Back to GetFilings.com
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
----- SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: July 26, 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
-------
Westerbeke Corporation
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 04-1925880
------------------------------- -------------------
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) Identification No.)
Myles Standish Industrial Park
Taunton, Massachusetts 02780
- --------------------------------------- ----------
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code (508) 823-7677
--------------
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was to file such reports.) and (2)
has been subject to such filing requirements for the past 90 days.
Yes X No
----- -----
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act)
Yes No X
----- -----
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Outstanding at
Class August 25, 2003
----- ---------------
Common Stock, $.01 par value 1,954,809
1
WESTERBEKE CORPORATION AND SUBSIDIARY
INDEX
Page
Part I - Financial Information
Item 1 - Consolidated Financial Statements
Consolidated Balance Sheets as of July 26, 2003
and October 26, 2002 3
Consolidated Statements of Operations for the three
months ended July 26, 2003 and July 27, 2002 4
Consolidated Statements of Operations for the nine
months ended July 26, 2003 and July 27, 2002 5
Consolidated Statements of Comprehensive Income (Loss) for
the three and nine months ended July 26, 2003
and July 27, 2002, respectively 6
Consolidated Statements of Cash Flows for the nine
months ended July 26, 2003 and July 27, 2002 7
Notes to Consolidated Financial Statements 8
Item 2 -
Management's Discussion and
Analysis of Financial Condition
and Results of Operations 14
Item 3 -
Quantitative and Qualitative Disclosures
About Market Risk 17
Item 4 -
Controls and Procedures 17
Part II - Other Information 18
Signatures 21
Exhibit Index 22
2
WESTERBEKE CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
July 26, October 26,
2003 2002
----------- -----------
(Unaudited) Audited
ASSETS
Current assets:
Cash and cash equivalents $ 1,596,600 $ 4,471,100
Accounts receivable, net of allowance for doubtful accounts
and price allowances of $718,000 at July 26, 2003
and $480,000 at October 26, 2002 2,123,800 2,114,500
Inventories (Note 2) 5,561,900 5,048,300
Prepaid expenses and other assets 299,400 456,800
Prepaid income taxes - 267,800
Deferred income taxes 1,275,400 951,700
----------- -----------
Total current assets 10,857,100 13,310,200
----------- -----------
Property, plant and equipment, net (Note 4) 7,909,600 8,348,600
Split dollar premiums (Note 5) 1,149,200 1,068,300
Other assets, net 155,500 170,300
Investments in marketable securities 104,600 109,900
Note receivable - related party 20,100 36,200
Deferred income taxes 18,000 46,400
----------- -----------
$20,214,100 $23,089,900
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt (Note 3) $ 357,600 $ 340,300
Accounts payable 1,189,400 1,385,600
Accrued expenses and other liabilities 788,600 1,237,400
Accrued income taxes - 1,317,700
----------- -----------
Total current liabilities 2,335,600 4,281,000
----------- -----------
Long-term debt, net of current portion (Note 3) 4,165,100 4,430,100
----------- -----------
Total liabilities 6,500,700 8,711,100
----------- -----------
Stockholders' equity:
Preferred stock, $1.00 par value; authorized 1,000,000 shares;
none issued or outstanding
Common stock, $.01 par value; authorized 5,000,000 shares;
issued 2,244,682 at July 26, 2003 and October 26, 2002 22,400 22,400
Additional paid-in-capital 6,126,700 6,126,700
Accumulated other comprehensive loss (426,000) (468,600)
Retained earnings 8,797,600 9,505,600
----------- -----------
14,520,700 15,186,100
Less - Treasury shares at cost, 289,873 shares at July 26,
2003 and October 26, 2002 807,300 807,300
----------- -----------
Total stockholders' equity 13,713,400 14,378,800
----------- -----------
$20,214,100 $23,089,900
=========== ===========
The accompanying notes are an integral part of the consolidated financial
statements.
3
WESTERBEKE CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended
-------------------------
July 26, July 27,
2003 2002
-------- --------
(Unaudited)
Net sales $5,698,000 $7,783,900
Cost of sales 4,494,000 5,953,000
---------- ----------
Gross profit 1,204,000 1,830,900
Selling, general and administrative expense (Note 9) 1,241,500 936,400
Research and development expense 272,500 254,000
---------- ----------
Income (loss) from operations (310,000) 640,500
---------- ----------
Other income (expense):
Interest expense, net (73,400) (89,100)
Other expense - -
---------- ----------
Other expense, net (73,400) (89,100)
---------- ----------
Income (loss) before income taxes (383,400) 551,400
Provision for income taxes (benefit) (Note 6) (153,400) 180,600
---------- ----------
Net income (loss) $ (230,000) $ 370,800
========== ==========
Income (loss) per common share, basic $ (.12) $ .19
========== ==========
Income (loss) per common share, diluted $ (.12) $ .19
========== ==========
Weighted average common shares, basic 1,954,809 1,954,809
========== ==========
Weighted average common shares, diluted 1,954,809 1,989,227
========== ==========
The accompanying notes are an integral part of the consolidated financial
statements.
4
WESTERBEKE CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
Nine Months Ended
---------------------------
July 26, July 27,
2003 2002
-------- --------
(Unaudited)
Net sales $15,442,600 $19,887,000
Cost of sales 12,172,900 15,394,200
----------- -----------
Gross profit 3,269,700 4,492,800
Selling, general and administrative expense (Note 9) 3,546,400 3,268,300
Research and development expense 900,900 841,200
----------- -----------
Income (loss) from operations (1,177,600) 383,300
----------- -----------
Other income (expense):
Interest expense, net (200,000) (301,900)
Other income 10,000 50,000
----------- -----------
Other expense, net (190,000) (251,900)
----------- -----------
Income (loss) before income taxes (1,367,600) 131,400
Provision for income taxes (benefit) (Note 6) (659,600) (301,100)
----------- -----------
Net income (loss) $ (708,000) $ 432,500
=========== ===========
Income (loss) per common share, basic $ (.36) $ .22
=========== ===========
Income (loss) per common share, diluted $ (.36) $ .22
=========== ===========
Weighted average common shares, basic 1,954,809 1,947,151
=========== ===========
Weighted average common shares, diluted 1,954,809 1,981,569
=========== ===========
The accompanying notes are an integral part of the consolidated financial
statements.
5
WESTERBEKE CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
Three Months Ended
-------------------------------
July 26, 2003 July 27, 2002
------------- -------------
(Unaudited)
Net income (loss) $(230,000) $ 370,800
Unrealized gain (loss) on marketable securities, net of income
taxes of $57,100 at July 26, 2003 and $75,200 at
July 27, 2002 85,700 (112,600)
--------- ---------
Comprehensive income (loss) $(144,300) $ 258,200
========= =========
Nine Months Ended
-------------------------------
July 26, 2003 July 27, 2002
------------- -------------
(Unaudited)
Net income (loss) $(708,000) $ 432,500
Unrealized gain (loss) on marketable securities, net of
income taxes of $28,400 at July 26, 2003 and $95,200
at July 27, 2002 42,600 (142,700)
--------- ---------
Comprehensive income (loss) $(665,400) $ 289,800
========= =========
The accompanying notes are an integral part of the consolidated financial
statements.
6
WESTERBEKE CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended
----------------------------
July 26, July 27,
2003 2002
-------- --------
(Unaudited)
Cash flows from operating activities:
Net income (loss) $ (708,000) $ 432,500
Reconciliation of net income (loss) to net cash
provided (used) by operating activities:
Depreciation and amortization 588,000 584,300
Deferred income taxes 85,200 -
Gain on disposal of fixed assets (10,000) -
Changes in operating assets and liabilities:
Accounts receivable (9,300) (409,200)
Inventories (513,600) 2,949,400
Prepaid expenses and other assets (251,500) (149,700)
Accounts payable (196,200) (86,000)
Accrued expenses and other liabilities (448,800) (7,400)
Prepaid income taxes 267,800 346,200
Accrued income taxes payable (1,317,700) -
----------- -----------
Net cash provided (used) by operating activities (2,514,100) 3,660,100
----------- -----------
Cash flows used in investing activities:
Purchase of property, plant and equipment (134,100) (215,900)
Proceeds from sale of fixed assets 10,000 -
Purchase of marketable securities (4,700) (13,300)
Proceeds from payment of note receivable - related party 16,100 14,900
----------- -----------
Net cash used in investing activities (112,700) (214,300)
----------- -----------
Cash flows from financing activities:
Exercise of stock options - 21,700
Net repayments under revolving demand note - (2,500,000)
Principal payments on long-term debt and capital leases (247,700) (231,500)
----------- -----------
Net cash used in financing activities (247,700) (2,709,800)
----------- -----------
Increase (decrease) in cash and cash equivalents (2,874,500) 736,000
Cash and cash equivalents, beginning of period 4,471,100 40,300
----------- -----------
Cash and cash equivalents, end of period $ 1,596,600 $ 776,300
=========== ===========
Supplemental cash flow disclosures:
Interest paid $ 228,800 $ 115,000
Income taxes paid 1,362,500 -
Supplemental disclosures of non-cash items:
Unrealized gain (loss) on marketable securities,
net of income taxes (6,000) 8,400
Unrealized gain (loss) in split-dollar life insurance investments,
net of income taxes 48,600 (134,300)
The accompanying notes are an integral part of the consolidated financial
statements.
7
WESTERBEKE CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Summary of Significant Accounting Policies:
-------------------------------------------
A. Financial Statements
--------------------
The condensed consolidated financial statements included herein have
been prepared by Westerbeke Corporation (the "Company"), without
audit, pursuant to the rules and regulations of the Securities and
Exchange Commission. While certain information and footnote
disclosures normally included in financial statements prepared in
accordance with accounting principles generally accepted in the United
States of America have been condensed or omitted pursuant to such
rules and regulations, the Company believes that the disclosures made
herein are adequate to make the information presented not misleading.
It is recommended that these condensed financial statements be read in
conjunction with the consolidated financial statements and notes
thereto included in the Company's Annual Report on Form 10-K for the
fiscal year ended October 26, 2002.
In the opinion of management of the Company, all adjustments,
consisting only of normal recurring adjustments necessary to present
fairly the financial position of Westerbeke Corporation and Subsidiary
as of July 26, 2003, and the results of their operations and their
cash flows, for the three and nine-month periods then ended, have been
included.
The results disclosed in the condensed consolidated financial
statements are not necessarily indicative of the results expected for
the full fiscal year.
B. Basis of Presentation
---------------------
The condensed consolidated financial statements include the accounts
of the Company and its wholly owned subsidiary, Westerbeke
International, Inc. (a Foreign Sales Corporation). All inter-company
transactions and accounts are eliminated in consolidation.
Continued
8
WESTERBEKE CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(Unaudited)
C. Earnings 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.
For the three months ended:
-------------------------------------------------------------------------
July 26, 2003 July 27, 2002
---------------------------------- ----------------------------------
Loss Net Income Net
per share Shares Loss per share Shares Income
--------- ------ ---- --------- ------ ------
Basic $.12 1,954,809 $230,000 $.19 1,954,809 $370,800
Effect of
Stock options - - - - 34,418 -
-------------------------------- --------------------------------
Diluted $.12 1,954,809 $230,000 $.19 1,989,227 $370,800
For the nine months ended:
-------------------------------------------------------------------------
July 26, 2003 July 27, 2002
---------------------------------- ----------------------------------
Loss Net Income Net
per share Shares Loss per share Shares Income
--------- ------ ---- --------- ------ ------
Basic $.36 1,954,809 $708,000 $.22 1,947,151 $432,500
Effect of
Stock options - - - - 34,418 -
-------------------------------- --------------------------------
Diluted $.36 1,954,809 $708,000 $.22 1,981,569 $432,500
At July 26, 2003, there were 33,300 exercisable options outstanding,
which were convertible into 33,300 common shares. These shares were
excluded from the earnings per share calculation in both the three and
nine-month periods ended July 26, 2003, since their inclusion would
have been antidilutive.
Continued
9
WESTERBEKE CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(Unaudited)
D. Split-Dollar Life Insurance Agreement
-------------------------------------
The Company has a split dollar life insurance agreement with John H.
Westerbeke, Jr., Chairman, President and Chief Executive Officer of
the Company. This agreement allows the premiums paid to be invested
in a select group of mutual funds thus 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 would
receive the cumulative value of the premiums paid. 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 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.
2. Inventories
-----------
The Company uses the last-in, first-out (LIFO) method to value
inventory.
Inventories are comprised of the following:
July 26, October 26,
2003 2002
-------- -----------
Raw materials $4,511,600 $3,808,400
Work-in-process 523,900 614,000
Finished goods 526,400 625,900
---------- ----------
$5,561,900 $5,048,300
========== ==========
The Company has estimated the fiscal year-end 2003 inventory levels
and the inflation/deflation that will occur during the fiscal year in
determining their effect on the LIFO reserve at July 26, 2003. As a
result, the Company anticipates an increase in its LIFO valuation
account as of October 25, 2003. Accordingly, the Company has recorded
an increase of $67,500, on a pro rata basis, in the LIFO reserve
during the first nine months of fiscal 2003. During the first nine
months of 2002, the Company recorded, on a pro rata basis, a decrease
of $192,800 in the LIFO reserve. Inventories would have been
$1,099,000 higher at July 26, 2003 and $1,031,500 higher as of October
26, 2002, if the first-in, first-out (FIFO) method had been used.
Inventory cost determination on the FIFO method approximates
replacement or current cost.
Continued
10
WESTERBEKE CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(Unaudited)
3. Long-Term Debt
--------------
July 26, 2003 October 26, 2002
------------- ----------------
Term Loan with an interest rate of 6.46%,
with repayment terms through April 2015,
secured by the Company's facility located
at 150 John Hancock Road. $3,942,100 $4,106,400
Term Loan with an interest rate of 6.46%,
with repayment terms through April 2007,
secured by certain equipment. 236,500 277,300
Term Loan with an interest rate of 8.50%,
with repayment terms through October 2007,
secured by certain equipment. 344,100 386,700
---------- ----------
4,522,700 4,770,400
Less current portion 357,600 340,300
---------- ----------
Long term debt, net of current portion $4,165,100 $4,430,100
========== ==========
4. Property, Plant and Equipment
July 26, 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 5,192,500 5,092,000
Transportation equipment 47,000 80,400
Leasehold improvements 20,400 20,400
Equipment under capital lease 769,200 769,200
----------- -----------
13,353,800 13,253,100
Less accumulated depreciation 5,444,200 4,904,500
----------- -----------
$ 7,909,600 $ 8,348,600
=========== ===========
Continued
11
WESTERBEKE CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(Unaudited)
5. Split-Dollar Premiums
---------------------
As discussed in more detail in note 1, the Company has a split dollar
life insurance agreement with John H. Westerbeke, Jr., Chairman,
President and Chief Executive Officer of the Company. At July 26,
2003 the Company had an unrealized accumulated loss of $720,400, net
of taxes of $288,200, included in accumulated 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. Taxes on Income
---------------
Taxes (benefit) on income (loss) for the nine-months ended July 26,
2003 includes a $108,500 credit received for research and development
expenditures. The credits relate to the years ended October 1999 and
October 2000. The Company took the position that income should not
have been recognized until the IRS approved such refund credits.
7. Major Customer
--------------
On April 19, 2002, the Company announced that its exclusive agreement
with this customer would not be extended. The agreement expired on
June 30, 2002. The Company had sales to this customer which
represented 20% or approximately $1,593,300 of total sales for the
three-months ended July 27, 2002 and 22% or approximately $4,507,600
of total sales for the nine-months ended July 27, 2002. Sales to this
customer amounted to $1,400 for the three-months ended July 26, 2003
and $17,400 for the nine-months ended July 26, 2003.
8. 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 actual amount available for borrowing is
based on a calculation of eligible accounts receivable and eligible
inventory. Based on this calculation, at July 26, 2003, the Company
had approximately $4,203,200 available for borrowing. As of July 26,
2003, the Company had approximately $3,802,400 in unused borrowing
capacity under the Credit Agreement and approximately $400,800
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.
9. Subsequent Events
-----------------
As previously announced, on May 2, 2003, the Company entered into a
definitive merger agreement with Westerbeke Acquisition Corporation
("Acquisition Corp."). Under the terms of the merger agreement, each
of the approximately 850,000 shares of Westerbeke common stock not
owned by Acquisition Corp. will be converted upon completion of the
merger into the right to receive $3.00 per share in cash. Acquisition
Corp. is a corporation formed and wholly owned
Continued
12
WESTERBEKE CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(Unaudited)
by Westerbeke's Chairman, President and Chief Executive Officer, John
H. Westerbeke, Jr. Acquisition Corp. owns approximately 56.2% of the
outstanding shares of Westerbeke common stock. The Company has
incurred $408,900 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
expenses.
On May 12, 2003, the Company announced that a purported class action
lawsuit has been filed naming the Company and its directors as
defendants. The complaint alleges, among other things, that the
proposed merger, as discussed above, is being advanced through "unfair
procedures" and the consideration offered in the merger is "grossly
unfair, inadequate and provides value to [Westerbeke] stockholders
substantially below the fair or inherent value of the Company" and
"does not constitute maximization of stockholder value". The
complaint also alleges breaches by the defendants of their fiduciary
duties to the Company's public stockholders in connection with the
proposed merger. The lawsuit seeks to enjoin the merger or, if it is
consummated, to recover damages. The Company believes that the
lawsuit lacks merit and intends to vigorously defend the lawsuit. The
Company is insured against damages and other costs relating to lawsuits
of this nature subject to a retention of $125,000. The Company has
incurred approximately $8,000 of costs to date in connection with this
lawsuit.
13
WESTERBEKE CORPORATION AND SUBSIDIARY
Item 2 - Management's Discussion and Analysis
- ---------------------------------------------
Of Financial Condition and Results Of Operations
- ------------------------------------------------
Forward Looking Information
- ---------------------------
This Quarterly Report on Form 10-Q contains forward-looking information
about the Company. In addition to the historical information contained
herein, the discussions contained in this document include statements that
constitute forward-looking statements under the safe harbor provisions of
the Private Securities Litigation Reform Act of 1995. The Company is hereby
setting forth statements identifying important factors that may cause the
Company's actual results to differ materially from those set forth in any
forward-looking statements made by the Company. Some of the most
significant factors include: an unanticipated down-turn in the recreational
boating industry resulting in lower demand for the Company's products; the
unanticipated loss of, or decline in sales to, a major customer; the
inability to replace revenues and/or profits associated with the loss of the
exclusive agreement with its largest customer; the unanticipated loss of a
major supplier; the unanticipated required repayment in full of outstanding
amounts under the Company's demand credit facility; the inability of the
Company to effect required modifications of its products to meet
governmental regulations with respect to emission standards; failure of the
requisite number of Westerbeke stockholders to approve the proposed merger
with Acquisition Corp. (as discussed above); the costs related to such
merger; litigation challenging such merger; and foreign currency
fluctuations resulting in cost increases to the Company for its foreign
supplied components. Accordingly, there can be no assurances that any
anticipated future results will be achieved.
Results of Operations -
- -----------------------
Net sales decreased by $2,085,900, or 27%, during the third quarter of
fiscal 2003 and decreased by $4,444,400, or 22%, for the first nine months
of fiscal 2003 as compared to the same periods in fiscal 2002. The decrease
in net sales for both the three and nine-month periods resulted primarily
from the loss of the Company's major customer offset by increases in net
sales to others.
Gross profit decreased $626,900, or 34%, during the third quarter and
decreased $1,223,100, or 27%, for the first nine months of fiscal 2003 as
compared to the same period in fiscal 2002. As a percentage of net sales,
gross profit was 21% during the third quarter of fiscal 2003 compared to 24%
for the same period in fiscal 2002. For the nine months ended July 26,
2003, gross profit was 21% compared to 23% for the period ended July 27,
2002.
Operating expenses, which consist of selling, general and administrative
expenses as well as research and development expenses, increased $323,600
for the third quarter and increased $337,800 in the first nine months of
fiscal 2003, as compared to the same periods in fiscal 2002. The Company
has incurred $408,900 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 expenses.
Net interest expense decreased $15,700 during the third quarter and
decreased $101,900 for the first nine months of fiscal 2003 as compared to
the same periods in fiscal 2002. The reduction in interest expense is
related to lower levels of outstanding debt and reduced borrowing costs.
Other income in fiscal year 2003 is from the sale of a vehicle. Other
income in fiscal 2002 is from a patent settlement awarded to the Company.
14
WESTERBEKE CORPORATION AND SUBSIDIARY
During the first quarter of fiscal 2003, the Company received and recorded a
credit to its tax provision amounting to $108,500 of research and
development credits from the U.S. Department of the Treasury.
During the second quarter ended April 27, 2002, the Company received
$353,700 of research and development credits from the U.S. Department of the
Treasury.
For the third quarter ended July 26, 2003, the Company reported a net loss
of $230,000, compared to net income of $370,800 for the same period in fiscal
2002. For the nine months ended July 26, 2003, the Company reported a net
loss of $708,000 as compared to net income of $432,500 for the nine-months
ended July 27, 2002.
On April 19, 2002 the Company announced that its exclusive agreement with
its largest customer would not be extended. The agreement expired on June
30, 2002. The Company had anticipated the loss of this agreement and has
undertaken certain cost reduction programs.
Liquidity and Capital Resources
- -------------------------------
During the first nine months of fiscal 2003, net cash used by operating
activities was $2,514,100, compared to net cash provided by operations of
$3,660,100 for the first nine months of fiscal 2002. The increase in cash
used by operating activities was primarily the result of increases in
inventory and accounts receivable and from the payment of income taxes. The
accrued income tax payments of $1,317,700 paid during the nine-months ended
July 26, 2003, relate to the arbitration award previously discussed in the
Company's Annual Report on Form 10-K for the fiscal year ended October 26,
2002.
During the nine months ended July 26, 2003, the Company purchased machinery
and equipment in the amount of $134,100. The Company plans additional
capital spending of $75,000 during the remainder of the fiscal year.
On April 25, 2000, the Company purchased a 110,000 square foot facility
located in Taunton, Massachusetts. This facility has enabled the Company to
consolidate its operations into one location. The MassDevelopment Financing
Agency approved the Company for a $5,000,000 tax-exempt industrial revenue
bond, which has been financed by GE Capital Public Finance. The real estate
portion of the industrial revenue bond is a 15-year mortgage loan, with
$3,942,100 outstanding at July 26, 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 $236,500 outstanding at July 26,
2003. The term loan requires monthly payments of $5,900. The Company also
has an additional 7-year equipment loan, with $344,100 outstanding at July
26, 2003. This loan agreement requires a monthly payment of $7,900.
On June 26, 2000, the Company entered into a $5,000,000 Credit Agreement
with Brown Brothers Harriman & Co. collateralized by inventory, 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
July 26, 2003, the Company had approximately $4,203,200 available for
borrowing. At July 26, 2003, the Company had approximately $400,800
committed to cover the Company's reimbursement obligations under certain
letters of credit and
15
WESTERBEKE CORPORATION AND SUBSIDIARY
bankers' acceptances. The Credit Agreement does not have an expiration
date, but is payable on written demand.
Management believes cash flow from operations and borrowings available under
the Credit Agreement will provide for working capital needs, principal
payments on long-term debt, and capital and operating leases through fiscal
2003.
Domestic inflation is not expected to have a material impact on the
Company's operations.
The cost of engine blocks and other components is 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 during the first nine months of fiscal 2003.
16
Item 3 - Quantitative and Qualitative Disclosures About Market Risk
- -------------------------------------------------------------------
There are no material changes to the disclosure made in the Annual Report on
Form 10-K for the year ended October 26, 2002 regarding this matter.
Item 4 - Controls and Procedures
- --------------------------------
(a) Evaluation of disclosure controls and procedures. As of the end
of the Company's fiscal quarter ended July 26, 2003, an
evaluation of the effectiveness of the Company's "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 the Company's
principal executive officer and principal financial officer.
Based upon that evaluation, the Company's principal executive
officer and principal financial officer have each concluded that
as of the end of that fiscal quarter, the Company's disclosure
controls and procedures are effective to ensure that information
required to be disclosed by the Company in reports that it files
or submits 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 the Company's management believes
that the Company's disclosure controls and procedures provide a
reasonable level of assurance, they do not expect that the
Company's disclosure controls and procedures or internal
controls will prevent all error 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 controls. During the fiscal quarter ended
July 26, 2003, there was no change in the Company's internal
control over financial reporting that has materially affected,
or is reasonably likely to materially affect, the Company's
internal control over financial reporting.
17
Part II. Other Information
Item 1 Legal Proceedings
------ -----------------
As previously announced on May 12, 2003, a purported class
action lawsuit has been filed naming the Company and its
directors as defendants. The complaint alleges, among other
things, that the proposed merger with Acquisition Corp., as
discussed above, is being advanced through "unfair procedures"
and the consideration offered in the merger is "grossly unfair,
inadequate and provides value to [Westerbeke] stockholders
substantially below the fair or inherent value of the Company"
and "does not constitute maximization of stockholder value".
The complaint also alleges breaches by the defendants of their
fiduciary duties to the Company's public stockholders in
connection with the proposed merger. The lawsuit seeks to
enjoin the merger or, if it is consummated, to recover damages.
The Company believes that the lawsuit lacks merit and intends to
vigorously defend the lawsuit. The Company is insured against
damages and other costs relating to lawsuits of this nature
subject to a retention of $125,000. The Company has incurred
approximately $8,000 of costs to date in connection with this
lawsuit.
Item 2 Changes in Securities
------ ---------------------
None to report
Item 3 Default Upon Senior Securities
------ ------------------------------
None to report
Item 4 Submissions of Matters to a Vote of Security Holders
------ ----------------------------------------------------
None to report
Item 5 Other Information
------ -----------------
(a) Split-Dollar Life Insurance Agreement
The Company has a split-dollar life insurance agreement with
John H. Westerbeke, Jr., Chairman, President and Chief Executive
Officer of the Company. Pursuant to the requirements of the
Sarbanes-Oxley Act of 2002, the Company has stopped paying
premiums in connection with such agreement.
Item 6 Exhibits and Reports on Form 8-K
------ --------------------------------
(a) Exhibits
See the Exhibit Index to this Form 8-K.
(b) Reports on Form 8-K
During the fiscal quarter ended July 26, 2003 the Company
filed the following Current Reports on Form 8-K:
In a Current Report filed on Form 8-K dated May 5, 2003, the
Company announced that it has entered into a definitive
merger agreement with Westerbeke Acquisition Corporation
("Acquisition Corp."). Under the terms of the merger
agreement, each of
18
the approximately 850,000 shares of Westerbeke common stock
not owned by Acquisition Corp. will be converted upon
completion of the merger into the right to receive $3.00 per
share in cash. Acquisition Corp. is a corporation formed
and wholly owned by Westerbeke's Chairman, President and
Chief Executive Officer, John H. Westerbeke, Jr.
Acquisition Corp. owns approximately 56.2% of the
outstanding shares of Westerbeke common stock.
In a Current Report filed on Form 8-K dated May 12, 2003,
the Company announced that a purported class action lawsuit
has been filed naming the Company and its directors as
defendants. The complaint alleges, among other things, that
the proposed merger, announced on May 5, 2003, of the
Company and Acquisition Corp. is being advanced through
"unfair procedures" and the consideration offered in the
merger is "grossly unfair, inadequate and provides value to
[Westerbeke] stockholders substantially below the fair or
inherent value of the Company" and "does not constitute
maximization of stockholder value." The complaint also
alleges breaches by the defendants of their fiduciary duties
to the Company's public stockholders in connection with the
proposed merger. The lawsuit seeks to enjoin the proposed
merger or, if it is consummated, to recover damages. The
Company believes that the lawsuit lacks merit and intends to
vigorously defend the lawsuit.
In a Current Report filed on Form 8-K dated June 4, 2003 the
Company reported the following:
John H. Westerbeke, Jr. ("Mr. Westerbeke"), the Chairman,
President and Chief Executive Officer of the Company,
received a preliminary inquiry from a private equity firm
about the possibility of purchasing Mr. Westerbeke's
beneficial interest in the Company on the terms set forth in
its letter of such date. Mr. Westerbeke referred this
inquiry to the special committee of the Company's Board of
Directors. The private equity firm was informed of Mr.
Westerbeke's unwillingness to sell any portion of his
beneficial interest in the Company to a third party, and
since such notification Mr. Westerbeke has not received any
further communication from such firm.
Also, Mr. Westerbeke received an inquiry from a potential
strategic acquiror of the Company regarding the possibility
of making an offer to purchase the entire Company at a price
in excess of $3.00 per share of common stock. On May 21,
2003, counsel for the potential acquiror sent a letter to
Pepe & Hazard LLP (counsel to Mr. Westerbeke and Acquisition
Corp.), advising that the acquiror expected to make a formal
proposal on the terms set forth in such counsel's letter of
such date. The letter was referred to the special
committee. Counsel for the special committee subsequently
spoke to counsel for the potential acquiror to determine
whether the proposal represented the acquiror's highest and
best offer. Counsel for the potential acquiror responded
that the potential acquiror would consider making a higher
offer if, subject to the conditions set forth in such
counsel's letter of May 21, 2003, its proposal were to
receive the support of Mr. Westerbeke. The special
committee also spoke to Mr. Westerbeke, who stated that he
would not vote the shares of Company common stock
beneficially owned by him (through Acquisition Corp.) in
favor of such proposal. Counsel for the special committee
informed counsel for the potential acquiror of Mr.
Westerbeke's position.
On May 27, 2003, the special committee received from the
potential acquiror a formal offer to acquire the assets of
the Company on the terms set forth in its letter of May 23,
2003, which terms were not materially different from the
terms stated in its letter of May 23, 2003. Subsequently, a
member of the special committee spoke to Mr. Westerbeke,
19
who again stated that he would not vote the shares of
Company common stock beneficially owned by him (through
Acquisition Corp.) in favor of such offer. On May 28, 2003,
the members of the special committee met and voted
unanimously to recommend to the board of directors that the
Company not pursue the offer. The basis of the special
committee's recommendation was that, under Delaware law, the
proposed acquisition would require approval by holders of a
majority of the Company's common stock, and that in light of
Mr. Westerbeke's stated opposition to the offer, it would be
imprudent to expend Company resources pursuing a transaction
that could not be consummated. The special committee
reported its recommendation to the board of directors of the
Company on May 29, 2003. On the same date, the board of
directors (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. Thereafter,
counsel for the special committee informed counsel for the
potential acquiror of Mr. Westerbeke's position with respect
to such offer. In addition, on May 29, 2003, the Chairman
of the special committee advised the potential acquiror of
the decision of the special committee and the board of
directors and the reason therefor.
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.
20
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
WESTERBEKE CORPORATION
(Registrant)
Dated September 9, 2003 /s/ John H. Westerbeke, Jr.
----------------- ------------------------------------
John H. Westerbeke, Jr.
Chairman of the Board,
President and Principal
Executive Officer
Dated September 9, 2003 /s/ Gregory Haidemenos
----------------- ------------------------------------
Gregory Haidemenos
Principal Financial
and Accounting Officer
21
EXHIBIT INDEX
Exhibit Description
- ------- -----------
31.1 Certification of Chief Executive Officer Pursuant to Rule 13e-14(a)
31.2 Certification of Chief Financial Officer Pursuant to Rule 13e-14(a)
32.1 Certification of Chief Executive Officer pursuant to Section 906
of the Sarbanes-Oxley Act of 2002
32.2 Certification of Chief Financial Officer pursuant to Section 906
of the Sarbanes-Oxley Act of 2002
22