Click here to go to the INDEX

**UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWASHINGTON, D.C. 20549_______________**

**FORM 10-K** 

**(MARK ONE)**

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

**FOR THE FISCAL YEAR ENDED DECEMBER 31, 2003OR**

| **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 NO. 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 Number) |
|-------------------------------------------------------------------------------------------|-------------------------------------------------------|
|                                                                                      |                                                  |
| **772 GRANITEVILLE ROAD  GRANITEVILLE, VERMONT**(Address of principal executive  offices) | **05654**(Zip Code)                                   |

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

Securities registered pursuant to Section 12(b) of theAct:

 

| **TITLE OF EACH CLASS** | **NAME OF EACH EXCHANGE  ON WHICH REGISTERED** |
|-------------------------|------------------------------------------------|
| None                    |                                           |

Securities registered pursuant to Section 12(g) of theAct:

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

Indicate by check markwhether the registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements for thepast 90 days. Yes xNo o
Indicate by check mark ifdisclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not containedherein, and will not be contained, to the best of registrant's knowledge, indefinitive proxy or information statements incorporated by reference in PartIII of this Form 10-K or any amendment to this Form 10-K. o

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

As of June 30, 2003, the aggregate market value of theregistrant's voting stock (including Class B Common Stock, par value $.01 pershare ("Class B Common Stock"), which is convertible on ashare-for-share basis into Class A Common Stock, par value $.01 per share("Class A Common Stock" and, together with Class B Common Stock,"Common Stock")), held by non-affiliates of the registrant was$36,688,126. As of March 23, 2004, there were outstanding 4,482,668 shares ofClass A Common Stock and 2,756,395 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

11

**PART II**
 

 

 

ITEM 5.

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

12

ITEM 6.

SELECTED FINANCIAL DATA

13

ITEM 7.

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

14

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

**PART III**
 

 

 

ITEM 10.

DIRECTORS AND EXECUTIVE  OFFICERS

31

ITEM 11.

EXECUTIVE COMPENSATION

34

ITEM 12.

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

39

ITEM 13.

CERTAIN RELATIONSHIPS AND  RELATED TRANSACTIONS

41

ITEM 14.

PRINCIPAL  ACCOUNTANT FEES AND SERVICES

42

 

 

 

**PART IV**
 

 

 

ITEM 15.

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

43

 

SIGNATURES

44

 

INDEX TO CONSOLIDATED  FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE

45

2

** SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS**

*This Annual Report on Form10-K, including "Management's Discussion and Analysis of FinancialCondition and Results of Operations" in Item 7, contains forward-lookingstatements that involve risks and uncertainties, as well as assumptions that,if they never materialize or prove incorrect, could cause the results of Rockof Ages Corporation ("Rock of Ages" or the "Company") todiffer materially from those contained in such statements. All statements otherthan statements of historical fact could be deemed forward-looking statements,and may include projections of revenue, gross profit, expenses, earnings or lossesfrom operations or other financial items; any statements of the plans,strategies and objectives of management for future operations; any statementsregarding future economic conditions or performance; any statements ofexpectation or belief; and any statements of assumptions underlying any of theforegoing. The risks, uncertainties and assumptions may include the challengeof continuing to build and grow Rock of Ages' retail distribution systemsthrough referral relationships, retail acquisitions and new store openings;uncertainties involving quarry yields and demand for Rock of Ages' dimensionstone; and other risks and uncertainties described herein, including, but notlimited to the items discussed in "Risk Factors That May Affect Future Results"in Item 7 of this report, and that are otherwise described from time to time inRock of Ages' reports filed with the Securities and Exchange Commission reportsfiled after this report.*

*We assume no obligation to update these forward-lookingstatements to reflect actual results or changes in factors or assumptionsaffecting such forward-looking statements.*

1

**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 10 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 82 Company-owned retail sales outlets in  the states indicated in Item 2 below. We also sell memorials wholesale to  approximately 70 independent authorized Rock of Ages retailers in the United  States as well as approximately 90 retailers in Canada. We market our  memorials at four quality and price points under four separate brand names: *Signature,  Sealmark, Golden Rule by Rock of Ages*and *Stone Eternal by Rock of  Ages.* We also sell non-branded memorials. 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 names and place a  seal bearing the brand name on each branded memorial. All *Rock of Ages*  branded memorials are supported by a perpetual warranty with varying levels  of coverage depending on the brand.

 

*Rock of Ages, Signature,  Sealmark, Golden Rule by Rock of Ages, Stone Eternal by Rock of Ages,  American Black, Barre Gray, Bethel White, Salisbury Pink, Gardenia 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 U.S. and in other countries to protect our  trademark rights.

 

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. In January 2002, we also sold the Lawson manufacturing  facility in Barre, Vermont ("Lawson") for a total sales price of  $2,550,000. 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, for $6,750,000 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 each of the cemeteries sold, as well as in  certain other  cemeteries owned by Saber. 

 

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, for a purchase price of $475,000. In connection  with the share purchase, we acquired exclusive rights to sell the output of  the Galactic Blue quarry.

During 2003 we had  operations in four business segments: Quarrying, Manufacturing, Retailing and  Cemeteries. As discussed above, we exited the cemetery business in late  December 2003. 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 that focuses on  forward vertical integration into retailing, moving Rock of Ages closer to  the ultimate customer. 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 that sell the Rock of   Ages' brands. 
- 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 and other proprietary brands sold at our Company-owned retail       outlets and independent authorized Rock of Ages retailers. 
- Acquisitions of Quarries. 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. 
- 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.

 

Beginning in January 2004,  we decided to merge our retail division and our manufacturing and wholesale  division to form the Memorials Division. The Memorials Division will have a  unified focus on increasing our retail distribution system of owned and  independently operated retailers. This transition to a unified  manufacturing/wholesale and retail division is currently underway. We are  engaged in a search to hire an executive with significant experience in  building a national branded retail distribution system to assume the role of  Chief Operating Officer (COO) of the Memorials Division. In the interim, Kurt  Swenson, Chairman/CEO of the Company, will assume that role until a Memorials  Division COO is hired. The principal changes we have made in forming the  Memorials Division relate to the management and implementation of our retail  distribution program. We have divided the country into regions with a group  of regional vice presidents who will be responsible for our owned stores, our  authorized retailers, retail acquisitions, new stores, new authorized  retailers, expanding our strategic alliances with funeral homes and  cemeteries, and every other aspect of our memorial business in their region. 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,  manufactured granite products and non-granite memorials and cemetery  products. 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 and cemetery products include burial  lots, community mausoleum niches, lawn crypts, vaults, bronze markers and  related services. For each of the last three years, from 2003 to 2001,  revenues derived from the sale of granite quarry products have accounted for  32%, 32% and 27%, respectively, of consolidated revenues and revenues derived  from the sale of manufactured granite products 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 and  cemetery products accounted for less than 6% of consolidated revenues. With  the sale of our cemetery assets in late 2003, we expect the sales of  non-granite memorials, such as bronze markers, to decline and we will no  longer sell cemetery products and services.

 

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.

 

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* quarry in North Carolina, (v) brownish red  granite from our *Autumn Rose* quarry in Oklahoma and (vi) 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, 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. 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. We also sell public and civic  memorials not placed in cemeteries both on a wholesale basis and directly to  the customer.

 

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 82 retail outlets in 15 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 are positioned to sell branded and unbranded memorials at all  price points and qualities based on differences in granite, size, design and  level of workmanship.

 

**Cemetery Products**

 

Our cemetery division  marketed and sold cemetery lots and funeral services such as grave openings  and closings. We also marketed and sold cemetery merchandise such as vaults,  bronze markers and niches in community mausoleums at some of our cemeteries.  From the time we acquired the cemeteries in early 2001, we opened sections in  some of the cemeteries that allow the placement of upright granite memorials.  Sales of upright granite memorials were handled either by cemetery sales  personnel who were trained to sell such memorials, or by sales personnel from  a nearby Company-owned retail store. Revenue from sales of upright granite  memorials is recognized in the retail products segment. In late December  2003, we sold all of our cemetery properties and assets and exited the  cemetery business. However, in connection with that sale we retained the  right to sell upright granite memorials in the cemeteries and we will  continue to sell our upright granite memorials in these cemeteries  using sales personnel from nearby Company stores or from independent  authorized Rock of Ages retailers.

 

**MANUFACTURING AND RAW  MATERIALS**

 

Rock of Ages quarries and  manufactures granite in the United States and Canada at the locations  detailed 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 2003. 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 $8.7 million as of December 31, 2003 and $10.6 million as of  December 31, 2002. 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 $8.9 million as of December 31, 2003 and $11.1 million as of  December 31, 2002. Substantially all of the backlog orders are expected to be  filled during the 2004 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 inactive.

 

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.

5

 

**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 2001, 2002 or 2003.

 

**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 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.

 

The sale of cemetery lots  and related products is highly competitive. The competition is based upon  price, geographic locations, and the overall aesthetics, maintenance and  upkeep of the cemetery. Competitors include religious organizations and municipalities that  own and operate cemeteries, and other cemetery owners, including  consolidators, which may have greater financial resources. As discussed  above, we sold all of our cemetery properties and assets in December 2003 and  have exited that business.

 

**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 726  employees as of December 31, 2003.

 

The collective bargaining  agreements with the Granite Cutters Association and the United Steelworkers  of America, respectively, which together represent approximately 178  employees in our Vermont manufacturing and quarrying operations, expire on April 25,  2005. 

 

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**

 

Our quarry and  manufacturing operations are subject to substantial regulation by federal and  state governmental statutes and agencies, 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 EPA and similar state and Canadian authorities for the protection of the  environment, including those relating to air and water quality, 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, and amendments to these reports 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

 

 

**OKLAHOMA**

Mill  Creek

     Quarry  Properties

          Autumn  Rose Quarry

Quarrying  of dimensional Autumn Rose 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

8

 

In addition, Rock of Ages  owns or operates 82 retail sales outlets and 4 associated sand blasting  facilities in the states of Georgia, Iowa, Illinois, Minnesota, Connecticut,  Massachusetts, Rhode Island, Nebraska, New Jersey, Pennsylvania, Ohio, South  Dakota, Kentucky, 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. Until the sale  of such properties in December 2003, we also owned 13 cemeteries in Kentucky.  

 

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). 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 does not produce granite in  commercial quantities and we do not expect the quarry to achieve significant  commercial production quantities in 2004. Accordingly, we do not consider  this property to be currently significant or material to our business.

**QUARRY**

**APPROXIMATE  DATE OF  COMMENCEMENT  OF OPERATIONS**

**PRIOR OWNER  (DATE ACQUIRED)**

**MEANS  OF  ACCESS**

**TOTAL  ORIGINAL COST  OF EACH PROPERTY**

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

**NET SALEABLE  RECOVERABLE  RESERVES  YEARS (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

 

 

 

 

 

 

 

Autumn  Rose (3)

1969

Autumn  Rose Quarry Inc. (1997)

Paved road

$200,000

708,000

20

 

 

 

 

 

 

 

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

 

(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.

  

  

(2)

Based on internal Company  estimates using current production levels.

 

 

(3)

The Autumn Rose quarry is  now classified as an asset held for sale. See Item 7 of this report.

 

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.

 

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 $40.

 

**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  arbitration proceeding described below.

 

Granite Stone Business  International Sarl (f/k/a Eurimex SA) (Luxembourg) vs Rock of Ages  Corporation (USA) ICC Arbitration 11502/KGA/MS. On April 18, 2001, we received a Request for  Arbitration ("Request") from our former distributor outside the  United States, Eurimex S.A. (now known as Granite Stone Business International),  in connection with our termination of the distribution agreement for our  Salisbury Pink granite. Eurimex has 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 is taking  place under the International Chamber of Commerce ("ICC") rules.

 

The Request includes claims  by Eurimex that we wrongfully terminated the Salisbury Pink and Bethel White  agreements. The Request also alleges we violated antitrust laws under the  European Community Treaty and United States antitrust laws. In the Request,  Eurimex alleged it suffered damages in excess of $30 million, and it would  seek to have damages trebled under U.S. antitrust laws. In subsequent  pre-hearing submissions, however, Eurimex asserted damages of approximately  $25.3 million, plus interest, "moral" damages, attorneys' fees and  costs.

 

We deny all of Eurimex's  allegations and we further assert Eurimex has engaged in improper or unlawful  tying practices in the sale of our products. We have answered Eurimex's  Request and have brought certain counterclaims against Eurimex, including a  claim for frivolous action. A preliminary scheduling conference was held on  October 2, 2001, and both arbitral and subject matter jurisdictional issues  were briefed. A second hearing on further procedural issues and jurisdiction  was held on March 13, 2002. On July 1, 2002, the arbitral tribunal rendered a  decision on the arbitral jurisdictional issues finding it has arbitral  jurisdiction over all of the claims brought by Eurimex. The tribunal deferred  ruling on whether it had subject matter jurisdiction over Eurimex's U.S.  antitrust law claims. The parties have completed the discovery process, and submitted  pre-hearing submissions setting out their respective positions. On March 11,  2003, after we had filed our First Pre-Hearing Submission, Eurimex withdrew  all of its U.S. antitrust law claims for which it was seeking treble damages.  A hearing on the merits of the dispute was held in May 2003, at which time  Eurimex confirmed its withdrawal of the U.S. antitrust laws claims was with  prejudice. The parties filed post-hearing submissions on August 29, 2003.  

 

We were advised by the  arbitral tribunal at the conclusion of the May 2003 hearing that a decision  would be rendered on or before November 30, 2003. On November 12, 2003, we  were advised by the arbitral tribunal that the deadline for decision in the  case had been extended by the tribunal from November 30, 2003 to February 28,  2004, as permitted by ICC rules. On February 9, 2004, we were further advised  by the arbitral tribunal the deadline for decision in the case was extended  from February 28, 2004 to May 31, 2004.

 

We deny liability and will  continue to vigorously defend the claims made by Eurimex. We have incurred  legal fees and expenses of $5.3 million since the inception of the case all  of which has been expensed through our quarry segment, as selling, general  and administrative expenses. If the arbitral tribunal were to decide in favor  of Eurimex, and award substantial damages, our business and financial  condition would likely be materially adversely affected. We continue to have  a reserve which we believe to be adequate for anticipated legal fees for the  review of the decision by the law firms retained to defend the claims and  pursue the counterclaims, but this reserve does not contain any provision of  any kind for an adverse judgment or an appeal thereof because it is our  opinion that we will prevail in this action. Therefore, if a judgment adverse  to us is entered by the arbitral tribunal, we will be required to expense the  entire judgment against us in 2004.

10

 

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. On October 3, 2003, the Court  dismissed all four of the counts of Kurtz's complaint, without prejudice to  Kurtz to file an amended complaint. On November 10, 2003, Kurtz filed an  amended complaint setting forth essentially the same facts as in the first  complaint and alleging breach of contract, commercial disparagement,  defamation and tortuous interference with prospective business advantage.  Damages have not been specified. The parties are currently engaged in the  discovery process. 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.

 

**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. 

 

11

**PART II**

 

 

**ITEM 5. **

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

 

The 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 Class A Common Stock commenced  public trading on October 21, 1997. 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. 

 

 

 

**2002**

 

**HIGH**
**LOW**

 

 

 

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

6.16

5.94

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

6.94

6.82

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

5.09

4.76

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

5.19

4.96

 

 

**2003**

 
**HIGH****LOW**
 

 

 

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

6.10

6.03

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

6.24

6.15

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

6.08

6.00

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

5.68

5.54

** **

 

As of March 23, 2004, based  upon information provided by our transfer agent, there were 252 record  holders of Class A Common Stock and 26 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. We did not declare  dividends during 2002. Rock of Ages paid its first cash dividend on March 28,  2003, and has paid dividends during each subsequent quarter in 2003 at a rate  of $.01 per share per quarter. The current rate in 2004 is $.02 per quarter  and we expect to pay a dividend for the first quarter of 2004.  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 2003.

 

 12

 

 

**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, 2003 are  derived from the consolidated financial statements of the Company, which  financial statements have been audited by KPMG LLP, independent certified  public accountants ("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,**

 
         
 

 

**2003**

 

 

**2002**

 

 

**2001**

 

 

**2000**

 

 

**1999**

 
                           
 

 

**(U.S. $ IN THOUSANDS,  EXCEPT PER SHARE DATA)**

 
            
**STATEMENT  OF OPERATIONS DATA:**

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net  revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   Quarrying

$

28,381

 

$

29,540 

 

$

25,504 

 

$

22,676 

 

$

22,016 

 

   Manufacturing

 

20,373

 

 

19,726

 

 

22,228

 

 

27,184

 

 

37,414

 

   Retailing

 

35,663

 

 

38,449

 

 

43,159

 

 

40,622

 

 

36,933

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

        Total  net revenues

 

84,417

 

 

87,715 

 

 

90,891 

 

 

90,482 

 

 

96,363 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross  Profit:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   Quarrying

 

11,178

 

 

13,132 

 

 

11,461 

 

 

9,916 

 

 

10,014 

 

   Manufacturing

 

5,774

 

 

5,521

 

 

5,422

 

 

6,801

 

 

7,791

 

   Retailing

 

20,388

 

 

21,314

 

 

25,461

 

 

22,389

 

 

19,579

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

          Total gross profit

 

37,340

 

 

39,967 

 

 

42,344 

 

 

39,106 

 

 

37,384 

 

Selling,  general and administrative expenses

 

35,182

 

 

34,538 

 

 

35,503 

 

 

33,164

 

 

31,241

 

Loss  on disposal of assets

 

—

 

 

—

 

 

2,534

 

 

—

 

 

845

 

Income  from operations

 

2,158

 

 

5,429 

 

 

4,307 

 

 

5,942 

 

 

5,298 

 

Interest  expense

 

471

 

 

522 

 

 

1,393 

 

 

2,143

 

 

2,034

 

Income  from continuing operations before provision for income taxes

 

1,687

 

 

4,907 

 

 

2,914 

 

 

3,799 

 

 

3,264 

 

Provision  for income taxes

 

578

 

 

1,364 

 

 

1,789 

 

 

1,300 

 

 

1,403 

 

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

$

1,109

 

$

3,543 

 

$

1,125 

 

$

2,499 

 

$

1,861 

 

Discontinued  operations, net of income tax effect

 

338

 

 

252

 

 

(692

)

 

(36

)

 

(32

)

Cumulative  effect of changes in accounting principles

 

—

 

 

(28,710

)

 

—

 

 

—

 

 

(150

)

Net  income (loss)

 

1,447

 

 

(24,915

)

 

433

 

 

2,463

 

 

1,679

 

**PER  SHARE DATA:**

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net  income (loss) per share - basic:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

$

0.15

 

$

0.45 

 

$

0.15 

 

$

0.34 

 

$

0.25 

 

Discontinued  operations

 

0.05

 

 

0.03

 

 

(0.09

)

 

(0.01

)

 

(0.01

)

Cumulative  effect of changes in accounting principle

 

—

 

 

(3.65

)

 
—
 

 
—
 

 

(0.02

)

Net  income (loss) per share

 

0.20

 

 

(3.17

)

 

0.06

 

 

0.33

 

 

0.22

 

Net  income (loss) per share - diluted:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

$

0.15

 

$

0.45 

 

$

0.15 

 

$

0.33

 

$

0.24 

 

Discontinued  operations

 

0.05

 

 

0.03

 

 

(0.09

)

 

0.00

 

 

(0.01

)

Cumulative  effect of changes in accounting principle

 
—
 

 

(3.64

)

 
—
 

 
—
 

 

(0.02

)

Net  income (loss) per share

 

0.20

 

 

(3.16

)

 

0.06

 

 

0.33

 

 

0.21

 

Cash  dividends paid

 

0.04

 

 
—
 

 
—
 

 
—
 

 

—

 

Weighted  average number of shares outstanding

 

7,182

 

 

7,848

 

 

7,606

 

 

7,447

 

 

7,509

 

Weighted  average number of shares outstanding assuming dilution

 

7,219

 

 

7,880

 

 

7,676

 

 

7,576

 

 

7,826

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

**AS OF ENDED DECEMBER 31,**

 
         
 

 

**2003**

 

 

**2002**

 

 

**2001**

 

 

**2000**

 

 

**1999**

 
                           
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

**BALANCE  SHEET DATA:**

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash  and cash equivalents

$

3,227

 

$

6,185

 

$

3,435

 

$

9,501

 

$

4,877

 

Working  capital

 

32,844

 

 

31,508

 

 

16,794

 

 

28,875

 

 

18,386

 

Total  assets

 

102,461

 

 

125,834

 

 

153,793

 

 

135,554

 

 

130,669

 

Long-term  debt, net of current maturities

 

12,794

 

 

12,832

 

 

323

 

 

18,527

 

 

12,620

 

Stockholders'  equity

 

62,970

 

 

62,646

 

 

89,670

 

 

88,720

 

 

86,382

 

13

 

 

**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 2003, we had four business  segments, quarrying, manufacturing, retail and cemeteries. 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. The cemetery division sells 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, accounted for as a sale of discontinued operations.

Our  quarry division's results were negatively impacted by a decrease in saleable  stone from our Pennsylvania Black quarry due to poor geological formations  (i.e. cracks and other abnormalities) in the current area of the quarry.  These conditions may be encountered from time to time in quarry operations.  We believe yields in the Pennsylvania Black quarry should improve during 2004  as we work through the formation. Results were also negatively impacted by a  sharp increase in selling, general and administrative expenses primarily  caused by the increase in legal fees and expenses in connection with the  Eurimex arbitration (See Item 3 - Legal Proceedings). Proceedings of this  nature and magnitude have historically been rare and we do not expect these  levels of expenditures to be a recurring part of our business. On the positive  side, the Bethel White quarry continued to have very good production and  yield as well as strong demand during 2003. 

Our  manufacturing division had a good year, and benefited from a slight increase  in the shipments of mausoleums and other larger, estate and feature  memorials, which generally have higher than average profit margins. We also  benefited from strong outsourcing relationships for certain colors of granite  and some lower-end products. The current climate for manufacturing is very  competitive, with imported products becoming more and more common. We  continue to explore outsourcing relationships with importers, and we also  plan to increase the amount of capital investments in our manufacturing  plants in 2004 to increase productivity, reduce costs and continue to meet  demand for our products.

During 2003, we continued  to focus on our strategy of building a profitable retail distribution system.  2003 was a challenging year for retail. We experienced declining revenues as  well as a decline in total units sold, and higher than anticipated sales  costs. We believe some of the declines may be due to a difficult economy in  early 2003 and a colder than normal 2002/2003 winter season, events that are  difficult to predict and control. We have been working and continue to work on  increasing sales and units sold, as well as controlling sales costs by  focusing on factors we can control. We are exploring and implementing a  number of initiatives to increase distribution of our products, both through  our owned stores as well as through independent authorized retailers and  funeral homes and cemeteries. As discussed in Item 1 of this Annual Report on  Form 10-K, we are also in the process of merging our retail division with our  manufacturing and wholesale division to form the Memorials Division, with a  unified focus on increasing our retail distribution system. We believe the  changes we are implementing and will continue to implement throughout 2004  will enhance our ability to increase the revenue and profitability of our  market share through an expanded  distribution system.

**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.

14

 

 

**Revenue Recognition**

The Company records  revenues from quarrying, manufacturing, retailing and 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. 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.

*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.

15

 

 

*Cemetery Division*

 

The cemetery division's  revenue from preneed sales of funeral services, and cemetery services and  merchandise is deferred until the period in which the services or merchandise  is delivered. On the balance sheet the full contract amount is included in  prearranged deferred revenue, a liability. The corresponding receivable due  from the customer is reflected in prearranged receivables, an asset, and the  corresponding cash received from the customer is 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 are expensed in the period in which they are incurred. When the  service or merchandise is delivered, we recognize as revenue the full  contract amount plus all trust earnings associated with that contract. 

 

**Impairment of long-lived  assets**

 

Our long-lived assets  consist primarily of property and equipment and, prior to 2002, goodwill.  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 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.

 

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.

 

In December 2003, we  decided to sell the Autumn Rose quarry in Mill Creek, Oklahoma. Accordingly,  it is now classified as assets held for sale in the accompanying balance  sheet. We have determined the carrying value of the quarry exceeded its fair  value based on discussions with interested parties. As a result, we  recognized an after-tax impairment charge of approximately $480,000 in the  4th quarter of 2003, which decreased the carrying value to our best estimate  of the fair value of the quarry. We will continue to actively search for a  buyer for this quarry and believe our estimate of the fair value is accurate.  However, if the ultimate negotiated price for the quarry is below our  estimate of fair value, further impairment charges may be required and future  operating results could be materially impacted.

 

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 principle and interest paid to the Company over a  period of generally not more than 5 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. 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. 

 

16

 

 

**Valuation of deferred  income taxes**

 

As of December 31,  2003, we had net deferred tax assets of $5,850,159. 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 $4,129,841 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.

 

As described in Item  3-Legal Proceedings, we are currently involved in an ICC arbitration  proceeding in which Eurimex, our former distributor outside the United  States, has brought claims against us alleging, among other things, breach of  contract and violation of antitrust laws under the European Community Treaty.  We believe the claims are without merit and we will prevail in this case.  Accordingly, we have not accrued a reserve for adverse judgment. However, if  the arbitral tribunal were to decide in favor of Eurimex and award  substantial damages, our business and financial condition would likely be  materially and adversely affected. 

 

**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 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  decrease in the expected long-term rate of return on plan assets 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.

17

 

**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,**         
 

**2003**

 

**2002**

 

**2001**
               
**STATEMENT OF OPERATIONS  DATA:**

 

 

 

 

 
   
Net Revenues:

 

 

 

 

 
   
     Quarrying

33.6%

 

33.7%

 

28.1%
   
     Manufacturing

24.1%

 

22.5%

 

24.4%
   
     Retailing

42.3%

 

43.8%

 

47.5%
               
          Total  net revenues

100.0%

 

100.0%

 

100.0%
   
**GROSS PROFIT:**

 

 

 

 

 
   
     Quarrying

39.4%

 

44.5%

 

44.9%
   
     Manufacturing

28.3%

 

28.0%

 

24.4%
   
     Retailing

57.2%

 

55.4%

 

59.0%
               
          Total  gross profit

44.2%

 

45.6%

 

46.6%
   
Selling, general &  administrative expenses

41.6%

 

39.4%

 

39.1%
   
Loss on disposal of assets

—

 

—

 

2.8%
   
Income from continuing  operations

2.6%

 

6.2%

 

4.7%
   
Interest expense

0.6%

 

0.6%

 

1.5%
   
Income from continuing  operations before provision for income taxes

2.0%

 

5.6%

 

3.2%
   
Provision for income taxes

0.7%

 

1.6%

 

2.0%
   
Income from continuing  operations before cumulative effect of changes in accounting principles

1.3%

 

4.0%

 

1.2%
   
Discontinued operations

0.4%

 

0.3%

 

(0.7%

)
Income before cumulative  effect of changes in accounting principles

1.7%

 

4.3%

 

0.5%
   
Cumulative effect of  changes in accounting principles

—

 

(32.7%

)

—
   
Net income (loss)

1.7%

 

(28.4%

)

0.5%
               
 

 

 

 

 

 
   
18

 

 

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

 

On a consolidated basis for  all segments for the year ended December 30, 2003 compared to the year ended  December 31, 2002; revenue was down 4%, gross profit declined 7% and total  Selling, General and Administrative (SG&A) costs increased 2% 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 the same  period last year 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. We believe yields will improve in  2004 as we work through the problematic part of the geological formation.  This should lead to increased revenues, as we believe demand for Pennsylvania  Black remains good. From time to time, we may experience a decrease in yield  at any one of our quarries due to natural variations in the geological  formations of the quarry. Historically, these issues have generally been  temporary in nature, and are resolved as the geological formation is worked  and/or new areas of the quarry are opened. Our Barre Gray quarry revenues  have declined in large part due to the increasing consumer demand for colored  granites, which has displaced sales of the traditional gray granite. While  Barre Gray remains one of the world's finest granites and is very desirable  in many markets, we expect sales of Barre Gray will remain flat or decline as  imported and other colored granites capture greater market share. Revenues  from the Bethel White quarry increased as a result of very strong export  customer demand as well as good quarry yields. We believe Bethel White  revenues will stay strong in 2004 as demand appears to be very good and the  quarry is in good condition to maximize 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 the  same period last year. 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 increased 12% from 2002 primarily due to an  additional $700,000 in legal expenses associated with the Eurimex arbitration  discussed in Item 3 - Legal Proceedings.

 

Manufacturing Segment  Analysis

 

Revenues in our Manufacturing  group for the year ended December 31, 2003 increased 3% over the same period  last year. 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. We have received increased  order receipts for mausoleums and estate memorials and expect orders for  those products to continue to be strong during 2004. While we have added  staff and increased our marketing efforts to increase the number of  mausoleums and estate memorials sold, demand for these products has  historically been cyclical and we cannot predict with certainty whether  orders for mausoleums and larger estate memorials will continue to grow,  level off, or decline in the long run.

 

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 the  same period last year. 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 were up 12% over last year. Roughly half of this increase  is a result of unfavorable currency exchange effects of the weakening US  dollar on our Canadian manufacturing operations and the balance is from  several smaller increases, including an increase in the cost of employee  benefits.

19

 

 

Retail Segment Analysis

 

Revenues for our retail  operations were down 7% from last year as our retail group experienced a very  difficult year. We believe the reasons behind the decline are 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. While we have little control over the economy, we are taking  measures to partner with certain funeral homes and cemeteries in selected  markets where appropriate and modifying and expanding our product offerings  in order to better capture sales to those customers who desire a memorial  priced at the lower end of the market.

 

Gross profit dollars for  the retail operations decreased 4% from last year as a result of decreased  revenue; however gross profit as a percentage of revenue increased 2% to 57% over  last year. We remain pleased with gross margins in the 55% to 58% range, but  expect this may drop slightly as a result of modifying our product offerings  to capture a larger share of the segment of the market buying lower-end  memorials. We believe increasing the availability of lower-end memorials will  add revenue and will not be a substitute for Rock of Ages personalized  branded memorials and will therefore increase overall gross profit, even if  gross profit as a percentage of revenue decreases somewhat.

 

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. We expect SG&A costs will decrease as a  result of some cost cutting measures implemented late in 2003 and expect  SG&A costs as a percentage of revenue to decrease as a result of the  combination of reduced costs and an expected increase in revenue in 2004.

 

As a result of the sale of  our cemetery division in December 2003, our cemetery operations are not shown  as a separate segment but as discontinued operations in accordance with GAAP  for all years presented. Further details concerning this are explained below.

 

Consolidated Items

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

 

As a result of classifying  the cemeteries as discontinued operations, a portion of interest expense  associated with the debt that was repaid using the proceeds from the sale of  our cemetery business was reclassified into discontinued operations in all  years presented. Interest expense decreased slightly 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. In  2004, we expect our tax rate will return to historical levels in the 26% to  30% range provided our pre-tax profits in the U.S. also return to historical  levels.

 

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. The Autumn Rose quarry has  been an immaterial contributor to our quarry operations over the last several  years and we determined it would be best to sell the quarry so we can focus  on other operations. The fair value of the quarry, and the associated  impairment charge, is management's best estimate based on discussions with  prospective buyers of the quarry. While we believe our estimate of fair value  is reasonable, we may need to take additional impairment charges if we are  unable to negotiate a sale that is consistent with our estimate of the  quarry's value. See additional discussion in "Critical Accounting  Policies, Impairment of Long Lived Assets."

 

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

 

On a consolidated basis for  all segments for the year ended December 31, 2002 compared to the year ended  December 31, 2001; revenue was down 3%, gross profit declined 6% and total  SG&A costs decreased 3% for reasons discussed in detail in the segment  analysis below.

20

 

 

Quarry Segment Analysis

 

Revenues for the quarry  division increased 16% for the year ended December 31, 2002 compared to the  same period in 2001. Strong demand for our Bethel White, Gardenia White and  Salisbury Pink quarries, as well as increased revenues from our Pennsylvania  Black quarry due to good yields, were the major factors for the revenue  increase.

 

Quarrying gross profit dollars  increased 15% for the year ended December 31, 2002 compared to the same  period in 2001. During 2002, we elected to change the method of valuing  inventory in the quarry division from the First-In, First-Out method to a  Specific Annual Average Cost method. The effect of the change in 2002 was to  decrease operating income by $789,447. We believe the Specific Annual Average  Cost method more accurately matches costs with revenue, resulting in an  enhanced measurement of operating results. (See note 3 to the Consolidated  Financial Statements.) The increase in gross profit dollars was attributable  to an increase in revenue and an increase in yields at the Bethel White,  Pennsylvania Black, and Gardenia White quarries. The slight decrease in gross  margin as a percentage of revenue was a result of decreased quarry yields and  higher repair and maintenance costs in the Barre Gray quarry, which was  almost entirely offset by an increase in gross margin percentage at the  Pennsylvania Black and Gardenia White quarries.

 

Quarry SG&A costs  increased 14% for the year ended December 31, 2002 largely as a result of  increased legal expenses for the Eurimex litigation compared to the same  period in 2001.

 

Manufacturing Segment  Analysis

 

Manufacturing revenues  decreased 11% for the year ended December 31, 2002 compared to the same  period in 2001. The decrease was primarily a result of the sale of the Childs  & Childs manufacturing facility in Elberton, Georgia ("Childs") in 2001 and a decrease in  sales in industrial products as a result of decreased demand for those  products due to a general economic slowdown. These decreases were partially  offset by revenue recognized on the National World War II memorial. 

 

Manufacturing gross profit  dollars increased 2% and gross margin as a percentage of manufacturing  revenue increased 4% to 28% for the year ended December 31, 2002 compared to the  same period in 2001. The increase in gross margin percentage was a result of  improved operations in our Barre manufacturing facility as well as a more  favorable product mix, including more branded memorials in this facility  compared to the same period in 2001. The sale of the Lawson facility, which  was completed in January 2002, also had a positive effect on gross margins  due to the elimination of traditionally low margin customers and a strong  focus on our core authorized dealer network resulting in increased branded  sales, which have historically had higher gross margins than unbranded sales.  In connection with the Lawson sale, we entered into a seven-year contract to  purchase memorials from the new owner. Although there are many alternative  suppliers of granite memorials, we are dependent on this arrangement to  provide product to our customers and believe it will continue to be a  favorable arrangement.

 

Manufacturing SG&A  costs decreased 30% for the year ended December 31, 2002 compared to the same  period in 2001. The decrease was primarily the result of the sale of the  Lawson manufacturing facility as well as the elimination of the SG&A  costs associated with the Childs plant in Elberton, GA.

 

Retail Segment Analysis

 

Retailing revenues were 11%  lower in 2002 compared to 2001. During the preceding 3-year period, order  receipts averaged approximately $39 million per year. In 2001, we decreased  our backlog of orders by approximately $3.0 million resulting in revenues in  excess of the average annual order receipts. The decrease in revenue in 2002  was a result of insufficient order receipts from our retail outlets that  would have been required to maintain the prior year's level due in part to  the closure of certain unprofitable stores in the latter part of 2001 and in  2002.

 

Retailing gross profit  dollars for the year ended December 31, 2002 declined 16% and gross profit as  a percentage of revenues decreased 4% to 55% compared to the year ended December 31,  2001. The decrease in dollars and percentage was attributable to the lower  revenues in 2002 and an associated decrease in operational efficiencies.

 

SG&A costs in the  retail segment decreased 7% for the year ended December 31, 2002 compared to  the same period in 2001 primarily as a result of lower commission payments to  sales persons as a result of lower revenues.

21

 

 

Consolidated Items

 

Interest expense for the  year ended December 31, 2002 decreased to $522,000 from $1.4 million for the  year ended December 31, 2001. This decrease was due to lower interest rates  under our credit facilities as well as a reduction in debt funded by cash  from operations and from the proceeds of the sale of Southern Mausoleums, Inc.  ("SMI"), Childs, the Royalty  Quarries ("Royalty") and Lawson.

 

Income taxes as a  percentage of earnings before taxes decreased to 27.8% in 2002 from 61.4% in  2001. The high rate in 2001 was the result of the disposition of the  quarrying and manufacturing assets for which the write down of goodwill was  non-deductible for tax purposes. The 2002 tax rate is consistent with the  Company's historical rate.

 

Income (loss) from  discontinued operations for the year ended December 31, 2002 of $252,000, net  of taxes, was primarily from cemetery operations (which were reclassified as  discontinued operations in 2003), compared to a loss of $692,000 net of taxes  for 2001. A significant portion of the increase in 2002 was the result of the  completion of a large project that had been presold.

 

The cumulative effect in  prior years of changes in accounting principles for the year ended December  31, 2002 was a loss of $28.7 million compared to $0 for 2001. The loss  consisted primarily of a write-down of $28.4 million in goodwill (net of  deferred tax benefit of $5.3 million) as a result of adopting SFAS 142 as  well as a change in accounting method for quarry inventory, which resulted in  a $280,000 write-down of inventory (net of tax benefit of $107,000). (See  notes 2 and 3 to the Consolidated Financial Statements for additional  information.)

 

**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.  We anticipate there may be future acquisitions, as we pursue our growth  strategy that may require additional financing compared to 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. Upon completion of this transaction, we  have repurchased a total of 676,200 shares for $3,359,269 under the share buy  back program. There remains 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.

 

In 2003, the funded status  of our defined benefit pension plan improved by approximately $1.2 million primarily as a result of payments  to fund the plan of $1.0 million in 2003. We also made payments of $1.4 million in 2002. We have  historically contributed between $800,000 and $1.0 million per year and  expect to make annual contributions in this range, which, we believe, we will  be able to fund either from cash from operations or borrowing under our  credit facilities. As a result of the accumulated benefit obligations of our  defined benefit plan exceeding the fair market value of the plan's assets, we  recorded a $3.1 million minimum liability during 2002, through a charge to  equity of $1.6 million, net of taxes of $679,000. This charge is reflected in  other comprehensive income (loss).

 

Cash Flow 

 

At December 31, 2003, we  had cash and cash equivalents of approximately $3.2 million and working  capital of approximately $32.8 million, compared to approximately $6.2 million  and $31.5 million, respectively, at December 31, 2002.

 

*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 is the 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.  

22

 

 

Cash flows from operating  activities were $6.9 million in 2002 compared to $11.6 million in 2001. The  primary differences were decreases in working capital in 2001 resulting from  the sale of SMI, Childs, the Royalty Quarries ("Royalty") and  Lawson, as well as an increase in accrued expenses associated with the  purchase of the cemeteries, both of which had the effect of increasing cash  from operations in 2001. (See note 16 to Consolidated Financial Statements.)

 

*Cash from Investing  Activities.* 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 used in  investing activities comes from either borrowings under our credit facilities  or from operations.

 

Cash flows used in  investing activities were $1.8 million in 2002 compared to $7.6 million in  2001. The higher uses in 2001 were primarily the result of the purchase of  the cemetery operations.

 

*Cash from Financing  Activities.* Financing activities  used $2.6 million in cash in 2003 primarily as a result of the repurchase of  500,500 shares of the Company's common stock, compared to $2.4 million used  in 2002 primarily as a result of principal payments on long-term debt. In  2001, $9.6 million in cash was used in financing activities for repayments of  the lines of credit and the 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. As of December 31, 2003, we had $12.5 million outstanding and $17.5  million available under the term loan line of credit and $4.8 million  outstanding and $15.2 million available under the revolving credit facility.  On January 2, 2004, we received payment under a promissory note from Saber in  connection with the sale of the Cemetery operations, which closed on December  16, 2003. Following the payment of that note on January 2, 2004, we had $0  outstanding on the revolving credit facility and $12.5 million outstanding on  the term loan line of credit. 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 and  capital expenditures to the sum of interest and scheduled debt repayments be  at least 1.25 for any trailing twelve-month period at the end of a quarter.  As of December 31, 2003, this ratio was a negative 2.31 as a result of  significant legal expenses in the Eurimex litigation and decreased earnings  in our retail operations which lowered EBITDA, as well as much higher than  normal capital expenditures in 2003. We have received a waiver of this  covenant until September 30, 2004 when we believe we will be in compliance  with the Debt Service Coverage Ratio. The waiver requires we meet a minimum  interim EBITDA target for the three-month period ended December 31, 2003 of  $3.1 million, for the six-month period ending March 31, 2004 of negative $2.0  million, and for the nine-month period ending June 30, 2004 of $2.3 million.  As of December 31, 2003, we were in compliance with the amended covenants as  our EBITDA for the three-month period ended December 31, 2003 was $6.6  million, which exceeded by $3.5 million our minimum requirement of $3.1  million as outlined in the table below. Finally, the waiver requires our  Capital Expenditures for the twelve-month period ending December 31, 2004 not  exceed $4.5 million, which historically is a typical level of our annual  capital expenditures.

 

 

**EBITDA consists of: (in  thousands)**

 

**Three Months Ended   December 31, 2003**
   
Net income

$

4,064

Interest

 

214

Income taxes

 

1,536

Depreciation and  amortization

 

821
      
EBITDA

 

6,635
               
23

 

 

*Total Liabilities  to Net Worth Ratio.*The facility also requires the ratio of the Company's  total liabilities to net worth not exceed 2.0. As of December 31, 2003, the  Company was in compliance with this covenant as our total liabilities to net  worth ratio was 0.63.

 

*Interest Rates.* We have a multi-tiered interest rate structure on  our outstanding debt with CIT. As a result of the covenant violation  described above in the Debt Service Coverage Ratio paragraph, we paid an  additional 0.25% on both the Revolving Credit Facility and the Term Loan for  the three-month period ended December 31, 2003. Those rates were 2.92% for  the Revolving Credit Facility for the LIBOR election and 4.0% for the Prime  rate election, and 3.16% for the Term Loan as of December 31, 2003. 

 

The rates in effect as of  December 31, 2003 (which include the additional 0.25% mentioned above) were  as follows:

 

 

 

**Amount  Outstanding**
 

**Formula**
 

**Effective Rate**
 

 

 

 
                     
Revolving Credit Facility

$

1.8 million

 

Prime - 0.25%

 

4.00%

Revolving  Credit Facility

 

3.0 million

 

LIBOR + 1.75%

 

2.92%

 

 

 

 

 

 

 

Term Loans

 

12.5 million

 

LIBOR + 2.00%

 

3.16%

 

 

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. As a result of the  waiver noted above, 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 since we substantially exceeded  the interim EBITDA minimum for the quarter ended December 31, 2003. 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, 2003, we  also had $4.0 million CDN available and $0 outstanding under a demand  revolving line of credit with the Royal Bank of Canada.

 

**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)

$

12,831,473

$

37,899

$

31,957

$

12,522,022

$

239,595

Operating  Leases (2)

2,501,736

797,637

1,124,640

554,259

25,200

Purchase  Obligations (3)

11,250,000

2,250,000

4,500,000

4,500,000

—

Total  Obligations

$

26,583,209

$

3,085,536

$

5,656,597

$

17,576,281

$

264,795

 

(1)

Long-Term Debt consists of  various notes payable (see note 6 of the Consolidated Financial Statements)  for general business use and strategic acquisitions, which will be funded  from a combination of cash flow from operations and our existing credit  facilities.

 

 

(2)

Operating Leases are  principally for real estate (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 five years.

24

 
**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 $4.5 million budgeted for capital expenditures in  2004. 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.

 

**RECENT ACCOUNTING  PRONOUNCEMENTS**

 

In April 2003, the  Financial Accounting Standards Board ("FASB") issued Statement No.  149, "Amendment of Statement 133 on Derivative Instruments and Hedging  Activities," effective for contracts entered into or modified after June  30, 2003. SFAS No. 149 amends and clarifies financial accounting and  reporting for derivative instruments, including certain derivative  instruments embedded in other contracts and for hedging activities under FASB  Statement No. 133. The adoption of SFAS No. 149 did not have a material  impact on our financial position or results of operations.

 

In May 2003 the FASB issued  SFAS No. 150, "Accounting for Certain Financial Instruments with  Characteristics of both Liabilities and Equity," effective for financial  instruments entered into or modified after May 31, 2003. SFAS No.150  establishes standards for how an issuer classifies and measures certain  financial instruments with characteristics of both liabilities and equity.  The adoption of SFAS No. 150 did not have a material impact on our financial  position or results of operations.

 

In December 2003, the FASB  revised Statement No. 132, "Employers' Disclosures about Pensions and  Other Postretirement Benefits - an amendment of FASB Statements No. 87, 88  and 106." The revised SFAS No. 132 requires additional disclosures to  those in the original statement about the assets, obligations, cash flows and  net periodic benefit cost of defined benefit pension plans and other defined  benefit postretirement plans. Our Company has adopted the disclosure  requirements of SFAS No. 132 (revised 2003) related to pensions and other  postretirement benefits. (See note 9 to the Consolidated Financial  Statements.)

 

In November 2002, the FASB  issued FASB Interpretation No. 45,"Guarantor's Accounting and Disclosure  Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of  Others" ("FIN 45"), requires that upon issuance of a  guarantee, the guarantor must disclose and recognize a liability for the fair  value of the obligation it assumes under that guarantee. The initial  recognition and measurement requirement of FIN 45 is effective for guarantees  issued or modified after December 31, 2002.  The adoption of FIN 45 did not have a material impact on our financial  position or results of operations.

 

In January 2003, the FASB  issued FASB Interpretation No. 46, "Consolidation of Variable Interest  Entities" ("FIN 46"). FIN 46 clarifies situations in which  entities shall be subject to consolidation. FIN 46 is effective for all  variable interest entities created after January 31, 2003 and to variable  interest entities in which an enterprise obtains an interest after that date.  It applies in the first fiscal year or interim period beginning after June 15,  2003, to variable interest entities in which an enterprise holds a variable  interest that it acquired before February 1, 2003. On October 9, 2003, the  FASB issued Position No. FIN46-6, which delayed the effective date of  consolidation provisions of FIN 46 for variable interest entities created  before February 1, 2003 if the reporting entity had not yet issued financial  statements reporting the variable interest entities in accordance with the  consolidation provisions of FIN 46. The new effective date is for reporting  periods ending after December 15, 2003. We have determined that we have no  variable interest entities and do not believe that the adoption of FIN 46  will have a material impact on our financial statements. 

 

**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.

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 the closing of the acquisition. 

 

**Litigation or similar  proceedings could result in substantial expense and distraction and seriously  harm our business.**

 

As described in Item 3 of  this report, we are involved in an arbitration proceeding with Eurimex  involving claims made by Eurimex related to our termination of the  distribution agreement for our Salisbury Pink granite and to the distribution  agreement for our Bethel White granite, which expired by its terms in 1998.  In connection with this matter, Eurimex has claimed damages of $25.3 million,  plus interest, "moral" damages, attorney's fees and costs. We have  reserved amounts which we believe to be adequate for anticipated legal fees  for the review of the decision in this matter when received and the pursuit  of counterclaims, but this reserve does not contain any provision of any kind  for an adverse judgment or an appeal thereof because it is our opinion that  we will prevail in this action. If the arbitral panel were to decide in favor  of Eurimex, and award substantial damages, we will not have any reserve to  cover these damages and our business would most likely be seriously harmed.  We may in the future be the target of other litigations or claims, which  could result in substantial costs and divert management's attention and  resources. 

 

**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 are unable to  maintain our relationships with independent retailers, our sales may not  continue to grow and could decline.**

 

We have historically sold  our granite memorials to consumers through independent retailers. Over the  past five years, we have acquired 26 retailers with multiple retail outlets  in 15 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 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.

 

**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.

27

 

 

**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  27% of the deaths in the United States in 2001, compared to approximately 17%  in 1990, 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 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.

 

**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 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 have a material  adverse effect on 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  28% of our revenues in fiscal 2003 from sales to customers outside the United  States, with approximately 8% of revenues in fiscal 2003 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.

28

 

 

**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. While we expect to be able to continue to comply with existing  environmental and occupational health and safety laws and regulations, any  material non-compliance 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.

 

**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.

29

 

 

**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.

 

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 xxxvii, inclusive, and is incorporated herein by reference.

 

**ITEM 9. **

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

 

None.

 

**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(c) 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, 2003 that have  materially affected, or are reasonably likely to materially affect, our  internal control over financial reporting.

30

**PART III**

 

**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**

 

 

 

Robert Campo

44

Vice  President/Quarry Sales

James L. Fox

52

Director

Peter  A. Friberg

53

Senior  Vice President/Northeast Region

Douglas  S. Goldsmith

34

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

Jon  M. Gregory

54

President  and Chief Operating Officer/Quarries Division

Richard  C. Kimball

63

Director,  Chief Strategic and Marketing Officer

Donald  Labonte

42

President  and Chief Operating Officer/Manufacturing Division

Dennis  I. Merchant

53

Vice  President/Retail Operations

Douglas  M. Schair

59

Director

Terry  Shipp

46

Senior  Vice President/Ohio Valley and Central Region

Kurt  M. Swenson

59

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

Michael  B. Tule

42

Vice  President, General Counsel and Secretary

Charles  M. Waite

71

Director

Frederick  E. Webster Jr.

66

Director

 

(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.

 

Robert Campo has been Vice  President/Quarry Sales and Marketing since February 2003. From 1993 to 2003,  he was Director of Quarry Sales and Marketing. From 1986 to 1993, Mr. Campo  was District Sales Manager for the Memorials Division. From 1979 to 1986, Mr.  Campo worked as a Civil Engineer Tech for the Company.

 

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, a provider of  business process outsourcing services to the financial services industry,  since September 2003. He was President of Fund Services of The Bisys Group  from April 2003 to September 2003. From July 2001 to April 2003, he was  President and Chief Executive Officer of govOne Solutions, L.P., an  electronic government paying service. From June 2000 to July 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 a twelve 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 investment 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 at the 2004 annual  shareholder's meeting.

 

Peter A. Friberg has been  Senior Vice President/Northeast Region since March 2004. He was Senior Vice  President/Corporate Development from February 2003 to March 2004. From  June 2001 to January 2003, he was Senior Vice President/Wholesale Sales  and Development. From 1998 to May 2001, Mr. Friberg was Senior Vice  President/Retail Acquisitions.  From 1975 to 1995, Mr. Friberg owned and  managed the Anderson-Friberg Company, a family wholesale memorial manufacturing  company, in Barre, Vermont, serving as President from 1991 to 1995. From 1991  to 1993, Mr. Friberg was President of the Barre Granite Association.

 

Douglas S. Goldsmith has  been Chief Financial Officer and 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  1993. 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. 

 

31

 

 

Richard C. Kimball has been  Chief Strategic and Marketing Officer since January 2001. From 1993 to  January 2001, he was Vice Chairman and Chief Operating Officer/Memorials  Division of the Company. He has been a director of the Company since 1986.  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's current term as a director  will expire in 2006.

 

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.

 

Dennis I. Merchant has been  Vice President/Retail Operations since August 1999. From 1984 to August 1999  he served as Manager/Manufacturing Operations.

 

Douglas M. Schair has been  a director of the Company since June 2001. He has been a principal of Insurance  Investment Associates since 1975. From 1988 to 1998, Mr. Schair was Vice  Chairman and Chief Investment Officer of Life Re Corporation. Mr. Schair is  Vice Chairman of the Board of SatelLife, a nonprofit humanitarian  organization dedicated to serving the health communication and information  needs in the developing world. He is a trustee of Colby College in  Waterville, Maine. Mr. Schair's current term as a director will expire at the  2004 annual shareholder's meeting.

 

Terry Shipp has been Senior  Vice President/Ohio Valley and Central Region since March 2004. He was  President and Chief Operating Officer/Retail Division from August 2002 to  March 2004. From January 2001 to July 2002, he was Vice President/Retail  Sales and Marketing. From 1997 to December 2000, he was the Sales Manager of  Keith Monument Company, LLC, a wholly owned subsidiary of the Company.

 

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 IPO 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 in 2006.

 

Michael B. Tule has been  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 2004 annual shareholder's 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. He is also a director of Image  Max, Samuel Cabot, Inc. and Diamond Phoenix Corp.  Mr. Webster's current  term as a director will expire in 2005.

 

**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 file reports of  initial beneficial ownership and changes in beneficial ownership of our  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 2003 such persons made all required filings, except Mr. Schair 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 disclaims ownership of the  shares held by the trust. The late reports were the result of inadvertent  clerical error.

32

 

 
**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, Douglas M. Schair and Charles M. Waite. The  Board of Directors has determined that each of James L. Fox, Chairman of the  Audit Committee, and Audit Committee member Douglas M. Schair 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. As disclosed in the table found in Item 12 of this Annual  Report on Form 10-K, Mr. Schair currently owns 11.4% of the outstanding  shares of Class A common stock of the Company. The board of directors of the  Company has determined, based on the facts and circumstances, that Mr.  Schair's stock ownership does not affect his independence or his  qualifications to serve on the audit committee, particularly in view of the  substantial voting power (approximately 64% of the voting power of the  outstanding shares) held by Kurt M. Swenson and Kevin C. Swenson.

 
**CODE  OF ETHICS**
 

Rock  of Ages is in the process of adopting a code of business ethics for  directors, officers (including Rock of Ages' principal executive officer and  principal financial and accounting officer) and employees. We expect to  formally adopt the code of ethics prior to May 4, 2004. The code of business  ethics will be available on Rock of Ages' website at www.rockofages.com as  soon as practicable after adoption by the Board of Directors. Stockholders  will also be able to request a free copy. We may 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 or our principal financial and accounting officer by  posting such information on our website.

33

 

 

**ITEM 11.**

** EXECUTIVE  COMPENSATION**

 

The following table sets  forth information with respect to the Chief Executive Officer of the Company  and each of the four other most highly compensated executive officers of the  Company (the "Named Executive Officers") for the years ended  December 31, 2003, December 31, 2002 and December 31, 2001.

 

**SUMMARY COMPENSATION TABLE**

 

**NAME  AND PRINCIPAL POSITION**

 

**YEAR**
 

**ANNUAL COMPENSATION   SALARY                    BONUS**

 

**LONG-TERM  COMPENSATION  SECURITIES  UNDERLYING OPTIONS**

 

**ALL OTHER  COMPENSATION (2)**

 

 

 

 

 

 

 
                                    
Kurt  M. Swenson

2003

$

        430,008 (1)

  $

         15,000 (1)

—

$

7,831

(3)

   Chief  Executive Office and Chairman 

2002

$

        420,000 (1) 

$

         30,000 (1)

—

$

2,878

(3)

    of the Board of Directors

2001

$

        360,000

$

         30,000

—
$

1,200

Richard C. Kimball 

2003

$

        300,000 (1)

$

         15,000 (1)

—

$

6,329

(3)

   Chief  Strategic and Marketing Officer

2002

$  

        290,016 (1)

$

         30,000 (1)

—
$

2,335

(3)

   Director

2001

$

        240,000

$

         30,000

—
$

1,200

Jon M. Gregory

2003

$

        260,004

$

         25,000

—

$

1,350

   President  and Chief Operating Officer/

2002

$

        250,008

$

         50,000

60,000

$

1,250

   Quarries Division

2001

$

        230,037
$
         40,000
—
$

1,259

Terry Shipp

2003

$

        235,008

$  

              —

—

$

1,350

   Senior Vice President/

2002

$

        204,590

$

          5,000

10,000

$

1,250

   Ohio Valley and Central Region

2001

$
        180,331
$
        15,000
—
$

1,200

Donald  Labonte

2003

$

        175,008

$

        15,000

—

$

12,031

(4)

   President and COO/

2002

$

        135,668

$

          5,000

15,000

$

8,544

(4)

   Manufacturing Division

2001

$
               —
$  
             —
—
$

—

 

(1)

Includes $70,000 and  $50,000 of salary for 2003, and $60,000 and $40,008 of salary for 2002,  earned but deferred at the election of Mr. Swenson and Mr. Kimball,  respectively; $15,000 of bonus on account of 2003 deferred by both in 2004,  and $30,000 of bonus on account of 2002 deferred by both in 2003, pursuant to  the Rock of Ages Key Employees Deferred Salary Plan ("Deferred Salary  Plan").

 

 

(2)

In each case, represents or  includes a matching contribution under the Company's 401(k) plan.

 

 

(3)

Includes $6,481 and $4,979  for 2003, and $1,028 and $1,085 for 2002, interest credited on deferred  compensation pursuant to the Deferred Salary Plan for Mr. Swenson and Mr.  Kimball, respectively, in excess of 120% of the applicable federal long-term  rate.

 

 

(4)

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.

 

 

34

 

 

**STOCK OPTION GRANTS**

 

Rock of Ages did not grant options to purchase its  Class A Common Stock or Class B Common Stock to any Named Executive Officer  during the 2003 fiscal year.

 

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

 

None of the Named Executive  Officers exercised any options during 2003.

 

 

 

**NUMBER OF SECURITIES  UNDERLYING OPTIONS  AT DECEMBER 31, 2003**

 

**VALUE OF UNEXERCISED  IN-THE-MONEY OPTIONS  AT DECEMBER 31, 2003 (1)**

 **NAME**

 

**EXERCISABLE**

 

**UNEXERCISABLE**

 

**EXERCISABLE**

 

**UNEXERCISABLE**

Kurt  M. Swenson

 

0

 

0

$

0

$

0

Richard  C. Kimball

 

25,000

 

0

$

0

$

0

Jon  M. Gregory

 

12,000

 

48,000

$

0

$

0

Donald  Labonte

 

13,000

 

12,000

$

8,300

$

0

Terry  Shipp

 

17,000

 

8,000

$

12,450

$

0

 

(1)

These values are calculated  using the $5.77 per share closing price of the Class A Common Stock on the  NASDAQ  National Market on December 31, 2003.

 

35

 

**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 2003 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 may exceed the  applicable limitations. Such limitations are not currently 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

$

38,476

$

51,301

$

64,126

$

76,952

$

150,000

$

46,726

$

62,301

$

77,876

$

93,452

$

175,000

$

54,976

$

73,301

$

91,626

$

109,952

$

200,000

$

63,226

$

84,301

$

105,376

$

126,452

$

225,000

$

71,476

$

95,301

$

119,126

$

142,952

$

250,000 

$

79,726

$

106,301

$

132,876

$

159,452

$

275,000

$

87,976

$

117,301

$

146,626

$

175,952

$

300,000

$

96,226

$

128,301

$

160,376

$

192,452

$

325,000

$

104,476

$

139,301

$

174,126

$

208,952

$

350,000

$

112,726

$

150,301

$

187,876

$

225,452

$

375,000

$

120,976

$

161,301

$

201,626

$

241,952

$

400,000

$

129,226

$

172,301

$

215,376

$

258,452

$

425,000

$

137,476

$

183,301

$

229,126

$

274,952

$

450,000

$

145,726

$

194,301

$

242,876

$

291,452

$

475,000

$

153,976

$

205,301

$

256,626

$

307,952

$

500,000

$

162,226

$

216,301

$

270,376

$

324,452

 

 

These calculations are based on the retirement formula in  effect as of December 31, 2003, 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, 2003 and rounded to  the full year, are: Mr. Gregory, 28 years; Mr. Kimball, 11 years; Mr. Shipp, 2  years and Mr. Swenson, 30 years. 

 

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.

 

36

 

**NAME**

 

**ANNUAL BASECOMPENSATION**

 

**TOTAL YEARS  OF SERVICEAT AGE 65**

 

**ANNUAL  RETIREMENT   BENEFITAT AGE 65**

 

 

 

 

 

 

 

R. Kimball

 

$300,000

 

12

 

36,000

K. Swenson

 

$430,008

 

26

 

122,982

J. Gregory

 

$260,004

 

39

 

60,841

 

 

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 and  Mr. Kimball 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 $15,500 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 $10,000 and  $500 for each meeting of the Board, including committee meetings. Directors  are also eligible for stock option grants under our Amended and Restated 1994  Stock Plan. 

37

 

 

**EMPLOYMENT AGREEMENTS**

 

Rock of Ages has 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 IPO  (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.

**COMPENSATION COMMITTEE  INTERLOCKS AND INSIDER PARTICIPATION**

 

Messrs. Fox, Waite and  Webster served as members of the Compensation Committee of the Board of  Directors of the Company for all of 2003. 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. 

 

38

 

**ITEM 12. **

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

 

The following table sets  forth, as of March 23, 2004, 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 4,482,668 shares of Class A Common Stock and 2,756,395 shares  of Class B Common Stock outstanding as of March 23, 2004.

 

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 23, 2004 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)**

Advisory Research, Inc. (3)  180 North Stetson Street, Suite 5780  Chicago, IL 60601

 

—

 

—

 

348,700

 

7.8%

Andrew Delaney (4)  2727 Allen Parkway, Suite 460  Houston, TX 77019

 

—

 
—
 

336,437

 

7.5%
Connors Investor Services, Inc. (5)  1100 Berkshire Boulevard  Wyomissing, PA 19610
 
—
 

—

 

294,050

 

6.6%

Dimensional Fund Advisors, Inc. (6)  1299 Ocean Avenue, 11th Floor  Santa Monica, CA 90401

 
—
 
—
 

281,500

 

6.3%

Kurt M. Swenson (7) **

1,005,000

36.5%

1,135,000

20.7%

Kevin C. Swenson (8)

1,023,489

37.1%

1,023,489

18.6%

Douglas M. Schair (9)**
——
561,253

12.5%

Robert L. Pope 

144,875

5.3%

144,875

3.1%

Richard C. Kimball **

29,126

1.1%

113,426

2.5%

Jon M. Gregory (10) **
——
49,326

1.1%

Charles M. Waite (11) **

29,126

1.1%

45,000

*

James L. Fox (12)**
——
16,000

*

Frederick E. Webster Jr. (13)**
——
15,000

*

Terry Shipp (14)**
——
20,000

*

Donald Labonte (15)
——
6,000

*

All directors and executive officers as a group (16)

1,194,627

43.3%

2,197,640

37.3%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

**  Named ExecutiveOfficer and/or Director

*  Less than 1%

39

(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 23,  2004 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 13G  dated February 12, 2004, Advisory Research, 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.

 

 

(4)

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.

 

 

(5)

According to a Schedule 13G  dated February 12, 2003, 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.

 

 

(6)

According to a Schedule 13G  dated February 3, 2004, 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.

 

 

(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)

Includes 6,000 shares of  Class A Common Stock subject to currently exercisable stock options. Also  includes 18,800 shares of Class A Common Stock held by a trust of which Mr.  Schair is co-trustee. Mr. Schair disclaims 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 24,000 shares of  Class A Common Stock subject to currently exercisable stock options.

 

 

(11)

Includes 15,000 shares of  Class A Common Stock subject to currently exercisable stock options.

 

 

(12)

Includes 15,000 shares of Class A Common Stock subject to  currently exercisable stock options.

 

 

(13)

All 15,000 shares of Class  A Common Stock listed are subject to currently exercisable stock options.

 

 

(14)

Includes 19,000 shares of  Class A Common Stock subject to currently exercisable stock options.

 

 

(15)

All 6,000 shares of Class A  Common Stock listed are subject to currently exercisable stock options.
      (16)Includes 131,375 shares of Class B Common Stock and 45,000  shares of Class A Common Stock held by Peter A. Friberg, Senior Vice President  of the Company.
 

40

 

 

**Equity Compensation Plan  Information**

 

The following table sets  forth information regarding the Company's equity compensation plan as of  December 31, 2003.

 

 

**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

510,333

$5.91

234,333 (1)

Equity  compensation plans not approved by security holders

None

None

None

Total

 

510,333

 

$5.91

 

234,333

 

 

 

 

 

 

 

 

(1)

In addition to stock  options, awards under the Rock of Ages Corporation Amended and Restated 1994  Stock Plan may take the form of restricted stock as specified in the Plan. If  such awards are granted, they will reduce the number of shares of common  stock available for issuance pursuant to future stock option awards.

 

**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 2003, the Company received  approximately $93,000 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 2003 were approximately $59,000. Swenson LLC also purchases  granite blocks and slabs from the Company. Such purchases amounted to  approximately $41,000 in 2003. 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.  

 

41

 

 

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 February 2004, the Board of Directors authorized  management to finalize negotiations and execute a definitive agreement with  FFS Holdings, Inc. ("FFS") for an investment of up to $5 million in  that company or a related company. The investment, which would include voting  and non-voting common shares, would represent approximately 8% of the common  voting shares and approximately 12% of the total common equity of FFS. A  definitive closing date has not been set and the investment remains subject  to the negotiation and execution of definitive investment documents, due  diligence investigations and numerous conditions to closing, including the  closing of the following transaction. FFS has signed a definitive agreement with  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 director of the Company and a  holder of approximately 12.5% of the Class A common stock of the Company. Mr.  Schair is expected to hold approximately 12% of the outstanding shares of FFS and will hold  the position of Vice Chairman and Chief Investment Officer of FFS. The  transaction is subject to customary closing conditions, including regulatory  approvals. A definitive closing date has not been set.
 

**ITEM 14. **
**PRINCIPAL ACCOUNTANT FEES AND SERVICES**
 

The Audit Committee  appointed KPMG, LLP as Rock of Ages' independent auditors for the fiscal year  ended December 31, 2003. The following table shows the fees paid by Rock of  Ages for the audit and other services provided by KPMG for fiscal 2003 and  2002.

 

The Audit Committee did not  utilize the de minimis exception to the pre-approval requirements to approve  any services provided by KPMG during fiscal 2003.

 

 

 

2003

 

2002

 

 

 

Audit  Fees (1)

$

319,340

$

317,500

Tax  Fees (2)

 

155,390

 

114,900

All  Other Fees

—
—
 

 

 

Total

$

474,730 

$

432,400

 

 

 

 

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 2003 and 2002, respectively, tax fees principally included tax  compliance fees of $70,650 and $72,000, and tax advice and tax planning fees  of $84,740 and $42,900. 

42

**PART IV**

**ITEM 15.**

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

 

 
(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.

 
 
 

 

 

 
 
(b)

The Company has filed the  following reports on Form 8-K during the quarter ended December 31, 2003:

 
 
 

 

 

 
 
 

 

On November 4, 2003, the Company filed a Current  Report on Form 8-K pursuant to Item 5 (Other Events) announcing the Board of  Directors had declared a quarterly cash dividend payable on December 17, 2003  to shareholders of record at the close of business on November 17, 2003, and  Item 12 (Results of Operations and Financial Condition) to report it would be  issuing a press release to disclose results of operations for the fiscal  quarter ending September 30, 2003.

 
 
 

 

 

 
 
 

 

On December 17, 2003, the  Company filed a Current Report on Form 8-K pursuant to Item 5 (Other Events)  announcing it had completed the previously announced sale of all of its  cemeteries to privately held Saber Management LLC, for $6,750,000.

 
 
 

 

 

 
 
 

 

On December 22, 2003, the  Company filed a Current Report on Form 8-K pursuant to Item 2 (Acquisition or  Disposition of Assets) to provide a more complete description of the  transaction of the sale of all of its cemeteries to Saber Management, LLC.  

 
43

** **
  
**ROCK OF AGES CORPORATION AND SUBSIDIARIES**

Consolidated Financial Statements

December 31, 2003, 2002 and 2001

(With Independent Auditors' Report Thereon)

 

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

 

 

**PAGE**
 

 

Independent Auditors'  Report

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:

 

 

 

          Independent  Auditors' Report on Supplementary Information

xxxvi

 

 

          Schedule  II-Valuation and Qualifying Accounts and Reserves

xxxvii

 

 

 

**INDEPENDENT AUDITORS'  REPORT**

 

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, 2003 and 2002, 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, 2003.  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 auditing standards generally accepted in the United States of  America.  Those standards require that we plan and perform the audit to obtain reasonable  assurance about whether the financial statements are free of material  misstatement. An audit includes examining, on a test basis, evidence  supporting the amounts and disclosures in the 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, 2003 and 2002, and the results of their  operations and their cash flows for each of the years in the three-year  period ended December 31, 2003, in conformity with accounting principles  generally accepted in the United States of America. 

 

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.

 

KPMG LLP/s/ KPMG LLP

February 20, 2004Burlington, Vermont 

 

i

**ROCK OF AGES CORPORATION AND SUBSIDIARIES**Consolidated Balance SheetsDecember 31, 2003 and 2002

 

**ASSETS (note 6)**

 

**2003**

 

 

**2002**

 
               
Current assets:

 

 

 

 

 

 

   Cash and  cash equivalents

$

3,226,870

 

$

6,185,263

 

   Trade  receivables, less allowance for doubtful accounts of       $739,929 in 2003 and $1,046,124 in 2002 (note  5)

 

15,586,829

 

 

17,670,481

 

   Due from  affiliates (note 11)

 

216,718

 

 

—

 

   Inventories  (notes 3 and 5)

 

21,151,696

 

 

21,425,582 

 

   Income  taxes receivable

 

408,744

 

 

213,133

 

   Deferred  tax assets (note 8)

 

720,869

 

 

859,832

 

   Assets  held for sale (note 16)

 

817,122

 

 

228,805

 

   Note receivable (note 16)

 

5,250,000

 

 

—

 

   Other  current assets

 

3,665,417

 

 

4,125,250

 
               
          Total  current assets

 

51,044,265

 

 

50,708,346

 
               
Property, plant and  equipment (note 5):

 

 

 

 

 

 

   Granite  reserves and development costs

13,846,831   

13,969,834 

   Land

 

6,290,736   

 

 

9,187,410 

 

   Buildings  and land improvements

 

19,420,251   

 

 

15,603,722 

 

   Machinery  and equipment

 

26,189,452   

 

 

25,792,745 

 

   Furniture  and fixtures

 

3,038,757   

 

 

2,354,042

 

   Construction-in-process

 

871,175   

 

 

640,843

 
               
 

 

69,657,202   

 

 

67,548,596 

 

   Less  accumulated depreciation, depletion and amortization

 

27,162,347   

 

 

25,011,732 

 
               
          Net  property, plant and equipment

 

42,494,855   

 

 

42,536,864 

 
                                    
Other assets:

 

 

 

 

 

 

   Cash  surrender value of life insurance, net of loans of -0- in 2003 and          $77,946 in 2002

 

728,182

 

 

765,719

 

   Intangibles,  less accumulated amortization of $619,217 in 2003 and          $482,873 in 2002 (note 2)

 

438,006

 

 

574,350

 

   Debt  issuance costs, less accumulated amortization of $81,039 in 2003 and           $15,987 in 2002

 

243,947

 

 

303,752

 

   Due from  affiliates (note 11)

 

65,902

 

 

80,883

 

   Deferred  tax assets (note 8)

 

5,236,474

 

 

6,249,168

 

   Intangible  pension asset (note 9)

 

903,758

 

 

1,135,798

 

   Prearranged  receivables (note 1(n))

 

—

 

 

14,013,176

 

   Cemetery  property, at cost (note 1(m))

 

—

 

 

6,056,049

 

   Other

 

1,305,798

 

 

2,025,483

 

  Assets held for sale (note 16)

 

—

 

 

1,384,442

 
               
          Total  other assets

 

8,922,067

 

 

32,588,820 

 
               
          Total  assets 

$

102,461,187

 

$

125,834,030

 
               
 

 

 

 

 

 

 

 

 

See accompanying notes to consolidated financialstatements

ii

**ROCK OF AGES CORPORATION AND SUBSIDIARIES**Consolidated Balance SheetsDecember 31, 2003 and 2002

 

**LIABILITIES AND  STOCKHOLDERS' EQUITY**

 

**2003**

 

 

**2002**

 
               
Current liabilities:

 

 

 

 

 

 

   Borrowings  under lines of credit (note 5)

$

4,751,405

 

$

4,385,486

 

   Current  installments of long-term debt (note 6)

 

37,899

 

 

62,206

 

   Deferred  compensation payable (note 9)

 

326,836

 

 

323,659

 

   Trade  payables

 

1,650,748

 

 

1,957,291

 

   Accrued  expenses

 

4,311,432

 

 

5,000,941

 

   Due to  affiliates (note 11)

 

—

 

 

9,027

 

   Customer  deposits

 

7,104,487

 

 

7,318,316

 

   Liabilities  held for sale (note 16)

 

17,122

 

 

143,106

 
               
          Total  current liabilities

 

18,199,929

 

 

19,200,032

 

 

 

 

 

 

 

 

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

 

12,793,574

 

 

12,832,354

 

Deferred compensation (note  9)

 

5,998,943 

 

 

4,723,356 

 

Prearranged deferred  revenue

 
—
 

 

21,845,430

 

Accrued pension cost (note  9)

 

1,490,497

 

 

2,690,765

 

Accrued postretirement  benefit cost (note 9)

 

827,230

 

 

834,482

 

Deferred tax liability  (note 8)

 

107,184

 

 
—
 

Other

 

74,083 

 

 

1,061,979 

 
               
          Total  liabilities

 

39,491,440

 

 

63,188,398

 

 

 

 

 

 

 

 

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 4,442,668 and         4,919,336 in 2003 and 2002, respectively

 

44,427

 

 

49,193

 

Common Stock - Class B, $.01 par value;        15,000,000 shares authorized; issued and  outstanding        2,756,395 in 2003 and 2002, respectively,  convertible into        equivalent shares of Class A common stock

 

27,564

 

 

27,564

 

Additional paid-in capital

 

65,878,461

 

 

68,573,821

 

Accumulated deficit

 

(2,066,344

)

 

(3,441,730

)

Accumulated other  comprehensive income (loss)

 

(914,361

)

 

(2,563,216

)
               
          Total  stockholders' equity

 

62,969,747

 

 

62,645,632

 
               
 

 

 

 

 

 

 

          Total  liabilities and stockholders' equity

$

102,461,187

 

$

125,834,030

 
               
 

 

 

 

 

 

 

iii

**ROCK OF AGES CORPORATION AND SUBSIDIARIES**Consolidated Statements of OperationsYears ended December 31, 2003, 2002 and 2001

 

 

 

**2003**

 

 

**2002**

 

 

**2001**

 
                     
Net  revenues:

 

 

 

 

 

 

 

 

 

   Quarrying

$

28,380,824

 

$

29,540,585

 

$

25,503,908

 

   Manufacturing

 

20,372,917

 

 

19,726,136

 

 

22,227,965

 

   Retailing

 

35,663,289

 

 

38,448,279

 

 

43,159,474

 
                     
      Total  net revenues

 

84,417,030

 

 

87,715,000

 

 

90,891,347

 
                                                   
Gross  profit:

 

 

 

 

 

 

 

 

 

   Quarrying

 

11,178,259

 

 

13,131,948

 

 

11,462,520

 

   Manufacturing

 

5,774,330

 

 

5,521,386

 

 

5,421,752

 

   Retailing

 

20,387,533

 

 

21,313,970

 

 

25,460,736

 
                     
      Total  gross profit

 

37,340,122

 

 

39,967,304

 

 

42,345,008

 
                                                   
Selling,  general and administrative expenses

 

 

 

 

 

 

 

 

 

   Quarrying

 

5,595,601

 

 

4,992,077

 

 

4,388,057

 

   Manufacturing

 

3,794,452

 

 

3,376,402

 

 

4,833,252

 

   Retailing

 

21,099,628

 

 

20,895,543

 

 

22,554,310

 

   Corporate overhead

 

4,692,213

 

 

5,273,954

 

 

3,727,867

 
                     
      Total  selling, general and administrative expenses

 

35,181,894

 

 

34,537,976

 

 

35,503,486

 
                     
 

 

 

 

 

 

 

 

 

 

Loss  on disposal of assets 

 

—

 

 
—
 

 

2,534,091

 
                     
 

 

 

 

 

 

 

 

 

 

   Income  from operations

 

2,158,228

 

 

5,429,328

 

 

4,307,431

 

 

 

 

 

 

 

 

 

 

 

Interest  expense

 

471,105

 

 

522,108

 

 

1,393,429

 
                     
 

 

 

 

 

 

 

 

 

 

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

 

1,687,123

 

 

4,907,220

 

 

2,914,002

 

 

 

 

 

 

 

 

 

 

 

Provision  for income taxes (note 8)

 

577,819

 

 

1,363,958

 

 

1,789,365

 
                     
 

 

 

 

 

 

 

 

 

 

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

 

1,109,304

 

 

3,543,262

 

 

1,124,637

 

   Discontinued  operations, net of tax effect (note 16)

 

337,901

 

 

251,825

 

 

(691,859

)
                     
 

 

 

 

 

 

 

 

 

 

 Income before cumulative effect of changes  in    accounting principles

 

1,447,205

 

 

3,795,087

 

 

 432,778

 

   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)

$

1,447,205

 

$

(24,915,211

)

$

432,778

 
                     
 

 

 

 

 

 

 

 

 

 

 Net  income (loss) per share - basic:

 

 

 

 

 

 

 

 

 

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

$

0.15

 

$

0.45

 

$

0.15

 

  Discontinued operations

 

0.05

 

 

0.03

 

 

(0.09

)

   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

$

0.20

 

$

(3.17

)

$

0.06

 
                     
 

 

 

 

 

 

 

 

 

 

Net  income (loss) per share - diluted:

 

 

 

 

 

 

 

 

 

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

$

0.15

 

$

0.45

 

$

0.15

 

    Discontinued operations

 

0.05

 

 

0.03

 

 

(0.09

)

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

 
—
 

 

(3.64

)

 
—
 
                     
        Net  income (loss) per share

$

0.20

 

$

(3.16

)

$

0.06

 
                     
 

 

 

 

 

 

 

 

 

 

Pro Forma amounts assuming the specific annual  average     cost method of valuing quarry  inventory was applied     retroactively:

 

 

 

 

 

 

 

 

 

   Net  income before cumulative effect of changes in   accounting principles

 
—      —
 

 

562,634

 

      Earnings per share - basic

 
—      —
 

 

0.07

 

      Earnings per share - diluted

 
            
 

 

0.07

 

 

 

 

 

 

 

 

 

 

 

       Weighted  average number of common shares                outstanding -  basic 

 

7,181,545

 

 

7,847,821

 

 

7,605,785

 

         Weighted  average number of common shares                outstanding - diluted

 

7,219,378

 

 

7,880,161

 

 

7,675,990

 

 

See accompanying notes to consolidated financialstatements.

iv

 

**ROCK OF AGES CORPORATION AND SUBSIDIARIES**Consolidated Statements ofStockholders' Equity and Comprehensive Income (Loss)Years ended December 31, 2003, 2002 and 2001

 

**NUMBER OF SHARES    ISSUED AND OUTSTANDING**
**CLASS A    COMMON    STOCK    (SHARES)**
**CLASS B    COMMON    STOCK    (SHARES)**
**CLASS A    COMMON    STOCK**
**CLASS B    COMMON    STOCK**
**ADDITIONAL    PAID-IN    CAPITAL**
**RETAINED    EARNINGS**
**ACCUMULATED    OTHER    COMPREHENSIVE    INCOME**
**TOTAL     STOCKHOLDERS'    EQUITY**Balance at December 31, 2000 
4,665,219 
2,826,438 
$
46,652 
$
28,264 
$
67,996,227 
$
21,040,703 
$
(392,322
)
$
88,719,524
 Comprehensive income (loss):
   Net income
— 
—
—
—
—
432,778
—
432,778  Cumulative  translation  adjustment
—
—
—
—
—
—
(396,382)
(396,382)   Minimum    pension   liability——————(158,997
)(158,997
)Total comprehensive loss
(122,601
)Conversion of common stock
359,999
(359,999)
3,600
(3,600)
—
—
—
—Exercise of options
—
320,582
—
3,206
1,186,421
—
—
1,189,627Repurchase of stock
(10,810)
—
(108)
—
(116,100)
—
—
(116,208)Balance at December 31, 2001
5,014,408
2,787,021
$
50,144
$
27,870
$
69,066,548
$
21,473,481
$
(947,701)
$
89,670,342Comprehensive income (loss):   Net loss
—
—
—
—
—
(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
—
—
262,685Repurchase 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)
$
62,645,632Comprehensive income:   Net income    
—
—
—
—
—
1,447,205
—
1,447,205   Cumulative   translation    adjustment
—
—
—
—
—
—
1,436,010     
1,436,010       Minimum  pension  liability, net of  tax of  $71,694
—
—
—
—
—
—
212,845
212,845Total comprehensive income (loss)
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
See accompanying notes to consolidated financialstatements.

v

**ROCK OF AGES CORPORATION AND SUBSIDIARIES**Consolidated Statements of Cash FlowsYears ended December 31, 2003, 2002 and 2001

 

 

 

**2003**

 

 

**2002**

 

 

**2001**

 
                     
Cash  flows from operating activities:

 

 

 

 

 

 

 

 

 

  Net  income (loss)

$

1,447,205

 

$

(24,915,211

)

$

432,778

 

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

 

 

 

 

 

 

 

 

 

    (Gain)  loss on sale of assets

 

(2,113,128

)

 

—

 

 

1,734,088

 

    Depreciation,  depletion and amortization

 

3,486,893

 

 

3,497,300

 

 

4,461,697

 

    Write  down of goodwill

 

—

 

 

33,781,555

 

 
—
 

    Decrease  (increase) in cash surrender value of life insurance

 

37,537

 

 

45,420

 

 

788,348

 

    Loss  on assets held for sale

 

610,768

 

 
—
 

 

800,003

 

    Loss  on sale of property, plant and equipment

 
—
 

 

22,633

 

 

196,905

 

   Cumulative  effect of a change in inventory method

 
—
 

 

387,521

 

 
—
 

    Deferred  taxes

 

1,258,841

 

 

(5,542,000

)

 

(72,092

)

    Changes  in operating assets and liabilities:

 

 

 

 

 

 

 

 

 

         Decrease  (increase) in trade receivables

 

1,104,430

 

 

(1,551,413

)

 

1,643,054

 

         Decrease  (increase) in due to/from related parties

 

(210,764

)

 

159,626

 

 

135,821

 

         Decrease  (increase) in inventories

 

268,214

 

 

638,279

 

 

(100,095

)

         Decrease  (increase) in other current assets

 

459,833 

 

 

(16,800

)

 

368,823

 

         Decrease  (increase) in intangible pension asset

 

232,040

 

 

(913,929

)

 

(102,386

)

         Decrease  (increase) in prearranged receivables

 

(567,002

)

 

1,375,316

 

 

449,714

 

         Increase  in cemetery property

 

(147,019

)

 

(58,481

)

 

(211,917

)

         Decrease  (increase) in other assets

 

378,054

 

 

1,212,000

 

 

(79,292

)

         Increase  (decrease) in trade payables

 

(306,543

)

 

11,666

 

 

258,203

 

         Increase  (decrease) in accrued expenses

 

(689,509

)

 

(235,620

)

 

1,612,702

 

         Increase  (decrease) in income taxes payable/receivable

 

(195,611

)

 

(286,034

)

 

594,160

 

         Increase  (decrease) in customer deposits

 

(213,829

)

 

607,236

 

 

(56,457

)

         Increase  in deferred compensation

 

837,505

 

 

623,766

 

 

803,730

 

         Increase  (decrease) in accrued pension cost

 

(987,423

)

 

651,579

 

 

(47,610

)

         Increase  (decrease) in accrued postretirement benefit cost

 

(7,252

)

 

55,389

 

 

73,556

 

         Increase  (decrease) in prearranged deferred revenue

 

181,772

 

 

(2,378,782

)

 

(1,029,438

)

         Increase  (decrease) in other liabilities

 

82,875

 

 

(299,618

)

 

(1,083,457

)
                     
         Net  cash provided by operating activities

 

4,947,887 

 

 

6,871,398

 

 

11,570,838

 
                     
 

 

 

 

 

 

 

 

 

 

Cash  flows from investing activities:

 

 

 

 

 

 

 

 

 

    Purchases  of property, plant and equipment

 

(7,735,891

)

 

(4,061,070

)

 

(3,752,960

)

    Proceeds  from sale of assets

 

1,500,000

 

 

2,296,216

 

 

3,263,038

 

    Acquisitions,  net of cash acquired

 
—      —
 

 

(7,043,366

)

    Increase  in intangible assets

 
—      —
 

 

(28,050

)
                     
         Net  cash used in investing activities

 

(6,235,891

)

 

(1,764,854

)

 

(7,561,338

)
                     
 

 

 

 

 

 

 

 

 

 

Cash  flows from financing activities:

 

 

 

 

 

 

 

 

 

    Net  borrowings (repayments) under lines of credit

 

365,919

 

 

415,084

 

 

(6,369,858

)

    Debt  issuance costs

 

(5,248

)

 

(319,752

)

 
—
 

    Principal  payments on long-term debt

 

(189,070

)

 

(1,956,149

)

 

(4,325,222

)

    Common stock repurchased

 

(2,602,600

)

 

(756,669

)

 

(116,208

)

    Dividends paid on common stock

 

(287,076

)

 
—      —
 

    Stock  options exercised

 

117,731 

 

 

262,685

 

 

1,189,627

 
                     
         Net  cash provided by (used in) financing activities

 

(2,600,344

)

 

(2,354,801

)

 

(9,621,661

)
                     
 

 

 

 

 

 

 

 

 

 

Effect  of exchange rate changes on cash

 

929,955 

 

 

(1,661

)

 

(454,023

)
                     
 

 

 

 

 

 

 

 

 

 

         Net  increase (decrease) in cash and cash equivalents

 

(2,958,393

)

 

2,750,082

 

 

(6,066,184

)

 

 

 

 

 

 

 

 

 

 

Cash  and cash equivalents, beginning of year

 

6,185,263

 

 

3,435,181

 

 

9,501,365

 
                     
 

 

 

 

 

 

 

 

 

 

Cash  and cash equivalents, end of year

$

3,226,870

 

$

6,185,263

 

$

3,435,181

 
                     
 

 

 

 

 

 

 

 

 

 

 

See accompanying notes to consolidated financialstatements.

vi

 

**ROCK OF AGES CORPORATION AND SUBSIDIARIES**Consolidated Statements of CashFlows, continued

 

 

 

**2003**

 

**2002**

 

**2001**

 

 

 

 

Supplemental cash flow  information:

 

 

 

 

 

 

    Cash  paid during the year for:

 

 

 

 

 

 

         Interest

$

672,255

$

738,108

$

1,757,929

         Income  taxes

 

285,434

 

1,344,453

 

1,003,249

 

 

Supplemental non-cash  investing and financing activities:

 

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

 

During the fourth quarter  of 2003, the Company completed the sale of Rock of Ages Kentucky, 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. 

 

During the third quarter of  2001, the Company completed the sale of  Southern Mausoleums, Inc. ("SMI") and Childs  & Childs ("Childs") manufacturing plants  in Elberton, Georgia in a non-cash transaction in which a note receivable was  recorded for $1,640,000.

 

**2003**

**2002**

**2001**

Acquisitions:

    Assets acquired
$
—
$
—$
34,560,804

    Liabilities assumed and issued

—
—
(27,517,438
)
    Common stock issued

—
—

—

    Cash paid

—
—
7,043,366

    Costs related to acquisitions

—
—

—

    Less cash acquired

—
—

—

        Net cash paid for acquisitions
$
—$
—$
7,043,366

 

 

See accompanying notes to consolidated financialstatements.

 

vii

**ROCK OF AGES CORPORATION AND SUBSIDIARIES**Notes to Consolidated Financial StatementsDecember 31, 2003, 2002 and 2001

 

**(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. The Company is an integrated quarrier,  manufacturer, wholesaler and retailer of granite and products manufactured  from granite. The Company 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 inter-company balances and  transactions have been eliminated in consolidation.

 

 

 

 

**(b)**

**CASH AND CASH  EQUIVALENTS**

 

 

 

 

 

For purposes of the  statement of cash flows, the Company considers 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, manufacturing and cemetery segments.  During the fourth quarter of 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 as discussed in note 3. 

 

 

 

 

 

Prior to 2003, the portion  of developed cemetery property management estimates will be used in the next  twelve months is included in inventories. All other developed cemetery  property is classified as a non-current asset and is included in cemetery  property.

 

 

 

 

**(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 $3,074,691, $3,091,734 and $3,015,215 in 2003, 2002 and 2001,  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 $210,806, $203,011 and $62,767 in 2003, 2002 and 2001,  respectively.

 

 

 

viii 

**ROCK OF AGES CORPORATION AND SUBSIDIARIES**Notes to Consolidated Financial StatementsDecember 31, 2003, 2002 and 2001

 

 

**(e)**

**INTANGIBLES**

 

 

 

 

 

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. The Company assesses  the recoverability of its amortizable intangible assets in accordance with  SFAS 144, "Accounting for the Impairment or Disposal of Long-Lived Assets,"  by determining whether the amortization of the asset balance over its  remaining life can be recovered through undiscounted future operating cash  flows. If projections indicate the unamortized asset will not be recovered,  an adjustment would be made to reduce the net asset to fair value. Cash flow  projections are based on trends of historical performance and management's  estimate of future performance, giving consideration to existing and  anticipated competitive and economic conditions. Effective January 1, 2002,  the Company adopted SFAS 142, "Goodwill and Other Intangible  Assets," and goodwill is no longer amortized, but instead tested for  impairment at least annually. The Company tests goodwill for impairment on an  annual basis by comparing the fair value of our reporting units to their fair  value. As of January 1, 2002, in connection with the transitional impairment  test, the Company determined all goodwill was impaired and was subsequently  written off. See note 2.

 

 

 

 

 

Amortization expense was  $136,344 in 2003, $136,343 in 2002 and $1,340,990 in 2001.

 

 

 

 

**(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 $65,052, $66,212 and $42,725 in 2003,  2002 and 2001, respectively.

 

 

 

 

**(g)**

**FOREIGN CURRENCY  TRANSLATION**

 

 

 

 

 

The Company translates the  accounts of its 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.

 

 

 

 

**(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.

 

 

 

 

 

The Company recognizes  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.  The Company measures 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. The Company  recognizes 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.

 

 

 

ix 

**ROCK OF AGES CORPORATION AND SUBSIDIARIES**Notes to Consolidated Financial StatementsDecember 31, 2003, 2002 and 2001

 

 

 

 

**(i)**

**STOCK-BASED EMPLOYEE  COMPENSATION**

 

 

 

 

 

The Company has adopted the  disclosure provisions of Statement of Financial Accounting Standards  ("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 the Company  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 and earnings per share  would have been changed to the pro forma amounts indicated below:

 

 

 

 

 

 

**2003**

 

 

**2002**
   
 

**2001**

 

 

 

 
   
 

Net income (loss), as  reported

$

1,447,205

 

$

(24,915,211
)
$

432,778

Net income (loss), pro  forma

 

893,209

 

 

(25,180,947
)
 

89,342

Net income (loss) per  share, pro forma

 

0.12

 

 

(3.21
)
 

0.01

Net income (loss) per share  - assuming dilution, pro forma

 

0.12

 

 

(3.20
)
 

0.01

 

 

 

 

 

 

Pro forma net income  reflects only options granted subsequent to December 31, 1995 and is not  necessarily indicative of future effects on net income. Therefore, the full  impact of calculating compensation cost for stock options under SFAS No. 123  is not reflected in the pro forma net income amounts presented because  compensation cost is reflected over the options' vesting periods and  compensation cost only for options granted after January 1, 1996 is  considered.

 

 

 

 

 

The fair value of each  option grant is estimated on the date of the grant. Options granted prior to  1997 were valued using the Minimum Value Method with the following weighted  average assumptions: risk-free interest rate of 6%; dividend yield of 0%; and  expected lives of four (4) years. The per share weighted average fair value  of stock options granted during 2002 and 2000 was $4.06 and $2.32,  respectively, on the date of grant using the Black-Scholes option-pricing  model with the following weighted average assumptions: risk-free interest  rate of 3.9% and 6%; dividend yield of $0; expected volatility of 61% and  52%, and expected lives of five (5) and four (4) years, respectively. There  were no stock options granted in 2003 or 2001. 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 effects on reported net income or 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.

 

 

 

 

 

The Company has 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 the Company as described in more detail in note  9. The Company measures the cost of its 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.

x

**ROCK OF AGES CORPORATION AND SUBSIDIARIES**Notes to Consolidated Financial StatementsDecember 31, 2003, 2002 and 2001

 

 

 

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, therefore, the benefit obligations  reported in note 9 for the Company's postretirement benefit plans do not  reflect the impact of the Act. 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 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. The Company measures  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. 

 

 

 

 

**(m)**

**REVENUE RECOGNITION**

 

 

 

 

 

*Quarrying*

 

 

 

 

 

The granite  quarried by the Company is sold both to outside customers and used by its  manufacturing division. The quarry division recognizes revenue from sales of  granite blocks to outside customers when the granite is shipped from the  quarry site and provides a 5% discount for domestic customers if payment is  made within 30 days of purchase, except as described below.  Sales to  foreign customers are typically secured by letters of credit. The Company  allows customers to purchase granite blocks at its Barre quarries and request  that the Company store the blocks in order to allow its customers to meet  their need for granite blocks since many do not have sufficient 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. 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 quarry is closed  notwithstanding the customer purchases a three-month supply in December and  makes payments over ninety days. 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. Normal payment terms apply when customers  request to purchase blocks on a bill-and-hold basis other times throughout  the year. In many cases, granite blocks owned by customers remain on the  Company's property for varying periods after title passes to the buyer. The  Company retains a delivery obligation using its trucks. However, the Company  considers 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 to a particular  customer and transaction.

 

 

 

xi

**ROCK OF AGES CORPORATION AND SUBSIDIARIES**Notes to Consolidated Financial StatementsDecember 31, 2003, 2002 and 2001

 

 

 

*Manufacturing*

 

 

 

 

 

The Company does not record  a sale, or gross profit, at the time granite is transferred to its manufacturing  division from the quarries. The Company records 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 Company facilities. Manufacturing revenues  related to internally transferred finished products 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, the Company 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*

 

 

 

 

 

In 2001, the Company  acquired 16 cemeteries (see note 15). On December 17, 2003, the Company sold  substantially all of the assets of its Cemetery division (see note 16).  Cemetery activity is accounted for in the manner described below:

 

 

 

 

 

The cemetery division  records revenues on its products and services primarily when the product is  delivered or the service is performed. However, preneed sales of cemetery  lots are recognized as revenue when 20% of the total purchase price of the  lot has been received from the customer. The cemetery division's recognition  of revenue from preneed sales of cemetery services and merchandise is  deferred until the period in which the service or merchandise is delivered.  On the balance sheet at December 31, 2002, the full contract amount is  included in prearranged deferred revenue, a liability. The corresponding  receivable due from the customer is reflected in prearranged receivables, an  asset, and the corresponding cash received from the customer is reflected  part in prearranged receivables (for the portion placed in trust) and part in  cash (for the portion the Company is allowed to retain). When the service or  merchandise is delivered, the Company recognizes as revenue the full contract  amount plus all trust earnings associated with that contract. The Company  cannot predict when the existing contracts will mature but it is estimated  most contracts will have an average life of ten to fifteen years. Due to the  sale of the cemetery division in 2003, the 2002 and 2001 statements of  operations have been reclassified to report the cemetery division as  discontinued operations.

 

 

 

 

**(n)**

**PREARRANGED RECEIVABLES**

 

 

 

 

 

Prearranged receivables are  comprised of funds owed to the Company for the preneed sale of funeral and  cemetery merchandise and services. These funds are due from trust funds,  which represent amounts already paid by customers and realized earnings on  those amounts, and due from customers.

 

 

 

 

**(o)**

**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.

xii

**ROCK OF AGES CORPORATION AND SUBSIDIARIES**Notes to Consolidated Financial StatementsDecember 31, 2003, 2002 and 2001

 

 

 

 

 

**(p)**

**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.

 

 

 

 

**(q)**

**COMPREHENSIVE INCOME  (LOSS)**

 

 

 

 

 

Comprehensive income (loss)  consists of net income, cumulative translation adjustment, and a 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,  2001

$

(788,704

)

$

(158,997

)

$

(947,701

)

 

 

 

 

 

 

 

 

 

 

Changes in 2002

 

32,684

 

 

(1,648,199

)

 

(1,615,515

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

)

 

 

 

 

 

 

 

 

 

 

 

 

**(r)**

**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 a quarry stone known as "Galactic  Blue" on certain property located in Zhytomir, Ukraine.

 

 

 

 

**(s)**
HISTORICAL INFORMATION
 

 

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).

 

 

xiii

**ROCK OF AGES CORPORATION AND SUBSIDIARIES**Notes to Consolidated Financial StatementsDecember 31, 2003, 2002 and 2001

 

 

 

**(2)**

**INTANGIBLES**

 

 

 

Intangibles consist of the  following at December 31, 2003 and 2002:

 

 

 

 

 

**ESTIMATED  USEFUL LIFE**

 

**2003**

 

**2002**

 

 

 

 

        Covenants  not to compete

5-11 Years

 

1,057,223

 

1,057,223

        Less  accumulated amortization

 

 

619,217

 

482,873

 

 

 

 

 

 

 

 

 

 

            Total

 

$

438,006

$

574,350

 

 

 

 

 

 

 

 

 

 

 

Estimated future amortization  expense related to covenants not to compete is as follows:

 

Year

 

(in thousands)
   
2004

 

29

2005

 

19

2006

 

16

2007

 

15

2008

 

15

 

 

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, the Company 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.

 

 

 

SFAS 142 provides 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, the Company  must perform a second test to measure the amount of impairment. The Company  had two reporting units with goodwill, the Retail and Cemetery segments. The  Company 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, the Company completed the second step of the goodwill impairment  test to measure the amount of the impairment loss. Accordingly, the Company  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 the Company believes were,  to some extent, temporary but significant enough to affect the fair value  determination.

 

xiv

**ROCK OF AGES CORPORATION AND SUBSIDIARIES**Notes to Consolidated Financial StatementsDecember 31, 2003, 2002 and 2001

 

 

 

 

 

The changes in the carrying  amount of goodwill for the year ended December 31, 2002 were as follows:

 

 

 

 

 

 

($ in thousands)

 

 

 

Retail

 

 

Cemetery

 

 

Total

 

 

 

 

 

 

 

 

Balance as of December 31,  2001

$

32,542

 

$

1,239

 

$

33,782

 

Impairment loss

 

(32,542

)

 

(1,239

)

 

(33,782

)

 

 

 

 

 

 

 

Balance as of December 31,  2002

$

—

 

$

—

 

$
—
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

xv

**ROCK OF AGES CORPORATION AND SUBSIDIARIES**Notes to Consolidated Financial StatementsDecember 31, 2003, 2002 and 2001

 

The following table  reconciles reported operating income, earnings before the cumulative effect  of changes in accounting principles and net income to their respective pro  forma balances adjusted to exclude amortization of goodwill, which is no  longer amortized. Prior period  results have been reclassified for discontinued operations.

 

($ in thousands)

Twelve Months Ended

December 30,

2003

2002

2001

Operating  Income

Income from operations

$

2,158

$

5,429

$

4,307

       Add back: Goodwill amortization

—

—

1,003

Adjusted  operating income

$

2,158

$

5,429

$

5,310

Earnings  Before Cumulative Effect of Changes in  Accounting Principles

 

 

 

 

 

 

 

 

 

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

$

1,109

 

$

3,543

 

$

1,125

 
    Add back: goodwill amortization of tax  effect     —          —      839   
Adjusted  earnings before changes in accounting principles

$

1,109

 

$

3,543

 

$

1,964

 

Net  Income (Loss)

Reported  Net Income (Loss)

$

1,447

$

(24,915

)

$

433

       Add back: goodwill amortization, net of tax      effect
  —      —    
839

     Add back: Cumulative  effect of changes in     accounting principles, net of tax effect-     adoption of FAS 142

 
  —  
 

 

28,430

 

 
  —  
 

Adjusted  Net Income 

$

1,447

$

3,515

$

1,272

Basic  Earnings Per Share

Reported  Net Income (Loss)

0.20

(3.17

)

0.06

Goodwill  amortization, net of tax effect
  —      —
0.11

     Cumulative effect of changes in accounting     principles, net of tax effect - adoption of SFAS      142

 
  —  
 

 

3.62

 

 
  —  
 

Adjusted  Net Income

0.20

0.45

0.17

Diluted  Earnings Per Share

Reported  Net Income (Loss)

$

0.20

$

(3.16

)

$

0.06

Goodwill  amortization, net of tax effect
  —    —    
0.11

     Cumulative effect of  changes in accounting     principles, net of tax effect - adoption of SFAS     142

 
  —    
 

 

3.61

 

 

—

 

 

Adjusted  Net Income

$

0.20

$

0.45

$

0.17

 

 

 

**(3)**

**INVENTORIES**

 

 

 

Inventories consist of the  following at December 31, 2003 and 2002:

 

 

 

 

 

**2003**

 

**2002**

 

 

 

        Raw  materials

$

9,975,799

$

9,847,285

        Work-in-process

 

1,000,576

 

1,421,296

        Finished  goods and supplies

 

10,175,321

 

10,385,806

 

 

 

 

$

21,151,696

$

21,654,387

 

 

 

 

 

 

 

 

xvi

**ROCK OF AGES CORPORATION AND SUBSIDIARIES**Notes to Consolidated Financial StatementsDecember 31, 2003, 2002 and 2001

 

 

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).  Additional pro forma disclosures of the impact of  the change in fiscal year 2001 as required under Accounting Principles Board  Opinion No. 20, "Accounting Changes" are shown on the consolidated  statements of operations.

 

 

 

 

**(4)**

**COMMITMENTS AND  CONTINGENCIES**

 

 

 

*Leases*

 

 

 

The Company has several  non-cancelable operating leases for vehicles, equipment and office space that  expire over the next five years. Rental expense for all operating leases was  $1,263,979, $1,149,537 and $1,221,751 during 2003, 2002 and 2001,  respectively. Rental expense includes amounts for related party operating  leases of $356,817, $516,491 and $419,659 in 2003, 2002 and 2001,  respectively.

 

 

 

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**
 

 

2004

$

248,086

$

549,551

2005

 

173,873

 

457,890

2006

 

112,073

 

380,804

2007

 

106,670

 

300,817

2008

 

69,148

 

77,624

Thereafter

 

  —
 

25,200

 

 

 

 

$

709,850

$

1,791,886

 

 

 

 

 

The Company also is the  lessor of various parcels of land, the leases, of which, expire at various  times through 2008. Rental income was $47,962, $68,645 and $33,341 in 2003,  2002 and 2001, respectively. Future minimum rentals to be received under  non-cancelable leases are as follows:

 

**YEAR ENDING DECEMBER  31:**

 

 

 

 

 

2004

$

44,962

2005

 

43,593

2006

 

43,593

2007

 

16,269

2008

 

11,001
      
 

$

159,418

 

 

 

xvii

**ROCK OF AGES CORPORATION AND SUBSIDIARIES**Notes to Consolidated Financial StatementsDecember 31, 2003, 2002 and 2001

 

 

 

*Purchase Commitment*

 

 

 

In connection with the  sale of the Lawson manufacturing plant in Barre, Vermont ("Lawson") (see note 16), the Company entered into a Supply Agreement with  Adams Granite Co. The Company had 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 shall, at its sole option 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 will 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 remained 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. One of the legal proceedings outstanding is a  request for Arbitration ("Request") from its former distributor  outside the United States, Eurimex, S. A. (now known as Granite Stone  Business International) in connection with the termination by the Company of the  distribution agreement for our Salisbury Pink granite. Eurimex has also  claimed damages in connection with a distribution agreement for the Company's  Bethel White granite, which agreement expired by its terms in 1998. Pursuant  to those agreements, the arbitration will take place under the International  Chamber of Commerce rules and will be held in Luxembourg.

 

 

 

The Request includes claims  by Eurimex that the Company wrongfully terminated the Salisbury Pink and  Bethel White agreements. The Request also alleges the Company violated  antitrust laws under the European Community Treaty and United States  antitrust laws. Eurimex has alleged it has suffered damages in excess of $30  million, and sought to have such damages trebled under U.S. antitrust laws.  In subsequent pre-hearing submissions, however, Eurimex asserted damages of  approximately $25.3 million, plus interest, "moral" damages,  attorney's fees and costs and withdrew the claim under U.S. antitrust laws  with prejudice.

 

 

 

We deny all of Eurimex's  allegations and believe Eurimex has engaged in improper or unlawful practices  in the sale of our products. The Company has answered Eurimex's Request and  has brought certain counterclaims against Eurimex, including a claim for  frivolous action. A preliminary scheduling conference was held on October 2,  2001 and both arbitral and subject matter jurisdictional issues were briefed.  A second hearing on further procedural issues and jurisdiction was held on  March 13, 2002. On July 1, 2002, the arbitral tribunal rendered a decision on  the arbitral jurisdictional issues and found it has arbitral jurisdiction  over all of the claims brought by Eurimex. The tribunal deferred ruling on  whether it has subject matter jurisdiction over the claimant's U.S. antitrust  law claims. On March 11, 2003, after the Company filed its First Pre-Hearing  Submission, Eurimex withdrew all of its U.S. antitrust law claims. A hearing  on the merits of the dispute was held in May 2003, at which time Eurimex  confirmed its withdrawal of the U.S. antitrust laws claims was with  prejudice. The parties filed post-hearing submissions on August 29,2003. The  matter is now ripe for a decision on the merits by the arbitral tribunal. We  had been advised by the arbitral tribunal at the conclusion of the hearing a  decision would be rendered on or before November 30, 2003. On November 12,  2003, we were advised by the arbitral tribunal the deadline for decision in  the case had been extended from November 30,2003 to February 29, 2004, as  permitted by ICC rules. On February 9, 2004, the Company was advised by the  arbitral tribunal the deadline for decision had been extended from February  29, 2004 to May 31, 2004, as permitted by ICC rules. The Company denies  liability and will continue to vigorously defend the claims made by Eurimex.  However, if the arbitral tribunal were to decide in favor of Eurimex, and  award substantial damages, its business and financial condition would likely  be materially adversely affected.

xviii

**ROCK OF AGES CORPORATION AND SUBSIDIARIES**Notes to Consolidated Financial StatementsDecember 31, 2003, 2002 and 2001

 

 

 

 

 

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. On  October 3, 2003, the Court dismissed all four of the counts of Kurtz's  complaint, without prejudice to Kurtz to file an amended complaint. On  November 10, 2003, Kurtz filed an amended complaint setting forth essentially  the same facts as in the first complaint and alleging breach of contract,  commercial disparagement, defamation and tortuous interference with  prospective business advantage. Damages have not been specified. The parties  are currently engaged in the discovery process.

 

 

**(5)**

**LINES OF CREDIT**

 

 

 

In 2002, the Company  renegotiated its financing agreement with the CIT Group/Business Credit,  Inc., which provides for an acquisition term loan line of credit of $30  million and a revolving credit facility of an additional $20 million. Fifty  percent of each facility has been assigned to FleetBoston.  The Company  currently has one term loan outstanding (term loan A) in the amount of $12.5  million; however, the agreement allows for additional term loans limited to  two per calendar quarter of at least $500,000 each up to a maximum term loan  line of credit of $30 million. Such loans and advances under the  revolving credit facility are limited to $20 million based on eligible  accounts receivable, inventory, and certain fixed assets. 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.

 

 

 

Fees include a one-time fee  of $135,000 (which was paid in full in 2002), 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 $4,751,405 and  $12,500,000 and $0 as of December 31, 2003, and $4,385,486 and  $12,500,000 and $0 as of December 31, 2002, on the revolving credit  facility, term loan A and term loan B, respectively. The weighted average  interest rate was 3.3% and 4.13% on the revolving credit facility in 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. As of December 31, 2003 we were not in  compliance with certain of the covenants and received an amendment to the  credit facility, which provides a waiver of that covenant until September 30,  2004 when the Company believes it will be in compliance. As of December 31,  2003 the company is in compliance with all other debt covenants.

 

 

 

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,  2003 and 2002.

xix

**ROCK OF AGES CORPORATION AND SUBSIDIARIES**Notes to Consolidated Financial StatementsDecember 31, 2003, 2002 and 2001

 

 

 

**(6)**

**LONG-TERM DEBT**

 

 

 

Long-term debt at December  31, 2003 and 2002 consists of the following:

 

 

 

 

 

**2003**

 

**2002**

 

 

 

Term loan, interest at  3.16% and 3.17% in 2003 and 2002, respectively (see note 5),      due October 2007, secured by substantially all assets  of the Company

$

12,500,000

$

12,500,000

Note payable - Dutton,  interest at 6%, payable in monthly principal and interest      payments of $674, unsecured, due December 2003

 

  —
 

7,868

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

 

288,780

 

296,352

Note payable - Anderson,  payable with granite inventory at a set sales price of      $14.50 per cubic foot at maximum sales of 1,500 cubic  feet per month

 

  —
 

143,106

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

 

21,872

 

34,795

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

 

3,388

 

23,256

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

 

8,678

 

13,974

Note payable - GMAC,  interest at 0%, payable in monthly installments of $797,      due October 2004, secured by equipment 

 

8,755

 

18,315

 

 

 

 

 

 

 

 

 

 

12,831,473

 

13,037,666

        Less  current installments (including $143,106 in 2002 classified as liabilities  held for           sale)

 

37,899

 

205,312

 

 

 

 

 

 

 

 

        Long-term  debt, excluding current installments

$

12,793,574

$

12,832,354

 

 

 

 

 

 

 

 

 

 

Future maturities of the  December 31, 2003 long-term debt are as follows: 

 

 

 

 

**YEAR ENDING DECEMBER 31:**

 

 

 

 

 

2004

$

37,899

2005

 

22,195

2006

 

9,762

2007

 

12,510,572

2008

 

11,450

Thereafter

 

239,595

 

 

 

$

12,831,473

 

 

 

 

xx

**ROCK OF AGES CORPORATION AND SUBSIDIARIES**Notes to Consolidated Financial StatementsDecember 31, 2003, 2002 and 2001

 

 

 

**(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, 2003.

 

 

**(8)**

**INCOME TAXES**

 

 

 

Income from continuing  operations before provision for income taxes, classified by source of income  for the years ended December 31, 2003, 2002 and 2001 was as follows:

 

 

 

**2003**

 

 

**2002**

 

**2001**

 

 

 

 

 

U.S.

$

716,670

 

$

3,816,429

$

1,695,490

Foreign

 

970,453

 

 

1,090,791

 

1,218,512

 

 

 

 

 

 

 

 

 

 

 

 

 

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

$

1,687,123

 

$

4,907,220

$

2,914,002 

 

 

 

 

 

 

 

 

 

 

 

 

 

xxi

**ROCK OF AGES CORPORATION AND SUBSIDIARIES**Notes to Consolidated Financial StatementsDecember 31, 2003, 2002 and 2001

 

 

A summary of the  significant components of the provision for income taxes for the years ended  December 31, 2003, 2002 and 2001 is as follows: 

 

 

 

**2003**

 

 

**2002**

 

 

**2001**

 

 

 

 

 

 

 

 

Current:

 

 

 

 

 

 

 

 

 

    Federal

$

(70,598

)

$

509,361 

 

$

1,078,668  

 

    State

 

123,750

 

 

183,123

 

 

191,057

 

    Foreign

 

252,046 

 

 

373,950

 

 

402,276

 

 

 

 

 

 

 

 

 

 

305,198

 

 

1,066,434 

 

 

1,672,001 

 

 

 

 

 

 

 

 

Deferred:

 

 

 

 

 

 

 

 

 

    Federal

 

(112,887

)

 

172,714

 

 

103,923 

 

    State

 

329,324

 

 

128,600 

 

 

49,604 

 

    Foreign

 

56,184 

 

 

(3,790

)

 

(36,163

)

 

 

 

 

 

 

 

 

 

272,621  

 

 

297,524 

 

 

117,364 

 

 

 

 

 

 

 

 

Total provision for income  taxes from continuing operations

 

577,819

 

 

1,363,958

 

 

1,789,365

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income taxes included in  discontinued operations:

 

 

 

 

 

 

 

 

 

  Current

 

(151,105

)

 

(128,302

)

 

16,096

 

   Deferred

 

914,526

 

 

191,258

 

 

(189,061

)

 

 

 

 

 

 

 

 

 

763,421

 

 

62,956

 

 

(172,965

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income taxes related to  cumulative effect of changes in accounting principles

 

  —
 

 

(5,459,151

)

 

  —
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income  taxes included in other comprehensive income for pensions

 

71,694

 

 

(678,631

)

 

  —
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

xxii

**ROCK OF AGES CORPORATION AND SUBSIDIARIES**Notes to Consolidated Financial StatementsDecember 31, 2003, 2002 and 2001

 

 

The tax effects of  temporary differences that give rise to significant portions of the deferred  tax assets and deferred tax liabilities at December 31, 2003 and 2002 are  presented below:

 

 

 

**2003**

 

 

**2002**

 

 

 

 

 

 

Deferred tax assets:

 

 

 

 

 

 

    Accrued  pension, accrued postretirement benefit cost and deferred    compensation

$

1,958,000

 

$

2,046,000

 

    Allowance  for doubtful accounts

 

201,000

 

 

237,000

 

    Accrued  expenses

 

257,000

 

 

472,000

 

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

 

283,000

 

 

381,000

 

    Prearranged  deferred revenue

 
  —
 

 

3,024,000

 

    Names  and reputations

 

3,646,000

 

 

4,027,000

 

    Alternative  minimum tax credits

 

3,433,000

 

 

3,878,000

 

    Impairment charge

151,000
  —
    Charitable contribution limitation

 

32,000

 

 
  —
 

    State  net operating loss carryovers

 

589,000

 

 

467,000

 

 

 

 

 

 

    Total  gross deferred tax assets

 

10,550,000

 

 

14,532,000

 

    Less  valuation allowance

 

(4,129,841

)

 

(4,638,000

)

 

 

 

 

 

    Total  net deferred tax assets

 

6,420,159

 

 

9,894,000

 

 

 

 

 

 

 

 

 

 

 

 

 

Deferred tax liabilities:

 

 

 

 

 

 

    Cemetery  property

 

  —
 

 

(1,617,000

)

    Quarry  development

 

(345,000

)

 

(360,000

)

 

 

 

 

 

 

 

    Other  liabilities

 

(11,000

)

 

(55,000

)

    Property  and equipment

 

(214,000

)

 

(753,000

)

 

 

 

 

 

    Total  gross deferred tax liabilities

 

(570,000

)

 

(2,785,000

)

 

 

 

 

 

 

 

 

 

 

 

 

    Net  deferred tax assets

$

5,850,159

 

$

7,109,000

 

 

 

 

 

 

 

 

 

 

 

 

 

** **

 

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  the results of future operations will generate sufficient taxable income to  realize the net deferred tax assets. The valuation allowance was reduced by  $508,159 in 2003 primarily resulting from a $445,000 refund of previously  paid alternative minimum tax created by carry back of the 2003 U.S. taxable  loss.

 

 

xxiii

**ROCK OF AGES CORPORATION AND SUBSIDIARIES**Notes to Consolidated Financial StatementsDecember 31, 2003, 2002 and 2001

 

 

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:

 

 

**2003**

 

**2002**

 

**2001**

 

 

 

 

 

U.S. statutory rate

34.0%

 

34.0%

 

34.0%

 

State taxes, net of federal  benefit

17.7 %

 

4.2%

 

5.5%

 

Names and reputations
  —  —
5.4%

Divestitures
  —
 

 

 

43.6%

 

Change in valuation allowance

(30.2%

)

(5.4%

)

25.1%

 

Incremental U.S. tax on  foreign earnings

17.0%

 

—

 

—

 

Other, primarily tax  depletion

(4.3%

)

(5.0%

)

(52.2%

)

 

 

 

 

 

 

 

 

 

 

 

Effective tax rate

34.2%

 

27.8%

 

61.4%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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 have 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. Prior to 2003 the Company reported the present value of  future payments for the key employee deferred salary plan separately. The  Company has adjusted the 2002 column under Deferred Compensation Benefits in  the following tables to reflect this change.

 

 

 

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 of the pension,  deferred compensation and postretirement benefit plans.

xxiv

**ROCK OF AGES CORPORATION AND SUBSIDIARIES**Notes to Consolidated Financial StatementsDecember 31, 2003, 2002 and 2001

 

**NON-UNION  PENSION BENEFITS**

**DEFERRED  COMPENSATION BENEFITS**

**OTHER BENEFITS**
**2003**

**2002**

**2003**

**2002**

**2003**

**2002**
                                       
**CHANGE  IN PROJECTED BENEFIT OBLIGATION:**

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Projected  benefit obligation at beginning of year

$

19,492,408

$

17,891,727

$

4,225,835 

$

2,354,092

$

1,679,515

$

1,716,638

Transfer  of obligation

—

—

—

1,579,778

—

—

Service  cost

532,789

474,830

188,519 

108,835 

20,830

15,916

Interest  cost

1,270,576

1,246,009

317,168 

278,454

112,350

106,745

Actuarial  (gain)/loss

516,239

991,425

728,491 

187,228 

197,417

(44,396

)

Benefits  paid

(1,079,021

)

(1,111,583

)

(279,848

)

(282,552

)

(205,377

)

(115,388

)
                                       
Projected  benefit obligation at end of year

$

20,732,991

$

19,492,408

$

5,180,165 

$

4,225,835 

$

1,804,735 

$

1,679,515

**CHANGE  IN PLAN ASSETS:**

Fair  value of plan assets at beginning of year

$

14,161,582

$

15,237,895

$

—

$

—

$

—

$

—

Actual  return on plan assets

2,862,549

(1,380,533

)

—

—

—

(15,020

)

Employer  contribution

989,735

1,415,803

279,848

282,552

205,377

130,408

Benefits  paid

(1,079,021

)

(1,111,583

)

(279,848

)

(282,552

)

(205,377

)

(115,388

)

Fair  value of plan assets at end of year

$

16,934,845

$

14,161,582

$

—

$

—

$

—

$

—

Funded  status

$

(3,798,146

)

$

(5,330,826

)

$

(5,180,165 

)

$

(4,225,835 

)

$

(1,804,735

)

$

(1,679,515

)

Unrecognized  net actuarial (gain)/loss

3,389,704

4,720,331

1,156,323 

475,209 
346,147
150,539

Unrecognized  prior service cost

829,463

969,986

74,295

104,642

—

—

Unrecognized  transition obligation

—

61,170

—

—

631,358

694,494

Net  amount recognized

$

421,021

$

420,661

$

(3,949,547 

)

$

(3,645,984 

)

$

(827,230

)

$

(834,482

)
                                       
Amounts  recognized in the consolidated balance sheet consists of:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   Prepaid  (Accrued) benefit liability

$

(1,490,497

)

$

(2,690,765

)

$

(5,423,075 

)

$

(4,156,183

)

$

(827,230

)

$

(834,482

)

   Intangible  asset

829,463

1,031,156

74,295

104,642

—

—

   Accumulated  other comprehensive     income

1,082,055 

2,080,270

1,399,233 

405,557
——                                       
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net  amount recognized

$

421,021 

$

420,661

$

(3,949,547 

)

$

(3,645,984 

)

$

(827,230

)

$

(834,482

)
                                       
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Discount  rate

6.25%

6.75%

6.25%

6.75%

6.25%

6.75%

Expected  return on plan assets

8.00%

9.00%

N/A

N/A

N/A

N/A

Rate  of compensation increase

3.00%

4.00%

4.00%

4.50%

4.00%

4.00%

 

For measurement purposes, a  9% annual rate of increase in the per capita cost of covered health care  benefits was assumed for 2003, 8% for 2004, 7% for 2005, 6% for 2006 and 5%  for 2007 and thereafter. 

xxv

**ROCK OF AGES CORPORATION AND SUBSIDIARIES**Notes to Consolidated Financial StatementsDecember 31, 2003, 2002 and 2001

 

 

 

 

**NON-UNION PENSION BENEFITS**
 

 

**DEFERRED  COMPENSATION BENEFITS**

 

 

**OTHER BENEFITS**
 
                     
 

 

**2003**

 

 

**2002**

 

 

**2001**

 

 

**2003**

 

 

**2002**

 

 

**2001**

 

 

**2003**

 

 

**2002**

 

 

**2001**

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

**COMPONENTS  OF NET  PERIODIC BENEFIT COST:**

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    Service  cost

$

532,789

$

474,830

$

434,532

$

188,519 

$

108,835 

$

30,374

$

20,830

$

15,916

$

21,488

    Interest  cost

1,270,576

1,246,009

1,229,210

317,168 

278,454

162,798

112,350

106,745

116,099

    Expected  return on     plan assets

 

(1,211,762

)

 

(1,361,451

)

 

(1,446,000

)

 

—

 

 

—

 

 

—

 

 

—

 

 

—

 

 

—

 

    Amortization  of prior    service cost

 

140,523

 

 

140,523

 

 

130,404

 

 

30,347

 

 

112,444

 

 

112,444

 

 

—

 

 

—

 

 

—

 

    Amortization of    transition obligation

 

61,170

 

 

104,244

 

 

104,244

 

 

—

 

 

4,783

 

 

6,165

 

 

63,136

 

 

63,136

 

 

63,136

 

    Recognized net    actuarial loss

 

196,079

 

 

—

 

 

—

 

 

47,377

 

 

—

 

 

20,766

 

 

1,809

 

 

—

 

 

—

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net  periodic benefit cost

$

989,375

$

604,155

$

452,390

$

583,411 

$

504,516 

$

332,547

$

198,125

$

185,797

$

200,723

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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 $20.3 million and $18.5 million at December 31,  2003 and 2002, respectively.

 

*Plan Assets*

 

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

 

 

2003

 

2002

 

Target Range

 

 

 

Equities

58%

 

53%

 

50% - 70%

Convertible securities & real estate

11%

 

11%

 

5% - 15%

Fixed income

26%

 

30%

 

25% - 35%

Cash equivalents

5%

 

6%

 

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.

 

 

The  convertible securities and real estate investments are through the use of a  collective fund and a REIT-based mutual fund, respectively.

 

The  fixed income holdings are in the form of separately managed corporate and  government bonds, convertible bonds, common trust funds or mutual funds.  Separately managed debt instruments are to have a quality rating of A or  better at the time of purchase. The duration of the fixed income portfolio is  to be maintained within a tolerance of +/- 15% of the duration of the Lehman  Bros. Aggregate Index.

 

Cash  equivalents are held in money market funds.

 

xxvi

**ROCK OF AGES CORPORATION AND SUBSIDIARIES**Notes to Consolidated Financial StatementsDecember 31, 2003, 2002 and 2001

 

 
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 2003 net periodic pension cost for the  U.S. plans was 8.5 percent.

 

***Contributions***

 

The Company  expects to contribute approximately $800,000 to the defined benefit  pension plan during 2004.  

 

**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 $425,078, $469,499 and $620,066 in 2003, 2002 and 2001,  respectively.

 

 

**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 $724,059, $709,450 and $714,871 as of December 31, 2003, 2002  and 2001, respectively. Total annual payments of $288,704 begin and end at  various dates from 1997 to 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 $178,645  and $181,382 as of December 31, 2003 and 2002. Total annual payments of  $38,132 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 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 $195,201, $200,119 and $311,582  in 2003, 2002 and 2001, respectively. 

 

 

xxvii

**ROCK OF AGES CORPORATION AND SUBSIDIARIES**Notes to Consolidated Financial StatementsDecember 31, 2003, 2002 and 2001

 

**(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, and options granted in 2002 have a 10 year term and  vest at 20% per year after the first year. 

 

 

 

The following table sets  forth the stock option transactions for the years ended December 31, 2003,  2002 and 2001:

** **

 

**NUMBER  OF OPTIONS**

 

 

**WEIGHTED  AVERAGE  EXERCISE PRICE**

 

 

 

 

 
                  
Outstanding, December 31,  2000

833,082

 

$

4.45

 

   Granted  during 2001

—

 

 

—

 

   Exercised  during 2001

(320,582

)

 

(3.70

)

   Surrendered  during 2001

(95,000

)

 

(3.81

)

 

 

 

 

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

 

 

5.91

 

 

 

 

 

 

 

Exercisable, December 31,  2003

274,333

 

$

5.84

 

Weighted average remaining  contractual life

4.9 years

 

 

 

 

 

 

 

 

 

 

 
**WEIGHTED AVERAGE**
 
**OPTIONS EXERCISABLE**                  
 

**EXERCISE PRICE**

 

**NUMBER OF  OPTIONS  OUTSTANDING**

 

**EXERCISE  PRICE**

 

**REMAINING  CONTRACTUAL  LIFE**

 

**NUMBER**
 

**WEIGHTED  AVERAGE  EXERCISE  PRICE**

 

 

 

 

 

 
                                    
$

4.94

 

190,333

$

4.94

 

.5 Years 

 

190,333

$

4.94

$

5.98

 

295,000

$

5.98

 

8.1 Years

 

59,000 

$

5.98

$

12.38

 

25,000

$

12.38

 

0.2 Years

 

25,000

$

12.38

xxviii

**ROCK OF AGES CORPORATION AND SUBSIDIARIES**Notes to Consolidated Financial StatementsDecember 31, 2003, 2002 and 2001

 

 

 

**(11)**

**RELATED PARTY  TRANSACTIONS**

 

 

 

The Company is related  through common ownership with several companies. The transactions with  related parties, included in the consolidated statements of operations, are  as follows for the years ended December 31, 2003, 2002 and 2001:

 

 

 

**2003**

 

**2002**

 

**2001**

 

 

 

 

Sales to related parties

$

40,795

$

12,284

$

25,223

Purchases from related  parties

 

81,002

 

32,092

 

12,842

 

 Amounts due from/(to)  related parties as of December 31, 2003 and 2002 are as follows:

 

 

 

**2003**

 

 

**2002**

 

 

 

 

 

 

Due from/(to) Swenson  Granite Company, LLC

$

(7,982

)

$

(9,027

)

Due from Rock of Ages Asia

 

65,902

 

 

80,883

 

Due from VIKA

 

224,700

 

 

—

 

 

 

 

 

 

 

$

282,620

 

$

71,856

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 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,  2003, 2002 and 2001 (in thousands, except per share data):

 

 

 

**NET  REVENUES**

 

**NET INCOME  (LOSS)**

 

**NET INCOME  (LOSS)  PER SHARE**

 

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

 
                  
 

 

 

 

 

 

 

 

 

 

2003 Quarters:

 

 

 

 

 

 

 

 

 

   First 

$

9,572

 

(4,881

)

(0.68

)

(0.68

)

   Second

 

26,109

 

1,353

 

0.18

 

0.18

 

   Third

 

23,144

 

911

 

0.13

 

0.13

 

   Fourth  (1)

 

25,592

 

4,064

 

0.57

 

0.57

 
                  
      Total

$

84,417

 

1,447

 

0.20

 

0.20

 
                  
 

 

 

 

 

 

 

 

 

 

2002 Quarters (2):

 

 

 

 

 

 

 

 

 

   First (3)

$

11,119

 

(32,435

)

(4.13

)

(4.12

)

   Second

 

28,110

 

3,848

 

0.49

 

0.49

 

   Third

 

22,985

 

1,674

 

0.21

 

0.21

 

   Fourth

 

25,501

 

1,998

 

0.26

 

0.26

 
                  
      Total

$

87,715

 

(24,915

)

(3.17

)

(3.16

)
                  
 

 

 

 

 

 

 

 

 

 

xxix

**ROCK OF AGES CORPORATION AND SUBSIDIARIES**Notes to Consolidated Financial StatementsDecember 31, 2003, 2002 and 20014

 

**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  income for the fourth quarter of 2003 includes a gain on the sale of the  Cemeteries, net of taxes, of $1,139,000. 

 

 

(2)

The 2002 quarterly results  have been restated to reflect revenue from the Autumn Rose quarry and the  Cemeteries as discontinued operations. The effect of this reclassification  was a reduction of net revenues of $4.8 million for 2002.

 

 

(3)

The 2002 first quarter  results reflect a $34 million non-cash charge recorded as of January 1, 2002,  which is the cumulative effect of the write-down of goodwill to its fair  value, less a deferred tax asset related thereto of $5.3 million, plus the  cumulative effect of the change in valuing quarry inventory of $280,521, net  of tax effect of $107,000 (see notes 2 and 3).

 

 

**(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, 2003, 2002 and 2001:

 

 

 

**2003**

 

 

**2002**

 

 

**2001**

 

 

 

 

 

 
                           
Numerator:

 

 

 

 

 

 

 

 

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

$

1,447,205

 

$

(24,915,211

)

$

432,778

 

 

 

 

 

 
                           
Denominator:

 

 

 

 

 

 

 

 

   Denominator  for basic earnings per share:

 

 

 

 

 

 

 

 

     Weighted  average shares

 

7,181,545

 

 

7,847,821

 

 

7,605,785

   Effect of  dilutive securities:

 

 

 

 

 

 

 

 

     Stock  options

 

37,833

 

 

32,340

 

 

70,205

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   Denominator  for diluted earnings per share:

 

 

 

 

 

 

 

 

     Adjusted  weighted average shares

 

7,219,378

 

 

7,880,161

 

 

7,675,990

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic earnings per share

$

0.20

 

$

(3.17

)

$

0.06

 

 

 

 

 

 

 

 

 

Diluted earnings per share

$

0.20

 

$

(3.16

)

$

0.06

 

 

Options to purchase  320,000, 320,000 and 25,000 shares of Class A common stock at exercises  prices ranging from $5.98 to $12.38 per share were outstanding in 2003, 2002  and 2001,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.

xxx

**ROCK OF AGES CORPORATION AND SUBSIDIARIES**Notes to Consolidated Financial StatementsDecember 31, 2003, 2002 and 2001

 

 

 

**(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.

 

 

 

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.

 

 

 

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

xxxi

**ROCK OF AGES CORPORATION AND SUBSIDIARIES**Notes to Consolidated Financial StatementsDecember 31, 2003, 2002 and 2001

The following is the  segment information for the years ended December 31, 2003, 2002 and 2001 (in  thousands):

 

**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

 

5,596

 

 

3,794

 

 

21,100

 

 

4,692

 

 

35,182

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income  (loss) from operations

$

5,582

 

$

1,980

 

$
(712
)

$

(4,692

)

$

2,158

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

**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

 

4,992

 

 

3,376

 

 

20,896

 

 

5,274

 

 

34,538

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income  (loss) from operations

$

8,140

 

$

2,145

 

$

418

 

$

(5,274

)

$

5,429

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

**2001**

 

**QUARRYING**

 

 

**MANUFACTURING**

 

 

**RETAILING**

 

 

**CORPORATE  OVERHEAD**

 

 

**TOTAL**

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total  net revenues

$

28,340

 

$

31,446

 

$

43,159

 

$

—

 

$

102,945

Inter-segment  net revenues

 

2,836

 

 

9,218

 

 

—

 

 

—

 

 

12,054

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net  revenues

 

25,504

 

 

22,228

 

 

43,159

 

 

—

 

 

90,891

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total  gross profit

 

12,565

 

 

5,249

 

 

24,531

 

 

—

 

 

42,345

Inter-segment  gross profit

 

1,103

 

 

(173

)

 

(930

)

 

—

 

 

—

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross  profit

 

11,462

 

 

5,422

 

 

25,461

 

 

—

 

 

42,345

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Selling,  general and     administrative   expenses

 

4,388

 

 

4,833

 

 

22,555

 

 

3,728

 

 

35,504

Loss  on disposal of assets

 

197

 

 

2,337

 

 

—

 

 

—

 

 

2,534

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income  (loss) from operations

$

6,877

 

$

(1,748

)

$

2,906

 

$

(3,728

)

$

4,307

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

xxxii

**ROCK OF AGES CORPORATION AND SUBSIDIARIES**Notes to Consolidated Financial StatementsDecember 31, 2003, 2002 and 2001

 

 

Net revenues by geographic  area are as follows for the years ended December 31, 2003, 2002 and 2001 (in  thousands):

 

 

 

 

 

**2003**

 

**2002**

 

**2001**

 

 

 

 

Net revenues (1):

 

 

 

 

 

 

   United  States

$

77,578

$

79,695

$

82,902

   Canada

 

6,797

 

8,020

 

7,989

   Ukraine

 

42

 

—

 

—

 

 

 

 

 

 

 

 

 

 

 

      Total  net revenues

$

84,417

$

87,715

$

90,891

 

 

 

 

 

 

 

 

 

 

 

 

(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, 2003, 2002 and 2001 (in  thousands): 

 

 

 

**2003**

 

**2002**

 

 

 

Long-lived assets:

 

 

 

 

   United  States

$

39,473

$

41,686

   Canada

 

3,022

 

2,235

 

 

 

 

 

 

 

 

                 Total long-lived assets

$

42,495

$

43,921

 

 

 

 

 

 

 

 

 

**(15)**

**ACQUISITIONS**

 

 

 

On January 3, 2001, the  Company acquired 16 cemeteries and one granite retailer in Kentucky. The aggregate  purchase price was approximately $7.5 million consisting of $7 million in  cash and an additional consideration amount of $558,000 was classified as  other liabilities payable in four annual installments commencing December  2001. 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 had resulted in  $1,271,150 of cost in excess of net assets acquired, which was subsequently  written off upon adoption of SFAS 142. 

 

 

**(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. The Company determined the carrying value of  the quarry exceeded its fair value and an after tax impairment charge of  $489,000 was recognized in discontinued operations. These quarry assets have  been classified as "assets held for sale" in the current assets  section of the balance sheet as of December 31, 2003. For business reporting  purposes, the Autumn Rose quarry was previously classified in the Quarrying  segment.

xxxiii

**ROCK OF AGES CORPORATION AND SUBSIDIARIES**Notes to Consolidated Financial StatementsDecember 31, 2003, 2002 and 2001

 

On December 17,  2003, the Company completed the sale of substantially all of the assets of  Rock of Ages Kentucky Cemeteries, LLC. The decision 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 "Accounting for the Impairment or Disposal of  Long-Lived Assets." 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, 2003, 2002 and 2001 were as follows (in thousands):

 
      
Years Ended December 31,            Autumn Rose Quarry
 

2003
   
 

2002
   
 

2001
                        
Net Sales

$

305
   
$

194
   
$

271
   
Gross Profit

(85

)
(148
)
(115
)
Pretax income (loss)

 

(85

)
 

(148
)
 

(115
)
Income tax (benefit)  expense

 

(17

)
 

(30
)
 

(23
)
Net income (loss)

 

(68
)
 

(118
)
 

(92
)   
 

 
   
 

 
   
 

 
   Rock of Ages Kentucky Cemeteries, LLC
 

 
   
 

 
   
 

 
   
Net Sales

 

3,823
   
 

4,604
   
 

3,143
   
Gross Profit

 

1,262
   
 

2,009
   
 

818
   
Pretax income (loss)

 

(316

)
 

463
   
 

(749
)
Income tax (benefit)  expense

(71

)
93

(150
)
Net income (loss)

 

(245

)
 

370
   
 

(599
)
 

 

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, $216,000 and $365,000 for 2003, 2002 and 2001, respectively. 

 

 

 

Assets and liabilities of Autumn Rose Quarry and  Rock of Ages Cemeteries, LLC were as follows (in thousands):

 

 

 
   
 

December 31,
Autumn Rose Quarry
 

2003

 

2002
         
Current  assets

$

817

$

230

Property,  plant and equipment, net

 

—

 

1,384

Total  assets

 

817

 

1,614

Current  liabilities

 

17 

 

143

Total  liabilities

 

17 

 

143
   
 

 

 

 
Rock of Ages Kentucky Cemeteries, LLC
 

 

 

 

Current  assets

 

—

 

2,162

Property,  plant and equipment, net

—

5,150
Other assets   
—   
21,607
Total  assets

 

—

 

28,919

Current  liabilities

 

—

 

2,289
Other liabilities
—
26,853
Total  liabilities

 

—

 

29,142

xxxiv

**ROCK OF AGES CORPORATION AND SUBSIDIARIES**Notes to Consolidated Financial StatementsDecember 31, 2003, 2002 and 2001

 

 

 

In October 2001, the  Company entered into an agreement to sell the Lawson manufacturing plant in  Barre, Vermont. In connection with this sale, it was determined the values of  certain assets had been impaired. At December 31, 2001, in accordance with  SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and  for Long-Lived Assets to be Disposed of", the Company recorded a  non-cash charge related to the impairment of assets of $800,003. These assets  held for sale had been grouped together and classified as "assets held  for sale" in the current assets section of the balance sheet as of  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.

 

 

 

During the third quarter of  2001, the Company completed the sale of the SMI and Childs  manufacturing plants and the Royalty and Millstone quarries in Elberton  Georgia in which cash of $3,250,000 was received and a note receivable was  recorded for $1,640,000 in exchange for $6,121,693 of assets. Closing costs  of $287,467 were also incurred. The loss on sale of assets reported for the  year ended December 31, 2001 includes a non-tax deductible disposal of  intangible assets of approximately $3.7 million. Taxable income resulted from  the sale of inventory and property and equipment, the impact of which was  recorded in the three months ended September 30,2001. 

 

 

 

During the second quarter  of 2001, the Company sold an idled Saw Plant in Barre, Vermont in which cash  of $300,505 was received in exchange for $515,433 of assets. The loss on the  sale was included in the 2001 Statement of Operations as a loss on disposal  of assets.

 

 

xxxv

 

 

**INDEPENDENT AUDITORS'  REPORT ON SUPPLEMENTARY INFORMATION**

 

 

The Board of Directors

Rock of Ages Corporation:

 

 

Under date of February 20,  2004, we reported on the consolidated balance sheets of Rock of Ages  Corporation and subsidiaries as of December 31, 2003 and 2002, 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, 2003. 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."  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.

 

 

 

KPMG LLP/s/ KPMG LLP

February 20, 2004Burlington, Vermont

xxxvi

 

**ROCK OF AGES CORPORATION AND SUBSIDIARIES**

Schedule II - Valuation and Qualifying Accounts andReserves

Years ended December 31, 2003, 2002 and 2001

(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**

 

 

 

 

 

 

 

 

 

 

 

2003

 

 

 

 

 

 

 

 

 

 

    Allowances  for doubtful accounts

$

1,046

 

—

 

655

 

961

 

740

  

  

  

  

  

  

  

  

  

  

  

2002

 

 

 

 

 

 

 

 

 

 

    Allowances  for doubtful accounts

$

1,548

 

—

 

675

 

1,177

 

1,046

 

 

 

 

 

 

 

 

 

 

 

2001

 

 

 

 

 

 

 

 

 

 

    Allowances  for doubtful accounts

$

1,303

 

534

 

743

 

1,032

 

1,548

 

See accompanying independentauditors' report on supplementary information. 

xxxvii

SIGNATURES

 

Pursuant to the requirementsof Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registranthas duly caused this report to be signed on its behalf by the undersigned,thereunto duly authorized.

 

**ROCK OF AGES CORPORATION**

 

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

 Date: March 30, 2004 

 

Pursuant to the requirementsof the Securities Exchange Act of 1934, this report has been signed below bythe following persons on behalf of the registrant and in the capacitiesindicated as of March 31, 2003.

 

**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, Chief Strategic  and Marketing Officers 

Richard C. Kimball

 

 

 

 

 

/s/James L. Fox

 

Director 

James L. Fox

 

 

 

 

 

/s/ Douglas M. Schair

 

Director

Douglas M. Schair

 

 

 

 

 

/s/Charles M. Waite

 

Director

Charles M. Waite

 

 

 

 

 

/s/Frederick E. Webster Jr.

 

Director

Frederick E. Webster Jr.

 

 

 

44

 

**EXHIBIT INDEX**

 

**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  Peter Friberg dated August 28, 2001 (incorporated herein by reference to  Exhibit 10.4 to the Company's Annual Report on Form 10-K for the year ended  December 31, 2002 and field with the Securities and Exchange Commission on  March 31, 2003)

 

 

10.5*

Separation Agreement and  General Release between the Company and John L. Forney dated July 23, 2002  (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, 2002 and filed  with the Securities and Exchange Commission on August 14, 2002)

 

 

10.6*

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)

 

 

10.7

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)

 

 

10.8

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)

 

 

10.9

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)

 

 

10.10

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)

 

 

 

45

 

10.11

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)

 

 

10.12

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)

 

 

10.13

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)

 

 

10.14

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.

 

 

10.15

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.

 

 

10.16

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)

 

 

10.17

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)

 

 

10.18

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)

 

 

10.19

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)

 

 

10.20

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)

 

 

10.21

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

 

 

10.22

Promissory Note dated  January 11, 2002 in the amount of $250,000 from Adams Granite Company, Inc.  to Rock of Ages Corporation (incorporated herein by reference to Exhibit  10.17 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)

 

 

10.23

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)

 

 

10.24

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)

 

 

10.25

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)

 

 

10.26

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)

 

 

10.27

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)

 

 

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)

 

 

46

 

 

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.

 

 

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 isa management contract or compensatory plan or arrangement.

47

INDEX

BUSINESSPROPERTIESLEGAL PROCEEDINGSSUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERSMARKET FOR THE REGISTRANTS COMMON EQUITY AND RELATED STOCKHOLDERMATTERS AND ISSUER REPURCHASES OF EQUITY SECURITIESQUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKFINANCIALSTATEMENTS AND SUPPLEMENTAL DATACHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIALDISCLOSURECONTROLS AND PROCEDURESDIRECTORS ANDEXECUTIVE OFFICERSEXECUTIVE COMPENSATIONSECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERSPRINCIPALACCOUNTANT FEES AND SERVICESEXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-KINDEPENDENT AUDITORSREPORTConsolidated BalanceSheetsConsolidatedStatements of OperationsConsolidated Statements of Stockholders Equity and Comprehensive Income (Loss)ConsolidatedStatements of Cash FlowsNotes toConsolidated Financial StatementsINDEPENDENTAUDITORS REPORT ON SUPPLEMENTARY INFORMATIONScheduleII - Valuation and Qualifying Accounts and ReservesSIGNATURESEXHIBIT INDEX