk for the entity to finance its activities without
additional subordinated financial support from other parties. FIN 46
requires an enterprise to consolidate a variable interest entity if that
enterprise will absorb a majority of the entity's
40
expected losses, is entitled to receive a majority of the entity's expected
residual returns, or both. FIN 46 also requires disclosures about
unconsolidated variable interest entities in which an enterprise holds a
significant variable interest. FIN 46 is currently effective for variable
interest entities created or entered into after January 31, 2003. FASB Staff
Position 46-6, which was issued in October 2003, delayed the effective date
of FIN 46 to the first reporting period ending after December 15, 2003 for
variable interest entities in which an enterprise holds a variable interest
that it acquired before February 1, 2003. The Company does not expect the
adoption of FIN 46 to have a material effect on its results of operations or
financial position.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities". This Statement clarifies
under what circumstances a contract with an initial net investment meets the
characteristics of a derivative, clarifies when a derivative contains a
financing component, amends the language used in FIN 45, and amends certain
other existing pronouncements. The provisions of SFAS No. 149 are effective
for contracts entered into or modified after June 30, 2003. The adoption of
SFAS No. 149 did not have a material effect on the Company's results of
operations or financial position.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity". This
Statement establishes standards for how an issuer classifies and measures
certain financial instruments with characteristics of both liabilities and
equity. SFAS No. 150 requires that an issuer classify a financial instrument
that is within its scope as a liability (or an asset in some circumstances),
which, under previous guidance, may have been classified as equity. The
provisions of SFAS No. 150 are effective for financial instruments entered
into or modified after May 31, 2003 and otherwise shall generally be
effective at the beginning of the first interim period beginning after June
15, 2003. The adoption of SFAS No. 150 did not have a material effect on the
Company's results of operations or financial position.
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 $2,651,800,
$2,687,800 and $2,523,000 for fiscal years ended October 25, 2003, October
26, 2002, and October 27, 2001, respectively. In fiscal 2003, three
customers each accounted for sales in excess of 10% of net sales as follows:
$5,321,900, $3,003,700 and $2,567,500. 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.
At October 25, 2003, two customers each accounted for trade accounts
receivable in excess of 10% of net accounts receivable as follows: $618,800
and $517,200. 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. The Company performs ongoing
credit evaluations of its customers and therefore does not require
collateralization of trade receivables.
41
3. Inventories
Inventories consist of the following:
October 25, 2003 October 26, 2002
---------------- ----------------
Raw materials $4,629,700 $3,808,400
Work-in-process 459,000 614,000
Finished goods 407,100 625,900
---------- ----------
$5,495,800 $5,048,300
========== ==========
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 $1,063,400 and $1,031,500 higher at October 25, 2003 and October
26, 2002, respectively, if the first-in, first-out (FIFO) method had been
used. In 2002, 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 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 25, 2003 October 26, 2002
---------------- ----------------
Land $ 921,500 $ 921,500
Building and building improvements 5,658,300 5,658,300
Furniture and fixtures 744,900 711,300
Machinery, patterns and equipment 5,215,700 5,092,000
Transportation equipment 47,000 80,400
Leasehold improvements 20,400 20,400
Equipment under capital lease 769,200 769,200
----------- -----------
13,377,000 13,253,100
Less accumulated depreciation and amortization 5,630,600 4,904,500
----------- -----------
$ 7,746,400 $ 8,348,600
=========== ===========
The Company incurred depreciation expense of approximately $759,500,
$784,600, and $754,300, for fiscal years 2003, 2002, and 2001, respectively.
The Company has no more continuing obligations for the equipment under
capital lease.
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 had paid the premium costs of certain life insurance
policies. This
42
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 25,
2003 and October 26, 2002 is $1,225,300 and $1,068,300, respectively, which
represents the fair value of insurance premiums paid to date. At October 25,
2003, in connection with the split-dollar insurance arrangement, the Company
recorded an unrealized gain of $157,000, net of taxes of $62,800, 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 25, 2003 and October 26,
2002 was $14,600 and $36,200, 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.
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 25, 2003, the LIBOR rate was 3.62% and the base rate was 4.00%. 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 25,
2003, the Company had approximately $3,702,800 available for borrowing. As
of October 25, 2003, the Company had approximately $3,676,800 in unused
borrowing capacity under the Credit Agreement and approximately $26,000
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 25, 2003, the
Company was in compliance with such covenants.
43
8. Long-Term Debt
October 25, 2003 October 26, 2002
---------------- ----------------
Term Loan with an interest rate of 8.50%, with $ 322,100 $ 386,700
repayment terms through October 2007,
secured by certain equipment, requiring
monthly payments of $7,900.
Term Loan with an interest rate of 6.46%, with 3,885,500 4,106,400
repayment terms through April 2015, secured
by the Company's facility located at 150 John
Hancock Road, requiring monthly payments of
$40,000.
Term Loan with an interest rate of 6.46%, with 222,400 277,300
repayment terms through April 2007, secured
by certain equipment, requiring monthly
payments of $5,900.
---------- ----------
4,430,000 4,770,400
Less current portion 364,300 340,300
---------- ----------
Long term debt, net of current portion $4,065,700 $4,430,100
========== ==========
In connection with the financing with GE related to the Company's facility
and certain equipment, 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 25, 2003, the
Company was in default with one of the covenants. GE has since given the
Company a waiver for this covenant. In November 2003, the Company entered
into an agreement with GE to provide a reduction in the interest rates on
both the real estate and equipment loans. The interest rate on the real
estate loan is an adjustable rate based on a non-GE 30-day non-financial
commercial paper rate. The rate at October 25, 2003 was 3.45%. The rate for
the equipment loan is fixed at 3.85%.
Aggregate maturities of long-term debt for each of the ensuing five years
are as follows:
Year Amount
---- ------
2004 $ 364,300
2005 390,200
2006 417,800
2007 410,700
2008 312,600
Thereafter 2,534,400
----------
$4,430,000
==========
44
9. Income Taxes
Income tax expense (benefit) consists of:
Years Ended
--------------------------------------------------------
October 25, 2003 October 26, 2002 October 27, 2001
---------------- ---------------- ----------------
Federal:
Current $(428,400) $ 656,000 $ (85,000)
Deferred (1,600) (131,600) 270,000
--------- --------- ---------
(430,000) 524,400 185,000
--------- --------- ---------
State:
Current - 55,000 47,100
Deferred (78,400) 65,200 (26,900)
--------- --------- ---------
(78,400) 120,200 20,200
--------- --------- ---------
Total $(508,400) $ 644,600 $ 205,200
========= ========= =========
The Company has approximately $162,000 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 25, 2003 October 26, 2002 October 27, 2001
---------------- ---------------- ----------------
Provision at statutory rate $(533,800) $1,200,400 $178,200
State tax provision,
net of federal tax benefit (59,600) 79,300 13,300
Research and development tax credits
and suspended losses not booked
previously (112,000) (606,700) -
Disallowed expenses, principally related
to the proposed merger 197,000 - -
Other, net - (28,400) 13,700
--------- ---------- --------
Total $(508,400) $ 644,600 $205,200
========= ========== ========
The income tax expense (benefit) was allocated as follows:
Years Ended
--------------------------------------------------------
October 25, 2003 October 26, 2002 October 27, 2001
---------------- ---------------- ----------------
Income taxes (benefit) related to operations $(508,400) $644,600 $205,200
Stockholders' equity, for compensation
expense for tax purposes in excess of
amounts recognized for financial
reporting purposes - - (16,600)
--------- -------- --------
Total $(508,400) $644,600 $188,600
========= ======== ========
45
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at October
25, 2003 and October 26, 2002 are presented below.
October 25, 2003 October 26, 2002
---------------- ----------------
Deferred tax assets:
Accounts receivable $ 213,900 $ 193,300
Inventory 503,600 444,800
Accrued bonus - 124,400
Warranty 164,300 173,200
Unrealized loss on split-dollar life insurance 255,400 319,600
Massachusetts net operating tax loss 42,000 -
Massachusetts investment tax credit 162,000 116,300
Other 19,400 16,100
---------- ----------
Total gross deferred tax assets 1,360,600 1,387,700
---------- ----------
Deferred tax liabilities:
Fixed assets, principally due to
accelerated depreciation methods (339,000) (389,600)
---------- ----------
Net deferred tax assets $1,021,600 $ 998,100
========== ==========
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 operating lease agreements for certain equipment (see note
6) expiring at various dates through 2008. Rental expense under operating
leases was $52,400, $115,500, and $185,400 for the years ended October 25,
2003, October 26, 2002 and October 27, 2001, 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
---- ---------
2004 $ 52,400
2005 18,000
2006 15,500
2007 15,500
2008 6,500
--------
Total future minimum lease payments $107,900
========
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 25, 2003, the Company was
contingently liable for open letters of credit and bankers' acceptances of
approximately $26,000 (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
46
Consumer Price Index and at the discretion of our board of directors. During
fiscal 2003, Mr. Westerbeke's salary was $215,100. The Agreement also
provides for payment of a bonus at the discretion of the board of directors.
The board of directors has extended through fiscal 2004 the incentive plan
established in September 1996 in connection with which Mr. Westerbeke has an
annual bonus opportunity, based upon our net income and increases in sales.
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 May 5, 2003, the Company announced that it had entered into an Agreement
and Plan of Merger (the "Merger Agreement") with Westerbeke Acquisition
Corporation ("Acquisition Corporation"), a corporation wholly-owned by John
H. Westerbeke, Jr., the Chairman, President and Chief Executive Officer of
the Company, pursuant to which the Company would merge with and into
Acquisition Corporation (the "Merger"). Under the terms of the Merger
Agreement, each of the approximately 850,000 shares of common stock of the
Company not owned by Acquisition Corporation would be converted upon
completion of the Merger into the right to receive $3.00 per share in cash.
On December 16, 2003, the Company and Acquisition Corporation entered into
an amendment to the Merger Agreement, which increased the merger
consideration from $3.00 to $3.26 per share in cash. Completion of the
Merger is subject to the satisfaction or waiver of a number of conditions
and there can be no assurance that the Merger will be completed. A special
meeting of the stockholders of the Company has been scheduled for February
5, 2004 in order to consider and vote on the adoption of the Merger
Agreement. Definitive proxy materials relating to the Merger were mailed to
the Company's stockholders on December 29, 2003. If the Merger is completed,
the Company will become a private company of which John H. Westerbeke, Jr.
will beneficially own 100% of the outstanding common stock.
In May 2003, a class action lawsuit was filed in the Court of Chancery of
the State of Delaware relating to the proposed Merger naming the Company and
its directors as defendants. The complaint alleged, among other things, that
the Merger was being advanced through unfair procedures, and that the merger
consideration offered in the Merger was grossly unfair, inadequate and
provided value to our stockholders substantially below the fair or inherent
value of our company and did not constitute maximization of stockholder
value. The complaint also alleged breaches by the defendants of their
fiduciary duties to our stockholders in connection with the proposed Merger.
The lawsuit sought to enjoin the proposed Merger or, if it was completed, to
recover damages. We and the other defendants filed an answer to the
complaint and discovery proceeded.
In December 2004, the parties in the class action lawsuit entered into a
Stipulation of Settlement with respect to a proposed settlement of the
lawsuit. In connection with the proposed settlement, the consideration
payable was increased from $3.00 to $3.26 cash per share. Completion of the
settlement is subject to certain additional conditions, including court
approval and completion of the Merger. There can be no assurance that the
settlement will be completed or that the Merger will be completed.
47
The Company has incurred approximately $670,000 of costs to date associated
with the proposed Merger. Due to uncertainty as to whether the proposed
Merger transaction will ultimately be completed, the costs incurred to date
have been expensed and included in selling, general and administrative
costs.
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 for year ended October 26, 2002. 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 of Credit Risk and Significant Customers
Financial instruments, which subject the Company to concentration of credit
risk, consist principally of accounts receivable and cash. The concentration
of credit risk with respect to accounts receivable is limited due to a large
number of customers comprising the Company's customer base. Customers'
financial condition is reviewed on an ongoing basis, and collateral is not
required. The Company maintains reserves for potential credit losses and
such losses, in the aggregate, have not exceeded management's expectations.
In fiscal 2003, three customers each accounted for sales in excess of 10% of
net sales as follows: $5,321,900, $3,003,700 and $2,567,500. 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. At October 25, 2003, two customers
each accounted for trade accounts receivable in excess of 10% of net
accounts receivable as follows: $618,800 and $517,200. 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. As of October 25, 2003, the Company had approximately $1,722,900
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
25, 2003, 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.
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.
48
Information for fiscal years 2001, 2002 and 2003, with respect to the
"Option Plan", is as follows:
Weighted average
exercise price of
Shares shares under plan
------ -----------------
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 at October 26, 2002 75,000 1.125
Forfeited (75,000) 1.125
-------
Balance outstanding at October 25, 2003 -
=======
Options for 88,100 shares are available for future grant under the "Option
Plan".
Information for fiscal years 2001, 2002 and 2003, with respect to the
"Supplemental Plan", is as follows:
Weighted average
exercise price of
Shares shares under plan
------ -----------------
Balance outstanding at October 21, 2000 118,400 $1.631
Exercised (10,100) 0.875
-------
Balance outstanding at October 27, 2001
and October 26, 2002 108,300 1.702
Forfeited (75,000) 1.125
-------
Balance outstanding and exercisable at
October 25, 2003 33,300 $3.000
=======
The following table summarizes information concerning currently outstanding
and exercisable options under the "Supplemental Plan" as of October 25,
2003:
Weighted
average Weighted
Range of remaining average Weighted
exercise Number contractual outstanding Options average
prices outstanding life (years) option price exercisable exercise price
- ----------------------------------------------------------------------------------------
$3.000 33,300 2.5 $3.000 33,300 $3.000
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:
49
2003 2002 2001
---- ---- ----
Net income, (loss) As reported $(1,061,500) $2,886,000 $318,800
Pro forma (1,061,500) 2,886,000 318,800
Basic income, (loss) As reported $ (0.54) $ 1.48 $ 0.16
per share Pro forma (0.54) 1.48 0.16
Diluted income, As reported $ (0.54) $ 1.45 $ 0.16
(loss) per share Pro forma (0.54) 1.45 0.16
Preferred Stock
As of October 25, 2003 and October 26, 2002, 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 25, 2003 and October 26, 2002 are
as follows:
For the twelve months ended:
------------------------------------
October 25, 2003 October 26, 2002
---------------- ----------------
Net income (loss) $(1,061,500) $2,886,000
Unrealized (losses) gains on marketable securities,
net of income taxes of $58,700 at October 25, 2003
and $72,500 at October 26, 2002 88,100 (108,800)
----------- ----------
Comprehensive income (loss) $ (973,400) $2,777,200
=========== ==========
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 25, 2003, 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
50
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 did
not contribute in fiscal 2003 and contributed $600 and $41,000 for the
fiscal years ended October 26, 2002 and October 27, 2001, 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 25, 2003.
Reconciliation of Funded Status at 10/25/2003:
Projected Benefit Obligation $(463,600)
Plan Assets at Fair Value 463,930
---------
Funded Status 330
---------
Total Balance Sheet Liability $ (2,095)
=========
Disclosure of Net Periodic Pension Cost for the Period:
Service Cost $ 232,792
---------
Net Periodic Pension Cost $ 232,792
=========
Accumulation Benefit Obligation at 10/25/2003:
Vested ABO $ 0
Non-Vested ABO 415,234
---------
Total ABO $ 415,234
=========
Change in Projected Benefit Obligation:
Projected Benefit Obligation at beginning of year $ 216,458
Service Cost 232,792
---------
Projected Benefit Obligation on 10/25/2003 $ 463,600
=========
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 25, 2003 and
October 26, 2002 is as follows:
Fiscal
Fiscal 2003: First Second Third Fourth Year
---------------------------------------------------
Net sales $4,496 $5,249 $5,698 $4,511 $19,954
Gross profit 947 1,119 1,204 1,205 4,475
Income (loss) from operations (423) (445) (310) (127) (1,305)
Other income (loss) (60) (56) (73) (76) (265)
Net income (loss) (177) (300) (230) (355) (1,062)
Net income (loss) per share, diluted (0.09) (0.15) (0.12) (0.18) (0.54)
51
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
* 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.
52
SCHEDULE II
WESTERBEKE CORPORATION AND SUBSIDIARY
VALUATION AND QUALIFYING ACCOUNT
For the years ended October 25, 2003, October 26, 2002
and October 27, 2001
Balance at Charged to Charged Balance
Beginning of Costs and To Other at End
Period Expenses Accounts Deductions of Year
2001
Allowance for
Doubtful accounts $115,000 - - - $115,000
2002
Allowance for
Doubtful accounts $115,000 (10,000) - - $105,000
2003
Allowance for
Doubtful accounts $105,000 (5,000) - - $100,000
53
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.
Not applicable.
ITEM 9A. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures. As of the end of
our fiscal year ended October 25, 2003, an evaluation of the effectiveness
of our "disclosure controls and procedures" (as such term is defined in
Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as
amended (the "Exchange Act")) was carried out by our principal executive
officer and principal financial officer. Based upon that evaluation, our
principal executive officer and principal financial officer have concluded
that as of the end of that fiscal year, our disclosure controls and
procedures are effective to ensure that information required to be disclosed
by us in reports that we file or submit under the Exchange Act is recorded,
processed, summarized and reported within the time periods specified in
Securities and Exchange Commission rules and forms.
It should be noted that while our management believes that our
disclosure controls and procedures provide a reasonable level of assurance,
they do not expect that our disclosure controls and procedures or internal
financial controls will prevent all errors and fraud. A control system, no
matter how well conceived or operated, can provide only reasonable, not
absolute, assurance that the objectives of the control system are met.
(b) Changes in Internal Control Over Financial Reporting. During the
fiscal year ended October 25, 2003, there were no changes in our internal
control over financial reporting that has materially affected, or is
reasonably likely to materially affect, our internal control over financial
reporting.
54
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Certain biographical information concerning the directors of the
Company as of January 1, 2004 is set forth below. Such information was
furnished by them to the Company.
Certain
Name of Director Age Biographical Information
- ---------------- --- ------------------------
GERALD BENCH 62 Vice Chairman, TDG Aerospace, Inc. (manufacturer of aircraft de-icing
devices) since January 2001; President, BFT Holdings Co., Inc. (investors 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; Director of the Company since June 1986.
THOMAS M. HAYTHE 64 Business and Legal Consultant since February 2000; Partner, Haythe & Curley
(attorneys) (now known as Torys LLP) from 1982 to January 2000; Director of
the Company since June 1986; outside general counsel of the Company since 2000.
JAMES W. STOREY 69 Consultant since January 1993, providing investment advice and investment
management services as trustee of fourteen trusts for individuals; Director
of the Company since June 1986.
JOHN H. WESTERBEKE, JR. 63 President of the Company and a director since 1976; Chairman of the Board
since June 1986; has served in various managerial capacities since joining
the Company in 1966.
GREGORY HAIDEMENOS 40 Chief Financial Officer of the Company since December 1999; Treasurer and
Secretary of the Company since April 2002; Controller of the Company from
September 1996 to November 1999.
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 C
directors will expire at the Annual Meeting of Stockholders to be held in
2004. Class A and Class B directors will be elected at the Annual Meetings
to be
55
held in 2005 and 2006, 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 25, 2003 all
Section 16 (a) filing requirements applicable to its officers, directors and
greater than ten percent beneficial owners were complied with.
Audit Committee Financial Expert
- --------------------------------
In light of the significant time and effort required to be expended by
the Company's directors in connection with the proposed Merger under which
the Company will become a private company, and the related uncertainty
associated therewith, the Board of Directors of the Company has not
determined that there is an audit committee financial expert serving on the
Audit Committee. If the proposed merger is not completed for any reason, the
Company expects to revisit this issue.
Code of Ethics
- --------------
The Company has adopted a code of ethics that applies to the Company's
principal executive officer, principal financial officer, principal
accounting officer or controller, or persons performing similar functions.
The Company will provide to any person without charge, upon request, a copy
of such code of ethics. Persons wishing to make such a request should
contact Gregory Haidemenos, Chief Financial Officer, Westerbeke Corporation,
Myles Standish Industrial Park, Taunton, Massachusetts 02780 (telephone:
(508) 823-7677).
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth information for the fiscal years ended
October 25, 2003, October 26, 2002 and October 27, 2001 concerning the
compensation paid or awarded to the Chief Executive Officer and the other
former executive officer of the Company.
56
SUMMARY COMPENSATION TABLE
Annual Compensation
--------------------
Fiscal
Name and Year
Principal Ended All Other
Position October Salary Bonus Compensation
- ------------------------------------------------------------------------------------
John H. Westerbeke, Jr. 2003 $215,100 $ - $39,700(1)
President, Chairman of the Board 2002 236,646 286,675 53,976(1)
of Directors and Class C Director 2001 231,629 2,179 55,408(1)
Carleton F. Bryant, III (2) 2003 $ - $ - -
Executive Vice President, 2002 76,661 - -
Treasurer, Chief Operating 2001 94,500 58,240 -
Officer and Secretary
- --------------------
Includes amounts ($37,400, $40,500 and $41,896 in fiscal 2003, 2002
and 2001, 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 25, 2003, October 26, 2002 and October 27,
2001 for the period from the date on which each premium was paid until
March 31, 2005 (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
25, 2003.
The following table sets forth the number and value of options
exercised by the executive officers named in the Summary Compensation Table
during the fiscal year ended October 25, 2003 and the number and value of
options held by such executive officers at October 25, 2003.
57
OPTION EXERCISES IN FISCAL 2003
AND OPTION VALUES AT OCTOBER 25, 2003
Number of Value of
Unexercised Unexercised
Options at In-the-Money
Shares October 25, 2003 Options at
Acquired on Value ---------------------------- October 25,
Name Exercise Realized Exercisable Unexercisable 2003 (1)
John H. Westerbeke, Jr. -- -- -- -- $--
Carleton F. Bryant, III (2) -- -- -- -- --
- --------------------
In-the-money options are those where the fair market value of the
underlying shares of common stock exceeds the exercise price of the
option. The value of in-the-money options is determined in accordance
with regulations of the SEC by subtracting the aggregate exercise
price of the option from the aggregate year-end value of the
underlying shares of common stock.
Mr. Bryant was an executive officer of the Company until April 4,
2002.
Employment Agreements
- ---------------------
The Company has an employment agreement (the "employment agreement")
with John H. Westerbeke, Jr., which provides for his employment by our
company at an annual base salary, subject to increases based upon the
Consumer Price Index and at the Company's discretion. During fiscal 2003,
Mr. Westerbeke's salary was $215,100. The employment agreement also provides
for payment of a bonus at the discretion of the board of directors. The
Company's Board of Directors has extended through fiscal 2004 the incentive
plan established in September 1996 in connection with which Mr. Westerbeke
has an annual bonus opportunity, based upon the Company's net income and
increases in sales. 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
employment agreement. The Company contributes amounts deferred by Mr.
Westerbeke to a trust established to hold and invest these funds until such
time as the amounts are payable to Mr. Westerbeke. The employment agreement
also requires the Company to pay premiums for certain life insurance
policies on the life of Mr. Westerbeke, including the split-dollar life
insurance policy described below. The Company may terminate the employment
agreement upon the disability of Mr. Westerbeke, or with or without cause,
and Mr. Westerbeke may terminate the employment agreement 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 employment 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
58
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 policy on his life for a three-year period. Mr. Westerbeke has
agreed that the proposed Merger of the Company with Acquisition Corporation
will not trigger the change of control provisions of the employment
agreement. Under the employment agreement, Mr. Westerbeke has agreed not to
compete with the Company for a period of one year following termination of
his employment. See footnote (6) to the "Summary Compensation Table" above
for further information on premium payments made by the Company.
The Company has a split-dollar insurance arrangement with Mr.
Westerbeke, in connection with which it paid the premium costs of certain
life insurance policies that will pay a death benefit of not less than a
total of $6,150,000 upon Mr. Westerbeke's death. Upon surrender of the
policies or payment of the death benefit under them, the Company is entitled
to repayment of the premiums previously paid by the Company, with all
remaining payments to be made to Mr. Westerbeke or his beneficiaries.
Applying the time value of money (using the applicable federal rates) of the
premiums paid by the Company during the fiscal years ended October 25, 2003
and October 26, 2002 for the period from the date on which each premium was
paid until May 19, 2003, the current dollar value of the benefit to Mr.
Westerbeke of premiums paid by the Company is $1,869,600. The Company is
permitted to terminate the split-dollar agreement and request a refund of
the lesser of the fair value of the mutual funds in which the premiums are
invested and the total value of the premiums paid. As of July 30, 2003,
pursuant to the requirements of the Sarbanes-Oxley Act of 2002, the Company
has stopped paying premiums in connection with the split-dollar insurance
arrangement
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 outside 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. The Chairman of the
audit committee receives $1,000 for each meeting of the audit committee. The
Company has also agreed to pay each member of the special committee formed
in connection with the Company's proposed Merger with Acquisition
Corporation a fee of $15,000 for his service on the special committee.
59
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.
60
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, 2004, 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
Westerbeke Acquisition Corporation 1,098,250(5) 56.2%
Myles Standish Industrial Park
Taunton, Massachusetts 02780
John H. Westerbeke, Jr 1,098,250(5) 56.2%
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) 1,145,550(2)(3)(4)(5) 57.6%
- --------------------
(*) Less than one percent.
61
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.
All shares of common stock held beneficially by Mr. Westerbeke are
held of record by Westerbeke Acquisition Corporation.
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, 2004.
The following table sets forth information required to be provided
under regulations of the Securities and Exchange Commission, as of October
25, 2003, with respect to compensation plans (including individual
compensation arrangements) under which equity securities of the registrant
are authorized for issuance:
EQUITY COMPENSATION INFORMATION
- ----------------------------------------------------------------------------------------------------------------------------------
October 25, 2003 (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 33,300 $3.00 129,400
------ ----- -------
Equity compensation plans not approved
by security holders N/A N/A N/A
------ ----- -------
Total 33,300 $3.00 129,400
------ ----- -------
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
62
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 outside
general counsel in the future.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
Not applicable.
63
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 29-30
Consolidated Balance Sheets at October 25, 2003 and October 26, 2002 31
Consolidated Statements of Operations for the three years in the
period ended October 25, 2003 32
Consolidated Statements of Stockholders' Equity and Comprehensive
Income for the three years in the period ended October 25, 2003 33
Consolidated Statements of Cash Flow for the three years in the
period ended October 25, 2003 34-35
Notes to Consolidated Financial Statements 36-52
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 25, 2003 53
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.
64
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.
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.
(b) Current Reports on Form 8-K:
In a Current Report filed on Form 8-K dated August 1, 2003 the Company
reported the following:
The special committee of the board of directors of the Company
received from Valley Detroit Diesel Allison ("VDDA"), a potential
strategic acquiror of the Company, a letter, dated July 18, 2003,
offering to conduct a tender offer to purchase all of the outstanding
common stock of the Company at a price of $3.70 per share. The offer
was conditioned upon at least 90% of the outstanding shares of common
stock of the Company being tendered in the tender offer. Subsequent to
receiving the VDDA offer, a member of the special committee spoke to
Mr. Westerbeke, who informed the special committee on July 28, 2003
that he would not tender the shares of the Company's common stock
beneficially owned by him (through Acquisition Corp.) in connection
with the VDDA offer.
On July 28, 2003, the members of the special committee met and voted
unanimously to recommend to the board of directors of the Company that
the Company not pursue the VDDA proposal. The basis of the special
committee's recommendation was that under the terms of the offer, the
proposed acquisition would require the tender of at least 90% of the
shares of the Company's outstanding common stock, and such condition
could not be achieved given Mr. Westerbeke's stated unwillingness to
tender the shares of the Company's common stock beneficially owned by
him in connection with the offer. The special committee determined
that it would be imprudent to expend the Company's resources pursuing
a transaction that could not be consummated. On July 31, 2003, the
Chairman of the special committee sent a letter, dated July 31, 2003,
to VDDA informing VDDA of Mr. Westerbeke's position and the resulting
determination by the special committee.
On August 1, 2003, the board of directors of the Company (with Mr.
Westerbeke abstaining), acting subsequent to the recommendation of the
special committee, determined not to pursue the proposed transaction
for the same reasons stated by the special committee.
In a Current Report filed on Form 8-K dated October 22, 2003 the
Company reported the following:
65
On September 26, 2003, the special committee of the board of directors
of Westerbeke Corporation (the "Company") received from Valley Detroit
Diesel Allison ("VDDA"), a potential strategic acquiror of the
Company, a letter, dated September 26, 2003, offering to conduct a
tender offer to purchase all of the outstanding common stock of the
Company at a price of $3.75 per share. The offer was conditioned upon
at least 90% of the outstanding shares of common stock of the Company
being tendered in the tender offer and certain other conditions. The
VDDA offer is attached hereto as Exhibit 99.1. The special committee
spoke with John H. Westerbeke, Jr. ("Mr. Westerbeke"), the Company's
Chairman, Chief Executive Officer and President, and the beneficial
holder of a majority of the Company's outstanding common stock
(through Westerbeke Acquisition Corporation ("Acquisition")) on
October 6, 2003 with respect to that offer. In the discussion with the
special committee, Mr. Westerbeke stated that he would not sell the
shares of the Company's common stock held by Acquisition and
beneficially owned by Mr. Westerbeke (through Acquisition) pursuant to
the offer presented. In the same discussion, Mr. Westerbeke also
stated that he would not agree to an increase in the $3.00 per share
merger consideration and that he had not decided at that time whether
to extend the October 31, 2003 date set forth in Section 9.01(c) of
the Agreement and Plan of Merger between the Company and Acquisition
(after which either party may terminate the merger agreement if the
merger has not been consummated).
On October 6, 2003, the members of the special committee met and voted
unanimously that the Company not pursue the latest VDDA offer. The
basis of the special committee's determination was that under the
terms of the offer, the proposed acquisition would require the tender
of at least 90% of the shares of the Company's outstanding common
stock, and such condition could not be achieved given Mr. Westerbeke's
stated unwillingness to tender the shares of the Company's common
stock beneficially owned by him (through Acquisition) in connection
with the offer. The special committee determined that it would be
imprudent to expend the Company's resources pursuing a transaction
that could not be consummated. Counsel for the special committee
subsequently informed counsel for VDDA by telephone of the rejection
of the offer by the special committee. In the same telephone
conversation, counsel for the special committee pointed out to counsel
for VDDA that the VDDA proposal incorrectly describes as an appraisal
the fairness opinion provided by Stout Risius Ross, Inc. in connection
with the Company's merger with Acquisition. Also in the same telephone
conversation, counsel for the special committee proposed to counsel
for VDDA that VDDA remove the 90% tender condition in its proposal
and/or offer to purchase the shares of the Company's outstanding
common stock beneficially held by stockholders other than Mr.
Westerbeke. On October 13, 2003, the Chairman of the special committee
sent a letter, dated October 13, 2003, to VDDA confirming to VDDA the
position of Mr. Westerbeke and the resulting determination and
proposal by the special committee set forth above.
* * *
66
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, 2004
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, 2004 By /s/ John H. Westerbeke, Jr.
---------------------------
John H. Westerbeke, Jr.
Chairman of the Board,
President and Principal
Executive Officer
Dated: January 23, 2004 By /s/ Gregory Haidemenos
----------------------
Gregory Haidemenos
Principal Financial
and Accounting Officer
67
Dated: January 23, 2004 By /s/ Gerald Bench
----------------
Gerald Bench
Director
Dated: January 23, 2004 By /s/ Thomas M. Haythe
--------------------
Thomas M. Haythe
Director
Dated: January 23, 2004 By /s/ James W. Storey
-------------------
James W. Storey
Director
68
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)
69
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)
10(q) Agreement and Plan of Merger, dated as of May 2, 2003, by
and between the Company and Westerbeke Acquisition
Corporation (8)
10(r) Amendment No. 1 to Agreement and Plan of Merger (9)
21 Subsidiary of the Company
23(a) Consent of Sansiveri, Kimball & McNamee, L.L.P.
23(b) Consent of KPMG LLP
70
24 Power of Attorney (See Page 56
of Annual
Report on
Form 10-K)
31.1 Rule 13e-14(a) Certification of Chief Financial Officer (75)
31.2 Rule 13e-14(a) Certification of Chief Financial Officer (77)
32.1 Section 1350 Certification of Chief Executive Officer (79)
32.2 Section 1350 Certification of Chief Financial Officer (80)
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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.
Incorporated by reference to Exhibit 2.1 to Current Report on Form 8-K
filed on May 5, 2003.
Incorporated by reference to Exhibit 99.2 to Current Report on Form
8-K filed on December 17, 2003.
71