-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, WlkGNd1yncy3zXs67aMHF97lyQqL7YiXKTr128k+yR2dYGUit73WlNWb1QiM+wrt GSrj74pYWli63GSnMYqKVA== 0000950135-97-004150.txt : 19971017 0000950135-97-004150.hdr.sgml : 19971017 ACCESSION NUMBER: 0000950135-97-004150 CONFORMED SUBMISSION TYPE: S-1/A PUBLIC DOCUMENT COUNT: 11 FILED AS OF DATE: 19971016 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: ROCK OF AGES CORP CENTRAL INDEX KEY: 0000084581 STANDARD INDUSTRIAL CLASSIFICATION: CUT STONE & STONE PRODUCTS [3281] IRS NUMBER: 020212792 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-1/A SEC ACT: SEC FILE NUMBER: 333-33685 FILM NUMBER: 97696437 BUSINESS ADDRESS: STREET 1: 369 NORTH STATE STREET CITY: CONCORD STATE: NH ZIP: 03301 BUSINESS PHONE: 6032258397 S-1/A 1 ROCK OF AGES CORPORATION - AMENDMENT NO. 2 1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 16, 1997 REGISTRATION NO. 333-33685 ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ AMENDMENT NO. 2 TO FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ------------------------ ROCK OF AGES CORPORATION (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 3281 030153200 (STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
772 GRANITEVILLE ROAD GRANITEVILLE, VERMONT 05654 (802) 476-3121 (ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES) ------------------------ KURT M. SWENSON PRESIDENT, CHIEF EXECUTIVE OFFICER AND CHAIRMAN OF THE BOARD OF DIRECTORS ROCK OF AGES CORPORATION 772 GRANITEVILLE ROAD GRANITEVILLE, VERMONT 05654 (802) 476-3121 (NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF AGENT FOR SERVICE) Copies of Communications to: KENT A. COIT, ESQ. JORGE L. FREELAND, ESQ. SKADDEN, ARPS, SLATE, MEAGHER & FLOM LLP GREENBERG TRAURIG HOFFMAN LIPOFF ROSEN & QUENTEL, ONE BEACON STREET P.A. BOSTON, MASSACHUSETTS 02108 1221 BRICKELL AVENUE (617) 573-4800 MIAMI, FLORIDA 33131 (617) 573-4822 (FAX) (305) 579-0500 (305) 579-0717 (FAX)
------------------------ APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after the effective date of this Registration Statement. If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. [ ] If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If this form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. [ ] THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE. ================================================================================ 2 INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE. SUBJECT TO COMPLETION, DATED OCTOBER 16, 1997 PROSPECTUS [ROCK OF AGES LOGO] 2,900,000 SHARES ROCK OF AGES CORPORATION CLASS A COMMON STOCK ------------------------ Of the 2,900,000 shares of Class A Common Stock, par value $.01 per share, of Rock of Ages Corporation, a Delaware corporation ("Rock of Ages" or the "Company"), offered hereby, 2,624,518 shares are being sold by the Company and 275,482 shares are being sold by certain stockholders of the Company (the "Selling Stockholders"). The Company will not receive any of the proceeds from the sale of Class A Common Stock by the Selling Stockholders. See "Principal and Selling Stockholders." The capital stock of the Company consists of Class A Common Stock and Class B Common Stock (collectively, the "Common Stock"). The two classes are substantially identical, except that the Class A Common Stock is entitled to one vote per share and the Class B Common Stock is entitled to ten votes per share on all matters, including the election of directors, and the Class B Common Stock is convertible into Class A Common Stock and converts automatically upon a transfer to any person other than a permitted transferee. Upon consummation of this offering, holders of Class B Common Stock will hold approximately 92% of the voting power of the outstanding shares of Common Stock. See "Description of Capital Stock." Prior to this offering, there has been no public market for the Class A Common Stock. It is currently estimated that the initial public offering price of the Class A Common Stock will be between $16.00 and $18.00 per share. See "Underwriting" for a discussion of the factors to be considered in determining the initial public offering price of the Class A Common Stock. Application has been made for listing of the Class A Common Stock on the Nasdaq National Market under the symbol "ROAC." ------------------------ SEE "RISK FACTORS" BEGINNING ON PAGE 8 FOR CERTAIN INFORMATION THAT SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS. ------------------------ THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
=========================================================================================================== PROCEEDS TO PROCEEDS TO SELLING PRICE TO PUBLIC UNDERWRITING COMPANY(2) STOCKHOLDERS DISCOUNTS AND COMMISSIONS(1) - ----------------------------------------------------------------------------------------------------------- Per Share.............................. $ $ $ $ - ----------------------------------------------------------------------------------------------------------- Total(3)............................... $ $ $ $ ===========================================================================================================
(1) The Company and the Selling Stockholders have agreed to indemnify the Underwriters against certain liabilities, including liabilities under the Securities Act of 1933, as amended. See "Underwriting." (2) Before deducting expenses estimated at $1.5 million, which are payable by the Company. (3) The Company has granted the Underwriters a 30-day option to purchase up to 435,000 additional shares of Class A Common Stock on the same terms and conditions as the Class A Common Stock offered hereby solely to cover overallotments, if any. If the option is exercised in full, the total Price to Public, total Underwriting Discounts and Commissions and total Proceeds to Company will be $ , $ and $ , respectively. See "Underwriting." ------------------------ The shares of Class A Common Stock are offered by the Underwriters, subject to prior sale, when, as and if delivered to and accepted by them, and subject to other conditions, including the right of the Underwriters to withdraw, cancel, modify or reject any order in whole or in part. It is expected that delivery of the shares will be made on or about , 1997 at the offices of Raymond James & Associates, Inc., 880 Carillon Parkway, St. Petersburg, Florida. RAYMOND JAMES & ASSOCIATES, INC. The date of this Prospectus is , 1997 3 [THE CRAFTSMAN PAINTING BY NORMAN ROCKWELL] [PICTURES OF MEMORIALS AND THE MEMORIAL MANUFACTURING PROCESS] "THE CRAFTSMAN" BY NORMAN ROCKWELL COMMISSIONED BY THE COMPANY IN 1957 AND ON DISPLAY AT THE COMPANY'S HEADQUARTERS IN GRANITEVILLE, VERMONT CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE CLASS A COMMON STOCK OFFERED HEREBY, INCLUDING OVER-ALLOTMENT, STABILIZING BIDS AND PURCHASES, SYNDICATE SHORT COVERING TRANSACTIONS AND PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING." 2 4 - -------------------------------------------------------------------------------- PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and historical and pro forma financial statements and notes thereto appearing elsewhere in this Prospectus. Unless otherwise indicated, the information in this Prospectus assumes that (i) the Underwriters' over-allotment option has not been exercised and (ii) the Reorganization and the Acquisitions (as such terms are defined herein) have occurred. As used in this Prospectus, unless the context indicates otherwise, the term the "Company" or "Rock of Ages" refers to Rock of Ages Corporation after giving effect to the Reorganization and the Acquisitions, and its consolidated subsidiaries and their respective predecessors. THE COMPANY Rock of Ages, founded in 1885, is an integrated granite quarrier, manufacturer and distributor whose principal product is granite memorials used primarily in cemeteries. The Company believes that it is the largest quarrier, manufacturer and distributor of finished granite memorials and granite blocks for memorial use in North America, based on revenues. The Company owns and operates 13 active quarry properties and 13 manufacturing and sawing facilities in North America, principally in Vermont, Georgia and the Province of Quebec. The Company markets and distributes its memorials on a wholesale basis to approximately 2,124 independent memorial retailers in the United States and Canada, including approximately 495 independent authorized Rock of Ages retailers that are the primary outlet for the Company's branded memorials. The Company recently entered into a definitive agreement to acquire one of the largest of its authorized independent retailers, which will provide the Company with 17 owned retail outlets and mark the Company's first significant entry into retailing. The Company's memorials are marketed under the names Rock of Ages Sealmark and Colorcraft, as well as several private labels. The Company believes the Rock of Ages trademark is one of the oldest and best known brand names in the granite memorialization industry. THE DEATH CARE INDUSTRY AND GRANITE MEMORIALIZATION The death care industry has traditionally been comprised of three principal segments: (i) ceremony and tribute, generally in the form of a funeral or memorial service; (ii) disposition of remains, either through burial or cremation; and (iii) memorialization, generally through monuments, markers or inscriptions. A majority of death care industry operators consist of small, family-owned businesses. The International Cemetery and Funeral Association estimates that in the United States there are approximately 23,000 active cemeteries, 9,500 of which are commercial (as opposed to religious, family, fraternal, military or municipal) cemeteries. At the end of 1996, publicly held death care companies ("consolidators") owned less than 5% of such active cemeteries, approximately 890, or less than 10%, of such commercial cemeteries and less than 12% of the estimated 22,800 funeral homes in the United States. The death care industry has certain attractive fundamental characteristics, including highly fragmented ownership, significant barriers to entry created by local heritage, community presence and tradition, and stable, predictable demand. Generally, the granite memorialization industry shares certain of these characteristics. However, the granite memorialization industry and its principal areas (i.e., quarrying, manufacturing and retailing) have certain distinguishing characteristics that the Company believes create attractive opportunities. These characteristics include: (i) different times and points of sale than most other death care products or services, with sales of granite memorials traditionally taking place some time after the funeral service and at an independent retailer rather than at a funeral home or cemetery; (ii) fragmented groups of both manufacturers of granite memorials (approximately 140 mostly family-owned firms) and independent memorial retailers (according to Monument Builders of North America, approximately 3,000 of such retailers are located outside funeral homes and cemeteries) in North America; (iii) concentration of memorial grade granite deposits and granite memorial manufacturers in limited geographic areas in North America; (iv) significant barriers to entry to quarrying memorial grade granite, including the limited number of known commercially exploitable memorial grade granite deposits, high capital costs and stringent environmental and other permitting requirements; (v) significant barriers to entry to the manufacturing of granite memorials, including the high capital cost to establish and operate a memorial grade granite manufacturing facility and - -------------------------------------------------------------------------------- 3 5 - -------------------------------------------------------------------------------- the difficulty of attracting the requisite highly skilled work force; and (vi) the personalization, permanence and visibility of upright granite memorials, which distinguish them from most other death care products and services. The Company believes the U.S. granite memorialization industry, excluding communal interments such as community mausoleums and columbariums, had in excess of $1.0 billion in retail sales in 1996. In 1996, on a pro forma basis giving effect to the Acquisitions as if they occurred on January 1, 1996, wholesale sales of the Company's granite memorials were approximately $41.4 million, which the Company believes accounted for approximately 12% of total wholesale sales of granite memorials in North America. BUSINESS STRATEGY Rock of Ages believes it is well-positioned to capitalize on the industry characteristics described above, and seeks to establish a dominant position in the granite memorialization industry. The Company intends both to improve the efficiency of its existing operations and to expand its business significantly. The principal elements of the Company's operating and growth strategies are summarized below. Operating Strategy. The Company pursues an operating strategy that includes the following key elements: - Providing, primarily through its own quarrying and manufacturing operations, a complete line of high quality granite memorials covering all price points and major color varieties. The Company believes it is the only industry participant with both quarrying and manufacturing operations in three of the four principal granite memorial producing regions of North America. - Enhancing operational efficiencies through the continued integration of acquired quarriers and manufacturers and the rationalization of its sales and distribution efforts. - Increasing advertising and promotion of the Rock of Ages brands, including the flagship Rock of Ages Sealmark and Colorcraft brands, in order to heighten consumer awareness and increase sales of the Company's products. Growth Strategy. The Company seeks to expand the scope and profitability of its operations by implementing a growth strategy that includes forward vertical integration into retailing, thereby enabling the Company to move closer to the ultimate customer. The principal elements of this strategy include the following: - Acquiring independent granite memorial retailers in selected markets in order to develop an integrated network of owned Rock of Ages retailers and thereby capture the higher margins that have historically existed at the retail level. - Increasing sales to independent retailers that are current customers and expanding its independent retailer customer base. During the last two years, principally through acquisitions of quarriers and manufacturers, the Company has increased the number of independent retailers to which it sells its products from approximately 495 in 1995 to approximately 2,124 in 1997. - Pursuing strategic alliances with funeral home and cemetery owners, including consolidators, to supply granite memorials to or through them, in order to increase both pre-need and at-need sales of granite memorials. - -------------------------------------------------------------------------------- 4 6 - -------------------------------------------------------------------------------- RECENT AND CONCURRENT ACQUISITIONS The Company's primary means of implementing its growth strategy to date has been through acquisitions, beginning with the acquisition on December 31, 1995 of Lawson Granite Company and Anderson-Friberg Company, each based in Barre, Vermont. These acquisitions helped expand the Company's manufacturing capacity and distribution base, while also broadening its granite memorial product line to include more non-branded granite memorials at lower price points than the Company's then-existing product line. The Company has recently taken further steps to implement its growth strategy by acquiring one, and entering into a definitive agreement to acquire another, significant granite quarrier and memorial manufacturer in Elberton, Georgia, which is the largest of the four principal granite producing regions in North America. The Company has also entered into a definitive agreement to acquire a major memorial retailer that the Company believes is one of the largest independent memorial retailers in the United States. The Company believes that these acquisitions and the continued implementation of the other elements of its operating and growth strategies will enable it to: (i) expand overall industry sales of granite memorials, which heretofore have been actively marketed to consumers primarily only on an at-need basis and in a limited manner; (ii) increase its share of the granite memorial market by offering a complete product line with strong brand names through distribution channels that more directly reach the consumer; and (iii) increase both its relative and total profitability both by enhancing operational efficiencies and by capturing some of the higher margins that have historically existed at the retail level. The Company's recent and pending acquisitions are briefly described below. Keystone. In June 1997, the Company acquired the successor to Keystone Memorials, Inc. ("Keystone"), the largest granite memorial manufacturer in Elberton, Georgia (the "Keystone Acquisition"), which included Keystone's 50% ownership interest in (i) Southern Mausoleums, Inc., a manufacturer of granite mausoleums in Elberton, Georgia ("SMI"); and (ii) three granite quarrying companies operating six granite quarries located in Georgia, Pennsylvania, North Carolina, South Carolina and Oklahoma (collectively, the "Quarry Companies"). In connection with the Keystone Acquisition, the Company issued 263,441 shares of Class B Common Stock and assumed or incurred $2.7 million of indebtedness of Keystone. C&C. In June 1997, the Company entered into a definitive agreement to acquire Childs & Childs Granite Company, Inc. and a related company ("C&C," and, together with the Quarry Companies, SMI and Keystone, the "Elberton Companies"), which the Company believes is the second largest manufacturer of granite memorials in Elberton, Georgia, and the remaining 50% of the Quarry Companies and SMI owned by the stockholders of C&C (the "C&C Acquisition" and, together with the Keystone Acquisition, the "Elberton Acquisitions"). It is currently anticipated that the C&C Acquisition will close concurrently with the consummation of this offering. The Elberton Acquisitions will establish the Company as the largest granite memorial manufacturer in Elberton, Georgia, which is the largest granite producing area in North America, and will give the Company a substantially broader product line and enhanced distribution capabilities in the southern United States. The purchase price payable for C&C is $6.6 million in cash and $200,000 in shares of Class A Common Stock (valued at the initial public offering price) and approximately $780,000 to repay outstanding indebtedness of C&C. Upon the closing of the C&C Acquisition, the Company will assume $5.5 million of indebtedness of the Quarry Companies and SMI. Keith. The Company's first significant entry into memorial retailing was initiated in July 1997, when the Company entered into a definitive agreement to acquire (the "Keith Acquisition", and, together with the Elberton Acquisitions, the "Acquisitions") substantially all of the assets and liabilities of Keith Monument Co. and its affiliated companies (collectively, "Keith Monument"). It is currently anticipated that the Keith Acquisition will close concurrently with the consummation of this offering. Keith Monument, founded in 1867, has been an authorized Rock of Ages retailer for more than 50 years. The Company believes that Keith Monument is one of the largest retailers of granite memorials in the United States. Upon the closing of the Keith Acquisition, John E. Keith, a principal owner and the president of Keith Monument with over thirty years of experience in granite memorial retailing, will head the Company's retailing operations. Mr. Keith will oversee the implementation of the Company's strategy to significantly expand its retail operations both through other acquisitions of retailers and by pursuing strategic alliances with funeral home and cemetery owners, including consolidators. The purchase price payable for Keith Monument is $16.4 million, consisting - -------------------------------------------------------------------------------- 5 7 - -------------------------------------------------------------------------------- of $13.1 million in cash, $1.5 million in shares of Class A Common Stock (valued at the initial public offering price) and $1.8 million to repay outstanding indebtedness of Keith Monument assumed by the Company. See "Business -- Recent and Concurrent Acquisitions" and "Business -- Marketing and Distribution; Retailing." The Company's principal executive offices are located at 772 Graniteville Road, Graniteville, Vermont 05654 and its telephone number is (802) 476-3121. THE OFFERING Class A Common Stock offered..... 2,900,000 shares, of which 2,624,518 shares are being offered by the Company and 275,482 shares are being offered by the Selling Stockholders. Common Stock to be outstanding after the offering(1)............ 3,000,000 shares of Class A Common Stock 3,487,957 shares of Class B Common Stock Use of proceeds.................. The net proceeds to the Company of this offering will be used to fund the C&C Acquisition and the Keith Acquisition, and to repay indebtedness under the Company's existing credit facilities, including indebtedness assumed in connection with the Keystone Acquisition. See "Use of Proceeds." Proposed Nasdaq National Market symbol........................... "ROAC" - --------------- (1) Excludes 862,500 shares of Class B Common Stock issuable upon the exercise of outstanding stock options (with a weighted average exercise price of $3.31 per share) granted under the Company's 1994 Amended and Restated Stock Plan (the "1994 Plan") and 383,252 shares of Class A Common Stock issuable upon the exercise of options to be granted in connection with the Acquisitions and to two non-employee directors who will assume their positions upon consummation of the offering (with an exercise price equal to the initial public offering price). See "Certain Relationships and Related Transactions." The rights of holders of the two classes of Common Stock are substantially identical, except that (a) the Class A Common Stock is entitled to one vote per share and the Class B Common Stock is entitled to ten votes per share on all matters, including the election of directors; and (b) the Class B Common Stock is convertible into Class A Common Stock at the option of the holder and automatically upon a transfer to any person other than a Permitted Transferee, as defined herein. See "Description of Capital Stock." - -------------------------------------------------------------------------------- 6 8 - -------------------------------------------------------------------------------- SUMMARY FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE DATA) The following table presents (i) summary historical consolidated financial data of the Company as of the dates and for the periods indicated and (ii) summary pro forma combined and condensed financial data of the Company as of the dates and for the periods indicated giving effect to the events described in the "Unaudited Pro Forma Combined and Condensed Financial Data" included elsewhere herein as though they had occurred on the dates indicated therein. The summary pro forma combined and condensed financial data are not necessarily indicative of operating results or financial position that would have been achieved had these events been consummated on the date indicated and should not be construed as representative of future operating results or financial position. The summary historical consolidated and pro forma combined and condensed financial data should be read in conjunction with the historical consolidated financial statements and related notes thereto of the Company and the historical financial statements and related notes thereto of Keystone, C&C, the Quarry Companies, SMI and Keith Monument, with the "Unaudited Pro Forma Combined and Condensed Financial Statements" and with "Management's Discussion and Analysis of Financial Condition and Results of Operations," included elsewhere in this Prospectus.
PRO FORMA(1) HISTORICAL ---------------------------------- ---------------------------------------------------- SIX MONTHS ENDED YEAR ENDED SIX MONTHS ENDED YEAR ENDED DECEMBER 31, JUNE 30, DECEMBER 31, JUNE 30, ----------------------------- ------------------ ------------ ------------------ 1994 1995 1996 1996 1997(2) 1996 1996 1997 ------- ------- ------- ------- ------- ------------ ------- ------- STATEMENT OF OPERATIONS DATA: Net revenues..................... $34,188 $33,088 $44,669 $19,943 $20,767 $ 73,774 $33,710 $35,253 Gross profit..................... 10,094 10,449 13,406 5,256 5,205 22,294 9,016 9,853 Selling, general and administrative expenses........ 6,049 6,453 9,131 4,649 4,328 15,254 7,338 7,352 ------- ------- ------- ------- ------- -------- ------- ------- Income from operations........... 4,045 3,996 4,275 607 877 7,040 1,678 2,501 Interest expense................. 1,653 1,678 1,723 934 866 1,065 573 565 Other expense.................... -- 564 -- -- -- -- -- -- Income (loss) before provision (benefit) for income taxes..... 2,392 1,754 2,552 (327) 11 5,975 1,105 1,936 Provision (benefit) for income taxes.......................... 577 358 643 (82) 3 1,625 301 527 ------- ------- ------- ------- ------- -------- ------- ------- Net income (loss)................ 1,815 1,396 1,909 (245) 8 4,350 804 1,409 ======= ======= ======= ======= ======= ======== ======= ======= Net income (loss) per share...... .47 .35 .46 (.06) .00 .64 .12 .20 Weighted average number of shares outstanding(3)................. 3,900 4,017 4,106 4,106 4,326 6,768 6,768 7,051
AS OF JUNE 30, 1997 -------------------------- PRO FORMA AS ACTUAL ADJUSTED(4) ------- ------------ BALANCE SHEET DATA: Cash and cash equivalents................................................................ $ 192 $ 2,833 Working capital.......................................................................... 13,232 18,545 Total assets............................................................................. 57,768 86,942 Long-term debt, less current maturities.................................................. 13,897 5,106 Total stockholders' equity............................................................... 19,832 57,727
- --------------- (1) For information regarding the pro forma adjustments made to the Company's historical financial data, see "Unaudited Pro Forma Combined and Condensed Financial Data." (2) Does not include the results of operations of Keystone which was acquired as of June 28, 1997. (3) Includes 362,500 shares of Common Stock issuable upon the exercise of outstanding stock options granted December 31, 1996 and deemed to be outstanding for all periods, an additional 275,000 shares subject to options outstanding granted in 1994 and subsequent periods and 225,000 shares subject to options granted in January, 1996 (and included in 1996 and subsequent periods). See Note 9 to the Company's audited financial statements included elsewhere in this Prospectus. (4) Gives effect to the Reorganization and the consummation of the C&C Acquisition and the Keith Acquisition as if they had occurred on June 30, 1997, as adjusted to reflect the sale of 2,624,518 shares of Class A Common Stock offered hereby by the Company (at an initial public offering price of $17.00 per share) and after deducting underwriting discounts and commissions and estimated offering expenses payable by the Company, the receipt of the net proceeds therefrom and the application of such net proceeds as described in "Use of Proceeds." See "Business -- Recent and Concurrent Acquisitions," "Certain Relationships and Related Transactions" and "Use of Proceeds." - -------------------------------------------------------------------------------- 7 9 RISK FACTORS Prospective investors should carefully consider all of the information set forth in this Prospectus, including the risk factors set forth below. RISKS RELATING TO ACQUISITIONS The Company's growth will depend in large part on its ability to acquire additional retailers, manage expansion, control costs in its operations and consolidate acquisitions into existing operations. The Company will have to review acquired operations, management infrastructure and systems and financial controls, and make any appropriate adjustments or complete reorganizations. Unforeseen capital and operating expenses, or other difficulties, complications and delays frequently encountered in connection with the expansion and integration of acquired operations could inhibit the Company's growth. The full benefits of a significant acquisition will require the integration of operational, administrative, finance, sales and marketing organizations, as well as the coordination of common sales and marketing efforts and the implementation of appropriate operational, financial and management systems and controls. This will require substantial attention from the Company's senior management team. The diversion of management attention required by the acquisition and integration of multiple companies, as in the case of the Acquisitions, as well as other difficulties that may be encountered in the transition and integration process, could have an adverse effect on the revenue and operating results of the Company. There can be no assurance that the Company will identify suitable acquisition candidates, that acquisitions will be consummated on acceptable terms or that the Company will be able to successfully integrate the operations of any acquisition. The Company's ability to continue to grow through the acquisition of additional companies will also be dependent upon the availability of suitable candidates, the Company's ability to attract and retain competent management, and the availability of capital to complete the acquisitions. See "Business -- Business Strategy." The Company intends to finance acquisitions through a combination of its 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 the Company's financial position, and could cause substantial fluctuations in the Company's quarterly and yearly operating results. Also, acquisitions are likely to result in the recording of significant goodwill and intangible assets on the Company's financial statements, the amortization of which would reduce reported earnings in subsequent years. In connection with the Acquisitions, for example, the Company expects to record an annual non-cash amortization charge to pre-tax earnings of approximately $300,000 in each of the next forty years. In addition, in connection with the Acquisitions, the Company has executed acquisition agreements that have limitations on indemnification and no security for indemnification obligations. Moreover, the former owners of the businesses sold to the Company pursuant to the Acquisitions have or will become executive officers of the Company upon the consummation of the Acquisitions. Consequently, the Company may have little or no recourse against the prior owners of the companies acquired in the Acquisitions in the event a breach of a representation or warranty or covenant in such acquisition agreements. Any material misrepresentations, omissions or breaches of covenants could have a material adverse effect on the Company's business, financial condition or results of operations. RELATIONSHIPS WITH RETAILERS The Company's granite memorials have historically been sold to consumers by independent retailers. Accordingly, the Company is dependent on its independent retailers for the successful distribution of its products to the ultimate customer. The Company has no control over the independent retailers' operations, including such matters as retail price, advertising and marketing. Two important components of the Company's growth strategy are to acquire retailers and pursue strategic alliances with funeral homes and cemetery owners, including consolidators. The implementation of these elements of the Company's strategy may be construed by the Company's existing independent retailers as an effort to compete with them, which could adversely affect their relationship with the Company and cause them to decrease or cease their purchases of the Company's products. In addition, the granite memorial retail industry is characterized by 8 10 significant barriers to entry created by local heritage, community presence and tradition. Consequently, the Company could experience difficulty replacing a retailer or entering the retail market itself in the event of a loss of a retailer. There can be no assurance that the Company will be able to maintain its existing relationships or establish new relationships with its independent retailers as it enters the retail market. Disruption in the Company's relationships with independent retailers would have a material adverse effect on the Company's business, financial condition or results of operations. NO RETAIL EXPERIENCE A key component of the Company's growth strategy and the purpose of the Keith Acquisition is for the Company to enter the retail market for granite memorials. The Company has no prior significant retail experience, and, accordingly, is subject to the numerous risks of entering a new business. Such risks include, among others, unanticipated operating problems, lack of experience and significant competition from existing and new retailers. There can be no assurance that the Company will be able to conduct retail operations profitably. RELIANCE ON KEY PERSONNEL The Company's operations and the implementation of its operating and growth strategies, such as integration of the Acquisitions, are management intensive. The Company is substantially dependent upon the abilities and continued efforts of Kurt M. Swenson, the Company's Chairman, President and Chief Executive Officer, and the Company's other senior management. The Company's implementation of its retail operating and growth strategies will be substantially dependent on the abilities and efforts of John E. Keith, who will head the Company's retail operations. The Company's business is also dependent on its ability to continue to attract and retain a highly skilled quarrying and manufacturing workforce, including stone cutters, sand blasters, sculptors and other skilled artisans. The loss of the services of Mr. Swenson or Mr. Keith, other members of the Company's senior management or other highly skilled personnel could have a material adverse effect on the Company's business, financial condition or results of operations. The Company will enter into employment agreements with its principal executive officers prior to consummation of the offering. The Company does not maintain key person life insurance policies on its key personnel, except for policies with respect to Mr. Swenson and Mr. Keith in the amounts of $2.0 million and $300,000, respectively. The Company is or will be the sole beneficiary of these policies. See "Management -- Employment Agreements." COMPETITION The granite memorial industry is highly competitive. The Company competes with other granite quarriers and manufacturers in the sale of granite blocks on the basis of price, color, quality, geographic proximity, service, design availability and availability of supply. All of the Company's colors of granite are subject to competition from 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 who sell finished memorials in North America. The Company competes based upon price, breadth of product line and design availability as well as production capabilities and delivery options. The Company's quarrying and manufacturing competitors include both domestic and international companies, some of which may have greater financial, technical, manufacturing, marketing and other resources than the Company. Additionally, foreign competitors of the Company may have access to lower cost labor and better commercial deposits of memorial grade granite, and may be subject to less restrictive regulatory requirements than the Company. Companies in South Africa, India, China and Portugal manufacture and export finished granite memorials into North America. The competition for retail sales of granite memorials 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 the Company as well as approximately 3,000 independent retailers of granite memorials located outside of cemeteries and funeral homes. There can be no assurance that domestic or foreign competition will not have a material adverse effect on the Company's business, financial condition or results of operations. See "Business -- Competition." 9 11 SEASONALITY; VARIABILITY OF QUARTERLY RESULTS Historically, the Company's operations have experienced certain seasonal patterns. Generally, the Company's net sales are highest in the 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. The Company typically closes certain of its Vermont and Canadian quarries during these months because of increased operating costs attributable to adverse weather conditions. The Company has historically incurred an aggregate net loss during the first six months of each calendar year. The Company's operating results may vary materially from quarter to quarter due to, among other things, acquisitions, changes in product mix and limitations on the timing of price increases, making quarterly year-to-year comparisons less meaningful. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Seasonality." CREMATION TRENDS There is an increasing trend toward cremation in the United States. According to the Cremation Association of North America ("CANA"), cremation was used in approximately 22% of the deaths in the United States in 1996, compared to approximately 10% in 1980, and CANA expects this rate to rise to 29% by 2010. To the extent increases in cremation rates result in decreases in memorialization rates, this decrease could have a material adverse effect on the Company's business, financial condition or results of operations. MEMORIALIZATION TRENDS The Company's business is subject to the risk that memorialization rates may decline over time. Certain cemeteries have in the past and may in the future limit the use of granite memorials as a memorialization option. To the extent that general memorialization rates or the willingness of cemeteries to accept granite memorials declines, this decline could have a material adverse effect on the Company's business, financial condition or results of operations. EFFECT OF CONSUMER SPENDING The success of the Company's operations depends to a significant extent upon a number of factors relating to discretionary consumer spending, including economic conditions affecting disposable consumer income such as employment, business conditions, taxation and interest rates. There can be no assurance that consumer spending will not be affected by adverse economic conditions, thereby adversely affecting the Company's business, financial condition or results of operations. OPERATING RISKS The Company's quarry and manufacturing operations are subject to numerous risks and hazards inherent in those industries, including among others, unanticipated surface or underground conditions, varying memorial grade granite recovery rates due to natural cracks and other imperfections in granite quarries, equipment failures, accidents and worker injuries, labor issues, weather conditions and events, unanticipated transportation costs and price fluctuations. As a result, actual costs and expenditures, production quantities and delivery dates, as well as revenues, may differ materially from those anticipated, which could have a material adverse effect on the Company's business, financial condition or results of operations. RISK OF INTERNATIONAL OPERATIONS The Company derived approximately 28.9% of its revenues in fiscal 1996 from sales outside the United States, with approximately 16.9% of revenues in fiscal 1996 from sales in Canada by the Company's Canadian subsidiaries. In prior years such percentage represented by international sales has been higher. 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. 10 12 CYCLICAL NATURE OF ANCILLARY PRODUCT SALES The markets for the Company's 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. Accordingly, sales of these products may decline significantly upon a downturn in, or as a result of uncertainties regarding future economic conditions that generally affect, such industries. No assurance can be given that changes in the industries to which the Company sells its precision products will not adversely affect the Company's business, financial condition or results of operations. CONTROL BY CERTAIN STOCKHOLDERS Upon consummation of this offering and the Acquisitions, Kurt M. Swenson and his brother, Kevin C. Swenson, will collectively have 56.3% of the total voting power of all outstanding shares of 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. See "Principal and Selling Stockholders" and "Description of Capital Stock." REGULATORY MATTERS The Company's 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 ("OSHA"), the Mine Safety and Health Administration and similar state and Canadian authorities. The Company's operations are also subject to extensive laws, and regulations administered by the United States Environmental Protection Agency (the "EPA") and similar state and Canadian authorities, for the protection of the environment, including but not limited to those relating to air and water quality, 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 the Company to modify or curtail its operations. The Company cannot predict the effect of such laws, regulations or regulatory interpretations on its business, financial condition or results of operations. While the Company expects to be able to continue to comply with existing environmental and occupational health and safety laws and regulations, any material non-compliance could have a material adverse affect on the Company's business, financial condition or results of operations. See "Business -- Regulation." SHARES ELIGIBLE FOR FUTURE SALE Sales of a substantial amount of Class A Common Stock in the public market following this offering could adversely affect the market price of the Class A Common Stock. Upon completion of this offering and the C&C Acquisition and the Keith Acquisition, the Company will have 6,487,957 shares of Common Stock (6,922,957 shares if the Underwriter's over-allotment option is exercised in full) outstanding (assuming an initial public offering price of $17.00 per share). In addition, an aggregate of 1,500,000 shares of Common Stock will be reserved for issuance to employees and directors of the Company under the 1994 Plan, 1,245,752 of which shares are currently, or will upon consummation of this offering be, subject to outstanding options. See "Shares Eligible for Future Sale." Such options are currently or will upon consummation of this offering be vested and immediately exercisable with respect to 327,500 shares of Common Stock, all of which shares issued upon such exercise would be eligible for resale subject to compliance with Rule 701 and to the "lock-up" agreements with Raymond James & Associates, Inc. described below, if applicable. The 2,900,000 shares of Class A Common Stock (3,335,000 shares if the Underwriter's over-allotment option is exercised in full) offered hereby will be freely tradable in the United States without restriction or further registration under the Securities Act of 1933, as amended (the "Securities Act"), unless purchased or held by "affiliates" (as such term is defined under the Securities Act) of the Company. All shares of Class B Common Stock outstanding upon completion of the offering will be "restricted securities" within the meaning of Rule 144 under the 11 13 Securities Act ("Rule 144") and will not be eligible for resale to the public pursuant to Rule 144 until the first anniversary of the consummation of the offering. The Company, its executive officers and directors, and holders of more than 2% of the Common Stock prior to the consummation of the offering, have agreed with Raymond, James & Associates, Inc. not to sell, offer to sell, contract to sell, pledge or otherwise dispose of or transfer any shares of Common Stock, or any securities convertible into or exchangeable or exercisable for, or any rights to purchase or acquire, Common Stock for a period of 180 days following the date of this Prospectus without the prior written consent of Raymond James & Associates, Inc., other than, in the case of the Company, the issuance of options to purchase Common Stock or shares of Common Stock issuable upon the exercise thereof, issuances of Common Stock in connection with the C&C Acquisition and the Keith Acquisition and other issuances of capital stock of the Company in connection with other acquisitions, provided such shares of Common Stock issued upon the exercise of options and such shares of capital stock issued in connection with any such other acquisitions shall not be transferable prior to the end of the aforesaid 180-day period. Raymond James & Associates, Inc. may, in its sole discretion and at any time without notice, release all or any portion of the shares subject to such lock-up agreements. See "Shares Eligible for Future Sale" and "Underwriting." NO PRIOR MARKET FOR CLASS A COMMON STOCK; OFFERING PRICE Prior to this offering, there has been no public market for the Class A Common Stock, and there can be no assurance that an active trading market will develop or, if developed, that such market will be sustained. The initial public offering price of the Class A Common Stock will be determined through negotiations between the Company and the representative of the Underwriters. In addition, the Company believes that factors such as quarterly fluctuations in the financial results of the Company, as well as developments that affect the Company's industry in general, the overall economy and the financial markets could cause the price of the Class A Common Stock to fluctuate substantially. ANTI-TAKEOVER PROVISIONS The Company's Certificate of Incorporation and By-laws contain certain provisions that may have the effect of discouraging, delaying or preventing a change in control of the Company or unsolicited acquisition proposals that a stockholder might consider favorable. Certain of these provisions: (i) grant ten votes per share to each share of Class B Common Stock; (ii) divide the Board of Directors into three classes, each of which will have a different three-year term; (iii) provide that the stockholders may remove directors from office only for cause and by a supermajority vote; (iv) provide that special meetings of the stockholders may be called only by the Board of Directors or certain Company officers and not by stockholders; (v) establish certain advance notice procedures for nomination of candidates for election as directors and for stockholder proposals to be considered at annual stockholders' meetings; and (vi) authorize the issuance of preferred stock with such designation, rights and preferences as may be determined, from time to time by the Board of Directors. 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 the Company's Common Stock. Certain of these provisions, as well as certain provisions of Delaware corporation law, may have the effect of discouraging, delaying or preventing a change in control of the Company or unsolicited acquisition proposals. See "Description of Capital Stock -- Antitakeover Effects of Provisions of the Charter and By-Laws and of Delaware Law." DILUTION Investors purchasing shares of Class A Common Stock in this offering will experience immediate and substantial dilution in net tangible book value per share of $10.14 (assuming an initial public offering price of $17.00 per share). See "Dilution." DIVIDENDS The Company intends to retain its cash for the continued development of its business and currently does not intend to pay cash dividends on the Common Stock in the foreseeable future. See "Dividend Policy." 12 14 FORWARD-LOOKING STATEMENTS This Prospectus contains certain forward-looking statements relating to, among other things, future results of operations, growth plans, sales, capital requirements and general industry and business conditions applicable to the Company. These forward-looking statements are based largely on the Company's current expectations and are subject to a number of risks and uncertainties. Actual results could differ materially from those implied by these forward-looking statements. Important factors to consider in evaluating such forward-looking statements include changes in external competitive market factors, changes in the Company's business strategy or an inability to execute its strategy due to unanticipated changes in the Company's industry or the economy in general and various competitive factors that may prevent the Company from competing successfully in existing or new markets. In light of these risks and uncertainties, many of which are described in further detail above, there can be no assurance that the forward-looking statements contained in this Prospectus will in fact be realized. 13 15 USE OF PROCEEDS The net proceeds to the Company from the sale of shares of Class A Common Stock offered by the Company hereby are estimated to be approximately $40.0 million (approximately $46.9 million if the Underwriters' over-allotment option is exercised in full), assuming an initial public offering price of $17.00 per share, after deducting estimated underwriting discounts and commissions and offering expenses. Of the net proceeds to the Company from this offering, (i) approximately $7.4 million will be used to fund the C&C Acquisition, consisting of $6.6 million in cash purchase price and approximately $780,000 to repay outstanding indebtedness of C&C; (ii) approximately $5.4 million will be used to repay outstanding indebtedness of the Quarry Companies and SMI; (iii) $14.9 million will be used to fund the Keith Acquisition, consisting of $13.1 million in cash purchase price and $1.8 million to repay outstanding indebtedness of Keith Monument assumed by the Company; and (iv) approximately $11.8 million will be used to repay indebtedness outstanding under certain of the Company's existing credit facilities, consisting of $2.7 million assumed or incurred in connection with the Keystone Acquisition and the balance of which was incurred for prior acquisitions, plant improvement and working capital. Such indebtedness under such existing credit facilities matures on various dates in 1998 and 1999, and bears interest at various rates per annum ranging from prime plus .25% to prime plus 1.25%. The maturity dates and interest rates of the indebtedness to be repaid by the Company in connection with the C&C Acquisition and Keith Acquisition are: (i) for the indebtedness of C&C, maturity dates of May and November 1998 and interest rates ranging from prime plus 1.00% to 9.00%; (ii) for the indebtedness of the Quarry Companies and SMI, maturity dates of May 1997 and June 2000 and interest rates ranging from prime plus .45% to 10.50%; and (iii) for the indebtedness of Keith Monument, a maturity date of March 2004 and an interest rate of 9.00%. See "Business -- Recent and Concurrent Acquisitions." The Company has received a commitment letter for a new $50 million credit facility, subject to the consummation of the offering. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources." The Company intends to use its increased borrowing capacity resulting from the intended debt repayment to finance the Company's expansion, including possible acquisitions, and for working capital and general corporate purposes. Although management regularly reviews acquisition prospects that would augment or complement the Company's existing operations, including the Company's retailing operations, the Company does not presently have any agreement with respect to any acquisition, other than the C&C Acquisition and the Keith Acquisition. The Company will not receive any proceeds from the sale of Class A Common Stock offered by the Selling Stockholders. DIVIDEND POLICY The Company does not anticipate paying cash dividends in the foreseeable future, but intends to retain any future earnings for reinvestment in its business. Any future determination to pay cash dividends will be at the discretion of the Board of Directors and will be dependent upon the Company's financial condition, results of operations, restrictions contained in credit agreements, capital requirements and such other factors as the Board of Directors deems relevant. 14 16 CAPITALIZATION The following table sets forth the borrowings under lines of credit, current portion of long-term debt and capitalization of the Company at June 30, 1997, (i) on a historical basis and (ii) pro forma as adjusted to give effect to the Reorganization, the C&C Acquisition and Keith Acquisition as if they had occurred on June 30, 1997, and to reflect the sale by the Company of 2,624,518 shares of Class A Common Stock offered hereby (at an assumed public offering price of $17.00 per share) and after deducting underwriting discounts and commissions and estimated offering expenses payable by the Company and the application of the estimated net proceeds thereof as described in "Use of Proceeds." This table should be read in conjunction with the historical financial statements and pro forma combined and condensed financial data and the notes thereto included elsewhere in this Prospectus. See also "Use of Proceeds" and "Management's Discussion and Analysis of Financial Condition and Results of Operations."
AS OF JUNE 30, 1997 --------------------- PRO FORMA ACTUAL AS ADJUSTED ------- ----------- (IN THOUSANDS) Borrowings under lines of credit......................................... $ 8,668 $ 8,668 Current portion of long-term debt........................................ 2,844 355 ======= ======= Long-term debt, net of current portion................................... $13,897 $ 5,106 Stockholders' equity: Preferred Stock, par value $.01 per share; 2,500,000 shares authorized, none outstanding; none outstanding pro forma as adjusted............ -- -- Class A Common Stock, par value $.01 per share; 30,000,000 shares authorized, none outstanding; 3,000,000 shares outstanding pro forma as adjusted(1)(2)................................................... -- 30 Class B Common Stock, par value $.01 per share; 15,000,000 shares authorized, 3,763,439 shares outstanding; 3,487,957 shares outstanding pro forma as adjusted(3)................................ 38 35 Additional paid-in capital............................................. 9,174 50,870 Retained earnings...................................................... 10,675 6,847 Other.................................................................. (55) (55) ------- ------- Total stockholders' equity.......................................... 19,832 57,727 ------- ------- Total capitalization........................................... $33,729 $62,833 ======= =======
- --------------- (1) Does not include an aggregate of 862,500 shares of Class B Common Stock (which are convertible on a share-for-share basis into Class A Common Stock) issuable upon the exercise of outstanding options outstanding under the 1994 Plan and an aggregate of 383,252 shares of Class A Common Stock issuable upon the exercise of options to be granted under the 1994 Plan in connection with the Acquisitions and to two non-employee directors who will assume their positions upon consummation of the offering. (2) The pro forma as adjusted number includes the concurrent conversion of 275,482 shares of Class B Common Stock into Class A Common Stock and sale thereof by the Selling Stockholders. See "Principal and Selling Stockholders." (3) Does not include an aggregate of 862,500 shares of Class B Common Stock (which are convertible on a share-for-share basis into Class A Common Stock) issuable upon the exercise of outstanding options outstanding under the 1994 Plan. See "Management -- Incentive Plans." 15 17 DILUTION The net tangible book value of the Company as of June 30, 1997 was $17.7 million, or $4.71 per share of Common Stock. Net tangible book value per share is determined by dividing total tangible assets less total liabilities of the Company by the total number of outstanding shares of Common Stock. After giving effect to the sale of the 2,624,518 shares of Class A Common Stock offered by the Company hereby (assuming an initial public offering price of $17.00 per share), after deducting the estimated underwriting discount and estimated expenses to be paid by the Company and the application of the estimated net proceeds as set forth in "Use of Proceeds," the pro forma net tangible book value of the Company at June 30, 1997 would have been $43.8 million or $6.86 per share. This represents an immediate increase in net tangible book value of $2.15 per share to existing stockholders and an immediate dilution of $10.14 per share to new investors. The following table illustrates this dilution per share: Assumed initial public offering price per share....................... $17.00 Net tangible book value per share as of June 30, 1997............... $4.71 Increase in net tangible book value per share attributable to new investors........................................................ 2.15 Pro forma net tangible book value per share after the offering........ 6.86 ------ Dilution per share to new investors................................... $10.14 ======
16 18 SELECTED CONSOLIDATED FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE DATA) The selected consolidated historical financial data presented below under the captions "Statement of Operations Data" and "Balance Sheet Data" for and as of the end of each of the years in the five-year period ended December 31, 1996 are derived from the consolidated financial statements of the Company, which financial statements have been audited by KPMG Peat Marwick LLP, independent certified public accountants. The selected consolidated historical financial data for and as of the end of the six month periods ended June 30, 1996 and 1997 have been derived from unaudited consolidated financial statements which, in the opinion of management, reflect all adjustments, consisting of normal recurring adjustments, necessary to present fairly the financial information for such periods and as of such dates. The consolidated historical results for the six months ended June 30, 1996 and 1997 are not necessarily indicative of results for a full fiscal year. The consolidated financial statements as of December 31, 1995 and 1996 and for each of the years in the three-year period ended December 31, 1996, and the auditors' report thereon and as of June 30, 1997 and for the six months ended June 30, 1996 and 1997, are included elsewhere in this Prospectus. The following selected consolidated financial data should be read in conjunction with the Consolidated Financial Statements of the Company, including the notes thereto, and "Management's Discussion and Analysis of Financial Condition and Results of Operations," appearing elsewhere herein.
SIX MONTHS ENDED YEARS ENDED DECEMBER 31, JUNE 30, ----------------------------------------------- ----------------- 1992 1993 1994 1995 1996 1996 1997(2) ------- ------- ------- ------- ------- ------- ------- STATEMENT OF OPERATIONS DATA: Net revenues: Manufacturing....................................... $18,383 $17,485 $17,299 $17,793 $32,586 $14,827 $15,278 Quarrying........................................... 15,457 13,522 16,889 15,295 12,083 5,116 5,489 ------- ------- ------- ------- ------- ------- ------- Total net revenues................................ 33,840 31,007 34,188 33,088 44,669 19,943 20,767 Gross profit: Manufacturing....................................... 4,008 2,489 4,050 4,345 8,248 3,603 3,640 Quarrying........................................... 6,474 4,294 6,044 6,104 5,158 1,653 1,565 ------- ------- ------- ------- ------- ------- ------- Total gross profit................................ 10,482 6,783 10,094 10,449 13,406 5,256 5,205 Selling, general and administrative expenses.......... 7,377 6,851 6,049 6,453 9,131 4,649 4,328 ------- ------- ------- ------- ------- ------- ------- Income (loss) from operations......................... 3,105 (68) 4,045 3,996 4,275 607 877 Interest expense...................................... 1,622 1,505 1,653 1,678 1,723 934 866 Other expenses........................................ -- 2,376 -- 564 -- -- -- Income (loss) before provision (benefit) for income taxes............................................... 1,483 (3,949) 2,392 1,754 2,552 (327) 11 Provision (benefit) for income taxes.................. 58 (31) 577 358 643 (82) 3 ------- ------- ------- ------- ------- ------- ------- Net income (loss)..................................... $ 1,425 $(3,638) $ 1,815 $ 1,396 $ 1,909 $ (245) $ 8 ======= ======= ======= ======= ======= ======= ======= Net income (loss) per share........................... .38 (.96) .47 .35 .46 (.06) .00 Weighted average number of shares outstanding(3)...... 3,783 3,783 3,900 4,017 4,106 4,106 4,326 PRO FORMA STATEMENT OF OPERATIONS DATA(1): Income before provision for income taxes.............. $ 5,975 $ 1,105 $ 1,936 Provision for income taxes............................ 1,625 301 527 ------- ------- ------- Net income............................................ 4,350 804 1,409 ======= ======= ======= Net income per share.................................. .64 .12 .20 Weighted average number of shares outstanding(3)...... 6,768 6,768 7,051
AS OF DECEMBER 31, AS OF JUNE 30, ----------------------------------------------- -------------- 1992 1993 1994 1995 1996 1997 ------- ------- ------- ------- ------- -------------- BALANCE SHEET DATA: Cash and cash equivalents................................. $ 95 $ 92 $ 394 $ 1,995 $ 763 $ 192 Working capital........................................... 8,478 7,605 13,668 13,691 13,286 13,232 Total assets.............................................. 40,810 37,179 42,529 48,101 47,995 57,768 Total long-term debt, net of current maturities........... 13,067 13,162 16,655 14,657 13,054 13,897 Total stockholders' equity................................ 12,528 8,849 10,686 15,479 17,371 19,832
- --------------- (1) For information regarding the pro forma adjustments made to the Company's historical financial data, see "Unaudited Pro Forma Combined and Condensed Financial Data." (2) Does not include the results of operations of Keystone which was acquired as of June 28, 1997. (3) Includes shares of Common Stock issuable upon the exercise of outstanding stock options granted under the 1994 Plan, as described in Note 1(n) to the Company's audited financial statements included elsewhere in this Prospectus, and excludes 263,441 shares of Class B Common Stock issued on June 30, 1997 pursuant to the Keystone Acquisition. 17 19 UNAUDITED PRO FORMA COMBINED AND CONDENSED FINANCIAL DATA The following unaudited pro forma combined and condensed statements of operations for the year ended December 31, 1996 and for the six months ended June 30, 1997 and 1996 reflect the consolidated historical accounts of the Company for those periods, adjusted to give pro forma effect to the Reorganization, the Acquisitions and this offering, as if such transactions had occurred on January 1, 1996. The following unaudited pro forma combined and condensed balance sheet as of June 30, 1997 reflects the consolidated historical accounts of the Company as of that date, adjusted to give pro forma effect to the Reorganization, the C&C Acquisition and the Keith Acquisition and this offering, as if such transactions had occurred on June 30, 1997. The unaudited pro forma financial data and accompanying notes should be read in conjunction with the Consolidated Financial Statements of the Company and the related notes as well as the financial statements and related notes of Keystone, C&C, the Quarry Companies, SMI and Keith Monument, all of which are included elsewhere in this Prospectus. The Company believes that the assumptions used in the following statements provide a reasonable basis on which to present the pro forma financial data. The pro forma financial data is provided for informational purposes only and should not be construed to be indicative of the Company's financial condition or results of operations had the transactions and events described above been consummated on the dates assumed and are not intended to project the Company's financial condition on any future date or results of operations for any future period. 18 20 UNAUDITED PRO FORMA COMBINED BALANCE SHEET AS OF JUNE 30, 1997 (IN THOUSANDS)
QUARRY OFFERING KEITH COMPANIES & ADJUSTMENTS PRO FORMA PRO FORMA COMPANY C&C MONUMENT SMI (A) ADJUSTMENTS AS ADJUSTED ------- ------ -------- ----------- ----------- ----------- ----------- ASSETS: Current assets: Cash and cash equivalents....... $ 192 $ 160 $1,783 $ 838 $40,023 $ (40,163)(A),(E) $ 2,833 Trade receivables, net.......... 11,249 753 1,003 1,149 14,154 Due from affiliates............. 5,375 192 49 (192) (3,690)(E),(F),(G) 1,734 Inventories..................... 13,374 1,141 1,192 611 202(E) 16,520 Current portion of notes receivable-related party...... 90 (90)(E) Current portion of notes receivable-other.............. 29 29 Deferred tax assets............. 467 10 477 Other current assets............ 837 21 98 174 1,130 ------- ------ ------ ------- ------- -------- ------- Total current assets.......... 31,494 2,267 4,254 2,580 40,023 (43,741) 36,877 ------- ------ ------ ------- ------- -------- ------- Net property, plant and equipment....................... 21,230 989 1,393 4,784 5,816(E),(F) 34,212 Other assets: Cash surrender value of life insurance, net................ 959 4 164 1,127 Notes receivable-related party, excluding current portion..... 401 (401)(E) Notes receivable-other, excluding current portion..... 16 16 Goodwill, net................... 1,731 825 1,806 9,349(E),(F) 13,711 Covenant not-to-compete......... 388 (388)(E) Debt issuance costs, net........ 89 (89)(B) Organization costs, net......... 190 (89)(C) 101 Deferred tax assets............. 543 (369) 174 Intangible pension asset........ 93 93 Investments in and advances to affiliated company............ 1,408 824 (2,033)(F) 199 Other investments............... 31 319 350 Other........................... 209 (127)(E) 82 ------- ------ ------ ------- ------- -------- ------- Total other assets............ 5,044 828 2,322 1,437 6,222 15,853 ------- ------ ------ ------- ------- -------- ------- Total assets.............. $57,768 $4,084 $7,969 $ 8,801 $40,023 $ (31,703) $86,942 ======= ====== ====== ======= ======= ======== ======= LIABILITIES AND STOCKHOLDERS' EQUITY: Current liabilities: Borrowings under lines of credit........................ 8,668 8,668 Current installments of long-term debt................ 2,844 278 648 (3,415)(A),(E) 355 Accounts payable................ 2,066 148 96 656 (301)(F) 2,665 Accrued expenses................ 2,358 85 629 12 (72)(E) 3,012 Dividends payable............... 86 86 Income taxes payable............ 131 (16) 115 Current portion of deferred income........................ 400 400 Customer deposits............... 1,795 845 391 3,031 ------- ------ ------ ------- ------- -------- ------- Total current liabilities............. 18,262 233 1,918 1,707 (3,788) 18,332 ------- ------ ------ ------- ------- -------- ------- Long-term debt, excluding current installments.......... 13,897 786 1,840 5,446 (16,863)(A),(D),(G) 5,106 Deferred compensation........... 3,566 3,566 Deferred income, excluding current portion............... 200 200 Accrued pension cost............ 1,504 1,504 Accrued postretirement benefit cost.......................... 507 507 ------- ------ ------ ------- ------- -------- ------- Total liabilities......... 37,936 1,019 3,758 7,153 (20,651) 29,215 ------- ------ ------ ------- ------- -------- ------- Stockholders' equity: Common stock.................... 38 21 180 5,502 40,023 (4,003)(D),(F) 41,761 Additional paid-in capital...... 9,174 9,174 Retained earnings............... 10,675 3,044 4,037 (3,854) (7,055)(B),(C),(F) 6,847 Treasury stock.................. (6) 6(F) Cumulative translation adjustment.................... (55) (55) ------- ------ ------ ------- ------- -------- ------- Total stockholders' equity.... 19,832 3,065 4,211 1,648 40,023 (11,052) 57,727 ------- ------ ------ ------- ------- -------- ------- Total liabilities and stockholders' equity.... $57,768 $4,084 $7,969 $ 8,801 $40,023 $ (31,703) $86,942 ======= ====== ====== ======= ======= ======== =======
19 21 - --------------- The Unaudited Pro Forma Combined Balance Sheet as of June 30, 1997 gives effect to the Reorganization and the consummation of the C&C Acquisition and the Keith Acquisition as if they had occurred on June 30, 1997 as follows: (A) Reflects this offering and the application of the proceeds therefrom as follows: Issuance of the stock.............................................. $44,617 Expenses for issuance of the stock................................. (4,594) ------- Net proceeds....................................................... 40,023 Cash paid to sellers............................................... (19,212) Cash paid to retire sellers debt................................... (2,263) Retirement of debt assumed......................................... (6,186) Retirement of current installments of long-term debt............... (2,674) Retirement of long-term debt....................................... (9,171) ------- Remaining proceeds................................................. 517 === (B) Reflects the elimination of debt issuance costs.................... (89) (C) Reflects the elimination of prior organization costs............... (89) (D) Represents the Acquisitions:
KEITH C&C MONUMENT TOTAL ------- -------- ------- Cash paid to sellers......................... $ 6,137 $13,075 $19,212 Stock issued to sellers...................... 200 1,500 1,700 Cash paid to retire sellers debt............. 463 1,800 2,263 Bank debt assumed(1)......................... 6,186 -- 6,186 ------- ------- ------- Total purchase price(1).................... $12,986 $16,375 $29,361 ======= ======= ======= (E) The Acquisitions are accounted for under the purchase method of accounting in accordance with Accounting Principles Board Opinion No. 16, "Business Combinations." The purchase price is allocated first to the tangible and identifiable assets and liabilities of the acquired companies based upon preliminary estimates of their fair market values, with the remainder allocated to goodwill:
KEITH C&C MONUMENT TOTAL ------- -------- ------- Net purchase price........................... $ 6,800 $16,375 $23,175 Book value of net assets on June 30, 1997.. 3,065 4,211 7,276 Net assets excluded or eliminated at Acquisition............................... (929) (710) (1,639) ------- ------- ------- Book value of tangible net assets acquired................................... 2,136 3,501 5,637 ------- ------- ------- Increase in basis............................ $ 4,664 $12,874 $17,538 ======= ======= ======= Allocation of increase in basis: Increase in inventory value to convert LIFO to fair value............................ -- 202 202 Step-up basis of property, plant and equipment to fair market value........... 4,342 1,014 5,356 Increase in goodwill......................... 322 11,658 11,980 ------- ------- ------- $ 4,664 $12,874 $17,538 ======= ======= ======= (F) Reflects the elimination of investments in and advances between C&C, the Quarry Companies and SMI pursuant to purchase accounting. (G) Includes the elimination of $3,340,000 due from Swenson Granite Company, Inc., an affiliate, assumed by the Company during the Reorganization and the assumption of a $310,000 note payable that was the obligation of Swenson Granite Company, Inc. prior to the Reorganization.
-------------------- (1) Includes the assumption of the total debt of the Quarry Companies and SMI of $5.4 million in conjunction with the acquisition of the remaining 50% that was not acquired pursuant to the Keystone Acquisition. 20 22 UNAUDITED PRO FORMA COMBINED AND CONDENSED STATEMENT OF OPERATIONS YEAR ENDED DECEMBER 31, 1996 (IN THOUSANDS, EXCEPT PER SHARE DATA)
HISTORICAL ----------------------------------- ELBERTON KEITH PRO FORMA PRO FORMA COMPANY COMPANIES(F) MONUMENT ADJUSTMENTS AS ADJUSTED ------- ------------ -------- ----------- ----------- STATEMENT OF OPERATIONS DATA: Net revenues: Manufacturing.................................. $32,586 $ 16,446 $ (150)(A) $48,882 Quarrying...................................... 12,083 5,545 17,628 Retailing...................................... $7,264 7,264 ------- -------- ------ ------- ------- Total net revenues........................... 44,669 21,991 7,264 (150) 73,774 Gross profit: Manufacturing.................................. 8,248 2,116 10,364 Quarrying...................................... 5,158 1,814 126(B) 7,098 Retailing...................................... 4,832 4,832 ------- -------- ------ ------- ------- Total gross profit........................... 13,406 3,930 4,832 126 22,294 Selling, general and administrative expenses..... 9,131 2,868 3,713 (458)(C) 15,254 ------- -------- ------ ------- ------- Income from operations........................... 4,275 1,062 1,119 584 7,040 ------- -------- ------ ------- ------- Interest expense................................. 1,723 643 (1,301)(D) 1,065 Income before provision (benefit) for income taxes.......................................... 2,552 419 1,119 1,885 5,975 Provision (benefit) for income taxes............. 643 156 (24) 850(E) 1,625 ------- -------- ------ ------- ------- Net income....................................... $ 1,909 $ 263 $1,143 $ 1,035 $ 4,350 ======= ======== ====== ======= ======= Net income per share............................. .64 Weighted average number of shares outstanding.... 6,768
- --------------- The Unaudited Pro Forma Combined and Condensed Statement of Operations for the year ended December 31, 1996 gives effect to the Reorganization and the consummation of the C&C Acquisition and the Keith Acquisition as if they had occurred on January 1, 1996 as follows: (A) To eliminate intercompany sales........................................................... $ (150) (B) Reflects the closure of the Caprice quarry................................................ 126 (C) Reflects the following: Reversal of debt issuance costs....................................................... (70) Reversal of organization costs........................................................ (33) Amortization of goodwill.............................................................. 300 Reduction in salary expense........................................................... (620) Selling, general and administrative expenses related to the Caprice quarry closure.... (35) ------- (458) (D) Reflects the elimination of interest expense.............................................. (1,301)
(E) Reflects the net additional income tax provision as a result of the above adjustments, at an effective tax rate of 27.2%, and provides for income tax expense for companies previously taxed as Subchapter S corporations. (F) Following is a summary of the Elberton Companies operations for the year ended December 31, 1996:
QUARRY COMPANIES & SMI C&C KEYSTONE TOTAL ----------- ------ -------- ------- Net revenues: Manufacturing...................................... $ 1,257 $5,885 $9,304 $16,446 Quarrying.......................................... 5,545 -- -- 5,545 Retailing.......................................... -- -- -- -- ------- ------ ------ ------- Total net revenues........................... 6,802 5,885 9,304 21,991 Gross profit: Manufacturing...................................... 219 1,132 765 2,116 Quarrying.......................................... 1,814 -- -- 1,814 Retailing.......................................... -- -- -- -- ------- ------ ------ ------- Total gross profit........................... 2,033 1,132 765 3,930 Selling, general and administrative expenses......... 1,280 669 919 2,868 ------- ------ ------ ------- Income (loss) from operations........................ 753 463 (154) 1,062 ------- ------ ------ ------- Interest expense..................................... 462 65 116 643 Income (loss) before provision (benefit) for income taxes.............................................. 291 398 (270) 419 Provision (benefit) for income taxes................. 156 -- -- 156 ------- ------ ------ ------- Net income (loss).................................... $ 135 $ 398 $ (270) $ 263 ======= ====== ====== =======
21 23 UNAUDITED PRO FORMA COMBINED AND CONDENSED STATEMENT OF OPERATIONS SIX MONTHS ENDED JUNE 30, 1997 (IN THOUSANDS, EXCEPT PER SHARE DATA)
HISTORICAL ------------------------------------- ELBERTON KEITH PRO FORMA PRO FORMA COMPANY COMPANIES(F) MONUMENT ADJUSTMENTS AS ADJUSTED ------- ------------ -------- ----------- ----------- STATEMENT OF OPERATIONS DATA: Net revenues: Manufacturing................................ $15,278 $ 8,365 $ (150)(A) $23,493 Quarrying.................................... 5,489 2,912 8,401 Retailing.................................... $3,359 3,359 ------- ------ ------ ------ ------- Total net revenues......................... 20,767 11,277 3,359 (150) 35,253 Gross profit: Manufacturing................................ 3,640 993 4,633 Quarrying.................................... 1,565 1,209 175(B) 2,949 Retailing.................................... 2,271 2,271 ------- ------ ------ ------ ------- Total gross profit......................... 5,205 2,202 2,271 175 9,853 Selling, general and administrative expenses... 4,328 1,370 1,883 (229)(C) 7,352 ------- ------ ------ ------ ------- Income from operations......................... 877 832 388 404 2,501 Interest expense............................... 866 389 (690)(D) 565 Income before provision for income taxes....... 11 443 388 1,094 1,936 Provision for income taxes..................... 3 524(E) 527 ------- ------ ------ ------ ------- Net income..................................... $ 8 $ 443 $ 388 $ 570 $ 1,409 ======= ====== ====== ====== ======= Net income per share........................... .20 Weighted average number of shares outstanding.................................. 7,051
- --------------- The Unaudited Pro Forma Combined and Condensed Statement of Operations for the six months ended June 30, 1997 gives effect to the Reorganization and the consummation of the C&C Acquisition and the Keith Acquisition as if they had occurred on January 1, 1997 as follows: (A) To eliminate intercompany sales.............................................................. $ (150) (B) Reflects the closure of the Caprice quarry................................................... 175 (C) Reflects the following: Reversal of debt issuance costs.............................................................. (35) Reversal of organization costs............................................................... (17) Amortization of goodwill..................................................................... 150 Reduction in salary expense.................................................................. (310) Selling, general and administrative expenses related to the Caprice quarry closure........... (17) ---- (229) (D) Reflects the elimination of interest expense................................................. (690)
(E) Reflects the net additional income tax provision as a result of the above adjustments, at an effective tax rate of 27.2%, and provides for income tax expense for companies previously taxed as Subchapter S corporations. (F) Following is a summary of the Elberton Companies operations for the six months ended June 30 , 1997:
QUARRY COMPANIES & SMI C&C KEYSTONE TOTAL --------------- ------ -------- ------ Net revenues: Manufacturing......................................... $ 649 $3,061 $4,654 $ 8,365 Quarrying............................................. 2,912 -- -- 2,912 Retailing............................................. -- -- -- -- ------- ------ ------ ------- Total net revenues.............................. 3,561 3,601 4,654 11,277 Gross profit: Manufacturing......................................... 129 679 186 993 Quarrying............................................. 1,209 -- -- 1,209 Retailing............................................. -- -- -- -- ------- ------ ------ ------- Total gross profit.............................. 1,338 679 186 2,202 Selling, general and administrative expenses............ 634 375 361 1,370 ------- ------ ------ ------- Income (loss) from operations........................... 704 304 (175) 832 ------- ------ ------ ------- Interest expense........................................ 201 35 154 389 ------- ------ ------ ------- Income (loss) before provision for income taxes......... 503 269 (329) 443 Provision for income taxes.............................. -- -- -- -- ------- ------ ------ ------- Net income.............................................. $ 503 $ 269 $ (329) $ 443 ======= ====== ====== =======
22 24 UNAUDITED PRO FORMA COMBINED AND CONDENSED STATEMENT OF OPERATIONS SIX MONTHS ENDED JUNE 30, 1996 (IN THOUSANDS, EXCEPT PER SHARE DATA)
HISTORICAL ------------------------------------- ELBERTON KEITH PRO FORMA PRO FORMA COMPANY COMPANIES(F) MONUMENT ADJUSTMENTS AS ADJUSTED ------- ------------ -------- ----------- ----------- STATEMENT OF OPERATIONS DATA: Net revenues: Manufacturing.............................. $14,827 $ 8,050 $ (80)(A) $22,797 Quarrying.................................. 5,116 2,985 8,101 Retailing.................................. $2,812 2,812 ------- ------- ------ ----- ------- Total net revenues....................... 19,943 11,035 2,812 (80) 33,710 Gross profit: Manufacturing.............................. 3,603 936 4,539 Quarrying.................................. 1,653 937 64(B) 2,654 Retailing.................................. 1,823 1,823 ------- ------- ------ ----- ------- Total gross profit....................... 5,256 1,873 1,823 64 9,016 Selling, general and administrative expenses................................... 4,649 1,376 1,545 (233)(C) 7,338 ------- ------- ------ ----- ------- Income from operations....................... 607 497 278 297 1,678 ------- ------- ------ ----- ------- Interest expense............................. 934 340 $(701)(D) 573 Income (loss) before provision (benefit) for income taxes............................... (327) 157 278 998 1,105 Provision (benefit) for income taxes......... (82) 383(E) 301 ------- ------- ------ ----- ------- Net income (loss)............................ $ (245) $ 157 $ 278 $ 615 $ 804 ======= ======= ====== ===== ======= Net income per share......................... .12 Weighted average number of shares outstanding................................ 6,768
- --------------- The Unaudited Pro Forma Combined and Condensed Statement of Operations for the six months ended June 30, 1996 gives effect to the Reorganization and the consummation of the C&C Acquisition and the Keith Acquisition as if they had occurred on January 1, 1996 as follows: (A) To eliminate intercompany sales.................................................................. $ (80) (B) Reflects the closure of the Caprice quarry....................................................... 64 (C) Reflects the following: Reversal of debt issuance costs.................................................................. (35) Reversal of organization costs................................................................... (17) Amortization of goodwill......................................................................... 150 Reduction in salary expense...................................................................... (310) Selling, general and administrative expenses related to the Caprice quarry closure............... (21) ----- (233) (D) Reflects the elimination of interest expense..................................................... (701) (E) Reflects the net additional income tax provision as a result of the above adjustments, at an effective tax rate of 27.2%, and provides for income tax expense for companies previously taxed as Subchapter S corporations. (F) Following is a summary of the Elberton Companies operations for the six months ended June 30, 1996:
QUARRY COMPANIES & SMI C&C KEYSTONE TOTAL ----------- ------ -------- ------- Net revenues: Manufacturing..................................... $ 574 $2,861 $4,615 $ 8,050 Quarrying......................................... 2,985 -- -- 2,985 Retailing......................................... -- -- -- -- ------ ------ ------ ------- Total net revenues.......................... 3,559 2,861 4,615 11,035 Gross profit: Manufacturing..................................... 51 599 286 936 Quarrying......................................... 937 -- -- 937 Retailing......................................... -- -- -- -- ------ ------ ------ ------- Total gross profit.......................... 988 599 286 1,873 Selling, general and administrative expenses........ 646 300 430 1,376 ------ ------ ------ ------- Income (loss) from operations....................... 342 299 (144) 497 ====== ====== ====== ======= Interest expense.................................... 236 35 69 340 Income (loss) before provision for income taxes..... 106 264 (213) 157 Provision for income taxes.......................... -- -- -- -- ------ ------ ------ ------- Net income.......................................... $ 106 $ 264 $ (213) $ 157 ====== ====== ====== =======
23 25 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL Rock of Ages, founded in 1885, is an integrated quarrier, manufacturer and distributor of granite and products manufactured from granite. The quarry division sells granite both to the manufacturing division and to outside manufacturers, as well as to distributors in Europe and Japan. 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 Company owns and operates 13 active quarry properties and 12 manufacturing and sawing facilities in North America, principally in Vermont, Georgia, and the Province of Quebec. The Company markets and distributes its memorials on a wholesale basis to approximately 2,124 independent memorial retailers in the United States and Canada, including approximately 495 independent authorized Rock of Ages retailers that are the primary outlet for the Company's branded memorials. The Company recently entered into a definitive agreement to acquire one of the largest of its authorized independent retailers, which will provide the Company with 17 owned retail outlets and mark the Company's first significant entry into retailing. The Company's memorials are marketed under the names of Rock of Ages Sealmark and Colorcraft, as well as several private labels. The Company believes that the Rock of Ages trademark is one of the oldest and best known brand names in the granite memorialization industry. Prior to 1996, the Company's quarrying and manufacturing operations were concentrated in Vermont and Quebec, and its manufacturing division produced primarily high-end branded memorials that were distributed to a relatively small percentage of the independent memorial retailers in North America. During the past 20 months, the Company has begun to implement a strategy that involves: (i) significantly expanding the breadth of its product offerings to include memorials covering all price points and major color varieties; (ii) increasing its distribution base; and (iii) vertically integrating forward into the retail distribution channel in order to move closer to the ultimate memorial customer. The steps taken by the Company so far in this regard have enabled it to increase manufacturing revenues from $17.8 million in 1995 to $32.6 million in 1996 ($48.9 million in 1996 on a pro forma basis), and to increase its distribution base from 495 independent retailers in 1995 to approximately 2,124 in 1997 including 17 Company-owned outlets. More importantly, these steps have positioned the Company favorably to capitalize on the opportunities to significantly expand its sales and profitability in the granite memorialization industry. The Company's primary means of implementing its growth strategy to date has been through acquisitions, beginning with the acquisitions on December 31, 1995 of Lawson Granite Company and Anderson-Friberg Company, each based in Barre, Vermont. These acquisitions helped expand the Company's manufacturing capacity and distribution base, while also broadening its granite memorial product line to include more non-branded granite memorials at lower price points than the Company's then-existing product line. In addition, the Company has recently taken further steps to implement its growth strategy through (i) the Keystone Acquisition, pursuant to which the Company acquired on June 30, 1997 the largest granite memorial manufacturer in Elberton, Georgia, and (ii) the execution of agreements to consummate the C&C Acquisition, pursuant to which the Company will acquire C&C, which the Company believes is the second-largest granite memorial manufacturer in Elberton. The Elberton Acquisitions will establish the Company as the largest granite memorial manufacturer in Elberton, Georgia, which is the largest granite producing area in North America and will give the Company a substantially broader product line, greater manufacturing capacity and enhanced distribution capabilities in the southern United States. The Company's first significant entry into memorial retailing was initiated in July 1997, when the Company entered into a definitive agreement to acquire Keith Monument. It is currently anticipated that the Keith Acquisition will close concurrently with the consummation of this offering. Keith Monument, founded in 1867, has been an authorized Rock of Ages retailer for more than 50 years. The Company believes that Keith Monument is one of the largest retailers of granite memorials in the United States. Upon the closing of the Keith Acquisition, John E. Keith, a principal owner and the president of Keith Monument with over 30 years of experience in granite memorial retailing, will head the Company's retailing operations. Mr. Keith 24 26 will oversee the implementation of the Company's strategy to significantly expand its retail operations both through other acquisitions of retailers and by pursuing strategic alliances with funeral home and cemetery owners, including consolidators. The Company records revenues from both manufacturing and quarrying. Manufacturing revenues are recorded when the finished product is shipped from Company facilities to an outside customer. The granite quarried by the Company is sold both to outside customers and used by the Company's manufacturing division. During 1996, 68.6% of the granite quarried by the Company was sold to outside customers. The Company records revenue and gross profit related to the sale of granite sold to an outside customer when the granite is shipped from the Company's quarry. The Company does not record a sale, nor does the Company record gross profit, at the time granite is transferred to the Company's manufacturing division. The Company records revenue and gross profit related to internally transferred granite only after the granite is manufactured into a finished product and sold to an outside customer. The following table sets forth certain historical statement of operations data as a percentage of net revenues with the exception of manufacturing gross profit and quarrying gross profit, which are shown as a percentage of manufacturing revenues and quarrying revenues, respectively.
FOR THE YEARS ENDED SIX MONTHS ENDED DECEMBER 31, JUNE 30, ------------------------- ---------------- 1994 1995 1996 1996 1997 ----- ----- ----- ----- ----- Net revenues..................................... 100.0% 100.0% 100.0% 100.0% 100.0% Manufacturing.................................. 50.6 53.8 72.9 74.3 73.6 Quarrying...................................... 49.4 46.2 27.1 25.7 26.4 ----- ----- ----- ----- ----- Total....................................... 100.0 100.0 100.0 100.0 100.0 Gross profit Manufacturing.................................. 23.4 24.4 25.3 24.3 23.8 Quarrying...................................... 35.8 39.9 42.7 32.3 28.5 Combined gross profit.......................... 29.5 31.6 30.0 26.4 25.1 Selling, general and administrative expenses..... 17.7 19.5 20.4 23.3 20.8 Income from operations........................... 11.8 12.1 9.6 3.0 4.2 Interest expense................................. 4.8 5.1 3.9 4.7 4.2 Income (loss) before provision (benefit) for income taxes................................... 7.0 5.3 5.7 (1.6) 0.1 Provision (benefit) for income taxes............. 1.7 1.1 1.4 (0.4) 0.0 Net income (loss)................................ 5.3 4.2 4.3 (1.2) 0.0
SIX MONTHS ENDED JUNE 30, 1997 COMPARED TO SIX MONTHS ENDED JUNE 30, 1996 Revenues for the six months ended June 30, 1997 increased 4.1% to $20.8 million from $19.9 million for the six months ended June 30, 1996. This increase was partly attributable to an increase in manufacturing revenues of $500,000 due to a greater number of memorial units sold. Although quarry revenues from the North American market experienced a slight decline during the period ended June 30, 1997, quarry revenues increased by a net $400,000 as a result of increased exports to Asia. Gross profit for the six months ended June 30, 1997 remained unchanged at $5.2 million compared to gross profit for the six months ended June 30, 1996. The gross profit percentage fell slightly to 25.1% for the six months ended June 30, 1997 from 26.4% for the six months ended June 30, 1996 but was offset by higher sales volumes during the most recent period. The gross profit margin in manufacturing declined during the six months ended June 30, 1997 as a result of a slight shift in the product mix toward lower margin products. The decrease in the quarry gross profit margin for the six months ended June 30, 1997 was a result of a shift in product mix toward lower-margin exports. Selling, general and administrative expenses for the six months ended June 30, 1997 decreased 6.9% to $4.4 million from $4.6 million for the six months ended June 30, 1996. As a percentage of sales, selling, 25 27 general and administrative expenses decreased to 20.8% from 23.3% for the prior six month period. This decrease during the most recent period compared to the prior period resulted from cost savings as a result of the integration of acquisitions consummated during 1996. Interest expense for the six month period ended June 30, 1997 decreased to $866,000 from $934,000 for the six month period ended June 30, 1996. The reduction in interest expense was the result of reduced borrowing levels during the most recent period. YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995. Revenues for the fiscal year ended December 31, 1996 increased 35.0% to $44.7 million from $33.1 million for the year ended December 31, 1995. This growth was attributable to an increase of $3.9 million in revenues from existing operations and an increase of $10.9 million in revenues from acquired manufacturing operations. This increase was offset by a decrease in quarry revenues as a result of the Company's acquisition of two manufacturers that had previously been significant customers and a $1.7 million decrease in quarry sales due to reduced exports to Japan and other Asian markets. Gross profit for 1996 compared to 1995 increased 28.3% to $13.4 million from $10.4 million in 1995. The higher total gross profit reflects an increase of $2.5 million from acquired manufacturing operations and an increase of $1.4 million from existing manufacturing operations. This increase was partly offset by reduced gross profit of $900,000 from quarrying operations due to lower revenue. The gross profit percentage fell slightly to 30.0% in 1996 from 31.6% in 1995 as a result of sales from the lower margin products of the acquired manufacturing operations. The lower gross margin in 1996 compared to 1995 was offset slightly by higher margins in the quarry operations due to a price increase that went into effect during 1996. Although gross profit margins in both manufacturing and quarrying increased for 1996 compared to 1995, the total gross profit margin declined as a result of the lower margin manufacturing business accounting for a higher percentage of total Company revenues. Selling, general and administrative expenses for 1996 increased 41.5% to $9.1 million from $6.5 million in 1995. As a percentage of net sales, selling, general and administrative expenses for 1996 increased to 20.4% from 19.5% in 1995. This increase resulted primarily from increased personnel expense necessary to support a higher rate of growth in memorial manufacturing and increased acquisition activity. Interest expense for 1996 remained unchanged from 1995 at $1.7 million. Income taxes as a percent of earnings before taxes increased from 20.4% to 25.2% in 1996. Although the Company was in an alternative minimum tax position for Federal tax purposes, the Company paid higher state taxes as a result of its income level exceeding the Company's depletion allowances. In 1995, the Company was in an alternative minimum tax position for Federal taxes and paid only a nominal amount of state taxes as a result of the magnitude of its depletion allowances. YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994. Revenues for 1995 decreased 3.2% to $33.1 million from $34.2 million for the fiscal year ended December 31, 1994. The decrease was attributable to a $1.6 million reduction in quarry sales from reduced exports to Japan and other Asian markets. This decrease was slightly offset by a $500,000 increase in manufacturing sales. Gross profit for 1995 increased 3.5% to $10.4 million from $10.1 million in 1994. The increase was the result of an improvement in the gross profit percentage to 31.6% in 1995 from 29.5% in 1994. The improved gross margin was in part a reflection of manufacturing volume increases and changes in the Company's marketing and pricing strategies to deemphasize lower margin customers. Additionally, gross profit margins increased as a result of unit cost reductions in the Company's quarry operations. Selling, general and administrative expenses for 1995 increased 6.7% to $6.5 million from $6.0 million in 1994. As a percentage of net revenue, selling, general and administrative expenses for 1995 increased to 19.5% 26 28 from 17.7% in 1994. This increase resulted primarily from expenses related to the employee savings and profit sharing plan which was established during fiscal 1995. Interest expense, net for 1995 remained unchanged at $1.7 million from 1994. Income taxes as a percent of earnings before taxes decreased from 24.1% in 1994 to 20.4% in 1995. The decrease was the result of a lower level of taxable income in 1995 which resulted in the Company being in an alternative minimum tax position for Federal income tax purposes. During 1994, the Company was still in an alternative minimum tax position but had a higher level of taxable income which exceeded its depletion allowance for state income tax purposes. LIQUIDITY AND CAPITAL RESOURCES Liquidity. The Company considers liquidity to be its ability to meet its long and short-term cash requirements. Historically the Company has met these requirements primarily from cash generated by operating activities and periodic borrowings under commercial credit facilities. The Company's recent and pending acquisitions have increased its requirements for external sources of liquidity, and the Company anticipates that this trend will continue as it further implements its growth strategy. Six Months Ended June 30, 1997. For the six months ended June 30, 1997 net cash used in operating activities was $3.0 million. The six month period results were primarily attributable to increases in trade receivables and amounts due from affiliates. Net cash used in investing activities was $1.7 million for the six month period. The results were primarily attributable to purchase of property, plant and equipment. Net cash provided by financing activities was $4.1 million for the six month period. The results were primarily attributable to borrowings under lines of credit that were partially offset by principal payments on long-term debt. Year Ended December 31, 1996. For 1996, net cash provided by operating activities was $3.9 million. 1996 results were driven primarily by cash provided by a decrease in trade receivables which were partially offset by an increase in inventories and receivables due from affiliates. Net cash used in investing activities was $1.8 million primarily for the purchase of property, plant and equipment. Net cash used in financing activities was $3.3 million used primarily for principal repayments on long-term debt, offset by increased borrowings under lines of credit. Capital Resources. As of June 30, 1997, the Company had $6.6 million outstanding and approximately $2.9 million available under its revolving credit facility with CIT Group -- Business Credit Inc. ("CIT"). The interest rate on this facility as of such date was 9.5%, based on a formula of prime plus 1%. In addition, the Company had outstanding a term loan payable to CIT in the principal amount of $13.6 million, bearing interest at 9.75% based on prime plus 1.25%. The term loan has a final maturity of January 1, 1999, with amortization requirements of $500,000 per quarter. As of June 30, 1997, the Company had approximately $1.8 million of indebtedness outstanding under credit facilities assumed in connection with the Keystone Acquisition, with maturities in 1997, 1998 and 1999 and interest of up to 9.75% per annum (the "Keystone Indebtedness"). The Company intends to apply a portion of the net proceeds of the offering toward repayment of outstanding amounts under its credit facility and term loan with CIT and the Keystone Indebtedness, and has received a commitment letter for a new $50 million credit facility subject to consummation of the offering, borrowings under which will be used to repay all remaining amounts outstanding under the existing credit facility with CIT. As of June 30, 1997, the Company also had $2.1 million outstanding and no availability under a demand revolving line of credit with the Royal Bank of Canada. The interest rate on this facility as of such date was 6.25% based on a formula of Canadian prime plus .75%. The Company's primary need for capital will be to maintain and improve its manufacturing and quarrying facilities and to finance acquisitions as part of its growth strategy. The Company has $3.7 million budgeted for capital expenditures in 1997, of which it had spent $1.6 million through June 30, 1997. The Company believes that the combination of cash flow from operations, its existing credit facilities, the proceeds of this offering, and the new credit facility it expects to put in place will be sufficient to fund its operations for at least the next twelve months. 27 29 SEASONALITY Historically, the Company's operations have experienced certain seasonal patterns. Generally the Company's net sales have been highest in the third quarter and lowest in the first quarter of each year due primarily to weather. Cemeteries in northern areas generally do not accept granite memorials during winter months when the ground is frozen because they cannot be properly set. The Company typically closes certain of its Vermont and Canadian quarries during these months because of increased operating costs attributable to adverse weather conditions. The Company has historically incurred a net loss during the first six months of each calendar year. However, the Company believes that the variability of its operating results on a quarterly basis will be lessened as its operations become more geographically dispersed. INFLATION The Company believes that the relatively moderate rates of inflation experienced in recent years have not had a significant effect on its results of operations. NEW ACCOUNTING PRONOUNCEMENTS SFAS No. 128, Earnings Per Share, will require a different calculation of earnings per share and will require a restatement in all prior periods. This will be effective for periods ending after December 15, 1997. SFAS No. 130, Reporting Comprehensive Income, will be effective for periods beginning after December 15, 1997. SFAS No. 131, Disclosure About Segments of an Enterprise and Related Information, will be effective for periods beginning after December 15, 1997. Management does not believe that the above pronouncements will have a material effect on the Company's financial statements. 28 30 THE DEATH CARE INDUSTRY AND GRANITE MEMORIALIZATION DEATH CARE INDUSTRY OVERVIEW The death care industry has traditionally been comprised of three principal segments: (i) ceremony and tribute, generally in the form of a funeral or memorial service; (ii) disposition of remains, either through burial or cremation; and (iii) memorialization, generally through monuments, markers or inscriptions. The death care industry is relatively stable due to predictable death rates and demographics relating to aging and wealth. Certain characteristics generally applicable to the death care industry are summarized below. Fragmented nature. Ownership in the death care industry is generally highly fragmented. With the exception of bronze memorial suppliers (two companies with an estimated market share of in excess of 80%) and casket manufacturers (three companies with an estimated 60% market share), the majority of death care operators are small, privately-owned family companies. At the end of 1996, consolidators owned (i) less than 12% of the estimated 22,800 funeral homes, (ii) approximately 890, or less than 10%, of the estimated 9,500 commercial cemeteries, and (iii) less than 5% of the total estimated 23,000 active cemeteries, in the United States. Barriers to entry. Death care businesses have traditionally been transferred to successive generations within a family and in most cases have a heritage, community presence and tradition that act as formidable barriers for new entrants into existing markets. Presence and tradition afford established industry operators an important local franchise and provide the opportunity for significant referral business. Stability. Death rates in the United States and Canada are fairly predictable and are expected to rise approximately 1% per year between 1996 and 2010. The general death care industry is therefore relatively stable and fairly predictable. Business failures are generally uncommon among retailers of death care products and services, with ownership traditionally passing from generation to generation. Consolidation. Consolidators are actively consolidating the funeral home and cemetery segments of the death care industry; the Company believes this consolidation will occur in all areas of the death care industry. Pre-need marketing and selling. An increasing number of general death care products and services, especially funeral products and services and cemetery lots controlled by consolidators, are being sold prior to the time of death ("pre-need") rather than at the time of death ("at-need"). Trend toward cremation. In recent years, there has been a steady, gradual growth in the number of families that have chosen cremation as an alternative to traditional methods of burial. According to CANA, cremations represented approximately 22% of the United States burial market in 1996 compared to approximately 10% in 1980, and CANA expects this rate to rise to 29% by 2010. Cremation rates vary dramatically by state for religious, cultural and other reasons. Cremation is generally marketed as a less costly alternative to interment; in addition, it is increasingly being marketed as a part of a death care program that incorporates a traditional service and memorialization. THE GRANITE MEMORIALIZATION INDUSTRY General. In 1995, there were approximately 1.8 million interments in the United States. Of these, the Company believes at least 50% were memorialized in some sort of permanent manner. These memorializations take a number of forms, depending on the type of interment. Individual cemetery lots typically have granite or bronze memorials, while communal interments such as community mausoleums, cremation niches and columbariums have a range of stone, masonry and wood construction. The Company believes the North American granite memorialization industry, excluding communal interments such as community mausoleums and columbariums, is in excess of $1.0 billion in annual retail sales in 1996. Granite memorials are manufactured in a wide variety of sizes, designs and colors, depending on the degree of personalization desired by the customer. The Company believes the largest selling colors, in descending order of magnitude, are Elberton Gray, Barre Gray, Black, Dakota Mahogany, Pink and Red, based on the Company's sales and market information. While there are a number of standard types of 29 31 memorials, including flush grass markers and various types of upright granite memorials, their size varies slightly from region to region. The granite memorialization industry is comprised of three principal areas: (i) quarrying of the granite; (ii) manufacture and wholesale distribution of the memorials; and (iii) retail sales of the memorials. The granite memorialization industry shares some of the fundamental characteristics of the death care industry, including barriers to entry created by local heritage, community presence and tradition, structural fragmentation and stable, predictable demand. However, the granite memorialization industry and its three principal areas have certain distinguishing characteristics that the Company believes create attractive opportunities. These characteristics include the following: Timing and point of sale. Unlike most death care products and services, the purchase of granite memorials by consumers is typically separated both physically and chronologically from the funeral planning and service process. Granite memorials have traditionally been sold primarily through independent monument retailers rather than at or through funeral homes or cemeteries (approximately 3,000 of such independent memorial retailers are located outside funeral homes and cemeteries, according to the Monument Builders of North America). In addition, granite memorials historically have been sold some time after the funeral or interment service. Additional barriers to entry. As in the death care industry generally, local heritage, community presence and tradition deter entry into the granite memorialization industry. However, the most significant barriers to entry to the quarrying of granite include: (i) the limited number of known commercially exploitable memorial grade granite deposits; (ii) stringent federal, state and local zoning and environmental laws; and (iii) substantial capital requirements. Barriers to entry in the manufacture of granite memorials include (a) the need to be in reasonable proximity to granite quarries producing memorial grade granite due to the high freight costs associated with transporting granite blocks; (b) substantial capital costs in establishing and operating a memorial grade granite manufacturing facility; and (c) the need for highly skilled stone cutters, sandblasters, sculptors and other skilled artisans necessary to produce granite memorials. Ownership structure. The granite memorialization industry is characterized by increasing fragmentation as one moves closer to the ultimate customer. The Company estimates that there are approximately 50 quarriers and 140 manufacturers of memorial grade granite in North America. The Company believes that it is the largest manufacturer of memorial grade granite in North America, based on revenues. According to the Monument Builders of North America, there are approximately 3,000 retailers of granite memorials in North America located outside funeral homes and cemeteries. Most of these quarrying, manufacturing and retail businesses are privately owned and family run. Geographic concentration and production costs. The quarrying and manufacture of granite memorials in North America are concentrated in four geographic areas: Barre, Vermont; Beebe, Quebec; Elberton, Georgia; and the area encompassing Milbank, South Dakota, Cold Spring and St. Cloud, Minnesota and Wausau, Wisconsin (known in the trade as the "Northwest"). Generally, granite quarriers and manufacturers in each area have the strongest market shares in the neighboring geographic regions because of the relatively high freight costs involved in shipping granite. The low cost and low price production area is Elberton, while the other three regions generally have similar costs and selling prices. Competing products. The primary competition for granite memorialization on individual cemetery lots comes from bronze products which currently constitute approximately one-third of the aggregate memorialization business, measured in retail sales dollars. Bronze markers are generally flush rather than upright and are typically offered in a limited number of styles and designs, with relatively little opportunity for personalization. Unlike granite memorials, bronze markers are sold primarily through cemeteries where they have traditionally been marketed to the consumer as a lower cost alternative to granite and to the cemeterian as a lower cost cemetery maintenance option. To a lesser extent, marble is also used as a substitute for granite in memorialization. See "Business -- Competition." 30 32 OPPORTUNITIES The Company believes that the aforementioned industry characteristics present it with the opportunity to: - Serve the geographically dispersed and fragmented memorial retailers by offering a full line of granite memorials throughout North America. The Company is the leading quarrier and manufacturer of granite memorials in three of the four principal granite memorial producing regions of North America. Accordingly, the Company is well positioned to provide, primarily through its own quarrying and manufacturing operations, a complete line of high quality, granite memorials covering all price points and major color varieties to North American retailers and to cemetery and funeral home owners, including consolidators. - Capitalize on the fragmented nature of granite memorial retailing and the Company's existing relationships with over 2,100 independent retailers by making strategic acquisitions of independent retailers in order to build an integrated network of owned Rock of Ages retailers and thereby capture the higher margins that have historically existed at the retail level. - Capitalize on the trend toward cremation by attracting consumer dollars otherwise spent on casket and burial vault expenses. The Company believes that with enhanced distribution capabilities, promotion, advertising and consumer awareness of memorialization, more consumers who have elected cremation may opt for personalized upright granite memorials. 31 33 BUSINESS GENERAL Rock of Ages, founded in 1885, is an integrated granite quarrier, manufacturer and distributor whose principal product is granite memorials used primarily in cemeteries. The Company believes that it is the largest quarrier, manufacturer and distributor of finished granite memorials and granite blocks for memorial use in North America, based on revenues. The Company owns and operates 13 active quarry properties and 13 manufacturing and sawing facilities in North America, principally in Vermont, Georgia and the Province of Quebec. The Company markets and distributes its memorials on a wholesale basis to approximately 2,124 independent memorial retailers in the United States and Canada, including approximately 495 independent authorized Rock of Ages retailers that are the primary outlet for the Company's branded memorials. The Company recently entered into a definitive agreement to acquire one of the largest of its authorized independent retailers, which will provide the Company with 17 owned retail outlets and mark the Company's first significant entry into retailing. The Company's memorials are marketed under the names Rock of Ages Sealmark and Colorcraft, as well as several private labels. The Company believes the Rock of Ages trademark is one of the oldest and best known brand names in the granite memorialization industry. BUSINESS STRATEGY Rock of Ages believes it is well-positioned to capitalize on the industry characteristics described previously, and seeks to establish a dominant position in the granite memorialization industry. The Company intends both to improve the efficiency of its existing operations and to expand its business significantly. The principal elements of the Company's operating and growth strategies are summarized below. Operating Strategy. The Company pursues an operating strategy that includes the following key elements: - Providing, primarily through its own quarrying and manufacturing operations, a complete line of high quality granite memorials covering all price points and major color varieties. The Company believes it is the only industry participant with both quarrying and manufacturing operations in three of the four principal granite memorial producing regions of North America. - Enhancing operational efficiencies through the continued integration of acquired quarriers and manufacturers and the rationalization of its sales and distribution efforts. - Increasing advertising and promotion of the Rock of Ages brands, including the flagship Rock of Ages Sealmark and Colorcraft brands, in order to heighten consumer awareness and increase sales of the Company's products. Growth Strategy. The Company seeks to expand the scope and profitability of its operations by implementing a growth strategy that includes forward vertical integration into retailing, thereby enabling the Company to move closer to the ultimate customer. The principal elements of this strategy include the following: - Acquiring independent granite memorial retailers in selected markets in order to develop an integrated network of owned Rock of Ages retailers and thereby capture the higher margins that have historically existed at the retail level. - Increasing sales to independent retailers that are current customers and expanding its independent retailer customer base. During the last two years, principally through acquisitions of quarriers and manufacturers, the Company has increased the number of independent retailers to which it sells its products from approximately 495 in 1995 to approximately 2,124 in 1997. - Pursuing strategic alliances with funeral home and cemetery owners, including consolidators, to supply granite memorials to or through them, in order to increase both pre-need and at-need sales of granite memorials. 32 34 RECENT AND CONCURRENT ACQUISITIONS The Company's primary means of implementing its growth strategy to date has been through acquisitions, beginning with the acquisition on December 31, 1995 of Lawson Granite Company and Anderson-Friberg Company, each based in Barre, Vermont. These acquisitions helped expand the Company's manufacturing capacity and distribution base, while also broadening its granite memorial product line to include more non-branded granite memorials at lower price points than the Company's then-existing product line. The Company has recently taken further steps to implement its growth strategy through the Keystone Acquisition and the proposed C&C Acquisition and Keith Acquisition. The Company believes that these acquisitions and the continued implementation of the other elements of its operating and growth strategies will enable it to: (i) expand overall industry sales of granite memorials, which heretofore have been actively marketed to consumers primarily only on an at-need basis and in a limited manner; (ii) increase its share of the granite memorial market by offering a complete product line with strong brand names through distribution channels that more directly reach the consumer; and (iii) increase both its relative and total profitability by capturing some of the higher margins that have historically existed at the retail level. Keystone. In June 1997, the Company acquired Keystone, the largest memorial manufacturer in Elberton, Georgia, including Keystone's 50% ownership interest in each of SMI and the Quarry Companies. Keystone had revenues of $9.3 million for the year ended December 31, 1996. The Company made the Keystone Acquisition in order to: (i) become the largest manufacturer of granite memorials in the largest granite producing area of North America; (ii) expand the Company's product offering to its and Keystone's customers by combining the product lines of the two companies and thereby offering easy "one-stop-shopping" to retailers; (iii) obtain immediate access to an expanded customer base of independent retailers; (iv) reduce raw material and production costs for certain granite; and (v) reduce transportation costs and enhance transportation capabilities. In connection with the Keystone Acquisition, the Company issued 263,441 shares of Class B Common Stock and assumed or incurred $2.7 million of indebtedness of Keystone. C&C. In June 1997, the Company also entered into a definitive agreement to acquire C&C, which the Company believes is the second largest manufacturer of granite memorials in Elberton, Georgia, and the remaining 50% of each of SMI and the Quarry Companies owned by the stockholders of C&C. It is expected that the C&C Acquisition will close concurrently with the consummation of this offering. C&C had revenues of $5.9 million for the year ended December 31, 1996. The Company believes that the C&C Acquisition by itself offers many of the same benefits that the Keystone Acquisition provides, and, in combination with the Keystone Acquisition, solidifies the Company's position as the largest granite memorial manufacturer in the Elberton region. The purchase price payable for C&C is $6.6 million in cash and $200,000 in shares of Class A Common Stock (valued at the initial public offering price) and approximately $780,000 to repay outstanding indebtedness of C&C. Quarry Companies and SMI. As part of the Keystone Acquisition and the C&C Acquisition, the Company will also acquire the Quarry Companies and SMI and assume $5.4 million of indebtedness of such companies upon the closing of the C&C Acquisition. The Quarry Companies and SMI had sales of $6.8 million for the year ended December 31, 1996. The Quarry Companies own and operate six quarries located in Georgia, Pennsylvania, North Carolina, South Carolina and Oklahoma. The Quarry Companies offer the Company an internal source of a variety of colored granite, including American Black, Salisbury Pink, Autumn Rose and Kershaw Pink. These colors supplement the Company's product line for both granite memorials and mausoleums. With the acquisition of SMI, the Company will obtain a manufacturing facility dedicated primarily to the construction of mausoleums, which are a more expensive and higher margin product than most other types of granite memorials. Keith Monument. In July 1997, the Company entered into a definitive agreement to acquire substantially all of the assets and liabilities of Keith Monument. Keith Monument has been an authorized Rock of Ages retailer for more than 50 years and, the Company believes, is one of the largest retailers of granite memorials in the United States. It is expected that the Keith Acquisition will close concurrently with the consummation of this offering. Keith Monument had revenues of $7.8 million for the year ended June 30, 1997. The Keith Acquisition offers the Company an immediate presence in memorial retailing and provides 33 35 the Company with management expertise in the retailing sector. The purchase price payable for Keith Monument is $16.4 million, consisting of $13.1 million in cash, $1.5 million in shares of Class A Common Stock (valued at the initial public offering price) and $1.8 million to repay outstanding indebtedness of Keith Monument assumed by the Company. Upon the closing of the Keith Acquisition, John E. Keith, a principal owner and the president of Keith Monument with over thirty years of experience in granite memorial retailing, will head the Company's retailing operations. Mr. Keith will oversee the implementation of the Company's strategy to significantly expand its retail operations both through other acquisitions of retailers and by pursuing strategic alliances with funeral home and cemetery owners, including consolidators. QUARRYING AND MANUFACTURING OPERATIONS Quarrying. The Company owns and operates 13 active quarries producing, or has supply agreements to obtain, each of the largest selling granite memorial colors in North America (Elberton Gray, Barre Gray, Black, Dakota Mahogany, Pink and Red, in that order). In 1996, on a pro forma basis assuming the Acquisitions occurred on January 1, 1996, the Company quarried in excess of 1,500,000 cubic feet of saleable granite from its quarries in Georgia, Vermont, Pennsylvania, North Carolina, South Carolina, Oklahoma and the Province of Quebec. The Company estimates that its U.S. production represents approximately 19% of the total U.S. output of dimension granite for all uses and at least 25% of the U.S. output for memorial use. The Company believes it is the largest quarrier of granite for memorial use in the U.S. based on quantity of output and revenues. The Company owns a large quarry complex in Barre, Vermont and is currently the only quarrier of Barre, Vermont gray granite. In 1996, on a pro forma basis assuming the Acquisitions occurred on January 1, 1996, over 50% of the Company's U.S. output came from its Barre quarries. The Company also owns three quarries in the Elberton, Georgia area. While most black granite for memorial use comes from Africa and India, the Company owns a quarry in Pennsylvania that produces the largest selling black granite for memorial use quarried in North America. The Company also owns quarries in North Carolina and Canada that produce pink granite, and a quarry in Bethel, Vermont that produces Bethel white granite used primarily for building purposes outside North America. The quarrying of granite involves three major processes. The first major process is to prepare the granite for extraction. The initial step in this process is to free a mass of stone from the quarry by cutting deep vertical channels in the stone with jet channeling torches, pneumatic slot-drills or diamond-wire saws. Next, a series of horizontal "lift" holes are drilled in the mass. Several of the lift holes are then filled with primer cord explosives which, after detonation, cause the granite mass to crack along the line where the holes have been drilled and to lift the mass free from the granite below it. Occasionally, these horizontal cuts are made with diamond wire saws. After the granite mass has been separated, pneumatic drills are used to drill a series of vertical holes to break the mass into large vertical pieces. Horizontal holes are then drilled to break these pieces into standard size saw blocks, known as "dimensioned blocks," which are typically ten feet by five feet by five feet and weigh approximately twenty-five tons. The second major process in quarrying granite is to extract the dimensioned block from the quarry. Extraction involves removing the dimensioned blocks from the quarry with very large forklifts or, in deeper quarries, with cinching notched wire cable around the block and then hoisting the blocks with very large derricks, or fixed cranes, or mobile cranes. These derricks range to up to 160 feet in height and up to 250 tons in lifting capacity. Most of the Company's quarries utilize forklifts for extraction or a combination of forklifts and fixed or mobile cranes. The third major process is to transport the dimensioned blocks. Once lifted from the quarry, the blocks are handled and transported by heavy duty diesel trucks and fork lifts. These vehicles transport the blocks either to an inventory area or directly to the manufacturer. Much of the granite quarried is not suitable for use as a finished memorial product due to cracks, spots, discoloration and other natural imperfections. The amount of usable granite varies markedly from quarry to quarry. Some of the granite not used for memorials is sold to other companies for use in buildings and other 34 36 non-memorial products. Unusable stone, or "grout," is stored in areas not expected to be quarried in the future. It is suitable for bridge piers, erosion control and other uses but the market for this product is very limited. The granite blocks sold by the Company are delivered to the Company's manufacturing division as well as to other granite manufacturers in Vermont via Company owned trucks. Blocks for delivery outside of the production areas are delivered via common carrier. Barre, Vermont, Elberton, Georgia and Beebe, Quebec all have at least two large regional or national trucking companies and a number of independent truckers. Manufacturing. The Company owns and operates 13 manufacturing and sawing facilities in North America, principally in Vermont, Georgia and the Province of Quebec. The Company is in the process of a $3.2 million expansion and improvement program for its Barre and Canadian manufacturing facilities to add 50,000 square feet of space and manufacturing and sawing equipment and to reconfigure production. In addition, the Company has ordered $600,000 of polishing equipment for the manufacturing facilities in Elberton and anticipates dedicating sawing equipment currently used for curb slabs to memorial slabs. The Company believes that these improvements and operational changes will increase memorial production significantly and allow the Company to meet its anticipated production requirements for the near future. The manufacture of memorials starts with quarried granite blocks, which are sawed into slabs of varying thicknesses with computer operated diamond saws and wire saws at Company saw plants. Once a block has been cut into slabs, the slabs are transported to nearby manufacturing plants such as the Company's Craftsman Center in Barre, Vermont. At the manufacturing plant, slabs are manufactured into memorials and other products. To manufacture a granite slab four to 12 inches thick into a memorial, the slabs are first polished at the manufacturing plant by various automatic polishing machines. Polished slabs are then inspected for flaws and defects and dimensioned with a hydraulic guillotine machine. Granite is like wood in that it splits uniformly along the grain. After dimensioning, the granite pieces are taken to stations to be shaped by stonecutting wire saws, diamond saws and carborundum wheels. Once shaped, memorials may be hand-carved into virtually any desired shape. This hand carving is generally done by the Company. The final step in memorial manufacturing is to sandblast the semi-finished memorial with a silicon carbide abrasive which etches the desired design into the memorial. This sandblasting step may be done by the Company or a retailer. Once complete, the memorial is inspected and branded products are then sandblasted with the Rock of Ages or other seal. Finished products are then crated and shipped to customers. In addition to granite memorials, the Company also manufactures precision industrial granite products, such as machine bases and surface plates, which are utilized in the automotive, aeronautic, computer, machine tool, optical, precision grinding and inspection industries, as well as granite press rolls used in the manufacture of paper. These are small but profitable niche markets within the granite industry with limited competition and limited growth prospects. The Company's granite deposits in Georgia, Vermont, Pennsylvania, North Carolina, South Carolina, Oklahoma and the Province of Quebec are expected to continue to meet the Company's current and anticipated raw materials needs for many years, and the Company believes it will continue to have access to adequate quantities of other granite at competitive prices. The Company has entered into a Supply and Distribution Agreement with Missouri Red Quarries, Inc., the owner of Keystone immediately prior to the Keystone Acquisition ("Missouri Red"), and G. Thomas Oglesby, Jr., who controls Missouri Red (the "Missouri Red Supply Agreement"), and a Supply and Distribution Agreement with Keystone Granite Company, Inc., an affiliate of Missouri Red ("KGCI"), and Missouri Red (the "Keystone Supply Agreement", and, together with the Missouri Red Supply Agreement, the "Supply Agreements"). Under the Missouri Red Supply Agreement, Missouri Red has agreed, for a 20-year term, to supply the Company at specified prices with the Company's requirements of Missouri Red granite blocks for memorial use, and has appointed the Company as its exclusive distributor to buy and sell all grades of Missouri Red granite for memorial use in the specified territory. The Company has agreed to purchase certain minimum annual amounts of Missouri Red granite blocks, and such supply arrangements are exclusive for memorial use so long as the Company purchases certain minimum amounts of Missouri Red 35 37 granite blocks within specified periods of time, provided that in any event the Company has a first priority to purchase all monumental grade Missouri Red granite quarried by Missouri Red during the term of the Missouri Red Supply Agreement. The terms of the Keystone Supply Agreement are substantially similar to the Missouri Red Supply Agreement, including the 20-year term, except that the Keystone Supply Agreement applies to KGCI granite blocks, any other granite blocks quarried at the KGCI quarries and Topaz granite blocks (collectively, "Topaz") and the Company has agreed to purchase all monumental grade Topaz produced by KGCI during the term of the Keystone Supply Agreement. Should the Company fail to purchase the specified minimum quantity of Topaz, then KGCI has the right to sell to others subject to the Company's right to supply priority. \Pursuant to the Supply Agreements, the Company has a right of refusal with respect to any sale of the quarries, land, buildings or equipment, or the stock of, Missouri Red or KGCI outside the Oglesby family. The Company also has a mutual supply agreement (the "Dakota Agreement") with Dakota Granite Company ("Dakota Granite"), whereby Dakota Granite has agreed to supply the Company with its requirements for Dakota Mahogany blocks, slabs and finished monuments, and the Company has agreed to supply Dakota Granite with its requirements for Barre Gray blocks, slabs and finished monuments, and each party has agreed to purchase such requirements exclusively from the other. The Dakota Agreement is terminable by either party upon 180-days prior notice. Other significant raw materials which the Company uses in its manufacturing operations include industrial diamond segments for saw blades and wires and abrasives. There are a number of sources for these raw materials and the Company believes it will continue to have access to adequate quantities of such materials at competitive prices. The Company had manufacturing backlogs of $13,833,000 as of June 30, 1997 and $14,386,000 as of June 30, 1996. These backlogs occurred in the normal course of business. The Company does not have a material backlog in its quarrying operations. As noted above, regional and national trucking companies are readily available to deliver granite memorials. Also, the Company owns eight trucks for delivery of finished memorials to customers. In addition, as a result of the Acquisitions, the Company will be able to ship full truckload quantities of memorials from Barre to Elberton and back via dedicated trucks, which the Company believes will improve the efficiency of national delivery of its products. As a result, the Company believes it will have a significant competitive cost advantage in the transportation of memorials. The Company does not normally maintain a significant inventory of finished manufactured products in anticipation of future orders. Approximately 75% of the Company's orders are delivered within two to twelve weeks, as is customary in the granite memorial industry. The Company does accumulate inventory of granite blocks from September through December in preparation for the winter months when its northern quarries are inactive. During the winter months, the Company offers a special payment plan to granite block customers ordering in December by giving 90-day payment terms. Additionally, any orders for granite memorials placed after September 1st but before February 1st may receive special payment terms allowing payment on the following June 1st. The Company is entitled to make delivery at its discretion no later than April of the following year. The winter payment terms accounted for approximately $2 million in Company sales in 1996. MARKETING AND DISTRIBUTION; RETAILING The Company is best known for its granite memorials. Rock of Ages produces each of the standard types of memorials, including flush grass markers and various types of upright memorials, and is recognized for its ability to manufacture highly personalized granite memorials designed to meet the specific needs of individual customers. For example, the Company has built a full size granite replica of a Mercedes Benz for a customer. Rock of Ages currently sells its granite memorial products to an estimated 2,124 independent memorial retailers in North America. Its flagship brands bearing the Rock of Ages seal are sold only to approximately 495 independent authorized Rock of Ages retailers who have written supply agreements with the Company. These branded Rock of Ages memorials are made of the highest quality granite available and are guaranteed in perpetuity to the customer and the cemetery against defects in the granite (including discoloration) or workmanship. The Company believes its warranty is the strongest in the memorial industry. 36 38 The Company generally limits the number of retailers authorized to sell branded Rock of Ages products in any geographic region. The Company seeks to select as its authorized retailers large and well-established companies that can provide high levels of design assistance, personalization and high quality sandblast carving and lettering, as well as the service of setting the memorial in the cemetery. Authorized retailer agreements may be terminated by either the Company or the retailer upon 30 days' notice. Under these agreements, the authorized retailer is free to purchase granite memorials from any source, but the Company expects its authorized retailers to promote the Rock of Ages brand and purchase reasonable quantities of its branded and unbranded granite memorials annually. Most authorized Rock of Ages retailers purchase both branded and lower-priced unbranded memorials from the Company. The Company also supplies private label and unbranded granite memorials not bearing the various Rock of Ages seals to a large number of other retailers. The Company's growth strategy principally involves vertically integrating forward into retailing. Pursuant to the Keith Acquisition, the Company will acquire what it believes is one of the largest retailers of granite memorials in the United States. Upon the closing of the Keith Acquisition, John E. Keith, a principal owner and president of Keith Monument with over 30 years experience in granite memorial retailing, will head the Company's retailing operations. Mr. Keith will oversee the implementation of the Company's strategy to significantly expand its retail operations both through other acquisitions of other independent retailers and by pursuing strategic alliances with funeral home and cemetery owners, including consolidators. While the Company currently supplies a limited amount of granite memorials to funeral homes and cemetery owners, including consolidators, the Company has not yet established a strategic alliance with any such group. The Company will seek to acquire well established full service granite memorial retailers with experienced personnel and strong market share in their marketing region, including both its existing authorized Rock of Ages retailers and other independent retailers. All owned retailers will be positioned as Rock of Ages retailers and will offer Rock of Ages branded products as well as other brands provided by the Company. The Company recognizes that certain of its customers, including both authorized Rock of Ages retailers and its other retailers, will prefer to remain as independently owned retailers or may not be viable acquisition targets for the Company due to price, size, location or other reasons. The Company believes the opportunity to become a part of an integrated quarrier, manufacturer and retailer of granite memorials promoting Rock of Ages branded memorials will be an attractive option for many granite memorial retailers who are currently customers of the Company. Likewise, the Company believes its improved knowledge of the retail market gained from owning retailers and the presence of John E. Keith, a prominent memorial retailer, as an officer and director will help it to better serve and be more responsive to the needs of its customers who remain independently owned. Since most independent retailers have competed with Rock of Ages authorized retailers for many years, the Company believes that the establishment of an owned Rock of Ages retail network through acquisition of existing granite memorial retail outlets should not disrupt the market in a fashion that would occur if a new entrant to the market entered the business or a manufacturer established new outlets instead of acquiring existing outlets. COMPETITION The granite memorial industry is highly competitive. The Company competes with other granite quarriers and manufacturers in the sale of granite blocks on the basis of price, color, quality, geographic proximity, service, design availability and availability of supply. All of the Company's colors of granite are subject to competition from 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 who sell finished memorials in North America. The Company competes based upon price, breadth of product line and design availability as well as production capabilities and delivery options. The Company's quarrying and manufacturing competitors include both domestic and international companies, some of which may have greater financial, technical, manufacturing, marketing and other resources than the Company. Additionally, foreign competitors of the Company may have access to lower cost labor and better commercial deposits of certain colors of memorial 37 39 grade granite, and may be subject to less restrictive regulatory requirements than the Company. Companies in South Africa, India, China and Portugal manufacture and export finished granite memorials into North America. See "Risk Factors -- Competition." The competition for retail sales of granite memorials 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 the Company as well as approximately 3,000 independent retailers of granite memorials located outside funeral homes and cemeteries. See "Risk Factors -- Relationships with Retailers". PATENTS, TRADEMARKS AND LICENSES The Company holds a number of domestic and foreign patents, trademarks and copyrights, including the original registered trademark "Rock of Ages" which the Company first registered in 1914. The Company believes the loss of a single patent, trademark or copyright, other than the "Rock of Ages" trademarks, would not have a material adverse effect on the Company's business, financial condition or results of operations. EMPLOYEES As of October 15, 1997, the Company had approximately 580 employees. After the consummation of the C&C Acquisition and the Keith Acquisition, the Company will have approximately 795 employees. The Company believes its relationship with its employees is good. A significant number of the Company's employees in Barre and Canada are represented by one of two labor unions. Some of the Company's employees in Elberton are also represented by a union. The Company has recently entered into collective bargaining agreements with its employees in Barre which are scheduled to expire in 2000, and the Company's collective bargaining agreements with its employees in Canada are scheduled to expire in 1999. PROPERTIES Following consummation of the Acquisitions, the Company will own the following quarry and manufacturing properties:
PROPERTY FUNCTION - -------------------------------------------------------- -------------------------------------------------------- VERMONT Barre Quarry Properties E. L. Smith Quarry................................ Quarrying of dimensional Barre Gray granite blocks Adam-Pirie Quarry................................. Quarrying of dimensional Barre Gray granite blocks Manufacturing Properties Associated Saw Plant.............................. Slabbing of granite blocks Rock of Ages Manufacturing Plant.................. Manufacturing of memorials Press Roll Production Plant....................... Manufacturing of granite press rolls Rock of Ages Saw Plant #1......................... Slabbing of granite blocks Lawson Production Plant........................... Slabbing of granite blocks and memorials production facility Bethel Quarry Properties Bethel Quarry..................................... Quarrying of dimensional Bethel White granite blocks GEORGIA Madison County Quarry Properties Royalty/Berkeley Quarries......................... Quarrying of dimensional Royalty Blue and Berkeley Blue granite blocks Oglethorpe County Caprice Quarry.................................... Quarrying of dimensional Caprice Blue blocks Millstone Quarry.................................. Quarrying of dimensional Millstone Gray
38 40
PROPERTY FUNCTION - -------------------------------------------------------- -------------------------------------------------------- Elberton Manufacturing Properties Southern Mausoleum Plant.......................... Manufacturing of memorials Keystone Memorials Plant.......................... Manufacturing of memorials Keywest Plant..................................... Manufacturing of memorials Childs & Childs Plant............................. Manufacturing of memorials CANADA Stanstead, Quebec Quarry Properties Stanstead Quarry.................................. Quarrying of dimensional Stanstead Gray granite blocks Guenette, Quebec Quarry Properties Laurentian Quarry................................. Quarrying of dimensional Laurentian Rose granite blocks Beebe Plain, Quebec Manufacturing Properties Rock of Ages Manufacturing Plant.................. Manufacturing of memorials Adru Manufacturing Plant.......................... Manufacturing of memorials PENNSYLVANIA St. Peters Quarry Properties American Black Quarry............................. Quarrying of dimensional black granite blocks Manufacturing Properties Saw Plant......................................... Slabbing of granite blocks NORTH CAROLINA Salisbury Quarry Properties Salisbury Pink Quarry............................. Quarrying of dimensional Salisbury Pink granite blocks Manufacturing Properties Carolina Plant.................................... Manufacturing of flush and granite under bronze markers OKLAHOMA Mill Creek Quarry Properties Autumn Rose Quarry................................ Quarrying of dimensional Autumn Rose granite blocks SOUTH CAROLINA Kershaw County Quarry Properties Kershaw Quarry.................................... Quarrying of dimensional Kershaw granite blocks Lancaster County Quarry Properties Coral Gray Quarry................................. Quarrying of dimensional Coral Gray granite blocks
In addition, upon consummation of the Keith Acquisition, the Company will own or lease 17 retail outlets and a sandblasting facility in Kentucky. 39 41 The following table sets forth certain information relating to the Company's quarry properties. Each of the quarries listed below: (i) is owned by the Company (other than the Kershaw quarry, which is leased with 40 years remaining on the lease); (ii) is an open-pit quarry; (iii) contains granite that is suitable for extraction as dimension granite for memorial or other use; (iv) is serviced by electricity provided by local utility companies (other than the Bethel quarry which is serviced by internal generators); and (v) has adequate and modern extraction and other equipment. The Company presently has no exploration plans in place.
TOTAL NET SALEABLE NET SALEABLE APPROXIMATE DATE ORIGINAL COST RECOVERABLE RECOVERABLE OF COMMENCEMENT PRIOR OWNER, MEANS OF OF RESERVES(1) RESERVES QUARRY OF OPERATIONS (DATE ACQUIRED) ACCESS EACH PROPERTY (CUBIC FEET) (YEARS)(2) - ------------------- ----------------- ----------------------- ----------- ------------- --------------- ------------ E.L. Smith......... 1880 E.L. Smith Quarry Co. Paved road $ 7,562,676 2,460,000,000 4,920 (1948) Adam-Pirie......... 1880 J.K. Pirie Quarry Paved road $ 4,211,363 985,000,000 6,560 (1955) Bethel............. 1900 Woodbury Granite Dirt road $ 174,024 76,665,000 383 Company, Inc. (1957) Royalty/Berkeley... 1923 Coggins Granite (1991) Paved road $ 2,794,500 6,695,000 67 Millstone.......... 1985 Coggins Granite (1991) Paved road $ 1,195,900 5,663,000 56 Caprice............ 1968 Caprice Blue Quarry Paved road $ 0 No estimate No estimate Inc.(1997) Stanstead.......... 1920 Brodies Limited and Paved road $ 505,453 32,670,000 217 Stanstead Granite Company (1960) Laurentian......... 1944 Brodies Limited (1960) Paved road $ 860,115 3,920,000 52 American Black..... 1973 Pennsylvania Granite Paved road $ 2,900,000 14,701,000 98 Inc. (1997) Salisbury.......... 1918 Pennsylvania Granite Paved road $ 3,886,592 19,602,000 87 Inc. (1997) Autumn Rose........ 1969 Autumn Rose Quarry Inc. Paved road $ 200,000 735,000 21 (1997) Kershaw............ 1955 Pennsylvania Granite Paved road $ 200,000 635,000 22 Inc. (1997) Coral Gray......... 1955 Pennsylvania Granite Paved road $ 200,000 No estimate No estimate Inc. (1997)
- --------------- (1) Net saleable reserves are based on internal Company estimates, except for the reserves for the E.L. Smith, Adam-Pirie and Bethel quarries, which are based on independent assessments by CA Rich Consultants, Inc. (2) Based on internal Company estimates using current production levels. The estimates of saleable reserves of the Company are based on historical quarry operations, workable reserves in the existing quarries and immediately adjacent areas, current work force sizes and current demand. While quarry operations decrease the granite deposits, the size of the granite deposits in which the Company's quarries are located are large and extend well beyond existing working quarry perimeters. The Company has historically expanded quarry perimeters or opened other quarries in the deposit as necessary to utilize reserves and the Company has adequate acreage for expansions as and when necessary. Most of the Company's quarries have operating histories dating back 50 or more years. The Company has no reason to believe that it will deplete its granite reserves at any time in the foreseeable future. Dimension granite is not considered a valuable mineral or commodity such as gold, nor is it traded on any commodities exchange. The prices charged by the Company to third parties for granite blocks depend on the characteristics of (such as color) and costs to quarry each granite block. The price per cubic foot currently charged by the Company for its granite blocks is generally comparable to other granite suppliers and typically does not exceed $30. REGULATION The Company's quarry and manufacturing operations are subject to substantial regulation by federal and state governmental statutes and agencies, including OSHA, the Mine Safety and Health Administration and similar state and Canadian authorities. The Company's operations are also subject to extensive laws, and regulations administered by the EPA and similar state and Canadian authorities for the protection of the 40 42 environment, including but not limited to those relating to air and water quality, 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 the Company to modify or curtail its operations. The Company cannot predict the effect of such laws, regulations or regulatory interpretations on its business, financial condition, results of operations. While the Company expects to be able to continue to comply, in all material respects, with existing laws and regulations, any material non-compliance could have a material adverse affect on the Company's business, financial condition and results of operations. LEGAL MATTERS The Company is a party to legal proceedings that arise from time to time in the ordinary course of its business. While the outcome of these proceedings cannot be predicted with certainty, management does not expect these matters to have a material adverse effect on the Company. 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 the Company against all contingencies, management believes that its insurance protection is reasonable in view of the nature and scope of the Company's operations. 41 43 MANAGEMENT DIRECTORS AND OFFICERS Certain information concerning directors, executive officers and other officers of the Company is set forth below:
NAME AGE POSITIONS WITH THE COMPANY - ------------------------------------------ --- ------------------------------------------ DIRECTORS AND EXECUTIVE OFFICERS(1) George R. Anderson........................ 57 Senior Vice President, Chief Financial Officer, Treasurer, Director James L. Fox(2)........................... 45 Director Peter A. Friberg.......................... 46 Senior Vice President -- Memorial Sales, Director Mark A. Gherardi.......................... 39 Senior Vice President -- Barre and Canada Manufacturing Operations, Director Jon M. Gregory............................ 48 President -- Quarry Division, Director John E. Keith(2).......................... 50 President -- Retail Division, Director Richard C. Kimball........................ 57 President -- Memorials Division, Vice Chairman of the Board of Directors G. Thomas Oglesby, Jr. ................... 51 President -- Keystone Division, Director Kurt M. Swenson........................... 52 President and Chief Executive Officer, Chairman of the Board of Directors Charles M. Waite.......................... 64 Director Fredrick E. Webster, Jr.(2)............... 59 Director OTHER OFFICERS Robert Otis Childs, III(2)................ 38 President -- C&C Division Albert Gherardi, Jr. ..................... 61 Vice President -- Facilities Management Edward E. Haydon.......................... 57 Senior Vice President -- National Accounts Manager John R. Monson............................ 56 Secretary and General Counsel George T. Oglesby, III.................... 27 Vice President -- Keystone Division Gerald E. Parrott......................... 48 Vice President -- Precision Products
- --------------- (1) Each officer serves for a term of one year. (2) Messrs. Childs, Fox, Keith and Webster will assume their respective positions upon consummation of this offering. George R. Anderson has been the Senior Vice President, Chief Financial Officer and a director of the Company since 1984. Mr. Anderson joined the Company in 1969 as the Chief Accountant and subsequently held the positions of Controller and Treasurer. He has been a director of the Barre Granite Association and a trustee of the Granite Group Insurance Trust and the Barre Belt Multi-Employer Pension Plan. Mr. Anderson's term as a director will expire in 1999. Robert Otis Childs, III will become, upon consummation of the C&C Acquisition, President -- C&C Division. Since 1983, Mr. Childs has been Vice President for Marketing of C&C. He has been President and a member of the Board of Directors of the American Monument Association, and is the President-elect and a director of the Manufacturers and Wholesalers Division of the Monument Builders of North America. James L. Fox. Since 1989, Mr. Fox has been Executive Vice President and General Manager of First Data Investor Services Group, a division of First Data Corporation. Mr. Fox's term as a director of the Company will expire in 1999. Peter A. Friberg has been Senior Vice President -- Memorial Sales, of the Company since 1996 and a director of the Company since January 1996. From 1975 to 1995, Mr. Friberg co-owned and co-managed the Anderson-Friberg Company, a memorial manufacturing company, in Barre, Vermont, serving as President 42 44 from 1991 to 1995. From 1991 to 1993, Mr. Friberg was President of the Barre Granite Association. Mr. Friberg's term as a director of the Company will expire in 1998. Albert Gherardi, Jr. has been Vice President, Facilities Management of the Company since 1996. Prior to 1996, Mr. Gherardi held various positions over a 40-year period with Lawson Granite Company, a memorials company that the Company acquired in 1996. Albert Gherardi, Jr. is the father of Mark A. Gherardi. Mark A. Gherardi has been Senior Vice President, Barre and Canada Manufacturing Operations and a director of the Company since 1996. Prior to 1996, Mr. Gherardi held various sales and production positions over a 20-year period with Lawson Granite Company. Mr. Gherardi's term as a director of the Company will expire in 1998. Mark Gherardi is the son of Albert Gherardi, Jr. Jon M. Gregory has been President -- Quarry Division since 1993 and has been a director of the Company since 1995. Since joining the Company in 1975, Mr. Gregory has served in various positions including Senior Vice President of the Memorials Division, Manager of Manufacturing and line production supervisor. Mr. Gregory's term as a director of the Company will expire in 1998. Edward E. Haydon has been Senior Vice President -- National Accounts Manager since 1996 and President of Rock of Ages Canada, Inc. since 1985. In addition, Mr. Haydon was also Senior Vice President, Memorial Operations from 1991 to 1993. Mr. Haydon is also a Director of the Canadian Stone Association, and a Trustee of the Manufacturers and Wholesalers Division of Monument Builders of North America. John E. Keith will become, upon consummation of the Keith Acquisition, the President -- Retail Division and a director of the Company. Mr. Keith has been an owner of and President of Keith Monument since 1989. From 1965 to 1989, Mr. Keith held various officer positions with Keith Monument. Mr. Keith's term as a director of the Company will expire in 2000. Richard C. Kimball has been President -- Memorials Division, and Vice Chairman of the Board of Directors since 1993 and a director of the Company since 1986. Prior to joining the Company, Mr. Kimball served as a director, principal and President of The Bigelow Company, Inc., a strategic planning and investment banking firm from 1972 until 1993. Mr. Kimball's current term as a director of the Company will expire in 2000. John R. Monson has been Secretary of the Company since 1984 and General Counsel of the Company since August, 1996. Since 1974, Mr. Monson has been a partner, director and member of Wiggin & Nourie, P.A., a law firm located in Manchester, New Hampshire that has represented the Company since 1984. G. Thomas Oglesby, Jr. became the President -- Keystone Division and a director of the Company in connection with the consummation of the Keystone Acquisition in June 1997. Since 1982, Mr. Oglesby has been President of Keystone Memorials Inc. Mr. Oglesby was a member of the Board of Directors and served four separate terms as President of the Elberton Granite Association from 1979 until 1996. He is a director of the American Monument Association and the Manufacturers and Wholesalers Division of the Monument Builders of North America. He is the father of George T. Oglesby, III. Mr. Oglesby's current term as a director of the Company will expire in 1999. George T. Oglesby, III was elected Vice President -- Keystone Division in connection with the consummation of the Keystone Acquisition in June 1997. Since 1992, Mr. Ogelsby has held various sales and management positions with Keystone Memorials Inc. He is a member of the Board of Directors of the Elberton Granite Association. Gerald E. Parrott has been Vice President -- Precision Products since 1992. From 1976 to 1992 he was Chief Engineer of the Company. Kurt M. Swenson has been the President and Chief Executive Officer and Chairman of the Board of Directors of the Company since 1984. Mr. Swenson has been the Chief Executive Officer and a director of Swenson Granite Company, Inc. since 1974. He is also a director of the American Monument Association, the Funeral and Memorial Information Council, the National Building Granite Quarriers Association and Group Polycor International. Mr. Swenson is also a director and the President of the StonExpo Federation and a 43 45 trustee of the Manufacturers and Wholesalers' Division of Monument Builders of North America. Mr. Swenson's current term as a director of the Company will expire in 2000. Charles M. Waite has been a director of the Company since 1985. Since 1989, Mr. Waite has been managing partner of Chowning Partners, a financial consulting firm that provides consulting services to New England companies. Mr. Waite's current term as a director will expire in 2000. Fredrick E. Webster, Jr., Ph.D. has been a Professor of Management at the Amos Tuck School of Business Administration of Dartmouth College since 1965. He is also a management consultant and lecturer. Dr. Webster serves as a director of Vermont Public Radio and the American Marketing Association. He is also a member of the Corporation of Mary Hitchcock Memorial Hospital. Mr. Webster's term as a director will expire in 1999. COMMITTEES OF THE BOARD OF DIRECTORS The principal function of the Audit Committee, which, upon consummation of this offering, will consist of Messrs. Fox and Waite, is to endeavor to assure the integrity and adequacy of financial statements issued by the Company. It is intended that the Audit Committee will review internal auditing systems and procedures as well as the activities of the public accounting firm performing the external audit. The principal function of the Compensation Committee, which, upon consummation of this offering, will consist of Messrs. Fox, Waite and Webster, is to review periodically the suitability of the remuneration arrangements (including benefits) for the executive officers of the Company and to administer the 1994 Plan. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION During 1996, the Compensation Committee of the Board of Directors was comprised of Kurt Swenson, Guy A. Swenson, Jr. and Charles M. Waite. During his 1996 service on the Compensation Committee, Mr. Swenson was the President and Chief Executive Officer of the Company and Mr. Swenson participated in all compensation decisions, including those related to his own compensation. COMPENSATION OF DIRECTORS Directors who are not also officers of the Company are paid annual directors' retainers of $5,000, and $250 for each meeting of the Board, including committee meetings. Directors are also eligible for stock option grants under the 1994 Plan. 44 46 EXECUTIVE COMPENSATION The following table sets forth information with respect to the Chief Executive Officer of the Company and each of the four other most highly compensated executive officers of the Company (the "Named Executive Officers") for the year ended December 31, 1996. SUMMARY COMPENSATION TABLE
LONG-TERM COMPENSATION ANNUAL COMPENSATION --------------------- -------------------- SECURITIES UNDERLYING ALL OTHER NAME AND PRINCIPAL POSITION YEAR SALARY BONUS OPTIONS(#) COMPENSATION(1) - --------------------------------- ----- --------- -------- --------------------- --------------- Kurt M. Swenson.................. 1996 $304,320 $15,220 12,500 $ 1,050 President, Chief Executive Officer, Chairman of the Board of Directors Richard C. Kimball............... 1996 $204,360 $14,000 12,500 $ 1,050 President -- Memorials Division, Vice Chairman of the Board of Directors George R. Anderson............... 1996 $154,440 $10,500 25,000 $ 1,050 Senior Vice President, Chief Financial Officer, Director Jon M. Gregory................... 1996 $153,360 $10,500 50,000 $ 1,050 President -- Quarry Division, Director Mark A. Gherardi................. 1996 $140,040 $12,500 75,000 -- Senior Vice President -- Barre and Canada Manufacturing Operations, Director
- --------------- (1) In each case, represents a matching contribution under the Company's 401K plan. STOCK OPTION GRANTS The following table sets forth certain information concerning grants of stock options made during the year ended December 31, 1996 by the Company to the Named Executive Officers: OPTION GRANTS IN LAST FISCAL YEAR
POTENTIAL REALIZABLE VALUE INDIVIDUAL GRANTS AT ASSUMED ANNUAL ------------------------------------------------------- RATES NUMBER OF PERCENT OF OF STOCK PRICE SECURITIES TOTAL OPTIONS APPRECIATION UNDERLYING GRANTED TO EXERCISE FOR OPTION TERM(4) OPTIONS EMPLOYEES IN PRICE EXPIRATION --------------------- NAME GRANTED(1) FISCAL YEAR(2) PER SHARE(3) DATE 5% 10% - ---------------------------- ---------- -------------- ------------ ---------- -------- ---------- Kurt M. Swenson............. 12,500 2.1% $ 4.12 12/31/01 $ 14,229 $ 31,441 Richard C. Kimball.......... 12,500 2.1% $ 3.74 12/31/01 12,916 28,541 George R. Anderson.......... 25,000 4.3% $ 3.74 12/31/01 25,832 59,083 Jon M. Gregory.............. 50,000 8.5% $ 3.74 12/31/01 51,665 114,165 Mark A. Gherardi............ 75,000 12.8% $ 3.59 01/01/01 74,389 164,380
- --------------- (1) The options represent the right to acquire Class B Common Stock, which is convertible on a share-for-share basis into Class A Common Stock. (2) Based on an aggregate of 587,500 options granted to employees and directors of the Company in fiscal 1996, including the Named Executive Officers. (3) The exercise price of each option was equal to the fair market value of the Common Stock on the date of grant as determined by the Board of Directors. (4) These amounts represent certain assumed annual rates of appreciation calculated from the exercise price, as required by the rules of the Securities and Exchange Commission. Actual gains, if any, on stock option exercises and Common Stock holdings are dependent on the future performance of the Common Stock. There can be no assurance that the amounts reflected in the table will be the actual amounts achieved. 45 47 The following table sets forth information concerning the fiscal year-end value of unexercised options held at December 31, 1996 by each of the Named Executive Officers, using the exercise price of options granted in December, 1996 as the fiscal year-end value per share of Common Stock. Each of the stock options set forth below represents the right to acquire Class B Common Stock. During 1996, no stock options were exercised by any of the Named Executive Officers. The Company has not granted any stock appreciation rights. FISCAL YEAR-END OPTION VALUES
NUMBER OF SECURITIES VALUE OF UNEXERCISED UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS OPTIONS AT DECEMBER 31, 1996 AT DECEMBER 31, 1996 ----------------------------- ----------------------------- NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE - ---------------------------------------------- ------------ -------------- ------------ -------------- Kurt M. Swenson............................... 62,500 50,000 $ 66,000 $ 44,000 Richard C. Kimball............................ 47,500 40,000 60,300 40,200 George R. Anderson............................ 35,000 40,000 40,200 26,800 Jon M. Gregory ............................... 25,000 50,000 20,100 13,400 Mark A. Gherardi.............................. 15,000 60,000 2,250 9,000
PENSION PLANS The Company maintains a qualified pension plan (the "Pension Plan"), and non-qualified salary continuation agreements (the "Salary Continuation Agreements") for certain executive officers of the Company. The Company's Pension Plan is noncontributory and provides benefits based upon length of service and final average earnings. Generally, employees age 21 with one year of continuous service are eligible to participate in the retirement plan. The annual pension benefits shown for the qualified plan assume a participant attains age 65 during 1997 and retires immediately. The Employee Retirement Income Security Act of 1974 places limitations on the compensation used to calculate pensions and on pensions which may be paid under federal income tax qualified plans, and some of the amounts shown on the following table may exceed the applicable limitations. Such limitations are not currently applicable to the Salary Continuation Agreements. The following table shows the total estimated annual retirement benefits payable upon normal retirement under the Pension Plan for the Named Executive Officers at the specified executive remuneration and years of continuous service. PENSION PLAN TABLE
FINAL AVERAGE COMPENSATION 15 YEARS 20 YEARS 25 YEARS 30 YEARS 35 YEARS ---------------------------- -------- -------- -------- -------- -------- $125,000.................... $ 39,492 $ 52,656 $ 65,820 $ 78,984 $ 78,984 $150,000.................... $ 47,742 $ 63,656 $ 79,570 $ 95,484 $ 95,484 $175,000.................... $ 55,992 $ 74,656 $ 93,320 $111,984 $111,984 $200,000.................... $ 64,242 $ 85,656 $107,070 $128,484 $128,484 $225,000.................... $ 72,492 $ 96,656 $120,820 $144,984 $144,984 $250,000.................... $ 80,742 $107,656 $134,570 $161,484 $161,484 $275,000.................... $ 88,992 $118,656 $148,320 $177,984 $177,984 $300,000.................... $ 97,242 $129,656 $194,484 $194,484 $194,484 $325,000.................... $105,492 $140,656 $175,820 $210,984 $210,984 $350,000.................... $113,742 $151,656 $189,570 $227,484 $227,484 $375,000.................... $121,992 $162,656 $203,320 $243,984 $243,984
46 48 These calculations are based on the retirement formula in effect as of December 31, 1996, which provides an annual life annuity at age 65 equal to 1.8% of a participant's final five-year average compensation (excluding bonus) plus .4% of a participant's final five-year average compensation in excess of Social Security Covered Compensation times years of service to a maximum of 30 years. Estimated years of continuous service for each of the Named Executive Officers, as of December 31, 1996 and rounded to the full year, are: Mr. G. Anderson, 28 years; Mr. J. Gregory, 21 years; Mr. M. Gherardi, 16 years; Mr. R. Kimball, 4 years; and Mr. K. Swenson, 13 years. In addition, the Company's Salary Continuation Agreements provide for supplemental pension benefits to certain executive officers of the Company, including the Named Executive Officers. The following table sets forth the supplemental pension benefits for the Named Executive Officers.
ANNUAL TOTAL YEARS RETIREMENT ANNUAL BASE OF SERVICE BENEFIT NAME COMPENSATION AT AGE 65 AT AGE 65 ------------------------------------------------ ------------ ----------- ---------- M. Gherardi..................................... $140,000 27 $ 22,680 G. Anderson..................................... $154,440 35 $ 32,432 R. Kimball...................................... $204,360 12 $ 24,523 K. Swenson...................................... $304,320 26 $ 87,036 J. Gregory...................................... $153,360 39 $ 35,886
These calculations are based on individual Salary Continuation Agreements, which provide a 100% joint and survivor annuity at age 65 equal to a percentage, ranging from .6% to 1.1%, of a participant's highest annual base compensation times full years of service. The percentage range has been determined by the Board of Directors. There is no compensation increases assumed in these calculations. EMPLOYMENT AGREEMENTS The Company has entered into an employment agreement with Kurt M. Swenson (the "Swenson Employment Agreement") for retention of his services as President and Chief Executive Officer of the Company. The term of the Swenson Employment Agreement commences on the date of consummation of the offering (the "Commencement Date") and continues until the fifth anniversary thereof, provided that on the third and each subsequent anniversary of the Commencement Date such term will automatically be extended for one additional year, unless, not later than ninety days prior to the expiration of the term, the Company or Mr. Swenson gives notice that the term will not be extended. The Swenson Employment Agreement provides for continued payment of salary and benefits over the remainder of the term if Mr. Swenson's employment is terminated by the Company without Cause (as defined in the Swenson Employment Agreement) or as a result of death or disability or by Mr. Swenson for Good Reason (as defined in the Swenson Employment Agreement). The Swenson Employment Agreement also provides for a lump sum payment to Mr. Swenson equal to the sum of (i) accrued but unpaid salary, and a prorated bonus amount equal to the greater of the largest annual bonus paid to Mr. Swenson during the prior three years and the annual bonus payable in respect of the most recently completed fiscal year (the "Highest Annual Bonus"), through the date of termination and (ii) three times the sum of (A) his then annual salary and (B) Highest Annual Bonus, and for continuation of benefits for three years, if Mr. Swenson's employment is terminated by the Company (other than for Cause, death or disability) during the twelve-month period following, or prior to but in connection with, or by Mr. Swenson during the twelve-month period following, a Change in Control (as defined in the Swenson Employment Agreement). In the event of such a termination, Mr. Swenson may elect in lieu of the lump sum payment described above, to receive in a lump sum or over the then remaining term of the Swenson Employment Agreement, an amount equal to the total amount he would have been entitled to receive if his employment had been terminated by the Company Without Cause or by Mr. Swenson for Good Reason. If any payment or distribution by the Company to or for the benefit of Mr. Swenson under the Swenson Employment Agreement would be subject to the excise tax imposed by Section 4999 of the Code or any interest or penalties are incurred by Mr. Swenson with respect to such excise tax, then Mr. Swenson will 47 49 generally be entitled to receive an additional payment such that after payment by Mr. Swenson of all taxes, Mr. Swenson retains an amount of the additional payment equal to the excise tax imposed. The Company has entered into an employment agreement with G. Thomas Oglesby, Jr. and George T. Oglesby, III and will enter into employment agreements with each of Robert Otis Childs, III, John E. Keith and Roy H. Keith, Jr. (such persons, together with G. Thomas Oglesby, Jr., being referred to as the "Acquisition Executives" and such employment agreements with the Acquisition Executives being referred to collectively as the "Acquisition Employment Agreements"), upon consummation of the C&C Acquisition and Keith Acquisition. The Acquisition Employment Agreement with Mr. Oglesby provides for an initial five-year term commencing on June 27, 1997, and each of the other Acquisition Employment Agreements provides, in effect, for an initial five-year term commencing on the date of the offering. Pursuant to the Acquisition Employment Agreements, the Executives will hold the respective positions listed for such persons under "Management -- Directors and Officers". The Acquisition Employment Agreements provide for benefits of the type generally provided to key executives of the Company, and for continued payment of salary and benefits over the remainder of the term if the Executive's employment is terminated by the Company without Cause. The Acquisition Employment Agreements and related undertakings generally prohibit the Executives from competing with the Company during the term of employment and for two years thereafter, and contain customary confidentiality provisions in favor of the Company. In addition, the Acquisition Employment Agreements of G. Thomas Oglesby, Jr. and John E. Keith provide that, so long as they remain employed under their respective Acquisition Employment Agreements, they will be nominated for election to the Board of Directors of the Company, subject to certain conditions. The Company will also enter into employment agreements with Richard C. Kimball, George R. Anderson, Jon Gregory and Edward E. Haydon (the "Officer Employment Agreements"), effective upon consummation of this offering. The Officer Employment Agreements will contain substantially the same terms as the Acquisition Employment Agreements, except that they will not include any right to be nominated for election to the Company's Board of Directors. In connection with the acquisitions of Lawson Granite Company and the Anderson Friberg Company, the Company on January 1, 1996 entered into five-year employment agreements (the "Lawson-AFCO Employment Agreements") with Peter Friberg, Albert Gherardi, Jr., Mark Gherardi and Paula Plante (the "Lawson-AFCO Employees") providing for the employment of such persons in their current positions. The Lawson-AFCO Employment Agreements contain substantially the same terms as the Acquisition Employment Agreements except that they provide for certain severance payments upon certain conditions occurring. INCENTIVE PLAN 1994 Amended and Restated Stock Plan. Under the 1994 Plan, 1,500,000 shares of Common Stock have been reserved for issuance to officers, directors, employees and consultants of the Company and its subsidiaries. Awards under the 1994 Plan made by the Board of Directors prior to the consummation of this offering will be satisfied in shares of Class B Common Stock and awards made under the 1994 Plan made on or after that date will be satisfied in shares of Class A Common Stock. As of the date of this Prospectus, options for 862,500 shares of Class B Common Stock have been granted and were outstanding under the 1994 Plan and no such options have been exercised. Options for 383,252 shares of Class A Common Stock will be granted in connection with the Acquisitions and to two non-employee directors who will assume their positions upon consummation of this offering. In addition, as of the date of this Prospectus, options to acquire 254,248 shares of Class A Common Stock remained available for future issuance under the 1994 Plan. Under the terms of the 1994 Plan, "incentive stock options" ("ISOs") within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"), "nonqualified stock options" or options which do not qualify as ISOs ("NQSOs"), awards of Common Stock, and opportunities to make direct purchases, of Common Stock ("Awards") may be granted by the Board of Directors to employees (including officers and directors who are employees), directors and consultants of the Company, except that ISOs may be granted only to persons who are employees of the Company at the time the ISOs are granted. Initially, each ISO will be exercisable over a period, determined by the Board of Directors in its discretion, not to exceed ten years from the date of grant, as required by the Code. In addition, in the case of an ISO granted to an individual who, at the time such ISO is granted, owns shares of capital stock of the 48 50 Company representing more than ten percent of the total combined voting power of all classes of stock of the Company, the exercise period for an ISO may not exceed five years from the date of grant. Options may be exercisable during the exercise period at such times, in such amount, in accordance with such terms and conditions, and subject to such restrictions as are set forth in the option agreement evidencing the grant of such options. The Board of Directors generally has the right to accelerate the exercisability of any options granted under the 1994 Plan which would otherwise be unexercisable. Upon certain consolidations or mergers, the board of directors of any entity assuming the obligations of the Company may make equitable adjustments to the options, accelerate the exercisability of options or terminate them in exchange for a cash payment. The 1994 Plan shall expire at the end of the day on November 20, 2004, except with respect to options or Awards outstanding on such date. The Board of Directors may terminate the 1994 Plan sooner at any time or amend the Plan at any time, subject to the terms of the 1994 Plan. LIMITATION OF LIABILITY AND INDEMNIFICATION The Company's Amended and Restated Certificate of Incorporation (the "Certificate of Incorporation") provides that no director of the Company shall be personally liable to the Company or to any stockholder for monetary damages arising out of such director's breach of fiduciary duty, except to the extent that the elimination or limitation of liability is not permitted by the Delaware General Corporation Law. The Delaware General Corporation Law, as currently in effect, permits charter provisions eliminating the liability of directors for breach of fiduciary duty, except that such charter provisions may not eliminate or limit the liability of directors for: (i) any breach of the director's duty of loyalty to a corporation or its stockholders; (ii) any acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law; (iii) any payment of a dividend or approval of a stock purchase or other transaction that is illegal under Section 174 of the Delaware General Corporation Law; or (iv) any transaction from which the director derived an improper personal benefit. A principal effect of this provision of the Certificate of Incorporation is to limit or eliminate the potential liability of the Company's directors for monetary damages arising from any breach of their duty of care, unless the breach involves one of the four exceptions described in clauses (i) through (iv) of the immediately preceding sentence. The Certificate of Incorporation and the Company's By-laws further provide for the indemnification of the Company's directors and officers to the fullest extent permitted by Section 145 of the Delaware General Corporation Law, including circumstances in which indemnification is otherwise discretionary. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the Company pursuant to the foregoing provisions, or otherwise, the Company has been advised that in the opinion of the Commission, such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. At the present time, there is no pending litigation or proceeding involving any director, officer, employee or agent of the Company in which indemnification will be required or permitted. The Company is not aware of any threatened litigation or proceeding which may result in a claim for such indemnification. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Prior to the closing of the offering, the Company will effect a reorganization (the "Reorganization") as follows: (i) the reincorporation merger of Rock of Ages Corporation, a Vermont corporation and the immediate predecessor to the Company ("ROA Vermont"), with and into a newly-formed Delaware corporation, with the Company surviving as a Delaware corporation (the "Reincorporation Merger"), which occurred on August 12, 1997, whereby the Class A and Class B Common Stock was created and each outstanding share of common stock of ROA Vermont was converted into one half of a share of Class B Common Stock; (ii) the merger of Swenson Granite Company ("Swenson Granite") with and into the Company, with the Company as the surviving corporation (the "Swenson Merger"), in which Swenson Granite's stockholders will receive 1,618.123 shares of Class B Common Stock for each share of Swenson Granite capital stock held by them; and (iii) immediately prior to the Swenson Merger, Swenson Granite will distribute its curb and landscaping business (essentially all of its operating assets and operating liabilities) to its stockholders (the "Swenson Granite Distribution") through a pro rata distribution of all of the member 49 51 interests in a newly formed limited liability company to be named Swenson Granite Company LLC ("Swenson LLC"). Following the Swenson Granite Distribution and prior to the Swenson Merger, the sole asset of Swenson Granite will be its 93% stock interest in the Company and its only liabilities will be a $3,340,000 intercompany payable to the Company and a $310,000 note payable described below. The Swenson Merger exchange ratio of 1,618,123 shares of Class B Common Stock for each share of Swenson Granite Common Stock was determined by dividing the number of outstanding shares of the Company held by Swenson Granite at the time of the Swenson Merger by the total number of shares of common stock of Swenson Granite which will be outstanding at such time. In determining this ratio, Swenson Granite and the Company sought to maintain in the Swenson Granite shareholders as a group the same aggregate percentage ownership of the Company as was held by Swenson Granite immediately prior to the Swenson Merger, as well as to preserve the same ownership proportions of such shareholders relative to one another with respect to the Company as they held with respect to Swenson Granite immediately prior to the Swenson Merger. Upon consummation of the Swenson Merger, the shares of the Company held by Swenson Granite will be cancelled, the Company will forgive the intercompany payable and the Company will assume the note payable. Kurt M. Swenson and his brother Kevin C. Swenson own in the aggregate approximately 60.6% of Swenson Granite. Robert Pope, a security holder of more than five percent of the Class B Common Stock of the Company, will become President and Chief Executive Officer of Swenson LLC following the Swenson Granite Distribution. Swenson Granite is a party to certain financing agreements of the Company with CIT and is a co-maker and/or guarantor of all indebtedness of the Company due to CIT. See "Management's Discussion and Analysis -- Liquidity and Capital Resources". Upon consummation of the Swenson Granite Distribution and the offering, Swenson LLC will be released by CIT as a party, co-maker and/or guarantor of the Company's indebtedness to CIT, and the Company will remain liable with respect thereto. As of June 30, 1997, the Company carried on its books approximately $4.6 million due from Swenson Granite with respect to borrowings by the Company under these credit facilities and advanced by the Company to Swenson Granite. Of this amount, approximately $3.3 million will not be assumed or repaid by Swenson LLC in connection with the Swenson Granite Distribution and will remain an obligation of the Company. The balance of approximately $1.3 million, together with any net advances from the Company to Swenson Granite from and after June 30, 1997 to the date of the Swenson Granite Distribution and the consummation of the offering, will be repaid by Swenson LLC to the Company on or before December 31, 1997. In connection with the Company's acquisition of Lawson Granite Company and Anderson Friberg Company in December 1995, Swenson Granite is obligated under certain notes and agreements related thereto (the "Lawson-Anderson Friberg Obligations"). Except for certain employment agreement and other obligations to Robert F. Pope (the "Pope Obligations"), the Chief Operating Officer of Swenson Granite who, effective upon the Swenson Granite Distribution, will become President and Chief Executive Officer of Swenson LLC, none of the Lawson-Anderson Friberg Obligations, including but not limited to a note payable to Paula Plante in the amount of $310,000, will be assumed by Swenson LLC and will become direct obligations of the Company as a result of the Swenson Merger. The Company will indemnify Swenson LLC with respect to such obligations, other than the Pope Obligations as to which Mr. Pope will release, and Swenson LLC will provide an indemnity to, Swenson Granite and the Company. Swenson LLC will own two granite quarries, one in Concord, New Hampshire and other in Woodbury, Vermont. Both have been owned by Swenson Granite for more than 40 years. The Company anticipates that it will continue to purchase Woodbury granite from Swenson LLC at the same price Swenson LLC charges its landscape manufacturing operations. The Company expects that it will continue to be able to purchase all of the excess output of the Woodbury quarry (beyond that required by Swenson LLC for its curb and landscaping operations) for resale for both memorial and other uses. Because of the proximity of the Woodbury quarry to Barre, Vermont, the Company has provided, and expects to continue to provide, certain maintenance services and equipment to the Woodbury quarry. Both the Company and Swenson LLC will have the right to terminate these services at any time and the Company will have no obligation to purchase or continue to purchase Woodbury granite from Swenson LLC. The Company's sales of Woodbury granite provided by Swenson Granite represented 1.8% of 1996 sales of the Company (1.1% assuming the Acquisitions occurred as of January 1, 1996). The Company believes these arrangements with Swenson LLC 50 52 are as favorable, or more favorable, than would be available from an unrelated party for comparable granite blocks. It is expected that, effective upon the Swenson Granite Distribution, ongoing pension liabilities under the Pension Plan (which is sponsored jointly by the Company and Swenson Granite) in respect of the employees of Swenson Granite will be assumed by Swenson LLC, and appropriate assets, determined in accordance with applicable law, will be transferred from the Pension Plan to a pension plan established by Swenson LLC. It is anticipated that in connection with the Swenson Granite Distribution, the 401(k) accounts of Swenson Granite employees who participate in 401(k) plans jointly sponsored by the Company and Swenson Granite will remain in a jointly sponsored plan since each employee's account is fully funded and vested as each contribution is made. Upon consummation of the Swenson Granite Distribution, Kurt M. Swenson, the Company's Chairman and Chief Executive Officer, will own approximately 30% of all outstanding member interests of Swenson LLC. Mr. Swenson, who has served as Chairman of the Board and Chief Executive Officer of Swenson Granite since 1974, will resign as President, Chief Executive Officer of Swenson Granite, effective upon the consummation of the Swenson Granite Distribution. However, Mr. Swenson will continue to serve as a non-officer Chairman of the Board of Swenson LLC, but will have no involvement with the day to day operations of Swenson LLC. Neither Mr. Swenson nor any other officer of the Company, will receive salary, bonus, expenses or other compensation from Swenson LLC except for any pro rata share of earnings attributable to their ownership interest. In connection with the Keystone Acquisition, the Company entered into the Supply Agreements with Missouri Red and KGCI. See "Business -- Quarrying and Manufacturing Operations". G. Thomas Oglesby, Jr. is the sole owner of Missouri Red and the trustee of a trust for the benefit of his mother and others which hold 100% of KGCI. G. Thomas Oglesby, Jr. is an officer of the Company. The Company believes the terms and conditions of the Supply Agreements are as favorable as would be available from unrelated suppliers. Also in connection with the Keystone Acquisition, the Company agreed to grant to G. Thomas Oglesby, Jr. and George T. Oglesby, III, principal owners and officers of Keystone, options under the 1994 Plan to purchase 75,000 shares and 50,000 shares, respectively, at an exercise price per share equal to the initial public offering price per share of the Class A Common Stock. See "Management -- Directors and Officers." In connection with the C&C Acquisition, the Company has agreed to grant to Robert Otis Childs, III, one of the principal owners of C&C, an option under the 1994 Plan to purchase 75,000 shares of Class A Common Stock at an exercise price per share equal to the initial public offering price per share of the Class A Common Stock. See "Management -- Directors and Officers." In connection with the Keith Acquisition, the Company agreed to (i) enter into a five year triple net lease agreement with John E. Keith, who will become an officer and director of the Company upon consummation of the Keith Acquisition, and Roy Keith, Jr., the principal owners of Keith Monument, for office buildings and retail locations containing 28,000 square feet at an annual rent of $120,000; and (ii) grant to John E. Keith and Roy Keith, Jr. options under the 1994 Plan to purchase an aggregate of 125,000 shares of Class A Common Stock at an exercise price per share equal to the initial public offering price per share of the Class A Common Stock. See "Management -- Directors and Officers." Upon consummation of the offering, the Company will grant to each of James L. Fox and Frederick E. Webster, Jr., each of whom will become non-employee directors of the Company at that time, options under the 1994 Plan to purchase 29,126 shares of Class A Common Stock at an exercise price per share equal to the initial public offering price per share of the Class A Common Stock. The Company has adopted a policy pursuant to which any future transaction with one of its officers, directors or affiliates will be on terms no less favorable to the Company than could be obtained from unrelated third parties and will be approved by a majority of the disinterested members of the Board of Directors. 51 53 PRINCIPAL AND SELLING STOCKHOLDERS The following tables set forth certain information as to the beneficial ownership of the Common Stock as of October 14, 1997, and as adjusted to reflect the sale of 2,900,000 shares of Class A Common Stock offered hereby, by (i) each person known by the Company to be the beneficial owner of 5% or more of Common Stock; (ii) each director of the Company; (iii) each of the executive officers of the Company; (iv) all directors and executive officers as a group; and (v) each Selling Stockholder. Unless otherwise indicated, the Company believes all persons listed have sole voting power and sole investment power with respect to the shares shown.
COMMON STOCK COMMON STOCK BENEFICIALLY OWNED SHARES OF BENEFICIALLY OWNED PRIOR TO OFFERING(2) CLASS A AFTER OFFERING(2) NAME AND ADDRESS OF --------------------- COMMON STOCK ------------------- BENEFICIAL OWNER(1) NUMBER PERCENT TO BE SOLD NUMBER PERCENT - ---------------------------------------- --------- ------- ------------ --------- ------- Kurt M. Swenson(3)+..................... 1,143,989 27.6 -- 1,143,989 16.5 Kevin C. Swenson(4)..................... 1,061,489 25.6 -- 1,061,489 15.3 Mark A. Gherardi(5)+.................... 277,573 6.7 -- 277,573 4.0 Missouri Red Quarries, Inc.(6).......... 263,441 6.4 -- 263,441 3.8 G. Thomas Oglesby, Jr.(7)+.............. 263,441 6.4 -- 278,441 4.0 George T. Oglesby, III(8)............... -- * -- 10,000 * Peter A. Friberg(9)+.................... 206,375 5.0 -- 206,375 3.0 Robert L. Pope(10)...................... 206,375 5.0 -- 206,375 3.0 Richard C. Kimball(11)+................. 91,626 2.2 -- 91,626 1.3 George R. Anderson(12)+................. 74,126 1.8 -- 74,126 1.1 Jon M. Gregory(13)+..................... 54,126 1.4 -- 59,126 * Charles M. Waite+....................... 29,126 * -- 29,126 * John E. Keith(14)+...................... -- * -- 100,735 1.5 James L. Fox(14)+....................... -- * -- 5,825 * Frederick E. Webster, Jr.(14)+.......... -- * -- 5,825 * Guy A. Swenson, III(15)................. 48,544 1.2 32,000 16,544 * Guy A. Swenson, Jr. (15)................ 45,307 1.1 30,307 15,000 * Peter B. Moore(15)...................... 40,453 1.0 8,000 32,453 * John D. Swenson(15)..................... 32,362 * 27,362 5,000 * George M. Karnedy....................... 29,126 * 26,126 3,000 * Christian P. Swenson(15)................ 24,272 * 17,272 7,000 * Melvin A. Friberg Irrevocable Trust for the benefit of Andrew C. Friberg(9)... 12,945 * 12,945 -- * Melvin A. Friberg Irrevocable Trust for the benefit of Lindsay S. Friberg(9)............................ 12,945 * 12,945 -- * Melvin A. Friberg Irrevocable Trust for the benefit of Elizabeth F. Pope(10).............................. 12,945 * 12,945 -- * Melvin A. Friberg Irrevocable Trust for the benefit of Gregory J. Pope(10).... 12.945 * 12,945 -- * Melvin A. Friberg Irrevocable Trust for the benefit of Michael R. Pope(10).... 12,945 * 12,945 -- * Melvin A. Friberg Irrevocable Trust for the benefit of Joseph Yalicki......... 12,945 * 12,945 -- * Carolyn Friberg(9)...................... 9,709 * 9,709 -- * Merilyn Friberg(9)...................... 9,709 * 9,709 -- * Sally S. Friberg(9)..................... 9,709 * 9,709 -- * Nancy F. Pope(10)....................... 9,709 * 9,709 -- * Susan S. Vogelsang(15).................. 9,709 * 200 9,509 * Carl Yalicki............................ 9,709 * 9,709 -- *
52 54
COMMON STOCK COMMON STOCK BENEFICIALLY OWNED SHARES OF BENEFICIALLY OWNED PRIOR TO OFFERING(2) CLASS A AFTER OFFERING(2) NAME AND ADDRESS OF --------------------- COMMON STOCK ------------------- BENEFICIAL OWNER(1) NUMBER PERCENT TO BE SOLD NUMBER PERCENT - ---------------------------------------- --------- ------- ------------ --------- ------- J. Malcolm Swenson...................... 8,091 * 8,000 91 * All directors and executive officers as a group (11 persons).................. 2,145,382 51.7 -- 2,272,767 32.8
- --------------- + Executive Officer and/or Director * Less than 1% (1) The business address of each director, executive officer and 5% stockholder of the Company is c/o Rock of Ages Corporation, 772 Graniteville Road, Graniteville, Vermont 05654. (2) The listed persons hold Class B Common Stock except as otherwise specified. Shares of Class B Common Stock held by the Selling Stockholders will automatically convert into Class A Common Stock on a share-for-shares basis upon the sale by the Selling Stockholders of such shares pursuant to the offering. (3) Includes (i) 82,500 shares subject to stock options exercisable within 60 days and (ii) 18,750 shares held by a trust for the benefit of the children of Kurt M. Swenson of which John R. Monson is the sole trustee. Mr. Monson is Secretary and General Counsel to the Company. Mr. Swenson disclaims any voting power or beneficial interest in the 18,750 shares held by the trust. Kurt M. Swenson is the brother of Kevin C. Swenson. (4) Includes 18,750 shares held by a trust for the benefit of the children of Kevin C. Swenson of which John R. Monson is the sole trustee. Mr. Swenson disclaims any voting power or beneficial interest in these shares. Kevin C. Swenson is the brother of Kurt M. Swenson. (5) Includes 30,000 shares subject to currently exercisable stock options. (6) Missouri Red Quarries, Inc. is 100% owned by G. Thomas Oglesby, Jr. who is its President and the sole director of Missouri Red Quarries, Inc. (7) Includes 263,441 shares owned by Missouri Red Quarries, Inc. Common Stock Beneficially Owned After Offering also includes 15,000 shares of Class A Common Stock subject to options which will be granted and exercisable upon consummation of the offering. G. Thomas Oglesby, Jr. is the father of George T. Oglesby, III. (8) Represents shares of Class A Common Stock subject to stock options that will be granted and exercisable upon consummation of the offering. (9) Includes 30,000 shares subject to currently exercisable options. Excludes 25,890 shares held by trusts established by Melvin A. Friberg for the benefit of his children of which Peter A. Friberg is Trustee and 9,709 owned by each of his wife, sister and mother all listed as Selling Stockholders. Mr. Friberg disclaims any beneficial interest in such shares being sold. (10) Includes 30,000 shares subject to currently exercisable options. Excludes 38,835 shares held by trusts established by Melvin A. Friberg for the benefit of his children of which Robert L. Pope is Trustee and 9,709 shares held by his wife all listed as Selling Stockholders. Mr. Pope disclaims any beneficial interest in such shares being sold. (11) Includes 62,500 shares subject to currently exercisable stock options. (12) Includes 45,000 shares subject to currently exercisable stock options. (13) Includes 30,000 shares subject to currently exercisable stock options. (14) Represents shares of Class A Common Stock subject to stock options that will be granted and exercisable upon consummation of the offering. Also includes 88,235 shares of Class A Common Stock to be issued to National Memorial Corporation in connection with the Keith Acquisition. Mr. Keith is the president and a 50% owner of National Memorial Corporation. (15) The listed holder, or beneficiaries of the listed trusts are relatives of Kurt M. Swenson and his brother Kevin C. Swenson. 53 55 DESCRIPTION OF CAPITAL STOCK The following summarizes the material terms of the capital stock of the Company. GENERAL The authorized capital stock of the Company consists of 30,000,000 shares of Class A Common Stock, par value $.01 per share, 3,000,000 shares of which will be issued and outstanding upon the consummation of this offering (assuming an initial offering price of $17.00 per share); 15,000,000 shares of Class B Common Stock, par value $.01 per share, 3,487,957 shares of which will be issued and outstanding upon consummation of this offering; and 2,500,000 shares of Preferred Stock, par value $.01 per share, none of which will be outstanding upon consummation of this offering. As of October 15, 1997 there were 3,763,441 shares of Class B Common Stock outstanding, all of which were held by Swenson Granite and Missouri Red, no shares of Class A Common Stock outstanding and no shares of Preferred Stock outstanding. CLASS A COMMON STOCK AND CLASS B COMMON STOCK The shares of Class A Common Stock and Class B Common Stock are substantially identical, except for voting rights and certain conversion rights, as described below. Voting Rights. Each share of Class A Common Stock entitles the holder to one vote on each matter submitted to a vote of the Company's stockholders and each share of Class B Common Stock entitles the holder to ten votes on each such matter, in each case including the election of directors. Except as required by applicable law, holders of the Class A Common Stock and Class B Common Stock will vote together as a single class on all matters submitted to a vote of the stockholders. Neither the Class A Common Stock nor the Class B Common Stock has cumulative voting rights. See "Risk Factors -- Control by Existing Stockholders" and "Anti-Takeover Effects of Certain Provisions of the Charter and By-laws and of Delaware Law." Any action that can be taken at a meeting of the stockholders may be taken by written consent in lieu of the meeting if the Company receives consents signed by stockholders having the minimum number of votes that would be necessary to approve the action at a meeting at which all shares entitled to vote on the matter were present. This could permit the holders of Class B Common Stock to take all actions required to be taken by the stockholders without providing the other stockholders the opportunity to vote or raise other matters at a meeting. Dividends. Holders of Class A Common Stock and Class B Common Stock are entitled to receive dividends at the same rate if and when declared by the Board of Directors out of funds legally available therefor, subject to the dividend and liquidation rights of any Preferred Stock that may be issued and outstanding. If a dividend or distribution payable in Class A Common Stock is made on the Class A Common Stock, the Company must also make a pro rata and simultaneous dividend or distribution on the Class B Common Stock payable in shares of either Class A Common Stock or Class B Common Stock. Conversely, if a dividend or distribution payable in Class B Common Stock is made on the Class B Common Stock, the Company must also make a pro rata and simultaneous dividend or distribution on the Class A Common Stock payable solely in shares of Class A Common Stock. Conversion. Class A Common Stock has no conversion rights. Class B Common Stock will be convertible into Class A Common Stock, in whole or in part, at any time and from time to time at the option of the holder on the basis of one share of Class A Common Stock for each share of Class B Common Stock converted. Each share of Class B Common Stock will also automatically convert into one share of Class A Common Stock upon transfer to any person or entity other than a "Permitted Transferee." For this purpose, a Permitted Transferee is (i) a spouse or lineal descendant of any person duly holding shares of Class B Common Stock (a "Qualified Holder") and any spouse of such lineal descendant (all such spouses and lineal descendants, collectively, "Family Members"), (ii) the trustee of a trust for the sole benefit of a Qualified Holder or Family Member, (iii) a partnership comprised exclusively of Qualified Holders or Family members or other entity wholly owned by Qualified Holders or Family Members, or (iv) the executor, administrator or 54 56 personal representative of the estate of a Qualified Holder or Family Member, or the guardian or conservator of a Qualified Holder or any Family Member who has been adjudged disabled by a court of competent jurisdiction. Liquidation. In the event of liquidation of the Company, after payment of the debts and other liabilities of the Company and after making provision for the holders of Preferred Stock, if any, the remaining assets of the Company will be distributable ratably among the holders of the Class A Common Stock and Class B Common Stock treated as a single class. Other Provisions. The holders of shares of the Common Stock are not entitled to preemptive rights. Neither the Class A Common Stock nor the Class B Common Stock may be subdivided or combined in any manner unless the other class is subdivided or combined in the same proportion. PREFERRED STOCK The Board of Directors may, without further action by the Company's stockholders, from time to time, direct the issuance of shares of Preferred Stock in series and may, at the time of issuance, determine the rights, preferences and limitations of each series. Satisfaction of any dividend preferences of outstanding shares of Preferred Stock would reduce the amount of funds available for the payment of dividends on shares of Common Stock. Holders of shares of Preferred Stock may be entitled to receive a preference payment in the event of any liquidation, dissolution or winding-up of the Company before any payment is made to the holders of shares of Common Stock. Under certain circumstances, the issuance of shares of Preferred Stock may render more difficult or tend to discourage a merger, tender offer or proxy contest, the assumption of control by a holder of a large block of the Company's securities or the removal of incumbent management. The Board of Directors, without stockholder approval, may issue shares of Preferred Stock with voting and conversion rights which could adversely affect holders of shares of Common Stock. Upon consummation of the offering, there will be no shares of Preferred Stock outstanding, and the Company has no present intention to issue any shares of Preferred Stock. ANTI-TAKEOVER EFFECTS OF PROVISIONS OF THE CHARTER AND BY-LAWS AND OF DELAWARE LAW Charter and By-Laws The Certificate of Incorporation and the By-laws, together with certain provisions of Delaware law, contain certain provisions that could discourage potential takeover attempts and make more difficult the acquisition of a substantial block of the Common Stock. The Certificate of Incorporation provides for a Board of Directors that is divided into three classes. The directors in Class I hold office until the first annual meeting of stockholders following this offering, the directors in Class II hold office until the second annual meeting of stockholders following this offering, and the directors in Class III hold office until the third annual meeting of stockholders following this offering (or, in each case, until their successors are duly elected and qualified or until their earlier resignation, removal from office for cause or death), and, after each such election, the directors in each such class will then serve in succeeding terms of three years and until their successors are duly elected and qualified. The classification system of electing directors, the ability of stockholders to remove directors only for cause (and only upon a two-thirds vote) and the inability of stockholders to call a special meeting may tend to discourage a third party from making a tender offer or otherwise attempting to obtain control of the Company and may maintain the incumbency of the Board of Directors, as the classification of the Board of Directors and such other provisions generally increase the difficulty of, or may delay, replacing a majority of the directors. In addition, such classification system and such other provisions may be amended only upon an 85% stockholder vote. The Certificate of Incorporation authorizes the directors to issue, without stockholder approval, shares of Preferred Stock in one or more series and to fix the voting powers, designations, preferences and relative, participating, optional or other special rights (and the qualifications, limitations or restrictions of such preferences and rights) of the shares of each such series. The Certificate of Incorporation and By-laws provide that special meetings of the Company's stockholders may be called only by the Chairman of the Board, (if there is one), or the President, any Vice President, (if there is one), the Secretary or any Assistant Secretary, 55 57 (if there is one), and shall be called by any such officer at the written request of a majority of the directors. The By-laws also provide that nominations for directors may not be made by stockholders at any annual or special meeting thereof unless the stockholder intending to make a nomination notifies the Company of its intentions a specified number of days in advance of the meeting and furnishes to the Company certain information regarding itself and the intended nominee. The By-laws also require a stockholder to provide to the Secretary of the Company advance notice of business to be brought by such stockholder before any annual or special meeting of stockholders as well as certain information regarding such stockholder and others known to support such proposal and any material interest they may have in the proposed business. These provisions could delay stockholder actions that are favored by the holders of a majority of the outstanding stock of the Company until the next stockholders' meeting. Delaware Anti-Takeover Statute The Company is subject to Section 203 of the Delaware General Corporation Law which, subject to certain exceptions, prohibits a Delaware corporation from engaging in any business combination with any interested stockholder for a period of three years following the time that such stockholder became an interested stockholder, unless: (i) prior to such time, the board of directors of the corporation approved either the business combination or the transaction which resulted in the stockholder becoming an interested stockholder; (ii) upon consummation of the transaction which resulted in the stockholder becoming an interested stockholder, the interested stockholder owned at least 85% of the voting stock of the corporation outstanding at the time the transaction commenced, excluding for purposes of determining the number of shares outstanding those shares owned (x) by persons who are directors and also officers and (y) by employee stock plans in which employee participants do not have the right to determine confidentially whether shares held subject to the plan will be tendered in a tender or exchange offer; or (iii) at or subsequent to such time, the business combination is approved by the board of directors and authorized at an annual or special meeting of stockholders, and not by written consent, by the affirmative vote of at least two-thirds of the outstanding voting stock which is not owned by the interested stockholder. The application of Section 203 may limit the ability of stockholders to approve a transaction that they may deem to be in their best interests. In general, Section 203 defines "business combination" to include: (i) any merger or consolidation involving the corporation and the interested stockholder; (ii) any sale, transfer, pledge or other disposition of 10% or more of the assets of the corporation to or with the interested stockholder; (iii) subject to certain exceptions, any transaction which results in the issuance or transfer by the corporation of any stock of the corporation to the interested stockholder; (iv) any transaction involving the corporation which has the effect of increasing the proportionate share of the stock of any class or series of the corporation beneficially owned by the interested stockholder; or (v) the receipt by the interested stockholder of the benefit of any loans, advances, guarantees, pledges or other financial benefits provided by or through the corporation. In general, Section 203 defines an "interested stockholder" as any entity or person beneficially owning 15% or more of the outstanding voting stock of the corporation and any entity or person associated with, affiliated with or controlling or controlled by such entity or person. TRANSFER AGENT AND REGISTRAR The transfer agent and registrar for the Common Stock is American Stock Transfer & Trust Company. 56 58 SHARES ELIGIBLE FOR FUTURE SALE Upon completion of this offering and the C&C Acquisition and Keith Acquisition, the Company will have 6,487,957 shares of Common Stock (6,922,957 shares if the Underwriters' over-allotment option is exercised in full) outstanding. The 2,900,000 shares of Class A Common Stock (3,335,000 shares if the Underwriters' over-allotment option is exercised in full) offered hereby will be freely tradable in the United States without restriction or further registration under the Securities Act, unless purchased or held by "affiliates" (as such term is defined in Rule 144) of the Company. All 3,487,957 shares of Class B Common Stock outstanding upon completion of this offering and 100,000 shares of Class A Common Stock to be issued pursuant to the C&C Acquisition and the Keith Acquisition (assuming an initial public offering price of $17 per share) will be "restricted securities" within the meaning of Rule 144 (the "Restricted Shares"). Restricted Shares may be sold in the public market only if registered or if they qualify for an exemption from registration under Rules 144 or 701 promulgated under the Securities Act, which are summarized below. Sales of the Restricted Shares in the public market, or the availability of such shares for sale, could adversely affect the market price of the Class A Common Stock. Of the 3,587,957 Restricted Shares, 263,441 shares will be eligible for sale in the public market pursuant to Rule 144 after June 30, 1998. The remaining 3,324,516 Restricted Shares will be eligible for sale in the public market pursuant to Rule 144 upon the first anniversary of the consummation of the offering. In addition, 459,150 shares of Common Stock that are reserved for issuance upon the exercise of vested options granted pursuant to the 1994 Plan will be available for sale 90 days after the Effective Date, subject to compliance with Rule 701 and the lock-up agreements described below, if applicable. In general, under Rule 144, as currently in effect, a person (or persons whose shares are aggregated) who has beneficially owned Restricted Shares for at least one year would be entitled to sell within any three-month period a number of shares that does not exceed the greater of: (i) one percent of the number of shares of Common Stock then outstanding (which will equal approximately 30,000 shares of Class A Common Stock and 34,880 shares of Class B Common Stock immediately after this offering); or (ii) the average weekly reported trading volume during the four calendar weeks preceding the filing of a Form 144 with respect to such sale. Sales under Rule 144 are also subject to certain manner of sale provisions and notice requirements and to the availability of current public information about the Company. Under Rule 144(k), a person who is not deemed to have been an affiliate of the Company at any time during the 90 days preceding a sale, and who has beneficially owned the shares proposed to be sold for at least two years, is entitled to sell such shares without complying with the manner of sale, public information, volume limitation or notice provisions of Rule 144. In general, under Rule 701, beginning 90 days after the Effective Date, certain shares issued upon the exercise of options granted by the Company prior to the date of this Prospectus will also be available for sale in the public market. Any employee, officer or director of or consultant to the Company who purchased his or her shares pursuant to a written compensatory plan or contract may be entitled to rely on the resale provisions of Rule 701. Rule 701 permits affiliates and non-affiliates to sell their Rule 701 shares under Rule 144 without complying with the holding period requirements of Rule 144. Rule 701 further provides that non-affiliates may sell such shares in the public market in reliance on Rule 144 without having to comply with the public information, volume limitation or notice provisions of Rule 144. In both cases, a holder of Rule 701 shares is required to wait until 90 days after the date of this Prospectus before selling such shares in the public market. An aggregate of 1,500,000 shares of Common Stock will be reserved for issuance to employees and directors of the Company pursuant to the 1994 Plan. Currently, 862,500 shares of Class B Common Stock are issuable under existing options granted to employees pursuant to the 1994 Plan. In addition, upon consummation of the offering, options exercisable for a total of 383,252 shares of Class A Common Stock will be granted under the 1994 Plan to employees in connection with the Acquisitions and to two new directors. After consummation of the offering, the Company intends to file one or more registration statements on Form S-8 with respect to shares of Common Stock issuable under the 1994 Plan. See "Management -- Incentive Plan." Shares covered by any such registration statement will be eligible for sale in the public market upon the effectiveness of such registration statement (which occurs immediately upon filing), subject to the limitations of Rule 144 that are applicable to affiliates and to the lock-up agreements described below, if 57 59 applicable. Upon the expiration of the lock-up agreements, 399,650 shares of Common Stock subject to vested options granted pursuant to the 1994 Plan will be available for public sale, subject to effectiveness of such a registration statement with respect to such shares or compliance with Rule 701. The Company, and the executive officers and directors and holders of more than 2% of the Common Stock have agreed with Raymond, James & Associates, Inc. not to sell, offer to sell, contract to sell, pledge or otherwise dispose of or transfer any shares of Common Stock, or any securities convertible into or exchangeable or exercisable for or any rights to purchase or acquire Common Stock for a period of 180 days following the date of this Prospectus without the prior written consent of Raymond James & Associates, Inc., other than, in the case of the Company, the issuance of options to purchase Common Stock or shares of Common Stock issuable upon the exercise thereof, issuances of Common Stock in connection with the C&C Acquisition and the Keith Acquisition and other issuances of capital stock in connection with other acquisitions, provided such shares of Common Stock issued upon the exercise of options and such shares of capital stock issued in connection with any such other acquisitions shall not be transferable prior to the end of the aforesaid 180-day period. Raymond James & Associates, Inc. may, in its sole discretion and at any time without notice, release all or any portion of the securities subject to lock-up agreements. Prior to the offering, there has been no market for the Class A Common Stock. No predictions can be made as to the effect, if any, that market sales of shares of Class A Common Stock or the availability of such shares for sale will have on the market price prevailing from time to time. Nevertheless, sales of significant amounts of Class A Common Stock could adversely affect the prevailing market price of Class A Common Stock, as well as impair the ability of the Company to raise capital through the issuance of additional equity securities. 58 60 CERTAIN UNITED STATES TAX CONSEQUENCES TO NON-UNITED STATES HOLDERS The following is a general summary of certain United States federal income and estate tax consequences of the purchase, ownership, sale or other taxable disposition of the Class A Common Stock by any person or entity other than (a) a citizen or resident of the United States, (b) a corporation created or organized in or under the laws of the United States or of any state thereof and (c) a person or entity otherwise subject to United States federal income taxation on income from sources outside the United States (a "non-U.S. Holder"). This summary does not address all United States federal tax considerations that may be relevant to non-U.S. Holders in light of their particular circumstances or to certain non-U.S. Holders that may be subject to special treatment under United States federal income or estate tax laws. This summary is based upon the Internal Revenue Code of 1986, as amended, existing, temporary and proposed regulations promulgated thereunder and administrative and judicial decisions, all of which are subject to change, possibly with retroactive effect. In addition, this summary does not address the effect of any state, local or foreign tax laws. Each prospective purchaser of the Class A Common Stock should consult its tax advisor with respect to the tax consequences of purchasing, owning and disposing of the Class A Common Stock. DIVIDENDS Dividends paid to a non-U.S. Holder of Class A Common Stock generally will be subject to a withholding of United States federal income tax at a 30% rate (or such lower rate as may be specified by an applicable income tax treaty) unless the dividend is effectively connected with the conduct of a trade or business of the non-U.S. Holder within the United States in which case the dividend will be taxed at ordinary federal income tax rates. If the non-U.S. Holder is a corporation, such effectively connected income may also be subject to an additional "branch profits tax." A non-U.S. Holder may be required to satisfy certain certification requirements in order to claim treaty benefits or otherwise claim a reduction of, or exemption from, the withholding described above. SALE OR OTHER DISPOSITION OF CLASS A COMMON STOCK A non-U.S. Holder generally will not be subject to United States federal income tax in respect of any gain recognized on the sale or other taxable disposition of Class A Common Stock unless (i) the gain is effectively connected with the conduct of a trade or business of the non-U.S. Holder within the United States, (ii) in the case of a non-U.S. Holder who is an individual and holds the Class A Common Stock as a capital asset, the holder is present in the United States for 193 or more days in the taxable year of the disposition and the gain is considered derived from sources within the United States, (iii) the non-U.S. Holder is subject to tax pursuant to the provisions of United States federal income tax law applicable to certain United States expatriates or (iv) the Company is or has been during certain periods preceding the disposition a "U.S. real property holding corporation" for United States federal income tax purposes and certain other requirements are met. The Company does not believe that it has ever been, or is likely to become, a U.S. real property holding corporation. ESTATE TAX Class A Common Stock owned or treated as owned by an individual non-U.S. Holder at the time of death will be includible in the individual's gross estate for United States federal estate tax purposes, unless an applicable treaty provides otherwise, and may be subject to United States federal estate tax. BACKUP WITHHOLDING AND INFORMATION REPORTING Dividends. United States backup withholding tax generally will not apply to dividends paid on the Class A Common Stock to a non-U.S. Holder at an address outside the United States. The Company must report annually to the Internal Revenue Service and to each nonU.S. Holder the amount of dividends paid to, and the tax withheld with respect to, such holder, regardless of whether any tax was withheld. This information may also be made available to the tax authorities in the non-U.S. Holder's country of residence. 59 61 Sale or Other Disposition of Class A Common Stock. Upon the sale or other taxable disposition of Class A Common Stock by a non-U.S. Holder to or through a United States office of a broker, the broker must backup withhold at a rate of 31% and report the sale to the Internal Revenue Service, unless the holder certifies its non-U.S. Holder status under penalties of perjury or otherwise establishes an exemption. Upon the sale or other taxable disposition of Class A Common Stock by a non-U.S. Holder to or through the foreign office of a United States broker, or a foreign broker with a certain relationship to the United States, the broker must report the sale to the Internal Revenue Service (but not backup withhold) unless the broker has documentary evidence in its files that the seller is a non-U.S. Holder and/or certain other conditions are met or the holder otherwise establishes an exemption. Amounts withheld under the backup withholding rules generally are allowable as a refund or credit against a non-U.S. Holder's United States federal income tax liability, if any, provided that the required information is furnished to the Internal Revenue Service on a timely basis. Proposed Regulations. The Department of the Treasury has issued proposed Treasury regulations concerning the non-U.S. Holder certification procedures regarding U.S. withholding tax on certain amounts paid to non-U.S. persons, which generally are proposed to be effective with respect to payments made after December 31, 1998. Prospective investors should consult their tax advisors concerning the effect, if any, of the adoption of such proposed Treasury regulations on an investment in the Class A Common Stock. 60 62 UNDERWRITING Subject to the terms and conditions of the Underwriting Agreement, the underwriters named below (the "Underwriters"), through their representative Raymond James & Associates, Inc. (the "Representative"), have severally agreed to purchase from the Company and the Selling Stockholders the following respective numbers of shares of Class A Common Stock at the public offering price less the underwriting discounts and commissions set forth on the cover page of this Prospectus:
NUMBER OF NAME SHARES -------------------------------------------------------------------------- --------- Raymond James & Associates, Inc. ......................................... --------- Total........................................................... 2,900,000 =========
The Underwriting Agreement provides that the obligations of the several Underwriters to pay for and accept delivery of the shares of Class A Common Stock offered hereby are subject to approval of certain legal matters by their counsel and to certain other conditions. The Underwriters are obligated to take and pay for all shares of Class A Common Stock offered hereby (other than those covered by the over-allotment option described below) if any such shares are purchased. The Underwriters, through the Representative, propose to offer part of the shares of Class A Common Stock directly to the public at the public offering price set forth on the cover page of this Prospectus and part of the shares to certain dealers at a price that represents a concession not in excess of $ per share under the public offering price. The Underwriters may allow, and such dealers may re-allow, a concession not in excess of $ per share to certain other dealers. The Representative has advised the Company that the Underwriters do not intend to confirm sales to any accounts over which they exercise discretionary authority. The Company has granted the Underwriters an option exercisable not later than 30 days after the date of this Prospectus, to purchase up to an aggregate of 435,000 additional shares of Class A Common Stock, at the public offering price, less the underwriting discounts and commissions set forth on the cover page of this Prospectus. To the extent that the Underwriters exercise such option, each of the Underwriters will have a firm commitment to purchase approximately the same percentage thereof as the number of shares of Class A Common Stock to be purchased by it shown in the above table bears to the total shown, and the Company will be obligated, pursuant to the option, to sell such shares to the Underwriters. The Underwriters may exercise their option only to cover over-allotments made in connection with the sale of the shares of Class A Common Stock offered hereby. If purchased, the Underwriters will sell such additional shares on the same terms as those on which the shares are being offered. The Company and the Selling Stockholders have agreed to indemnify the Underwriters against, or to contribute to, losses arising out of certain liabilities in connection with this offering, including liabilities under the Securities Act. At the request of the Company, the Underwriters have reserved for sale, at the initial public offering price, up to 250,000 shares of Class A Common Stock to be sold and offered hereby by the Company to certain employees and customers of the Company and other persons. The number of shares of Class A Common Stock available for sale to the general public will be reduced to the extent such persons purchase such reserved shares. Any reserved shares which are not orally confirmed for purchase within one day of the pricing of the offering will be offered by the Underwriters to the general public on the same terms as the other shares offered hereby. Certain individuals purchasing reserved shares may be required to agree not to sell, offer or otherwise dispose of any shares of Class A Common Stock for a period of 180 days after the date of this Prospectus. 61 63 The Company, its executive officers and directors, and holders of more than 2% of the Common Stock prior to the consummation of the offering, have agreed not to sell, offer to sell, contract to sell, pledge or otherwise dispose of or transfer any shares of Common Stock, or any securities convertible into or exchangeable or exercisable for, or any rights to purchase or acquire, Common Stock for a period of 180 days following the date of this Prospectus without the prior written consent of Raymond James & Associates, Inc., other than, in the case of the Company, the issuance of options to purchase Common Stock or shares of Common Stock issuable upon the exercise thereof, issuances of Common Stock in connection with the C&C Acquisition and the Keith Acquisition and other issuances of capital stock of the Company in connection with other acquisitions, provided such shares of Common Stock issued upon the exercise of options and such shares of capital stock issued in connection with any such other acquisitions shall not be transferable prior to the end of the aforesaid 180-day period. Raymond James & Associates, Inc. may, in its sole discretion and at any time without notice, release all or any portion of the shares subject to such lock-up agreements. Prior to this offering, there has been no public market for the Class A Common Stock of the Company. The initial public offering price the Class A Common Stock was determined by negotiation between the Company and the Representative. Among the factors considered in such negotiations were prevailing market conditions, the value of publicly traded companies believed to be comparable to the Company, the results of operations of the Company in recent periods, estimates of the business potential of the Company, the present state of the Company's development and other factors deemed relevant. The Representative, acting on behalf of the Underwriters, may over-allot the shares offered hereby and, during the course of this offering, may engage in stabilizing and syndicate short covering and may impose a penalty bid on members of the offering syndicate. Over-allotment involves sales of shares in excess of the total number being offered, thereby creating a syndicate short position. Stabilizing involves a bid by the syndicate to purchase shares in the open market at a specified price, which may not exceed the public offering price and may be decreased but not increased. Syndicate short covering involves open market purchases of shares to cover all or a portion of the syndicate short position created by over-allotments. A penalty bid permits the Representative to reclaim selling concessions from a syndicate member when shares sold by that member in the offering are purchased by the Representative in the open market to cover a syndicate short position or pursuant to a stabilizing bid. All of these activities may cause the market price of the Class A Common Stock to be higher than otherwise might be the case in the absence of these activities. These transactions may be effected on the Nasdaq National Market or otherwise and, if commenced, may be discontinued at any time. The foregoing includes a summary of certain principal terms of the Underwriting Agreement and does not purport to be complete. Reference is made to the copy of the Underwriting Agreement that is on file as an exhibit to the Registration Statement on Form S-1 (the "Registration Statement") under the Securities Act and filed by the Company with the Commission with respect to the shares of Class A Common Stock offered hereby, of which this Prospectus is a part. LEGAL MATTERS The validity of the issuance of the shares of Class A Common Stock offered hereby will be passed upon for the Company by Skadden, Arps, Slate, Meagher & Flom LLP, Boston, Massachusetts. Certain legal matters will be passed upon for the Underwriters by Greenberg Traurig Hoffman Lipoff Rosen & Quentel, P.A., Miami, Florida. EXPERTS The audited financial statements of the Company, the audited financial statements of Keystone, the audited financial statements of C&C, and the audited financial statements of Keith Monument, have been included herein and in the Registration Statement in reliance upon the reports of KPMG Peat Marwick LLP, independent auditors, as of the dates and for the periods indicated in their reports appearing elsewhere herein, and upon the authority of said firm as experts in accounting and auditing. The audited financial statements of the Quarry Companies and SMI have been included herein and in the Registration Statement in reliance upon 62 64 the report of Greene and Company, L.L.P., independent certified public accountants as of the dates and for the periods indicated in their reports appearing elsewhere herein, and upon the authority of said firm as experts in accounting and auditing. AVAILABLE INFORMATION The Company filed with the Commission the Registration Statement under the Securities Act with respect to the shares of Class A Common Stock being offered hereby. This Prospectus does not contain all the information set forth in the Registration Statement and the exhibits and schedules thereto, to which reference is hereby made. Statements made in this Prospectus as to the contents of any contract, agreement or other document referred to are not necessarily complete; with respect to each such contract, agreement or other document filed as an exhibit to the Registration Statement, reference is made to the exhibit for a more complete description thereof. The Registration Statement and the exhibits and schedules thereto may be inspected and copied at the public reference facilities maintained by the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 and will also be available for inspection and copying at the regional offices of the Commission located at 7 World Trade Center, New York, New York 10048 and at Northwestern Atrium Center, 500 West Madison Street (Suite 1400), Chicago, Illinois 60661. Copies of such material may also be obtained from the Public Reference Section of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549 at prescribed rates. Additionally, the Commission maintains a World Wide Web site that contains reports, proxy and information statements and other information regarding registrants that file electronically with the Commission at (http://www.sec.gov). Upon consummation of this offering, the Company will become subject to the information requirements of the Exchange Act, and in accordance therewith will be required to file periodic reports and other information with the Commission. The Company intends to furnish its stockholders with annual reports containing audited financial statements. 63 65 INDEX TO FINANCIAL STATEMENTS ROCK OF AGES CORPORATION
PAGE ------ Independent Auditors' Report......................................................... F-4 Consolidated Balance Sheets at December 31, 1995 and 1996 and June 30, 1997 (unaudited)........................................................................ F-5 Consolidated Statements of Operations for the years ended December 31, 1994, 1995 and 1996 and the six months ended June 30, 1996 and 1997 (unaudited)................... F-7 Consolidated Statements of Stockholders' Equity for the years ended December 31, 1994, 1995 and 1996 and the six months ended June 30, 1997 (unaudited)............. F-8 Consolidated Statements of Cash Flows for the years ended December 31, 1994, 1995 and 1996 and the six months ended June 30, 1996 and 1997 (unaudited)................... F-9 Notes to Consolidated Financial Statements........................................... F-11 CHILDS & CHILDS GRANITE CO., INC., C & C GRANITE CO., INC., QUARRY COMPANIES AND SMI Independent Auditors' Report......................................................... F-24 Combined Balance Sheet as of May 31, 1997 and August 31, 1997 (unaudited)............ F-25 Combined Statement of Operations for the Eleven-Month Period ended May 31, 1997 and the Three-Month Periods ended August 31, 1996 and 1997 (unaudited)................. F-26 Combined Statement of Stockholders' Equity for the Eleven-Month Period ended May 31, 1997 and the Three-Month Period ended August 31, 1997 (unaudited).................. F-27 Combined Statement of Cash Flows for the Eleven-Month Period ended May 31, 1997 and the Three-Month Periods ended August 31, 1996 and 1997 (unaudited)................. F-28 Notes to Combined Financial Statements............................................... F-29 KEYSTONE MEMORIALS, INC., QUARRY COMPANIES AND SMI Independent Auditors' Report......................................................... F-33 Combined Balance Sheet as of April 30, 1997 and July 31, 1997 (unaudited)............ F-34 Combined Statement of Operations for the Ten-Month Period ended April 30, 1997 and the Three-Month Periods ended July 31, 1996 and 1997 (unaudited)................... F-35 Combined Statement of Stockholder's Deficit for the Ten-Month Period ended April 30, 1997 and the Three-Month Period ended July 31, 1997 (unaudited).................... F-36 Combined Statement of Cash Flows for the Ten-Month Period ended April 30, 1997 and the Three-Month Periods ended July 31, 1996 and 1997 (unaudited)................... F-37 Notes to Combined Financial Statements............................................... F-38 KEITH MONUMENT COMPANIES Independent Auditors' Report......................................................... F-43 Combined Balance Sheets as of June 30, 1996 and 1997................................. F-44 Combined Statements of Operations for the Years ended June 30, 1995, 1996 and 1997... F-45 Combined Statements of Stockholders' Equity for the Years ended June 30, 1995, 1996 and 1997........................................................................... F-46 Combined Statements of Cash Flows for the Years ended June 30, 1995, 1996 and 1997... F-47 Notes to Combined Financial Statements............................................... F-48 PENNSYLVANIA GRANITE CORPORATION Independent Auditors' Report on Financial Statements................................. F-56 Consolidated Balance Sheets as of May 31, 1997 and April 30, 1997.................... F-57 Consolidated Statement of Operations and Accumulated Deficit for the Eleven Months ended May 31, 1997................................................................. F-58
F-1 66
PAGE ------ Consolidated Statement of Operations and Accumulated Deficit for the Ten Months ended April 30, 1997..................................................................... F-59 Consolidated Statement of Cash Flows for the Eleven Months ended May 31, 1997........ F-60 Consolidated Statement of Cash Flows for the Ten Months ended April 30, 1997......... F-61 Notes to Consolidated Financial Statements........................................... F-62 PENNSYLVANIA GRANITE CORPORATION Accountants' Review Report........................................................... F-68 Consolidated Balance Sheets as of August 31, 1996 and 1997 (unaudited)............... F-69 Consolidated Statement of Operations and Accumulated Deficit for the Three-Month Period ended August 31, 1997 (unaudited)........................................... F-70 Consolidated Statement of Operations and Accumulated Deficit for the Three-Month Period ended August 31, 1996 (unaudited)........................................... F-71 Consolidated Statement of Cash Flows for the Three-Months ended August 31, 1997 (unaudited)........................................................................ F-72 Consolidated Statement of Cash Flows for the Three-Months ended August 31, 1996 (unaudited)........................................................................ F-73 Notes to Financial Statements........................................................ F-74 PENNSYLVANIA GRANITE CORPORATION Independent Auditors' Report on Financial Statements................................. F-79 Consolidated Balance Sheet as of June 30, 1996....................................... F-80 Consolidated Statement of Operations and Accumulated Deficit for the Year ended June 30, 1996...................................................................... F-81 Consolidated Statement of Cash Flows for the Year ended June 30, 1996................ F-82 Notes to Consolidated Financial Statements........................................... F-83 CAPRICE BLUE QUARRY, INC. Independent Auditors' Report on Financial Statements................................. F-88 Balance Sheets as of May 31, 1997 and April 30, 1997................................. F-89 Statement of Operations and Accumulated Deficit for the Eleven Months ended May 31, 1997............................................................................... F-90 Statement of Operations and Accumulated Deficit for the Ten Months ended April 30, 1997............................................................................... F-91 Statement of Cash Flows for the Eleven Months ended May 31, 1997..................... F-92 Statement of Cash Flows for the Ten Months ended April 30, 1997...................... F-93 Notes to Financial Statements........................................................ F-94 CAPRICE BLUE QUARRY, INC. Accountants' Review Report........................................................... F-97 Balance Sheets as of August 31, 1996 and 1997 (unaudited)............................ F-98 Statement of Operations and Accumulated Deficit for the Three-Month Period ended August 31, 1997 (unaudited)........................................................ F-99 Statement of Operations and Accumulated Deficit for the Three-Month Period ended August 31, 1996 (unaudited)........................................................ F-100 Statement of Cash Flows for the Three-Months ended August 31, 1997 (unaudited)....... F-101 Statement of Cash Flows for the Three-Months ended August 31, 1996 (unaudited)....... F-102 Notes to Financial Statements........................................................ F-103 SOUTHERN MAUSOLEUMS, INC. Independent Auditors' Report......................................................... F-106 Balance Sheets as of May 31, 1997 and April 30, 1997................................. F-107 Statement of Operations and Accumulated Deficit for the Eleven Months ended May 31, 1997............................................................................... F-108
F-2 67
PAGE ------ Statement of Operations and Accumulated Deficit for the Ten Months ended April 30, 1997............................................................................... F-109 Statement of Cash Flows for the Eleven Months ended May 31, 1997..................... F-110 Statement of Cash Flows for the Ten Months ended April 30, 1997...................... F-111 Notes to Financial Statements........................................................ F-112 SOUTHERN MAUSOLEUMS, INC. Accountants' Review Report........................................................... F-116 Balance Sheets as of August 31, 1996 and 1997 (unaudited)............................ F-117 Statement of Operations and Accumulated Deficit for the Three-Month Period ended August 31, 1997 (unaudited)........................................................ F-118 Statement of Operations and Accumulated Deficit for the Three-Month Period ended August 31, 1996 (unaudited)........................................................ F-119 Statement of Cash Flows for the Three-Months ended August 31, 1997 (unaudited)....... F-120 Statement of Cash Flows for the Three-Months ended August 31, 1996 (unaudited)....... F-121 Notes to Financial Statements........................................................ F-122 AUTUMN ROSE QUARRY, INC. Independent Auditors' Report on Financial Statements................................. F-126 Balance Sheets as of May 31, 1997 and April 30, 1997................................. F-127 Statement of Operations and Accumulated Deficit for the Eleven Months ended May 31, 1997............................................................................... F-128 Statement of Operations and Accumulated Deficit for the Ten Months ended April 30, 1997............................................................................... F-129 Statement of Cash Flows for the Eleven Months ended May 31, 1997..................... F-130 Statement of Cash Flows for the Ten Months ended April 30, 1997...................... F-131 Notes to Financial Statements........................................................ F-132 AUTUMN ROSE QUARRY, INC. Accountants' Review Report........................................................... F-136 Balance Sheets as of August 31, 1996 and 1997 (unaudited)............................ F-137 Statement of Operations and Accumulated Deficit for the Three-Month Period ended August 31, 1997 (unaudited)........................................................ F-138 Statement of Operations and Accumulated Deficit for the Three-Month Period ended August 31, 1996 (unaudited)........................................................ F-139 Statement of Cash Flows for the Three-Months ended August 31, 1997 (unaudited)....... F-140 Statement of Cash Flows for the Three-Months ended August 31, 1996 (unaudited)....... F-141 Notes to Financial Statements........................................................ F-142
F-3 68 INDEPENDENT AUDITORS' REPORT The Board of Directors Rock of Ages Corporation: We have audited the accompanying consolidated balance sheets of Rock of Ages Corporation and Subsidiaries as of December 31, 1995 and 1996 and the related consolidated statements of operations, stockholders' equity and cash flows for each of the years in the three-year period ended December 31, 1996. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Rock of Ages Corporation and Subsidiaries as of December 31, 1995 and 1996, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1996, in conformity with generally accepted accounting principles. Burlington, Vermont /s/ KPMG Peat Marwick LLP March 24, 1997, except as to Note 13 which is as of August 12, 1997 F-4 69 ROCK OF AGES CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
DECEMBER 31, --------------------------- JUNE 30, 1995 1996 1997 ----------- ----------- ----------- (UNAUDITED) ASSETS Current assets: Cash and cash equivalents......................... $ 1,994,534 $ 763,056 $ 191,855 Trade receivables, less allowance for doubtful accounts of $445,627 in 1995 and $564,242 in 1996........................................... 10,757,049 8,525,463 11,248,648 Due from affiliates............................... 2,292,677 3,584,644 5,375,181 Inventories (note 2).............................. 10,110,107 11,323,613 13,374,103 Deferred tax assets (note 6)...................... 270,071 419,871 467,161 Other current assets.............................. 190,755 322,216 837,308 ----------- ----------- ----------- Total current assets........................... 25,615,193 24,938,863 31,494,256 ----------- ----------- ----------- Property, plant and equipment: Granite reserves and development costs............ 6,747,993 7,045,644 7,045,644 Land.............................................. 1,937,132 1,981,230 2,151,084 Buildings and land improvements................... 8,028,757 8,661,575 8,850,364 Machinery and equipment........................... 18,548,026 19,331,762 21,616,857 Furniture and fixtures............................ 13,329 13,270 208,722 Construction-in-process........................... 208,239 372,028 1,955,824 ----------- ----------- ----------- 35,483,476 37,405,509 41,828,495 Less accumulated depreciation, depletion and amortization................................... 17,306,340 18,809,535 20,598,189 ----------- ----------- ----------- Net property, plant and equipment.............. 18,177,136 18,595,974 21,230,306 ----------- ----------- ----------- Other assets: Cash surrender value of life insurance, net of loans of $95,412 in 1995 and 1996.............. 752,007 917,137 959,478 Goodwill, less accumulated amortization of $30,450 in 1996........................................ 1,779,113 1,748,663 1,730,663 Debt issuance costs, less accumulated amortization of $229,976 in 1995 and $104,040 in 1996....... 157,019 123,293 88,683 Organization costs, less accumulated amortization of $26,688 in 1995 and $63,961 in 1996......... 72,644 212,799 189,985 Deferred tax assets (note 6)...................... 763,862 597,576 543,176 Intangible pension asset (note 8)................. 0 93,418 93,418 Investments in and advances to affiliated companies (note 5)............................. 378,614 217,953 1,407,760 Other investments, at cost which approximates market......................................... 109,119 59,366 30,948 Other............................................. 296,333 489,734 0 ----------- ----------- ----------- Total other assets............................. 4,308,711 4,459,939 5,044,111 ----------- ----------- ----------- Total assets (notes 3 and 4).............. $48,101,040 $47,994,776 $57,768,673 =========== =========== ===========
See accompanying notes to consolidated financial statements. F-5 70 ROCK OF AGES CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS -- (CONTINUED)
DECEMBER 31, --------------------------- JUNE 30, 1995 1996 1997 ----------- ----------- ----------- (UNAUDITED) LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Borrowings under lines of credit (note 3)......... $ 2,579,859 $ 3,500,437 $ 8,667,627 Current installments of long-term debt (note 4)... 4,096,813 2,081,481 2,844,419 Accounts payable.................................. 1,929,388 1,693,144 2,066,541 Accrued expenses.................................. 1,668,822 1,969,976 2,357,840 Income taxes payable.............................. 397,409 466,711 131,149 Current portion of deferred income................ 400,000 400,000 400,000 Customer deposits................................. 851,673 1,541,602 1,794,819 ----------- ----------- ----------- Total current liabilities................. 11,923,964 11,653,351 18,262,395 Long-term debt, excluding current installments (note 4)................................................ 14,656,514 13,054,399 13,896,615 Deferred compensation (note 8)...................... 3,232,094 3,504,090 3,566,431 Deferred income, excluding current portion.......... 800,000 400,000 200,000 Accrued pension cost (note 8)....................... 1,504,512 1,504,512 1,504,512 Accrued postretirement benefit cost (note 8)........ 504,750 506,938 506,938 ----------- ----------- ----------- Total liabilities......................... 32,621,834 30,623,290 37,936,891 ----------- ----------- ----------- Commitments (note 7) 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 No shares issued or outstanding Common stock -- Class B, $.01 par value; 15,000,000 shares authorized 3,500,000 shares issued and outstanding in 1995 and 1996............................... 35,000 35,000 37,634 Additional paid-in capital........................ 5,593,843 5,593,843 9,174,007 Retained earnings................................. 9,827,918 11,736,082 10,675,378 Cumulative translation adjustment................. 22,445 6,561 (55,237) ----------- ----------- ----------- Total stockholders' equity................ 15,479,206 17,371,486 19,831,782 ----------- ----------- ----------- Total liabilities and stockholders' equity.................................. $48,101,040 $47,994,776 $57,768,673 =========== =========== ===========
See accompanying notes to consolidated financial statements. F-6 71 ROCK OF AGES CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED SIX MONTHS ENDED DECEMBER 31, JUNE 30, ------------------------------------- ----------------------- 1994 1995 1996 1996 1997 ----------- ---------- ---------- ---------- ---------- (UNAUDITED) Net revenues........................ $34,187,749 33,087,783 44,668,851 19,943,096 20,767,426 Cost of revenues.................... 24,094,198 22,638,804 31,262,530 14,686,791 15,562,135 ----------- ---------- ---------- ---------- ---------- Gross profit.............. 10,093,551 10,448,979 13,406,321 5,256,305 5,205,291 Selling, general and administrative expenses.......................... 6,048,890 6,453,425 9,131,459 4,649,628 4,327,952 ----------- ---------- ---------- ---------- ---------- Income from operations.... 4,044,661 3,995,554 4,274,862 606,677 877,339 ----------- ---------- ---------- ---------- ---------- Other expenses: Interest expense.................. 1,652,895 1,678,178 1,723,355 933,684 866,064 Early retirement plan expense (note 8)....................... -- 563,857 -- -- -- ----------- ---------- ---------- ---------- ---------- Total other expenses...... 1,652,895 2,242,035 1,723,355 933,684 866,064 ----------- ---------- ---------- ---------- ---------- Income (loss) before provision (benefit) for income taxes............ 2,391,766 1,753,519 2,551,507 (327,007) 11,275 Provision (benefit) for income taxes (note 6).......................... 576,485 358,021 643,343 (82,452) 2,843 ----------- ---------- ---------- ---------- ---------- Net income (loss)......... $ 1,815,281 1,395,498 1,908,164 (244,555) 8,432 =========== ========== ========== ========== ========== Net income (loss) per share......... $ .47 .35 .46 (.06) .00 Weighted average number of common shares outstanding................ 3,899,897 4,017,257 4,105,912 4,105,912 4,326,287
See accompanying notes to consolidated financial statements. F-7 72 ROCK OF AGES CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 AND THE SIX MONTHS ENDED JUNE 30, 1997 (UNAUDITED)
ISSUED AND OUTSTANDING SHARES OF CLASS B CLASS B ADDITIONAL CUMULATIVE TOTAL COMMON COMMON PAID-IN RETAINED TRANSLATION STOCKHOLDERS' STOCK STOCK CAPITAL EARNINGS ADJUSTMENT EQUITY ----------- ------- ---------- ---------- ---------- ------------- Balance at December 31, 1993...... 3,500,000 $35,000 2,212,044 6,617,139 (15,467) 8,848,716 Net income...................... -- -- -- 1,815,281 -- 1,815,281 Cumulative translation adjustment.................... -- -- -- -- 22,142 22,142 --------- ------- --------- --------- ------- ---------- Balance at December 31, 1994...... 3,500,000 35,000 2,212,044 8,432,420 6,675 10,686,139 Net income...................... -- -- -- 1,395,498 -- 1,395,498 Acquisitions (note 12).......... -- -- 3,381,799 -- -- 3,381,799 Cumulative translation adjustment.................... -- -- -- -- 15,770 15,770 --------- ------- --------- --------- ------- ---------- Balance at December 31, 1995...... 3,500,000 35,000 5,593,843 9,827,918 22,445 15,479,206 Net income...................... -- -- -- 1,908,164 -- 1,908,164 Cumulative translation adjustment.................... -- -- -- -- (15,884) (15,884) --------- ------- --------- --------- ------- ---------- Balance at December 31, 1996...... 3,500,000 35,000 5,593,843 11,736,082 6,561 17,371,486 Net income...................... -- -- -- 8,432 -- 8,432 Dividends (note 13)............. -- -- -- (1,069,136) -- (1,069,136) Acquisition (note 13)........... 263,441 2,634 3,580,164 -- -- 3,582,798 Cumulative translation adjustment.................... -- -- -- -- (61,798) (61,798) --------- ------- --------- --------- ------- ---------- Balance at June 30, 1997.......... 3,763,441 $37,634 9,174,007 10,675,378 (55,237) 19,831,782 ========= ======= ========= ========= ======= ==========
See accompanying notes to consolidated financial statements F-8 73 ROCK OF AGES CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED SIX MONTHS ENDED DECEMBER 31, JUNE 30, --------------------------------------- ------------------------- 1994 1995 1996 1996 1997 ----------- ----------- ----------- ----------- ----------- (UNAUDITED) Cash flows from operating activities: Net income (loss).............. $ 1,815,281 1,395,498 1,908,164 (244,555) 8,432 Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation, depletion and amortization.............. 1,399,028 1,413,336 1,846,298 1,049,466 984,841 Decrease (increase) in cash surrender value of life insurance................. 26,068 71,132 (165,130) (82,565) (42,341) Loss (gain) on sale of property, plant and equipment................. (319,917) (45,063) (5,500) (3,389) 20,004 Loss (equity) in income of affiliated companies...... (134,264) 43,156 160,661 134,434 19,019 Deferred taxes.............. 79,967 (131,676) 16,486 (152,452) 7,110 Changes in assets and liabilities: Decrease (increase) in trade receivables...... (1,524,444) (1,727,154) 2,231,586 2,046,113 (1,269,760) Decrease (increase) in due from affiliates........ (421,630) 378,885 (1,291,967) (1,416,988) (1,319,007) Decrease (increase) in inventories............ 2,148,792 243,979 (1,081,430) (1,686,701) (918,391) Increase in other current assets................. (4,022) (36,783) (131,461) (391,593) (497,668) Decrease (increase) in intangible pension asset.................. (178,630) 481,366 (93,418) -- -- Decrease (increase) in other assets........... 184,454 101,365 (193,401) (762,900) 19,779 Increase (decrease) in accounts payable....... 499,742 (205,627) (236,244) 477,197 (22,375) Increase in accrued expenses............... 733,651 85,493 301,154 515,851 224,869 Increase (decrease) in income taxes payable... 541,354 (290,090) 69,302 (136,775) (298,374) Increase in customer deposits............... 5,918 228,447 689,929 266,453 253,217 Increase (decrease) in deferred compensation........... (14,706) 9,264 271,996 73,565 62,341 Decrease in deferred income................. (400,000) (400,000) (400,000) (200,000) (200,000) Increase in accrued pension cost........... 86,700 29,912 2,188 -- -- Increase in accrued postretirement benefit cost................... 9,345 10,811 -- 45,000 -- ---------- ---------- ---------- ---------- ---------- Net cash provided by (used in) operating activities........... 4,532,687 1,656,251 3,899,213 (469,839) (2,968,304) ---------- ---------- ---------- ---------- ---------- Cash flows from investing activities: Purchases of property, plant and equipment............... (502,918) (896,447) (1,648,505) (883,593) (1,589,953) Proceeds from sale of property, plant and equipment......... 751,866 70,836 14,476 11,000 --
See accompanying notes to consolidated financial statements. F-9 74 ROCK OF AGES CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS -- (CONTINUED)
YEARS ENDED SIX MONTHS ENDED DECEMBER 31, JUNE 30, --------------------------------------- ------------------------- 1994 1995 1996 1996 1997 ----------- ----------- ----------- ----------- ----------- (UNAUDITED) Increase in investments in and advances to affiliates...... -- -- -- -- (171,020) Decrease (increase) in other investments................. 1,927 (53,933) 49,753 10,897 28,418 Acquisitions, net of cash acquired.................... -- 2,642 (238,310) -- 73,256 ----------- ----------- ----------- ----------- ----------- Net cash provided by (used in) investing activities........... 250,875 (876,902) (1,822,586) (861,696) (1,659,299) ----------- ----------- ----------- ----------- ----------- Cash flows from financing activities: Net borrowings (repayments) under lines of credit....... (3,062,646) 2,454,269 920,578 2,401,628 5,167,190 Increase in debt issuance costs....................... (190,027) (2,569) (36,415) (36,415) -- Increase in organization costs....................... (97,565) (1,766) (172,689) (172,689) -- Proceeds from long-term debt... -- -- 122,082 -- -- Principal payments on long-term debt........................ (1,145,802) (1,644,533) (4,126,635) (2,376,882) (1,048,990) ----------- ----------- ----------- ----------- ----------- Net cash provided by (used in) financing activities........... (4,496,040) 805,401 (3,293,079) (184,358) 4,118,200 ----------- ----------- ----------- ----------- ----------- Effect of exchange rate changes on cash........................ 14,498 16,176 (15,026) (32,665) (61,798) ----------- ----------- ----------- ----------- ----------- Net increase (decrease) in cash and cash equivalents.......... 302,020 1,600,926 (1,231,478) (1,548,558) (571,201) Cash and cash equivalents, beginning of period............ 91,588 393,608 1,994,534 1,994,534 763,056 ----------- ----------- ----------- ----------- ----------- Cash and cash equivalents, end of period......................... $ 393,608 1,994,534 763,056 445,976 191,855 =========== =========== =========== =========== =========== Supplemental cash flow information: Cash paid during the period for: Interest.................... $ 1,780,181 1,678,178 1,520,420 933,684 866,064 Income taxes................ 150,150 711,299 742,626 168,983 351,155
Supplemental non-cash investing and financing activities: See Note 12 for non-cash activities relating to the acquisitions. In 1994, $3,663,747 in borrowings under lines of credit was refinanced as long-term debt.
YEARS ENDED SIX MONTHS ENDED DECEMBER 31, JUNE 30, --------------------------------------- ------------------------- 1994 1995 1996 1996 1997 ----------- ----------- ----------- ----------- ----------- (UNAUDITED) Acquisitions: Assets acquired................ $ -- 9,186,561 625,416 -- 6,807,521 Liabilities assumed and issued...................... -- (5,449,882) (387,106) -- (3,224,723) Capital contributed............ -- (3,381,799) -- -- -- Common stock issued............ -- -- -- -- (3,582,798) ---------- ---------- ---------- ---------- ---------- Cash paid...................... -- 354,880 238,310 -- -- Less cash acquired............. -- (357,522) -- -- (73,256) ---------- ---------- ---------- ---------- ---------- Net cash paid for (received from) acquisitions......... $ -- (2,642) 238,310 -- (73,256) ========== ========== ========== ========== ==========
See accompanying notes to consolidated financial statements. F-10 75 ROCK OF AGES CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Rock of Ages Corporation, together with its wholly-owned subsidiaries (the "Company"), Rock of Ages Canada, Inc., Royalty Granite Corporation, Rock of Ages International, and Associated Memorials, Inc. is an integrated quarrier, manufacturer and distributor of granite and products manufactured from granite. The quarry division sells granite both to the manufacturing division and to outside manufacturers, as well as to distributors in Europe and Japan. The manufacturing division's principal product is granite memorials used primarily in cemeteries, although it also manufactures some specialized granite products for industrial applications. Manufacturing revenues were approximately 50%, 60% and 60% of total revenues in 1994, 1995 and 1996 respectively, with the balance being quarry revenues. Foreign revenues represented approximately 44.9%, 40.7% and 28.9% of total revenues in 1994, 1995 and 1996, respectively. (a) Principles of Consolidation The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. (b) Cash and Cash Equivalents For purposes of the statement of cash flows, the Company considers all highly liquid investments purchased with a maturity of three months or less to be cash equivalents. (c) Inventories Inventories are stated at the lower of cost or market. Cost is determined using the first-in, first-out (FIFO) method. (d) Depreciation, Depletion and Amortization Property, plant and equipment are stated at cost. Depreciation is calculated using the straight-line and declining balance methods, based upon the following estimated useful lives: Buildings and land improvements........................ 5 to 40 years Machinery and equipment................................ 3 to 20 years Furniture and fixtures................................. 5 to 12 years
Depreciation expense amounted to $1,281,415, $1,253,186 and $1,659,160 in 1994, 1995 and 1996, respectively. Cost depletion and amortization of granite reserves and development costs is provided by charges to operations based on cubic feet produced in relation to estimated reserves of the property. Cost depletion and amortization charged to operations amounted to $71,010, $69,338 and $54,013 in 1994, 1995 and 1996, respectively. (e) Foreign Currency Translation The Company translates the accounts of its foreign subsidiary in accordance with Statement of Financial Accounting Standards No. 52, under which all assets and liabilities are translated at the rate of exchange in effect at year end. Revenue and expense accounts are translated using weighted average exchange rates in effect during the year. Gains or losses from foreign currency translation are charged to "cumulative translation adjustment" which is included in stockholders' equity in the accompanying consolidated balance sheets. F-11 76 ROCK OF AGES CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED) (f) Income Taxes The Company files its Federal income tax returns on a consolidated basis. Rock of Ages Canada, Inc. is responsible for income taxes in Canada. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to the differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. (g) Goodwill Goodwill was recorded in 1995 as a result of two acquisitions (see Note 12) and is being amortized over 40 years using the straight-line method. Amortization expense amounted to $30,450 in 1996. The Company assesses the recoverability of this intangible asset by determining whether the amortization of the goodwill balance over its remaining life can be recovered through undiscounted future operating cash flows of the acquired operation. The amount of goodwill impairment, if any, is measured based on projected discounted future operating cash flows using a discount rate reflecting the Company's average cost of funds. The assessment of the recoverability of goodwill will be impacted if estimated future operating cash flows are not achieved. (h) Debt Issuance Costs Debt issuance costs are amortized using the straight-line method over the term of the related borrowing. Amortization expense amounted to $40,603, $70,124 and $70,141 in 1994, 1995 and 1996, respectively. (i) Organization Costs Organization costs are amortized using the straight-line method over 60 months. Amortization expense amounted to $6,000, $20,688 and $32,534 in 1994, 1995 and 1996, respectively. (j) Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of The Company adopted the provisions of SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, on January 1, 1996. This Statement requires that long-lived assets and certain identifiable intangibles be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceed the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. Adoption of the Statement did not have a material impact on the Company's financial position, results of operations, or liquidity. (k) Deferred Income Deferred income represents revenues received in 1992 in relation to a distribution agreement. Revenue is being recognized over six years beginning in 1993, per the terms of the agreement. F-12 77 ROCK OF AGES CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED) (l) Revenue Recognition The manufacturing division recognizes revenue upon shipment of finished orders. The quarry division recognizes revenue upon sales order at which time ownership passes to the customer although the block may not be shipped until a later date. (m) Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to use estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates. (n) Stock-Based Employee Compensation The Company uses the intrinsic value based method per APB Opinion No. 25, Accounting for Stock Issued to Employees, for all of its stock-based employee compensation arrangements. (o) Net Income Per Share Net income per share is computed by dividing earnings available for common shares by the weighted average number of common shares outstanding during each year. Common stock equivalent shares are not included in the per share calculations where the effect of their inclusion would be antidilutive. (p) Interim Consolidated Financial Statements The consolidated financial statements for the six months ended June 30, 1996 and 1997 are unaudited but, in the opinion of management, include all normal, recurring adjustments necessary for a fair presentation of results for these interim periods. The results of operations for the interim periods are not necessarily indicative of trends or results expected for a full year. (2) INVENTORIES Inventories consist of the following at December 31, 1995 and 1996:
1995 1996 ----------- ----------- Raw materials..................................... $ 6,994,078 7,065,320 Work-in-process................................... 1,304,347 1,694,671 Finished goods and supplies....................... 1,811,682 2,563,622 ----------- ----------- $10,110,107 11,323,613 =========== ===========
(3) LINES OF CREDIT The Company and an affiliate, Swenson Granite Company, Inc., may be advanced up to a maximum of $9,500,000 under the terms of line of credit agreements with a lending institution, based on percentages of eligible accounts receivable and eligible inventory. The line of credit arrangements expire August 1999 and bear interest at the Chemical Bank prime rate plus 1%, and are secured by substantially all assets of the Company. Amounts outstanding as of December 31, 1995 and 1996 were $1,179,859 and $1,779,124, respectively. F-13 78 ROCK OF AGES CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (3) LINES OF CREDIT -- (CONTINUED) Effective November 30, 1995, Rock of Ages Canada, Inc. entered into a line of credit agreement with a lending institution. Under the terms of this agreement, a maximum of approximately $2,400,000 may be advanced based on percentages of eligible accounts receivable, eligible inventory, and tangible fixed assets. The line of credit agreement will be reviewed at least annually for any revisions to the agreement, bears interest at the prime rate plus 3/4%, and is secured by substantially all assets of the subsidiaries. Amounts outstanding as of December 31, 1995 and 1996 were $1,400,000 and $1,721,313, respectively. (4) LONG-TERM DEBT Long-term debt at December 31, 1995 and 1996 consists of the following:
1995 1996 ----------- ---------- Note payable -- bank, interest at Chemical Bank prime plus 1 1/4%, payable in quarterly installments of $100,000 with the final installment of $2,500,000 due October 1998, secured by substantially all assets of the Company.................................................. $ 3,600,000 3,200,000 Note payable -- bank, interest at Chemical Bank prime plus 1 1/4%, payable in quarterly installments of $400,000 with the final installment of $8,400,000 due January 1999, secured by substantially all assets of the Company.................................................. 13,010,384 11,410,385 Notes payable -- bank, interest at prime plus 1%, unsecured, paid in full in January 1996.................. 1,320,622 -- Note payable -- Small Business Administration, interest at 10.147%, secured by property, plant and equipment, paid in full in January 1996.................................. 327,230 -- Note payable -- VEDA, interest at 4%, unsecured, paid in full in January 1996..................................... 118,233 -- Note payable -- Dutton, interest at 6%, payable in monthly principal and interest payments of $674, unsecured, due December 2003............................................ 51,280 46,130 Note payable -- Friberg, interest at 8%, unsecured, paid in full in April 1996....................................... 325,578 -- Note payable -- bank, interest at lender's operational rate plus 1%, payable in monthly installments of $3,649 plus interest, due April 2004, secured by property with a net book value of $336,330 at December 31, 1996.............. -- 321,068 Note payable -- bank, interest at 10.5%, payable in monthly principal and interest installments of $1,216, due March 2000, secured by machinery with a net book value of $39,792 at December 31, 1996............................. -- 40,012 Note payable -- bank, interest at prime plus 1.5%, payable in monthly installments of $608 plus interest, due November 2001, secured by property with a net book value of $40,193 at December 31, 1996.......................... $ -- 35,269
F-14 79 ROCK OF AGES CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (4) LONG-TERM DEBT -- (CONTINUED)
1995 1996 ----------- ---------- Obligation under capital lease, interest at 7.99%, payable in monthly installments of $1,680 plus interest, due December 2000, secured by equipment with a cost and accumulated depreciation of $95,731 and $1,595, respectively, at December 31, 1996....................... -- 83,016 ----------- ---------- 18,753,327 15,135,880 Less current installments.................................. 4,096,813 2,081,481 ----------- ---------- Long-term debt, excluding current installments............. $14,656,514 13,054,399 =========== ==========
All bank-related obligations are guaranteed by an affiliate, Swenson Granite Company, Inc. Future maturities of the December 31, 1996 long-term debt are as follows:
OBLIGATION OTHER UNDER LONG-TERM YEAR ENDED DECEMBER 31: CAPITAL LEASE DEBT ----------------------------------------------------------- ------------- ---------- 1997.................................................. $ 20,163 2,067,444 1998.................................................. 20,163 4,468,983 1999.................................................. 20,163 1,670,669 2000.................................................. 41,337 6,671,596 2001.................................................. -- 56,810 Thereafter............................................ -- 117,362 -------- ---------- 101,826 15,052,864 ========== Interest included in obligation under capital lease........ 18,810 -------- $ 83,016 ========
The financing agreements with banks contain various restrictive covenants with respect to the maintenance of financial ratios, capital additions, and other items. As of December 31, 1996 all covenants have been complied with or waived by the banks. (5) INVESTMENTS IN AND ADVANCES TO AFFILIATED COMPANIES Investments in and advances to affiliated companies, accounted for under the equity method, at December 31, 1995 and 1996 consists of a 50% equity interest in Rock of Ages of Asia of $378,613 and $217,953, respectively. The Company's equity (loss) in the income of Rock of Ages Asia was $134,264, $(43,156) and $(160,661), in 1994, 1995 and 1996, respectively. Sales to Rock of Ages Asia were $3,911,195, $2,997,845 and $592,100 in 1994, 1995 and 1996, respectively. Accounts receivable from Rock of Ages Asia was $2,221,824, $2,327,054 and $769,354 as of December 31, 1994, 1995 and 1996, respectively. See note 13. F-15 80 ROCK OF AGES CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (6) INCOME TAXES A summary of components of the provision for income taxes for the years ended December 31, 1994, 1995 and 1996 is as follows:
1994 1995 1996 -------- -------- -------- Current............................................ $496,518 $381,719 $626,857 Deferred........................................... 79,967 (23,698) 16,486 -------- -------- -------- Total.................................... $576,485 $358,021 $643,343 ======== ======== ========
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 1995 and 1996 are presented below:
1995 1996 ---------- ---------- Deferred tax assets: Accrued pension, accrued postretirement benefit cost and deferred compensation.................................. $ 903,743 $ 890,941 Allowance for doubtful accounts........................... 79,096 94,920 Accrued expenses.......................................... 60,224 86,120 Deferred income........................................... 326,400 217,600 Inventories, principally due to additional costs inventoried for tax purposes pursuant to the Tax Reform Act of 1986............................................ 211,634 237,279 Other assets.............................................. 297,426 374,789 ---------- ---------- Total gross deferred tax assets................... 1,878,523 1,901,649 Less valuation allowance.......................... (482,241) (495,877) ---------- ---------- Total net deferred tax assets..................... 1,396,282 1,405,772 ---------- ---------- Deferred tax liabilities: Quarry development........................................ (309,176) (375,445) Other liabilities......................................... (53,173) (12,880) ---------- ---------- Total gross deferred tax liabilities.............. (362,349) (388,325) ---------- ---------- Net deferred tax assets........................... $1,033,933 $1,017,447 ========== ==========
The reconciliation of differences between the statutory U.S. federal income tax rate and the Company's effective tax rate follows:
1994 1995 1996 ----- ----- ----- U.S. statutory rate......................................... 34.0% 34.0% 34.0% State taxes................................................. 5.9 6.0 6.1 Valuation allowance change.................................. (5.3) -- -- Other....................................................... (10.5) (19.6) (14.9) ----- ----- ----- Effective tax rate.......................................... 24.1% 20.4% 25.2% ===== ===== =====
SFAS No. 109 requires a valuation allowance against deferred tax assets if, based on the weight of available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized. Management believes that it is more likely than not that the results of future operations will generate sufficient taxable income to realize the net deferred tax assets. F-16 81 ROCK OF AGES CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (7) LEASES The Company has several noncancellable operating leases for vehicles and equipment which expire over the next four years. Rental expense for operating leases was $118,211, $164,467 and $161,607 during 1994, 1995 and 1996, respectively. Future minimum lease payments under noncancellable operating leases (with initial or remaining lease terms in excess of one year) are as follows:
YEAR ENDED DECEMBER 31: ---------------------------------------------------------- 1997...................................................... $149,763 1998...................................................... 134,777 1999...................................................... 105,008 2000...................................................... 37,989 -------- $427,537 ========
The Company also acts as the lessor of various parcels of land. Rental income was $28,841, $32,182 and $32,210 in 1994, 1995 and 1996, respectively. Future minimum rentals to be received under noncancellable leases are as follows:
YEAR ENDED DECEMBER 31: ---------------------------------------------------------- 1997...................................................... $ 22,950 1998...................................................... 19,950 1999...................................................... 19,575 2000...................................................... 16,950 2001...................................................... 16,200 Thereafter................................................ 44,550 -------- $140,175 ========
(8) PENSION AND RETIREMENT PLANS Pension Plans -- Non-Union The Company has a defined benefit pension plan which covers all salaried employees of the Company and its affiliate, Swenson Granite Company, Inc. who have attained age 21 and have completed one year of service. Employees with five or more years of service are entitled to pension benefits beginning at normal retirement age (65) equal to 1.8% of average compensation times years of credited service. Maximum number of years of credited service is equal to 30 years. The Company makes contributions in such amounts and at such times as it shall determine in accordance with an established funding method and policy, which is consistent with plan objectives and the requirements of the Employee Retirement Income Security Act of 1974 (ERISA). The Company's contributions for the year ended December 31, 1994, 1995 and 1996 were based on the minimum funding requirements of ERISA. Plan assets consist of marketable securities and an unallocated insurance contract. F-17 82 ROCK OF AGES CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (8) PENSION AND RETIREMENT PLANS -- (CONTINUED) Net periodic pension cost for the Company's defined benefit pension plan for the years ended December 31, 1995 and 1996, charged to operations in the accompanying consolidated statements of operations, excluding the expense incurred as a result of the early retirement window described below, consisted of the following:
1995 1996 ----------- ----------- Service cost-benefits attributable to service during the period.................................................. $ 222,485 $ 392,429 Interest cost on projected benefit obligation............. 881,644 1,042,864 Return on plan assets..................................... (1,660,367) (1,342,269) Net amortization and deferral............................. 1,149,127 776,636 ----------- ----------- Net periodic pension cost................................. $ 592,889 $ 869,660 =========== ===========
Assumptions used by the Company in the determination of pension plan information consisted of the following as of December 31, 1995 and 1996:
1995 1996 ---- ---- Discount rate.......................................................... 7.25% 7.25% Rate of increase in compensation levels................................ 5.50% 5.50% Expected long-term rate of return on plan assets....................... 9.00% 9.00%
The following table sets forth the funded status of the plan and amounts recognized in the accompanying consolidated balance sheets at December 31, 1995 and 1996:
1995 1996 ------------ ------------ Actuarial present value of accumulated benefit obligation including vested benefits of $10,760,173 in 1995 and $11,654,986 in 1996.......................... $(11,087,582) $(12,225,920) ============ ============ Actuarial present value of projected benefit obligation............................................ (12,845,942) (15,045,099) Plan assets at fair value............................... 9,901,354 11,296,553 ------------ ------------ Projected benefit obligation in excess of plan assets... (2,944,588) (3,748,546) Unrecognized net gain from past experience different from that assumed and the effects of changes in assumptions........................................... (500,947) (899,363) Unrecognized net prior service cost..................... 865,707 2,209,852 Unrecognized net obligation............................. 1,075,316 933,545 ------------ ------------ Accrued pension cost.................................... $ (1,504,512) $ (1,504,512) ============ ============
Effective November 1, 1995 the Company offered an early retirement window for eligible employees. As a result, the Company recognized a curtailment loss of $563,857 which has been charged to other expenses in the accompanying consolidated statement of operations. Postretirement Benefits In addition to providing pension benefits, the Company and its affiliate, Swenson Granite Company, Inc. (Swenson) have sponsored a defined benefit postretirement health care plan for early retirees. No other Company employees or retirees are eligible to participate in the plan. The Company and Swenson also sponsor defined benefit postretirement group life insurance plans for union and non-union employees. The death benefit provided to union retirees is $6,000; the death benefit provided to non-union retirees is 0.75 times the retiree's salary on the date of retirement (capped at $60,000). Included in selling, general and administrative F-18 83 ROCK OF AGES CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (8) PENSION AND RETIREMENT PLANS -- (CONTINUED) expenses of the Company is its share of the net periodic postretirement benefit costs of $219,428, $194,719 and $188,076 for the years ended December 31, 1994, 1995 and 1996, respectively. Net periodic postretirement benefit costs for the Company and its affiliate for the years ended December 31, 1994, 1995 and 1996 consisted of the following:
POSTRETIREMENT POSTRETIREMENT 1994 MEDICAL LIFE INSURANCE TOTAL ---------------------------------------------- -------------- -------------- -------- Service cost-benefits attributable to service during the period........................... $ -- $ 14,728 $ 14,728 Interest cost on accumulated postretirement benefit obligation.......................... 49,000 99,079 148,079 Net amortization and deferral................. 37,625 66,053 103,678 ------- -------- -------- Net periodic postretirement benefit cost...... $86,625 $179,860 $266,485 ======= ======== ======== 1995 Service cost-benefits attributable to service during the period........................... $ -- $ 12,559 $ 12,559 Interest cost on accumulated postretirement benefit obligation.......................... 35,677 98,599 134,276 Net amortization and deferral................. 24,410 66,053 90,463 ------- -------- -------- Net periodic postretirement benefit cost...... $60,087 177,211 237,298 ======= ======== ======== 1996 Service cost-benefits attributable to service during the period........................... $ -- $ 20,308 $ 20,308 Interest cost on accumulated postretirement benefit obligation.......................... 22,096 106,150 128,246 Net amortization and deferral................. 9,878 66,053 75,931 ------- -------- -------- Net periodic postretirement benefit cost...... $31,974 $192,511 $224,485 ======= ======== ========
The amounts recognized in the accompanying consolidated balance sheets as of December 31, 1995 and 1996, representing the Company's share of the funded status of the plans, were $504,750 and $506,938, respectively. The following table sets forth the funded status for the Company and its affiliate as of December 31, 1995 and 1996:
POSTRETIREMENT POSTRETIREMENT 1995 MEDICAL LIFE INSURANCE TOTAL -------------------------------------------- -------------- -------------- ----------- Accumulated postretirement benefit obligation: Retirees.................................. $(429,652) $(1,048,213) $(1,477,865) Fully eligible active plan participants... -- (148,911) (148,911) Other active plan participants............ -- (181,823) (181,823) --------- ----------- ----------- Accumulated postretirement benefit obligation in excess of plan assets....... (429,652) (1,378,947) (1,808,599) Unrecognized transition obligation.......... 73,231 1,188,952 1,262,183 Unrecognized net (gain)/loss from past experience different from that assumed.... (22,012) 16,184 (5,828) --------- ----------- ----------- Accrued postretirement benefit cost......... $(378,433) $ (173,811) $ (552,244) ========= =========== ===========
F-19 84 ROCK OF AGES CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (8) PENSION AND RETIREMENT PLANS -- (CONTINUED)
POSTRETIREMENT POSTRETIREMENT MEDICAL LIFE INSURANCE TOTAL -------------- -------------- ----------- 1996 Accumulated postretirement benefit obligation: Retirees.................................. $(285,441) $(1,094,623) $(1,380,064) Fully eligible active plan participants... -- (193,450) (193,450) Other active plan participants............ -- (219,676) (219,676) --------- ----------- ----------- Accumulated postretirement benefit obligation in excess of plan assets....... (285,441) (1,507,749) (1,793,190) Unrecognized transition obligation.......... 48,821 1,122,899 1,171,720 Unrecognized net (gain)/loss from past experience different from that assumed.... (79,047) 133,080 54,033 --------- ----------- ----------- Accrued postretirement benefit cost......... $(315,667) $ (251,770) $ (567,437) ========= =========== ===========
The weighted-average discount rate used in determining the actuarial present value of the accumulated postretirement benefit obligation was 7.25% and 7.5% as of December 31, 1995 and 1996, respectively. For measurement purposes, a 9% rate of increase in the per capita cost of covered health care benefits was assumed for 1996 and was assumed to gradually decrease to 4% over the next 6 years. An increase in the assumed health care cost trend rates of 1 percentage point in each year would result in an increase in the postretirement medical plan accumulated postretirement benefit obligation as of December 31, 1996 of $9,846 and the aggregate of the service and the interest cost components of the postretirement medical plan net periodic postretirement benefit cost for 1996 would increase by $687. Union Employee Plans Union employees participate in a multi-employer defined benefit pension plan. The Company contributes amounts as required by the union contract. At the present time, there is not sufficient information to accurately determine the Company's share of the liability for unfunded vested benefits of the plan. If the Company terminated its operations or withdrew from the plan, it would be required, under federal law, to accelerate funding of its proportionate share of the plan's unfunded vested benefits. The amount charged to operations in the accompanying consolidated statements of operations was $284,591, $456,470 and $713,738 in 1994, 1995 and 1996, respectively. Deferred Compensation Plans The Company has deferred compensation agreements with certain employees under a salary continuation plan. Generally, the terms of the plan provides for specified monthly payments to the employee or the beneficiary for a 15-year period beginning at the employee's retirement, disability or death. In certain cases, the plan also provides for minimum payments in the event of termination other than retirement, disability or death. Net periodic deferred compensation cost, charged to operations in the accompanying consolidated statements of operations, under the plan for the years ended December 31, 1994, 1995 and 1996 consisted of the following:
1994 1995 1996 -------- -------- -------- Service cost earned during the period.............. $ 33,635 $ 13,369 $ 56,108 Interest cost on projected benefit obligation...... 87,457 87,876 98,386 Net amortization and deferral...................... 18,761 18,761 31,392 -------- -------- -------- Net periodic deferred compensation cost............ $139,853 $120,006 $185,886 ======== ======== ========
F-20 85 ROCK OF AGES CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (8) PENSION AND RETIREMENT PLANS -- (CONTINUED) The following table sets forth the funded status of the plan as of December 31, 1995 and 1996 and amounts recognized in the accompanying consolidated balance sheets as of December 31, 1995 and 1996:
1995 1996 ----------- ----------- Actuarial present value of projected benefit obligation... $(1,159,113) $(1,445,083) Plan assets at fair value................................. -- -- ----------- ----------- Projected benefit obligation in excess of plan assets..... (1,159,113) (1,445,083) Unrecognized net gain from past experience different from that assumed and the effect of changes in assumptions... (57,128) (17,589) Unrecognized net obligation............................... 41,205 36,736 Unrecognized prior service obligation..................... 90,121 251,873 Adjustment required to recognize minimum liability........ (570) (183,418) ----------- ----------- Deferred compensation..................................... $(1,085,485) $(1,357,481) =========== ===========
The assumed rate of return used in determining the value of accumulated plan benefits was 7.25% and 7.5% for the years ended December 31, 1995 and 1996, respectively. The Company also has deferred compensation agreements with former stockholders of Lawson Granite Company and a former stockholder of Anderson-Friberg Company which are not covered under the Company's salary continuation plan. Total annual payments of $224,000 begin in 2000 and end at various dates through 2020. The present value of these payments was $2,146,609 as of December 31, 1995 and 1996, which is included in deferred compensation in the consolidated balance sheets. Savings and Profit Sharing Plan The Company has a defined contribution savings plan under Section 401(k) of the Internal Revenue Code for employees whose employment is not governed by a collective bargaining agreement and who have completed one year of service. The Company's contribution was $12,088, $19,804 and $27,587 in 1994, 1995 and 1996, respectively. The Company has a defined contribution savings plan under Section 401(k) of the Internal Revenue Code for employees covered by a collective bargaining agreement who have completed one year of service. The Company's contribution was $7,257, $13,830 and $24,362 in 1994, 1995 and 1996, respectively. (9) STOCK-BASED EMPLOYEE COMPENSATION Under the terms of the Amended and Restated 1994 Stock Plan, 1,500,000 options were reserved for issuance to key employees to purchase equivalent shares of common stock at exercise prices ranging from $2.40 to $4.12. The options granted have a five year term and vest at 20% per year over this period. The following table sets forth the stock option transactions for the years ended December 31, 1994, 1995 and 1996:
NUMBER WEIGHTED AVERAGE OF SHARES EXERCISE PRICE ----------- ---------------- Outstanding, December 31, 1993, 1994 and 1995............ 275,000 $ 2.49 Granted, January 2, 1996............................... 225,000 3.59 Granted, December 31, 1996............................. 362,500 3.75 ------- ----- Outstanding, December 31, 1996........................... 862,500 3.31 ======= ===== Exercisable, December 31, 1996........................... 282,500 2.99 Weighted average remaining contractual life.............. 3.4 years
The Company has adopted the disclosure-only provisions of Statement of Financial Standards No. 123, Accounting for Stock-Based Compensation. Accordingly, no compensation cost has been recognized for stock options granted under the plan during 1996 as the options were all granted at exercise prices which equaled the fair value at the date of the grant. There were no awards granted during 1995 and 1994. Had compensation cost for the Company's stock option plan been determined based on the fair value at the grant date for awards F-21 86 ROCK OF AGES CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (9) STOCK-BASED EMPLOYEE COMPENSATION -- (CONTINUED) during 1996 consistent with the provisions of SOFAS No. 123, the Company's net income would have been reduced to the pro forma amount indicated below: Net income, as reported.................................. $1,908,164 Net income, pro forma.................................... 1,798,619 Net income per share, pro forma.......................... $ .44
Pro forma net income reflects only options granted in 1996. Therefore, the full impact of calculating compensation cost for stock options under SFAS No. 123 is not reflected in the pro forma net income amounts presented because compensation cost is reflected over the options' vesting periods and compensation cost for options granted prior to January 1, 1995 is not considered. The fair value of each option grant is estimated on the date of the grant using the Minimum Value Method with the following weighted-average assumptions used for grants in 1996: risk-free interest rate of 6%; dividend yield of $0; and expected lives of five (5) years. (10) RELATED PARTY TRANSACTIONS The Company is related, through common ownership, to Swenson Granite Company, Inc. (Swenson). The Company paid a management fee of $632,000, $912,000, $936,000 in 1994, 1995 and 1996, respectively. Sales to Swenson were $0, $0 and $729,611 and purchases from Swenson were $0, $0 and $197,047 in 1994, 1995 and 1996, respectively. (11) FAIR VALUE OF FINANCIAL INSTRUMENTS Statement of Financial Accounting Standards No. 107, "Disclosures About the Fair Value of Financial Instruments", requires disclosure of information about the fair value of certain financial instruments for which it is practicable to estimate that value. For purposes of the following disclosure the fair value of a financial instrument is the amount at which the instrument could be exchanged in a current transaction between willing parties other than in a forced sale or liquidation. Management has determined that the carrying values of its financial assets and liabilities approximate fair value at December 31, 1996. (12) ACQUISITIONS Effective December 31, 1995 Swenson Granite Company purchased all of the outstanding stock of Lawson Granite Company and Anderson-Friberg Company. The aggregate cost of these acquisitions was $5,715,288 made up of 463 shares of Swenson stock valued at $3,381,799, a $310,000 note payable, $354,880 in cash paid in 1996, and $2,146,609 in deferred compensation arrangements. Accordingly, the purchase price was allocated to the assets acquired and liabilities assumed based upon their respective fair values. This treatment resulted in $1,779,113 of cost in excess of net assets acquired, or goodwill, and was accounted for under the purchase method. The net assets from the acquisition were contributed by Swenson to the Company. The following unaudited pro forma information has been prepared assuming that the acquisitions occurred at the beginning of the periods presented. The pro forma information is presented for information purposes only and is not necessarily indicative of what would have occurred if the acquisitions had been made as of those dates.
(UNAUDITED) YEARS ENDED DECEMBER 31, --------------------------- 1994 1995 ----------- ----------- Net revenues...................................... $43,689,296 $41,199,480 Net income........................................ 1,842,046 1,462,688 Net income per share.............................. .47 .36
The Company also acquired certain assets and assumed certain liabilities of Adru Granite, Inc. for $238,310 in 1996. The results of operations were not material in relation to the Company's consolidated results of operations. F-22 87 ROCK OF AGES CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (13) SUBSEQUENT EVENTS On June 27, 1997 the Company dividended assets of $1,069,136 to Swenson Granite Company, Inc. On June 30, 1997 the Company acquired all of the outstanding stock of KSMG, a successor to Keystone Memorials, Inc. for 263,441 shares of the Company's stock which was accounted for under the purchase method. The fair market value of KSMG on the date of acquisition was $3,582,798. As of June 30, 1997 investments in and advances to affiliated companies included Keystone's share of its investment in and advances to four Quarry Companies and Southern Mausoleums, Inc. The following unaudited pro forma information has been prepared assuming that the acquisitions occurred at the beginning of the periods presented. The pro forma information is presented for information purposes only and is not necessarily indicative of what would have occurred if the acquisitions had been made as of those dates.
(UNAUDITED) --------------------------- YEAR ENDED SIX MONTHS DECEMBER ENDED 31, JUNE 30, 1996 1997 ----------- ----------- Net revenues...................................... $53,972,546 $25,415,687 Net income (loss)................................. 1,711,447 (285,625) Net income (loss) per share....................... .42 (.07)
On August 12, 1997, pursuant to the reincorporation merger of Rock of Ages Corporation, a Vermont corporation and the immediate predecessor to the Company ("ROA Vermont") with and into a newly-formed Delaware corporation, with the Company surviving as a Delaware corporation, (i) the Company authorized 30,000,000 shares of $.01 par value Class A Common Stock, 15,000,000 shares of $.01 par value Class B Common Stock, and 2,500,000 shares of $.01 par value Preferred Stock and (ii) each outstanding share of common stock of ROA Vermont was converted into one half of a share of Class B Common Stock of the Company. As of August 12, 1997, no shares of Class A Common or Preferred Stock had been issued. The Common Stock outstanding and weighted average shares outstanding for all periods presented have been adjusted for the new stock capitalization. Prior to the closing of the offering, the Company will effect a reorganization (the "Reorganization") as follows: (i) the merger of Swenson Granite Company, Inc. ("Swenson Granite") with and into the Company, with the Company as the surviving corporation (the "Swenson Merger"), in which Swenson Granite's stockholders will receive 1,618,123 shares of Class B Common Stock for each share of Swenson Granite common stock (currently a total of 2,163 shares of Swenson Granite is outstanding); and (ii) immediately prior to the Swenson Merger, Swenson Granite will distribute its curb and landscaping business (essentially all of its operating assets and operating liabilities) to its stockholders (the "Swenson Granite Distribution") through a pro rata distribution of all of the member interests in a newly formed limited liability company named Swenson Granite Company LLC ("Swenson LLC"). The Swenson Granite stockholders will receive a total of 3,502,000 shares of Class B Common Stock which will represent 93% of the Company's total shares outstanding prior to the offering. The minority interest in the Company will be the same both before and after the exchange of shares. Following the Swenson Granite Distribution and prior to the Swenson Merger, the sole asset of Swenson Granite will be its 93% stock interest in the Company and its only liabilities will be a $3,340,000 intercompany payable to the Company and a $310,000 note payable. Pursuant to the Swenson Merger, the shares of Class B Common Stock held by Swenson Granite will be cancelled, the Company will forgive the intercompany payable and the Company will assume the note payable. The only effect on the Company's financial statements will be a reduction in stockholders' equity of $3,650,000. This effect is due solely to the forgiveness of the aforesaid intercompany payable and the assumption of the aforesaid note payable. F-23 88 INDEPENDENT AUDITORS' REPORT The Board of Directors, Childs & Childs Granite Company, Inc. and C & C Granite Company, Inc.: We have audited the accompanying combined balance sheet of Childs & Childs Granite Company, Inc., C & C Granite Company Inc., the Quarry Companies and Southern Mausoleums, Inc. (SMI) as of May 31, 1997, and the related combined statements of operations, stockholders' equity, and cash flows for the eleven- month period ended May 31, 1997. These combined financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these combined financial statements based on our audit. We did not audit the financial statements of the Quarry Companies (Caprice Blue Quarry, Inc.; Autumn Rose Quarry, Inc.; and Pennsylvania Granite Corporation, including its wholly-owned subsidiary, Carolina Quarries, Inc.) or SMI. The Company's combined investment in and advances to the Quarry Companies and SMI at May 31, 1997 was $540,184 and its equity in the earnings of the Quarry Companies and SMI was $128,839 for the eleven-month period ended May 31, 1997. The financial statements of the Quarry Companies and SMI were audited by other auditors whose reports have been furnished to us, and our opinion, insofar as it relates to the amounts included for the Quarry Companies and SMI, is based solely on the reports of the other auditors. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit and the reports of the other auditors provides a reasonable basis for our opinion. In our opinion, based on our audit and the reports of the other auditors, the combined financial statements referred to above present fairly, in all material respects, the financial position of Childs & Childs Granite Company, Inc., C & C Granite Company, Inc., the Quarry Companies and SMI at May 31, 1997, and the results of their operations and their cash flows for the eleven-month period ended May 31, 1997 in conformity with generally accepted accounting principles. KPMG Peat Marwick LLP Atlanta, Georgia July 18, 1997 F-24 89 CHILDS & CHILDS GRANITE COMPANY, INC., C & C GRANITE COMPANY, INC., QUARRY COMPANIES AND SMI COMBINED BALANCE SHEET
MAY 31, AUGUST 31, 1997 1997 ---------- ----------- (UNAUDITED) ASSETS (NOTE 5) Current assets: Cash.............................................................. $ 113,486 $ 181,222 Trade accounts receivable, less allowance for doubtful accounts of $134,000 at May 31 and August 31, 1997......................... 1,055,833 665,150 Inventories (note 2).............................................. 1,136,298 871,806 Prepaids.......................................................... -- 35,411 ---------- ---------- Total current assets........................................... 2,305,617 1,753,589 ---------- ---------- Investments in and advances to affiliated companies (note 4)........ 540,184 591,249 Property, plant, and equipment: Land.............................................................. 15,000 15,000 Buildings......................................................... 480,115 480,115 Machinery and equipment........................................... 1,050,767 1,057,298 Trucks, autos, and trailers....................................... 357,319 357,319 Furniture and fixture............................................. 45,310 45,310 ---------- ---------- 1,948,511 1,955,042 Less accumulated depreciation..................................... 945,953 979,492 ---------- ---------- Net property, plant, and equipment............................. 1,002,558 975,550 ---------- ---------- $3,848,359 $3,320,388 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current portion of long-term debt (note 5)........................ $ 412,185 $ 312,185 Trade accounts payable............................................ 128,887 38,861 Trade accounts payable -- affiliates.............................. 170,290 3,346 Due to stockholders............................................... 23,909 23,909 Accrued wage related costs........................................ 37,318 21,213 ---------- ---------- Total current liabilities...................................... 772,589 399,514 Long-term debt, less current portion (note 5)....................... 500,000 420,608 ---------- ---------- Total liabilities.............................................. 1,272,589 820,122 ---------- ---------- Stockholders' equity: Common stock (note 6)............................................. 22,500 22,500 Quarry Companies' and SMI's capital............................... 348,184 399,249 Retained earnings................................................. 2,205,086 2,078,517 ---------- ---------- Total stockholders' equity..................................... 2,575,770 2,500,266 ---------- ---------- Commitment and contingency (notes 5 and 7).......................... ---------- ---------- $3,848,359 $3,320,388 ========== ==========
See accompanying notes to combined financial statements. F-25 90 CHILDS & CHILDS GRANITE COMPANY, INC., C & C GRANITE COMPANY, INC., QUARRY COMPANIES AND SMI COMBINED STATEMENT OF OPERATIONS
THREE-MONTH ELEVEN-MONTH PERIOD ENDED PERIOD ENDED AUGUST 31, MAY 31, ------------------------- 1997 1996 1997 ------------ ---------- ---------- (UNAUDITED) Net revenues.......................................... $5,606,364 $1,470,590 $1,407,729 Cost of goods sold (including purchases from the Quarry Companies of $1,009,448 for the eleven-month period ended May 31, 1997) -- (note 4).............. 4,592,884 1,201,186 1,147,332 ---------- ---------- ---------- Gross profit................................ 1,013,480 269,404 260,397 Selling, general, and administrative expenses......... 701,325 192,127 221,726 ---------- ---------- ---------- Operating income............................ 312,155 77,277 38,671 ---------- ---------- ---------- Other income (expense): Interest expense.................................... (58,758) (17,245) (18,787) Finance charge income............................... 28,322 15,952 16,679 Miscellaneous income................................ 2,033 15,020 16,868 ---------- ---------- ---------- Net other (expense) income.................. (28,403) 13,727 14,760 ---------- ---------- ---------- Income before equity in earnings of investees................................. 283,752 91,004 53,431 Equity in earnings of investees (note 4).............. 128,839 231,166 51,065 ---------- ---------- ---------- Net income.................................. $ 412,591 $ 322,170 $ 104,496 ========== ========== ==========
See accompanying notes to combined financial statements. F-26 91 CHILDS & CHILDS GRANITE COMPANY, INC., C & C GRANITE COMPANY, INC., QUARRY COMPANIES AND SMI COMBINED STATEMENT OF STOCKHOLDERS' EQUITY FOR THE ELEVEN-MONTH PERIOD ENDED MAY 31, 1997 AND THE THREE-MONTH PERIOD ENDED AUGUST 31, 1997 (UNAUDITED)
QUARRY COMPANIES' TOTAL COMMON AND SMI'S RETAINED STOCKHOLDERS' STOCK CAPITAL EARNINGS EQUITY ------- --------- ---------- ------------ Balance at June 30, 1996...................... $22,500 $ 219,345 $2,269,711 $ 2,511,556 Distributions to stockholders............... -- -- (348,377) (348,377) Net income.................................. -- 128,839 283,752 412,591 ------- -------- ---------- ---------- Balance at May 31, 1997....................... 22,500 348,184 2,205,086 2,575,770 Distributions to stockholders............... -- -- (180,000) (180,000) Net income.................................. -- 51,065 53,431 104,496 ------- -------- ---------- ---------- Balance at August 31, 1997 (unaudited)........ $22,500 $ 399,249 $2,078,517 $ 2,500,266 ======= ======== ========== ==========
See accompanying notes to the combined financial statements. F-27 92 CHILDS & CHILDS GRANITE COMPANY, INC., C & C GRANITE COMPANY, INC., QUARRY COMPANIES AND SMI COMBINED STATEMENT OF CASH FLOWS
THREE-MONTH ELEVEN-MONTH PERIOD ENDED PERIOD ENDED AUGUST 31, MAY 31, --------------------- 1997 1996 1997 ------------ --------- --------- (UNAUDITED) Cash flows from operating activities: Net income............................................... $ 412,591 $ 322,170 $ 104,496 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation.......................................... 144,638 41,615 33,539 Equity in earnings of Quarry Companies and SMI........ (128,839) (231,166) (51,065) Changes in operating assets and liabilities: Trade accounts receivable........................... (213,089) 164,802 390,683 Inventories......................................... (57,466) 53,406 264,492 Prepaid expenses.................................... 57,561 (47,095) (35,411) Trade accounts payable, trade accounts payable-affiliates, and accrued costs............ 96,690 (67,663) (273,075) --------- --------- --------- Net cash provided by operating activities........ 312,086 236,069 433,659 --------- --------- --------- Cash flows from investing activities: Additions to property, plant, and equipment.............. (31,768) -- (6,531) Increase in cash surrender value......................... (56,008) -- -- --------- --------- --------- Net cash used in investing activities............ (87,776) -- (6,531) --------- --------- --------- Cash flows from financing activities: Proceeds from long-term debt............................. 912,185 -- -- Payments on long-term debt............................... (814,377) (181,299) (179,392) Distributions to stockholders............................ (234,000) (73,000) (180,000) --------- --------- --------- Net cash used in financing activities............ (136,192) (254,299) (359,392) --------- --------- --------- Net change in cash............................... 88,118 (18,230) 67,736 Cash at beginning of period................................ 25,368 66,164 113,486 --------- --------- --------- Cash at end of period...................................... $ 113,486 $ 47,934 $ 181,222 ========= ========= ========= Supplemental disclosure of cash flow information -- cash paid during the period for interest...................... $ 62,545 $ 17,245 $ 18,787 ========= ========= ========= Supplemental disclosure of noncash investing and financing activities -- the Company distributed the cash surrender value of certain life insurance policies to the Company's stockholders which amounted to........................... $ 114,377 $ -- $ -- ========= ========= =========
See accompanying notes to the combined financial statements. F-28 93 CHILDS & CHILDS GRANITE COMPANY, INC., C & C GRANITE COMPANY, INC., QUARRY COMPANIES AND SMI NOTES TO COMBINED FINANCIAL STATEMENTS MAY 31, 1997 (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (a) Description of Business Childs & Childs Granite Company, Inc. is a manufacturer of granite monuments and memorials in Elberton, Georgia. The three stockholders of Childs & Childs Granite Company, Inc. collectively own C & C Granite Company, Inc., which is a trucking company that primarily delivers products to Childs & Childs Granite Company, Inc.'s customers. Additionally, the three stockholders of Childs & Childs Granite Company, Inc. collectively own a 50% interest in the Quarry Companies (Caprice Blue Quarry, Inc.; Autumn Rose Quarry, Inc.; and Pennsylvania Granite Corporation, including its wholly owned subsidiary, Carolina Quarries, Inc.) which operate six granite quarries in five states and Southern Mausoleum, Inc. (SMI), a mausoleum manufacturing plant. Net revenues are to various retail monument customers throughout the United States. (b) Basis of Presentation The combined financial statements include the financial statements of Childs & Childs Granite Company, Inc.; C & C Granite Company, Inc.; and the 50% ownership in the aforementioned three Quarry Companies and SMI owned by the three stockholders of Childs & Childs Granite Company, Inc. (collectively, the "Company"). Childs & Childs Granite Company, Inc., the Quarry Companies and SMI have been combined using historical costs as a result of the common ownership. The Quarry Companies and SMI are accounted for under the equity method. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for the fair presentation of the unaudited condensed financial statements of the Company as of and for the three months ended August 31, 1996 and 1997 have been included. All significant intercompany balances and transactions have been eliminated in combination. (c) Cash Equivalents For purposes of the combined statement of cash flows, the Company considers all highly liquid debt instruments with original maturities of three months or less to be cash equivalents. At May 31, 1997, the Company owned no cash equivalents. (d) Inventories Inventories are stated at the lower of cost or market (net realizable value). Cost is determined using the first-in, first-out (FIFO) method for all inventories. (e) Property, Plant, and Equipment Property, plant, and equipment are stated at cost. Depreciation is provided over the estimated useful lives of the assets on a straight-line basis. Property, plant, and equipment are depreciated over the following estimated useful lives:
YEARS Buildings.................................................... 39 Machinery and equipment...................................... 12 Vehicles..................................................... 5 Office equipment............................................. 5 to 7
(f) Income Taxes The stockholders of the Company have elected to have the earnings of the Company taxed under the S Corporation provisions of the Internal Revenue Code. Under the S Corporation provisions, the income taxes of the Company are the responsibility of the stockholders for Federal and state income tax purposes. Accordingly, no income tax provision or income tax balances have been recorded by the Company. F-29 94 CHILDS & CHILDS GRANITE COMPANY, INC., C & C GRANITE COMPANY, INC., QUARRY COMPANIES AND SMI NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED) (g) Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of The Company adopted the provisions of SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, on January 1, 1996. This statement requires that long-lived assets and certain identifiable intangibles be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceed the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. Adoption of this statement did not have a material impact on the Company's financial position, results of operations, or liquidity. (h) Revenue Recognition Revenue is recognized upon shipment of goods. (i) Use of Estimates Management of the Company has made a number of estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities to prepare these financial statements in conformity with generally accepted accounting principles. Actual results could differ from those estimates. (2) INVENTORIES The components of inventories are as follows:
MAY 31, AUGUST 31, 1997 1997 ---------- ----------- (UNAUDITED) Raw materials................................................. $ 896,816 $ 688,029 Work in process............................................... 56,629 43,416 Finished goods................................................ 182,853 140,361 ---------- -------- Total inventories................................... $1,136,298 $ 871,806 ========== ========
(3) FAIR VALUE OF FINANCIAL INSTRUMENTS For cash, trade accounts receivables, trade accounts payables, trade accounts payable-affiliates, due to stockholders, and accrued wage related costs, the carrying amounts approximate fair value because of the short maturity of these instruments. The carrying value of long-term debt approximates fair value due to the variable interest of these instruments using a discounted cash flow analysis. F-30 95 CHILDS & CHILDS GRANITE COMPANY, INC., C & C GRANITE COMPANY, INC., QUARRY COMPANIES AND SMI NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) (4) INVESTMENTS IN AND ADVANCES TO AFFILIATED COMPANIES Investments in affiliated companies consist of the three stockholders' 50% of the common stock of each of the Quarry Companies and SMI. Summary unaudited financial information for the Quarry Companies and SMI is as follows:
ELEVEN-MONTH PERIOD ENDED MAY 31, 1997 ---------------------------------------------------------------- CAPRICE AUTUMN BLUE ROSE PENNSYLVANIA QUARRY SMI QUARRY GRANITE TOTAL --------- ---------- ---------- ------------ ----------- Current assets.............. $ 25,169 $ 611,297 $ 85,413 $1,887,749 $ 2,609,628 Noncurrent assets........... 277,301 288,514 1,530,708 5,476,508 7,573,031 --------- ---------- ---------- ---------- ----------- Total assets...... $ 302,470 $ 899,811 $1,616,121 $7,364,257 $10,182,659 ========= ========== ========== ========== =========== Current liabilities......... $ 200,443 $ 587,554 $ 171,684 $5,097,809 $ 6,057,490 Noncurrent liabilities...... 797,511 590,242 1,511,181 529,868 3,428,802 Stockholders' equity (deficit)................. (695,484) (277,985) (66,744) 1,736,580 696,367 --------- ---------- ---------- ---------- ----------- Total liabilities and stockholders' equity (deficit)....... $ 302,470 $ 899,811 $1,616,121 $7,364,257 $10,182,659 ========= ========== ========== ========== =========== Net revenues................ $ 183,569 $1,225,396 $ 325,533 $6,725,009 $ 8,459,507 Gross profit (loss)......... (234,920) 244,123 (29,267) 1,657,346 1,637,282 Net income (loss)........... $(254,707) $ 126,185 $ (78,525) $ 464,725 $ 257,678 ========= ========== ========== ========== ===========
THREE-MONTH PERIOD ENDED AUGUST 31, 1996 ---------------------------------------------------------------- CAPRICE AUTUMN BLUE ROSE PENNSYLVANIA QUARRY SMI QUARRY GRANITE TOTAL --------- ---------- ---------- ------------ ----------- Net revenues................ $ 38,954 $ 323,187 $ 70,805 $2,345,650 $ 2,778,596 Gross profit (loss)......... (16,607) 41,315 (25,805) 771,264 770,167 Net income (loss)........... $ (24,299) $ (29,770) $ (40,400) $ 556,800 $ 462,331 ========= ========== ========== ========== ===========
THREE-MONTH PERIOD ENDED AUGUST 31, 1997 ---------------------------------------------------------------- CAPRICE AUTUMN BLUE ROSE PENNSYLVANIA QUARRY SMI QUARRY GRANITE TOTAL --------- ---------- ---------- ------------ ----------- Net revenues................ $ 44,361 $ 440,998 $ 75,230 $1,749,105 $ 2,309,694 Gross profit (loss)......... (5,775) 130,423 22,772 242,905 390,325 Net income (loss)........... $ (11,617) $ 63,484 $ 11,334 $ 38,929 $ 102,130 ========= ========== ========== ========== ===========
In addition, the Company has advances to the Quarry Companies and SMI totaling $192,000 at May 31, 1997. Childs & Childs Granite Co., Inc. purchases a substantial portion of its raw granite from the Quarry Companies. Such purchases amounted to $1,009,448 for the eleven-month period ended May 31, 1997. Individually, the purchases from each Quarry Company are as follows: Caprice Blue Quarry...................................... $ 158,657 Autumn Rose Quarry....................................... 84,608 Pennsylvania Granite..................................... 766,183 ---------- Total.......................................... $1,009,448 ==========
At May 31, 1997, the Company's 50% interest in the cumulative losses of the Quarry Companies and SMI amounted to $(928,927). F-31 96 CHILDS & CHILDS GRANITE COMPANY, INC., C & C GRANITE COMPANY, INC., QUARRY COMPANIES AND SMI NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) (5) LONG-TERM DEBT Long-term debt at May 31, 1997 consists of the following: Borrowings under line of credit, interest at 9.00%, payable monthly, principal due November 1998............ $500,000 Borrowings under line of credit, interest at prime plus 1% (9.5% at May 31, 1997) payable quarterly beginning August 1997, principal due May 1998..................... 412,185 -------- Total long-term debt............................ 912,185 Less current portion...................................... 412,185 -------- Long-term debt, less current portion............ $500,000 ========
The aggregate maturities of long-term debt for each of the two years subsequent to May 31, 1997 are as follows: 1998, $412,185 and 1999, $500,000. Childs & Childs Granite Co., Inc. has two lines of credit with a bank for a total of $1,000,000, of which $912,185 was outstanding at May 31, 1997. The lines of credit are secured by substantially all of the assets of Childs and Childs Granite Co., Inc. The lines of credit may be prepaid at any time without penalty. (6) COMMON STOCK At May 31, 1997, the par value and the authorized shares of common stock of Childs & Childs Granite Co., Inc. were $100 and 5,000, respectively. In addition, 210 shares were issued and outstanding. At May 31, 1997, the par value and the authorized shares of common stock of C & C Granite Co., Inc. were $100 and 5,000, respectively. In addition, 15 shares were issued and outstanding. (7) SUBSEQUENT EVENT On June 28, 1997, Rock of Ages Corporation entered into a definitive agreement with the shareholders of the Company to purchase all of the outstanding stock of the Company. F-32 97 INDEPENDENT AUDITORS' REPORT The Board of Directors, Keystone Memorials, Inc.: We have audited the accompanying combined balance sheet of Keystone Memorials, Inc., the Quarry Companies and Southern Mausoleums, Inc. (SMI) as of April 30, 1997, and the related combined statements of operations, stockholder's deficit, and cash flows for the ten-month period ended April 30, 1997. These combined financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these combined financial statements based on our audit. We did not audit the financial statements of the Quarry Companies (Caprice Blue Quarry, Inc.; Autumn Rose Quarry, Inc.; or Pennsylvania Granite Corporation and its subsidiary, Carolina Quarries, Inc.) or SMI. The Company's combined investment in and advances to the Quarry Companies and SMI at April 30, 1997 was $585,010 and its equity in the earnings of the Quarry Companies and SMI was $55,787 for the ten-month period ended April 30, 1997. The financial statements of the Quarry Companies and SMI were audited by other auditors whose reports have been furnished to us, and our opinion, insofar as it relates to the amounts included for the Quarry Companies and SMI, is based solely on the reports of the other auditors. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit and the reports of the other auditors provides a reasonable basis for our opinion. In our opinion, based on our audit and the reports of the other auditors, the combined financial statements referred to above present fairly, in all material respects, the financial position of Keystone Memorials, Inc., the Quarry Companies and SMI at April 30, 1997, and the results of their operations and their cash flows for the ten-month period ended April 30, 1997 in conformity with generally accepted accounting principles. KPMG Peat Marwick LLP Atlanta, Georgia July 25, 1997 F-33 98 KEYSTONE MEMORIALS, INC., QUARRY COMPANIES AND SMI COMBINED BALANCE SHEET
APRIL 30, JULY 31, 1997 1997 ---------- ----------- (UNAUDITED) ASSETS (NOTE 6) Current assets: Cash equivalents.................................................. $ 35,883 $ 174,596 Trade accounts receivable, less allowance for doubtful accounts of $1,282,000 at April 30 and July 31, 1997....................... 1,626,474 1,425,780 Due from employees................................................ 14,790 14,562 Prepaid expenses.................................................. 62,040 85,331 Inventories (note 2).............................................. 1,532,099 1,662,465 ---------- ---------- Total current assets........................................... 3,271,286 3,362,734 ---------- ---------- Investments in and advances to affiliated companies (note 4)........ 585,010 439,997 Property, plant, and equipment: Land.............................................................. 272,977 272,977 Buildings......................................................... 906,882 906,882 Machinery and equipment........................................... 3,293,562 3,252,032 Trucks, autos, and trailers....................................... 718,778 738,096 Furniture and fixtures............................................ 195,452 195,452 ---------- ---------- 5,387,651 5,365,439 Less accumulated depreciation..................................... 2,682,924 2,747,234 ---------- ---------- Net property, plant, and equipment............................. 2,704,727 2,618,205 ---------- ---------- $6,561,023 $6,420,936 ========== ========== LIABILITIES AND STOCKHOLDER'S (DEFICIT) EQUITY Current liabilities: Current portion of long-term debt (note 6)........................ $ 844,419 $1,828,116 Bank overdraft.................................................... 70,921 -- Trade accounts payable............................................ 522,088 337,053 Trade accounts payable-affiliates................................. 3,689,509 411,103 Accrued expenses.................................................. 171,464 172,879 ---------- ---------- Total current liabilities...................................... 5,298,401 2,749,151 Long-term debt, less current portion (note 6)....................... 1,745,649 775,974 ---------- ---------- Total liabilities......................................... 7,044,050 3,525,125 ---------- ---------- Stockholder's (deficit) equity: Common stock, $100 par value. Authorized 100 shares; issued and outstanding 100 shares......................................... 10,000 10,000 Additional paid-in capital (note 8)............................... -- 3,285,054 Quarry Companies and SMI's capital................................ 275,132 332,752 Accumulated deficit............................................... (768,159) (731,995) ---------- ---------- Total stockholder's (deficit) equity...................... (483,027) 2,895,811 Commitments and contingencies (notes 5 and 6)....................... ---------- ---------- $6,561,023 $6,420,936 ========== ==========
See accompanying notes to combined financial statements. F-34 99 KEYSTONE MEMORIALS, INC., QUARRY COMPANIES AND SMI COMBINED STATEMENT OF OPERATIONS
THREE-MONTH TEN-MONTH PERIOD ENDED PERIOD ENDED JULY 31, APRIL 30, ------------------------- 1997 1996 1997 ------------ ---------- ---------- (UNAUDITED) Net revenues.......................................... $7,537,876 $2,321,977 $2,449,525 Cost of goods sold (including purchases from affiliated companies of $761,923 and related parties of $848,822 for the ten-month period ended April 30, 1997) -- (notes 4 and 8)............................ 6,723,718 2,169,643 2,170,555 ---------- ---------- ---------- Gross profit................................ 814,158 152,334 278,970 Selling, general, and administrative expenses......... 1,093,782 369,038 260,449 ---------- ---------- ---------- Operating (loss) income..................... (279,624) (216,704) 18,521 ---------- ---------- ---------- Other income (expense): Interest expense.................................... (186,401) (39,636) (27,580) Finance charge income............................... 92,955 35,465 24,881 Gain on sales of property and equipment............. 40,207 -- 20,342 ---------- ---------- ---------- Total other (expense) income................ (53,239) (4,171) 17,643 ---------- ---------- ---------- (Loss) income before equity in earnings of Quarry Companies and SMI and income taxes..................................... (332,863) (220,875) 36,164 Equity in earnings of Quarry Companies and SMI (note 4).................................................. 55,787 182,215 57,620 ---------- ---------- ---------- (Loss) income before income taxes........... (277,076) (38,660) 93,784 Income taxes (note 7)................................. -- -- -- ---------- ---------- ---------- Net (loss) income........................... $ (277,076) $ (38,660) $ 93,784 ========== ========== ==========
See accompanying notes to combined financial statements. F-35 100 KEYSTONE MEMORIALS, INC., QUARRY COMPANIES AND SMI COMBINED STATEMENT OF STOCKHOLDER'S (DEFICIT) EQUITY FOR THE TEN-MONTH PERIOD ENDED APRIL 30, 1997 AND THE THREE-MONTH PERIOD ENDED JULY 31, 1997 (UNAUDITED)
QUARRY TOTAL ADDITIONAL COMPANIES' STOCKHOLDER'S COMMON PAID-IN AND SMI'S ACCUMULATED (DEFICIT) STOCK CAPITAL CAPITAL DEFICIT EQUITY ------- ---------- ---------- ----------- ------------- Balance at June 30, 1996.................. $10,000 -- 219,345 (435,296) (205,951) Net income (loss)....................... -- -- 55,787 (332,863) (277,076) ------- --------- ------- -------- --------- Balance at April 30, 1997................. 10,000 -- 275,132 (768,159) (483,027) Net income.............................. -- -- 57,620 36,164 93,784 Conversion to capital (note 8).......... -- 3,285,054 -- -- 3,285,054 ------- --------- ------- -------- --------- Balance at July 31, 1997 (unaudited)...... $10,000 3,285,054 332,752 (731,995) 2,895,811 ======= ========= ======= ======== =========
See accompanying notes to the combined financial statements. F-36 101 KEYSTONE MEMORIALS, INC., QUARRY COMPANIES AND SMI COMBINED STATEMENT OF CASH FLOWS
TEN-MONTH PERIOD THREE-MONTH PERIOD ENDED ENDED JULY 31, APRIL 30, ----------------------- 1997 1996 1997 ---------- --------- --------- (UNAUDITED) Cash flows from operating activities (note 8): Net (loss) income................................... $ (277,076) $ (38,660) $ 93,784 Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities: Depreciation..................................... 297,023 93,740 84,652 Gain on sales of property, plant, and equipment...................................... (40,207) -- (20,342) Equity in earnings of Quarry Companies and SMI... (55,787) (182,215) (57,620) Changes in operating assets and liabilities: Trade accounts receivable and due from employees................................... (190,647) 416,447 200,922 Inventories.................................... (59,243) 89,629 (130,366) Prepaid expenses............................... 33,258 (9,218) (23,291) Trade accounts payable, trade accounts payable- affiliates, and accrued expenses............ 172,684 29,824 (116,972) ---------- --------- --------- Net cash (used in) provided by operating activities................................ (119,995) 399,547 30,767 ---------- --------- --------- Cash flows from investing activities (note 8): Additions to property, plant, and equipment......... (172,670) (118,362) (37,788) Proceeds from sales of property, plant, and equipment........................................ 185,000 -- -- (Increase) decrease in advances to affiliated companies........................................ (121,998) 39,422 202,633 ---------- --------- --------- Net cash (used in) provided by investing activities................................ (109,668) (78,940) 164,845 ---------- --------- --------- Cash flows from financing activities (note 8): Increase (decrease) in bank overdraft............... 70,921 -- (70,921) Proceeds from long-term debt........................ 1,013,458 -- 51,946 Payments on long-term debt.......................... (979,972) (79,303) (37,924) ---------- --------- --------- Net cash provided by (used in) financing activities................................ 104,407 (79,303) (56,899) ---------- --------- --------- Net change in cash equivalents.............. (125,256) 241,304 138,713 Cash equivalents at beginning of period............... 161,139 43,615 35,883 ---------- --------- --------- Cash equivalents at end of period..................... $ 35,883 $ 284,919 $ 174,596 ========== ========= ========= Supplemental disclosure of cash flow information: Cash paid during the period for: Interest......................................... $ 186,401 $ 39,636 $ 27,580 ========== ========= ========= Income taxes..................................... $ -- $ -- $ -- ========== ========= =========
See accompanying notes to the combined financial statements. F-37 102 KEYSTONE MEMORIALS, INC., QUARRY COMPANIES AND SMI NOTES TO COMBINED FINANCIAL STATEMENTS APRIL 30, 1997 (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (a) Description of Business Keystone Memorials, Inc. is a manufacturer of granite monuments and memorials in Elberton, Georgia. Additionally, the sole stockholder of Keystone Memorials, Inc. owns a 50% interest in three Quarry Companies (Caprice Blue Quarry, Inc.; Autumn Rose Quarry, Inc.; and Pennsylvania Granite Corporation, including its wholly owned subsidiary, Carolina Quarries, Inc.) which operate six granite quarries in five states and Southern Mausoleum, Inc. (SMI), a mausoleum manufacturing plant. Net revenues are to various retail monument customers throughout the United States. (b) Basis of Presentation The combined financial statements include the financial statements of Keystone Memorials, Inc., and its 50% ownership in three Quarry Companies and SMI owned by the sole stockholder of Keystone Memorials, Inc. (collectively, the "Company"). Keystone Memorials, Inc., Quarry Companies and SMI have been combined using historical costs as a result of the common ownership. The Quarry Companies and SMI are accounted for under the equity method. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for the fair presentation of the unaudited condensed financial statements of the Company as of and for the three months ended July 31, 1996 and 1997 have been included. (c) Cash Equivalents For purposes of the combined statement of cash flows, the Company considers all highly liquid debt instruments with original maturities of three months or less to be cash equivalents. At April 30, 1997, the cash equivalents consisted of $35,883 invested in a money market account. (d) Inventories Inventories are stated at the lower of cost or market (net realizable value). Cost is determined using the first-in, first-out (FIFO) method for all inventories. (e) Property, Plant, and Equipment Property, plant, and equipment are stated at cost. Depreciation is provided over the estimated useful lives of the assets on a straight-line basis. Property, plant, and equipment are depreciated over the following estimated useful lives:
YEARS ------ Buildings.................................................... 39 Machinery and equipment...................................... 12 Vehicles..................................................... 5 Office equipment............................................. 5 to 7
(f) Income Taxes Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. (g) Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of The Company adopted the provisions of SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, on January 1, 1996. This statement requires that long-lived assets and certain identifiable intangibles be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceed the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. F-38 103 KEYSTONE MEMORIALS, INC., QUARRY COMPANIES AND SMI NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED) Adoption of this statement did not have a material impact on the Company's financial position, results of operations, or liquidity. (h) Revenue Recognition Revenue is recognized upon shipment of goods. (i) Use of Estimates Management of the Company has made a number of estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities to prepare these financial statements in conformity with generally accepted accounting principles. Actual results could differ from those estimates. (2) INVENTORIES The components of inventories are as follows:
APRIL 30, JULY 31, 1997 1997 ---------- ----------- (UNAUDITED) Raw materials....................................... $ 791,570 $ 815,493 Work in process..................................... 154,017 156,825 Finished goods...................................... 586,512 690,147 ---------- ---------- Total inventories......................... $1,532,099 $1,662,465 ========== ==========
(3) FAIR VALUE OF FINANCIAL INSTRUMENTS For cash equivalents, trade accounts receivables, due from employees, bank overdraft, trade accounts payables, trade accounts payable-affiliates, and accrued expenses, the carrying amounts approximate fair value because of the short maturity of these instruments. The carrying value of long-term debt approximates fair value based on discounted cash flow analyses. (4) INVESTMENTS IN AND ADVANCES TO AFFILIATED COMPANIES Investments in affiliated companies consists of the sole stockholder's 50% of the common stock of each of the Quarry Companies and SMI. Summary unaudited financial information for the Quarry Companies and SMI is as follows:
TEN-MONTH PERIOD ENDED APRIL 30, 1997 ------------------------------------------------------------------- CAPRICE AUTUMN ROSE PENNSYLVANIA BLUE QUARRY SMI QUARRY GRANITE TOTAL ----------- ---------- ----------- ------------ ----------- Current assets.............. $ 17,557 $ 610,406 $ 91,700 $1,774,381 $ 2,494,044 Noncurrent assets........... 279,247 292,488 1,534,118 5,454,693 7,560,546 --------- ---------- ---------- ---------- ----------- Total assets...... $ 296,804 $ 902,894 $1,625,818 $7,229,074 $10,054,590 ========= ========== ========== ========== =========== Current liabilities......... $ 231,976 $ 632,922 $ 178,070 $4,994,908 $ 6,037,876 Noncurrent liabilities...... 749,409 605,748 1,512,690 579,868 3,447,715 Stockholders' equity (deficit)................. (684,581) (335,776) (64,942) 1,654,298 568,999 --------- ---------- ---------- ---------- ----------- Total liabilities and stockholders' equity (deficit)....... $ 296,804 $ 902,894 $1,625,818 $7,229,074 $10,054,590 ========= ========== ========== ========== =========== Net revenues................ $ 164,197 $1,073,646 $ 294,495 $6,076,004 $ 7,608,342 Gross profit (loss)......... (226,437) 174,251 (31,007) 1,401,663 1,318,470 Net income (loss)........... $(243,804) $ 68,394 $ (76,723) $ 382,443 $ 130,310 ========= ========== ========== ========== ===========
F-39 104 KEYSTONE MEMORIALS, INC., QUARRY COMPANIES AND SMI NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) (4) INVESTMENTS IN AND ADVANCES TO AFFILIATED COMPANIES -- (CONTINUED)
THREE-MONTH PERIOD ENDED JULY 31, 1996 ------------------------------------------------------------------ CAPRICE AUTUMN ROSE PENNSYLVANIA BLUE QUARRY SMI QUARRY GRANITE TOTAL ----------- ---------- ----------- ------------ ---------- Net revenues................. $ 23,678 $319,195 $ 81,507 $ 2,290,528 $2,714,908 Gross profit (loss).......... (25,759) 46,115 (39,147) 675,829 657,038 Net income (loss)............ $(34,594) $ (5,476) $ (55,206) $ 459,706 $ 364,430 -------- -------- -------- ---------- ----------
THREE-MONTH PERIOD ENDED JULY 31, 1997 ------------------------------------------------------------------ CAPRICE AUTUMN ROSE PENNSYLVANIA BLUE QUARRY SMI QUARRY GRANITE TOTAL ----------- ---------- ----------- ------------ ---------- Net revenues................. $ 45,075 $428,875 $ 71,263 $ 1,758,703 $2,303,916 Gross profit (loss).......... (7,732) 139,434 (1,902) 269,446 399,246 Net income (loss)............ $(14,808) $ 92,035 $ (12,300) $ 50,313 $ 115,240 -------- -------- -------- ---------- ----------
In addition, the Company has advances to the Quarry Companies and SMI totaling $300,510 at April 30, 1997. Keystone Memorials, Inc. purchases a substantial portion of its raw granite from the Quarry Companies and SMI. Such purchases amounted to $761,923 for the ten-month period ended April 30, 1997. Intercompany profits of $9,368 have been eliminated in combination. Individually, the purchases from each of the Quarry Companies and SMI are as follows: Caprice Blue Quarry....................................... $ 21,297 Southern Mausoleums....................................... 31,597 Autumn Rose Quarry........................................ 62,068 Pennsylvania Granite...................................... 646,961 -------- $761,923 ========
Keystone Memorials, Inc. sold various property and equipment to Pennsylvania Granite for $109,000 for the ten-month period ended April 30, 1997. At April 30, 1997, the Company's 50% interest in the cumulative losses of the Quarry Companies and SMI amounted to $(992,611). (5) LEASES The Company has several noncancelable operating leases, primarily for office equipment, that expire over the next three years. Rental expense for the operating leases (except those with lease terms of a month or less that were not renewed) during the ten-month period ending April 30, 1997 was $4,000. Future minimum lease payments under noncancelable operating leases with initial or remaining lease terms in excess of one year as of April 30, 1997 are $13,000 over the next three years. (6) LONG-TERM DEBT Long-term debt at April 30, 1997 consists of the following: 9.75% note payable in monthly installments of $7,840, including interest, with final payment of $484,708, due June 1999.............................................. $ 568,688 9.75% note payable in monthly installments of $4,035, including interest, with final payment of $249,962, due June 1999.............................................. 293,083 Borrowings under line of credit, interest at prime plus .25% (8.75% at April 30, 1997) payable monthly, principal due May 1998................................. 945,243 Non-interest bearing note payable to former owner which is the estate of the relative of the sole stockholder............................................ 783,054 ---------- Total long-term debt........................... 2,590,068 Less current portion..................................... 844,419 ---------- Long-term debt, excluding current portion...... $1,745,649 ==========
F-40 105 KEYSTONE MEMORIALS, INC., QUARRY COMPANIES AND SMI NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) (6) LONG-TERM DEBT -- (CONTINUED) The aggregate maturities of long-term debt for each of the three years subsequent to April 30, 1997 are as follows: 1998, $844,419; 1999, $1,012,866; and 2000, $732,783. Keystone Memorials, Inc. has a line of credit with a bank for a total of $1,000,000, of which $945,243, was outstanding at April 30, 1997. The line of credit is secured by substantially all of the assets of Keystone Memorials, Inc. The line of credit may be prepaid at any time without penalty. Keystone Memorials, Inc. also has two financing notes used to finance various equipment. These notes are paid on a monthly basis, with the final payments due in June 1999. These notes are secured by the equipment they are financing. (7) INCOME TAXES Income taxes for the ten-month period ended April 30, 1997 differed from the amounts computed by applying the U.S. federal income tax rate of 34% to loss before income taxes as a result of the following: Computed "expected" tax benefit.......................... $ (94,206) Increase (reduction) in income taxes resulting from: Change in the beginning-of-the-year balance of the valuation allowance for deferred tax assets allocated to income taxes........................... 108,060 State and local income taxes, net of federal income tax benefit............................................. (15,683) Other, net............................................. 1,829 --------- $ -- =========
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at April 30, 1997 are presented below. Deferred tax assets: Accounts receivable principally due to allowance for doubtful accounts................................... $ 499,980 Inventories, principally due to additional costs inventoried for tax purposes pursuant to the Tax Reform Act of 1986.................................. 72,150 Accruals not deductible until paid..................... 21,648 Investments in affiliated companies, principally due to undistributed losses of affiliated companies........ 387,118 Net operating loss carryforwards....................... 253,422 Other.................................................. 4,801 --------- Total gross deferred tax assets................ 1,239,119 Less valuation allowance............................... 821,555 --------- Net deferred tax assets........................ 417,564 --------- Deferred tax liability -- property, plant, and equipment, principally due to differences in depreciation......... (417,564) --------- Net deferred taxes............................. $ -- =========
The change in the income tax valuation allowance for the ten-month period ended April 30, 1997 was $108,060. At April 30, 1997, the Company has net operating loss carryforwards for federal income tax purposes of $649,800 which are available to offset future federal taxable income, if any, through 2012. Such net operating loss carryforwards may not be utilized subsequent to the acquisition (see note 9). (8) RELATED PARTY TRANSACTIONS The sole stockholder of the Company has an ownership interest in two quarries that sell raw granite to the Company on a routine basis. Total purchases from these related parties for the ten-month period ended April 30, 1997 was $848,822. Also, the Company sold various machinery and equipment to one of the quarries for $76,000 for the ten-month period ended April 30, 1997 and exchanged machinery for $60,000 of trade accounts payable-affiliates for the three-month period ended July 31, 1997 (unaudited). F-41 106 KEYSTONE MEMORIALS, INC., QUARRY COMPANIES AND SMI NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) (8) RELATED PARTY TRANSACTIONS -- (CONTINUED) As part of the acquisition of the Company by Rock of Ages Corporation ("Rock of Ages") (see note 9), the two related quarries converted $3,285,054 of trade accounts payable-affiliates and notes payable into additional paid-in capital. (9) SUBSEQUENT EVENT On June 30, 1997, a successor to the Company was acquired by Rock of Ages in exchange for 263,441 shares of common stock of Rock of Ages. A total of $3,273,856, included in trade accounts payable-affiliates and $11,198 included in notes payable, were not included in this transaction. F-42 107 INDEPENDENT AUDITORS' REPORT The Boards of Directors Keith Monument Companies: We have audited the accompanying combined balance sheets of Keith Monument Companies (the "Companies") as of June 30, 1997 and 1996, and the related combined statements of operations, stockholders' equity, and cash flows for each of the years in the three-year period ended June 30, 1997. These combined financial statements are the responsibility of the Companies' management. Our responsibility is to express an opinion on these combined financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the combined financial statements referred to above present fairly, in all material respects, the financial position of Keith Monument Companies as of June 30, 1997 and 1996, and the results of their operations and their cash flows for each of the years in the three-year period ended June 30, 1997 in conformity with generally accepted accounting principles. KPMG PEAT MARWICK LLP Louisville, Kentucky August 8, 1997 F-43 108 KEITH MONUMENT COMPANIES COMBINED BALANCE SHEETS JUNE 30, 1996 AND 1997
1996 1997 ---------- ---------- ASSETS Current assets: Cash and cash equivalents......................................... $1,866,496 $1,783,346 Accounts receivable, less allowance for doubtful accounts of $124,500....................................................... 834,237 1,002,527 Current portion of notes receivable (note 4): Related party.................................................. 63,145 89,876 Other.......................................................... 39,525 28,738 Inventories (note 2).............................................. 664,100 1,192,364 Prepaid expenses and other current assets......................... 77,474 98,210 Prepaid income taxes (note 7)..................................... 26,300 16,400 Deferred income taxes (note 7).................................... 9,900 10,300 ---------- ---------- Total current assets........................................... 3,581,177 4,221,761 Property, plant and equipment, net (notes 3 and 5).................. 977,386 1,393,261 Notes receivable, excluding current portion (note 4): Related party..................................................... 468,346 401,406 Other............................................................. 26,580 15,775 Due from related party.............................................. 48,870 48,870 Investments......................................................... 304,046 319,434 Cash surrender value of life insurance.............................. 148,956 164,329 Covenants not to compete, less accumulated amortization of $45,000 and $83,022, respectively (note 9)................................ 105,000 387,861 Goodwill, less accumulated amortization of $13,982 (note 9)......... -- 824,940 Other assets........................................................ 237,853 209,199 ---------- ---------- $5,898,214 $7,986,836 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current maturities of long-term debt (note 5)..................... $ -- $ 277,921 Trade accounts payable............................................ 31,818 96,964 Accrued expenses.................................................. 493,602 630,137 Dividends payable................................................. 141,303 85,825 Customer deposits................................................. 964,324 844,895 ---------- ---------- Total current liabilities...................................... 1,631,047 1,935,742 Long-term debt, excluding current maturities (note 5)............... -- 1,840,562 Deferred income taxes (note 7)...................................... 27,200 -- ---------- ---------- Total liabilities......................................... 1,658,247 3,776,304 ---------- ---------- Commitments and contingencies (note 8).............................. Stockholders' equity (note 6): Common stock...................................................... 179,700 179,700 Retained earnings................................................. 4,066,267 4,036,832 Treasury stock.................................................... (6,000) (6,000) ---------- ---------- Total stockholders' equity................................ 4,239,967 4,210,532 ---------- ---------- $5,898,214 $7,986,836 ========== ==========
See accompanying notes to combined financial statements. F-44 109 KEITH MONUMENT COMPANIES COMBINED STATEMENTS OF OPERATIONS YEARS ENDED JUNE 30, 1995, 1996 AND 1997
1995 1996 1997 ---------- ---------- ---------- Net revenues........................................... $7,041,748 $6,781,005 $7,810,831 Cost of goods sold..................................... 2,133,608 2,048,600 2,531,797 ---------- ---------- ---------- Gross profit................................. 4,908,140 4,732,405 5,279,034 Selling, general and administrative expenses........... 3,940,554 3,854,739 4,208,996 ---------- ---------- ---------- Operating income............................. 967,586 877,666 1,070,038 Interest income........................................ 98,856 148,582 172,300 Other income........................................... 81,295 93,521 71,633 Other expense.......................................... (23,251) (23,502) (85,328) ---------- ---------- ---------- Income before income taxes................... 1,124,486 1,096,267 1,228,643 Income tax expense (benefit) (note 7).................. 11,000 2,600 (23,650) ---------- ---------- ---------- Net income................................... $1,113,486 $1,093,667 $1,252,293 ========== ========== ==========
See accompanying notes to combined financial statements. F-45 110 KEITH MONUMENT COMPANIES COMBINED STATEMENTS OF STOCKHOLDERS' EQUITY YEARS ENDED JUNE 30, 1995, 1996 AND 1997
COMMON RETAINED TREASURY STOCK EARNINGS STOCK TOTAL -------- ---------- -------- ---------- Balance at June 30, 1994...................... $179,700 4,230,074 (6,000) 4,403,774 Net income.................................. -- 1,113,486 -- 1,113,486 Dividends................................... -- (1,207,237) -- (1,207,237) -------- ---------- ------ ---------- Balance at June 30, 1995...................... 179,700 4,136,323 (6,000) 4,310,023 Net income.................................. -- 1,093,667 -- 1,093,667 Dividends................................... -- (1,163,723) -- (1,163,723) -------- ---------- ------ ---------- Balance at June 30, 1996...................... 179,700 4,066,267 (6,000) 4,239,967 Net income.................................. -- 1,252,293 -- 1,252,293 Dividends................................... -- (1,281,728) -- (1,281,728) -------- ---------- ------ ---------- Balance at June 30, 1997...................... $179,700 4,036,832 (6,000) 4,210,532 ======== ========== ====== ==========
See accompanying notes to combined financial statements. F-46 111 KEITH MONUMENT COMPANIES COMBINED STATEMENTS OF CASH FLOWS YEARS ENDED JUNE 30, 1995, 1996 AND 1997
1995 1996 1997 --------- --------- --------- Cash flows from operating activities: Net income............................................... $1,113,486 $1,093,667 $1,252,293 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation.......................................... 131,295 104,203 117,072 Amortization.......................................... 15,000 30,000 52,004 (Gain) loss on sale of property, plant and equipment........................................... (4,044) 7,433 25,349 Deferred income taxes................................. (1,900) (1,800) (27,600) (Increase) decrease in accounts receivable............ 27,061 306,879 (168,290) (Increase) decrease in inventories.................... (37,649) 24,952 41,914 (Increase) decrease in prepaid expenses and other current assets...................................... 24,768 104,627 (20,736) (Increase) decrease in prepaid income taxes........... 14,400 (26,300) 9,900 (Increase) decrease in other assets................... (20,269) (161,091) 28,654 Increase (decrease) in trade accounts payable......... (85,882) (18,784) 65,146 Increase (decrease) in accrued expenses............... 5,524 (20,162) 136,535 Increase (decrease) in income taxes payable........... 12,709 (12,709) -- Increase (decrease) in customer deposits.............. (43,356) 254,593 (119,429) ---------- ---------- ---------- Net cash provided by operating activities........ 1,151,143 1,685,508 1,392,812 ---------- ---------- ---------- Cash flows from investing activities: Decrease in notes receivable............................. 75,579 91,223 61,801 Additions to property, plant and equipment............... (74,562) (142,857) (195,701) Proceeds from sale of property, plant and equipment...... 11,400 28,105 25,905 (Increase) decrease in investments....................... (13,306) 92,635 (15,388) Increase in cash surrender value of life insurance....... (11,172) (23,070) (15,373) Cash paid for covenant not to compete.................... (150,000) -- -- ---------- ---------- ---------- Net cash provided by (used in) investing activities..................................... (162,061) 46,036 (138,756) ---------- ---------- ---------- Cash flows from financing activities -- Cash dividends paid...................................... (1,255,494) (1,192,264) (1,337,206) ---------- ---------- ---------- Net increase (decrease) in cash.................. (266,412) 539,280 (83,150) Cash and cash equivalents at beginning of year............. 1,593,628 1,327,216 1,866,496 ---------- ---------- ---------- Cash and cash equivalents at end of year................... $1,327,216 $1,866,496 $1,783,346 ========== ========== ========== Supplemental cash flow information -- Cash (paid) refunded for income taxes.................... $ 14,026 $ (23,517) $ -- ========== ========== ========== Supplemental schedule of noncash investing and financing activities -- Note receivable for sale of building and land............ $ -- $ 36,000 $ -- ========== ========== ==========
See accompanying notes to combined financial statements. F-47 112 KEITH MONUMENT COMPANIES NOTES TO COMBINED FINANCIAL STATEMENTS JUNE 30, 1996 AND 1997 (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (a) Description of Business Keith Monument Companies (the Companies) are engaged in a single line of business of the engraving and selling of memorials, primarily to customers in the Commonwealth of Kentucky. (b) Principles of Combination The combined financial statements include the following Kentucky corporations, all affiliated through common ownership and control of substantially all of the issued and outstanding shares of common stock of the Companies by Messers. John E. Keith and Roy H. Keith, Jr., and their families: Keith Monument Company, National Memorial Corporation, Riehm-Gerlack Monument Company, Inc., Keith Lettering & Setting Corporation, Glasgow Monument Company, Inc. and Snyder Corporation. Keith Monument Company is a wholly-owned subsidiary of Keith National Corporation, a Kentucky corporation also controlled by Messers. Keith. All significant intercompany balances and transactions have been eliminated in the combined financial statements. (c) Cash Equivalents Cash equivalents of $415,283 and $321,572 at June 30, 1996 and 1997, respectively, consist primarily of money market funds and certificates of deposit with an initial term of less than three months. For purposes of the statements of cash flows, the Companies consider all short-term highly liquid investments with original maturities of three months or less to be cash equivalents. Cash and certificates of deposit are insured by the Federal Deposit Insurance Corporation (FDIC) up to $100,000. The Companies had bank balances exceeding individual FDIC insurance limits by $1,184,665 at June 30, 1997. (d) Accounts Receivable and Revenue Recognition The Companies recognize revenue upon the setting of the memorial. In certain instances, the Companies may enter into agreements with their customers which provide for extended payment terms, generally up to two years from either the date of setting of the memorial or, in certain instances, upon the settlement of an estate. Customer deposits and prepayments are recorded as a liability and recognized as revenue upon the setting of the memorial. Finance charges are recognized when received. The Companies do not require collateral or other security on accounts receivable. The credit risk on accounts is controlled by requiring significant deposits and monitoring procedures. (e) Notes Receivable Notes receivable are recorded at cost, less the related allowance for impaired notes receivable, if necessary. Management, considering current information and events regarding the borrowers' ability to repay their obligations, considers a note to be impaired when it is probable that the Companies will be unable to collect all amounts due according to the contractual terms of the note agreement. When a loan is considered to be impaired, the amount of the impairment is measured based on the present value of expected future cash flows discounted at the notes effective interest rate. No impairment losses are estimated to exist at June 30, 1996 and 1997. (f) Inventories Inventories consist primarily of memorials purchased for resale or for display purposes, and are stated at the lower of cost or market. Cost is determined using the last-in, first-out method (LIFO) for all inventories except those acquired from Lexington Granite Company, Inc. (which were acquired March 31, 1997, see note 9) for which cost is determined using the first-in, first-out method (FIFO). F-48 113 KEITH MONUMENT COMPANIES NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED) (g) Property, Plant and Equipment and Depreciation Property, plant and equipment are stated at cost. Depreciation on plant and equipment is calculated on various accelerated methods over the estimated useful lives of the assets as follows: Buildings and improvements............................ 10 to 30 years Machinery, equipment, furniture and fixtures.......... 5 to 10 years Vehicles.............................................. 4 to 10 years
(h) Investments Investments consist of certificates of deposit with initial terms of six years with maturities through 1999. Certificates of deposit are valued at cost plus accrued interest, which approximates fair value. The Companies had certificates of deposits exceeding individual FDIC insurance limits (see note 1(c)) by $224,118 at June 30, 1997. (i) Covenants Not to Compete Covenants not to compete are amortized on a straight-line basis over five to ten years, the lives of the covenants. (j) Goodwill Goodwill, which represents the excess of purchase price over fair value of net assets acquired, is amortized on a straight-line basis over 15 years, the expected periods to be benefited. The Companies assess the recoverability of this intangible asset by determining whether the amortization of the goodwill balance over its remaining life can be recovered through undiscounted future operating cash flows of the acquired operation. The amount of goodwill impairment, if any, is measured based on projected discounted future operating cash flows using a discount rate reflecting the Companies' average cost of funds. The assessment of the recoverability of goodwill will be impacted if estimated future operating cash flows are not achieved. (k) Income Taxes National Memorial Corporation, Riehm-Gerlack Monument Company, Inc., Keith Lettering & Setting Corporation, Glasgow Monument Company, Inc. and Snyder Corporation have elected to be taxed as Small Business Corporations for Federal and state income tax purposes. Therefore, no provision for Federal and state income taxes has been made in the combined financial statements for those companies since such taxes are the responsibility of the stockholders. Keith Monument Company has elected to be taxed as a C Corporation. Accordingly, income taxes are accounted for under the asset and liability method for Keith Monument Company. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. (l) Use of Estimates Management of the Companies has made a number of estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities to prepare these financial statements in conformity with generally accepted accounting principles. Actual results could differ from these estimates. (m) Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of The Companies adopted the provisions of Statement of Financial Accounting Standards No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, on July 1, 1996. This Statement requires that long-lived assets and certain identifiable intangibles be reviewed for F-49 114 KEITH MONUMENT COMPANIES NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED) impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceed the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. Adoption of this Statement did not have a material impact on the Companies' financial position, results of operations, or liquidity. (n) Fair Value of Financial Instruments Various methods and assumptions were used by the Companies in estimating their fair value disclosures for significant financial instruments. Fair values of cash equivalents, accounts and notes receivable, investments, trade accounts payable, accrued expenses and customer deposits approximate their carrying amount because of the short maturity of those instruments. The fair value of long-term debt is based on the present value of the underlying cash flows discounted at the current estimated borrowing rates available to the Companies. The fair value of the Companies' long-term debt at June 30, 1997 approximates the carrying value. (2) INVENTORIES Inventories consist of the following:
1996 1997 ---------- ---------- Memorials accounted for under the FIFO method.................................... $ -- $ 577,672 Memorials accounted for under the LIFO method.................................... 865,821 860,903 LIFO reserve................................ (201,721) (246,211) ---------- ---------- $ 664,100 $1,192,364 ========== ==========
During 1996 and 1997, LIFO inventory layers were reduced. The impact of charging lower inventory costs prevailing in previous years to cost of goods sold in 1996 and 1997 was not significant. (3) PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment are summarized as follows:
1996 1997 ---------- ---------- Land........................................ $ 297,557 $ 521,462 Buildings and improvements.................. 880,454 1,084,032 Machinery, equipment, furniture and fixtures.................................. 336,122 364,005 Vehicles.................................... 499,125 478,537 ---------- ---------- 2,013,258 2,448,036 Less accumulated depreciation............... 1,035,872 1,054,775 ---------- ---------- $ 977,386 $1,393,261 ========== ==========
F-50 115 KEITH MONUMENT COMPANIES NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) (4) NOTES RECEIVABLE Notes receivable consist of the following:
1996 1997 ---------- ---------- GMMC, Inc., an affiliated company, $200,000 dated April 26, 1993, receivable in semi-annual installments of $13,443 commencing October 26, 1993 with a final receipt due on April 26, 2003, at a 6% rate of interest, secured by a first mortgage on real estate................... $ 151,855 $ 133,814 GMMC, Inc., an affiliated company, $500,000 dated April 26, 1993, receivable in semi-annual installments of $33,608 commencing October 26, 1993 with a final receipt due on April 26, 2003, at a 6% rate of interest, secured by a first mortgage on real estate................... 379,636 357,468 Others...................................... 66,105 44,513 -------- -------- Total notes receivable............ 597,596 535,795 Less current portion........................ 102,670 118,614 -------- -------- Notes receivable, excluding current portion................. $ 494,926 $ 417,181 ======== ========
(5) LONG-TERM DEBT Long-term debt consists of the following:
1996 1997 --------- ---------- Lexington Granite Company, Inc., $1,797,600 dated March 31, 1997, payable in annual installments of $256,800 plus interest commencing March 31, 1998 with a final payment due on March 31, 2004, at a 9% rate of interest.......................... $ -- $1,797,600 David DeMarcus, $500,000 covenant not to compete dated March 31, 1997, payable in annual installments of $50,000 commencing March 31, 1998 with a final payment due March 31, 2007, with no interest stated, imputed interest at 9%.................... -- 320,883 --------- ---------- Total long-term debt.............. -- 2,118,483 Less current maturities..................... -- 277,921 --------- ---------- Long-term debt, excluding current maturities...................... -- $1,840,562 ========= ==========
The Lexington Granite Company, Inc. note and interest are secured by certain assets of Keith & Keith Partnership, a related party, and National Memorial Corporation. Long-term debt matures as follows:
YEAR ENDING JUNE 30 --------------------------------------------------------- 1998..................................................... $ 277,921 1999..................................................... 279,821 2000..................................................... 281,893 2001..................................................... 284,152 2002..................................................... 286,613 Thereafter............................................... 708,083 ---------- $ 2,118,483 ==========
F-51 116 KEITH MONUMENT COMPANIES NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) (6) STOCKHOLDERS EQUITY Common stock at June 30, 1996 and 1997 is summarized as follows:
SHARES SHARES ISSUED AND COMPANY PAR/STATED VALUE AUTHORIZED OUTSTANDING AMOUNT - ------------------------------------------- --------------------- ---------- ----------- -------- Keith Monument Company..................... Par value of $100 1,500 1,320 $132,000 National Memorial Corporation.............. Stated value of $10 1,000 1,000 10,000 Riehm-Gerlack Monument Company, Inc. ........................... Par value of $100 1,000 95 9,500 Keith Lettering & Setting Corporation...... Par value of $100 500 60 6,000 Glasgow Monument Company, Inc. ............ Stated value of $150 160 60 9,000 Snyder Corporation......................... Stated value of $60 1,000 220 13,200 ===== ===== -------- $179,700 ========
All of the above shares of stock are voting shares. Treasury stock consists of the cost of shares purchased from shareholders of Keith Lettering & Setting Corporation and Snyder Corporation in the amounts of $4,000 (2 shares) and $2,000 (20 shares), respectively. National Memorial Corporation also has authorized 1,000 shares of no par value Class A Preferred Stock and 10,000 shares of no par value Class B Preferred Stock. None of these shares were issued on June 30, 1996 or 1997. The dividends represent distributions of Small Business Corporations. (7) INCOME TAXES Income tax expense (benefit) is attributable only to Keith Monument Company and consists of:
CURRENT DEFERRED TOTAL ------- -------- -------- Year ended June 30, 1995: U.S. Federal...................... $10,400 $ (1,425) $ 8,975 State and local................... 2,500 (475) 2,025 ------- -------- -------- $12,900 $ (1,900) $ 11,000 ======= ======== ======== Year ended June 30, 1996: U.S. Federal...................... $ 3,300 $ (1,350) $ 1,950 State and local................... 1,100 (450) 650 ------- -------- -------- $ 4,400 $ (1,800) $ 2,600 ------- -------- -------- Year ended June 30, 1997: U.S. Federal...................... $ 2,700 $(20,700) $(18,000) State and local................... 1,250 (6,900) (5,650) ------- -------- -------- $ 3,950 $(27,600) $(23,650) ------- -------- --------
F-52 117 KEITH MONUMENT COMPANIES NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) (7) INCOME TAXES -- (CONTINUED) Income tax expense (benefit) was $11,000, $2,600 and ($23,650) for the years ended June 30, 1995, 1996 and 1997, respectively, and differed from the amounts computed by applying the U.S. Federal income tax rate of 35% to Keith Monument Company pretax income (loss) as a result of the following:
1995 1996 1997 -------- -------- -------- Computed "expected" tax expense (benefit)........................ $ 19,593 $ 11,005 $(33,696) Increase (reduction) in income taxes resulting from: State and local income taxes, net of federal income tax benefit....................... 2,911 1,635 (5,006) Other, net....................... (11,504) (10,040) 15,052 -------- -------- -------- $ 11,000 $ 2,600 $(23,650) ======== ======== ========
The tax effects of temporary differences that give rise to significant portion of the deferred tax assets (liabilities) at June 30, 1996 and 1997 are presented below.
1996 1997 -------- -------- Deferred tax assets: Accounts receivable, principally due to allowances for doubtful accounts.......... $ 5,800 $ 5,800 Compensated absences, principally due to accrual for financial reporting purposes.................................. 2,000 2,000 Other........................................ 2,100 2,500 -------- ------- Total gross deferred tax assets...... 9,900 10,300 Less valuation allowance..................... -- -- -------- ------- Net deferred tax assets.............. $ 9,900 $10,300 -------- ------- Deferred tax liabilities: Deferred income from affiliated companies.... (27,200) -- -------- ------- Net deferred tax asset (liability)... $(17,300) $10,300 ======== =======
In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers projected future taxable income and tax planning strategies in making this assessment. Based upon the level of historical taxable income and projections for future taxable income over the periods which the deferred tax assets are deductible, management believes it is more likely than not Keith Monument Company will realize the benefits of these deductible differences. (8) COMMITMENTS AND CONTINGENT LIABILITIES The Companies have entered into certain leases, all of which will expire by 1999. Certain of such leases are with related parties. Such leases are classified as operating leases and will require cash outflows as follows:
YEAR ENDING JUNE 30 ------------------------------------------------------- 1998................................................... $66,500 1999................................................... 17,000 ------- $83,500 -------
The Companies are in the process of negotiating with Keith and Keith Partnership, an entity controlled by Messrs. John E. Keith and Roy H. Keith, Jr., for a lease of land and buildings associated with the purchase F-53 118 KEITH MONUMENT COMPANIES NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) (8) COMMITMENTS AND CONTINGENT LIABILITIES -- (CONTINUED) of Lexington Granite Company, Inc. (see note 9). The monthly lease amount will be $10,000. The lease term has not yet been finalized. Rent expense was $75,635, $75,692 and $93,398 for 1995, 1996 and 1997, respectively, of which $51,515, $50,772 and $80,772, respectively, was with related parties. The Companies sponsor two defined contribution profit sharing plans, which cover substantially all employees. Contributions to the plans are based on a percentage of employees' compensation. Such expenses amounted to $297,073, $304,572 and $303,869 in 1995, 1996 and 1997, respectively. In the ordinary course of business, the Companies are subject to environmental matters. Management provides for such matters when they are probable and can be reasonably estimated. Management is of the opinion there are no existing matters which would have a material impact on the Companies' financial condition or results of operations. In the ordinary course of business, the Companies are subject to litigation matters. Management provides for such matters when they are probable and can be reasonably estimated. Management is of the opinion there are no existing matters which would have a material impact on the Companies' financial condition or results of operations. The Companies participate in the Safety Association Fund (the Fund), a workers' compensation self-insurance fund organized pursuant to the regulations of the Commonwealth of Kentucky -- Department of Workers' Claims. The Companies are charged premiums for workers' compensation based on rates determined by the Fund. While significant judgmental factors are included in the determination of these premiums, management of the Companies believes the amounts paid are adequate to provide for all existing known and incurred but not reported cases, and retroactive adjustments, if any, from the Fund would not have a material impact on the Companies' financial condition or results of operations. (9) ACQUISITION On March 31, 1997, National Memorial Corporation acquired certain assets of Lexington Granite Company, Inc. for a note payable in the amount of $1,797,600 (see note 5). The acquisition has been accounted for as a purchase, with the results of operations of Lexington Granite Company, Inc. included in the combined results of operations of the Companies since April 1, 1997. The purchase price was allocated as follows: Inventories.............................................. $ 570,178 Land..................................................... 300,000 Equipment and machinery.................................. 88,500 Goodwill................................................. 838,922 ---------- $1,797,600 ==========
In addition, the previous owner of Lexington Granite Company, Inc. entered into a ten-year covenant not to compete with National Memorial Corporation for $500,000, payable $50,000 per year for ten years with no interest rate. The covenant not to compete has been recorded at its net present value using a 9% discount rate (see note 5). Pro forma results, giving effect to interest, amortization, rent, salary and commissions, as if the acquisition had occurred on July 1, 1995 are as follows:
1996 1997 ---------- ---------- Net revenues................................ $8,273,000 $9,021,000 ---------- ---------- Net income.................................. $1,009,000 $1,225,000 ---------- ----------
F-54 119 KEITH MONUMENT COMPANIES NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) (10) SUBSEQUENT EVENT On July 30, 1997, Messrs. John E. Keith and Roy H. Keith, Jr. and the Companies entered into a definitive agreement with Rock of Ages Corporation ("Rock of Ages"), whereby Rock of Ages will purchase substantially all of the assets and assume substantially all of the liabilities of the Companies for $16,375,000 in cash and shares of Class A common stock, the number of shares to be determined pursuant to a formula defined in the agreement. The purchase price includes an amount of $1,797,600 to be used to repay the Companies' long-term debt to Lexington Granite Company, Inc. (see note 5) at the closing date of the purchase. Rock of Ages is currently planning an initial public offering, and the sale of the Companies is expected to occur concurrently with the consummation of the offering. F-55 120 INDEPENDENT AUDITORS' REPORT ON FINANCIAL STATEMENTS To the Board of Directors Pennsylvania Granite Corporation St. Peters, Pennsylvania We have audited the accompanying consolidated balance sheets of Pennsylvania Granite Corporation and subsidiary as of May 31, 1997 and April 30, 1997, and the related consolidated statements of operations and accumulated deficit, and cash flows for the eleven months and ten months then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to in the first paragraph present fairly, in all material respects, the financial position of Pennsylvania Granite Corporation and subsidiary as of May 31, 1997 and April 30, 1997, and the results of their operations and their cash flows for the eleven months and ten months then ended in conformity with generally accepted accounting principles. /s/ GREENE AND COMPANY, L.L.P. -------------------------------------- GREENE AND COMPANY, L.L.P. Anderson, South Carolina July 22, 1997 F-56 121 PENNSYLVANIA GRANITE CORPORATION CONSOLIDATED BALANCE SHEETS MAY 31, 1997 AND APRIL 30, 1997
MAY 31, APRIL 30, 1997 1997 ---------- ---------- ASSETS Current assets: Cash and cash equivalent.......................................... $ 432,487 $ 402,432 Trade receivables, less allowance for doubtful accounts of $13,495........................................................ 457,327 453,609 Trade receivables -- affiliates................................... 661,348 616,645 Employee receivables.............................................. 120 70 Inventory -- finished goods....................................... 244,751 220,347 Prepaid taxes..................................................... 2,109 4,040 Prepaid expenses.................................................. 86,107 73,738 Deposits.......................................................... 3,500 3,500 ---------- ---------- Total current assets...................................... 1,887,749 1,774,381 ---------- ---------- Property and equipment, net......................................... 2,273,052 2,297,914 ---------- ---------- Other assets: Advances to affiliates............................................ 941,489 873,989 Intangibles, net.................................................. 2,261,967 2,282,790 ---------- ---------- Total other assets............................................. 3,203,456 3,156,779 ---------- ---------- Total assets.............................................. $7,364,257 $7,229,074 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable.................................................. $ 503,185 $ 483,839 Accounts payable -- affiliates.................................... 196,529 192,058 Accrued interest.................................................. 20,794 10,877 Accrued expenses.................................................. 14,837 22,608 Income taxes payable.............................................. 155,720 82,000 Deferred income taxes............................................. 279,000 261,000 Notes payable..................................................... 3,927,744 3,942,526 ---------- ---------- Total current liabilities................................. 5,097,809 4,994,908 ---------- ---------- Long-term liabilities -- advances from affiliates................... 529,868 579,868 ---------- ---------- Stockholders' equity: Common stock, no par value. Authorized 1,950 shares; 1,740 shares issued and outstanding......................................... 2,500,500 2,500,500 Accumulated deficit............................................... (763,920) (846,202) ---------- ---------- Total stockholders' equity..................................... 1,736,580 1,654,298 ---------- ---------- Total liabilities and stockholders' equity................ $7,364,257 $7,229,074 ========== ==========
See accompanying notes to financial statements. F-57 122 PENNSYLVANIA GRANITE CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS AND ACCUMULATED DEFICIT FOR THE ELEVEN MONTHS ENDED MAY 31, 1997 Net revenues (including revenues to affiliates of $1,526,022)................... $ 6,725,009 Cost of goods sold (including purchases from affiliates of $99,997)............. 5,067,663 ----------- Gross profit.................................................................... 1,657,346 Selling and administrative expenses (including fees paid to affiliates of $55,278)...................................................................... 619,257 ----------- Operating income................................................................ 1,038,059 ----------- Other (income) expense: Interest expense.............................................................. 343,601 Finance charges............................................................... (1,982) Interest income............................................................... (10,350) Rental income................................................................. (3,935) ----------- Total other expense................................................... 327,334 ----------- Income before income taxes...................................................... 710,725 Income taxes.................................................................... 246,000 ----------- Net income...................................................................... 464,725 Accumulated deficit, July 1, 1996............................................... (1,228,645) ----------- Accumulated deficit, May 31, 1997............................................... $ (763,920) ===========
See accompanying notes to financial statements. F-58 123 PENNSYLVANIA GRANITE CORPORATION CONSOLIDATED STATEMENT OF OPERATIONS AND ACCUMULATED DEFICIT FOR THE TEN MONTHS ENDED APRIL 30, 1997 Net revenues (including revenues to affiliates of $1,323,006)................... $ 6,076,004 Cost of goods sold (including purchases from affiliates of $97,776)............. 4,674,341 ----------- Gross profit.................................................................... 1,401,663 Selling and administrative expenses (including fees paid to affiliates of $49,767)...................................................................... 569,950 ----------- Operating income................................................................ 831,713 ----------- Other (income) expense: Interest expense.............................................................. 312,223 Finance charges............................................................... (1,879) Interest income............................................................... (10,139) Rental income................................................................. (3,935) ----------- Total other expense................................................... 296,270 ----------- Income before income taxes...................................................... 535,443 Income taxes.................................................................... 153,000 ----------- Net income...................................................................... 382,443 Accumulated deficit, July 1, 1996............................................... (1,228,645) ----------- Accumulated deficit, April 30, 1997............................................. $ (846,202) ===========
See accompanying notes to financial statements. F-59 124 PENNSYLVANIA GRANITE CORPORATION CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE ELEVEN MONTHS ENDED MAY 31, 1997 Cash flows from operating activities: Net income..................................................................... $ 464,725 Adjustments to reconcile net income to net cash provided by operating activities: Amortization................................................................ 207,426 Depletion................................................................... 24,078 Depreciation................................................................ 296,646 Deferred income taxes....................................................... 61,000 (Increase) decrease in assets: Trade receivables......................................................... (157,215) Employee receivables...................................................... 1,083 Inventory................................................................. (114,021) Prepaid taxes............................................................. 1,673 Prepaid expenses.......................................................... 36,682 Increase (decrease) in liabilities: Accounts payable.......................................................... 215,322 Accrued interest.......................................................... 20,794 Accrued expenses.......................................................... (71,114) Income taxes payable...................................................... 155,720 ---------- Net cash provided by operating activities.............................. 1,142,799 ---------- Cash flows used in investing activities -- purchase of property and equipment.... (230,572) ---------- Cash flows from financing activities: Payments on notes payable...................................................... (318,908) Advances to affiliates......................................................... (611,500) ---------- Net cash used in financing activities.................................. (930,408) ---------- Net decrease in cash and cash equivalents........................................ (18,181) Cash and cash equivalents, July 1, 1996.......................................... 450,668 ---------- Cash and cash equivalents, May 31, 1997.......................................... $ 432,487 ========== Supplemental disclosures of cash flows information -- cash paid for interest..... $ 343,601 ==========
See accompanying notes to financial statements. F-60 125 PENNSYLVANIA GRANITE CORPORATION CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE TEN MONTHS ENDED APRIL 30, 1997 Cash flows from operating activities: Net income..................................................................... $ 382,443 Adjustments to reconcile net income to net cash provided by operating activities: Amortization................................................................ 188,569 Depletion................................................................... 22,112 Depreciation................................................................ 268,523 Deferred income taxes....................................................... 43,000 (Increase) decrease in assets: Trade receivables......................................................... (108,795) Employee receivables...................................................... 1,133 Inventory................................................................. (89,617) Prepaid taxes............................................................. (258) Prepaid expenses.......................................................... 49,052 Increase (decrease) in liabilities: Accounts payable.......................................................... 191,506 Accrued interest.......................................................... 10,877 Accrued expenses.......................................................... (63,344) Income taxes payable...................................................... 82,000 ---------- Net cash provided by operating activities.............................. 977,201 ---------- Cash flows used in investing activities -- purchase of property and equipment.... (227,311) ---------- Cash flows used in financing activities: Payments on notes payable...................................................... (304,126) Advances to affiliates......................................................... (494,000) ---------- Net cash used in financing activities.................................. (798,126) ---------- Net decrease in cash and cash equivalents........................................ (48,236) Cash and cash equivalents, July 1, 1996.......................................... 450,668 ---------- Cash and cash equivalents, April 30, 1997........................................ $ 402,432 ========== Supplemental disclosures of cash flows information -- cash paid for interest..... $ 312,223 ==========
See accompanying notes to financial statements. F-61 126 PENNSYLVANIA GRANITE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MAY 31, 1997 AND APRIL 30, 1997 NOTE A -- NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES This summary of significant accounting policies of the Company is presented to assist in understanding the Company's financial statements. The financial statements and notes are representations of the Company's management, who is responsible for their integrity and objectivity. These accounting policies conform to generally accepted accounting principles and have been consistently applied in the preparation of the financial statements. Nature of Business The Company quarries granite dimensional blocks for monuments, industrial surface plates and building materials in Pennsylvania and North and South Carolina. These products are sold nationwide and in Europe. Use of Estimates The presentation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Cash and Cash Equivalents For purposes of the statement of cash flows, the Company considers all highly liquid debt instruments purchased with a maturity of three months or less to be cash equivalents. The Company has a money market account in the amount of $266,887 at May 31, 1997 and $66,703 at April 30, 1997. Trade Receivables The Company accounts for uncollectible trade receivables on the reserve method. Inventory Inventory of quarry product is valued at the lower of average cost or market. Average cost is the cost to quarry, which includes direct labor and overhead. Revenue Recognition Revenue is recognized upon shipment of goods. See accountants' report. F-62 127 PENNSYLVANIA GRANITE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE A -- NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED) Property and Equipment Property and equipment are stated at acquisition cost as of October 12, 1988, and cost for additions thereafter. Depreciation is computed under the straight-line method for financial reporting purposes over the following estimated useful lives:
YEARS ----- Buildings............................................ 10-40 Trucks and automobiles............................... 3-7 Machinery and equipment.............................. 3-10 Office fixtures and equipment........................ 3-10
Major renewals and betterments are added to the property accounts while maintenance and repairs are charged against earnings as incurred. Intangibles Amortization is computed under the straight-line method for financial reporting purposes over the following estimated useful lives: Goodwill........................................... 18 1/2-40 Organization costs................................. 5 Loan costs......................................... 5 Overburden removal................................. 15 Covenant not to compete............................ 5
Depletion of mineral deposits is computed using cost depletion for financial reporting purposes. Income Taxes Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or recognized in income in the period that includes the enactment date. Goodwill Goodwill, which represents the excess of purchase price over fair value of net assets acquired, is amortized on a straight-line basis over the expected periods to be benefitted. The Company assesses the recoverability of this intangible asset by determining whether the amortization of the goodwill balance over its remaining life can be recovered through undiscounted future operating cash flows of the acquired operation. The amount of goodwill impairment, if any, is measured based on projected discounted future operating cash flows using a discount rate reflecting the Company's average cost of funds. The assessment of the recoverability of goodwill will be impacted if estimated future operating cash flows are not achieved. See accountants' report. F-63 128 PENNSYLVANIA GRANITE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE A -- NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED) Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed of The Company adopted the provisions of SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, on January 1, 1996. This statement requires that long-lived assets and certain identifiable intangibles be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceed the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. Adoption of this statement did not have a material impact on the Company's financial position, results of operations, or liquidity. NOTE B -- PROPERTY AND EQUIPMENT Property and equipment consist of the following:
MAY 31, APRIL 30, 1997 1997 ----------- ----------- Land.............................................. $ 721,570 $ 721,570 Buildings......................................... 477,955 477,955 Trucks and automobiles............................ 181,331 181,331 Machinery and equipment........................... 4,719,544 4,716,283 Office fixtures and equipment..................... 61,819 61,819 ----------- ----------- 6,162,219 6,158,958 Accumulated depreciation.......................... (3,889,167) (3,861,044) ----------- ----------- $ 2,273,052 $ 2,297,914 =========== ===========
Depreciation expense for the eleven months ended May 31, 1997 and the ten months ended April 30, 1997 was $296,646 and $268,523, respectively. NOTE C -- INTANGIBLES Intangibles consist of the following:
MAY 31, APRIL 30, 1997 1997 ----------- ----------- Goodwill.......................................... $ 2,883,628 $ 2,884,511 Organization costs................................ 36,990 37,262 Mineral deposits.................................. 540,162 540,162 Loan costs........................................ 24,711 24,711 Overburden removal................................ 150,204 150,204 Covenant not to compete........................... 300,000 300,000 ----------- ----------- 3,935,695 3,936,850 Accumulated amortization and depletion............ (1,673,728) (1,654,060) ----------- ----------- $ 2,261,967 $ 2,282,790 =========== ===========
See accountants' report. F-64 129 PENNSYLVANIA GRANITE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE C -- INTANGIBLES -- (CONTINUED) Amortization and depletion expense for the eleven months ended May 31, 1997 were $207,426 and $24,078, respectively. Amortization and depletion expense for the ten months ended April 30, 1997 were $188,569 and $22,112, respectively. NOTE D -- NOTES PAYABLE Notes Payable are as follows:
MAY 31, APRIL 30, 1997 1997 ----------- ----------- Bank mortgage, payable $19,092 monthly (principal and interest at 9 1/2%) with a maturity date of October 1998; the mortgage balance is secured by substantially all of the Company's assets and guarantees by the stockholders. ................ $ 1,590,843 $ 1,597,291 Bank mortgage, payable $8,334 monthly plus interest at prime plus 1 1/2% with a maturity date of October 1998; secured by substantially all of the Company's assets and guarantees by the stockholders. .............................. 1,050,117 1,058,451 Bank mortgage, payable $25,000 monthly (principal and interest at prime plus 0.45%) with a maturity date of May 1997; the mortgage balance is secured by substantially all of the subsidiary's assets and guarantees by the stockholders. Principal and accrued interest were paid in full on July 2, 1997. ............. 1,286,784 1,286,784 ---------- ---------- 3,927,744 3,942,526 Current portion................................... (3,927,744) (3,942,526) ---------- ---------- $ -- $ -- ========== ==========
In regard to the term loans, the Company has agreed to maintain proper financial records and statements and to maintain certain financial ratios pertaining to its net worth, working capital, debt coverage, etc. The Company has not met these requirements for the periods ended May 31, 1997 and April 30, 1997, and the bank has decided not to waive the requirements. Therefore, all notes payable have been classified as current. NOTE E -- RELATED-PARTY TRANSACTIONS The Company is affiliated with numerous other companies through common control and stock ownership. The stockholders and other joint venture companies have made unsecured non-interest bearing advances to the Company for working capital purposes. See accountants' report. F-65 130 PENNSYLVANIA GRANITE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE F -- INCOME TAX MATTERS A summary of the provision for income taxes is as follows:
MAY 31, APRIL 30, 1997 1997 -------- -------- Current................................................ $185,000 $110,000 Deferred............................................... 61,000 43,000 -------- -------- Provision for Income Taxes................... $246,000 $153,000 ======== ========
The net deferred tax liability on the balance sheet includes the following components:
MAY 31, APRIL 30, 1997 1997 -------- -------- Deferred tax liabilities arising from: Accelerated methods of depreciation for tax.......... $136,000 $137,000 Tax depletion on quarry.............................. 26,000 26,000 Alternative minimum tax.............................. 129,000 129,000 Deferred tax assets arising from: Allowance for bad debts.............................. (5,000) (5,000) Inventory adjustments (Section 263(a))............... (7,000) (6,000) Net operating loss carryovers........................ -- (8,000) Investment tax credit carryovers..................... -- (12,000) -------- -------- Net deferred tax liability................... $279,000 $261,000 ======== ========
The Company has unused net operating losses and investment tax credits available for carryforward to offset future taxable income and tax liabilities for income tax reporting purposes which expire as follows:
NET YEARS ENDING OPERATING TAX SEPTEMBER 30, LOSS CREDITS -------------------------------------------------------- --------- ------- 1999.................................................. $ -- $ 6,992 2000.................................................. -- 12,483 2001.................................................. -- 9,831 2006.................................................. 10,375 -- 2007.................................................. 6,302 -- 2008.................................................. 3,964 -- ------- ------- $20,641 $29,306 ======= =======
NOTE G -- CONCENTRATION OF CREDIT RISK All of the Company's cash funds are located in financial institutions that are insured by the FDIC for up to $100,000. The amounts in excess of this limit at May 31, 1997 and April 30, 1997 are $166,887 and $187,949, respectively. Sales to two major customers represented 56% of total revenues for both the eleven and ten months ended May 31, 1997 and April 30, 1997. Trade accounts receivable from major customers represented 40% and 62% of total trade accounts receivable as of May 31, 1997 and April 30, 1997, respectively. NOTE H -- SUBSEQUENT EVENTS Subsequent to the date of these financial statements, the Company joined in a merger with its affiliates and other unrelated granite companies. See accountants' report. F-66 131 PENNSYLVANIA GRANITE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE I -- FAIR VALUES OF FINANCIAL INSTRUMENTS The Company has a number of financial instruments, none of which are held for trading purposes. The Company estimates that the fair value of all financial instruments at May 31, 1997 and April 30, 1997 does not differ materially from the aggregate carrying values of its financial instruments recorded in the accompanying balance sheets. The estimated fair value amounts have been determined by the Company using available market information and appropriate valuation methodologies. Considerable judgement is necessarily required in interpreting market data to develop the estimates of fair value, and accordingly, the estimates are not necessarily indicative of the amounts that the Company could realize in a current market exchange. See accountants' report. F-67 132 ACCOUNTANTS' REVIEW REPORT To the Board of Directors Pennsylvania Granite Corporation St. Peters, Pennsylvania We have reviewed the accompanying consolidated balance sheets of Pennsylvania Granite Corporation as of August 31, 1997 and 1996, and the related consolidated statements of income, accumulated deficit, and cash flows for the three months then ended, in accordance with Statements on Standards for Accounting and Review Services issued by the American Institute of Certified Public Accountants. All information included in these financial statements is the representation of the management of Pennsylvania Granite Corporation. A review consists principally of inquiries of Company personnel and analytical procedures applied to financial data. It is substantially less in scope than an audit in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our review, we are not aware of any material modifications that should be made to the accompanying financial statements in order for them to be in conformity with generally accepted accounting principles. /s/ GREENE AND COMPANY, L.L.P. -------------------------------------- GREENE AND COMPANY, L.L.P. Anderson, South Carolina September 18, 1997 F-68 133 PENNSYLVANIA GRANITE CORPORATION CONSOLIDATED BALANCE SHEETS AUGUST 31, 1997 AND AUGUST 31, 1996
AUGUST 31, ------------------------- 1997 1996 ---------- ---------- (UNAUDITED) ASSETS Current assets: Cash and cash equivalent.......................................... $ 290,802 $ 556,525 Trade receivables, less allowance for doubtful accounts of $13,495........................................................ 569,494 672,930 Trade receivables -- affiliates................................... 380,740 352,487 Employee receivables.............................................. 700 1,118 Inventory -- finished goods....................................... 278,610 230,766 Prepaid taxes..................................................... 13,124 9,471 Prepaid expenses.................................................. 91,496 112,075 Deposits.......................................................... 3,500 3,500 ---------- ---------- Total current assets...................................... 1,628,466 1,938,872 ---------- ---------- Property and equipment, net......................................... 2,252,781 2,295,129 ---------- ---------- Other assets: Advances to affiliates............................................ 1,019,489 586,989 Intangibles, net.................................................. 2,214,227 2,453,396 ---------- ---------- Total other assets............................................. 3,233,716 3,040,385 ---------- ---------- Total assets.............................................. $7,114,963 $7,274,386 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable.................................................. $ 469,477 $ 365,465 Accounts payable -- affiliates.................................... 23,849 84,978 Accrued expenses.................................................. 29,228 93,298 Income taxes payable.............................................. 165,900 -0- Deferred income taxes............................................. 281,000 266,000 Current portion of long-term debt................................. 1,850,946 4,188,780 ---------- ---------- Total current liabilities................................. 2,820,400 4,998,521 ---------- ---------- Long-term liabilities: Advances from affiliates.......................................... 2,060,831 -0- Long-term debt, less current portion.............................. 458,223 659,868 ---------- ---------- 2,519,054 659,868 Stockholders' equity: Common stock, no par value. Authorized 1,950 shares; 1,740 shares issued and outstanding......................................... 2,500,500 2,500,500 Accumulated deficit............................................... (724,991) (884,503) ---------- ---------- Total stockholders' equity..................................... 1,775,509 1,615,997 ---------- ---------- Total liabilities and stockholders' equity................ $7,114,963 $7,274,386 ========== ==========
See accompanying notes to financial statements. F-69 134 PENNSYLVANIA GRANITE CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS AND ACCUMULATED DEFICIT FOR THE THREE MONTHS ENDED AUGUST 31, 1997 (UNAUDITED) Net revenues (including revenues to affiliates of $365,326)..................... $ 1,749,105 Cost of goods sold (including purchases from affiliates of $165,318)............ 1,506,200 ----------- Gross profit.................................................................... 242,905 Selling and administrative expenses (including fees paid to affiliates of $15,654)...................................................................... 84,883 ----------- Operating income................................................................ 158,022 ----------- Other (income) expense: Interest expense.............................................................. 117,646 Finance charges............................................................... (1,602) Interest income............................................................... (2,254) Rental income................................................................. (15,597) ----------- Total other expense................................................... 98,193 ----------- Income before income taxes...................................................... 59,829 Income taxes.................................................................... 20,900 ----------- Net income...................................................................... 38,929 Accumulated deficit, June 1, 1997............................................... (763,920) ----------- Accumulated deficit, August 31, 1997............................................ $ (724,991) ===========
See accompanying notes to financial statements. F-70 135 PENNSYLVANIA GRANITE CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS AND ACCUMULATED DEFICIT FOR THE THREE MONTHS ENDED AUGUST 31, 1996 (UNAUDITED) Net revenues (including revenues to affiliates of $351,064)..................... $ 2,345,650 Cost of goods sold (including purchases from affiliates of $68,729)............. 1,574,386 ----------- Gross profit.................................................................... 771,264 Selling and administrative expenses (including fees paid to affiliates of $13,567)...................................................................... 87,679 ----------- Operating income................................................................ 683,585 ----------- Other (income) expense: Interest expense.............................................................. 83,252 Finance charges............................................................... (1,013) Interest income............................................................... (2,704) Rental income................................................................. (750) ----------- Total other expense................................................... 78,785 ----------- Income before income taxes...................................................... 604,800 Income taxes.................................................................... 48,000 ----------- Net income...................................................................... 556,800 Accumulated deficit, June 1, 1996............................................... (1,441,303) ----------- Accumulated deficit, August 31, 1996............................................ $ (884,503) ===========
See accompanying notes to financial statements. F-71 136 PENNSYLVANIA GRANITE CORPORATION CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE THREE MONTHS ENDED AUGUST 31, 1997 (UNAUDITED) Cash flows from operating activities: Net income.................................................................... $ 38,929 Adjustments to reconcile net income to net cash provided by operating activities: Amortization............................................................... 47,152 Depletion.................................................................. 6,893 Depreciation............................................................... 81,162 Deferred income taxes...................................................... 2,000 (Increase) decrease in assets: Trade receivables........................................................ 168,441 Employee receivables..................................................... (580) Inventory................................................................ (33,859) Prepaid taxes............................................................ (11,015) Prepaid expenses......................................................... (5,388) Increase (decrease) in liabilities: Accounts payable......................................................... (206,388) Accrued interest......................................................... (20,794) Accrued expenses......................................................... 14,391 Income taxes payable..................................................... 10,180 ---------- Net cash provided by operating activities............................. 91,124 ---------- Cash flows used in investing activities -- purchase of property and equipment... (60,891) increase in intangible assets........ (6,306) ---------- net cash used in investing activities.................................................................... (67,197) ---------- Cash flows from financing activities: Payments on notes payable..................................................... (2,390,967) Advances to affiliates........................................................ (149,645) Loan proceeds................................................................. 2,375,000 ---------- Net cash used in financing activities................................. (165,612) ---------- Net decrease in cash and cash equivalents....................................... (141,685) Cash and cash equivalents, June 1, 1997......................................... 432,487 ---------- Cash and cash equivalents, August 31, 1997...................................... $ 290,802 ========== Supplemental disclosures of cash flows information -- cash paid for interest.... $ 117,646 ========== Cash paid for income taxes...................................................... $ 14,545 ==========
See accompanying notes to financial statements. F-72 137 PENNSYLVANIA GRANITE CORPORATION CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE THREE MONTHS ENDED AUGUST 31, 1996 (UNAUDITED) Cash flows from operating activities: Net income..................................................................... $ 556,800 Adjustments to reconcile net income to net cash provided by operating activities: Amortization................................................................ 56,571 Depletion................................................................... 8,208 Depreciation................................................................ 75,209 Deferred income taxes....................................................... 48,000 (Increase) decrease in assets: Trade receivables......................................................... (53,891) Employee receivables...................................................... 303 Inventory................................................................. (124,675) Prepaid taxes............................................................. (5,050) Prepaid expenses.......................................................... 14,405 Increase (decrease) in liabilities: Accounts payable.......................................................... (14,440) Accrued expenses.......................................................... 1,901 ---------- Net cash provided by operating activities.............................. 563,341 ---------- Cash flows used in investing activities -- purchase of property and equipment.... (29,449) ---------- Cash flows from financing activities: Payments on notes payable...................................................... (72,498) Advances to affiliates......................................................... (245,500) ---------- Net cash used in financing activities.................................. (317,998) ---------- Net increase in cash and cash equivalents........................................ 215,894 Cash and cash equivalents, June 1, 1996.......................................... 340,631 ---------- Cash and cash equivalents, August 31, 1996....................................... $ 556,525 ========== Supplemental disclosures of cash flows information -- cash paid for interest..... $ 83,252 ========== Cash paid for income taxes....................................................... -0- ==========
See accompanying notes to financial statements. F-73 138 PENNSYLVANIA GRANITE CORPORATION NOTES TO FINANCIAL STATEMENTS AUGUST 31, 1997 AND 1996 NOTE A -- NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES This summary of significant accounting policies of the Company is presented to assist in understanding the Company's financial statements. The financial statements and notes are representations of the Company's management, who is responsible for their integrity and objectivity. These accounting policies conform to generally accepted accounting principles and have been consistently applied in the preparation of the financial statements. NATURE OF BUSINESS The Company quarries granite dimensional blocks for monuments, industrial surface plates and building materials in Pennsylvania and North and South Carolina. Thee products are sold nationwide and in Europe. USE OF ESTIMATES The presentation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. CASH AND CASH EQUIVALENTS For purposes of the statement of cash flows, the Company considers all highly liquid debt instruments purchased with a maturity of three months or less to be cash equivalents. The Company has a money market account in the amount of $269,063 at August 31, 1997 and $493,475 at August 31, 1996. TRADE RECEIVABLES The Company accounts for uncollectible trade receivables on the reserve method. INVENTORY Inventory of quarry product is valued at the lower of average cost or market. Average cost is the cost to quarry, which includes direct labor and overhead. PROPERTY AND EQUIPMENT Property and equipment are stated at acquisition cost as of October 12, 1988, and cost for additions thereafter. Depreciation is computed under the straight-line method for financial reporting purposes over the following estimated useful lives:
YEARS ------ Buildings............................................................ 10-40 Trucks and automobiles............................................... 3-7 Machinery and equipment.............................................. 3-10 Office fixtures and equipment........................................ 3-10
Major renewals and betterments are added to the property accounts while maintenance and repairs are charged against earnings as incurred. See accountants' report. F-74 139 NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) NOTE A -- NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED) INTANGIBLES Amortization is computed under the straight-line method for financial reporting purposes over the following estimated useful lives:
YEARS ------- Goodwill............................................................ 18 1/2-40 Organization costs.................................................. 5 Loan costs.......................................................... 5 Overburden removal.................................................. 15 Covenant not to compete............................................. 5
Depletion of mineral deposits is computed using cost depletion for financial reporting purposes. INCOME TAXES Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or recognized in income in the period that includes the enactment date. IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED OF The Company adopted the provisions of SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, on January 1, 1996. This statement requires that long-lived assets and certain identifiable intangibles be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceed the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount of fair value less costs to sell. Adoption of this statement did not have a material impact on the Company's financial position, results of operations, or liquidity. NOTE B -- PROPERTY AND EQUIPMENT Property and equipment consist of the following:
1996 1997 ----------- ----------- Land and land improvements................................ $ 741,185 $ 701,570 Buildings................................................. 477,955 433,955 Trucks and automobiles.................................... 181,331 181,331 Machinery and equipment................................... 4,760,820 4,567,816 Office fixtures and equipment............................. 61,819 53,118 ----------- ----------- 6,223,110 5,937,790 Accumulated depreciation.................................. (3,970,329) (3,642,661) ----------- ----------- $ 2,252,781 $ 2,295,129 =========== ===========
See accountants' report. F-75 140 NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) NOTE B -- PROPERTY AND EQUIPMENT -- (CONTINUED) Depreciation expense for the three months ended August 31, 1997 and 1996 was $81,162 and $75,209, respectively. NOTE C -- INTANGIBLES Intangibles consist of the following:
1997 1996 ----------- ----------- Goodwill.......................................................... $ 2,880,978 $ 2,891,578 Organized costs................................................... 36,174 39,438 Mineral deposits.................................................. 540,162 540,162 Loan costs........................................................ 6,306 24,711 Overburden removal................................................ 150,204 150,204 Covenant not to compete........................................... 300,000 300,000 ----------- ----------- 3,913,824 3,946,093 Accumulated amortization and depletion............................ (1,699,597) (1,492,697) ----------- ----------- $ 2,214,227 $ 2,453,396 =========== ===========
Amortization and depletion expense for the three months ended August 31, 1997 were $47,152 and $6,893, respectively. Amortization and depletion expense for the three months ended August 31, 1996 were $56,571 and $8,208, respectively. NOTE D -- NOTES PAYABLE Notes Payable are as follows:
1997 1996 ----------- ----------- Bank mortgage, payable $19,092 monthly (principal and interest at 9 1/2%) with a maturity date of October 1998; the mortgage balance is secured by substantially all of the Company's assets and guarantees by the stockholders.............................. $ 1,579,443 $ 1,651,224 Bank mortgage, payable $8,334 monthly plus interest at prime plus 1 1/2% with a maturity date of October 1998; secured by substantially all of the Company's assets and guarantees by the stockholders.................................................... -0- 1,125,123 Bank mortgage, payable $25,000 monthly (principal and interest at prime plus 0.45%) with a maturity date of May 1997; the mortgage balance is secured by substantially all of the subsidiary's assets and guarantees by the stockholders. Principal and accrued interest were paid in full on August 2, 1997.................... -0- 1,412,433 Bank mortgage, payable $40,360 monthly (principal and interest at 9.63%) with a maturity date of June 1999; the mortgage balance is secured by substantially all of the subsidiary's assets and guarantees by the stockholders.................................. 2,332,334 -0- ----------- ----------- 3,911,777 4,188,780 Current portion................................................... (1,850,946) (4,188,780) ----------- ----------- $ 2,060,831 $ -0- =========== ===========
See accountants' report. F-76 141 NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) NOTE D -- NOTES PAYABLE -- (CONTINUED) In regard to the term loans, the Company has agreed to maintain proper financial records and statements and to maintain certain financial ratios pertaining to its net worth, working capital, debt coverage, etc. The Company has not met these requirements for the periods ended August 31, 1997 and 1996, and the bank has decided not to waive the requirements. The amounts classified as current due to this condition are $1,579,443 for the period ended August 31, 1997, and all outstanding notes payable for the period ended August 31, 1996. The following is a schedule of maturities of notes payable:
1997 1996 ---------- ---------- 1997................................................ $ -0- $4,188,780 1998................................................ 1,850,946 -0- 1999................................................ 2,060,831 -0- ---------- ---------- $3,911,777 $4,188,780 ========== ==========
NOTE E -- RELATED-PARTY TRANSACTIONS The Company is affiliated with numerous other companies through common control and stock ownership. The stockholders and other joint venture companies have made unsecured non-interest bearing advances to the Company for working capital purposes. NOTE F -- INCOME TAX MATTERS A summary of the provision for income taxes is as follows:
1997 1996 ------- ------- Current............................................... $18,900 $ -0- Deferred.............................................. 2,000 48,000 ------- ------- Provision for Income Taxes............................ $20,900 $48,000 ======= =======
The net deferred tax liability on the balance sheet includes the following components:
1997 1996 -------- -------- Deferred tax liabilities arising from: Accelerated methods of depreciation for tax Tax depletion on quarry.............................................. $136,000 $149,000 Alternative minimum tax.............................................. 23,000 21,000 129,000 159,000 Deferred tax assets arising from: Allowance for bad debts.............................................. (5,000) (5,000) Inventory Adjustments (Section 263(a))............................... (2,000) (2,000) Net operating loss carryovers........................................ -0- (45,000) Investment tax credit carryovers..................................... -0- (11,000) -------- -------- Net deferred tax liability........................................... $281,000 $266,000 ======== ========
See accountants' report. F-77 142 NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) NOTE G -- CONCENTRATION OF CREDIT RISK All of the Company's cash funds are located in financial institutions that are insured by the FDIC for up to $100,000. The amounts in excess of this limit at August 31, 1997 and 1996 are $119,063 and $393,475, respectively. Sales to two major customers represented 55% and 56% of total revenues for the three months ended August 31, 1997 and 1996, respectively. Trade accounts receivable from major customers represented 73% and 57% of total trade accounts receivable as of August 31, 1997 and 1996, respectively. NOTE H -- MERGER During June of 1997, the Company joined in a merger with its affiliates and other unrelated granite companies. NOTE I -- FAIR VALUES OF FINANCIAL INSTRUMENTS The Company has a number of financial instruments, none of which are held for trading purposes. The Company estimates that the fair value of all financial instruments at August 31, 1997 and 1996 does not differ materially from the aggregate carrying values of its financial instruments recorded in the accompanying balance sheets. The estimated fair value amounts have been determined by the Company using available market information and appropriate valuation methodologies. Considerable judgement is necessarily required in interpreting market data to develop the estimates of fair value, and accordingly, the estimates are not necessarily indicative of the amounts that the Company could realize in a current market exchange. See accountants' report. F-78 143 INDEPENDENT AUDITORS' REPORT ON FINANCIAL STATEMENTS To the Board of Directors Pennsylvania Granite Corporation St. Peters, Pennsylvania We have audited the accompanying consolidated balance sheet of Pennsylvania Granite Corporation and subsidiary as of June 30, 1996, and the related consolidated statements of operations and accumulated deficit, and cash flows for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to in the first paragraph present fairly, in all material respects, the financial position of Pennsylvania Granite Corporation and subsidiary as of June 30, 1996, and the results of their operations and their cash flows for the year then ended in conformity with generally accepted accounting principles. /s/ GREENE AND COMPANY, L.L.P. -------------------------------------- GREENE AND COMPANY, L.L.P. Anderson, South Carolina July 22, 1997 F-79 144 PENNSYLVANIA GRANITE CORPORATION CONSOLIDATED BALANCE SHEET JUNE 30, 1996 ASSETS Current assets: Cash and cash equivalents..................................................... $ 450,668 Trade receivables, less allowance for doubtful accounts of $13,495............ 634,240 Trade receivables -- affiliates............................................... 327,220 Employee receivables.......................................................... 1,203 Inventory -- finished goods................................................... 130,730 Prepaid taxes................................................................. 3,782 Prepaid expenses.............................................................. 122,789 Deposits...................................................................... 3,500 ---------- Total current assets.................................................. 1,674,132 ---------- Property and equipment, net..................................................... 2,339,126 ---------- Other assets: Advances to affiliates........................................................ 489,989 Intangibles, net.............................................................. 2,493,471 ---------- Total other assets......................................................... 2,983,460 ---------- Total assets.......................................................... $ 6,996,718 ========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable.............................................................. $ 393,970 Accounts payable -- affiliates................................................ 90,421 Accrued expenses.............................................................. 85,952 Deferred income taxes......................................................... 218,000 Notes payable................................................................. 4,246,652 ---------- Total current liabilities............................................. 5,034,995 ---------- Long-term liabilities -- advances from affiliates............................... 689,868 ---------- Stockholders' equity: Common stock, no par value, 1,950 shares authorized, 1,740 shares issued and outstanding............................................................ 2,500,500 Accumulated deficit........................................................... (1,228,645) ---------- Total stockholders' equity................................................. 1,271,855 ---------- Total liabilities and stockholders' equity............................ $ 6,996,718 ==========
See accompanying notes to financial statements. F-80 145 PENNSYLVANIA GRANITE CORPORATION CONSOLIDATED STATEMENT OF OPERATIONS AND ACCUMULATED DEFICIT FOR THE YEAR ENDED JUNE 30, 1996 Net revenues (including sales to affiliates of $1,772,844)...................... $ 7,528,511 Cost of goods sold (including purchases from affiliates of $57,029)............. 6,244,640 ----------- Gross profit.................................................................... 1,283,871 Selling and administrative expenses (including fees paid to affiliates of $54,269)...................................................................... 589,172 ----------- Operating income................................................................ 694,699 ----------- Other (income) expense: Interest expense.............................................................. 409,255 Loss from judgment............................................................ 62,104 Other income.................................................................. (32,591) Interest income............................................................... (7,763) Rental income................................................................. (3,000) Gain on sale of equipment..................................................... (1,656) Finance charges............................................................... (1,478) ----------- Total other expense................................................... 424,871 ----------- Income before income tax........................................................ 269,828 Income tax...................................................................... (72,000) ----------- Net income...................................................................... 341,828 Accumulated deficit, beginning of year.......................................... (1,002,250) Distributions................................................................... (568,223) ----------- Accumulated deficit, end of year................................................ $(1,228,645) ===========
See accompanying notes to financial statements. F-81 146 PENNSYLVANIA GRANITE CORPORATION CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE YEAR ENDED JUNE 30, 1996 Cash flows from operating activities: Net income..................................................................... $ 341,828 Adjustments to reconcile net income to net cash provided by operating activities: Amortization................................................................ 226,283 Depreciation................................................................ 289,155 Depletion................................................................... 24,783 Deferred income taxes....................................................... (72,000) Gain on sale of equipment................................................... (1,656) (Increase) decrease in assets: Trade receivables......................................................... (24,649) Employee receivables...................................................... (756) Inventory................................................................. 60,600 Prepaid taxes............................................................. 2,521 Prepaid expenses.......................................................... 61,631 Deposits.................................................................. 10,938 Increase (decrease) in liabilities: Accounts payable.......................................................... (8,632) Accrued expenses.......................................................... 61,135 -------- Net cash provided by operating activities.............................. 971,181 -------- Cash flows used in investing activities: Purchase of fixed assets....................................................... (220,759) Sale of equipment -- proceeds.................................................. 41,000 -------- Net cash used in investing activities.................................. (179,759) -------- Cash flows used in financing activities: Distributions to stockholders.................................................. (568,223) Payments on notes payable...................................................... (384,480) Advances from affiliates....................................................... 683,800 Advances to affiliates......................................................... (385,000) -------- Net cash used in financing activities.................................. (653,903) -------- Net increase in cash and cash equivalents........................................ 137,519 Cash and cash equivalents at beginning of year................................... 313,149 -------- Cash and cash equivalents at end of year......................................... $ 450,668 ======== Supplemental disclosure of cash flow information -- cash paid for interest....... $ 409,255 ========
See accompanying notes to financial statements. F-82 147 PENNSYLVANIA GRANITE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1996 NOTE A -- NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES This summary of significant accounting policies of the Company is presented to assist in understanding the Company's financial statements. The financial statements and notes are representations of the Company's management, who is responsible for their integrity and objectivity. These accounting policies conform to generally accepted accounting principles and have been consistently applied in the preparation of the financial statements. Nature of Business The Company quarries granite dimensional blocks for monuments, industrial surface plates and building materials in Pennsylvania and North and South Carolina. These products are sold nationwide and in Europe. Use of Estimates The presentation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Intangibles Amortization is computed under the straight-line method for financial reporting purposes over the following estimated useful lives: Goodwill........................................... 18 1/2-40 Organization costs................................. 20 Loan costs......................................... 5 Overburden removal................................. 15 Covenant not to compete............................ 5
Depletion of mineral deposits is computed using cost depletion for financial reporting purposes. Income Taxes Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or recognized in income in the period that includes the enactment date. Cash and Cash Equivalents For purposes of the statement of cash flows, the Company considers all highly liquid debt instruments purchased with a maturity of three months or less to be cash equivalents. The Company has a money market account in the amount of $352,014 at June 30, 1996. See accountants' report. F-83 148 PENNSYLVANIA GRANITE CORPORATION NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) NOTE A -- NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED) Trade Receivables The Company accounts for uncollectible trade receivables on the reserve method. Inventory Inventory of quarry product is valued at the lower of average cost or market. Average cost is the cost to quarry, which includes direct labor and overhead. Revenue Recognition Revenue is recognized upon shipment of goods. Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed of The Company adopted the provisions of SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, on January 1, 1996. This statement requires that long-lived assets and certain identifiable intangibles be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceed the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. The estimated fair value amounts have been determined by the Company using available market information and appropriate valuation methodologies. The fair value of the Company's assets approximates the carrying cost at the balance sheet dates. Property and Equipment Property and equipment are stated at acquisition cost as of October 12, 1988, and cost for additions thereafter. Depreciation is computed under the straight-line method for financial reporting purposes over the following estimated useful lives: Buildings........................................... 10-40 Trucks and automobiles.............................. 3-7 Machinery and equipment............................. 3-10 Office fixtures and equipment....................... 3-10 Overburden removal.................................. 15
Major renewals and betterments are added to the property accounts while maintenance and repairs are charged against earnings as incurred. Goodwill Goodwill, which represents the excess of purchase price over fair value of net assets acquired, is amortized on a straight-line basis over the expected periods to be benefitted. The Company assesses the recoverability of this intangible asset by determining whether the amortization of the goodwill balance over its remaining life can be recovered through undiscounted future operating cash flows of the acquired operation. The amount of goodwill impairment, if any, is measured based on projected discounted future operating cash See accountants' report. F-84 149 PENNSYLVANIA GRANITE CORPORATION NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) NOTE A -- NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED) flows using a discount rate reflecting the Company's average cost of funds. The assessment of the recoverability of goodwill will be impacted if estimated future operating cash flows are not achieved. NOTE B -- PROPERTY AND EQUIPMENT Property and equipment consist of the following: Land........................................................... $ 701,570 Buildings...................................................... 433,955 Trucks and automobiles......................................... 181,331 Machinery and equipment........................................ 4,561,674 Office fixtures and equipment.................................. 53,117 ----------- 5,931,647 Accumulated depreciation....................................... (3,592,521) ----------- $2,339,126 ===========
Depreciation expense for the year ended June 30, 1996 was $289,155. NOTE C -- INTANGIBLES Intangibles consist of the following: Goodwill........................................................ $ 2,893,345 Organization costs.............................................. 39,982 Mineral deposits................................................ 540,162 Loan costs...................................................... 24,711 Overburden removal.............................................. 150,204 Covenant not to compete......................................... 300,000 ----------- 3,948,404 Accumulated amortization and depletion.......................... (1,454,933) ----------- $ 2,493,471 ===========
Amortization and depletion expense for the year ended June 30, 1996 was $226,283 and $24,783, respectively. See accountants' report. F-85 150 PENNSYLVANIA GRANITE CORPORATION NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) NOTE D -- NOTES PAYABLE Notes payable are as follows: Bank mortgage, payable $25,000 monthly (principal and interest at prime + 0.45%) with a maturity date of May, 1997; the mortgage balance is secured by substantially all of the subsidiary's assets and guarantees by the stockholders........ $ 1,440,571 Bank mortgage, payable $19,092 monthly (principal and interest at 9 1/2%) with a maturity date of October 1998; the mortgage balance is secured by substantially all of the Company's assets and guarantees by the stockholders..................... $ 1,664,290 Bank mortgage, payable $8,334 monthly plus interest at prime plus 1 1/2% with a maturity date of October 1998; secured by substantially all of the Company's assets and guarantees by the stockholders.............................................. 1,141,791 ----------- 4,246,652 Current portion................................................. (4,246,652) ----------- $ 0 ===========
In regard to the term loans, the Company has agreed to maintain proper financial records and statements and to maintain certain financial ratios pertaining to its net worth, working capital, debt coverage, etc. The Company has not met these requirements for the year ended June 30, 1996 and the bank has decided not to waive the requirements. Therefore, the entire notes payable balance must be classified as current. NOTE E -- RELATED-PARTY TRANSACTIONS The Company is affiliated with numerous other companies through common control and stock ownership. The stockholders and other joint venture companies have made unsecured non-interest bearing advances to the Company for working capital purposes. NOTE F -- INCOME TAX MATTERS A summary of the provision for income taxes is as follows: Current........................................................... $ 0 Deferred.......................................................... (72,000) -------- Provision (benefit) for income taxes.................... $(72,000) ========
The net deferred tax liability on the balance sheet includes the following components: Deferred tax liabilities arising from: Accelerated methods of depreciation for tax..................... $134,000 Tax depletion on quarry......................................... 32,000 Alternative minimum tax......................................... 121,000 Deferred tax assets arising from: Allowance for bad debts......................................... (6,000) Inventory adjustments (Section 263(a)).......................... (7,000) Net operating loss carryovers................................... (45,000) Investment tax credit carryovers................................ (11,000) -------- Net deferred tax liability.............................. $218,000 ========
See accountants' report. F-86 151 PENNSYLVANIA GRANITE CORPORATION NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) NOTE F -- INCOME TAX MATTERS -- (CONTINUED) The Company has unused net operating losses and investment tax credits available for carryforward to offset future taxable income and tax liabilities for income tax reporting purposes which expire in the following tax years:
NET OPERATING LOSS TAX CREDITS ------------------ ----------- 1999............................................ $ 0 $ 6,992 2000............................................ 0 12,483 2001............................................ 0 9,831 2006............................................ 104,786 0 2007............................................ 6,302 0 2008............................................ 3,964 0 -------- ------- $115,052 $29,306 ======== =======
NOTE G -- CONCENTRATION OF CREDIT RISK Cash accounts are insured by the FDIC for up to $100,000. Amount in excess of insured limits was approximately $252,014 at June 30, 1996. Sales to two major customers represented 54% of total revenues for the year ended June 30, 1996. Trade accounts receivable from major customers represented 72% of total trade accounts receivable as of June 30, 1996. NOTE H -- SUBSEQUENT EVENTS Subsequent to the date of these financial statements, the Company joined in a merger with its affiliates and other unrelated granite companies. NOTE I -- FAIR VALUES OF FINANCIAL INSTRUMENTS The Company has a number of financial instruments, none of which are held for trading purposes. The Company estimates that the fair value of all financial instruments at June 30, 1996 does not differ materially from the aggregate carrying values of its financial instruments recorded in the accompanying balance sheets. The estimated fair value amounts have been determined by the Company using available market information and appropriate valuation methodologies. Considerable judgement is necessarily required in interpreting market data to develop the estimates of fair value, and accordingly, the estimates are not necessarily indicative of the amounts that the Company could realize in a current market exchange. See accountants' report. F-87 152 INDEPENDENT AUDITORS' REPORT ON FINANCIAL STATEMENTS To the Board of Directors Caprice Blue Quarry, Inc. Elberton, Georgia We have audited the accompanying balance sheets of Caprice Blue Quarry, Inc. (an "S" corporation) as of May 31, 1997 and April 30, 1997, and the related statements of operations and accumulated deficit, and cash flows for the eleven months and ten months then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to in the first paragraph present fairly, in all material respects, the financial position of Caprice Blue Quarry, Inc. as of May 31, 1997 and April 30, 1997, and the results of its operations and its cash flows for the eleven months and ten months then ended in conformity with generally accepted accounting principles. /s/ GREENE AND COMPANY, L.L.P. -------------------------------------- GREENE AND COMPANY, L.L.P. Anderson, South Carolina July 22, 1997 F-88 153 CAPRICE BLUE QUARRY, INC. BALANCE SHEETS MAY 31, 1997 AND APRIL 30, 1997
MAY 31, APRIL 30, 1997 1997 --------- --------- ASSETS Current assets: Cash............................................................... $ 1,525 $ 370 Trade receivables.................................................. 3,782 380 Trade receivables -- affiliates.................................... 4,112 2,794 Employee receivables............................................... 1,144 1,295 Inventory -- finished goods........................................ 13,550 10,022 Prepaid expenses................................................... 1,056 2,696 --------- --------- Total current assets....................................... 25,169 17,557 --------- --------- Property and equipment, net.......................................... 81,898 83,376 --------- --------- Other assets: Intangibles, net................................................... 168,103 169,166 Advances to affiliates............................................. 27,300 26,705 --------- --------- Total other assets.............................................. 195,403 195,871 --------- --------- Total assets............................................... $ 302,470 $ 296,804 ========= ========= LIABILITIES AND STOCKHOLDERS' DEFICIT Current liabilities: Bank overdraft..................................................... $ 0 $ 5,616 Accounts payable................................................... 18,470 9,493 Accounts payable -- affiliates..................................... 123,620 158,586 Accrued expenses................................................... 2,592 3,004 Current portion of long-term debt.................................. 55,761 55,277 --------- --------- Total current liabilities.................................. 200,443 231,976 --------- --------- Long-term liabilities: Long-term debt, less current portion............................... 45,636 50,534 Advances from affiliates........................................... 483,000 430,000 Advances from stockholders......................................... 268,875 268,875 --------- --------- Total long-term liabilities................................ 797,511 749,409 --------- --------- Stockholders' deficit: Common stock, $10 par value. Authorized 100,000 shares; 240 shares issued and outstanding.......................................... 2,400 2,400 Additional paid-in capital......................................... 121 121 Accumulated deficit................................................ (698,005) (687,102) --------- --------- Total stockholders' deficit..................................... (695,484) (684,581) --------- --------- Total liabilities and stockholders' deficit................ $ 302,470 $ 296,804 ========= =========
See accompanying notes to financial statements. F-89 154 CAPRICE BLUE QUARRY, INC. STATEMENT OF OPERATIONS AND ACCUMULATED DEFICIT FOR THE ELEVEN MONTHS ENDED MAY 31, 1997 Net revenues (including revenues to affiliates of $176,562)...................... $ 183,569 Cost of goods sold (including purchases from affiliates of $104,659)............. 418,489 --------- Gross loss....................................................................... (234,920) Selling and administrative expenses (including fees paid to affiliates of $4,601)........................................................................ 10,768 --------- Operating loss................................................................... (245,688) --------- Other (income) expense: Rent income.................................................................... (2,973) Interest expense............................................................... 11,992 --------- Total other expense.................................................... 9,019 --------- Net loss......................................................................... (254,707) Accumulated deficit, July 1, 1996................................................ (443,298) --------- Accumulated deficit, May 31, 1997................................................ $(698,005) =========
See accompanying notes to financial statements. F-90 155 CAPRICE BLUE QUARRY, INC. STATEMENT OF OPERATIONS AND ACCUMULATED DEFICIT FOR THE TEN MONTHS ENDED APRIL 30, 1997 Net revenues (including revenues to affiliates of $160,592)...................... $ 164,197 Cost of goods sold (including purchases from affiliates of $104,292)............. 390,634 --------- Gross loss....................................................................... (226,437) Selling and administrative expenses (including fees paid to affiliates of $4,234)........................................................................ 8,636 --------- Operating loss................................................................... (235,073) --------- Other (income) expense: Rental income.................................................................. (2,378) Interest expense............................................................... 11,109 --------- Total other expense.................................................... 8,731 --------- Net loss......................................................................... (243,804) Accumulated deficit, July 1, 1996................................................ (443,298) --------- Accumulated deficit, April 30, 1997.............................................. $(687,102) =========
See accompanying notes to financial statements. F-91 156 CAPRICE BLUE QUARRY, INC. STATEMENT OF CASH FLOWS FOR THE ELEVEN MONTHS ENDED MAY 31, 1997 Cash flows from operating activities: Net loss....................................................................... $(254,707) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation................................................................ 21,303 Depletion................................................................... 9,651 (Increase) decrease in assets: Trade receivables......................................................... (7,126) Employee receivables...................................................... (533) Advances to affiliates.................................................... (2,973) Inventory................................................................. (13,550) Prepaid expenses.......................................................... 790 Increase (decrease) in liabilities: Accounts payable.......................................................... 78,718 Accrued expenses.......................................................... 1,758 --------- Net cash used in operating activities.................................. (166,669) --------- Cash flows used in investing activities -- purchases of machinery and equipment...................................................................... (21,586) --------- Cash flows from financing activities: Payments on notes payable...................................................... (45,577) Advances from affiliates....................................................... 234,000 --------- Net cash provided by financing activities.............................. 188,423 --------- Net increase in cash............................................................. 168 Cash, July 1, 1996............................................................... 1,357 --------- Cash, May 31, 1997............................................................... $ 1,525 ========= Supplemental disclosure of cash flow information -- cash paid for interest....... $ 11,992 =========
See accompanying notes to financial statements. F-92 157 CAPRICE BLUE QUARRY, INC. STATEMENT OF CASH FLOWS FOR THE TEN MONTHS ENDED APRIL 30, 1997 Cash flows from operating activities: Net loss....................................................................... $(243,804) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation................................................................ 19,824 Depletion................................................................... 8,588 (Increase) decrease in assets: Trade receivables......................................................... (2,407) Employee receivables...................................................... (683) Advances to affiliates.................................................... (2,378) Inventory................................................................. (10,022) Prepaid expenses.......................................................... (850) Increase (decrease) in liabilities: Accounts payable.......................................................... 104,708 Accrued expenses.......................................................... 2,170 --------- Net cash used in operating activities.................................. (124,854) --------- Cash flows from investing activities -- purchases of fixed assets................ (21,586) --------- Cash flows from financing activities: Increase in bank overdraft..................................................... 5,616 Payments on notes payable...................................................... (41,163) Advances from affiliates....................................................... 181,000 --------- Net cash provided by financing activities.............................. 145,453 --------- Net decrease in cash............................................................. (987) Cash, July 1, 1996............................................................... 1,357 --------- Cash, April 30, 1997............................................................. $ 370 ========= Supplemental disclosure of cash flow information -- cash paid for interest....... $ 11,109 =========
See accompanying notes to financial statements. F-93 158 CAPRICE BLUE QUARRY, INC. NOTES TO FINANCIAL STATEMENTS MAY 31, 1997 AND APRIL 30, 1997 NOTE A -- NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES This summary of significant accounting policies of the Company is presented to assist in understanding the Company's financial statements. The financial statements and notes are representations of the Company's management, who is responsible for their integrity and objectivity. These accounting policies conform to generally accepted accounting principles and have been consistently applied in the preparation of the financial statements. Nature of Business The Company quarries granite blocks in northeast Georgia for sale to customers nationwide. Use of Estimates The presentation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Basis of Accounting Assets, liabilities, revenues, and expenses are recognized on the accrual method of accounting. Inventory Inventories are stated at lower of cost or market with cost being determined using average cost. Revenue Recognition Revenue is recognized upon shipment of goods. Property and Equipment Property and equipment are stated at acquisition cost. Depreciation is computed under the accelerated method for financial reporting purposes over the following estimated useful lives:
YEARS ----- Vehicles.............................................. 3-7 Machinery and equipment............................... 3-10
Major renewals and betterments are added to the property accounts while maintenance and repairs are charged against earnings as incurred. Intangibles Intangibles consist of mineral rights which are depleted using cost depletion. Income Taxes The Company with the consent of its stockholders has elected to be an "S" Corporation under the Internal Revenue Code. Instead of paying corporate income taxes the stockholders of an "S" Corporation are See accountants' report. F-94 159 CAPRICE BLUE QUARRY, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) NOTE A -- NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED) taxed individually on their proportionate share of the Company's taxable income. Therefore, no provision or liability for federal income taxes has been included in these financial statements. Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed of The Company adopted the provisions of SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, on January 1, 1996. This statement requires that long-lived assets and certain identifiable intangibles be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceed the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. The estimated fair value amounts have been determined by the Company using available market information and appropriate valuation methodologies. The fair value of the Company's assets approximates the carrying cost at the balance sheet dates. NOTE B -- PROPERTY AND EQUIPMENT Property and equipment consist of the following:
MAY 31, APRIL 30, 1997 1997 --------- --------- Land................................................. $ 43,000 $ 43,000 Vehicles............................................. 18,635 18,635 Machinery and equipment.............................. 318,087 318,087 --------- --------- 379,722 379,722 Accumulated depreciation............................. (297,824) (296,346) --------- --------- $ 81,898 $ 83,376 ========= =========
Depreciation expense for the eleven months ended May 31, 1997 was $21,303. Depreciation expense for the ten months ended April 30, 1997 was $19,825. NOTE C -- INTANGIBLES Intangibles consist of the following:
MAY 31, APRIL 30, 1997 1997 -------- -------- Mineral rights......................................... $240,000 $240,000 Accumulated depletion.................................. (71,897) (70,834) -------- -------- $168,103 $169,166 ======== ========
Depletion expense for the eleven months ended May 31, 1997 was $9,651. Depletion expense for the ten months ended April 30, 1997 was $8,588. See accountants' report. F-95 160 CAPRICE BLUE QUARRY, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) NOTE D -- NOTES PAYABLE Notes payable are as follows:
MAY 31, APRIL 30, 1997 1997 -------- -------- Bank loan, payable $5,297 monthly (principal and interest at 10 1/2%) with a maturity date of February 1999; the loan is secured by the Company's inventory............................................ $101,397 $105,811 Current portion........................................ (55,761) (55,277) -------- -------- $ 45,636 $ 50,534 ======== ========
The following is a schedule of maturities of notes payable at May 31, 1997 and April 30, 1997:
MAY 31, APRIL 30, 1997 1997 -------- -------- 1998................................................... $ 55,761 $ 55,277 1999................................................... 45,636 50,534 -------- -------- $101,397 $105,811 ======== ========
NOTE E -- RELATED-PARTY TRANSACTIONS The Company is affiliated with numerous other companies through common control and stock ownership. The stockholders and other joint venture companies have made unsecured non-interest bearing advances to the Company for working capital purposes. The Company classifies advances payable to affiliates as long-term based upon the intent of the parties. NOTE F -- CONCENTRATION OF CREDIT RISK All of the Company's cash funds are located in financial institutions that are insured by the FDIC for up to $100,000. There are no amounts in excess of this limit at May 31, 1997 and April 30, 1997. NOTE G -- SUBSEQUENT EVENT Subsequent to the date of these financial statements, the Company joined in a merger with its affiliates and other unrelated granite companies. As of the effective date of the merger, the Company's election to be an "S" corporation under the Internal Revenue Code will terminate. NOTE H -- FAIR VALUES OF FINANCIAL INSTRUMENTS The Company has a number of financial instruments, none of which are held for trading purposes. The Company estimates that the fair value of all financial instruments at May 31, 1997 and April 30, 1997, does not differ materially from the aggregate carrying values of its financial instruments recorded in the accompanying balance sheets. The estimated fair value amounts have been determined by the Company using available market information and appropriate valuation methodologies. Considerable judgment is necessarily required in interpreting market data to develop the estimates of fair value, and accordingly, the estimates are not necessarily indicative of the amounts that the Company could realize in a current market exchange. See accountants' report. F-96 161 ACCOUNTANTS' REVIEW REPORT To the Board of Directors Caprice Blue Quarry, Inc. Elberton, Georgia We have reviewed the accompanying balance sheets of Caprice Blue Quarry, Inc. as of August 31, 1997 and 1996, and the related statements of operations, accumulated deficit, and cash flows for the three months then ended, in accordance with Statements on Standards for Accounting and Review Services issued by the American Institute of Certified Public Accountants. All information included in these financial statements is the representation of the management of Caprice Blue Quarry, Inc. A review consists principally of inquiries of Company personnel and analytical procedure applied to financial data. It is substantially less in scope than an audit in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our review, we are not aware of any material modifications that should be made to the accompanying financial statements in order for them to be in conformity with generally accepted accounting principles. /s/ GREENE AND COMPANY, L.L.P. -------------------------------------- GREENE AND COMPANY, L.L.P. Anderson, South Carolina September 18, 1997 F-97 162 CAPRICE BLUE QUARRY, INC. BALANCE SHEETS AUGUST 31, 1997 AND AUGUST 31, 1996
AUGUST 31, ----------------------- 1997 1996 --------- --------- (UNAUDITED) ASSETS Current assets: Cash............................................................... $ 6,814 $ 1,797 Trade receivables.................................................. 1,211 -0- Trade receivables -- affiliates.................................... 16,546 18,411 Employee receivables............................................... 854 476 Inventory -- finished goods........................................ 6,325 11,921 Prepaid expenses................................................... 3,071 2,384 --------- --------- Total current assets....................................... 34,821 34,989 --------- --------- Property and equipment, net.......................................... 77,951 80,528 --------- --------- Other assets: Intangibles, net................................................... 166,605 176,361 Advances to affiliates............................................. 25,201 17,473 --------- --------- Total other assets.............................................. 191,806 193,834 --------- --------- Total assets............................................... $ 304,578 $ 309,351 ========= ========= LIABILITIES AND STOCKHOLDERS' DEFICIT Current liabilities: Accounts payable................................................... $ -0- $ 10,239 Accounts payable -- affiliates..................................... 115,796 58,158 Accrued expenses................................................... -0- 99 Current portion of long-term debt.................................. 57,238 50,927 --------- --------- Total current liabilities.................................. 173,034 119,423 --------- --------- Long-term liabilities: Long-term debt, less current portion............................... 30,770 88,008 Advances from affiliates........................................... 539,000 282,000 Advances from stockholders......................................... 268,875 268,875 --------- --------- Total long-term liabilities................................ 838,645 638,883 --------- --------- Stockholders' deficit: Common stock, $10 par value. Authorized 100,000 shares; 240 shares issued and outstanding.......................................... 2,400 2,400 Additional paid-in capital......................................... 121 121 Accumulated deficit................................................ (709,622) (451,476) --------- --------- Total stockholders' deficit..................................... (707,101) (448,955) --------- --------- Total liabilities and stockholders' deficit................ $ 304,578 $ 309,351 ========= =========
See accompanying notes to financial statements. F-98 163 CAPRICE BLUE QUARRY, INC. STATEMENT OF OPERATIONS AND ACCUMULATED DEFICIT FOR THE THREE MONTHS ENDED AUGUST 31, 1997 (UNAUDITED) Net revenues (including revenues to affiliates of $43,122)....................... $ 44,361 Cost of goods sold (including purchases from affiliates of $25,138).............. 50,136 --------- Gross loss....................................................................... (5,775) Selling and administrative expenses (including fees paid to affiliates of $1,044)........................................................................ 5,125 --------- Operating loss................................................................... (10,900) --------- Other (income) expense: Rent income.................................................................... (1,784) Interest expense............................................................... 2,501 --------- Total other expense.................................................... 717 --------- Net loss......................................................................... (11,617) Accumulated deficit, June 1, 1997................................................ (698,005) --------- Accumulated deficit, August 31, 1997............................................. $(709,622) =========
See accompanying notes to financial statements. F-99 164 CAPRICE BLUE QUARRY, INC. STATEMENT OF OPERATIONS AND ACCUMULATED DEFICIT FOR THE THREE MONTHS ENDED AUGUST 31, 1996 (UNAUDITED) Net revenues (including revenues to affiliates of $40,674)....................... $ 38,954 Cost of goods sold (including purchases from affiliates of $964)................. 55,561 --------- Gross loss....................................................................... (16,607) Selling and administrative expenses (including fees paid to affiliates of $904).......................................................................... 5,931 --------- Operating loss................................................................... (22,538) --------- Other (income) expense: Rent income.................................................................... (1,784) Interest expense............................................................... 3,545 --------- Total other expense.................................................... 1,761 --------- Net loss......................................................................... (24,299) Accumulated deficit, June 1, 1996................................................ (427,177) --------- Accumulated deficit, August 31, 1996............................................. $(451,476) =========
See accompanying notes to financial statements. F-100 165 CAPRICE BLUE QUARRY, INC. STATEMENT OF CASH FLOWS FOR THE THREE MONTHS ENDED AUGUST 31, 1997 (UNAUDITED) Cash flows from operating activities: Net loss....................................................................... $ (11,617) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation................................................................ 3,946 Depletion................................................................... 1,498 (Increase) decrease in assets: Trade receivables......................................................... (9,863) Employee receivables...................................................... 291 Advances to affiliates.................................................... 2,099 Inventory................................................................. 7,225 Prepaid expenses.......................................................... (2,015) Increase (decrease) in liabilities: Accounts payable.......................................................... (26,294) Accrued expenses.......................................................... (2,592) --------- Net cash used in operating activities.................................. (37,322) --------- Cash flows from financing activities: Payments on notes payable...................................................... (13,389) Advances from affiliates....................................................... 56,000 --------- Net cash provided by financing activities.............................. 42,611 --------- Net increase in cash............................................................. 5,289 Cash, June 1, 1997............................................................... 1,525 --------- Cash, August 31, 1997............................................................ $ 6,814 ========= Supplemental disclosure of cash flow information -- cash paid for interest....... $ 2,501 =========
See accompanying notes to financial statements. F-101 166 CAPRICE BLUE QUARRY, INC. STATEMENT OF CASH FLOWS FOR THE THREE MONTHS ENDED AUGUST 31, 1996 (UNAUDITED) Cash flows from operating activities: Net loss........................................................................ $(24,299) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation................................................................. 3,422 Depletion.................................................................... 1,584 (Increase) decrease in assets: Trade receivables.......................................................... (14,904) Employee receivables....................................................... 460 Advances to affiliates..................................................... (1,785) Inventory.................................................................. (11,921) Prepaid expenses........................................................... (1,194) Increase (decrease) in liabilities: Accounts payable........................................................... 3,302 Accrued expenses........................................................... (67) --------- Net cash used in operating activities................................... (45,402) --------- Cash flows used in investing activities -- purchases of machinery and equipment... (1,200) --------- Cash flows from financing activities: Payments on notes payable....................................................... (12,114) Advances from affiliates........................................................ 59,500 --------- Net cash provided by financing activities............................... 47,386 --------- Net increase in cash.............................................................. 784 Cash, June 1, 1996................................................................ 1,013 --------- Cash, August 31, 1996............................................................. $ 1,797 ========= Supplemental disclosure of cash flow information -- cash paid for interest........ $ 3,545 =========
See accompanying notes to financial statements. F-102 167 CAPRICE BLUE QUARRY, INC. NOTES TO FINANCIAL STATEMENTS AUGUST 31, 1997 AND 1996 NOTE A -- NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES This summary of significant accounting policies of the Company is presented to assist in understanding the Company's financial statements. The financial statements and notes are representations of the Company's management, who is responsible for their integrity and objectivity. These accounting policies conform to generally accepted accounting principles and have been consistently applied in the preparation of the financial statements. NATURE OF BUSINESS The Company quarries granite blocks in northeast Georgia for sale to customers nationwide. USE OF ESTIMATES The presentation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of continent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. BASIS OF ACCOUNTING Assets, liabilities, revenues, and expenses are recognized on the accrual method of accounting. INVENTORY Inventories are stated at lower of cost or market with cost being determined using average cost. PROPERTY AND EQUIPMENT Property and equipment are stated at acquisition cost. Depreciation is computed under the accelerated method for financial reporting purposes over the following estimated useful lives:
YEARS ----- Vehicles............................................................. 3-7 Machinery and equipment.............................................. 3-10
Major renewals and betterments are added to the property accounts while maintenance and repairs are charged against earnings as incurred. INTANGIBLES Intangibles consist of mineral rights which are depleted using cost depletion. INCOME TAXES The Company's election to be an "S" Corporation under the Internal Revenue Code was terminated in June of 1997. The Company experienced a loss of $1,168.00 for the two months of July and August 1997, therefore, no liability or expense has been included. Also, no tax benefit has been reported in the accompanying financial statements because the tax benefit of the net losses has been offset by a valuation allowance of the same amount. SEE ACCOUNTANTS' REPORT. F-103 168 CAPRICE BLUE QUARRY, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 1997 AND 1996 NOTE A -- NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED) IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED OF The Company adopted the provisions of SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, on January 1, 1996. This statement requires that long-lived assets and certain identifiable intangibles be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceed the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. The estimated fair value amounts have been determined by the Company using available market information and appropriate valuation methodologies. The fair value of the Company's assets approximates the carrying cost at the balance sheet dates. NOTE B -- PROPERTY AND EQUIPMENT Property and equipment consist of the following:
1997 1996 --------- --------- Land......................................................... $ 43,000 $ 43,000 Vehicles..................................................... 18,635 12,135 Machinery and equipment...................................... 318,087 304,201 --------- --------- 379,722 359,336 Accumulated depreciation..................................... (301,771) (278,808) --------- --------- $ 77,951 $ 80,528 ========= =========
Depreciation expense for the three months ended August 31, 1997 was $3,422. Depreciations expense for the three months ended August 31, 1996 was $3,946. NOTE C -- INTANGIBLES Intangibles consist of the following:
1997 1996 -------- -------- Mineral rights....................................................... $240,000 $240,000 Accumulated depletion................................................ (73,395) (63,639) -------- -------- $166,605 $176,361 ======== ========
Depletion expense for the three months ended August 31, 1997 was $1,498. Depletion expense for the three months ended August 31, 1996 was $1,584. SEE ACCOUNTANTS' REPORT. F-104 169 CAPRICE BLUE QUARRY, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 1997 AND 1996 NOTE C -- INTANGIBLES -- (CONTINUED) NOTE D -- NOTES PAYABLE Notes payable are as follows:
1997 1996 -------- -------- Bank loan, payable $5,297 monthly (principal and interest at 10 1/2% with a maturity date of February 1999; the loan is secured by the Company's inventory................................................ $ 88,008 $138,935 Current portion...................................................... (57,238) (50,927) -------- -------- $ 30,770 $ 88,008 ======== ========
The following is a schedule of maturities of notes payable: 1997.............................................................. $ 50,927 1998.............................................................. 57,238 1999.............................................................. 30,770 ------- $138,935 =======
NOTE E -- RELATED-PARTY TRANSACTIONS The Company is affiliated with numerous other companies through common control and stock ownership. The stockholders and other joint venture companies have made unsecured non-interest bearing advances to the Company for working capital purposes. The Company classifies advances payable to affiliates as long-term based upon the intent of the parties. NOTE F -- CONCENTRATION OF CREDIT RISK All of the Company's cash funds are located in financial institutions that are insured by the FDIC for up to $100,000. There are no amounts in excess of this limit at August 31, 1997 and 1996. NOTE G -- MERGER During June of 1997, the Company joined in a merger with its affiliates and other unrelated granite companies. NOTE H -- FAIR VALUES OF FINANCIAL INSTRUMENTS The Company has a number of financial instruments, none of which are held for trading purposes. The Company estimates that the fair value of all financial instruments at August 31, 1997 and 1996, does not differ materially from the aggregate carrying values of its financial instruments recorded in the accompanying balance sheets. The estimated fair value amounts have been determined by the Company using available market information and appropriate valuation methodologies. Considerable judgment is necessarily required in interpreting market data to develop the estimates of fair value, and accordingly, the estimates are not necessarily indicative of the amounts that the Company could realize in a current market exchange. SEE ACCOUNTANTS' REPORT. F-105 170 INDEPENDENT AUDITORS' REPORT ON FINANCIAL STATEMENTS To the Board of Directors Southern Mausoleums, Inc. Elberton, Georgia We have audited the accompanying balance sheets of Southern Mausoleums, Inc. (an "S" corporation) as of May 31, 1997 and April 30, 1997, and the related statements of operations and accumulated deficit, and cash flows for the eleven months and ten months then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to in the first paragraph present fairly, in all material respects, the financial position of Southern Mausoleums, Inc. as of May 31, 1997 and April 30, 1997, and the results of its operations and its cash flows for the eleven months and ten months then ended in conformity with generally accepted accounting principles. /s/ GREENE AND COMPANY, L.L.P. -------------------------------------- GREENE AND COMPANY, L.L.P. Anderson, South Carolina July 22, 1997 F-106 171 SOUTHERN MAUSOLEUMS, INC. BALANCE SHEETS MAY 31, 1997 AND APRIL 30, 1997
MAY 31, APRIL 30, 1997 1997 --------- --------- ASSETS Current assets: Cash and cash equivalents.......................................... $ 223,242 $ 237,934 Cash -- restricted................................................. 7,115 6,265 Trade receivables (less allowance for doubtful accounts of $25,539 and $25,162).................................................... 26,443 32,529 Trade receivables -- affiliates.................................... 42,576 40,613 Inventory.......................................................... 302,272 280,759 Prepaid expenses................................................... 9,649 12,306 --------- --------- Total current assets....................................... 611,297 610,406 --------- --------- Property and equipment, net.......................................... 270,445 274,355 --------- --------- Other assets: Intangibles, net................................................... 2,088 2,152 Deposits........................................................... 3,885 3,885 Advances to affiliates............................................. 12,096 12,096 --------- --------- Total other assets.............................................. 18,069 18,133 --------- --------- Total assets............................................... $ 899,811 $ 902,894 ========= ========= LIABILITIES AND STOCKHOLDERS' DEFICIT Current liabilities: Accounts payable................................................... $ 45,159 $ 49,234 Accrued expenses................................................... 19,478 25,084 Current portion of long-term debt.................................. 157,068 156,267 Customer deposits.................................................. 365,849 402,337 --------- --------- Total current liabilities.................................. 587,554 632,922 --------- --------- Long-term liabilities: Long-term debt, less current portion............................... 271,588 280,472 Advances from affiliates........................................... 36,489 36,489 Accounts payable -- affiliates..................................... 252,154 258,776 Advances from stockholders......................................... 30,011 30,011 --------- --------- Total long-term liabilities................................ 590,242 605,748 --------- --------- Stockholders' deficit: Common stock, $10 par value. Authorized 100,000 shares; 120 shares issued and outstanding.......................................... 1,200 1,200 Accumulated deficit................................................ (279,185) (336,976) --------- --------- Total stockholders' deficit..................................... (277,985) (335,776) --------- --------- Total liabilities and stockholders' deficit................ $ 899,811 $ 902,894 ========= =========
See accompanying notes to financial statements. F-107 172 SOUTHERN MAUSOLEUMS, INC. STATEMENTS OF OPERATIONS AND ACCUMULATED DEFICIT FOR THE ELEVEN MONTHS ENDED MAY 31, 1997 Net revenues (including revenues to affiliates of $47,912)....................... $1,225,396 Cost of goods sold (including purchases from affiliates of $261,501)............. 981,273 ---------- Gross profit..................................................................... 244,123 Selling and administrative expenses (reduced by fees charged to affiliates of $63,565)....................................................................... 80,993 ---------- Operating income................................................................. 163,130 ---------- Other (income) expense: Interest expense............................................................... 40,640 Finance charge income.......................................................... (1,482) Interest income................................................................ (2,213) ---------- Total other expense.................................................... 36,945 ---------- Net income....................................................................... 126,185 Accumulated deficit, July 1, 1996................................................ (405,370) ---------- Accumulated deficit, May 31, 1997................................................ $ (279,185) ==========
See accompanying notes to financial statements. F-108 173 SOUTHERN MAUSOLEUMS, INC. STATEMENTS OF OPERATIONS AND ACCUMULATED DEFICIT FOR THE TEN MONTHS ENDED APRIL 30, 1997 Net revenues (including revenues to affiliates of $46,368)....................... $1,073,646 Cost of goods sold (including purchases from affiliates of $232,842)............. 899,395 ---------- Gross profit..................................................................... 174,251 Selling and administrative expenses (reduced by fees charged to affiliates of $57,319)....................................................................... 71,471 ---------- Operating income................................................................. 102,780 ---------- Other (income) expense: Interest expense............................................................... 37,135 Finance charge income.......................................................... (760) Interest income................................................................ (1,989) ---------- Total other expense.................................................... 34,386 ---------- Net income....................................................................... 68,394 Accumulated deficit, July 1, 1996................................................ (405,370) ---------- Accumulated deficit, April 30, 1997.............................................. $ (336,976) ==========
See accompanying notes to financial statements. F-109 174 SOUTHERN MAUSOLEUMS, INC. STATEMENT OF CASH FLOWS FOR THE ELEVEN MONTHS ENDED MAY 31, 1997 Cash flows from operating activities: Net income..................................................................... $ 126,185 Adjustments to reconcile net income to net cash provided by operating activities: Amortization................................................................ 696 Depreciation................................................................ 51,724 (Increase) decrease in assets: Trade receivables......................................................... 7,304 Related party receivables................................................. (10,596) Inventory................................................................. (102,264) Prepaid expenses.......................................................... 1,744 Increase (decrease) in liabilities: Accounts payable.......................................................... (42,662) Accrued expenses.......................................................... 22,799 Customer deposits......................................................... 224,367 --------- Net cash provided by operating activities.............................. 279,297 --------- Cash flows used in investing activities -- purchase of property and equipment.... (1,628) --------- Cash flows from financing activities: Payments on notes payable...................................................... (78,282) Loan proceeds.................................................................. 5,000 --------- Net cash used in financing activities.................................. (73,282) --------- Net increase in cash and cash equivalents........................................ 204,387 Cash and cash equivalents, July 1, 1996.......................................... 25,970 --------- Cash and cash equivalents, May 31, 1997.......................................... $ 230,357 ========= Supplemental disclosure of cash flow information -- cash paid for interest....... $ 41,262 =========
See accompanying notes to financial statements. F-110 175 SOUTHERN MAUSOLEUMS, INC. STATEMENT OF CASH FLOWS FOR THE TEN MONTHS ENDED APRIL 30, 1997 Cash flows from operating activities: Net income...................................................................... $ 68,394 Adjustments to reconcile net income to net cash provided by operating activities: Amortization................................................................. 633 Depreciation................................................................. 47,814 (Increase) decrease in assets: Trade receivables.......................................................... 3,181 Related party receivables.................................................. (10,596) Inventory.................................................................. (80,754) Prepaid expenses........................................................... (913) Increase (decrease) in liabilities: Accounts payable........................................................... (46,347) Accrued expenses........................................................... 42,789 Customer deposits.......................................................... 260,855 -------- Net cash provided by operating activities............................... 285,056 -------- Cash flows used in investing activities -- purchase of property and equipment..... (1,628) -------- Cash flows from financing activities: Payments on notes payable....................................................... (70,199) Loan proceeds................................................................... 5,000 -------- Net cash used in financing activities................................... (65,199) -------- Net increase in cash and cash equivalents......................................... 218,229 Cash and cash equivalents, July 1, 1996........................................... 25,970 -------- Cash and cash equivalents, April 30, 1997......................................... $244,199 ======== Supplemental disclosure of cash flow information -- cash paid for interest........ $ 38,243 ========
See accompanying notes to financial statements. F-111 176 SOUTHERN MAUSOLEUMS, INC. NOTES TO FINANCIAL STATEMENTS MAY 31, 1997 AND APRIL 30, 1997 NOTE A -- NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES This summary of significant accounting policies of the Company is presented to assist in understanding the Company's financial statements. The financial statements and notes are representations of the Company's management, who is responsible for their integrity and objectivity. These accounting policies conform to generally accepted accounting principles and have been consistently applied in the preparation of the financial statements. Nature of Business The Company saws and polishes granite into dimensional blocks for mausoleum assembly at a plant located in northeast Georgia. The completed mausoleums are sold nationwide. Use of Estimates The presentation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Basis of Accounting Assets, liabilities, revenues, and expenses are recognized on the accrual method of accounting. Cash and Cash Equivalents For purposes of the statement of cash flows, the Company considers all highly liquid debt instruments purchased with a maturity of three months or less to be cash equivalents. The Company has a money market account in the amount of $179,767 at May 31, 1997 and $104,543 at April 30, 1997. Trade Receivables The Company accounts for uncollectible trade receivables on the reserve method. Inventory Inventories are stated at lower of cost or market, with cost determined as follows: Finished goods....................... First-in first-out (FIFO) method Materials and work in process........ Average cost
Revenue Recognition Revenue is recognized upon shipment of goods. See accountants' report. F-112 177 SOUTHERN MAUSOLEUMS, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) NOTE A -- NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED) Property and Equipment Property and equipment are stated at acquisition cost. Depreciation is computed under the straight-line method for financial reporting purposes over the following estimated useful lives:
YEARS ------- Buildings........................................................... 31 1/2 Building improvements............................................... 31 1/2 Vehicles............................................................ 5 Machinery and equipment............................................. 2 1/2 - 7 Office fixtures and equipment....................................... 7
Major renewals and betterments are added to the property accounts while maintenance and repairs are charged against earnings as incurred. Intangibles Intangibles consist of start-up costs and loan costs. Amortization of the intangibles is computed using the straight-line method over terms ranging from five years for start-up costs to six years for loan costs. Income Taxes The Company with the consent of its stockholders has elected to be an "S" Corporation under the Internal Revenue Code. Instead of paying corporate income taxes the stockholders of an "S" Corporation are taxed individually on their proportionate share of the Company's taxable income. Therefore, no provision or liability for federal income taxes has been included in these financial statements. NOTE B -- PROPERTY AND EQUIPMENT Property and equipment consist of the following:
MAY 31, APRIL 30, 1997 1997 --------- --------- Land................................................. $ 20,105 $ 20,105 Land improvements.................................... 7,180 7,180 Buildings............................................ 180,945 180,945 Building improvements................................ 11,904 11,904 Vehicles............................................. 3,208 3,208 Machinery and equipment.............................. 342,559 342,559 Office fixtures and equipment........................ 41,119 41,119 --------- --------- 607,020 607,020 Accumulated depreciation............................. (336,575) (332,665) --------- --------- $ 270,445 $ 274,355 ========= =========
Depreciation expense for the eleven months ended May 31, 1997 was $51,724. Depreciation expense for the ten months ended April 30, 1997 was $47,814. See accountants' report. F-113 178 SOUTHERN MAUSOLEUMS, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) NOTE C -- NOTES PAYABLE Notes payable are as follows:
MAY 31, APRIL 30, 1997 1997 --------- --------- Bank loan, payable $11,100 monthly (principal and interest at prime + 1%) with a maturity date of February 2000; the mortgage balance is secured by substantially all of the Company's assets and guarantees by the stockholders..................... $ 373,656 $ 381,739 Individual, payable on demand at 10% interest. Principal and accrued interest were paid in full on June 27, 1997. .................................... 55,000 55,000 --------- --------- 428,656 436,739 Current portion...................................... (157,068) (156,267) --------- --------- $ 271,588 $ 280,472 ========= =========
The following is a schedule of maturities of notes payable due as of:
MAY 31, APRIL 30, -------- --------- 1998........................................... $157,068 $ 156,267 1999........................................... 112,200 111,320 2000........................................... 159,388 169,152 -------- -------- $428,656 $ 436,739 ======== ========
NOTE D -- RELATED-PARTY TRANSACTIONS The Company is affiliated with numerous other companies through common control and stock ownership. The stockholders and other joint venture companies have made unsecured non-interest bearing advances to the Company for working capital purposes. Accounts payable to affiliates are classified as long-term liabilities based upon the intent of the related parties. NOTE E -- CONCENTRATION OF CREDIT RISK The Company's cash is located in a single financial institution. Cash accounts are insured by the FDIC for up to $100,000. Amounts in excess of insured limits were approximately $79,767 at May 31, 1997 and $57,391 at April 30, 1997. Sales to a major customer represented 44% of total revenues for both the eleven and ten months ended May 31, 1997 and April 30, 1997. There were no outstanding trade accounts receivable from the Company's major customer at May 31, 1997 and April 30, 1997. NOTE F -- SUBSEQUENT EVENTS Subsequent to the date of these financial statements, the Company joined in a merger with its affiliates and other unrelated granite companies. As of the effective date of the merger, the Company's election to be an "S" corporation under the Internal Revenue Code will terminate. See accountants' report. F-114 179 SOUTHERN MAUSOLEUMS, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) NOTE G -- RESTRICTED CASH Restricted cash balances at May 31, 1997 and April 30, 1997 were $7,115 and $6,265, respectively. These cash balances are employee savings accounts and are restricted for that purpose. NOTE H -- INVENTORY Inventory consisted of the following as of:
MAY 31, APRIL 30, 1997 1997 -------- --------- Materials.............................................. $165,858 $ 154,169 Work in process........................................ 76,836 71,303 Finished goods......................................... 59,578 55,287 -------- -------- $302,272 $ 280,759 ======== ========
NOTE I -- FAIR VALUES OF FINANCIAL INSTRUMENTS The Company has a number of financial instruments, none of which are held for trading purposes. The Company estimates that the fair value of all financial instruments at May 31, 1997 and April 30, 1997, does not differ materially from the aggregate carrying values of its financial instruments recorded in the accompanying balance sheets. The estimated fair value amounts have been determined by the Company using available market information and appropriate valuation methodologies. Considerable judgment is necessarily required in interpreting market data to develop the estimates of fair value, and accordingly, the estimates are not necessarily indicative of the amounts that the Company could realize in a current market exchange. See accountants' report. F-115 180 ACCOUNTANTS' REVIEW REPORT To the Board of Directors Southern Mausoleums, Inc. Elberton, Georgia We have reviewed the accompanying balance sheets of Southern Mausoleums, Inc. as of August 31, 1997 and 1996, and the related statements of operations, accumulated deficit, and cash flows for the three months then ended, in accordance with Statements on Standards for Accounting and Review Services issued by the American Institute of Certified Public Accountants. All information included in these financial statements is the representation of the management of Southern Mausoleums, Inc. A review consists principally of inquiries of Company personnel and analytical procedures applied to financial data. It is substantially less in scope than an audit in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our review, we are not aware of any material modifications that should be made to the accompanying financial statements in order for them to be in conformity with generally accepted accounting principles. /s/ GREENE AND COMPANY, L.L.P. -------------------------------------- GREENE AND COMPANY, L.L.P. Anderson, South Carolina September 18, 1997 F-116 181 SOUTHERN MAUSOLEUMS, INC. BALANCE SHEETS AUGUST 31, 1997 AND AUGUST 31, 1996
AUGUST 31, ----------------------- 1997 1996 --------- --------- (UNAUDITED) ASSETS Current assets: Cash and cash equivalents.......................................... $ 167,622 $ 59,487 Cash -- restricted................................................. 9,525 6,825 Trade receivables (less allowance for doubtful accounts of $25,539 and -0-)........................................................ 43,188 35,059 Trade receivables -- affiliates.................................... 8,134 17,702 Inventory.......................................................... 378,184 239,953 Prepaid expenses................................................... 8,341 5,836 --------- --------- Total current assets....................................... 614,994 364,862 --------- --------- Property and equipment, net.......................................... 259,983 309,986 --------- --------- Other assets: Intangibles, net................................................... 1,899 2,658 Deposits........................................................... 3,885 3,885 Advances to affiliates............................................. 12,096 1,500 --------- --------- Total other assets.............................................. 17,880 8,043 --------- --------- Total assets............................................... $ 892,857 $ 682,891 ========= ========= LIABILITIES AND STOCKHOLDERS' DEFICIT Current liabilities: Accounts payable and accrued expenses.............................. $ 57,368 $ 61,690 Current portion of long-term debt.................................. 104,496 146,096 Customer deposits.................................................. 450,925 196,628 Customer deposits -- affiliates.................................... 4,170 -0- Provision for income taxes......................................... 4,976 -0- --------- --------- Total current liabilities.................................. 621,935 404,414 --------- --------- Long-term liabilities: Long-term debt, less current portion............................... 244,725 348,340 Advances from affiliates........................................... 36,489 36,489 Accounts payable -- affiliates..................................... 210,198 296,797 Advances from stockholders......................................... 30,011 30,011 --------- --------- Total long-term liabilities................................ 521,423 711,637 --------- --------- Stockholders' deficit: Common stock, $10 par value. Authorized 100,000 shares; 120 shares issued and outstanding.......................................... 1,200 1,200 Accumulated deficit................................................ (251,701) (434,360) --------- --------- Total stockholders' deficit..................................... (250,501) (433,160) --------- --------- Total liabilities and stockholders' deficit................ $ 892,857 $ 682,891 ========= =========
See accompanying notes to financial statements. F-117 182 SOUTHERN MAUSOLEUMS, INC. STATEMENTS OF OPERATIONS AND ACCUMULATED DEFICIT FOR THE THREE MONTHS ENDED AUGUST 31, 1997 (UNAUDITED) Net revenues (including revenues to affiliates of $18,587)....................... $ 440,998 Cost of goods sold (including purchases from affiliates of $114,131)............. 310,575 ---------- Gross profit..................................................................... 130,423 Selling and administrative expenses (reduced by fees charged to affiliates of $17,741)....................................................................... 56,754 ---------- Operating income................................................................. 73,669 ---------- Other (income) expense: Interest expense............................................................... 9,129 Finance charge income.......................................................... (2,401) Interest income................................................................ (1,519) ---------- Total other expense.................................................... 5,209 ---------- Net income before taxes.......................................................... 68,460 Income taxes..................................................................... 4,976 ---------- Net income....................................................................... 63,484 Accumulated deficit, June 1, 1997................................................ (279,185) ---------- Stockholder distributions........................................................ (36,000) ---------- Accumulated deficit, August 31, 1997............................................. $ (251,701) ==========
See accompanying notes to financial statements. F-118 183 SOUTHERN MAUSOLEUMS, INC. STATEMENTS OF OPERATIONS AND ACCUMULATED DEFICIT FOR THE THREE MONTHS ENDED AUGUST 31, 1996 (UNAUDITED) Net revenues (including revenues to affiliates of $13,650)....................... $ 323,187 Cost of goods sold (including purchases from affiliates of $67,613).............. 281,872 ---------- Gross profit..................................................................... 41,315 Selling and administrative expenses (reduced by fees charged to affiliates of $15,376)....................................................................... 59,353 ---------- Operating loss................................................................... (18,038) ---------- Other (income) expense: Interest expense............................................................... 11,930 Interest income................................................................ (198) ---------- Total other expense.................................................... 11,732 ---------- Net loss......................................................................... (29,770) Accumulated deficit, June 1, 1996................................................ (404,590) ---------- Accumulated deficit, August 31, 1996............................................. $ (434,360) ==========
See accompanying notes to financial statements. F-119 184 SOUTHERN MAUSOLEUMS, INC. STATEMENT OF CASH FLOWS FOR THE THREE MONTHS ENDED AUGUST 31, 1997 (UNAUDITED) Cash flows from operating activities: Net income..................................................................... $ 63,484 Adjustments to reconcile net income to net cash provided by operating activities: Amortization................................................................ 190 Depreciation................................................................ 11,766 (Increase) decrease in assets: Trade receivables......................................................... 17,697 Inventory................................................................. (75,912) Prepaid expenses.......................................................... 1,308 Increase (decrease) in liabilities: Accounts payable and accrued expenses..................................... (49,225) Customer deposits......................................................... 89,246 --------- Net cash provided by operating activities.............................. 63,530 --------- Cash flows used in investing activities -- purchase of property and equipment.... (1,305) --------- Cash flows used in financing activities: Payments on notes payable...................................................... (79,435) Stockholder distributions...................................................... (36,000) --------- Net cash used in financing activities.................................. (115,435) --------- Net decrease in cash and cash equivalents........................................ (53,210) Cash and cash equivalents, June 1, 1997.......................................... 230,357 --------- Cash and cash equivalents, August 31, 1997....................................... $ 177,147 ========= Supplemental disclosure of cash flow information -- cash paid for interest....... $ 12,531 =========
See accompanying notes to financial statements. F-120 185 SOUTHERN MAUSOLEUMS, INC. STATEMENT OF CASH FLOWS FOR THE THREE MONTHS ENDED AUGUST 31, 1996 (UNAUDITED) Cash flows from operating activities: Net loss..................................................................... $(29,770) Adjustments to reconcile net loss to net cash provided by operating activities: Amortization.............................................................. 160 Depreciation.............................................................. 15,727 (Increase) decrease in assets: Trade receivables....................................................... (48,681) Inventory............................................................... 22,324 Prepaid expenses........................................................ 2,438 Increase (decrease) in liabilities: Accounts payable and accrued expenses................................... 48,154 Customer deposits....................................................... 8,510 -------- Net cash provided by operating activities............................ 18,862 -------- Cash flows used in investing activities -- purchase of property and equipment.................................................................... (12,000) -------- Cash flows provided by financing activities: Payments on notes payable.................................................... (15,060) Advances from Affiliates..................................................... 20,000 -------- Net cash provided by financing activities............................ 4,940 -------- Net increase in cash and cash equivalents...................................... 11,802 Cash and cash equivalents, June 1, 1996........................................ 54,510 -------- Cash and cash equivalents, August 31, 1996..................................... 66,312 ======== Supplemental disclosure of cash flow information -- cash paid for interest..... 7,140 ========
See accompanying notes to financial statements. F-121 186 SOUTHERN MAUSOLEUMS, INC. NOTES TO FINANCIAL STATEMENTS AUGUST 31, 1997 AND 1996 NOTE A -- NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES This summary of significant accounting policies of the Company is presented to assist in understanding the Company's financial statements. The financial statements and notes are representations of the Company's management, who is responsible for their integrity and objectivity. These accounting policies conform to generally accepted accounting principles and have been consistently applied in the preparation of the financial statements. Nature of Business The Company saws and polishes granite into dimensional blocks for mausoleum assembly at a plant located in northeast Georgia. The completed mausoleums are sold nationwide. Use of Estimates The presentation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Basis of Accounting Assets, liabilities, revenues, and expenses are recognized on the accrual method of accounting. Cash and Cash Equivalents For purposes of the statement of cash flows, the Company considers all highly liquid debt instruments purchased with a maturity of three months or less to be cash equivalents. The Company has a money market account in the amount of $140,908 at August 31, 1997 and $15,080 at August 31, 1996. Trade Receivables The Company accounts for uncollectible trade receivables on the reserve method. Inventory Inventories are stated at lower of cost or market, with cost determined as follows: Finished goods....................... First-in first-out (FIFO) method Materials and work in process........ Average cost
See accountants' report. F-122 187 SOUTHERN MAUSOLEUMS, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 1997 AND 1996 NOTE A -- NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED) Property and Equipment Property and equipment are stated at acquisition cost. Depreciation is computed under the straight-line method for financial reporting purposes over the following estimated useful lives:
YEARS ------- Buildings........................................................... 31 1/2 Building improvements............................................... 31 1/2 Vehicles............................................................ 5 Machinery and equipment............................................. 2 1/2 - 7 Office fixtures and equipment....................................... 7
Major renewals and betterments are added to the property accounts while maintenance and repairs are charged against earnings as incurred. Intangibles Intangibles consist of start-up costs and loan costs. Amortization of the intangibles is computed using the straight-line method over terms ranging from five years for start-up costs to six years for loan costs. Income Taxes The Company's election to be an "S" Corporation under the Internal Revenue Code was terminated in June of 1997. Therefore, a liability for federal income taxes has been included for 1997 based on the Company's income for the two months ended August 31, 1997. NOTE B -- PROPERTY AND EQUIPMENT Property and equipment consist of the following:
1997 1996 --------- --------- Land................................................. $ 20,105 $ 20,105 Land improvements.................................... 7,180 7,180 Buildings............................................ 180,945 180,945 Building improvements................................ 11,904 11,904 Vehicles............................................. 3,208 3,208 Machinery and equipment.............................. 343,864 341,562 Office fixtures and equipment........................ 41,119 40,488 --------- --------- 608,325 605,392 Accumulated depreciation............................. (348,342) (295,406) --------- --------- $ 259,983 $ 309,986 ========= =========
Depreciation expense for the three months ended August 31, 1997 was $11,766. Depreciation expense for the three months ended August 31, 1996 was $15,727. See accountants' report. F-123 188 SOUTHERN MAUSOLEUMS, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 1997 AND 1996 NOTE C -- NOTES PAYABLE Notes payable are as follows:
1997 1996 --------- --------- Bank loan, payable $11,100 monthly (principal and interest at prime + 1%) with a maturity date of February 2000; the mortgage balance is secured by substantially all of the Company's assets and guarantees by the stockholders. ................... $ 349,221 $ 444,436 Individual, payable on demand at 10% interest. Principal and accrued interest were paid in full on June 27, 1997. .................................... 0 50,000 --------- --------- $ 349,221 $ 494,436 Current portion...................................... (104,496) (146,096) --------- --------- $ 244,725 $ 348,340 ========= =========
The following is a schedule of maturities of notes payable due as of: 1997.................................................... $146,096 1998.................................................... 104,496 1999.................................................... 114,867 2000.................................................... 128,977 -------- $494,436 ========
NOTE D -- RELATED-PARTY TRANSACTIONS The Company is affiliated with numerous other companies through common control and stock ownership. The stockholders and other joint venture companies have made unsecured non-interest bearing advances to the Company for working capital purposes. Accounts payable to affiliates are classified as long-term liabilities based upon the intent of the related parties. NOTE E -- CONCENTRATION OF CREDIT RISK The Company's cash is located in a single financial institution. Cash accounts are insured by the FDIC for up to $100,000. Amounts in excess of insured limits were approximately $40,908 at August 31, 1997. All of the Company's cash accounts were covered by Federal Deposit Insurance at August 31, 1996. Sales to a major customer represented 40% of total revenues for the three months ended August 31, 1997 and 38% for the three months ended August 31, 1996. Trade accounts receivable for the Company's major customer represented 0% of total outstanding accounts receivable at August 31, 1997, and 34% at August 31, 1996. NOTE F -- MERGER During June of 1997, the Company joined in a merger with its affiliates and other unrelated granite companies. See accountants' report. F-124 189 SOUTHERN MAUSOLEUMS, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 1997 AND 1996 NOTE G -- RESTRICTED CASH Restricted cash balances at August 31, 1997 and 1996 were $9,525 and $6,825, respectively. These cash balances are employee savings accounts and are restricted for that purpose. NOTE H -- INVENTORY Inventory consisted of the following as of:
1997 1996 -------- --------- Materials.............................................. $208,001 $ 131,974 Work in process........................................ 94,546 59,988 Finished goods......................................... 75,637 47,991 -------- -------- $378,184 $ 239,953 ======== ========
NOTE I -- FAIR VALUES OF FINANCIAL INSTRUMENTS The Company has a number of financial instruments, none of which are held for trading purposes. The Company estimates that the fair value of all financial instruments at August 31, 1997 and 1996, does not differ materially from the aggregate carrying values of its financial instruments recorded in the accompanying balance sheets. The estimated fair value amounts have been determined by the Company using available market information and appropriate valuation methodologies. Considerable judgment is necessarily required in interpreting market data to develop the estimates of fair value, and accordingly, the estimates are not necessarily indicative of the amounts that the Company could realize in a current market exchange. See accountants' report. F-125 190 INDEPENDENT AUDITORS' REPORT ON FINANCIAL STATEMENTS To the Board of Directors Autumn Rose Quarry, Inc. Ada, Oklahoma We have audited the accompanying balance sheets of Autumn Rose Quarry, Inc. as of May 31, 1997 and April 30, 1997, and the related statements of operations and accumulated deficit, and cash flows for the eleven months and ten months then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to in the first paragraph present fairly, in all material respects, the financial position of Autumn Rose Quarry, Inc. as of May 31, 1997 and April 30, 1997, and the results of its operations and its cash flows for the eleven months and ten months then ended in conformity with generally accepted accounting principles. /s/ GREENE AND COMPANY, L.L.P. -------------------------------------- GREENE AND COMPANY, L.L.P. Anderson, South Carolina July 22, 1997 F-126 191 AUTUMN ROSE QUARRY, INC. BALANCE SHEETS MAY 31, 1997 AND APRIL 30, 1997
MAY 31, APRIL 30, 1997 1997 ---------- ---------- ASSETS Current assets: Cash.............................................................. $ 8,291 $ 4,864 Trade receivables................................................. 8,535 19,456 Trade receivables -- affiliates................................... 22,830 18,943 Employee receivables.............................................. 155 280 Inventory -- finished goods....................................... 45,602 45,094 Prepaid expenses.................................................. 0 3,063 ---------- ---------- Total current assets...................................... 85,413 91,700 ---------- ---------- Property and equipment, net......................................... 174,066 176,757 ---------- ---------- Other assets: Intangibles, net.................................................. 1,351,362 1,352,081 Deposits.......................................................... 5,280 5,280 ---------- ---------- Total other assets............................................. 1,356,642 1,357,361 ---------- ---------- Total assets.............................................. $1,616,121 $1,625,818 ========== ========== LIABILITIES AND STOCKHOLDERS' DEFICIT Current liabilities: Accounts payable.................................................. $ 207 $ 7,707 Accounts payable -- due to affiliates............................. 8,923 8,238 Accrued expenses.................................................. 5,525 5,096 Current portion of long-term debt................................. 157,029 157,029 ---------- ---------- Total current liabilities................................. 171,684 178,070 ---------- ---------- Long-term liabilities: Long-term debt, less current portion.............................. 505,681 521,690 Advances from affiliates.......................................... 605,500 591,000 Advances from stockholders........................................ 400,000 400,000 ---------- ---------- Total long-term liabilities............................... 1,511,181 1,512,690 ---------- ---------- Stockholders' deficit: Common stock, $100 par value. Authorized 1,000,000 shares; 60 shares issued and outstanding.................................. 6,000 6,000 Additional paid-in capital........................................ 44,000 44,000 Accumulated deficit............................................... (116,744) (114,942) ---------- ---------- Total stockholders' deficit.................................... (66,744) (64,942) ---------- ---------- Total liabilities and stockholders' deficit............... $1,616,121 $1,625,818 ========== ==========
See accompanying notes to financial statements. F-127 192 AUTUMN ROSE QUARRY, INC. STATEMENTS OF OPERATIONS AND ACCUMULATED DEFICIT FOR THE ELEVEN MONTHS ENDED MAY 31, 1997 Net revenues (including revenues to affiliates of $168,059)...................... $ 325,533 Cost of goods sold............................................................... 354,800 --------- Gross loss....................................................................... (29,267) Selling and administrative expenses (including fees paid to affiliates of $3,685)........................................................................ 25,392 --------- Operating loss................................................................... (54,659) --------- Other (income) expense: Interest expense............................................................... 21,249 Loss on disposal of equipment.................................................. 2,930 Finance charge income.......................................................... (313) --------- Total other expense.................................................... 23,866 --------- Net loss......................................................................... (78,525) Accumulated deficit, July 1, 1996................................................ (38,219) --------- Accumulated deficit, May 31, 1997................................................ $(116,744) =========
See accompanying notes to financial statements. F-128 193 AUTUMN ROSE QUARRY, INC. STATEMENTS OF OPERATIONS AND ACCUMULATED DEFICIT FOR THE TEN MONTHS ENDED APRIL 30, 1997 Net revenues (including revenues to affiliates of $149,426)...................... $ 294,495 Cost of goods sold............................................................... 325,502 --------- Gross loss....................................................................... (31,007) Selling and administrative expenses (including fees paid to affiliates of $3,318)........................................................................ 23,589 --------- Operating loss................................................................... (54,596) --------- Other (income) expense: Interest expense............................................................... 19,482 Loss on disposal of equipment.................................................. 2,930 Finance charge income.......................................................... (285) --------- Total other expense.................................................... 22,127 --------- Net loss......................................................................... (76,723) Accumulated deficit, July 1, 1996................................................ (38,219) --------- Accumulated deficit, April 30, 1997.............................................. $(114,942) =========
See accompanying notes to financial statements. F-129 194 AUTUMN ROSE QUARRY, INC. STATEMENT OF CASH FLOWS FOR THE ELEVEN MONTHS ENDED MAY 31, 1997 Cash flows from operating activities: Net loss....................................................................... $ (78,525) Adjustments to reconcile net loss to net cash used in operating activities: Amortization................................................................ 4,392 Depreciation................................................................ 29,503 Depletion................................................................... 3,360 Loss on disposal of equipment............................................... 2,930 (Increase) decrease in assets: Trade receivables......................................................... (24,520) Employee receivables...................................................... 1,175 Deposits.................................................................. 1,692 Inventory................................................................. 7,253 Prepaid expenses.......................................................... 10,903 Increase (decrease) in liabilities: Accounts payable.......................................................... (28,356) Accrued expenses.......................................................... 3,972 --------- Net cash used in operating activities.................................. (66,221) --------- Cash flows from financing activities: Payments on notes payable...................................................... (146,409) Advances from affiliates....................................................... 217,500 --------- Net cash provided by financing activities.............................. 71,091 --------- Net increase in cash............................................................. 4,870 Cash, July 1, 1996............................................................... 3,421 --------- Cash, May 31, 1997............................................................... $ 8,291 ========= Supplemental disclosure of cash flow information -- cash paid for interest....... $ 21,249 =========
See accompanying notes to financial statements. F-130 195 AUTUMN ROSE QUARRY, INC. STATEMENT OF CASH FLOWS FOR THE TEN MONTHS ENDED APRIL 30, 1997 Cash flows from operating activities: Net loss....................................................................... $ (76,723) Adjustments to reconcile net loss to net cash used in operating activities: Amortization................................................................ 3,993 Depreciation................................................................ 26,814 Depletion................................................................... 3,039 Loss on disposal of equipment............................................... 2,930 (Increase) decrease in assets: Trade receivables......................................................... (31,554) Employee receivables...................................................... 1,050 Deposits.................................................................. 1,692 Inventory................................................................. 7,761 Prepaid expenses.......................................................... 7,840 Increase (decrease) in liabilities: Accounts payable.......................................................... (21,542) Accrued expenses.......................................................... 3,543 --------- Net cash used in operating activities.................................. (71,157) --------- Cash flows from financing activities: Payments on notes payable...................................................... (130,400) Advances from affiliates....................................................... 203,000 --------- Net cash provided by financing activities.............................. 72,600 --------- Net increase in cash............................................................. 1,443 Cash, July 1, 1996............................................................... 3,421 --------- Cash, April 30, 1997............................................................. $ 4,864 ========= Supplemental disclosure of cash flow information -- cash paid for interest....... $ 19,482 =========
See accompanying notes to financial statements. F-131 196 AUTUMN ROSE QUARRY, INC. NOTES TO FINANCIAL STATEMENTS MAY 31, 1997 AND APRIL 30, 1997 NOTE A -- NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES This summary of significant accounting policies of the Company is presented to assist in understanding the Company's financial statements. The financial statements and notes are representations of the Company's management, who is responsible for their integrity and objectivity. These accounting policies conform to generally accepted accounting principles and have been consistently applied in the preparation of the financial statements. Nature of Business The Company quarries granite blocks in northeast Oklahoma for sales to customers nationwide. Use of Estimates The presentation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Basis of Accounting Assets, liabilities, revenues, and expenses are recognized on the accrual method of accounting. Inventory Inventories are stated at lower of cost or market, with cost determined using average cost. Revenue Recognition Revenue is recognized upon shipment of goods. Property and Equipment Property and equipment are stated at acquisition cost. Depreciation is computed under the straight-line method for financial reporting purposes over the following estimated useful lives:
YEARS ----- Buildings............................................. 7 Vehicles.............................................. 3-7 Machinery and equipment............................... 3-10
Major renewals and betterments are added to the property accounts while maintenance and repairs are charged against earnings as incurred. Intangibles Intangibles consist of loan costs, mineral rights, and overburden removal. Amortization of the loan costs is computed using the straight-line method over the term of the loan which is five years. Amortization of See accountants' report. F-132 197 AUTUMN ROSE QUARRY, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) NOTE A -- NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED) overburden removal is computed using the straight-line method over ten years. Depletion of mineral rights is computed using cost depletion. Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed of The Company adopted the provisions of SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, on January 1, 1996. This statement requires that long-lived assets and certain identifiable intangibles be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceed the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. The estimated fair value amounts have been determined by the Company using available market information and appropriate valuation methodologies. The fair value of the Company's assets approximates the carrying cost at the balance sheet dates. NOTE B -- PROPERTY AND EQUIPMENT Property and equipment consist of the following:
MAY 31, APRIL 30, 1997 1997 -------- --------- Land................................................... $ 40,000 $ 40,000 Buildings.............................................. 5,536 5,536 Machinery and equipment................................ 196,773 196,773 Vehicles............................................... 2,613 2,613 -------- -------- 244,922 244,922 Accumulated depreciation............................... (70,856) (68,165) -------- -------- $174,066 $176,757 ======== ========
Depreciation expense for the eleven months ended May 31, 1997 was $29,503. Depreciation expense for the ten months ended April 30, 1997 was $26,814. NOTE C -- INTANGIBLES Intangibles consist of the following:
MAY 31, APRIL 30, 1997 1997 ---------- ---------- Loan costs.......................................... $ 2,709 $ 2,709 Mineral rights...................................... 1,327,500 1,327,500 Overburden removal.................................. 42,500 42,500 ---------- ---------- 1,372,709 1,372,709 Accumulated amortization and depletion.............. (21,347) (20,628) ---------- ---------- $1,351,362 $1,352,081 ========== ==========
See accountants' report. F-133 198 AUTUMN ROSE QUARRY, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) NOTE C -- INTANGIBLES -- (CONTINUED) Amortization and depletion expense for the eleven months ended May 31, 1997 were $4,392 and $3,360, respectively. Amortization and depletion expense for the ten months ended April 30, 1997 were $3,993 and $3,039, respectively. NOTE D -- NOTES PAYABLE Notes payable are as follows:
MAY 31, APRIL 30, 1997 1997 --------- --------- Bank loan, payable $5,833 principal monthly plus 9 1/2% interest with a maturity date of June 2000; the mortgage balance is secured by substantially all of the Company's assets and guarantees by the shareholders. ..................................... $ 210,000 $ 215,833 Note to corporation to be paid with granite inventory. Sales price set at $14.50 per cubic foot per agreement of purchase and sale. ............... 452,710 462,886 --------- --------- 662,710 678,719 Current portion...................................... (157,029) (157,029) --------- --------- $ 505,681 $ 521,690 ========= =========
The following is a schedule of maturities of notes payable:
MAY 31, APRIL 30, 1997 1997 -------- --------- 1998................................................... $157,029 $157,029 1999................................................... 162,862 162,862 2000................................................... 162,862 162,862 2001................................................... 98,696 104,529 2002................................................... 81,261 91,437 -------- -------- $662,710 $678,719 ======== ========
NOTE E -- RELATED-PARTY TRANSACTIONS The Company is affiliated with numerous other companies through common control and stock ownership. The stockholders and other joint venture companies have made unsecured non-interest bearing advances to the Company for working capital purposes. The Company classifies advances payable to affiliates as long-term based upon the intent of the parties. NOTE F -- CONCENTRATION OF CREDIT RISK All of the Company's cash funds are located in financial institutions that are insured by the FDIC for up to $100,000. There are no amounts in excess of this limit at May 31, 1997 and April 30, 1997. See accountants' report. F-134 199 AUTUMN ROSE QUARRY, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) NOTE G -- SUBSEQUENT EVENTS Subsequent to the date of these financial statements, the Company joined in a merger with its affiliates and other unrelated granite companies. NOTE H -- FAIR VALUES OF FINANCIAL INSTRUMENTS The Company has a number of financial instruments, none of which are held for trading purposes. The Company estimates that the fair value of all financial instruments at May 31, 1997 and April 30, 1997, does not differ materially from the aggregate carrying values of its financial instruments recorded in the accompanying balance sheets. The estimated fair value amounts have been determined by the Company using available market information and appropriate valuation methodologies. Considerable judgment is necessarily required in interpreting market data to develop the estimates of fair value, and accordingly, the estimates are not necessarily indicative of the amounts that the Company could realize in a current market exchange. NOTE I -- INCOME TAXES The Company is taxed as a corporation under the Internal Revenue Code. For federal income tax purposes, approximately $430,727 of net operating loss carryforwards exist to offset future taxable income. These carryforwards begin to expire in 2009. No tax benefit has been reported in the accompanying financial statements, however, because the Company believes that the carryforwards will expire unused. Accordingly, the $146,000 tax benefit of the cumulative carryforwards has been offset by evaluation allowance of the same amount. See accountants' report. F-135 200 ACCOUNTANTS' REVIEW REPORT To the Board of Directors Autumn Rose Quarry, Inc. Ada, Oklahoma We have reviewed the accompanying balance sheets of Autumn Rose Quarry, Inc. (a corporation) as of August 31, 1997 and 1996, and the related statements of operations, accumulated deficit, and cash flows for the three months then ended, in accordance with Statements on Standards for Accounting and Review Services issued by the American Institute of Certified Public Accountants. All information included in these financial statements is the representation of the management of Autumn Rose Quarry, Inc. A review consists principally of inquiries of Company personnel and analytical procedures applied to financial data. It is substantially less in scope than an audit in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our review, we are not aware of any material modifications that should be made to the accompanying financial statements in order for them to be in conformity with generally accepted accounting principles. /s/ GREENE AND COMPANY, L.L.P. -------------------------------------- GREENE AND COMPANY, L.L.P. Anderson, South Carolina September 18, 1997 F-136 201 AUTUMN ROSE QUARRY, INC. BALANCE SHEETS AUGUST 31, 1997 AND AUGUST 31, 1996
AUGUST 31, ------------------------- 1997 1996 ---------- ---------- (UNAUDITED) ASSETS Current assets: Cash.............................................................. $ 7,124 $ 1,640 Trade receivables................................................. 3,049 4,293 Trade receivables -- affiliates................................... 7,902 6,034 Employee receivables.............................................. -0- 1,555 Inventory -- finished goods....................................... 74,781 70,425 Prepaid expenses.................................................. 4,070 9,667 ---------- ---------- Total current assets...................................... 96,926 93,614 ---------- ---------- Property and equipment, net......................................... 165,821 201,120 ---------- ---------- Other assets: Intangibles, net.................................................. 1,349,410 1,357,766 Deposits.......................................................... 5,280 7,196 ---------- ---------- Total other assets............................................. 1,354,690 1,364,962 ---------- ---------- Total assets.............................................. $1,617,437 $1,659,696 ========== ========== LIABILITIES AND STOCKHOLDERS' DEFICIT Current liabilities: Accounts payable and accrued expenses............................. 13,088 21,537 Accounts payable -- due to affiliates............................. 371 322 Current portion of long-term debt................................. 162,862 162,862 ---------- ---------- Total current liabilities................................. 176,321 184,721 ---------- ---------- Long-term liabilities: Long-term debt, less current portion.............................. 469,025 618,116 Advances from affiliates.......................................... 627,500 452,000 Advances from stockholders........................................ 400,000 400,000 ---------- ---------- Total long-term liabilities............................... 1,496,525 1,470,116 ---------- ---------- Stockholders' deficit: Common stock, $100 par value. Authorized 1,000,000 shares; 60 shares issued and outstanding.................................. 6,000 6,000 Additional paid-in capital........................................ 44,000 44,000 Accumulated deficit............................................... (105,409) (45,141) ---------- ---------- Total stockholders' deficit.................................... (55,409) 4,859 ---------- ---------- Total liabilities and stockholders' deficit............... 1,617,437 1,659,696 ========== ==========
See accompanying notes to financial statements. F-137 202 AUTUMN ROSE QUARRY, INC. STATEMENTS OF OPERATIONS AND ACCUMULATED DEFICIT FOR THE THREE MONTHS ENDED AUGUST 31, 1997 (UNAUDITED) Net revenues (including revenues to affiliates of $24,380)....................... 75,230 Cost of goods sold (including purchases from affiliates of $8,238)............... 52,458 --------- Gross profit..................................................................... 22,772 Selling and administrative expenses (including fees paid to affiliates of $1,044)........................................................................ 6,595 --------- Operating income................................................................. 16,177 --------- Other (income) expense: Interest expense............................................................... 4,971 Finance charge income.......................................................... (129) --------- Total other expense.................................................... 4,842 --------- Net income....................................................................... 11,335 Accumulated deficit, June 1, 1997................................................ (116,744) --------- Accumulated deficit, August 31, 1997............................................. (105,409) =========
See accompanying notes to financial statements. F-138 203 AUTUMN ROSE QUARRY, INC. STATEMENTS OF OPERATIONS AND ACCUMULATED DEFICIT FOR THE THREE MONTHS ENDED AUGUST 31, 1996 (UNAUDITED)
Net revenues (including revenues to affiliates of $22,828)....................... $ 70,805 Cost of goods sold............................................................... 96,610 --------- Gross loss....................................................................... (25,805) Selling and administrative expenses (including fees paid to affiliates of $904).......................................................................... 8,226 --------- Operating loss................................................................... (34,031) --------- Other (income) expense: Interest expense............................................................... 6,489 Finance charge income.......................................................... (120) --------- Total other expense.................................................... 6,369 --------- Net loss......................................................................... (40,400) Accumulated deficit, June 1, 1996................................................ (4,741) --------- Accumulated deficit, August 31, 1996............................................. $ (45,141) =========
See accompanying notes to financial statements. F-139 204 AUTUMN ROSE QUARRY, INC. STATEMENT OF CASH FLOWS FOR THE THREE MONTHS ENDED AUGUST 31, 1997 (UNAUDITED)
Cash flows from operating activities: Net income..................................................................... $ 11,335 Adjustments to reconcile net income to net cash provided by operating activities: Amortization................................................................ 1,197 Depreciation................................................................ 8,246 Depletion................................................................... 753 (Increase) decrease in assets: Trade receivables......................................................... 20,414 Employee receivables...................................................... 155 Inventory................................................................. (29,179) Prepaid expenses.......................................................... (4,070) Increase (decrease) in liabilities: Accounts payable and accrued expenses..................................... (1,195) -------- Net cash provided by operating activities.............................. 7,656 -------- Cash flows used in financing activities: Payments on notes payable...................................................... (30,823) Advances from affiliates....................................................... 22,000 -------- Net cash used in financing activities.................................. (8,823) -------- Net decrease in cash............................................................. (1,167) Cash, June 1, 1997............................................................... 8,291 -------- Cash, August 31, 1997............................................................ $ 7,124 ======== Supplemental disclosure of cash flow information -- cash paid for interest....... $ 4,972 ========
See accompanying notes to financial statements. F-140 205 AUTUMN ROSE QUARRY, INC. STATEMENT OF CASH FLOWS FOR THE THREE MONTHS ENDED AUGUST 31, 1996 (UNAUDITED) Cash flows from operating activities: Net loss....................................................................... $ (40,400) Adjustments to reconcile net loss to net cash used in operating activities: Amortization................................................................ 1,198 Depreciation................................................................ 8,069 Depletion................................................................... 712 (Increase) decrease in assets: Trade receivables......................................................... 14,420 Employee receivables...................................................... (100) Inventory................................................................. (27,165) Prepaid expenses.......................................................... (9,667) Increase (decrease) in liabilities: Accounts payable and accrued expenses..................................... (8,382) --------- Net cash provided by operating activities.............................. (61,315) --------- Cash flows used in investing activities -- purchase of fixed assets.............. (2,971) Cash flows provided by financing activities: Payments on notes payable...................................................... (41,314) Advances from affiliates....................................................... 106,000 --------- Net cash provided by financing activities.............................. 64,686 --------- Net increase in cash............................................................. 400 Cash, June 1, 1996............................................................... 1,240 --------- Cash, August 31, 1996............................................................ $ 1,640 ========= Supplemental disclosure of cash flow information -- cash paid for interest....... $ 6,489 =========
See accompanying notes to financial statements. F-141 206 AUTUMN ROSE QUARRY, INC. NOTES TO FINANCIAL STATEMENTS AUGUST 31, 1997 AND 1996 NOTE A -- NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES This summary of significant accounting policies of the Company is presented to assist in understanding the Company's financial statements. The financial statements and notes are representations of the Company's management, who is responsible for their integrity and objectivity. These accounting policies conform to generally accepted accounting principles and have been consistently applied in the preparation of the financial statements. Nature of Business The Company quarries granite blocks in northeast Oklahoma for sales to customers nationwide. Use of Estimates The presentation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Basis of Accounting Assets, liabilities, revenues, and expenses are recognized on the accrual method of accounting. Inventory Inventories are stated at lower of cost or market, with cost determined using average cost. Property and Equipment Property and equipment are stated at acquisition cost. Depreciation is computed under the straight-line method for financial reporting purposes over the following estimated useful lives:
YEARS ----- Buildings............................................. 7 Vehicles.............................................. 3-7 Machinery and equipment............................... 3-10
Major renewals and betterments are added to the property accounts while maintenance and repairs are charged against earnings as incurred. Intangibles Intangibles consist of loan costs, mineral rights, and overburden removal. Amortization of the loan costs is computed using the straight-line method over the term of the loan which is five years. Amortization of overburden removal is computed using the straight-line method over ten years. Depletion of mineral rights is computed using cost depletion. See accountants' report. F-142 207 AUTUMN ROSE QUARRY, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 1997 AND 1996 NOTE A -- NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED) Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed of The Company adopted the provisions of SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, on January 1, 1996. This statement requires that long-lived assets and certain identifiable intangibles be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceed the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. The estimated fair value amounts have been determined by the Company using available market information and appropriate valuation methodologies. The fair value of the Company's assets approximates the carrying cost at the balance sheet dates. NOTE B -- PROPERTY AND EQUIPMENT Property and equipment consist of the following:
1997 1996 -------- -------- Land................................................... $ 40,000 $ 40,000 Buildings.............................................. 5,536 5,536 Machinery and equipment................................ 196,773 202,000 Vehicles............................................... 2,613 2,613 -------- -------- 244,922 250,149 Accumulated depreciation............................... (79,101) (49,029) -------- -------- $165,821 $201,120 ======== ========
Depreciation expense for the three months ended August 31, 1997 was $8,426. Depreciation expense for the three months ended August 31, 1996 was $8,069. NOTE C -- INTANGIBLES Intangibles consist of the following:
1997 1996 ---------- ---------- Loan costs.......................................... $ 2,709 $ 2,709 Mineral rights...................................... 1,327,500 1,327,500 Overburden removal.................................. 42,500 42,500 ---------- ---------- 1,372,709 1,372,709 Accumulated amortization and depletion.............. (23,299) (14,943) ---------- ---------- $1,349,410 $1,357,766 ========== ==========
Amortization and depletion expense for the three months ended August 31, 1997 were $1,198 and $752, respectively. See accountants' report. F-143 208 AUTUMN ROSE QUARRY, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 1997 AND 1996 NOTE C -- INTANGIBLES -- (CONTINUED) Amortization and depletion expense for the three months ended August 31, 1996 were $1,198 and $712, respectively. NOTE D -- NOTES PAYABLE Notes payable are as follows:
1997 1996 --------- --------- Bank loan, payable $5,833 principal monthly plus 9 1/2% interest with a maturity date of June 2000; the mortgage balance is secured by substantially all of the Company's assets and guarantees by the shareholders. ..................................... $ 192,500 $ 262,500 Note to corporation to be paid with granite inventory. Sales price set at $14.50 per cubic foot per agreement of purchase and sale. ............... 439,387 518,478 --------- --------- 631,887 780,978 Current portion...................................... (162,862) (162,862) --------- --------- $ 469,025 $ 618,116 ========= =========
The following is a schedule of maturities of notes payable: 1997.............................................................. $162,862 1998.............................................................. 162,862 1999.............................................................. 162,862 2000.............................................................. 151,196 2001.............................................................. 92,862 2002.............................................................. 48,334 -------- $780,978 ========
NOTE E -- RELATED-PARTY TRANSACTIONS The Company is affiliated with numerous other companies through common control and stock ownership. The stockholders and other joint venture companies have made unsecured non-interest bearing advances to the Company for working capital purposes. The Company classifies advances payable to affiliates as long-term based upon the intent of the parties. NOTE F -- CONCENTRATION OF CREDIT RISK All of the Company's cash funds are located in financial institutions that are insured by the FDIC for up to $100,000. There are no amounts in excess of this limit at August 31, 1997 and 1996. NOTE G -- MERGER During June of 1997, the Company joined in a merger with its affiliates and other unrelated granite companies. See accountants' report. F-144 209 AUTUMN ROSE QUARRY, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 1997 AND 1996 NOTE H -- FAIR VALUES OF FINANCIAL INSTRUMENTS The Company has a number of financial instruments, none of which are held for trading purposes. The Company estimates that the fair value of all financial instruments at August 31, 1997 and 1996, does not differ materially from the aggregate carrying values of its financial instruments recorded in the accompanying balance sheets. The estimated fair value amounts have been determined by the Company using available market information and appropriate valuation methodologies. Considerable judgment is necessarily required in interpreting market data to develop the estimates of fair value, and accordingly, the estimates are not necessarily indicative of the amounts that the Company could realize in a current market exchange. NOTE I -- INCOME TAXES The Company is taxed as a corporation under the Internal Revenue Code. For federal income tax purposes, approximately $430,727 of net operating loss carryforwards exist to offset future taxable income. These carryforwards begin to expire in 2009. No tax benefit has been reported in the accompanying financial statements, however, because the Company believes that the carryforwards will expire unused. Accordingly, the $146,000 tax benefit of the cumulative carryforwards has been offset by a valuation allowance of the same amount. See accountants' report. F-145 210 DESCRIPTION OF ARTWORK ON INSIDE BACK COVER: [Map showing locations of Independent Retailers of Rock of Ages products, Manufacturing locations, Quarry locations and Corporate headquarters.] 211 =============================================================================== NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED OR INCORPORATED BY REFERENCE IN THIS PROSPECTUS IN CONNECTION WITH THE OFFERING HEREIN, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR THE UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THOSE SPECIFICALLY OFFERED HEREBY IN ANY JURISDICTION TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION IN SUCH JURISDICTION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE. ------------------------ TABLE OF CONTENTS
PAGE ----- Prospectus Summary.................. 3 Risk Factors........................ 8 Use of Proceeds..................... 14 Dividend Policy..................... 14 Capitalization...................... 15 Dilution............................ 16 Selected Consolidated Financial Data.............................. 17 Unaudited Pro Forma Combined and Condensed Financial Data.......... 18 Management's Discussion and Analysis of Financial Condition and Results of Operations..................... 24 The Death Care Industry and Granite Memorialization................... 29 Business............................ 32 Management.......................... 42 Certain Relationships and Related Transactions...................... 49 Principal and Selling Stockholders...................... 52 Description of Capital Stock........ 54 Shares Eligible for Future Sale..... 57 Certain United States Tax Consequences to Non-United States Holders........................... 59 Underwriting........................ 61 Legal Matters....................... 62 Experts............................. 62 Available Information............... 63 Index to Financial Statements....... F-1
UNTIL , 1997, ALL DEALERS EFFECTING TRANSACTIONS IN THE CLASS A COMMON STOCK OFFERED HEREBY, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS. =============================================================================== =============================================================================== 2,900,000 SHARES [ROCK OF AGES LOGO] ROCK OF AGES CORPORATION COMMON STOCK --------------------- PROSPECTUS --------------------- RAYMOND JAMES & ASSOCIATES, INC. , 1997 =============================================================================== 212 PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION Set forth below is an estimate (except for the Securities and Exchange Commission Registration Fee) of the fees and expenses all of which are payable by the Company, other than any underwriting discounts and commissions, in connection with the registration and sale of the securities being registered: Securities and Exchange Commission Registration Fee...................... $ 18,191 National Association of Securities Dealers, Inc. Filing Fee.............. 6,200 Nasdaq National Market Listing Fee....................................... 20,000 Transfer Agent and Registrar Fees and Expenses........................... 10,000 Blue Sky Fees and Expenses............................................... 5,000 Legal Fees and Expenses.................................................. 700,000 Accounting Fees and Expenses............................................. 550,000 Printing, Engraving and Mailing Expenses................................. 150,000 Miscellaneous............................................................ 40,609 ---------- Total.......................................................... $1,500,000 ==========
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS Section 102 of the Delaware General Corporation Law, as amended, allows a corporation to eliminate the personal liability of directors of a corporation to the corporation or its stockholders for monetary damages for a breach of fiduciary duty as a director, except where the director breached his duty of loyalty, failed to act in good faith, engaged in intentional misconduct or knowingly violated a law, authorized the payment of a dividend or approved a stock repurchase in violation of Delaware corporate law or obtained an improper personal benefit. Section 145 of the Delaware General Corporation Law, as amended, provides that a corporation may indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the corporation), by reason of the fact that he is or was a director, officer, employee or agent of the corporation or is or was serving at its request in such capacity in another corporation, partnership, joint venture, trust or other enterprise, against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by him in connection with such action, suit or proceeding if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the corporation and, with respect to any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful. Article Ninth of the Registrant's Amended and Restated Certificate of Incorporation provides for elimination of directors' personal liability and indemnification as follows: "(Nine) No director shall be personally liable to the Corporation or any of its stockholders for monetary damages for breach of fiduciary duty as a director, except to the extent such exemption from liability or limitation thereto is not permitted under the DGCL as the same exists or may hereafter be amended. If the DGCL is amended hereafter to authorize the further elimination or limitation of the liability of directors, then the liability of a director of the Corporation shall be eliminated or limited to the fullest extent authorized by the DGCL, as so amended. Any repeal or modification of this Article NINTH shall not adversely affect any right or protection of a director of the Corporation existing at the time of such repeal or modification with respect to acts or omissions occurring prior to such repeal or modification." II-1 213 In addition, Article VIII of the By-Laws of the Registrant provides for indemnification of officers and directors of the Company and certain other persons against liabilities and expenses incurred by any of them in certain stated proceedings and under certain stated conditions. Section 9 of the Underwriting Agreement between the Company and the Representative provides for indemnification by the Company of the Representative, the Underwriters and each person, if any, who controls the Representative or any Underwriter, against certain liabilities under the Securities Act. The Underwriting Agreement also provides that the Representative and the Underwriters shall similarly indemnify the Company, its directors, officers, and controlling person, as set forth therein. The Registrant has purchased directors' and officers' liability insurance which would indemnify the directors and officers of the Company against damages arising out of certain kinds of claims which might be made against them based on their negligent acts or omissions while acting in their capacity as such. ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES The following information is furnished with regard to all securities sold by the Company within the past three years which were not registered under the Securities Act. 1. As of June 27, 1997, Rock of Ages Quarries, Inc., a predecessor of the Company ("ROAQ"), and Royalty Granite Corporation, a wholly owned subsidiary of the Company, entered into an Agreement and Plan of Reorganization (the "Keystone Agreement") with KSGM, Inc. ("KSGM") and Missouri Red Quarries, Inc. ("Missouri Red") pursuant to which, effective June 28, 1997, KSGM was merged with and into Rock of Ages Corporation, a Vermont corporation and the immediate predecessor of the Company ("ROA Vermont"), and all outstanding shares of capital stock of KSGM were converted into 526,882 shares (263,441 shares after giving effect to the 1-for-2 reverse stock pursuant to the merger of ROA Vermont with and into the Company as described in 5. below) of common stock of ROA Vermont, which shares were issued to Missouri Red, as the sole stockholder of KSGM (the "Keystone Merger Shares"). The issuance of the Keystone Merger Shares was not registered under the Securities Act in reliance on the exemption provided by Section 4(2) thereof as a transaction by an issuer not involving any public offering in that (i) the Keystone Merger Shares were issued to a single entity (Missouri Red) that, at the time of entering into the Keystone Agreement, represented to the Company that it was an "accredited investor" and that it was acquiring the Keystone Merger Shares solely for investment for its own account and not with a view toward the resale or distribution thereof, (ii) at that time the Company provided written disclosure to Missouri Red stating, and Missouri Red acknowledged, that the Keystone Merger Shares were not registered under the Act and would be subject to certain restrictions on transfer, (iii) the Company placed a restricted share legend to such effect on the certificates representing the Keystone Merger Shares and (iv) the Company did not engage in any general solicitation or advertising in connection with entering into the Keystone Agreement. 2. As of June 27, 1997, ROAQ entered into a Stock Purchase Agreement with Robert Otis Childs, Jr., Robert Otis Childs, III, and Timothy Carroll Childs (the "C&C Agreement"), pursuant to which the Company will issue to Robert Otis Childs, III, contemporaneously with the consummation of the offering, $200,000 in shares of Class A Common Stock (valued at the initial public offering price per share) (the "Childs Shares") as a portion of the consideration payable in connection with the C&C Acquisition. The issuance of the Childs Shares will not be registered under the Securities Act in reliance on the exemption provided by Section 4(2) thereof as a transaction by an issuer not involving any public offering in that (i) the Childs Shares will be issued to a single investor who, at the time of entering into the C&C Agreement, represented to the Company that he was an "accredited investor" and that he would be acquiring the Childs Shares solely for investment for his own account and not with a view toward the resale or distribution thereof, (ii) at that time the Company provided written disclosure to Robert Otis Childs, III stating, and Robert Otis Childs, III acknowledged, that the Childs Shares will not be registered under the Act and will be subject to certain restrictions on transfer, (iii) the Company will place a restricted share legend to such effect on the certificate(s) representing the Childs Shares and (iv) the Company did not engage in any general solicitation or advertising in connection with entering into the C&C Agreement. II-2 214 3. Effective June 27, 1997, ROA Vermont merged with and into ROAQ and ROAQ changed its name to Rock of Ages Corporation. In connection therewith, each outstanding share of Class A Common Stock of ROAQ was converted into 72.8347276 shares of Common Stock of ROAQ ("ROAQ Shares"). The ROAQ Shares were not registered under the Securities Act in reliance on the exemption provided by Section 3(a)(9) thereof with respect to securities exchanged by the issuer with its existing security-holders exclusively in that only the shares of Class A Common Stock held by existing shareholders of ROAQ were converted into and exchanged for Common Stock and no commission or other remuneration was paid or given directly or indirectly in connection with such exchange of shares. 4. As of July 30, 1997, ROA Vermont entered into an Asset Purchase Agreement with Keith Monument (the "Keith Agreement"), pursuant to which the Company will issue to Keith Monument, contemporaneously with the consummation of the offering, $1.5 million in shares of Class A Common Stock (valued at the initial public offering price per share) (the "Keith Monument Shares") as a portion of the consideration payable in connection with the Keith Acquisition. The issuance of the Keith Monument Shares will not be registered under the Securities Act in reliance on the exemption provided by Section 4(2) thereof as a transaction by an issuer not involving any public offering in that (i) the Keith Monument Shares will be issued to a single entity (Keith Monument Corporation) that at the time of entering into the Keith Agreement represented to the Company that it was an "accredited investor" and that it would be acquiring the Keith Monument Shares solely for investment for its own account and not with a view toward the resale or distribution thereof, (ii) at that time the Company provided written disclosure to Keith Monument Corporation stating, and Keith Monument Corporation acknowledged, that the Keith Monument Shares will not be registered under the Act and will be subject to certain restrictions on transfer, (iii) the Company will place a restricted share legend to such effect on the certificate(s) representing the Keith Monument Shares and (iv) the Company did not engage in any general solicitation or advertising in connection with entering into the Keith Agreement. 5. Effective August 12, 1997, ROA Vermont became a Delaware corporation pursuant to a reincorporation merger (the "Reincorporation Merger"). In the Reincorporation Merger, each outstanding share of ROA Vermont was converted into one half of one share of Class B Common Stock of the Company. In connection therewith, an aggregate of 3,763,441 shares of Class B Common Stock of the Company were issued (the "Reincorporation Merger Shares"). The issuance of the Reincorporation Merger Shares was not registered under the Securities Act in reliance on the exemption provided by Section 4(2) thereof as a transaction by an issuer not involving any public offering in that (i) the Reincorporation Merger Shares were issued to two entities (Swenson Granite and Missouri Red) that represented to the Company that they were "accredited investors" and were acquiring the Reincorporation Merger Shares solely for investment for their own accounts and not with a view toward the resale or distribution thereof, (ii) the Company provided written disclosure to such entities stating, and such entities acknowledged, that the Reincorporation Merger Shares would not be registered under the Act and would be subject to certain restrictions on transfer, (iii) the Company placed a restricted share legend to such effect on the certificates representing the Reincorporation Merger Shares and (iv) the Company did not engage in any general solicitation or advertising in connection with the issuance of the Reincorporation Merger Shares pursuant to the Reincorporation Merger. 6. On August 13, 1997, the Company entered into an Agreement and Plan of Merger and Reorganization with Swenson Granite Company, Inc., Kurt M. Swenson and Kevin C. Swenson (the "Swenson Merger Agreement"), pursuant to which, immediately prior to consummation of the offering, each share of Swenson Granite Company, Inc. will be converted into 1,618.23 shares of Class B Common Stock of the Company (the "Reorganization Merger Shares"). The issuance of the Reorganization Merger Shares will not be registered under the Securities Act in reliance on the exemption provided by Section 4(2) thereof as a transaction by an issuer not involving any public offering in that (i) the Reorganization Merger Shares will be issued to less than thirty-five shareholders of Swenson Granite Company, Inc. who, in order to receive such shares will be required by the terms of the Swenson Merger Agreement to represent to the Company that (A) they are an "accredited investor" or have engaged a "purchaser representative" to act on their behalf, (B) they will be acquiring the Reorganization Merger Shares for investment only and not with a view to any public distribution thereof, (C) they understand that the Reorganization Merger Shares will not be registered under the Act and II-3 215 will be subject to certain restrictions on transfer, and (D) if they are not an "accredited investor," they, either alone or together with their purchaser representative, have such knowledge and experience in financial and business matters that they are capable of evaluating the merits and risks of an investment in the Reorganization Merger Shares, (ii) the Company will place a restricted share legend on the certificates representing the Reorganization Merger Shares, (iii) the Company did not engage in any general solicitation or advertising in connection with entering into the Swenson Merger Agreement and (iv) the issuance of the Reorganization Merger Shares will otherwise comply with Rule 506 under the Securities Act. ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (a) Exhibits:
EXHIBIT NUMBER DESCRIPTION - -------- ---------------------------------------------------------------------------------- 1.* Form of Underwriting Agreement by and between the Company and Raymond James & Associates, Inc. 2.1* Agreement and Plan of Reorganization dated as of June 27, 1997 by and among Rock of Ages Quarries, Inc., to be known as Rock of Ages Corporation, KSGM, Inc., Royalty Granite Corporation and Missouri Red Quarries, Inc. 2.2* Stock Purchase Agreement dated as of June 27, 1997 by and among Rock of Ages Quarries, Inc., to be known as Rock of Ages Corporation, Robert Otis Childs, Jr., Robert Otis Childs, III and Timothy Carroll Childs 2.3* Asset Purchase Agreement dated as of July 30, 1997 by and among the Company, John E. Keith, Roy H. Keith, Jr., Glasgow Monument Co., Inc., Keith Lettering and Setting Corporation, Keith Monument Company, National Memorial Corporation, Riehm-gerlack Monument Co., and the Snyder Corporation. 2.4* Agreement and Plan of Merger and Reorganization dated as of August 13, 1997 by and among Rock of Ages Corporation, Swenson Granite Company, Inc., Kurt M. Swenson and Kevin C. Swenson 3.1* Form of Amended and Restated Certificate of Incorporation of the Company 3.2* By-laws of the Company 4.* Specimen Certificate representing the Class A Common Stock 5. Opinion of Skadden, Arps, Slate, Meagher & Flom LLP, special counsel to the Company, regarding the legality of the shares of Class A Common Stock 10.1* Rock of Ages Corporation Amended and Restated 1994 Stock Plan 10.2* Employment Agreement of Kurt M. Swenson 10.3* Employment Agreement of Paula Plante 10.4* Employment Agreement of Peter Friberg 10.5* Employment Agreement of Albert Gherardi, Jr. 10.6* Employment Agreement of Mark Gherardi 10.7* Form of Acquisition Employment Agreement with G. Thomas Oglesby, Jr., George T. Oglesby, III, Robert Otis Childs, III, John E. Keith and Roy H. Keith 10.8* Form of Officer Employment Agreement with each of Richard C. Kimball, George R. Andersen, Jon M. Gregory and Edward E. Haydon 10.9*+ Supply and Distribution Agreement dated as of June 27, 1997 by and among Keystone Granite Company, Inc., the Estate of George T. Oglesby, Sr., Rock of Ages Corporation and Missouri Red Quarries, Inc. 10.10*+ Supply and Distribution Agreement dated as of June 27, 1997 by and among Missouri Red Quarries, Inc., George T. Oglesby, Jr. and Rock of Ages Corporation. 10.11*+ Letter Agreement dated as of July 25, 1997 between Rock of Ages Corporation and Dakota Granite Company 10.12* Stock Subscription Agreement and Continuity of Interest Agreement dated June 27, 1997 between Rock of Ages Corporation and Missouri Red Quarries, Inc. 10.13* Stock Subscription Agreement dated as of July 30, 1997 between Rock of Ages Corporation and National Memorial Corporation 10.14* Stock Subscription Agreement dated as of June 27, 1997 between Rock of Ages Corporation and Robert Otis Childs, III
II-4 216
EXHIBIT NUMBER DESCRIPTION - -------- ---------------------------------------------------------------------------------- 10.15* Form of Salary Continuation Agreement 10.16* Salary Continuation Agreement dated January 3, 1996 between Rock of Ages Corporation and Mark Gherardi 10.17* Salary Continuation Agreement dated January 3, 1997 between Rock of Ages Corporation and Melvin Friberg 10.18* Form of Custody Agreement and Power of Attorney 10.19* Financing Agreement dated as of August 25, 1994 between the CIT Group/Business Credit, Inc. and Rock of Ages Corporation 10.20* Credit Facility dated as of June 25, 1997 between Royal Bank of Canada and Rock of Ages Canada Inc., Rock of Ages Quarries Inc. and Rock of Ages Canada Inc. 10.21* Commitment Letter dated as of September 14, 1997, between CIT Group/Business Credit, Inc. and Rock of Ages Corporation. 10.22* Letter Agreement dated as of September 19, 1997, by and among Rock of Ages Corporation, Richard Campbell, Robert Otis Childs, III, Timothy Carrol Childs. 11.* Statement re: computation of per share earnings 21. Subsidiaries of the Company 23.1 Consent of Skadden, Arps, Slate, Meagher & Flom LLP (included in Exhibit 5) 23.2 Consent of KPMG Peat Marwick LLP 23.3 Consent of KPMG Peat Marwick LLP 23.4 Consent of KPMG Peat Marwick LLP 23.5 Consent of KPMG Peat Marwick LLP 23.6 Consent of Greene and Company, L.L.P. 23.7 Consent of Greene and Company, L.L.P. 23.8 Consent of Greene and Company, L.L.P. 23.9 Consent of Greene and Company, L.L.P. 23.10* Consent of Frederick E. Webster 23.11* Consent of John E. Keith 23.12* Consent of James L. Fox 23.13* Consent of CA Rich Consultants, Inc. 24.* Power of Attorney (set forth on the signature page of this Registration Statement) 27.* Financial Data Schedule
- --------------- * Previously filed + Confidential treatment requested as to certain portions of this exhibit. Omitted portions have been filed separately with the Securities and Exchange Commission. (b) Financial Statement Schedules: Schedule II -- Valuation and Qualifying Accounts and Reserves......... S-1
All other schedules for which provision is made by the applicable accounting regulation of the Commission are not required under the related instructions or are inapplicable, and therefore have been omitted. ITEM 17. UNDERTAKINGS Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the Registrant pursuant to its Restated Articles of Incorporation, By-Laws, by agreement or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the II-5 217 successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. The Company hereby undertakes that: (1) For purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus filed as part of this Registration Statement in reliance on Rule 430A and contained in a form of prospectus filed by the Company pursuant to Rule 424(b)(1) or (4) or Rule 497(h) under the Securities Act shall be deemed to be part of the Registration Statement as of the time it was declared effective. (2) For the purpose of determining any liability under the Securities Act, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. (3) To provide to the Underwriters at the closing specified in the Underwriting Agreement, certificates in such denominations and registered in such names as required by the Underwriters to permit prompt delivery to each purchaser. II-6 218 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the Company certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form S-1 and has duly caused this Amendment No. 2 to the Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in Barre, Vermont on October 14, 1997. ROCK OF AGES CORPORATION By: /s/ KURT M. SWENSON ------------------------------------ Name: Kurt M. Swenson Title: President, Chief Executive Officer and Chairman of the Board of Directors Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities indicated on October 14, 1997.
SIGNATURE TITLE - ---------------------------------------- --------------------------------------------------- KURT M. SWENSON President, Chief Executive Officer and Chairman of - ---------------------------------------- the Board of Directors (Principal Executive Kurt M. Swenson Officer) * Senior Vice President, Chief Financial Officer, - ---------------------------------------- Treasurer and Director (Principal Financial George R. Anderson Officer) * Vice Chairman and President, Memorials Division, - ---------------------------------------- and Director Richard C. Kimball * President, Quarry Division and Director - ---------------------------------------- Jon M. Gregory * Senior Vice President, Barre and Canada - ---------------------------------------- Manufacturing Operations and Director Mark A. Gherardi President, Keystone Memorials, Inc. and Director - ---------------------------------------- G. Thomas Oglesby, Jr. * Senior Vice President -- Memorial Sales, Director - ---------------------------------------- Peter A. Friberg * Director - ---------------------------------------- Charles M. Waite *By: /s/ KURT M. SWENSON - ---------------------------------------- Kurt M. Swenson Attorney-in-fact
II-7 219 ROCK OF AGES CORPORATION SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS AND RESERVES (IN THOUSANDS)
COL. A COL. B COL. C COL. E COL. F - ------------------------------------------------------ ---------- ---------- ---------- ---------- BALANCE AT CHARGED TO BALANCE AT BEGINNING COSTS AND END OF DESCRIPTION OF PERIOD EXPENSES DEDUCTIONS PERIOD - ------------------------------------------------------ ---------- ---------- ---------- ---------- Year ended December 31, 1996 Allowances for possible losses on accounts receivable....................................... $446 $181 $ 63 $564 Year ended December 31, 1995 Allowances for possible losses on accounts receivable....................................... $464 $ 62 $ 80 $446 Year ended December 31, 1994 Allowances for possible losses on accounts receivable....................................... $378 $216 $130 $464
S-1 220 EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION - -------- ----------------------------------------------------------------------------------- 1.* Form of Underwriting Agreement by and between the Company and Raymond James & Associates, Inc. 2.1* Agreement of Merger and Plan of Reorganization dated as of June 27, 1997 by and among Rock of Ages Quarries, Inc., to be known as Rock of Ages Corporation, KSGM, Inc., Royalty Granite Corporation and Missouri Red Quarries, Inc. 2.2* Stock Purchase Agreement dated as of June 27, 1997 by and among Rock of Ages Quarries, Inc., to be known as Rock of Ages Corporation, Robert Otis Childs, Jr., Robert Otis Childs, III and Timothy Carroll Childs 2.3* Asset Purchase Agreement dated as of July 30, 1997 by and among the Company, John E. Keith, Roy H. Keith, Jr., Glasgow Monument Co., Inc., Keith Lettering and Setting Corporation, Keith Monument Company, National Memorial Corporation, Riehm-gerlack Monument Co., and the Snyder Corporation. 2.4* Agreement and Plan of Merger and Reorganization dated as of August 13, 1997 by and among Rock of Ages Corporation, Swenson Granite Company, Inc., Kurt M. Swenson and Kevin C. Swenson 3.1* Form of Amended and Restated Certificate of Incorporation of the Company 3.2* By-laws of the Company 4.* Specimen Certificate representing the Class A Common Stock 5. Opinion of Skadden, Arps, Slate, Meagher & Flom LLP, special counsel to the Company, regarding the legality of the shares of Class A Common Stock 10.1* Rock of Ages Corporation Amended and Restated 1994 Stock Plan 10.2* Employment Agreement of Kurt M. Swenson 10.3* Employment Agreement of Paula Plante 10.4* Employment Agreement of Peter Friberg 10.5* Employment Agreement of Albert Gherardi, Jr. 10.6* Employment Agreement of Mark Gherardi 10.7* Form of Acquisition Employment Agreement with G. Thomas Oglesby, Jr., George T. Oglesby, III, Robert Otis Childs, III, John E. Keith and Roy H. Keith 10.8* Form of Officer Employment Agreement with each of Richard C. Kimball, George R. Andersen, Jon M. Gregory and Edward E. Haydon 10.9*+ Supply and Distribution Agreement dated as of June 27, 1997 by and among Keystone Granite Company, Inc., the Estate of George T. Oglesby, Sr., Rock of Ages Corporation and Missouri Red Quarries, Inc. 10.10*+ Supply and Distribution Agreement dated as of June 27, 1997 by and among Missouri Red Quarries, Inc., George T. Oglesby, Jr. and Rock of Ages Corporation. 10.11*+ Letter Agreement dated as of July 25, 1997 between Rock of Ages Corporation and Dakota Granite Company 10.12* Stock Subscription Agreement and Continuity of Interest Agreement dated June 27, 1997 between Rock of Ages Corporation and Missouri Red Quarries, Inc. 10.13* Stock Subscription Agreement dated as of July 30, 1997 between Rock of Ages Corporation and National Memorial Corporation 10.14* Stock Subscription Agreement dated as of June 27, 1997 between Rock of Ages Corporation and Robert Otis Childs, III
221
EXHIBIT NUMBER DESCRIPTION - -------- ----------------------------------------------------------------------------------- 10.15* Form of Salary Continuation Agreement 10.16* Salary Continuation Agreement dated January 3, 1996 between Rock of Ages Corporation and Mark Gherardi 10.17* Salary Continuation Agreement dated January 3, 1997 between Rock of Ages Corporation and Melvin Friberg 10.18* Form of Custody Agreement and Power of Attorney 10.19* Financing Agreement dated as of August 25, 1994 between the CIT Group/Business Credit, Inc. and Rock of Ages Corporation 10.20* Credit Facility dated as of June 25, 1997 between Royal Bank of Canada and Rock of Ages Canada Inc., Rock of Ages Quarries Inc. and Rock of Ages Canada Inc. 10.21* Commitment Letter dated as of September 14, 1997, between CIT Group/Business Credit, Inc. and Rock of Ages Corporation. 10.22* Letter Agreement dated as of September 19, 1997, by and among Rock of Ages Corporation, Richard Campbell, Robert Otis Childs, III, Timothy Carrol Childs. 11.* Statement re: computation of per share earnings 21. Subsidiaries of the Company 23.1 Consent of Skadden, Arps, Slate, Meagher & Flom LLP (included in Exhibit 5) 23.2 Consent of KPMG Peat Marwick LLP 23.3 Consent of KPMG Peat Marwick LLP 23.4 Consent of KPMG Peat Marwick LLP 23.5 Consent of KPMG Peat Marwick LLP 23.6 Consent of Greene and Company, L.L.P. 23.7 Consent of Greene and Company, L.L.P. 23.8 Consent of Greene and Company, L.L.P. 23.9 Consent of Greene and Company, L.L.P. 23.10* Consent of Frederick E. Webster 23.11* Consent of John E. Keith 23.12* Consent of James L. Fox 23.13* Consent of CA Rich Consultants, Inc. 24.* Power of Attorney (set forth on the signature page of this Registration Statement) 27.* Financial Data Schedule
- --------------- * Previously filed + Confidential treatment requested as to certain portions of this exhibit. Omitted portions have been filed separately with the Securities and Exchange Commission. EX-5 2 OPINION OF SKADDEN, ARPS, SLATE , MEAGHER & FLOM 1 Exhibit 5 October 14, 1997 ROCK OF AGES CORPORATION 772 Graniteville Road Graniteville, Vermont 05654 Re: Rock of Ages Corporation Registration Statement on Form S-1 ---------------------------------- Ladies and Gentlemen: We have acted as special counsel to Rock of Ages Corporation, a Delaware corporation (the "Company"), in connection with the initial public offering by the Company of an aggregate of up to 3,059,518 shares (including 435,000 shares subject to an over-allotment option) (the "Company Shares") and the sale by certain stockholders of the Company (the "Selling Stockholders") of up to 275,482 shares (the "Selling Stockholder Shares" and together with the Company Shares, the "Shares") of the Company's common stock, par value $.01 per share (the "Common Stock"). This opinion is being furnished in accordance with the requirements of Item 601(b)(5) of Regulation S-K under the Securities Act of 1933, as amended (the "Securities Act"). In connection with this opinion, we have examined originals or copies, certified or otherwise identified to our satisfaction, of (i) the Registration Statement on Form S-1 (File No. 333-33685), relating to the Shares, as filed with the Securities and Exchange Commission (the "Commission") under the Securities Act on August 15, 1997, Amendment No. 1 thereto, filed with the Commission on September 24, 1997 and Amendment No.2 thereto, filed with the Securities and Exchange Commission on October 16, 1997 (such Registration Statement, as so amended, being hereinafter referred to as the 2 ROCK OF AGES CORPORATION October 14, 1997 Page 2 "Registration Statement"); (ii) the form of the Underwriting Agreement (the "Underwriting Agreement") proposed to be entered into among the Company, as issuer, the Selling Stockholders and Raymond, James & Associates, Inc. (the "Underwriter"), filed as an exhibit to the Registration Statement; (iii) the form of a specimen certificate representing the Shares; (iv) the Amended and Restated Certificate of Incorporation of the Company, as presently in effect; (v) the By-Laws of the Company, as presently in effect; and (vi) certain resolutions adopted by the Board of Directors of the Company and drafts of certain resolutions (the "Draft Resolutions") proposed to be adopted by the Offering Committee appointed by the Board of Directors of the Company (the "Offering Committee") in each case relating to the issuance and sale of the Shares and certain related matters. We have also examined originals and copies, certified or otherwise identified to our satisfaction, of such other documents, certificates and records as we have deemed necessary or appropriate as a basis for the opinions set forth herein. In our examination, we have assumed the legal capacity of all natural persons, the genuineness of all signatures, the authenticity of all documents submitted to us as originals, the conformity to original documents of all documents submitted to us as certified, conformed or photostatic copies, and the authenticity of the originals of such latter documents. In making our examination of documents executed or to be executed by parties other than the Company, we have assumed that such parties had or will have the power, corporate and other, to enter into and perform all obligations thereunder and have also assumed the due authorization by all requisite action, corporate and other, and execution and delivery by such parties of such documents and the validity and binding effect thereof on such parties. As to any facts material to the opinions expressed herein which we have not independently established or verified, we have relied upon oral or written statements and representations of officers and other representatives of the Company and others. 3 ROCK OF AGES CORPORATION October 14, 1997 Page 3 The opinions expressed herein are limited to the laws of the State of Delaware and to the federal laws of the United States of America to the extent specifically referred to herein. Based upon and subject to the foregoing, we are of the opinion that: 1. When (i) the Registration Statement becomes effective; (ii) the Draft Resolutions have been adopted by the Offering Committee; (iii) the Underwriting Agreement has been duly executed and delivered; and (v) certificates representing the Shares in the form of the specimen certificate examined by us have been duly executed by an authorized officer of the transfer agent and registrar for the Common Stock and registered by such transfer agent and registrar, and delivered to and paid for by the Underwriter as contemplated by the Underwriting Agreement, the issuance and sale of the Company Shares will have been duly authorized, validly issued, fully paid and nonassessable. 2. The Selling Stockholders Shares have been duly authorized and validly issued, and are fully paid and nonassessable. We hereby consent to the filing of this opinion with the Commission as an exhibit to the Registration Statement. We also consent to the reference to our firm under the caption "Legal Matters" in the Registration Statement. In giving such consent, we do not thereby admit that we are included in the category of persons whose consent is required under Section 7 of the Securities Act or the rules and regulations of the Commission promulgated thereunder. 4 ROCK OF AGES CORPORATION October 14, 1997 Page 4 This opinion is furnished by us, as your special counsel, in connection with the filing of the Registration Statement and, except as provided in the immediately preceding paragraph, is not to be used, circulated, quoted or otherwise referred to for any other purpose or relied upon by any other person without our prior written permission. Very truly yours, /s/ Skadden, Arps, Slate, Meagher & Flom LLP EX-21 3 SUBSIDIARIES OF THE COMPANY 1 Exhibit 21
Subsidiaries of the Company State of Incorporation - --------------------------- ---------------------- Royalty Granite Corporation Georgia Rock of Ages International, Ltd. U.S. Virgin Islands Rock of Ages Canada Inc. Canada Associated Memorials, Inc. Vermont Kabushiki Kaisha Rock of Ages Asia Japan Southern Mausoleums, Inc. Georgia Autumn Rose Quarry, Inc. Georgia Caprice Blue Quarry, Inc. Georgia Pennsylvania Granite Corporation Pennsylvania Carolina Quarries, Inc., a subsidiary Georgia of Pennsylvania Granite Corporation Pama Corporation Vermont Rock of Ages Memorials LLC Delaware
EX-23.2 4 CONSENT OF KPMG PEAT MARWICK LLP 1 Exhibit 23.2 The Board of Directors, Rock of Ages Corporation: The audits referred to in our report dated March 24, 1997, except as to Note 13 which is as of August 12, 1997, included the related financial statement schedules as of December 31, 1996, and for each of the years in the three-year period ended December 31, 1996, included in the registration statement (or incorporated by reference in the registration statement). These financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statement schedules based on our audits. In our opinion, such financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly in all material respects the information set forth therein. We consent to the use of our reports included herein and to the reference to our firm under the heading "Experts" in the registration statement. /s/ KPMG Peat Marwick LLP ------------------------------ KPMG Peat Marwick LLP Burlington, VT October 13, 1997 EX-23.3 5 CONSENT OF KPMG PEAT MARWICK LLP 1 Exhibit 23.3 The Board of Directors, Keystone Memorials, Inc.: We consent to the use of our reports included herein and to the reference to our firm under the heading "Experts" in the registration statement. /s/ KPMG Peat Marwick LLP ------------------------------ KPMG Peat Marwick LLP Atlanta, GA October 13, 1997 EX-23.4 6 CONSENT OF KPMG PEAT MARWICK LLP 1 Exhibit 23.4 The Board of Directors, Childs & Childs Granite Company, Inc. and C&C Granite Company, Inc.: We consent to the use of our reports included herein and to the reference to our firm under the heading "Experts" in the registration statement. /s/ KPMG Peat Marwick LLP ------------------------------ KPMG Peat Marwick LLP Atlanta, GA October 13, 1997 EX-23.5 7 CONSENT OF KPMG PEAT MARWICK LLP 1 Exhibit 23.5 The Boards of Directors Keith Monument Companies: We consent to the use of our reports included herein and to the reference to our firm under the heading "Experts" in the prospectus. /s/ KPMG Peat Marwick LLP ------------------------------ KPMG Peat Marwick LLP Louisville, KY October 13, 1997 EX-23.6 8 CONSENT OF GREENE AND COMPANY, L.L.P. 1 Exhibit 23.6 INDEPENDENT AUDITORS' CONSENT The Board of Directors Southern Mausoleums, Inc. We consent to the use of our reports included herein and to the reference to our firm under the heading "Experts" in the registration statement - amendment #2. /s/ Greene and Company, L.L.P. ------------------------------------- Greene and Company, L.L.P. Anderson, South Carolina October 13, 1997 EX-23.7 9 CONSENT OF GREENE AND COMPANY, L.L.P. 1 Exhibit 23.7 INDEPENDENT AUDITORS' CONSENT The Board of Directors Autumn Rose Quarry, Inc. We consent to the use of our reports included herein and to the reference to our firm under the heading "Experts" in the registration statement - amendment #2. /s/ Greene and Company, L.L.P. ------------------------------------- Greene and Company, L.L.P. Anderson, South Carolina October 13, 1997 EX-23.8 10 CONSENT OF GREENE AND COMPANY, L.L.P. 1 Exhibit 23.8 INDEPENDENT AUDITORS' CONSENT The Board of Directors Caprice Blue Quarry, Inc. We consent to the use of our reports included herein and to the reference to our firm under the heading "Experts" in the registration statement - amendment #2. /s/ Greene and Company, L.L.P. ------------------------------------- Greene and Company, L.L.P. Anderson, South Carolina October 13, 1997 EX-23.9 11 CONSENT OF GREENE AND COMPANY, L.L.P. 1 ================================================================================ Exhibit 23.9 INDEPENDENT AUDITORS' CONSENT The Board of Directors Pennsylvania Granite Corporation We consent to the use of our reports included herein and to the reference to our firm under the heading "Experts" in the registration statement - amendment #2. /s/ Greene and Company, L.L.P. ------------------------------------- Greene and Company, L.L.P. Anderson, South Carolina October 13, 1997 -----END PRIVACY-ENHANCED MESSAGE-----