10-K 1 west-10k.txt BODY OF FORM 10-K 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 ------- WESTERBEKE CORPORATION ------------------------------------------------------ (Exact name of registrant as specified in its charter) Delaware 041925880 ---------------------------------------- --------------------------- (State or other jurisdiction of Employer (I.R.S. Identification No.) incorporation or organization) Myles Standish Industrial Park Taunton, Massachusetts 02780 02780 ---------------------------------------- --------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (508) 823 - 7677 ---------------- Securities registered pursuant to Section 12 (b) of the Act: Name of each exchange on Title of each class which registered ------------------- ------------------------ 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 ----- ----- 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. 2 PART I ITEM 1. BUSINESS. General ------- 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. 3 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 ----------------------- 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 ---------------------- 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 ----------------------------------- 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 ----------------------------------- Management believes that maintaining high quality manufacturing standards is important to its competitive position and also believes that the Company has developed a reputation for high quality products. The Company maintains quality control systems and procedures which it reviews with its manufacturing personnel and which it modifies as appropriate. The Company's quality control systems and procedures include the testing of each fully assembled generator set and propulsion engine at increasing loads up to full operating capacity to verify performance and safety features. The checklist includes testing wiring and electrical systems, all connections and fittings, fuel and oil systems, the fresh water-cooling system and safety shutdown features. In the case of the Company's generator sets, output current, voltage and frequency are also tested. The results of the tests are recorded, and quality assurance personnel approve each product before it leaves the testing area. In line with its policy of updating and improving its manufacturing operations, the Company utilizes a computerized manufacturing management system, which integrates the Company's inventory control, sales and financial functions with its manufacturing operations. Marketing and Sales ------------------- The Company's marine engine and air-conditioning products are marketed through a nationwide and international network of distributors and dealers. The Company markets its non-marine engine products through 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 ------------------ Although the Company follows a policy of protecting its proprietary rights to its marine engine products and designs, it does not believe that its business, as a whole, is materially dependent upon such protection. The Company has registered the names Westerbeke(R), Universal(R), Rotary Aire(R) and Atomic Four(R) under Federal trademark law. Backlog and Credit Terms ------------------------ The Company believes that because its production is based upon cancelable purchase orders rather than long-term agreements, the amount of its backlog is not an important indicator of future sales. The Company extends credit to certain of its customers on terms that it believes are normal and customary in the marine industry. Competition ----------- 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. 11 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 --------- 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 6263 Director (Class C) Gregory Haidemenos Principal Financial Officer 3940 Gerald Bench Director (Class A) 6162 Thomas M. Haythe Director (Class B) 6364 James W. Storey Director (Class B) 6869

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 ~~2001~~2002 First Quarter (October 2228, ~~2000~~2001 to January 2726, ~~2001~~2002) $32.~~125~~010 $21.~~500~~310 Second Quarter (January 2827, ~~2001~~2002 to April 2827, ~~2001~~2002) 31.~~000~~950 21.~~000~~450 Third Quarter (April 2928, ~~2001~~2002 to July 2827, ~~2001~~2002) 21.~~250~~500 21.~~050~~070 Fourth Quarter (July 2928, ~~2001~~2002 to October 2726, ~~2001~~2002) 21.~~450~~790 1.~~800~~050 FISCAL ~~2002~~2003 First Quarter (October 2827, ~~2001~~2002 to January 2625, ~~2002~~2003) $23.~~010~~450 $1.~~310~~500 Second Quarter (January 2726, ~~2002~~2003 to April 2726, ~~2002~~2003) 12.~~950~~540 1.~~450~~140 Third Quarter (April 2827, ~~2002~~2003 to July 2726, ~~2002~~2003) 13.~~500~~400 1.~~070~~760 Fourth Quarter (July 2827, ~~2002~~2003 to October 2625, ~~2002~~2003) 13.~~790~~380 12.~~050~~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, ~~October~~2003 ~~24,~~ 2002 2001 2000 1999 ~~1998~~ ----------- ----------- ----------- ----------- --------------------------- For the Year: (In thousands, except for per share amount) Net sales $19,954 $25,526 $28,694 $34,528 $29,114 ~~$26,202~~ Gross profit 4,475 5,559 6,461 7,752 6,563 ~~5,966~~ Selling, general and administrative ~~Expense~~expense 4,542 4,996 4,436 5,756 4,359 ~~3,684~~ Research and development expense 1,238 1,098 1,446 1,501 1,365 ~~1,181~~ Income (loss) from operations (1,305) (535) 1,132 494 839 ~~1,100~~ Interest income (expense), net (275) (378) (618) (172) 60 ~~(10)~~ Other income (expense) 10 4,444 10 (189) 387 - Net income, (loss) (1,062) 2,886 319 228 796 ~~644~~ Net income (loss) per share, diluted* (0.54) 1.45 0.16 0.11 0.39 ~~0.31~~ At end of year: Total assets $19,782 $23,090 $21,878 $24,839 $15,384 ~~$14,670~~ Working capital 8,106 9,029 5,808 5,537 7,616 ~~5,650~~ Long-term liabilities 4,066 4,430 4,770 5,030 647 ~~893~~ Stockholders' equity 13,405 14,379 11,580 11,627 11,381 ~~10,719~~ * 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 2625, October 2726, October 2127, 2003 2002 2001 ~~2000~~ ----------- ----------- ------------------- Net sales 100.0% 100.0% 100.0% Gross profit 22.4 21.8 22.5 ~~22.5~~ Selling, general and administrative expense 22.8 19.6 15.5 ~~16.7~~ Research and development expense 6.2 4.3 5.0 ~~4.3~~ Income (loss) from operations (6.5) (2.1) 3.9 ~~1.4~~ Interest income (expense), net (1.54) (21.25) (02.52) Other income (expense) 0.1 17.4 - ~~(0.5)~~ Provision for income (benefit) taxes (2.5) 02.75 (0.3)7 Net income (loss) (5.3) 11.3 1.1 ~~0.7~~

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:

October 26, October 27, 2002 2001 ----------- ----------- ASSETS Current assets: Cash and cash equivalents $ 4,471,100 $ 40,300 Accounts receivable, net of allowance for doubtful accounts and price allowances of $480,000 at October 26, 2002 and $282,000 at October 27, 2001 (Note 2) 2,114,500 2,131,800 Inventories (Note 3) 5,048,300 7,566,800 Prepaid expenses and other assets 456,800 397,500 Prepaid income taxes 267,800 354,700 Deferred income taxes (Note 9) 951,700 844,200 ----------- ----------- Total current assets 13,310,200 11,335,300 Property, plant and equipment, net (Notes 4,8 and 10) 8,348,600 8,862,400 Split dollar premiums (Note 5) 1,068,300 1,237,000 Other assets, net 170,300 190,200 Investments in marketable securities 109,900 109,200 Note receivable - related party (Note 6) 36,200 56,200 Deferred income taxes (Note 9) 46,400 87,400 ----------- ----------- $23,089,900 $21,877,700 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current portion of long-term debt (Notes 8 and 10) $ 340,300 $ 317,900 Revolving demand note payable (Note 7) - 2,500,000 Accounts payable 1,385,600 2,164,300 Accrued expenses and other liabilities 1,237,400 545,200 Accrued income taxes (Note 9) 1,317,700 ----------- ----------- Total current liabilities 4,281,000 5,527,400 ----------- ----------- Long-term debt, net of current portion (Notes 8 and 10) 4,430,100 4,770,400 ----------- ----------- Total Liabilities 8,711,100 10,297,800 ----------- ----------- Stockholders' equity (Notes 11 and 12): Preferred stock, $1.00 par value; authorized 1,000,000 shares; none issued or outstanding at October 26, 2002 and October 27, 2001 Common stock, $.01 par value; authorized 5,000,000 shares; issued 2,244,682 shares in 2002 and 2,225,328 in 2001. 22,400 22,300 Additional paid-in-capital 6,126,700 6,105,100 Accumulated other comprehensive income (loss) (468,600) (359,800) Retained earnings 9,505,600 6,619,600 ----------- ----------- 15,186,100 12,387,200 Less - Treasury shares at cost, 289,873 shares in 2002 and 2001 807,300 807,300 ----------- ----------- Total stockholders' equity 14,378,800 11,579,900 ----------- ----------- $23,089,900 $21,877,700 =========== ===========

Years Ended ----------------------------------------- October 26, October 27, October 21, 2002 2001 2000 ----------- ----------- ----------- Net sales (Note 2) $25,525,700 $28,694,200 $34,528,400 Cost of sales 19,966,800 22,232,800 26,776,400 ----------- ----------- ----------- Gross profit 5,558,900 6,461,400 7,752,000 Selling, general and administrative expense 4,995,700 4,435,900 5,756,300 Research and development expense 1,098,500 1,445,800 1,501,500 Gain on sale of facility - 552,800 - ----------- ----------- ----------- Income (loss) from operations (535,300) 1,132,500 494,200 ----------- ----------- ----------- Other income (expense): Interest income (expense), net (378,000) (618,200) (171,700) Arbitration award (Note 10) 4,433,900 - - Other income (expense) 10,000 9,700 (188,600) ----------- ----------- ----------- Other income (expense), net 4,065,900 (608,500) (360,300) ----------- ----------- ----------- Income before income taxes 3,530,600 524,000 133,900 Provision for income (benefit) taxes (Note 9) 644,600 205,200 (94,400) ----------- ----------- ----------- Net income $ 2,886,000 $ 318,800 $ 228,300 =========== =========== =========== Income per common share, basic $ 1.48 $ .16 $ .12 =========== =========== =========== Income per common share, diluted $ 1.45 $ .16 $ .11 =========== =========== =========== Weighted average common shares, basic 1,949,066 1,941,391 1,920,147 =========== =========== =========== Weighted average common shares, diluted 1,984,270 2,042,912 2,057,891 =========== =========== ===========

Accumulated Common Additional Other Stock Paid-in Comprehensive Retained Treasury Stockholders' Comprehensive Amount Capital Income Earnings Stock Equity Income ------ ---------- ------------- -------- -------- ------------- ------------- October 23,1999 $21,900 $6,025,300 $ 16,900 $6,072,500 $(756,000) $11,380,600 Exercise of stock options 100 11,200 - - - 11,300 Tax benefit from the exercise of stock options - 6,000 - - - 6,000 Unrealized gains on marketable securities - - 900 - - 900 900 Net income - - - 228,300 - 228,300 228,300 ------- ---------- --------- ---------- --------- ----------- ---------- October 21, 2000 22,000 6,042,500 17,800 6,300,800 (756,000) 11,627,100 229,200 ---------- Exercise of stock options 300 46,000 - - - 46,300 Tax benefit from the exercise of stock options - 16,600 - - - 16,600 Repurchase of 21,735 shares - - - - (51,300) (51,300) Unrealized losses on marketable securities - - (377,600) - - (377,600) (377,600) Net income - - - 318,800 - 318,800 318,800 ------- ---------- --------- ---------- --------- ----------- ---------- October 27,2001 22,300 6,105,100 (359,800) 6,619,600 (807,300) 11,579,900 (58,800) Exercise of stock options 100 21,600 - - - 21,700 Unrealized losses on marketable securities - - (108,800) - - (108,800) (108,800) Net income - - - 2,886,000 - 2,886,000 2,886,000 ------- ---------- --------- ---------- --------- ----------- ---------- October 26, 2002 $22,400 $6,126,700 $(468,600) $9,505,600 $(807,300) $14,378,800 $2,777,200 ======= ========== ========= ========== ========= =========== ==========

Years Ended ------------------------------------------ October 26, October 27, October 21, 2002 2001 2000 ----------- ----------- ----------- Cash flows from operating activities: Net income $ 2,886,000 $ 318,800 $ 228,300 Reconciliation of net income to net cash provided by (used in) operating activities: Depreciation and amortization 804,300 774,100 509,200 Loss (gain) on disposal of fixed assets - (554,000) 53,900 Deferred income taxes 6,100 243,100 (358,600) Changes in operating assets and liabilities: Accounts receivable 17,300 437,900 (67,600) Inventories 2,518,500 1,474,100 (3,400,700) Prepaid expenses and other assets (59,300) 13,600 65,800 Split-dollar premiums - (344,500) (55,500) Prepaid income taxes 86,900 (27,600) (268,900) Other assets - 345,800 159,500 Accounts payable (778,700) (995,600) 911,200 Accrued expenses and other liabilities 692,200 (346,300) (22,400) Deferred compensation - (345,800) (63,400) Accrued income taxes payable 1,317,700 ----------- ----------- ----------- Net cash provided by (used in) operating activities 7,491,000 993,600 (2,309,200) ----------- ----------- ----------- Cash flows from investing activities: Purchase of property, plant and equipment (270,700) (1,440,600) (7,384,700) Proceeds from sale of fixed assets including former Avon facility - 1,241,200 - Purchase of marketable securities (13,300) (4,600) (9,100) Proceeds from payment of note receivable 20,000 18,600 18,600 ----------- ----------- ----------- Net cash used in investing activities (264,000) (185,400) (7,375,200) ----------- ----------- ----------- Cash flows (used in) from financing activities: Exercise of stock options 21,700 46,300 11,300 Net borrowings (repayments) under revolving demand note (2,500,000) (1,350,000) 3,850,000 Purchase of treasury stock - (51,300) - Proceeds from GE Capital - - 5,000,000 Proceeds from Massachusetts Development - 500,000 - Principal payments on long-term debt and capital lease obligations (317,900) (334,000) (495,100) ----------- ----------- ----------- Net cash (used in) provided by financing activities (2,796,200) (1,189,000) 8,366,200 ----------- ----------- ----------- (Decrease) increase in cash and cash equivalents 4,430,800 (380,800) (1,318,200) Cash and cash equivalents, beginning of year 40,300 421,100 1,739,300 ----------- ----------- ----------- Cash and cash equivalents, end of year $ 4,471,100 $ 40,300 $ 421,100 =========== =========== =========== Continued 29 WESTERBEKE CORPORATION AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS, Continued Years Ended ------------------------------------------ October 26, October 27, October 21, 2002 2001 2000 ----------- ----------- ----------- Supplemental cash flow disclosures: Interest paid $ 436,800 $ 623,200 $ 185,100 Income taxes paid - 10,000 644,000 Supplemental disclosures of non-cash flow items: Increase (decrease) in unrealized gains on marketable securities, net of income taxes (7,500) 2,000 900 Unrealized loss in split-dollar life insurance Investments, net of income taxes (101,300) (379,600) - Supplemental disclosures of non-cash operating activities: Tax benefit from the exercise of stock options - 16,000 6,000

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

~~For the twelve months ended:~~ October 2625, ~~2002~~ October 2726, ~~2001~~2003 ~~October~~2002 ~~21,~~----------- ~~2000~~ ----------- 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 ----------- ----------- ~~Income~~Long-term ~~Net~~debt, ~~Income~~net ~~Net~~of ~~Income~~current ~~Net~~portion ~~per~~(Notes ~~share~~8 ~~Shares~~and ~~Income~~10) ~~per~~4,065,700 ~~share~~4,430,100 ~~Shares Income per share Shares Income~~ --------- --~~----~~ ------ -----~~----~~ ~~------~~Total Liabilities 6,376,600 8,711,100 ------ -----~~----~~ ------ ------ ~~Basic~~Stockholders' equity (Notes 11 and 12): Preferred stock, $1.4800 par value; authorized 1,~~949~~000,~~066~~000 $2shares; none issued or outstanding at October 25,~~886,000~~ ~~$.16~~2003 1and October 26,~~941,391~~ ~~$318~~2002 Common stock,~~800~~ $.1201 1par value; authorized 5,~~920~~000,~~147~~000 ~~$228~~shares; issued 2,~~300~~244,682 ~~Effect~~shares ofin ~~Stock~~2003 ~~options~~and (2002.~~03)~~ 3522,~~204~~400 -22,400 Additional paid-in-capital ~~101~~6,~~521~~126,700 -6,126,700 Accumulated other comprehensive loss (~~.01~~380,500) ~~137~~(468,~~744~~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 ---- ------- -- --------- ~~Diluted~~ $~~1.45 1~~19,~~984~~782,~~270 $2,886,~~000 $~~.16 2~~23,~~042~~089,~~912~~900 ~~$318,800~~=========== ~~$.11 2,057,891 $228,300~~===========

The accompanying notes are an integral part of the consolidated financial statements. 31 WESTERBEKE CORPORATION AND SUBSIDIARY CONSOLIDATED STATEMENTS OF OPERATIONS

Years Ended ------------------------------------------- October 2625, ~~2002~~October 26, October 27, 2003 2002 2001 ----------- ----- ------ ----------- ~~Raw~~Net ~~materials~~sales (Note 2) $319,~~808~~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,~~734~~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) ~~Work~~1,132,500 -in-~~process~~--------- ~~614~~----------- ----------- Other income (expense): Interest income (expense), net (275,100) (378,000) ~~855~~(618,~~800~~200) ~~Finished~~Arbitration ~~goods~~award ~~625~~(Note 10) - 4,433,900 ~~976~~- 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) $5(1,~~048~~061,~~300~~500) $7 2,~~566~~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

~~October~~Accumulated ~~26,~~Common ~~2002~~Additional ~~October~~Other ~~27,~~Stock ~~2001~~Paid-in Comprehensive Retained Treasury Stockholders' Comprehensive Amount Capital Income (loss) Earnings Stock Equity Income (loss) ------ ---------- ------------- -------- ~~Land~~-------- ------------- ------------- October 21,2000 $22,000 ~~921~~$6,042,500 $ ~~921~~17,~~500~~800 ~~Building~~$6,300,800 ~~and~~$(756,000) ~~building~~$11,627,100 ~~improvements~~$ 5229,~~658~~200 ----------- Exercise of stock options 300 46,000 - - - 46,300 5Tax benefit from the exercise of stock options - 16,~~630~~600 - - - 16,~~200~~600 ~~Furniture~~Repurchase ~~and~~of ~~fixtures~~21,735 ~~711~~shares - - - - (51,300) ~~706~~(51,300) Unrealized losses on marketable securities - - (377,600) - - (377,600) (377,600) Net income - - - 318,800 ~~Machinery~~- 318,800 ~~patterns~~318,800 ~~and~~---------------------------------------------------------------------------------------------- ~~equipment~~October 527,~~092~~ 2001 22,~~000~~300 46,~~853~~105,100 (359,800) ~~Transportation~~6,619,600 ~~equipment~~(807,300) 8011,~~400~~579,900 80(58,~~400~~800) ~~Leasehold~~----------- ~~improvements~~Exercise 20of stock options 100 21,~~400~~600 20- - - 21,~~400~~700 ~~Equipment~~Unrealized ~~under~~losses ~~capital~~on ~~lease~~marketable ~~769~~securities - - (108,~~200~~800) ~~769~~- - (108,~~200~~800) (108,800) Net income - - - 2,886,000 - 2,886,000 2,886,000 ------- --------------------------------------------------------------------------------------- 13October 26,~~253~~2002 22,~~100~~400 126,~~982~~126,700 (468,600) 9,505,600 (807,300) ~~Less~~14,378,800 ~~accumulated~~2,777,200 ~~depreciation~~----------- ~~and~~Unrealized ~~amortization~~gains 4on marketable securities - - 88,~~904~~100 - - 88,100 88,100 Net loss - - - (1,061,500) 4- (1,~~119~~061,~~900~~500) (1,061,500) ----------- ----------------------------------------------------------------------------------- October 25, 2003 $22,400 8$6,~~348~~126,~~600~~700 $(380,500) $8,~~862~~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 2625, ~~2002~~October 26, October 27, 2003 2002 2001 ----------- ----- ------ ----------- ~~Term~~Cash ~~Loan~~flows ~~with~~from anoperating ~~interest~~activities: ~~rate~~Net ofincome ~~8.50%~~(loss) $(1,061,500) ~~with~~ $ ~~386~~2,~~700~~886,000 $ ~~446~~318,~~100~~800 ~~repayment~~Reconciliation ~~terms~~of ~~through~~net ~~October~~income ~~2007,~~(loss) ~~secured~~to net cash provided by ~~certain~~(used ~~equipment.~~in) ~~Term~~operating ~~Loan~~activities: ~~with~~Depreciation anand ~~interest~~amortization ~~rate~~779,400 804,300 774,100 Gain on disposal of fixed assets (10,000) - (554,000) Deferred income taxes (80,000) 6~~.46%~~,100 ~~with~~243,100 4Changes in operating assets and liabilities: Accounts receivable 251,~~106~~200 17,~~400~~300 4437,~~313~~900 Inventories (447,500) 2,518,500 1,474,100 Prepaid expenses and other assets (400) ~~repayment~~(59,300) ~~terms~~13,600 ~~through~~Split-dollar ~~April~~premiums ~~2015~~- - (344,500) ~~secured~~Refundable byincome ~~the~~taxes ~~Company's~~(47,500) ~~facility~~86,900 ~~located~~(27,600) atOther ~~150~~assets ~~John~~- ~~Hancock~~- ~~Road.~~345,800 ~~Term~~Accounts ~~Loan~~payable ~~with~~(273,900) an(778,700) ~~interest~~(995,600) ~~rate~~Accrued ofexpenses ~~6.46%~~and other liabilities (629,700) ~~with~~692,200 ~~277~~(346,300) ~~328~~Deferred compensation - - (345,800) ~~repayment~~Accrued ~~terms~~income ~~through~~taxes ~~April~~(1,092,700) ~~2007~~1,317,700 ~~secured~~- ----------- ----------- ----------- Net cash provided by ~~certain~~(used ~~equipment.~~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,~~770~~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) 5(264,~~088~~000) (185,400) ----------- ----------- ----------- Cash flows from financing activities: Exercise of stock options - 21,700 46,300 ~~Less~~Net ~~current~~repayments ~~portion~~under ~~340~~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) ----------- ----------- ~~Long~~----------- ~~term~~Net ~~debt~~cash ~~net~~used ofin ~~current~~financing ~~portion~~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,~~770~~471,~~400~~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:

~~Year~~Asset ~~Amount~~Classification Estimated Useful Lives -------------------- ---------------------- ~~2003~~Building $and ~~340,300~~building ~~2004~~improvements ~~364,300~~15 ~~2005~~- ~~390,200~~40 ~~2006~~years ~~417,800~~Machinery ~~2007~~and ~~410,700~~equipment ~~Thereafter~~10 ~~2,847,100~~years Patterns 5 years Furniture and fixtures 5 - 10 years Transportation equipment 3 - 5 years Equipment under capital lease 5 - 10 years Intangibles 3 -~~------~~ ~~$4,770,400~~17 ~~==========~~years

~~Years~~For ~~Ended~~the twelve months ended: October 25, 2003 October 26, 2002 October 27, 2001 ------------------------------------- --------------------- ~~October 26, 2002 October 27, 2001 October 21, 2000~~ ---------------- ---------------- ------------------ ~~Federal:~~Loss ~~Current~~Net $Income ~~656,000~~Net $Income ~~(85,000)~~Net $per ~~217,200~~share ~~Deferred~~Shares ~~(131,600)~~Loss ~~270,000~~per ~~(95,500)~~share Shares Income per share Shares Income --------- ------ ---- --------- ~~524,400 185,000 121,700~~ ------ ------ --------- ------ ------ ~~State:~~Basic ~~Current~~$(0.54) 551,~~000 47~~954,~~100~~809 47$(1,061,500) ~~Deferred~~$1.48 651,~~200~~949,066 ~~(26~~$2,~~900)~~886,000 ~~(263~~$.16 1,~~600~~941,391 $318,800 Effect of Stock options - - - (.03) 35,204 - - 101,521 - ------ --------- ----------- ~~120,200~~----- ~~20,200 (216,100)~~ --------- ---------- ---- --------- ~~Total~~-------- Diluted $(0.54) ~~644~~1,~~600~~954,809 $ ~~205~~(1,~~200~~061,500) $1.45 ~~(94~~1,~~400)~~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:

~~Years~~October ~~Ended~~25, ~~--------------------------------------------------------~~2003 October 26, 2002 ~~October 27, 2001 October 21, 2000~~ ---------------- ---------------- ~~----------------~~Raw ~~Provision~~materials ~~at statutory rate~~ $14,~~200~~629,~~400~~700 $~~178~~3,~~200 $ 45~~808,~~500~~400 ~~State~~Work-in-process ~~tax provision~~459,000 ~~net of federal tax benefit 79~~614,~~300~~000 ~~13,300~~Finished ~~(142,600)~~goods ~~Research and development tax credits and suspended losses not booked previously (606~~407,~~700)~~100 ~~- - Other~~625,900 ~~net (28,400) 13,700 2,700~~ ---------- -------- --~~-------~~ ~~Total~~ $ ~~644~~5,~~600 $205~~495,~~200~~800 $ ~~(94~~5,~~400)~~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:

~~Years~~October ~~Ended~~25, 2003 October 26, 2002 ---------------- ----------------~~------------------------~~ ~~October~~Land 26$ 921,500 ~~2002~~$ ~~October~~921,500 27Building and building improvements 5,658,300 ~~2001~~5,658,300 ~~October~~Furniture 21and fixtures 744,900 ~~2000~~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 -----------~~-----~~ -----------~~-----~~ ~~Income taxes related to operations $644~~13,~~600 $205~~377,~~200~~000 ~~$ (94~~13,~~400) Stockholders' equity~~253,100 ~~for~~Less ~~compensation~~accumulated ~~expense~~depreciation ~~for~~and ~~tax~~amortization ~~purposes in excess of amounts recognized for financial reporting purposes - (16~~5,630,600) (64,~~000)~~904,500 -------- --- ----- ------~~---~~ ~~Total~~ $~~644~~ 7,~~600~~746,400 $~~188~~ 8,348,600 ~~$(100,400)~~ ======== === ===== ======~~===~~

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 2625, ~~2002~~2003 October 2726, ~~2001~~2002 ---------------- ---------------- ~~Deferred~~Term ~~tax~~Loan ~~assets:~~with ~~Accounts~~an ~~receivable~~interest $rate ~~193~~of 8.50%,~~300~~ with $ 97322,~~400~~100 ~~Inventory~~$ ~~444~~386,~~800~~700 ~~601,800~~repayment ~~Accrued~~terms ~~bonus~~through ~~124~~October 2007,~~400~~ -secured ~~Warranty~~by ~~173,200~~certain ~~145~~equipment,~~000~~ ~~Unrealized~~requiring ~~loss~~monthly onpayments ~~split-dollar~~of ~~life~~$7,900. ~~insurance~~Term ~~319,600~~Loan ~~239,900~~with ~~Massachusetts~~an ~~net~~interest ~~operating~~rate ~~tax~~of ~~loss~~6.46%, -with 223,~~600~~885,500 ~~Massachusetts~~4,106,400 ~~investment~~repayment ~~tax~~terms ~~credit~~through ~~116,300~~April ~~183~~2015,~~100~~ ~~Other~~secured ~~16,100~~by -the ~~----------~~Company's ~~----------~~facility ~~Total~~located ~~gross~~at ~~deferred~~150 ~~tax~~John ~~assets~~Hancock 1Road,~~387,700~~ 1requiring monthly payments of $40,~~289,800~~000. ~~----------~~Term ~~----------~~Loan ~~Deferred~~with ~~tax~~an ~~liabilities:~~interest ~~Fixed~~rate ~~assets~~of 6.46%, ~~principally~~with ~~due~~222,400 to277,300 ~~accelerated~~repayment ~~depreciation~~terms ~~methods~~through ~~(389~~April 2007,~~600)~~ ~~(358~~secured by certain equipment,~~200)~~ requiring monthly payments of $5,900. ---------- ---------- ~~Total~~4,430,000 ~~gross~~4,770,400 ~~deferred~~Less ~~tax~~current ~~liabilities~~portion ~~(389~~364,~~600)~~300 ~~(358~~340,~~200)~~300 ---------- ---------- ~~Net~~Long ~~deferred~~term ~~tax~~debt, ~~assets~~net $of ~~998,100~~current portion $4,065,700 ~~931~~$4,~~600~~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 ~~Operating~~Amount ---- ------~~---~~ ~~2003~~2004 $36 364,~~800~~300 ~~2004~~2005 36390,200 2006 417,800 ~~2005~~2007 410,700 2008 312,600 Thereafter 2,~~500~~534,400 ---------- ~~Total future minimum lease payments~~ $764,~~100~~430,000 ==========

44 9. Income Taxes Income tax expense (benefit) consists of:

~~Weighted~~Years ~~average~~Ended ~~exercise~~-------------------------------------------------------- ~~price~~October of25, ~~Shares~~2003 ~~shares~~October ~~under~~26, ~~plan~~2002 October 27, 2001 ---------------- ---------------- ---------------- ~~Balance~~Federal: ~~outstanding~~Current ~~at October 23~~$(428,400) ~~1999~~$ ~~150~~656,000 $~~1.125~~ ~~Exercised~~ (1085,000) Deferred (1~~.125~~,600) (131,600) 270,000 --------- ~~Balance~~--------- ~~outstanding~~--------- at(430,000) ~~October 21~~524,400 ~~2000 140~~185,000 ~~1.125~~--------- ~~Exercised~~--------- ~~(19,278) 1.125~~ --------- ~~Balance~~State: ~~outstanding~~Current at- ~~October 27~~55,000 ~~2001 120~~47,~~722~~100 ~~1.125~~Deferred ~~Exercised~~ (1978,~~354~~400) ~~1.125~~65,200 ~~Forfeited~~ (26,~~368~~900) ~~1.125~~--------- --------- ~~Balance~~--------- ~~outstanding~~(78,400) ~~and~~120,200 ~~exercisable~~20,200 at--------- ~~October~~--------- 26--------- Total $(508,400) ~~2002~~$ 75644,~~000~~600 $~~1.125~~ 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:

~~Weighted~~Years ~~average~~Ended ~~Weighted~~-------------------------------------------------------- ~~Range~~October of25, ~~remaining~~2003 ~~average~~October ~~Weighted~~26, ~~exercise~~2002 ~~Number~~October ~~contractual~~27, ~~outstanding~~2001 ~~Options average prices outstanding life (years) option price exercisable exercise price~~ -------- -------- --- ------------- ---------------- 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 --------- ---------- -------- ~~$1.125~~Total 75$(508,~~000~~400) ~~0.4~~ $~~1.125~~ 75644,~~000~~600 $~~1.125~~205,200 ========= ========== ========

The income tax expense (benefit) was allocated as follows:

~~Weighted~~Years ~~average~~Ended ~~exercise~~-------------------------------------------------------- ~~price~~October of25, ~~Shares~~2003 ~~shares~~October ~~under~~26, ~~plan~~2002 October 27, 2001 ---------------- ---------------- ---------------- ~~Balance~~Income ~~outstanding~~taxes at(benefit) ~~October~~related ~~23,~~to ~~1999~~operations ~~and~~$(508,400) ~~October~~$644,600 21$205,200 ~~2000~~Stockholders' ~~118~~equity,~~400~~ ~~$1.631~~for ~~Exercised~~compensation ~~(10,100)~~expense ~~0.875~~for ~~-------~~tax ~~Balance~~purposes ~~outstanding~~in ~~and~~excess ~~exercisable~~of atamounts ~~October~~recognized ~~27,~~for ~~2001~~financial ~~and~~reporting ~~October~~purposes ~~26,~~- ~~2002~~- ~~108~~(16,~~300~~600) ~~$1.702~~--------- -------- -------- 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.

~~Weighted~~October ~~average~~25, ~~Weighted~~2003 ~~Range~~October of26, ~~remaining~~2002 ~~average~~---------------- ~~Weighted~~---------------- ~~exercise~~Deferred ~~Number~~tax ~~contractual~~assets: ~~outstanding~~Accounts ~~Options~~receivable ~~average~~$ ~~prices~~213,900 ~~outstanding~~$ 193,300 Inventory 503,600 444,800 Accrued bonus - 124,400 Warranty 164,300 173,200 Unrealized loss on split-dollar life ~~(years)~~insurance ~~option~~255,400 ~~price~~319,600 ~~exercisable~~Massachusetts ~~exercise~~net ~~price~~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) ----------- ----------~~----~~ ~~$1.125~~Net -deferred ~~$3.000~~tax ~~108,300~~assets $1.4,021,600 $~~1.702~~ ~~108~~998,~~300~~100 ~~$1.702~~========== ==========

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:

~~2002~~Year ~~2001~~Operating ~~2000~~ ---- ---- ----- ~~Net~~2004 ~~income~~$ As52,400 ~~reported~~2005 $218,~~886,~~000 ~~$318,800~~2006 ~~$228~~15,~~300~~500 ~~Pro~~2007 ~~forma 2~~15,~~886,000~~500 ~~318,800~~2008 ~~227~~6,~~300~~500 ~~Basic~~-------- ~~income~~Total ~~per~~future ~~share~~minimum Aslease ~~reported~~payments $107,900 ~~1.48 $ 0.16 $ 0.12 Pro forma 1.48 0.16 0.12 Diluted income per share As reported $ 1.45 $ 0.16 $ 0.11 Pro forma 1.45 0.16 0.11~~========

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:

~~For~~Weighted ~~the~~average ~~twelve~~exercise ~~months~~price ~~ended:~~of Shares shares under plan ------ -----------------~~-------------~~ Balance outstanding at October 2621, ~~2002~~2000 ~~October~~140,000 27$1.125 Exercised (19,278) ~~2001~~1.125 -------~~---------~~ ~~----------------~~Balance ~~Net~~outstanding ~~income~~at $2October 27,~~886,000~~ $2001 ~~318~~120,~~800~~722 ~~Unrealized~~1.125 Exercised (~~losses~~19,354) ~~gains~~1.125 onForfeited ~~marketable securities~~(26,368) ~~net~~1.125 of------- ~~income~~Balance ~~taxes~~outstanding ~~of $72,500~~ at October 26, 2002 ~~and $251~~75,~~800~~000 at1.125 ~~October~~Forfeited ~~27, 2001~~ (~~108~~75,~~800~~000) ~~(377,600)~~1.125 -------~~---~~ ~~---------~~Balance ~~Comprehensive~~outstanding ~~income~~at ~~(loss)~~October $225,~~777,200~~ $2003 ~~(58,800)~~- =======~~=== =========~~

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:

~~Fiscal~~Weighted ~~Fiscal~~average ~~2002:~~exercise ~~First~~price ~~Second~~of ~~Third~~Shares ~~Fourth~~shares ~~Year~~under ~~-----~~plan ------ ----- ------ ------ ~~Net~~Balance ~~sales~~outstanding ~~$4,674~~at ~~$7,429~~October $721,~~784~~ ~~$5,639~~2000 ~~$25~~118,~~526~~400 ~~Gross profit 955~~ $1~~,707~~.631 ~~1,831~~Exercised ~~1,066 5,559 Income~~ (~~loss) from operations (444) 187 640 (918) (535) Other income (loss) (104) (59) (89) 4~~10,~~318 4,066 Net income (loss~~100) ~~(329) 390 371 2,454 2,886 Net income (loss) per share, diluted (~~0.~~17)~~875 ~~0.19 0.19 1.24 1.45 Fiscal Fiscal 2001: First Second Third Fourth Year~~ ----- --~~----~~ ~~-----~~Balance ~~------~~outstanding ~~------~~at ~~Net~~October ~~sales $7~~27,~~436~~ ~~$8,173~~2001 ~~$6,760~~and ~~$6,325~~October ~~$28~~26,~~694~~ ~~Gross~~2002 ~~profit 1~~108,~~305~~300 1~~,732~~.702 ~~1,632~~Forfeited ~~1,792 6,461 Income~~ (~~loss~~75,000) ~~from operations (228) 642 258 460~~ 1~~,132~~.125 ~~Other~~------- ~~income~~Balance ~~(loss)~~outstanding ~~(176)~~and ~~(186)~~exercisable ~~(119)~~at ~~(127)~~October ~~(608)~~25, ~~Net~~2003 ~~income (loss) (243) 274 83 205 319 *Net income (loss) per share~~33,300 ~~diluted (0~~$3.~~13)~~000 ~~0.13 0.04 0.10 0.16 * The amounts do not add because of the first quarter's loss effect on the determination of the diluted weighted average common shares for that period.~~=======

The following table summarizes information concerning currently outstanding and exercisable options under the "Supplemental Plan" as of October 25, 2003:

~~Balance~~Weighted ataverage ~~Charged~~Weighted toRange ~~Charged~~of ~~Balance~~remaining ~~Beginning~~average ofWeighted ~~Costs~~exercise ~~and~~Number Tocontractual ~~Other~~outstanding atOptions ~~End~~average ~~Period~~prices ~~Expenses~~outstanding ~~Accounts~~life ~~Deductions~~(years) ofoption ~~Year~~price exercisable exercise price ------------ ---------- -------- ---------- ------- ~~2000 Allowance for Doubtful accounts $ 59,200 62,500~~ - ~~6,700 $115,000 2001 Allowance for Doubtful accounts $115,000~~ - - -------------------------------------- $~~115,~~3.000 ~~2002~~33,300 ~~Allowance~~2.5 ~~for Doubtful accounts~~ $~~115,~~3.000 ~~(10~~33,~~000)~~300 ~~- -~~ $~~105,~~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

~~Certain~~2003 ~~Name~~2002 of2001 ~~Director Age Biographical Information~~ ---- ----~~--------~~ --- -~~-----------------------~~ ~~GERALD~~Net ~~BENCH 61 Vice Chairman~~income, ~~TDG Aerospace, Inc.~~ (~~manufacturer of aircraft de-icing devices~~loss) ~~since~~As ~~January~~reported ~~2001; President~~$(1, ~~BFT Holdings Co.~~061, ~~Inc. (investor in emerging growth businesses~~500) ~~from November 1996 to January 2001; President and Chief Executive Officer~~$2, ~~Hadley Fruit Orchards~~886,000 ~~Inc. from November 1996 to June 1999; Consultant~~$318,800 ~~Hadley~~Pro ~~Fruit~~forma ~~Orchards~~(1, ~~Inc. from March 1995 to November 1996; Partner~~061, ~~ICAP Marine Group (consulting firm~~500) ~~from November 1993 to February 1995; Chairman and President~~2,886,000 ~~TDG Aerospace~~318,800 ~~Inc.~~Basic ~~from October 1991 to November 1993; President~~income, ~~Thermion, Inc.~~ (~~manufacturer of heaters for aircraft de-icing devices~~loss) ~~from~~As ~~April~~reported ~~1990~~$ ~~to September 1991; General Manager, Lermer Corporation~~ (~~manufacturer of airline galley equipment~~0.54) ~~from~~$ ~~June~~1.48 ~~1989~~$ ~~through~~0.16 ~~March~~per ~~1990;~~share ~~former~~Pro ~~Chairman~~forma ~~of the Board, President, Chief Executive Officer and Director of E&B Marine Inc.~~ (~~marine supplies and accessories~~0.54) ~~from~~1.48 ~~prior to 1988; Director of the Company since June 1986 THOMAS M~~0.16 ~~HAYTHE~~Diluted ~~63 Business and Legal Consultant since February 2000: Partner~~income, ~~Haythe~~As &reported ~~Curley~~$ (~~attorneys~~0.54) ~~(renamed~~$ ~~Torys in 2000) from 1982 to January 2000; Director: Novametrix Medical Systems Inc~~1.45 ~~(manufacturer~~$ ~~of electronic medical instruments) and Ramsay Youth Services, Inc~~0.16 (~~provider of youth and educational services~~loss); ~~Director~~per ofshare ~~the~~Pro ~~Company~~forma since June 1986. 46 Certain Name of Director Age Biographical Information ---------------- --- ------------------------ JAMES W. STOREY 68 Consultant since January 1993; President, Wellingsley Corporation (~~private investment management company~~0.54) ~~from December 1986 through December 1992; President and Chief Executive Officer of Codex Corporation, a subsidiary of Motorola, Inc~~1.45 ~~from 1982 to 1986; Vice President of Motorola, Inc~~0. from 1982 to 1986; Director of the Company since June 1986. JOHN H. WESTERBEKE, JR. 62 President of the Company since 1976; Director of the Company since 1976; Chairman of the Board of Directors of the Company since June 1986.16

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:

~~Annual~~For ~~Compensation~~the twelve months ended: ------------------------------------ ~~Fiscal~~October ~~Name~~25, ~~and~~2003 ~~Year Principal Ended All Other Position~~ October ~~Salary~~26, ~~Bonus~~2002 ~~Compensation~~ --------- ------- ------ ----- -----~~-------~~ ~~John~~Net H.income ~~Westerbeke,~~(loss) ~~Jr. 2002~~ $~~236~~(1,~~646 $286~~061,~~675 $53,976(3~~500) ~~President, Chairman of the Board 2001 231,629~~ $2,~~179 55~~886,~~408(3)~~000 ofUnrealized ~~Directors and Class C Director 2000 228,359~~(1losses) ~~134,247(2)~~gains ~~38,549(3)~~on ~~Carleton~~marketable ~~F. Bryant~~securities, ~~III~~net ~~(4)~~of ~~2002~~income $taxes ~~94,500~~of $ 58,~~240~~700 -at ~~Executive~~October ~~Vice President~~25, ~~2001~~2003 94and $72,500 ~~58,240~~at -October ~~Treasurer~~26, ~~Chief~~2002 ~~Operating 2000 94~~88,~~500~~100 60(108,~~633~~800) - ~~Officer and Secretary~~ ---------- ---------- ~~Includes~~Comprehensive ~~$75,300~~income of(loss) ~~salary earned in fiscal year 2000, payment of which had been deferred. Payment was made in fiscal 2001. Includes a~~ $~~126,692~~ ~~bonus earned in fiscal year 2000, payment of which had been deferred. Payment was made in fiscal 2001. Includes amounts~~ (~~$40~~973,~~500,~~400) $412,~~896 and $22~~777,~~750~~200 in=========== fiscal 2002, 2001 and 2000, respectively) reflecting the current dollar value of the benefit to Mr. Westerbeke of premiums paid by the Company with respect to a split-dollar insurance arrangement (see "Employment Agreements" below for a description of such arrangement). Such benefit was determined by calculating the time value of money (using the applicable federal rates) of the premiums paid by the Company in the fiscal years ended October 26, 2002, October 27, 2001 and October 21, 2000 for the period from the date on which each premium was paid until March 31, 2004 (which is the earliest date on which the Company could terminate the agreement and request a refund of premiums paid). Mr. Bryant was an executive officer of the Company until April 4, 2002.==========

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:

~~Number~~Fiscal ofFiscal ~~Value~~2003: ofFirst ~~Unexercised~~Second ~~Unexercised~~Third ~~In-the-Money(1)~~Fourth ~~Options~~Year ~~at Options at October 26, 2002 October 26, 2002~~ ----------------------------- ----------------------~~-------~~ ~~Name~~Net ~~Exercisable~~sales ~~Unexercisable~~$4,496 ~~Exercisable~~$5,249 ~~Unexercisable~~$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 ---- ----------- ------------- ----------- ------------- ~~John~~Net H.sales ~~Westerbeke~~$4,674 ~~Jr.~~$7,429 ~~150~~$7,~~000~~784 -$5,639 $5625,~~250~~526 -Gross ~~--------------------~~profit ~~In-the-money~~955 ~~options~~1,707 ~~are~~1,831 ~~those~~1,066 ~~where~~5,559 ~~the~~Income ~~fair~~(loss) ~~market~~from ~~value~~operations of(444) ~~the~~187 ~~underlying~~640 ~~Common~~(918) ~~Stock~~(535) ~~exceeds~~Other ~~the~~income ~~exercise~~(loss) ~~price~~(104) of(59) ~~the~~(89) ~~option.~~4,318 ~~The~~4,066 ~~value~~Net ofincome ~~in-the-money~~(loss) ~~options~~(329) is390 ~~determined~~371 in2,454 ~~accordance~~2,886 ~~with~~Net ~~regulations~~income of(loss) ~~the~~per ~~Securities~~share, ~~and~~diluted ~~Exchange~~(0.17) ~~Commission~~0.19 by0.19 ~~subtracting~~1.24 ~~the~~1.45 ~~aggregate~~* ~~exercise~~The ~~price~~amounts do not add because of the ~~option~~first ~~from~~quarter's ~~the~~loss ~~aggregate~~effect ~~year-end~~on ~~value~~the determination of the ~~underlying~~diluted ~~Common~~weighted ~~Stock~~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

~~Shares~~Balance ofat ~~Common~~Charged ~~Stock~~to ~~Name~~Charged ~~and~~Balance ~~Address~~Beginning ~~Owned Beneficially Percent~~ of ~~Class~~Costs ~~----------------~~and ~~----------------------~~To ~~----------------~~Other ~~Marvin~~at A.End ~~Gordon~~Period ~~100,000(1)~~Expenses ~~5.1%~~Accounts ~~750~~Deductions ~~Everett~~of ~~Street~~Year ~~Norwood,~~2001 MAAllowance ~~02062~~for ~~Gerald~~Doubtful ~~Bench~~accounts 11$115,~~100(2)~~000 *- 17- ~~1/2~~- ~~Passaic Avenue Spring Lake~~$115,000 ~~New~~2002 ~~Jersey~~Allowance ~~07762~~for ~~Thomas~~Doubtful M.accounts ~~Haythe 16~~$115,~~100(3)~~000 * Myles Standish Industrial Park Taunton, Massachusetts 02780 James W. Storey 20,100(~~4) 1.0% 3 Saddle Ridge Road Dover~~10, ~~Massachusetts 02030 John H. Westerbeke, Jr. 1,248,250(5~~000) ~~59.3%~~- ~~Myles~~- ~~Standish Industrial Park Taunton~~$105,000 ~~Massachusetts~~2003 ~~02780~~Allowance ~~Gregory~~for ~~Haidemenos~~Doubtful -accounts * Myles Standish Industrial Park Taunton$105,000 ~~Massachusetts 02780 All Directors and Officers as a Group~~ (~~five persons) 1~~5,~~295,550(2~~000)~~(3)(4)(5)~~ ~~60.6%~~- -~~-------------------~~ (*) Less than one percent. 51 Information as to these holdings is based upon a report on Schedule 13D filed with the Securities and Exchange Commission by Mr. Marvin A. Gordon. Such report indicates that Mr. Gordon has sole voting and dispositive power with respect to $100,000 shares. Consists of 11,100 shares issuable upon the exercise of presently exercisable stock options held by Mr. Bench. Includes 11,100 shares issuable upon the exercise of presently exercisable stock options held by Mr. Haythe. Includes 11,100 shares issuable upon the exercise of presently exercisable stock options held by Mr. Storey. Includes 150,000 shares issuable upon the exercise of presently exercisable stock options held by Mr. Westerbeke.

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.

~~EQUITY~~Certain ~~COMPENSATION~~Name ~~INFORMATION~~of Director Age Biographical Information ---------------- --- ------------------------ GERALD BENCH 62 Vice Chairman, TDG Aerospace, Inc. (manufacturer of aircraft de-~~-----------------------------------------------------------------------------------~~icing ~~October~~devices) 26since January 2001; President, ~~2002~~BFT Holdings Co., Inc. (ainvestors 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 (battorneys) (cnow known as Torys LLP) ~~Number~~from 1982 to January 2000; Director of ~~securities~~the ~~remaining~~Company ~~available~~since ~~for~~June ~~Number~~1986; outside general counsel of ~~securities~~the toCompany besince ~~future~~2000. ~~issuance~~JAMES ~~under~~W. ~~issued~~STOREY ~~upon~~69 ~~exercise~~Consultant ofsince ~~Weighted-average~~January ~~exercise~~1993, ~~equity~~providing ~~compensation~~investment ~~plans~~advice ~~outstanding~~and ~~options,~~investment ~~price~~management services as trustee of ~~outstanding~~fourteen ~~options~~trusts for individuals; Director of the Company since June 1986. JOHN H. WESTERBEKE, ~~(excluding~~JR. ~~securities~~63 ~~Plan~~President ~~category~~of ~~warrants~~the Company and ~~rights~~a ~~warrants~~director ~~and~~since ~~rights~~1976; ~~reflected~~Chairman inof ~~column~~the ~~(a))~~Board ~~-------------~~since ~~--------------------------~~June ~~-----------------------------~~1986; ~~-------------------------~~has ~~Equity~~served ~~compensation~~in ~~plans~~various ~~approved~~managerial bycapacities ~~security~~since ~~holders~~joining ~~183,300~~the $1Company in 1966.47 ~~129,400~~GREGORY ~~-------~~HAIDEMENOS ~~-----~~40 ~~-------~~Chief ~~Equity~~Financial ~~compensation~~Officer ~~plans~~of ~~not~~the ~~approved~~Company bysince ~~security~~December ~~holders~~1999; ~~N/A~~Treasurer ~~N/A~~and ~~N/A~~Secretary ~~-------~~of ~~-----~~the ~~-------~~Company ~~Total~~since ~~183,300~~April ~~$1.47~~2002; ~~129,400~~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

~~Exhibit~~Annual ~~No.~~Compensation ~~Name of Exhibit Page~~ ------- --------------- ~~----~~Fiscal 2Name ~~Agreement~~ and ~~Plan~~Year ofPrincipal ~~Merger~~Ended ~~between~~All ~~the~~Other ~~Company~~Position ~~and~~October ~~J.H.~~Salary ~~Westerbeke~~Bonus ~~Corporation,~~Compensation ~~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, SRJr. ~~(1)~~2003 ~~10(b) 1986 Stock Option Plan of the Company as amended on January 6~~$215,100 ~~1987~~$ ~~and~~- ~~on May 26~~$39, ~~1988~~ 700(~~4) 10(c) 1986 Employee Stock Purchase Plan of the Company (~~1) ~~10(d)~~President, ~~Supplemental~~Chairman ~~Stock Option Plan~~ of the ~~Company~~Board ~~(4)~~2002 ~~10(e)~~236,646 ~~1996~~286,675 ~~Stock Option Plan of the Company~~ 53,976(21) ~~10(f) Agreement dated as~~ of ~~June~~Directors ~~1, 1986 by~~ and ~~among~~Class ~~the~~C ~~Company,~~Director ~~Ruth~~2001 ~~A. Westerbeke~~231,629 ~~John H. Westerbeke~~2,179 ~~Jr.~~55, ~~John H. Westerbeke, Sr. and Ruth A. Westerbeke, as trustees~~ 408(1) ~~10(g)~~Carleton ~~Supplemental Medical Insurance Policy (1) 10(h) Employment Agreement dated March 24, 1993 between the Company and John H~~F. ~~Westerbeke~~Bryant, ~~Jr.,~~III ~~Chairman, President and Chief Executive Officer of the Company~~ (42) 622003 ~~10(i)~~$ ~~Purchase~~- ~~and~~$ ~~Sale~~- ~~Agreement~~- ~~dated~~Executive ~~March~~Vice 1President, ~~2000~~2002 ~~between the Company and Dead River Company (5) 10(j) Real Estate Loan Agreement dated April 24~~76,661 ~~2000~~- ~~among~~- ~~the Company~~Treasurer, ~~150~~Chief ~~John~~Operating ~~Hancock~~2001 ~~LLP~~94,500 ~~GE Capital Public Finance~~58,240 ~~Inc.~~- Officer and ~~Massachusetts~~Secretary ~~Development~~-------------------- ~~Finance~~Includes ~~Agency~~amounts (~~5) 10(k) Equipment Loan Agreement dated April 24~~$37, ~~2000 between the Company~~400, ~~GE Capital Public Finance~~$40,500 ~~Inc.~~ and ~~Massachusetts Development Finance Agency (5) 10(l) Mortgage Security Agreement~~$41,896 ~~Assignment~~in offiscal ~~Leases and Rents and Fixture Filing dated April 24~~2003, ~~2000~~2002 ~~between the Company~~ and ~~GE Capital Public Finance~~2001, ~~Inc. (5~~respectively) ~~10(m)~~reflecting ~~Loan and Security Agreement dated June 26, 2000 between~~ the ~~Company~~current ~~and~~dollar ~~Brown~~value ~~Brothers~~of ~~Harriman & Co (6) 10(n) Revolving Credit Note dated June 26, 2000 between~~ the ~~Company~~benefit ~~and~~to ~~Brown Brothers Harriman & Co~~Mr. ~~(6)~~Westerbeke ~~10(o)~~of ~~Amendment~~premiums ~~dated~~paid ~~September~~by ~~2000 to Loan and Security Agreement dated June 26, 2000 between~~ the Company ~~and~~with ~~Brown~~respect ~~Brothers Harriman Co. (7) 10(p) Amendment dated September 2000~~ to ~~Revolving~~a ~~Credit~~split-dollar ~~Note~~insurance ~~dated~~arrangement ~~June 26, 2000 between the Company and Brown Brothers Harriman & Co.~~ (7)see 21"Employment ~~Subsidiary~~Agreements" ofbelow ~~the~~for ~~Company 23(~~a) ~~Consent~~description of ~~Sansiveri,~~such ~~Kimball & McNamee, L.L.P. 23(b~~arrangement) ~~Consent of KPMG LLP 63 24 Power of Attorney (See Page 56 of Annual Report on Form 10-K) 99~~.1 ~~Certification~~Such ofbenefit ~~Chief~~was ~~Executive~~determined ~~Officer~~by ~~pursuant~~calculating ~~to Section 906 of~~ the ~~Sarbanes-Oxley~~time ~~Act~~value of ~~2002~~money ~~99.2~~(using ~~Certification~~the ofapplicable ~~Chief~~federal ~~Financial~~rates) ~~Officer pursuant to Section 906~~ of the ~~Sarbanes-Oxley~~premiums ~~Act~~paid ~~of 2002 -------------------- Incorporated~~ by ~~reference to Exhibits to Registration Statement No. 33-6972 filed with~~ the ~~Securities~~Company ~~and~~in ~~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~~years ended ~~January~~October 2325, ~~1999.~~2003, ~~Incorporated~~October by26, ~~reference~~2002 toand ~~Exhibits to Annual Report on Form 10-K for fiscal year ended~~ October 2327, ~~1999.~~2001 ~~Incorporated~~for bythe ~~reference~~period tofrom ~~Exhibits~~the todate ~~Quarterly Report~~ on ~~Form~~which ~~10-Q~~each ~~for~~premium ~~fiscal~~was ~~quarter~~paid ~~ended~~until ~~April~~March 2231, ~~2000.~~2005 ~~Incorporated~~(which byis ~~reference~~the toearliest ~~Exhibits~~date ~~to Quarterly Report~~ on ~~Form~~which ~~10-Q~~the ~~for~~Company ~~fiscal~~could ~~quarter~~terminate ~~ended~~the ~~July~~agreement ~~22,~~and ~~2000.~~request ~~Incorporated~~a byrefund ~~reference~~of topremiums ~~Exhibits~~paid). toMr. ~~Annual~~Bryant ~~Report~~was onan ~~Form~~executive ~~10-K~~officer ~~for~~of ~~fiscal~~the ~~year~~Company ~~ended~~until ~~October~~April 214, ~~2000~~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

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.

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:

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 -----------------

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