Rock of Ages (ROAC) 10-Q 2003 Q1 Quarterly report

Click here for a list of Quick Links

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

 Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

 For the quarterly period ended March 31, 2003

 OR

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

For the transition period from ______________ to ______________

 Commission file number: 0-29464

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

Delaware
(State or other jurisdiction of
incorporation or organization) 03-0153200
(I.R.S. Employer
Identification No.)

772 Graniteville Road, Graniteville, Vermont       05654
(Address of principal executive offices)                (Zip Code)

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

Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period than the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X   No ___

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

As of May 12, 2003, 4,418,836 shares of Class A Common Stock, par value $0.01 per share, and 2,756,395 shares of Class B Common Stock, par value $0.01 per share, of Rock of Ages Corporation were outstanding.

ROCK OF AGES CORPORATION

INDEX

Form 10-Q for the Quarterly Period
Ended March 31, 2003

PART I	FINANCIAL INFORMATION		PAGE NO.
Item 1.	Financial Statements
		Consolidated Balance Sheets - March 31, 2003 and December 21, 2002	4
		Consolidated Statements of Operations - Three Months Ended March 31, 2003 and 2002	5
		Consolidated Statements of Cash Flows - Three Months Ended March 31, 2003 and 2002	6
		Notes to Consolidated Financial Statements	7
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations		11
Item 3.	Quantitative and Qualitative Disclosures About Market Risk		22
Item 4.	Controls and Procedures		22
PART II	OTHER INFORMATION
Item 1.	Legal Proceedings		23
Item 5.	Other Information		23
Item 6.	Exhibits and Reports on Form 8-K		24
Signature			25
Certifications			26

2

Special Note Regarding Forward-Looking Statements

This Quarterly Report on Form 10-Q (including exhibits and information incorporated by reference herein) contains certain "forward-looking" statements within the meaning of Section 21E of the Securities and Exchange Act of 1934, as amended (the "Exchange Act"), including but not limited to those that discuss strategies, goals, outlook or other non-historical matters, or projected or anticipated 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 or indicated by such statements, including but not limited to the ability of the Company to continue to identify suitable acquisition candidates, to consummate additional retail acquisitions on acceptable terms and to successfully integrate the operations of such acquired entities, to successfully open new retail stores, demand for the Company's products, as well as general economic, competitive, key employee and other factors described in this report or other filings with the Securities and Exchange Commission. See "Risk Factors That May Affect Future Results" under Item 2 below. 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.

PART I: FINANCIAL INFORMATION
Item 1: Financial Statement

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

		March 31,			December 31,
		2003			2002
ASSETS
Current Assets:
Cash and cash equivalents	$	1,000		$	6,185
Trade receivables, net		13,385			17,671
Inventories		23,076			21,654
Prepaid & refundable income taxes		2,054			213
Due from affiliates		3			—
Deferred tax assets		694			860
Other current assets		4,422			4,125
Total current assets		44,634			50,708
Property, plant and equipment, net		44,339			43,921
Cash surrender value of life insurance, net		742			766
Other intangible assets, net		540			574
Due from affiliates		81			81
Deferred tax assets		6,249			6,249
Intangible pension asset		1,136			1,136
Prearranged receivables		14,040			14,013
Cemetery property		6,018			6,056
Other		2,406			2,330
Total assets	$	120,185		$	125,834
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Borrowings under lines of credit	$	4,854		$	4,386
Current installments of long-term debt		200			205
Current installments of deferred compensation		326			324
Trade payables		1,573			1,957
Accrued expenses		3,527			5,001
Due to Affiliates					9
Customer deposits		10,189			7,318
Total current liabilities		20,669			19,200
Long-term debt, excluding current installments		12,819			12,832
Deferred compensation		4,704			4,649
Prearranged deferred revenue		21,661			21,846
Accrued pension cost		2,716			2,691
Accrued postretirement benefit cost		834			834
Other		1,242			1,136
Total liabilities		64,645			63,188
Commitments
Stockholders' equity:
Preferred stock - $.01 par value;
2,500,000 shares authorized, no shares issued or outstanding
Common Stock - Class A, $.01 par value;
30,000,000 shares authorized
4,418,836  and 4,929,336  shares issued and outstanding		44			49
Common Stock - Class B, $.01 par value;
15,000,000 shares authorized
2,756,395 and 2,756,395 shares issued and outstanding		28			28
Additional paid-in capital		65,904			68,574
Accumulated deficit		(8,323	)		(3,442	)
Accumulated other comprehensive loss		(2,113	)		(2,563	)
Total stockholders' equity		55,540			62,646
Total liabilities and stockholders' equity	$	120,185		$	125,834

**SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

3

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

		Three Months Ended
		March 31,
		2003			2002
Net Revenues:
Quarrying	$	2,897		$	4,220
Manufacturing		3,579			3,419
Retailing		3,137			3,515
Cemeteries		977			1,008
Total net revenues		10,590			12,162
Gross Profit:
Quarrying		(660	)		839
Manufacturing		873			317
Retailing		1,224			1,158
Cemeteries		392			406
Total gross profit		1,829			2,720
Selling, general and administrative expenses		8,104			7,454
Loss from operations		(6,275	)		(4,734	)
Interest expense		149			175
Loss before benefit for income taxes		(6,424	)		(4,909	)
Income tax benefit		(1,543	)		(1,184	)
Net loss before cumulative effect of changes in accounting         principles	$	(4,881	)	$	(3,725	)
Cumulative effect of changes in accounting principles, net of         tax effect of $5,459, (Note 2)		—			(28,710	)
Net loss	$	(4,881	)	$	(32,435	)
Net loss per share - basic:
Net loss before cumulative effect of changes in accounting        principles	$	(0.68	)	$	(0.47	)
Cumulative effect of changes in accounting principles		—			(3.66	)
Net loss per share - basic	$	(0.68	)	$	(4.13	)
Net loss per share - diluted:
Net loss before cumulative effect of changes in accounting          principles	$	(0.68	)	$	(0.47	)
Cumulative effect of changes in accounting principles		—			(3.66	)
Net loss per share - diluted		$(0.68)			$(4.13)
Weighted average number of common shares outstanding - basic		7,186			7,847
Weighted average number of common shares outstanding - diluted		7,186			7,847

**SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 4

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

		Three Months Ended
		March 31,
		2003			2002
Cash flows from operating activities:
Net loss	$	(4,881	)	$	(32,435	)
Adjustments to reconcile net income (loss) to net cash used in      operating activities:
Goodwill impairment		—			33,782
Depreciation, depletion and amortization		943			761
Cash surrender value of life insurance		24			62
Deferred taxes		166			(5,352	)
Changes in assets and liabilities:
Decrease in trade receivables		4,286			2,105
Decrease (increase) in prearranged receivables		(27	)		459
Decrease (increase) in due from related parties		(12	)		25
Increase in inventories		(1,422	)		(1,011	)
Decrease (increase) in cemetery property		38			(56	)
Increase in other assets		(384	)		(322	)
Decrease in trade payables, accrued expenses and income
taxes payable		(3,699	)		(2,414	)
Increase in customer deposits		2,871			3,802
Increase (decrease) in deferred compensation and pension		82			(6	)
Decrease in prearranged deferred revenue		(185	)		(199	)
Increase (decrease) in other liabilities		106			(89	)
Net cash used in operating activities		(2,094	)		(888	)
Cash flows from investing activities:
Purchases of property, plant and equipment		(1,147	)		(934	)
Increase in intangibles		(5	)		—
Proceeds from sale of assets		—			2,296
Net cash provided by (used in) investing activities		(1,152	)		1,362
Cash flows from financing activities:
Net borrowings (repayments) under lines of credit		468			(132	)
Net stock option transactions		—			238
Treasury stock repurchase		(2,603	)		—
Principal payments on long-term debt		(18	)		(1,964	)
Dividends paid on common stock		(71	)		—
Net cash provided by (used in) financing activities		(2,224	)		(1,858	)
Effect of exchange rate changes on cash		285			(32	)
Net decrease in cash and cash equivalents		(5,185	)		(1,416	)
Cash and cash equivalents, beginning of period		6,185			3,435
Cash and cash equivalents, end of period	$	1,000		$	2,019
Supplemental cash flow information:
Cash paid during the quarter for:
Interest		149			175
Income taxes		155			208
Supplemental non-cash investing activities:
During the first quarter of 2002 the Company completed the sale of the Lawson plant in which $2,296,216 was received in cash (net of closing costs) plus a note receivable of $250,000.

**SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

5

ROCK OF AGES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(1)	Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared pursuant to the rules and regulations for reporting on Form 10-Q. Accordingly, certain information and notes required by generally accepted accounting principles for complete financial statements are not included herein. In the opinion of management, all adjustments of a normal recurring nature considered necessary for a fair presentation have been included. Results of operations for the interim periods are not necessarily indicative of the results that may be expected for a full year. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company's Annual Report on Form 10-K (SEC File No. 000-29464, filed March 31, 2003), and Form 10-K/A filed on April 3, 2003.
(2)	Accounting Changes
In December 2002, the Company changed its method of accounting for its granite block inventory from the first-in, first-out method to the specific annual average cost method. In accordance with generally accepted accounting principles, the Company implemented this change retroactively to January 1, 2002. The effect of the change in the first quarter of 2002 was to increase income by approximately $26,000.
Effective January 1, 2002, the Company assessed impairment of goodwill in accordance with the provisions of SFAS No. 142. The provisions of SFAS No. 142 require that a two-step test be performed. First, the fair value of each reporting unit will be compared to its carrying value. If the fair value exceeds the carrying value, goodwill is not impaired and no further testing is performed. If the carrying value exceeds the fair value, then the implied fair value of the reporting unit's goodwill must be determined and compared to the carrying value of the goodwill. If the carrying value of a reporting unit's goodwill exceeds its implied fair value, then an impairment loss equal to the difference will be recorded. The Company determined the fair value of each of the reporting units using a discounted cash flow analysis and compared such values to the respective reporting unit's carrying amounts. This evaluation indicated that goodwill recorded in the Retail and Cemetery segments was impaired as of January 1, 2002.  As a result, the Company completed the second step of the goodwill impairment test to measure the amount of the impairment loss. Accordingly, the Company recognized a $34 million non-cash charge, recorded as of January 1, 2002, as the cumulative effect of a change in accounting principle for the write-down of goodwill to its fair value.  Approximately $19 million of the goodwill write-down was  deductible for taxes, therefore a deferred tax asset of $5.3 million was  recorded.
(3)	Stock Based Compensation

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

		March 31,			March 31,
		2003			2002
Net income (loss), as reported, in thousands	$	(4,881	)	$	(32,435	)
Net income (loss), pro forma, in thousands	$	(5,019	)	$	(32,501	)
Net income (loss) per share, pro forma	$	(0.70	)	$	(4.14	)
Net income (loss) per share - assuming dilution, pro forma	$	(0.70	)	$	(4.14	)

The fair value of each option grant is estimated on the date of the grant. The per share weighted average fair value of stock options granted during the first quarter of 2002 was $4.06 on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions: risk-free interest rate of 3.9%; dividend yield of 0%; expected volatility of 61%, and expected lives of five (5) years, respectively. There were no stock options granted during the first quarter of 2003.

6

(4) Inventories

		($ in thousands)
Inventories consist of the following:		March 31,		December 31,
		2003		2002
Raw materials	$	9,775	$	9,847
Work-in-process		1,421		1,421
Finished goods and supplies		11,880		10,386
	$	23,076	$	21,654

(5)	Earnings Per Share
The following is a reconciliation of the numerators and denominators of the basic and diluted earnings per share computations for net loss for the three months ended March 31, 2003 and 2002:

		($ in thousands except per share data)
		Three Months Ended
		March 31,
		2003			2002
Numerator:
Net loss available to common shareholders used in basic and diluted earnings per share	$	(4,881	)	$	(32,435	)
Denominator:
Denominator for basic earnings per share:
Weighted average shares		7,186			7,847
Effect of dilutive securities:
Stock options		—			—
Denominator for diluted earnings per share:
Adjusted weighted average shares		7,186			7,847
Basic earnings (loss) per share	$	(0.68	)	$	(4.13	)
Diluted earnings (loss) per share	$	(0.68	)	$	(4.13	)

Options to purchase 322,500 shares of Class A common stock were outstanding at March 31, 2003, but were not included in the computation of diluted earnings per share because the effect would be anti-dilutive.
Options to purchase 674,166 shares of Class A common stock were outstanding at March 31, 2002, but were not included in the computation of diluted earnings per share because the effect would be anti-dilutive.
(6)	Segment Information
The Company is organized based on the products and services that it offers. Under this organizational structure, the Company operates in four segments: quarrying, manufacturing, retailing and cemeteries.
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.
The cemetery segment includes prearranged funeral and cemetery merchandise as well as maintenance of cemetery grounds funded through perpetual care funds.

7

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

The following is the unaudited segment information for the three-month periods ended March 31, 2003 and 2002 ($ in thousands):

2003		Quarrying			Manufacturing			Retailing			Cemeteries		Corporate Overhead			Total
Total net revenues	$	3,209		$	5,325		$	3,137		$	977	$	—		$	12,648
Inter-segment net revenues		(312	)		(1,746	)		—			—		—			(2,058	)
Net revenues		2,897			3,579			3,137			977		—			10,590
Total gross profit		(660	)		947			1,150			392		—			1,829
Inter-segment gross profit		—			(74)			74			—		—			—
Gross profit		(660	)		873			1,224			392		—			1,829
Selling, general and administrative expenses		1,330			837			4,343			349		1,245			8,104
Income (loss) from operations	$	(1,990	)	$	36		$	(3,119	)	$	43	$	(1,245	)	$	(6,275	)
2002		Quarrying			Manufacturing			Retailing			Cemeteries		Corporate Overhead			Total
Total net revenues	$	4,479		$	4,555		$	3,515		$	1,008	$	—		$	13,557
Inter-segment net revenues		(259	)		(1,136	)		—			—		—			(1,395	)
Net revenues		4,220			3,419			3,515			1,008		—			12,162
Total gross profit		858			316			1,140			406		—			2,720
Inter-segment gross profit		(19	)		1			18			—		—			—
Gross profit		839			317			1,158			406		—			2,720
Selling, general and administrative expenses		751			770			4,400			338		1,195			7,454
Income (loss) from operations	$	88		$	(453	)	$	(3,242	)	$	68	$	(1,195	)	$	(4,734	)

Net revenues by geographic area are as follows:

		($ in thousands)
		Three Months Ended
		March 31,
Net revenues (1):		2003		2002
United States	$	9,131	$	10,883
Canada		1,459		1,279
Total net revenues	$	10,590	$	12,162

(1)	Net revenues are attributed to countries based on where the product is produced.
Long-lived assets by geographic area are as follows:

		($ in thousands)
		March 31,		December 31,
		2003		2002
Long-lived assets:
United States	$	41,658	$	41,686
Canada		2,681		2,235
	$	44,339	$	43,921

 8

(7) Comprehensive Income

Comprehensive income (loss) consists of net income, cumulative translation adjustment, and a minimum pension liability adjustment. ($ in thousands)

		Foreign Currency Items			Minimum Pension Liability Adjustment			Accumulated Other Comprehensive Income (Loss)
Balance at December 30, 2002	$	(756	)	$	(1,807	)	$	(2,563	)
Changes in 2003		450			—			450
Balance at March 31, 2003	$	(306	)	$	(1,807	)	$	(2,113	)

(8)

Stock Repurchase

In January 2003, the Company repurchased 500,500 shares of its common stock for a total of $2,602,000 as part of its share buy back program. Since August 5, 2002, the Company has repurchased a total of 676,200 shares for $3,359,269 under the share buy back program. These shares have subsequently been retired. There remain 323,800 shares authorized to be purchased under the current repurchase program.

9

Item 2:	Management's Discussion and Analysis of Financial Condition and Results of Operations
General
Rock of Ages Corporation (the "Company") is an integrated quarrier, manufacturer, distributor and retailer of granite and products manufactured from granite. The Company also owns and operates cemeteries. 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, which are sold to owned and non-owned retail memorial stores and 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 and through certain cemeteries owned by the Company. The cemetery division sells cemetery property and funeral and cemetery products and services both at the time of need and on a preneed basis. Including these cemeteries, the Company sells its memorials through 100 owned retail outlets in fifteen states.
Critical Accounting Policies
Critical accounting policies are as follows: Revenue recognition, accounting for pensions, impairment of long-lived assets and valuation of deferred income taxes.
Revenue Recognition
The Company records revenues from quarrying, manufacturing, retailing and cemeteries.
The granite quarried by the Company is sold both to outside customers and used by the Company's manufacturing division. The quarry segment records revenue and gross profit related to the sale of granite sold to an outside customer either when the granite is shipped or, in the case of the special December terms, when the customer selects and identifies the blocks at the quarry site and an invoice is issued. 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. The Company records cemetery revenues as described below.

10

The quarry division recognizes revenue from sales of granite blocks when the granite is shipped from the quarry site and provides for a  5% discount if payment is made within 30 days of purchase, except as described in the following paragraph.

The Company allows customers to purchase granite blocks on a bill-and-hold basis at its Barre quarries upon customer request in order to allow its customers to meet their need for granite blocks since many do not have sufficient storage space at their facilities and want to ensure an adequate supply of blocks especially when the Barre quarries are closed from mid-December through mid-March because of weather. During this time, the quarry customers' manufacturing plants remain open, and many prefer to ensure they own blocks of a size and quality selected by them prior to the quarries' closure. All blocks purchased in December are invoiced on or about December 31 and, at that time, the blocks are removed from the Company's inventory, the customer's name is printed on the blocks, and title and risk of ownership passes to the buyer. Payment terms are one-third of the invoice amount on January 15, one-third on February 15, and one-third on March 15. The program provides essentially the normal 30-day payment terms during the months when the quarry is closed notwithstanding that the customer purchases a three-month supply in December and makes payments over ninety days. Customers need not use these terms and may buy from inventory during the closure period on a first-come, first-served basis with normal 30-day terms. Normal payment terms apply when customers request to purchase blocks on a bill-and-hold basis at other times throughout the year.  In many cases, granite blocks owned by customers remain on the Company's property for varying periods after title passes to the buyer.  The Company retains a delivery obligation using the Company's trucks. However the Company considers the earnings process substantially complete because the cost of delivery service is inconsequential (less than 3%) in relation to the selling price. Further, under industry terms of trade, title passes and the payment obligation is established when the block is identified to a particular customer and transaction.

The manufacturing division recognizes revenue upon shipment of finished orders from the manufacturing plant.

The retailing division recognizes revenue upon the setting of the memorial in the cemetery. In certain instances, the Company may enter into an agreement with a customer, which provides for extended payment terms, generally up to two years from either the date of setting the memorial or, in certain instances, upon the settlement of an estate.

The cemetery division records revenues on its products and services primarily when the product is delivered or the service is performed. However, preneed sales of cemetery lots are recognized as revenue when 20% of the total purchase price of the lot has been received from the customer. The cemetery division's recognition of revenue from preneed sales of cemetery services and merchandise is deferred until the period in which the services or merchandise is delivered. On the balance sheet, the full contract amount is included in prearranged deferred revenue, a liability. The corresponding receivable due from the customer is reflected in prearranged receivables, an asset, and the corresponding cash received from the customer is reflected part in prearranged receivables (for the portion placed in trust) and part in cash (for the portion the Company is allowed to retain). When the services or merchandise is delivered, the Company recognizes as revenue the full contract amount plus all trust earnings associated with that contract. The Company cannot predict when the existing contracts will mature but it is estimated that most contracts will have an average life of ten to fifteen years. The amount of prearranged deferred revenue was $21.7 million at March 31, 2003 and $21.8 million at December 31, 2002.

Accounting for Pensions

The Company provides defined benefit pension and other postretirement benefit plans for certain of its employees. Accounting for these plans requires the use of actuarial assumptions, including estimates of the expected long-term rate of return on assets and discount rates. In order to make informed assumptions, management relies on outside actuarial experts as well as public market data and general economic information. If changes in any of these assumptions occur, they may materially affect certain amounts reported on the Company's balance sheet. In particular, a decrease in the expected long-term rate of return on plan assets could result in an increase in the Company's pension liability and a charge to equity.

11

Impairment of long-lived assets

The Company's long-lived assets consist primarily of property and equipment and, prior to 2002, goodwill. Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of such an asset may not be recoverable. Such events or circumstances include, but are not limited to, a significant decrease in the fair value of the underlying business or change in utilization of property and equipment.

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

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

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

Valuation of deferred income taxes

As of March 31, 2003 and December 31, 2002, the Company had net deferred tax assets of $6.9 million and $7.1 million, respectively. In assessing the realization of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependant upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. Management has recorded a valuation allowance of $4.6 million as of March 31, 2003 and December 31, 2002, against the minimum tax credit carry-forwards and other deferred tax assets. Based upon the projections for future taxable income over the periods for which the deferred tax assets are deductible, management believes that it is more likely than not that the Company will realize the benefit of these unreserved net deferred tax assets. The amount of the deferred tax assets considered realizable, however, could be reduced in the near term if estimates of future taxable income are reduced.

 

12

Results of Operations

The following table sets forth certain consolidated historical operations data as a percentage of net revenues with the exception of quarrying, manufacturing, retailing and cemetery gross profit, selling, general and administrative expenses, and divisional income which are shown as a percentage of their respective revenues.

	Three Months Ended
	March 31,
	2003		2002
Statement of Operations Data:
Net Revenues:
Quarrying	27.4%		34.7%
Manufacturing	33.8%		28.1%
Retailing	29.6%		28.9%
Cemeteries	9.2%		8.3%
Total net revenues	100.0%		100.0%
Gross Profit:
Quarrying	(22.8%	)	19.1%
Manufacturing	24.4%		9.3%
Retailing	39.0%		32.9%
Cemeteries	40.2%		40.4%
Total gross profit	17.3%		22.1%
Selling, general & administrative expenses:
Quarrying	45.9%		17.8%
Manufacturing	23.4%		22.5%
Retailing	138.4%		125.1%
Cemeteries	35.7%		33.6%
Total SG&A expenses	64.8%		51.5%
Divisional income from operations:
Quarrying	(68.7%	)	1.3%
Manufacturing	1.0%		(13.2%	)
Retailing	(99.4%	)	(92.2%	)
Cemeteries	4.4%		6.7%
Total divisional income from                     operations	(47.5%	)	(29.4%	)
Unallocated corporate administrative expense	11.8%		9.8%
Income (loss) from operations	(59.3%	)	(39.2%	)
Interest expense	1.4%		1.4%
Income (loss) before income taxes	(60.7%	)	(40.6%	)
Provision for income taxes	(14.6%	)	(9.8%	)
Net income (loss) before cumulative          effect of changes in accounting          principles	(46.1%)		(30.8%)

13

Three Months Ended March 31, 2003 Compared to Three Months Ended March 31, 2002

Revenues for the quarter ended March 31, 2003 decreased 12.9% to $10.6 million from $12.1 million for the quarter ended March 31, 2002.

Quarrying revenues were $2.9 million for the quarter ended March 31, 2003 compared to $4.2 million for the quarter ended March 31, 2002. The decrease was due to unusually severe winter weather conditions that affected both our ability to quarry as well as our ability to ship quarried stone, thereby decreasing revenue. The Company expects shipments to recover significantly over the balance of the year as overseas demand for quarried stone remains strong.

Manufacturing revenues were $3.6 million for the quarter ended March 31, 2003 compared to $3.4 million for the quarter ended March 31, 2002. The increase was a result of revenue recognized on a large memorial for World War II as well as an increase in revenue from our industrial products group as a result of somewhat greater demand for those products.

Retailing revenues were $3.1 million for the quarter ended March 31, 2003 compared to $3.5 million for the quarter ended March 31, 2002. The decrease in revenue was due to unusually severe winter weather conditions in many areas which significantly affected our ability to set memorials in cemeteries and, we believe, the short-term demand for memorials as well. 

Cemetery revenues were $1.0 million for both the quarter ended March 31, 2003 and March 31, 2002.

Gross profit dollars for the quarter ended March 31, 2003 decreased 34% to $1.8 million from $2.7 million for the quarter ended March 31, 2002. Gross profit percentage decreased to 17.3% in 2003 from 22.1% in 2002.

Gross loss from quarrying was $660,000 or negative 22.8% of quarrying revenue for the quarter ended March 31, 2003 compared to gross profit of $839,000 or 19.1% of quarrying revenue for the quarter ended March 31, 2002. The decrease in gross profit dollars as well as the decrease in gross profit percentage was a result of unusually severe winter weather conditions, which decreased production. During 2002, the Company elected to change the method of valuing inventory in the quarry division from a First-In, First-Out method to a Specific Annual Average Cost method. The effect of the change in the first quarter of 2002 was to increase gross profit by $34,000.

Manufacturing gross profit was $873,000, or 24.4% of manufacturing revenue for the quarter ended March 31, 2003 compared to $317,000, or 9.3% of manufacturing revenue for the quarter ended March 31, 2002. The increase in gross margin percentage was a result of improved operations in our Barre manufacturing facility as well as a more favorable product mix in this facility, including a large memorial for World War II,compared to the same period in 2002 and an increase in gross margin percentage in our industrial products group.

Retailing gross profit was $1.2 million or 39% of retailing revenue for the quarter ended March 31, 2003 compared to $1.2 million or 33% of retailing revenue for the quarter ended March 31, 2002. The increase in percentage was largely attributable to a decrease in expenses associated with the closing of plant facilities within our retail group that took place throughout 2002 and contracting with suppliers for those goods and services.

Cemetery gross profit was $392,000, or 40.2% of cemetery revenue for the quarter ended March 31, 2003 compared to $406,000, or 40.4% of cemetery revenue for the quarter ended March 31, 2002, and thus was approximately consistent on a quarter-to-quarter basis.

Selling, general and administrative expenses for the quarter ended March 31, 2003 increased 8.0% to $8.1 million from $7.5 million for the quarter ended March 31, 2002. As a percentage of net revenues, these expenses for the quarter ended March 31, 2003 increased to 76.5% from 61.3% in the same period of 2002. The increase was primarily a result of increased legal expenses in the quarry segment as a result of the Eurimex arbitration proceeding (see Part II, Item 1, "Legal Proceedings").

14

Interest expense for the quarter ended March 31, 2003 decreased to $149,000 from $175,000 for the quarter ended March 31, 2002. This decrease was primarily due to lower interest rates under the Company's credit facilities.

Income tax expense as a percentage of earnings before taxes was 24% in the quarter ended March 31, 2003 and 2002. While the rate in the current period is equal to the rate in the same period last year, it is a decrease from the 27% tax rate the Company experienced in its 2002 fiscal year. The reason for the anticipated decrease in tax rates from 27% to 24% is the Company's anticipated ability to use state tax loss carry-forwards in its retail group as well as an increase in taxable income in the United States as compared to Canada which decreases our overall tax rate as a result of lower effective federal tax rates in the United States.

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 the commercial credit facilities described below. The Company's acquisitions have increased its requirements for external sources of liquidity, and the Company anticipates that this trend will continue as it further implements its growth strategy.

In January 2003, the Company repurchased 500,500 shares of its common stock for a total of $2,602,600 as part of its share buy back program. Since August 5, 2002, the Company has repurchased a total of 676,200 shares for $3,359,269 under the share buy back program. The shares have subsequently been retired. There remain 323,800 shares authorized to be purchased under the current repurchase program. The Company expects to continue to repurchase shares on an opportunistic basis determined by, among other things, current debt levels, anticipated uses of capital, the price of the stock and the general market conditions.

The Company made a payment to fund its defined benefit pension plan of $1.4 million in 2002, which was the maximum allowable deductible amount for tax purposes. Based on current market conditions and the related impact on the fair value of plan assets, additional funding of this extent may be warranted in the future and the Company believes it will be able to fund such contributions either from cash from operations or borrowing under its credit facilities.

Cash Flow. At March 31, 2003, the Company had cash, cash equivalents and marketable securities of $1.0 million and working capital of $24 million, compared to $2.0 million and $14.0 million, at March 31, 2002.

For the three month period ended March 31, 2003, net cash used in operating activities was $2.1 million which consisted primarily of the net loss of $4.9 million plus cash provided primarily by a decrease in receivables and an increase in customer deposits less cash used primarily as a result of a decrease in payables and accrued expenses.  This compares to cash used in operating activities for the period ended March 31, 2002 of $888,000 which consisted primarily of the net loss of $32.4 million plus the non-cash charges associated with the goodwill impairment net of taxes as well as the cash provided by a decrease in receivables and an increase in customer deposits, less the cash used as a result of a decrease in payables and accrued expenses.    

Net cash used in investing activities was $1.2 million in the three month period ended March 31, 2003 as a result of capital purchases, compared to $1.4 million provided by investing activities in the corresponding period of 2002 as a result of the proceeds from the sale of the Company's Lawson facility which was partially offset by capital purchases.

Net cash used in financing activities in the three month period ended March 31, 2003 was $2.2 million, which consisted primarily of repurchases of stock under the Company's stock repurchase program, compared to $1.9 million in the corresponding period of 2002 which consisted primarily of principal payments on long-term debt from the proceeds of the sale of the Company's Lawson facility.

15

Capital Resources. The Company has a credit facility with the CIT Group/Business Credit ("CIT"). The facility consists of an acquisition term loan line of credit of up to $30.0 million and a revolving credit facility of up to another $20.0 million based on eligible accounts receivable, inventory and certain fixed assets. As of March 31, 2003, the Company had $12.5 million outstanding and $17.5 million available under the term loan line of credit and $4.9 million outstanding and $15.1 million available under the revolving credit facility. The Company has a multi-tiered interest rate structure on its outstanding debt with CIT. As of March 31, 2003, the interest rate structure was as follows:

	Amount	Formula	Effective Rate
Revolving Credit Facility	$     4.9 million	Prime - .50%	3.75%
Term Loans	12.5 million	LIBOR + 1.75%	3.17%

The Company can elect the interest rate structure for the Revolver and/or the Term Loan based on the prime rate or LIBOR.

The incremental rate above or below prime and above LIBOR is based on the Company's Funded Debt to Net Worth Ratio. As of March 31, 2003, the Company was at the most favorable increments available.

As of March 31, 2003, the Company had $4.0 million CDN available and $0 outstanding under a demand revolving line of credit with the Royal Bank of Canada.

Contractual Obligations - ($ in thousands)

Contractual Cash Obligations		Total		Less than 1 Year		1-3 Years		4-5 Years		After 5 Years
Long-Term Debt (1)	$	13,019	$	200	$	50	$	12,521	$	248
Operating Leases (2)		2,756		1,035		1,121		600		—
Purchase Obligations (3)		18,000		3,000		6,000		6,000		3,000
Total Obligations	$	33,775	$	4,235	$	7,171	$	19,121	$	3,248

(1)	Long-Term Debt consists of various notes payable for general business use and strategic acquisitions, the repayment of which will be funded from a combination of cash flow from operations and its existing credit facility.
(2)	Operating Leases are principally for real estate and will be funded from a combination of cash flow from operations.
(3)	The purchase obligation is a supply agreement with Adams Granite Co. The Company has agreed to purchase a minimum of $3,000,000 of monuments from Adams Granite each year for a term of seven years with various stipulations as to variations from the "minimum order" and pricing agreements, and will be funded from a combination of cash flow from operations and its existing credit facilities.

The Company's primary need for capital will be to maintain and improve its manufacturing, quarrying, and retail facilities and to finance acquisitions as part of its growth strategy. The Company has approximately $5.0 million budgeted for capital expenditures in 2003.  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 second and 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.

16

Risk Factors That May Affect Future Results

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

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

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

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

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

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

We have historically sold our granite memorials to consumers through independent retailers. Over the past five years, we have acquired 26 retailers with approximately 100 retail outlets in 15 states. However, we are still dependent in part on our independent retailers for the successful distribution of our products to the ultimate customer. We have no control over the independent retailers' operations, including such matters as retail price, advertising and marketing. Three important components of our growth strategy are to continue to acquire retailers, open new retail stores in selected markets and pursue strategic alliances with funeral homes, cemetery owners, and other death care professionals. Although we have taken steps to reduce conflicts between our owned retail stores and our independent retailers, the implementation of these elements of our strategy has in the past been, and may in the future be construed by some of our existing independent retailers as an effort to compete with them. In certain cases this has adversely affected their relationship with us and caused them to decrease or cease their purchases of our products. These issues may continue to arise as we pursue our growth strategy. In addition, the granite memorial retail industry is characterized by significant barriers to entry created by local heritage, community presence and tradition. Consequently, we have experienced, and may continue to experience difficulty replacing retailers or entering particular retail markets in the event of a loss of an independent retailer. We cannot assure you that we will be able to maintain our existing relationships or establish new relationships with independent retailers. Disruption in our relationships with independent retailers could impede our sales growth or cause sales to decline, which would adversely affect our business and financial results.

17

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

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

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

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

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

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. 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. For example, companies in South Africa, India, China and Portugal also manufacture and export finished granite memorials into North America which compete with the Company's products.

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.

The sale of cemetery lots and related products is highly competitive. The competition is based upon price, geographic location, and the overall aesthetics, maintenance and upkeep of the cemetery. Competitors include churches and municipalities that own and operate cemeteries, and other cemetery owners, including consolidators, which may have greater financial resources than the Company.

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

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

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

18

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

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

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

There is an increasing trend toward cremation in the United States. According to the Cremation Association of North America, or CANA, cremation was used in approximately 25% of the deaths in the United States in 2000, compared to approximately 17% in 1990, and CANA expects this rate to rise to approximately 40% by 2010. While we continue to believe that most families will choose to memorialize their loved-ones, regardless of whether they choose cremation over a traditional burial, to the extent increases in cremation rates result in decreases in memorialization rates, this decrease will result in a decline in our memorial sales, which would adversely affect our business and results of operations.

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

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

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

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

We derived approximately 23% of our revenues in fiscal 2002 from sales outside the United States, with approximately 9% of revenues in fiscal 2002 from sales in Canada by the Company's Canadian subsidiaries. In prior years such percentage represented by international sales has been higher. Foreign sales are subject to numerous risks, including currency conversion risks, limitations (including taxes) on the reparation of earnings, slower and more difficult accounts receivable collection and greater complication and expense in complying with foreign laws.

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

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

Existing stockholders are able to exercise significant control over us.

Kurt M. Swenson and his brother, Kevin C. Swenson, collectively have approximately 63% of the total voting power of all outstanding shares of our common stock, and will therefore be in a position to control the outcome of most corporate actions requiring stockholder approval, including the election of directors and the approval of transactions involving a change in control of the Company.

19

We may incur substantial costs to comply with government regulations.

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

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

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

• grant ten votes per share to each share of Class B Common Stock;

• divide the Board of Directors into three classes, each of which will have a different three-year term;

• provide that the stockholders may remove directors from office only for cause and by a supermajority vote;

• provide that special meetings of the stockholders may be called only by the Board of Directors or certain Company officers and not by stockholders;

• establish certain advance notice procedures for nomination of candidates for election as directors and for stockholder proposals to be considered at annual stockholders' meetings;

• authorize the issuance of preferred stock. Accordingly, the Board of Directors is empowered, without stockholder approval, to issue preferred stock with dividend, liquidation, conversion, voting or other rights that could materially adversely affect the voting power or other rights of, or be dilutive to, the holders of our Common Stock.

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

20

Item 3:	Quantitative and Qualitative Disclosure About Market Risk
The Company has financial instruments that are subject to interest rate risk, principally debt obligations under its credit facilities. Historically, the Company has not experienced material gains or losses due to interest rate changes. Based on the Company's current variable rate debt obligations, the Company believes its exposure to interest rate risk is not material.
The Company is subject to foreign currency exchange rate risk primarily from the operations of its Canadian subsidiary. Based on the size of this subsidiary and the Company's corresponding exposure to changes in the Canadian/U.S. dollar exchange rate, the Company does not consider its market exposure relating to currency exchange to be material.
Item 4.	Controls and Procedures
	(a)  Evaluation of Disclosure Controls and Procedures.  The Company's Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of the Company's disclosure controls and procedures (as such term is defined in Rules 13a-14(c) and 15d-14(c) under the Exchange Act) as of a date within 90 days prior to the filing date of this Quarterly Report on Form 10-Q (the "Evaluation Date"). Based on such evaluation, such officers have concluded that, as of the Evaluation Date, the Company's disclosure controls and procedures are effective in alerting them on a timely basis to material information relating to the Company (including its consolidated subsidiaries) required to be included in the Company's reports filed or submitted under the Exchange Act.
	(b) Changes in Internal Controls.  Since the Evaluation Date, there have not been any significant changes in the Company's internal controls or in other factors that could significantly affect such controls.

21

PART II	OTHER INFORMATION
Item 1.	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. In addition, the Company is involved in the arbitration proceeding described below and is a defendant in the lawsuit described below.
Granite Stone Business International Sarl (f/k/a Eurimex SA) (Luxembourg) vs Rock of Ages Corporation (USA) ICC Arbitration 11502/KGA/MS. On April 18, 2001 the Company received a Request for Arbitration ("Request") from its former distributor outside the United States, Eurimex S. A. (now known as Granite Stone Business International), in connection with the termination by the Company of the distribution agreement for the Company's Salisbury Pink granite. Eurimex has also claimed damages in connection with a distribution agreement for the Company's Bethel White granite, which agreement expired by its terms in 1998. Pursuant to those agreements, the arbitration will take place under the International Chamber of Commerce rules and will be held in Luxembourg.
The Request includes claims by Eurimex that the Company wrongfully terminated the Salisbury Pink and Bethel White agreements. The Request also alleges that the Company violated antitrust laws under the European Community Treaty and United States antitrust laws. In the Request, Eurimex alleged that it suffered damages in excess of $30 million, and that it would seek to have such damages trebled under U.S. antitrust laws. In subsequent pre-hearing submissions, however, Eurimex asserted damages of approximately $25.3 million, plus interest, "moral" damages, attorneys' fees and costs.
The Company denies all of Eurimex's allegations and further states that it believes that Eurimex has engaged in improper or unlawful tying practices in the sale of the Company's products. The Company has answered Eurimex's Request and has brought certain counterclaims against Eurimex, including a claim for frivolous action. A preliminary scheduling conference was held on October 2, 2001 and both arbitral and subject matter jurisdictional issues were briefed. A second hearing on further procedural issues and jurisdiction was held on March 13, 2002. On July 1, 2002, the arbitral tribunal rendered a decision on the arbitral jurisdictional issues and found that it has arbitral jurisdiction over all of the claims brought by Eurimex. The tribunal deferred ruling on whether it would have subject matter jurisdiction over the claimant's U.S. antitrust law claims. The parties have completed the discovery process, and submitted pre-hearing submissions setting out their respective positions. On March 11, 2003, after the Company had filed its First Pre-Hearing Submission, Eurimex withdrew all of its U.S. antitrust law claims. A hearing on the merits of the dispute is scheduled to be held in May 2003.  The Company denies liability and will continue to vigorously defend the claims made by Eurimex. However, if the arbitral tribunal were to decided in favor of Eurimex, and award substantial damages, the Company's business and financial condition would likely be materially adversely affected. 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.
Kurtz Monument Company (Pennsylvania) v. Rock of Ages Corporation (Delaware) Case No. 03-510 U.S. District Court for the Western District of Pennsylvania. On April 22, 2003, Kurtz Monument Company filed a complaint against the Company alleging that the Company breached certain terms of a sealed settlement agreement by engaging in conduct constituting commercial disparagement. Damages have not been specified. The Company believes this action by Kurtz Monument Company is without merit. The Company denies liability and will continue to vigorously defend claims made by Kurtz Monument Company.

Item 5.

Other Information

Holders of the Common Stock are entitled to receive such dividends as may be legally declared by the board of directors and, in the event of dissolution and liquidation, to receive the net assets of the Company remaining after payment of all liabilities, in proportion to their respective holdings. On February 17, 2003, the Board of Directors declared a dividend of $.01 per share of common stock, payable on March 28, 2003 to holders of record as of February 28, 2003. On May 9, 2003, the Board of Directors declared a dividend of $.01 per share of common stock, payable on June 15, 2003 to holders of record as of May 15, 2003.

22

Item 6.	Exhibits and Reports on Form 8-K
(a)	Exhibits
	Number	Exhibits
	3.1	Amended and Restated Certificate of Incorporation of the Registrant incorporated by reference to Exhibit 3.1 to the Company's Registration Statement on Form S-1 (File No. 333-33685) filed with the Securities and Exchange Commission on August 15, 1997 and declared effective on October 20, 1997.
	3.2	Amended and Restated By-Laws of the Registrant (as amended through April 6, 1999) incorporated by reference to Exhibit 3.2 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended March 31.1999.
	4	Specimen Certificate representing the Class A Common Stock incorporated by reference to Exhibit 4 to the Company's Registration Statement on Form S-1 (Registration No. 333-33685) filed with the Securities and Exchange Commission on August 15, 1997 and declared effective on October 20, 1997.
	18	Letter re: Change in Accounting Principles incorporated by reference to Exhibit 18 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2002.
	99.1	Certification of CEO pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
	99.2	Certification of CFO pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
(b)	Reports Submitted on Form 8-K:
	On January 6, 2003, the Registrant filed a report on Form 8-K to report that it had repurchased 500,500 shares of its common stock in a single transaction.
	On February 19, 2003, the Registrant filed a report on Form 8-K to report the financial results for the fourth quarter and annual results for 2002. The Registrant also reported that the Board of Directors had declared a quarterly dividend of $.01 per share on the Company's Class A and Class B common stock, to be paid on March 28, 2003 to shareholders of record as of February 28, 2003. The Registrant also reported it expected to pay a dividend on a quarterly basis.

23

SIGNATURE

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

	ROCK OF AGES CORPORATION
Dated: May 15, 2003	By:/s/ Douglas S. Goldsmith Douglas S. Goldsmith Vice President, Chief Financial Officer and Treasurer

24

CERTIFICATIONS

I, Kurt M. Swenson, Chief Executive Officer of Rock of Ages Corporation, certify that:
1.	I have reviewed this quarterly report on Form 10-Q of Rock of Ages Corporation;
2.	Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
3.	Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;
4.	The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
	a)	Designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
	b)	Evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and
	c)	Presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
5.	The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent function):
	a)	All significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and
	b)	Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and
6.	The registrant's other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date: May 15, 2003  /s/Kurt M. Swenson                           
    Kurt M. Swenson
    Chief Executive Officer

25

I, Douglas S. Goldsmith, Chief Financial Officer of Rock of Ages Corporation, certify that:
1.	I have reviewed this quarterly report on Form 10-Q of Rock of Ages Corporation;
2.	Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
3.	Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;
4.	The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
	a)	Designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
	b)	Evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and
	c)	Presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
5.	The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent function):
	a)	All significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and
	b)	Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and
6.	The registrant's other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date: May 15, 2003  /s/Douglas S. Goldsmith
    Douglas S. Goldsmith
    Chief Financial Officer

26

Exhibit Index

Number	Exhibits
3.1	Amended and Restated Certificate of Incorporation of the Registrant incorporated by reference to Exhibit 3.1 to the Company's Registration Statement on Form S-1 (File No. 333-33685) filed with the Securities and Exchange Commission on August 15, 1997 and declared effective on October 20, 1997.
3.2	Amended and Restated By-Laws of the Registrant (as amended through April 6, 1999) incorporated by referenced to Exhibit 3.2 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended March 31,1999.
4	Specimen Certificate representing the Class A Common Stock incorporated by reference to Exhibit 4 to the Company's Registration Statement on Form S-1 (Registration No. 333-33685) filed with the Securities and Exchange Commission on August 15, 1997and declared effective on October 20, 1997.
18	Letter re: Change in Accounting Principles incorporated by reference to Exhibit 18 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2002.
99.1	Certification of CEO pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
99.2	Certification of CFO pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

27

Quick Links

Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
Managements Discussion and Analysis of Financial Condition and Results of Operations
Quantitative and Qualitative Disclosure About Market Risk
Controls and Procedures
Legal Proceedings
Other Information
Exhibits and Reports on Form 8-K
Signature
Certifications
Exhibit Index