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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended July 2, 2005

OR

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

For the transition period from ______________ to ______________
 

Commission file number: 0-29464

ROCK OF AGES CORPORATION
(Exact name of Registrant as Specified in its Charter)

 

Delaware	03-0153200
(State or other jurisdiction of incorporation or organization)	(I. R. S. Employer Identification Number)

 772 Graniteville Road, Graniteville, Vermont05654
(Address of principal executive offices)                                     (Zip Code)

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

Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period than the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý Noo

Indicate by check mark whether the Registrant is an accelerated filer (as described in Rule 12b-2 of the Exchange Act). Yes o No ý

As of August 10, 2005, 4,660,800 shares of Class A Common Stock, par value $0.01 per share, and 2,738,596 shares of Class B Common Stock, par value $0.01 per share, of Rock of Ages Corporation were outstanding.

ROCK OF AGES CORPORATION

INDEX

Form 10-Q for the Quarterly Period
Ended July 2, 2005

PART I	FINANCIAL INFORMATION		PAGE NO.
Item 1.	Financial Statements (Unaudited)
		Consolidated Balance Sheets - July 2, 2005 and December 31, 2004	4
		Consolidated Statements of Operations - Three Months and Six Months Ended July 2, 2005 and July 3, 2004	5
		Consolidated Statements of Cash Flows - Six Months Ended July 2, 2005 and July 3, 2004	6
		Notes to Consolidated Financial Statements	7
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations		16
Item 3.	Quantitative and Qualitative Disclosures About Market Risk		31
Item 4.	Controls and Procedures		31
PART II	OTHER INFORMATION
Item 1.	Legal Proceedings		32
Item 4.	Submission of Matters to a Vote of Security Holders		33
Item 6.	Exhibits and Reports on Form 8-K		34
Signature			35

2

Special Note Regarding Forward-Looking Statements

This Quarterly Report on Form 10-Q, including "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Item 2, contains forward-looking statements that involve risks and uncertainties, as well as assumptions that, if they never materialize or prove incorrect, could cause the results of Rock of Ages Corporation ("Rock of Ages" or the "Company") to differ materially from those contained in such statements. All statements other than statements of historical fact could be deemed forward-looking statements, and may include projections of revenue, gross profit, expenses, earnings or losses from operations or other financial items; any statements of the plans, strategies and objectives of management for future operations; any statements regarding future economic conditions or performance; any statements of expectation or belief; and any statements of assumptions underlying any of the foregoing. The risks, uncertainties and assumptions may include the challenge of continuing to build and grow Rock of Ages' retail distribution systems through strategic alliances, retail acquisitions, independent retailers and new store openings; uncertainties involving quarry yields and demand for Rock of Ages' dimension stone; the ability to meet bank covenants or receive waivers for such covenants; and other risks and uncertainties described herein, including, but not limited to the items discussed in "Risk Factors That May Affect Future Results" in Item 2 of this report, and that are otherwise described from time to time in Rock of Ages' reports filed with the Securities and Exchange Commission reports filed after this report.

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

3

PART I: FINANCIAL INFORMATION
Item 1: Financial Statement

ROCK OF AGES CORPORATION
CONSOLIDATED BALANCE SHEETS
($ in thousands)
(Unaudited)

		July 2,			December 31,
		2005			2004
ASSETS
Current Assets:
Cash and cash equivalents	$	2,796		$	4,298
Trade receivables, net		14,560			15,017
Inventories		25,699			23,858
Current and deferred tax assets		—			708
Due from affiliates		318			265
Other current assets		3,754			4,528
Total current assets		47,127			48,674
Property, plant and equipment, net		51,219			46,130
Cash surrender value of life insurance, net		743			743
Goodwill		700			163
Other intangibles, net		650			388
Deferred tax assets		—			6,740
Intangible pension asset		739			739
Long-term investments		4,106			4,112
Due from affiliates		54			66
Other		744			822
Total assets	$	106,082		$	108,577
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Borrowings under line of credit	$	15,448		$	7,287
Current installments of long-term debt		312			36
Current installments of deferred compensation		366			372
Accounts payable		1,851			2,433
Accrued expenses		5,073			4,234
Customer deposits		9,239			8,173
Total current liabilities		32,289			22,535
Long-term debt, excluding current installments		19,352			16,289
Deferred compensation		6,802			6,620
Accrued pension cost		2,217			1,993
Deferred tax liability		29			30
Other		989			924
Total liabilities		61,678			48,391
Commitments
Stockholders' equity:
Preferred stock - $.01 par value;
2,500,000 shares authorized
No shares issued or outstanding		—			—
Common Stock - Class A, $.01 par value;
30,000,000 shares authorized 4,660,800
and 4,694,800 shares issued and outstanding as of July 2, 2005 and December 31, 2004,     respectively		47			47
Common Stock - Class B, $.01 par value;
15,000,000 shares authorized
2,738,596 and 2,700,596 shares issued and outstanding as of July 2, 2005 and      December 31, 2004, respectively		27			27
Additional paid-in capital		65,921			66,267
Accumulated deficit		(20,387	)		(5,288	)
Accumulated other comprehensive loss		(1,204	)		(867	)
Total stockholders' equity		44,404			60,186
Total liabilities and stockholders' equity	$	106,082		$	108,577

**SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.


4

ROCK OF AGES CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
( in thousands except per share data)
(Unaudited)

		Three Months Ended						Six Months Ended
		July 2,			July 3,			July 2,			July 3,
		2005			2004			2005			2004
Net Revenues:
Quarrying	$	5,870		$	9,455		$	9,435		$	13,987
Manufacturing		7,704			6,323			10,554			9,555
Retailing		14,108			12,256			18,163			16,654
Total net revenues		27,682			28,034			38,152			40,196
Gross Profit:
Quarrying		1,660			4,280			783			4,630
Manufacturing		2,626			2,032			2,825			2,676
Retailing		7,831			7,271			9,660			9,474
Total gross profit		12,117			13,583			13,268			16,780
Operating Expenses:
Selling, general and administrative expenses:
Quarrying		852			860			1,746			1,702
Manufacturing		1,276			952			2,483			1,809
Retailing		6,771			5,591			12,858			10,169
Corporate overhead		1,429			1,312			2,795			2,603
Total SG&A expenses		10,328			8,715			19,882			16,283
Adverse judgment and legal expenses		—			6,500			—			6,500
Total Operating Expenses		10,328			15,215			19,882			22,783
Income (loss) from continuing operations       before interest and income taxes		1,789			(1,632	)		(6,614	)		(6,003	)
Interest expense		428			125			745			261
Income (loss) from continuing operations before income taxes		1,361			(1,757	)		(7,359	)		(6,264	)
Income tax expense (benefit)		9,505			(721	)		7,740			(1,841	)
Loss from continuing operations		(8,144	)		(1,036	)		(15,099	)		(4,423	)
Discontinued operations, net of income taxes		—			(14	)		—			(52	)
Net loss	$	(8,144	)	$	(1,050	)	$	(15,099	)	$	(4,475	)
Net loss per share - basic:
Net loss from continuing operations	$	(1.10	)	$	(0.14	)	$	(2.04	)	$	(0.61	)
Discontinued operations, net of income taxes		0.00			0.00			0.00			(0.01	)
Net loss per share	$	(1.10	)	$	(0.14	)	$	(2.04	)	$	(0.62	)
Net loss per share - diluted
Net loss from continuing operations	$	(1.10	)	$	(0.14	)	$	(2.04	)	$	(0.61	)
Discontinued operations, net of income taxes		0.00			0.00			0.00			(0.01	)
Net loss per share	$	(1.10	)	$	(0.14	)	$	(2.04	)	$	(0.62	)
Weighted average number of common shares        outstanding - basic		7,399			7,281			7,398			7,247
Weighted average number of common shares        outstanding - diluted		7,399			7,281			7,398			7,247

**SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

5

ROCK OF AGES CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
($ in thousands)
(Unaudited)

		Six Months Ended
		July 2,			July 3,
		2005			2004
Cash flows from operating activities:
Net loss	$	(15,099	)	$	(4,475	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation, depletion and amortization		2,285			1,774
Deferred taxes		7,447			(3	)
Changes in operating assets and liabilities, net of acquisitions:
Trade receivables, net		457			246
Due from related parties		(35	)		(39	)
Inventories		(1,425	)		(685	)
Other assets		807			(811	)
Trade payables, accrued expenses and income taxes		256			(1,879	)
Customer deposits		845			2,461
Deferred compensation and pension		465			366
Accrued adverse judgment		—			6,500
Other liabilities		—			(5	)
Net cash provided by (used in) operating activities		(3,997	)		3,450
Cash flows from investing activities:
Purchases of property, plant and equipment		(4,315	)		(3,841	)
Acquisitions, net of cash acquired		(4,135	)		—
Purchases of long-term investments		—			(3,650	)
Collection of note receivable		—			5,250
Net cash used in investing activities		(8,450	)		(2,241	)
Cash flows from financing activities:
Net borrowings (repayments) under lines of credit		8,161			(4,751	)
Principal payments on long-term debt		(161	)		(21	)
Borrowings on long-term debt		3,500			3,500
Stock options exercised		24			747
Dividends paid on common stock		(370	)		(290	)
Net cash provided by (used in) financing activities		11,154			(815	)
Effect of exchange rate changes on cash		(209	)		(133	)
Net increase (decrease) in cash and cash equivalents		(1,502	)		261
Cash and cash equivalents, beginning of period		4,298			3,227
Cash and cash equivalents, end of period	$	2,796		$	3,488
Supplemental cash flow information:
Cash paid during the period for:
Interest	$	730		$	261
Income Taxes	$	506		$	177
Supplemental disclosure of non-cash investing and financing activities:
Acquisitions:
Assets acquired	$	4,356		$	—
Liabilities assumed		(221	)		—
Common stock issued		—			—
Cash paid		4,135			—
Less cash acquired		—			—
Net cash paid for acquisitions	$	4,135		$	—

**SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

6

ROCK OF AGES CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(1)	Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared pursuant to the rules and regulations for reporting on Form 10-Q. Accordingly, certain information and notes required by generally accepted accounting principles for complete financial statements are not included herein. In the opinion of management, all adjustments of a normal recurring nature considered necessary for a fair presentation have been included. Results of operations for the interim periods are not necessarily indicative of the results that may be expected for a full year. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company's Annual Report Form 10-K (SEC File No. 000-29464, filed March 30, 2005).
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's fiscal year ends on December 31 and its fiscal quarters are the 13-week periods ending on the Saturday nearest March 31, June 30 and September 30. The first and fourth quarter may be more or less than 13 weeks, by 1 to 6 days, which can affect comparability between periods.
The consolidated financial statements include all subsidiaries in which we have the ability to control operating and financial policies. Affiliated companies (20% to 50% ownership) are generally recorded in the consolidated financial statements using the equity method of accounting. Less-than-20%-owned companies are included in the consolidated financial statements at the cost of our investment.

(2)	Discontinued Operations
On November 9, 2004, the Company completed the sale of the assets of the Autumn Rose quarry for a total sale price of $750,000. The decision to sell this quarry 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 business have been classified as discontinued operations, and prior periods have been restated to reflect this reclassification. For business reporting purposes, the Autumn Rose quarry was previously classified in the Quarry segment.
Operating results from the Autumn Rose Quarry for the three and six months ended July 3, 2004 were as follows (in thousands):

		Three Months Ended			Six Months Ended
		July 3,			July 3,
		2004			2004
Autumn Rose Quarry
Net Sales	$	—		$	35
Gross Profit		(18	)		(65	)
Pretax loss		(18	)		(65	)
Income tax benefit		(4	)		(13	)
Net loss		(14	)		(52	)

(3)

Stock Based Compensation

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

7

		Three Months Ended						Six Months Ended
		July 2,			July 3,			July 2,			July 3,
		2005			2004			2005			2004
Net loss, as reported	$	(8,144	)	$	(1,050	)	$	(15,099	)	$	(4,475)
Deduct total stock-based employee compensation expense determined under fair value based method for all awards, net of taxes		(143	)		(72	)		(260	)		(144	)
Net loss, pro forma	$	(8,287	)	$	(1,122	)	$	(15,359	)	$	(4,619	)
Net loss per share, as reported	$	(1.10	)	$	(0.14	)	$	(2.04	)	$	(0.62	)
Net loss per share, pro forma	$	(1.12	)	$	(0.15	)	$	(2.08	)	$	(0.64	)
Net loss per share - assuming dilution, as reported	$	(1.10	)	$	(0.14	)	$	(2.04	)	$	(0.62	)
Net loss per share - assuming dilution, pro forma	$	(1.12	)	$	(0.15	)	$	(2.08	)	$	(0.64	)

The fair value of each option grant is estimated on the date of the grant. The per share weighted average fair value of stock options granted throughout 2004 was $5.48 on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions: risk-free interest rate of 4.34%; dividend yield of 0%; expected volatility of 74%, and expected lives of six (6) years. The per share fair value of stock options granted in the second quarter of 2005 was $4.53 on the date of the grant using the Black-Scholes option-pricing model with the following weighted average assumptions: risk-free interest rate of 3.86%; dividend yield of 1.7% per year; expected volatility of 109%, and expected lives of seven (7) years. Because changes in the subjective input assumptions can materially affect the fair value estimate, in the opinion of management, the existing models do not necessarily provide a reliable single value of its options and may not be representative of the future stock price of the Company.

(4) Inventories

		July 2,		December 31,
Inventories consist of the following (in thousands):		2005		2004
Raw materials	$	13,323	$	12,485
Work-in-process		1,703		1,247
Finished goods and supplies		10,673		10,126
	$	25,699	$	23,858

(5)	Earnings Per Share
The following is a reconciliation of shares used in calculating basic and diluted earnings per share (in thousands):

	Three Months Ended		Six Months Ended
	July 2,	July 3,	July 2,	July 3,
	2005	2004	2005	2004
Basic weighted average shares	7,399	7,281	7,398	7,247
Effect of dilutive stock options	—	—	—	—
Diluted weighted average shares	7,399	7,281	7,398	7,247

Options to purchase 544,000 and 484,167 shares of Class A common stock were outstanding at July 2, 2005, and July 3, 2004, respectively, but were not included in the computation of diluted earnings per share because the effect would be anti-dilutive.

8

(6)	Segment Information
The Company is organized based on the products and services that it offers. Under this organizational structure, the Company operates in three segments: quarrying, manufacturing and retailing.
The quarrying segment extracts rough dimension granite blocks from the ground and sells those blocks or sawn slabs to both the manufacturing segment and to outside manufacturers, as well as to customers in Europe and Asia.
The manufacturing segment's principal products are granite memorials used primarily in cemeteries, although it also manufactures some specialized granite products for industrial applications.
The retailing segment sells granite and other types of memorials and other memorialization related products at various locations throughout the United States.
The other segment includes unallocated corporate overhead, the Eurimex adverse judgment and legal expenses and the impairment of the note receivable. The Company reports the salaries and benefits of its chief executive officer, chief financial officer, general counsel and other employees and expenses that cannot be accurately allocated to a particular segment as unallocated corporate overhead.
Inter-segment revenues are accounted for as if the sales were to third parties and then eliminated in consolidation.

 9

 The following is the unaudited segment information for the three and six-month periods ended July 2, 2005 and July 3, 2004 (in thousands):

 Three-month period: 

2005		Quarrying			Manufacturing			Retailing		Other		Total
Total net revenues	$	6,865		$	11,058		$	14,108	$	—	$	32,031
Inter-segment net revenues		(995	)		(3,354	)		—		—		(4,349	)
Net revenues		5,870			7,704			14,108		—		27,682
Total gross profit		1,860			2,668			7,589		—		12,117
Inter-segment gross profit		(200	)		(42	)		242		—		—
Gross profit		1,660			2,626			7,831		—		12,117
Selling, general and administrative expenses		852			1276			6,771		1,429		10,328
Adverse judgment and legal expenses		—			—			—		—		—
Total operating expenses		852			1,276			6,771		1,429		10,328
Income (loss) from continuing operations before interest and taxes	$	808		$	1,350		$	1,060	$	(1,429)	$	1,789
2004		Quarrying			Manufacturing			Retailing		Other		Total
Total net revenues	$	10,435		$	8,688		$	12,256	$	—	$	31,379
Inter-segment net revenues		(980	)		(2,365	)		—		—		(3,345	)
Net revenues		9,455			6,323			12,256		—		28,034
Total gross profit		4,609			1,932			7,042		—		13,583
Inter-segment gross profit		(329	)		100			229		—		—
Gross profit		4,280			2,032			7,271		—		13,583
Selling, general and administrative expenses		860			952			5,591		1,312		8,715
Adverse judgment and legal expenses		—			—			—		6,500		6,500
Total operating expenses		860			952			5,591		7,812		15,215
Income (loss) from continuing operations before interest and taxes	$	3,420		$	1,080		$	1,680	$	(7,812)	$	(1,632	)

 10

Six-month period:

2005		Quarrying			Manufacturing			Retailing			Other			Total
Total net revenues	$	10,839		$	15,517		$	18,163		$	—		$	44,519
Inter-segment net revenues		(1,404	)		(4,963	)		—			—			(6,367	)
Net revenues		9,435			10,554			18,163			—			38,152
Total gross profit		987			2,989			9,292			—			13,268
Inter-segment gross profit		(204)			(164	)		368			—			—
Gross profit		783			2,825			9,660			—			13,268
Selling, general and administrative expenses		1,746			2,483			12,858			2,795			19,882
Adverse judgment and legal expenses		—			—			—			—			—
Total operating expenses		1,746			2,483			12,858			2,795			19,882
Income (loss) from continuing operations before interest and taxes	$	(963	)	$	342		$	(3,198	)	$	(2,795	)	$	(6,614	)
2004		Quarrying			Manufacturing			Retailing			Other			Total
Total net revenues	$	15,518		$	13,604		$	16,654		$	—		$	45,776
Inter-segment net revenues		(1,531	)		(4,049	)		—			—			(5,580	)
Net Revenues		13,987			9,555			16,654			—			40,196
Total gross profit		4,961			2,766			9,053			—			16,780
Inter-segment gross profit		(331	)		(90	)		421			—			—
Gross profit		4,630			2,676			9,474			—			16,780
Selling, general and administrative expenses		1,702			1,809			10,169			2,603			16,283
Adverse judgment and legal expenses		—			—			—			6,500			6,500
Total operating expenses		1,702			1,809			10,169			9,103			22,783
Income (loss) from continuing operations before interest and taxes	$	2,928		$	867		$	(695	)	$	(9,103	)	$	(6,003	)

11

Net revenues by geographic area are as follows (in thousands):

		Three Months Ended				Six Months Ended
		July 2,		July 3,		July 2,		July 3,
		2005		2004		2005		2004
Net revenues (1):
United States	$	24,805	$	25,315	$	34,140	$	36,240
Canada		2,765		2,540		3,750		3,525
Ukraine		112		179		262		431
Total net revenues	$	27,682	$	28,034	$	38,152	$	40,196

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

Long-lived assets by geographic area are as follows (in thousands):  

		July 2,		December 31,
		2005		2004
Long-lived assets:
United States	$	47,398	$	42,495
Canada		3,735		3,635
Luxembourg		86		—
	$	51,219	$	46,130

(7)	Comprehensive Income (Loss)
Comprehensive income (loss) consists of net loss and foreign currency translation adjustment, and a minimum pension liability adjustment. Comprehensive income (loss) for the three and six month periods ended July 2, 2005 and July 3, 2004 are as follows (in thousands):

		Three Months Ended						Six Months Ended
		July 2,			July 3,			July 2,			July 3,
		2005			2004			2005			2004
Net loss	$	(8,144	)	$	(1,050	)	$	(15,099	)	$	(4,475	)
Other comprehensive loss:
Foreign currency translation adjustment		(198	)		(57	)		(337	)		(217	)
Comprehensive loss	$	(8,342	)	$	(1,107	)	$	(15,436	)	$	(4,692	)

		Foreign Currency Translation Adjustment			Minimum Pension Liability Adjustment			Accumulated Other Comprehensive Loss
Balance at December 31, 2004	$	1,379		$	(2,246	)	$	(867	)
Changes in 2005		(337	)		—			(337	)
Balance at July 2, 2005	$	1,042		$	(2,246	)	$	(1,204	)

12

(8) Components of Net Periodic Benefit Cost (in thousands)

		Three Months Ended July 2, 2005 and July 3, 2004
		NON-UNION PENSION BENEFITS						DEFERRED COMPENSATION BENEFITS				OTHER BENEFITS
		2005			2004			2005		2004		2005		2004
Service cost	$	182		$	156		$	73	$	43	$	4	$	5
Interest cost		326			320			83		79		30		28
Expected return on plan assets		(356	)		(340	)		—		—		—		—
Amortization of prior service costs		35			35			32		17		26		20
Amortization of net loss		49			29			—		—		—		—
Net periodic benefit cost	$	236		$	200		$	188	$	139	$	60	$	53

		Six Months Ended July 2, 2005 and July 3, 2004
		NON-UNION PENSION BENEFITS						DEFERRED COMPENSATION BENEFITS				OTHER BENEFITS
		2005			2004			2005		2004		2005		2004
Service cost	$	364		$	312		$	146	$	86	$	8	$	10
Interest cost		652			640			166		158		60		56
Expected return on plan assets		(712	)		(680	)		—		—		—		—
Amortization of prior service costs		70			70			64		34		52		40
Amortization of net loss		98			58			—		—		—		—
Net periodic benefit cost	$	472		$	400		$	376	$	278	$	120	$	106

The Company previously disclosed in its consolidated financial statements for the year ended December 31, 2004 it expected to contribute $945,000 to the defined benefit pension plan during 2005. As of July 2, 2005, $236,000 has been contributed with plans to contribute $118,000 a month for the remainder of the year.

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(9)	Recent Accounting Pronouncements
In November 2004, the FASB issued SFAS No. 151, "Inventory Costs-An Amendment of ARB No. 43, Chapter 4" ("SFAS 151"). SFAS 151 amends the guidance in ARB No. 43, Chapter 4, "Inventory Pricing," to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material (spoilage). Among other provisions, the new rule requires that items such as idle facility expense, excessive spoilage, double freight, and re-handling costs be recognized as current-period charges regardless of whether they meet the criterion of "so abnormal" as stated in ARB No. 43. Additionally, SFAS 151 requires that the allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities. SFAS 151 is effective for fiscal years beginning after June 15, 2005 and is required to be adopted by us in the first quarter of 2006, beginning on January 1, 2006. We are currently evaluating the effect, if any, that the adoption of SFAS 151 will have on our consolidated results of operations.
In December 2004, the FASB issued SFAS No. 123 (revised 2004), "Share-Based Payment" ("SFAS 123R"), which replaces SFAS No. 123, "Accounting for Stock-Based Compensation," ("SFAS 123") and supercedes APB Opinion No. 25, "Accounting for Stock Issued to Employees." SFAS 123R requires that all share-based payments to employees, including grants of employee stock options, be recognized in the financial statements based on their fair values, as of the beginning of our first annual period beginning after June 15, 2005. The pro forma disclosures previously permitted under SFAS 123 no longer will be an alternative to financial statement recognition.  Under SFAS 123R, we must determine the appropriate fair value model and related assumptions to be used for valuing share-based payments, the amortization method for compensation cost and the transition method to be used at date of adoption. The transition methods include modified prospective and modified retrospective adoption options. Under the modified retrospective option, prior periods may be restated either as of the beginning of the year of adoption or for all periods presented. The modified prospective method requires that compensation expense be recorded for all unvested stock options at the beginning of the first quarter of adoption of SFAS 123R, while the modified retrospective method would record compensation expense for all unvested stock options beginning with the first period restated. We are evaluating the requirements of SFAS 123R and expect that the adoption of SFAS 123R will have a material impact on our consolidated results of operations and earnings per share. We have not yet determined the method of adoption or the effect of adopting SFAS 123R, and we have not determined whether the adoption will result in amounts that are similar to the current pro forma disclosures under SFAS 123.
In May 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections” (“SFAS 154”), which replaces APB No. 20 “Accounting Changes”, and FASB Statement No. 3, “Reporting Changes in Interim Financial Statements”. The Statement changes the accounting for, and reporting of, a change in accounting principle. It requires retrospective application to prior period’s financial statements of voluntary changes in accounting principle and changes required by new accounting standards when the standard does not include specific transition provisions, unless it is impracticable to do so. SFAS No. 154 is effective for fiscal years beginning after December 15, 2005. The Company does not believe the adoption of SFAS No. 154 will have a material impact on its financial statements.
(10)	Credit Facility
We have a credit facility with CIT that consists of an acquisition term loan line of credit of up to $30 million and a revolving credit facility of up to another $20 million based on eligible accounts receivable, inventory and certain fixed assets. As of July 2, 2005, we had $19.4 million outstanding and $10.6 million available under the term loan line of credit and $15.4 million outstanding and $4.6 million available under the revolving credit facility. The agreement 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.
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. Primarily as a result of significant Eurimex expenses, the Company has been in violation of this covenant and has received waivers, which primarily allow the Company to exclude those expenses from the covenant calculation. As of July 2, 2005, we were in violation of this amended covenant primarily as a result of poor operating results. The Company has received a waiver allowing us to be in compliance with our credit facility at July 2, 2005. The Company and its lenders have agreed to adjust the required covenant levels for the balance of 2005 and 2006, and the Company believes it is probable that it will be in compliance with those adjusted covenants. Therefore, we continue to classify the term debt as long-term on our Consolidated Balance Sheet at July 2, 2005. The Company has agreed to pay an additional 25 basis points on the outstanding balances on both the revolving credit facility and the term loan until the Company’s trailing twelve month coverage ratio is equal to or greater than 1.25.
The facility also requires that the ratio of the Company's total liabilities to net worth not exceed 2.0. As of July 2, 2005, the Company was in compliance with this covenant as our total liabilities to net worth ratio was 1.41.

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(11)	Acquisitions
In February 2005, we acquired McColly Memorials, a memorial retailer, with four (4) locations in the Pittsburgh, Pennsylvania area, for a net purchase price of $554,000. The acquisition was accounted for by the purchase method of accounting. The assets acquired and liabilities assumed were recorded at estimated fair values as determined by management based on information currently available and on current assumptions as to future operations. We recorded property, plant and equipment of $291,000, inventory and work in process of $329,000 and a liability for customer deposits of $221,000, which has resulted in $155,000 of cost in excess of net assets acquired, which was entirely assigned to goodwill.
In February 2005, we acquired the land and equipment comprising the Rockwell White quarry in Rockwell, North Carolina for a purchase price of $3.5 million. 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. We evaluated the intangible assets and determined that the customer list had a value of $310,000. We recorded property, plant and equipment of $870,000, inventory of $87,000 and granite reserves of $1.9 million, with the excess of the purchase price of $382,000 assigned to goodwill.
(12)    Valuation of  Deferred Income Taxes
In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the current and deferred tax assets will not be realized. The ultimate realization of current and 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. This assessment is made each reporting period. At the end of the second quarter, based on the recent levels of historical taxable income and projections for future taxable income, the Company believes it is not more likely than not that it will generate the required taxable income to fully realize the benefit of the net U.S. deferred tax assets.  As such, we have adjusted our valuation allowance against the deferred tax assets to fully reserve for the entire net U.S. deferred tax asset which resulted in a charge to tax expense of $9,194,000 in the current period.
(13)	Dividend Declaration
On May 10, 2005, the Board of Directors declared a dividend of $.025 per share of common stock, payable on June 16, 2005 to holders of record as of May 26, 2005.
(14)	Subsequent Events
On August 4, 2005, the Board of Directors declared a dividend of $.025 per share of common stock, payable on September 15, 2005 to holders of record as of August 24, 2005.

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Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations
General
Rock of Ages is an integrated quarrier, manufacturer, distributor and retailer of granite blocks and products manufactured from granite. During 2005, we had three business segments, quarrying, manufacturing, and retail. The quarry division sells granite blocks, the raw material inventory of the granite industry, 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 and related products and services directly to consumers.
Our quarry group continued to have a difficult year in the second quarter of 2005 compared to the same period last year largely as a result of continued decline in export shipments primarily to our customers in China.  The largest shortfall came from our Salisbury Pink and Gardenia White quarries in North Carolina and our Bethel White quarry in Vermont where shipments are down due to higher inventories in the supply chain as well as what we believe are more restrictive credit policies for our customers in China.  Recently, we have seen some improvement in scheduled inspections of blocks by our customers and anticipate some recovery of export shipments in the balance of 2005.  Results from our other, primarily domestic, quarries are down slightly from last year due in part to short-term demand fluctuations as well as some longer-term negative trends from imported granites.  We continue to aggressively market our products in the US and abroad and continue to take whatever cost cutting measures are necessary to adjust to market conditions.
The manufacturing division had a very strong second quarter of 2005 due primarily to increased revenues from large mausoleums whose shipment had been delayed in the first quarter of 2005 due to customer delays and/or cemetery delays.  Demand for these and other large memorial projects remains strong and has offset the decline in orders and shipments relating to the lower end memorials from authorized retailers.  We have increased our Sales General and Administrative (SG&A) expenses in an effort to grow the business with our authorized retailer base, including adding new authorized retailers and continue to assess the effectiveness of this program.
The retail segment had stronger second quarter revenue compared to last year, with the first increase in second quarter revenue and year to date revenue through six months in several years, reversing the revenue decline in the first quarter of 2005.  We are pleased that the numerous new programs, incentives and other efforts of the Memorials Group appear to be effective in achieving solid revenue growth.  Our gross margins declined somewhat primarily due to the mix of product sold reflecting, in part, the program changes implemented this year. We are addressing this mix issue with our sales force.  We were also disappointed with the level of SG&A spending year-to-date that was required to implement these programs and will be aggressively implementing steps in the months ahead to improve SG&A productivity.

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 and our independent auditors. 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.

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Revenue Recognition

The Company records revenues from quarrying, manufacturing and retailing.

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 except as described below. 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 at the Barre quarries when the customer selects and identifies the block at the quarry site, when their name is printed on the block at their request and when the customer requests the block be stored for them on our property when they have significant business reasons to do so. At that time, the block is removed from our inventory; and title along with the risk of loss passes to the buyer. At that point 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 loss 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.

Impairment of long-lived assets

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

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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. 

We assess 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. We will perform our annual test of the impairment of goodwill in the third quarter of 2005.

We have entered into arrangements whereby we have accepted promissory notes as partial or full payment for certain transactions, particularly the sale of operations. Such notes have varying terms with principal 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. 

Valuation of deferred income taxes

In assessing the realizability of deferred tax assets, management considers whether it is more likely than not some portion or all of the current and deferred tax assets will not be realized. The ultimate realization of current and 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. In the three-month period ended July 2, 2005, the Company made the determination that, based on the results of the previous three years coupled with our projected current year operating loss and the guidance in Statement of Financial Accounting Standard No. 109, “Accounting for Income Taxes”, we cannot now estimate, at this time, that it is more likely than not that we can generate the required U.S. taxable income to fully realize the benefit of the net U.S. deferred tax assets the Company has generated over the years.  As such, we have adjusted our valuation allowance against the deferred tax assets to fully reserve for the entire net U.S. deferred tax asset which resulted in a significant charge to tax expense in the current period. We will continue to assess the valuation allowance on a regular basis and may reduce the valuation allowance if and/or when the Company has taxable income from its U.S. operations in the future.  

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. 

18

Accounting for pensions

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

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Results of Operations

The following table sets forth certain operations data as a percentage of net revenues with the exception of quarrying, manufacturing and retailing gross profit, and SG&A expenses, which are shown as a percentage of their respective revenues.

	Three Months Ended				Six Months Ended
	July 2,		July 3,		July 2,		July 3,
	2005		2004		2005		2004
Statement of Operations Data:
Net Revenues:
Quarrying	21.2%		33.7%		24.7%		34.8%
Manufacturing	27.8%		22.6%		27.7%		23.8%
Retailing	51.0%		43.7%		47.6%		41.4%
Total net revenues	100.0%		100.0%		100.0%		100.0%
Gross Profit:
Quarrying	28.3%		45.3%		8.3%		33.1%
Manufacturing	34.1%		32.1%		26.8%		28.0%
Retailing	55.5%		59.3%		53.2%		56.9%
Total gross profit	43.8%		48.5%		34.8%		41.7%
Operating Expenses:
Selling, general and administrative:
Quarrying	14.5%		9.1%		18.5%		12.2%
Manufacturing	16.6%		15.1%		23.5%		18.9%
Retailing	48.0%		45.6%		70.8%		61.1%
Corporate Overhead	5.2%		4.7%		7.3%		6.5%
Total SG&A expenses	37.3%		31.1%		52.1%		40.5%
Adverse Judgment and                 legal expenses	—		23.2%		—		16.2%
Total operating expenses	37.3%		54.3%		52.1%		56.7%
Income (loss) from continuing                operations before                interest and income taxes	6.5%		(5.8%	)	(17.3%	)	(15.0%	)
Interest expense	1.6%		0.4%		2.0%		0.6%
Income (loss) from                continuing operations before                income taxes	4.9%		(6.2%	)	(19.3%	)	(15.6%	)
Provision for income taxes	34.3%		(2.6%	)	20.3%		(4.6%	)
Income (loss) from continuing operations	(29.4%	)	(3.6%	)	(39.6%	)	(11.0%	)
Discontinued operations, net of income taxes	—		0.0%		—		(0.1%	)
Net income (loss)	(29.4%	)	(3.6%	)	(39.6%	)	(11.1%	)

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Three Months Ended July 2, 2005 Compared to Three Months Ended July 3, 2004

On a consolidated basis for all segments for the three-month period ended July 2, 2005, compared to the same period in 2004, revenue decreased 1.3%, gross profit decreased 10.8% and total operating expenses, excluding the costs associated with the judgment and expenses in the Eurimex litigation, increased 18.5% for reasons discussed in detail in the segment analyses below.

Quarry Segment Analysis

Revenue in our quarry operations for the three-month period ended July 2, 2005 was down 37.9% from the three-month period ended July 3, 2004 primarily as a result of decreased shipments from our Salisbury Pink, Bethel White and Gardenia White quarries to overseas customers. Our export shipments declined as a result of several factors including our customers’ existing inventory levels as well as what we believe are credit restrictions in China. 

Gross profit dollars from our quarry operations for the three-month period ended July 2, 2005 decreased 61.2% and gross profit as a percentage of revenue decreased from 45.3% of revenue to 28.3% of revenue compared to the three-month period ended July 3, 2004. The decreases in gross profit dollars and gross profit as a percentage of revenue were largely a result of some additional repair and maintenance expenses, absorption of additional expenses associated with the Rockwell quarry acquisition and lower operating efficiencies associated with the decrease in revenue.

SG&A costs in our quarry segment were essentially unchanged in the three-month period ended July 2, 2005 compared to last year.

Manufacturing Segment Analysis

Revenue in our manufacturing operations for the three-month period ended July 2, 2005 increased 21.8% from the three-month period ended July 3, 2004 as a result of strong shipments of mausoleums as well as an increase in shipments from our industrial products division which, together, more than offset a decline in shipments of other memorial products to our authorized retailers. Our backlog of mausoleum orders remains strong, however we have experienced a decline in orders for typical memorial products (i.e. not mausoleums) from our authorized retailers compared to the same period last year.  We continue to monitor and assess whether the programs we put in place to increase the business with our authorized retailers and attract new retailers to our brand program will ultimately be effective. 

Gross profit dollars from the manufacturing group increased 29.2% and gross profit as a percentage of manufacturing revenue increased by 2.0 percentage points for the three-month period ended July 2, 2005 compared to the three-month period ended July 3, 2004. The significant increase in gross profit was primarily attributable to the increased proportion of shipments of mausoleums from our Barre manufacturing plant.

SG&A costs for the three-month period ended July 2, 2005 for the manufacturing group increased 34.0% compared to the three-month period ended July 3, 2004 primarily as a result of the additional people and programs put in place to expand our sales to current authorized retailers and to add new authorized retailers.

Retail Segment Analysis

Revenues in our retail operations for the three-month period ended July 2, 2005 increased 15.1% from the three-month period ended July 3, 2004. We believe the increase is a direct result of the modifications to our product mix, branding strategy, marketing plan, retail counselor compensation structure, pricing policy and other items.  Our order receipts in the current period increased $1.5 million or 15.1% over the same period last year and our backlog is down 14.2% compared to the backlog balance at July 3, 2004 as a result of increased sets in the cemetery in this year’s quarter.

Gross profit dollars from the retail operations increased 7.7% and gross profit as a percentage of revenue declined from 59.3% to 55.5% compared to the same three-month period as last year. Although gross profit dollars increased as a direct result of higher revenues, gross profit as a percentage of revenue declined due to several factors associated with the transition to our new marketing and branding programs.  We expect our gross margin as a percentage of revenue will increase as revenues increase, however we may see continued downward pressure on gross margins depending, primarily, on the average craftsmanship level consumers choose to purchase in our branded product line.

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SG&A costs from our retail operations increased 21.1% for the three-month period ended July 2, 2005 compared to last year, and SG&A costs as a percentage of retail revenue increased 2.4 percentage points from the same period last year. The increase in SG&A was a result of the expenses associated with the various investments in people and programs related to changing  our product mix, branding strategy, marketing plan, retail counselor compensation structure, pricing policy, and other items.  Although we believe some of the expenses are for items we do not expect in future periods, our overall SG&A expenses represent a significant increase in effort and resources devoted to growing our retail business.

Consolidated Items

Unallocated Corporate overhead, consisting of operating costs not directly related to an operating segment, increased 8.9% for the three-month period ended July 2, 2005 compared to the three-month period ended July 3, 2004 primarily from executive searches as well as additional audit fees.

In the three-month period ended July 3, 2004 we recognized a $6.5 million expense associated with the Eurimex legal case, including the judgment and any legal or other related expenses. This case was concluded in 2004.

Interest expense increased 242.4%, to $428,000 for the three-month period ended July 2, 2005 compared to the three-month period ended July 3, 2004 as a result of the increase in debt as well as higher interest rates on our credit facilities. The increase in debt is due, in part to the Rockwell Quarry and the McColly retail operation acquisitions as well as our operating results and changes in working capital.

Income tax expense as a percentage of pre-tax income for the three-month period ended July 2, 2005 increased to 69.8%, or an expense of $9.5 million for 2005, from a benefit of 41%, or $721,000 for the same three-month period in 2004. In the three-month period ended July 2, 2005, the Company made the determination that, based on the results of the previous three years coupled with current year actual and projected operating results and the guidance in SFAS 109, we can not now estimate that the Company will more likely than not generate the required taxable income to fully realize the benefit of the net U.S. deferred tax assets the Company has generated over the years.  As such, we have adjusted our valuation allowance against the net U.S. deferred tax assets to fully reserve for the entire net U.S. deferred tax assets. This resulted in a charge to tax expense of $9,194,000 in the current period.  This action does not affect the cash taxes paid by the Company.  We will continue to assess the valuation allowance on a regular basis and may reduce the valuation allowance if and/or when the Company has taxable income from its U.S. operations in the future as required by SFAS 109. 

Six Months Ended July 2, 2005 Compared to Six Months Ended July 3, 2004

On a consolidated basis for all segments for the six-month period ended July 2, 2005, compared to the same six-month period in 2004, revenue decreased 5.1%, gross profit decreased 20.9% and total operating expenses, excluding the costs associated with the judgment and expenses in the Eurimex litigation, increased 22.1% from the same six-month period last year for reasons discussed in detail in the segment analyses below.

Quarry Segment Analysis

Revenues in our quarry operations for the six-month period ended July 2, 2005 decreased 32.5% from the six-month period ended July 3, 2004 primarily as a result of a 70% decrease in shipments from our Salisbury Pink quarry, and to a lesser degree, a decrease in shipments from  Bethel White and Gardenia White quarries. Our export shipments from these quarries declined as a result of several factors including our customers’ existing inventory levels as well as credit restrictions in China. 

Gross profit dollars from our quarry operations for the six-month period ended July 2, 2005 decreased 83.1% and gross profit as a percentage of revenue decreased from 33.1% of revenue to 8.3% of revenue.  The decreases in gross profit dollars and gross profit as a percentage of revenue were largely a result of some additional repair and maintenance expenses, absorption of additional expenses associated with a quarry acquisition and lower operational efficiencies associated with a decrease in revenue.

SG&A costs in our quarry segment increased 2.6% for the six-month period ended July 2, 2005. The increase in SG&A costs, in the six-month period ended July 2, 2005, are primarily a result of increased administrative salaries and other small miscellaneous expense increases.

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 Manufacturing Segment Analysis

Revenue in our manufacturing operations for the six-month period ended July 2, 2005 increased 10.5% from the six-month period ended July 3, 2004 as a result of increased shipments of mausoleums as well as an increase in shipments from our industrial products division.

Gross profit dollars from the manufacturing group increased 5.6% and gross profit as a percentage of manufacturing revenue decreased by 1.2 percentage points for the six-month period ended July 2, 2005 compared to the six-month period ended July 3, 2004. The decrease in gross profit is a result of significantly lower gross profits in the first quarter of 2005 which were not entirely overcome by the stronger gross profits of the second quarter.

SG&A costs for the six-month period ended July 2, 2005 for the manufacturing group increased 37.3% compared to the six-month period ended July 3, 2004 primarily as a result of the additional people and programs put in place to expand sales to the authorized retailer market. To date there have not been revenue increases sufficient to cover the additional costs incurred, and management is monitoring these expenditures on an ongoing basis.

Retail Segment Analysis

Revenue in our retail operations for the six-month period ended July 2, 2005 increased 9.1% from the six-month period ended July 3, 2004 We believe the increase is a direct result of modifications to our product mix, branding strategy, marketing plan, retail counselor compensation structure, pricing policy, and other items.  Our order receipts in the current period increased 3.9% over the same period last year and our backlog is down 14.2% compared to the backlog balance at July 3, 2004, primarily as a result of higher sets during the current period.

Gross profit dollars from the retail operations increased 2.0% and gross profit as a percentage of revenue decreased 3.7 percentage points compared to the same six-month period last year. Although gross profit dollars increased as a direct result of higher revenues, gross profit as a percentage of revenue declined due to several factors associated with the transition to our new marketing and branding programs.  We expect our gross margin as a percentage of revenue will increase as revenues increase, however we may see continued downward pressure on gross margins depending, primarily, on the average craftsmanship level of products sold.

SG&A costs from our retail operations increased 26.4% for the six-month period ended July 2, 2005 compared to the six-month period ended July 3, 2004 and SG&A costs as a percentage of retail revenue increased 9.7 percentage points from the same six-month period last year. The increase in SG&A was a result of the expenses associated with the various investments in people and programs related to changing our product mix, branding strategy, marketing plan, retail counselor compensation structure, pricing policy and other items.  Although we believe some of the expenses are for items we do not expect in future periods, our overall SG&A represents a significant increase in effort and resources devoted to growing our retail business.

Consolidated Items

Unallocated Corporate overhead increased 7.4% for the six-month period ended July 2, 2005 compared to the six-month period ended July 3, 2004 primarily from executive searches as well as additional audit fees.

In the six-month period ended July 3, 2004 we recognized a $6.5 million expense associated with the Eurimex legal case, including the judgment and any legal or other related expenses. This case was concluded in 2004.

Interest expense increased 185.4% to $745,000 for the six-month period ended July 2, 2005 compared to the six-month period ended July 3, 2004 as a result of the increase in debt and higher interest rates on our credit facilities. The increase in debt is due, in part, to the Rockwell Quarry and the McColly retail operation acquisitions as well as our operating results and changes in working capital.

Income tax expense as a percentage of pre-tax net loss for the six-month period ended July 2, 2005 increased to 105%, or an expense of $7.7 million for 2005, from a benefit of 29%, or $1.8 million for the same six-month period in 2004. In the six-month period ended July 2, 2005, the Company made the determination that, based on the results of the previous three years coupled with current year actual and projected operating results and the guidance in SFAS 109, we can not now estimate that the Company will more likely than not generate the required taxable income to fully realize the benefit of the net U.S. deferred tax assets the Company has generated over the years.  As such, we have adjusted our valuation allowance against the net U.S. deferred tax assets to fully reserve for the entire net U.S. deferred tax assets. This resulted in a charge to tax expense of $9,194,000 in the second quarter.  This action does not affect the cash taxes paid by the Company.  We will continue to assess the valuation allowance on a regular basis and may reduce the valuation allowance if and/or when the Company has taxable income from its U.S. operations in the future.

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Liquidity and Capital Resources

We consider our liquidity to be adequate to meet our long and short-term cash requirements to fund operations and pursue our retail strategy. Historically, we have met these requirements primarily from cash generated by operating activities and periodic borrowings under the commercial credit facilities described below. Our operating results and changes in working capital in the first half of 2005 have required us to increase our borrowings under our revolving credit facility.  We are actively monitoring our cash requirements and adjusting those requirements as needed particularly with regard to acquisitions and capital spending.  We do not anticipate any requirements for additional financing in the next 12-18 months beyond what is available to us under our existing credit facilities.

In 2004, the funded status of our defined benefit pension plan decreased by approximately $1 million primarily as a result of a decrease in the discount rate used to calculate the pension benefit obligation from 6.25% to 5.79%. We have historically contributed between $800,000 and $1.0 million per year to the plan. We have contributed $236,000 to the plan through July 2, 2005 and expect to make additional contributions of $709,000 in the balance of 2005, which, we believe, we will be able to fund either from cash from operations or borrowing under our credit facilities.

Cash Flow.

At July 2, 2005, the Company had cash and cash equivalents of $2.8 million and working capital of $14.8 million, compared to $3.5 million and $26.8 million, at July 3, 2004. The decrease in working capital is primarily the result of the increase in the revolving credit facility.

Cash flows from Operations. Net cash used in operating activities was $4.0 million in the six-month period ended July 2, 2005 compared to cash provided by operating activities of $3.5 million in the same six-month period of 2004. The primary reason for the change is the lower earnings in 2005 coupled with higher inventory levels, which had the effect of decreasing cash from operations.

Cash flows from Investing Activities. Cash flows used in investing activities were $8.5 million in the six-month period ended July 2, 2005. Cash used in investing activities comes from either borrowings under our credit facilities or from operations. Capital spending was $4.3 million as a result of continued investment in our quarry, retail and manufacturing operations. In addition, we used $3.5 million in cash to acquire the Rockwell quarry and approximately $600,000 in cash to acquire the McColly retail operation. This compares to cash used in investing activities of $2.2 million in the six-month period ended July 3, 2004 which consisted of capital spending of $3.8 million and the Forethought Financial Services investment of $3.5 million, which was partially offset by the cash payment of $5.25 million received from the sale of the cemeteries.

Cash flows from Financing Activities. Net cash provided by financing activities in the six-month period ended July 2, 2005 was $11.2 million, which consisted of borrowings under the line of credit of $8.2 million and net long-term debt borrowings of $3.3 million, and proceeds from stock options exercised of $24,000 less dividends paid on common stock of $370,000. This compares to $815,000 used in the financing activities in the corresponding period of 2004, which consisted of repayments under the line of credit of $4.8 million plus the dividends paid on common stock of $290,000, which was largely offset by an increase in long-term debt of $3.5 million used to make the Forethought Financial Services investment and proceeds from stock options exercised of $747,000.

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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 a 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 July 2, 2005, we had $19.4 million outstanding and $10.6 million available under the term loan line of credit and $15.4 million outstanding and $4.6 million available under the revolving credit facility. Our loan agreement with CIT places restrictions on our ability to, among other things, sell assets, participate in mergers, incur debt, pay dividends, repurchase stock and make investments or guarantees. The 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.

Minimum Operating Cash Flow to Debt Service Coverage Ratio. The facility requires the ratio of the sum of earnings before interest, taxes, depreciation and amortization (EBITDA) less taxes paid and capital expenditures to the sum of interest, scheduled debt repayments and dividends be at least 1.25 for any trailing twelve-month period at the end of a quarter. Primarily as a result of the expenses attributable to the Eurimex arbitration (including the $6.5 million settlement amount paid in 2004) the Company has been in violation of this covenant and has received waivers, which primarily allow the Company to exclude those expenses from the covenant calculation. As of December 31, 2004, the Company was in violation of the Debt Service Coverage Ratio due to charges in the fourth quarter of 2004 related to an impaired note receivable and severance payments as well as higher than normal capital expenditures in 2004. We received a waiver, which allowed us to exclude certain of these expenditures from our calculation of EBITDA and capital expenditures in the fourth quarter of 2004 and in 2005. For the period ended July 2, 2005, the Company was in violation of the modified covenant levels primarily as a result of the poor operating results. The Company has received a waiver allowing us to be in compliance with our credit facility at July 2, 2005 and the Company and its lenders have agreed to adjust the required covenant levels for the balance of 2005 and all of 2006.  The Company believes it is probable that it will be in compliance with those covenants during that time.  The Company has agreed to pay an additional 25 basis points on the outstanding balances on both the revolving credit facility and the term loan until its lenders have received audited financial statements confirming that the Company's trailing twelve month coverage ratio is equal to or greater than 1.25.

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 July 2, 2005, the Company was in compliance with this covenant as our total liabilities to net worth ratio was 1.41. 

Interest Rates. We have a multi-tiered interest rate structure on our outstanding debt with CIT. We can elect the interest rate structure under the credit facility based on the prime rate or LIBOR for both the revolving credit facility and the term loan. The incremental rate above or below prime and above LIBOR is based on our Funded Debt to Net Worth Ratio. Based on this ratio, our current rates are 25 basis points higher than the lowest rates available to us.  As a result of the waiver and covenant adjustments noted above, the Company’s rate structure will increase an additional 25 basis points for both the revolver and term loans until the Company’s trailing twelve month coverage ratio is equal to or greater than 1.25. The rates in effect as of July 2, 2005 (excluding the 25 basis point increase for the covenant waiver and adjustment) were as follows:

		Amount	Formula	Effective Rate
Revolving Credit Facility	$	7.4 million	Prime – 0.25%	5.75%
Revolving Credit Facility		8.0 million	LIBOR + 1.75%	4.71%
Term Loans		100,000	Prime	6.00%
Term Loans		15.8 million	LIBOR +2.00%	5.10%
Term Loans		3.5 million	LIBOR +2.00%	4.96%

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Canadian Credit Facility

As of July 2, 2005, the Company had $4.0 million CDN available and $0 outstanding under a demand revolving line of credit with the Royal Bank of Canada.

Contractual Obligations

Our contractual obligations have not changed materially since December 31, 2004, as disclosed in our annual report on Form 10-K.  Our primary need for capital will be to maintain and improve our manufacturing, quarrying, and retail facilities. We have approximately $5.1 million budgeted for capital expenditures in 2005 primarily in the first half of the year as $4.3 million has been expended to date. We expect to finish the year within the budgeted amount. We believe the combination of cash flow from operations and our credit facility will be sufficient to fund our operations for the next twelve months.

Seasonality

Historically, the Company's 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 primarily due 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.

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 reporting units under SFAS 142, “Goodwill and Other Intangible Assets”, goodwill impairment could be incurred at our normal annual impairment review or in some cases at the closing of the acquisition.

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

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

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

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. 

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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 granite, and may be subject to less restrictive regulatory requirements.

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

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

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

There is an increasing trend toward cremation in the United States. According to the National Funeral Director's Association, or NFDA, cremation was used in approximately 29% of the deaths in the United States in 2003, compared to approximately 32% in 2005. While we continue to believe 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 the months of January and February because of increased operating costs attributable to weather conditions. We have historically incurred an aggregate net loss during the first three months of each calendar year. Our operating results may vary materially from quarter to quarter due to, among other things, acquisitions, changes in product mix, shipping conditions and limitations on the timing of price increases, making quarterly year-to-year comparisons less meaningful. 

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

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

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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 deposits, equipment failures, accidents and worker injuries, labor issues, weather conditions and events, unanticipated transportation costs and price fluctuations. As a result, actual costs and expenditures, production quantities and delivery dates, as well as revenues, may differ materially from those anticipated, which could adversely affect our operating results. 

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

We derived approximately 30% of our revenues in fiscal 2004 from sales to customers outside the United States, with approximately 9% of revenues in fiscal 2004 from sales in Canada by the Company's Canadian subsidiary. Foreign sales are subject to numerous risks, including currency conversion risks, limitations (including taxes) on the repatriation of earnings, slower and more difficult accounts receivable collection and greater complication and expense in complying with foreign laws. Our sales of granite blocks to foreign countries are primarily for building use and are subject to various cyclical factors in foreign countries, foreign exchange rates, policies of foreign governments and numerous other factors over which we have no control.

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

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

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

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

 As described under such caption, we have been and were as of December 31, 2004, in violation of the minimum Operating Cash Flow to Debt Service Coverage Ratio, but were granted a waiver allowing us to exclude certain expenditures from our calculation of EBITDA and capital expenditures in the fourth quarter of 2004 and thereby comply with this covenant at December 31, 2004. Also as described under such caption, the waiver includes modifications to the minimum Operating Cash Flow to Debt Service Coverage Ratio in 2005 based on our projections. For the period ended July 2, 2005, we were in violation of the modified covenant levels primarily as a result of poor operating results for the second quarter and the first half of the year. We received a waiver allowing us to be in compliance with our credit facility at July 2, 2005 and our lenders have agreed to adjust the required covenant levels for the balance of 2005 and 2006.  While we believe we will be in compliance with the adjusted covenants during the remainder of 2005 and for 2006, we cannot provide assurances that we will be able to maintain compliance with this or other covenants in our loan facility or that we will continue to receive waivers of any non-compliance. While we currently maintain excellent relations with our lenders, if we are unable to comply with the financial or other covenants of our loan facility and do not receive waivers of our non-compliance, we may be unable to borrow additional amounts under the facility or amounts under the facility could be accelerated and become due and payable immediately, which would adversely affect our liquidity and our business and operations.

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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.

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

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

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

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

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Our collective bargaining agreements with the Granite Cutters Association and the United Steelworkers of America,  which together represent approximately 169 employees in our Vermont manufacturing and quarrying operations, expire on April 28, 2006. If we are unable to reach agreement with any of our unionized work groups in future negotiations regarding the terms of their collective bargaining agreement, or if additional segments of our workforce become unionized, we could be subject to work interruptions or stoppages which could adversely affect our operations and our business.
Provisions of our corporate organizational documents and Delaware law could delay or prevent a change in control of the Company, even if it would be beneficial to our stockholders.
Certain provisions contained in our Certificate of Incorporation and By-laws:
grant ten votes per share to each share of Class B Common Stock; divide the Board of Directors into three classes, each of which will have a different three-year term; provide the stockholders may remove directors from office only for cause and by a supermajority vote; provide special meetings of the stockholders may be called only by the Board of Directors or certain Company officers and not by stockholders; establish certain advance notice procedures for nomination of candidates for election as directors and for stockholder proposals to be considered at annual stockholders' meetings; authorize the issuance of preferred stock. Accordingly, the Board of Directors is empowered, without stockholder approval, to issue preferred stock with dividend, liquidation, conversion, voting or other rights that could materially adversely affect the voting power or other rights of, or be dilutive to, the holders of our Common Stock.
Certain of these provisions may have the effect of discouraging, delaying or preventing a change in control or unsolicited acquisition proposals a stockholder may consider favorable. In addition, because we are incorporated in Delaware, we are governed by the provisions of Section 203 of the Delaware General Corporation Law, which may prohibit or delay large stockholders, in particular those owning 15% or more of our outstanding voting stock, from merging or combining with us.
Item 3.	Quantitative and Qualitative Disclosure About Market Risk
The Company has financial instruments that are subject to interest rate risk, principally debt obligations under its credit facilities. Historically, the Company has not experienced material gains or losses due to interest rate changes. Based on the Company's current variable rate debt obligations, the Company believes its exposure to interest rate risk is not material.
The Company is subject to foreign currency exchange rate risk primarily from the operations of its Canadian subsidiary. Based on the size of this subsidiary and the Company's corresponding exposure to changes in the Canadian/U. S. dollar exchange rate, the Company does not consider its market exposure relating to currency exchange to be material.
Item 4.	Controls and Procedures
	(a)  Disclosure Controls and Procedures.  The Company's management, with the participation of the Company's Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company's disclosure controls and procedures (as such 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 Company's Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, the Company's disclosure controls and procedures are effective in recording, processing, summarizing and reporting, on a timely basis, information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act.
	(b) Internal Control Over Financial Reporting.  There have not been any changes in the Company's 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 fiscal quarter to which this report relates that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.

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PART II	OTHER INFORMATION
Item 1.	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 ordinary course proceedings cannot be predicted with certainty, we do not expect them to have a material adverse effect on our business or financial condition.
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 us alleging that we breached certain terms of a sealed settlement agreement by engaging in conduct constituting commercial disparagement. Damages have not been specified. We believe this action by Kurtz Monument Company is without merit. We deny liability and will continue to vigorously defend claims made by Kurtz Monument Company.
David A. Pier and Rock of Ages Memorials, Inc. # 53 160 00645 04 American Arbitration Association.  On September 29, 2004, Mr. Pier, a 56 year old former sales employee of Rock of Ages Memorials, Inc. ("ROAM"), filed a demand for arbitration, alleging age and sex discrimination in connection with his termination from employment by ROAM. Mr. Pier also alleges that ROAM defamed him. ROAM denies that Mr. Pier's termination was motivated by any discriminatory or illegal reason, and further denies that it has defamed Mr. Pier or published any facts concerning his termination other than the termination letter directed to him. On May 21, 2005, we paid David Pier the sum of $15,000 and each party released the other and its affiliated persons from all claims of any kind arising through the date of the mutual release agreement, including those that were the subject of the American Arbitration Association arbitration.
The Company carries insurance with coverages that it believes to be customary in its industry. Although there can be no assurance that such insurance will be sufficient to protect us against all contingencies, management believes that its insurance protection is reasonable in view of the nature and scope of our operations.

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Item 4.	Submission of Matters to a Vote of Security Holders
The Company held its annual meeting of stockholders on June 22, 2005 (the "Annual Meeting"), to elect two Class II directors, approve the Rock of Ages Corporation 2005 Stock Plan and to ratify the selection of KPMG LLP as the Company's registered public accounting firm for the 2005 fiscal year.
Pamela G. Sheiffer and Frederick E. Webster Jr. were elected to serve as Class II directors for a three-year term expiring at the annual meeting of stockholders in 2008 and until their successors are duly elected and qualified. Richard C. Kimball and Kurt M. Swenson continue to serve as Class III directors for a term expiring at the annual meeting of stockholders in 2006 and until their successors are duly elected and qualified. James L. Fox and Charles M. Waite continue to serve as Class I directors for a term expiring at the annual meeting of stockholders in 2007 and until their successors are duly elected and qualified.
The following table sets forth the number of votes cast for, against or withheld, as well as the number of abstentions, as to the election of each of Pamela G. Sheiffer and Frederick E. Webster Jr., the approval of the Rock of Ages Corporation 2005 Stock Plan and the ratification of the selection of KPMG LLP as the Company's independent auditors of the 2005 fiscal year.

	Votes For	Votes Withheld/ Votes Against	Abstentions
Election of
Pamela G. Sheiffer	30,337,441	389,422	—
Frederick E. Webster Jr.	30,339,626	387,237	—
Rock of Ages Corporation 2005 Stock Plan	27,892,028	841,923	217,140
KPMG LLP	30,671,925	3,700

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Item 6.	Exhibits and Reports on Form 8-K
(a)	Exhibits
	Number	Exhibits
	3.1	Amended and Restated Certificate of Incorporation of the Registrant incorporated by reference to Exhibit 3.1 to the Company's Registration Statement on Form S-1 (File 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 Registrant (as amended through April 6, 1999) incorporated by reference to Exhibit 3.2 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended March 31.1999.
	4	Specimen Certificate representing the Class A Common Stock incorporated 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, 1997and declared effective on October 20, 1997.
	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.
(b)	Reports Submitted on Form 8-K:
	On April 21, 2005, the Registrant filed a report on Form 8-K pursuant to Item 7.01 (Regulation FD Disclosure) and Item 9.01 (Financial Statements and Exhibits) to report that on April 21, 2005, Kurt M. Swenson, Chairman and CEO, and Rick Wrabel, President and COO/Memorials Division of Rock of Ages Corporation, would make a presentation to investors at the 2005 Merrill Lynch Deathcare Investor Conference at the Merrill Lynch Midtown Conference Center in New York City.
	On May 4, 2005, the Registrant filed a report on Form 8-K pursuant to Item 7.01 (Regulation FD Disclosure), and Item 9.01. (Financial Statements and Exhibits) to report the Company issued a press release to announce it would be reporting results for the quarter ended March 31, 2005 on May 10, 2005.
	On May 10, 2005, the Registrant filed a report on Form 8-K pursuant to Item 2.02 (Results of Operation and Financial Condition), Item 8.01 (Other Events) and Item 9.01 (Financial Statements and Exhibits) to report the Company issued a press release regarding its results of operations for the quarter ended April 3, 2005. The Registrant also announced the Board of Directors of the Company had declared a quarterly cash dividend of $0.025 for each share of common stock, payable on June 16, 2005 to shareholders of record on May 26, 2005.
	On May 13, 2005, the Registrant filed a report on Form 8-K pursuant to Item 1.01 (Entry into a Material Definitive Agreement) and Item 9.01 (Financial Statements and Exhibits) to report the Company received a letter from its lenders, the CIT Group, Business Credit and Chittenden Trust Company (the "Waiver Letter"), pursuant to which CIT and Chittenden waived compliance with certain financial covenants contained in the Financing Agreement dated December 17, 1997, as amended. In relevant part, the Waiver Letter waives the Company's failure to maintain the Minimum Operating Cash Flow Ratio (as that term is defined in the Financing Agreement) for the first quarter 2005.
	On May 31, 2005, the Registrant filed a report on Form 8-K pursuant to Item 1.01 (Entry into a Material Definitive Agreement), Item 5.02 (Departure of Directors or Principal Officers; Election of Directors; Appointment of Principal Officers), Item 8.01 (Other Events) and Item 9.01 (Financial Statements and Exhibits) to report on May 27, 2005, the Company entered into an employment agreement with Nancy Rowden Brock.  Ms. Brock will join the Company’s senior executive team on June 13, 2005 and that she would succeed Douglas S. Goldsmith as Senior Vice President and Chief Financial Officer of the Company after a brief transition period. The Registrant also reported on May 27, 2005, the Company entered into an employment agreement with N. Daniel Ginsberg.  Mr. Ginsberg will join the Company’s senior executive team as Senior Vice President/Human Resources on June 13, 2005. The Registrant also announced that on May 31, 2005, the Company issued a press release announcing the appointment of Nancy Rowden Brock as Senior Vice President and Chief Financial Officer, and N. Daniel Ginsberg as Senior Vice President of Human Resources.
	On June 23, 2005, the Registrant filed a report on Form 8-K pursuant to Item 1.01 (Entry into a Material Definitive Agreement) and Item 9.01 (Financial Statements and Exhibits) to report that on June 22, 2005 at the Company's Annual Meeting of Stockholders, the stockholders approved the Rock of Ages Corporation 2005 Stock Plan (the "2005 Plan"). The Registrant also announced that on June 22, 2005, the Compensation Committee approved the grant of incentive stock options pursuant to the 2005 Plan to two of our executive officers who recently joined the Company. Nancy Rowden Brock, Senior Vice President/Finance was granted an option to purchase 25,000 shares of Class A common stock and N. Daniel Ginsberg, Senior Vice President/Human Resources was granted an option to purchase 10,000 shares of Class A common stock. In addition, the Registrant announced that on June 22, 2005, the Compensation Committee also approved the terms of a retirement agreement with Jon M. Gregory, President/COO of the Company's Quarry Division.

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SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

	ROCK OF AGES CORPORATION
Dated: August 16, 2005	By: /s/ Douglas S. Goldsmith        Douglas S. Goldsmith        Vice President, Chief Financial Officer        and Treasurer         (Duly Authorized Officer and Principal Financial and Accounting Officer)

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Exhibit Index

Number	Exhibits
3.1	Amended and Restated Certificate of Incorporation of the Registrant incorporated by reference to Exhibit 3.1 to the Company's Registration Statement on Form S-1 (File 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 Registrant (as amended through April 6, 1999) incorporated by reference to Exhibit 3.2 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended March 31,1999.
4	Specimen Certificate representing the Class A Common Stock incorporated 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, 1997and declared effective on October 20, 1997.
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.

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Index

CONSOLIDATED BALANCE SHEETS
CONSOLIDATED STATEMENTS OF OPERATIONS
CONSOLIDATED STATEMENTS OF CASH FLOWS
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Managements Discussion and Analysis of Financial Condition and Results of Operations
Quantitative and Qualitative Disclosure About Market Risk
Controls and Procedures
Legal Proceedings
Submission of Matters to a Vote of Security Holders
Exhibits and Reports on Form 8-K
SIGNATURE