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**UNITED STATESSECURITIES AND EXCHANGE COMMISSION********Washington, D.C. 20549**
 
**FORM 10-K/A**

**(Mark One)**

**x**

** ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES  EXCHANGE ACT OF 1934**

**For  the fiscal year ended December 31, 2004**

**OR**

**o**

**TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE  ACT OF 1934**

**For  the transition period from****                             to****                             **

**Commission file Number:****000-29464**

 
**ROCK OF AGES CORPORATION**(Exact name of registrant as specified in its charter) 

 

 

 

**Delaware**  (State or other jurisdiction of  incorporation or organization)

 

**030153200**(I.R.S. Employer  Identification No.)

**772  GRANITEVILLE ROAD  GRANITEVILLE, VERMONT 05654**

(Address of principal executive offices and zip code)

 

**(802)  476-3121**(Registrant's telephone number,  including area code)

Securities registeredpursuant to Section 12(b) of the Act: None

Securities registeredpursuant to Section 12(g) of the Act:

 **CLASS A COMMON STOCK, PAR VALUE $0.01**(Title of Class)

Indicate by check mark whether the registrant (1) has filed all reportsrequired to be filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject to suchfiling requirements for the past 90 days. Yes x No o

Indicate by check mark ifdisclosure of delinquent filers pursuant to Item 405 of Regulation S-K is notcontained herein, and will not be contained, to the best of registrant'sknowledge, in definitive proxy or information statements incorporated byreference in Part III of this Form 10-K or any amendment to this Form10-K. o

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

As of June 30, 2004, theaggregate market value of the registrant's voting stock (including Class BCommon Stock, par value $.01 per share ("Class B Common Stock"),which is convertible on a share-for-share basis into Class A Common Stock, parvalue $.01 per share ("Class A Common Stock" and, together with ClassB Common Stock, "Common Stock")), held by non-affiliates of theregistrant was $41,635,764. As of March 28, 2005, there were outstanding 4,698,800shares of Class A Common Stock and 2,700,596 shares of Class B Common Stock.

**TABLE OF CONTENTSPART I**

 

 

 

**PAGE**
ITEM 1.

BUSINESS 

2

ITEM 2.

PROPERTIES

8

ITEM 3.

LEGAL PROCEEDINGS

10

ITEM 4.

SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

10

 

 

 

 

**PART  II**
 

 

 

 

ITEM 5.

MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED  STOCKHOLDER MATTERS AND ISSUER REPURCHASES OF EQUITY SECURITIES

11

ITEM 6.

SELECTED FINANCIAL DATA

12

ITEM 7.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL  CONDITION AND RESULTS OF OPERATIONS 

13

ITEM 7A.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT  MARKET RISK

30
ITEM 8.

FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA

30

ITEM 9.

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON  ACCOUNTING AND FINANCIAL DISCLOSURE 

30

ITEM 9A.

CONTROLS AND PROCEDURES

30

ITEM 9B.

OTHER INFORMATION

31

 

 

 

 

**PART  III**
 

 

 

 

ITEM 10.

DIRECTORS AND EXECUTIVE OFFICERS

32

ITEM 11.

EXECUTIVE COMPENSATION

35

ITEM 12.

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND  MANAGEMENT AND RELATED STOCKHOLDER MATTERS

41

ITEM 13.

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

43

ITEM 14.

PRINCIPAL ACCOUNTANT FEES AND SERVICES

44

 

 

 

 

**PART  IV**
 

 

 

 

ITEM 15.

EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS  ON FORM 8-K

45

 

SIGNATURES

46

 

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND  FINANCIAL STATEMENT SCHEDULE

47

 2

 

**SPECIALNOTE REGARDING FORWARD-LOOKING STATEMENTS**

*This Annual Report on Form 10-K, including"Management's Discussion and Analysis of Financial Condition and Resultsof Operations" in Item 7, contains forward-looking statements that involverisks and uncertainties, as well as assumptions that, if they never materializeor prove incorrect, could cause the results of Rock of Ages Corporation("Rock of Ages" or the "Company") to differ materially fromthose contained in such statements. All statements other than statements ofhistorical fact could be deemed forward-looking statements, and may includeprojections of revenue, gross profit, expenses, earnings or losses fromoperations or other financial items; any statements of the plans, strategiesand objectives of management for future operations; any statements regardingfuture economic conditions or performance; any statements of expectation orbelief; and any statements of assumptions underlying any of the foregoing. Therisks, uncertainties and assumptions may include the challenge of continuing tobuild and grow Rock of Ages' retail distribution systems through referralrelationships, retail acquisitions, adding new independent retailers and newstore openings; uncertainties involving quarry yields and demand for Rock ofAges' dimension stone; and other risks and uncertainties described herein,including, but not limited to the items discussed in "Risk Factors That MayAffect Future Results" in Item 7 of this report, and that are otherwisedescribed from time to time in Rock of Ages' reports filed with the Securitiesand Exchange Commission reports after the date of filing of this report.*

* We assume no obligation to update theseforward-looking statements to reflect actual results or changes in factors orassumptions affecting such forward-looking statements.*

 1

 

**EXPLANATORY NOTE:**This amendment to Form10-K has been filed by the registrant to amend the Annual Report on Form 10-Kfiled by the registrant on March 30, 2005, solely for the purpose of correcting certaininformationin Part III, Item 11, footnotes (1), (2) and (3) on Page 35.

**PART I**

**ITEM 1.**
**BUSINESS**

 
**GENERAL**
 

Rock of Ages was founded in 1885 and is an  integrated granite quarrier, manufacturer and retailer whose principal  product is granite memorials used primarily in cemeteries. We believe we are  the largest quarrier, manufacturer and retailer of finished granite memorials  and granite blocks for memorial use in North America, based on revenues. We  own and operate 11 active quarry properties and 6 manufacturing and sawing  facilities in North America, principally in Vermont and the Province of  Quebec. We market and distribute our memorials on a retail basis through  approximately 89 Company-owned retail sales outlets in the states indicated  in Item 2 below. We also sell memorials wholesale to approximately 80  independent authorized Rock of Ages retailers in the United States as well as  approximately 90 retailers in Canada. We market and sell our memorials at  four distinctive levels of craftsmanship at various price points: *Classic, Deluxe, Select* and *Signature*. Our memorials are offered in  granites of various colors and are covered by a full perpetual warranty or a  limited perpetual warranty, depending on the particular granite. We believe  the *Rock of Ages* trademark is  one of the oldest and best-known brand names in the granite memorialization  industry, and we actively promote our brand name and place a seal bearing the  brand name on each memorial. 

 

*Rock of Ages, Signature, Sealmark,  American Black, Barre Gray, Bethel White, Salisbury Pink, Gardenia White,  Rockwell White,**Laurentian Pink*and *Galactic Blue*are trade names or  trademarks of the Company. We rely on both registered and common law  trademarks in the United States and in other countries to protect the  goodwill associated with these brands.

 

As part of our growth strategy to build and expand  our branded memorial retail distribution system and profitable quarry  operations, and to increase the profitability of our manufacturing  operations, we sold 2 quarries and 2 non-core manufacturing facilities in  2001, and one non-core manufacturing facility in 2002. In December 2003, we  sold all of our cemetery properties and assets located in Kentucky to Saber  Management, LLC, an Indiana-based operator of cemeteries and funeral homes,  and exited the cemetery business. In connection with that sale, we entered  into an agreement with Saber whereby we have retained the right to sell and  install upright granite memorials in certain sections of most of the  cemeteries sold, as well as in certain other cemeteries owned by Saber. In  November 2004, we sold the Autumn Rose quarry located in Mill Creek, Oklahoma  to AR Quarry Acquisition, LLC, for $750,000.

 

Also as part of our growth strategy, we have engaged  in various strategic acquisitions. From 1997 to 2000, we acquired 26 retail  monument companies, expanding our retail presence to 15 states. During the second  quarter of 2002, the Company acquired a 1/3-equity interest in VIKA Ltd., a  Ukrainian closed joint stock company that owns rights to quarry stone known  as "Galactic Blue" on certain property located in Zhytomir,  Ukraine. In connection with the share purchase, we acquired exclusive rights  to sell the output of the Galactic Blue quarry. In November 2004, we acquired  Crone Monument, a memorial retailer, with 2 locations in the Memphis, Tennessee  area for a purchase price of $500,000. In February 2005, we acquired McColly  Memorials, a memorial retailer, with 4 locations in the Pittsburgh,  Pennsylvania area for a purchase price of $625,000. Finally, in February 2005  we acquired the land and equipment comprising the Rockwell White quarry in  Rockwell, North Carolina for a purchase price of $3.5 million. 

 

During 2004, we had operations in three business  segments: Quarrying, Manufacturing and Retailing. As noted above, in December  2003 we sold substantially all of the assets comprising our cemetery  operations and exited the cemetery business. Accordingly, we did not have  operations in the cemetery segment in 2004. Included within the business  segments are operations that are unincorporated divisions of Rock of Ages and  others that are separately incorporated subsidiaries. Financial information  by business segment and geographic area is incorporated herein by reference  to note 14 to our Consolidated Financial Statements included in this report.  In addition, information regarding the revenues of each business segment is incorporated  herein by reference to Item 7, "Management's Discussion and Analysis of  Financial Condition and Results of Operations." Risks attendant to  foreign operations are also incorporated herein by reference to  "Management's Discussion and Analysis of Financial Condition and Results  of Operations-Risk Factors that May Affect Future Results" in Item 7.  Additional information regarding each business segment and Rock of Ages in  general is set forth below. 

 2

 

 

**GROWTH STRATEGY**

 

We seek to expand the scope and profitability of our  operations through a growth strategy focusing on forward vertical integration  into retailing, moving Rock of Ages closer to the ultimate customer, and  selected acquisitions of quarries or acquiring distribution rights to  selected types of dimension stone. The principal elements of this growth  strategy include the following:

 
- Strategic Alliances with Funeral Homes and       Cemeteries. We have formed and will continue to pursue strategic       alliances with funeral home and cemetery owners to sell granite       memorials in cooperation with them, in order to increase both pre-need       and at-need sales of granite memorials.        
- Selective Expansion of Company-Owned Retail       Network. We expect to continue to expand our Company-owned retail network       by selectively acquiring independent granite memorial retailers and by       opening new retail stores in selected markets in North America. By       expanding our Company-owned retail network, we believe we can capture       the higher gross margins (relative to quarrying and manufacturing gross       margins) that have historically existed at the retail level.         
- Adding Independent Authorized Dealers. We will       continue to expand where appropriate our base of independent authorized       Rock of Ages retailers that are current or potential customers to       further our efforts to build an integrated retail network consisting of       Company-owned and independent authorized Rock of Ages retail outlets       selling the Rock of Ages' brand.        
- Brand Enhancement. We believe the Rock of Ages       brand is one of the best-known brand names in the memorial industry. As       a part of building an integrated network of Company-owned and       independent retailers, we will continue to promote the Rock of Ages       brand sold at our Company-owned retail outlets and independent authorized       Rock of Ages retailers.        
- Acquisitions of Quarries and Distribution       Rights. While we own or control many of the highest quality granite       quarries in North America, we will continue to explore the possibility       of acquiring selected granite quarriers in North America and       internationally to assure we will continue to have the colors and grades       of granites sought by retail purchasers of granite memorials in North       America, as well as granites for other uses. We will also continue to       explore the acquisition of distribution rights to certain colors and       grades of granites.        
- Other Product Line Enhancements. We intend to       continue to expand and enhance our memorial product lines in color,       design and style. Our objective is to provide a full range of memorials       available at various price ranges. We also expect to expand our product       line beyond granite, marble and bronze memorials to other       memorialization products and services.

 

In January 2004, we decided to combine our retail  division and our manufacturing and wholesale division to form the Memorials  Division. The Memorials Division has a unified focus on expanding our retail  distribution system of owned and independently operated retailers. We have  divided the country into regions with one group of regional vice presidents  responsible for our owned stores, and a second group of officers and managers  in various regions responsible for our authorized retailers, identifying  retail acquisition candidates, obtaining new authorized retailers, and  expanding our wholesale strategic alliances with funeral homes and cemeteries  We believe this consolidated regional focus will enhance our success in  expanding our retail distribution system.

 

**PRODUCTS**

 

Our principal products may be classified into three  general product lines: granite quarry products (with limited value added  manufacturing performed), manufactured granite products and non-granite  memorials. The principal raw material for both granite product lines is  natural granite as it comes from the ground, with the primary difference  between the product lines being the extent of the processing or manufacturing  of the granite. Non-granite memorials consist primarily of bronze markers.  For each of the last three years, from 2004 to 2002, revenues derived from  the sale of granite quarry products have accounted for 34%, 32% and 27%,  respectively, of consolidated revenues and revenues derived from the sale of  manufactured granite products at wholesale and retail have accounted for 63%,  63% and 69%, respectively, of consolidated revenues. In each of the last  three years, revenues attributable to the sale of non-granite memorials  accounted for less than 6% of consolidated revenues. 

 3

 
**Granite  Quarry Products**
 

Our principal quarry product is granite blocks, the  raw material of the dimension granite industry. These blocks are extracted  from quarries in various sizes through a drilling, blasting and wire sawing  process in the quarry. The range of block sizes is large, but most  manufacturers of granite memorials and other products generally require  minimum dimensions of height, width and length to maximize the efficiency of  their block sawing equipment in meeting the required dimensions of the  finished product. Granite blocks are normally sold in heights from 2'6"  to 5', widths of 3' to 5', and lengths from 7' to 10'. These blocks typically  weigh between 20 and 30 tons. Our quarry revenues are also derived, to a  lesser degree, from the sale of blocks purchased from other quarries for  resale through our distribution system, and from the sale of rough or sawn slabs.

 

Granite differs from deposit to deposit by color,  grade and/or quality. We quarry and sell blocks of (i)*Barre Gray*granite from our Barre,  Vermont quarry and gray granite from our Stanstead, Quebec quarry, (ii) black  granite from our *American Black*  quarry in Pennsylvania, (iii) pink granites from our *Laurentian Pink* quarry in Quebec and our  *Salisbury Pink*quarry in North  Carolina, (iv) white granites from our *Bethel  White* quarry in Vermont and our *Gardenia  White* and *Rockwell White*quarries  in North Carolina and (v) grayish pink granites from our *Kershaw* and *Coral Gray*quarries in South Carolina. We also sell black  granite with prominent blue feldspar from the Galactic Blue quarry in the  Ukraine.

 

We sell granite blocks for memorial, building and  other uses. While each of our quarries sell granite for memorial use and for  building use, the output of the *Bethel  White* quarry, the *Gardenia  White* quarry, the *Rockwell  White*quarry and the *Salisbury  Pink*quarry are primarily sold and used for building granite use  (such as building cladding, tiles, pavers, steps, countertops and other  building products) outside North America and the output of the other quarries  is primarily used for memorial use in North America.

 

A quarry sales force both in and outside North  America sells our granite blocks. The quarry sales force markets and  advertises our granite blocks in various trade publications and by attending  various trade shows worldwide. Outside of North America, our quarry sales  force generally sells directly to the customer or to independent  distributors who buy blocks and resell them. This includes Rock of Ages Asia,  a 50% Company-owned corporation based in Osaka, Japan.

 

Other quarry products include waste pieces not of a shape  or size suitable for manufacturing, which are sold for erosion control for  embankments, bridges or piers, and for other uses. In various quarries, we  have arrangements with crusher operators who operate on or near our quarries  and sell crushed stone. The revenues and profits of these operations are not  material. We have no marketing and advertising programs for these other  quarry products.

 
**Manufactured  Products**
 

The principal manufactured product of Rock of Ages  is granite memorials, which are sold to retailers of granite memorials,  including Company-owned outlets, and substantially all of which are placed in  cemeteries in remembrance of the life of a person or persons. Our memorials  encompass a wide range of granites, including granite blocks purchased from  others, as well as a wide array of sizes, styles and shapes ranging from  small, inexpensive markers set flush to the ground, to very elaborate and  expensive personal mausoleums of larger sizes available at various price  ranges. The broad classifications of granite memorials used by the industry  are generally markers, hickeys, slants, standard uprights, estate uprights,  pre-assembled mausoleums and conventional mausoleums. We also sell public and  civic memorials not placed in cemeteries both on a wholesale basis and  directly to the customer. From time to time, memorial retailers or others  order granite products such as benches, steps and other products that may or  may not be for cemetery use. These are classified as memorial sales. 

 

Rock of Ages is widely recognized for the  personalized granite memorials it produces and the very large memorials it  can produce. We have made memorials as large as thirty-five feet in length  from one block of granite, including a full size granite replica of a Mercedes  Benz automobile.

 

Our granite memorials are sold to retailers by our  memorial sales force that regularly speaks with customers by phone and makes  personal visits to customers. We provide various point of sale materials to  both our owned and independent authorized Rock of Ages retailers, and we also  advertise in various trade publications.

 

Rock of Ages also manufactures certain precision  granite products, which are made along with memorials primarily at our Barre,  Vermont plant. These products include surface plates, machine bases, bases  for coordinate measuring devices, press rolls and other products manufactured  to exacting dimensions. These products are sold to the manufacturers of  precision measuring devices or end users. A precision products sales force  that phones or visits customers sells precision products. We also advertise  our precision products in various trade publications and provide printed  sales materials to prospective customers.

 4

 

**Retail Products**

 

Our retail stores market and sell granite, bronze  and marble memorials primarily to consumers. We currently own and operate  approximately 89 retail outlets in 18 states. The granite memorials sold at  retail include a wide variety of sizes, styles and shapes. We source  memorials from our own plants and a number of additional manufacturers in  North America and elsewhere in the world. Our retail operations utilize a  retail sales force that markets and sells memorials through relationships  with funeral homes and cemeteries and direct meetings with customers in their  homes and at retail sales offices. We advertise and promote retail sales  through direct mail material, yellow page listings, placing brochures at  funeral homes and cemeteries, and newspaper advertising. Our retail sales outlets  have been positioned to sell branded and unbranded memorials at all price  points and qualities based on differences in granite, size, design and level  of workmanship. In March 2005, we simplified and expanded the price points  within our branded memorial lines with the objective of selling only branded  memorials at our owned retail stores by June 30, 2005.

 
**MANUFACTURING  AND RAW MATERIALS**
 

Rock of Ages quarries and manufactures granite in  the United States and Canada at the locations indicated in Item 2  "Properties." We also outsource the manufacturing of certain  memorial products pursuant to supply agreements with other  manufacturers.  There were no plants acquired or material additions to  plants in 2004. We believe our manufacturing and quarrying capacity, together  with our manufacturing outsourcing arrangements, are generally sufficient to  meet anticipated production requirements for the foreseeable future.

 

The most significant raw material we use in our  manufacturing operations is granite blocks primarily from our quarries. We  believe we have an adequate supply from our quarries to supply our  manufacturing operations. We also purchase certain colors of granite,  primarily red and black, from other quarriers. We believe there is an  adequate supply of memorial granite available from our quarries and quarries  owned by others for the foreseeable future.

 

Significant supplies used in our manufacturing  operations include industrial diamond segments for saw blades and wires,  drill steel, drill bits and abrasives. There are a number of sources for  these supplies at competitive prices.

 

We had manufacturing backlogs of $10 million as of  December 31, 2004 and $8.7 million as of December 31, 2003. These backlogs  occurred in the normal course of business. We do not have a material backlog  in our quarrying operations. We had retail backlogs of $8.6 million as of  December 31, 2004 and $8.9 million as of December 31, 2003. Substantially all  of the backlog orders as of December 31, 2004, are expected to be filled  during the 2005 fiscal year.

 

We do not normally maintain a significant inventory  of finished manufactured products in anticipation of future orders in our  manufacturing operations. Our retail outlets do maintain an inventory of  memorials for display and delivery purposes. Approximately 75% of our  manufactured product orders and retail orders are delivered within two to  twelve weeks, as is customary in the granite memorial industry. The delivery  time depends on the size and complexity of the memorial. We do accumulate  inventory of granite blocks from September through December in preparation  for the winter months when our northern quarries are normally closed from  mid-December to mid-March.

 

Because our Barre quarries are closed from mid-December  through mid-March, in December each year we provide special 90-day payment  terms at these quarries for all blocks purchased in the month of December.  Customers' manufacturing plants generally remain open during most of this  period, and most customers prefer to assure they own blocks of a size and  quality selected by them prior to the quarry closure. All blocks purchased  from our Barre quarries in December on deferred payment terms are invoiced on  or about December 31 and removed from our inventory with title passing to the  buyer.

 

Payment terms are one-third of the invoice amount on  January 15, one-third on February 15, and one-third on March 15. This program  provides essentially the normal 30-day payment terms during the months when  the Barre quarries are closed, notwithstanding the customer's purchase of a  3-month supply in December. Customers need not use these terms and may buy  from inventory during the closure period on a first come first served basis  with normal 30-day terms.

 

**RESEARCH AND DEVELOPMENT**

 

We do not have a research and development department  for any of our products. We regularly conduct market research, as well as  research on new product designs and on equipment to improve the Company's  technology. These activities are not separately accounted for as research,  and we had no expenditures classified for financial reporting purposes as  research in 2002, 2003 or 2004.

 5

 

**COMPETITION**

 

The dimension stone industry is highly competitive.  We compete with other dimension stone quarriers, including quarriers of  granite, marble, limestone, travertine and other natural stones. We also  compete with manufacturers of so-called "engineered stone" as well  as manufacturers of other building materials like concrete, aluminum, glass,  wood and other materials. The competition with providers of these materials  is based on price, availability of supply, end-user preference for certain  colors, patterns or textures, and other factors.

 

The granite memorial industry is also highly  competitive. We compete with other granite quarriers and manufacturers in the  sale of granite blocks for memorial use, and finished memorials, on the basis  of price, color, quality, geographic proximity, service, design,  availability, production capability, availability of supply and delivery  options. All of our colors of granite are subject to competition from  memorial grade granite blocks of similar color supplied by quarriers located  throughout the world. There are approximately 140 manufacturers of granite  memorials in North America. There are also many manufacturers of granite  memorials in India, South Africa, China and Portugal that sell finished  memorials in North America.

 

Our quarrying and manufacturing competitors include  both domestic and international companies, some of which may have greater  financial, technical, manufacturing, marketing and other resources than we  have. Foreign competitors may have access to lower cost labor and extensive  commercial deposits of memorial grade granite, and may be subject to less  restrictive regulatory requirements. For example, companies in South Africa,  India, China and Portugal manufacture and export finished granite memorials  into North America, which compete with our products.

 

The competition for retail sales of granite  memorials faced by our retail outlets is also intense and is based on price,  quality, service, design availability, store location and breadth of product  line. Competitors include funeral home and cemetery owners, including  consolidators, which have greater financial resources than we have, as well  as approximately 3,000 independent retailers of granite memorials located  outside of cemeteries and funeral homes.

 

**PATENTS, TRADEMARKS AND LICENSES**

 

We hold a number of domestic and foreign patents,  trademarks and copyrights, including the original registered trademark  "Rock of Ages," which we first registered in 1913. We believe the  loss of a single patent, trademark or copyright, other than the "Rock of  Ages" trademark, would not have a material adverse effect on our  business, financial condition or results of operations. See "Risk  Factors That May Affect Future Results." 

 

**EMPLOYEES**

 

We had approximately 715 employees as of December  31, 2004.

 

The collective bargaining agreements with the Granite  Cutters Association and the United Steelworkers of America, respectively,  which together represent approximately 169 employees in our Vermont  manufacturing and quarrying operations, expire on April 28, 2006. 

 

We believe our relations with our employees are  generally good, and recognize our employees are our most important asset.

 

**SEASONALITY**

 

Historically, our operations have experienced  certain seasonal patterns. Generally, our net sales are highest in the second  or third quarter and lowest in the first quarter of each year due primarily  to weather. See Item 7 "Management's Discussion and Analysis of  Financial Conditions and Results of Operations - Seasonality."

6

  

 

**REGULATION AND ENVIRONMENTAL  COMPLIANCE**

 

Pursuant to federal, state and foreign statutes and  regulations, our quarry and manufacturing operations are subject to  substantial regulation by federal, state and foreign governmental agencies  and other authorities, including OSHA, the Mine Safety and Health  Administration and similar state and Canadian authorities. Our operations are  also subject to extensive laws and regulations administered by the United  Stated Environmental Protection Agency and similar state and Canadian  authorities for the protection of the environment, including those relating  to air and water quality, noise levels, and solid and hazardous waste handling and  disposal. These laws and regulations may require us to fund remedial action  or to pay damages regardless of fault. Environmental laws and regulations may  also impose liability with respect to divested or terminated operations even  if the operations were divested or terminated many years ago. In addition,  current and future environmental or occupational health and safety laws,  regulations or regulatory interpretations may require significant  expenditures for compliance which could require us to modify our operations.  We cannot predict the effect of such laws, regulations or regulatory  interpretations on our business, financial condition or results of  operations. We expect to be able to continue to comply, in all material  respects, with existing laws and regulations.

 

**AVAILABLE INFORMATION**

 

We maintain a website with the address  www.rockofages.com. We are not including the information contained on our  website as a part of, or incorporating it by reference into, this Annual  Report on Form 10-K. We make available free of charge through our website our  Annual Report on Form 10-K, Quarterly Reports on Form 10-Q and Current  Reports on Form 8-K (in each case without exhibits), and amendments to these  reports (without exhibits) filed as soon as reasonably practicable after such  reports are electronically filed with the Securities and Exchange Commission.

 7

 

**ITEM 2.**

**PROPERTIES**

 

Rock of Ages owns the following quarry and  manufacturing properties: 

 

**PROPERTY**
**FUNCTION**
 

 

**VERMONT**

** **

Barre

 

     Quarry Properties

 

          E.  L. Smith Quarry

Quarrying of dimensional Barre Gray granite blocks

          Adam-Pirie  Quarry

Quarrying of dimensional Barre Gray granite blocks

     Manufacturing  Properties

 

          Rock  of Ages Manufacturing Plant

Manufacturing of memorials and precision products

          Press  Roll Production Plant

Manufacturing of granite press rolls

          Rock  of Ages Saw Plant #1

Slabbing of granite blocks

Bethel

 

     Quarry Properties

 

          Bethel  Quarry

Quarrying of dimensional Bethel White granite blocks

 

 

**CANADA**

** **

Stanstead, Quebec 

 

     Quarry Properties 

 

          Stanstead  Quarry 

Quarrying of dimensional Stanstead Gray granite  blocks 

Guenette, Quebec 

 

     Quarry Properties 

 

          Laurentian  Quarry 

Quarrying of dimensional Laurentian Rose granite  blocks 

Beebe Plain, Quebec 

 

     Manufacturing  Properties 

 

          Rock  of Ages Manufacturing Plant 

Manufacturing of memorials

          Adru  Manufacturing Plant 

Manufacturing of memorials 

 

 

**PENNSYLVANIA**

** **

St. Peters 

 

     Quarry Properties 

 

          American  Black Quarry

Quarrying of dimensional American Black granite  blocks

     Manufacturing  Properties 

 

          Saw  Plant

Slabbing of granite blocks

 

 

**NORTH CAROLINA**

** **

Salisbury

 

     Quarry Properties

 

          Salisbury  Pink Quarry

Quarrying of dimensional Salisbury Pink granite  blocks

Rockwell

 

     Quarry Properties

 

          Gardenia  White Quarry

Quarrying of dimensional Gardenia White granite  blocks

          Rockwell White Quarry

Quarrying of dimensional Rockwell White granite  blocks

 

 

**SOUTH CAROLINA**

** **

Kershaw County

 

     Quarry Properties

 

          Kershaw  Quarry

Quarrying of dimensional Kershaw granite blocks

Lancaster County

 

     Quarry Properties

 

         Coral  Gray Quarry

Quarrying of dimensional Coral Gray granite blocks

 Asnoted in Item 1, the Company sold its Autumn Rose quarry located in Oklahoma in November 2004.

 8

In addition, Rock of Ages owns or operates 89 retail  sales outlets and 4 associated sand blasting facilities in the states of  Georgia, Iowa, Illinois, Indiana, Minnesota, Connecticut, Massachusetts,  Rhode Island, Nebraska, New Jersey, Pennsylvania, Ohio, South Dakota,  Kentucky, Tennessee, Vermont, West Virginia and Wisconsin. In certain cases,  we lease, under customary lease arrangements, the land or other real estate  associated with these outlets and facilities. We believe these facilities are  suitable and adequate for our present and anticipated near-term needs. 

 
 

The following table sets forth certain information  relating to our quarry properties. Each of the quarries listed below: (i) is  an open-pit quarry; (ii) contains granite suitable for extraction as  dimension granite for memorial or other use; (iii) is serviced by electricity  provided by local utility companies (other than the Bethel quarry which is  serviced by internal generators); and (iv) has adequate and modern extraction  and other equipment. We presently have no exploration plans. We own each of  the quarries listed below (other than the Kershaw quarry, which is leased  with 36 years remaining on the lease). In the Rockwell quarry, we own part of  the land comprising the quarry and we also lease an additional 14 acres on  which we conduct quarry operations with 11 years remaining on the lease. As  described in Item 1 of this report, we also own a 1/3 interest in VIKA, Ltd.,  which owns the Galactic Blue quarry in Zhytomir, Ukraine. However, while we  consult from time to time on the development of the quarry, we do not  directly or indirectly operate the quarry. The Galactic Blue quarry is  currently under development and currently produces granite in small  commercial quantities. We do not expect the quarry to achieve significant  commercial production quantities in 2005. Accordingly, we do not consider  this property to be currently significant or material to our business.

 
 

 

 

**QUARRY**

**APPROXIMATE  DATE OF  COMMENCEMENTOF OPERATIONS**

**PRIOR  OWNER(DATE ACQUIRED)**

**MEANS  OFACCESS**

**TOTAL  ORIGINAL COST  OF EACH PROPERTY**

**NET  SALEABLE  RECOVERABLE  RESERVES (1)  (CUBIC FEET)**

**NET  SALEABLE  RECOVERABLE  RESERVESYEARS (2)**

 

E.L. Smith

1880

E.L. Smith Quarry Co. (1948)

Paved road

$7,562,676

2,459,534,000

4,917

 

 

 

 

 

 

 

Adam-Pirie

1880

J.K. Pirie Quarry (1955)

Paved road

$4,211,363

984,886,000

6,558

 

 

 

 

 

 

 

Bethel

1900

Woodbury Granite Company, Inc. (1957)

Dirt road

$174,024

76,529,000

381

 

 

 

 

 

 

 

Stanstead

1920

Brodies Limited and Stanstead Granite Company (1960)

Paved road

$505,453

32,563,000

215

 

 

 

 

 

 

 

Laurentian Pink

1944

Brodies Limited (1960)

Paved road

$860,115

3,864,000

51

 

 

 

 

 

 

 

American Black

1973

Pennsylvania Granite Inc. (1997)

Paved road

$2,900,000

14,615,000

96

 

 

 

 

 

 

 

Salisbury

1918

Pennsylvania Granite Inc. (1997)

Paved road

$3,886,592

19,344,000

85

 

 

 

 

 

 

 

Kershaw

1955

Pennsylvania Granite Inc. (1997)

Paved road

$200,000

591,000

21

 

 

 

 

 

 

 

Coral Gray

1955

Pennsylvania Granite Inc. (1997)

Paved road

$200,000

No estimate

No estimate

 

 

 

 

 

 

 

Gardenia White

1995

J. Greg Faith  Thomas E. Ebans, Sr.  David S. Hooker  William L. Comolli (1998)

Dirt road

$4,633,000

2,602,000

36

 

 

 

 

 

 

 

Rockwell White

1993

Rockwell Granite Company (2005)

Dirt road

$3,500,000

5,950,000

80

 

 

(1)

Net saleable reserves are based on internal Company  estimates, except for the reserves for the E.L. Smith, Adam-Pirie and Bethel  quarries, which are based on independent assessments by CA Rich Consultants,  Inc; and for the Gardenia White quarry, which are based on an independent  assessment by Geomapping Associates. It is impossible to know the exact  percentage of recoverable reserves that will not be saleable as a result of natural  cracks, seams, color variations, or other natural defects in the quarry that are not  discoverable through random core drilling samples. Likewise, reductions in  recovery rates of saleable stone can dramatically increase the cost of the  saleable stone making the quarry not commercially viable. Accordingly, these  quantities are purely estimates based on observable surface area size times  commercially feasible depths for quarrying granite, adjusted for historic  recovery rates. Thus, the actual quantities and years of net saleable  reserves could vary materially from the estimates set forth in the table.

  

  

(2)

See Note 1 above. Based on internal Company  estimates using current production levels.

 

 

 9

 

The estimates of saleable reserves are based on  historical quarry operations, workable reserves in the existing quarries and  immediately adjacent areas, current work force sizes and current demand.  While quarry operations decrease the granite deposits, the size of the  granite deposits in which our quarries are located are large and extend well  beyond existing working quarry perimeters. We have historically expanded  quarry perimeters or opened other quarries in the deposit as necessary to  utilize reserves and we believe we have adequate acreage for expansions as  and when necessary. Currently, we have no reason to believe we will deplete  our granite reserves more quickly than is shown in the table, assuming  recovery rates and demand remain at current levels.

 

Dimension granite is not considered a valuable  mineral or commodity such as gold, nor is it traded on any commodities  exchange. The prices we charge to third parties for granite blocks depend on  characteristics such as color of and costs to quarry each granite block, as  well as market conditions. The price per cubic foot we currently charge for  our granite blocks is generally comparable to other granite suppliers and  typically does not exceed $45.

 

**ITEM 3. **
** ****LEGAL PROCEEDINGS**
 

We are a party to legal proceedings that arise from  time to time in the ordinary course of our business. While the outcome of  these proceedings cannot be predicted with certainty, we do not expect these  matters to have a material adverse effect on our business or financial  condition. In addition, we are involved in the litigation described below.

 

Kurtz Monument Company (Pennsylvania) v. Rock of  Ages Corporation (Delaware) Case No. 03-510 U.S. District Court for the  Western District of Pennsylvania. On April 22, 2003, Kurtz Monument Company filed a  complaint against Rock of Ages alleging we breached certain terms of a sealed  settlement agreement by engaging in conduct constituting commercial  disparagement. Damages have not been specified. We believe this action by  Kurtz Monument Company is without merit, deny liability and will continue to  vigorously defend claims made by Kurtz Monument Company.

 

David A. Pier and Rock of Ages Memorials, Inc. # 53  160 00645 04 American Arbitration Association. On September 29, 2004, Mr. Pier, a 56 year old  former sales employee of Rock of Ages Memorials, Inc. ("ROAM"),  filed a demand for arbitration, alleging age and sex discrimination in  connection with his termination from employment by ROAM. Mr. Pier also  alleges ROAM defamed him. He seeks reinstatement of full pay and benefits,  and compensatory, punitive and liquidated damages totaling $500,000. ROAM denies  Mr. Pier's termination was motivated by any discriminatory or illegal reason,  and further denies it has defamed Mr. Pier or published any facts concerning  his termination other than the termination letter directed to him. At the  present time, the parties are engaged in an abbreviated discovery process.  ROAM expects the case to be arbitrated in late July 2005, with a decision to  be rendered sometime during the fourth quarter of 2005. While we believe Mr.  Pier's claims are without merit, it is not possible at this time to assess  the likelihood of Mr. Pier prevailing on his claims.

 

**ITEM 4.**

**SUBMISSION OF MATTERS  TO A VOTE OF SECURITY HOLDERS**

 

No matters were submitted to a vote of Rock of Ages'  security holders, through solicitations of proxies or otherwise, during the  fourth quarter covered by this Annual Report on Form 10-K. 

 

 10

**PARTII**

 

**ITEM 5. **

** MARKET FOR THE  REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS AND ISSUER  REPURCHASES OF EQUITY SECURITIES**
 

Our Class A Common Stock is traded on the NASDAQ  National Market under the symbol "ROAC." There is currently no  established public trading market for the Class B Common Stock.   However, the Class B Common Stock is convertible at any time into shares of  Class A Common Stock. The table below sets forth the range of high and low  per share sales prices for the Class A Common Stock as reported on the NASDAQ  National Market for the periods indicated. 

 

 

 

U**2003**

 

**HIGH**

**LOW**

 

 

 

First  Quarter...............................................................................................................................  

$ 6.57

$ 5.04

Second Quarter.........................................................................................................................  

   7.08

   4.84

Third  Quarter..............................................................................................................................  

   8.65

   5.17

Fourth  Quarter............................................................................................................................

   5.95

  3.75

 

 

U**2004**U

 

**HIGH**

**LOW**

 

 

 

First  Quarter..................................................................................................................................  

$ 7.57

$  5.43

Second  Quarter.............................................................................................................................  

  9.00

    6.40

Third  Quarter................................................................................................................................  

  8.93

    7.26

Fourth Quarter..............................................................................................................................  

   7.71

    7.00

 

 

As of March 25, 2005, based upon information provided  by our transfer agent, there were 246 record holders of Class A Common Stock  and 23 record holders of Class B Common Stock, which numbers do not include  stockholders who beneficially own shares held in street name by brokers.

 

Holders of the Common Stock are entitled to receive  such dividends as may be legally declared by the Board of Directors and, in  the event of dissolution and liquidation, to receive the net assets of Rock  of Ages remaining after payment of all liabilities, in proportion to their  respective holdings. Rock of Ages has paid dividends during each quarter in  2003 at a rate of $.01 per share per quarter, and in 2004 at a rate of $.02  per share per quarter. We paid a dividend of $.025 for the first quarter of  2005 on March 15, 2005 and expect to continue to pay dividends at that rate for the remainder  of 2005. Our Financing Agreement with our lender currently limits dividends  to $.026 per share per quarter, based on the current number of outstanding  shares of common stock. Future dividend payments will depend on our earnings,  capital requirements, financial condition and other factors considered  relevant by the Board of Directors.

 

The information under the heading "Equity  Compensation Plan Information" under Item 12 of this report is  incorporated herein by reference.

 

**RECENT SALES OF UNREGISTERED SECURITIES**

 

We made no sales of unregistered securities during  fiscal 2004.

 

 11

  

 

 

**ITEM 6.**

** SELECTED  CONSOLIDATED FINANCIAL DATA
 

The selected  consolidated historical financial data presented below under the captions  "Statement of Operations Data" and "Balance Sheet Data"  for and as of the end of each of the years in the five-year period ended  December 31, 2004 are derived from the consolidated financial statements of  the Company, which financial statements have been audited by KPMG LLP, independent  registered public accounting firm ("KPMG"). The following selected  consolidated financial data should be read in conjunction with Item 7  "Management's Discussion and Analysis of Financial Condition and Results  of Operations," and the Consolidated Financial Statements of the  Company, including the notes thereto, referred to in Item 8. 

 

 

 

**YEAR  ENDED DECEMBER 31,**

 

 

 

**2004**

 

 

**2003**

 

 

**2002**

 

 

**2001**

 

 

**2000**

 

 

 

**( IN  THOUSANDS, EXCEPT PER SHARE DATA)**

 

**STATEMENT OF OPERATIONS DATA:**

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   Quarrying

$

29,927

 

$

28,381 

 

$

29,541 

 

$

25,504 

 

$

22,676 

 

   Manufacturing

 

20,865

 

 

20,373

 

 

19,726

 

 

22,228

 

 

27,184

 

   Retailing

 

35,802

 

 

35,663

 

 

38,448

 

 

43,159

 

 

40,622

 

        Total  net revenues

 

86,594

 

 

84,417 

 

 

87,715 

 

 

90,891 

 

 

90,482 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross Profit:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   Quarrying

 

12,327

 

 

11,178 

 

 

13,132 

 

 

11,461

 

 

9,916 

 

   Manufacturing

 

5,572

 

 

5,774

 

 

5,521

 

 

5,422

 

 

6,801

 

   Retailing

 

20,354

 

 

20,388

 

 

21,314

 

 

25,461

 

 

22,389

 

          Total gross profit

 

38,253

 

 

37,340 

 

 

39,967 

 

 

42,344 

 

 

39,106 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Selling, general and administrative expenses (1)

 

34,473

 

 

32,621

 

 

32,838 

 

 

34,404

 

 

33,181

 

Impairment of note receivable

 

400

 

 

—

 

 

—

 

 
—
 

 
—
 

Adverse judgment and legal expenses

 

6,500

 

 

2,440

 

 

1,725

 

 

1,118

 

 
—
 

Loss on disposal of assets

 
—
 

 
—
 

 
—
 

 

2,534

 

 
—
 

Income from operations

 

(3,120

) 

 

2,279

 

 

5,404 

 

 

4,288

 

 

5,925 

 

Foreign exchange (gain)/loss

 

69

 

 

121

 

 

(25)

 

 

(19

) 

 

(17

) 

Interest expense

 

821

 

 

471 

 

 

522 

 

 

1,393

 

 

2,143

 

Income from continuing operations before provision  for income taxes

 

(4,010

) 

 

1,687 

 

 

4,907 

 

 

2,914 

 

 

3,799

 

Provision for income taxes

 

(854

) 

 

578

 

 

1,364 

 

 

1,789 

 

 

1,300 

 

Net income from continuing operations, before  cumulative effect of changes in  accounting principles

 

(3,156

) 

 

1,109 

 

 

3,543 

 

 

1,125 

 

 

2,499 

 

Discontinued operations, net of income tax effect

 

(65

) 

 

338

 

 

252

 

 

(692

) 

 

(36

) 

Cumulative effect of changes in accounting principles

 
—
 

 
—
 

 

(28,710

) 

 
—
 

 
—
 

Net income (loss)

$

(3,221

) 

$

1,447

 

$

(24,915

) 

$ 

433

 

$

2,463

 

**PER SHARE DATA:**

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss) per share - basic:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income from continuing operations before cumulative  effect of changes in accountingprinciples

 

(0.43

) 

 

0.15 

 

 

0.45 

 

 

0.15 

 

 

0.34 

 

Discontinued operations

 

(0.01

) 

 

0.05

 

 

0.03

 

 

(0.09

) 

 

(0.01

) 

Cumulative effect of changes in accounting principle

 

—

 

 
—
 

 

(3.65

) 

 
—
 

 
—
 

Net income (loss) per share

 

(0.44

) 

 

0.20

 

 

(3.17

) 

 

0.06

 

 

0.33

 

Net income (loss) per share - diluted:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income from continuing operations before cumulative  effect of changes in accounting principles

 

(0.43

) 

 

0.15 

 

 

0.45 

 

 

0.15

 

 

0.33

 

Discontinued operations

 

(0.01

) 

 

0.05

 

 

0.03

 

 

(0.09

) 

 

0.00

 

Cumulative effect of changes in accounting principle

 
—
 

 
—
 

 

(3.64

) 

 
—
 

 
—
 

Net income (loss) per share

 

(0.44

) 

 

0.20

 

 

(3.16

) 

 

0.06

 

 

0.33

 

Cash dividends paid

$

0.08

 

$

0.04

 

$
—
 

$
—
 

$
—
 

Weighted average number of shares outstanding

 

7,318

 

 

7,182

 

 

7,848

 

 

7,606

 

 

7,447

 

Weighted average number of shares outstanding  assuming dilution

 

7,318

 

 

7,219

 

 

7,880

 

 

7,676

 

 

7,576

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
 

 
 
(1) For all periods presented the adverse judgment  and legal expenses have been reclassified from selling, general and  administrative expenses and are stated separately. 

 
 

 

**AS OF  DECEMBER 31,**

 

 

 

**2004**

 

 

**2003**

 

 

**2002**

 

 

**2001**

 

 

**2000**

 

 

 

 

 

 

 

 

 

 

 

 

**BALANCE SHEET DATA:**

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

$

4,298

 

$

3,227

 

$

6,185

 

$

3,435

 

$

9,501

 

Working capital

 

26,140

 

 

32,844

 

 

31,508

 

 

16,794

 

 

28,875

 

Total assets

 

108,577

 

 

102,461

 

 

125,834

 

 

153,793

 

 

135,554

 

Long-term debt, net of current maturities

 

16,289

 

 

12,794

 

 

12,832

 

 

323

 

 

18,527

 

Other long-term obligations

 

9,568

 

 

8,498

 

 

31,156

 

 

30,900

 

 

5,173

 

Stockholders' equity

 

60,186

 

 

62,970

 

 

62,646

 

 

89,670

 

 

88,720

 

 12

 

**ITEM 7. **

**MANAGEMENT'S  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

The following discussion should be read in  conjunction with the Selected Consolidated Financial Data and the  Consolidated Financial Statements, including the related Notes, contained  elsewhere in this document.

 

**Overview**

 

Rock of Ages is an integrated quarrier,  manufacturer, distributor and retailer of granite and products manufactured  from granite. During 2004, we had three business segments, quarrying,  manufacturing, and retail. The quarry division sells granite blocks both to  the manufacturing division and to outside manufacturers, as well as to  customers outside North America. The manufacturing division's principal  product is granite memorials used primarily in cemeteries, although it also  manufactures some specialized granite products for industrial applications.  The retail division primarily sells granite memorials directly to consumers. During  2003, we also had a fourth business segment, cemeteries. The cemetery  division sold cemetery property and funeral and cemetery products and  services both at the time of need and on a preneed basis. On December 17,  2003, we sold all of our cemetery properties and assets to Saber Management,  LLC for $6,750,000, thereby exiting the cemetery business. We recorded a gain  of $1,139,000 in 2003 after taxes and accounted for the transaction as a sale of discontinued  operations.

 

Our quarry division performed well in 2004, with a  5% increase in revenue and a 9% increase in operating income over 2003. We  had improved results from our Pennsylvania Black quarry over 2003 as we  continued to work through the difficult geological formation in the quarry  that increased costs and hurt the production of saleable blocks last year. We also saw significant increased sales in 2004 from our Gardenia White  quarry primarily to overseas customers, especially in China. We also  continue to experience strong demand in 2004 for our Bethel White granite,  primarily from overseas customers. Demand for our Salisbury Pink granite was  somewhat weaker in 2004 from 2003, due in large part to the completion of the  supply of a large project in Dubai in 2003, but demand is still within what we consider  normal demand fluctuations.

 

In 2004, we also made a $6.5 million payment to  Eurimex as a result of an adverse judgment in the Eurimex arbitration  proceeding. While we were disappointed with the verdict, the decision to  terminate our relationship with Eurimex in 2000 has given us control over the  worldwide distribution of our granite that has been critical to our success  in selling overseas and our increased quarry operating profits. We have  classified and presented the $6.5 million payment and all legal fees and expenses  associated with the Eurimex arbitration proceeding in all years as a separate  line on the income statement labeled "Adverse judgment and legal  expenses."

 

Our Manufacturing division benefited in 2004 from an  increase in shipments from our industrial products group but saw a slight  decline in shipments of memorial products in the U.S., primarily as a result  of several mausoleums and other larger estate and feature memorials which  were completed at year-end but could not be shipped due to customer and/or  cemetery delays. Such large memorials generally have higher than average  profit margins so the decrease in shipments of these products caused our  gross margins to decrease compared to 2003. Finally, our Sales General and  Administrative (SG&A) costs increased primarily as a result of an  increase in our sales force as part of our intensified efforts to attract a  greater number of authorized Rock of Ages retailers. 

 

We made higher than average investments  in equipment in our manufacturing division in 2004 in an effort to meet the  current and anticipated demand for our products as we work to grow our  manufacturing and retail operations as well as to improve efficiency and our cost structure in order to remain  competitive. We expect capital spending in this area to return to historical  levels going forward.

 

The current climate for manufacturing is very  competitive, with imported products becoming more common. We will continue to  utilize and further explore outsourcing relationships (including importing  from areas like China and India) as appropriate.

 

Revenues in our retail segment were up very slightly  over 2003 and although the increase was modest, we were pleased that it  reversed the recent trend of year-over-year declining retail revenues. Unfortunately, retail operating income declined significantly compared to  2003 primarily as a result of the combination of severance payments in  connection with changes in our management group and additional sales expense  relating to changes in the compensation structure for our retail sales  counselors from a commission basis to salary plus bonus basis. When retail operating income is adjusted for these two events  (which total approximately $760,000), we believe the results in retail in  2004 were substantially equal to those in 2003.

13

 

 

In 2004, we implemented significant changes in our  retail division as we restructured the management group by hiring a new Chief  Operating Officer of the Memorials Division (which includes the Manufacturing  and Retail segments), a new Senior Vice President of Marketing, and by  effecting numerous other changes such as modifications to our product mix,  branding strategy, marketing plan, retail counselor compensation structure,  pricing policy, and other items. Our future success depends on increasing  revenues from our existing retail stores through outreach programs with  funeral homes and cemeteries to maximize revenues per store by expanding  share and market area. In addition, we continue to work to expand and improve  the distribution of our product through our owned stores, authorized dealers,  funeral homes, and cemeteries. We believe these changes were necessary based  on the performance of the retail segment to date and the important market  opportunity we believe exists at the retail level. These changes, and the  programs put in place as a result, represent a significant increase in effort  and resources devoted to growing our retail business and as a result we  expect operating results for the segment may suffer in the short term as we  invest in people and programs in anticipation of future revenue growth.

 
**Critical  Accounting Policies**
 

**General**

 

Management's Discussion and Analysis of Financial  Condition and Results of Operations is based upon our Consolidated Financial  Statements, which have been prepared in accordance with generally accepted accounting  principles (GAAP). The preparation of these financial statements requires  management to make estimates and assumptions that affect the reported amounts  of assets, liabilities, revenue and expenses, and related disclosure of  contingent assets and liabilities. Management bases its estimates on  historical experience and on various other assumptions that are believed to  be reasonable under the circumstances. Management has discussed the  development, selection and disclosure of these estimates with the Audit  Committee. Actual results may differ from these estimates.

 

An accounting policy is deemed to be critical if it  requires an accounting estimate to be made based on assumptions about matters  that are highly uncertain at the time the estimate is made, and if different  estimates that reasonably could have been used, or changes in the accounting  estimates that are reasonably likely to occur periodically, could materially  impact the financial statements. 

 

Our critical accounting policies are as follows:  Revenue recognition, impairment of long-lived assets, valuation of deferred  income taxes, contingencies and accounting for pensions.

 

**Revenue Recognition**

 

The Company records revenues from quarrying,  manufacturing, retailing and (through December 17, 2003) cemeteries.

 

*Quarry Division*

 

The granite we quarry is sold both to outside  customers and used by our manufacturing group. Our quarry division recognizes  revenue from sales of granite blocks to outside customers when the granite is  shipped from the quarry. We provide a 5% discount for domestic customers if  payment is made within 30 days of purchase, except in the case of December  terms described below. Sales to foreign customers are typically secured by a  letter of credit.

 

At our Barre, Vermont quarries, we allow customers  to purchase granite blocks and request that we store the blocks for them.  Many of our customers do not have adequate storage space at their facilities  and want to ensure an adequate supply of blocks, especially when the Barre  quarries are closed from mid-December through mid-March because of weather.  Our quarry division recognizes revenue from blocks purchased when the  customer selects and identifies the block at the quarry site and the customer  requests the block be stored, when they have significant business reasons to  do so. At that time, the block is removed from inventory; the customer's name  is printed on the block, and title and risk of ownership passes to the buyer.  The customer is invoiced and normal payment terms apply, except in the case  of December terms described below. Granite blocks owned by customers remain  on our property for varying periods of time after title passes to the buyer.  We retain a delivery obligation using our trucks. However, we consider the earnings  process substantially complete because the cost of delivery service is  inconsequential (less than 3%) in relation to the selling price. Further,  under industry terms of trade, title passes and the payment obligation is  established when the block is identified at the quarry.

 14

 

Each December, we offer special December payment  terms to our Barre quarries' customers. As noted above, from approximately  mid-December to approximately mid-March, our Barre quarries are closed due to  weather. During this time, the quarry customers' manufacturing plants remain  open, and many prefer to ensure they own blocks of a size and quality  selected by them prior to the quarries' closure. All blocks purchased in  December are invoiced on or about December 31 and, at that time, the blocks  are removed from inventory, the customer's name is printed on the blocks, and  title and risk of ownership passes to the buyer. Payment terms are one-third  of the invoice amount on January 15, one-third on February 15, and one-third  on March 15. The program provides essentially the normal 30-day payment terms  during the months when the Barre quarries are closed notwithstanding the  customer purchases a three-month supply in December and makes payments over  90 days. Customers need not use these special December terms and may buy from  inventory during the closure period on a first-come, first-served basis with  the normal 30-day payment terms.

 

*Manufacturing*

 

Rock of Ages does not record a sale, nor do we  record gross profit, at the time granite is transferred to the manufacturing  division from our quarries. We record revenue and gross profit related to  internally transferred granite only after the granite is manufactured into a  finished product and sold to an outside customer. Manufacturing revenues  related to outside customers are recorded when the finished product is  shipped from our facilities. Manufacturing revenues related to internally  transferred finished products to our owned retail outlets are recorded when  ultimately sold at retail to an outside customer.

 

*Retail*

 

Retailing revenues are recorded when the finished  monument is set in the cemetery. In certain instances, we may enter into an  agreement with a customer that provides for extended payments terms,  generally up to two years from either the date of setting the memorial or, in  certain instances, upon the settlement of an estate.

* *

*Cemetery Division*

 

The cemetery division was sold on December 17, 2003.  Accordingly, the operating results of the cemetery division have been classified  as discontinued operations for all periods presented. In 2003, the cemetery  division's revenue from preneed sales of cemetery services and merchandise  was deferred until the period in which the services or merchandise was  delivered. On the balance sheet the full contract amount is included in  prearranged deferred revenue, a liability. The corresponding receivable due  from the customer was reflected in prearranged receivables, an asset, and the  corresponding cash received from the customer was reflected partly in  prearranged receivables (for the portion placed in trust) and partly in cash  (for the portion the Company is allowed to retain). Indirect costs of  marketing were expensed in the period in which they were incurred. When the  service or merchandise was delivered, we recognized as revenue the full  contract amount plus all trust earnings associated with that contract.

 

**Impairment of long-lived assets and  goodwill**

 

Our long-lived assets consist primarily of property,  plant and equipment. Long-lived assets are reviewed for impairment whenever  events or changes in circumstances indicate the carrying amount of such an  asset may not be recoverable. Such events or circumstances include, but are  not limited to, a significant decrease in the fair value of the underlying  business or change in utilization of property and equipment.

 

Recoverability of the undepreciated cost of  property, plant and equipment is measured by comparison of the carrying  amount to estimated future undiscounted net cash flows the assets are  expected to generate. Those cash flows include an estimated terminal value  based on a hypothetical sale at the end of its depreciation period.  Estimating these cash flows and terminal values requires management to make  judgments about the growth in demand for our services, sustainability of  gross margins, and our ability to integrate acquired companies and achieve  economies of scale. If assets are considered to be impaired, the impairment  to be recognized is measured as the amount by which the carrying amount of  the long-lived asset exceeds its fair value.

15 

 

 

Effective January 1, 2002, we assessed impairment of  goodwill in accordance with the provisions of Statement of Financial  Accounting Standards (SFAS) No. 142, "Goodwill and Other Intangible  Assets." The provisions of SFAS No. 142 require a two-step test be  performed. First, the fair value of each reporting unit will be compared to  its carrying value. If the fair value exceeds the carrying value, goodwill is  not impaired and no further testing is performed. If the carrying value  exceeds the fair value, then the implied fair value of the reporting unit's  goodwill must be determined and compared to the carrying value of the  goodwill. If the carrying value of a reporting unit's goodwill exceeds its  implied fair value, then an impairment loss equal to the difference will be  recorded. Upon implementation of SFAS No. 142, we determined the fair value  of each of the reporting units using a discounted cash flow analysis and  compared such values to the respective reporting units carrying amounts. This  evaluation indicated goodwill recorded in the Retail and Cemetery segments  was impaired as of January 1, 2002. Accordingly, we completed the second  step of the goodwill impairment test to measure the amount of the impairment  loss, and recognized a $34 million non-cash charge, recorded as of January 1,  2002, as the cumulative effect of a change in accounting principle for the  write-down of goodwill to its fair value. Approximately $19 million of the  goodwill write-down is deductible for taxes. Therefore a deferred tax asset  of $5.3 million has been recorded.

 

There were two major factors that contributed to the  goodwill impairment in the retail segment. First, we underestimated the  amount of time required to fully integrate the branding strategy through the  retail network. Second, we had difficulty increasing profitability in the  timeframe expected and to the extent we anticipated prior to the retail  acquisitions. The major factors that contributed to the goodwill  impairment in the cemetery segment were lower than expected revenues and  greater than expected selling and administrative costs.

 

We have entered into arrangements whereby we  accepted a promissory note as partial or full payment for certain  transactions, particularly the sale of an operation. Such notes have varying  terms with principal and interest paid to the Company over a period of  generally not more than five years. While most notes are secured by an  interest in real property and/or assets, management must make estimates and  judgments as to the collectibility of such promissory notes. Such judgments  depend on many factors including current and future economic conditions, the  financial condition of the debtor as well as our estimate of the net  realizable value of the security interest securing the note. In 2004, we  wrote off $400,000 of a note receivable related to a non-core manufacturing operation in Elberton  we sold in 2001 in accordance with an agreement reached with the buyer of  that facility in connection with the termination of a supply agreement  whereby we agreed to buy memorials from the buyer. We believe we have  accurately assessed the collectibility of these assets, however, the above  factors and other factors may cause our accounting estimates concerning the  collectibility of the notes to change and future operating results could be  materially impacted. 

 

**Valuation of deferred income taxes**

 

As of December 31, 2004, we had net deferred  tax assets of $7.4 million. In assessing the realizability of deferred tax  assets, management considers whether it is more likely than not some portion  or all of the deferred tax assets will not be realized. The ultimate  realization of deferred tax assets depends upon the generation of future  taxable income during the periods in which those temporary differences become  deductible. Management considers the scheduled reversal of deferred tax  liabilities, projected future taxable income, and tax planning strategies in  making this assessment. We have recorded a valuation allowance of $4.5  million against the alternative minimum tax credit carry-forwards and other  deferred tax assets. Based upon the projections for future taxable income  over the periods for which the deferred tax assets are deductible, we believe  it is more likely than not we will realize the benefit of these unreserved  net deferred tax assets. The amount of the deferred tax assets considered  realizable, however, could be reduced in the near term if estimates of future  taxable income are reduced.

 
**Contingencies**
 

We are involved in various types of legal  proceedings from time to time. Due to their nature, such legal proceedings  involve inherent uncertainties and risks, including, but not limited to,  court rulings, judgments, negotiations between affected parties and  government action. Management, with the assistance of its outside advisors,  assesses the probability of loss for such contingencies and accrues a  liability and/or discloses the relevant circumstances, as appropriate.

 16

 

**Accounting for pensions**

 

We provide defined benefit pension and other  postretirement benefit plans for certain of our employees. Accounting for  these plans requires the use of actuarial assumptions including estimates on  the expected long-term rate of return on assets and discount rates. In 2004  we decreased the discount rate used to determine our liability in the pension  plan from 6.25% to 5.79% based on a bond matching model which uses data on  individual high-quality corporate bonds and the timing and amount of the  future benefit payments in our plan to develop a weighted discount rate  specific to our plan. In order to make informed assumptions, we rely on  outside actuarial experts as well as public market data and general economic  information. Any changes in one or more of these assumptions may materially  affect certain amounts reported on our balance sheet. In particular, a further  decrease in the expected long-term rate of return on plan assets or a  decrease in discount rate could result in an increase in our pension  liability and a charge to equity as well as increases in pension expenses  over time. See Note 9 of the Notes to Consolidated Financial Statements.
** ****RESULTS  OF OPERATIONS**
 

The following table sets forth certain historical  statement of operations data as a percentage of net revenues with the  exception of quarrying, manufacturing and retailing gross profit, which are  shown as a percentage of quarrying, manufacturing and retailing revenues,  respectively.

 

 

**YEAR  ENDED DECEMBER 31,**

 
      
 

**2004**

** **

**2003**

** **

**2002**

 
            
 

 

 

 

 

 

 

**STATEMENT OF OPERATIONS DATA:**

** **

** **

** **

** **

** **

** **

Net Revenues:

 

 

 

 

 

 

     Quarrying

34.6%

 

33.6%

 

33.7%

 

     Manufacturing

24.1%

 

24.1%

 

22.5%

 

     Retailing

41.3%

 

42.3%

 

43.8%

 
            
          Total  net revenues

100.0%

 

100.0%

 

100.0%

 

 

 

 

 

 

 

 

**GROSS PROFIT:**

** **

** **

** **

** **

** **

** **

     Quarrying

41.2%

 

39.4%

 

44.5%

 

     Manufacturing

26.7%

 

28.3%

 

28.0%

 

     Retailing

56.9%

 

57.2%

 

55.4%

 
            
          Total  gross profit

44.2%

 

44.2%

 

45.6%

 

Selling, general & administrative expenses

39.8%

 

38.6%

 

37.4%

 

Impairment of note receivable

0.5%

 

—

 
—
 

Adverse judgment and legal expenses

7.5%

 

2.9%

 

2.0%

 

Income (loss) from continuing operations

(3.6%

) 

2.7%

 

6.2%

 

Foreign exchange loss/(gain)

0.1%

 

0.1%

 

0.0%

 

Interest expense

0.9%

 

0.6%

 

0.6%

 

Income (loss) from continuing operations before  provision for income taxes

(4.6%

) 

2.0%

 

5.6%

 

Provision for income taxes

(1.0%

) 

0.7%

 

1.6%

 

Income (loss) from continuing operations before  cumulative effect of changes in accounting principles

(3.6%

) 

1.3%

 

4.0%

 

Discontinued operations

(0.1%

) 

0.4%

 

0.3%

 

Income (loss) before cumulative effect of changes in  accounting principles

(3.7%

) 

1.7%

 

4.3%

 

Cumulative effect of changes in accounting  principles

—

 
—
 

(32.7%

) 

Net income (loss)

(3.7%)

 

1.7%

 

(28.4%

) 
            
 

 

 

 

 

 

 

17

 

**Year Ended December 31, 2004  Compared To Year Ended December 31, 2003**

 

On a consolidated basis for all segments for the  year ended December 31, 2004 compared to the year ended December 31, 2003;  revenue increased 3%, gross profit increased 2% and total Selling, General  and Administrative (SG&A) costs increased 6% for reasons discussed in  detail in the segment analysis below.

 
Quarry  Segment Analysis
 

Revenues in our quarry operations for the year ended  December 31, 2004 increased 5% from 2003 primarily as a result of increased  shipments from our Gardenia White and Pennsylvania Black quarries as well as  an increase in shipments from our Galactic Blue quarry in the Ukraine. Both  Gardenia White and Bethel White remain very popular export granites and our  improved production of Gardenia White provided greater stone available for  sale. Recoveries in our Pennsylvania Black quarry improved in 2004 as we  progressed through a difficult part of the quarry, which also provided us  with greater production and higher sales. Finally, our new venture in the  Galactic Blue quarry in the Ukraine has continued to improve production,  which also led to higher revenues. These increases in revenue were somewhat  offset by a decrease in revenue from our Salisbury Pink quarry where demand  for that export product was somewhat lower than anticipated. Demand for  Salisbury Pink may be somewhat soft in 2005, as worldwide inventories of pink  granite blocks are somewhat high. Our Barre Gray quarry continues to face  competition from imported granites, especially colored granites, which may  decrease demand for this quarry over time, however revenue levels in 2004  were relatively consistent with 2003.

 

Gross profit dollars from our quarry operations for  the year ended December 31, 2004 increased 10% and gross profit as a  percentage of revenue increased 2% to 41% from 2003. The increase in gross  profit was primarily the result of higher revenues and higher gross profit as  a percentage of revenue in our Pennsylvania Black quarry as well as smaller  increases in our Gardenia White quarry as a result of higher revenues. These  increases were offset by a decrease in gross profit in our Bethel White quarry  due to higher than normal repair and maintenance expenses in 2004. 

 

SG&A costs in our quarry segment for 2004  increased 13% from 2003 primarily due to increased travel expenses required  to support our granite exports as well as higher bonus payments paid to  quarry personnel for the improved results.

 

Manufacturing Segment Analysis

 

Revenues in our Manufacturing group for the year  ended December 31, 2004 increased 2% from 2003. The increase was primarily a  result of greater shipments from our precision products group as a result of  greater demand for their products. Demand for these products generally  follow purchasing in the high technology industry and we anticipate demand  will continue its modest improvement in the coming year. This increase was  offset by a decrease in shipments from the memorials group primarily as a  result of not being able to ship approximately $600,000 in mausoleums and  estate memorials in the fourth quarter of 2004 due to incomplete foundations,  which are the responsibility of the customer. We have begun making  significant investments in people and programs to promote, both our standard  memorial products as well as mausoleums and estate memorials, which we  believe should result in increased revenues in 2005.

 

Gross profit dollars from the manufacturing group  declined 4% and gross profit as a percentage of revenue decreased 1.6% for  the year ended December 31, 2004 compared to 2003. The slight decrease is  primarily a result of the decrease in shipments from the memorials group,  especially the larger and more expensive memorials, mausoleums and estate  memorials.

 

SG&A costs for the manufacturing group were up  9% over last year primarily as a result of increased sales personnel hired in  the memorials group in order to implement our growth plans.

 18

 

Retail Segment Analysis

 

Revenues in our retail operations were marginally  higher than last year, and while this is not a significant improvement in  dollars, we are pleased that the retail group reversed the trend of declining  revenues since 2001. As described in Item 7 under "Overview" we  implemented significant changes in our retail division. While the changes  have been helpful in stabilizing our core market in the short term, some of  these changes, including a new Chief Operating Officer, a change in  compensation structure, changes to our product offerings and pricing, among  other things, may have distracted our sales force somewhat. We continue to  make significant changes in how we approach our markets and are implementing  programs which we believe should lead to significant future growth in our  retail operations.

 

Gross profit dollars for the retail operations in  2004 was essentially unchanged from 2003 and gross profit as a percentage of  revenue was also essentially unchanged from 2003.

 

SG&A costs in retail in 2004 increased 3% from  last year primarily as a result of additional personnel and programs in 2004  which are aimed at increasing revenues in the retail segment, $260,000 in  severance payments to managers, and approximately $500,000 in additional  sales compensation expense as a result of converting our sales force from  commission based to salary based. As stated above, we made a decision to  invest in the people and programs in an effort to achieve significant growth  in the retail segment and we expect these additional costs will result in  higher SG&A costs in 2005 as well.

 

Consolidated Items

 

In 2004, we recognized an impairment of $400,000 on  a long term note receivable which dated back to the sale of the Childs &  Childs manufacturing plant in Elberton, Georgia in 2001. In the fourth quarter of 2004, we  were in a dispute with the buyer and determined this note was not collectable in its entirety and negotiated a  payment of $300,000 in cash to the Company and a remaining note for $100,000,  which will be repaid through the purchase of product from Childs &  Childs. In return, a supply agreement requiring us to buy all of our Elberton  memorials from the buyer was terminated.

 

Expenses related to the adverse arbitral award and  legal expenses were $6.5 million in 2004 compared to $2.4 million in 2003. The 2004 charge consists entirely of the $6.5 million settlement amount paid  to Eurimex. The charges in 2003 were for legal and associated expenses  relating entirely to the Eurimex arbitration.

 

Foreign exchange loss in 2004 was $69,000 compared  to $121,000 in 2003 resulting from the effect of the declining value of the  US dollar compared to the Canadian dollar on transactions that are originated  in US dollars in our Canadian operations.

 

Unallocated corporate overhead increased 8% from  last year primarily as a result of expenses associated with executive  searches for our memorials group as well as consulting expenses associated  with the Company's Sarbanes-Oxley Section 404 compliance efforts.

 

Interest expense increased 74% from $471,000 to  $822,000 primarily as a result of higher borrowings and higher interest rates  in 2004 compared to 2003. The increased borrowings resulted from an increase  in long-term debt from the investment in Forethought Financial Services and  an increase in short term borrowings on our revolving credit facility  primarily as a result of payment of the Eurimex settlement amount. The  interest rate paid on our credit facility is tied primarily to LIBOR, which  increased throughout 2004 and we anticipate further increases in 2005. Due to the  restructuring of our debt facility in the second quarter of 2004 we wrote-off  an additional $85,000 of deferred financing charges, which also contributed  to the increase.

 

Income tax benefit, as a percentage of pre-tax  income, decreased to 21% for 2004 from an expense of 34% in 2003. Our tax  rate is significantly affected by the fact that we operate in both the US and  Canada and have historically had different tax rates in those jurisdictions.  We expect our Canadian tax rate to remain approximately 33% and our US tax  rate to range from 22% to 25%. It is very difficult to predict an expected  blended rate for the company for 2005, as it is heavily dependant on pre-tax  earnings in those jurisdictions. The lower blended effective tax rate in  2004 was due to higher losses in the US resulting from the Eurimex payment.

 

We had a loss from discontinued operations, net of  taxes, of $65,000 in 2004 as a result of the sale of the Autumn Rose quarry. This compares to income, net of taxes, of $338,000 in 2003 broken down as  follows: We had a gain on the sale of the cemetery operations of $1,138,000. This gain was offset by the loss from operations of the cemeteries in 2003 of  $244,000, an impairment charge of $488,000 for the discontinued Autumn Rose  quarry, and the loss from the operations of the Autumn Rose Quarry of  $68,000. We have no remaining discontinued operations held for sale as of  December 31, 2004.

19

**Year Ended December 31, 2003  Compared To Year Ended December 31, 2002**

 

On a consolidated basis for all segments for the  year ended December 31, 2003 compared to the year ended December 31, 2002;  revenue was down 4%, gross profit declined 7% and total SG&A costs  decreased 1% for reasons discussed in detail in the segment analysis below.

 

Quarry Segment Analysis

 

Revenues in our quarry operations for the year ended  December 31, 2003 were down 4% from 2002 primarily as a result of lower  shipments from our Pennsylvania Black and Barre Gray quarries. These lower  shipments were partially offset by increased shipments from the Bethel White  quarry. Our Pennsylvania Black quarry had decreased revenues because of low  yields, which means we had lower than normal recoveries of saleable granite.  This decreased the quantity of granite available for sale. Revenues from the  Bethel White quarry increased as a result of a very strong export customer  demand as well as good quarry yields.

 

Gross profit dollars from our quarry operations for  the year ended December 31, 2003 decreased 15% and gross profit as a  percentage of revenue decreased 5% to 40% from 2002. The primary reason for  the decrease in gross profit was the decrease in revenue and higher quarrying  costs resulting from low yields from our Pennsylvania Black quarry. This was  partially offset by the increase in revenue from our Bethel White quarry.  Gross profit was affected to a lesser degree by increased productivity and  higher gross margins in the Barre Gray quarry which was offset by lower gross  margins in the Salisbury Pink quarry as a result of decreased pricing  required in an effort to decrease inventory and develop new markets for that  stone.

 

SG&A costs in our quarry segment for 2003  decreased 3% from 2002 primarily due to lower incentive payments and a  decrease in bad debt expense. 

 

Manufacturing Segment Analysis

 

Revenues in our manufacturing group for the year  ended December 31, 2003 increased 3% over 2002. This was primarily due to  increased shipments of mausoleums and estate memorials, which was partially  offset by a decrease in revenues from the National World War II memorial  being constructed in Washington, D.C. (which was completed in 2003) compared  to 2002. 

 

Gross profit dollars from the manufacturing group  increased 5% and gross profit as a percentage of revenue increased slightly  for the year ended December 31, 2003 compared to 2002. The slight increase is  consistent with the general improvement in the quality of orders in the  division, including larger and more expensive memorials, mausoleums and  estate memorials.

 

SG&A costs for the manufacturing group in 2003  were up 8% over 2002, primarily as a result of several small increases,  including an increase in the cost of employee benefits.

 

Retail Segment Analysis

 

Revenues for our retail operations in 2003were down  7% from 2002 as our retail group experienced a very difficult year. We  believe the reasons behind the decline were a combination of a weak economy  in the first quarter of 2003, increased competition primarily from funeral  homes selling memorials, and pricing policies for our retail memorials that  caused us to lose sales from the lower-end segment of the market. 

 

Gross profit dollars in 2003 for the retail  operations decreased 4% from 2002 as a result of decreased revenue; however  gross profit as a percentage in 2003 increased 2% to 57% over 2002. 

 

SG&A costs in retail increased just 1% but  increased 5% as a percentage of revenue primarily as a result of declining  revenues and a certain portion of our SG&A costs being fixed in the short  term. 

 

Consolidated Items

 

Unallocated corporate overhead in 2003 decreased 11%  from 2002 primarily as a result of a one-time severance payment of $750,000  in 2002.

20

 

Expenses related to the adverse arbitral award and  legal expenses were $2.4 million in 2003 compared to $1.7 million in 2002. The 2003 and 2002 charges consist of legal and associated expenses relating  entirely to the Eurimex arbitration.

 

Foreign exchange loss in 2003 was $121,000 compared  to a gain of $25,000 in 2002 resulting from changes in the value  of the US dollar compared to the Canadian dollar on transactions that are  originated in US dollars in our Canadian operations.

 

Interest expense decreased 10% from the combined  effect of slightly lower borrowings and decreased interest rates in 2003  compared to 2002.

 

Income tax expense as a percentage of pre-tax income  increased to 34% for 2003 from 28% in 2002 primarily as a result of a greater  portion of our consolidated pre-tax income coming from our Canadian  operations, which are taxed at a higher rate.

 

Income from discontinued operations, net of taxes  was $338,000 in 2003 broken down as follows: We had a gain on the sale of the  cemetery operations of $1,138,000. This gain was offset by the loss from  operations of the cemeteries in 2003 of $244,000, an impairment charge of  $488,000 for the discontinued Autumn Rose quarry, and the loss from the  operations of the Autumn Rose quarry of $68,000. In 2002, income from  discontinued operations net of taxes was $252,000 consisting primarily of the  profit from cemetery operations. 

 

**LIQUIDITY AND CAPITAL RESOURCES**

 

**Liquidity**

 

We consider our liquidity to be adequate to meet our  long and short-term cash requirements to fund operations and pursue our  growth strategy. Historically, we have met these requirements primarily from  cash generated by operating activities and periodic borrowings under the  commercial credit facilities described below. There may be  future acquisitions as we pursue our growth strategy that may require additional  financing in excess of that available under our existing credit facility.

 

In January 2003, we repurchased 500,500 shares of  our common stock for a total of $2,602,600 as part of our share buy back  program. We have repurchased a total of 676,200 shares for $3,359,269 under  the share buy back program. There remain 323,800 shares authorized to be  purchased under the current repurchase program. We will continue to  repurchase shares on an opportunistic basis determined by, among other things,  current debt levels, anticipated uses of capital, the price of the stock and  the general market conditions. We did not repurchase any shares in 2004.

 

In 2004, the funded status of our defined benefit  pension plan decreased by approximately $1 million primarily as a result of a  decrease in the discount rate used to calculate the pension benefit  obligation from 6.25% to 5.79%. We have historically contributed between  $800,000 and $1.0 million per year to the plan and expect to make an annual  contribution of $945,000 in 2005, which, we believe, we will be able to fund  either from cash from operations or borrowing under our credit facilities. 

 

Cash Flow 
 

At December 31, 2004, we had cash and cash  equivalents of approximately $4.3 million and working capital of  approximately $26.1 million, compared to approximately $3.2 million and $32.8  million, respectively, at December 31, 2003.

 

*Cash from Operations.* Net cash used in operating activities  was $351,000 in 2004 compared to cash provided by operating activities of  $4.9 million in 2003. The primary reason for the change is the lower earnings  in 2004 due in significant part to the $6.5 million Eurimex settlement  payment coupled with the non-cash adjustments primarily from an increase in  deferred taxes related to the Eurimex settlement and an increase in inventory  as well as other working capital changes, which had the effect of decreasing  cash from operations. 

 

Cash flows from operating activities were $4.9  million in 2003 compared to $6.9 million in 2002. The primary reason for the  change was lower earnings in 2003, (excluding the effects of the write-down  of goodwill in 2002) coupled with the non-cash adjustments primarily  associated with the sale of the cemeteries, and other working capital changes,  which had the effect of decreasing cash from operations.

 21

 

*Cash from Investing Activities.* Cash flows used in investing  activities were $5.4 million in 2004 compared to $6.2 million in 2003. In  2004, our capital spending was $6.7 million primarily as a result of  continued investment in our quarry, retail and manufacturing operations. In  addition, we used $3.6 million in cash to make investments, primarily a $3.5  million investment in Forethought Financial Services. This cash used was  partially offset by the receipt of $5.4 million primarily from the payment of  a note, which we had received in 2003 as partial consideration for the sale  of our cemeteries. Cash used in investing activities comes from either  borrowings under our credit facilities or from operations.

 

Cash flows used in investing activities were $6.2  million in 2003 compared to $1.8 million in 2002. In 2003, we had higher than  normal levels of capital expenditures, especially in our retail segment, as  we made improvements to store facilities and constructed new facilities in  order to support and enhance the brand image of our company. These  expenditures were slightly offset by the $1.5 million in cash received, as of  December 31, 2003, toward the total $6.75 million due from Saber Management  LLC from the sale of the cemeteries. In 2002, our capital expenditures were  at a lower level and were partially offset by the proceeds from the sale of  the Lawson facility. 

 

*Cash from Financing Activities.* Financing activities provided $6.3 million  in 2004 as a result of increased borrowings under our line of credit, an  increase in borrowing under our long-term note as well as cash provided from  employees exercising stock options. This was partially offset by the payment  of dividends. In 2003, $2.6 million in cash was used primarily as a result  of the repurchase of 500,500 shares of the Company's common stock. In 2002,  $2.4 million in cash was used primarily as a result of principal payments on  long-term debt.

 

**Capital Resources**

 

CIT Credit Facility

 

We have a credit facility with the CIT  Group/Business Credit ("CIT") that expires in October 2007. The  facility consists of an acquisition term loan line of credit of up to $30.0  million and a revolving credit facility of up to another $20.0 million based  on eligible accounts receivable, inventory and certain fixed assets. In the  second quarter of 2004, we opted to decrease our total facility from $50  million to $30 million and remove Fleet Bank as a participant. In the fourth  quarter of 2004, we added Chittenden Bank as a participant in the facility  and returned the facility to the original $50 million. There were no substantive  changes to the facility as a result of the changes and we believe  we have adequate borrowing capacity to implement our growth strategy. As of  December 31, 2004, we had $16 million outstanding and $14 million available  under the term loan line of credit and $7.3 million outstanding and $12.7  million available under the revolving credit facility. On February 15, 2005,  the Company acquired the Rockwell White granite quarry for $3.5 million,  which was financed using the term loan, bringing the total outstanding on the  term loan to approximately $19.5 million and $10.5 million available. Our  loan agreement with CIT places restrictions on our ability to, among other  things, sell assets, participate in mergers, incur debt, pay dividends,  repurchase stock, and make investments or guarantees. The agreement also  contains certain covenants for a minimum Operating Cash Flow to Debt Service  Ratio and a limit on the Total Liabilities to Net Worth Ratio of the Company  as described below.

 

*Debt Service Coverage Ratio.* The facility requires the ratio of the  sum of earnings before interest, taxes, depreciation and amortization (EBITDA)  less taxes paid and capital expenditures to the sum of interest, scheduled  debt repayments and dividends be at least 1.25 for any trailing twelve-month  period at the end of a quarter. Primarily as a result of the expenses  attributable to the Eurimex arbitration (including the $6.5 million  settlement amount paid in 2004) the Company has been in violation of this  covenant and has received waivers, which primarily allow the Company to  exclude those expenses from the covenant calculation. As of December 31,  2004, the Company was in violation of the Debt Service Coverage Ratio due to  charges in the fourth quarter of 2004 related to an impaired note receivable  and severance payments as well as higher than normal capital expenditures in  2004. We have received a waiver which will allow us to exclude certain of  these expenditures from our calculation of EBITDA and capital expenditures in  the fourth quarter of 2004 allowing the Company to be in compliance with the  Debt Service Coverage ratio at December 31, 2004. This waiver includes  modifications to the Debt Service Coverage Ratio in 2005 based on the  Company's projections which we believe will allow us to remain in compliance  with this covenant in the future.

 22

 

*Total Liabilities to Net Worth Ratio.*The facility  also requires that the ratio of the Company's total liabilities to net worth  not exceed 2.0. As of December 31, 2004, the Company was in compliance with  this covenant as our total liabilities to net worth ratio was 0.81.

 

*Interest Rates.* We have a multi-tiered interest rate  structure on our outstanding debt with CIT. We are currently at the lowest  available rates 

 

The rates in effect as of December 31, 2004 were as  follows:

 

 

 

**AmountOutstanding**

** **

**Formula**

** **

**Effective  Rate**

 

 

 

 

 

 

 

Revolving Credit Facility

$

3.8 million

 

Prime - 0. 50%

 

4.75%

Revolving Credit Facility

 

3.5 million

 

LIBOR + 1.50%

 

4.17%

Term Loan A

 

 12.5 million

 

LIBOR + 1.75%

 

3.91%

Term Loan B

 

3.5 million

 

LIBOR + 1.75%

 

3.93%

 

We can elect the interest rate structure under the  credit facility based on the prime rate or LIBOR for both the revolving  credit facility and the term loan. The incremental rate above or below prime  and above LIBOR is based on our Funded Debt to Net Worth Ratio and the  Company is currently at the most favorable increments available. The  following table shows the LIBOR or Prime rate elections:

 

 

 

**LIBOR  Election**

** **

**Prime  Election**

 

 

 

 

 

Revolving Credit Facility

 

LIBOR + 1.50%

 

Prime - 0.50%

 

 

 

 

 

Term Loans

 

LIBOR + 1.75%

 

Prime - 0.25%

 
Canadian  Credit Facility
 

As of December 31, 2004, we also had $4.0 million  CDN available and $0 outstanding under a demand revolving line of credit with  the Royal Bank of Canada.

 23

 

 

**Contractual Obligations**

 

 

 

 

 

**Payments  Due By Period**
**Contractual Cash Obligations**

** **

**Total**

** **

**Less  than 1 year**

** **

**1-3  Years**

** **

**4-5  Years**

** **

**After 5  Years**

 

 

 

 

 

 

 

 

 

 

 

Long-Term Debt (1)

$

18,303

$

685

$

17,214

$

62

$
342
Operating Leases (2)

 

3,908 

 

1,029 

 

1,414 

 

602 

 

863 

Purchase Obligations (3)

 

9,000

 

2,250

 

4,500

 

2,250

 

—

Total Obligations (4)

$

31,211 

$
3,964
$

23,128 

$

2,914 

$

1,205 

 

(1)

Long-Term Debt consists of various notes payable  (see note 6 of the Consolidated Financial Statements) for general business  use and strategic acquisitions and estimated interest thereon, which will be funded from a combination of  cash flow from operations and our existing credit facilities. Obligations  of $7.3 million under our Revolving Credit Facility at December 31, 2004 are not included in this table.

 

 

(2)

Operating Leases are principally for real estate and  vehicles (see note 4 of the Consolidated Financial Statements) and will be  funded from a combination of cash flow from operations and our existing  credit facilities. 

 

 

(3)

The purchase obligation is a supply agreement with  Adams Granite Co. The Company has agreed to purchase a minimum of $2,250,000  (+/- 10%) of monuments from Adams Granite each year for a term of seven years  with various stipulations as to variations from the "minimum order"  and pricing agreements (see note 4 of the Consolidated Financial Statements),  and will be funded from a combination of cash flow from operations and our  existing credit facilities. The agreement was entered into on January 11,  2002 and the remaining term is four years.

 

 

(4)

In addition to the contractual obligations included  in the table, we have obligations to fund  pension plans. The actual commitment is contingent on certain factors that  are uncertain or unknown at this time. Therefore, these obligations are not  included in the table. 

 

**Capital Expenditures**

 

Our primary need for capital will be to maintain and  improve our manufacturing, quarrying, and retail facilities and to finance  acquisitions as part of our growth strategy. We have approximately $5.1  million budgeted for capital expenditures in 2005, not including potential  acquisitions. We believe the combination of cash flow from operations  and our credit facility will be sufficient to fund our operations for at  least the next twelve months.

 

**SEASONALITY**

 

Historically, our operations have experienced  certain seasonal patterns. Generally, our net sales have been highest in the  second or third quarter and lowest in the first quarter of each year due  primarily to weather. Cemeteries in northern areas generally do not accept  granite memorials during winter months when the ground is frozen because they  cannot be properly set. In addition, we typically close certain of our  Vermont and Canadian quarries during these months because of increased operating  costs attributable to adverse weather conditions. As a result, we have  historically incurred a net loss during the first three months of each  calendar year.

 

**RECENT ACCOUNTING PRONOUNCEMENTS**

 

In November 2004, the  FASB issued SFAS No. 151, "Inventory Costs-An Amendment of ARB No. 43,  Chapter 4" ("SFAS 151"). SFAS 151 amends the guidance in ARB  No. 43, Chapter 4, "Inventory Pricing," to clarify the accounting  for abnormal amounts of idle facility expense, freight, handling costs, and  wasted material (spoilage). Among other provisions, the new rule requires  that items such as idle facility expense, excessive spoilage, double freight,  and re-handling costs be recognized as current-period charges regardless of  whether they meet the criterion of "so abnormal" as stated in ARB  No. 43. Additionally, SFAS 151 requires that the allocation of fixed  production overheads to the costs of conversion be based on the normal  capacity of the production facilities. SFAS 151 is effective for fiscal years  beginning after June 15, 2005 and is required to be adopted by us in the  first quarter of 2006, beginning on January 1, 2006. We are currently  evaluating the effect, if any, that the adoption of SFAS 151 will have on our  consolidated results of operations. 

 

 24

 

 

In December 2004, the Financial Accounting Standards  Board ("FASB") issued Statement No. 153 "Exchanges of  Non-monetary Assets—an Amendment of APB Opinion No. 29," effective for  fiscal years beginning after June 15, 2005. SFAS No. 153 amends Opinion 29 to  eliminate the exception for non-monetary exchanges of similar productive  assets and replaces it with a general exception for exchanges of non-monetary  assets that do not have commercial substance. The Company does not believe  the adoption of SFAS No. 153 will have a material impact on its financial  statements.

 

In December 2004, the  FASB issued SFAS No. 123 (revised 2004), "Share-Based Payment"  ("SFAS 123R"), which replaces SFAS No. 123, "Accounting for  Stock-Based Compensation," ("SFAS 123") and supercedes APB  Opinion No. 25, "Accounting for Stock Issued to Employees." SFAS  123R requires that all share-based payments to employees, including grants of  employee stock options, to be recognized in the financial statements based on  their fair values beginning with the first interim or annual period after  June 15, 2005, with early adoption encouraged. The pro forma disclosures  previously permitted under SFAS 123 no longer will be an alternative to  financial statement recognition. We are required to adopt SFAS 123R in the  third quarter of 2005, beginning July 1, 2005. Under SFAS 123R, we must  determine the appropriate fair value model and related assumptions to be used  for valuing share-based payments, the amortization method for compensation  cost and the transition method to be used at date of adoption. The transition  methods include modified prospective and modified retrospective adoption  options. Under the modified retrospective option, prior periods may be  restated either as of the beginning of the year of adoption or for all  periods presented. The modified prospective method requires that compensation  expense be recorded for all unvested stock options at the beginning of the  first quarter of adoption of SFAS 123R, while the modified retrospective  method would record compensation expense for all unvested stock options  beginning with the first period restated. We are evaluating the requirements  of SFAS 123R and expect that the adoption of SFAS 123R will have a material  impact on our consolidated results of operations and earnings per share. We  have not yet determined the method of adoption or the effect of adopting SFAS  123R, and we have not determined whether the adoption will result in amounts  that are similar to the current pro forma disclosures under SFAS 123. 

 

 25

 

**Risk Factors That May Affect Future  Results**

 

*The risks and uncertainties  described below are not the only ones we face. Additional risks and  uncertainties not presently known to us or which are currently deemed  immaterial may also impair our business, financial condition and results of  operations. If any of these risks actually occur, our business, financial  condition and results of operations could be materially adversely affected.*

 

**Our continued growth depends, at  least in part, on our ability to form relationships with funeral directors,  cemeteries and other death care providers.**

 

Our ability to continue to grow our retail business  depends in part on our ability to develop referral relationships with funeral  homes, cemeteries and other death care professionals. We cannot assure you we  will be able to successfully form these relationships in all of the areas in  which we have retail businesses. In certain areas, we may be unable to form  such relationships where our stores are in direct competition with funeral  homes and cemeteries that sell granite memorials.

 

**Our continued growth depends, at  least in part, on acquisitions, which involve numerous risks that could  negatively affect our earnings and financial condition.**

 

Our ability to continue to grow depends in part upon  the acquisition of additional companies. We cannot assure you we will  identify suitable acquisition candidates, or we will be able to consummate  transactions on acceptable terms. Further, even if we successfully acquire  additional companies, we cannot assure you we will be able to successfully  integrate the operations of such companies with our own. We intend to finance  acquisitions through a combination of available cash resources, bank  borrowings, and, in appropriate circumstances, the issuance of equity and/or  debt securities. Acquiring additional companies will have a significant  effect on our financial position, and could cause substantial fluctuations in  our quarterly and yearly operating results. Also, acquisitions may result in  the recording of significant goodwill and intangible assets on the Company's  financial statements, the write-off of which would reduce reported earnings  at the point in time the goodwill is deemed impaired. With respect to retail  acquisitions, and as a result of our definition of reporting units under SFAS  142, goodwill impairment could be incurred at our normal annual impairment  review or in some cases at the closing of the acquisition. 

 

**If we are unable to maintain our  relationships with existing independent retailers, or add additional  independent retailers, our sales may not continue to grow and could decline.**

** **

We have historically sold our granite memorials to  consumers through independent retailers. Since we entered the retail  business, we have acquired retailers with multiple retail outlets and have  opened new stores in 18 states. However, we are still dependent in part on  our independent retailers for the successful distribution of our products to  the ultimate customer. We have no control over the independent retailers'  operations, including such matters as retail price, advertising and  marketing. Three important components of our growth strategy are to continue  to acquire retailers, open new retail stores in selected markets and pursue  strategic alliances with funeral homes, cemetery owners, and other death care  professionals. Although we have taken steps to reduce conflicts between our  owned retail stores and our independent retailers, the implementation of these  elements of our strategy has in the past been, and may in the future be,  construed by some of our existing independent retailers as an effort to  compete with them. In certain cases, this has adversely affected their  relationship with us and caused them to decrease or cease their purchases of  our products. These issues may continue to arise as we pursue our growth  strategy. In addition, significant barriers to entry created by local  heritage, community presence and tradition characterize the granite memorial  retail industry. Consequently, we have experienced and may continue to  experience difficulty replacing and adding retailers or entering particular  retail markets in the event of a loss of an independent retailer. We cannot  assure you we will be able to maintain our existing relationships or  establish new relationships with independent retailers. Disruption in our  relationships with independent retailers could impede our sales growth or  cause sales to decline, which would adversely affect our business and  financial results.

 

**Opening new stores is a component  of our growth strategy and entails uncertainties and risks that could  adversely affect our profitability.**

 

Our ability to continue to grow our retail business  will depend in part upon our ability to open new retail stores in selected  locations. Our success in opening new retail stores will depend on our  ability to identify suitable locations for opening new retail stores on  acceptable terms, our ability to attract and retain competent management and  sales personnel, and our ability to form strategic alliances and  relationships with local funeral homes, cemeteries and other death care  professionals, and our ability to attract customers to our new stores. It is  unlikely new retail stores we open will generate significant profits in the  early stages, and many new stores will lose money for the first few years of  operation. Accordingly, opening new retail stores may adversely affect our  business or profitability.

26

 

 

**If we lose our key personnel, or  are unable to attract and retain additional qualified personnel, our business  could suffer.**

 

Our operations and the implementation of our  operating and growth strategies, such as integration of acquisitions and the  opening of new retail stores, are management intensive. We are substantially  dependent upon the abilities and continued efforts of Kurt M. Swenson, our  Chairman, President and Chief Executive Officer, and other senior management.  Our business is also dependent on our ability to continue to attract and  retain a highly skilled retail, quarrying and manufacturing workforce,  including sales managers and counselors, stone cutters, sand blasters,  sculptors and other skilled artisans. The loss of the services of Mr.  Swenson, other members of the Company's senior management or other highly  skilled personnel could adversely affect our business and operating results. 

 

**We face intense competition and, if  we are unable to compete successfully, we may be unable to increase our  sales, which would adversely affect our business and profitability.**

 

The dimension stone industry is highly competitive.  We compete with other dimension stone quarriers, including quarriers of  granite, marble, limestone, travertine and other natural stones. We also  compete with manufacturers of so-called "engineered stone" as well  as manufacturers of other building materials like concrete, aluminum, glass,  wood and other materials. We compete with providers of these materials on the  basis of price, availability of supply, end-user preference for certain  colors, patterns or textures, and other factors. 

 

The granite memorial industry is also highly  competitive. We compete with other granite quarriers and manufacturers in the  sale of granite blocks for memorial use on the basis of price, color,  quality, geographic proximity, service, design availability, production  capability, availability of supply and delivery options. All of our  colors of granite are subject to competition from memorial grade granite  blocks of similar color supplied by quarriers located throughout the world.  There are approximately 140 manufacturers of granite memorials in North  America. There are also manufacturers of granite memorials in India, South  Africa, China and Portugal that sell finished memorials in North America.

 

Our quarrying and manufacturing competitors include  both domestic and international companies, some of which may have greater  financial, technical, manufacturing, marketing and other resources. Foreign  competitors may have access to lower cost labor and better commercial  deposits of memorial grade granite, and may be subject to less restrictive  regulatory requirements. For example, companies in South Africa, India, China  and Portugal also manufacture and export finished granite memorials into  North America which compete with our products.

 

The competition for retail sales of granite  memorials faced by our retail outlets is also intense and is based on price,  quality, service, design availability and breadth of product line.  Competitors include funeral home and cemetery owners, including  consolidators, which have greater financial resources than we do, as well as  approximately 3,000 independent retailers of granite memorials located  outside of cemeteries and funeral homes.

 

We cannot assure you domestic or foreign competition  will not adversely impact our business.

 

**The increasing trend toward  cremation, and potential declines in memorialization for other reasons, may  result in decreased sales of our products.**

 

There is an increasing trend toward cremation in the  United States. According to the Cremation Association of North America, or  CANA, cremation was used in approximately 28% of the deaths in the United  States in 2002, compared to approximately 24% in 1998, and CANA expects this  rate to rise to approximately 36% by 2010. While we continue to believe that  many families will choose to permanently memorialize their loved-ones,  regardless of whether they choose cremation over a traditional burial, to the  extent increases in cremation rates result in decreases in memorialization  rates, this decrease will result in a decline in our memorial sales, which  will adversely affect our business and results of operations.

 

Our business is also subject to the risk that  memorialization rates may decline over time for other reasons. Certain  cemeteries have in the past and may in the future limit the use of granite  memorials as a memorialization option. To the extent general memorialization  rates or the willingness of cemeteries to accept granite memorials declines,  this decline could adversely affect our business.

 27

 

**Sales of our products are seasonal  and may cause our quarterly operating results to fluctuate.**

 

Historically, our operations have experienced  certain seasonal patterns. Generally, our net sales are highest in the second  or third quarter and lowest in the first quarter of each year due primarily  to weather. Cemeteries in northern regions generally do not accept granite  memorials during winter months when the ground is frozen because they cannot  be properly set. We typically close certain of our Vermont and Canadian  quarries during these months because of increased operating costs  attributable to weather conditions. We have historically incurred an  aggregate net loss during the first three months of each calendar year. Our  operating results may vary materially from quarter to quarter due to, among  other things, acquisitions, changes in product mix, shipping conditions and limitations on the  timing of price increases, making quarterly year-to-year comparisons less  meaningful.

 

**Our competitive position could be  harmed if we are unable to protect our intellectual property rights.**

 

We believe our tradenames, trademarks, brands,  designs and other intellectual property are of great value, and we rely on  trademark, copyright and other proprietary rights laws to protect our rights  to this valuable intellectual property. Third parties may in the future try  to challenge our ownership of our intellectual property. In addition, our  business is subject to the risk of third parties counterfeiting our products  or infringing on our intellectual property rights. We may need to resort to  litigation in the future to protect our intellectual property rights, which  could result in substantial costs and diversion of resources. Our failure to  protect our intellectual property rights, most notably the *Rock of Ages* trademark, could adversely  affect our business and competitive position.

 

**Our business is subject to a number  of operating risks that are difficult to predict and manage.**

 

Our quarry and manufacturing operations are subject  to numerous risks and hazards inherent in those industries, including among  others, unanticipated surface or underground conditions, varying saleable  granite recovery rates due to natural cracks and other imperfections in  granite quarries, equipment failures, accidents and worker injuries, labor  issues, weather conditions and events, unanticipated transportation costs and  price fluctuations. As a result, actual costs and expenditures, production  quantities and delivery dates, as well as revenues, may differ materially  from those anticipated, which could adversely affect our operating results.

 

**Our international operations may  expose us to a number of risks related to conducting business in foreign  countries.**

 

We derived approximately 30% of our revenues in  fiscal 2004 from sales to customers outside the United States, with  approximately 9% of revenues in fiscal 2004 from sales in Canada by the  Company's Canadian subsidiary. Foreign sales are subject to numerous risks,  including currency conversion risks, limitations (including taxes) on the  reparation of earnings, slower and more difficult accounts receivable  collection and greater complication and expense in complying with foreign  laws.

 

**Sales of our ancillary products are  cyclical, which may adversely affect our operating results.**

 

The markets for our industrial precision products,  which include machine base and surface plates that are utilized in the  automotive, aeronautic, computer, machine tool, optical, precision grinding  and inspection industries, and granite press rolls used in the manufacture of  paper, are subject to substantial cyclical variations. Sales of these  products are subject to decline as a result of general economic downturns, or  as a result of uncertainties regarding current and future economic conditions  that generally affect such industries. We cannot assure you changes in the  industries to which we sell our precision products will not adversely affect our  operating results.

 

**Our credit facility with CIT includes covenants that  impose restrictions on our financial and business operations and financial  tests that we must meet in order to continue to borrow under the facility.**

 

The terms of our credit facility with CIT restrict  our ability to, among other things, consummate asset sales, participate in  mergers, incur additional debt, pay dividends, repurchase stock or make  investments or guarantees. The terms also contain covenants that require us  to meet financial tests, including a minimum Operating Cash Flow to Debt  Service Ratio and a maximum Total Liabilities to Net Worth Ratio, in order to  continue to borrow under the facility and avoid a default that might lead to  an early termination of the facility. The terms of this credit facility,  including these covenants, are generally described above in this Item 7 under  the caption "Liquidity and Capital Resources—Capital Resources—CIT  Credit Facility."

28

 

As described under such caption, we have been and  were as of December 31, 2004, in violation of the minimum Operating Cash Flow  to Debt Service Coverage Ratio, but were granted a waiver allowing us to  exclude certain expenditures from our calculation of EBITDA and capital  expenditures in the fourth quarter of 2004 and thereby comply with this  covenant at December 31, 2004. Also as described under such caption, the  waiver includes modifications to the minimum Operating Cash Flow to Debt  Service Coverage Ratio in 2005 based on our projections. However, our actual  results may vary from these projections and, accordingly, we cannot provide  assurances that we will be able to maintain compliance with this or other  covenants in our loan facility or that we will continue to receive waivers of  any non-compliance. If we are unable to comply with the financial or other  covenants of our loan facility and do not receive waivers of our  non-compliance, we may unable to borrow additional amounts under the facility  and outstanding amounts under the facility could be accelerated and become  due and payable immediately, which would adversely affect or liquidity and  our business and operations.

 

**Existing stockholders are able to  exercise significant control over us.**

 

Kurt M. Swenson and his brother, Kevin C. Swenson,  collectively have 64% of the total voting power of all outstanding shares of  our common stock, and will therefore be in a position to control the outcome  of most corporate actions requiring stockholder approval, including the  election of directors and the approval of transactions involving a change in  control of the Company.

 

**We may incur substantial costs to  comply with government regulations.**

 

Our quarry and manufacturing operations are subject  to substantial regulation by federal and state governmental statutes and  agencies, including the federal Occupational Safety and Health Act, the Mine  Safety and Health Administration and similar state and Canadian authorities.  Our operations are also subject to extensive laws and regulations  administered by the United States Environmental Protection Agency and similar  state and Canadian authorities, for the protection of the environment,  including but not limited to those relating to air and water quality, and  solid and hazardous waste handling and disposal. These laws and regulations  may require parties to fund remedial action or to pay damages regardless of  fault. Environmental laws and regulations may also impose liability with  respect to divested or terminated operations even if the operations were  divested or terminated many years ago. In addition, current and future  environmental or occupational health and safety laws, regulations or  regulatory interpretations may require significant expenditures for  compliance, which could require us to modify or curtail our operations. We  cannot predict the effect of such laws, regulations or regulatory  interpretations on our business, financial condition or results of  operations. Any material noncompliance with existing environmental and  occupational health and safety laws and regulations could adversely affect  our business and results of operations.

 

**No-Call Legislation may adversely  affect our retail marketing efforts.**

 

Our retail stores and sales counselors are subject  to the so-called "No-Call" laws, which allow consumers to place  their telephone number on a "no-call" list maintained by various  states and the federal government. At present, there are "No-Call"  laws in a majority of states in which we do business and the federal  "No-Call" law went into effect in the Fall of 2003. Counselors are  unable to make telephone calls to any consumer whose number has been placed  on the applicable no-call list, subject to certain limited exceptions. Making  telephone calls to introduce the Company and set appointments has been an  important part of marketing our retail products and services. While we are  taking steps to decrease our reliance on telephone marketing calls,  compliance with the "No-Call" laws could adversely affect our  retail business and results of operations.

 
**If  we or our independent registered public accounting firm are unable to affirm  the effectiveness of our internal control over financial reporting in future  years, the market value of our common stock could be adversely affected.**
 

Our internal controls may not be adequate. Section  404 of the Sarbanes-Oxley Act of 2002 requires that we assess and report on  our internal control over financial reporting, beginning with our Annual  Report on Form 10-K for the year ending December 31, 2006. In addition, our independent  registered public accounting firm must audit and report on, management's assessment of our internal  controls over financial reporting. We are in the process of documenting and  testing our system of internal controls to provide the basis for our report.  However, at this time, due to the ongoing evaluation and testing, no  assurance can be given that there may not be significant deficiencies or  material weaknesses in our internal control over financial reporting that  would be required to be reported. Accordingly, we cannot assure you that we  or our independent registered public accounting firm will be able to report  that our internal controls over financial reporting are effective. In this  event, investors could lose confidence in the reliability of our financial  statements, which could result in a decrease in the market value of our  Class A Common Stock.

 29

 

**Employees' strikes and other labor-related  disruptions may adversely affect our operations.**

 

Our business is labor intensive, and our workforce  includes, among other employees, highly skilled quarrying and manufacturing  personnel such as stone cutters, sand blasters, sculptors and other skilled  artisans. Approximately 35% of our workforce is unionized. Strikes or labor  disputes with our unionized employees may adversely affect our ability to  conduct our business.

 

Our collective bargaining agreements with the  Granite Cutters Association and the United Steelworkers of America,  respectively, which together represent approximately 169 employees in our  Vermont manufacturing and quarrying operations expire on April 28, 2006. If  we are unable to reach agreement with any of our unionized work groups in  future negotiations regarding the terms of their collective bargaining  agreement, or if additional segments of our workforce become unionized, we  could be subject to work interruptions or stoppages which could adversely  affect our operations and our business.

 

**Provisions of our corporate  organizational documents and Delaware law could delay or prevent a change in  control of the Company, even if it would be beneficial to our stockholders.**

 

Certain provisions contained in our Certificate of  Incorporation and By-laws: 

 
- grant ten votes per share to each share of       Class B Common Stock; 
- divide the Board of Directors into three       classes, each of which will have a different three-year term; 
- provide the stockholders may remove directors       from office only for cause and by a supermajority vote;
- provide special meetings of the stockholders       may be called only by the Board of Directors or certain Company officers       and not by stockholders; 
- establish certain advance notice procedures for       nomination of candidates for election as directors and for stockholder       proposals to be considered at annual stockholders' meetings; 
- authorize the issuance of preferred stock.       Accordingly, the Board of Directors is empowered, without stockholder       approval, to issue preferred stock with dividend, liquidation,       conversion, voting or other rights that could materially adversely       affect the voting power or other rights of, or be dilutive to, the       holders of our Common Stock. 

 

Certain of these provisions may have the effect of  discouraging, delaying or preventing a change in control or unsolicited  acquisition proposals a stockholder may consider favorable. In addition,  because we are incorporated in Delaware, we are governed by the provisions of  Section 203 of the Delaware General Corporation Law, which may prohibit or  delay large stockholders, in particular those owning 15% or more of our  outstanding voting stock, from merging or combining with us.

 

**ITEM 7A. **

**QUANTITATIVE AND  QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

 

Rock of Ages has financial instruments that are  subject to interest rate risk, principally debt obligations under its credit  facilities. Historically, we have not experienced material gains or losses  due to interest rate changes. Based on our current variable rate debt  obligations, we believe our exposure to interest rate risk is not material.  Based on the December 31, 2004 outstanding borrowings under the credit  facility, of $23.3 million, the impact of a 1% increase in the interest rates  would be approximately $233,000 a year. 

 

We are subject to foreign currency exchange rate  risk primarily from the operations of our Canadian subsidiary. Based on the  size of this subsidiary and our corresponding exposure to changes in the  Canadian/U.S. dollar exchange rate, we do not consider our market exposure  relating to currency exchange to be material.

 

**ITEM 8.  **

**FINANCIAL STATEMENTS  AND SUPPLEMENTAL DATA**

 

The information required for this item is included  in this Annual Report on Form 10-K on Pages i through xxxiii, inclusive, and  is incorporated herein by reference.

 

**ITEM 9. **

**CHANGES IN AND  DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND  FINANCIAL DISCLOSURE**

 

None.

 30

 

**ITEM 9A.**

**CONTROLS AND  PROCEDURES**

 

*Disclosure Controls*

 

The Company's management, with the participation of  the Chief Executive Officer and the Chief Financial Officer has evaluated the  effectiveness of our disclosure controls and procedures (as that term is  defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of  1934, as amended (the "Exchange Act")) as of the end of the period  covered by this report. Based on such evaluation, the Chief Executive Officer  and Chief Financial Officer have concluded, that as of the end of such  period, our disclosure controls and procedures are effective to provide  reasonable assurance that information required to be disclosed by us in  reports that we file or submit under the Exchange Act is recorded, processed,  summarized and reported within the time periods specified in applicable SEC  rules and forms.

 

*Internal Control Over Financial  Reporting.*

 

There have not been any changes in our internal control  over financial reporting (as such term is defined in Rules 13a-15(f) and  15d-15(f) under the Exchange Act) during the fourth quarter of the fiscal  year ended December 31, 2004 that have materially affected, or are reasonably  likely to materially affect, our internal control over financial reporting.

 

**ITEM 9B.**

**CONTROLS AND  PROCEDURES**

 

Not applicable.

 31

**PARTIII**

 

**ITEM 10.**

**DIRECTORS AND  EXECUTIVE OFFICERS**

 

Certain information concerning directors and executive  officers of the Company is set forth below.

 

Unless otherwise indicated, none of the companies or  organizations referred to below is a parent, subsidiary or affiliate of the  Company.

 

**NAMES OF DIRECTORS AND  EXECUTIVE OFFICERS (1)**

**AGE**

**POSITIONS WITH THE  COMPANY**

 

 

 

Caryn A. Crump

52

Senior Vice President of Marketing/Memorials Division

James L. Fox

53

Director

Douglas S. Goldsmith

35

Chief Financial Officer/Senior Vice President of  Finance and Administration, Treasurer

Jon M. Gregory

55

President and Chief Operating Officer/Quarries  Division

Richard C. Kimball (2)

64

Director and Vice Chairman

Donald Labonte

43

President and Chief Operating Officer/Manufacturing  Division

Pamela Sheiffer

58

Director

Kurt M. Swenson

60

President, Chief Executive Officer and Chairman of  the Board of Directors

Michael B. Tule

43

Senior Vice President, General Counsel and Secretary

Charles M. Waite

72

Director

Frederick E. Webster Jr.

67

Director

Rick Wrabel

48

President and Chief Operating Officer/Memorials  Division

 

(1)

Each executive officer serves for a term of one year  (and until his successor is chosen and qualified) at the discretion of the  Board of Directors.

 

 

(2)

Mr. Kimball retired as an employee of the Company on  December 31, 2004.

 

 

 

 

Caryn A. Crump has been  Senior Vice President of Marketing/Memorials Division since October 2004.  From 2003 to 2004, she was a self-employed marketing consultant. From 2001 to  2003, Ms. Crump worked at Conagra Foods—Premium Frozen Food Products and where  she served as Vice President/General Manager. From 1997 to 2001, she worked at Pennzoil-Quaker  State Company, an automotive consumer products and service company, where she  served as Senior Vice President of the Automotive Chemicals Division, and Vice  President/Brand Management for Pennzoil Products and Motor Oil Division. From  1995 to 1996, Ms. Crump held was Brand Manager for Shell Oil, and from 1980  to 1995, she held various positions for Coca Cola Foods, including director  of Marketing Services (1994-1995) and General Manager—Grocery Products  (1992-1994).

 

James L. Fox has been a  director of the Company since October 1997. He has been Executive Vice  President and Chief Financial Officer of The BISYS Group, Inc. a provider of  business process outsourcing services to the financial services industry,  since September 2003. He was President of Fund Services Division of The BISYS  Group, Inc. from April 2003 to September 2003. From August 2001 to April  2003, he was President and Chief Executive Officer of govOne Solutions, L.P.,  an electronic government payment service. From June 2000 to August 2001, he  was Vice President—Corporate Development and Chief Financial Officer of  Gomez, Inc., a research and consulting firm specializing in Internet quality measurement.  Prior to joining Gomez, Mr. Fox had been Vice Chairman of PFPC Inc., a  division of the PNC Financial Services Group, Inc. from December 1999 to June  2000. Before joining PFPC, Inc., Mr. Fox had an eleven year career with the  Investor Services Group of First Data Corporation, a provider of processing  and mutual fund and retirement services for mutual fund complexes, banks,  insurance companies and advisory firms, including President and Chief  Executive Officer (1999) and Chief Operating Officer (1997-1999). Mr. Fox's  current term as a director of the Company will expire in 2007.

 

Douglas S. Goldsmith has been Chief Financial  Officer and Senior Vice President of Finance and Administration and Treasurer  since September 2001. From 1997 until September 2001, Mr. Goldsmith served as  the Chief Information Officer of the Company. From 1991 to 1997, he held  various positions in the engineering department, and was responsible for the  integration of the Company's information systems for the manufacturing operations  in the U.S. and Canada.

 

 
Jon M. Gregory has been President and Chief  Operating Officer/Quarries Division of the Company since 1992. Mr. Gregory  was a director of the Company from October 1998 to June 2003. Between 1975  and 1993, Mr. Gregory served in various positions, including Senior Vice  President-Memorials Division, Manager of Manufacturing and line production  supervisor. 

 
32 

 

 

Richard C. Kimball has been a director of the  Company since 1986, and Vice Chairman since 1993. From 1993 to January 2001,  he was Vice Chairman and Chief Operating Officer/Memorials Division of the  Company and from January 2001 to December 2004, was Chief Strategic and  Marketing Officer. Prior to joining the Company, Mr. Kimball served as a  director, principal and President of The Bigelow Company, Inc., a strategic  planning and investment banking firm from 1972 until 1993. Mr. Kimball  retired as an employee of the Company on December 31, 2004 and his current  term as a director will expire at the Company's 2006 Annual Meeting.

 

Donald Labonte has been President and Chief  Operating Officer/Manufacturing Division since August 2002 and has been  President of Rock of Ages Canada, Inc., a wholly owned subsidiary of the  Company, since 1999. From January 2002 to July 2002, he was Vice  President/Manufacturing. From 1998 to 1999, he was Vice President/General  Manager of Rock of Ages Canada, Inc. From 1993 to 1998, Mr. Labonte was  Director of Operations of Rock of Ages Canada, Inc. From 1980 to 1993, Mr.  Labonte held various positions in the manufacturing plant at Rock of Ages  Canada, Inc.

 

Pamela G. Sheiffer has been a director of the  Company since June 2004. Since 1997, she has been President of P. Joyce  Associates, Inc., a consulting firm specializing in retail, manufacturing,  licensing and providing services to investment firms. From 1995 to 1997, she  was CEO of The Design and Source Company, a manufacturer and marketer of  ladies apparel. From 1988 to 1995, she was Vice President of Merchandising  and Marketing for the Retail Apparel Group, Inc. d/b/a Dots, a retailer of  women's clothing with over 250 stores nationwide. Prior to that, Ms. Sheiffer  held various senior management positions in retail and manufacturing,  including Senior Vice President of May Department Stores. She is currently  Vice Chairman and Chair of the Development Committee of Learning Lenders, New  York City's largest educational nonprofit with over 14,000 volunteers in New  York City schools. She has been a member of the board of  directors of Dan River Mills, Inc., a manufacturer and marketer of textile  products for home fashions and apparel fabrics, since February 2005. Ms.  Sheiffer's current term as a director will expire at the Company's 2005  Annual Meeting.

 

Kurt M. Swenson has been President, Chief Executive  Officer and Chairman of the Board of Directors of the Company since 1984.  Prior to the Company's initial public offering in 1997, Mr. Swenson had been  the Chief Executive Officer and a director of Swenson Granite Company, Inc.  since 1974. Mr. Swenson currently serves as non-officer Chairman of the Board  of Swenson Granite Company, LLC, a Delaware limited liability company engaged  in the granite curb and landscaping business. Swenson Granite Company, LLC  may be deemed an affiliate of the Company. He is also a director of the  American Monument Association, the National Building Granite Quarries  Association and Group Polycor International and Polycor, Inc. Mr. Swenson's  current term as a director will expire at the Company's 2006 Annual Meeting.

 

Michael B. Tule has been Senior Vice  President/General Counsel and Secretary of the Company since April 2000. From  March 1996 to April 2000, he was Vice President, General Counsel and  Secretary of WPI Group, Inc., a provider of diagnostic tools for commercial  vehicles. Prior to 1996, Mr. Tule was a partner at the Manchester, New  Hampshire law firm of McLane, Graf, Raulerson & Middleton.

 

Charles M. Waite has been a director of the Company  since 1985. Since 1989, Mr. Waite has been managing partner of Chowning  Partners, a financial consulting firm that provides consulting services to  New England companies. Mr. Waite's current term as a director will expire at  the Company's 2007 Annual Meeting.

 

Frederick E. Webster Jr., Ph.D. has been a director  of the Company since October 1997. He was a Professor of Management at the  Amos Tuck School of Business Administration of Dartmouth College from 1965  until 2002, and is now a Professor Emeritus. He is also a management  consultant and lecturer, and is Visiting Scholar at the Eller College of  Management, University of Arizona. He is also a director of Samuel Cabot,  Inc., a manufacturer and marketer of wood care products, and Diamond Phoenix  Corp., a designer and manufacturer of automated materials handling  systems.  Mr. Webster's current term as a director will expire at the  Company's 2005 Annual Meeting.

 

Rick Wrabel has been President and Chief Operating  Officer/Memorials Division since May 2004. From January 2002 to May 2004, Mr.  Wrabel was a self-employed marketing consultant. From 1999 to 2001, he worked  at Pennzoil-Quaker State Company, an automotive consumer products and service  company, where he served as President of the Consumer Products Group from  2000 to 2001, and President of the Axius Division of Pennzoil-Quaker State  from 1999 to 2000. From 1993 to 1999, Mr. Wrabel held numerous positions at  Oral B Laboratories, a division of The Gillette Company that manufactures,  markets and sells a comprehensive line of oral care products, including  President of North America (1998 to 1999); General Manager of Australia, New  Zealand and South Pacific (1997 to 1998); Vice President of Sales (1996 to  1997); and National Sales Manager (1993 to 1995); From 1983 to 1993, Mr.  Wrabel held numerous sales and management positions in American Home Products  - A.H. Robins Company, a pharmaceutical and consumer products company,  including Director-National Accounts. Mr. Wrabel began his career as a sales  representative for Metropolitan Life Insurance Company.

33

 

**SECTION 16(a) BENEFICIAL OWNERSHIP  REPORTING COMPLIANCE**

 

Section 16(a) of the Securities Exchange Act of 1934  requires directors, certain officers and beneficial owners of more than 10%  of our Common Stock to file reports of initial beneficial ownership and  changes in beneficial ownership of our Class A Common Stock with the  Securities and Exchange Commission. Based solely upon a review of reports  filed pursuant to Section 16(a) of the Exchange Act and written  representations by such reporting persons, we believe during fiscal year 2004  such persons made all required filings, except Douglas M. Schair, a former  director of the Company until his death in January 2005, filed a late Form 4 (Statement of Changes In  Beneficial Ownership) reporting the acquisition of 20,000 shares of Class A  Common Stock; and a late Form 4 reporting the acquisition of an aggregate of  18,800 shares of Class A Common Stock by a trust of which Mr. Schair is  co-trustee. Mr. Schair has disclaimed ownership of the shares held by the trust.  The late reports were the result of inadvertent clerical error. In addition,  Derek Dearwater, Vice President, Wholesale Sales/Memorials failed to report  a purchase of 410 shares of Class A Common Stock. Mr. Dearwater reported the  purchase on Form 5 (Annual Statement of Changes in Beneficial Ownership),  which was also filed late. Mr. Dearwater is no longer subject to Section 16  reporting requirements since he is not considered to be an executive officer  of the Company.

 

**AUDIT COMMITTEE**

 

Rock of Ages has a separately designated standing  Audit Committee established in accordance with Section 3(a)(58)(A) of the  Exchange Act. The members of the Audit Committee are James L. Fox, Charles M.  Waite and Frederick E. Webster Jr. The Board of Directors has determined  James L. Fox, Chairman of the Audit Committee is an audit committee financial  expert as defined by Item 401(h) of Regulation S-K of the Exchange Act, and  is independent under Rule 10A-3(b)(1) under the Exchange Act and the  applicable Rules of the National Association of Securities Dealers, Inc.  within the meaning of Item 7(d)(3)(iv) of Schedule 14A of the Exchange Act. 

 

**CORPORATE GOVERNANCE AND NOMINATING  COMMITTEE**

 

On April 28, 2004, the Board of Directors  established a Corporate Governance and Nominating Committee and adopted a  charter to define and outline the responsibilities of its members. A copy of  the Corporate Governance and Nominating Committee charter is available on the  Company's website at www.rockofages.com. The Corporate Governance and  Nominating Committee consists of James L. Fox, Pamela G. Sheiffer, Charles M.  Waite and Frederick E. Webster Jr., each of whom is independent within the  meaning of Rule 4200(a)(15) of the NASDAQ Marketplace Rules.

 

**CODE OF ETHICS**

 

On April 28, 2004, the Board of Directors adopted a  code of business ethics for directors, officers (including Rock of Ages'  principal executive officer and principal financial and accounting officer)  and employees. The code of business ethics is available on Rock of Ages'  website at www.rockofages.com. Stockholders can also request a free copy by  making such request in writing to Rock of Ages Corporation, 369 North State  Street, Concord, New Hampshire 03301, attn: Corporate Secretary. We intend to  satisfy the disclosure requirement under Item 10 of Form 8-K regarding an  amendment to, or a waiver from, a provision of our code of ethics that  applies to our principal executive officer, principal financial officer, or  principal accounting officer or controller by posting such information on our  website.

34

 

**ITEM 11.**

**EXECUTIVE  COMPENSATION**

 

The following table sets forth compensation  information for the years ended December 31, 2004, 2003 and 2002 with respect  to our Chief Executive Officer, each of our four other most highly compensated  executive officers and Terry Shipp and Dennis Merchant, each of whom served  as an executive officer for only part of 2004 and would have been one of our  four other most highly compensated executive officers as of December 31, 2004  had they still been executive officers of the Company at that time (the  "Named Executive Officers").

 

**SUMMARYCOMPENSATION TABLE**

 

**NAME AND PRINCIPAL POSITION**

 

**YEAR**

 

**ANNUAL COMPENSATION SALARY                    BONUS**

 

**LONG—TERM  COMPENSATION  SECURITIESUNDERLYING OPTIONS**

 

**ALL  OTHERCOMPENSATION (1)**

 

 

 

 

 

 

 

 

 

 

 

 

 

Kurt M. Swenson

 

2004

$

445,000 (2)

  $

—

 

—

$

17,674

(5)

   Chief Executive Office and Chairman  

 

2003

$

  430,008 (2)  

$

15,000

 

—

$

7,831

(5)

   of the Board of Directors

 

2002

$

  420,000 (2)    

$

30,000

 

—

$

2,878

(5) 

 

 

 

 

 

 

 

 

 

 

 

 

Richard C. Kimball (8)

 

2004

$

315,000 (3)

$

20,000

 

—

$

14,384

(6)

   Chief Strategic and Marketing  Officer 

 

2003

$

   300,000 (3)     

$

15,000

 

—

$

6,329

(6) 

   Director

 

2002

$

   290,016 (3)     

$

30,000

 

—

$

2,335

(6) 

 

 

 

 

 

 

 

 

 

 

 

 

Jon M. Gregory

 

2004

$

300,004 (4)

$

30,000

 

—

$

2,849

(7)

   President and Chief Operating  Officer/  

 

2003

$

260,004      

$

25,000

 

—

$

1,350

 

   Quarries Division

 

2002

$

250,008      

$

50,000

 

60,000

$

1,250

 

 

 

 

 

 

 

 

 

 

 

 

 

Donald Labonte

 

2004

$

185,359     

$

15,000

 

—

$

13,756

(9)

  President and COO/

 

2003

$

192,414     

$

15,000

 

—

$

12,031
(9)
  Manufacturing Division

 

2002

$

132,293     

$

5,000

 

15,000

$

8,544
(9)
 

 

 

 

 

 

 

 

 

 

 

 

Rick Wrabel (10)

 

2004

$

175,005     

$

20,000

 

150,000

$

16,800

(11)

  President/Memorials Division

 

2003

 

—

 

—

 

 —

 

 

 

 

 

2002

 

—

 

—

 

 —

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Terry Shipp (12)

 

2004

$

223,335   

$

—

 

—

$

1,450

 

  Vice President/

 

2003

$

235,008    

$

—

 

—

$

1,350

 

  Ohio Valley and Central Region

 

2002

$

204,590    

$

5,000

 

10,000

$

1,250

 

 

 

 

 

 

 

 

 

 

 

 

 

Dennis I. Merchant (13)

 

2004

$

180,000   

$

8,000

 

—

$

1,450

 

  Vice President/Retail Operations

 

2003

$

175,008   

$

—

 

—

$

1,350

 

 

2002

$

167,004   

$

5,000

 

15,000

$

1,250

 

 

 

 

 

 

 

 

 

 

 

 

 

  

(1)

Except as otherwise specified, represents a matching  contribution under the Company's 401(k) Plan.

 

 

(2)

For 2004, includes $85,000 and $15,000  of bonus paid in 2004 on account of 2003 results, earn but deferred at the election of Mr. Swenson pursuant to the Rock of Ages Key  Employees Deferred Salary Plan ("Deferred Salary Plan"). For 2003,  includes $70,000 of salary and $30,000 of bonus paid in 2003 on account of  2002 results, deferred at the election of  Mr. Swenson under the Deferred Salary Plan. For 2002, includes $60,000 of  salary deferred at the election of Mr. Swenson under the  Deferred Salary Plan.

 

 

(3)

For 2004, Includes $85,000 of salary  and $15,000 of bonus paid in 2004 on account of 2003 results, earned but  deferred at the election of Mr. Kimball pursuant to the Deferred Salary Plan.  For 2003, includes $50,000 of salary and $30,000 of bonus paid in 2003 on  account of 2002 results, deferred at the  election of Mr. Kimball. For 2002, includes $40,008 of salary deferred at the election of Mr. Kimball under the Deferred Salary Plan.  

 

 

(4)

Includes $40,008 of salary for 2004 earned but  deferred by Mr. Gregory pursuant to the Deferred Salary Plan.

 

 

(5)

Includes $16,224 for 2004, $6,481 for  2003, and $1,028 for 2002 of interest credited on  deferred compensation pursuant to the Deferred Salary Plan in excess of 120%  of the applicable federal long term rate.

35

 

 

(6)

Includes $12,934 for 2004, $4,979 for  2003, and $1,085 for 2002 of interest credited on  deferred compensation pursuant to the Deferred Salary Plan in excess of 120%  of the applicable federal long term rate.

 

 

(7)

Includes $1,399 for 2004 of interest credited on  deferred compensation pursuant to the Deferred Salary Plan in excess of 120%  of the applicable federal long term rate.

 

 

(8)

Mr. Kimball retired from his employment with the  Company as of December 31, 2004. 

 

 

(9)

Represents amounts paid by the Company to Mr.  Labonte's self-directed retirement account under the Retirement Plan for  Salaried Employees of Rock of Ages Canada, Inc.

 

 

(10)

Mr. Wrabel joined the Company as of May 17, 2004.

 

 

(11)

Represents amounts paid for temporary living  allowance.

 

 

(12)

Mr. Shipp was considered to be an executive officer  until October 2004. He resigned from employment in December 2004.

 

 

(13)

Mr. Merchant was considered to be an executive  officer until October 2004.

 

 

 

 

**STOCK OPTION GRANTS**

 

The following table sets forth  information concerning options to purchase Class A Common Stock held by the  Named Executive Officers that were granted during 2004. The Company has not  granted any stock appreciation rights.

 

** Name**

 

** Number of Securi-  ties Underlying  Options Granted**

 

**Percent of Total Op-tions Granted  to Em-  ployees in  Fiscal Year**

 

**Exercise  Price  ($/Sh)**

 

** Expiration  Date**

 

** Potential Realizable Value  At Assumed Annual Rates  of Stock Price Appreciation  for Option Term**

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

5%($)

 

10%($)

 

 

 

 

 

 

 

 

 

 

 

 

 

Rick  Wrabel

 

150,000

 

79%

$

7.15

 

05/10/2014

$

674,000

$

1,709,000

 

(1)

The options become exercisable  in 20% increments on May 10, 2005, 2006, 2007, 2008 and 2009, respectively.

 

 36

   

 

**AGGREGATED OPTION EXERCISES IN LAST  FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES**

 

The  following table sets forth information concerning options to purchase Class A  Common Stock held by the Named Executive Officers.  

** **

** **

** **

** **

** **

** **

** **

**EXERCISABLE**

** **

**UNEXERCISABLE**

** **

**EXERCISABLE**

** **

**UNEXERCISABLE**

**NAME**

** **

**SHARES  ACQUIRED  ONEXERCISE**

** **

**VALUEREALIZED (1)**

** **

**NUMBER OF SECURITIES  UNDERLYING UNEXERCISED OPTIONS AT DECEMBER 31, 2004**

** **

**VALUE OF UNEXERCISED   IN-THE-MONEY OPTIONSAT DECEMBER 31, 2004 (2)**

 

 

 

 

 

 

 

 

 

 

 

 

 

Kurt M. Swenson

 

—

$

—

 

—

 

—

$

—

$

—

Richard C. Kimball

 

—

$

—

 

—

 

—

$

—

$

—

Jon M. Gregory

 

—

$

—

 

24,000

 

36,000

$

31,680

$

47,520

Donald Labonte

 

10,000

$

17,100

 

6,000

 

9,000

$

7,920

$

11,880

Dennis Merchant

 

10,000

$

23,500

 

6,000

 

9,000

$

7,920

$

11,880

Terry Shipp

 

15,000

$

34,200

 

4,000

 
—
$

5,280

$
—
Rick Wrabel

 

—
$

—

 

—

 

150,000

$

—

$

22,500

 

(1)

These values are calculated using the closing price  of the Class A Common Stock on the NASDAQ National Market on the date of  exercise.

 

 

(2)

These values are calculated using the $7.30 per  share closing price of the Class A Common Stock on the NASDAQ National Market  on December 31, 2004.

 37

**PENSION PLANS**

 

We maintain a qualified pension plan (the  "Pension Plan"), and have entered into non-qualified salary  continuation agreements (the "Salary Continuation Agreements") with  certain of our officers, including the Named Executive Officers listed in the  table on the next page. Our Pension Plan is noncontributory and provides  benefits based upon length of service and final average earnings. Generally,  employees age 21 with one year of continuous service are eligible to  participate in the Pension Plan. The annual pension benefits shown for the  Pension Plan assume a participant attains age 65 during 2004 and retires  immediately. The Employee Retirement Income Security Act of 1974 places limitations  on the compensation used to calculate pensions and on pensions that may be  paid under federal income tax qualified plans, and some of the amounts shown  on the following table exceed the applicable limitations and will not be paid  under the pension plan. Such limitations are not applicable to the  Salary Continuation Agreements.

 

The following table shows the total estimated annual  retirement benefits payable upon normal retirement under the Pension Plan for  the Named Executive Officers at the specified executive remuneration and  years of continuous service.

**PENSION PLAN TABLE**

 

 

**FINAL  AVERAGE  COMPENSATION**

** **

** **

**15  YEARS**

** **

**20  YEARS**

** **

**25  YEARS**

** **

**30+  YEARS**

 

 

 

 

 

 

 

 

 

 

 

$

125,000

 

$

38,335

$

51,114

$

63,892

$

76,671

$

150,000

 

$

46,585

$

62,114

$

77,642

$

93,171

$

175,000

 

$

54,835

$

73,114

$

91,392

$

109,671

$

200,000

 

$

63,085

$

84,114

$

105,142

$

126,171

$

225,000

 

$

71,335

$

95,114

$

118,892

$

142,671

$

250,000 

 

$

79,585

$

106,114

$

132,642

$

159,171

$

275,000

 

$

87,835

$

117,114

$

146,392

$

175,671

$

300,000

 

$

96,085

$

128,114

$

160,142

$

192,171

$

325,000

 

$

104,335

$

139,114

$

173,892

$

208,671

$

350,000

 

$

112,585

$

150,114

$

187,642

$

225,171

$

375,000

 

$

120,835

$

161,114

$

201,392

$

241,671

$

400,000

 

$

129,085

$

172,114

$

215,142

$

258,171

$

425,000

 

$

137,335

$

183,114

$

228,892

$

274,671

$

450,000

 

$

145,585

$

194,114

$

242,642

$

291,171

$

475,000

 

$

153,835

$

205,114

$

256,392

$

307,671

$

500,000

 

$

162,085

$

216,114

$

270,142

$

324,171

 

 

These calculations are based on the retirement  formula in effect as of December 31, 2004, which provides an annual life  annuity at age 65 equal to 1.8% of a participant's highest consecutive  five-year average compensation (excluding bonus) during the last ten years of  employment ("Final Average Compensation"), plus .4% of a  participant's Final Average Compensation in excess of social security covered  compensation times years of service to a maximum of 30 years. Completed years  of continuous service for each of the Named Executive Officers, as of  December 31, 2004 and rounded to the full year, are: Mr. Gregory, 29 years;  Mr. Kimball, 12 years; Mr. Merchant 27 years; Mr. Shipp, 3  years; Mr. Swenson, 31 years and Mr. Wrable 1 year. 

 

In addition, Salary Continuation Agreements provide  for supplemental pension benefits to certain of our officers, including the  Named Executive Officers listed in the table below. The following table sets  forth the supplemental pension benefits for the specified Named Executive  Officers under their respective Salary Continuation Agreements.

 

**NAME**

** **

**ANNUAL  BASE****COMPENSATION**

** **

**TOTAL  YEARS  OF SERVICE****AT AGE 65**

** **

**ANNUAL  RETIREMENT   BENEFIT****AT AGE 65**

 

 

 

 

 

 

 

R. Kimball

 

$315,000

 

12

 

37,800

K. Swenson

 

$445,000

 

26

 

127,270

J. Gregory

 

$300,000

 

39

 

70,200

 38

 

 

These calculations are based on individual Salary  Continuation Agreements, which provide a 100% joint and survivor annuity at  age 65 equal to a percentage, ranging from .6% to 1.1%, of a participant's  highest annual base compensation times full years of service. The Board of  Directors has determined the percentage range. There are no compensation  increases assumed in these calculations.

 

We have a deferred salary plan ("Plan")  for certain management and highly compensated employees within the meaning of  Section 2520.104-23(d) of the U.S. Department of Labor Regulations.  Participation in the Plan is limited to those employees designated by the  Board of Directors in its sole discretion, and who satisfy the following  criteria: (1) the employee has attained the age of 55; the employee is an  executive officer; the employee has completed a minimum of ten years of  continuous service with the Company; and the employee's annual base salary,  fringe benefits and other non-cash compensation exceeds $200,000 (subject to  adjustment each year to reflect the average percentage change in the base  salaries of all officers of the Company). Currently, Mr. Swenson, Mr. Kimball  and Mr. Gregory are the only participants in the Plan. Participants may make  an irrevocable election to defer up to $100,000 annually under the Plan. Any  amounts deferred are held in deferred salary accounts created by the Company.  Interest at the rate of 12% per annum is credited on a monthly basis to each  Participant's deferred salary account. The aggregate account balances remain  part of the general unrestricted assets of the Company and are available for  investment and use by the Company. Participants do not have any right or  claim to any specific assets of the Company, but only a claim against the  Company as a general, unsecured creditor to the extent of the undistributed  portion of their deferred salary account. Benefits under the Plan are paid  upon the retirement, death or disability of the participant or other  termination of participation, subject to certain procedures relating to  distribution.

 

We have a retirement plan for our Canadian  employees, the Retirement Plan for Salaried Employees of Rock of Ages Canada,  Inc. (the "Canadian Retirement Plan"), which is registered with the  Province of Quebec and the Government of Canada. All salaried, non-union  employees of Rock of Ages Canada, Inc. are participants in the Canadian  Retirement Plan, including Mr. Labonte. Pursuant to the Plan, Rock of Ages  Canada contributes 8% of a participant's monthly compensation each month to  each participant's account. The investments in the account are self-directed  by each participant with a range of investment options. Rock of Ages Canada  may, at its discretion, make an additional annual contribution to a  participant's account, up to a maximum aggregate amount of $16,500 CDN per  year (including amounts previously contributed during the year).

 

**COMPENSATION OF DIRECTORS**

 

Directors who are not also officers of Rock of Ages  are paid annual directors' retainers of $20,000 and $1,000 for each meeting  of the Board, including committee meetings. The Chairman of each committee  is paid an additional annual retainer of $1,500. Directors are also eligible for stock option grants under our Amended and Restated 1994 Stock Plan.

 
**EMPLOYMENT  AGREEMENTS**
 

We have an employment agreement with Kurt M. Swenson  (the "Swenson Employment Agreement") for retention of his services  as President and Chief Executive Officer of the Company. The term of the  Swenson Employment Agreement commenced on October 24, 1997, the date of  consummation of the initial public offering (the "Commencement  Date"), and continues until the fifth anniversary thereof, provided on  the third and each subsequent anniversary of the Commencement Date such term  will automatically be extended for one additional year, unless, not later  than ninety days prior to the expiration of the term, the Company or Mr.  Swenson gives notice the term will not be extended. The Swenson Employment  Agreement has been automatically extended each year since 2002 and will,  subject to further automatic extension, expire in October 2005. The Swenson  Employment Agreement provides for continued payment of salary and benefits  over the remainder of the term if Mr. Swenson's employment is terminated by  the Company without Cause (as defined in the Swenson Employment Agreement) or  as a result of death or disability or by Mr. Swenson for Good Reason (as  defined in the Swenson Employment Agreement). The Swenson Employment  Agreement also provides for a lump sum payment to Mr. Swenson equal to the  sum of (i) accrued but unpaid salary, and a prorated bonus amount equal to  the greater of the largest annual bonus paid to Mr. Swenson during the prior  three years and the annual bonus payable in respect of the most recently  completed fiscal year (the "Highest Annual Bonus"), through the  date of termination and (ii) three times the sum of (A) his then annual  salary and (B) Highest Annual Bonus, and for continuation of benefits for  three years, if Mr. Swenson's employment is terminated by the Company (other  than for Cause, death or disability) during the twelve-month period  following, or prior to but in connection with, or by Mr. Swenson during the  twelve-month period following, a Change in Control (as defined in the Swenson  Employment Agreement). In the event of a termination related to a Change in  Control, Mr. Swenson may elect in lieu of the lump sum payment described  above, to receive in a lump sum or over the then remaining term of the  Swenson Employment Agreement, an amount equal to the total amount he would  have been entitled to receive if his employment had been terminated by the  Company without Cause or by Mr. Swenson for Good Reason. If any payment or  distribution by the Company to or for the benefit of Mr. Swenson under the  Swenson Employment Agreement would be subject to the excise tax imposed by  Section 4999 of the Code or any interest or penalties are incurred by Mr.  Swenson with respect to such excise tax, then Mr. Swenson will generally be  entitled to receive an additional payment such that after payment by Mr.  Swenson of all taxes, Mr. Swenson retains an amount of the additional payment  equal to the excise tax imposed.

 

We have an employment agreement with Rick Wrabel  (the "Wrabel Employment Agreement") for retention of his services  as President of the Memorials Division of the Company. The term of the Wrabel  Employment Agreement commenced on May 17, 2004 and continues until the fifth  anniversary thereof. The Wrabel Employment Agreement provides for continued  payment of salary and benefits over a period of 12 months if Mr. Wrabel's  employment is terminated by the Company without Cause (as defined in the  Wrabel Employment Agreement) or if he terminates the Agreement for Good  Reason (as defined in the Wrabel Employment Agreement). In such event, the  Wrabel Employment Agreement also provides for payment of (i) earned, but  unpaid bonus, prorated to the date of termination; (ii) continuation of  health care coverage for a period of 12 months; and (iii) reimbursement for  outplacement services in an aggregate amount not to exceed $10,000. The  Wrabel Employment Agreement provides for a lump sum payment to Mr. Wrabel  equal to two times his then current annual base salary if his employment is  terminated by the Company within 12 months of a Change In Control (as defined  by the Wrabel Employment Agreement) or if he terminates his employment for  Good Reason within 12 months after the occurrence of a Change In Control. In addition,  Mr. Wrabel would receive the payments and/or benefits set forth in (i), (ii)  and (iii) above in the event of a termination in connection with a Change In  Control. We have also agreed to reimburse Mr. Wrabel for housing expenses  incurred while he is searching for a suitable residence in Vermont.

 

**COMPENSATION COMMITTEE INTERLOCKS  AND INSIDER PARTICIPATION**

 

Mr. Fox, Ms. Sheiffer, Mr. Waite and Mr. Webster  served as members of the Compensation Committee of the Board of Directors of  the Company for all of 2004. None of the members of the Compensation  Committee is currently or has ever been an officer or employee of the Company  or any of its subsidiaries. None of the Company's executive officers serves  as a member of the board of directors or compensation committee of any entity  that has one or more executive officers serving as a member of the Board or  the Compensation Committee. 

 

 39

  

**ITEM 12.**

**SECURITY OWNERSHIP OF  CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS**

 

The following table sets forth, as of March 28,  2005, certain information with respect to the beneficial ownership of our  Common Stock by each (i) director, (ii) Named Executive Officer and (iii)  beneficial owner of more than 5% of either class of the outstanding Common  Stock known to us, based on Securities and Exchange Commission filings and  other available information and (iv) by all directors and executive officers  of the Company as a group. This information is based upon information  received from or on behalf of the individuals or entities named below, except  as otherwise noted. The Class B Common Stock is convertible on a  share-for-share basis into Class A Common Stock. The Class B Common Stock is  entitled to ten votes per share and the Class A Common Stock is entitled to  one vote per share. Beneficial ownership has been determined in accordance  with the rules of the Securities and Exchange Commission. Except as indicated  in the footnotes below, we believe, based on the information furnished or  otherwise available to us, the persons and entities named in the table below  have sole voting and investment power with respect to all shares of Common  Stock shown as beneficially owned by them, subject to applicable community  property laws. The calculation of beneficial ownership is based upon  4,694,800 shares of Class A Common Stock and 2,700,596 shares of Class B  Common Stock outstanding as of March 28, 2005.

 

In computing the number of shares of Common Stock  beneficially owned by a person and the percentage ownership of such person,  shares of Class A Common Stock subject to options held by that person that  are currently exercisable or exercisable within 60 days of March 30, 2005  were deemed to be outstanding. Such shares were not deemed to be outstanding,  however, for the purpose of computing the percentage ownership of any other  person.

 

** **

** **

** **

**SHARES  OF CLASS B  COMMON STOCK  BENEFICIALLY OWNED**

** **

**SHARES  OF CLASS A  COMMON STOCK  BENEFICIALLY OWNED**

**NAME AND ADDRESS OF BENEFICIAL OWNER  (1)**

** **

**NUMBER**

** **

**PERCENT  OF  CLASS**

** **

**NUMBER  (2)**

** **

**PERCENT  OF   CLASS (2)**

 

 

 

 

 

 

 

 

Andrew Delaney (3)  2727 Allen Parkway, Suite 460  Houston, TX 77019

 

—

 
—
 

336,437

 

7.1%

 

 

 

 

 

 

 

 

 

Connors Investor Services, Inc. (4)  1100 Berkshire Boulevard  Wyomissing, PA 19610

 

—

 

—

 

310,450

 

6.6%

 

 

 

 

 

 

 

 

 

Dimensional Fund Advisors, Inc. (5)  1299 Ocean Avenue, 11th Floor  Santa Monica, CA 90401

 

—

 
—
 

280,800

 

6.0%

 

 

 

 

 

 

 

 

 

AXA Financial, Inc. (6)  1290 Avenue of the Americas  New York, NY 10104 

 

—

 

—

 

240,578

 

5.1%

 

 

 

 

 

 

 

 

 

Kurt M. Swenson (7) **

 

1,005,000

 

37.2%

 

1,135,000

 

19.9%

Kevin C. Swenson (8)

 

1,023,489

 

37.9%

 

1,023,049

 

17.9%

Estate of Douglas M. Schair (9)**

 

—

 
—
 

579,303

 

12.3%

Robert L. Pope 

 

144,875

 

5.4%

 

144,875

 

3.0%

Richard C. Kimball **

 

29,126

 

1.1%

 

113,426

 

2.4%

Jon M. Gregory (10) **

 

—

 

—

 

61,326

 

1.3%

Charles M. Waite **

 

29,126

 

1.1%

 

45,000

 

*

James L. Fox **

 

—

 
—
 

1,000

 

*

Frederick E. Webster Jr. **

 

—

 

—

 

5,000

 

*

Donald Labonte (11)**

 
—
 
—
 

9,000

 

*

Pamela G. Sheiffer **

 
—
 
—
 

2,500

 

*

Rick Wrabel (12)**

 
—
 
—
 

37,000

 

*

Terry Shipp**

 
—
 
—
 

1,000

 

*

Dennis Merchant (13)**

 
—
 
—
 

15,000

 

*

All directors and executive officers as a group (13  persons)

 

1,063,252

 

39.4%

 

1,483,752

 

24.6%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

**  Named Executive Officer and/orDirector*    Less than 1%

 41

(1)

The business address of each director and executive  officer of the Company is c/o Rock of Ages Corporation, 772 Graniteville  Road, Graniteville, Vermont 05654.

 

 

(2)

For each beneficial owner (and directors and executive  officers as a group), (i) the number of shares of Class A Common Stock listed  includes (or is comprised solely of) a number of shares equal to the number  of shares of Class B Common Stock, if any, listed as beneficially owned by  such beneficial owner(s) and (ii) the percentage of Class A Common Stock  listed assumes the conversion on March 28, 2005 of all shares of Class B  Common Stock, if any, listed as beneficially owned by such beneficial  owner(s) into Class A Common Stock and also that no other shares of Class B  Common Stock beneficially owned by others are so converted.

 

 

(3)

According to a Schedule 13D dated October 18, 2002,  Andrew Delaney, a private investor with an address of 2727 Allen Parkway,  Suite 460, Houston, Texas 77019, has sole dispositive power with respect to  the 336,437 shares of Class A Common Stock.

 

 

(4)

According to a Schedule 13G dated February 14, 2005,  Connors Investment Services, Inc., in its capacity as an investment advisor  or manager, may be deemed to be the beneficial owner of the listed shares  that are held of record by certain investment companies, trusts or other  accounts it advises or manages.

 

 

(5)

According to a Schedule 13G dated February 9, 2005,  Dimensional Fund Advisors, Inc., in its capacity as an investment advisor or  manager, may be deemed to be the beneficial owner of the listed shares that  are held of record by certain investment companies, trusts or other accounts  it advises or manages.

 

 

(6)

According to a Schedule 13G dated February 14, 2005,  AXA Financial Services, Inc., in its capacity as an investment advisor or  manager, may be deemed to be the beneficial owner of the listed shares that  are held of record by certain investment companies, trusts or other accounts  it advises or manages.

 

 

(7)

Kurt M. Swenson is the brother of Kevin C. Swenson.  Includes 1,005,000 shares of Class B Common Stock and 130,000 shares of Class  A Common Stock held by the Kurt M. Swenson Revocable Trust of 2000. Kurt M.  Swenson, as the sole trustee of the Kurt M. Swenson Revocable Trust of 2000,  beneficially owns such shares. Does not include 61,489 Class B Common Stock  held by trusts with an independent trustee for the benefit of Mr. Swenson's  adult children.

 

 

(8)

Kevin C. Swenson is the brother of Kurt M. Swenson.  Does not include 38,000 shares of Class B Common Stock held by trusts with an  independent trustee for the benefit of Mr. Swenson's adult children.

 

 

(9)

Douglas M. Schair, a former director of the Company,  died January 26, 2005. Includes 9,000 shares of Class A Common Stock subject  to currently exercisable stock options, which his estate may exercise on or  before June 27, 2005, in accordance with our Amended and Restated 1994 Stock  Plan. Also includes 18,800 shares of Class A Common Stock held by a trust of  which Mr. Schair was co-trustee until his death. Mr. Schair disclaimed  beneficial ownership of such shares. Does not include 15, 018 shares held by  trusts with an independent trustee for the benefit of Mr. Schair's adult  children.

 

 

(10)

Includes 36,000 shares of Class A Common Stock  subject to currently exercisable stock options.

 

 

(11)

Includes 9,000 shares of Class A Common Stock  subject to currently exercisable stock options.

 

 

(12)

Includes 30,000 shares of Class A Common Stock subject  to currently exercisable stock options.

 

 

(13)

Includes 9,000 shares of Class A Common Stock  subject to currently exercisable options.

 42

 

 

**Equity Compensation Plan  Information**

 

The following table sets forth information regarding  the Company's equity compensation plan as of December 31, 2004.

 

**Plan Category**

** **

**Number  of securities  to be issued upon  exercise of  outstanding options,warrants and rights**

** **

**Weighted-average  exercise price of  outstanding options,warrants and rights**

** **

**Number  of securities  remaining available for future  issuance under equity  compensation plans (excluding  securities reflected in column(a))**

 

 

(a)

 

(b)

 

(c)

 

 

 

 

 

 

 

Equity compensation plans approved by security  holders

 

498,000

 

$6.56

 
None
 

 

 

 

 

 

 

Equity compensation plans not approved by security  holders

 

None

 

None

 

None

 

 

 

 

 

 

 

Total

 

498,000

 

$6.56

 

None

 

 

 

 

 

 

 

 

(1)

The Rock of Ages Corporation Amended  and Restated 1994 Stock Plan expired in November 2004. While grants made prior  to expiration remain outstanding, no further grants may be made under the  Plan.

 

 

**ITEM 13.**

**CERTAIN RELATIONSHIPS  AND RELATED TRANSACTIONS**

 

In connection with and prior to its initial public  offering in 1997, the Company effected a reorganization whereby, among other  things, the Company's then parent corporation, Swenson Granite Company, Inc.  ("Swenson Granite"), was merged with and into the Company, with the  Company as the surviving corporation, and, immediately prior to such merger,  Swenson Granite distributed its curb and landscaping business to its  stockholders through a pro rata distribution of all of the member interests  in a newly formed limited liability company named Swenson Granite Company LLC  ("Swenson LLC"). Kurt M. Swenson, the Company's Chairman, President  and Chief Executive Officer, and his brother Kevin C. Swenson, each own  approximately 31% of Swenson Granite LLC. Certain other executive officers  and directors of the Company collectively own approximately 9% of Swenson  LLC. Kurt M. Swenson serves as a non-officer Chairman of the Board of Swenson  LLC, but has no involvement with its day-to-day operations. Robert Pope, a  holder of more than 5% of the Class B Common Stock, is the President and  Chief Executive Officer, and including shares owned by his wife and children,  owns 12% of Swenson LLC. Neither Kurt M. Swenson nor any other officer or  director of the Company, receives salary, bonus, expenses or other  compensation from Swenson LLC, except for any pro rata share of earnings  attributable to their ownership interest in Swenson LLC.

 

Swenson LLC owns two granite quarries, one in  Concord, New Hampshire and another in Woodbury, Vermont. Both have been owned  by Swenson LLC (or its predecessor Swenson Granite) for more than 40 years.  Because of the proximity of the Woodbury quarry to Barre, Vermont, the  Company provides, and may continue to provide, certain maintenance services  and parts to the Woodbury quarry and is reimbursed for the cost of such  services. During 2004, the Company received approximately $66,000 for such  maintenance services and parts. Both the Company and Swenson LLC have the  right to terminate these services at any time. The Company also purchases  Concord blocks and other products from Swenson LLC at market prices. The  Company's purchases of granite provided by Swenson LLC in 2004 were  approximately $31,000. Swenson LLC also purchases granite blocks and slabs  from the Company. Such purchases amounted to approximately $17,000 in 2004.  The Company believes these arrangements with Swenson LLC are as favorable, or  more favorable, to the Company than would be available from an unrelated  party for comparable granite blocks. Both of Swenson LLC 's quarries produce  gray granite primarily for curb and landscape use. Although Rock of Ages'  gray granite from its Barre and Stanstead quarries is used primarily for  memorial use, it may be in competition with Swenson LLC in some markets,  including the supply of its gray granites for other than memorial use.  Swenson LLC has supplied its Woodbury granite to manufacturers of government  grave markers made for the Veterans' Administration for many years and Rock  of Ages has not been in the business of selling or manufacturing its gray  granites for use in Veterans markers. 

 

43

  

 

Swenson LLC owns approximately 5% of the common  stock of Polycor, Inc. and Kurt M. Swenson has been a director of Group  Polycor International and Polycor, Inc. since approximately 1991. Polycor is  in the business of quarrying and manufacturing granite and marble and is  engaged in all segments of the granite market. In a recent press release,  Polycor described itself as the third largest granite company in North  America. As such, it may be deemed to compete with both Rock of Ages and  Swenson LLC in various markets. The primary businesses of Polycor are  cut-to-size granite for building use, for thin slab sales, for tiles and for  granite curb. Rock of Ages is not engaged in those segments of the granite  markets. Polycor sells marble and granite blocks and slabs worldwide for all  uses including monumental use and could be deemed in competition with Rock of  Ages in some markets. Most of Polycor's granites are of different types than  Rock of Ages, except for Polycor's gray granite, which is located near Rock  of Ages' Stanstead quarry and is substantially identical to Stanstead gray.  In 2003, Polycor sold its memorial manufacturing equipment and exited the  manufacture and sale of finished granite memorials, but it continues to sell  granite and marble blocks and slabs for memorial use.

 

In July 2004, the Company invested $3.5 million in FFS  Holdings, Inc. ("FFS"). The investment, which includes voting and  non-voting common shares, represents approximately 6% of the common voting  shares and approximately 8% of the total common equity of FFS. FFS holds the  stock of Hillenbrand Industries to acquire Forethought Financial Services, a  leading provider of pre-need insurance trust service programs, which are  currently marketed primarily through funeral directors. FFS was formed to  acquire Forethought by The Devlin Group, a group of several senior insurance  industry executives including Douglas M. Schair, a former director of the  Company until his death on January 26, 2005, and a holder of approximately  12.5% of the Class A common stock of the Company. Mr. Schair's estate holds  approximately 18% of the outstanding shares of FFS and until his death he  held the position of Vice Chairman and Chief Investment Officer of FFS. 

 

We have a consulting agreement with Richard C.  Kimball, a director of the Company and Vice Chairman of the Board. Pursuant  to the agreement, we pay Mr. Kimball during 2005 a retainer of $60,000 for  consulting services. The agreement was entered into in connection with Mr.  Kimball's retirement from full time employment with the Company as January 1,  2005, as a result of the expected additional time to be spent by Mr. Kimball  beyond the normal time commitments of outside directors, to assure completion  of an orderly transition to others of all of his operating responsibilities,  including certain strategic growth initiatives.

 

**ITEM 14.**

**PRINCIPAL ACCOUNTANT  FEES AND SERVICES**

 

The Audit Committee appointed KPMG, LLP as Rock of  Ages' independent registered public accounting firm for the fiscal year ended  December 31, 2004. The following table shows the fees paid by Rock of Ages  for the audit and other services provided by KPMG for fiscal 2004 and 2003.

 

The Audit Committee did not utilize the de minimis  exception to the pre-approval requirements to approve any services provided  by KPMG during fiscal 2004.

 
  
2004 
2003Audit Fees (1)$
402,958
$
319,340Tax Fees (2) 
99,407 
155,390All Other Fees 
—
—Total$
502,365
$
474,730
 

The Audit Committee has delegated to the Chair of  the Audit Committee the authority to pre-approve audit-related and non-audit  services not prohibited by law to be performed by Rock of Ages' independent  auditors, provided the Chair shall report any decisions to pre-approve such  audit-related or non-audit services and fees to the full Audit Committee at  its next regular meeting and the Audit Committee ratifies the approval of  such non-audit services by the Chair.

 

(1)

Audit fees represent fees for professional services  provided in connection with the audit of our financial statements and review  of our quarterly financial statements and audit services provided in  connection with other statutory or regulatory filings.

 

 

(2)

For fiscal 2004 and 2003, respectively, tax fees  principally included tax compliance fees of $76,350 and $70,650, and tax  advice and tax planning fees of $23,057 and $84,740. 

 44

**PARTIV**

 

**ITEM 15.**

**EXHIBITS AND ,  FINANCIAL STATEMENT SCHEDULES**

 

 

(a)

The following documents are filed as part of or are  included in this Annual Report on Form 10-K and are incorporated herein by  reference: 

 

 

 

  

 

 

1.

The financial statements listed in the Index to Consolidated  Financial Statements and Financial Statement Schedule, filed as part of this  Annual Report on Form 10-K. 

 

 

 

  

 

 

2.

All schedules for which provision is made in the  applicable accounting regulations of the Securities and Exchange Commission  are not required under the related instructions or are inapplicable and  therefore have been omitted. 

 

 

 

  

 

 

3.

The exhibits listed in the Exhibit Index filed as  part of this Annual Report on Form 10- K. 

 

 

 

  

 45

 
**ROCKOF AGES CORPORATION AND SUBSIDIARIES** 
Consolidated FinancialStatements 

December 31, 2004, 2003and 2002 

(With Report ofIndependent Registered Public Accounting Firm Thereon)

 

 

**ROCK OF AGES CORPORATION AND SUBSIDIARIES**Table of Contents

 

 

**PAGE**

 

 

Report of Independent Registered Public Accounting  Firm

i

 

 

Consolidated Balance Sheets

ii

 

 

Consolidated Statements of Operations

iv

 

 

Consolidated Statements of Stockholders' Equity and  Comprehensive Income (Loss)

v

 

 

Consolidated Statements of Cash Flows 

vi

 

 

Notes to Consolidated Financial Statements

viii

 

 

Supplementary Information:

 

 

 

          Report  of Independent Registered Public Accounting Firm on Supplementary Information

xxxii

 

 

          Schedule  II-Valuation and Qualifying Accounts and Reserves

xxxiii

 

 

  

 

**REPORT OF INDEPENDENT REGISTERED  PUBLIC ACCOUNTING FIRM**

 

The Board of Directors 

Rock of Ages Corporation:

 

We have audited the accompanying consolidated  balance sheets of Rock of Ages Corporation and subsidiaries as of December  31, 2004 and 2003, and the related consolidated statements of operations,  stockholders' equity and comprehensive income (loss), and cash flows for each  of the years in the three-year period ended December 31, 2004. These  consolidated financial statements are the responsibility of the Company's  management. Our responsibility is to express an opinion on these consolidated  financial statements based on our audits.

 

We conducted our audits in accordance with the  standards of the Public Company Accounting Oversight Board (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 consolidated 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 our audits provide a  reasonable basis for our opinion.

 

In our opinion, the consolidated financial  statements referred to above present fairly, in all material respects, the  financial position of Rock of Ages Corporation and subsidiaries as of  December 31, 2004 and 2003, and the results of their operations and their  cash flows for each of the years in the three-year period ended December 31,  2004 in conformity with U.S. generally accepted accounting principles. 

 

As discussed in Note 2 to  the consolidated financial statements, effective January 1, 2002, the Company  adopted the provisions of Statement of Financial Accounting Standards No.  142, "Goodwill and Other Intangible Assets."

 

As discussed in Note 3 to  the consolidated financial statements, the Company changed its method of  accounting for its quarry inventory from the first-in, first-out method to  the specific annual average cost method, effective January 1, 2002.
   
/s/ KPMG LLPBurlington, Vermont 

February 22, 2005, except for Note 5    as to which the date is March 22, 2005 

 

 i

 **ROCK OFAGES CORPORATION AND SUBSIDIARIES**Consolidated Balance SheetsDecember 31, 2004 and 2003

  

 

**2004**

 

 

**2003**

 
**ASSETS (notes 5 and 6)**                  
Current assets:

 

 

 

 

 

 

   Cash and cash equivalents

$

4,298,049

 

$

3,226,870

 

   Trade receivables, less allowance  for doubtful accounts of       $1,022,055 in 2004 and $739,929 in 2003 (note  5)

 

15,017,249

 

 

15,586,829

 

   Due from affiliates (note 11)

 

282,508

 

 

216,718

 

   Inventories (notes 3 and 5)

 

23,858,228

 

 

21,151,696 

 

   Income taxes receivable

 

—

 

 

408,744

 

   Deferred tax assets (note 8)

 

707,947

 

 

720,869

 

   Assets held for sale (note 16)

 

—

 

 

817,122

 

   Note receivable (note 16)

 

—

 

 

5,250,000

 

   Other current assets

 

4,510,294

 

 

3,665,417

 

          Total  current assets

 

48,674,275

 

 

51,044,265

 

 

 

 

 

 

 

 

Property, plant and equipment:

 

 

 

 

 

 

   Granite reserves and development  costs

 

14,001,597

 

 

13,846,831 

 

   Land

 

7,340,310 

 

 

6,290,736 

 

   Buildings and land improvements

 

21,226,048

 

 

19,420,251 

 

   Machinery and equipment

 

29,285,553

 

 

26,189,452 

 

   Furniture and fixtures

 

3,564,855

 

 

3,038,757

 

   Construction-in-process

 

871,246

 

 

871,175

 

 

 

76,289,609

 

 

69,657,202 

 

   Less accumulated depreciation,  depletion and amortization

 

30,159,497

 

 

27,162,347 

 

          Net  property, plant and equipment

 

46,130,112

 

 

42,494,855

 

Other assets:

 

 

 

 

 

 

   Cash surrender value of life insurance

 
742,701
 

 

728,182

 

   Intangible assets, less  accumulated amortization of $668,789 in 2004       and $619,217  in 2003 (note 2)

 

388,434

 

 

438,006

 

   Goodwill (note 2)

 

163,492

 

 

—

 

   Debt issuance costs, less  accumulated amortization of       $212,905 in 2004 and $81,039 in 2003

 

225,081

 

 

243,947

 

   Due from affiliates (note 11)

 

54,690

 

 

65,902

 

   Deferred tax assets (note 8)

 

6,739,769

 

 

5,236,474

 

   Intangible pension asset (note 9)

 

738,972

 

 

903,758

 

   Long term investments (note 11 )

 

4,111,964

 

 

500,570

 

   Other long term assets

 

607,857

 

 

805,228

 

          Total  other assets

 

13,772,960

 

 

8,922,067 

 

          Total  assets 

$

108,577,347

 

$

102,461,187

 

 

 

 

 

 

 

 

  

 ii

**ROCK OF AGES CORPORATION AND SUBSIDIARIES**ConsolidatedBalance SheetsDecember 31, 2004 and 2003

  

 

**2004**

 

 

**2003**

 
**LIABILITIES AND STOCKHOLDERS'  EQUITY**
Current liabilities:

 

 

 

 

 

 

   Borrowings under lines of credit  (note 5)

$

7,287,278

 

$

4,751,405

 

   Current installments of long-term  debt (note 6)

 

35,612

 

 

37,899

 

   Deferred compensation (note 9)

 

371,537

 

 

326,836

 

   Trade payables

 

2,433,125

 

 

1,650,748

 

   Accrued expenses

 

3,845,415

 

 

4,311,432

 

   Income taxes payable

 

389,088

 

 

—

 

   Customer deposits

 

8,172,665

 

 

7,104,487

 

   Liabilities held for sale (note  16)

 

—

 

 

17,122

 

          Total  current liabilities

 

22,534,720

 

 

18,199,929

 

 

 

 

 

 

 

 

Long-term debt, excluding current installments (note  6)

 

16,289,153

 

 

12,793,574

 

Deferred compensation (note 9)

 

6,620,347

 

 

5,998,943

 

Accrued pension cost (note 9)

 

1,993,294

 

 

1,490,497

 

Accrued postretirement benefit cost (note 9)

 

878,610

 

 

827,230

 

Deferred tax liabilities (note 8)

 

30,464

 

 

107,184

 

Other

 

45,000

 

 

74,083 

 

          Total  liabilities

 

48,391,588

 

 

39,491,440

 

 

 

 

 

 

 

 

Commitments and contingencies (note 4 and 9)

 

 

 

 

 

 

 

 

 

 

 

 

 

Stockholders' equity (note 10):

 

 

 

 

 

 

   Preferred stock - $.01 par value;        2,500,000 shares authorized        No shares issued and outstanding

 

—

 

 
—
 

   Common stock - Class A, $.01 par  value;        30,000,000 shares authorized;        issued and outstanding 4,694,800 and         4,442,668 in 2004 and 2003, respectively

 

46,948

 

 

44,427

 

Common Stock — Class B, $.01 par value;        15,000,000 shares authorized; issued and  outstanding 2,700,596and 2,756,395 in 2004 and 2003, respectively, convertible into        equivalent shares of Class A common stock

 

27,006

 

 

27,564

 

Additional paid-in capital

 

66,266,869

 

 

65,878,461

 

Accumulated deficit

 

(5,287,571

)

 

(2,066,344

)

Accumulated other comprehensive loss

 

(867,493

)

 

(914,361

)

          Total  stockholders' equity

 

60,185,759

 

 

62,969,747

 

 

 

 

 

 

 

 

          Total  liabilities and stockholders' equity

$

108,577,347

 

$

102,461,187

 

 

 

 

 

 

 

 

See accompanying notes toconsolidated financial statements

 iii

**ROCK OFAGES CORPORATION AND SUBSIDIARIES**ConsolidatedStatements of OperationsYears ended December 31, 2004, 2003 and 2002

 

 

 

**2004**

 

 

**2003**

 

 

**2002**

 

Net revenues:

 

 

 

 

 

 

 

 

 

   Quarrying

$

29,926,649

 

$

28,380,824

 

$

29,540,585

 

   Manufacturing

 

20,865,252

 

 

20,372,917

 

 

19,726,136

 

   Retailing

 

35,801,733

 

 

35,663,289

 

 

38,448,279

 

      Total net  revenues

 

86,593,634

 

 

84,417,030

 

 

87,715,000

 

Gross profit:

 

 

 

 

 

 

 

 

 

   Quarrying

 

12,326,882

 

 

11,178,259

 

 

13,131,948

 

   Manufacturing

 

5,572,461

 

 

5,774,330

 

 

5,521,386

 

   Retailing

 

20,353,954

 

 

20,387,533

 

 

21,313,970

 

      Total gross  profit

 

38,253,297

 

 

37,340,122

 

 

39,967,304

 

Selling, general and administrative expenses

 

 

 

 

 

 

 

 

 

   Quarrying

 

3,555,606

 

 

3,155,147

 

 

3,266,652

 

   Manufacturing

 

4,001,668

 

 

3,673,758

 

 

3,401,855

 

   Retailing

 

21,828,546

 

 

21,099,628

 

 

20,895,543

 

  Corporate overhead

 

5,087,447

 

 

4,692,213

 

 

5,273,954

 

      Total selling,  general and administrative expenses

 

34,473,267

 

 

32,620,746

 

 

32,838,004

 

 

 

 

 

 

 

 

 

 

Impairment of note receivable 

 

400,000

 

 

—

 

 

—

 

Adverse judgment and legal expenses

 

6,500,000

 

 

2,440,454

 

 

1,725,425

 

 

 

 

 

 

 

 

 

 

 

   Income (loss) from operations

 

(3,119,970)

 

 

2,278,922

 

 

5,403,875

 

 

 

 

 

 

 

 

 

 

 

Foreign exchange loss (gain)

 

68,531 

 

 

120,694 

 

 

(25,453

) 

Interest expense

 

821,520

 

 

471,105

 

 

522,108

 

 

 

 

 

 

 

 

 

 

 

   Income (loss) from continuing  operations before provision for income taxes      and cumulative effect of changes in accounting principle

 

(4,010,021

) 

 

1,687,123

 

 

4,907,220

 

 

 

 

 

 

 

 

 

 

 

Provision for income taxes (note 8)

 

(853,634

) 

 

577,819

 

 

1,363,958

 

 

 

 

 

 

 

 

 

 

 

   Income (loss) from continuing  operations before cumulative effect of changes in       accounting principles

 

(3,156,387

)

 

1,109,304

 

 

3,543,262

 

  Discontinued operations, net of tax effect (note  16)

 

(64,840

)

 

337,901

 

 

251,825

 

 

 

 

 

 

 

 

 

 

 

  Income (loss) before cumulative effect of  changes in accounting principles

 

 (3,221,227

)

 

1,447,205

 

 

 3,795,087

 

  Cumulative effect of changes in accounting  principles (net of tax benefit      of $5,459,151) (notes 2 and 3)

 

—

 

 

—

 

 

(28,710,298

) 

 

 

 

 

 

 

 

 

 

 

   Net income (loss)

$

(3,221,227

) 

$

1,447,205

 

$

(24,915,211

) 

 

 

 

 

 

 

 

 

 

 

Net income (loss) per share - basic:

 

 

 

 

 

 

 

 

 

   Income (loss) from continuing  operations before cumulative effect of changes          in accounting  principles

$

(0.43

) 

$

0.15

 

$

0.45

 

  Discontinued operations

 

(0.01

)

 

0.05

 

 

0.03

 

   Cumulative effect of changes in  accounting principles (net of tax benefit of          ($5,459,151) (notes 2 and  3)

 

—

 

 

—

 

 

(3.65

) 

        Net  income (loss) per share

$

(0.44

) 

$

0.20

 

$

(3.17

) 

 

 

 

 

 

 

 

 

 

 

Net income (loss) per share - diluted:

 

 

 

 

 

 

 

 

 

   Income (loss) from continuing  operations before cumulative effect of changes          in accounting  principles

$

(0.43

) 

$

0.15

 

$

0.45

 

  Discontinued operations

 

(0.01

)

 

0.05

 

 

0.03

 

   Cumulative effect of changes in  accounting principles (net of tax benefit of          $5,459,151)

 

—

 

 

—

 

 

(3.64

) 

        Net  income (loss) per share

$

(0.44

) 

$

0.20

 

$

(3.16

) 

 

 

 

 

 

 

 

 

 

 

Weighted average number of common shares outstanding  - basic 

 

7,318,127

 

 

7,181,545

 

 

7,847,821

 

Weighted average number of common shares outstanding  - diluted

 

7,318,127

 

 

7,219,378

 

 

7,880,161

 

 See accompanying notes to consolidated financialstatements.

iv

** ROCK OFAGES CORPORATION AND SUBSIDIARIES**ConsolidatedStatements of Stockholders' Equity and Comprehensive Income (Loss)Years ended December 31, 2004, 2003 and 2002

 

 

 

**NUMBER  OF SHARES  ISSUED AND OUTSTANDING**

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

**CLASS  A  COMMON  STOCK(SHARES)**

 

**CLASS  B  COMMON  STOCK(SHARES)**

 

 

**CLASS  A  COMMONSTOCK**

 

 

**CLASS  B  COMMONSTOCK**

 

 

**ADDITIONAL  PAID-INCAPITAL**

 

 

**RETAINED  EARNINGS(ACCUMULATED DEFICIT)**

 

 

**ACCUMULATED  OTHER  COMPREHENSIVEINCOME (LOSS)**

 

 

**TOTAL    STOCKHOLDERS'EQUITY**

 

Balance at December 31, 2001

 

5,014,408

 

2,787,021

 

$

50,144

 

$

27,870

 

$

69,066,548

 

$

21,473,481

 

$

(947,701

)

$

89,670,342

 

 

 

—

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   Net income

 

— 

 
—
 

 

—

 

 

—

 

 

—

 

 

(24,915,211

)

 
—
 

 

(24,915,211

) 

  Cumulative  translation  adjustment

 
—   —      —      —      —      —
 

 

32,684

 

 

32,684

 

  Minimum pension  liability, net of tax  benefit of   $678,631

 
—   —      —      —      —      —
 

 

(1,648,199

) 

 

(1,648,199

) 
                                                                     
Total comprehensive income (loss)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(26,530,726

) 

Conversion of common stock

 

45,626

 

(45,626

) 

 

456

 

 

(456

) 

 
—      —      —
 

 
—
 

Exercise of options

 

35,002

 

15,000

 

 

350

 

 

150

 

 

262,185

 

 

—

 

 

—

 

 

262,685

 

Repurchase of stock

 

(175,700

) 
—
 

 

(1,757

)

 
—
 

 

(754,912

) 

 
—
 

 
—
 

 

(756,669

) 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2002

 

4,919,336

 

2,756,395

 

$

49,193

 

$

27,564

 

$

68,573,821

 

$

(3,441,730

) 

$

(2,563,216

) 

$

62,645,632

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    Net income

 
—————
 

 

1,447,205

 

 
—
 

 

1,447,205

 

  Cumulative   translation   adjustment

 
—   —      —      —      —      —
 

 

1,436,010

 

 

1,436,010

 

   Minimum    pension   liability, net   of tax benefit of   $71,694

 
—   —      —      —      —      —
 

 

212,845

 

 

212,845

 

Total comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3,096,060

 

Common stock dividends

 
—   —      —      —
 

 

(215,257

) 

 

(71,819

) 

 
—
 

 

(287,076

) 

Exercise of options

 

23,832

 
—
 

 

239

 

 
—
 

 

117,492

 

 
—
 

 
—
 

 

117,731

 

Repurchase of stock

 

(500,500

) 
—
 

 

(5,005

) 

 
—
 

 

(2,597,595

) 

 
—
 

 
—
 

 

(2,602,600

) 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2003

 

4,442,668

 

2,756,395

 

$

44,427

 

$

27,564

 

$

65,878,461

 

$

(2,066,344

) 

$

(914,361

) 

$

62,969,747

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   Net loss 

 
—————
 

 

(3,221,227

) 

 

—

 

 

(3,221,227

) 

  Cumulative   translation  adjustment

 
—   —      —      —      —      —
 

 

699,100 

 

 

699,100 

 

  Minimum pension  liability, net of tax    benefit  of $258,087

 
—   —      —      —      —      —
 

 

(652,232

) 

 

(652,232

) 

Total comprehensive income (loss)

 
—   —      —      —      —      —      —
 

 

(3,174,359

) 

Common stock dividends

 
—   —      —      —
 

 

(585,754

) 

 

—
 

 
—
 

 

(585,754

)

Conversion of common stock

 

55,799

 

(55,799

) 

 

558

 

 

(558)

 

 

— 

 

 

—
 

 

—
 

 
—
 

Exercise of options

 

196,333

 
—
 

 

1,963

 

 
—
 

 

974,162

 

 
—
 

 
—
 

 

976,125

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2004

 

4,694,800

 

2,700,596

 

$

46,948

 

$

27,006

 

$

66,266,869

 

$

(5,287,571

) 

$

(867,493

) 

$

60,185,759

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying notes to consolidated financial statements.

v

** **

**ROCK OFAGES CORPORATION AND SUBSIDIARIES**Consolidated Statements of Cash FlowsYears ended December 31, 2004, 2003 and 2002

 

 

 

**2004**

 

 

**2003**

 

 

**2002**

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

 

  Net income (loss)

$

(3,221,227

) 

$

1,447,205

 

$

(24,915,211

) 

  Adjustments to reconcile net income to  net cash provided by operating activities:

 

—

 

 

 

 

 

 

 

    (Gain) loss on sale of assets

 

(6,118

) 

 

(1,502,360

)

 
—
 

    Depreciation, depletion and  amortization

 

3,620,428

 

 

3,486,893

 

 

3,497,300

 
    Impairment of note  receivable(400,000)——
    Write down of goodwill

 

—

 

 
—
 

 

33,781,555

 

    Decrease (increase) in cash  surrender value of life insurance

 

(14,519

) 

 

37,537

 

 

45,420

 

    Loss on sale of property,  plant and equipment

 
—
 

 

—

 

 

22,633

 

   Cumulative effect of a change in  inventory method

 
—
 

 
—
 

 

387,521

 

    Deferred taxes

 

(1,567,093

)

 

1,258,841

 

 

(5,542,000

) 

    Changes in operating assets  and liabilities:

 

 

 

 

 

 

 

 

 

         Decrease  (increase) in trade receivables

 

596,308

 

 

1,104,430

 

 

(1,551,413

) 

         Decrease  (increase) in due to/from related parties

 

(54,578

) 

 

(210,764

) 

 

159,626

 

         Decrease  (increase) in inventories

 

(2,412,689

) 

 

268,214

 

 

638,279

 

         Decrease  (increase) in other current assets

 

 (444,877

) 

 

459,833

 

 

(16,800

) 

         Decrease  (increase) in intangible pension asset

 

164,786

 

 

232,040

 

 

(913,929

) 

         Decrease  (increase) in prearranged receivables

 
—
 

 

(567,002

) 

 

1,375,316

 

         Decrease  (increase) in cemetery property

 
—
 

 

(147,019

) 

 

(58,481

) 

         Decrease  (increase) in other assets

 

797,371

 

 

378,054

 

 

1,212,000

 

         Increase  (decrease) in trade payables

 

760,448

 

 

(306,543

) 

 

11,666

 

         Increase  (decrease) in accrued expenses

 

(466,017

) 

 

(689,509

) 

 

(235,620

) 

         Increase  (decrease) in income taxes payable/receivable

 

797,832

 

 

(195,611

) 

 

(286,034

) 

         Increase  (decrease) in customer deposits

 

959,651

 

 

(213,829

) 

 

607,236

 

         Increase  (decrease) in deferred compensation

 

666,105

 

 

837,505

 

 

623,766

 

         Increase  (decrease) in accrued pension cost

 

(149,435

) 

 

(987,423

) 

 

651,579

 

         Increase  (decrease) in accrued postretirement benefit cost

 

51,380

 

 

(7,252

) 

 

55,389

 

         Increase  (decrease) in prearranged deferred revenue

 
—
 

 

181,772

 

 

(2,378,782

) 

         Increase  (decrease) in other liabilities

 

(29,083

) 

 

82,875

 

 

(299,618

) 

         Net  cash (used in) provided by operating activities

 

(351,327

) 

 

4,947,887

 

 

6,871,398

 

 

 

 

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

 

    Purchases of property, plant  and equipment

 

(6,706,857

) 

 

(7,735,891

) 

 

(4,061,070

) 

    Purchase of long term investments

 

(3,611,394)

 

 
——
    Proceeds from sale of assets

 

5,400,000 

 

 

1,500,000

 

 

2,296,216

 

    Acquisition, net of cash acquired

 

(477,202

) 

 

—

 

 
—
 

         Net  cash used in investing activities

 

(5,395,453

)

 

(6,235,891

) 

 

(1,764,854

) 

 

 

 

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

 

 

 

 

    Net borrowings under lines of  credit

 

2,535,873

 

 

365,919

 

 

415,084

 

    Debt issuance costs

 

(113,000

) 

 

(5,248

) 

 

(319,752

) 
    Principal borrowings  on long-term debt3,536,763——    Principal payments on  long-term debt(43,471)(189,070)(1,956,149)
    Common stock repurchased

 

—

 

 

(2,602,600

) 

 

(756,669

) 

    Dividends paid on common stock

 

(585,754

)

 

(287,076

)

 

—

 

    Stock options exercised

 

976,125

 

 

117,731

 

 

262,685

 

         Net  cash provided by (used in) financing activities

 

6,306,536

 

 

(2,600,344

) 

 

(2,354,801

) 

 

 

 

 

 

 

 

 

 

 

Effect of exchange rate changes on cash

 

511,423

 

 

929,955

 

 

(1,661

) 

 

 

 

 

 

 

 

 

 

 

         Net  increase (decrease) in cash and cash equivalents

 

1,071,179

 

 

(2,958,393

) 

 

2,750,082

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents, beginning of year

 

3,226,870

 

 

6,185,263

 

 

3,435,181

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents, end of year

$

4,298,049

 

$

3,226,870

 

$

6,185,263

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying notes to consolidated financialstatements.

 vi

**ROCK OFAGES CORPORATION AND SUBSIDIARIES**ConsolidatedStatements of Cash Flows, continued

 

 

 

2004
   
 

2003

 

2002

 

 

 

 

Supplemental cash flow information:

 

 
   
 

 

 

 

    Cash paid during the year  for:

 

 
   
 

 

 

 

         Interest

$

821,520
   
$

672,255

$

738,108

         Income  taxes (net of refunds)

 

(234,028
)
 

285,434

 

1,344,453

 

 

Supplemental non-cash investing and financing  activities:

 

The Company recorded an adjustment for a (decrease)/  increase in the minimum pension liability of $745,533, $(534,642) and  $3,240,759 and a (decrease)/ increase in the intangible asset for pension of  $(164,786), $(232,040) and $913,929 in 2004, 2003 and 2002, respectively.

 

During the fourth quarter of 2004, the Company  completed the sale of its Autumn Rose quarry in a transaction that included  cash of $150,000 received in 2004 and a note receivable of $600,000, which is  payable in kind through the supply of diamond tools and segments pursuant to  a supply agreement.

 

During the fourth quarter of 2003, the Company  completed the sale of Rock of Ages Kentucky Cemeteries, LLC in a transaction  that included cash of $1,500,000 received in 2003 and a note receivable of  $5,250,000, which was paid in full in January 2004. 

 

 

 

 

2004

 

 

2003

 

 

2002

 

 

 

 

 

 

 

 

Acquisitions:

 

 

 

 

 

 

 

 

    Assets acquired

$

590,536

 

$

—

 

$

—

 

    Liabilities assumed and  issued

 

(113,334

) 

 

—

 

 

—

 

    Common stock issued

 
———
 

 

 

 

 

 

 

 

    Cash paid

 

477,202

 

 

—

 

 

—

 

    Costs related to  acquisitions

 
———
 

    Less cash acquired

 
———
 

 

 

 

 

 

 

 

        Net  cash paid for acquisitions

$

477,202

 

$

—

 

$

—

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 See accompanying notes to consolidated financial statements.

vii

**ROCK OF AGESCORPORATION AND SUBSIDIARIES**Notes to Consolidated Financial StatementsDecember 31, 2004, 2003 and 2002

** **

** **

** **

**(1)**

**SUMMARY OF SIGNIFICANT ACCOUNTING  POLICIES**

 

 

 

 

In this report, the terms "Company,"  "we," "us," or "our" mean Rock of Ages  Corporation and all subsidiaries included in our consolidated financial statements.  Rock of Ages was founded in 1885 and is an integrated granite quarrier,  manufacturer and retailer whose principal product is granite memorials used  primarily in cemeteries. We believe we are the largest quarrier, manufacturer  and retailer of finished granite memorials and granite blocks for memorial  use in North America, based on revenues. We own and operate eleven active  quarry properties and six manufacturing and sawing facilities in North  America, principally in Vermont and the Province of Quebec. We market and  distribute our memorials on a retail basis through approximately eighty-nine  Company-owned retail sales outlets in eighteen states. We also sell memorials  wholesale to approximately eighty independent authorized Rock of Ages  retailers in the United States as well as approximately ninety retailers in  Canada. We also owned and operated cemeteries until December 2003.

 

 

 

 

**(a)**

**PRINCIPLES OF CONSOLIDATION**

 

 

 

 

 

The accompanying consolidated financial statements  include the accounts of the Company and its wholly owned subsidiaries. All  significant intercompany balances and transactions have been eliminated in  consolidation.

 

 

 

 

**(b)**

**CASH AND CASH EQUIVALENTS**

 

 

 

 

 

For purposes of the statement of cash flows, we  consider all highly liquid investments purchased with a maturity of three  months or less to be cash equivalents.

 

 

 

** **

**(c)**

**INVENTORIES**

 

 

 

 

 

Inventories are stated at the lower of cost or  market. Cost is determined using the specific annual average cost method for  the retail and manufacturing segments. During the fourth quarter of 2002, we  changed our method of accounting for granite block inventory from the  first-in, first-out method to the specific annual average cost method as  discussed in note 3. 

 

 

 

** **

**(d)**

**DEPRECIATION, DEPLETION AND  AMORTIZATION**

 

 

 

 

 

Property, plant and equipment are stated at cost.  Depreciation is calculated using the straight-line and declining balance  methods, based upon the following estimated useful lives:

 

 

 

 

Buildings and land improvements 

15 to 40 years

 

Machinery and equipment

3 to 20 years

 

Furniture and fixtures

5 to 12 years

 

 

 

 

Depreciation expense amounted to $3,219,756,  $3,074,691 and $3,091,734 in 2004, 2003 and 2002, respectively, which  includes depreciation related to equipment under capital leases.

 

 

 

 

Cost depletion and amortization of granite reserves  and development costs are provided by charges to operations based on cubic  feet produced in relation to estimated reserves of the property. Cost  depletion and amortization charged to operations amounted to $215,771,  $210,806 and $203,011 in 2004, 2003 and 2002, respectively.

 

 

 

** **

**(e)**

**GOODWILL AND INTANGIBLE ASSETS** 

 

 

  

 

 

Amortizable intangible assets (those intangible  assets with definite estimated useful lives) are recorded at fair value at  date of acquisition and are amortized, using the straight-line method, over  their estimated useful lives. Effective January 1, 2002, we adopted Statement  of Financial Accounting Standards, "SFAS" 142, "Goodwill and  Other Intangible Assets," and goodwill is no longer amortized, but  instead tested for impairment at least annually. We test goodwill for  impairment on an annual basis by comparing the fair value of our reporting  units to their carrying value. As of January 1, 2002, in connection with the  transitional impairment test, we determined all goodwill was impaired and was  subsequently written off. See note 2. With the acquisition of Crone Monuments  in August of 2004, we recorded $163,492 of goodwill, which will be tested for  impairment in 2005.

 

 

 

 
viii

**ROCK OF AGES CORPORATION AND SUBSIDIARIES**Notes to Consolidated Financial StatementsDecember 31, 2004, 2003 and 2002

 

 

  

** **

**(f)**

**DEBT ISSUANCE COSTS** 

 

 

  

 

 

The Company amortizes debt issuance costs using the  straight-line method over the term of the related borrowing. Amortization  expense was $131,866, $65,052 and $66,212 in 2004, 2003 and 2002,  respectively and is reported as interest expense in the accompanying  consolidated statements of operations.

 

 

 

** **

**(g)**

**FOREIGN CURRENCY TRANSLATION**

 

 

 

 

 

The Company translates the accounts of our foreign subsidiaries  in accordance with Statement of Financial Accounting Standards (SFAS) No. 52*,* "Foreign Currency  Translation," under which all assets and liabilities are translated at  the rate of exchange in effect at year-end. Revenue and expense accounts are translated  using weighted average exchange rates in effect during the year. Gains or  losses from foreign currency translation are charged to accumulated other  comprehensive income that is included in stockholders' equity in the  accompanying consolidated financial statements. All realized and unrealized  transaction gains and losses are charged to operations and reported as income  in foreign exchange gain/loss.

 

 

 

** **

**(h)**

**INCOME TAXES**

 

 

 

 

 

The Company files its U.S. Federal income tax  returns on a consolidated basis. Rock of Ages Canada, Inc., a wholly owned  subsidiary, is responsible for income taxes in Canada.

 

 

 

 

 

We recognize deferred tax assets and liabilities for  the future tax consequences attributable to the difference between the financial  statement carrying amounts of existing assets and liabilities and their  respective tax basis. We measure deferred tax assets and liabilities using  enacted tax rates expected to apply to taxable income in the years in which  those temporary differences are expected to be recovered or settled. We  recognize the effect on deferred tax assets and liabilities of a change in  tax rates in income in the period that includes the enactment date.

 

 

 

 

 

The Company is allowed to claim percentage  depletion, under IRS Code Section 613, for tax purposes based upon income  derived from quarrying operations.

 

 

 

** **

**(i)**

**STOCK-BASED EMPLOYEE COMPENSATION**

 

 

 

 

 

The Company has adopted the disclosure provisions  of SFAS No. 148, "Accounting for Stock-Based Compensation-Transition  and Disclosure" which is an amendment of SFAS No. 123, "Accounting  for Stock-Based Compensation" ("SFAS 123"), and continues to  apply Accounting Principles Board Opinion No. 25 and related interpretations  in accounting for its stock plans. If we had elected to recognize  compensation cost for all of the plans based upon the fair value at the grant  dates for awards under those plans, consistent with the method prescribed by  SFAS 123, net income (loss) and earnings per share would have been changed to  the pro forma amounts indicated below:

 

 

 

2004

 

 

2003

 

 

2002
   
 

 

 

 

 

 
   
Net income (loss), as reported

$

(3,221,227

) 

$

1,447,205

 

$

(24,915,211

)Deduct: Total stock-based employee  compensation  expense determined under fair value based  method for all awards(385,854)(418,180)(554,401
)
Net income (loss), pro forma

 

(3,607,081

) 

 

1,029,025

 

 

(25,469,612

)
Net income (loss) per share:

 

 

 

 

 

 

 

 
   
Basic as reported

 

(0.44

)

 

0.20

 

 

(3.17

)
Basic-pro forma

 

(0.49

) 

 

0.14

 

 

(3.25

)
 

 

 

 

 

 

 

 

 

Diluted-as reported

 

(0.44

)

 

0.20

 

 

(3.16

)
Diluted-pro forma

 

(0.49

)

 

0.14

 

 

(3.23

)                              
ix

 

**ROCK OF AGES CORPORATION AND SUBSIDIARIES**Notes to Consolidated Financial StatementsDecember 31, 2004, 2003 and 2002

 

 

 

The fair value of each option grant is estimated on  the date of the grant. The per share weighted average fair value of stock  options granted during 2004 and 2002 was $5.48 and $4.06, respectively, on  the date of grant using the Black-Scholes option-pricing model with the  following weighted average assumptions: risk-free interest rate of 4.34% and  3.9%; dividend yield of $0; expected volatility of 74% and 61%, and expected  lives of six (6) and five (5) years, respectively. There were no stock options  granted in 2003. Because changes in the subjective input assumptions can  materially affect the fair value estimate, in the opinion of management, the  existing models do not necessarily provide a reliable single value of its  options and may not be representative of the future stock price of the Company.

 

 

 

** **

**(j)**

**PENSION AND OTHER POSTRETIREMENT  PLANS**

 

 

 

 

 

The Company has a defined benefit pension plan  covering substantially all of its Vermont based non-union employees. The  benefits are based on years of service and the employee's compensation. The  cost of this program is being funded currently.

 

 

 

 

 

We have deferred compensation agreements in the form  of a deferred salary plan as well as a salary continuation plan that covers  certain employees who have deferred compensation agreements with us as  described in more detail in note 9. We measure the cost of our obligations  based on actuarial estimates and recognizes net periodic costs as employees  render the necessary services to earn the deferred compensation benefits.

 

 

 

 

 

The Company also sponsors a defined benefit  postretirement health care plan for certain early retirees and defined  benefit postretirement group life insurance plans for all Vermont based union  and non-union employees. We measure the cost of our obligations based on  actuarial estimates and recognize net periodic costs as employees render the  services necessary to earn the postretirement benefits.

 

 

 

 

 

In 2003, the Medicare Prescription Drug, Improvement  and Modernization Act (the "Act") was signed into law in the United  States. The Company has elected to defer the accounting for the effect of the  Act as permitted by FASB Staff Position No. FAS 106-1 and 106-2, and, therefore, the  benefit obligations reported in note 9 for the Company's postretirement  benefit plans do not reflect the impact of the Act. The Company has not  determined what the impact of the legislation will be, if any, on the results  of operations or financial position of the Company. Specific authoritative  guidance on the accounting for the federal subsidy related to the Act is  pending and, when issued, could require the Company to change previously  reported information.

 

 

 

** **

**(k)**

**USE OF ESTIMATES**

 

 

 

 

 

The preparation of financial statements in  conformity with generally accepted accounting principles in the United States  of America requires management to use estimates and assumptions that affect  the reported amounts of assets and liabilities and disclosure of contingent  assets and liabilities at the date of the financial statements, and the  reported amounts of revenues and expenses during the reporting period. Actual  results could differ from these estimates.

 

 

 

** **

**(l)**

**IMPAIRMENT OF LONG-LIVED ASSETS AND  LONG-LIVED ASSETS TO BE DISPOSED OF**

 

 

 

 

 

The Company accounts for long-lived assets in  accordance with the provisions of SFAS No. 144, " Accounting for the  Impairment or Disposal of Long-Lived Assets." This Statement requires  that long-lived assets and certain identifiable intangibles be reviewed for  impairment whenever events or changes in circumstances indicate the carrying  amount of an asset may not be recoverable. We measure recoverability of  assets to be held and used by a comparison of the carrying amount of an asset  to estimated, undiscounted future cash flows expected to be generated by the  asset. If the carrying amount of an asset exceeds its estimated future cash  flows, an impairment charge is recognized for the amount by which the carrying  amount of the asset exceeds the fair value of the asset. Assets to be  disposed of, are separately presented in the balance sheet and recorded at  the lower of the carrying amount or fair value less costs to sell, and are no  longer depreciated. The assets and liabilities of the disposed group  classified as held for sale are presented separately in the appropriate asset  and liability section of the balance sheet. 
         
x

 

**ROCK OF AGES CORPORATION AND SUBSIDIARIES**Notes to Consolidated Financial StatementsDecember 31, 2004, 2003 and 2002

 

 

 

** **

**(m)**
**REVENUE  RECOGNITION**
 

 

 

 

 

*Quarrying*

 

 

 

 

 

The granite we quarry is sold both to outside  customers and used by our manufacturing group. Our quarry division recognizes  revenue from sales of granite blocks to outside customers when the granite is  shipped from the quarry. We provide a 5% discount for domestic customers if  payment is made within 30 days of purchase, except in the case of December  terms described below. Sales to foreign customers are typically secured by a  letter of credit.

 

 

 

 

 

At our Barre, Vermont  quarries, we allow customers to purchase granite blocks and request that we  store the blocks for them. Many of our customers do not have adequate storage  space at their facilities and want to ensure an adequate supply of blocks,  especially when the Barre quarries are closed from mid-December through mid-March  because of weather. Our quarry division recognizes revenue from blocks  purchased when the customer selects and identifies the block at the quarry  site and the customer requests the block be stored, when they have  significant business reasons to do so. At that time, the block is removed  from inventory; the customer's name is printed on the block, and title and  risk of ownership passes to the buyer. The customer is invoiced and normal  payment terms apply, except in the case of December terms described below.  Granite blocks owned by customers remain on our property for varying periods  of time after title passes to the buyer. We retain a delivery obligation  using our trucks. However, we consider the earnings process substantially  complete because the cost of delivery service is inconsequential (less than  3%) in relation to the selling price. Further, under industry terms of trade,  title passes and the payment obligation is established when the block is  identified at the quarry.

 

 

 

 

 

Each December, we offer special December payment  terms to our Barre quarries' customers. As noted above, from approximately  mid-December to approximately mid-March, our Barre quarries are closed due to  weather. During this time, the quarry customers' manufacturing plants remain  open, and many prefer to ensure they own blocks of a size and quality  selected by them prior to the quarries' closure. All blocks purchased in  December are invoiced on or about December 31 and, at that time, the blocks  are removed from inventory, the customer's name is printed on the blocks, and  title and risk of ownership passes to the buyer. Payment terms are one-third  of the invoice amount on January 15, one-third on February 15, and one-third  on March 15. The program provides essentially the normal 30-day payment terms  during the months when the Barre quarries are closed notwithstanding the  customer purchases a three-month supply in December and makes payments over  90 days. Customers need not use these special December terms and may buy from  inventory during the closure period on a first-come, first-served basis with  the normal 30-day payment terms.

 

 

 

 

 

*Manufacturing*

 

 

 

 

 

Rock of Ages does not record a sale, nor do we  record gross profit, at the time granite is transferred to the manufacturing  division from our quarries. We record revenue and gross profit related to  internally transferred granite only after the granite is manufactured into a  finished product and sold to an outside customer. Manufacturing revenues  related to outside customers are recorded when the finished product is  shipped from our facilities. Manufacturing revenues related to internally  transferred finished products to our owned retail outlets are recorded when  ultimately sold at retail to an outside customer.

 

 

 

 

 

*Retailing*

 

 

 

 

 

Retailing revenues are recorded when the finished  monument is placed in the cemetery. In certain instances, we may enter into  an agreement with a customer, which provides for extended payment terms,  generally up to two years from either the date of setting the memorial or, in  certain instances, upon the settlement of an estate.

 

 

 

 

 

*Cemeteries*

 

 

 

 

 

On December 17, 2003, we sold substantially all of  the assets of our Cemetery division (see note 16) and the operating results  are reflected in discontinued operations for all periods presented. 

xi

**ROCK OF AGES CORPORATION AND SUBSIDIARIES**Notes to Consolidated Financial StatementsDecember 31, 2004, 2003 and 2002

 

 

 

 

 

The cemetery division recorded revenues on its  products and services primarily when the product was delivered or the service  was performed. However, preneed sales of cemetery lots were recognized as  revenue when 20% of the total purchase price of the lot had been received  from the customer. The cemetery division's recognition of revenue from  preneed sales of cemetery services and merchandise was deferred until the  period in which the service or merchandise was delivered. 

 

 

 

 

** **

**(n)**

**COMMON  STOCK**

 

 

 

 

 

The Company has two classes of common stock  outstanding, Class A and Class B. The shares of Class A common stock and  Class B common stock differ with respect to voting rights and certain  conversion rights, as described below:

 

 

 

 

 

*Voting Rights* - Each share of Class A common stock  entitles the holder to one vote on each matter submitted to a vote of the  Company's stockholders and each share of Class B common stock entitles the  holder to ten votes on each such matter, in each case including the election  of directors. Neither the Class A common stock nor the Class B common stock  has cumulative voting rights. 

 

 

 

 

 

*Conversion* - Class A common stock has no conversion  rights. Class B common stock is convertible into Class A common stock, in  whole or in part, at any time and from time to time at the option of the  holder on the basis of one share of Class A common stock for each share of  Class B common stock converted. Each share of Class B common stock will also  automatically convert into one share of Class A common stock upon transfer to  any person or entity other than a Permitted Transferee, as defined in the  Company's Amended and Restated Certificate of Incorporation.

 

 

 

** **

**(o)**

**NET INCOME PER SHARE** 

 

 

  

 

 

Net income per share, or basic earnings per share,  is computed by dividing earnings available for common shares by the weighted  average number of common shares outstanding during each year. Net income per  share - diluted, or diluted earnings per share, is computed by dividing  earnings available for common shares by the weighted average number of common  shares outstanding during each year, adjusted to include the additional  number of common shares that would have been outstanding if the dilutive  potential common shares under stock based compensation programs had been  issued. Potential common shares are not included in the diluted earnings per  share calculations where the effect of their inclusion would be antidilutive.

 

 

 

** **

**(p)**

**COMPREHENSIVE INCOME (LOSS)** 

 

 

  

 

 

Comprehensive income (loss) consists of net income  (loss), cumulative translation adjustment, and a net pension minimum  liability adjustment and is presented in the consolidated statements of  stockholders' equity and comprehensive income (loss).

 

 

 

**Foreign  Currency  Items**

** **

** **

**Minimum  Pension  Liability Adjustment**

** **

** **

**Accumulated  Other  Comprehensive Income**

 

 

 

 

 

 

 

 

Balance at December 31, 2002

$

(756,020

) 

$

(1,807,196

) 

$

(2,563,216

)

 

 

 

 

 

 

 

 

 

 

Changes in 2003

 

1,436,010

 

 

212,845

 

 

1,648,855

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2003

 

679,990

 

 

(1,594,351

) 

 

(914,361

) 

 

 

 

 

 

 

 

 

 

 

Changes in 2004

 

699,100 

 

 

(652,232

) 

 

46,868

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2004

$

1,379,090 

 

$

(2,246,583

) 

$

(867,493

) 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

xii

**ROCK OF AGES CORPORATION AND SUBSIDIARIES**Notes to Consolidated Financial StatementsDecember 31, 2004, 2003 and 2002

** **

**(q)**

**INVESTMENTS**

 

 

 

 

 

The Company's investment in the common stock of an  affiliated company is accounted for by the equity method. Investment in an  affiliated company consists of a 1/3-equity interest in VIKA Ltd., a  Ukrainian closed stock company that owns rights to quarry stone known as  "Galactic Blue" on certain property located in Zhytomir, Ukraine.

 

 

 

 

 

The investment in an affiliated company consists of a  1/3-equity interest in VIKA Ltd., a Ukrainian closed stock company that owns  rights to quarry stone known as "Galactic Blue" on certain property  located in Zhytomir, Ukraine.

 

 

 

 

 

Cost-based investments are primarily comprised of  common stock of non-public companies, representing equity interests of less  than 20% where we do not exercise significant influence over the operating  and financial policies of the investee.

 

 

 

 

 

 

** **

**(r)**

**HISTORICAL INFORMATION AND  RECLASSIFICATIONS**

 

 

Historical financial information reflects the  reclassification of the business conducted by Rock of Ages Kentucky  Cemeteries, LLC and the Autumn Rose quarry as discontinued operations (see  note 16). Certain reclassifications have been made to prior periods as a result  of current year presentation, with no effect on net income (loss).
      
 

 

 

**(2)**

**GOODWILL AND INTANGIBLE ASSETS**

 

 

 

Goodwill and intangible assets consist of the  following at December 31, 2004 and 2003:

 

 

 

** **

**ESTIMATED  USEFUL LIFE**

** **

**2004**

** **

**2003**
               
        Goodwill

 Indefinite

 

163,492

 

 

 

 

 

 

 

        Covenants  not to compete

5-11 Years

 

1,057,223

 

1,057,223
   
        Less  accumulated amortization

 

 

(668,789

) 

(619,217
  )               
 

 

 

 

 

 
   
            Total  Covenants not to compete

 

$

388,434

$

438,006
                  
 

 

 

 

 

 
   
 

Amortization expense was $49,572 in 2004, $136,344  in 2003 and $136,343 in 2002.
   
Estimated future amortization expense related to  covenants not to compete is as follows:

 

Year

 

(in thousands)

 

 

 

2005

 

72

2006

 

70

2007

 

69

2008

 

69

2009

 

54

2010

 

54

 

 

In July 2001, the FASB issued SFAS No. 142, *Goodwill and Other Intangible Assets.*The  Company adopted SFAS 142 as of January 1, 2002. SFAS 142 requires goodwill  and other intangible assets with indefinite lives to no longer be amortized,  but instead be tested for impairment at least annually.

 

 

 

With the adoption of SFAS 142, we reassessed the  useful lives and residual values of all acquired intangible assets to make  any necessary amortization period adjustments. Based on that assessment, no  adjustments were made to the amortization period or residual values of other  intangible assets.

xiii

**ROCK OF AGES CORPORATION AND SUBSIDIARIES**Notes to Consolidated Financial StatementsDecember 31, 2004, 2003 and 2002

 

 

 

SFAS 142 provided a six-month transitional period  from the effective date of adoption for the Company to perform an assessment  of whether there is an indication goodwill is impaired. To the extent an  indication of impairment exists, we must perform a second test to measure the  amount of impairment. At the time, the Company had two reporting units with  goodwill, the Retail and Cemetery segments. We determined the fair value of  each of these reporting units using a discounted cash flow analysis and  compared such values to the respective reporting units' carrying amounts.  This evaluation indicated goodwill recorded in the Retail and Cemetery  segments was impaired as of January 1, 2002. As a result, we completed the  second step of the goodwill impairment test to measure the amount of the  impairment loss. Accordingly, we recognized a $34 million non-cash charge,  recorded as of January 1, 2002, as the cumulative effect of a change in  accounting principle for the write-down of goodwill to its fair value.  Approximately $19 million of the goodwill write-down is deductible for taxes;  therefore a deferred tax asset of $5.3 million has been recorded.

 

 

 

Conditions that contributed to the goodwill  impairment in Retail were an underestimation of the amount of time required  to fully integrate the branding strategy through the retail network and the  difficulty in increasing profitability to the extent anticipated prior to  acquisition. Conditions that contributed to the goodwill impairment in  Cemeteries were lower than expected revenues and greater than expected  selling and administrative costs, which we believe were, to some extent,  temporary but significant enough to affect the fair value determination.

 

 

 

**(3)**

**INVENTORIES**

 

 

 

Inventories consist of the following at December 31,  2004 and 2003:

 

 

 

 

 

2004

 

2003

 

 

 

        Raw  materials

$

12,485,229

$

9,975,799

        Work-in-process

 

1,247,148

 

1,000,576

        Finished  goods and supplies

 

10,125,851

 

10,175,321

 

 

 

 

$

23,858,228

$

21,151,696

 

 

 

 

 

 

 

 

 

 

In December 2002, the Company changed its method of  accounting for granite block inventory from the first-in, first-out method to  the specific annual average cost method. The Company believes this change is  preferable because it more accurately measures the cost of the quarry  inventory and more accurately matches quarrying costs with revenues resulting  in an enhanced measurement of operating results. In accordance with generally  accepted accounting principles, the Company implemented this change  retroactively to January 1, 2002. The cumulative effect of the accounting  change decreased retained earnings at January 1, 2002 by $280,521 (after  reduction for income taxes of $107,000) and is included in net income in  2002. The effect of the change in 2002 was to decrease income before  cumulative change in accounting principle by approximately $573,928 or $0.07  per share (after reduction for income taxes of $215,519).  

 

 

 

**(4)**

**COMMITMENTS AND CONTINGENCIES**

 

 

 

*Leases*

 

 

 

The Company has several non-cancelable operating  leases for land, vehicles and office space. Rental expense for all operating  leases was $1,101,453, $1,263, 979 and $1,149,537 during 2004, 2003 and 2002,  respectively. Rental expense includes amounts for related party operating  leases of $298,265, $356,817 and $516,491 in 2004, 2003 and 2002,  respectively.

xiv

**ROCK OF AGES CORPORATION AND SUBSIDIARIES**Notes to Consolidated Financial StatementsDecember 31, 2004, 2003 and 2002

 

 

 

Future minimum lease payments under non-cancelable  operating leases (with initial or remaining lease terms in excess of one  year) are as follows:

 

**YEAR  ENDING DECEMBER 31:**

** **

**RELATED  PARTY**

** **

**OTHER**

 

 

2005

$ 

245,672

$ 

783,010 

2006

 

153,206

 

647,876 

2007

 

136,670

 

476,222 

2008

 

99,148

 

211,588 

2009

 

86,648

 

205,064 

Thereafter

 
—
 

862,498 
         
 

$

721,344

$

3,186,258 
         
 

 

 

 

 

 

 

The Company also is the lessor of various parcels of  lands. The leases expire at various times through 2027. Rental income was  $65,704, $47,962 and $68,645 in 2004, 2003 and 2002, respectively. Future  minimum rentals to be received under non-cancelable leases are as follows:

 

YEAR ENDING DECEMBER 31:

 

 

 

 

 

2005

$

62,860

2006

 

64,510

2007

 

37,165

2008

 

33,281

2009

 

11,320

Thereafter

 

155,519
      
 

$

364,655

 

 

 

 

 

*Purchase Commitment*

 

 

 

In connection with the sale of the Lawson  manufacturing plant in Barre, Vermont ("Lawson") in 2001, the  Company entered into a Supply Agreement with Adams Granite Co. The Company  agreed to purchase a minimum of $3,000,000 of monuments from Adams Granite  Co. each year for a term of seven years with various stipulations as to  variations from the "minimum order" and pricing agreements. If  orders over a two-year period were less than the "minimum order,"  then the Company would be required, at its sole option, to either place  orders for monuments in the amount of the deficiency or pay to Adams the  gross margin that Adams would have realized had such orders been placed and  filled. The gross margin used in this calculation would be Adams' average  gross margin on sales of monuments to the Company over the prior two-year  period.

 

 

 

The Supply Agreement with Adams Granite was amended  on January 1, 2004, which reduced the minimum order obligation to $2,250,000  per year, plus or minus 10%. The minimum order for each year will be measured  separately and any variance in one year will not be added to or subtracted  from the minimum order obligation in any subsequent year. The remedy for  placing less than the minimum order remains the same.

 

 

 

*Litigation*

 

 

 

The Company is party to legal proceedings that arise  from time to time in the ordinary course of its business. While the outcome  of these proceedings cannot be predicted with certainty, management does not  expect these matters to have a material adverse effect on the Company. 

xv

**ROCK OF AGES CORPORATION AND SUBSIDIARIES**Notes to Consolidated Financial StatementsDecember 31, 2004, 2003 and 2002

 

 

 

Eurimex Settlement. In April, 2001 our former distributor outside the  United States, Eurimex S.A. (now known as Granite Stone Business  International S.a.r.l.), initiated an arbitration proceeding against us in  connection with our termination of the distribution agreement for our  Salisbury Pink granite. Eurimex also claimed damages in connection with a  distribution agreement for our Bethel White granite, which agreement expired  by its terms in 1998. Pursuant to those agreements, the arbitration took  place under the ICC rules.

 

  

 

On June 10, 2004, the three-member ICC arbitral  tribunal awarded Granite Stone Business International approximately $5.4  million in damages, plus interest on the award estimated at $1.1 million. The  award was made on the claim we had wrongfully terminated the Salisbury Pink  distribution agreement. The tribunal ruled in our favor on the other four claims  brought against us in the arbitration. We recorded a charge of $6.5 million  for the adverse judgment in 2004. In 2003 and 2002, we incurred legal  expenses of $2.4 million and $1.7 million related to this litigation. 

 

  

 

Kurtz Monument Company (Pennsylvania)  v. Rock of Ages Corporation (Delaware) Case No. 03-510 U.S. District Court  for the Western District of Pennsylvania. On April 22, 2003, Kurtz Monument  Company filed a complaint against Rock of Ages alleging the Company breached  certain terms of a sealed settlement agreement by engaging in conduct  constituting commercial disparagement. Damages have not been specified. The  Company believes this action by Kurtz Monument Company is without merit, deny  liability and will continue to vigorously defend claims made by Kurtz  Monument Company.

 

  

 

David A. Pier and Rock of Ages Memorials, Inc. # 53  160 00645 04 American Arbitration Association. On September 29, 2004, Mr. Pier, a 56 year old  former sales employee of Rock of Ages Memorials, Inc. ("ROAM"),  filed a demand for arbitration, alleging age and sex discrimination in  connection with his termination from employment by ROAM. Mr. Pier also  alleges that ROAM defamed him. He seeks reinstatement of full pay and  benefits, and compensatory, punitive and liquidated damages totaling  $500,000. ROAM denies that Mr. Pier's termination was motivated by any  discriminatory or illegal reason, and further denies that it has defamed Mr.  Pier or published any facts concerning his termination other than the termination  letter directed to him. At the present time, the parties are engaged in an  abbreviated discovery process. ROAM expects the case to be heard in late July  2005, with a decision to be rendered sometime during the fourth quarter of  2005. While we believe Mr. Pier's claims are without merit, it is not  possible at this time to assess the likelihood of Mr. Pier prevailing on his  claims.

 

 

**(5)**

**LINES OF CREDIT** 

 

  

 

We have a credit facility with the CIT  Group/Business Credit ("CIT") that expires in October 2007. The  facility consists of an acquisition term loan line of credit of up to $30.0  million and a revolving credit facility of up to another $20.0 million based  on eligible accounts receivable, inventory and certain fixed assets. In the  second quarter of 2004, we opted to decrease our total facility from $50  million to $30 million and remove Fleet Bank as a participant. In the fourth  quarter of 2004, we added Chittenden Bank as a participant in the facility  and returned the facility to the original $50 million. There were no  substantive changes to the facility as a result of the changes and we believe  we have adequate borrowing capacity to implement our growth strategy. As of  December 31, 2004, we had $16 million outstanding and $14 million available under  the term loan line of credit and $7.3 million outstanding and $12.7 million  available under the revolving credit facility. Our loan agreement with CIT  places restrictions on our ability to, among other things, sell assets,  participate in mergers, incur debt, pay dividends, repurchase stock, and make  investments or guarantees.

 

 

 

The interest rates on the term loan and revolving  loan are affected by the Company's Funded Debt to Net Worth ratio. The  interest rate on term loans is based on a formula of prime less 0.25 %, or,  at the Company's election, the sum of 1.75% plus LIBOR. For the revolving  credit facility the interest rate is based on the formula of prime less  0.50%, or at the Company's election, the sum of 1.50% plus LIBOR. For both  the term and revolving facilities, if the LIBOR option is chosen, the Company  must specify the amount and duration (30, 60 or 90 days) the debt will be  subject to the LIBOR based rate and is obligated to pay the interest on the  specified amount, even if the actual debt outstanding subsequently decreases  below that specified amount.  No more than four LIBOR elections may be  in effect at any one time.

xvi

**ROCK OF AGES CORPORATION AND SUBSIDIARIES**Notes to Consolidated Financial StatementsDecember 31, 2004, 2003 and 2002

 

 

 

Fees include a one-time fee of $135,000 (which was  paid in full in 2002), a one-time fee of $50,000 to add Chittenden as a  participant (which was paid in 2004), an obligation to obtain a reappraisal  (the cost of which was estimated at $63,000 and was accrued in 2004), an  unused line fee whose rate is determined by the Company's Funded Debt to Net  Worth Ratio and calculated on the unused portion of the revolving credit  facility only, and a collateral management fee of $1,000 per month. Amounts  outstanding were $7,287,278, $12,500,000 and $3,500,000 as of December 31,  2004, and $4,751,405, $12,500,000 and $0 as of December 31, 2003, on the  revolving credit facility, term loan A and term loan B, respectively. The  weighted average interest rate was 3.46%, 3.3% and 4.13% on the revolving  credit facility in 2004, 2003 and 2002, respectively.

 

 

 

The financing agreements with banks  contain various restrictive covenants with respect to the maintenance of  financial ratios, capital additions, and other items.  The facility requires the ratio of the  sum of earnings before interest, taxes, depreciation and amortization (EBITDA)  less taxes paid and capital expenditures to the sum of interest, scheduled  debt repayments and dividends be at least 1.25 for any trailing twelve-month  period at the end of a quarter. Primarily as a result of the expenses  attributable to the Eurimex arbitration (including the $6.5 million  settlement amount paid in 2004) the Company has been in violation of this  covenant and has received waivers, which primarily allow the Company to  exclude those expenses from the covenant calculation. As of December 31,  2004, the Company was in violation of the Debt Service Coverage Ratio due to  charges in the fourth quarter of 2004 related to an impaired note receivable  and severance payments as well as higher than normal capital expenditures in  2004. We have received a waiver which will allow us to exclude certain of  these expenditures from our calculation of EBITDA and capital expenditures in  the fourth quarter of 2004 allowing the Company to be in compliance with the  Debt Service Coverage ratio at December 31, 2004. This waiver includes  modifications to the Debt Service Coverage Ratio in 2005 based on the  Company's projections which we believe will allow us to remain in compliance  with this covenant in the future.

 

 

 

The Company's Canadian subsidiary also has a line of  credit agreement with a lending institution. Under the terms of this  agreement, a maximum of approximately $4,000,000 CDN may be advanced based on  percentages of eligible accounts receivable, eligible inventory, and tangible  fixed assets. The line of credit agreement will be reviewed at least annually  for any revisions to the agreement, bears interest at the U.S. prime rate,  and is secured by substantially all assets of the subsidiary. There were no  amounts outstanding as of December 31, 2004 and 2003.

 

 

 

**(6)**

**LONG-TERM DEBT**

 

 

 

Long-term debt at December 31, 2004 and 2003  consists of the following:

 

 

 

 

 

**2004**

** **

**2003**

 

 

 

Term loan, interest at 3.91% and 3.16% at December  31, 2004 and 2003, respectively (see note 5), due October 2007, secured by  substantially all assets of the Company

$

12,500,000

$

12,500,000

Term loan, interest at 3.93% at December 31, 2004  (see note 5), due October 2007, secured by substantially all assets of the  Company

 

3,500,000

 

—

Note payable - Plante, interest at 8%, payable in  monthly payments of $2,593      beginning February 2001, unsecured, due January 2021

 

280,343

 

288,780

Note payable - GMAC, interest at 1.9%, payable in  monthly payments of $1,052, due July 2007, secured by equipment

 

30,450

 
—
Note payable - GMAC, interest at 0%, payable in  monthly payments of $994, due       November 2005, secured by equipment

 

9,941

 

21,872

Note payable - Toyota Financial Services, interest  at 2.65%, payable in monthly      installments of $467, due July 2005, secured by equipment 

 

3,240

 

8,678

Note payable - Audi Financial Services, interest at  2%, payable in monthly   payments of $1,679, due February 2004, secured by equipment

 
—
 

3,388

Note payable - GMAC, interest at 0%, payable in  monthly installments of $797,      due January 2005, secured by equipment 

 

791

 

8,755

 

 

 

 

 

 

 

 

 

 

16,324,765

 

12,831,473

        Less  current installments 

 

35,612

 

37,899

 

 

 

 

 

 

 

 

        Long-term  debt, excluding current installments

$

16,289,153

$

12,793,574

 

 

 

 

 

 

 

 

xvii

**ROCK OF AGES CORPORATION AND SUBSIDIARIES**Notes to Consolidated Financial StatementsDecember 31, 2004, 2003 and 2002

 

Future maturities of the December 31, 2004 long-term  debt are as follows: 

 

 

 

YEAR ENDING DECEMBER 31:

 

 

 

 

 

2005

$

35,612

2006

 

22,112

2007

 

16,016,046

2008

 

11,450

2009

 

12,400

Thereafter

 

227,145
      
 

$

16,324,765
      
 

 

 

 

 

 

**(7)**

**FAIR VALUE OF FINANCIAL INSTRUMENTS**

 

 

 

SFAS No. 107, *Disclosures  About the Fair Value of Financial Instruments*, requires disclosure  of information about the fair value of certain financial instruments for  which it is practicable to estimate that value. For purposes of the following  disclosure the fair value of a financial instrument is the amount at which  the instrument could be exchanged in a current transaction between willing  parties other than in a forced sale or liquidation. Management has determined  the carrying values of its financial assets and liabilities approximate fair  value at December 31, 2004 and 2003.

 

 

**(8)**

**INCOME TAXES**

 

 

 

Income from continuing operations before provision  for income taxes, classified by source of income for the years ended December  31, 2004, 2003 and 2002 was as follows:

 

 

 

**2004**

** **

** **

**2003**

** **

**2002**

 

 

 

 

 

U.S.

$

(5,739,945

) 

$

716,670

$

3,816,429

Foreign

 

1,729,924

 

 

970,453

 

1,090,791

 

 

 

 

 

 

 

 

 

 

 

 

 

Income from continuing operations before provision  for income taxes and cumulative effect of changes in accounting principles

$

(4,010,021

) 

$

1,687,123

$

4,907,220 

 

 

 

 

 

 

 

 

 

 

 

 

 

xviii

**ROCK OF AGES CORPORATION AND SUBSIDIARIES**Notes to Consolidated Financial StatementsDecember 31, 2004, 2003 and 2002

 

A summary of the significant components of the  provision for income taxes for the years ended December 31, 2004, 2003 and  2002 is as follows: 

 

 

 

**2004**

** **

** **

**2003**

** **

** **

**2002**

 

 

 

 

 

 

 

 

Current:

 

 

 

 

 

 

 

 

 

    Federal

$

26,040

 

$

(70,598

) 

$

509,361  

 

    State

 

1,325

 

 

123,750

 

 

183,123

 

    Foreign

 

550,007

 

 

252,046

 

 

373,950

 

 

 

 

 

 

 

 

 

 

577,372

 

 

305,198

 

 

1,066,434

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deferred:

 

 

 

 

 

 

 

 

 

    Federal

 

(1,331,249

) 

 

(112,887

) 

 

172,714 

 

    State

 

(23,037

) 

 

329,324

 

 

128,600 

 

    Foreign

 

 (76,720

) 

 

56,184

 

 

(3,790

) 

 

 

 

 

 

 

 

 

 

  (1,431,006

) 

 

272,621 

 

 

297,524 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total provision for income taxes from continuing  operations

 

(853,634

) 

 

577,819

 

 

1,363,958

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income taxes included in discontinued operations:

 

 

 

 

 

 

 

 

 

   Current

 

(138,211

) 

 

(151,105

) 

 

(128,302

) 

   Deferred

 

122,000

 

 

914,526

 

 

191,258

 

 

 

 

 

 

 

 

 

 

(16,211

) 

 

763,421

 

 

62,956

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income taxes related to cumulative effect of changes  in accounting principles

 

—

 

 

—

 

 

(5,459,151

) 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income taxes included in other comprehensive income  for pensions

 

(258,087

) 

 

71,694

 

 

(678,631

) 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

xix

**ROCK OF AGES CORPORATION AND SUBSIDIARIES  **Notes to Consolidated Financial StatementsDecember 31, 2004, 2003 and 2002

 

The tax effects of temporary differences that give  rise to significant portions of the deferred tax assets and deferred tax  liabilities at December 31, 2004 and 2003 are presented below:

 

 

 

**2004**

** **

** **

**2003**

 

 

 

 

 

 

Deferred tax assets:

 

 

 

 

 

    Accrued pension, accrued  postretirement benefit cost and deferred      compensation

$

2,242,000

 

$

1,958,000

 

    Allowance for doubtful  accounts

 

243,000

 

 

201,000

 

    Accrued expenses

 

331,000

 

 

257,000

 

    Inventories, principally due  to additional costs inventoried for tax     purposes pursuant to the Tax Reform Act of 1986

 

397,000

 

 

283,000

 

    Deferred revenue

 

64,000

 

 

—

 

    Names and reputations

 

3,186,000

 

 

3,646,000

 

    Alternative minimum tax  credits

 

3,417,000

 

 

3,433,000

 

    Impairment charge

 

—

 

 

151,000

 

    Charitable contribution  limitation

 

50,000

 

 

32,000

 

    State net operating loss  carryovers

 

1,114,000

 

 

589,000

 

    Federal net operating loss carryforward

 

1,361,000

 

 

—

 

 

 

 

 

 

    Total gross deferred tax  assets

 

12,405,000

 

 

10,550,000

 

    Less valuation allowance

 

(4,522,748

) 

 

(4,129,841

) 

 

 

 

 

 

    Total net deferred tax  assets

 

7,882,252

 

 

6,420,159

 

 

 

 

 

 

 

 

 

 

 

 

 

Deferred tax liabilities:

 

 

 

 

 

 

    Quarry development

 

(326,000

) 

 

(345,000

) 

    Other liabilities

 

(7,000

) 

 

(11,000

) 

    Property and equipment

 

(132,000

) 

 

(214,000

) 

 

 

 

 

 

    Total gross deferred tax  liabilities

 

(465,000

) 

 

(570,000

) 

 

 

 

 

 

 

 

 

 

 

 

 

    Net deferred tax assets

$

7,417,252

 

$

5,850,159

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

SFAS No. 109, *Accounting  for Income Taxes*, requires a valuation allowance against deferred  tax assets if, based on the weight of available evidence, it is more likely  than not some or all of the deferred tax assets will not be realized.  Deferred tax assets include significant alternative minimum tax credit  carry-forwards, which have been fully reserved and may be carried forward  indefinitely. Utilization of these alternative minimum tax credits is limited  to future federal income tax in excess of the alternative minimum tax.  Deferred tax assets also include state net operating loss carryovers, which  have been fully reserved due to uncertainties regarding sufficient future  state taxable income to utilize carryovers. Management believes it is more likely  than not that the results of future operations will generate sufficient  taxable income to realize the net deferred tax assets including a federal net  operating loss carryover of $1,361,000. The valuation allowance was increased  by $392,907 in 2004 primarily resulting from additional state net operating  losses that will more likely than not, not be utilized in the future.

 

 

xx

**ROCK OF AGES CORPORATION AND SUBSIDIARIES**Notes to Consolidated Financial StatementsDecember 31, 2004, 2003 and 2002

 

A reconciliation of differences between the  statutory U.S. federal income tax rate on income from continuing operations  before provision for income taxes, discontinued operations and cumulative  effect of changes in accounting principles, and the Company's effective tax  rate follows:

 

 

**2004**

** **

**2003**

** **

**2002**

 

 

 

 

 

U.S. statutory rate

(34.0%

) 

34.0%

 

34.0%

 

State taxes, net of federal benefit

—

 

17.7%

 

4.2%

 

Change in valuation allowance

9.8%

 

(30.2%

) 

(5.4%

) 

Incremental U.S. tax on foreign earnings

—

 

17.0%

 
—
 

Other, primarily tax depletion

2.9%

 

(4.3%

) 

(5.0%

) 

 

 

 

 

 

 

 

 

 

 

 

Effective tax rate

(21.3%

) 

34.2%

 

27.8%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deferred taxes have, historically, not been provided  on certain undistributed earnings of the Company's wholly owned Canadian  subsidiary since the Company can control the distribution of such earnings  and has determined such earnings will be reinvested indefinitely. Additional  taxes could be due if these earnings were distributed. During 2002, the  Company received a $1,525,188 cash distribution from the Canadian subsidiary.  No incremental U.S. taxes were due on this distribution as a result of  available foreign tax credits and state tax losses. During 2003, the Company  provided $286,000 for the estimated incremental U.S. taxes due upon the  distribution of that portion of the undistributed earnings that are no longer  expected to be permanently reinvested. 

 

 

**(9)**

**PENSION AND OTHER BENEFITS**

 

 

 

The Company has a defined benefit pension plan  covering substantially all of its Vermont based non-union employees. The  benefits are based on years of service and the employee's compensation. The  cost of this program is being funded currently. 

 

 

 

The Company has salary continuation plans that cover  certain employees who have deferred compensation agreements with the Company.  Costs of its obligations are based on actuarial estimates. The net periodic  costs are recognized as employees render the necessary services to earn the  deferred compensation benefits. The Company reports both the deferred  compensation plan and the key employee deferred salary plan in the column labeled  Deferred Compensation Benefits in the following tables. 

 

 

 

The Company also sponsors a defined benefit  postretirement health care plan for certain early retirees and defined  benefit postretirement group life insurance plans for all Vermont based union  and non-union employees. The Company measures the cost of its obligation  based on actuarial estimates. The net periodic costs are recognized as  employees render the services necessary to earn the postretirement benefits.

 

 

 

The Company uses a measurement date of December 31  for substantially all the pension, deferred compensation and postretirement  benefit plans.

xxi

**ROCK OF AGES CORPORATION AND SUBSIDIARIES**Notes to Consolidated Financial StatementsDecember 31, 2004, 2003 and 2002

 

 

**NON-UNION  PENSION BENEFITS**

 

 

**DEFERRED  COMPENSATION BENEFITS**

 

 

**OTHER BENEFITS**

 

 

 

**2004**

 

 

**2003**

 

 

**2004**

 

 

**2003**

 

 

**2004**

 

 

**2003**

 

**CHANGE IN PROJECTED BENEFIT  OBLIGATION:**

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Projected benefit obligation at beginning of year

$

20,732,991

 

$

19,492,408

 

$

5,180,165 

 

$

4,225,835

 

$

1,804,735

 

$

1,679,515

 

Transfer of obligation

 

—

 

 

—

 

 

 

 

 

—

 

 

 

 

 

—

 

Service cost

 

626,009

 

 

532,789

 

 

171,663

 

 

188,519 

 

 

22,237

 

 

20,830

 

Interest cost

 

1,278,827

 

 

1,270,576

 

 

316,185

 

 

317,168

 

 

112,139

 

 

112,350

 

Actuarial (gain)/loss

 

1,594,451

 

 

516,239

 

 

282,066

 

 

728,491 

 

 

186,327

 

 

197,417

 

Benefits paid

 

(1,146,492

) 

 

(1,079,021

) 

 

(346,260

) 

 

(279,848

) 

 

(162,006

) 

 

(205,377

)

Projected benefit obligation at end of year

$

23,085,786

 

$

20,732,991

 

$

5,603,819

 

$

5,180,165

 

$

1,963,432

 

$

1,804,735

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

**CHANGE IN PLAN ASSETS:**

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair value of plan assets at beginning of year

$

16,934,845

 

$

14,161,582

 

$

—

 

$

—

 

$

—

 

$

—

 

Actual return on plan assets

 

1,768,911

 

 

2,862,549

 

 

—

 

 

—

 

 

—

 

 

—

 

Employer contribution

 

799,223

 

 

989,735

 

 

346,260

 

 

279,848

 

 

162,006

 

 

205,377

 

Benefits paid

 

(1,146,492

) 

 

(1,079,021

) 

 

(346,260

) 

 

(279,848

) 

 

(162,006

) 

 

(205,377

) 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair value of plan assets at end of year

$

18,356,487

 

$

16,934,845

 

$

—

 

$

—

 

$

—

 

$

—

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Funded status

$

(4,729,299

) 

$

(3,798,146

) 

$

(5,603,819

) 

$

(5,180,165

) 

$

(1,963,432

) 

$

(1,804,735

) 

Unrecognized net actuarial (gain)/loss

 

4,461,380

 

 

3,389,704

 

 

1,393,069

 

 

1,156,323

 

 

516,600

 

 

346,147

 

Unrecognized prior service cost

 

688,940

 

 

829,463

 

 

50,032

 

 

74,295

 

 

—

 

 

—

 

Unrecognized transition obligation

 

—

 

 

—

 

 

—

 

 

—

 

 

568,222

 

 

631,358

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net amount recognized

$

421,021

 

$

421,021

 

$

(4,160,718

) 

$

(3,949,547

)

$

(878,610

)

$

(827,230

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amounts recognized in the consolidated balance sheet  consists of:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   Prepaid (Accrued) benefit liability

$

(1,993,294

) 

$

(1,490,497

) 

$

(6,116,982

) 

$

(5,423,075

)

$

(878,610

) 

$

(827,230

) 

   Intangible asset

 

688,940

 

 

829,463

 

 

50,032

 

 

74,295

 

 

—

 

 

—

 

   Accumulated other comprehensive  income

 

1,725,375

 

 

1,082,055

 

 

1,906,232

 

 

1,399,233

 

 

—

 

 

—

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net amount recognized

$

421,021

 

$

421,021

 

$

(4,160,718

) 

$

(3,949,547

) 

$

(878,610

)

$

(827,230

) 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

**WEIGHTED-AVERAGE ASSUMPTIONS AS OF  DECEMBER 31:**

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Discount rate

 

5.79%

 

 

6.25%

 

 

5.79%

 

 

6.25%

 

 

5.79%

 

 

6.25%

 

Expected return on plan assets

 

8.00%

 

 

8.00%

 

 

N/A

 

 

N/A

 

 

N/A

 

 

N/A

 

Rate of compensation increase

 

3.00%

 

 

3.00%

 

 

3.00%

 

 

4.00%

 

 

3.00%

 

 

4.00%

 

 

For measurement purposes, a 12% annual rate of  increase in the per capita cost of covered health care benefits was assumed  for 2004, 9% for 2005, 6% for 2006 and 5% for 2007 and thereafter. 

 

 

 

**NON-UNION PENSION BENEFITS**

 

 

**DEFERRED  COMPENSATION BENEFITS**

 

 

**OTHER BENEFITS**

 

 

 

**2004**

 

 

**2003**

 

 

**2002**

 

 

**2004**

 

 

**2003**

 

 

**2002**

 

 

**2004**

 

 

**2003**

 

 

**2002**

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

**COMPONENTS OF NET  PERIODIC BENEFIT COST:**

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    Service cost

$

626,009

 

$

532,789

 

$

474,830

 

$

171,663 

 

$

188,519 

 

$

108,835

 

$

22,237

 

$

20,830

 

$

15,916

 

    Interest cost

 

1,278,827

 

 

1,270,576

 

 

1,246,009

 

 

316,185

 

 

317,168

 

 

278,454

 

 

112,139

 

 

112,350

 

 

106,745

 

    Expected return on plan    assets

 

(1,360,607

)

 

(1,211,762

) 

 

(1,361,451

) 

 

—

 

 

—

 

 

—

 

 

—

 

 

—

 

 

—

 

    Amortization of prior     service cost

 

140,523

 

 

140,523

 

 

140,523

 

 

24,263

 

 

30,347

 

 

112,444

 

 

—

 

 

—

 

 

—

 

    Amortization of     transition obligation

 

—

 

 

61,170

 

 

104,244

 

 

—

 

 

—

 

 

4,783

 

 

63,136

 

 

63,136

 

 

63,136

 

    Recognized net actuarial    loss

 

114,471

 

 

196,079

 

 

—

 

 

45,320

 

 

47,377

 

 

—

 

 

15,874

 

 

1,809

 

 

—

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net periodic benefit cost

$

799,223

 

$

989,375

 

$

604,155

 

$

557,431

 

$

583,411 

 

$

504,516

 

$

213,386

 

$

198,125

 

$

185,797

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

xxii

**ROCK OF AGES CORPORATION AND SUBSIDIARIES**Notes to Consolidated Financial StatementsDecember 31, 2004, 2003 and 2002

The Company has multiple postretirement benefit  plans. The health care plan covers a closed group of retirees selected by the  Company and benefits for all but two of the participants cease at age 65. The  life insurance plan covers all Vermont based employees; non-union employee  coverage is 50% of the group insurance coverage the employee had prior to  retirement (but not more than $60,000) and union employee coverage is $6,000.  The life insurance plan assumes a 4.0% rate of compensation increase for all  years.

  

Assumed health care trends do not have a significant  effect on the amounts reported for the health care plan. 

  

The accumulated benefit obligation for the defined  benefit pension plans (both the defined benefit pension plan and the defined  benefit post-retirement health and life plans) was $22.3 million and $20.3  million at December 31, 2004 and 2003, respectively.

 

*Plan Assets*

 

The fair value of plan assets for the defined  benefit pension plan as of December 31, 2004 and 2003 was $18.4 million and  $16.9 million respectively. The following table sets forth the actual asset  allocation for the U.S. plan assets:

 

 

2004

 

2003

 

Target Range

 

 

 

 

 

 

Equities

53%

 

58%

 

50% - 70%

Fixed income

43%

 

37%

 

25% - 35%

Cash equivalents

4%

 

5%

 

0 - 5%

 

 

 

The Company invests its equity holdings primarily in  mutual funds which are diversified among the spectrum of value and growth,  large, medium and small cap, domestic and foreign securities, as appropriate,  to achieve the objective of a balanced portfolio, which optimizes the  expected returns and volatility in the various asset classes. In general, the  majority of the equity investments will be large cap domestic funds.

  

Fixed  income holdings are in the form of mutual funds that hold a combination of  short-duration, investment-grade fixed-income securities, inflation-indexed  bonds of varying maturities issued by the U.S. and non-U.S. governments, and  a diversified selection of investment-grade, fixed income securities,  including corporate securities, mortgage-backed securities, U.S. government  securities and U.S. dollar denomination bonds of foreign issuers.

 

Cash equivalents are held in money market funds.

 

The Company prohibits certain transactions in its  plan including, but not limited to: short sales, commodities, transactions on  margin, letter stock, unregistered or restricted stock, private placements,  and derivative securities.

  

The Company determines its investment strategies  based on the composition of the beneficiaries in its defined benefit plans  and the relative time horizons that those beneficiaries receive payouts from  the plan. In addition, the Company receives advice from the plan  administrator regarding market conditions, which, taken together with the  characteristics of the plan, result in the investment strategy.

  

To develop the Company's expected long-term rate of  return assumption on plan assets, the Company uses long-term historical  return information for the targeted asset mix. Adjustments are made to the  expected long-term rate of return assumption when deemed necessary based upon  revised expectations of future investment performance of the overall capital  markets. The expected long-term rate of return assumption used in computing  2004 net periodic pension cost for the U.S. plans was 8.0 percent.

  

*Contributions* 

  

The Company expects to contribute  approximately $945,000 to the defined benefit pension plan during 2005.  Estimated future benefit payments are as follows:

  

 

**Pension**
**Postretirement**20051,575,469137,48820061,660,373124.81020071,649,829124,18320081,680,812111,31020091,648,375115,4632010-20149,153,008626,071
 
   **UNION  PENSION BENEFITS**
   

In July 1999, Vermont based union employees became  participants in Steelworkers Pension Trust. The Company contributes amounts  as required by the union contract. The amount charged to operations in the  accompanying consolidated statements of operations was $470,082, $425,078 and  $469,499 in 2004, 2003 and 2002, respectively.

xxiii

**ROCK OF AGES CORPORATION AND SUBSIDIARIES**Notes to Consolidated Financial StatementsDecember 31, 2004, 2003 and 2002

   

**DEFERRED COMPENSATION BENEFITS** 

  

In addition to the deferred compensation benefits  under its salary continuation plan, the Company has deferred compensation  agreements with certain employees including former stockholders of acquired  companies. The present value of the future payments under these agreements  was $713,542, $724,059 and $709,450 as of December 31, 2004, 2003 and 2002,  respectively. Total annual payments of $333,552 begin and end at various  dates through 2017. One of these agreements is partially paid through  benefits paid by the Company into the defined pension plan; therefore, the  payment amount changes annually based on actuarial estimates.

  

The Company's Canadian subsidiary has deferred  compensation agreements with three former employees. The present value of the  future payments under these agreements was $161,360 and $178,645 as of  December 31, 2004 and 2003. Total annual payments of $37,985 begin and end at  various dates through 2023.

   

**401(k) BENEFITS** 

   

The Company maintains a 401K plan for all full-time,  permanent, U.S. employees. Employees are eligible to join on the first day of  the quarter following their first full year of service. The Company makes  matching contributions equal to a percentage of the employee's deferrals. The  Company's contributions to the 401K plan were $185,257, $195,201 and $200,119  in 2004, 2003 and 2002, respectively.

   

 

**(10)**

**STOCK-BASED EMPLOYEE COMPENSATION**

 

 

 

Under the terms of the Amended and Restated 1994  Stock Plan, 1,500,000 options were reserved for issuance to key employees and  directors to purchase equivalent shares of common stock. The options granted  prior to 1999 have a five-year term and vest at 20% per year, options granted  in 1999 and 2000 have a four-year term and vest at 25% per year, options  granted in 2002 have a 10 year term and vest at 20% per year after the first  year and options granted in 2004 have terms from one to five years and vest  at various rates from 20% to 100% per year. 

 

 

 

The following table sets forth the stock option  transactions for the years ended December 31, 2004, 2003 and 2002:

 

 

**NUMBER  OF OPTIONS**

 

 

**WEIGHTED  AVERAGE  EXERCISE PRICE**

 

 

 

 

 

Outstanding, December 31, 2001

417,500

 

$

5.16

 

   Granted during 2002

355,000

 

 

5.98

 

   Exercised during 2002

(50,002

) 

 

(4.58

) 

   Surrendered during 2002

(188,333

) 

 

(5.27

) 

 

 

 

 

Outstanding, December 31,2002

534,165

 

$

5.86

 

   Granted during 2003

—

 

 

—

 

   Exercised during 2003

(23,832

) 

 

(4.94

) 

   Surrendered during 2003

—

 

 

—

 

 

 

 

 

Outstanding, December 31, 2003

510,333

 

$

5.86

 

   Granted during 2004

215,000

 

 

7.33

 

   Exercised during 2004

(196,333

) 

 

(4.97

) 

   Surrendered during 2004

(31,000

) 

 

(11.14

) 

 

 

 

 

 

 

 

 

 

 

Outstanding, December 31, 2004

498,000

 

 

6.56

 

 

 

 

 

 

 

 

 

 

 

Exercisable, December 31, 2004

113,200

 

$

5.98

 

 

 

 

 

Weighted average remaining contractual life

7.8 years

 

 

 

 

xxiv

**ROCK OF AGES CORPORATION AND SUBSIDIARIES**Notes to Consolidated Financial StatementsDecember 31, 2004, 2003 and 2002

 

 

 

 

 

**WEIGHTED  AVERAGE**
 

**OPTIONS  EXERCISABLE**
 

**EXERCISE PRICE**

 

**NUMBER  OF  OPTIONSOUTSTANDING**

 

**EXERCISEPRICE**

 

**REMAINING  CONTRACTUALLIFE**

 

**NUMBER**
 

**WEIGHTED  AVERAGE  EXERCISEPRICE**

 

 

 

 

 

 

 

 

 

 

 

 

$

5.98

 

283,000

$

5.98

 

7.1 Years

 

113,200 

$

5.98

$

7.15

 

150,000

$

7.15

 

9.4 Years

 

—

$

7.15

$

8.21

 

18,000

$

8.21

 

3.6 Years

 

—

$

8.21

$

8.21

 

7,000

$

8.21

 

1.6 Years

 

—

$

8.21

$

7.90

 

15,000

$

7.90

 

9.7 Years

 

—

$

7.90

$

7.20

 

25,000

$

7.20

 

9.8 Years

 

—

$

7.20

 

 

 

498,000

 

 

 

 

 

113,200

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

**(11)**

**RELATED PARTY TRANSACTIONS**

 

 

 

The Company is related through common ownership with  several companies. Kurt M. Swenson, the Company's Chairman, President and  Chief Executive Officer, and his brother Kevin C. Swenson, each own  approximately 31% of Swenson Granite LLC. Certain other executive officers  and directors of the Company collectively own approximately 9% of Swenson  LLC. Kurt M. Swenson serves as a non-officer Chairman of the Board of Swenson  LLC, but has no involvement with its day-to-day operations. Robert Pope, a  holder of more than 5% of the Class B Common Stock, is the President and Chief  Executive Officer, and including shares owned by his wife and children, owns  12% of Swenson LLC. Neither Kurt M. Swenson nor any other officer or director  of the Company, receives salary, bonus, expenses or other compensation from  Swenson LLC, except for any pro rata share of earnings attributable to their  ownership interest in Swenson LLC. Swenson LLC owns two granite quarries, one  in Concord, New Hampshire and another in Woodbury, Vermont. Both have been  owned by Swenson LLC (or its predecessor Swenson Granite) for more than 40  years. Because of the proximity of the Woodbury quarry to Barre, Vermont, the  Company provides, certain maintenance services and parts to the Woodbury  quarry and is reimbursed for the cost of such services. The Company also purchases  Concord blocks and other products from Swenson LLC at market prices. Swenson  LLC also purchases granite blocks and slabs from the Company. The Company  believes these arrangements with Swenson LLC are as favorable, or more  favorable, to the Company than would be available from an unrelated party for  comparable granite blocks. The transactions with related parties, included in  the consolidated statements of operations, are as follows for the years ended  December 31, 2004, 2003 and 2002:

 

 

 

**2004**

** **

**2003**

** **

**2002**

 

 

 

 

Sales to related parties

$

16,536

$

40,795

$

12,284

Purchases from related parties

 

348,141

 

81,002

 

32,092

 

 Amounts due from/(to) related parties as of  December 31, 2004 and 2003 are as follows:

 

 

 

**2004**

** **

** **

**2003**

 

 

 

 

 

 

Due from/(to) Swenson Granite Company, LLC

$

7,354

 

$

(7,982

) 

Due from Rock of Ages Asia

 

54,690

 

 

65,902

 

Due from VIKA

 

275,154

 

 

224,700

 

 

 

 

 

 
                     
 

$

337,198

 

$

282,620

 

 

 

 

 

 

 

 

 

 

 

 

 

xxv

**ROCK OF AGES CORPORATION AND SUBSIDIARIES**Notes to Consolidated Financial StatementsDecember 31, 2004, 2003 and 2002

In July 2004, the Company invested $3.5 million in FFS  Holdings, Inc. ("FFS"). The investment, which includes voting and  non-voting common shares, represents approximately 6% of the common voting  shares and approximately 8% of the total common equity of FFS. FFS holds the  stock of Hillenbrand Industries to acquire Forethought Financial Services, a  leading provider of pre-need insurance trust service programs, which are  currently marketed primarily through funeral directors. FFS was formed to  acquire Forethought by The Devlin Group, a group of several senior insurance  industry executives including Douglas M. Schair, a former director of the  Company until his death on January 26, 2005, and a holder of approximately  12.5% of the Class A common stock of the Company. Mr. Schair's estate holds  approximately 18% of the outstanding shares of FFS and until his death he  held the position of Vice Chairman and Chief Investment Officer of FFS.

 

 See note 4 for operating lease obligations  with related parties. 

 

**(12)**

**UNAUDITED QUARTERLY SUMMARY  INFORMATION**

 

 

 

The following is a summary of unaudited quarterly  summary information for the years ended December 31, 2004 and 2003 (in  thousands, except per share data):

 

 

 

**NET  REVENUES**

 

**GROSS  PROFIT**

 

**NET  INCOME  (LOSS)**

 

**NET  INCOME  (LOSS)  PER SHARE**

 

**NET  INCOME  (LOSS)  PER SHARE -   ASSUMING  DILUTION**

 

 

 

 

 

 

 

 

2004 Quarters:

 

 

 

 

 

 

 

 

 

 

 

   First 

$

12,163

 

3,197

 

(3,425

) 

(0.47

) 

(0.47

) 

   Second (1)

 

28,034

 
13,583
 

(1,050

) 

(0.14

) 

(0.14

) 

   Third

 

23,455

 

11,151

 

1,331

 

0.18

 

0.18

 

   Fourth 

 

22,942

 

10,322

 

(77

) 

(0.01

) 

(0.01

) 

 

 

 

 

 

 

 

      Total

$

86,594

 

38,253

 

(3,221

) 

(0.44

) 

(0.44

) 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2003 Quarters:

 

 

 

 

 

 

 

 

 

 

 

   First 

$

9,572

 

1,479

 

(4,881

) 

(0.68

) 

(0.68

) 

   Second

 

26,109

 

12,187

 

1,353

 

0.18

 

0.18

 

   Third

 

23,144

 

10,701

 

911

 

0.13

 

0.13

 

   Fourth (2)

 

25,592

 

12,973

 

4,064

 

0.57

 

0.57

 

 

 

 

 

 

 

 

      Total

$

84,417

 

37,340

 

1,447

 

0.20

 

0.20

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

** **

**NOTES:**

 

 

 

The Company has historically experienced certain  seasonal patterns, primarily due to weather conditions affecting operations  in Vermont and Canada and the setting of memorials in cemeteries located in  northern regions. 

 

 

(1)

Net loss for the second quarter of 2004 includes the  adverse judgment of $6,500,000 (see note 4).

 

 

(2)

Net income for the fourth quarter of 2003 includes a  gain on the sale of the Cemeteries, net of taxes, of $1,139,000 (see note  16). 

 

 

xxvi

**ROCK OF AGES CORPORATION AND SUBSIDIARIES**Notes to Consolidated Financial StatementsDecember 31, 2004, 2003 and 2002

**(13)**

**EARNINGS PER SHARE**

 

 

 

The following is a reconciliation of the numerators  and denominators of the basic and diluted earnings per share (EPS)  computations for net income for the years ended December 31, 2004, 2003 and  2002:

 

 

 

**2004**

 

 

**2003**

 

 

**2002**

 

 

 

 

 

 

Numerator:

 

 

 

 

 

 

 

 

   Income available to common  shareholders used    in basic and diluted earnings per share

$

(3,221,227

) 

$

1,447,205

 

$

(24,915,211
)
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Denominator:

 

 

 

 

 

 

 

 

   Denominator for basic earnings per  share:

 

 

 

 

 

 

 

 

     Weighted average  shares

 

7,318,127

 

 

7,181,545

 

 

7,847,821

     Effect of dilutive securities:

 

 

 

 

 

 

 

 

     Stock options

 

—

 

 

37,833

 

 

32,340

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   Denominator for diluted earnings  per share:

 

 

 

 

 

 

 

 

     Adjusted weighted  average shares

 

7,318,127

 

 

7,219,378

 

 

7,880,161

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic earnings per share

$

(0.44

) 

$

0.20

 

$

(3.17
)
 

 

 

 

 

 

 

 

 

Diluted earnings per share

$

(0.44

) 

$

0.20

 

$

(3.16
)
** **

 

Options to purchase 498,000 shares of Class A common  stock at exercise prices ranging from $5.98 to $8.21 per share were  outstanding in 2004, but were not included in the computation of diluted EPS  because the effect would be anti-dilutive.

 

 

 

Options to purchase 320,000 shares of Class A common  stock at exercises prices ranging from $5.98 to $12.38 per share were  outstanding in 2003 and 2002 but were not included in the computation of  diluted EPS because the options' exercise price was greater than the average  market price of the common shares during those years.

 

 

**(14)**

**SEGMENT INFORMATION**

 

 

 

The Company is organized based on the products and  services it offers. Under this organizational structure, the Company operates  in three segments: quarrying, manufacturing and retailing.

 

 

 

The quarrying segment extracts granite from the  ground and sells it to both the manufacturing segment and to outside  manufacturers, as well as to distributors in Europe and Japan. As a result of  the adverse judgment in 2004, the quarry segment SG&A has been restated as we decided to reclassify  our expenses associated with the Eurimex litigation (both the judgment and  legal costs and related expenses) out of Quarry SG&A expenses into a separate  category for the current and prior periods. We believe separating these costs  provides a better understanding of our ongoing quarry operations. For 2003,  Quarry SG&A was restated from $5,596,000 to $3,155,000. For 2002, Quarry SG&A  was restated from $4,992,000 to $3,267,000.

 

 

 

The manufacturing segment's principal product is  granite memorials used primarily in cemeteries, although it also manufactures  some specialized granite products for industrial applications.

 

 

 

The retailing segment engraves and sells memorials  and other granite products at various locations throughout the United States.

 

 

 

The other segment includes unallocated corporate  overhead, the Eurimex adverse judgment and legal expenses and the impairment  of the note receivable.

 

 

 

Inter-segment revenues are accounted for as if the  sales were to third parties.

xxvii

**ROCK OF AGES CORPORATION AND SUBSIDIARIES**Notes to Consolidated Financial StatementsDecember 31, 2004, 2003 and 2002

**2004**

 

**QUARRYING**

 

 

**MANUFACTURING**

 

 

**RETAILING**

 

 

**CORPORATE  OVERHEAD**

 

 

**TOTAL**
   
 

 

 

 

 

 

 

 

 

Total net revenues

$

32,843

 

$

29,770

 

$

35,802

 

$

—

 

$

98,415

Inter-segment net revenues

 

2,916

 

 

8,905

 

 

—

 

 

—

 

 

11,821

 

 

 

 

 

 

 

 

 

 

Net revenues

 

29,927

 

 

20,865

 

 

35,802

 

 

—

 

 

86,594

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total gross profit

 

13,190

 

 

5,390

 

 

19,673

 

 

—

 

 

38,253

Inter-segment gross profit

 

863

 

 

(182

) 

 

(681

) 

 

—

 

 

—

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross profit

 

12,327

 

 

5,572

 

 

20,354

 

 

—

 

 

38,253

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Selling, general and     administrative expenses

 

3,556

 

 

4,002

 

 

21,828

 

 

5,087

 

 

34,473
   
Adverse judgment and legal expenses

 

 

 

 

 

 

 

 

 

 

6,500

 

 

6,500
   
Impairment of note receivable

 

 

 

 

 

 

 

 

 

 

400

 

 

400

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) from operations

$

8,771

 

$

1,570

 

$

(1,474

) 

$

(11,987

) 

$

(3,120)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

**2003**

 

**QUARRYING**

 

 

**MANUFACTURING**

 

 

**RETAILING**

 

 

**CORPORATE  OVERHEAD**

 

 

**TOTAL**
   
 

 

 

 

 

 

 

 

 

Total net revenues

$

30,190

 

$

29,674

 

$

35,663

 

$

—

 

$

95,527

Inter-segment net revenues

 

1,809

 

 

9,301

 

 

—

 

 

—

 

 

11,110

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net revenues

 

28,381

 

 

20,373

 

 

35,663

 

 

—

 

 

84,417

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total gross profit

 

11,829

 

 

5,753

 

 

19,758

 

 

—

 

 

37,340

Inter-segment gross profit

 

651

 

 

(21)

 

 

(630

) 

 

—

 

 

—

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross profit

 

11,178

 

 

5,774

 

 

20,388

 

 

—

 

 

37,340

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Selling, general and     administrative expenses

 

3,155

 

 

3,673

 

 

21,100

 

 

4,692

 

 

32,620
   
Adverse judgment and legal expenses

 

 

 

 

 

 

 

 

 

 

2,441

 

 

2,441
   
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) from operations

$

8,023

 

$

2,101

 

$

(712

) 

$

(7,133

) 

$

2,279

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

**2002**

 

**QUARRYING**

 

 

**MANUFACTURING**

 

 

**RETAILING**

 

 

**CORPORATE  OVERHEAD**

 

 

**TOTAL**
   
 

 

 

 

 

 

 

 

 

Total net revenues

$

31,208

 

$

28,052

 

$

38,448

 

$

—

 

$

97,708

Inter-segment net revenues

 

1,667

 

 

8,326

 

 

—

 

 

—

 

 

9,993

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net revenues

 

29,541

 

 

19,726

 

 

38,448

 

 

—

 

 

87,715

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total gross profit

 

13,717

 

 

5,496

 

 

20,754

 

 

—

 

 

39,967

Inter-segment gross profit

 

585

 

 

(25)

 

 

(560)

 

 

—

 

 

—

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross profit

 

13,132

 

 

5,521

 

 

21,314

 

 

—

 

 

39,967

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Selling, general and     administrative expenses

 

3,267

 

 

3,401

 

 

20,896

 

 

5,274

 

 

32,838
   
Adverse judgment and legal expenses

 

 

 

 

 

 

 

 

 

 

1,725

 

 

1,725
   
 

 

 

 

 

 

 

 

 

 

Income (loss) from operations

$

9,865

 

$

2,120

 

$

418

 

$

(6,999

) 

$

5,404

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

xxviii

**ROCK OF AGES CORPORATION AND SUBSIDIARIES**Notes to Consolidated Financial StatementsDecember 31, 2004, 2003 and 2002

 

 

Net revenues by geographic area are as follows for  the years ended December 31, 2004, 2003 and 2002 (in thousands):

 

 

 

 

 

**2004**

 

**2003**

 

**2002**

 

 

 

 

Net revenues (1):

 

 

 

 

 

 

   United States

$

77,733

$

77,578

$

79,695

   Canada

 

8,180

 

6,797

 

8,020

   Ukraine

 

681

 

42

 

—

 

 

 

 

 

 

 

 

 

 

 

      Total net  revenues

$

86,594

$

84,417

$

87,715

 

 

 

 

 

 

 

 

 

 

 

 

(1)

Net revenues are attributed to countries based on  where product is produced.

 

 

 

 

Long-lived assets by geographic area are as follows  as of December 31, 2004 and 2003 (in thousands): 

 

  

 

**2004**

** **

**2003**

** **

**2002**

 

 

 

 

Long-lived assets:

 

 

 

 

 

 

   United States

$

42,495

$

39,473

$

41,686

   Canada

 

3,635

 

3,022

 

2,235

 

 

 

 

 

 

 

 

 

 

 

                 Total long-lived assets

$

46,130

$

42,495

$

43,921

 

 

 

 

 

 

 

 

 

 

 

 

**(15)**

**ACQUISITIONS**

 

 

 

On August 4, 2004, the Company acquired a granite  retailer in Tennessee. The aggregate purchase price was approximately  $477,000. The acquisition was accounted for by the purchase method of accounting.  The assets acquired and liabilities assumed were recorded at estimated fair  values as determined by management based on information currently available  and on current assumptions as to future operations, which has resulted in  $163,000 of cost in excess of net assets acquired. 

 

 

**(16)**

**ASSETS HELD FOR SALE AND ASSETS  SOLD**

 

 

 

In December 2003, the Company decided to sell the  Autumn Rose quarry in Mill Creek, Oklahoma. This decision represents a  disposal of long-lived assets under SFAS No. 144, "Accounting for the  Impairment or Disposal of Long-Lived Assets." Accordingly, results of  this quarry have been classified as discontinued operations and prior periods  have been restated to reflect this reclassification. In November 2004, the  Company completed the sale. The sales price for the quarry was $750,000,  consisting of $150,000 paid in cash and the balance payable pursuant to the terms of a Promissory  Note and a Supply Agreement, which provide for payment in industrial diamond  segments and diamond wire used in the Company's operations. No material gain or loss was  recognized on the transaction. For business reporting purposes, the Autumn  Rose quarry was previously classified in the Quarrying segment.

xxix

**ROCK OF AGES CORPORATION AND SUBSIDIARIES**Notes to Consolidated Financial StatementsDecember 31, 2004, 2003 and 2002

 

 

 

On December 17, 2003, the Company completed the sale  of substantially all of the assets of Rock of Ages Kentucky Cemeteries, LLC.  The disposition was made to allow the Company to concentrate on its core  businesses, quarrying, manufacturing and retailing, freeing up resources to  pursue other growth strategies. The Company expects to continue to sell  upright memorials in those cemeteries through its relationship with the  buyer, Saber Management, LLC. The decision to sell this company represents a  disposal of long-lived asset and disposal group under SFAS No. 144.  Accordingly, results of this business have been classified as discontinued  operations, and prior periods have been restated to reflect this  reclassification. The sales price for the cemetery assets and properties was  $6,750,000, consisting of $1,500,000 paid in cash and the balance payable by  promissory note, payable in full on January 15, 2004. The promissory note was  secured by a first priority mortgage and lien against all of the assets sold,  and guaranties by Saber's parent company and principal. The promissory note  was paid in full on January 2, 2004. The Company reported a gain on the sale  of the cemeteries in 2003 of $1,139,000, after taxes, which is included in  discontinued operations in 2003. For business reporting purposes, Rock of  Ages Kentucky Cemeteries was previously classified in the Cemeteries segment.

 

 

 

 Operating results from the Autumn Rose Quarry  and Rock of Ages Kentucky Cemeteries, LLC for the years ended December 31,  2004, 2003 and 2002 were as follows (in thousands):

 

 

** **

**Years  Ended December 31,**

 

Autumn Rose Quarry

** **

**2004**

** **

** **

**2003**

** **

** **

**2002**

 

Net Sales

$

41

 

$

305

 

$

194

 

Gross Profit

 

(77

) 

 

(85

) 

 

(148

) 

Pretax income (loss)

 

(77

) 

 

(85

) 

 

(148

) 

Income tax (benefit) expense

 

(15

) 

 

(17

) 

 

(30

) 

Net income (loss)

 

(62

) 

 

(68

) 

 

(118

) 

 

 

 

 

 

 

 

 

 

 

Rock of Ages Kentucky Cemeteries, LLC

 

 

 

 

 

 

 

 

 

Net Sales

 

—

 

 

3,823

 

 

4,604

 

Gross Profit

 

—

 

 

1,262

 

 

2,009

 

Pretax income (loss)

 

—

 

 

(316

) 

 

463

 

Income tax (benefit) expense

 

—

 

 

(71)

 

 

93

 

Net income (loss)

 

—

 

 

(245)

 

 

370

 

 

 

The total income from discontinued operations for  2003 is net of the Autumn Rose impairment loss and the gain on the sale of  the cemeteries. Discontinued operations also includes interest expense of  $201,000 and $216,000 for 2003 and 2002, respectively. 

 

**December 31,**
Autumn Rose Quarry

** **

**2003**

Current assets
$
817

Property, plant and equipment, net

 

—

Total assets

 

817

Current liabilities

 

17

Total liabilities

 

17

 

 

 

Rock of Ages Kentucky Cemeteries, LLC

 

 

Current assets

 

—

Property, plant and equipment, net

 

—

Other assets

 

—

Total assets

 

—

Current liabilities

 

—

Other liabilities

 

—

Total liabilities

 

—

xxx

 

**ROCK OF AGES CORPORATION AND SUBSIDIARIES**Notes to Consolidated Financial StatementsDecember 31, 2004, 2003 and 2002

 

 

 

 

In October 2001, the Company entered into an  agreement to sell the Lawson manufacturing plant in Barre, Vermont. At December  31, 2001, assets held for sale have been written down to their realizable  values based upon expected sale proceeds. The Lawson sale was completed in  January 2002.

 

 

**(17)**

**SUBSEQUENT EVENTS**

** **

** **

 

 On February 15, 2005, the Company acquired  substantially all of the assets of the Rockwell White granite quarry in Rowan  County, North Carolina for $3.5 million, which was financed using the term  loan. In connection with the purchase we assumed an operating lease for  14.129 acres for $70,000 per year through December 1, 2006 with a ten-year  renewal option, which was exercised on March 18, 2005 and extends the lease  to December 1, 2016. The lease also requires a payment of $1.40 per cubic  foot for all granite exceeding 40,000 cubic feet per year that is extracted  by the lessor.

 

 

 

On February 14, 2005, the Company acquired  substantially all of the assets of McColly Memorials, a memorial retailer  with four locations in the Pittsburgh, Pennsylvania area for a purchase price  of $625,000.

**(18)**

**RECENT ACCOUNTING PRONOUNCEMENTS**

 

 

 

In November 2004, the FASB issued SFAS No. 151,  "Inventory Costs-An Amendment of ARB No. 43, Chapter 4" ("SFAS  151"). SFAS 151 amends the guidance in ARB No. 43, Chapter 4,  "Inventory Pricing," to clarify the accounting for abnormal amounts  of idle facility expense, freight, handling costs, and wasted material  (spoilage). Among other provisions, the new rule requires that items such as  idle facility expense, excessive spoilage, double freight, and re-handling  costs be recognized as current-period charges regardless of whether they meet  the criterion of "so abnormal" as stated in ARB No. 43.  Additionally, SFAS 151 requires that the allocation of fixed production  overheads to the costs of conversion be based on the normal capacity of the  production facilities. SFAS 151 is effective for fiscal years beginning after  June 15, 2005 and is required to be adopted by us in the first quarter of  2006, beginning on January 1, 2006. We are currently evaluating the effect,  if any, that the adoption of SFAS 151 will have on our consolidated results  of operations.

 

 

 

In December 2004, the Financial Accounting Standards  Board ("FASB") issued Statement No. 153 "Exchanges of  Non-monetary Assets - an Amendment of APB Opinion No. 29," effective for  fiscal years beginning after June 15, 2005. SFAS No. 153 amends Opinion 29 to  eliminate the exception for non-monetary exchanges of similar productive  assets and replaces it with a general exception for exchanges of non-monetary  assets that do not have commercial substance. The Company does not believe  the adoption of SFAS No. 153 will have a material impact on its financial  statements.

 

 

 

In December 2004, the  FASB issued SFAS No. 123 (revised 2004), "Share-Based Payment"  ("SFAS 123R"), which replaces SFAS No. 123, "Accounting for  Stock-Based Compensation," ("SFAS 123") and supercedes APB  Opinion No. 25, "Accounting for Stock Issued to Employees." SFAS  123R requires that all share-based payments to employees, including grants of  employee stock options, be recognized in the financial statements based on  their fair values beginning with the first interim or annual period after  June 15, 2005, with early adoption encouraged. The pro forma disclosures  previously permitted under SFAS 123 no longer will be an alternative to  financial statement recognition. We are required to adopt SFAS 123R in the  third quarter of 2005, beginning July 1, 2005. Under SFAS 123R, we must  determine the appropriate fair value model and related assumptions to be used  for valuing share-based payments, the amortization method for compensation  cost and the transition method to be used at date of adoption. The transition  methods include modified prospective and modified retrospective adoption  options. Under the modified retrospective option, prior periods may be  restated either as of the beginning of the year of adoption or for all  periods presented. The modified prospective method requires that compensation  expense be recorded for all unvested stock options at the beginning of the  first quarter of adoption of SFAS 123R, while the modified retrospective  method would record compensation expense for all unvested stock options  beginning with the first period restated. We are evaluating the requirements  of SFAS 123R and expect that the adoption of SFAS 123R will have a material  impact on our consolidated results of operations and earnings per share. We  have not yet determined the method of adoption or the effect of adopting SFAS  123R, and we have not determined whether the adoption will result in amounts  that are similar to the current pro forma disclosures under SFAS 123. 

 

 

xxxi

 

 

**REPORT OF INDEPENDENT REGISTERED  PUBLIC ACCOUNTING FIRM**

 

 

The Board of Directors

Rock of Ages Corporation:

 

 

Under date of February 22, 2005, except  for Note 5 as to which the date is March 22, 2005, we reported on the  consolidated balance sheets of Rock of Ages Corporation and subsidiaries as  of December 31, 2004 and 2003, and the related consolidated statements of  operations, stockholders' equity and comprehensive income (loss), and cash  flows for each of the years in the three-year period ended December 31, 2004,  which are included in the Form 10-K.  Our report notes that the Company adopted the provisions of Statement of  Financial Accounting No. 142, "Goodwill and Other Intangible Assets" and  changed its method of accounting for its quarry inventory from the first-in,  first-out method to the specific annual average cost method, effective January  1, 2002. In connection with our audits of the aforementioned consolidated financial  statements, we also audited the related consolidated financial statement  schedule referred to as "Schedule II - Valuation and Qualifying Accounts  and Reserves," which is included in the Form 10-K. This financial statement schedule is the responsibility  of the Company's management. Our responsibility is to express an opinion on  this financial statement schedule based on our audits.

 

 

In our opinion, such financial statement schedule,  when considered in relation to the basic consolidated financial statements  taken as a whole, presents fairly, in all material respects, the information  set forth therein.

 

 

/s/ KPMG LLPBurlington, Vermont

February 22, 2005, except for Note 5     as to which the date is March 22, 2005   

xxxii

 

 

**ROCKOF AGES CORPORATION AND SUBSIDIARIES **

Schedule II - Valuationand Qualifying Accounts and Reserves 

Years ended December 31,2004, 2003 and 2002

(In Thousands)

 

**COLUMN A**

** **

**COLUMN B**

** **

**COLUMN C**

** **

**COLUMN D**

** **

**COLUMN E**

 

 

 

 

**ADDITIONS**

 

 

 

 

**DESCRIPTION**

 

**BALANCE  AT  BEGINNING  OF PERIOD**

 

**INCREASE  DUE TO  ACQUISITIONS**

 

**CHARGED  TO  COSTS AND  EXPENSES**

 

**DEDUCTIONS**

 

**BALANCE  AT  END  OF PERIOD**

 

 

 

 

 

 

 

 

 

 

 

2004

 

 

 

 

 

 

 

 

 

 

    Allowances for doubtful  accounts

$

740

 

—

 

412

 

130

 

1,022

  

  

  

  

  

  

  

  

  

  

  

2003

 

 

 

 

 

 

 

 

 

 

    Allowances for doubtful  accounts

$

1,046

 

—

 

655

 

961

 

740

 

 

 

 

 

 

 

 

 

 

 

2002

 

 

 

 

 

 

 

 

 

 

    Allowances for doubtful  accounts

$

1,548

 

—

 

675

 

1,177

 

1,046

xxxiii

**     SIGNATURES**

 

Pursuant to the requirements of Section 13 or 15(d) of the SecuritiesExchange Act of 1934, the Registrant has duly caused this report to be signedon its behalf by the undersigned, thereunto duly authorized.

 

**ROCKOF AGES CORPORATION**

 

By: /s/ Kurt M.  Swenson                                          Kurt M. Swenson        President, Chief Executive Officer and         Chairman of the Board of Directors

 

Date: May 25, 2005 

 

Pursuant to the requirements of the Securities Exchange Act of 1934,this report has been signed below by the following persons on behalf of theregistrant and in the capacities indicated as of March 30, 2005.

SIGNATURE

 

TITLE

 

 

 

 

/s/Kurt M. Swenson

 

President, Chief Executive Officer and Chairman of  the Board of Directors  (Principal Executive Officer)

Kurt M. Swenson

 

 

 

 

 

/s/ Douglas S. Goldsmith

 

Chief Financial Officer and Treasurer (Principal  Financial and Accounting Officer)

Douglas S. Goldsmith

 

 

 

 

 

/s/Richard C. Kimball

 

Director 

Richard C. Kimball

 

 

 

 

 

/s/James L. Fox

 

Director 

James L. Fox

 

 

 

 

 

/s/ Pamela G. Sheiffer

 

Director

Pamela G. Sheiffer

 

 

 

 

 

/s/Charles M. Waite

 

Director

Charles M. Waite

 

 

 

 

 

/s/Frederick E. Webster Jr.

 

Director

Frederick E. Webster Jr.

 

 

46

**EXHIBITINDEX**

**EXHIBIT  NUMBER**

**DESCRIPTION**

 

 

3.1

Form of Amended and Restated Certificate of  Incorporation of the Company (incorporated herein by reference to Exhibit 3.1  to the Company's Registration Statement on Form S-1 (Registration No.  333-33685) filed with the Securities and Exchange Commission on August 15,  1997 and declared effective on October 20, 1997)

 

 

3.2

Amended and Restated By-laws of the Company (as  amended through April 6, 1999) (incorporated herein by reference to Exhibit  3.2 to the Company's Quarterly report on Form 10-Q for the quarterly period  ended March 31, 1999 and filed with the Securities and Exchange Commission on  May 17, 1999)

 

 

4.

Specimen Certificate representing the Class A Common  Stock (incorporated herein by reference to Exhibit 4 to the Company's  Registration Statement on Form S-1 (Registration No. 333-33685) filed with  the Securities and Exchange Commission on August 15, 1997 and declared  effective on October 20, 1997)

 

 

10.1*

Rock of Ages Corporation Amended and Restated 1994  Stock Plan (as amended through October 26, 1998) (incorporated herein by  reference to Exhibit 10.1 to the Company's Annual Report on Form 10-K for the  fiscal year ended December 31, 1998 and filed with the Securities and  Exchange Commission on March 31, 1999)

 

 

10.2*

Rock of Ages Corporation Key Employees Deferred  Salary Plan (incorporated herein by reference to Exhibit 10.2 to the  Company's Quarterly Report on Form 10-Q for the quarterly period ended  September 30, 2002 and filed with the Securities and Exchange Commission on  November 14, 2002)

 

 

10.3*

Employment Agreement of Kurt M. Swenson  (incorporated herein by reference to Exhibit 10.2 to the Company's  Registration Statement on Form S-1 (Registration No. 333-33685) filed with  the Securities and Exchange Commission on August 15, 1997 and declared  effective on October 20, 1997)

 

 

10.4*

Employment Agreement of Rudolph R. Wrabel dated as  of May 17, 2004 (incorporated herein by reference to Exhibit 10.1 to the  Company's Quarterly Report on Form 10-Q for the quarterly period ended March  31, 2004 and filed with the Securities and Exchange Commission on May 14,  2004)

 

 

10.5*

Employment Agreement of Caryn Crump dated October 4,  2004.

 

 

10.6*

Letter Agreement re: Expense Reimbursement to  Rudolph R. Wrabel dated May 3, 2004 (incorporated herein by reference to  Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q for the quarterly  period ended March 31, 2004 and filed with the Securities and Exchange  Commission on May 14, 2004) 

 

 

10.7

Consulting Agreement dated January 3, 2005 between  Richard C. Kimball and the Company (incorporated herein by reference to  Exhibit 10.1 to the Company's Report on Form 8-K and filed with the  Securities and Exchange Commission on January 4, 2005)

 

 
10.8*Summary of 2005 Compensation for  Executive Officers and Non-Employee Directors      
10.9*

Form of Salary Continuation Agreement (incorporated  herein by reference to Exhibit 10.15 to the Company's Registration Statement  on Form S-1 (Registration No. 333-33685) filed with the Securities and  Exchange Commission on August 15, 1997 and declared effective on October 20,  1997)

 

 

10.10

Form of Collective Bargaining Agreement dated May 1,  2003 by and between Rock of Ages Corporation and the United Steelworkers of  America, AFL-CIO-CLC on behalf of Amalgamated Local #4 (incorporated herein  by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q  for the quarterly period ended June 30, 2003 and filed with the Securities  and Exchange Commission on August 13, 2003)

47

 

 

10.11

Form of Collective Bargaining Agreement dated April  28, 2003 by and between Rock of Ages Corporation-Quarries Division and the  United Steelworkers of America, AFL-CIO-CLC on behalf of Amalgamated Local #4  (incorporated herein by reference to Exhibit 10.2 to the Company's Quarterly  Report on Form 10-Q for the quarterly period ended June 30, 2003 and filed  with the Securities and Exchange Commission on August 13, 2003)

 

 

10.12

Form of Collective Bargaining Agreement dated April  26, 2003 by and between Rock of Ages Corporation and the Granite Cutter's  Association (incorporated herein by reference to Exhibit 10.3 to the  Company's Quarterly Report on Form 10-Q for the quarterly period ended  September 30, 2003 and filed with the Securities and Exchange Commission on  November 13, 2003)

 

 

10.13

Form of Side Letter Agreement dated April 26, 2003  by and between the Granite Cutter's Association and Rock of Ages Corporation  (incorporated herein by reference to Exhibit 10.4 to the Company's Quarterly  Report on Form 10-Q for the quarterly period ended September 30, 2003 and filed  with the Securities and Exchange Commission on November 13, 2003)

 

 

10.14

Credit Facility dated as of June 25, 1997 between  Royal Bank of Canada and Rock of Ages Canada, Inc., Rock of Ages Quarries  Inc. and Rock of Ages Canada Inc. (incorporated herein by reference to  Exhibit 10.20 to the Company's Registration Statement on Form S-1  (Registration No. 333-33685) filed with the Securities and Exchange  Commission on August 15, 1997 and declared effective on October 20, 1997)

 

 

10.15

Financing Agreement dated December 17, 1997 by and  between The CIT Group/Business Credit, Inc., Rock of Ages Corporation,  Royalty Granite Corporation, Carolina Quarries, Inc., Pennsylvania Granite  Corp., Childs & Childs Granite Company, Inc., Southern Mausoleums, Inc. and  Rock of Ages Memorials LLC (incorporated herein by reference to Exhibit 10.19  to the Company's Annual Report on Form 10-K for the fiscal year ended  December 31, 1997 and filed with the Securities and Exchange Commission on  March 31, 1998)

 

 

10.16

Fifth Amendment to Financing Agreement dated as of  October 25, 2002, by and between The CIT Group/Business Credit and Rock of  Ages Corporation, Rock of Ages Kentucky Cemeteries, LLC, Carolina Quarries,  Inc., Autumn Rose Quarry, Inc., Pennsylvania Granite Corp., Keith Monument  Company, LLC, Rock of Ages Memorials, Inc. and Sioux Falls Monument Co.  (incorporated herein by reference to Exhibit 10.1 to the Company's Quarterly  Report on Form 10-Q for the quarterly period ended September 30, 2002 and  filed with the Securities and Exchange Commission on November 14, 2002)

 

 

10.17

Sixth Amendment to Financing Agreement dated as of  November 11, 2003, by and between The CIT Group/Business Credit and Rock of  Ages Corporation, Rock of Ages Kentucky Cemeteries, LLC, Carolina Quarries,  Inc., Autumn Rose Quarry, Inc., Pennsylvania Granite Corp., Keith Monument  Company, LLC, Rock of Ages Memorials, Inc. and Sioux Falls Monument. Co.  (incorporated herein by reference to Exhibit 10.14 to the Company's Annual  Report on Form 10-K for the fiscal year ended December 31, 2003 and filed  with the Securities and Exchange Commission on March 30, 2004)

 

 

10.18

Seventh Amendment to Financing Agreement dated as of  February 17, 2004, by and between The CIT Group/Business Credit and Rock of  Ages Corporation, Rock of Ages Kentucky Cemeteries, LLC, Carolina Quarries,  Inc., Autumn Rose Quarry, Inc., Pennsylvania Granite Corp., Keith Monument  Company, LLC, Rock of Ages Memorials, Inc. and Sioux Falls Monument Co.  (incorporated herein by reference to Exhibit 10.15 to the Company's Annual  Report on Form 10-K for the fiscal year ended December 31, 2003 and filed  with the Securities and Exchange Commission on March 30, 2004)

 

 

10.19

Eighth Amendment to Financing Agreement dated as of  July 8, 2004, by and between The CIT Group/Business Credit and Rock of Ages  Corporation, Rock of Ages Kentucky Cemeteries, LLC, Carolina Quarries, Inc.,  Autumn Rose Quarry, Inc., Pennsylvania Granite Corporation, Rock of Ages  Memorials, Inc. and Sioux Falls Monument Company. (incorporated herein by  referenced to Exhibit 10.3 to the Company's Quarterly Report on Form 10-Q for  the quarterly period ended July 3, 2004 and filed with the Securities and  Exchange Commission on August 14, 2004)

48

 

 

 

10.20

Ninth Amendment to Financing Agreement dated as of  December 31, 2004, by and between The CIT Group/Business Credit and Rock of  Ages Corporation, Rock of Ages Kentucky Cemeteries, LLC, Carolina Quarries,  Inc., Autumn Rose Quarry, Inc., Pennsylvania Granite Corporation, Rock of  Ages Memorials, Inc. and Sioux Falls Monument Company (incorporated herein by  reference to the Company's Report on Form 8-K and filed with the Securities  and Exchange Commission on January 4, 2005)

 

 

10.21

Letter Agreement dated August 8, 2003 by and between  Rock of Ages Corporation, CIT Business Credit and Fleet National Bank  (incorporated herein by reference to Exhibit 10.4 to the Company's Quarterly  Report on Form 10-Q for the quarterly period ended June 30, 2003 and filed  with the Securities and Exchange Commission on August 13, 2003)

 

 

10.22

Letter Agreement dated November 11, 2003 by and  between Rock of Ages Corporation, CIT Business Credit and Fleet National Bank  (incorporated herein by reference to Exhibit 10.5 to the Company's Quarterly  Report on Form 10-Q for the quarterly period ended September 30, 2003 and  filed with the Securities and Exchange Commission on November 13, 2003)

 

 

10.23

Consent Agreement dated as of June 21, 2004 by and  among Rock of Ages Corporation, Rock of Ages Kentucky Cemeteries, LLC,  Carolina Quarries, Inc., Autumn Rose Quarry, Inc., Pennsylvania Granite  Corporation, Keith Monuments Company, LLC, Rock of Ages Memorials, Inc.,  Sioux Falls Monument Company and The CIT Group/Business Credit (incorporated  herein by reference to Exhibit 10.1 to the Company's Quarterly Report on Form  10-Q for the quarterly period ended July 3, 2004 and filed with the  Securities and Exchange Commission on August 16, 2004)

 

 

10.24

Assignment and Transfer Agreement dated as of July  9, 2004 by and between The CIT Group/Business Credit and Rock of Ages  Corporation, Rock of Ages Kentucky Cemeteries, LLC, Carolina Quarries, Inc.,  Autumn Rose Quarry, Inc., Pennsylvania Granite Corporation, Rock of Ages  Memorials, Inc. and Sioux Falls Monument Company (incorporated herein by  reference to Exhibit 10.4 to the Company's Quarterly Report on Form 10-Q for  the quarterly period ended July 3, 2004 and filed with the Securities and  Exchange Commission on August 16, 2004) 

 

 

10.25

Waiver and Agreement dated as of August 10, 2004 by  and between The CIT Group/Business Credit and Rock of Ages Corporation, Rock  of Ages Kentucky Cemeteries, LLC, Carolina Quarries, Inc., Autumn Rose  Quarry, Inc., Pennsylvania Granite Corporation, Rock of Ages Memorials, Inc.  and Sioux Falls Monument Company (incorporated herein by reference to Exhibit  10.5 to the Company's Quarterly Report on Form 10-Q for the quarterly period  ended July 3, 2004 and filed with the Securities and Exchange Commission on  August 16, 2004)

 

 

10.26

Waiver Letter dated March 21, 2005 (incorporated  herein by reference to Exhibit 10.1 to the Company's report on Form 8-K and  filed with the Securities and Exchange Commission on March 22, 2005)

 

 

10.27

Supply Agreement dated as of September 7, 2000 by  and between Keystone Memorials, Inc. and Rock of Ages Corporation  (incorporated herein by reference to Exhibit 10.14 to the Company's Annual  Report on Form 10-K for the fiscal year ended December 31, 2000 filed with  the Securities and Exchange Commission on March 31, 2001)

 

 

10.28

Supply Agreement dated as of January 11, 2002 by and  between Rock of Ages Corporation and Adams Granite Co., Inc. (incorporated  herein by reference to exhibit 10.15 to the Company's Annual Report on Form  10-K for the fiscal year ended December 31, 2001 and filed with the  Securities and Exchange Commission on April 1, 2002)

 

 

10.29

Supply Agreement dated as of August 20, 2001 by and  between Rock of Ages Corporation, Keystone Memorials, Inc. and IMEX  International, Inc. (incorporated herein by reference to Exhibit 10.16 to the  Company's Annual Report on Form 10-K for the fiscal year ended December 31,  2001 and filed with the Securities and Exchange Commission on April 1, 2002)

 

 

10.30

Amendment to Supply Agreement dated as of January 1,  2004 by and between Rock of Ages Corporation and Adams Granite Co., Inc.

49

 

 

 

10.31

Promissory Note dated October 26, 2001 in the amount  of $800,000 from Mize Acquisition, Inc. to Rock of Ages Corporation  (incorporated herein by reference to Exhibit 10.18 to the Company's Annual  Report on Form 10-K for the fiscal year ended December 31, 2001 and filed  with the Securities and Exchange Commission on April 1, 2002)

 

 

10.32

Promissory Note dated August 20, 2001 in the amount  of $840,000 from Keystone Memorials, Inc. to Rock of Ages Corporation  (incorporated herein by reference to Exhibit 10.19 to the Company's Annual  Report on Form 10-K for the fiscal year ended December 31,2001 and filed with  the Securities and Exchange Commission on April 1, 2002)

 

 

10.33

Promissory Note dated June 21, 2004 in the amount of  $3,500,000 from Rock of Ages Corporation, Rock of Ages Kentucky Cemeteries,  LLC, Carolina Quarries, Inc., Autumn Rose Quarry, Inc., Pennsylvania Granite  Corporation, Keith Monument Company, LLC, Rock of Ages Memorials, Inc., and  Sioux Falls Monument Company to The CIT Group/Business Credit (incorporated  herein by reference to Exhibit 10.2 to the Company's Quarterly Report on Form  10-Q for the quarterly period ended July 3, 2004 and filed with the  Securities and Exchange Commission on August 16, 2004)

 

 

10.34

Amendment, Consent and Release and related exhibits  dated November 9, 2004 by and between Rock of Ages Corporation, Rock of Ages  Kentucky Cemeteries, LLC, Autumn Rose Quarry, Inc., Carolina Quarries, Inc.,  Pennsylvania Granite Corporation, Keith Monument Company, LLC, Rock of Ages  Memorials, Inc., Sioux Falls Monument Company and The CIT Group/Business  Credit, Inc. (incorporated herein by reference to Exhibit 10.2 to the  Company's Report on Form 8-K and filed with the Securities and Exchange  Commission on November 10, 2004)

 

 

10.35

Asset Purchase Agreement dated July 28, 2003 by and  between Rock of Ages Kentucky Cemeteries, LLC and Saber Management, LLC  (incorporated herein by reference to Exhibit 10.3 to the Company's Quarterly  Report on Form 10-Q for the quarterly period ended June 30, 2003 and filed  with the Securities and Exchange Commission on August 13, 2003)

 

 

10.36

Purchase and Sale Agreement and related exhibits  dated November 9, 2004 by and between Rock of Ages Corporation, Autumn Rose  Quarry, Inc., Imex International, Inc. and AR Quarry Acquisition LLC  (incorporated herein by reference to Exhibit 10.1 to the Company's Report on  Form 8-K filed with the Securities and Exchange Commission on November 10,  2004)

 

 

10.37

Assignment to Asset Purchase Agreement dated August  27, 2003 by and between Saber Management, LLC and Saber Management-Kentucky,  LLC (incorporated herein by reference to Exhibit 10.1 to the Company's  Quarterly Report on Form 10-Q for the quarterly period ended September 30,  2003 and filed with the Securities and Exchange Commission on November 13,  2003)

 

 

10.38

Extension Agreement dated September 30, 2003 by and  between Rock of Ages Kentucky Cemeteries, LLC and Saber Management-Kentucky,  LLC (incorporated herein by reference to Exhibit 10.2 to the Company's  Quarterly Report on Form 10-Q for the quarterly period ended September 30,  2003 and filed with the Securities and Exchange Commission on November 13,  2003)

 

 

10.39

Mutual Release Agreement dated August 6, 2004  between Dyckerhoff AG, Granite Stone Business International S.a.r.l.,  formerly known as Eurimex S.A., and Rock of Ages Corporation (incorporated  herein by reference to Exhibit 10.6 to the Company's Quarterly Report on Form  10-Q for the quarterly period ended July 3, 2004 and filed with the  Securities and Exchange Commission on August 16, 2004)

 

 

10.40

Common Stock Purchase Agreement dated June 16, 2004  between CRGH, LLC and Rock of Ages Corporation (incorporated herein by  reference to Exhibit 10.7 to the Company's Quarterly Report on Form 10-Q for  the quarterly period ended July 3, 2004 and filed with the Securities and  Exchange Commission on August 16, 2004)

 

 

11.

Statement re: computation of per share earnings  (incorporated herein by reference to Note (1)(q) of the Company's  consolidated financial statements (filed herewith))

 

 

18.

Letter re: Change in Accounting Principles  (incorporated herein by reference to Exhibit 18 to the Company's Annual  Report on Form 10-K and filed with the Securities and Exchange Commission on  March 31, 2003)

 

 

21.

Subsidiaries of the Company 

 

 

23.

Consent of KPMG LLP 

 

 

31.1

Certification of CEO pursuant to Rule 13a-14(a) or  Rule 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002.

50

 

 

 

31.2

Certification of CFO pursuant to Rule 13a-14(a) or  Rule 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002.

 

 

32.1

Certification of CEO pursuant to 18 U.S.C. Section  1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

 

32.2

Certification of CFO pursuant to 18 U.S.C. Section  1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

* This exhibit is amanagement contract or compensatory plan or arrangement.

51

 

INDEX

BUSINESSPROPERTIESLEGAL PROCEEDINGSSUBMISSION OFMATTERS TO A VOTE OF SECURITY HOLDERSMARKET FOR THE REGISTRANTS COMMON EQUITY AND RELATED STOCKHOLDER MATTERS ANDISSUER REPURCHASES OF EQUITY SECURITIESSELECTED CONSOLIDATED FINANCIALDATAMANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OFOPERATIONSQUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKFINANCIAL STATEMENTS ANDSUPPLEMENTAL DATACHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIALDISCLOSURECONTROLS AND PROCEDURESDIRECTORS AND EXECUTIVE OFFICERSEXECUTIVE COMPENSATIONSECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATEDSTOCKHOLDER MATTERSCERTAINRELATIONSHIPS AND RELATED TRANSACTIONSPRINCIPAL ACCOUNTANT FEES ANDSERVICESEXHIBITS AND , FINANCIALSTATEMENT SCHEDULESREPORT OFINDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMConsolidated Balance SheetsConsolidated Statements ofOperationsConsolidated Statements of Stockholders Equity and Comprehensive Income (Loss)Consolidated Statements of CashFlowsNotes to ConsolidatedFinancial StatementsScheduleII - Valuation and Qualifying Accounts and ReservesSIGNATURESIndex **