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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM 10-K
(Mark One)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2003
-----------------------------------
Commission File No. 1-16263
MARINE PRODUCTS CORPORATION
DELAWARE 58-2572419
(STATE OF INCORPORATION) (I.R.S. EMPLOYER IDENTIFICATION NO.)
2170 PIEDMONT ROAD, NE
ATLANTA, GEORGIA 30324
(404) 321-7910
Securities registered pursuant to Section 12(b) of the Act:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
COMMON STOCK, $0.10 PAR VALUE AMERICAN STOCK EXCHANGE
Securities registered pursuant to section 12(g) of the Act:
NONE
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. [X] Yes [ ] No
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act):[X] Yes [ ] No
The aggregate market value of Marine Products Corporation Common Stock held by
non-affiliates on June 30, 2003, the last business day of the registrant's most
recent second fiscal quarter, was $56,547,663 based on the closing price on the
American Stock Exchange on June 30, 2003 of $10.85 per share.
Marine Products Corporation had 25,792,725 (adjusted for the three-for-two stock
split payable March 10, 2004) shares of Common Stock outstanding as of February
27, 2004.
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. [X]
Documents Incorporated by Reference
Portions of the Proxy Statement for the 2004 Annual Meeting of Stockholders of
Marine Products Corporation are incorporated by reference into Part III, Items
10 through 14 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, except where the context indicates otherwise.
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
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
Marine Products Corporation designs, manufactures and sells recreational
fiberglass powerboats in the sportboat, deckboat, cruiser, and sport fishing
markets. The Company sells its products to a network of 161 domestic and 19
international independent authorized dealers. Marine Products' mission is to
enhance its customers' boating experience by providing them with high quality,
innovative powerboats. The Company intends to remain a leading manufacturer of
recreational powerboats for sale to a broad range of consumers worldwide.
The Company manufactures Chaparral sterndrive and inboard-powered sportboats,
deckboats, and cruisers, and the most recent available industry statistics
[source: Statistical Surveys, Inc. report dated June 30, 2003] indicate that
Chaparral is the third largest manufacturer of 18 to 35 foot sterndrive boats in
the United States. 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 provided Chaparral an opportunity to obtain additional
manufacturing space and access to a trained work force. With 38 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.
Marine Products Corporation also manufactures and sells Robalo sport fishing
boats, which are powered by outboard engines and designed primarily for salt
water sport fishing. The Company's ownership of Robalo is the
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result of the acquisition, in June 2001, of certain operating and intangible
assets of Robalo, formerly a segment of the U.S. Marine division of Brunswick
Corporation. This transaction also included the purchase of the Wahoo!(TM) trade
name. The purchase price was funded using available cash and has been accounted
for using the purchase method of accounting.
After the acquisition by Marine Products, Robalo began production of two 23-foot
models and made its first sales during the fourth quarter of 2001. Since that
time, Robalo has expanded its product offerings to include a total of eight
models ranging from 19 feet to 26 feet in length. Net sales of the Robalo
products accounted for over six percent of total fiscal 2003 net sales. The
Company believes that Robalo's share of the outboard sport fishing boat market
is less than one percent.
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 Robalo's
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.
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 sport fishing market through its Robalo brand.
The following table provides a brief description of each of our brands and its
particular market focus:
APPROXIMATE
NUMBER OF OVERALL RETAIL
BRAND MODELS LENGTH PRICE RANGE DESCRIPTION
- --------------------------- ------------- -------------- ------------------ -----------------------------------------
Chaparral - 7 24'-35' $54,000 - Fiberglass, accommodation-focused
Signature Cruisers $230,000 cruisers. Marketed to experienced boat
owners through trade magazines and boat
show exhibitions.
Chaparral - 13 18'-28' $18,000 - Fiberglass bowriders and closed deck
SS Sportboats $103,000 runabouts. Encompasses affordable,
entry-level to mid-range sportboats.
Marketed as high value runabouts for
family groups.
Chaparral - 7 21'-28' $33,000 - Fiberglass deckboats. Encompasses
Sunesta Deckboats $60,000 affordable, entry-level to mid-range
deck boats. Marketed as high value
family pleasure boats with the
handling of a runabout, the style
of a sportboat and the roominess
of a cruiser.
Robalo - 9 19'-26' $25,000 - Sport fishing boats for large
Sport Fishing Boats $125,000 freshwater lakes or saltwater use.
Marketed to experienced fishermen.
MANUFACTURING
Marine Products' manufacturing facilities are located in Nashville, Georgia and
Valdosta, Georgia. Marine Products utilizes seven 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.
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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 gel coat to the mold. Then numerous
layers of fiberglass and resin are applied during the lamination process over
the gel coat. 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.
In 2002, Chaparral became ISO 9001: 2000 certified. ISO 9001: 2000 is an
international designation of design, manufacturing, and customer service
processes. ISO 9001: 2000 surpasses previous ISO designations. The audit process
was conducted by Det Norske Veritas (DNV) as registrar. The Company believes
that Chaparral is the largest boat manufacturer that does not design and
construct its own engines in addition to being the second largest boat
manufacturing brand to hold the ISO 9001: 2000 certification.
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 Boat Builders
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 through the ABA on a voluntary basis in order to receive
volume-based purchase discounts. Marine Products does not have a supply contract
with the ABA. Marine Products has engine supply contracts for its Robalo product
line with Mercury, Honda, and Yamaha. These engine supply arrangements were not
negotiated through the ABA. 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 145 Chaparral dealers and 32 Robalo dealers
located in markets throughout the United States. Sixteen of these dealers sell
both brands. Dealers market directly to consumers at boat shows and in the
dealers' showrooms. Marine Products also has 19 international dealers. Most of
our dealers inventory and sell 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
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 distribution
network 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 before it will ship a boat overseas. Consequently,
there is no credit risk associated with its foreign sales or risk related to
foreign currency
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fluctuation. Marine Products believes that within several years, foreign sales
could produce additional sales growth.
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. The Company attempts to ensure
that its dealers do not accept an excessive amount of inventory by monitoring
their inventory levels and scheduling production with very short lead times in
order to maintain flexibility, in the event that adjustments need to be made to
the inventory that the dealers initially ordered. 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 a 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 with several major third-party financing
institutions. Under these arrangements, a dealer establishes lines of credit
with one or more third-party lenders for the purchase of inventory for sales to
retail customers in the show room or boat shows. When a dealer purchases and
takes delivery of 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, within 10 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. Most dealers maintain financing arrangements with
more than one lender. In connection with the dealer's floor plan arrangements
with qualifying providers, Marine Products or its subsidiaries has agreed to
repurchase any of its boats, up to specified limits, which the 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. As of December 31, 2003, Marine
Products' aggregate obligation to repurchase boats under these floor plan
financing programs described above was approximately $4,000,000. 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 off-peak periods, and to promote sales of certain products.
For the 2004 model year (which commenced July 1, 2003), Marine Products offered
its dealers several incentive programs based on dollar volumes and timing of
dealer purchases. One program offered discounts, protection against model year
price increases, and payment of floor plan financing interest charged by
qualified floor plan providers to dealers generally through April 1, 2004 based
on volumes and timing of purchases throughout the model year. 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 set forth in the floor plan agreements between the dealer and their
particular commercial lender. In addition, Marine Products periodically conducts
sales promotion programs designed to increase sales of a particular product
during specific periods of a given model year.
These various sales incentives and promotions have resulted in relatively level
month-to-month production and sales. Similar sales incentive and promotion
programs have been in effect during the past several years, and Marine Products
expects to continue to offer these types of programs in the future.
As of December 31, 2003, the sales order backlog was 1,933 units with estimated
gross sales of approximately $53,769,000. This represents an approximate 14 week
backlog based on recent production levels. The Company is able to avoid
manufacturing a significant number of boats for inventory by monitoring dealer
inventories, retail boat sales and boat show attendance, and making inquiries of
its sales representatives and third party floor plan lenders, and then adjusting
its production levels based on this information, in order to manufacture boats
in response to immediate demand. Boats are occasionally manufactured for
inventory rather than immediate delivery because the number of boats required
for immediate shipment is not always the most efficient number of boats to
produce in a given production schedule.
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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 deck space, better planing 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 LiftTM hull design. This variable dead rise
hull design provides a smooth ride in rough 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 LiftTM design and we
plan to utilize this design on Robalo or other sport fishing boat models as
well.
In support of its new product development efforts, Marine Products incurred
research and development costs of $1,075,000 in 2003, $1,605,000 in 2002 and
$1,955,000 in 2001.
INDUSTRY OVERVIEW
For 2003, 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 (latest data available to us) retail expenditures of
$30 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. One of the greatest obstacles for the pleasure boat industry is
consumers' diminishing leisure time.
The NMMA conducts various surveys of pleasure boat industry trends, and the most
recent surveys indicate that more than 70 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 sterndrive and inboard boating category with its three lines of
Chaparral boats, and in the outboard boating category with its Robalo sport
fishing boats. More than 90 percent of the Company's products are sterndrive
boats.
At 56,099 units, sterndrive boats accounted for approximately 43 percent of the
total new fiberglass powered boat units between 18 and 35 feet in hull length
sold in 2003. Sales in this category had an estimated total retail value of $2.5
billion, or an average retail price per boat of approximately $45,000.
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 2003 were realized
in the segments of new and used boat sales, motors and engines, trailers, and
other boat accessories. Marine Products' subsidiaries compete in the new
fiberglass boat market with hull lengths of 18 to 35 feet, which realized an
estimated $5.1 billion in retail sales during 2003. The table below shows these
estimated sales by category for 2003 and 2002, ranked by 2003 retail sales
(source: Info-Link Technologies, Inc.):
2003 2002
- ------------------------------------------------------------------------------------------------------
Units Sales ($ B) Units Sales ($ B)
----- ----------- ----- -----------
Sterndrive Boats 56,099 $ 2.5 60,350 $ 2.6
Outboard Boats 57,475 1.7 56,629 1.5
Inboard Boats 12,672 .8 12,901 .8
Jet Boats 3,253 .1 3,530 .1
- ------------------------------------------------------------------------------------------------------
TOTAL 129,499 $ 5.1 133,410 $ 5.0
======================================================================================================
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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 the
exception of Brunswick Corporation and Genmar, which have acquired a number of
recreational boat manufacturing operations, there has been very little
consolidation in the industry. We estimate that the boat manufacturing industry
includes over 100 sterndrive manufacturers and over 300 outboard boat
manufacturers, largely small, privately held companies with varying degrees of
professional management and manufacturing skill. According to estimates provided
by Statistical Surveys, Inc., as of June 30, 2003 (latest information
available), the top five sterndrive manufacturers have a market share of
approximately 52 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:
o labor-intensive manufacturing processes that remain largely
unautomated;
o increasingly strict environmental standards derived from governmental
regulations and customer sensitivities;
o a lack of focus on coordinated customer service and support by dealers
and manufacturers; and
o 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. According to Info-Link
Technologies, Inc. unit sales of sterndrive boats have declined by more than
five percent between 2001 and 2003, so Marine Products has grown its unit sales
and net sales primarily through increasing market share and by expanding the
number of models and product lines. Chaparral has grown its sterndrive market
share in the 18 to 35 feet length category from 4.75 percent in fiscal 1996 to
8.35 percent for the six months ended June 2003 (the most recent information
provided to us by Statistical Surveys, Inc.). The Company continues to expand
its product offerings into the outboard boats market, the largest boat market
not previously served by the Company's products, and by constant improvement and
expansion into larger boats within its sterndrive and inboard offerings.
Marine Products' operating strategy emphasizes innovative designs and
manufacturing processes, by delivering a high quality product while lowering
manufacturing costs through increased efficiencies in our facilities. In
addition, we seek opportunities to leverage our buying power through economies
of scale. Management believes its membership in the ABA positions Marine
Products as a significant third party customer of major components including
sterndrive engine suppliers. Marine Products' Chaparral subsidiary is a founding
member of the ABA, which collectively represents 12 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'
profitable growth.
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Our marketing strategy seeks to increase market share by enabling Marine
Products to expand its presence by building dedicated sales, marketing and
distribution systems. Marine Products has a distribution network of
approximately 180 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 its 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.
As part of Marine Products' overall strategy, Marine Products will also consider
making strategic acquisitions in order to complement existing product lines,
expand its geographic presence in the marketplace and strengthen its
capabilities.
COMPETITION
The recreational boat industry is highly fragmented, resulting in intense
competition for customers, dealers 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, Inc. 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, 2003 (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, 2003.
1. Bayliner*
2. Sea Ray*
3. Chaparral
4. Glastron**
5. Four Winns**
6. Crownline
7. Larson**
8. Stingray
9. Rinker
10. Maxum*
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 sport fishing boat
market during the six months ending June 30, 2003 was immaterial. Primary
competitors for Robalo include 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. 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 expenditure 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 manufactured to meet
the standards of certification required by the United States Coast Guard. 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, 2003, Marine Products had approximately 975 employees, of
whom six were management and 36 administrative. None of Marine Products'
employees is party to a collective bargaining agreement. Marine Products' entire
workforce is 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 it 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. As of
December 31, 2003, there were seven Chaparral hull designs registered under the
Vessel Hull Design Protection Act. These designs were registered in 2002. There
are no Robalo hull designs registered as of December 31, 2003.
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 at no
cost to current and potential investors.
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
threats in the Middle East, Marine Products will be negatively affected as
consumers delay large discretionary purchases pending the resolution of that
uncertainty.
9
INTEREST RATES AND FUEL PRICES AFFECT MARINE PRODUCTS' SALES
The Company's products are often financed by our dealers and the retail boat
consumers, thereby higher interest rates increase the borrowing costs and,
accordingly, the cost of doing business for dealers and cost of a boat purchase
for consumers. Fuel costs can represent a large portion of the costs to operate
our products. Therefore, higher interest rates and fuel costs can adversely
affect purchasers' 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. Competition for dealers among recreational powerboat manufacturers
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 trade names 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 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
10
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, COMPLETE OR SUCCESSFULLY INTEGRATE
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 to successfully 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 or 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.
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.
11
MARINE PRODUCTS' MANAGEMENT HAS A SUBSTANTIAL OWNERSHIP INTEREST; PUBLIC
STOCKHOLDERS MAY HAVE NO EFFECTIVE VOICE IN MARINE PRODUCTS' MANAGEMENT
The Company has elected the "Controlled Company" exemption under Part 8, Sec.
801(a) of the American Stock Exchange ("AMEX") Company Guide. The Company is a
"Controlled Company" because a group that includes the Company's Chairman of the
Board, R. Randall Rollins and his brother, Gary W. Rollins, who is also a
director of the Company, and certain companies under their control, controls in
excess of fifty percent of the Company's voting power. As a "Controlled
Company", the Company need not comply with certain AMEX rules including those
requiring a majority of independent directors.
Marine Products' executive officers, directors and their affiliates hold
directly or through indirect beneficial ownership, in the aggregate,
approximately 67 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 including advance notice requirements for shareholder
proposals and staggered terms of office for the Board of Directors, 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.
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 $1,800 per month
in rent. Marine Products may cancel this arrangement at any time after giving a
30 day notice. Chaparral owns and maintains approximately 1,045,000 square feet
of space utilized for 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 -
183,000, office and other - 85,000.
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 ultimate
outcome of such litigation will have a material adverse effect on its liquidity,
financial position or results of operations.
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 2003.
12
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.
Date First Elected
------------------
Name and Office with Registrant Age to Present Office
------------------------------- --- -----------------
R. Randall Rollins (1)
Chairman of the Board 72 2/28/01
Richard A. Hubbell (2)
President and
Chief Executive Officer 59 2/28/01
James A. Lane, Jr. (3)
Executive Vice President 61 2/28/01
President of Chaparral Boats, Inc.
Linda H. Graham (4)
Vice President and
Secretary 67 2/28/01
Ben M. Palmer (5)
Vice President
Chief Financial Officer and Treasurer 43 2/28/01
(1) R. Randall Rollins began working for Rollins, Inc. in 1949. At the time of
the spin-off of RPC from Rollins, in 1984, Mr. Rollins was elected Chairman
of the Board and Chief Executive Officer of RPC. He remains Chairman of
RPC, Inc. and held the position of Chief Executive Officer of RPC until
April 22, 2003. He has served as Chairman of the Board of the Company since
February 2001 and Chairman of the Board of Rollins, Inc. (consumer
services) since October 1991. He is also on the boards of SunTrust Banks,
Inc., SunTrust Banks of Georgia, Dover Downs Gaming and Entertainment,
Inc., and Dover Motorsports, Inc.
(2) Richard A. Hubbell has been the President and Chief Executive Officer of
Marine Products Corporation since it was spun-off in February 2001. He has
also been the President of RPC, Inc., since 1987 and Chief Executive
Officer since April 22, 2003. Mr. Hubbell serves on the Board of Directors
for both of these companies.
(3) James A. Lane, Jr., has held the position of President of Chaparral Boats
(formerly a subsidiary of RPC, Inc.) since 1976. He is also a director of
RPC, Inc., and has served in that capacity since 1987.
(4) Linda H. Graham has been Vice President and Secretary of Marine Products
Corporation since it was spun-off in 2001, and Vice President and Secretary
of RPC, Inc. since 1987. Ms. Graham serves on the Board of Directors for
both of these companies.
(5) Ben M. Palmer has been Vice President, Chief Financial Officer and
Treasurer of Marine Products Corporation since it was spun-off in 2001 and
has served the same roles at RPC, Inc. since 1996.
13
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
Marine Products' common stock is listed on the American Stock Exchange under the
ticker symbol "MPX". All share and earnings per share data disclosed below have
been restated for the three-for-two stock split to be paid March 10, 2004, to
stockholders of record on February 10, 2004. At February 27, 2004, there were
25,792,725 (adjusted for the three-for-two stock split) shares of common stock
outstanding.
At the close of business on February 27, 2004, there were approximately 2,418
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, 2003 and 2002 were
as follows:
2003 2002
Quarter High Low Dividends High Low Dividends
- ---------------------------------------------------------------------------------------------------
First $ 7.69 $ 6.20 $ 0.027 $ 5.33 $ 2.92 $ 0.013
Second 7.67 5.90 0.027 7.77 4.97 0.013
Third 10.67 7.00 0.027 7.93 6.20 0.013
Fourth 12.67 9.07 0.027 7.80 6.50 0.013
- ---------------------------------------------------------------------------------------------------
The Company has paid cash dividends since the second quarter of 2001. Beginning
in the first quarter of 2003, Marine Products increased its quarterly cash
dividend from $0.013 to $0.027 per common share. At the January 27, 2004 Board
of Directors' Meeting, the Board approved a 50 percent increase in the cash
dividend, from $0.027 to $0.040 on the split number of shares.
14
ITEM 6. SELECTED FINANCIAL DATA
The following table summarizes certain selected combined financial data of
Marine Products and Chaparral 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. The information set
forth below should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the Consolidated
Financial Statements and the notes thereto included elsewhere in this document.
All earnings per share, shares outstanding and dividends per share have been
restated for the three-for-two stock split effective March 10, 2004 for shares
held on February 10, 2004.
YEARS ENDED DECEMBER 31,
-----------------------------------------------------------------------
(IN THOUSANDS, EXCEPT SHARE, PER SHARE AND EMPLOYEE DATA)
-----------------------------------------------------------------------
2003 2002 2001 2000 1999
----------- ----------- ----------- ----------- -----------
STATEMENT OF INCOME DATA: (a)
Net sales $ 193,980 $ 162,682 $ 134,689 $ 148,276 $ 122,878
Cost of goods sold 143,663 125,282 105,344 115,876 93,247
----------- ----------- ----------- ----------- -----------
Gross profit 50,317 37,400 29,345 32,400 29,631
Selling, general and administrative expenses 23,015 18,018 16,223 16,945 15,147
----------- ----------- ----------- ----------- -----------
Operating income 27,302 19,382 13,122 15,455 14,484
Interest income 501 600 689 280 233
Gain on settlement of claim -- -- -- 6,817 --
----------- ----------- ----------- ----------- -----------
Income before income taxes 27,803 19,982 13,811 22,552 14,717
Income tax provision 9,731 7,593 5,248 8,591 5,599
----------- ----------- ----------- ----------- -----------
NET INCOME $ 18,072 $ 12,389 $ 8,563 $ 13,961 $ 9,118
=========== =========== =========== =========== ===========
EARNINGS PER SHARE (b)
Basic $ 0.71 $ 0.49 $ 0.34 $ 0.55 $ 0.36
=========== =========== =========== =========== ===========
Diluted $ 0.67 $ 0.46 $ 0.33 $ 0.55 $ 0.36
=========== =========== =========== =========== ===========
DIVIDENDS PAID PER SHARE $ 0.11 $ 0.05 $ 0.04 $ - $ -
=========== =========== =========== =========== ===========
OTHER FINANCIAL AND OPERATING DATA: (a)
Gross profit margin percent 25.9% 23.0% 21.8% 21.9% 24.1%
Operating margin percent 14.1 11.9 9.7 10.4 11.8
Net cash provided by operating activities $ 17,828 $ 11,696 $ 10,231 $ 15,464 $ 9,235
Net cash (used for) provided by investing activities (4,432) 2,860 (5,919) (4,198) (1,665)
Net cash used for financing activities 4,432 2,229 456 13,600 7,619
Capital expenditures $ 3,707 $ 3,800 $ 5,456 $ 4,198 $ 1,810
Employees at end of year 975 867 758 807 683
Manufacturing space at end of year (square ft.) 1,045 898 898 670 670
BALANCE SHEET DATA AT END OF YEAR: (a)
Cash and cash equivalents $ 26,244 $ 17,280 $ 4,953 $ 1,097 $ 3,431
Marketable securities - current 1,402 1,929 5,478 - -
Marketable securities - non-current 5,930 4,865 7,781 - -
Inventories 21,770 20,685 14,478 15,064 13,703
Working capital 45,984 33,390 20,311 10,488 12,514
Property, plant and equipment, net 17,761 16,216 14,230 9,796 6,714
Total assets 86,314 71,063 56,513 103,449 88,168
Total stockholders' equity $ 69,966 $ 56,833 $ 46,345 $ 92,593 $ 78,632
(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.
(b) Earnings per share for the years 1999 through 2001 have been stated on
a pro forma basis and have not been audited.
15
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.
The Board of Directors, at their quarterly meeting on January 27, 2004,
authorized a three-for-two stock split by the issuance on March 10, 2004 of one
additional common share for each two common shares held of record at February
10, 2004. Accordingly, the par value of additional shares issued will be
adjusted between common stock and capital in excess of par value, and fractional
shares resulting from the stock split will be settled in cash. All share and per
share data have been retroactively adjusted for this split.
OVERVIEW
Marine Products Corporation, through its wholly-owned subsidiaries Chaparral and
Robalo, is a leading manufacturer of recreational fiberglass powerboats. The
Company sells its products to a network of independent dealers who in turn sells
the products to retail customers. These dealers are located throughout the
continental United States and in several international markets. Marine Products'
business is impacted by economic conditions, consumer confidence, interest
rates, the weather, and other factors. The Company's management believes that it
has the opportunity to continue to enhance its' customers' boating experience by
providing them with high quality, innovative powerboats, and thereby increase
its market share, net sales, and net income. Marine Products' management is also
focused on the competitive nature of the recreational powerboat manufacturing
business and factors which may lead to a decline in consumer confidence or
consumers' discretionary income, both of which could negatively impact sales of
the Company's powerboats.
OUTLOOK
Management believes that net sales and profits will continue to increase in
2004, based on the projections of continued low interest rates and improving
economic conditions. This belief is also based on reports of attendance and
sales during the winter 2004 retail boat show season, which began in December
2003. Media reports regarding recent boat shows indicate that attendance has
increased by as much as 10 percent compared to last year, although several shows
reported decreased attendance due to inclement weather. Boat show attendance has
historically been positively correlated with retail boat sales later in the
selling season because consumers attend shows due to their interest in
recreational boating and make purchasing decisions at a boat show. However,
there can be no assurance that this relationship will continue in 2004 or
subsequent years. Pleasure boating is a discretionary consumer expenditure,
therefore, an increase in interest rates or decline in consumer confidence due
to a weakening economy or renewed global conflict would have a serious and
immediate negative impact on sales and profits. At the present time, Marine
Products Corporation as well as other manufacturers are refining and improving
their customer service capabilities, marketing strategies and sales promotions
in order to attract more consumers to recreational boating as well as improve
consumers' boating experiences. Management believes that these efforts may
result in increased marketing and other selling, general and administrative
expenses in the future.
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
accounting 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
16
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 of the sales price is reasonably assured.
Accrued sales discounts - The Company's 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. In addition, the Company selectively creates retail
sales incentive programs. The Company records these estimated sales discounts at
the later of the recognition of sales or the announcement of an incentive
program. These estimates are based upon the Company's assessment of the volume
of sales that will qualify for each program. 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 instead of additional cash discounts. The costs
to be paid 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 charged by the floor plan financing companies. At the time the boat sales
are recognized, the Company records an experience based estimate of the future
interest costs to be incurred. While the Company believes the recorded 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. Warranty costs, if any, on other components of the boats are absorbed by
the original manufacturer. 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 the Company believes the recorded 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. Prospective
financial results will be impacted by any differences between these 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 historical experience, and where appropriate, the advice of
outside experts. Upon the ultimate resolution of these uncertainties, future
financial results will be impacted by the difference between these estimates and
the actual amounts paid to settle the liabilities.
Pension liabilities - Pension expense is determined in accordance with the
provisions of SFAS 87, "Employers' Accounting for Pensions." Pension costs are
actuarially determined on an annual basis 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 expectations
with respect to investment returns and asset allocations. 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 on the results of operations, financial position or
liquidity of the Company.
17
RESULTS OF OPERATIONS
----------------------------------------------------------------------------------------------------
($'S IN THOUSANDS) 2003 2002 2001
----------------------------------------------------------------------------------------------------
Total number of boats sold 6,265 5,625 4,891
Average selling price per boat $ 31.4 $ 29.4 $ 28.2
Net sales $ 193,980 $ 162,682 $ 134,689
Percentage of cost of goods sold to net sales 74.1% 77.0% 78.2%
Percentage of selling, general and
administrative expense to net sales 11.9% 11.1% 12.0%
Operating income $ 27,302 $ 19,382 $ 13,122
Research and development expense $ 1,075 $ 1,605 $ 1,955
Warranty expense $ 3,646 $ 2,745 $ 1,143
----------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 2003 COMPARED TO YEAR ENDED DECEMBER 31, 2002
NET SALES. Marine Products' net sales increased by $31,298,000 or 19.2 percent
in 2003 compared to 2002. The increase was primarily due to an 11.4 percent
increase in units sold, as well as a 6.8 percent increase in the average sales
price of boats sold. The increases in units sold were realized primarily in the
Chaparral sportboat and cruiser lines, and in the Robalo sport fishing boat
line. The increase in average sales prices resulted from increased sales of
larger cruisers, increased Robalo unit sales, and overall price increases that
were implemented for the 2004 model year, which began in July 2003. The net
sales increase was also due to higher parts and accessories sales, which is a
result of the increasing numbers of boats sold in prior years that are still in
operation and require routine maintenance and repair.
Management believes that in general, the increase in unit volume during the year
resulted from favorable economic and industry conditions, including continued
low interest rates, an improving domestic economy, and a trend in which
consumers choose recreational activities that are safe, close to home, and can
be enjoyed in a controlled environment with family and friends. The available
industry statistics also indicate that Chaparral continued to gain market share
in the 18 to 35 foot sterndrive pleasure boat market during 2003, which
management believes is due to increased industry recognition of the Company's
product quality, enhanced dealer incentive and training programs, and new boat
models with designs and features that have broader consumer appeal. The Robalo
unit sales increased by 64.1 percent, due to an expanded model offering
including larger sizes and more available design options, which led to broader
dealer acceptance of the Robalo line and ultimately increased sales volumes.
COST OF GOODS SOLD. Cost of goods sold increased 14.7 percent to $143,663,000 in
2003 compared to $125,282,000 in 2002, an increase of $18,381,000, consistent
with the increase in net sales. As a percentage of net sales, cost of goods sold
decreased from 2002 to 2003, because of efficiencies gained from higher
production volumes, especially within the Robalo line, and an overall shift in
model mix to larger boats which typically generate higher margins.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses were $23,015,000 in 2003 compared to $18,018,000 in
2002, an increase of $4,997,000 or 27.7 percent. The Company continued to create
some expense leverage with higher net sales. 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. These increases were partially offset by a decrease in
18
research and development expense, related to less new model design activities in
2003 compared to 2002 when the Company performed a large cruiser design project
and several projects to expand the Robalo line. As a percentage of net sales,
these expenses increased because the incentive compensation and sales commission
expenses were higher due to the increase in gross profit margin and operating
margin percents.
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 was $3,646,000 in 2003 and $2,745,000 in
2002, or 1.9 percent and 1.7 percent of sales in 2003 and 2002, respectively.
Warranty expense as a percentage of net sales increased in 2003 due to 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.
OPERATING INCOME. Operating income was $27,302,000 in 2003, an increase of
$7,920,000 or 40.9 percent compared to $19,382,000 in 2002, resulting from
higher net sales and gross profit, partially offset by the increase in selling,
general and administrative expenses.
INTEREST INCOME. Interest income was $501,000 in 2003 compared to $600,000 in
2002. 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 2003 consistent with
lower interest rates offset slightly by a higher balance of investable cash.
INCOME TAX PROVISION. THE effective tax rate was 35 percent in 2003, compared to
38 percent in 2002. The decrease in rate reflects the effect of implementing tax
planning strategies. The effective rate change increased net income by $834,000.
The income tax provision of $9,731,000 was $2,138,000 or 28.2 percent higher
than the income tax provision of $7,593,000 for the prior year as a result of
higher income before income taxes, partially offset by the lower effective tax
rate.
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 $27,993,000 or 20.8 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 15.0
percent increase in the volume of boats sold coupled with a 4.3 percent increase
in the average sales price per unit. 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 decreased in
2002 compared to 2001, the majority of the increase 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 11.1 percent. The Company continued to create
some expense leverage with higher net sales. 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 as a result of the implementation of Statement of Financial Accounting
Standard ("SFAS") No. 142.
OPERATING INCOME. Operating income was $19,382,000 in 2002, an increase of
$6,260,000 or 47.7 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, consistent with
lower interest rates and yields offset slightly by a higher balance of available
cash.
19
LIQUIDITY AND CAPITAL RESOURCES
----------------------------------------------------------------------------------------------------
(IN THOUSANDS) 2003 2002 2001
----------------------------------------------------------------------------------------------------
Net cash provided by operating activities $ 17,828 $ 11,696 $ 10,231
Net cash (used for) provided by investing
activities (4,432) 2,860 (5,919)
Net cash used for financing activities $ (4,432) $ (2,229) $ (456)
----------------------------------------------------------------------------------------------------
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 increased during 2003 by $6,132,000 compared to
2002. The increase was due to higher operating income in 2003 compared to 2002,
partially offset by higher working capital requirements at December 31, 2003 due
to an increase in accounts receivable correlated with higher sales and related
manufacturing activities, and an increase in income taxes receivable, together
with decreases in accounts payable and income tax payable that were caused by
timing differences in payments.
Cash used for investing activities increased $7,292,000 compared to 2002. This
change was caused by a $7,385,000 net increase in marketable securities in 2003
compared to 2002 due to overall increase in available cash for investment.
Capital expenditures decreased slightly to $3,707,000 in 2003 compared to
$3,800,000 in 2002. Capital expenditures in 2002 included expenditures for
operating equipment and initial expenditures for the construction of a new
administrative building at Chaparral's Nashville, Georgia headquarters. In 2003,
the largest capital expenditures related to the completion of this
administrative office building, the purchase of operating equipment, and the
purchase of additional buildings for warehouse storage space. Management expects
that capital expenditures during 2004 will be approximately $4,000,000, and are
projected to include expenditures for the construction of new warehouse space
and capital expenditures for new operating equipment.
Cash used for financing activities increased $2,203,000 in 2003 compared to
2002. The increase relates to cash used to purchase the Company's common stock
in the open market, and an increase in dividends resulting from the Company's
decision during the first quarter of 2003 to increase its quarterly dividend
from $0.013 per share to $0.027 per share. During 2003, the Company purchased
304,785 shares at an average price of $6.60 per share. The Company has purchased
a total of 447,351 shares in the open market pursuant to a resolution in April
2001 by the Board of Directors and, as of December 31, 2003, can buy back
1,052,649 more shares under the program. At the January 27, 2004 Board of
Directors' Meeting, the Board approved a three-for-two stock split to holders of
record on February 10, 2004 payable March 10, 2004, as well as a 50 percent
increase in the cash dividend, from $0.027 to $0.040 on the split number of
shares.
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).
Consistent with customary industry practices, the Company has agreements with
selected third-party dealer floor plan lenders to repurchase any of its 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. The Company does not currently expect any of its dealers to default in
their obligations to the respective lenders in the near future.
20
The Company participates in a multiple employer Retirement Income Plan,
sponsored by RPC. This plan is a trusteed defined benefit pension plan that
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 defined benefit pension plan. It
is expected that the Company's pension expense will increase in 2004 compared to
2003 primarily because of the decline in the discount rate used to calculate
plan liabilities offset slightly by improved pension asset performance in 2003.
The Company expects to contribute approximately $700,000 to the multiple
employer pension plan in 2004 to achieve its funding objectives.
We believe the liquidity provided by our existing cash, cash equivalents and
marketable securities, our overall strong capitalization including no debt, and
cash expected to be generated from operations, will be sufficient 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.
OFF BALANCE SHEET ARRANGEMENTS
GUARANTEES. 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 qualifying dealers' debt
obligations related to inventory purchases. The Company's obligation under these
guarantees becomes effective in the case of default by the dealer. The
agreements provide for the return of all repossessed boats in "like new"
condition 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,
2003, the maximum repurchase obligation outstanding under these agreements which
expire in 2004 and 2005 totaled approximately $4,000,000. The Company records
the estimated fair value of the guarantee; at December 31, 2003, this amount is
immaterial.
The Company has no other off balance sheet transactions as defined in the SEC
rules.
CONTRACTUAL OBLIGATIONS
The following table summarizes the Company's contractual obligations as of
December 31, 2003:
Payments due by period
---------------------------------------------------------------------------
Less More
than 1 1-3 3-5 than 5
Contractual Obligations Total year years years years
- ----------------------------------- ------------ ------------ ------------ ------------ ------------
Long-term debt $ - $ - $ - $ - $ -
Capital lease obligation 150,000 - - - 150,000
Operating leases (1) 94,844 28,307 53,170 13,367 -
Purchase obligations (2) - - - - -
Other long-term liabilities (3) - - - - -
------------ ------------ ------------ ------------ ------------
Total $ 244,844 $ 28,307 $ 53,170 $ 13,367 $ 150,000
============ ============ ============ ============ ============
(1). Operating leases represent agreements for various office equipment.
21
(2). As part of the normal course of business the Company enters into purchase
commitments to manage its various operating needs. However, the Company
does not have any obligations that are non-cancelable or subject to a
penalty if canceled.
(3). Long-term liabilities on the balance sheet primarily represent pension
obligation and deferred taxes. Minimum pension funding contributions are
not included as such amounts have not been determined. The Company expects
to make a contribution to the multiple employer pension plan of
approximately $700,000 in 2004 which it expects to fund with available cash
or from cash generated from operating activities.
RELATED PARTY TRANSACTIONS
Effective with the spin-off, RPC established a cash balance at Marine Products
of approximately $15,000,000 by contributing $13,800,000, 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. The Company's cost for such services
aggregated approximately $496,000 in 2003, $588,000 in 2002 and $868,000 in
2001. During 2003 and 2002, the Company paid approximately $171,000 and $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.
The Company participates in a multiple employer plan sponsored by RPC. Following
the spin-off of the Company in 2001, RPC has charged the Company for, and the
Company has been obligated to pay, its allocable share of pension costs and the
associated funding obligation related to the prior service liabilities of
Chaparral employees. Effective December 2003, the related prior service
liabilities totaling $3,314,000 and pension assets totaling $2,517,000 were
transferred within the multiple employer plan by RPC to the Company.
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 Products' 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.
IMPACT OF RECENT ACCOUNTING PRONOUNCEMENTS
In December 2002, the Financial Accounting Standards Board ("FASB") issued FASB
Interpretation ("FIN") No. 46, "Consolidation of Variable Interest Entities."
The Interpretation requires that a variable interest entity be consolidated by a
company if that company is subject to a majority of the risk of loss from the
variable interest entity's activities or entitled to receive a majority of the
entity's residual returns or both. The consolidation requirements of FIN 46
apply immediately to variable interest entities created after January 31, 2003.
The consolidation requirements apply to older entities in the first fiscal year
or interim period ending after December 15, 2003. Certain of the disclosure
requirements apply in all financial statements issued after January 31, 2003,
regardless of when the variable interest entity was established. The Company has
completed an evaluation of its existing relationships with various dealerships
that sell its products and has concluded that none of them are variable interest
entities under the provisions of FIN 46. In addition, the Company has not
22
entered into any agreements subject to FIN 46 since January 31, 2003. Therefore,
the adoption of the Interpretation will not have a material impact on the
financial position, results of operations or liquidity of the Company.
In March 2003, the Emerging Issues Task Force ("EITF") of the FASB reached a
consensus on EITF Issue No. 02-16, "Accounting by a Customer (Including a
Reseller) for Certain Consideration Received from a Vendor," which addresses how
a reseller of a vendor's products should account for cash consideration received
from the vendor. Marine Products has adopted EITF 02-16 for all arrangements
entered into after December 31, 2002. The Company receives a discount on the
purchase of engines from certain manufacturers to be used by the Company to
promote the respective engines. The discounts are accounted for as a reduction
in cost of inventory acquired. The effect of the adoption of EITF 02-16 did not
have a material impact on the Company's earnings.
In December 2003, the FASB reissued Statement of Financial Accounting Standard
("SFAS") 132, "Employers' Disclosures about Pension and Other Postretirement
Benefits," which replaced the previously existing pronouncement. The revised
SFAS does not change the measurement or recognition provisions; however, it
requires additional disclosures about assets, obligations, cash flows and net
periodic benefit cost of defined benefit pension plans and other post retirement
benefit plans. The disclosure rules apply to annual financial statements for
fiscal years ending after December 15, 2003. In addition, there are additional
disclosure requirements for the interim-period financial reports starting in the
first quarter of 2004. The Company has adopted the provisions of SFAS 132 and
presented the additional disclosures in the notes to the consolidated financial
statements. The adoption of SFAS 132 did not have a material effect on the
financial position, results of operations or liquidity of the Company.
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. The Company has
been affected by the impact of lower interest rates on interest income from its
short-term investments. 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.
23
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------------------------------------
MARINE PRODUCTS CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------------------------------------
(in thousands except share information)
- --------------------------------------------------------------------------------------------------------------
DECEMBER 31, 2003 2002
- --------------------------------------------------------------------------------------------------------------
ASSETS
- --------------------------------------------------------------------------------------------------------------
Cash and cash equivalents $ 26,244 $ 17,280
Marketable securities 1,402 1,929
Accounts receivable, less allowance for doubtful accounts of $67
in 2003 and 2002 3,970 1,471
Inventories 21,770 20,685
Income taxes receivable 1,073 -
Deferred income taxes 2,265 2,419
Prepaid expenses and other current assets 616 1,623
- --------------------------------------------------------------------------------------------------------------
Current assets 57,340 45,407
Property, plant and equipment, net 17,761 16,216
Intangibles, net of accumulated amortization
of $10,469 in 2003 and $10,429 in 2002 3,818 3,858
Marketable securities 5,930 4,865
Other assets 1,465 717
- --------------------------------------------------------------------------------------------------------------
Total assets $ 86,314 $ 71,063
==============================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable $ 2,730 $ 3,414
Income taxes payable - 1,066
Other accrued expenses 8,626 7,537
- --------------------------------------------------------------------------------------------------------------
Current liabilities 11,356 12,017
Pension liabilities 2,233 626
Deferred income taxes 1,160 614
Other long-term liabilities 1,599 973
- --------------------------------------------------------------------------------------------------------------
Total liabilities 16,348 14,230
Commitments and contingencies
Common stock, $.10 par value, 50,000,000 shares authorized,
25,728,233 shares issued in 2003, 25,682,076 shares issued in 2002 2,573 2,568
Capital in excess of par value 35,722 37,422
Retained earnings 32,409 17,074
Accumulated other comprehensive (loss) income (509) 103
Deferred compensation (229) (334)
- --------------------------------------------------------------------------------------------------------------
Total stockholders' equity 69,966 56,833
- --------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 86,314 $ 71,063
==============================================================================================================
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
24
CONSOLIDATED STATEMENTS OF INCOME
- --------------------------------------------------------------------------------------------------------------
MARINE PRODUCTS CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------------------------------------
(in thousands except per share data)
- --------------------------------------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31, 2003 2002 2001
- --------------------------------------------------------------------------------------------------------------
NET SALES $ 193,980 $ 162,682 $ 134,689
Cost of goods sold 143,663 125,282 105,344
----------- ----------- -----------
Gross profit 50,317 37,400 29,345
Selling, general and administrative expenses 23,015 18,018 16,223
----------- ----------- -----------
Operating income 27,302 19,382 13,122
Interest income 501 600 689
----------- ----------- -----------
INCOME BEFORE INCOME TAXES 27,803 19,982 13,811
Income tax provision 9,731 7,593 5,248
----------- ----------- -----------
NET INCOME $ 18,072 $ 12,389 $ 8,563
=========== =========== ===========
EARNINGS PER SHARE (2001 PRO FORMA - UNAUDITED)
Basic $ 0.71 $ 0.49 $ 0.34
=========== =========== ===========
Diluted $ 0.67 $ 0.46 $ 0.33
=========== =========== ===========
DIVIDENDS PAID PER SHARE $ 0.11 $ 0.05 $ 0.04
=========== =========== ===========
==============================================================================================================
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
25
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
- ------------------------------------------------------------------------------------------------------------------------------------
MARINE PRODUCTS CORPORATION AND SUBSIDIARIES
- ------------------------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS)
Accumulated
Capital in RPC, Inc. Other
Three Years Ended Comprehensive Common Stock Excess of Retained Deferred Equity Comprehensive
December 31, 2003 Income Shares Amount Par Value Earnings Compensation Investment Income (Loss) Total
====================================================================================================================================
Balance, December 31, 2000 $ - - $ - $ - $ - $ - $ 92,593 $ - $92,593
Net income (from
January 1, 2001 through
February 28, 2001) 1,487 1,487
Cancellation and repayment
of receivable from RPC, Inc. 13,833 (67,662) (53,829)
Spin-off transaction 17,012 1,701 25,014 (297) (26,418) -
Stock issued for stock
incentive plans, net 13 1 21 1 17 - 40
Net income (from March 1,
2001 through December 7,076 7,076
31, 2001)
Dividends declared (1,022) (1,022)
Three-for-two stock split 8,513 852 (852) -
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2001 25,538 2,554 38,016 6,055 (280) - 46,345
Stock issued for stock
incentive plans, net 238 24 618 (54) 588
Stock purchased and retired (141) (14) (1,208) (1,222)
Net income $12,389 12,389 12,389
Minimum pension
liability adjustment,
net of taxes of $11 (18) (18) (18)
Unrealized gain on
securities, net of
taxes of $74 121 121 121
----------
Comprehensive income $12,492
==========
Dividends declared (1,370) (1,370)
Three-for-two stock split 47 4 (4) -
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2002 25,682 2,568 37,422 17,074 (334) 103 56,833
Stock issued for stock
incentive plans, net 257 26 550 - 105 681
Stock purchased and retired (226) (23) (2,248) (2,271)
Net income $18,072 18,072 18,072
Minimum pension
liability adjustment,
net of taxes of $288 (534) (534) (534)
Unrealized gain on
securities, net of
taxes and
reclassification
adjustments (78) (78) (78)
----------
Comprehensive income $17,460
==========
Dividends declared (2,737) (2,737)
Three-for-two stock
split 15 2 (2) -
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2003 25,728 $2,573 $35,722 $32,409 $(229) $(509) $69,966
====================================================================================================================================
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
26
CONSOLIDATED STATEMENTS OF CASH FLOWS
- ----------------------------------------------------------------------------------------------------------------------
MARINE PRODUCTS CORPORATION AND SUBSIDIARIES
- ----------------------------------------------------------------------------------------------------------------------
(in thousands)
- ----------------------------------------------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31, 2003 2002 2001
- ----------------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net income $ 18,072 $ 12,389 $ 8,563
Non-cash charges (credits) to earnings:
Depreciation and amortization 2,306 2,079 2,267
Deferred income tax provision (benefit) 1,029 (247) 460
(Increase) decrease in assets:
Accounts receivable (2,499) (293) 568
Inventories (1,085) (6,207) 698
Prepaid expenses and other current assets 1,007 (283) (1,491)
Income taxes receivable (1,073) 831 -
Other non-current assets (679) (292) (40)
Increase (decrease) in liabilities:
Accounts payable (684) 985 (481)
Income taxes payable (1,066) 1,066 -
Other accrued expenses 1,089 1,668 (313)
Other long-term liabilities 1,411 - -
- ----------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 17,828 11,696 10,231
- ----------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Capital expenditures (3,707) (3,800) (5,456)
Net (purchase) sale of marketable securities (725) 6,660 (13,259)
Purchase of business - - (1,037)
Receipt of cash and marketable securities from RPC, Inc. - - 13,833
- ----------------------------------------------------------------------------------------------------------------------
Net cash (used for) provided by investing activities (4,432) 2,860 (5,919)
- ----------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Decrease in receivable from RPC, Inc. - - 614
Payment of dividends (2,737) (1,370) (1,022)
Cash paid for common stock purchased and retired (2,271) (1,222) (65)
Proceeds received upon exercise of stock options 576 363 17
- ----------------------------------------------------------------------------------------------------------------------
Net cash used for financing activities (4,432) (2,229) (456)
- ----------------------------------------------------------------------------------------------------------------------
Net increase in cash and cash equivalents 8,964 12,327 3,856
Cash and cash equivalents at beginning of year 17,280 4,953 1,097
- ----------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 26,244 $ 17,280 $ 4,953
======================================================================================================================
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
27
MARINE PRODUCTS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
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 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 25,518,416 (restated for the
three-for-two stock split effective March 10, 2004 for shares held on February
10, 2004) 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.
The Company has only one reportable segment - its Powerboat Manufacturing
business. The Company's results of operations and its financial condition are
not significantly reliant upon any single customer, product model or the
Company's international 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
international 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 sales incentives and discounts, warranty accruals,
insurance reserves and pension liabilities.
SALES RECOGNITION - The Company recognizes revenue in accordance with the
Securities and Exchange Commission's Staff Accounting Bulletin No. 104, "Revenue
Recognition," that clarifies the basic criteria for recognizing revenue. Marine
Products recognizes sales when a fully executed agreement exists, prices are
determinable, products are delivered to the dealer and collectibility is
reasonably assured.
28
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 is 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.
ADVERTISING - Advertising expenses are charged to expense during the period in
which they are incurred. Expenses associated with the product brochures and
other inventoriable marketing materials are capitalized and amortized over the
related model year which approximates the consumption of these materials. As of
December 31, 2003 and 2002, the Company had recorded approximately $320,000 and
$655,000 in prepaid expenses related to the capitalized brochure costs. Total
advertising expense recorded was approximately $2,785,000 in 2003, $2,086,000 in
2002 and $1,801,000 in 2001.
SALES INCENTIVES - Sales incentives including dealer discounts and retail sales
promotions are provided for and recorded as a reduction in sales for the period
in which the related sales are recorded. The Company records these incentives at
the later of the recognition of the related sales or the announcement of a
promotional program.
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 does not allow 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 gains on sales of marketable securities totaled $87,738 for the year
ended December 31, 2003, realized losses for the years ended December 31, 2002
and 2001 totaled $23,400 and $5,066. Of the total gain realized in 2003,
$168,000 was reclassified from other comprehensive income. 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, 2003, Marine Products owned approximately
$2,998,000 of corporate obligations with an unrealized loss of $6,215 and
approximately $1,477,000 of municipal obligations with an unrealized gain of
$5,309.
Investments with remaining maturities of less than 12 months are considered to
be current marketable securities. Investments with remaining maturities greater
than 12 months are considered to be non-current marketable securities. Marine
Products' marketable securities generally consist of United States government,
corporate and municipal debt securities. The maturities of the Company's
non-current marketable securities are as follows: $0 in 2004, approximately
$4,750,000 between 2005 and 2009, $894,000 between 2010 and 2014, $286,000 in
2015 and thereafter.
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. Accounts are written-off against the
allowance for doubtful accounts when the Company determines that amounts are
uncollectible.
INVENTORIES - Inventories are stated at the lower of cost (determined on a
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.
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.
29
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. Property, plant and
equipment are reviewed for impairment when indicators of impairment exist.
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, 2003 and 2002. Pursuant to the
adoption of Statement of Accounting Standard ("SFAS") 142 on January 1, 2002,
goodwill is no longer amortized to earnings but instead is subject to an annual
test for impairment. The Company completed an initial impairment analysis upon
adoption of SFAS No. 142 and a subsequent analysis during the fourth quarter of
2003. 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 lives. Trade names
are reviewed for impairment when such indicators exist.
The carrying amount and accumulated amortization for trade names are as follows:
December 31, 2003 2002
- --------------------------------------------------------------------------------
Trade names $ 600,000 $ 600,000
Less: accumulated amortization (90,000) (50,000)
- --------------------------------------------------------------------------------
$ 510,000 $ 550,000
================================================================================
Had the Company adopted the provisions of SFAS No. 142 as of January 1, 2001,
the effects on net income would have been as follows:
Year ended December 31, 2003 2002 2001
- ----------------------------------------------- --------- ----------- ----------
(IN THOUSANDS)
Net income (as reported) $18,072 $12,389 $8,563
Effect of goodwill amortization, net of taxes - - 424
- --------------------------------------------------------------------------------
Pro forma net income $18,072 $12,389 $8,987
================================================================================
Pro forma income per share would have been as follows:
Basic $0.71 $0.49 $0.35
================================================================================
Diluted $0.67 $0.46 $0.34
================================================================================
Amortization of trade names was approximately $40,000 each in 2003 and 2002 and
$10,000 in 2001. Goodwill amortization was $684,000 in 2001. Estimated
amortization expense for trade names is $40,000 for each of the five succeeding
years from 2004 to 2008.
ALLOWANCE FOR BOAT REPURCHASES - The Company is obligated under certain
circumstances to repurchase boats from selected finance companies through which
its dealers have financed boats under floor-plan financing arrangements. The
Company estimated fair value of the guarantee is immaterial at December 31,
2003.
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 estimated future
warranty costs at the time of the sale based on its historical claims
experience. An analysis of the warranty accruals for the years ended December
31, 2003 and 2002 is as follows:
(IN THOUSANDS) 2003 2002
---------------------------------------------------------------------------------------------
Balances at beginning of year $ 1,944 $ 1,739
Less: Payments made during the year (2,744) (2,540)
Add: Warranties issued during the year 3,344 2,441
Changes in warranties issued in prior years 302 304
---------------------------------------------------------------------------------------------
Balances at end of year $ 2,846 $ 1,944
=============================================================================================
30
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
$1,075,000 in 2003, $1,605,000 in 2002 and $1,955,000 in 2001.
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. The Company establishes a valuation allowance against the carrying
value of deferred tax assets if the Company concludes that it is more likely
than not that the asset will not be realized through future taxable income.
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 average shares outstanding is as follows:
- --------------------------------------------------------------------------------
UN AUDITED
(PRO-FORMA)
2003 2002 2001
- --------------------------------------------------------------------------------
Basic 25,386,434 25,419,830 25,339,056
Dilutive effect of stock options
and restricted shares 1,474,956 1,457,254 845,634
- --------------------------------------------------------------------------------
Diluted 26,861,390 26,877,084 26,184,690
================================================================================
FAIR VALUE OF FINANCIAL INSTRUMENTS - The Company's financial instruments
consist primarily of cash and cash equivalents, 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
sterndrive 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 December 2002, the Financial Accounting Standards
Board ("FASB") issued FASB Interpretation ("FIN") No. 46, "Consolidation of
Variable Interest Entities." The Interpretation requires that a variable
interest entity, as defined, be consolidated by a company if that company is
subject to a majority of the risk of loss from the variable interest entity's
activities or entitled to receive a majority of the entity's residual returns or
both. The consolidation requirements of FIN 46 apply immediately to variable
interest entities created after January 31, 2003. The consolidation requirements
apply to entities created prior to January 31, 2003 in the first fiscal year or
interim period ending after December 15, 2003. Certain of the disclosure
requirements apply in all financial statements issued after January 31, 2003,
regardless of when the variable interest entity was established. The Company has
completed an evaluation of its existing relationships with various dealerships
that sell its products and has concluded that none of them are variable interest
entities under the provisions of FIN 46.
31
In addition, the Company has not entered into any agreements subject to FIN 46
since January 31, 2003. Therefore, the adoption of the Interpretation will not
have an impact on the financial position, results of operations, or liquidity of
the Company.
In March 2003, the Emerging Issues Task Force ("EITF") of the FASB reached a
consensus on EITF Issue No. 02-16, "Accounting by a Customer (Including a
Reseller) for Certain Consideration Received from a Vendor," which addresses how
a reseller of a vendor's products should account for cash consideration received
from the vendor. Marine Products has adopted EITF 02-16 for all arrangements
entered into after December 31, 2002. The Company receives a discount on the
purchase of engines from certain manufacturers to be used by the Company to
promote the sale of their respective engines. The discounts are being accounted
for as a reduction in cost of inventory acquired. The effect of the adoption of
EITF 02-16 did not have a material impact on the Company's earnings.
In December 2003, the FASB reissued SFAS No. 132, "Employers' Disclosures about
Pension and Other Postretirement Benefits," that replaced the existing
pronouncement. The revised SFAS does not change the measurement or recognition
provisions; however, it requires additional disclosures about assets,
obligations, cash flows, net periodic benefit cost of defined benefit pension
plans and other post retirement benefit plans. The disclosure rules apply to
annual financial statements for fiscal years ending after December 15, 2003. In
addition, there are additional disclosure requirements for the interim-period
financial reports starting in the first quarter of 2004. The Company has adopted
the provisions of SFAS 132 and presented the additional disclosures in Note 9 to
the consolidated financial statements. The adoption of SFAS 132 did not have a
material effect on the financial position, results of operations or liquidity of
the Company.
STOCK-BASED COMPENSATION - Marine Products accounts for its stock incentive plan
using the intrinsic value method prescribed by Accounting Principles Board
("APB") Opinion 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 issue date and amortizes
such amounts over the vesting period for the shares. Marine Products recorded
amortization of deferred compensation related to these restricted stock grants
totaling $104,000 in 2003, $226,000 in 2002 and $89,000 in 2001.
If Marine Products had accounted for the stock incentives in accordance with the
provisions of SFAS No. 123, "Accounting for Stock-Based Compensation", the total
fair value of awards granted under the plan would be amortized over the vesting
period of the awards, and Marine Products' reported net income and diluted net
income per share would have been as follows:
Years ended December 31, 2003 2002 2001
- -------------------------------------------------------------------------------------------------------------
(IN THOUSANDS)
Net income (as reported) $18,072 $12,389 $8,563
Add: Stock-based employee compensation
expense included in reported net income, net
of related tax 68 140 55
Deduct: Total stock-based employee
compensation expense determined under fair
value based method for all awards, net of
related tax effect (405) (354) (181)
- -------------------------------------------------------------------------------------------------------------
Pro forma net income $17,735 $12,175 $8,437
- -------------------------------------------------------------------------------------------------------------
Pro forma income per share would have been as follows:
Basic - as reported $0.71 $0.49 $0.34
Basic - pro forma $0.70 $0.48 $0.33
=============================================================================================================
Diluted - as reported $0.67 $0.46 $0.33
Diluted - pro forma $0.66 $0.45 $0.32
=============================================================================================================
32
Pro forma net income for 2001 noted above is based on the fair value of RPC
options held by Marine Products' employees. The Company has computed for pro
forma disclosure purposes the value of all options granted during 2003, 2002 and
2001 using the Black-Scholes option pricing model as prescribed by SFAS No. 123
using the following weighted average assumptions:
- --------------------------------------------------------------------------------
2003 2002 2001
- --------------------------------------------------------------------------------
Risk free interest rate 1.1% 2.9% 4.6%
Expected dividend yield 1.3% 1.0% 2.0%
Expected lives 7 years 7 years 7 years
Expected volatility 33% 39% 45%
- --------------------------------------------------------------------------------
The total fair value of options granted to Marine Products employees during each
of the years was computed as follows:
Years ended December 31, 2003 2002 2001
- --------------------------------------------------------------------------------
(IN THOUSANDS)
Total $1,838 $1,389 $510
RECLASSIFICATION - Certain amounts for previous years have been reclassified to
conform with the 2003 consolidated financial statement presentation.
THREE-FOR-TWO STOCK SPLIT - The Board of Directors, at their quarterly meeting
on January 27, 2004, authorized a three-for-two stock split by the issuance on
March 10, 2004 of one additional common share for every two common shares held
of record at February 10, 2004. Accordingly, the par value of additional shares
issued will be adjusted between common stock and capital in excess of par value,
and fractional shares resulting from the stock split will be settled in cash.
All share and per share data appearing in the consolidated financial statements
and related footnotes have been retroactively adjusted for this split.
NOTE 2: INVENTORIES
Inventories consist of the following:
December 31, 2003 2002
- ---------------------------------------------------------------------
(IN THOUSANDS)
- ---------------------------------------------------------------------
Raw materials $9,485 $6,617
Work in process 5,889 3,535
Finished goods 6,396 10,533
- ---------------------------------------------------------------------
Total inventories $21,770 $20,685
=====================================================================
NOTE 3: PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are presented at cost, net of accumulated
depreciation and consist of the following:
Estimated
December 31, Useful Lives 2003 2002
- ---------------------------------------------------------------------------------------------
(IN THOUSANDS)
- ---------------------------------------------------------------------------------------------
Land N/A $ 495 $ 454
Buildings 20-39 14,711 11,984
Operating equipment and property 3-15 7,417 6,940
Furniture and fixtures 5-7 1,063 950
Vehicles 3-5 4,876 4,750
Construction in progress N/A - 543
- ---------------------------------------------------------------------------------------------
Gross property, plant and equipment 28,562 25,621
Less: accumulated depreciation 10,801 9,405
- ---------------------------------------------------------------------------------------------
Net property, plant and equipment $ 17,761 $ 16,216
=============================================================================================
33
Depreciation expense was $2,162,000 in 2003, $1,814,000 in 2002 and $1,485,000
in 2001. 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 cash flow 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 provided 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 inter-company balances. Effective with the
spin-off in February 2001, RPC established a cash balance at Marine Products of
approximately $15,000,000 by contributing $13,800,000, 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.
In accordance with the Transition Support Services Agreement, Marine Products
reimbursed RPC for its estimated allocable share of administrative costs
incurred for services rendered on behalf of Marine Products totaling $496,000 in
2003, $588,000 in 2002 and $868,000 in 2001. 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. The Company paid
$171,000 in 2003 and $332,000 in 2002 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.
The Company participates in a multiple employer plan sponsored by RPC. Following
the spin-off of the Company in 2001, RPC has charged the Company for, and the
Company has been obligated to pay, its allocable share of pension costs and the
associated funding obligation related to the prior service liabilities of
Chaparral employees. Effective December 2003, the related prior service
liabilities totaling $3,314,000 and pension assets totaling $2,517,000 were
transferred within the multiple employer plan by RPC to the Company.
34
NOTE 5: OTHER ACCRUED EXPENSES
Other accrued expenses consist of the following:
December 31, 2003 2002
- -------------------------------------------------------------------------------------------------------
(IN THOUSANDS)
- -------------------------------------------------------------------------------------------------------
Accrued payroll and related expenses $ 2,280 $ 1,933
Accrued sales discounts 2,745 2,431
Accrued warranty expenses 2,846 1,944
Liability for repurchases 50 202
Other 705 1,027
- -------------------------------------------------------------------------------------------------------
Other accrued expenses $ 8,626 $ 7,537
=======================================================================================================
NOTE 6: INCOME TAXES
The following table lists the components of the provision for income taxes:
- -------------------------------------------------------------------------------------------------------
Years ended December 31, 2003 2002 2001
- -------------------------------------------------------------------------------------------------------
(IN THOUSANDS)
- -------------------------------------------------------------------------------------------------------
Current:
Federal $ 8,295 $ 7,452 $ 4,346
State 407 388 442
Deferred:
Federal 1,000 (227) 424
State 29 (20) 36
- -------------------------------------------------------------------------------------------------------
Total income tax provision $ 9,731 $ 7,593 $ 5,248
=======================================================================================================
A reconciliation between the federal statutory rate and Marine Products' effective tax rate is as follows:
Years ended December 31, 2003 2002 2001
- --------------------------------------------------------------------------------------
Federal statutory rate 35.0% 35.0% 35.0%
State income taxes 2.0 1.9 2.0
Goodwill amortization 0.0 0.0 1.7
Other (2.0) 1.1 (0.7)
- --------------------------------------------------------------------------------------
Effective tax rate 35.0% 38.0% 38.0%
======================================================================================
Significant components of the Company's deferred tax assets and liabilities are as follows:
December 31, 2003 2002
- --------------------------------------------------------------------------------------
(IN THOUSANDS)
- --------------------------------------------------------------------------------------
Deferred tax assets:
Warranty $ 814 $ 738
Sales discounts 557 433
Self-insurance 149 233
Stock-based compensation 250 232
Pension expense 452 137
Coop advertising 138 128
All others 285 630
- --------------------------------------------------------------------------------------
Gross deferred tax assets 2,645 2,531
- --------------------------------------------------------------------------------------
Deferred tax liabilities:
Depreciation (1,456) (652)
All others (84) (74)
- --------------------------------------------------------------------------------------
Gross deferred tax liabilities $(1,540) $ (726)
- --------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------
Net deferred tax assets $ 1,105 $1,805
======================================================================================
35
Total income tax payments, net of refunds, were $9,751,000 in 2003, $5,455,000
in 2002 and $4,536,000 in 2001. 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. No settlements occurred in 2003 and approximately $140,000 was
transferred from RPC as a settlement in 2002.
NOTE 7: ACCUMULATED OTHER COMPREHENSIVE (LOSS) INCOME
Accumulated other comprehensive (loss) income consists of the following (in
thousands):
Minimum Unrealized
pension gain (loss) on
liability securities Total
- -------------------------------------------------------------------------------------------------
Balance at December 31, 2001 $ - $ - $ -
Change during 2002:
Before-tax amount (29) 195 166
Tax benefit (expense) 11 (74) (63)
- -------------------------------------------------------------------------------------------------
Total activity in 2002 (18) 121 103
- -------------------------------------------------------------------------------------------------
Balance at December 31, 2002 (18) 121 103
Change during 2003:
Before-tax amount (822) (287) (1,109)
Tax benefit 288 100 388
Reclassification adjustment, net of taxes - 109 109
- -------------------------------------------------------------------------------------------------
Total activity in 2003 (534) (78) (612)
- -------------------------------------------------------------------------------------------------
Balance at December 31, 2003 $ (552) $ 43 $ (509)
=================================================================================================
NOTE 8: 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, after
consultation with legal counsel, 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 selected
dealers and financing institutions to guarantee varying amounts of qualifying
dealers' inventory debt obligations. The Company's obligation under its
guarantee becomes effective in the case of default financing 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, 2003, the maximum repurchase
obligation outstanding under these agreements, which expire in 2004 and 2005,
totaled approximately $4,000,000.
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, 2003, 2002,
and 2001, the expense associated with this profit-sharing plan totaled
$7,240,000, $5,195,000, and $4,151,000, respectively, and is included in
selling, general and administrative expenses in the accompanying consolidated
statements of income.
36
NOTE 9: 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 for certain longer serviced employees that had not reached the
normal retirement age of 65 as of March 31, 2002. These discretionary
contributions are expected to be made over a seven year period beginning in 2002
to either a non-qualified Supplemental Executive Retirement Plan ("SERP")
established by the Company or to the 401(k) plan for each employee that is
entitled to the enhanced benefit. The expenses related to the enhanced benefits
were $126,000 in 2003 and 2002.
Beginning late in 2002, the Company began permitting selected highly compensated
employees to defer a portion of their compensation into the nonqualified SERP.
These employee deferrals are invested in mutual funds set up within a rabbi
trust. The SERP assets are marked to market and are reported as other assets on
the balance sheet. The SERP deferrals and the contributions are recorded on the
balance sheet in pension liabilities with any change in the fair value of the
liabilities recorded to compensation cost in the statement of income.
The following table sets forth the funded status of the retirement income plan
and the amounts recognized in Marine Products' consolidated balance sheets:
December 31, 2003 2002
- ----------------------------------------------------------------------------
(IN THOUSANDS)
CHANGE IN BENEFIT OBLIGATION:
Benefit obligation at beginning of year $ 346 $ 230
Service cost - 72
Interest cost 22 27
Actuarial loss (gain) 23 45
Allocation of prior service liabilities 3,314 -
Benefits paid (2) -
Curtailments - (28)
- ----------------------------------------------------------------------------
Benefit obligation at end of year $ 3,703 $ 346
- ----------------------------------------------------------------------------
CHANGE IN PLAN ASSETS:
Fair value of plan assets at beginning of year $ 56 $ -
Actual return on plan assets 8 -
Allocation of plan assets 2,517 -
Employer contribution 25 56
Benefits paid (2) -
- ----------------------------------------------------------------------------
Fair value of plan assets at end of year $ 2,604 $ 56
- ----------------------------------------------------------------------------
Funded status $ (1,099) $ (290)
Unrecognized net loss 851 29
- ----------------------------------------------------------------------------
Net accrued benefit cost $ (248) $ (261)
- ----------------------------------------------------------------------------
The accumulated benefit obligation for the defined benefit pension plan at
December 31, 2003 and 2002, has been disclosed above. The Company uses a
December 31 measurement date for its qualified plan.
Marine Products' funding policy is to contribute to the retirement income plan
the amount required, if any, under the Employee Retirement Income Security Act
of 1974. Marine Products contributed $25,000 in 2003 and $56,174 in 2002. No
contributions were required in 2001. Following the spin-off of the Company in
2001, RPC has charged the Company for, and the Company has been obligated to
pay, its allocable share of pension costs and the associated funding obligation
related to the prior service liabilities of Chaparral employees. Effective
December 2003, the related prior service liabilities totaling $3,314,000 and
pension assets totaling $2,517,000 were transferred within the multiple employer
plan by RPC to the Company.
37
Pursuant to the provisions of SFAS No. 87, "Employers' Accounting for Pensions,"
the Company recorded pre-tax minimum pension liability adjustments of $822,000
in 2003 and $29,000 in 2002. As there were no previously unrecognized prior
service costs as of December 31, 2003 and 2002, the full amount of the
adjustments, net of related deferred tax benefit, are reflected as a reduction
to stockholders' equity.
Amounts recognized in the consolidated balance sheets and reflected as pension
liabilities consist of:
December 31, 2003 2002
------------------------------------------------------------------------------------
(IN THOUSANDS)
Net accrued benefit cost $ 248 $ 261
Minimum pension liability adjustment 851 29
SERP employer contributions 136 68
SERP employee deferrals 998 268
------------------------------------------------------------------------------------
Net amount recognized $ 2,233 $ 626
------------------------------------------------------------------------------------
The components of net periodic benefit cost are summarized as follows:
Years Ended December 31, 2003 2002
- -------------------------------------------------------------------------------------------
(IN THOUSANDS)
- -------------------------------------------------------------------------------------------
Service cost for benefits earned
during the period $ - $ 72
Interest cost on projected
benefit obligation 22 27
Expected return on plan assets (9) (2)
- -------------------------------------------------------------------------------------------
Net periodic benefit cost $ 13 $ 97
===========================================================================================
The weighted average assumptions as of December 31 used to determine the
projected benefit obligation and net benefit cost were as follows:
December 31, 2003 2002
- -------------------------------------------------------------------------------------------
PROJECTED BENEFIT OBLIGATION:
Discount rate 6.250% 6.875%
Rate of compensation increase N/A N/A
NET BENEFIT COST:
Discount rate 6.875% 7.375%
Expected return on plan assets 8.000% 8.000%
Rate of compensation increase N/A N/A
===========================================================================================
The Company's expected return on assets assumption is derived from a detailed
periodic assessment by its management and investment adviser. It includes a
review of anticipated future long-term performance of individual asset classes
and consideration of the appropriate asset allocation strategy given the
anticipated requirements of the plan to determine the average rate of earnings
expected on the funds invested to provide for the pension plan benefits. While
the assessment gives appropriate consideration to recent fund performance and
historical returns, the rate of return assumption is derived primarily from a
long-term, prospective view. Based on its recent assessment, the Company has
concluded that its expected long-term return assumption of eight percent is
reasonable.
At December 31, 2003 and 2002, the Plan's assets were comprised of listed common
stocks and U.S. government and corporate securities. The plan's weighted average
asset allocation at December 31, 2003 and 2002 by asset category along with the
target allocation for 2004 are as follows:
38
TARGET Percentage of Percentage of
ALLOCATIONS Plan Assets as of Plan Assets as of
FOR 2004 December 31, December 31,
Asset Category 2003 2002
------------------------------------------------------------------------------------------------
Equity Securities 52.0% 53.2% 51.1%
Debt Securities - core fixed income 41.0% 41.4% 42.6%
Debt Securities - high yield 0% 0% 0%
Real Estate 0% 0% 0%
Other 7.0% 5.4% 6.3%
------------------------------------------------------------------------------------------------
Total 100.0% 100.0% 100.0%
================================================================================================
The Company's investment strategy for its pension plan is to maximize the
long-term rate of return on plan assets within an acceptable level of risk in
order to minimize the cost of providing pension benefits. The investment policy
establishes a target allocation for each asset class, which is rebalanced as
required. The Company utilizes a number of investment approaches, including
individual market securities, equity and fixed income funds in which the
underlying securities are marketable, and debt funds to achieve this target
allocation. The Company expects to contribute approximately $700,000 to the
pension plan in 2004.
401(K) PLAN - Marine Products participates in a defined contribution 401(k) plan
sponsored by RPC that is available to substantially all full-time employees with
more than six months of service. This plan allows employees to make tax-deferred
contributions of up to 25 percent of their annual compensation, not exceeding
the permissible deduction imposed by the Internal Revenue Code. The Company
matches 50 percent of each employee's contributions that do not exceed six
percent of the employee's compensation contributed to the plan. Employees vest
in the Company's contributions after three years of service. The charges to
expense for Marine Products' contributions to the 401(k) plan were $147,000 in
2003, $136,000 in 2002 and $61,000 in 2001.
STOCK INCENTIVE PLAN - Historically, certain RPC employees, including employees
of Marine Products, participated in the RPC, Inc. Employee Stock Incentive Plan
(the "Plan"). In conjunction with the spin-off, Marine Products adopted a 10
year Employee Stock Incentive Plan ("2001 Plan") under which 2,000,000 shares of
common stock had been reserved for issuance to Marine Products employees.
Following the spin-off, outstanding stock option grants under the Plan held by
Marine Products employees were replaced with stock option grants under the 2001
Plan. On January 27, 2004, the Marine Products Board recommended adopting a new
10 year Employee Stock Incentive Plan (the "2004 Plan") under which 1,500,000
shares of common stock have been reserved for issuance. The 2004 Plan is to be
voted upon at the Annual Meeting of Shareholders to be held on April 27, 2004.
This plan provides for the issuance of various forms of stock incentives,
including, among others, incentive and non-qualified stock options and
restricted stock. As of December 31, 2003, approximately 113,000 shares were
available for grants under the 2001 Plan.
STOCK OPTIONS - Stock options are granted at an exercise price equal to the fair
market value of the Company's common stock at the date of grant except for
grants of incentive stock options to owners of greater than 10 percent of the
Company's voting securities which must be made at 110 percent of the fair market
value of the Company's common stock. Options generally vest ratably over a
period of five years and expire in 10 years, except to owners of greater than
10 percent of the Company's voting securities, which expire in five years.
Transactions involving the Marine Products stock options were as follows:
39
Total Options Outstanding Exercisable Options
- ----------------------------------------------------------------------------------------------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
- ----------------------------------------------------------------------------------------------------
Outstanding December 31, 2000 - $ -
Granted 1,671,840 1.43
Exercised (15,750) 0.99
- ----------------------------------------------------------------------------------------------------
Outstanding December 31, 2001 1,656,090 $ 1.43 875,514 $ 1.13
Granted 583,500 4.01
Canceled (29,925) 2.60
Exercised (284,335) 1.28
- ----------------------------------------------------------------------------------------------------
Outstanding December 31, 2002 1,925,330 $ 2.21 865,748 $ 1.23
Granted 507,000 6.91
Canceled (2,700) 2.57
Exercised (384,629) 1.50
- ----------------------------------------------------------------------------------------------------
Outstanding December 31, 2003 2,045,001 $ 3.51 846,173 $ 1.75
- ----------------------------------------------------------------------------------------------------
As of December 31, 2003, the options outstanding and the exercise prices together with the weighted
average remaining contractual life are as follows:
Weighted
average
Weighted average remaining
Exercise Prices Number of Options exercise prices contractual life
-------------------------------------------------------------------------------------------
Total Exercisable Total Exercisable
----- ----------- ----- -----------
$ 0.53 80,993 80,993 $ 0.53 $ 0.53 0.4 years
$ 0.59 101,243 101,243 $ 0.59 $ 0.59 2.1 years
$ 0.99 81,000 81,000 $ 0.99 $ 0.99 3.1 years
$ 1.68 190,930 190,930 $ 1.68 $ 1.68 4.1 years
$ 0.91 259,435 179,456 $ 0.91 $ 0.91 5.1 years
$ 2.57 248,100 84,450 $ 2.57 $ 2.57 7.3 years
$ 4.01 576,300 98,101 $ 4.01 $ 4.01 8.1 years
$ 6.81 - 7.49 507,000 30,000 $ 6.91 $ 7.15 9.1 years
-------------------------------------------------------------------------------------------
2,045,001 846,173 $ 3.51 $ 1.75 6.7 years
===========================================================================================
RESTRICTED STOCK - Marine Products has granted employees two forms of restricted
stock; performance restricted and time lapse restricted. The performance
restricted shares are granted, but not earned and issued, until certain
five-year tiered performance criteria are met. The performance criteria are
predetermined market prices of Marine Products' common stock. On the date the
common stock appreciates to each level (determination date), 20 percent of
performance shares are earned. Once earned, the performance shares vest five
years from the determination date. Time lapse restricted shares vest 10 years
from the grant date. There were no restricted shares granted under these stock
programs in 2003, 2002 and 2001. There were 48,600 and 18,231 performance shares
earned and issued under the plans in 2002 and 2001. Compensation cost on
restricted shares is valued at the date of issuance and amortized over the
respective vesting period. As of December 31, 2003, there were 184,431 shares of
unvested restricted stock outstanding. During 2003, 2002 and 2001, no shares of
restricted stock vested.
NOTE 10: PURCHASE OF BUSINESS
Effective June 2001, Marine Products purchased certain operating and intangible
assets of the Robalo Marine segment of the U.S. Marine Division of Brunswick
Corporation ("Brunswick") for total consideration of $1,037,000. Robalo is a
manufacturer of sport fishing boats. The purchase was funded by cash and has
been accounted for using the purchase method of accounting. The purchase cost
has been allocated to the assets acquired based on estimated fair values as
follows:
(in thousands)
--------------
Inventory $ 112
Prepaid Assets 12
Equipment 313
Trade name 600
-----------
Total Cost $1,037
-----------
Results of operations from the Robalo acquisition have been included in the
accompanying statements of income from the acquisition date. Pro forma results
of operations have not been presented for the acquisition because the effects of
this acquisition were not material to the Company.
40
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES - The Company maintains
disclosure controls and procedures that are designed to ensure that information
required to be disclosed in its Exchange Act reports is recorded, processed,
summarized and reported within the time periods specified in the Commission's
rules and forms, and that such information is accumulated and communicated to
its management, including the Chief Executive Officer and Chief Financial
Officer, as appropriate, to allow timely decisions regarding required
disclosure.
As of the end of the period covered by this report, December 31, 2003 (the
"Evaluation Date"), the Company carried out an evaluation, under the supervision
and with the participation of its management, including the Chief Executive
Officer and Chief Financial Officer, of the effectiveness of the design and
operation of its disclosure controls and procedures. Based upon this evaluation,
the Chief Executive Officer and the Chief Financial Officer concluded that the
Company's disclosure controls and procedures were effective as of the Evaluation
Date.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING - There were no changes in
the Company's internal control over financial reporting that occurred during the
Company's most recent fiscal quarter that have materially affected, or are
reasonably likely to materially affect, the Company's internal control over
financial reporting.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information concerning directors and executive officers is included in the
Marine Products Proxy Statement for its 2004 Annual Meeting of Stockholders, in
the section titled "Election of Directors." This information is incorporated
herein by reference. Information about executive officers is contained on page
13 of this document.
AUDIT COMMITTEE AND AUDIT COMMITTEE FINANCIAL EXPERT
Information concerning the Audit Committee of the Company and the Audit
Committee Financial Expert(s) is included in the Marine Products Proxy Statement
for its 2004 Annual Meeting of Stockholders, in the section titled "Corporate
Governance and Board of Directors Compensation, Committees and Meetings." This
information is incorporated herein by reference.
CODE OF ETHICS
Marine Products has adopted a Code of Business Conduct that applies to all
employees. In addition, the Company has adopted a Supplemental Code of Business
Conduct and Ethics for directors, the Principal Executive Officer and Principal
Financial and Accounting Officer. Both of these documents are available on the
Company's website at WWW.MARINEPRODUCTSCORP.COM.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Information regarding compliance with Section 16(a) of the Exchange Act is
included under "Section 16(a) Beneficial Ownership Reporting Compliance" in the
Company's Proxy Statement for its 2004 Annual Meeting of Stockholders, which is
incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
Information concerning executive compensation is included in the Marine Products
Proxy Statement for its 2004 Annual Meeting of Stockholders, in the section
titled "Executive Compensation." This information is incorporated herein by
reference.
41
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information concerning security ownership is included in the Marine Products
Proxy Statement for its 2004 Annual Meeting of Stockholders, in the sections
titled, "Capital Stock" and "Election of Directors." This information is
incorporated herein by reference.
Information regarding Marine Products' equity compensation plans including plans
approved by security holders and plans not approved by security holders is
included in the section titled, "Executive Compensation" in the Marine Products
Proxy Statement for its 2004 Annual Meeting of Stockholders, which is
incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
Information concerning certain relationships and related party transactions is
included in the Marine Products Proxy Statement for its 2004 Annual Meeting of
Stockholders, in the sections titled, "Certain Relationships and Related Party
Transactions" and "Compensation Committee Interlocks and Insider Participation."
This information is incorporated herein by reference.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Information regarding principal accountant fees and services is included in the
section titled, "Independent Public Accountants" in the Marine Products Proxy
Statement for its 2004 Annual Meeting of Stockholders. This information is
incorporated herein by reference.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
CONSOLIDATED FINANCIAL STATEMENTS, FINANCIAL STATEMENT SCHEDULE AND EXHIBITS.
1. Consolidated financial statements listed in the accompanying Index to
Consolidated Financial Statements and Schedule are filed as part of
this report.
2. The financial statement schedule listed in the accompanying Index to
Consolidated Financial Statements and Schedule is filed as part of
this report.
3. Exhibits listed in the accompanying Index to Exhibits are filed as
part of this report. The following such exhibits are management
contracts or compensatory plans or arrangements:
10.1 Marine Products Corporation 2001 Employee Stock Incentive
Plan (incorporated herein by reference to Exhibit 10.1 to
the Form 10 filed on February 13, 2001)
10.6 Compensation Agreement between James A. Lane, Jr. and
Chaparral Boats, Inc. (incorporated herein by reference
to Exhibit 10.6 to the Form 10 filed on February 13,
2001).
10.7 Form of stock option grant agreement (incorporated
herein by reference to Exhibit 10.7 to the Form 10-K
filed on March 21, 2003).
10.8 Form of time lapse restricted stock grant agreement
(incorporated herein by reference to Exhibit 10.8 to the
Form 10-K filed on March 21,2003).
10.9 Form of performance restricted stock grant agreement
(incorporated herein by reference to Exhibit 10.9 to the
Form 10-K filed on March 21, 2003).
42
EXHIBITS (INCLUSIVE OF ITEM 3 ABOVE):
Exhibit
Number Description
- ------------- ---------------------------------------------------------------
3.1 Articles of Incorporation of Marine Products Corporation
(incorporated herein by reference to Exhibit 3.1 to the Form
10 filed on February 13, 2001).
3.2 Bylaws of Marine Products Corporation
4 Form of Common Stock Certificate of Marine Products
Corporation (incorporated herein by reference to Exhibit 4.1
to the Form 10 filed on February 13, 2001).
10.1 Marine Products Corporation 2001 Employee Stock Incentive
Plan (incorporated herein by reference to Exhibit 10.1 to the
Form 10 filed on February 13, 2001).
10.2 Agreement Regarding Distribution and Plan of Reorganization,
dated February 12, 2001, by and between RPC, Inc. and Marine
Products Corporation (incorporated herein by reference to
Exhibit 10.2 to the Form 10 filed on February 13, 2001).
10.3 Employee Benefits Agreement, dated February 12, 2001, by and
between RPC, Inc., Chaparral Boats, Inc. and Marine Products
Corporation (incorporated herein by reference to Exhibit 10.3
to the Form 10 filed on February 13, 2001).
10.4 Transition Support Services Agreement, dated February 12,
2001, by and between RPC, Inc. and Marine Products Corporation
(incorporated herein by reference to Exhibit 10.4 to the Form
10 filed on February 13, 2001).
10.5 Tax Sharing Agreement, dated February 12, 2001, by and between
RPC, Inc. and Marine Products Corporation (incorporated herein
by reference to Exhibit 10.5 to the Form 10 filed on February
13, 2001).
10.6 Compensation Agreement between James A. Lane, Jr. and
Chaparral Boats, Inc. (incorporated herein by reference to
Exhibit 10.6 to the Form 10 filed on February 13, 2001).
10.7 Form of stock option grant agreement (incorporated herein by
reference to Exhibit 10.7 to the Form 10-K filed on March 21,
2003).
10.8 Form of time lapse restricted stock grant agreement
(incorporated herein by reference to Exhibit 10.8 to the Form
10-K filed on March 21, 2003).
10.9 Form of performance restricted stock grant agreement
(incorporated herein by reference to Exhibit 10.9 to the Form
10-K filed on March 21, 2003).
21 Subsidiaries of Marine Products Corporation
23 Consent of Ernst & Young LLP
24 Powers of Attorney for Directors
31.1 Section 302 certification for Chief Executive Officer
31.2 Section 302 certification for Chief Financial Officer
32.1 Section 906 certification for Chief Executive Officer and
Chief Financial Officer
43
REPORTS ON FORM 8-K
The following reports on Form 8-K were filed by Marine Products for the quarter
ended December 31, 2003.
- -----------------------------------------------------------------------------------------------------------
Date of earliest event
Date filed reported Description of event
- -----------------------------------------------------------------------------------------------------------
October 10, 2003 October 10, 2003 Item 5 and Item 7: Registrant issued a press release
titled "Marine Products Corporation Reports Stock Buyback"
- -----------------------------------------------------------------------------------------------------------
October 29, 2003 October 29, 2003 Item 5 and Item 7: Registrant issued a press release
titled "Marine Products Corporation Reports 2003 Third
quarter Results"
- -----------------------------------------------------------------------------------------------------------
October 29, 2003 October 29, 2003 Item 5 and Item 7: Registrant issued a press release
titled "Marine Products Corporation Announces Third
quarter Cash Dividend"
- -----------------------------------------------------------------------------------------------------------
Any schedules or exhibits not shown above have been omitted because they are not
applicable.
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
Marine Products Corporation
By: /s/ RICHARD A. HUBBELL
--------------------------
Richard A. Hubbell
President and Chief Executive Officer
March 5, 2004
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated.
NAME TITLE DATE
---- ----- ----
/s/ RICHARD A. HUBBELL President and Chief Executive Officer March 5, 2004
- -------------------------- (Principal Executive Officer)
Richard A. Hubbell
/s/ BEN M. PALMER Chief Financial Officer
- -------------------------- (Principal Financial and Accounting Officer) March 5, 2004
Ben M. Palmer
The Directors of Marine Products (listed below) executed a power of attorney,
appointing Richard A. Hubbell their attorney-in-fact, empowering him to sign
this report on their behalf.
R. Randall Rollins, Director James B. Williams, Director
Wilton Looney, Director James A. Lane, Jr., Director
Gary W. Rollins, Director Linda H. Graham, Director
Henry B. Tippie, Director
/s/ RICHARD A. HUBBELL
- --------------------------------------
Richard A. Hubbell
Director and as Attorney-in-fact
March 5, 2004
44
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE (ITEM 15(a))
The following documents are filed as part of this report.
FINANCIAL STATEMENTS PAGE
Consolidated Balance Sheets as of December 31, 2003 and 2002 24
Consolidated Statements of Income for the three years ended December 31, 2003 25
Consolidated Statements of Stockholders' Equity for the three years ended December 31, 2003 26
Consolidated Statements of Cash Flows for the three years ended December 31, 2003 27
Notes to Consolidated Financial Statements 28-40
SCHEDULES
Schedule II - Valuation and Qualifying Accounts 45
Schedules not listed above have been omitted because they are not applicable or
the required information is included in the consolidated financial statements or
notes thereto.
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
- --------------------------------------------------------------------------------------------------------------
MARINE PRODUCTS CORPORATION AND SUBSIDIARIES (in thousands of dollars)
- --------------------------------------------------------------------------------------------------------------
For the years ended December 31, 2003, 2002 and 2001
- --------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------
Balance at Charged to Net Balance
Beginning Costs and (Write-Offs)/ at End of
Description of Period Expenses Recoveries Period
- --------------------------------------------------------------------------------------------------------------
Year ended December 31, 2003
Allowance for doubtful accounts $ 67 $ - $ - $ 67
- --------------------------------------------------------------------------------------------------------------
Year ended December 31, 2002
Allowance for doubtful accounts $ 67 $ - $ - $ 67
- --------------------------------------------------------------------------------------------------------------
Year ended December 31, 2001
Allowance for doubtful accounts $ 67 $ - $ - $ 67
- --------------------------------------------------------------------------------------------------------------
45
Report of Independent Auditors
The Board of Directors and Stockholders
Marine Products Corporation
We have audited the accompanying consolidated balance sheet of Marine Products
Corporation and Subsidiaries as of December 31, 2003 and 2002, and the related
consolidated statements of income, stockholders' equity and comprehensive income
and cash flows for the two years then ended. Our audit also included the
financial statement schedule for the two years ended December 31, 2003 and 2002,
listed in the Index at Item 15(a). These financial statements and schedule are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements and schedule based on our audit. The
consolidated financial statements and schedule of Marine Products Corporation
and Subsidiaries for the year ended December 31, 2001, were audited by other
auditors who have ceased operations and whose report dated February 28, 2002
expressed an unqualified opinion on those statements and schedule before the
restatement adjustments included in Notes 1 and 6.
We conducted our audit in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the 2003 and 2002 financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Marine
Products Corporation and Subsidiaries at December 31, 2003 and 2002, and the
consolidated results of their operations and their cash flows for the year then
ended in conformity with accounting principles generally accepted in the United
States. Also, in our opinion, the related financial statement schedule for the
two years ended December 31, 2003 and 2002, when considered in relation to the
basic financial statements taken as a whole, presents fairly in all material
respects the information set forth therein.
As described in Note 1 to the consolidated financial statements, effective
January 1, 2002, the Company changed its method of accounting for goodwill and
other intangible assets to conform with Statement of Financial Accounting
Standard No. 142, GOODWILL AND OTHER INTANGIBLE ASSETS.
As discussed above, the consolidated financial statements and schedule of Marine
Products Corporation and Subsidiaries for the year ended December 31, 2001 were
audited by other auditors who have ceased operations. As described in Note 1,
the consolidated financial statements of Marine Products Corporation and
Subsidiaries for the year ended December 31, 2001 have been revised to include
the transitional disclosures required by Statement of Financial Accounting
Standards No. 142, GOODWILL AND OTHER INTANGIBLE ASSETS, which was adopted by
the Company as of January 1, 2002. Our audit procedures with respect to the
disclosures in Note 1 with respect to 2001 included (a) agreeing the previously
reported net income to the previously issued financial statements, (b) agreeing
the adjustments to reported net income representing amortization expense
(including any related tax effects) recognized in 2001 related to goodwill that
is no longer being amortized as a result of initially applying Statement No. 142
to the Company's underlying records obtained from management, (c) agreeing all
2001 expense balances as disclosed for individual intangibles to the Company's
underlying accounting records obtained from management, and (d) testing the
mathematical accuracy of the reconciliation of pro forma net income to reported
net income and related earnings per share amounts.
As also discussed in Note 1, the consolidated financial statements of Marine
Products Corporation and Subsidiaries for the year ended December 31, 2001 have
been revised to include the disclosures required by Statement of Financial
Accounting Standards No. 148, ACCOUNTING FOR STOCK-BASED COMPENSATION-TRANSITION
AND DISCLOSURE, which was adopted by the Company as of December 31, 2002. Our
audit procedures with respect to the disclosures in Note 1 with respect to 2001
included (a) agreeing the previously reported net
46
income to the previously issued financial statements, (b) agreeing the
adjustments to reported net income representing compensation expense and pro
forma compensation expense (including any related tax effects) related to 2001
to the Company's underlying records obtained from management and (c) testing the
mathematical accuracy of the reconciliation of pro forma net income to reported
net income and related earnings per share amounts.
As also discussed in Note 1, the consolidated financial statements of Marine
Products Corporation and Subsidiaries for the year ended December 31, 2001 have
been revised to include the disclosures required by FASB Interpretation No. 45,
GUARANTOR'S ACCOUNTING AND DISCLOSURE REQUIREMENTS FOR GUARANTEES, INCLUDING
DIRECT GUARANTEES OF INDEBTEDNESS OF OTHERS, which was adopted by the Company as
of December 31, 2002. Our audit procedures with respect to the disclosures in
Note 1 with respect to 2001 included (a) agreeing the previously reported
warranty accrual balances to the previously issued financial statements and
agreeing the adjustments to the warranty accrual balance to the Company's
underlying records obtained from management and (c) testing the mathematical
accuracy of the reconciliation of the warranty accrual.
The disclosures in Note 6 of the consolidated financial statements of Marine
Products Corporation and Subsidiaries for the year ended December 31, 2001 have
been revised to disclose additional detail with respect to the components of the
provision for income taxes. Our audit procedures with respect to the disclosures
in Note 6 with respect to 2001 included agreeing the components of the provision
for income taxes to the Company's underlying records obtained from management.
In our opinion, the disclosures for 2001 in Notes 1 and 6 with respect to the
matters referred to in the preceding three paragraphs are appropriate. However,
we were not engaged to audit, review, or apply any procedures to the 2001
consolidated financial statements of the Company other than with respect to such
disclosures and, accordingly, we do not express an opinion or any other form of
assurance on the 2001 consolidated financial statements taken as a whole.
Atlanta, Georgia Ernst & Young LLP
February 27, 2004
47
THE FOLLOWING REPORT OF ARTHUR ANDERSEN LLP ("ANDERSEN") IS A COPY OF THE REPORT
PREVIOUSLY ISSUED BY ANDERSEN ON FEBRUARY 28, 2002. THE REPORT OF ANDERSEN IS
INCLUDED IN THIS ANNUAL REPORT ON FORM 10-K PURSUANT TO RULE 2-02(e) OF
REGULATION S-X. THE COMPANY HAS NOT BEEN ABLE TO OBTAIN A REISSUED REPORT FROM
ANDERSEN. ANDERSEN HAS NOT CONSENTED TO THE INCLUSION OF ITS REPORT IN THIS
ANNUAL REPORT ON FORM 10-K. BECAUSE ANDERSEN HAS NOT CONSENTED TO THE INCLUSION
OF ITS REPORT IN THIS ANNUAL REPORT, IT MAY BE DIFFICULT TO SEEK REMEDIES
AGAINST ANDERSEN, AND THE ABILITY TO SEEK RELIEF AGAINST ANDERSEN MAY BE
IMPAIRED.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Marine Products Corporation:
We have audited the accompanying consolidated balance sheets of Marine
Products Corporation (a Delaware corporation) and subsidiaries as of December
31, 2001 and 2000, and the related consolidated statements of income,
stockholders' equity, and cash flows for each of the three years in the period
ended December 31, 2001. These financial statements and the schedule referred to
below are the responsibility of the Company's management. Our responsibility is
to express an opinion on these financial statements and schedule based on our
audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free from material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Marine Products Corporation
and Subsidiaries as of December 31, 2001 and 2000, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2001, in conformity with accounting principles generally accepted
in the United States.
Our audit was made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in Item 14 is
presented for the purposes of complying with the Securities and Exchange
Commission's rules and is not part of the basic financial statements. This
schedule has been subjected to the auditing procedures applied in our audit of
the basic financial statements and, in our opinion, fairly states in all
material respects, the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
Atlanta, Georgia
Arthur Andersen LLP
February 28, 2002
48
UNAUDITED QUARTERLY DATA
- --------------------------------------------------------------------------------
First Second Third Fourth
- --------------------------------------------------------------------------------
(IN THOUSANDS EXCEPT PER SHARE DATA)
Restated for the three-for-two stock split effective March 10, 2004 for shares
held on February 10, 2004
2003
Net sales $50,107 $51,951 $44,903 $47,019
Gross profit 12,092 13,551 11,503 13,171
Net income 4,194 4,961 4,459 4,458
Earnings per share - basic (a) 0.17 0.19 0.17 0.18
Earnings per share - diluted (a) 0.15 0.19 0.17 0.17
2002
Net sales $38,324 $47,193 $41,551 $35,614
Gross profit 8,139 10,442 9,698 9,121
Net income 2,487 3,611 3,340 2,951
Earnings per share - basic (a) 0.10 0.14 0.13 0.11
Earnings per share - diluted (a) 0.09 0.13 0.13 0.11
(a) The sum of the earnings per share for the four quarters differs from annual
earnings per share due to the required method of computing the weighted average
shares in interim periods.
49