MARINE PRODUCTS CORP - Annual Report: 2002 (Form 10-K)

SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549

FORM 10-K

Commission File No. 1-16263

MARINE PRODUCTS CORPORATION

        Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý    No o

        Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act): Yes ý    No o

        The aggregate market value of Marine Products Corporation Common Stock held by non-affiliates on June 30, 2002 was $71,838,455 based on the closing price on the American Stock Exchange on June 28, 2002 of $11.65 per share.

        Marine Products Corporation had 17,110,603 shares of Common Stock outstanding as of February 24, 2003.

        Indicate by 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. ý

Documents Incorporated by Reference

        Portions of the Proxy Statement for the 2003 Annual Meeting of Stockholders of Marine Products Corporation are incorporated by reference into Part III, Items 10 through 13 of this report.

PART I

        References in this document to "we," "our," "us," "Marine Products," or "the Company" mean Marine Products Corporation ("MPC") and its subsidiaries, Chaparral Boats, Inc. ("Chaparral") and Robalo Marine LLC ("Robalo") (collectively or individually).

Forward-Looking Statements

        Certain statements made in this report that are not historical facts are "forward-looking statements" under the Private Securities Litigation Reform Act of 1995. Such forward-looking statements may include, without limitation, statements that relate to our business strategy, plans and objectives, and our beliefs and expectations regarding future demand for our products and services and other events and conditions that may influence our performance in the future.

        The words "may," "should," "will," "expect," "believe," "anticipate," "intend," "plan," "believe," "seek," "project," "estimate," and similar expressions used in this document that do not relate to historical facts are intended to identify forward-looking statements. Such statements are based on certain assumptions and analyses made by our management in light of its experience and its perception of historical trends, current conditions, expected future developments and other factors it believes to be appropriate. We caution you that such statements are only predictions and not guarantees of future performance and that actual results, developments and business decisions may differ from those envisioned by the forward-looking statements. See "Risk Factors" below.

Item 1. Business

        Marine Products manufactures fiberglass motorized boats distributed and marketed through its independent dealer network. Marine Products' product offerings include Chaparral sterndrive and inboard pleasure boats and Robalo outboard offshore sport fishing boats.

Organization

        Marine Products is a Delaware corporation, incorporated on August 31, 2000, in connection with a spin-off from RPC, Inc. (NYSE: RES) ("RPC"). Effective February 28, 2001, RPC accomplished the spin-off by contributing 100 percent of the issued and outstanding stock of Chaparral to Marine Products, a newly formed wholly-owned subsidiary of RPC, and then distributing the common stock of Marine Products to RPC stockholders. As part of the transaction, RPC's stockholders received 0.6 shares of Marine Products common stock for every one share of RPC common stock owned as of February 16, 2001, the record date for the spin-off.

Overview

        Chaparral designs, manufactures and sells recreational fiberglass powerboats in the sportboat, deckboat and cruiser markets. Available industry statistics measure Chaparral as the third largest sterndrive boatbuilder in the United States. Marine Products sells its four lines of powerboats to an international network of independent authorized dealers comprised of approximately 150 domestic dealers and 19 international dealers. Marine Products' basic mission is to enhance its customers' boating experience by providing them with high quality, innovative powerboats. Marine Products intends to remain a leading manufacturer of recreational powerboats for sale to a broad range of consumers worldwide.

        Chaparral was founded in 1965 in Ft. Lauderdale, Florida. Chaparral's first boat was a 15-foot tri-hull design with a retail price of less than $1,000. Over time the company grew by offering exceptional quality and consumer value. In 1976, Chaparral moved to Nashville, Georgia, where a manufacturing facility of a former boat manufacturing company was available for purchase. This

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provided Chaparral an opportunity to obtain additional manufacturing space and access to a trained work force. With 37 years of boatbuilding experience, Chaparral continues to improve the design and manufacturing of its product offerings to meet the growing needs of discriminating recreational boaters. Chaparral's management team has focused on improvements in manufacturing efficiency and refinement of product offerings.

        Effective June 2001, Marine Products purchased certain operating and intangible assets of Robalo, a segment of the U.S. Marine division of Brunswick Corporation ("U.S. Marine"), for total consideration of $1,037,000. Robalo is an offshore sport fishing boat brand. This transaction also included the purchase of the Wahoo!™ tradename. The purchase price was funded using available cash and has been accounted for using the purchase method of accounting.

        Robalo was founded in 1969 and its first boat was a 19-foot center console salt-water fishing boat, among the first of this type of boat to have an "unsinkable" hull. Robalo was acquired by U.S. Marine and relocated to Tallahassee, Florida, in 1991. During 2000, Robalo produced and sold approximately 600 units. With the downturn in the boating industry in 2000, U.S. Marine ceased production of Robalo boats in early 2001, prior to its purchase by Marine Products. Following the acquisition, Marine Products moved the operating assets of Robalo from Tallahassee, Florida, to a manufacturing facility in Valdosta, Georgia.

        Robalo began production of two 23-foot models and made its first sales following the acquisition during the fourth quarter of 2001. During 2002, Robalo expanded its product offerings to include six models ranging from 18 feet to 26 feet in length. Net sales of the Robalo products accounted for less than four percent of total fiscal 2002 net sales.

Products

        Marine Products offers a comprehensive range of motorized recreational boats. Marine Products distinguishes itself by offering a wide range of products to the family recreational market and cruiser market through its Chaparral brand, and to the offshore sport fishing market through its Robalo brand.

        The following table provides a brief description of each of our brands and its particular market focus:

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Manufacturing

        Marine Products' manufacturing facilities are located in Nashville, Georgia and Valdosta, Georgia. Marine Products utilizes six different plants to, among other things, manufacture interiors, design new models, create fiberglass hulls and decks, and assemble various end products. Quality control is conducted throughout the manufacturing process. When fully assembled and inspected, the boats are loaded onto either company-owned trailers or third-party marine transport trailers for delivery to dealers.

        The manufacturing process begins with design of a product to meet dealer and customer needs. Plugs are constructed in the research and development phase from designs. Plugs are used to create a mold from which prototype boats can be built. Adjustments are made to the plug design until acceptable parameters are met. The final plug is used to create the necessary number of production molds. Molds are used to produce the fiberglass hulls and decks. Fiberglass components are made by applying the outside finish or gelcoat to the mold. Then numerous layers of fiberglass and resin are applied during the lamination process over the gelcoat. After curing, the hulls and deck are removed from the molds and are trimmed and prepared for final assembly, which includes the installation of electrical and plumbing systems, engines, upholstery, accessories and graphics.

Suppliers

        Marine Products' two most significant components used in manufacturing boats, based on cost, are engines and fiberglass. For each of these, there is currently an adequate supply available in the market. Marine Products has not experienced any material shortages in any of these products. Temporary shortages, when they do occur, usually involve manufacturers switching model mixes or introducing new product lines. Marine Products obtains most of its fiberglass from a leading domestic supplier. Marine Products believes that there are several alternative suppliers if this supplier fails to provide adequate quantities at acceptable prices.

        Marine Products does not manufacture the engines installed in its boats. Engines are generally specified by the dealers at the time of ordering, usually on the basis of anticipated customer preferences or actual customer orders. Sterndrive engines for the Chaparral brand are purchased through the American Boatbuilders Association ("ABA"), which has entered into engine supply arrangements with Mercury Marine and Volvo Penta, the two currently existing suppliers of sterndrive engines. These arrangements contain incentives and discount provisions, which may reduce the cost of the engines purchased, if specified purchase volumes are met during specified periods of time. Although no minimum purchases are required, Marine Products expects to continue purchasing sterndrive engines from the ABA on a voluntary basis in order to receive purchase volume discounts. Marine Products does not have a supply contract with the ABA. Marine Products has engine supply contracts for its Robalo product line with three engine suppliers that are not affiliated with the ABA. Outboard engines for the Robalo brand are purchased from Mercury, Honda, and Yamaha. See "Growth Strategies" below.

        In the event of a sudden interruption in the supply of engines from these suppliers, our sales and profitability could be negatively impacted.

Sales and Distribution

        Sales are made through approximately 134 Chaparral dealers and 26 Robalo dealers located in markets throughout the United States, ten of which sell both brands. Dealers market directly to the consumer at boat shows and in the dealers' showrooms. Marine Products also has 19 international Chaparral dealers. Most dealers are not exclusive to Marine Products and carry boat brands manufactured by other companies, including some that compete directly with our brands. The territories served by any dealer are not exclusive to the dealer; however, Marine Products uses

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discretion in establishing relationships with new dealers in an effort to protect the interests of the existing dealers. Marine Products' seven independent field sales representatives call upon existing dealers and develop new dealer relationships. The field sales force is directed by a National Sales Coordinator, who is responsible for developing a full dealer organization for the Company's products. The marketing of boats to retail customers is primarily the responsibility of the dealer. Marine Products supports dealer marketing efforts by supplementing local advertising, sales and marketing follow up in boating magazines, and participation in selected regional, national, and international boat shows. The largest Marine Products' dealer accounts for less than 10 percent of annual net sales. Marine Products continues to seek new dealers in many areas throughout the U.S., Europe, South America, Asia and the Middle East.

        In general, Marine Products requires payment in full or a payment in advance from a floor plan financing lender before it will ship a boat overseas. Consequently, there is no credit risk associated with its foreign sales nor risk related to foreign currency fluctuation. Marine Products believes that within several years, foreign sales could produce additional sales growth. Management grew the Robalo dealer network from eight to 26 in 2002, and intends to continue to selectively grow this network during 2003. We will attempt to develop relationships with the best offshore fishing boat dealers in our target markets. The Robalo dealer network will not always overlap with the Chaparral dealer network.

        Marine Products' sales orders are based on strong interest by its dealers. Although orders are cancelable at any time, substantially all boats are pre-sold to a dealer before entering the production line. Historically, dealers have in most cases taken delivery of all their orders. In the past, Marine Products has been able to resell any boat for which the order has been cancelled. To date, cancellations have not had any material effect on Marine Products.

        Most of Marine Products' domestic shipments are made pursuant to commercial dealer "floor plan financing" programs in which Marine Products' subsidiaries participate on behalf of their dealers. Under these arrangements, a dealer establishes lines of credit with one or more third-party lenders for the purchase of showroom inventory. When a dealer purchases a boat pursuant to a floor plan arrangement, it draws against its line of credit and the lender pays the invoice cost of the boat directly to Marine Products. Generally, payment is made to Marine Products within ten business days. When the dealer in turn sells the boat to a retail customer, the dealer repays the lender, thereby restoring its available credit line. Each dealer's floor plan credit facilities are secured by the dealer's inventory, letters of credit, and perhaps other personal and real property. In connection with the dealer's floor plan arrangements, Marine Products or its subsidiaries has agreed to repurchase any of its boats, up to specified limits, which a lender repossesses from a dealer and returns to Marine Products in a "like new" condition. In the event that a dealer defaults under a credit line, the lender may then invoke the manufacturers' repurchase agreements with respect to that dealer. In that event, all repurchase agreements of all manufacturers supplying a defaulting dealer are generally invoked regardless of the boat or boats with respect to which the dealer has defaulted. Marine Products participates in floor plan arrangements with several major third-party lenders on behalf of its dealers, most of whom have financing arrangements with more than one lender. As of December 31, 2002, Marine Products' obligation to repurchase boats under the floor plan financing programs described above was approximately $1,994,000. Unlike Marine Products' obligation to repurchase boats repossessed by lenders, Marine Products is under no obligation to repurchase boats directly from dealers. Marine Products does not sponsor financing programs to the consumer; any consumer financing promotions for Chaparral or Robalo boats would be the responsibility of the dealer.

        Marine Products' dealer incentive programs are designed to promote early replenishment of the stock in dealer inventories depleted throughout the prime spring and summer selling seasons, to stabilize Marine Products' manufacturing between the peak and offpeak periods, and to promote sales of certain products. For the 2003 model year (which commenced July 1, 2002), Marine Products offered its dealers several incentive programs based on dollar volumes and timing of dealer purchases. One

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program offered discounts, protection against model year price increases, and payment of interest charged to dealers by floor plan lenders through April 1, 2003 based on volumes and timing of purchases throughout the model year. In addition to the dealer incentive programs described above, Marine Products occasionally offers discount programs designed to increase sales of a particular product during a specific part of a given model year.

        These incentives to the dealers have resulted in relatively level month-to-month production and sales. After the free interest programs end, interest costs revert to the dealer at the rates set by the lender. The dealers make curtailment payments (principal payments) on the boats as required by their particular commercial lenders. Similar sales promotion programs have been in effect during the past several years, and Marine Products anticipates that we will continue to offer these types of incentive programs in the future.

        As of December 31, 2002, the sales order backlog was 1,547 units with estimated net sales of $50,106,000. This represents a 13-week backlog based on recent production levels. Marine Products normally does not manufacture boats for inventory.

Product Warranty

        Marine Products provides a five year transferable hull structural warranty on Chaparral products against defects in material and workmanship and a 10 year transferable structural hull warranty on Robalo products. A one year warranty on components is provided as well. The engine manufacturer warrants engines included in the boats. Warranty expense of $2,745,000, or 1.7 percent of net sales, was recorded in 2002. Warranty expense was $1,143,000 in 2001 and $1,483,000 in 2000, or one percent of sales in both years. Marine Products' warranty expense as a percentage of sales is considered low relative to the marine industry. Warranty expense as a percentage of sales increased in 2002 due to more aggressive claims filings by dealers, increased sales of cruisers (which generally incur higher warranty claim costs due to the higher retail price and additional features of the products) and increased customer service demands. Marine Products anticipates that this trend will continue in the future.

Research and Development

        Essentially the same technologies and processes are used to produce fiberglass boats by all boat manufacturers. The most common method is open-face molding. This is usually a labor-intensive, manual process whereby employees hand spray and apply fiberglass and resin in layers on open molds to create boat hulls, decks and other smaller fiberglass components. This process can result in inconsistencies in the size and weight of parts, which may lead to higher warranty costs. A single open-face mold is typically capable of producing approximately three hulls per week.

        Chaparral has been a leading innovator in the recreational boating industry. One of Chaparral's most innovative designs is the full-length "Extended V-Plane" running surface. Typically, sterndrive boats have a several foot gap on the bottom rear of the hull where the engine enters the water. With Chaparral's design, the running surface extends the full length to the rear of the boat. The benefit of this innovation is more space, better performance and a more comfortable ride. All of Chaparral's models have the "Extended V-Plane" running surface. Although the basic hull designs are similar, Chaparral introduces a variety of new models each year. New models are generally in production for only a few years before being replaced, updated, or discontinued.

        Robalo's hulls utilize the Hydro Lift™ hull design. This variable dead rise hull design provides a smooth ride in rough offshore conditions. It also increases fuel economy and allows a given level of engine horsepower to propel a heavier boat to a given speed. Robalo's current models utilize the Hydro Lift™ design and we plan to utilize this design on Robalo or other offshore fishing boat models as well.

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        In support of its new product development efforts, Marine Products incurred research and development costs of $1,605,000 in 2002, $1,955,000 in 2001, and $1,428,000 in 2000.

Industry Overview

        For 2002, the recreational boat industry accounted for less than one percent of the United States Gross Domestic Product. The recreational marine market is a mature market, with 2002 retail expenditures of $29 billion spent on new and used boats, motors and engines, trailers, accessories and other associated costs as estimated by the National Marine Manufacturers Association ("NMMA"). Pleasure boats compete for consumers' free time with all other leisure activities, from computers and video games to other outdoor sports. The greatest obstacle for the pleasure boat industry is the consumers' diminishing leisure time.

        The NMMA conducts various surveys of pleasure boat industry trends. The NMMA surveys estimate that almost 69 million people in the United States participate in recreational boating. There are currently over 17 million boats owned in the United States, including outboard, inboard, sterndrive, sailboats, personal watercraft, and miscellaneous (canoes, rowboats, etc.). Marine Products competes in the outboard boating category with its Robalo offshore fishing boats, and in the sterndrive boating category with its three lines of Chaparral boats. Outboard boats comprised 48 percent of all boats in use during 2002, totaling 8,381,100. Sterndrive boats number 1,767,100, or 10 percent of all boats in use during 2002.

        At 68,400 units, sterndrive boats accounted for more than 13 percent of the total new boat units sold in 2002, making sterndrive boats the fourth largest category of boats sold. Sales of boats with sterndrive engines in 2002 had a total retail value of $2.2 billion, or an average retail price per boat of approximately $32,000. Management believes that the five largest states for boat sales are Michigan, California, Florida, New York and Texas. Marine Products has dealers in each of these states.

        The U.S. domestic recreational boating industry sales during 2002 were realized in the segments of new and used boat sales, motors and engines, trailers, and other associated expenses. Marine Products' subsidiaries compete in the new boat market, which realized an estimated $10.5 billion in retail sales during 2002. The table below shows estimated sales by boat industry segment for 2001 and 2002, ranked by 2002 retail sales (source: NMMA estimates):

        Chaparral's products are categorized as sterndrive and inboard boats and Robalo's products are categorized as outboard boats.

        The recreational boat manufacturing market remains highly fragmented with little consolidation. We estimate that the boat manufacturing industry includes more than 100 sterndrive manufacturers, largely small, privately held companies with varying degrees of professional management and

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manufacturing skills. According to estimates provided by Statistical Surveys, Inc., the top five manufacturers have a market share of 51.2 percent.

        Several factors influence sales trends in the recreational boating industry, including general economic growth, consumer confidence, household incomes, weather, tax laws, and demographics. Interest rates and fuel prices also have a direct impact on boat sales, as well as trends at the local, regional and national level. Competition from other leisure and recreational activities, such as vacation properties and travel, can also affect sales of recreational boats.

        Management believes Marine Products is well positioned to take advantage of the following conditions, which continue to characterize the industry:

•

labor-intensive manufacturing processes that remain largely unautomated;



•

increasingly strict environmental standards derived from governmental regulations and customer sensitivities;



•

a lack of focus on coordinated customer service and support by dealers and manufacturers; and



•

a high degree of fragmentation and competition among the more than 100 recreational boat manufacturers.

Growth Strategies

        The pleasure boat market is a mature industry. Unit sales of sterndrive boats have declined almost 7 percent during the past three years, so Marine Products has grown its unit sales and revenues by increasing our market share and by expanding our product line. Marine Products has grown its Chaparral sterndrive market share from 4.75 percent in fiscal 1996 to 7.80 percent for the six months ended June 2002 (the most recent information available to us). The Company continues to expand its product offerings by expanding into the largest potential boat market, outboard boats, and by constant improvement and expansion into larger boats within its sterndrive offerings.

        Marine Products' operating strategy emphasizes innovative designs and high quality manufacturing processes, by delivering a superior quality product while lowering manufacturing costs through increased efficiencies in our facilities. We have been leveraging our buying power through economies of scale. Management believes this, together with its membership in the ABA, positions Marine Products as a significant third party customer of major engine suppliers. Marine Products' Chaparral subsidiary is a founding member of the ABA, which collectively represents 11 independent boat manufacturers that have formed a buying group to pool their purchasing power in order to gain improved pricing on engines, fiberglass, resin and many other components. Marine Products intends to continue seeking the most advantageous purchasing arrangements from its suppliers. Marine Products is also a significant consumer of fiberglass materials and the Company intends to capitalize on relationships with fiberglass suppliers to assist Marine Products' growth.

        Our marketing strategy seeks to increase market share by enabling Marine Products to expand its presence by continuing to build dedicated sales, marketing and distribution systems. Marine Products has a distribution network of approximately 170 dealers located throughout the United States and internationally. Our strategy is to increase selectively the quantity of our dealers, and work to improve the quality and effectiveness of our entire dealer network. Marine Products seeks to capitalize on this strong dealer network by educating its dealers on the sales and servicing of our products and helping them provide more comprehensive customer service, with the goal of increasing customer satisfaction, customer retention and future sales. Marine Products provides promotional and incentive programs to help its dealers increase product sales. Marine Products intends to continue to strengthen its dealer network and build brand loyalty with both dealers and customers.

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        As part of Marine Products' overall strategy, Marine Products will also consider making strategic acquisitions in order to complement existing product lines, expand Marine Products' geographic presence in the marketplace and strengthen capabilities.

Competition

        The recreational boat industry is highly fragmented, resulting in intense competition for customers, quality products and boat show space. There is significant competition both within markets we currently serve and in new markets that we may enter. Marine Products' brands compete with several large national or regional manufacturers that have substantial financial, marketing and other resources. However, we believe that our corporate infrastructure and marketing and sales capabilities, in addition to our cost structure and our nationwide presence, enable us to compete effectively against these companies. In each of our markets, Marine Products competes on the basis of responsiveness to customer needs, the quality and range of products offered, and the competitive pricing of those products. Additionally, Marine Products faces general competition from all other recreational businesses seeking to attract consumers' leisure time and discretionary spending dollars.

        According to Statistical Surveys, the following is a list of the top ten (largest to smallest) sterndrive boat manufacturers in the United States based on unit sales for the six months ended June 30, 2002 (the most current information available to us). Several of these manufacturers are part of larger integrated boat building companies and are marked with asterisks. Management believes the companies set forth below represent approximately 73 percent of all United States retail sterndrive boat registrations during the six months ending June 30, 2002.

1.

Sea Ray*

2.

Bayliner*

3.

Chaparral

4.

Four Winns**

5.

Glastron**

6.

Crownline

7.

Larson**

8.

Maxum*

9.

Stingray

10.

Rinker

The outboard engine powered market has a large breadth and depth, accounting for almost 50 percent of all boats sold. Robalo's share of the offshore sport fishing boat market during the six months ending June 30, 2002 was immaterial. Some of the primary competitors for Robalo are: Grady-White, Mako, Boston Whaler* and Hydra Sports**.

*

a subsidiary of Brunswick Corporation

**

a subsidiary of Genmar Industries

Environmental and Regulatory Matters

        Certain materials used in boat manufacturing, including the resins used to make the decks and hulls, are toxic, flammable, corrosive, or reactive and are classified by the federal and state governments as "hazardous materials." Control of these substances is regulated by the Environmental Protection Agency ("EPA") and state pollution control agencies, which require reports and inspect facilities to monitor compliance with their regulations. The Occupational Safety and Health Administration ("OSHA") standards limit the amount of emissions to which an employee may be exposed without the need for respiratory protection or upgraded plant ventilation. Marine Products' manufacturing facilities are regularly inspected by OSHA and by state and local inspection agencies and

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departments. Marine Products believes that its facilities comply with substantially all regulations. Marine Products' cost of compliance with environmental regulations has not been material.

        In connection with the recent expansion of its manufacturing facilities in Nashville, Georgia, Marine Products incurred costs of approximately $700,000 to install an air purification system. This equipment is designed to comply with OSHA and EPA regulatory limits. Although capital expenditures related to compliance with environmental laws are expected to increase during the coming years, we do not currently anticipate that any material expenditures will be required to continue to comply with existing environmental or safety regulations in connection with its existing manufacturing facilities.

        Recreational powerboats sold in the United States must be certified by the manufacturer to meet United States Coast Guard specifications. In addition, boats manufactured for sale in the European Community must be certified to meet the European Community's imported manufactured products standards. These certifications specify standards for the design and construction of powerboats. All boats sold by Marine Products meet these standards. In addition, safety of recreational boats is subject to federal regulation under the Boat Safety Act of 1971. The Boat Safety Act requires boat manufacturers to recall products for replacement of parts or components that have demonstrated defects affecting safety. While Marine Products has instituted recalls for defective component parts produced by other manufacturers, there has never been a safety related recall resulting from Marine Products' design or manufacturing process. None of the recalls has had a material adverse effect on Marine Products.

Employees

        As of December 31, 2002, Marine Products had approximately 867 employees, of whom five were management and 31 administrative. None of Marine Products' employees is party to a collective bargaining agreement. All of Marine Products' workforce are currently employed in the United States and Marine Products believes that its relations with its employees are good.

Proprietary Matters

        Marine Products owns a number of trademarks and trade names that Marine Products believes are important to its business. Except for the Chaparral, Robalo and Wahoo! trademarks, however, Marine Products is not dependent upon any single trademark or trade name or group of trademarks or trade names. The Chaparral, Robalo and Wahoo! trademarks are currently registered in the United States. The current duration for such registration ranges from seven to 15 years in the United States, but each registration may be renewed an unlimited number of times.

        Several of Chaparral's designs are protected under the U.S. Copyright Office's Vessel Hull Design Protection Act. This law grants an owner of an original vessel hull design certain exclusive rights. Protection is offered for hull designs that are made available to the public for purchase provided that the application is made within two years of the hull design being made public. During 2002, Chaparral registered seven of its designs under the Vessel Hull Design Protection Act.

Availability of Filings

        Marine Products makes available free of charge on its website, www.marineproductscorp.com, the annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to those reports on the same day as they are filed with the Securities and Exchange Commission and has done so since November 15, 2002.

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Risk Factors

Economic Conditions and Consumer Confidence Level Affect Marine Products' Sales because Marine Products' Products are Purchased with Discretionary Income

        During an economic recession or when an economic recession is perceived as a threat, Marine Products will be adversely affected as consumers have less discretionary income or are more apt to save their discretionary income rather than spend it. During times of global political uncertainty, such as the current threat of war in the Middle East, Marine Products will be negatively affected as consumers delay large discretionary purchases pending the resolution of that uncertainty.

Interest Rates and Fuel Prices Affect Marine Products' Sales

        The Company's products are often financed by consumers, thereby higher interest rates increase the borrowing costs and, accordingly, the total cost of a boat purchase. Fuel costs can represent a large portion of the costs to operate our products. Therefore, higher interest rates and fuel costs can adversely affect consumers purchase decisions.

Marine Products' Dependence On Its Network Of Independent Boat Dealers May Affect Its Growth Plans And Sales

        Virtually all of Marine Products' sales are derived from its network of independent boat dealers. Marine Products has no long-term agreements with these dealers. Dealer competition continues to increase based on the quality of available products, the price and value of the products, and attention to customer service. We face intense competition from other recreational powerboat manufacturers in attracting and retaining independent boat dealers. The number of independent boat dealers supporting the Chaparral and Robalo tradenames and the quality of their marketing and servicing efforts are essential to Marine Products' ability to generate sales. A deterioration in the number or quality of Marine Products' network of independent boat dealers would have a material adverse effect on its powerboat sales. Marine Products' inability to attract new dealers and retain those dealers, or its inability to increase sales with existing dealers, could substantially impair its ability to execute its growth plans.

        Although Marine Products' management believes that the quality of its products and services in the recreational powerboat market should permit it to maintain its relationship with its dealers and its market position, there can be no assurance that Marine Products will be able to sustain its current sales levels. In addition, independent dealers in the recreational boating industry have experienced significant consolidation in recent years, which could result in the loss of one or more of Marine Products' dealers in the future if the surviving entity in any such consolidation purchases similar products from a Marine Products competitor. See "Growth Strategies" above.

Marine Products' Sales Are Affected By Weather Conditions

        Marine Products' business is subject to weather patterns that may adversely affect its sales. For example, drought conditions, or merely reduced rainfall levels, or excessive rain, may close area boating locations or render boating dangerous or inconvenient, thereby curtailing customer demand for our products. In addition, unseasonably cool weather and prolonged winter conditions may lead to a shorter selling season in some locations.

Marine Products Has Potential Liability for Personal Injury and Property Damage Claims

        The products we sell or service may expose Marine Products to potential liabilities for personal injury or property damage claims relating to the use of those products. Historically, the resolution of product liability claims has not materially affected Marine Products' business. Marine Products

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maintains product liability insurance that it believes to be adequate. However, there can be no assurance that Marine Products will not experience legal claims in excess of its insurance coverage or that claims will be covered by insurance. Furthermore, any significant claims against Marine Products could result in negative publicity, which could cause Marine Products' sales to decline.

Because Marine Products Relies On Third Party Vendors, Marine Products May Be Unable To Obtain Adequate Raw Materials and Components

        Marine Products is dependent on third party vendors to provide raw materials and components essential to the construction of its various powerboats. Especially critical are the availability and cost of marine engines and commodity raw materials used in the manufacture of Marine Products' boats. While Marine Products' management believes that vendor relationships currently in place are sufficient to provide the materials necessary to meet present production demands, there can be no assurance that these relationships will continue or that the quantity or quality of materials available from these vendors will be sufficient to meet Marine Products' future needs irrespective of whether Marine Products successfully implements its growth and acquisition strategies. Disruptions in current vendor relationships or the inability of Marine Products to continue to purchase construction materials in sufficient quantities and of sufficient quality to meet ongoing production schedules could cause a decrease in sales or a sharp increase in the cost of goods sold. Additionally, because of this dependence, the volatility in commodity raw materials or current or future price increases in construction materials or the inability of Marine Products' management to purchase construction materials required to complete its growth and acquisition strategies could cause a reduction in Marine Products' profit margins or reduce the number of powerboats Marine Products may be able to produce for sale.

Marine Products May Be Unable To Identify Or Complete Acquisitions

        Marine Products intends to pursue acquisitions and form strategic alliances that will enable Marine Products to acquire complementary skills and capabilities, offer new products, expand its customer base, and obtain other competitive advantages. There can be no assurance, however, that Marine Products will be able successfully to identify suitable acquisition candidates or strategic partners, obtain financing on satisfactory terms, complete acquisitions or strategic alliances, integrate acquired operations into its existing operations, or expand into new markets. Once integrated, acquired operations may not achieve anticipated levels of sales, profitability, or otherwise perform as expected. Acquisitions also involve special risks, including risks associated with unanticipated problems, liabilities and contingencies, diversion of management resources, and possible adverse effects on earnings and earnings per share resulting from increased interest costs, the issuance of additional securities, and difficulties related to the integration of the acquired business. The failure to integrate acquisitions successfully may divert management's attention from Marine Products' existing business and may damage Marine Products' relationships with its key customers and suppliers.

Marine Products' Success Will Depend On Its Key Personnel, And The Loss Of Any Key Personnel May Affect Its Powerboat Sales

        Marine Products' success will depend to a significant extent on the continued service of key management personnel. The loss or interruption of the services of any senior management personnel or the inability to attract and retain other qualified management, sales, marketing and technical employees could disrupt Marine Products' operations and cause a decrease in its sales and profit margins.

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Marine Products' Ability To Attract And Retain Qualified Employees Is Crucial To Its Results Of Operations And Future Growth

        Marine Products relies on the existence of an available hourly workforce to manufacture its products. As with many businesses, we are challenged to find qualified employees. There are no assurances that Marine Products will be able to attract and retain qualified employees to meet current and/or future growth needs.

If Marine Products Is Unable To Comply With Environmental And Other Regulatory Requirements, Its Business May Be Exposed to Liability and Fines

        Marine Products' operations are subject to extensive regulation, supervision, and licensing under various federal, state, and local statutes, ordinances, and regulations. While Marine Products believes that it maintains all requisite licenses and permits and is in compliance with all applicable federal, state and local regulations, there can be no assurance that Marine Products will be able to continue to maintain all requisite licenses and permits. The failure to satisfy these and other regulatory requirements could cause Marine Products to incur fines or penalties or could increase the cost of operations. The adoption of additional laws, rules and regulations could also increase Marine Products' costs.

        As with boat construction in general, our manufacturing processes involve the use, handling, storage and contracting for recycling or disposal of hazardous or toxic substances or wastes. Accordingly, we are subject to regulations regarding these substances, and the misuse or mishandling of such substances could expose Marine Products to liability or fines.

        Additionally, certain states have required or are considering requiring a license in order to operate a recreational boat. While such licensing requirements are not expected to be unduly restrictive, regulations may discourage potential first-time buyers, thereby reducing future sales.

Marine Products' Management Has A Substantial Ownership Interest; Public Stockholders May Have No Effective Voice In Marine Products' Management

        Marine Products' executive officers, directors and their affiliates hold directly or through indirect beneficial ownership, in the aggregate, approximately 66 percent of Marine Products' outstanding common stock. As a result, these stockholders will effectively control the operations of Marine Products, including the election of directors and approval of significant corporate transactions such as acquisitions. This concentration of ownership could also have the effect of delaying or preventing a third party from acquiring control of Marine Products at a premium. In addition, the availability of Marine Products common stock to the investing public is limited to the extent that shares are not sold by the executive officers, directors and their affiliates, which could negatively impact Marine Products' stock trading prices and affect the ability of minority stockholders to sell their shares. Future sales by executive officers, directors and their affiliates of all or a substantial portion of their shares could also negatively affect the trading price of Marine Products common stock.

Provisions In Marine Products' Certificate of Incorporation And Bylaws May Inhibit A Takeover Of Marine Products

        Marine Products' certificate of incorporation, bylaws and other documents contain provisions that may make more difficult or expensive, or that may otherwise discourage, a tender offer, change in control or takeover attempt that is opposed by Marine Products' Board of Directors.

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Item 2. Properties

        Marine Products' principal executive office is located in Atlanta, Georgia. This office is currently shared with RPC and is leased from a third party. The monthly rent paid to the third party is allocated between Marine Products and RPC. Under this arrangement, Marine Products pays approximately $1,300 per month in rent. Marine Products may cancel this arrangement at any time after giving a 30 day notice. Chaparral owns and maintains approximately 815,000 square feet of manufacturing, research and development, warehouse, and sales office and operations in Nashville, Georgia and owns and maintains 83,000 square feet of manufacturing space at our Robalo facility in Valdosta, Georgia. Marine Products' total square footage under roof is allocated as follows: manufacturing—712,000, research and development—65,000, warehousing—75,000, office and other—46,000.

Item 3. Legal Proceedings

        Marine Products is involved in litigation from time to time in the ordinary course of its business. Marine Products does not believe that the outcomes of such litigation will have a material adverse effect on the financial position or results of operations of Marine Products.

Item 4. Submission of Matters to a Vote of Security Holders

        There were no matters submitted to a vote of security holders during the fourth quarter of 2002.

Item 4A. Executive Officers of the Registrant

        Each of the executive officers of Marine Products was elected by the Board of Directors to serve until the Board of Directors' meeting immediately following the next annual meeting of stockholders or until his or her earlier removal by the Board of Directors or his or her resignation. The following table lists the executive officers of Marine Products and their ages, offices, and date first elected to office.

        Mr. Palmer has served as Vice President, Chief Financial Officer and Treasurer of RPC, Inc. since 1996.

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PART II

Item 5. Market for Registrant's Common Equity and Related Stockholder Matters

        Marine Products' common stock is listed on the American Stock Exchange under the ticker symbol "MPX". At February 24, 2003, there were 17,110,603 shares of common stock outstanding.

        At the close of business on February 24, 2003, there were approximately 2,096 holders of record of common stock. The high and low prices of Marine Products' common stock for each quarter in the years ended December 31, 2002 and 2001, were as follows:

        The Company has paid cash dividends since the second quarter of 2001. In the first quarter of 2003, Marine Products declared a quarterly cash dividend of $0.04 per common share.

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Item 6. Selected Financial Data

        The following table summarizes certain selected combined financial data of Marine Products including data for periods prior to the February 28, 2001 spin-off from RPC, Inc. The historical information may not be indicative of Marine Products' future results of operations. This information set forth below should be read in conjunction with "Management's Discussion And Analysis of Financial Condition And Results of Operations," the Consolidated Financial Statements and the notes thereto, included elsewhere in this document.

(a)

See Related Party Transactions in Item 7 for information about spin-off transactions affecting selected financial data for periods presented prior to December 31, 2001.

Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

        The following discussion is based upon and should be read in conjunction with "Selected Financial Data," "Consolidated Financial Statements," and the notes thereto. See also "Forward-Looking Statements" above.

Overview

        Marine Products' mission is to maximize the boating experience by providing its customers with high-quality, innovative powerboats and related products and services. Marine Products, through its wholly-owned subsidiaries Chaparral and Robalo, is a leading manufacturer of recreational fiberglass powerboats. Chaparral competes in the sterndrive engine powered, sportboat, deckboat and cruiser

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markets. Robalo, acquired in June 2001, competes in the outboard engine powered offshore sport fishing boat market. Robalo sales comprised 4 percent of net sales in 2002.

Critical Accounting Policies

        The consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States, which require significant judgment by management in selecting the appropriate assumptions for calculating financial estimates. These judgments are based on our historical experience, terms of existing contracts, trends in the industry, and information available from other outside sources, as appropriate. The Company believes that of its significant accounting policies the following may involve a higher degree of judgment and complexity.

        Recognition of sales—The Company sells its boats through its international network of independent dealers. Although sales orders are cancelable at any time, substantially all boats are pre-sold to a dealer before entering the production line. The Company recognizes sales when all the following conditions are met: (1) a fully executed sales agreement exists, (2) the price of the boat is established, (3) the dealer takes delivery of the boat, and (4) collectibility is reasonably assured.

        Accrued dealer discounts—The Company's dealer incentive programs include annual volume based discounts that promote early replenishment of dealer inventories after the spring and summer peak selling seasons and help to level out manufacturing volumes throughout the year. These discounts are based on the dealer purchase volumes for the period July 1 through June 30 of the following year. The Company monitors dealer purchases and uses its judgment to determine an appropriate dealer discount reserve. The Company records these estimated discounts and other sales incentives as the related sales are recognized. Our future financial results will be impacted by any differences between our estimates and the actual amounts paid to settle these liabilities.

        Dealer floor plan interest—The Company provides an option to pay a qualifying dealer's incurred floor plan interest costs on current model year inventory held during specified periods of time. The ultimate interest costs to be absorbed by the Company will vary depending upon the dollar amount and length of time the dealer maintains the inventory as well as variations in interest rates. At the time the boat sales are recognized, the Company records an experience-based estimate of the future interest costs to be incurred on boats sold as of the balance sheet date. While we believe that our floor plan interest reserve is adequate and that the judgment applied is appropriate, such estimated amounts could differ materially from what will actually transpire in the future. Our future financial results will be impacted by any differences between our estimates and the actual amounts paid to settle these liabilities.

        Warranty accruals—The Company provides warranties against manufacturing defects for various components of the boats, primarily the fiberglass deck and hull. The warranty periods vary by component, but extend up to ten years. At the time the boat sales are recognized, the Company records an experience-based estimate of the future warranty costs to be incurred on boats sold. While we believe that our warranty reserve is adequate and that the judgment applied is appropriate, such estimated amounts could differ materially from what will actually transpire in the future. Our future financial results will be impacted by any differences between our estimates and the actual amounts paid to settle these liabilities.

        Accrued insurance liabilities—The Company has exposure to various contingent liabilities and future claims. The Company self insures, up to specified limits, its employee health insurance plan costs. The cost of claims under this self-insurance program is estimated and accrued as the claims are incurred although actual settlement of the claims may not be made until future periods. These claims are monitored and the cost estimates are revised as developments occur relating to such claims. To estimate the ultimate cost of the claims, the Company uses its experience, and where appropriate, the advice of outside experts. Upon the ultimate resolution of these uncertainties, our future financial

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results will be impacted by the difference between our estimates and the actual amounts paid to settle the liabilities.

        Pension liabilities—Pension costs are actuarially determined and affected by assumptions including the discount rate, the estimated future return on plan assets and other factors. The Company evaluates assumptions used on a periodic basis and makes adjustments to these liabilities as necessary. The Company utilizes the Moody's Aa long-term corporate bond yield as a basis for determining the discount rate with a yield adjustment made for the longer duration of the Company's obligations. The Company evaluates its assumption regarding the estimated long-term rate of return on plan assets based on historical experience and future expectation on investment returns. The Company chooses a rate of return on plan assets that it believes is an appropriate long-term average return. The expected return on plan assets takes into account estimated future investment returns for various asset classes held in the plans' portfolio. To the extent changes are required in the assumptions discussed above, the Company's recorded liabilities may have to be adjusted and may result in a material impact to the results of operations, financial position or liquidity of the Company.

Results of Operations

Year Ended December 31, 2002 Compared To Year Ended December 31, 2001

        Net Sales.    Marine Products generated net sales of $162,682,000 in 2002 compared to $134,689,000 in 2001, an increase of $27,933,000 or 21 percent. Based on available industry statistics, Chaparral has continued to gain market share. The net sales increase in 2002 compared to 2001 resulted primarily from a 15 percent increase in the volume of boats sold coupled with a four percent increase in the average sales price. Management believes that the increase in unit volume was partially related to the American consumers' decision to pursue recreational activities closer to home due to political and economic uncertainty. The increase in the average sales price resulted from an increase in the number of larger cruisers, sportboats, and deckboats sold during the year in combination with the elimination of our lowest price line of boats, the Chaparral SSe.

        Cost of Goods Sold.    Cost of goods sold was $125,282,000 in 2002 compared to $105,344,000 in 2001. Cost of goods sold, as a percent of net sales, for 2002 was 77 percent, slightly less than 78 percent in 2001. The majority of the increase in cost of goods sold related to the increase in net sales.

        Selling, General and Administrative Expenses.    Selling, general and administrative expenses were $18,018,000 in 2002 compared to $16,223,000 in 2001, an increase of $1,795,000 or 11 percent. The Company continued to create some leverage with higher net sales. Selling, general and administrative expenses were 11 percent of net sales in 2002 and 12 percent of net sales in 2001. The increase in selling, general and administrative expenses resulted from costs that vary with increased sales and profitability, such as incentive compensation, sales commissions and warranty expense. This increase in costs was partially offset by a decrease in goodwill amortization, which was $684,000 in 2001 and was eliminated during all of 2002.

        Operating Income.    Operating income was $19,382,000 in 2002, an increase of $6,260,000 or 48 percent compared to $13,122,000 in 2001. The increase in operating income resulted from higher net sales and gross profit, partially offset by the increase in selling, general and administrative expenses.

        Interest Income.    Interest income was $600,000 in 2002 compared to $689,000 in 2001. Marine Products generates interest income from investment of its available cash primarily in overnight and marketable securities. The decrease in interest income resulted primarily from lower investment returns in 2002 offset slightly by a higher balance of available cash.

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        Net Income.    Net income was $12,389,000 in 2002 compared to $8,563,000 in 2001. The increase was due to the factors discussed above. The income tax rate of 38 percent was the same in both periods.

Year Ended December 31, 2001 Compared To Year Ended December 31, 2000

        Net Sales.    Marine Products generated net sales of $134,689,000 in 2001 compared to $148,276,000 in 2000, a decrease of $13,587,000 or nine percent. The net sales decrease in 2001 compared to 2000 resulted primarily from a 19 percent decrease in the volume of boats sold offset by a 12 percent increase in the average sales price. The decrease in unit volume was due to weakness in consumer confidence caused by the economic recession, the war on terrorism and stock market volatility. The increase in the average sales price resulted from an increase in the number of large, higher priced, cruisers sold during the year.

        Cost of Goods Sold.    Cost of goods sold was $105,344,000 in 2001 compared to $115,876,000 in 2000. Cost of goods sold, as a percent of net sales, held steady at 78 percent from 2000 to 2001. The majority of the decline in cost of goods sold related to the decline in net sales. Direct labor costs as a percentage of net sales were higher due to production inefficiencies caused by lower production volume in 2001 compared to 2000. This increase was offset by lower materials costs as a percentage of net sales.

        Selling, General and Administrative Expenses.    Selling, general and administrative expenses were $16,223,000 in 2001 compared to $16,945,000 in 2000, a decrease of $722,000 or four percent. Selling, general and administrative expenses were 12 percent of net sales in 2001 and 11 percent of net sales in 2000. The decrease in selling, general and administrative expenses resulted from actions taken to reduce costs to correspond with the lower net sales, partially offset by increases in research and development costs related to new model development and start-up expenses associated with the Robalo operations.

        Operating Income.    Operating income was $13,122,000 in 2001, a decrease of $2,333,000 or 15 percent compared to $15,455,000 in 2000. The decrease in operating income resulted from lower net sales and gross profit offset slightly by the decrease in selling, general and administrative expenses, as discussed above.

        Gain on Settlement of Claim.    In the first quarter of 2000, Marine Products recorded a pre-tax gain of $6,817,000 relating to settlement of a claim. The gain was a result of Marine Products' receipt of its share of a non-refundable $35 million settlement payment made by Brunswick Corporation, a major engine supplier, to the members of the ABA.

        Interest Income.    Interest income was $689,000 in 2001 compared to $280,000 in 2000. Marine Products generates interest income from investment of its available cash primarily in overnight and marketable securities. The amount of cash available for investment has varied depending upon the cash requirements of Marine Products and increased during 2001 as a result of its receipt of approximately $14 million from RPC in connection with the spin-off and the cash generated from operations during fiscal 2001.

        Net Income.    Net income was $8,563,000 in 2001 compared to $13,961,000 in 2000. The decrease in net income was due to the decrease in operating income and the impact of the after-tax gain on settlement of claim totaling $4,227,000 recognized in the first quarter of 2000, as discussed above. The income tax rate of 38 percent was the same in both periods.

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Liquidity and Capital Resources

        The Company's decisions about the amount of cash to be used for investing and financing purposes are influenced by our capital position and the expected amount of cash to be provided by operations. As the result of being spun-off in February 2001, the Company became a separate publicly traded company. The Company's operations historically have generated sufficient cash for its operations and the excess was transferred to RPC. In connection with the spin-off from RPC, the Company received $14,447,000 in cash and marketable securities from RPC. The Company is now able to retain any excess cash it generates, however, in the event capital is needed to fund operations, capital expenditures or acquisitions, it is no longer able to rely upon the capital resources of RPC.

        Cash provided by operations during 2002 was $11,696,000 an increase of $1,465,000 compared to 2001. The increase was due to higher operating income in 2002 compared to 2001 offset by higher working capital requirements at December 31, 2002 because of higher sales and manufacturing activities.

        Cash used for investing activities decreased $2,693,000 to $3,800,000 in 2002. The Company had lower capital expenditures in 2002 compared to 2001 and the prior year included the cost of the Robalo acquisition. During 2002, the Company completed construction of 130,000 square feet of new manufacturing space to accommodate the building of Signature Cruisers up to 40 feet in length. During 2001, the Company acquired a manufacturing facility for the new Robalo product line.

        Cash used in financing activities included cash dividend payments to Marine Products' common stockholders for four quarters of 2002 and after the spin-off for three quarters of 2001.

        Consistent with customary industry practices, the Company has agreements with third-party dealer floor plan lenders to repurchase any of it boats that are repossessed by the lender. The Company maintains a reserve for estimated losses on boats repurchased. The Company's obligation under its guarantee becomes effective in the case of default in payments by the dealer. The agreements provide for the return of all repossessed boats to the Company in exchange for the Company's assumption of specified percentages of the dealers' unpaid debt obligation on those boats based on the original dealer purchase date. During the fourth quarter of 2002, the Company repurchased boats from one of its dealers pursuant to the guarantee described above. The net sales recorded on the original sale of the boats was approximately $1,900,000 and the Company was obligated to pay approximately 90 percent of the net sales to satisfy the obligation to the lender. Prior to year end, the Company sold some of the boats to a replacement dealer generating net sales of about $650,000. The net sales recorded on the original sale of these boats less amounts sold to other dealers were reversed and the related boats are included in inventory at December 31, 2002. Subsequent to year-end, the Company has, in the normal course of business, sold substantially all of the remaining boats. As of December 31, 2002, obligations remaining on the outstanding guarantees totaled approximately $1,994,000.

        The Company's Retirement Income Plan, a trusteed defined benefit pension plan, provides monthly benefits upon retirement at age 65 to eligible employees. In the first quarter of 2002, the Company's Board of Directors approved a resolution to cease all future retirement benefit accruals under the Retirement Income Plan effective March 31, 2002. However, the adverse conditions in the equity markets, along with the low interest rate environment, have had an unfavorable impact on the funded status of the Company's defined benefit pension plan. Additional contributions to the pension plan may be required in 2003 to achieve the Company's funding objectives.

        We believe the liquidity provided by our existing cash, cash equivalents and marketable securities, our overall strong capitalization, and cash expected to be generated from operations, will provide sufficient liquidity to meet our requirements for at least the next twelve months. We believe our liquidity will allow us the ability to continue to grow and provide us the opportunity to take advantage of strategic business opportunities that may arise.

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Related Party Transactions

        Effective with the spin-off, RPC established a cash balance at Marine Products of approximately $15 million by contributing $13.8 million, and cancelled a remaining receivable from RPC totaling approximately $53,800,000. Effective February 28, 2001, the Company began receiving certain administrative services from RPC. The service agreements are more fully described in Note 4 to the consolidated financial statements. See Notes 1and 4 to the consolidated financial statements for more information. The Company's cost for such services aggregated approximately $454,000 in 2002 and $868,000 in 2001. During 2002, the Company paid $332,000 to a division of RPC for the purchase, installation and service of overhead cranes. The Company's directors are also directors of RPC and certain officers are employees of both the Company and RPC.

Seasonality

        Marine Products' quarterly operating results are affected by weather and the general economic conditions in the United States. Quarterly operating results for the second quarter have historically recorded the highest sales volume for the year. The results for any quarter are not necessarily indicative of results to be expected in any future period.

Inflation

        Inflation has not had a material effect on Marine Product's operations. If inflation increases, Marine Products will attempt to increase its prices to offset its increased expenses. No assurance can be given, however, that the Company will be able to adequately increase its prices in response to inflation. Inflation can also impact Marine Products' sales and profitability. New boat buyers typically finance their purchases. Because higher inflation results in higher interest rates, the cost of boat ownership increases. Prospective buyers may choose to delay their purchases or buy a less expensive boat.

New Accounting Standards

        In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations," which addresses accounting and reporting for asset retirement costs of long-lived assets resulting from legal obligations associated with acquisition, construction, or development transactions. The Company adopted SFAS No. 143 on January 1, 2003. Management believes that the adoption of this statement will not have a material effect on the results of operations, financial position or liquidity of the Company.

        In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections," which rescinds SFAS No. 4, "Reporting Gains and Losses from Extinguishment of Debt" and an amendment of that statement, SFAS No. 64, "Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements," and SFAS No. 44, "Accounting for Intangible Assets of Motor Carriers." SFAS No. 145 amends SFAS No. 13, "Accounting for Leases." This Statement also amends other existing authoritative pronouncements to make various technical corrections, clarify meanings, or describe their applicability under changed conditions. The Company adopted the provisions of SFAS No. 145 related to the rescission of SFAS No. 4 on January 1, 2003. The Company adopted the provisions of SFAS No. 145 related to Statement 13, as well as all other provisions of this Statement, effective May 15, 2002. The adoption of these provisions did not have a material impact on the Company's financial position, results of operations or liquidity for the year ended December 31, 2002. The Company does not believe the impact of adopting the provisions of SFAS No. 145 related to the rescission of SFAS No. 4 will have a material impact on its financial position, results of operations or liquidity.

        In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities," which requires that a liability for a cost associated with an exit or disposal activity

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be recognized when the liability is incurred and replaces the current accounting for costs associated with an exit or disposal activity contained in Emerging Issues Task Force (EITF) 94-3. The Company adopted SFAS No. 146 on January 1, 2003. Management believes that the adoption of this statement will not have a material effect on the financial position, results of operations or liquidity of the Company.

        In December 2002, the FASB issued SFAS No. 148 "Accounting for Stock-Based Compensation-Transition and Disclosure." This statement provides alternative methods of transition for a voluntary change to the fair value-based method of accounting for employee stock-based compensation and requires expanded disclosure regarding stock-based compensation in the "Summary of Significant Accounting Policies," or its equivalent, in the Notes to the Consolidated Financial Statements about the method of accounting and the effect of the method used on reported results. The disclosure provisions of this statement are effective for financial statements issued for fiscal years ending after December 15, 2002. The Company does not currently expect to transition to using the fair value-based method of accounting for stock-based compensation; therefore, management believes the adoption of SFAS No. 148 will not have a material effect on the financial position, results of operations or liquidity of the Company.

        In November 2002, the FASB issued FASB Interpretation (FIN) No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Direct Guarantees of Indebtedness of Others," which requires expanded disclosure for existing guarantees and product warranties for the year ended December 31, 2002 in addition to stipulating that at the inception of guarantees issued after December 31, 2002, a company needs to record the fair value of the guarantee as a liability, with the offsetting entry being recorded based on the circumstances in which the guarantee was issued. FIN 45 further states that the liability is typically reduced over the term of the guarantee. The Company will apply the initial recognition and initial measurement provisions on a prospective basis for all guarantees issued after December 31, 2002. Adoption of FIN 45 will have no impact on the Company's historical financial statements as existing guarantees are not subject to the measurement provisions of FIN 45.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

        Marine Products does not utilize financial instruments for trading purposes and holds no derivative financial instruments which could expose Marine Products to significant market risk. Marine Products maintains an investment portfolio, comprised of United States Government, corporate and municipal debt securities, which is subject to interest rate risk exposure. This risk is managed through conservative policies to invest in high-quality obligations. Marine Products has performed an interest rate sensitivity analysis using a duration model over the near term with a 10 percent change in interest rates. Marine Products' portfolio is not subject to material interest rate risk exposure based on this analysis. Marine Products does not expect any material changes in market risk exposures or how those risks are managed.

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Item 8. Financial Statements and Supplementary Data

CONSOLIDATED BALANCE SHEETS
MARINE PRODUCTS CORPORATION AND SUBSIDIARIES

The accompanying notes are an integral part of these statements.

23

CONSOLIDATED STATEMENTS OF INCOME
MARINE PRODUCTS CORPORATION AND SUBSIDIARIES

The accompanying notes are an integral part of these statements.

24

CONSOLIDATED STATEMENTS OF STOCKHOLDERS'
EQUITY AND COMPREHENSIVE INCOME
MARINE PRODUCTS CORPORATION AND SUBSIDIARIES

(in thousands)

The accompanying notes are an integral part of these statements.

25

CONSOLIDATED STATEMENTS OF CASH FLOWS
MARINE PRODUCTS CORPORATION AND SUBSIDIARIES

The accompanying notes are an integral part of these statements.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARINE PRODUCTS CORPORATION AND SUBSIDIARIES

YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000

NOTE 1: SIGNIFICANT ACCOUNTING POLICIES

Basis of Consolidation and Presentation

        The consolidated financial statements include the accounts of Marine Products Corporation (a Delaware corporation) and its wholly owned subsidiaries ("Marine Products" or the "Company"). Marine Products, through Chaparral Boats, Inc. ("Chaparral") and Robalo LLC ("Robalo"), operates in a single industry segment as a manufacturer of fiberglass powerboats and related products and services to a broad range of consumers worldwide.

        The consolidated financial statements included herein may not necessarily be indicative of the results of operations, financial position and cash flows of Marine Products in the future or had it operated as a separate, independent company during all periods presented.

        In January 2000, the Board of Directors of RPC, Inc. ("RPC") announced that it planned to spin-off to RPC stockholders the business conducted through Chaparral, RPC's powerboat manufacturing segment (the "spin-off"). RPC's Board of Directors subsequently approved the spin-off on February 12, 2001. RPC accomplished the spin-off on February 28, 2001 by contributing 100 percent of the issued and outstanding stock of Chaparral to Marine Products, and then distributing the common stock of Marine Products to RPC stockholders. RPC stockholders received 0.6 shares of Marine Products common stock for each share of RPC common stock owned as of the record date. Based on an Internal Revenue Service Private Letter ruling, subject to certain assumptions, the spin-off was tax-free to RPC and RPC's stockholders, except for cash received for any fractional shares. Immediately after the spin-off was completed, RPC owned no shares of Marine Products common stock, and Marine Products became an independent public company. A total of 17,012,277 shares of Marine Products common stock were distributed in connection with the spin-off.

        The consolidated financial statements have been prepared on the historical cost basis, and present the Company's financial position, results of operations and cash flows since the spin-off transaction and prior to the spin-off that related directly to RPC's powerboat manufacturing segment operations.

Nature of Operations

        Marine Products is principally engaged in manufacturing powerboats and providing related products and services. Marine Products distributes fiberglass recreational boats through a network of domestic and foreign independent dealers.

Use of Estimates in the Preparation of Financial Statements

        The preparation of financial statements in conformity with accounting principles generally accepted in the United States 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 sales and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates are used in the determination of accrued dealer discounts, warranty accruals, insurance reserves and pension liabilities.

Segment Reporting

        The Company has adopted Statement of Financial Accounting Standards ("SFAS") No. 131, "Disclosures About Segments of an Enterprise and Related Information." As the Company has only

27

one reportable segment—its Powerboat Manufacturing business—the majority of the disclosures required by SFAS No. 131 do not apply to the Company. In regard to the general disclosures required by SFAS No. 131, the Company's results of operations and its financial condition are not significantly reliant upon any single customer, product model or the Company's foreign operations.

Sales Recognition

        The Company's sales recognition policy is in accordance with the Securities and Exchange Commission's Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements," which clarifies the basic criteria for recognizing revenue. Marine Products recognizes sales when a fully executed agreement exists, prices are determinable, and products are delivered to the dealer and collectibility is reasonably assured.

Shipping and Handling Charges

        The shipping and handling of the Company's products to dealers is handled through a combination of a third-party marine transport service and a company owned fleet of delivery trucks. Fees charged to customers for shipping and handling are included in net sales in the accompanying consolidated statements of income; the related costs incurred by the Company are included in cost of goods sold.

Cash and Cash Equivalents

        Highly liquid investments with original maturities of three months or less are considered to be cash equivalents.

Marketable Securities

        Marine Products maintains investments held with several large, well-capitalized financial institutions. Marine Products' investment policy disallows investment in any securities rated less than "investment grade" by national rating services.

        Management determines the appropriate classification of debt securities at the time of purchase and re-evaluates such designations as of each balance sheet date. Debt securities are classified as available-for-sale because the Company does not have the intent to hold the securities to maturity. Available-for-sale securities are stated at their fair values, with the unrealized gains and losses, net of tax, reported as a separate component of stockholders' equity. Realized gains and losses and declines in value judged to be other than temporary on available-for-sale securities are included in interest income. Realized loss on sale of marketable securities totaled $23,400 for the year ended December 31, 2002. The cost of securities sold is based on the specific identification method. Interest and dividends on securities classified as available-for-sale are included in interest income. As of December 31, 2002, Marine Products owned $3,673,000 of corporate obligations with an unrealized gain of $178,000 and $2,783,000 of municipal obligations with an unrealized loss of $3,700.

        Investments with remaining maturities between three and 12 months are considered to be current marketable securities. Investments with remaining maturities greater than 12 months are considered to be noncurrent marketable securities. Marine Products' marketable securities generally consist of United

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States government, corporate and municipal debt securities. The Company's noncurrent marketable securities mature at various dates through 2012.

Accounts Receivable

        Accounts receivable are carried at the amount owed by customers less an allowance for doubtful accounts. The allowance for doubtful accounts is estimated based upon historical write-off percentages, known problem accounts and current economic conditions. Uncollectible accounts are written-off against the allowance for doubtful accounts.

Inventories

        Inventories are stated at the lower of cost (first-in, first-out basis) or market value. Market value is determined based on replacement cost for raw materials and net realizable value for work in process and finished goods.

Long-Lived Assets

        Long-lived assets, including goodwill, are reviewed for potential impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The Company periodically reviews the values assigned to long-lived assets, such as property, plant and equipment and goodwill, to determine if any impairments are other than temporary. Management believes that the long-lived assets and goodwill in the accompanying balance sheets are appropriately valued.

Property, Plant and Equipment

        Property, plant and equipment is carried at cost. Depreciation is provided principally on a straight-line basis over the estimated useful lives of the assets. The cost of assets retired or otherwise disposed of and the related accumulated depreciation are eliminated from the accounts in the year of disposal with the resulting gain or loss credited or charged to income. Expenditures for additions, major renewals, and betterments are capitalized while expenditures for routine maintenance and repairs are expensed as incurred. Depreciation expense on operating equipment used in production is included in cost of goods sold in the accompanying consolidated statements of income. All other depreciation is included in selling, general and administrative expenses in the accompanying consolidated statements of income.

Intangibles

        Intangibles consist primarily of goodwill and trade names related to businesses acquired. Goodwill represents the excess of the purchase price over the fair value of net assets of businesses acquired. The carrying amount of goodwill was $3,308,000 as of December 31, 2002 and 2001. During the years ended December 31, 2000 and 2001, the values assigned to all intangible assets, including goodwill, were amortized on a straight-line basis over the estimated useful lives of the assets, not exceeding 20 years. On January 1, 2002, the Company adopted SFAS No. 142, "Goodwill and Other Intangible Assets." In connection with the adoption, the Company reviewed the classification of its goodwill and other

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intangible assets. Goodwill is no longer amortized to earnings, but instead is subject to periodic testing for impairment. The Company completed an initial impairment analysis upon adoption of SFAS No. 142 and a subsequent analysis during the fourth quarter of 2002. Based upon the results of these analyses, the Company has concluded that no impairment of its goodwill has occurred. Trade names are amortized on a straight-line basis over the periods of their estimated useful lives, as straight-line best estimates the ratio that current sales bear to the total of current and anticipated sales, based on the estimated useful life.

        The carrying amount and accumulated amortization for trade names are as follows:

        Had the Company adopted the provisions of SFAS No. 142 as of January 1, 2000, the effects on net income would have been as follows:

        Amortization of trade names was approximately $40,000 in 2002, $10,000 in 2001 and $0 in 2000. Goodwill amortization was $684,000 in 2001 and $684,000 in 2000. Estimated amortization expense for each of the five succeeding fiscal years is as follows:

Sales Incentives

        Sales incentives including dealer discounts are provided for in the period the related sales are recorded.

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Allowance for Boat Repurchases

        The Company is obligated under certain circumstances to repurchase boats from finance companies through which its dealers have financed boats under floor-plan financing arrangements. The Company maintains an allowance for estimated losses on boats repurchased.

Warranty Accruals

        The Company warrants the entire boat, excluding the engine, against defects in materials and workmanship for a period of one year. The Company also warrants the entire deck and hull, including its bulkhead and supporting stringer system, against defects in materials and workmanship for periods ranging from five to ten years. The Company accrues for these experience-based estimated future warranty costs at the time of the sale. An analysis of the warranty accruals for the year ended December 31, 2002 follows (in thousands):

        Changes in warranties issued in prior years are due to updated information about the frequency and size of claims incurred related to prior year sales.

Insurance Accruals

        The Company fully insures its risks related to general liability, product liability, workers' compensation, and vehicle liability, whereas the health insurance plan is self-funded up to a maximum annual claim amount for each covered employee and related dependents. The estimated cost of claims under the self-insurance program is accrued as the claims are incurred and may subsequently be revised based on developments relating to such claims.

Research and Development Costs

        The Company expenses research and development costs for new products and components as incurred. Research and development costs are included in selling, general and administrative expenses and totaled $1,605,000 in 2002, $1,955,000 in 2001, and $1,428,000 in 2000.

Income Taxes

        Deferred tax liabilities and assets are determined based on the difference between the financial and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse.

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Earnings per Share

        SFAS No. 128, "Earnings Per Share," requires a basic earnings per share and diluted earnings per share presentation. The two calculations differ as a result of the dilutive effect of stock options and time lapse restricted and performance restricted shares included in diluted earnings per share, but excluded from basic earnings per share. A reconciliation of weighted shares outstanding is as follows:

        Pro forma earnings per share for all periods prior to 2001 have been calculated using 17,012,000 basic shares outstanding, which was the number of shares distributed in connection with the spin-off, and 17,045,000 diluted shares outstanding.

Fair Value of Financial Instruments

        The Company's financial instruments consist primarily of cash, accounts receivable, accounts payable and marketable securities. The carrying value of cash, accounts receivable and accounts payable approximate their fair values because of the short term nature of such instruments. The Company's marketable securities are classified as available-for-sale securities and are carried at fair value in the accompanying consolidated balance sheets. The fair value of these securities is based upon quoted market prices.

Concentration of Suppliers

        The Company purchases a significant number of its stern-drive engines from only two available suppliers. This concentration of suppliers could impact our sales and profitability in the event of a sudden interruption in the delivery of these engines.

New Accounting Standards

        In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations," which addresses accounting and reporting for asset retirement costs of long-lived assets resulting from legal obligations associated with acquisition, construction, or development transactions. The Company adopted SFAS No. 143 effective January 1, 2003. Management believes that the adoption of this statement will not have a material effect on the results of operations or financial position of the Company.

        In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections," which rescinds SFAS No. 4, "Reporting Gains and Losses from Extinguishment of Debt" and an amendment of that statement, SFAS No. 64, "Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements," and SFAS No. 44, "Accounting for Intangible Assets of Motor Carriers." SFAS No. 145 amends SFAS No. 13,

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"Accounting for Leases." This Statement also amends other existing authoritative pronouncements to make various technical corrections, clarify meanings, or describe their applicability under changed conditions. The Company adopted the provisions of SFAS No. 145 related to the rescission of SFAS No. 4 on January 1, 2003. The Company adopted the provisions of this SFAS No. 145 related to Statement 13, as well as all other provisions of this Statement, effective May 15, 2002. The adoption of these provisions did not have a material impact on the Company's financial position, results of operations or liquidity for the year ended December 31, 2002. The Company does not believe the impact of adopting the provisions of SFAS No. 145 related to the rescission of SFAS No. 4 will have a material impact on its financial position, results of operations or liquidity.

        In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities," which requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred and replaces the current accounting for costs associated with an exit or disposal activity contained in Emerging Issues Task Force (EITF) 94-3. The Company adopted SFAS No. 146 effective January 1, 2003. Management believes that the adoption of this statement will not have a material effect on the financial position, results of operations or liquidity of the Company.

        In December 2002, the FASB issued SFAS No. 148 "Accounting for Stock-Based Compensation-Transition and Disclosure." This statement provides alternative methods of transition for a voluntary change to the fair value-based method of accounting for employee stock-based compensation and requires expanded disclosure regarding stock-based compensation in the "Summary of Significant Accounting Policies," or its equivalent, in the Notes to the Consolidated Financial Statements about the method of accounting and the effect of the method used on reported results. The disclosure provisions of this statement are effective for financial statements issued for fiscal years ending after December 15, 2002. The Company does not currently expect to transition to using the fair value-based method of accounting for stock-based compensation; therefore, management believes the adoption of SFAS No. 148 will not have a material effect on the financial position, results of operations or liquidity of the Company.

        In November 2002, the FASB issued FASB Interpretation (FIN) No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Direct Guarantees of Indebtedness of Others," which requires expanded disclosure for existing guarantees and product warranties for the year ended December 31, 2002 in addition to stipulating that at the inception of guarantees issued after December 31, 2002, a company needs to record the fair value of the guarantee as a liability, with the offsetting entry being recorded based on the circumstances in which the guarantee was issued. FIN 45 further states that the liability is typically reduced over the term of the guarantee. The Company will apply the initial recognition and initial measurement provisions on a prospective basis for all guarantees issued after December 31, 2002. Adoption of FIN 45 will have no impact on the Company's historical financial statements as existing guarantees are not subject to the measurement provisions of FIN 45.

Stock-Based Compensation

        As of December 31, 2002, Marine Products has a stock-based employee compensation plan, which is detailed in footnote 8, "Employee Benefit Plans." Marine Products accounts for its stock incentive plan using the intrinsic value method prescribed by Accounting Principles Board ("APB") Opinion

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No. 25, "Accounting for Stock Issued to Employees." Marine Products records deferred compensation related to the restricted stock grants based on the fair market value of the shares at the date of the grant and amortizes such amounts over the vesting period for the shares. Marine Products recorded amortization of deferred compensation totaling $226,000 in 2002, $89,000 in 2001 and $0 in 2000.

        If Marine Products had accounted for the stock incentive plan in accordance with SFAS No. 123, "Accounting for Stock-Based Compensation" the total fair value of options granted under the plan would be amortized over the vesting period of the options, and Marine Products' reported pro forma net income and pro forma diluted net income per share would have been as follows:

        Pro forma net income for 2001 and 2000 noted above is based on the fair value of RPC options held by Marine Products' employees.

NOTE 2: INVENTORIES

        Inventories consist of the following:

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NOTE 3: PROPERTY, PLANT AND EQUIPMENT

        Property, plant and equipment are presented at cost, net of accumulated depreciation and consist of the following:

        Depreciation expense was $1,814,000 in 2002, $1,485,000 in 2001, and $1,116,000 in 2000. During 2002, the Company entered into and completed a like kind exchange for operating equipment. The equipment that was traded in had a net book value of $68,000 with a fair market value of $680,000. The fair market value of the equipment purchased was $2,456,000. The Company recorded the new asset at $1,837,000 with no gain or loss being recognized on the transaction. The consolidated cashflow statement for the year ended December 31, 2002 excludes the value of the operating equipment traded in.

NOTE 4: RELATED PARTY TRANSACTIONS

        In conjunction with the spin-off, RPC and Marine Products entered into various agreements that address the allocation of assets and liabilities between the two companies and that define the companies' relationship after the separation. These include the Distribution Agreement and Plan of Reorganization, the Transition Support Services Agreement, the Employee Benefits Agreement, and the Tax Sharing and Indemnification Agreement.

        The Distribution Agreement and Plan of Reorganization provides for, among other things, the principal corporate transactions required to effect the spin-off including the distribution ratio of Marine Products shares to RPC shares, the contribution of cash by RPC to Marine Products at the date of the spin-off, and the cancellation of any remaining intercompany balances. Effective with the spin-off in February 2001, RPC established a cash balance at Marine Products of approximately $15 million by contributing $13.8 million, and cancelled a remaining receivable from RPC totaling approximately $53,800,000.

        The Transition Support Services Agreement provides for RPC to provide certain services, including financial reporting and income tax administration, acquisition assistance, etc. to Marine Products until the agreement is terminated by either party.

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        In accordance with the Transition Support Services Agreement, Marine Products reimbursed RPC for its allocable share of administrative costs incurred for services rendered on behalf of Marine Products totaling $454,000 in 2002 and $868,000 in 2001 based on management's estimates. The Company's directors are also directors of RPC and certain officers are employees of both the Company and RPC. Many of the costs previously shared with and allocated from RPC are now incurred directly by the Company. The allocation of costs prior to the spin-off was based on Marine Products' revenues as a percent of RPC's total revenues. These allocated costs are included in selling, general and administrative expenses in the accompanying consolidated statements of income. Management believes that such allocation methodology was reasonable. The costs allocated to Marine Products for these services are not necessarily indicative of the costs that would have been incurred if Marine Products had been a separate, independent entity and had otherwise independently managed these functions. During 2000, Marine Products was allocated shared corporate costs of $2,372,000. During 2002, the Company paid $332,000 to a division of RPC for the purchase, installation and service of overhead cranes.

        The Employee Benefits Agreement provides for, among other things, Marine Products to continue participating subsequent to the spin-off in two RPC sponsored benefit plans, specifically, the defined contribution 401(k) plan and the defined benefit retirement income plan. It also sets forth the method of handling the stock options, and other stock incentive awards issued to RPC employees that became Marine Products employees subsequent to the spin-off.

        The Tax Sharing and Indemnification Agreement provides for, among other things, the treatment of income tax matters for periods through the date of the spin-off and responsibility for any adjustments as a result of audit by any taxing authority. The general terms provide for the indemnification for any tax detriment incurred by one party caused by the other party's action.

NOTE 5: OTHER ACCRUED EXPENSES

        Other accrued expenses consist of the following:

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NOTE 6: INCOME TAXES

        The following table lists the components of the provision (benefit) for income taxes:

        A reconciliation between the federal statutory rate and Marine Products' effective tax rate is as follows:

        Significant components of the Company's deferred tax assets and liabilities are as follows:

        Prior to the spin-off, RPC paid substantially all income taxes on behalf of Marine Products. Total income tax payments, net of refunds, totaled $5,455,000 in 2002 and $4,536,000 in 2001.

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        The Company and RPC have entered into a tax-sharing and indemnification agreement whereby any subsequent income tax adjustment resulting in a change in income tax assets or liabilities of either RPC or Marine Products prior to the spin-off will be settled through an exchange of cash. Approximately $140,000 of settlements occurred in 2002 and no settlements occurred in 2001.

NOTE 7: COMMITMENTS AND CONTINGENCIES

Lawsuits

        The Company is a defendant in some lawsuits, which allege that plaintiffs have been damaged as a result of the use of the Company's products. The Company is vigorously contesting these actions. Management is of the opinion that the outcome of these lawsuits will not have a material adverse effect on the financial position, results of operations or liquidity of Marine Products.

Dealer Floor-Plan Financing

        To assist dealers in obtaining financing for the purchase of its boats, the Company has entered into agreements with various dealers and financing institutions to guarantee varying amounts of the dealers' purchase debt obligations. The Company's obligation under its guarantee becomes effective in the case of default in payments by the dealer. The agreements provide for the return of all repossessed boats to the Company, in exchange for the Company's assumption of specified percentages of the unpaid debt obligation on those boats. As of December 31, 2002, the maximum repurchase obligation outstanding under these agreements, which expire in 2003 and 2004, totaled approximately $1,994,000.

Lease Obligation

        In June 2001, the Company entered into a lease transaction for existing boat manufacturing space located in Valdosta, Georgia. The lease has a term of 12 years. This lease has been accounted for as a capital lease, and accordingly, the building, land, and miscellaneous equipment have been recorded in property, plant and equipment on the consolidated balance sheet at a gross amount of $859,000 with a lease obligation equal to the estimated present value of the remaining lease obligation totaling $150,000.

Employment Agreements

        The Company has an agreement with two employees, which provides for a monthly payment to each of the employees equal to 10 percent of profits (defined as pretax income before goodwill amortization and certain allocated corporate expenses). During the years ended December 31, 2002, 2001, and 2000, the expense associated with this profit-sharing plan totaled $5,195,000, $4,151,000, and $6,402,000, respectively, and is included in selling, general and administrative expenses in the accompanying consolidated statements of income.

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NOTE 8: EMPLOYEE BENEFIT PLANS

Retirement Plan

        Effective with the spin-off, Marine Products began participating in the tax-qualified, defined benefit, noncontributory, trusteed retirement income plan sponsored by RPC that covers substantially all employees with at least one year of service. In the first quarter of 2002, the Company's Board of Directors approved a resolution to cease all future retirement benefit accruals under the Retirement Income Plan effective March 31, 2002. In lieu thereof, the Company began providing enhanced benefits in the form of cash contributions to certain longer serviced employees that had not reached the normal retirement age of 65 as of March 31, 2002. The contributions are discretionary and made annually and vest over a seven year period beginning in 2002. The contributions are made to a non-qualified supplemental executive retirement plan established by the Company or to the 401(k) plan for each employee that is entitled to the enhanced benefit. The expense related to the enhanced benefits for 2002 was $126,000. Beginning late in 2002, the Company began permitting deferral of income of a portion of the employee's compensation for highly compensated employees into the nonqualified plan.

        The following table sets forth the funded status of the retirement income plan and the amounts recognized in Marine Products' consolidated balance sheets: