-----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, DwpSMIu/wng1oUE5l+MdrqOk8Fa0L/WTT2nCNOH02kTv9tXLbUTnNaWo5Ew/eRh9 H8DkoaWXiVppYv1GM+sG6w== 0001047469-99-012654.txt : 19990402 0001047469-99-012654.hdr.sgml : 19990402 ACCESSION NUMBER: 0001047469-99-012654 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990331 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ROCK OF AGES CORP CENTRAL INDEX KEY: 0000084581 STANDARD INDUSTRIAL CLASSIFICATION: CUT STONE & STONE PRODUCTS [3281] IRS NUMBER: 030153200 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 000-29464 FILM NUMBER: 99580173 BUSINESS ADDRESS: STREET 1: 369 NORTH STATE STREET CITY: CONCORD STATE: NH ZIP: 03301 BUSINESS PHONE: 6032258397 10-K405 1 FORM 10-K ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ------------------------ FORM 10-K (Mark One) |X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Fiscal Year Ended December 31, 1998. |_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Transition Period from __________ to __________. Commission File No. 000-29464 ROCK OF AGES CORPORATION (Exact name of registrant as specified in its charter) ------------------------ Delaware 030153200 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 772 Graniteville Road Graniteville, Vermont 05654 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (802) 476-3121 Securities registered pursuant to Section 12(b) of the Act: Name of each exchange Title of each class on which registered ------------------- ------------------- None Securities registered pursuant to Section 12(g) of the Act: Class A Common Stock, par value $0.01 (Title of Class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes |X| No |_| Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. |X| As of March 25, 1999, the aggregate market value of the registrant's voting stock (including Class B Common Stock, par value $.01 per share ("Class B Common Stock"), which is convertible on a share-for-share basis into Class A Common Stock, par value $.01 per share ("Class A Common Stock" and, together with Class B Common Stock, "Common Stock")), held by non-affiliates of the registrant was $53,638,597. As of March 25, 1999, there were outstanding 4,202,575 shares of Class A Common Stock and 3,426,705 shares of Class B Common Stock. ------------------------ ================================================================================ TABLE OF CONTENTS PAGE PART I ITEM 1. BUSINESS.............................................................1 ITEM 2. PROPERTIES...........................................................6 ITEM 3. LEGAL PROCEEDINGS...................................................10 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF THE SECURITY HOLDERS.............10 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.................................................10 ITEM 6. SELECTED FINANCIAL DATA.............................................12 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.................................13 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK..........17 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA..........................17 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE............................................17 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS....................................18 ITEM 11. EXECUTIVE COMPENSATION..............................................20 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT......23 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS .....................25 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.....25 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE..................................................26 SIGNATURES..........................................................57 PART I ITEM 1. BUSINESS General Rock of Ages Corporation ("Rock of Ages" or the "Company") was founded in 1885 and is an integrated granite quarrier, manufacturer and retailer whose principal product is granite memorials used primarily in cemeteries. The Company believes that it is the largest quarrier, manufacturer and retailer 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 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 retail basis through 73 owned retail sales outlets as of March 22, 1999 (57 as of December 31, 1998) in the states indicated in Item 2 below. The Company also sells memorials wholesale to approximately 2,100 independent memorial retailers in the United States and Canada, including approximately 495 independent authorized Rock of Ages retailers that, in addition to the Company's owned retail sales outlets, are the primary outlet for the Company's branded memorials. 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 Company actively promotes the brand name Rock of Ages and places a seal bearing the Rock of Ages name on its top of the line branded memorials which are warranted by a full perpetual warranty running both to the consumer and to the cemetery where it is located. The Company also supplies other brands and generic memorials. The Company estimates that 80% or more of all granite memorials manufactured in North America are made in one of four regions: Barre, Vermont; Beebe, Quebec; Elberton, Georgia, and an area encompassing Milbank, South Dakota, Cold Spring, Minnesota, and Wausau, Wisconsin known in the industry as the "Northwest". The Company has solidified its leading position in the granite memorial business primarily through acquisitions of quarries with high quality memorial grade granite and of major granite memorial manufacturers, principally in three of these four regions. In 1998, the Company continued its strategy to vertically integrate into the retail channel by acquiring 13 memorial retailers in 13 separate and independent transactions, thereby acquiring 43 retail sales outlets in the states of Iowa, Illinois, Ohio, Georgia, Minnesota, South Dakota, Nebraska, Pennsylvania and New Jersey (the "1998 Retail Acquisitions"). The Company paid a total aggregate purchase price in the 1998 Retail Acquisitions of approximately $17.8 million, comprised of $16.4 million in cash and assumed interest bearing debt and 90,537 shares of Class A Common Stock having an aggregate market value of $1.4 million as of the respective closings of these acquisitions. In November, 1998, the Company also acquired the Gardenia White quarry and related operating assets for approximately $4.6 million in cash; this quarry is located in North Carolina in proximity to the Company's Salisbury Pink quarry. The Company has operations in three business segments - Quarrying, Manufacturing and Retailing. Included within the business segments are operations that are unincorporated divisions of Rock of Ages and others that are separately incorporated subsidiaries. Financial information by business segment and geographic area is incorporated herein by reference to note 14 to the Consolidated Financial Statements of the Company. Additional information regarding each business segment and Rock of Ages in general is set forth below. Growth Strategy The Company seeks to expand the scope and profitability of its operations through a growth strategy that focuses on forward vertical integration into retailing, thereby enabling the Company to move closer to the ultimate customer. The principal elements of the growth strategy include the following: o Forward Vertical Integration into Retail. The Company anticipates that it will continue to acquire independent granite memorial retailers in selected markets in North America in order to develop an integrated network of owned Rock of Ages retailers, thereby capturing the higher margins that have historically existed at the retail level. 1 o Increased Shipments at Wholesale. The Company will seek to increase sales to independent retailers that are current or potential customers of the Company by focusing its efforts on building an integrated retail network consisting of owned and independent retail outlets. Since sales to owned retail outlets are intracompany sales and are therefore eliminated from manufacturing revenues, reported manufacturing revenues may decline over time even if shipments actually increase. o Brand Enhancement. The Company believes that the Rock of Ages brand is one of the best known brand names in the memorial industry. The Company anticipates that it will, as a part of building its integrated network of owned retailers, significantly increase promotion and advertising expenditures on the Rock of Ages brand and other proprietary brands sold at its owned retail outlets. o Pre-Need Selling Program. The Company intends to initiate an active pre-need selling program for granite memorials at its owned retail locations and to assist its independently owned Rock of Ages retailers in developing similar programs. Currently, the best estimate of the Company is that less than 10% of granite memorials are sold pre-need. o Strategic Alliances with Funeral Homes and Cemeteries. The Company anticipates that it will pursue strategic alliances with funeral home and cemetery owners, including consolidators, to sell granite memorials in cooperation with them, in order to increase both pre-need and at-need sales of granite memorials. o Selected Acquisitions of Quarriers and Manufacturers. While the Company owns or controls many of the highest quality memorial grade granite quarries in North America, the Company will continue to explore the possibility of acquiring selected memorial grade granite quarriers and manufacturers in North America and internationally to assure that it will continue to have the colors and grades of granites sought by retail purchasers of granite memorials in North America. o Other Product Line Enhancements. The Company intends to continue to expand and enhance its memorial product lines in color, design and style. The Company's objective is to provide a full range of memorials encompassing all price points. Recent Acquisitions In January 1999, the Company acquired, in separate and independent transactions, three memorial retailers located in Wisconsin, Illinois and Ohio, for a total aggregate purchase price of approximately $4.1 million, comprised of approximately $3.7 million in cash and 32,045 shares of Class A Common Stock having an aggregate market value of approximately $.4 million as of the respective closings of these acquisitions. Products The Company's principal products may be classified into three general product lines: granite quarry products, manufactured granite products and non-granite memorials. The principal raw material for both granite product lines is natural granite as it comes from the ground with the primary difference between the product lines being the extent of the processing or manufacturing of the granite. Granite Quarry Products. The principal quarry product sold by the Company is granite blocks, the raw material of the dimension granite industry. These blocks are extracted from quarries in various sizes through a drilling, blasting and wire sawing process in the quarry. The range of block sizes is large, but most manufacturers of granite memorials and other products generally require minimum dimensions of height, width and length to maximize the efficiency of their block sawing equipment in meeting the required dimensions of the finished product. Granite blocks are normally sold in heights from 2'6" to 5', widths of 3' to 5', and lengths from 7' to 10'. These blocks weigh from 20 to 30 tons. Granite differs from deposit to deposit by color, grade and/or quality. Rock of Ages owns, quarries and sells blocks of (i) gray granites from its Barre, Vermont, Elberton, Georgia, and Stanstead, Quebec quarries, (ii) black granite from its American Black quarry in Pennsylvania, (iii) pink granites from its Laurentian Pink quarry in Quebec and its Salisbury Pink quarry in North Carolina, (iv) white granite from its Bethel White quarry in Vermont and its Gardenia 2 White quarry in North Carolina, (v) brownish red granite from its Autumn Rose quarry in Oklahoma, and (vi) grayish pink granites from its Kershaw and Coral Gray quarries in South Carolina. The Company sells granite blocks for memorial, building and other uses. While each of the quarries owned by the Company sells granite for memorial use and for building use, the output of the Bethel White quarry, the Gardenia White quarry and the Salisbury Pink quarry are primarily sold and used for building granite use outside North America and the output of the other quarries is primarily used for memorial use in North America. The Company has an exclusive supply agreement with Eurimex, a societe anonyme of Luxembourg ("Eurimex"), whereby the Company appointed Eurimex as its exclusive distributor outside of North America, as specified in the agreement, of Salisbury Pink granite, for a term of six years. A similar exclusive supply agreement with Eurimex for Bethel White granite expired in accordance with its terms on December 31, 1998, and the Company and Eurimex did not reach an agreement on a renewal. The Company now distributes Bethel White, Gardenia White and other owned granites outside North America using its own sales personnel, commissioned agents, and stocking distributors. Granite blocks sold by the Company in North America are sold by a quarry sales force. The Company markets and advertises granite blocks in various trade publications and by attending various trade shows in North America. Outside of North America, the Company generally sells to the user or independent distributors who buy blocks from the Company and resell them. This includes Rock of Ages Asia, a 50% Company owned corporation. Other quarry products include waste pieces not of a shape or size suitable for manufacturing which are sold for rip rap for embankments, bridges or piers, and for other uses. In various quarries, the Company has arrangements with crusher operators who operate on or near the Company's quarries and sell crushed stone. The revenues and profits of these operations are not material. The Company has no marketing and advertising programs for these other quarry products. Manufactured Products. The principal manufactured product of Rock of Ages is granite memorials, which are sold to retailers of granite memorials, including Company owned outlets, and substantially all of which are placed in cemeteries in remembrance of the life of a person or persons. The memorials sold by the Company encompass a wide range of granites, including granite blocks purchased from others, as well as a wide range of sizes, styles, shapes and price points ranging from small, inexpensive markers set flush to the ground to very elaborate and expensive personal mausoleums of larger sizes. The broad classifications of granite memorials used by the industry are generally markers, hickeys, slants, standard uprights, estate uprights, pre-assembled mausoleums and conventional mausoleums. From time to time memorial retailers or others order granite products such as benches, steps and other products that may or may not be for cemetery use. These are classified by the Company as memorial sales. The Company is widely recognized for the personalized granite memorials it produces and the very large memorials it can produce. It has made memorials as large as thirty-five feet in length from one block of granite, including a full size granite replica of a Mercedes Benz automobile. The Company's granite memorials are sold to retailers by the Company's memorial sales force which regularly speaks with customers by phone and makes personal visits to customers. The Company provides various point of sale materials to its authorized Rock of Ages dealers. The Company also advertises in various trade publications. The Company also manufactures certain precision granite products, which are made along with memorials at one of the Company's Barre, Vermont plants. These products include surface plates, machine bases, coordinate measuring devices, and other products manufactured to exacting dimensions. These products are sold to the manufacturers of precision measuring devices or end users. Precision products are sold by a precision products sales force which phones or visits customers. The Company does little or no advertising of its precision products. Retail Products. The Company's retail division markets and sells granite, bronze and marble memorials primarily to consumers. The Company currently operates 73 retail outlets in 12 states. The granite memorials sold at retail also vary widely and are of the same types as those manufactured by the Company. The Company's retail operations utilize a retail sales force which markets and sells memorials through phone calls and direct meetings with customers in their homes and at retail sales offices. The Company advertises and promotes retail sales through direct mail material, yellow page listings and newspaper advertising. The Company's retail sales outlets are positioned to sell branded and unbranded memorials at all price points and qualities. 3 Manufacturing and Raw Materials The Company quarries and manufactures granite in the United States and Canada at the locations detailed in Item 2 - "Properties." The Company is continuing to consolidate its manufacturing operations in Elberton, Georgia acquired in the latter part of 1997 with a view to improving their profitability. In 1998, the Company acquired new equipment for certain of its quarries and plants. There were no plants acquired or material additions to plants in 1998. Management believes that the Company's manufacturing and quarrying capacity is generally sufficient to meet anticipated production requirements for the foreseeable future. However, the demand by manufacturers of granite outside the Company for granite from the Company's Pennsylvania Black and Salisbury Pink quarries has historically exceeded supply. While the Company has invested in equipment for these quarries and increased output, the extent of the actual demand beyond current output levels cannot be determined by the Company at this time, and, accordingly the Company cannot predict whether it will be able to meet future demand for granite from these quarries. The most significant raw material used by the Company in its manufacturing operations is granite blocks primarily from the Company's quarries. The Company has an adequate supply from its quarries to supply its manufacturing operations. The Company also purchases certain colors of granite, primarily red and black, from other quarriers. The Company believes there is an adequate supply of memorial granite available from its quarries and quarries owned by others for the foreseeable future. Other significant raw materials used by the Company include industrial diamond segments for saw blades and wires, drill steel, drill bits and abrasives. There are a number of sources for these raw materials at competitive prices. The Company had manufacturing backlogs of $16,152,000 as of December 31, 1998 and $15,322,000 as of December 31, 1997. These backlogs occurred in the normal course of business. The Company does not have a material backlog in its quarrying operations. The Company had retail backlogs evidenced by purchase orders of $7,009,000 as of December 31, 1998 and no material retail backlogs as of December 31, 1997. The Company does not normally maintain a significant inventory of finished manufactured products in anticipation of future orders in its manufacturing operations. The Company does maintain a significant inventory of memorials for display and delivery purposes at its retail operations. Approximately 75% of the Company's manufactured product orders and retail orders are delivered within two to twelve weeks, as is customary in the granite memorial industry. The delivery time depends on the size and complexity of the memorial. The Company does accumulate inventory of granite blocks from September through December in preparation for the winter months when its northern quarries are inactive. Because the Company's Barre quarries are closed from mid-December through mid-March, in December each year the Company provides special 90 day payment terms at these quarries for all blocks purchased in the month of December. Customers' manufacturing plants generally remain open during most of this period, and most customers prefer to assure they own blocks of a size and quality selected by them prior to the closure. All blocks purchased from the Company's Barre quarries in December on deferred payment terms are invoiced on or about December 31 and removed from the Company's inventory with title passing to the buyer. Payment terms are one-third of the invoice amount on January 15, one-third on February 15, and one-third on March 15. This program provides essentially the normal 30 day payment terms during the months when the Barre quarries are closed, notwithstanding the customer's purchase of a three month supply in December. Customers need not use these terms and may buy from inventory during the closure period on a first come first served basis with normal 30 day terms. The Company has a Supply and Distribution Agreement with Missouri Red Quarries, Inc. ("Missouri Red"), the owner of Keystone immediately prior to its acquisition by the Company in 1997, 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 granite 4 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. In 1998, a supply agreement with Dakota Granite Company ("Dakota Granite") was terminated by the Company in accordance with its terms, but Dakota Granite and the Company continue to supply each other with various products without a formal written agreement. Research and Development The Company does not have a research and development department for any of its products. The Company regularly conducts market research, as well as research on new product designs and on equipment to improve the Company's technology. These activities are not separately accounted for as research, and the Company had no expenditures classified for financial reporting purposes as research in 1996, 1997 or 1998. 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 that 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 also manufacture and export finished granite memorials into North America. The competition for retail sales of granite memorials faced by the Company's retail outlets is also intense and is based on price, quality, service, design availability and breadth of product line. Competitors include funeral home and cemetery owners, including consolidators, which have greater financial resources than the Company, as well as approximately 3,000 independent retailers of granite memorials located outside of cemeteries and funeral homes. 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 1913. The Company believes the loss of a single patent, trademark or copyright, other than the "Rock of Ages" trademark, would not have a material adverse effect on the Company's business, financial condition or results of operations. Employees As of December 31, 1998, the Company had approximately 985 employees. Seasonality 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. See Item 7. "Management's Discussion and Analysis of Financial Conditions and Results of Operations - Seasonality." 5 Regulation and Environmental Compliance 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 environment, including but not limited to those relating to air and water quality, and solid and hazardous waste handling and disposal. These laws and regulations may require parties to fund remedial action or to pay damages regardless of fault. Environmental laws and regulations may also impose liability with respect to divested or terminated operations even if the operations were divested or terminated many years ago. In addition, current and future environmental or occupational health and safety laws, regulations or regulatory interpretations may require significant expenditures for compliance which could require the Company to modify its operations. The Company cannot predict the effect of such laws, regulations or regulatory interpretations on its business, financial condition or results of operations. The Company expects to be able to continue to comply, in all material respects, with existing laws and regulations. Forward-Looking Statements Certain statements in this Annual Report on Form 10-K, and other oral and written statements made by the Company from time to time, are "forward-looking statements" within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, including those that discuss strategies, goals, outlook or other non-historical matters, or projected revenues, income, returns or other financial measures. These forward-looking statements are subject to numerous risks and uncertainties that may cause actual results to differ materially from those contained in such statements. Among the most important of these risks and uncertainties is the ability of the Company to continue to identify suitable retail acquisition candidates, to consummate additional retail acquisitions on acceptable terms and to successfully integrate the operations of such acquired entities. Other factors and assumptions that could generally cause the Company's actual results to differ materially from those included in the forward-looking statements made herein include, without limitation, the effects of general economic conditions in the United States or abroad, changes in competitive market conditions, changes in the Company's business strategy or an inability of the Company to implement its growth strategy due to unanticipated changes in general economic conditions, competitive market conditions or other factors, and the sufficiency of the Company's production capacity to meet future demand for its products. Other factors and assumptions not identified above were also involved in the derivation of the forward-looking statements contained in this Annual Report on Form 10-K, and the failure of such other assumptions to be realized, as well as other factors, may also cause actual results to differ materially from those projected. The Company assumes no obligation to update these forward-looking statements to reflect actual results or changes in factors or assumptions affecting such forward-looking statements. ITEM 2. PROPERTIES The Company owns the following quarry and manufacturing properties:
Property Function - -------- -------- Vermont Barre Quarry Properties E. L. Smith Quarry Quarrying of dimensional Barre Gray granite blocks Adam-Pirie Quarry Quarrying of dimensional Barre Gray granite blocks Manufacturing Properties Associated Saw Plant Finished product storage Rock of Ages Manufacturing Plant Manufacturing of memorials Press Roll Production Plant Manufacturing of granite press rolls
6 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 Quarrying of dimensional Royalty Blue and Berkeley Blue granite Royalty/Berkeley Quarries blocks Oglethorpe County Caprice Quarry Quarrying of dimensional Caprice Blue blocks Millstone Quarry Quarrying of dimensional Millstone Gray Elberton Manufacturing Properties 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 Rockwell Quarry Properties Gardenia White Quarry Quarrying of dimensional Gardenia White granite blocks Oklahoma Mill Creek Quarry Properties Autumn Rose Quarry Quarrying of dimensional Autumn Rose granite blocks
7 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, the Company owns 73 retail sales outlets and 15 associated sand blasting facilities in the states of Georgia, Iowa, Illinois, Minnesota, Nebraska, New Jersey, Pennsylvania, Ohio, South Dakota, Kentucky, Wisconsin and Missouri. In certain cases, the Company leases under customary lease arrangements the land or other real estate associated with these outlets and facilities. 8 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 39 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.
Approximate Date Total Net Saleable Net Saleable of Means Original Cost Recoverable Recoverable Commencement Prior Owner 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. (1948) Paved $ 7,562,676 2,460,000,000 4,920 road Adam-Pirie 1880 J.K. Pirie Quarry (1955) Paved $ 4,211,363 985,000,000 6,560 road Bethel 1900 Woodbury Granite Company, Dirt $ 174,024 76,665,000 383 Inc. (1957) road Royalty/Berkeley 1923 Coggins Granite (1991) Paved $ 2,794,500 6,695,000 67 road Millstone 1985 Coggins Granite (1991) Paved $ 1,195,900 5,663,000 56 road Caprice 1968 Caprice Blue Quarry Paved $ 0 No estimate No estimate Inc.(1997) road Stanstead 1920 Brodies Limited and Stanstead Paved $ 505,453 32,670,000 217 Granite Company (1960) road Laurentian Pink 1944 Brodies Limited (1960) Paved $ 860,115 3,920,000 52 road American Black 1973 Pennsylvania Granite Inc. Paved $ 2,900,000 14,701,000 98 (1997) road Salisbury 1918 Pennsylvania Granite Inc. Paved $ 3,886,592 19,602,000 87 (1997) road Autumn Rose 1969 Autumn Rose Quarry Inc. Paved $ 200,000 735,000 21 (1997) road Kershaw 1955 Pennsylvania Granite Inc. Paved $ 200,000 635,000 22 (1997) road Coral Gray 1955 Pennsylvania Granite Inc. Paved $ 200,000 No estimate No estimate (1997) road Gardenia White 1995 J. Greg Faith Dirt $ 4,633,000 2,650,000 37 Thomas E. Ebans, Sr. road David S. Hooker William L. Comolli (1998)
- ---------- (1) Net saleable reserves are based on internal Company estimates, except for the reserves for the E.L. Smith, Adam-Pirie and Bethel quarries, which are based on independent assessments by CA Rich Consultants, Inc., and for the Gardenia White quarry, which are based on an independent assessment by Geomapping Associates. (2) Based on internal Company estimates using current production levels. 9 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 believes it has adequate acreage for expansions as and when necessary. 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 such as color of 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. ITEM 3. LEGAL PROCEEDINGS 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. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of the Company's security holders, through the solicitation of proxies or otherwise, during the fourth quarter of the fiscal year covered by this Annual Report on Form 10-K. PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Class A Common Stock is traded on the Nasdaq(R) National Market under the symbol "ROAC." There is currently no established public trading market for the Class B Common Stock. The Class A Common Stock commenced public trading on October 21, 1997. The table below sets forth the quarterly high and low sales quotations for the Class A Common Stock for each full quarterly period during the Company's 1998 fiscal year, compiled from information supplied by Nasdaq(R). All prices represent inter dealer quotations without retail mark ups, mark downs or commissions, and may not necessarily represent actual transactions. High Low ---- --- First Quarter . . . . . . . . . . . . . . 18 1/4 14 1/4 Second Quarter. . . . . . . . . . . . . . 18 1/4 15 1/8 Third Quarter . . . . . . . . . . . . . . 16 1/2 9 1/8 Fourth Quarter . . . . . . . . . . . . . . 16 10 As of March 25, 1999, based upon information provided by the Company's transfer agent, there were 165 record holders of Class A Common Stock and 34 record holders of Class B Common Stock, which numbers do not include stockholders who beneficially own shares held in street name by brokers. The Company has not declared or paid, and 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, capital requirements, contractual restrictions and such other factors as the Board of Directors deems relevant. 10 Recent Sales of Unregistered Securities During fiscal 1998, in connection with the 1998 Retail Acquisitions, the Company issued and sold to the respective individual owners of the acquired retailers (the "Acquired Retail Owners"), as partial consideration for such acquisitions, a total of 90,537 shares of Class A Common Stock (the "1998 Acquisition Shares"). The respective issuances and sales of the 1998 Acquisition Shares were not registered under the Securities Act of 1933, as amended (the "Securities Act"), in reliance on the exemption provided by Section 4(2) thereof as transactions by an issuer not involving any public offering, in that (i) the 1998 Acquisition Shares were issued and sold to the respective Acquired Retail Owners who, at the respective times of entering into the respective agreements providing for the respective 1998 Retail Acquisitions, represented to the Company that they were "accredited investors" as such term is defined in the Securities Act and that they were acquiring the respective 1998 Acquisition Shares solely for investment for their own account and not with a view toward the resale or distribution thereof, (ii) at such respective times the Company provided written disclosure to the respective Acquired Retail Owners stating, and the respective Acquired Retail Owners acknowledged, that the respective 1998 Acquisition Shares were not registered under the Securities 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 respective 1998 Acquisition Shares and (iv) the Company did not engage in any general solicitation or advertising in connection with entering into the respective agreements providing for the 1998 Retail Acquisitions or the issuance and sale of the respective 1998 Acquisition Shares. 11 ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA The selected consolidated historical financial data presented below under the captions "Statement of Operations Data" and "Balance Sheet Data" for and as of the end of each of the years in the five-year period ended December 31, 1998 are derived from the consolidated financial statements of the Company, which financial statements have been audited by KPMG LLP, independent certified public accountants ("KPMG"). The following selected consolidated financial data should be read in conjunction with Item 7 - "Management's Discussion and Analysis of Financial Condition and Results of Operations," and the Consolidated Financial Statements of the Company, including the notes thereto, referred to in Item 8.
Year Ended December 31, 1994 1995 1996 1997 1998 ---- ---- ---- ---- ---- Statement of Operations Data: (U.S. $ in thousands, except per share data) Net revenues: Quarrying $16,889 $15,295 $12,083 $14,090 $19,225 Manufacturing 17,299 17,793 32,586 38,336 44,294 Retailing 1,781 18,597 Total net revenues 34,188 33,088 44,669 54,207 82,746 Gross Profit: Quarrying 6,044 6,104 5,158 5,606 8,780 Manufacturing 4,050 4,345 8,248 9,302 10,842 Retailing 1,198 10,799 Total gross profit 10,094 10,449 13,406 16,106 30,421 Selling, general and administrative expenses 6,049 6,453 9,131 11,036 20,371 Income from operations 4,045 3,996 4,275 5,070 10,050 Interest expense 1,653 1,678 1,723 1,576 511 Other expenses 564 Income before provision for income taxes 2,392 1,754 2,552 3,494 9,539 Provision for income taxes 577 358 643 849 2,303 Net income $ 1,815 $ 1,396 $ 1,909 $ 2,645 $ 7,236 ======= ======= ======= ======= ======= Net income per share $ 0.52 $ 0.40 $ 0.55 $ 0.62 $ 0.98 Net income per share assuming dilution $ 0.46 $ 0.35 $ 0.45 $ 0.53 $ 0.91 Weighted average number of shares outstanding 3,500 3,500 3,500 4,290 7,349 Weighted average number of shares outstanding assuming dilution 3,908 4,027 4,208 4,997 7,984 As of December 31, 1994 1995 1996 1997 1998 ---- ---- ---- ---- ---- Balance Sheet Data: Cash and cash equivalents $ 394 $ 1,995 $ 763 $ 8,637 $ 4,701 Working capital 13,668 13,691 13,286 28,737 26,520 Total assets 42,529 48,101 47,995 93,137 121,893 Long-term debt, net of current maturities 16,655 14,657 13,054 975 12,880 Stockholders equity 10,686 15,479 17,371 77,844 85,837
12 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS General Rock of Ages is an integrated quarrier, manufacturer, distributor and retailer of granite and products manufactured from granite. The quarry division sells granite blocks 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 retail division primarily sells granite memorials directly to consumers. In June 1997, the Company acquired the successor to Keystone Memorials, Inc. ("Keystone") and in October 1997, acquired Childs & Childs Granite Company Inc. ("C&C"), both granite memorial manufacturers in Elberton, Georgia. In connection with the Keystone and C&C acquisitions, the Company also acquired Southern Mausoleums, Inc., (collectively referred to as the "Acquired Manufacturing Operations"). Also in connection with the Keystone and C&C acquisitions, the Company acquired three granite quarrying companies operating quarries located in Georgia, Pennsylvania, North Carolina, South Carolina and Oklahoma. In November 1998, the Company acquired another quarry company in North Carolina which produces a white granite that will be a companion stone for the Bethel White Quarry. These quarry companies are referred to as the "Acquired Quarrying Operations". In October 1997, the Company acquired the Keith Monument Company and related companies that are engaged in the retail sales of granite memorials to consumers in the State of Kentucky. In addition, during the year ended December 31, 1998, the Company made thirteen more acquisitions of retail monument companies, thereby expanding its retail presence to locations in Georgia, Iowa, Illinois, Minnesota, Nebraska, New Jersey, Pennsylvania, Ohio and South Dakota. The aforementioned retailers acquired in 1997 and 1998 are collectively referred to as the "Acquired Retailing Operations". The Company records revenues from quarrying, manufacturing and retailing. The granite quarried by the Company is sold both to outside customers and used by the Company's manufacturing division. The Company records revenue and gross profit related to the sale of granite sold to an outside customer either when the granite is shipped or when the customer selects and identifies the blocks at the quarry site. 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. Manufacturing revenues related to outside customers are recorded when the finished product is shipped from Company facilities. Manufacturing revenues related to internally transferred finished products are recorded when ultimately sold at retail to an outside customer. Retailing revenues are recorded when the finished monument is placed in the cemetery. 13 The following table sets forth certain historical statement of operations data as a percentage of net revenues with the exception of quarrying, manufacturing and retailing gross profit, which are shown as a percentage of quarrying, manufacturing and retailing revenues respectively. Year Ended December 31, 1996 1997 1998 ---- ---- ---- Statement of Operations Data: Net Revenues: Quarrying 27.1% 26.0% 23.2% Manufacturing 72.9% 70.7% 54.3% Retailing 0.0% 3.3% 22.5% Total net revenues 100.0% 100.0% 100.0% Gross Profit: Quarrying 42.7% 39.8% 45.7% Manufacturing 25.3% 24.3% 24.1% Retailing 0.0% 67.3% 58.1% Total gross profit 30.0% 29.7% 36.7% Selling, general & administrative expenses 20.4% 20.3% 24.6% Income from operations 9.6% 9.4% 12.1% Interest expense 3.9% 2.9% 0.6% Income before provision for income taxes 5.7% 6.5% 11.5% Provision for income taxes 1.4% 1.6% 2.8% Net income 4.3% 4.9% 8.7% ==== ==== ==== Year Ended December 31, 1998 Compared to Year Ended December 31, 1997. Revenues for the fiscal year ended December 31, 1998 increased 52.6% to $82.7 million from $54.2 million for the year ended December 31, 1997. Quarrying revenues increased $5.1 million, of which $.7 million was from existing quarry operations and the remaining $4.4 million from Acquired Quarrying Operations, primarily due to strong exports from the Salisbury quarry. Manufacturing revenues increased $6.6 million primarily from the Acquired Manufacturing Operations. Monument manufacturing revenue increases of $1.0 million from existing operations were more than offset by a reduction of $2.7 million in precision products revenues. The Company's Acquired Retailing Operations accounted for the entire increase of $16.8 million in revenues for the retailing segment. Gross profit for the fiscal year ended December 31, 1998 increased 88.9% to $30.4 million from $16.1 million for the fiscal year ended December 31, 1997. Quarrying gross profit from existing operations increased $1.2 million reflecting increased productivity at all major quarry locations. The Company's Acquired Quarrying Operations reported an increase in gross profit of $2.0 million for a total increase of $3.2 million from quarrying operations. The quarrying gross profit percentage increased to 45.7% in 1998 from 39.8% in 1997. Manufacturing gross profit increased $1.5 million, which was attributable to the Acquired Manufacturing Operations. Monumental manufacturing gross profit increases of $2.2 million were offset by reductions in precision products gross profit of $.7 million. The manufacturing gross profit percentage decreased from 24.3% in 1997 to 24.1% in 1998 due to a decrease in sales of higher margin precision products. The Company's Acquired Retailing Operations accounted for all of the 1998 gross profit of $10.8 million as prior to the Keith Monument acquisition in October 1997 the Company had no retailing presence. The gross profit percentage for these operations decreased to 58.1% in 1998 from 67.3% in 1997 principally because 1997 results for these operations reflected the Company's highest margin sales (by Keith Monument) and only for a partial year which did not include the low seasonal first quarter. Selling, general and administrative expenses for 1998 increased 84.6% to $20.4 million from $11.0 million in 1997. Acquired operations accounted for all of this increase as the existing operations reported a reduction in selling, general and administrative expenses of $.6 million. As a percentage of net sales, these expenses for 1998 increased to 24.6% from 20.3% in 1997. This increase is attributable to the introduction of retailing activities, which have a higher 14 level of selling, general and administrative expenses, and the Company's investment in people in anticipation of continued growth. Interest expense for the fiscal year ended December 31, 1998 decreased to $.5 million from $1.6 million for the fiscal year ended December 31, 1997. This decrease is the result of the reduction of debt levels from the net proceeds of the IPO. Debt levels did increase during the final two quarters of 1998 due to the implementation of the retail acquisition strategy. Income taxes as a percent of earnings before taxes decreased from 24.3% in 1997 to 24.1% in 1998. The Company's taxable income exceeded alternative minimum tax ("AMT") levels in 1998; however, available AMT credits resulted in the Company's effective tax rate remaining at historical levels. Year Ended December 31, 1997 Compared to Year Ended December 31, 1996. Revenues for the fiscal year ended December 31, 1997 increased 21.4% to $54.2 million from $44.7 million for the year ended December 31, 1996. Quarrying revenues increased $2.0 million, of which $1.3 million was from existing quarry operations due to stronger monumental markets and increased exports to Japan. The remaining $671,000 increase was generated by acquired quarrying operations. Manufacturing revenues increased $5.7 million primarily from the acquired manufacturing operations in Elberton, Georgia, with existing operations showing a modest increase of $285,000. The Company's retail operations, consisting of Keith Monument, which was acquired in October 1997, accounted for $1.8 million in revenues. Gross profit for 1997 increased 20.1% to $16.1 million from $13.4 million in 1996. Quarrying gross profit increased $357,000 from existing operations and $91,000 from acquired operations for a total of $448,000. The quarry gross margin percentage fell from 42.7% in 1996 to 39.8% in 1997. This was the result of increased sales volumes from lower margin products. In addition, the acquired quarry operations reported a gross profit percentage of 13.6% for 1997. The acquired operations were included for the months of November and December that are normally periods of reduced operating margins. Manufacturing gross profit increased by $1.1 million from 1996, resulting from an increase of $386,000 from existing operations due to improved product mix plus efficiencies achieved by consolidating manufacturing operations, and an increase of $668,000 from acquired operations. The manufacturing gross profit percentage decreased from 25.3% in 1996 to 24.3% in 1997. This decrease was the result of a lower gross profit percentage from acquired operations, which offset increases at existing operations. Price increases and work force adjustments have been implemented in 1998 to improve operating margins at the acquired operations. Retailing gross profit was $1.2 million for 1997. Prior to October 1997, the Company had no retailing presence. The gross profit percentage for this segment was 67.3%. Selling, general and administrative expenses for 1997 increased 20.9% to $11.0 million from $9.1 million in 1996. Existing operations accounted for $371,000 of the increase consisting of charges for previously deferred organization and financing costs and settlement of a legal action, and an increase to the provision for doubtful accounts. Acquired operations resulted in an increase of another $1.5 million. As a percentage of net sales, selling, general and administrative expenses for 1997 decreased to 20.3% from 20.4% in 1996. Interest expense for 1997 decreased 8.5% to $1.6 million from $1.7 million in 1996, as a result of the retirement of all existing bank debt, with the exception of a revolving line of credit with the Royal Bank of Canada, from the net proceeds of the IPO in October 1997. Income taxes as a percent of earnings before taxes decreased from 25.2% in 1996 to 24.3% in 1997. The Company continues to be in an AMT position for Federal income tax purposes. The decrease in the effective rate resulted from Canadian income being applied against a tax-loss carry back. Liquidity and Capital Resources Liquidity. The Company considers its liquidity to be adequate 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 acquisitions have increased its 15 requirements for external sources of liquidity, and the Company anticipates that this trend will continue as it further implements its growth strategy. Year Ended December 31, 1998. For 1998, net cash provided by operating activities was $3.7 million. This result was primarily attributable to net income of $7.2 million and depreciation, depletion and amortization of $3.3 million, reduced by an increase in inventories of $4.0 million. Net cash used in investing activities was $23.9 million primarily for net acquisitions of $20.5 million and the purchase of property, plant and equipment of $3.5 million. Net cash provided by financing activities was $16.5 million. This result was primarily attributable to proceeds from long-term debt of $12.0 million and net borrowings under lines of credit of $5.4 million. Capital Resources. The Company has a credit facility with the CIT Group/Business Credit. The facility consists of an acquisition term loan line of credit of up to $25.0 million and a revolving credit facility of up to another $25.0 million based on eligible accounts receivable and inventory. As of December 31, 1998, the Company had $12.0 million outstanding and $13.0 million available under the term loan line of credit and $6.4 million outstanding and $6.8 million available under the revolving credit facility. The interest rate under the revolving credit facility as of such date was 7.25% based on a formula of prime less .50%. The interest rate under the term loan as of such date was 6.97% based on a formula of LIBOR plus 1.75%. As of December 31, 1998, the Company also had $.3 million outstanding and $2.0 million available under a demand revolving line of credit with the Royal Bank of Canada. The interest rate on this facility as of such date was 7.50% 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 approximately $3.0 million budgeted for capital expenditures in 1999. The Company believes that the combination of cash flow from operations and its existing credit facilities will be sufficient to fund its operations for at least the next twelve months. 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. In addition, the Company typically closes certain of its Vermont and Canadian quarries during these months because of increased operating costs attributable to adverse weather conditions. As a result, the Company has historically incurred a net loss during the first three months of each calendar year. 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. Year 2000 The Company has developed a plan to address the Year 2000 issue and is currently in the process of implementing that plan. Scope of Readiness. A large part of the Company's legacy IT systems would require substantial resources to become Year 2000 compliant. Instead of remediating those core systems, the Company decided to replace those systems with a purchased package that is Year 2000 compliant in addition to software written in house that is also Year 2000 compliant. This decision was based on Year 2000 compliance requirements as well as the need to upgrade the software to meet current and future business requirements. Installation of the purchased software was complete in 1998 and implementation of those systems is expected to be complete by mid-1999. In house programming and the installation and implementation of purchased software packages is being performed by three information technology employees as well as two external programmer/analysts. Other IT infrastructure equipment is generally Year 2000 compliant, however, some hardware systems will be replaced by year end 1999. Support software is being evaluated by in-house personnel and will be remediated or replaced by mid-1999. Non-IT systems (HVAC systems, machine controls, and other similar systems) have been evaluated and are not materially affected by the Year 2000 compliance issue. Suppliers to the Company have been evaluated and management believes that critical suppliers do not have any Year 2000 compliance issues. The Company believes that products sourced from a non-critical supplier facing a Year 2000 compliance issue could be sourced elsewhere. 16 Products manufactured by the Company do not utilize programmable logic to function and are not affected by Year 2000 compliance issues. Costs to Address Year 2000 Issues. Expenditures for Year 2000 remediation are not separable from the costs of software and hardware associated with the normal course of business. Year 2000 remediation costs are not expected to be material to the Company's financial position. Risk of Year 2000 Issues. The timing of a Year 2000 related disruption would coincide with a seasonal low in the Company's business cycle and thus have less impact on the business than it otherwise would during other parts of the cycle. The Company estimates the most likely worst case Year 2000 scenarios as follows: 1. A portion of non-core IT systems experience temporary disruption. Such disruption is not expected to have a material impact on the Company's ability to function. 2. A portion of the manufacturing operations experience temporary disruption. Such disruption is not expected to have a material impact on the Company's ability to function. 3. A portion of the supplier base experiences disruption. Such disruption is not expected to have a material impact on the Company's ability to function. Contingency Plans. Although the Company has not yet developed a contingency plan for each of the scenarios above, the Company would respond to those scenarios as follows: 1. A contingency plan will be developed if the perceived risk increases. 2. It is expected that normal safety block levels would cover such a scenario. Appropriate levels will be determined by business conditions and perceived risk. 3. The Company would source materials from alternative suppliers. New Accounting Pronouncements SOP 98-5, Reporting on the costs of start-up activities, will be effective for periods beginning after December 15, 1998. Implementation of the SOP will result in the remaining net book value of organization costs of $220,513 at December 31, 1998 being expensed on January 1, 1999. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company has financial instruments that are subject to interest rate risk, principally debt obligations under its credit facilities. Historically, the Company has not experienced material gains or losses due to interest rate changes. Based on the Company's current variable rate debt obligations, the Company believes its exposure to interest rate risk is not material. The Company is subject to foreign currency exchange rate risk primarily from the operations of its Canadian subsidiary. Based on the size of this subsidiary and the Company's corresponding exposure to changes in the Canadian/U.S. dollar exchange rate, the Company does not consider its market exposure relating to currency exchange to be material. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA The information required for this item is included in this Annual Report on Form 10-K on Pages 26 through 56, inclusive, and is incorporated herein by reference. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE The Company believes, and it has been advised by KPMG that KPMG concurs with the Company's belief that during the period of its engagement, the Company and KPMG did not have any disagreement on any matter of accounting principles or practices, financial statement disclosure or auditing scope or procedures, which disagreement, if not resolved to the satisfaction of KPMG, would have caused it to make reference in connection with its report on the Company's financial statements to the subject matter of the disagreement. 17 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS Certain information concerning directors and executive officers of the Company is set forth below: Names of Directors and Executive Officers(1) Age Positions with the Company - -------------------------------- --- --------------------------------------- George R. Anderson (2) 59 Senior Vice President, Director John L. Forney (3) 36 Chief Financial Officer, Treasurer James L. Fox 47 Director Mark A. Gherardi 40 Senior Vice President/ Manufacturing/Memorials Division Jon M. Gregory 49 President and Chief Operating Officer/Quarries Division, Director John E. Keith 51 President/Memorials Division Richard C. Kimball 58 Chief Operating Officer/Memorials Division, Vice Chairman of the Board of Directors Kurt M. Swenson 54 President and Chief Executive Officer, Chairman of the Board of Directors Charles M. Waite 66 Director Frederick E. Webster, Jr 61 Director - ---------- (1) Each executive officer serves for a term of one year (and until his successor is chosen and qualified). (2) Mr. Anderson resigned as Chief Financial Officer and Treasurer, effective February 1, 1999. (3) Mr. Forney assumed the position of Chief Financial Officer and Treasurer, effective February 1, 1999. George R. Anderson has been a Senior Vice President and a director of the Company since 1984. From 1984 until February 1999, Mr. Anderson was also Chief Financial Officer and Treasurer. Mr. Anderson joined the Company in 1969 as Chief Accountant and subsequently held the position of Controller. 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 current term as a director will expire in 1999. John L. Forney has been Chief Financial Officer and Treasurer of the Company since February 1999. Prior to assuming that position and since 1996, Mr. Forney was Senior Vice President of Finance at Raymond James & Associates, Inc. From 1994 to 1996, Mr. Forney was a Vice President at Morgan Stanley & Company. James L. Fox has been Executive Vice President and General Manager of First Data Investor Services Group, a division of First Data Corporation, since 1989. Mr. Fox has been a director of the Company since October 1997. Mr. Fox's current term as a director of the Company will expire in 2001. Mark A. Gherardi has been Senior Vice President/Manufacturing/Memorials Division of the Company since March 1999. Prior to that time and since 1996, Mr. Gherardi was Senior Vice President - Barre and Canada Manufacturing Operations of the Company. Prior to 1996, Mr. Gherardi held various sales and production positions over a 20-year period with Lawson Granite Company. 18 Jon M. Gregory has been President and Chief Operating Officer/Quarries Division of the Company since 1993. Mr. Gregory was elected by the Board of Directors to his current directorship in October 1998. Since joining the Company in 1975, Mr. Gregory has served in various positions including Senior Vice President - Memorials Division, Manager of Manufacturing and line production supervisor. Mr. Gregory's current term as a director will expire in 2000. John E. Keith has been President/Memorials Division of the Company since October 1997. Prior to that time and since 1989, Mr. Keith was an owner and the President of Keith Monument. From 1965 to 1989, Mr. Keith held various officer positions with Keith Monument. Richard C. Kimball has been Chief Operating Officer/Memorials Division of the Company and Vice Chairman of the Company's 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 will expire in 2000. Kurt M. Swenson has been President, Chief Executive Officer and Chairman of the Board of Directors of the Company since 1984. Prior to the IPO, Mr. Swenson had been the Chief Executive Officer and a director of Swenson Granite Company, Inc. since 1974, and currently serves as non-officer Chairman of the Board of Swenson Granite Company, LLC, a Delaware limited liability company engaged in the granite curb and landscaping business. He is also a director of the American Monument Association, the Funeral and Memorial Information Council, the National Building Granite Quarries Association and Group Polycor International. Mr. Swenson's current term as a director 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 2001. Frederick 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 has been a director of the Company since October 1997. Mr. Webster's current term as a director will expire in 1999. 19 ITEM 11. EXECUTIVE COMPENSATION The following table sets forth information with respect to the Chief Executive Officer of the Company and each of the four other most highly compensated executive officers of the Company (the "Named Executive Officers") for the year ended December 31, 1998. Summary Compensation Table
Long-Term Compensation Annual Compensation -------------- ----------------- - ---------------------------------------------------------------- ---------------------- Securities All Other Name and Principal Position Year Salary Bonus Options(#) Compensation(1) --------------------------- ------ ---------- --------- -------------- ----------------- Kurt M. Swenson 1998 $310,320 $36,000 -0- $1,150 President, Chief Executive Officer, Chairman of the Board of Directors Richard C. Kimball 1998 $210,360 $33,000 -0- $1,150 Chief Operating Officer/Memorials Division, Vice Chairman of the Board of Directors George R. Anderson 1998 $166,320 $15,000 -0- $1,150 Senior Vice President, Director (2) Jon M. Gregory 1998 $171,920 $22,000 -0- $1,150 President and Chief Operating Officer/Quarries Division, Director John E. Keith 1998 $169,200 $17,500 -0- $1,150 President/Memorials Division
- ---------- (1) In each case, represents a matching contribution under the Company's 401K plan. (2) Mr. Anderson resigned as Chief Financial Officer and Treasurer, effective February 1, 1999. 20 Stock Option Grants No grants of stock options were made during the year ended December 31, 1998 by the Company to the Named Executive Officers. The following table sets forth information concerning options to purchase Class B Common Stock (except for John E. Keith who has options to purchase Class A Common Stock) held by the Named Executive Officers. The Class B Common Stock is convertible on a share-for-share basis into Class A Common Stock. During 1998, 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, 1998 at December 31, 1998(1) ----------------------------------- ---------------------------------- Name Exercisable Unexercisable Exercisable Unexercisable - ---- ----------------- ----------------- ---------------- ----------------- Kurt M. Swenson 107,500 5,000 $1,236,975 $ 50,650 Richard C. Kimball 82,500 5,000 988,200 52,550 George R. Anderson 65,000 10,000 750,150 105,100 Jon M. Gregory 55,000 20,000 611,550 210,200 John E. Keith 25,000 37,500 0 0
(1) These values are calculated using the $14 1/4 per share closing price of the Class A Common Stock on the Nasdaq(R) National Market on December 31, 1998. Pension Plans The Company maintains a qualified pension plan (the "Pension Plan"), and has entered into non-qualified salary continuation agreements (the "Salary Continuation Agreements") with certain officers of the Company, including the Named Executive Officers listed in the table on the next succeeding page. 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 Pension Plan. The annual pension benefits shown for the Pension Plan assume a participant attains age 65 during 1999 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...................... $39,274 $52,365 $65,456 $78,547 $78,547 $150,000...................... $47,524 $63,365 $79,206 $95,047 $95,047 $175,000...................... $55,774 $74,365 $92,956 $111,547 $111,547 $200,000...................... $64,024 $85,365 $106,706 $128,047 $128,047 $225,000...................... $72,274 $96,365 $120,456 $144,547 $144,547 $250,000...................... $80,524 $107,365 $134,206 $161,047 $161,047 $275,000...................... $88,774 $118,365 $147,956 $177,547 $177,547 $300,000...................... $97,024 $129,365 $161,706 $194,047 $194,047 $325,000...................... $105,274 $140,365 $175,456 $210,547 $210,547 $350,000...................... $113,524 $151,365 $189,206 $227,047 $227,047
21 These calculations are based on the retirement formula in effect as of December 31, 1998, 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, 1998 and rounded to the full year, are: Mr. Anderson, 30 years; Mr. Gregory, 23 years; Mr. Keith, 1 year; Mr. Kimball, 6 years; and Mr. Swenson, 15 years. In addition, the Company's Salary Continuation Agreements provide for supplemental pension benefits to certain officers of the Company, including the Named Executive Officers listed in the table below. The following table sets forth the supplemental pension benefits for the specified Named Executive Officers under their respective Salary Continuation Agreements. Annual Total Years Retirement Annual Base of Service Benefit Name Compensation at Age 65 at Age 65 - ---- ------------ --------- --------- G. Anderson............... $166,320 35 35,925 R. Kimball................ $210,360 12 27,347 K. Swenson................ $310,320 26 92,165 J. Gregory................ $171,920 39 41,261 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. 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 Company's Amended and Restated 1994 Stock Plan. Employment Agreements The Company has an employment agreement with Kurt M. Swenson (the "Swenson Employment Agreement") for retention of his services as President and Chief Executive Officer of the Company. The term of the Swenson Employment Agreement commenced on October 24, 1997, the date of consummation of the IPO (the "Commencement Date"), and continues until the fifth anniversary thereof, provided 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 a termination related to a Change in Control, Mr. Swenson may elect in lieu of the lump sum payment described above, to receive in a lump sum or over the then remaining term of the Swenson Employment Agreement, an amount equal to the total amount he would have been entitled to receive if his employment had been terminated by the Company without Cause or by Mr. Swenson for Good Reason. If any payment or distribution by the Company to or for the benefit of Mr. Swenson under the Swenson Employment Agreement would be subject to the 22 excise tax imposed by Section 4999 of the Code or any interest or penalties are incurred by Mr. Swenson with respect to such excise tax, then Mr. Swenson will generally be entitled to receive an additional payment such that after payment by Mr. Swenson of all taxes, Mr. Swenson retains an amount of the additional payment equal to the excise tax imposed. The Company also has employment agreements with each of the other Named Executive Officers (such employment agreements being referred to collectively as the "Other Employment Agreements") , each of which provides for an initial five-year employment term commencing on October 24, 1997, the date of consummation of the IPO. The Other 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 employee's employment is terminated by the Company without Cause (as defined in the Other Employment Agreements). The Other Employment Agreements or related undertakings generally prohibit the employee 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. As noted above under Item 10, George R. Anderson resigned as the Company's Chief Financial Officer and Treasurer, effective February 1, 1999. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth, as of March 25, 1999, certain information with respect to the beneficial ownership of the Common Stock by each (i) director, (ii) executive officer and (iii) beneficial owner of more than 5% of either class of the outstanding Common Stock known to the Company, based on Securities and Exchange Commission filings and other available information, and (iv) by all directors and executive officers of the Company as a group. The Class B Common Stock is convertible on a share-for-share basis into Class A Common Stock. The Class B Common Stock is entitled to ten votes per share and the Class A Common Stock is entitled to one vote per share.
Shares of Class B Shares of Class A Common Stock Common Stock Beneficially Owned Beneficially Owned Name and Address of Beneficial Owner(1) Number Percent of Class Number (2) Percent of Class (2) - --------------------------------------- ------ ---------------- ---------- -------------------- Goldman Sachs Group LP(3) 85 Broad Street New York, NY 10004......................... - - 507,700 13.0 First Union Corporation (4) One First Union Center Charlotte, NC 28288-0137................... - - 383,700 9.9 Wellington Management Company(5) 75 State Street Boston, MA 02109........................... - - 401,200 10.3 J.P. Morgan & Co., Incorporated(6) 60 Wall Street New York, NY 10260......................... - - 211,000 5.4 G. Thomas Oglesby, Jr.(7).............................. 263,441 6.9 293,441 5.7 Kurt M. Swenson(8)+.................................... 1,023,489 26.8 1,130,989 20.5 Kevin C. Swenson(9).................................... 1,023,489 26.8 1,023,489 18.9 Mark A. Gherardi(10)+.................................. 307,573 8.0 307,573 6.5 Robert L. Pope(11)..................................... 231,375 6.1 231,375 5.0 Peter A. Friberg (12).................................. 236,375 6.2 236,375 5.1 Richard C. Kimball +................................... 29,126 0.8 111,926 2.5 John E. Keith (13)+.................................... - - 65,540 1.5 George R. Anderson(14)+................................ 65,000 1.7 65,000 1.5 Jon M. Gregory(15)+.................................... 30,000 * 84,126 1.9 John L. Forney(16)+.................................... - * 15,000 * Charles M. Waite+...................................... 29,126 * 30,000 * James L. Fox(17)+...................................... - - 12,650 * Frederick E. Webster, Jr.(18)+......................... - - 11,650 * All directors and executive officers as a group (10 persons)........................................ 1,484,314 38.8 1,834,454 29.4
- ---------- + Executive Officer and/or Director * Less than 1% 23 (1) The business address of each director and executive officer of the Company is c/o Rock of Ages Corporation, 772 Graniteville Road, Graniteville, Vermont 05654. (2) For each beneficial owner (and directors and executive officers as a group), (i) the number of shares of Class A Common Stock listed includes (or is comprised solely of) a number of shares equal to the number of shares of Class B Common Stock, if any, listed as beneficially owned by such beneficial owner(s) and (ii) the percentage of Class A Common Stock listed assumes the conversion on March 25, 1999 of all shares of Class B Common Stock, if any, listed as beneficially owned by such beneficial owner(s) into Class A Common Stock and also that no other shares of Class B Common Stock beneficially owned by others are so converted. (3) According to an Amendment No. 1 to Schedule 13G dated February 14, 1999, the shares listed are owned by Goldman Sachs Performance Partners, L.P. and Goldman Sachs Performance Partners (Offshore), L.P., or are owned or may deem to be beneficially owned by Goldman Sachs & Co., a registered broker or dealer and investment advisor. (4) According to a Schedule 13G dated February 11, 1999, the shares listed are owned by certain subsidiaries of First Union Corporation which are either investment advisors or hold the securities in a fiduciary capacity for their respective customers. (5) According to an Amendment No. 1 to Schedule 13G dated February 26, 1999, Wellington Management Company LLP, in its capacity as an investment advisor, may be deemed to be the beneficial owner of the listed shares which are held of record its clients. (6) According to a Schedule 13G dated February 23, 1999, the shares listed are owned by certain bank and investment advisor subsidiaries of J.P. Morgan & Co. Incorporated. (7) The 263,441 shares of Class B Common Stock listed are owned of record by Missouri Red Quarries, Inc. Missouri Red Quarries, Inc. is 100% owned by G. Thomas Oglesby, Jr. who is its President and sole director. Includes 30,000 shares of Class A Common Stock subject to currently exercisable stock options. (8) Kurt M. Swenson is the brother of Kevin C. Swenson. (9) Kevin C. Swenson is the brother of Kurt M. Swenson. (10) Includes 60,000 shares of Class B Common Stock subject to currently exercisable stock options. (11) Includes 60,000 shares of Class B Common Stock subject to currently exercisable stock options. (12) Includes 60,000 shares of Class B Common Stock subject to currently exercisable stock options. (13) Includes 25,000 shares of Class A Common Stock subject to currently exercisable stock options. (14) All 65,000 shares of Class B Common Stock listed are subject to currently exercisable stock options. (15) All 30,000 shares of Class B Common Stock listed are subject to currently exercisable stock options. (16) All 15,000 shares of Class A Common Stock listed are subject to currently exercisable stock options. (17) Includes 11,650 shares of Class A Common Stock subject to currently exercisable stock options. (18) All 11,650 shares of Class A Common Stock listed are subject to currently exercisable stock options. 24 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS In connection with and prior to the IPO, the Company effected a reorganization whereby, among other things, the Company's then parent corporation Swenson Granite Company, Inc. ("Swenson Granite") was merged with and into the Company, with the Company as the surviving corporation, and, immediately prior to such merger, Swenson Granite distributed its curb and landscaping business to its stockholders through a pro rata distribution of all of the member interests in a newly formed limited liability company named Swenson Granite Company LLC ("Swenson LLC"). Kurt M. Swenson, the Company's Chairman, President and Chief Executive Officer, and his brother Kevin C. Swenson, each own approximately 30.3% of Swenson Granite LLC. Certain other executive officers and directors of the Company collectively own approximately 9% of Swenson LLC. Kurt M. Swenson serves as a non-officer Chairman of the Board of Swenson LLC, but has no involvement with its day-to-day operations. Robert Pope, a holder of more than five percent of the Class B Common Stock, is the President and Chief Executive Officer, and owns approximately 5% of Swenson LLC. Neither Kurt M. Swenson nor any other officer of the Company, receives salary, bonus, expenses or other compensation from Swenson LLC, except for any pro rata share of earnings attributable to their ownership interest in Swenson LLC. Swenson LLC owns two granite quarries, one in Concord, New Hampshire and another in Woodbury, Vermont. Both have been owned by Swenson LLC (or its predecessor Swenson Granite) for more than 40 years. The Company purchases Woodbury granite from Swenson LLC at the same price Swenson LLC charges its landscape manufacturing operations. Because of the proximity of the Woodbury quarry to Barre, Vermont, the Company provides, and may continue to provide, certain maintenance services and equipment to the Woodbury quarry. Both the Company and Swenson LLC have the right to terminate these services at any time and the Company has no obligation to purchase or continue to purchase Woodbury granite from Swenson LLC. The Company also purchases Concord blocks from Swenson LLC at market prices. The Company's purchases of granite provided by Swenson LLC in 1998 were approximately $579,000. The Company believes these arrangements with Swenson LLC are as favorable, or more favorable, to the Company than would be available from an unrelated party for comparable granite blocks. In connection with the Keystone acquisition in 1997, the Company entered into the Supply Agreements with Missouri Red and its subsidiary KGCI. 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 to the Company as would be available from unrelated suppliers. In 1998, the Company's purchases from Missouri Red were approximately $790,000. In connection with the acquisition of Keith Monument in 1997, the Company entered into a five year triple net lease agreement with John E. Keith, who is an executive officer of the Company, and Mr. Keith's nephew, for office buildings and retail locations. The lease provides for, and in 1998 the Company paid, annual rental payments of $120,000. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) The following documents are filed as part of or are included in this Annual Report on Form 10-K and are incorporated herein by reference: 1. The financial statements listed in the Index to Consolidated Financial Statements and Financial Statement Schedule, filed as part of this Annual Report on Form 10-K. 2. The financial statement schedule listed in the Index to Consolidated Financial Statements and Financial Statement Schedule, filed as part of this Annual Report on Form 10-K. 3. The exhibits listed in the Exhibit Index filed as part of this Annual Report on Form 10- K. (b) Reports on Form 8-K: No reports on Form 8-K were filed by the Company during the last quarter of the fiscal year ended December 31, 1998. 25 ROCK OF AGES CORPORATION AND SUBSIDIARIES Table of Contents Page Independent Auditors' Report 27 Consolidated Balance Sheets 28 Consolidated Statements of Operations 30 Consolidated Statements of Stockholders' Equity and Comprehensive Income 31 Consolidated Statements of Cash Flows 32 Notes to Consolidated Financial Statements 34 Supplementary Information: Independent Auditors' Report on Supplementary Information 55 Schedule II - Valuation and Qualifying Accounts and Reserves 56 26 Independent Auditors' Report The Board of Directors Rock of Ages Corporation and Subsidiaries: We have audited the accompanying consolidated balance sheets of Rock of Ages Corporation and Subsidiaries as of December 31, 1998 and 1997 and the related consolidated statements of operations, stockholders' equity and comprehensive income and cash flows for each of the years in the three-year period ended December 31, 1998. 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, 1998 and 1997, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1998, in conformity with generally accepted accounting principles. KPMG LLP March 12, 1999 Burlington, Vermont 27 ROCK OF AGES CORPORATION AND SUBSIDIARIES Consolidated Balance Sheets December 31, 1998 and 1997
Assets 1998 1997 -------------- -------------- Current assets: Cash and cash equivalents $ 4,701,168 8,636,860 Trade receivables, less allowance for doubtful accounts of $2,123,702 in 1998 and $2,231,283 in 1997 (note 3) 14,003,954 12,857,282 Inventories (notes 2 and 3) 24,074,622 16,103,857 Income taxes receivable 585,765 -- Deferred tax assets (note 6) 352,201 352,201 Other current assets 1,548,658 1,050,565 -------------- -------------- Total current assets 45,266,368 39,000,765 -------------- -------------- Property, plant and equipment: Granite reserves and development costs 16,461,219 14,445,660 Land 6,736,003 3,559,210 Buildings and land improvements 15,302,318 13,147,697 Machinery and equipment 36,328,432 31,758,198 Furniture and fixtures 960,994 502,263 Construction-in-process 418,823 802,684 -------------- -------------- 76,207,789 64,215,712 Less accumulated depreciation, depletion and amortization 31,732,945 27,779,698 -------------- -------------- Net property, plant and equipment 44,474,844 36,436,014 -------------- -------------- Other assets: Cash surrender value of life insurance, net of loans of $95,412 in 1998 and 1997 1,426,476 1,175,741 Names and reputations, less accumulated amortization of $771,428 in 1998 and $141,489 in 1997 29,070,802 15,249,822 Debt issuance costs, less accumulated amortization of $42,436 in 1998 and $7,753 in 1997 195,495 82,691 Organization costs, less accumulated amortization of $77,634 in 1998 and $40,930 in 1997 220,513 263,809 Deferred tax assets (note 6) 110,321 375,904 Intangible pension asset (note 8) 218,888 194,036 Investment in affiliated company (note 5) 130,627 130,627 Other investments 342,551 330,127 Other 436,241 91,764 -------------- -------------- Total other assets 32,151,914 17,894,521 -------------- -------------- Total assets (note 4) $ 121,893,126 93,331,300 ============== ==============
See accompanying notes to consolidated financial statements. 28
Liabilities and Stockholders' Equity 1998 1997 ------------- ------------ Current liabilities: Borrowings under lines of credit (note 3) $ 6,686,656 1,328,480 Current installments of long-term debt (note 4) 802,685 383,676 Trade payables 2,674,139 2,100,946 Accrued expenses 3,478,280 3,012,322 Due to related parties (note 10) 4,412 55,442 Income taxes payable -- 275,171 Deferred income -- 400,000 Customer deposits 5,099,963 2,707,970 ------------- ------------ Total current liabilities 18,746,135 10,264,007 Long-term debt, excluding current installments (note 4) 12,879,661 974,570 Deferred compensation (note 8) 3,691,899 3,721,297 Accrued pension cost (note 8) 34,092 -- Accrued postretirement benefit cost (note 8) 569,645 527,514 Other 135,000 -- ------------- ------------ Total liabilities 36,056,432 15,487,388 ------------- ------------ Commitments (note 7) Stockholders' equity (note 9): Preferred stock - $.01 par value; 2,500,000 shares authorized No shares issued and outstanding Common stock - Class A, $.01 par value; 30,000,000 shares authorized 3,896,178 shares issued and outstanding in 1998 and 3,800,641 shares in 1997 38,962 38,007 Common stock - Class B, $.01 par value; 15,000,000 shares authorized 3,484,957 shares issued and outstanding in 1998 and 3,487,957 shares in 1997, convertible into equivalent shares of Class A common stock 34,849 34,879 Additional paid-in capital 69,350,225 68,277,394 Retained earnings 16,897,906 9,661,879 Accumulated other comprehensive income (485,248) (168,247) ------------- ------------ Total stockholders' equity 85,836,694 77,843,912 ------------- ------------ Total liabilities and stockholders' equity $ 121,893,126 93,331,300 ============= ============
29 ROCK OF AGES CORPORATION AND SUBSIDIARIES Consolidated Statements of Operations Years ended December 31, 1998, 1997 and 1996
1998 1997 1996 ------------- ------------- ------------- Net revenues $ 82,745,780 54,207,117 44,668,851 Cost of revenues 52,324,812 38,100,903 31,262,530 ------------- ------------- ------------- Gross profit 30,420,968 16,106,214 13,406,321 Selling, general and administrative expenses 20,371,776 11,035,768 9,131,459 ------------- ------------- ------------- Income from operations 10,049,192 5,070,446 4,274,862 Interest expense 510,341 1,576,477 1,723,355 ------------- ------------- ------------- Income before provision for income taxes 9,538,851 3,493,969 2,551,507 Provision for income taxes (note 6) 2,302,824 849,036 643,343 ------------- ------------- ------------- Net income $ 7,236,027 2,644,933 1,908,164 ============= ============= ============= Net income per share - basic $ .98 .62 .55 Net income per share - diluted $ .91 .53 .45 Weighted average number of common shares outstanding - basic 7,349,371 4,289,858 3,499,998 Weighted average number of common shares outstanding - diluted 7,984,094 4,997,229 4,207,825
See accompanying notes to consolidated financial statements. 30 ROCK OF AGES CORPORATION AND SUBSIDIARIES Consolidated Statements of Stockholders' Equity and Comprehensive Income Years ended December 31, 1998, 1997 and 1996
Number of Shares Issued and Outstanding ------------------------- Class A Class B Common Common Class A Class B Additional Stock Stock Common Common Paid-In Retained (shares) (shares) Stock Stock Capital Earnings ---------- ---------- ------------ ------------ ------------ ------------ Balance at December 31, 1995 -- 3,499,998 $ -- $ 35,000 $ 5,593,843 $ 9,827,918 Comprehensive income: Net income -- -- -- -- -- 1,908,164 Cumulative translation adjustment -- -- -- -- -- -- Total comprehensive income ---------- ---------- ------------ ------------ ------------ ------------ Balance at December 31, 1996 -- 3,499,998 -- 35,000 5,593,843 11,736,082 Comprehensive income: Net income -- -- -- -- -- 2,644,933 Cumulative translation adjustment -- -- -- -- -- -- Total comprehensive income Dividends -- -- -- -- -- (1,069,136) Swenson merger (note 17) -- -- -- -- -- (3,650,000) Issuance of stock (note 15) 3,708,750 (275,482) 37,088 (2,755) 57,088,177 -- Acquisitions (note 16) 91,891 263,441 919 2,634 5,595,374 -- ---------- ---------- ------------ ------------ ------------ ------------ Balance at December 31, 1997 3,800,641 3,487,957 38,007 34,879 68,277,394 9,661,879 Comprehensive income: Net income -- -- -- -- -- 7,236,027 Cumulative translation adjustment -- -- -- -- -- -- Minimum liability adjustment -- -- -- -- -- -- Total comprehensive income Conversion of common stock 5,000 (5,000) 50 (50) -- -- Exercise of options -- 2,000 -- 20 7,460 -- Purchase of options -- -- -- -- (381,200) -- Acquisitions (note 16) 90,537 -- 905 -- 1,446,571 -- ---------- ---------- ------------ ------------ ------------ ------------ Balance at December 31, 1998 3,896,178 3,484,957 $ 38,962 $ 34,849 $ 69,350,225 $ 16,897,906 ========== ========== ============ ============ ============ ============
Accumulated Other Total Comprehensive Stockholders' Income Equity ------------ ------------ Balance at December 31, 1995 $ 22,445 $ 15,479,206 Comprehensive income: Net income -- 1,908,164 Cumulative translation adjustment (15,884) (15,884) Total comprehensive income 1,892,280 ------------ ------------ Balance at December 31, 1996 6,561 17,371,486 Comprehensive income: Net income -- 2,644,933 Cumulative translation adjustment (174,808) (174,808) Total comprehensive income 2,470,125 Dividends -- (1,069,136) Swenson merger (note 17) -- (3,650,000) Issuance of stock (note 15) -- 57,122,510 Acquisitions (note 16) -- 5,598,927 ------------ ------------ Balance at December 31, 1997 (168,247) 77,843,912 Comprehensive income: Net income -- 7,236,027 Cumulative translation adjustment (286,259) (286,259) Minimum liability adjustment (30,742) (30,742) Total comprehensive income 6,919,026 Conversion of common stock -- -- Exercise of options -- 7,480 Purchase of options -- (381,200) Acquisitions (note 16) -- 1,447,476 ------------ ------------ Balance at December 31, 1998 $ (485,248) $ 85,836,694 ============ ============ See accompanying notes to consolidated financial statements. 31 ROCK OF AGES CORPORATION AND SUBSIDIARIES Consolidated Statements of Cash Flows Years ended December 31, 1998, 1997 and 1996
1998 1997 1996 ---------------- ---------------- ---------------- Cash flows from operating activities: Net income $ 7,236,027 2,644,933 1,908,164 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation, depletion and amortization 3,308,377 2,106,642 1,846,298 Increase in cash surrender value of life insurance (149,685) (105,713) (165,130) Loss (gain) on sale of property, plant and equipment 34,078 (40,612) (5,500) Loss in income of affiliated company -- 130,341 160,661 Deferred taxes 207,044 (79,658) 16,486 Changes in operating assets and liabilities: Decrease (increase) in trade receivables 538,321 (152,923) 2,231,586 Decrease (increase) in due to/from related parties (31,030) 38,872 (1,291,967) Increase in inventories (3,996,110) (1,034,738) (1,081,430) Decrease (increase) in other current assets 241,015 (376,363) (131,461) Increase in intangible pension asset (24,852) (100,618) (93,418) Decrease (increase) in other assets 26,462 (59,108) (193,401) Decrease in trade payables (716,437) (996,628) (236,244) Increase (decrease) in accrued expenses (607,247) (309,864) 301,154 Increase (decrease) in income taxes payable/receivable (941,723) (199,708) 69,302 Increase (decrease) in customer deposits (1,090,054) (238,225) 689,929 Increase (decrease) in deferred compensation (29,398) 217,207 271,996 Decrease in deferred income (400,000) (400,000) (400,000) Increase (decrease) in accrued pension cost 34,092 (1,504,512) 2,188 Increase in accrued postretirement benefit cost 42,131 20,576 -- ---------------- ---------------- ---------------- Net cash provided by (used in) operating activities 3,681,011 (440,099) 3,899,213 ---------------- ---------------- ---------------- Cash flows from investing activities: Purchases of property, plant and equipment (3,462,286) (4,100,519) (1,648,505) Proceeds from sale of property, plant and equipment 40,725 136,959 14,476 Decrease (increase) in other investments (12,424) 56,340 49,753 Acquisitions, net of cash acquired (20,451,341) (19,124,100) (238,310) ---------------- ---------------- ---------------- Net cash used in investing activities (23,885,326) (23,031,320) (1,822,586) ---------------- ---------------- ---------------- Cash flows from financing activities: Net borrowings (repayments) under lines of credit 5,358,176 (2,171,957) 920,578 Increase in debt issuance costs (147,398) (66,215) (36,415) Increase in organization costs (9,717) (234,765) (172,689) Proceeds from long-term debt 12,000,000 -- 122,082 Principal payments on long-term debt (327,016) (23,181,796) (4,126,635) Net stock option transactions (373,720) -- -- Proceeds from issuance of common stock, net of fees -- 57,122,510 -- ---------------- ---------------- ---------------- Net cash provided by (used in) financing activities 16,500,325 31,467,777 (3,293,079) ---------------- ---------------- ---------------- Effect of exchange rate changes on cash (231,702) (122,554) (15,026) ---------------- ---------------- ---------------- Net increase (decrease) in cash and cash equivalents (3,935,692) 7,873,804 (1,231,478) Cash and cash equivalents, beginning of year 8,636,860 763,056 1,994,534 ---------------- ---------------- ---------------- Cash and cash equivalents, end of year $ 4,701,168 8,636,860 763,056 ================ ================ ================ Supplemental cash flow information: Cash paid during the year for: Interest $ 432,257 1,576,477 1,520,420 Income taxes 3,203,313 982,262 742,626
See accompanying notes to consolidated financial statements. 32 ROCK OF AGES CORPORATION AND SUBSIDIARIES Consolidated Statements of Cash Flows Supplemental non-cash investing and financing activities: See Note 16 for non-cash activities relating to the acquisitions. During 1998, the Company adjusted goodwill and income tax payable for the 1997 acquisitions in the amount of $163,439 upon filing of final tax returns. During 1997, the Company dividended certain assets of $1,069,136 to a related party, converted 275,482 shares of Class B common stock into Class A common stock, and incurred a capital lease obligation of $555,687 in exchange for property, plant and equipment. See Note 17 for non-cash activities relating to the Swenson merger.
1998 1997 1996 ---------------- ---------------- ---------------- Acquisitions: Assets acquired $ 29,187,584 40,345,902 625,416 Liabilities assumed and issued (6,664,933) (13,271,975) (387,106) Common stock issued (1,447,476) (5,598,927) -- ---------------- ---------------- ---------------- Cash paid 21,075,175 21,475,000 238,310 Less cash acquired (623,834) (2,350,900) -- ---------------- ---------------- ---------------- Net cash paid for acquisitions $ 20,451,341 19,124,100 238,310 ================ ================ ================
See accompanying notes to consolidated financial statements. 33 ROCK OF AGES CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 1998, 1997 and 1996 (1) Summary of Significant Accounting Policies Rock of Ages Corporation and Subsidiaries (the "Company") is an integrated quarrier, manufacturer, wholesaler and retailer of granite and products manufactured from granite. (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 $2,547,300, $1,720,810 and $1,659,160 in 1998, 1997 and 1996, respectively, which includes depreciation related to equipment under capital leases. 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 $58,080, $66,906 and $54,013 in 1998, 1997 and 1996, respectively. (e) Foreign Currency Translation The Company translates the accounts of its foreign subsidiary in accordance with Statement of Financial Accounting Standards (SFAS) No. 52, Foreign Currency Translation, under which all assets and liabilities are translated at the rate of exchange in effect at year end. Revenue and expense accounts are translated using weighted average exchange rates in effect during the year. Gains or losses from foreign currency translation are charged to accumulated other comprehensive income which is included in stockholders' equity in the accompanying consolidated balance sheets. 34 (Continued) ROCK OF AGES CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 1998, 1997 and 1996 (f) Income Taxes The Company files its U.S. Federal income tax returns on a consolidated basis. Rock of Ages Canada, Inc., a wholly-owned subsidiary, is responsible for income taxes in Canada. 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. The Company is allowed to claim percentage depletion, under IRS Code Section 613, for tax purposes based upon income derived from quarrying operations. The Company intends to reinvest the unremitted earnings of its non-U.S. subsidiaries and postpone their remittance indefinitely. Accordingly, no provision for U.S. income taxes was required on such earnings during the three years ended December 31, 1998. (g) Names and Reputations Names and reputations, essentially goodwill, was recorded as a result of acquisitions and is being amortized over 40 years using the straight-line method. Amortization expense amounted to $615,389 in 1998, $111,039 in 1997 and $30,450 in 1996. The Company assesses the recoverability of this intangible asset by determining whether the amortization over its remaining life can be recovered through undiscounted future operating cash flows of the acquired operations. The amount of 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 names and reputations 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 $34,595, $131,046 and $70,141 in 1998, 1997 and 1996, respectively. (i) Organization Costs Organization costs are amortized using the straight-line method over 60 months. Amortization expense amounted to $53,013, $76,841 and $32,534 in 1998, 1997 and 1996, respectively. (j) 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. 35 (Continued) ROCK OF AGES CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 1998, 1997 and 1996 (k) 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. (l) 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. (m) 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. Neither the Class A common stock nor the Class B common stock has cumulative voting rights. Conversion - Class A common stock has no conversion rights. Class B common stock is convertible into Class A common stock, in whole or in part, at any time and from time to time at the option of the holder on the basis of one share of Class A common stock for each share of Class B common stock converted. Each share of Class B common stock will also automatically convert into one share of Class A common stock upon transfer to any person or entity other than a Permitted Transferee, as defined in the Company's Amended and Restated Certificate of Incorporation. (n) Revenue Recognition The manufacturing division recognizes revenue upon shipment of finished orders. The retailing division recognizes revenue upon the setting of the memorial. In certain instances, the Company may enter into an agreement with a customer which provides for extended payment terms, generally up to two years from either the date of setting of the memorial or, in certain instances, upon the settlement of an estate. 36 (Continued) ROCK OF AGES CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 1998, 1997 and 1996 The quarry division recognizes revenue from sales of granite blocks when the customer is invoiced for the block. At that time, the block is removed from the Company's inventory, the customer's name is printed on the block, and title and risk of ownership passes to the buyer. In many cases, granite blocks owned by customers remain on the Company's property for varying periods of time after title passes to the buyer. Payment terms are less 5% 30 days, net 30 days, except the December terms described below. Sales of the Company's blocks are FOB quarry and the Company retains the obligation to load customer's blocks on trucks. At its Barre, Vermont location, sales are FOB Barre, Vermont and the Company retains a delivery obligation on the Company's trucks to block customers in Barre. The customer may take delivery at any time determined by the customer, but all invoices must be paid in accordance with their terms when due whether or not the customer requests delivery. The Company considers the earnings process substantially complete despite the Company's obligations to load the blocks, and, in the case of its Barre customers, deliver the blocks, because the cost of delivery service is inconsequential (less than 3%) in relation to the selling price. Further, under industry terms of trade, title passes and the payment obligation is established when the block is identified to a particular transaction. In December each year, the Company provides special 90 day payment terms at its Barre quarries for all block purchased in the month of December. The reason for this is that the Barre quarries are closed from mid-December through mid-March. The customer's manufacturing plants remain open during most of this period, and most prefer to assure they own blocks of a size and quality selected by them prior to the closure. All blocks purchased in December on deferred payment terms are invoiced on or about December 31 and removed from the Company's inventory with title passing to the buyer. Payment terms are one-third of the invoice amount on January 15, one-third on February 15, and one-third on March 15. The program provides essentially the normal 30 day payment terms during the months when the quarry is closed notwithstanding the customer's purchase of a three months supply in December. Customers need not use these terms and may buy from inventory during the closure period on a first come first served basis with normal 30 day terms. The Company does not require collateral or other security on trade receivables. The credit risk on trade receivables is controlled by requiring significant deposits. The Company continuously monitors outstanding trade receivables. (o) 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. (p) Stock-Based Employee Compensation The Company uses the intrinsic value based method per Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees, for all of its stock-based employee compensation arrangements. 37 (Continued) ROCK OF AGES CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 1998, 1997 and 1996 (q) Pension and Other Postretirement Plans On January 1, 1998, the Company adopted SFAS No. 132, Employers' Disclosures about Pension and Other Postretirement Benefits. SFAS No. 132 revises employers' disclosures about pension and other postretirement benefit plans. SFAS No. 132 does not change the method of accounting for such plans. (r) Net Income Per Share Net income per share, or basic earnings per share, is computed by dividing earnings available for common shares by the weighted average number of common shares outstanding during each year. Net income per share - diluted, or diluted earnings per share, is computed by dividing earnings available for common shares by the weighted average number of common shares outstanding during each year, adjusted to include the additional number of common shares that would have been outstanding if the dilutive potential common shares had been issued. Potential common shares are not included in the diluted earnings per share calculations where the effect of their inclusion would be antidilutive. (s) Comprehensive Income On January 1, 1998, the Company adopted SFAS No. 130, Reporting Comprehensive Income. SFAS No. 130 establishes standards for reporting and presentation of comprehensive income and its components in a full set of financial statements. Comprehensive income consists of net income, a cumulative translation adjustment, and a minimum liability adjustment and is presented in the consolidated statements of stockholders' equity and comprehensive income. The Statement requires only additional disclosures in the consolidated financial statements; it does not affect the Company's financial position or results of operations. Prior year financial statements have been reclassified to conform to the requirements of SFAS No. 130. (t) Reclassifications Certain reclassifications have been made to 1997 in order to conform to the 1998 presentation. (2) Inventories Inventories consist of the following at December 31, 1998 and 1997: 1998 1997 ------------ ----------- Raw materials $ 9,814,621 9,013,974 Work-in-process 5,724,011 2,261,444 Finished goods and supplies 8,535,990 4,828,439 ------------ ----------- $ 24,074,622 16,103,857 ============ =========== 38 (Continued) ROCK OF AGES CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 1998, 1997 and 1996 (3) Lines of Credit The Company's financing with the CIT Group/Business Credit, Inc. provides for an acquisition term loan line of credit of $25 million and a revolving credit facility of an additional $25 million. Effective July 1, 1998, 50% of each facility has been assigned to the Bank of Boston, consistent with the initial agreement. Such loans and advances under the revolving credit facility shall be in amounts up to 75% of the outstanding eligible accounts receivable of the Company and 50% of the aggregate value of eligible inventory of the Company; however, advances against eligible inventory may not exceed $12,500,000 at any one time. The acquisition term loans are limited to two per calendar quarter and must be at least $1,000,000 each. The interest rate on this agreement is based on a formula of prime less .50%, or at the Company's election, the sum of 1-3/4% plus LIBOR. However, if the Company chooses the latter option, the elections must be in multiples of $1,000,000, and no more than four LIBOR elections may be in effect at any one time. Fees include a one time fee of $125,000, a line of credit fee of $4,167 per month and a collateral management fee of $1,000 per month. Amounts outstanding as of December 31, 1998 were $6,379,511 and $12,000,000 on the revolving credit facility and term loan line of credit, respectively. The weighted average interest rate was 7.96% on the revolving credit facility in 1998. As of December 31, 1997, both credit lines were unused and available in their entirety. A subsidiary of the Company also has 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 Canadian prime rate plus 3/4%, and is secured by substantially all assets of the subsidiary. Amounts outstanding as of December 31, 1998 and 1997 were $307,145 and $1,328,480, respectively. The weighted average interest rates were 7.35% and 7.02% in 1998 and 1997, respectively. (4) Long-Term Debt Long-term debt at December 31, 1998 and 1997 consists of the following:
1998 1997 ------------ ------------ Note payable - Dutton, interest at 6%, payable in monthly principal and interest payments of $674, unsecured, due December 2003 $ 34,860 40,662 Note payable - Plante, interest at 8.0%, payable in monthly payments of $2,593 beginning February 2001, unsecured, due January 2021 310,000 310,000 Note payable - bank, interest at prime plus 1.5%, payable in monthly installments of $544 plus interest, due November 2001, secured by property 18,516 26,802 Obligation under capital lease, interest at 7.99%, payable in monthly installments of $1,505 plus interest, due December 2000, secured by equipment 48,163 66,096 Obligation under capital lease, interest at 7.89%, payable in monthly installments of $10,276, due June 2001, secured by equipment 384,909 507,139
39 (Continued) ROCK OF AGES CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 1998, 1997 and 1996
1998 1997 ----------- ----------- Note payable - Anderson, payable with granite inventory at a set sales price of $14.50 per cubic foot at maximum sales of 1,500 cubic feet per month $ 342,227 407,547 Note payable - Chrysler Financial, interest at 2.9%, payable in monthly installments of $598, due December 2001, secured by equipment 20,045 -- Note payable - GMAC, interest at 4.9%, payable in monthly installments of $439, due February 2002, secured by equipment 15,440 -- Note payable - GMAC, interest at 2.9%, payable in monthly installments of $716, due October 2002, secured by equipment 31,157 -- Note payable - Harold, interest at 10%, payable in monthly installments of $4,366, due June 2001, secured by property and equipment 115,465 -- Term loan, interest at 6.97% (see note 3), due December 2002, secured by substantially all assets of the Company 12,000,000 -- Note payable - PNC, interest at 8.95%, payable in monthly installments of $334, due July 2001, secured by equipment 9,220 -- Note payable - Ford Motor Credit, interest at 9.2%, payable in monthly installments of $480, due July 1999, secured by equipment 3,264 -- Notes payable - assumed at acquisition and paid in full in 1999 349,080 -- 13,682,346 1,358,246 Less current installments 802,685 383,676 ----------- ----------- Long-term debt, excluding current installments $12,879,661 974,570 =========== ===========
Future maturities of the December 31, 1998 long-term debt are as follows:
Obligations Other Under Long-Term Year ended December 31: Capital Lease Debt ------------- --------- 1999 $ 141,364 691,571 2000 158,823 166,835 2001 191,494 64,255 2002 -- 12,021,818 2003 -- 15,464 Thereafter -- 289,331 491,681 13,249,274 =========== Interest included in obligations under capital lease 58,609 ----------- $ 433,072 ===========
40 (Continued) ROCK OF AGES CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 1998, 1997 and 1996 The cost of the equipment under capital leases was $742,554 and $794,482 and related accumulated depreciation was $107,760 and $39,831 as of December 31, 1998 and 1997, respectively. The financing agreements with banks contain various restrictive covenants with respect to the maintenance of financial ratios, capital additions, and other items. As of December 31, 1998 all covenants have been complied with or waived by the banks. (5) Investment in Affiliated Company Investment in affiliated company, accounted for under the equity method, at December 31, 1998 and 1997 consists of the Company's 50% equity interest in Rock of Ages of Asia. The Company has recorded losses on its investment in Rock of Ages Asia of $0, $87,326 and $160,661 in 1998, 1997 and 1996, respectively. Net revenues with Rock of Ages Asia were $0, $2,161,891 and $837,842 in 1998, 1997 and 1996, respectively. Trade receivables due from Rock of Ages Asia were $662,659 and $1,113,549 as of December 31, 1998 and 1997, respectively. (6) Income Taxes A summary of the significant components of the provision for income taxes for the years ended December 31, 1998, 1997 and 1996 is as follows: 1998 1997 1996 ----------- ------------ ------------ Current $2,095,780 922,016 626,857 Deferred 207,044 (72,980) 16,486 ---------- --------- --------- Total $2,302,824 849,036 643,343 ========== ========= ========= Included in income before provision for income taxes is foreign income (loss) of $1,346,338, $379,736 and ($303,374) for the years ended December 31, 1998, 1997 and 1996, respectively. The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 1998 and 1997 are presented below:
1998 1997 ----------- ----------- Deferred tax assets: Accrued pension, accrued postretirement benefit cost and deferred compensation $ 1,590,080 1,050,131 Allowance for doubtful accounts 615,273 499,980 Accrued expenses 147,863 109,766 Deferred income -- 111,200 Inventories, principally due to additional costs inventoried for tax purposes pursuant to the Tax Reform Act of 1986 546,376 410,922 Other assets 492,500 1,295,252 ----------- ----------- Total gross deferred tax assets 3,392,092 3,477,251 Less valuation allowance (1,158,339) (1,520,183) ----------- ----------- Total net deferred tax assets 2,233,753 1,957,068 ----------- -----------
41 (Continued) ROCK OF AGES CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 1998, 1997 and 1996 1998 1997 ------------ ------------ Deferred tax liabilities: Quarry development $ (657,235) (412,169) Names and reputations (204,693) -- Other liabilities (909,303) (816,794) ----------- ---------- Total gross deferred tax liabilities (1,771,231) (1,228,963) ----------- ---------- Net deferred tax assets $ 462,522 728,105 =========== ========== SFAS No. 109, Accounting for Income Taxes, requires a valuation allowance against deferred tax assets if, based on the weight of available evidence, it is more likely than not 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. Deferred tax assets and liabilities have been computed utilizing a tax rate of 39.3% and 27.8% for 1998 and 1997, respectively. The deferred tax rate used prior to 1998 reflected the Company being subjected to only a 20% Federal alternative minimum tax rate, as the Company was generating minimum tax credits in those years. The reconciliation of differences between the statutory U.S. federal income tax rate and the Company's effective tax rate follows: 1998 1997 1996 -------- -------- -------- U.S. statutory rate 34.0% 34.0% 34.0% State taxes 5.3 6.0 6.1 Names and reputations amortization 1.6 0.0 0.0 Minimum tax credits (2.3) 0.0 0.0 Other, primarily tax depletion (14.5) (15.7) (14.9) ------ ------ ------ Effective tax rate 24.1% 24.3% 25.2% ====== ====== ====== The Company has approximately $2 million in minimum tax credits which may be carried forward indefinitely. (7) Leases The Company has several noncancellable operating leases for vehicles, equipment and office space which expire over the next five years. Rental expense for all operating leases was $596,912, $207,646 and $161,607 during 1998, 1997 and 1996, respectively. Rental expense includes amounts for related party operating leases of $320,330, $29,500 and $0 in 1998, 1997 and 1996, respectively. 42 (Continued) ROCK OF AGES CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 1998, 1997 and 1996 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: Related Party Other ----------------------- ------------- --------- 1999 $ 560,220 373,960 2000 543,649 231,487 2001 541,949 126,046 2002 516,816 95,650 2003 255,401 49,977 Thereafter 200,750 17,600 --------- --------- $ 2,618,785 894,720 ========= ========= The Company also acts as the lessor of various parcels of land. Rental income was $36,031, $32,133 and $32,210 in 1998, 1997 and 1996, respectively. Future minimum rentals to be received under noncancellable leases are as follows: Year ended December 31: ----------------------- 1999 $ 34,952 2000 32,527 2001 31,927 2002 19,827 2003 16,227 Thereafter 12,150 --------- $ 147,610 ========= (8) Pension and Other Benefits The Company has a defined pension plan covering substantially all of its Vermont based non-union employees. The benefits are based on years of service and the employee's compensation. The cost of this program is being funded currently. The Company has a salary continuation plan which covers certain employees who have deferred compensation agreements with the Company. The Company measures the costs of its obligations based on actuarial estimates. The net periodic costs are recognized as employees render the necessary services to earn the deferred compensation benefits. The Company also sponsors a defined benefit postretirement health care plan for certain early retirees and defined benefit postretirement group life insurance plans for all Vermont based union and non-union employees. The Company measures the costs of its obligation based on actuarial estimates. The net periodic costs are recognized as retirees and employees render the services necessary to earn the postretirement benefits. 43 (Continued) ROCK OF AGES CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 1998, 1997 and 1996
Non-Union Deferred Pension Benefits Compensation Benefits 1998 1997 1998 1997 ------------ ------------ ------------ ------------ Change in benefit obligation: Benefit obligation at beginning of year $ 16,359,506 15,045,099 1,585,088 1,445,083 Service cost 451,249 387,461 84,815 67,366 Interest cost 1,146,229 1,098,197 111,725 99,859 Amendments (1,108,710) -- -- (44,390) Actuarial (gain)/loss 881,772 661,895 100,226 155,656 Benefits paid (910,431) (833,146) (88,100) (138,486) ------------ ------------ ------------ ------------ Benefit obligation at end of year $ 16,819,615 16,359,506 1,793,754 1,585,088 ------------ ------------ ------------ ------------ Change in plan assets: Fair value of plan assets at beginning of year $ 14,670,887 11,277,530 -- -- Actual return on plan assets 1,723,826 1,922,656 -- -- Employer contribution 649,588 2,303,847 88,100 138,486 Spin-off (note 17) (458,445) -- -- -- Benefits paid (910,431) (833,146) (88,100) (138,486) ------------ ------------ ------------ ------------ Fair value of plan assets at end of year $ 15,675,425 14,670,887 -- -- ------------ ------------ ------------ ------------ Funded status $ (1,144,190) (1,688,619) (1,793,754) (1,585,088) Unrecognized net actuarial (gain)/loss (732,885) (1,135,787) 202,768 102,542 Unrecognized prior service cost 1,364,837 2,032,632 195,610 219,873 Unrecognized transition obligation 478,146 791,774 23,278 29,443 ------------ ------------ ------------ ------------ Net amount recognized $ (34,092) -- (1,372,098) (1,233,230) ------------ ------------ ------------ ------------ Amounts recognized in the consolidated balance sheet consist of: Accrued benefit liability $ (34,092) -- (1,621,728) (1,427,266) Intangible asset -- -- 218,888 194,036 Minimum liability adjustment -- -- 30,742 -- ------------ ------------ ------------ ------------ Net amount recognized $ (34,092) -- (1,372,098) (1,233,230) ------------ ------------ ------------ ------------ Weighted-average assumptions as of December 31: Discount rate 6.75% 7.25% 6.75% 7.25% Expected return on plan assets 9.00% 9.00% Rate of compensation increase 5.50% 5.50% 4.50% 4.50%
Other Benefits 1998 1997 ------------ ------------ Change in benefit obligation: Benefit obligation at beginning of year 1,670,595 1,653,506 Service cost 22,159 13,619 Interest cost 117,122 117,876 Amendments -- -- Actuarial (gain)/loss 131,324 53,316 Benefits paid (158,598) (167,722) ------------ ------------ Benefit obligation at end of year 1,782,602 1,670,595 ------------ ------------ Change in plan assets: Fair value of plan assets at beginning of year -- -- Actual return on plan assets -- -- Employer contribution 158,598 167,722 Spin-off (note 17) -- -- Benefits paid (158,598) (167,722) ------------ ------------ Fair value of plan assets at end of year -- -- ------------ ------------ Funded status (1,782,602) (1,670,595) Unrecognized net actuarial (gain)/loss 265,919 132,907 Unrecognized prior service cost -- -- Unrecognized transition obligation 947,038 1,010,174 ------------ ------------ Net amount recognized (569,645) (527,514) ------------ ------------ Amounts recognized in the consolidated balance sheet consist of: Accrued benefit liability (569,645) (527,514) Intangible asset -- -- Minimum liability adjustment -- -- ------------ ------------ Net amount recognized (569,645) (527,514) ------------ ------------ Weighted-average assumptions as of December 31: Discount rate 6.75% 7.25% Expected return on plan assets Rate of compensation increase
For measurement purposes, a 7 percent annual rate of increase in the per capita cost of covered health care benefits was assumed for 1998. The rate was assumed to decrease gradually to 4 percent for 2001 and remain at that level thereafter. 44 (Continued) ROCK OF AGES CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 1998, 1997 and 1996
Deferred Non-Union Pension Benefits Compensation Benefits -------------------------------------------- --------------------------------------- 1998(1) 1997 1996 1998 1997 1996 ----------- ----------- ----------- ----------- ----------- ----------- Components of net periodic benefit cost: Service cost $ 451,249 387,461 392,429 84,815 67,366 56,108 Interest cost 1,146,229 1,098,197 1,042,864 111,725 99,859 98,386 Expected return on plan assets (1,283,875) (1,005,314) (884,624) -- -- -- Amortization of prior service cost 173,318 177,220 177,220 24,263 24,263 25,032 Amortization of transition obligation 138,644 141,771 141,771 6,165 6,165 6,360 Recognized net actuarial (gain)/loss -- -- -- -- -- -- ----------- ----------- ----------- ----------- ----------- ----------- Net periodic benefit cost $ 625,565 799,335 869,660 226,968 197,653 185,886 ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Other Benefits ----------------------------------------- 1998 1997 1996 ----------- ----------- ----------- Components of net periodic benefit cost: Service cost 22,159 13,619 17,454 Interest cost 117,122 117,876 118,168 Expected return on plan assets -- -- -- Amortization of prior service cost -- -- -- Amortization of transition obligation 63,136 63,136 63,136 Recognized net actuarial (gain)/loss (1,688) (6,334) (10,682) ----------- ----------- ----------- Net periodic benefit cost 200,729 188,297 188,076 ----------- ----------- ----------- ----------- ----------- ----------- (1) In addition, there was a special charge under SFAS No. 88 of $58,115 due to the spin-off of the Swenson Granite Company LLC salaried employees as of December 1, 1998. The Company has multiple postretirement benefit plans. The health care plan covers a closed group of retirees selected by the Company and benefits for all but two of the participants cease at age 65. The life insurance plan covers all Vermont based employees; non-union employee coverage is 50% of the group insurance coverage which the employee had prior to retirement (but not more than $60,000) and union employee coverage is $6,000. The life insurance plan assumes a 4.50% rate of compensation increase for all years. Assumed health care trend rates have a significant effect on the amounts reported for the health care plan. A one-percentage-point change in assumed health care cost trend rates would have the following effects: 1-Percentage- 1-Percentage- Point Increase Point Decrease -------------- -------------- Effect on total of service and interest cost components $ 342 (327) Effect on postretirement benefit obligation 5,174 (4,945) Union Pension Benefits Vermont based 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 $740,941, $786,217 and $713,738 in 1998, 1997 and 1996, respectively. 45 (Continued) ROCK OF AGES CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 1998, 1997 and 1996 Deferred Compensation Benefits In addition to the deferred compensation benefits under its salary continuation plan, the Company has deferred compensation agreements with three former stockholders of acquired companies. The present value of the future payments under these agreements was $2,070,171 and $2,294,031 as of December 31, 1998 and 1997, respectively. Total annual payments of $260,200 begin and end at various dates from 1997 to 2016. One of these agreements is partially paid through benefits paid by the Company into the defined pension plan, therefore the payment amount changes annually based on actuarial estimates. 401(k) Benefits The Company's contributions were $93,263, $72,303 and $51,949 in 1998, 1997 and 1996, respectively. The acquisitions during 1998 and 1997 have significantly increased the number of participants in the plans. (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 and directors to purchase equivalent shares of common stock. The options granted have a five year term and vest at 20% per year. The following table sets forth the stock option transactions for the years ended December 31, 1998, 1997 and 1996: Weighted Number Average of Options Exercise Price ---------- -------------- Outstanding, December 31, 1995 275,000 $ 2.49 Granted during 1996 587,500 3.69 ---------- ---------- Outstanding, December 31, 1996 862,500 3.31 Granted during 1997 383,252 18.50 ---------- ---------- Outstanding, December 31, 1997 1,245,752 7.98 Granted during 1998 125,000 14.44 Lapsed during 1998 (40,500) (3.57) Exercised during 1998 (42,000) (3.10) ---------- ---------- Outstanding, December 31, 1998 1,288,252 $ 8.90 ========== ========== Exercisable, December 31, 1998 746,301 $ 6.69 Weighted average remaining contractual life 2.1 years
Weighted Average Options Exercisable ----------------------------- ----------------------- Weighted Number of Remaining Average Options Exercise Contractual Exercise Exercise Price Outstanding Price Life Number Price -------------- ----------- -------- ----------- ------ --------- $ 2.40 - $ 4.12 780,000 $ 3.30 1.4 Years 568,000 $ 3.16 $ 12.00 - $ 18.50 508,252 $ 17.50 3.2 Years 178,301 $ 17.93
46 (Continued) ROCK OF AGES CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 1998, 1997 and 1996 The Company has adopted the disclosure-only provisions of SFAS No. 123, Accounting for Stock-Based Compensation. Accordingly, no compensation cost has been recognized for stock options granted under the plan as the options were all granted at exercise prices which equaled the fair market value at the date of the grant. Had compensation cost for the Company's stock option plan been determined based on the fair value at the grant date for awards during 1998, 1997 and 1996 consistent with the provisions of SFAS No. 123, the Company's net income would have been reduced to the pro forma amount indicated below:
1998 1997 1996 ----------------- ------------------ ----------------- Net income, as reported $ 7,236,027 2,644,933 1,908,164 Net income, pro forma 6,616,927 2,268,984 1,798,619 Net income per share, pro forma .90 .53 .51 Net income per share - assuming dilution, pro forma .83 .45 .43
Pro forma net income reflects only options granted subsequent to December 31, 1995 and is not necessarily indicative of future effects on net income. Therefore, the full impact of calculating compensation cost for stock options under SFAS No. 123 is not reflected in the pro forma net income amounts presented because compensation cost is reflected over the options' vesting periods and compensation cost for options granted prior to January 1, 1996 is not considered. The fair value of each option grant is estimated on the date of the grant. Options granted prior to 1997 were valued using the Minimum Value Method with the following weighted-average assumptions: risk-free interest rate of 6%; dividend yield of $0; and expected lives of five (5) years. The 1998 and 1997 options were valued using the Black-Scholes option-pricing model with the following weighted-average assumptions: risk-free interest rate of 6%; dividend yield of $0; expected volatility of 49% and 16%, respectively; and expected lives of five (5) years. (10) Related Party Transactions The Company is related through common ownership with several companies. The transactions with related parties, included in the consolidated statements of operations, are as follows for the years ended December 31, 1998, 1997 and 1996:
1998 1997 1996 ----------------- ------------------ ----------------- Net revenues $ 196,032 840,554 729,611 Cost of revenues 2,084,292 1,231,151 194,047 Selling, general and administrative expenses -- 750,000 936,000
47 (Continued) ROCK OF AGES CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 1998, 1997 and 1996 Amounts due to (from) related parties as of December 31, 1998 and 1997 are as follows:
1998 1997 ------------------- ------------------ Due to (from) Swenson Granite Company, LLC $ 37,417 (89,597) Due from K & E Sawing Company (6,213) (6,000) Due to Missouri Red Quarries 107,047 146,708 Due to (from) Keystone Granite Company (28,267) 4,331 Due from Granite Accents, Inc. (105,572) -- -------------- ------------- $ 4,412 55,442 ============== =============
See note 7 for operating lease obligations with related parties. (11) Fair Value of Financial Instruments SFAS No. 107, Disclosures About the Fair Value of Financial Instruments, requires disclosure of information about the fair value of certain financial instruments for which it is practicable to estimate that value. For purposes of the following disclosure the fair value of a financial instrument is the amount at which the instrument could be exchanged in a current transaction between willing parties other than in a forced sale or liquidation. Management has determined that the carrying values of its financial assets and liabilities approximate fair value at December 31, 1998. (12) Unaudited Quarterly Summary Information The following is a summary of unaudited quarterly summary information for the years ended December 31, 1998 and 1997 (in thousands, except per share data):
Net Income (Loss) Net Income Per Share - Net Net Income (Loss) Assuming Revenues (Loss) Per Share Dilution ----------- ---------- ----------- ------------ 1998 Quarters: First $ 15,171 (431) (.06) (.06) Second 22,955 2,787 .38 .35 Third 22,006 2,754 .37 .35 Fourth 22,614 2,126 .29 .27 ----------- ---------- ----------- ------------ Total $ 82,746 7,236 .98 .91 ============ ========== =========== ============ 1997 Quarters: First $ 8,192 (978) (.28) (.23) Second 12,575 986 .28 .23 Third 16,374 833 .22 .19 Fourth 17,066 1,804 .28 .26 ----------- ---------- ----------- ------------ Total $ 54,207 2,645 .62 .53 =========== ========== =========== ============
48 (Continued) ROCK OF AGES CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 1998, 1997 and 1996 Note The Company has historically experienced certain seasonal patterns, primarily due to weather conditions affecting operations in Vermont and Canada and the setting of memorials in cemeteries located in northern regions. The Company made a significant number of acquisitions in the third and fourth quarters of 1997 and the second and third quarters of 1998. (13) Earnings Per Share Effective December 31, 1997 the Company adopted SFAS No. 128, Earnings per Share. This adoption resulted in the restatement of per share information for 1996. The following is a reconciliation of the numerators and denominators of the basic and diluted earnings per share (EPS) computations for net income for the years ended December 31, 1998, 1997 and 1996:
1998 1997 1996 ------------ ------------ ------------ Numerator: Income available to common shareholders used in basic and diluted earnings per share $ 7,236,027 2,644,933 1,908,164 ============ ============ ============ Denominator: Denominator for basic earnings per share: Weighted average shares 7,349,371 4,289,858 3,499,998 Effect of dilutive securities: Stock options 634,723 707,371 707,827 ------------ ------------ ------------ Denominator for diluted earnings per share: Adjusted weighted average shares $ 7,984,094 4,997,229 4,207,825 ============ ============ ============ Basic earnings per share $ .98 .62 .55 Diluted earnings per share $ .91 .53 .45
Options to purchase 478,252 and 383,252 shares of Class A common stock at exercises prices ranging from $13.688 to $18.50 per share were outstanding in 1998 and 1997, respectively, but were not included in the computation of diluted EPS because the options' exercise price was greater than the average market price of the common shares. 49 (Continued) ROCK OF AGES CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 1998, 1997 and 1996 (14) Segment Information On December 31, 1998 the Company adopted SFAS No. 131, Disclosures about Segments of and Enterprise and Related Information. SFAS No. 131 established standards for reporting information about operating segments in annual financial statements and requires selected information about operating segments in interim financial reports issued to stockholders. It also established standards for related disclosures about products and services and geographic areas. The Company is organized based on the products and services that it offers. Under this organizational structure, the Company operates in three segments: quarrying, manufacturing, and retailing. The quarrying segment extracts granite from the ground and sells it to both the manufacturing segment and to outside manufacturers, as well as to distributors in Europe and Japan. The manufacturing segment's principal product is granite memorials used primarily in cemeteries, although it also manufactures some specialized granite products for industrial applications. The retailing segment engraves and sells memorials and other granite products at various locations throughout the United States. Inter-segment revenues are accounted for as if the sales were to third parties. The following is the segment information for the years ended December 31, 1998 and 1997 (in thousands):
1998 Quarrying Manufacturing Retailing Total ---- ------------- ------------- ------------- ------------- Total net revenues $ 26,448 48,858 18,597 93,903 Inter-segment net revenues 7,223 3,934 -- 11,157 ------------- ------------- ------------- ------------- Net revenues 19,225 44,924 18,597 82,746 Total gross profit 11,672 7,950 10,799 30,421 Inter-segment gross profit 2,892 (2,892) -- -- ------------- ------------- ------------- ------------- Gross profit 8,780 10,842 10,799 30,421 Selling, general and administrative expenses 4,497 6,506 9,368 20,371 ------------- ------------- ------------- ------------- Income from operations 4,283 4,336 1,431 10,050 Interest expense 56 182 273 511 ------------- ------------- ------------- ------------- Income before provision for income taxes $ 4,227 4,154 1,158 9,539 ============= ============= ============= =============
50 (Continued) ROCK OF AGES CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 1998, 1997 and 1996
1997 Quarrying Manufacturing Retailing Total ---- ------------- ------------- ------------- ------------- Total net revenues $ 18,544 40,850 1,781 61,175 Inter-segment net revenues 4,454 2,514 -- 6,968 ------------- ------------- ------------- ------------- Net revenues 14,090 38,336 1,781 54,207 Total gross profit 7,400 7,508 1,198 16,106 Inter-segment gross profit 1,794 (1,794) -- -- ------------- ------------- ------------- ------------- Gross profit 5,606 9,302 1,198 16,106 Selling, general and administrative expenses 4,407 5,832 797 11,036 ------------- ------------- ------------- ------------- Income from operations 1,199 3,470 401 5,070 Interest expense 783 793 -- 1,576 ------------- ------------- ------------- ------------- Income before provision for income taxes $ 416 2,677 401 3,494 ------------- ------------- ------------- -------------
Comparative reportable segment information is not readily available for 1996 and the Company does not maintain its asset records by segment. Net revenues by geographic area is as follows for the years ended December 31, 1998, 1997 and 1996 (in thousands): 1998 1997 1996 ------------ ------------- ------------- Net revenues (1): United States $ 74,174 46,138 42,617 Canada 8,572 8,069 2,052 ---------- ----------- ----------- Total net revenues $ 82,746 54,207 44,669 ========== =========== =========== (1) Net revenues are attributed to countries based on where product is produced. Long-lived assets by geographic area is as follows as of December 31, 1998 and 1997 (in thousands): 1998 1997 ------------ ------------- Long-lived assets: United States $ 42,810 34,570 Canada 1,660 1,866 Japan 5 -- ---------- ----------- $ 44,475 36,436 ========== =========== Comparative reportable geographic area information is not readily available for 1996. (15) Initial Public Offering Effective October 21, 1997 the Company made an initial public offering (IPO) of 3,225,000 shares of Class A common stock at $18.50 per share, inclusive of 275,482 shares being sold by the selling shareholders. On November 21, 1997 the underwriters exercised their option to purchase an additional 483,750 shares of Class A common stock at $18.50 per share. The issuance of stock has been recorded net of underwriting fees and other IPO expenses incurred of $6,392,948. 51 (Continued) ROCK OF AGES CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 1998, 1997 and 1996 (16) Acquisitions On June 30, 1997 the Company acquired all of the outstanding stock of KSGM, a successor to Keystone Memorials, Inc. for 263,441 shares of the Company's Class B common stock in a transaction which was accounted for under the purchase method. The fair market value of KSGM on the date of acquisition was $3,898,927. As of June 30, 1997 investment in affiliated company included Keystone's 50% equity investment in four Quarry Companies (QC's) and Southern Mausoleums, Inc. (SMI). On October 24, 1997 the Company acquired Childs & Childs Granite Company, Inc. and a related company for $6,600,000 in cash and 10,810 shares of Class A common stock at the IPO price of $18.50 per share in a transaction which was accounted for under the purchase method. The assets acquired included the remaining 50% equity investment in four QC's and SMI. The purchase price has been allocated to the assets acquired and liabilities assumed based upon their respective fair market values, resulting in $5,690,032 of cost in excess of net assets acquired of which $4,167,254 was allocated to property, plant and equipment with the remaining $1,522,778 to names and reputations. Also on October 24, 1997 the Company acquired Keith Monument Company and its affiliated companies for $16,375,000, consisting of 81,081 shares of Class A common stock at the IPO price of $18.50 per share and $14,875,000 in cash in a transaction which was accounted for under the purchase method. The purchase price has been allocated to the assets acquired and liabilities assumed based upon their respective fair market values, resulting in $13,202,181 of cost in excess of net assets acquired of which $1,014,000 was allocated to property, plant and equipment, $246,211 for the conversion of inventory previously accounted for under LIFO, and the remaining $11,941,970 to names and reputations. Proceeds from the purchases of $100,000 and $250,000 for the Keith and Childs acquisitions, respectively, were held by the Company per the purchase and sale agreements for the settlement of certain conditions. These amounts were recorded as accrued expenses as of December 31, 1997 and have been paid by the Company during 1998. For the period April through December 1998 the Company, through its subsidiary Rock of Ages Memorials, Inc., acquired Clark Memorials, Inc., Watertown Monument Works, Inc., Aberdeen Monument Works, Inc., Owatonna Granite Works, Inc., Desch-Paine Monuments, Inc., Mount Rushmore Granite Corp., Gallagher & Sons Monuments, Inc., Owatonna Granite & Monument Works, Inc. and all of the outstanding stock of Maumee Valley Memorials, Inc., Miller Bros. Monument, Inc., Sioux Falls Monument Co., Portage Marble & Granite Co., Nor-Por Granite, Inc., North Hill Marble & Granite Co., Kotecki Monuments, Inc., Edward T. Christiansen & Sons, Inc., and Joseph Uras Monument Corp. In connection with these acquisitions, certain assets were acquired and liabilities assumed of Fremont Forsberg, JUM Corporation and Joseph Uras Management Cemeteries, Inc. In November 1998 the Company, through its subsidiary Carolina Quarries, Inc., acquired the Gardenia White Quarry, its related operating entity, Piedmont Quarries Limited Liability Company, and certain undeveloped land in proximity to the Company's existing Salisbury Pink Quarry. 52 (Continued) ROCK OF AGES CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 1998, 1997 and 1996 The aggregate consideration for the 1998 acquisitions was $21,075,175 in cash and $1,447,476 representing 90,537 shares of the Company's Class A common stock ranging from $14.6875 to $17.625 per share in a transaction which was accounted for under the purchase method of accounting. The aggregate purchase price has been allocated to the assets acquired and liabilities assumed based upon their respective fair market values, resulting in $16,547,323 of cost in excess of net assets acquired of which $2,274,392 has been allocated to property, plant and equipment and the remaining $14,272,931 to names and reputations. Proceeds of $261,022 from certain of the 1998 purchases are being held by the Company for a period of one year per the purchase and sale agreements for the settlement of certain conditions. These amounts are recorded as accrued expenses as of December 31, 1998. The following unaudited pro forma information has been prepared assuming that the acquisitions occurred at the beginning of the current and immediately preceding periods, if 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, ----------------------------------------------------------- 1998 1997 1996 ----------------- ------------------ ---------------- Net revenues $ 92,420,780 100,579,947 74,157,928 Net income 6,854,027 5,160,312 2,761,948 Net income per share .93 1.20 .79 Net income per share - assuming dilution .86 1.03 .66
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, therefore pro forma information has not been provided. (17) Reorganization/Recapitalization In August 1997, in connection with 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. The Common Stock outstanding and weighted average shares outstanding for all periods presented have been adjusted for the new stock capitalization. 53 (Continued) ROCK OF AGES CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 1998, 1997 and 1996 Prior to the initial public offering, the Company went through 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 received 1,618.123 shares of Class B Common Stock for each share of Swenson Granite common stock (immediately prior to the Swenson Merger, a total of 2,163 shares of Swenson Granite were outstanding); and (ii) immediately prior to the Swenson Merger, Swenson Granite distributed 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"). Following the Swenson Granite Distribution and prior to the Swenson Merger, the sole asset of Swenson Granite was a 93% stock interest in the Company and its only liabilities were a $3,340,000 intercompany payable to the Company and a $310,000 note payable. Pursuant to the Swenson Merger, the Swenson Granite stockholders received a total of 3,499.998 shares of Class B Common Stock which represented 93% of the Company's total shares outstanding prior to the offering, the shares of Class B Common Stock held by Swenson Granite were cancelled, the intercompany payable was forgiven and the Company assumed the note payable. The minority interest in the Company is the same both before and after the Swenson Merger. The only effect on the Company's financial statements was 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. (18) Subsequent Event In January 1999 the Company acquired Toledo Monument Works Co. and J.W. Reynolds Monument Co. and all of the outstanding stock of Milwaukee Monuments Co., Inc. for $3,771,094 in cash and 32,045 shares of the Company's Class A common stock at $13.2625 per share. The aggregate purchase price has been allocated to the assets acquired and liabilities assumed based upon their respective fair market values. The amount of cost in excess of net assets acquired has been allocated to names and reputations. Also in January 1999 employees exercised 216,100 options and the Company granted options to purchase 75,000 shares of Class A common stock to a key employee under the Amended and Restated 1994 Stock Plan at the market price on the date of grant of $13.25 per share. 54 (Continued) Independent Auditors' Report On Supplementary Information The Board of Directors Rock of Ages Corporation and Subsidiaries: Under date of March 12, 1999, we reported on the consolidated balance sheets of Rock of Ages Corporation and subsidiaries as of December 31, 1998 and 1997, and the related consolidated statements of operations, stockholders' equity and comprehensive income, and cash flows for each of the years in the three-year period ended December 31, 1998. In connection with our audits of the aforementioned consolidated financial statements, we also audited the related consolidated financial statement schedule referred to as "Schedule II - Valuation and Qualifying Accounts and Reserves". This financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion on this financial statement schedule based on our audits. In our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. KPMG LLP March 12, 1999 Burlington, Vermont 55 Rock of Ages Corporation and Subsidiaries Schedule II - Valuation and Qualifying Accounts and Reserves Years ended December 31, 1998, 1997 and 1996 (In Thousands)
Column A Column B Column C Column D Column E ------------- --------------- ----------------------------- ------------- ------------- Additions ----------------------------- Balance at Increase Charged to Balance at Beginning Due to Costs and End Description of Period Acquisitions Expenses Deductions of Period ------------- --------------- ------------- ------------ ------------- ------------- 1998 Allowances for doubtful accounts $ 2,231 120 238 465 2,124 1997 Allowances for doubtful accounts $ 564 1,472 332 137 2,231 1996 Allowances for doubtful accounts $ 446 -- 181 63 564
See accompanying independent auditors' report on supplementary information. 56 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Rock of Ages Corporation By: /s/ Kurt M. Swenson ------------------------------- Kurt M. Swenson President, Chief Executive Officer and Chairman of the Board of Directors Date: March 31, 1999 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated as of March 31, 1999. Signature Title --------- ----- /s/ Kurt M. Swenson President, Chief Executive Officer and - ------------------------ Chairman of the Board of Directors Kurt M. Swenson (Principal Executive Officer) /s/ John L. Forney Chief Financial Officer and Treasurer - ------------------------ (Principal Financial Officer and John L. Forney Principal Accounting Officer) /s/ Richard C. Kimball Vice Chairman and Chief Operating Officer, - ------------------------ Memorials Division, Director Richard C. Kimball /s/ Jon M. Gregory President and Chief Operating Officer, - ------------------------ Quarry Division, Director Jon M. Gregory /s/ George R. Anderson Senior Vice President, Director - ------------------------ George R. Anderson /s/ James L. Fox Director - ------------------------ James L. Fox /s/ Charles M. Waite Director - ------------------------ Charles M. Waite /s/ Frederick Webster Director - ------------------------ Frederick Webster 57 EXHIBIT INDEX Exhibit Number Description - ------ ----------- 3.1 Form of Amended and Restated Certificate of Incorporation of the Company (incorporated herein by reference to Exhibit 3.1 to the Company's Registration Statement on Form S-1 (Registration No. 333-33685) filed with the Securities and Exchange Commission on August 15, 1997 and declared effective on October 20, 1997) 3.2 By-laws of the Company (incorporated herein by reference to Exhibit 3.2 to the Company's Registration Statement on Form S-1 (Registration No. 333-33685) filed with the Securities and Exchange Commission on August 15, 1997 and declared effective on October 20, 1997) 4. Specimen Certificate representing the Class A Common Stock (incorporated herein by reference to Exhibit 4. to the Company's Registration Statement on Form S-1 (Registration No. 333-33685) filed with the Securities and Exchange Commission on August 15, 1997 and declared effective on October 20, 1997) 10.1* Rock of Ages Corporation Amended and Restated 1994 Stock Plan (as amended through October 26, 1998) 10.2* Employment Agreement of Kurt M. Swenson (incorporated herein by reference to Exhibit 10.2 to the Company's Registration Statement on Form S-1 (Registration No. 333-33685) filed with the Securities and Exchange Commission on August 15, 1997 and declared effective on October 20, 1997) 10.3* Employment Agreement of Peter Friberg (incorporated herein by reference to Exhibit 10.4 to the Company's Registration Statement on Form S-1 (Registration No. 333-33685) filed with the Securities and Exchange Commission on August 15, 1997 and declared effective on October 20, 1997) 10.4* Employment Agreement of Mark Gherardi (incorporated herein by reference to Exhibit 10.6 to the Company's Registration Statement on Form S-1 (Registration No. 333-33685) filed with the Securities and Exchange Commission on August 15, 1997 and declared effective on October 20, 1997) 10.5* Form of Employment Agreement with G. Thomas Oglesby, Jr., George T. Oglesby, III, Robert Otis Childs, III and John E. Keith (incorporated herein by reference to Exhibit 10.7 to the Company's Registration Statement on Form S-1 (Registration No. 333-33685) filed with the Securities and Exchange Commission on August 15, 1997 and declared effective on October 20, 1997) 10.6* Form of Employment Agreement with each of Richard C. Kimball, George R. Anderson and Jon M. Gregory (incorporated herein by reference to Exhibit 10.8 to the Company's Registration Statement on Form S-1 (Registration No. 333-33685) filed with the Securities and Exchange Commission on August 15, 1997 and declared effective on October 20, 1997) 10.7 Supply and Distribution Agreement dated as of June 27, 1997 by and among Keystone Granite Company, Inc., the Estate of George T. Oglesby and Rock of Ages Corporation (incorporated herein by reference to Exhibit 10.9 to the Company's Registration Statement on Form S-1 (Registration No. 333-33685) filed with the Securities and Exchange Commission on August 15, 1997 and declared effective on October 20, 1997) 10.8 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 (incorporated herein by reference to Exhibit 10.10 to the Company's Registration Statement on Form S-1 (Registration No. 333-33685) filed with the Securities and Exchange Commission on August 15, 1997 and declared effective on October 20, 1997) 10.9* Form of Salary Continuation Agreement (incorporated herein by reference to Exhibit 10.15 to the Company's Registration Statement on Form S-1 (Registration No. 333-33685) filed with the Securities and Exchange Commission on August 15, 1997 and declared effective on October 20, 1997) 10.10 Credit Facility dated as of June 25, 1997 between Royal Bank of Canada and Rock of Ages Canada, Inc., Rock of Ages Quarries Inc. and Rock of Ages Canada Inc. (incorporated herein by reference to Exhibit 10.20 to the Company's Registration Statement on Form S-1 (Registration No. 333-33685) filed with the Securities and Exchange Commission on August 15, 1997 and declared effective on October 20, 1997) 10.11 Financing Agreement dated December 17, 1997 by and between The CIT Group/Business Credit, Inc., Rock of Ages Corporation, Royalty Granite Corporation, Carolina Quarries, Inc., Pennsylvania Granite Corp., Childs & Childs Granite Company, Inc., Southern Mausoleums, Inc. and Rock of Ages Memorials LLC (incorporated herein by reference to Exhibit 10.19 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1997 filed with the Securities and Exchange Commission on March 31, 1998) 10.12 Exclusive Supply Agreement dated as of December 8, 1997 by and between Rock of Ages Corporation and Eurimex (incorporated herein by reference to Exhibit 10.21 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1997 filed with the Securities and Exchange Commission on March 31, 1998) 11. Statement re: computation of per share earnings (incorporated herein by reference to Note (1)(r) of the Company's consolidated financial statements (filed herewith)) 21. Subsidiaries of the Company 23. Consent of KPMG LLP 58 27. Financial Data Schedule - --------------------------- * This exhibit is a management contract or compensatory plan or arrangement. 59 EX-10.1 2 EXHIBIT 10.1 EXHIBIT 10.1 ROCK OF AGES CORPORATION AMENDED AND RESTATED 1994 STOCK PLAN As Approved by the Board of Directors and Shareholders on August 18, 1997 and as Amended by the Board of Directors on October 26, 1998 1. PURPOSE. This Amended and Restated 1994 Stock Plan (the "Plan") is intended to benefit and provide incentives: (a) to the employees of Rock of Ages Corporation, a Delaware corporation (the "Company"), its parent (if any) and any present or future subsidiaries of the Company (collectively, "Related Corporations"), by providing them with opportunities to purchase stock in the Company pursuant to options granted hereunder which qualify as "incentive stock options" ("ISO" or "ISOs") under Section 422(b) of the Internal Revenue Code of 1986, as amended (the "Code"); (b) to employees, directors and consultants of the Company and Related Corporations by providing them with opportunities to purchase stock in the Company pursuant to options granted hereunder which do not qualify as ISOs ("Non-Qualified Option" or "Non-Qualified Options"); and (c) to employees, directors and consultants of the Company and Related Corporations by providing them with awards or opportunities to make direct purchases of stock in the Company ("Awards"). Both ISOs and Non-Qualified Options are referred to hereinafter individually as an "Option" and collectively as "Options." Options and Awards are referred to hereinafter collectively as "Stock Rights." As used herein, the terms "parent" and "subsidiary" mean "parent corporation" and "subsidiary corporation," respectively, as those terms are defined in Section 424 of the Code. 2. ADMINISTRATION OF THE PLAN. (a) BOARD OR COMMITTEE ADMINISTRATION. The Plan shall be administered by a Committee of not less than two (2) persons, each of whom shall be a "Non- Employee Director" within the meaning of Rule 16b-3(b)(3)(i) promulgated under the Securities Exchange Act of 1934, as amended (the "Exchange Act") and an "outside director" within the meaning of Section 162(m) of the Code. The members of the Committee shall be appointed by the Company's Board of Directors (the "Board") and shall serve at the pleasure of the Board. If no Committee has been appointed to administer the Plan, the functions of the Committee specified in the Plan shall be carried out by the Board, except that at any time after a registration of any of the Company's stock under the Exchange Act or the Company otherwise becomes subject to the reporting requirements of the Exchange Act, administration by a Committee is required. Subject to the terms of the Plan, the Committee shall have the authority to: (i) determine the employees of the Company and Related Corporations (from among the class of employees eligible under paragraph 3 to receive ISOs) to whom ISOs may be granted, and to determine (from among the class of individuals and entities eligible under paragraph 3 to receive Non-Qualified Options and Awards) to whom Non-Qualified Options and Awards may be granted; (ii) determine the time or times at which Options or Awards may be granted; (iii) determine the option price of shares subject to each Option, which price shall not be less than the minimum price specified in paragraph 6, and the purchase price (if any) of shares subject to each Award; (iv) determine whether each Option granted shall be an ISO or a Non-Qualified Option; (v) determine (subject to paragraph 7) the time or times when each Option shall become exercisable and the duration of the exercise period; (vi) determine whether restrictions such as repurchase rights and other vesting restrictions are to be imposed on shares subject to Options and Awards and the nature of such restrictions, if any; and (vii) interpret the Plan and prescribe and rescind rules and regulations relating to it. -2- If the Committee determines to issue a Non-Qualified Option, it shall designate the Non-Qualified Option as such upon grant and in the agreement governing such Non-Qualified Option. The interpretation and construction by the Committee of any provisions of the Plan or of any Stock Right granted under it shall be final unless otherwise determined by regulations for carrying out the Plan as it may deem best. No member of the Board or the Committee shall be liable for any action or determination made in good faith with respect to the Plan or any Stock Right granted under the Plan. (b) COMMITTEE ACTIONS. The Committee may select one of its members as its chairman, and shall hold meetings at such time and place as it may determine. Acts by a majority of the Committee, or acts reduced to or approved in writing by a majority of the members of the Committee, shall be the valid acts of the Committee. All references in this Plan to the Committee shall mean the Board if no Committee has been appointed. 3. ELIGIBLE EMPLOYEES AND OTHERS. ISOs may be granted to any employee (including employees who serve as officers or directors) of the Company or any Related Corporation. Non-Qualified Options and Awards may be granted to any employee (including an employee who serves as an officer or director), director or consultant (including a consultant who also serves as a director) of the Company or any Related Corporation. The Committee may take into consideration a recipient's individual circumstances in determining whether to grant a Stock Right. No participant in the Plan shall be granted Stock Rights which in the aggregate exceed fifty percent (50%) of the total number of shares of Class A Common Stock, par value one cent ($.01) per share ("Class A Common Stock"), and Class B Common Stock, par value one cent ($.01) per share, of the Company (collectively, the "Common Stock"), authorized to be issued with respect to such Stock Rights pursuant to the Plan. The granting of any Stock Right to any individual or entity shall neither entitle that individual or entity to, nor disqualify him from, participation in any other grant of Stock Rights. 4. STOCK. The stock subject to Options and Awards shall be authorized but unissued shares of Common Stock or shares of Common Stock reacquired by the Company in any manner; provided that the stock subject to Options granted on or after the date of consummation of the Company's initial public offering shall be Class A Common Stock only. The aggregate number of shares which may be issued pursuant to the Plan is one million five hundred thousand (1,500,000), which aggregate number of shares reflects (i) the adjustment, pursuant to paragraph 13 of the Plan as in effect at the time, and as a result, of the reincorporation merger of Rock of Ages Corporation, a -3- Vermont corporation and the predecessor to the Company, with and into the Company on August 12, 1997 (the "Reincorporation Merger"), including the one-for-two reverse stock split effected pursuant to the Reincorporation Merger, and (ii) a five hundred thousand (500,000) share increase in such aggregate number of shares approved by the Board as of August 18, 1997, in connection with the approval and adoption by the Board of the Plan as set forth in paragraph 15 hereof, subject to adjustment as provided in paragraph 13. Any such shares may be issued pursuant to ISOs, Non-Qualified Options or Awards, so long as the number of shares so issued does not exceed such number, as adjusted. If any Option granted under the Plan shall expire or terminate for any reason without having been exercised in full or shall cease for any reason to be exercisable in whole or in part, or if the Company shall reacquire any unvested shares issued pursuant to Awards, the unpurchased shares subject to such Options and any unvested shares so reacquired by the Company shall again be available for grants of Stock Rights under the Plan. 5. GRANTING OF STOCK RIGHTS. Stock Rights may be granted under the Plan at any time on or after November 21, 1994, and prior to November 21, 2004. The date of grant of a Stock Right under the Plan will be the date specified by the Committee at the time it grants the Stock Right; provided, however, that such date shall not be prior to the date on which the Committee acts to approve the grant. The Committee shall have the right, with the consent of the optionee, to convert an ISO granted under the Plan to a NonQualified Option pursuant to paragraph 16. 6. MINIMUM OPTION PRICE; ISO LIMITATIONS. (a) PRICE FOR NON-QUALIFIED OPTIONS. The exercise price per share specified in the agreement relating to each Non-Qualified Option granted under the Plan shall in no event be less than the par value per share of Common Stock as of the date of grant. (b) EXERCISE PRICE FOR ISOS. The exercise price per share of Common Stock specified in the agreement relating to each ISO granted under the Plan shall not be less than the fair market value per share of Common Stock on the date of such grant. In the case of an ISO to be granted to an employee owning stock possessing more than ten percent (10%) of the total combined voting power of all classes of stock of the Company or any Related Corporation, the price per share specified in the agreement relating to such ISO shall not be less than one hundred ten percent (110%) of the fair market value per share of Common Stock on the date of such grant. -4- (c) $100,000 ANNUAL LIMITATION ON ISOS. Each eligible employee may be granted ISOs only to the extent that, in the aggregate under this Plan and all incentive stock option plans of the Company and any Related Corporation, such ISOs do not become exercisable for the first time by such employee during any calendar year in a manner which would entitle the employee to purchase more than One Hundred Thousand Dollars ($100,000) in fair market value (determined at the time the ISOs were granted) of Common Stock in that year. Any options granted to an employee in excess of such amount will be granted as Non-Qualified Options. (d) DETERMINATION OF FAIR MARKET VALUE. If, at the time an Option is granted under the Plan, the Company's Common Stock is publicly traded, "fair market value" shall be determined as of the last business day for which the prices or quotes referred to in this sentence are available prior to the date such Option is granted and shall mean (i) the average (on that date) of the high and low prices of the Common Stock on the principal national securities exchange on which the Common Stock is traded, if the Common Stock is then traded on a national securities exchange; or (ii) the last reported sale price (on that date) of the Common Stock on the NASDAQ National Market, if the Common Stock is not then traded on a national securities exchange; or (iii) the closing bid price (or average bid prices) last quoted (on that date) by an established quotation service for over-the-counter securities, if the Common Stock is not then listed on the NASDAQ National Market. However, if the Common Stock is not publicly traded at the time an Option is granted under the Plan, "fair market value" shall be deemed to be the fair market value of the Common Stock as determined by the Committee after taking into consideration all factors which it deems appropriate, including, without limitation, recent sale and offer prices of the Common Stock in private transactions negotiated at arm's length. 7. OPTION DURATION. Subject to earlier termination as provided in paragraphs 9 and 10, each Option shall expire on the date specified by the Committee, but not more than (i) ten (10) years from the date of grant in the case of Non-Qualified Options and in the case of ISOs generally, and (ii) five (5) years from the date of grant in the case of ISOs granted to an employee owning stock possessing more than ten percent (10%) of the total combined voting power of all classes of stock of the Company or any Related Corporation. Subject to earlier termination as provided in paragraphs 9 and 10, the term of each ISO shall be the term set forth in the original instrument granting such ISO, except with respect to any part of such ISO that is converted into a Non-Qualified Option pursuant to paragraph 16. -5- 8. EXERCISE OF OPTION. Subject to the provisions of paragraphs 9 through 12, each Option granted under the Plan shall be exercisable as follows: (a) VESTING. The Option (or any portion thereof) shall either be fully exercisable on the date of grant or shall become exercisable thereafter in such installments as the Committee may specify. (b) FULL VESTING OF INSTALLMENTS. Once an installment becomes exercisable, it shall remain exercisable until expiration or termination of the Option, unless otherwise specified by the Committee. (c) PARTIAL EXERCISE. Each Option or installment may be exercised at any time or from time to time, in whole or in part, for up to the total number of shares with respect to which it is then exercisable. (d) ACCELERATION OF VESTING. The Committee shall have the right to accelerate the date of exercise of any installment of any Option; provided, that the Committee shall not, without the consent of an optionee, accelerate the exercise date of any installment of any Option granted to any employee as an ISO (and not previously converted into a Non-Qualified Option pursuant to paragraph 16) if such acceleration would violate the annual vesting limitation contained in Section 422(d) of the Code, as described in paragraph 6(c). 9. TERMINATION OF EMPLOYMENT. If an ISO optionee ceases to be employed by the Company and all Related Corporations other than by reason of death or disability as defined in paragraph 10, no further installments of his ISOs shall become exercisable (unless otherwise approved by the Committee), and his ISOs which are exercisable on the date of termination of his employment shall terminate after the passage of three (3) months from the date of termination of his employment, but in no event later than on their specified expiration dates, except (i) in the case of termination for "Misconduct," as defined in the instrument granting such ISOs, in which case such ISOs shall terminate automatically on the date of such termination, and (ii) to the extent that such ISOs (or unexercised installments thereof) have been converted into Non-Qualified Options pursuant to paragraph 16. Employment shall be considered as continuing uninterrupted during any bona fide leave of absence (such as those attributable to illness, military obligations or governmental service); provided, that the period of such leave does not exceed three (3) months or, if longer, any period during which such optionee's right to reemployment is guaranteed by statute. A bona fide leave of absence with the written approval of the Committee shall not be considered an interruption of employment under -6- the Plan, provided, that such written approval contractually obligates the Company or any Related Corporation to continue the employment of the optionee after the approved period of absence. ISOs granted under the Plan shall not be affected by any change of employment within or among the Company and Related Corporations, so long as the optionee continues to be an employee of the Company or any Related Corporation. Nothing in the Plan shall be deemed to give any grantee of any Stock Right the right to be retained in employment or other service by the Company or any Related Corporation for any period of time. 10. DEATH; DISABILITY. (a) DEATH. If an ISO optionee ceases to be employed by the Company and all Related Corporations by reason of his death, any ISO of his may be exercised, to the extent of the number of shares with respect to which he could have exercised it on the date of his death, by his estate, personal representative or beneficiary who has acquired the ISO by will or by the laws of descent and distribution, at any time prior to the earlier of the specified expiration date of the ISO or one hundred eighty (180) days from the date of the optionee's death or such longer period not in excess of one (1) year as the Committee shall determine. (b) DISABILITY. If an ISO optionee ceases to be employed by the Company and all Related Corporations by reason of his disability, he shall have the right to exercise any ISO held by him on the date of termination of employment, to the extent of the number of shares with respect to which he could have exercised it on that date, at any time prior to the earlier of the specified expiration date of the ISO or one hundred eighty (180) days from the date of the termination of the optionee's employment or such longer period not in excess of one (1) year as the Committee shall determine. For the purposes of the Plan, the term "disability" shall mean "permanent and total disability" as defined in Section 22(e)(3) of the Code or successor statute. 11. ASSIGNABILITY. No Option shall be assignable or transferable by the optionee except by will or by the laws of descent and distribution or, in the sole discretion of the Committee at the time of the proposed assignment or transfer, pursuant to a qualified domestic relations order as defined under the Code or Title I of the Employee Retirement Income Security Act of 1974, as amended, (or the rules thereunder), or as the Committee, in its sole discretion, shall otherwise permit. The Option shall be exercisable during the lifetime of the optionee only by such optionee or his guardian or legal representative, or by an assignee or transferee if the Option has been assigned or transferred in compliance -7- with the immediately preceding sentence.. Notwithstanding the foregoing, to the extent the instrument evidencing any Non-Qualified Option so provides, and subject to the conditions that the Committee may prescribe, an optionee may, upon providing written notice to the President of the Company, elect to transfer the Options granted to such optionee pursuant to such instrument, without consideration therefor. The terms of such Option shall be binding upon any recipient of such Option. 12. TERMS AND CONDITIONS OF OPTIONS. Options shall be evidenced by instruments (which need not be identical) in such forms as the Committee may from time to time approve. Such instruments shall conform to the terms and conditions set forth in paragraphs 6 through 11 hereof and may contain such other provisions as the Committee deems advisable which are not inconsistent with the Plan, including restrictions applicable to shares of Common Stock issuable upon exercise of Options (including, without limitation, rights of repurchase by the Company and, in the event of an underwritten public offering of the Company's securities, restrictions on any sale or distribution by the optionee of any of the Company's common equity for a period of time as the underwriters in such public offering shall determine). In granting any Non-Qualified Option, the Committee may specify that such Non-Qualified Option shall be subject to the restrictions set forth herein with respect to ISOs, or to such other termination, cancellation and other provisions not inconsistent with the Plan as the Committee may determine. The Committee may from time to time confer authority and responsibility on one or more of its own members or one or more officers of the Company to execute and deliver such instruments. The proper officers of the Company are authorized and directed to take any and all action necessary or advisable from time to time to carry out the terms of such instruments. 13. ADJUSTMENTS. Upon the occurrence of any of the following events, an optionee's rights with respect to Options granted to him hereunder shall be adjusted as and to the extent hereinafter required, unless otherwise specifically provided in the written agreement between the optionee and the Company relating to such Option: (a) STOCK DIVIDENDS AND STOCK SPLITS. If the shares of Common Stock shall be subdivided or combined into a greater or smaller number of shares or if the Company shall issue any shares of Common Stock as a stock dividend on its outstanding Common Stock, the number of shares of Common Stock deliverable upon the exercise of Options shall be appropriately increased or decreased proportionately and appropriate adjustments shall be made in the purchase price per share to reflect such subdivision, combination or stock dividend. -8- (b) CONSOLIDATIONS OR MERGERS. If the Company is to be consolidated with or acquired by another entity in a merger, sale of all or substantially all of the Company's assets or otherwise (an "Acquisition"), the Committee or the Board of Directors of any entity assuming the obligations of the Company hereunder (the "Successor Board"), shall, as to the outstanding Options, either (i) make appropriate provision for the continuation of such Options by (A) substituting on an equitable basis for the shares then subject to such Options the consideration payable with respect to the outstanding shares of Common Stock in connection with the Acquisition, or (B) making such other equitable changes or adjustments in the terms of such Options (including, without limitation, the type or number of shares of capital stock subject to such Options and the respective exercise prices thereof) as the Successor Board shall deem necessary or appropriate; (ii) upon written notice to the optionees, provide that all Options must be exercised, to the extent then exercisable (or in the discretion of the Committee or the Successor Board, also provide that all unvested Options shall be, or become at the time which the Committee shall determine, immediately exercisable), within a specified number of days of the date of such notice, at the end of which period the Options shall terminate; or (iii) terminate all Options in exchange for a cash payment or other consideration equal to the excess of the fair market value of the shares subject to such Options (to the extent then exercisable, or in the discretion of the Committee or the Successor Board, whether or not then exercisable) over the exercise price thereof. (c) RECAPITALIZATION OR REORGANIZATION. In the event of a recapitalization or reorganization of the Company (other than a transaction described in subparagraph (b) above) pursuant to which securities of the Company or of another corporation are issued with respect to the outstanding shares of Common Stock, an optionee upon exercising an Option shall be entitled to receive for the purchase price paid upon such exercise, the securities he would have received if he had exercised his Option immediately prior to such recapitalization or reorganization. (d) MODIFICATION OF ISOS. Notwithstanding the foregoing, any adjustments made pursuant to subparagraphs (a), (b), or (c) with respect to ISOs shall be made only after the Committee, after consulting with counsel for the Company, determines whether such adjustments would constitute a "modification" of such ISOs (as that term is defined in Section 424 of the Code) or would cause any adverse tax consequences for the holders of such ISOs. If the Committee determines that such adjustments made with respect to ISOs would constitute a modification of such ISOs, it may refrain from making such adjustments. -9- (e) DISSOLUTION OR LIQUIDATION. In the event of the proposed dissolution or liquidation of the Company, each Option will terminate immediately prior to the consummation of such proposed action or at such other time and subject to such other conditions as shall be determined by the Committee. (f) ISSUANCES OF SECURITIES. Except as expressly provided herein, no issuance by the Company of shares of stock of any class, or securities convertible into shares of stock of any class, shall affect, and no adjustment by reason thereof shall be made with respect to, the number or price of shares subject to Options. No adjustments shall be made for dividends paid in cash or in property other than securities of the Company. (g) FRACTIONAL SHARES. No fractional shares shall be issued under the Plan and the optionee shall receive from the Company cash in lieu of such fractional shares. (h) ADJUSTMENTS. Upon the happening of any of the events described in subparagraphs (a), (b), or (c) above, the class and aggregate number of shares set forth in paragraph 4 hereof that are subject to Stock Rights which previously have been or subsequently may be granted under the Plan shall also be appropriately adjusted to reflect the events described in such subparagraphs. If changes in the capitalization of the Company shall occur other than those referred to above in this paragraph 13, the Committee shall make such adjustments, if any, in the number of shares covered by each Option and in the per share purchase price as the Committee in its discretion may consider appropriate. The Committee or, if applicable, the Successor Board, shall determine the specific adjustments to be made under this paragraph 13 and its determination shall be conclusive. If any person or entity owning restricted Common Stock obtained by exercise of a Stock Right made hereunder receives shares or securities or cash in connection with a corporate transaction described in subparagraphs (a), (b), or (c) above as a result of owning such restricted Common Stock, such shares or securities or cash shall be subject to all of the conditions and restrictions applicable to the restricted Common Stock with respect to which such shares or securities or cash were issued, unless otherwise determined by the Committee or the Successor Board. 14. MEANS OF EXERCISING OPTIONS. An Option (or any part or installment thereof) shall be exercised by giving written notice to the Company at its principal executive office or to the transfer agent as the Company shall designate. Such notice -10- shall identify the Option being exercised and specify the number of shares as to which such Option is being exercised, accompanied by full payment of the purchase price therefor either (a) in United States dollars in cash or by check, (b) at the discretion of the Committee at the time of exercise, through delivery of shares of Common Stock having an aggregate fair market value (as determined by the Committee in its sole discretion) equal as of the date of the exercise to the cash exercise price of the Option, (c) at the discretion of the Committee at the time of exercise, by delivery of the grantee's personal recourse note bearing interest payable not less than annually at no less than one hundred percent (100%) of the lowest applicable Federal rate, as defined in Section 1274 (d) of the Code, or (d) at the discretion of the Committee at the time of exercise, by any combination of (a), (b), or (c) above. In connection with any payment pursuant to clause (c) above, the Committee may require the optionee to concurrently execute and deliver to the Company a pledge agreement in a form reasonably satisfactory to the Company, together with a stock certificate or certificates representing shares of the Company's Common Stock (having an aggregate fair market value, as determined by the Committee at the time of exercise, equal as of the date of exercise to at least the value of the principal amount of the note), duly endorsed or accompanied by a stock power or powers duly endorsed, to secure the optionee's obligations under such personal recourse note. The holder of an Option shall not have the rights of a shareholder with respect to the shares covered by his Option until the date of issuance of a stock certificate to him for such shares. Except as expressly provided above in paragraph 13 with respect to changes in capitalization and stock dividends, no adjustment shall be made for dividends or similar rights for which the record date is before the date such stock certificate is issued. 15. TERM AND AMENDMENT OF PLAN. The Plan was originally adopted by the Board and the shareholders of the Company on November 21, 1994. The Plan was amended by action of the Board which, on December 16, 1996, approved and adopted an amendment and restatement thereof, effective on December 31, 1996, which amendment and restatement was approved by the sole shareholder of the Company on December 31, 1996. The Plan as currently in effect was approved and adopted by the Board as of August 18, 1997, and was approved by the shareholders of the Company as of August 18, 1997. The Plan shall expire at the end of the day on November 21, 2004 (except as to Stock Rights outstanding on that date). The Board may terminate or amend the Plan in any respect at any time; provided, that no such amendment or termination shall adversely affect any Plan participant's rights under any Stock Right previously granted, without such participant's written consent. 16. CONVERSION OF ISOS INTO NON-QUALIFIED OPTIONS; TERMINATION OF ISOS. The Committee, at the written request of any optionee, may in its discretion, take such actions -11- as may be necessary to convert such optionee's ISOs (or any installments or portions of installments thereof) that have not been exercised on the date of conversion into Non-Qualified Options at any time prior to the expiration of such ISOs, regardless of whether the optionee is an employee of the Company or a Related Corporation at the time of such conversion. Such actions may include, but not be limited to, extending the exercise period or reducing the exercise price of the appropriate installments of such ISOs. At the time of such conversion, the Committee (with the consent of the optionee) may impose such conditions on the exercise of the resulting Non-Qualified Options as the Committee in its discretion may determine; provided, that such conditions shall not be inconsistent with this Plan. Nothing in the Plan shall be deemed to give any optionee the right to have such optionee's ISOs converted into Non-Qualified Options, and no such conversion shall occur until and unless the Committee takes appropriate action. The Committee, with the consent of the optionee, may also terminate any portion of any ISO that has not been exercised at the time of such conversion. 17. GOVERNMENTAL REGULATION. The Company's obligation to sell and deliver shares of the Common Stock under this Plan is subject to the approval of any governmental authority required in connection with the authorization, issuance or sale of such shares. 18. TAX WITHHOLDING. Upon the exercise of a Non-Qualified Option, the grant of an Award or the making of a purchase of Common Stock for less than its fair market value pursuant to an Award, the making of a Disqualifying Disposition (as defined in paragraph 19) or the vesting of Restricted Stock (as defined in paragraph 20), the Company, in accordance with Section 3402(a) of the Code, may require the optionee or Award recipient to pay withholding taxes in respect of the amount that is considered compensation required to be included in such person's gross income. The Committee, in its discretion, may condition (i) the exercise of an Option, (ii) the grant of an Award, (iii) the making of a purchase of Common Stock for less than its fair market value pursuant to an Award, or (iv) the vesting of Restricted Stock on the grantee's payment of such withholding taxes. The Committee shall have the sole discretion to determine the form in which payment of such withholding taxes will be made (i.e., cash, securities, or a combination thereof). 19. NOTICE TO COMPANY OF DISQUALIFYING DISPOSITION. Each employee who receives an ISO must agree to notify the Company in writing immediately after the employee makes a Disqualifying Disposition of any Common Stock acquired pursuant to the exercise of an ISO. A Disqualifying Disposition is any disposition (including any sale) of such Common Stock before the later of (a) two (2) years after the date the -12- employee was granted the ISO, or (b) one (1) year after the date the employee acquired Common Stock by exercising the ISO. If the employee has died before such stock is sold, these holding period requirements do not apply and no Disqualifying Disposition can occur thereafter. 20. PROVISIONS RELATED TO RESTRICTED STOCK AND OTHER AWARDS. (a) Awards of shares of Common Stock may be granted either alone, in addition to or in tandem with other awards granted under the Plan or cash awards made outside the Plan, and such shares may be subject to repurchase by the Company upon such terms and conditions as the Committee may determine (such shares subject to such repurchase being referred to as "Restricted Stock"). The Committee shall determine the eligible persons to whom, and the time or times at which, Awards will be made, the number of shares to be awarded, the price (if any) to be paid by the Award recipient, in the case of Restricted Stock, the time or times within which such shares of Restricted Stock may be subject to forfeiture and all other terms and conditions of any such Award. The Committee may condition an Award or the vesting of Restricted Stock upon the attainment of specified performance goals or such other factors as the Committee may determine in its sole discretion. The terms and conditions of Awards need not be the same for each recipient. (b) The prospective recipient of an Award shall not have any rights with respect to such Award, unless and until such recipient has executed an agreement evidencing the Award and has delivered a fully executed copy thereof to the Company, and has otherwise complied with the applicable terms and conditions of such Award. (i) The consideration for shares issued pursuant to an Award shall be equal to or greater than their par value. (ii) Awards must be accepted within a period of sixty (60) days (or such shorter period as the Committee may specify at grant) after the Award date, by executing an Award agreement and paying whatever price (if any) is required under the Award. (iii) A stock certificate in respect of shares of Common Stock which are the subject of an Award shall be issued in the name of the -13- participant receiving such Award, and shall bear an appropriate legend referring to the terms, conditions and restrictions applicable to such Award. (iv) The Committee may require that the stock certificates evidencing shares of Restricted Stock be held in custody by the Company until the restrictions thereon shall have lapsed, and that, as a condition of any Restricted Stock Award, the participant shall have delivered a stock power, endorsed in blank, relating to the shares of Restricted Stock covered by such Award. (c) Awards of shares of Restricted Stock under the Plan shall be subject to the following restrictions and conditions (in addition to other restrictions and conditions set forth in the Award agreement with respect to such shares not inconsistent with this Plan which the Committee shall determine in its sole discretion): (i) Subject to the provisions of the Plan and the Award agreement, during a period set by the Committee commencing with the date of such Award (the "Restricted Period"), the participant shall not be permitted to sell, transfer, pledge or assign shares of Restricted Stock issued pursuant to an Award. The Committee, in its sole discretion, may provide for the lapse of such restrictions in installments and may accelerate or waive such restrictions in whole or in part, based on service, performance or such other factors or criteria as the Committee may determine, in its sole discretion. The Award agreement may contain other restrictions and conditions not inconsistent with the Plan as the Committee shall deem appropriate, including, without limitation, rights of repurchase by the Company and, in the event of an underwritten public offering of the Company's securities, restrictions on any sale or distribution by the Award recipient of any of the Company's common equity for a period of time as the underwriters in such public offering shall determine. (ii) Except as provided herein, the recipient shall have, with respect to shares of Restricted Stock issued pursuant to an Award, all of the rights of a shareholder of the Company, including the right to vote the shares, and the right to receive any cash dividends. The Committee may, in its sole discretion, at the time of the grant of an Award of Restricted Stock, permit or require the payment of cash dividends with respect to such Restricted Stock to be deferred and, if the Committee so determines, -14- reinvested in additional shares of Restricted Stock to the extent shares are available under the Plan, or otherwise reinvested. Stock dividends issued with respect to Restricted Stock shall be treated as additional shares of Restricted Stock that are subject to the same restrictions and other terms and conditions that apply to the shares with respect to which such dividends are issued. (iii) Subject to the applicable provisions of the Award agreement, if and when the Restricted Period expires without a prior forfeiture of the Restricted Stock subject to such Restricted Period, certificates for an appropriate number of unrestricted shares (without any legend referred to in subparagraph (iii) of subsection (b) of Section 20) shall be delivered to the participant promptly upon the surrender and cancellation of the previously issued certificate(s) representing such shares. 21. GOVERNING LAW; CONSTRUCTION. The validity and construction of the Plan and the instruments evidencing Stock Rights shall be governed by the laws of the State of Delaware, or the laws of any jurisdiction in which the Company or its successors in interest may be organized. In construing this Plan, the singular shall include the plural and the masculine gender shall include the feminine and neuter, unless the context otherwise requires. -15- EX-21 3 EXHIBIT 21 EXHIBIT 21 Subsidiaries of the Company Place of Incorporation - --------------------------- ---------------------- Associated Memorials Inc. Vermont Autumn Rose Quarry, Inc. Georgia C&K Trucking Inc. Georgia Carolina Quarries, Inc. Georgia Kabushiki Kaisha Rock of Ages Asia* Japan Keith Monuments Company LLC Delaware Keystone & Childs Inc. Georgia Pennsylvania Granite Corp. Pennsylvania Rock of Ages Canada, Inc. Canada Rock of Ages International Corp. Japan Rock of Ages International, Ltd. Virgin Islands Rock of Ages Memorials Inc. Delaware Sioux Falls Monument Co. South Dakota *50% owned EX-23 4 EXHIBIT 23 The Board of Directors Rock of Ages Corporation: We consent to the use of our reports included herein (or incorporated herein by reference) and to the reference to our firm under the heading "Experts" in the prospectus. KPMG LLP Burlington, Vermont March 29, 1999 EX-27 5 EXHIBIT 27
5 1,000 12-MOS 12-MOS DEC-31-1997 DEC-31-1998 DEC-31-1997 DEC-31-1998 0 4,701 0 0 0 14,004 0 2,124 0 24,075 0 45,266 0 76,208 0 31,733 93,331 121,893 0 18,746 0 0 0 74 0 0 0 0 0 85,763 93,331 121,893 0 82,746 0 82,746 0 30,421 0 30,421 0 20,371 0 0 0 511 0 9,539 0 2,303 0 7,236 0 0 0 0 0 0 0 7,236 0 .98 0 .91
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