Rock of Ages (ROAC) 10-Q 2004 Q1 Quarterly report

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended March 31, 2004

OR

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

  For the transition period from ______________ to ______________

Commission file number: 0-29464

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

Delaware
(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 ý No o

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

As of May 13, 2004, 4,528,467 shares of Class A Common Stock, par value $0.01 per share, and 2,738,596 shares of Class B Common Stock, par value $0.01 per share, of Rock of Ages Corporation were outstanding.

ROCK OF AGES CORPORATION

INDEX

Form 10-Q for the Quarterly Period
Ended March 31, 2004

PART I	FINANCIAL INFORMATION		PAGE NO.
Item 1.	Financial Statements
		Consolidated Balance Sheets - March 31, 2004 and December 21, 2003	4
		Consolidated Statements of Operations - Three Months Ended March 31, 2004 and 2003	5
		Consolidated Statements of Cash Flows - Three Months Ended March 31, 2004 and 2003	6
		Notes to Consolidated Financial Statements	7
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations		13
Item 3.	Quantitative and Qualitative Disclosures About Market Risk		25
Item 4.	Controls and Procedures		25
PART II	OTHER INFORMATION
Item 1.	Legal Proceedings		26
Item 5.	Other Information		27
Item 6.	Exhibits and Reports on Form 8-K		27
Signature			28

2

Special Note Regarding Forward-Looking Statements

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

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

3

PART I: FINANCIAL INFORMATION
Item 1: Financial Statement

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

		March 31,			December 31,
		2004			2003
ASSETS
Current Assets:
Cash and cash equivalents	$	3,333		$	3,227
Trade receivables, net		11,458			15,587
Inventories		22,234			21,151
Prepaid & refundable income taxes		1,668			409
Due from affiliates		257			216
Deferred tax assets		721			721
Note Receivable		—			5,250
Other current assets		4,507			3,665
Assets held for sale		745			817
Total current assets		44,923			51,043
Property, plant and equipment, net		43,514			42,495
Cash surrender value of life insurance, net		728			728
Intangible assets, net		428			438
Debt issuance costs, net		228			244
Due from affiliates		65			66
Deferred tax assets		5,131			5,129
Intangible pension asset		904			904
Other		1,448			1,306
Total assets	$	97,369		$	102,353
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Borrowings under lines of credit	$	—		$	4,751
Current installments of long-term debt		32			38
Current installments of deferred compensation		326			327
Trade payables		2,165			1,651
Accrued expenses		3,626			4,312
Customer deposits		10,407			7,104
Liabilities held for sale		—			17
Total current liabilities		16,556			18,200
Long-term debt, excluding current installments		12,787			12,794
Deferred compensation		6,173			5,999
Accrued pension cost		1,516			1,490
Accrued postretirement benefit cost		827			827
Other		71			74
Total liabilities		37,930			39,384
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 4,482,668 and 4,442,668 shares issued and        outstanding		45			44
Common Stock - Class B, $.01 par value; 15,000,000 shares         authorized 2,756,395 shares issued and outstanding		28			28
Additional paid-in capital		65,931			65,878
Accumulated deficit		(5,491	)		(2,067	)
Accumulated other comprehensive loss		(1,074	)		(914	)
Total stockholders' equity		59,439			62,969
Total liabilities and stockholders' equity	$	97,369		$	102,353

**SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

4

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

		Three Months Ended
		March 31,
		2004			2003
Net Revenues:
Quarrying	$	4,532		$	2,856
Manufacturing		3,232			3,579
Retailing		4,398			3,137
Total net revenues		12,162			9,572
Gross Profit:
Quarrying		350			(618	)
Manufacturing		644			873
Retailing		2,203			1,224
Total gross profit		3,197			1,479
Selling, general and administrative expenses:
Quarrying		842			1,329
Manufacturing		857			837
Retailing		4,577			4,343
Corporate overhead		1,291			1,246
Total selling, general and administrative expenses		7,567			7,755
Loss from continuing operations before interest and income taxes		(4,370	)		(6,276	)
Interest expense		136			149
Loss from continuing operations before income taxes		(4,506	)		(6,425	)
Income tax benefit		(1,120	)		(1,543	)
Loss from continuing operations	$	(3,386	)	$	(4,882	)
Discontinued operations		(38	)		1
Net loss	$	(3,424	)	$	(4,881	)
Net loss per share - basic:
Net loss from continuing operations	$	(0.47	)	$	(0.68	)
Discontinued operations		(0.00	)		(0.00	)
Net loss per share - basic	$	(0.47	)	$	(0.68	)
Net loss per share - diluted:
Net loss from continuing operations	$	(0.47	)	$	(0.68	)
Discontinued operations		(0.00	)		(0.00	)
Net loss per share - diluted	$	(0.47	)	$	(0.68	)
Weighted average number of common shares outstanding - basic		7,215			7,186
Weighted average number of common shares outstanding - diluted		7,215			7,186

**SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

5

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

		Three Months Ended
		March 31,
		2004			2003
Cash flows from operating activities:
Net loss	$	(3,424	)	$	(4,881	)
Adjustments to reconcile net income (loss) to net cash provided by (used         in) operating activities:
Depreciation, depletion and amortization		821			943
Cash surrender value of life insurance		—			24
Deferred taxes		(2	)		166
Changes in assets and liabilities:
Decrease in trade receivables		4,129			4,286
Increase in prearranged receivables		—			(27	)
Increase in due from related parties		(39	)		(12	)
Increase in inventories		(1,013	)		(1,422	)
Increase in other current assets		(842	)		—
Decrease in cemetery property		—			38
Increase in other assets		(142	)		(384	)
Decrease in trade payables, accrued expenses and income taxes payable		(1,448	)		(3,699	)
Increase in customer deposits		3,303			2,871
Increase in deferred compensation and pension		199			82
Decrease in prearranged deferred revenue		—			(185	)
Increase (decrease) in other liabilities		(3	)		106
Net cash provided by (used in) operating activities		1,539			(2,094	)
Cash flows from investing activities:
Purchases of property, plant and equipment		(1,871	)		(1,147	)
Increase in intangible assets		—			(5	)
Collection of note receivable		5,250			—
Net cash provided by (used in) investing activities		3,379			(1,152	)
Cash flows from financing activities:
Net borrowings (repayments) under lines of credit		(4,751	)		468
Principal payments on long-term debt		(13	)		(18	)
Common stock repurchased		—			(2,603	)
Stock options exercised		197			—
Dividends paid on common stock		(144	)		(71	)
Net cash used in financing activities		(4,711	)		(2,224	)
Effect of exchange rate changes on cash		(101	)		285
Net increase (decrease) in cash and cash equivalents		106			(5,185	)
Cash and cash equivalents, beginning of period		3,227			6,185
Cash and cash equivalents, end of period	$	3,333		$	1,000
Supplemental cash flow information:
Cash paid during the quarter for:
Interest		136			149
Income taxes		131			155

**SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 6

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 30, 2004).
(2)	Discontinued Operations
In December 2003, the Company decided to sell the Autumn Rose quarry in Mill Creek, Oklahoma. This decision represents a disposal of long-lived assets under SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." Accordingly, results of this quarry have been classified as discontinued operations and prior periods have been restated to reflect this reclassification. These quarry assets are classified as "assets held for sale" in the current assets section of the balance sheets. For business reporting purposes, the Autumn Rose quarry was previously classified in the Quarrying segment.
On December 17, 2003, the Company completed the sale of substantially all of the assets of Rock of Ages Kentucky Cemeteries, LLC. The decision was made to allow the Company to concentrate on its core businesses, quarrying, manufacturing and retailing, freeing up resources to pursue other growth strategies. The Company expects to continue to sell upright memorials in those cemeteries through its relationship with the buyer, Saber Management, LLC. The decision to sell this company represents a disposal of long-lived asset and disposal group under SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." Accordingly, results of this business have been classified as discontinued operations, and prior periods have been restated to reflect this reclassification. For business reporting purposes, Rock of Ages Kentucky Cemeteries was previously classified in the Cemeteries segment.
Operating results from the Autumn Rose Quarry and Rock of Ages Kentucky Cemeteries, LLC for the three months ended March 31, 2004 and 2003 were as follows (in thousands):

		Three Months Ended
		March 31,			March 31,
		2004			2003
Autumn Rose Quarry
Net Sales	$	35		$	41
Gross Profit		(47	)		(42	)
Pretax loss		(47	)		(42	)
Income tax benefit		(9	)		(8	)
Net loss		(38	)		(34	)
Rock of Ages Kentucky Cemeteries, LLC
Net Sales		0			977
Gross Profit		0			392
Pretax income		0			43
Income tax expense		0			8
Net income		0			35

7

(3) Stock Based Compensation

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

		March 31,			March 31,
		2004			2003
Net loss, as reported	$	(3,424	)	$	(4,881	)
Compensation expense		129			138
Net loss, pro forma	$	(3,553	)	$	(5,019	)
Net loss per share, as reported		(0.47	)		(0.68	)
Net loss per share, pro forma	$	(0.49	)	$	(0.70	)
Net loss per share - assuming dilution, as reported		(0.47	)		(0.68	)
Net loss per share - assuming dilution, pro forma	$	(0.49	)	$	(0.70	)

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. Because changes in the subjective input assumptions can materially affect the fair value estimate, in the opinion of management, the existing models do not necessarily provide a reliable single value of its options and may not be representative of the future effects on reported net income or the future stock price of the Company.

(4)

Inventories

		($ in thousands)
Inventories consist of the following:		March 31,		December 31,
		2004		2003
Raw materials	$	9,258	$	9,976
Work-in-process		1,592		1,000
Finished goods and supplies		11,384		10,175
	$	22,234	$	21,151

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

	Three Months Ended
	March 31,
	2004	2003
Basic weighted average shares	7,215	7,186
Effect of dilutive stock options	—	—
Diluted weighted average shares	7,215	7,186

Options to purchase 445,333 and 509,165 shares of Class A common stock were outstanding at March 31, 2004 and 2003, respectively, but were not included in the computation of diluted earnings per share because the effect would be anti-dilutive.

8

Options to purchase 25,000 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 options' exercise price was greater than the average market price of the common shares. These options expired in February 2004.
(6)	Segment Information
The Company is organized based on the products and services that it offers. Under this organizational structure, the Company operates in three segments: quarrying, manufacturing and retailing.
The quarrying segment extracts rough dimension granite blocks from the ground and sells those blocks to both the manufacturing segment and to outside manufacturers, as well as to distributors in Europe and Asia.
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 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.

9

The following is the unaudited segment information for the three-month periods ended March 31, 2004 and 2003 ($ in thousands):

2004		Quarrying			Manufacturing			Retailing			Corporate Overhead			Total
Total net revenues	$	5,082		$	4,916		$	4,398		$	—		$	14,396
Inter-segment net revenues		(550	)		(1,684	)		—			—			(2,234	)
Net revenues		4,532			3,232			4,398			—			12,162
Total gross profit		352			835			2,010			—			3,197
Inter-segment gross profit		(2	)		(191	)		193			—			—
Gross profit		350			644			2,203			—			3,197
Selling, general and administrative expenses		842			857			4,577			1,291			7,567
Income (loss) from continuing operations before interest and taxes	$	(492	)	$	(213	)	$	(2,374	)	$	(1,291	)	$	(4,370	)
2003		Quarrying			Manufacturing			Retailing			Corporate Overhead			Total
Total net revenues	$	3,162		$	5,325		$	3,137		$	—		$	11,624
Inter-segment net revenues		(306	)		(1,746	)		—			—			(2,052	)
Net revenues		2,856			3,579			3,137			—			9,572
Total gross profit		(618	)		947			1,150			—			1,479
Inter-segment gross profit		—			(74	)		74			—			—
Gross profit		(618	)		873			1,224			—			1,479
Selling, general and administrative expenses		1,329			837			4,343			1,246			7,755
Income (loss) from continuing operations before interest and taxes	$	(1,947	)	$	36		$	(3,119	)	$	(1,246	)	$	(6,276	)

10

Net revenues by geographic area are as follows:

		($ in thousands)
		Three Months Ended
		March 31,
Net revenues (1):		2004		2003
United States	$	10,925	$	8,113
Canada		985		1,459
Ukraine		252		—
Total net revenues	$	12,162	$	9,572

(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,
		2004		2003
Long-lived assets:
United States	$	40,531	$	39,473
Canada		2,983		3,022
	$	43,514	$	42,495

(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 31, 2003	$	680		$	(1,594	)	$	(914	)
Changes in 2004		(160	)		—			(160	)
Balance at March 31, 2004	$	520		$	(1,594	)	$	(1,074	)

		March 31,			March 31,
		2004			2003
Net loss	$	(3,424	)	$	(4,881	)
Other comprehensive income:
Foreign currency translation adjustment		(160	)		450
Comprehensive loss	$	(3,584	)	$	(4,431	)

11

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

		Three Months Ended March 31,
		NON-UNION PENSION BENEFITS						DEFERRED COMPENSATION BENEFITS				OTHER BENEFITS
		2004			2003			2004		2003		2004		2003
Service cost	$	156		$	133		$	43	$	47	$	5	$	5
Interest cost		320			318			79		79		28		28
Expected return on plan assets		(340	)		(303	)		0		0		0		0
Amortization of prior service costs		35			50			17		19		20		16
Amortization of net (gain) loss		29			49			0		0		0		0
Net periodic benefit cost	$	200		$	247		$	139	$	145	$	53	$	49

The Company previously disclosed in its financial statements for the year ended December 31, 2003, that it expected to contribute $800,000 to the defined benefit pension plan during 2004. As of March 31, 2004, no contribution had been made but the Company still plans on contributing $800,000 to the plan in 2004.

(9)	Subsequent Events
	On February 19, 2004, the Board of Directors declared a dividend of $.02 per share of common stock, payable on March 30, 2004 to holders of record as of March 1, 2004. On May 3, 2004, the Board of Directors declared a dividend of $.02 per share of common stock, payable on June 15, 2004 to holders of record as of May 15, 2004.

12

Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations
General
Rock of Ages is an integrated quarrier, manufacturer, distributor and retailer of granite and products manufactured from granite. During 2003, we had four business segments, quarrying, manufacturing, retail and cemeteries. The quarry division sells granite blocks both to the manufacturing division and to outside manufacturers, as well as to customers outside North America. The manufacturing division's principal product is granite memorials used primarily in cemeteries, although it also manufactures some specialized granite products for industrial applications. The retail division primarily sells granite memorials directly to consumers. The cemetery division sells cemetery property and funeral and cemetery products and services both at the time of need and on a preneed basis. On December 17, 2003, we sold all of our cemetery properties and assets to Saber Management, LLC for $6,750,000, thereby exiting the cemetery business.
Our quarry operations had a good first quarter as sales were up in most quarries compared to the first quarter of 2003 and the winter weather conditions were more favorable this year (2003-2004 winter) than last year allowing us to quarry more stone and increase sales. Our Salisbury Pink quarry had very strong export sales compared to the first quarter last year as did our Gardenia White quarry. In addition, our Barre gray quarry had strong sales compared to last year. Our gross margins were generally higher due to the higher sales revenues and our Sales, General and Administrative (SG&A) costs were lower primarily as a result of not having any legal expenses in the Eurimex litigation in this year's first quarter.
Our manufacturing division had slightly lower sales and earnings as a result of the timing of shipments in the memorials group as well as a decrease in the sales in our press roll group. We are generally pleased with results from our manufacturing division, including our industrial products group, where orders and shipments of granite surface plates were up over last year primarily as a result of improved economic conditions in that industry.
We are also very pleased with the first quarter results in our retail segment. Increased order receipts in the latter part of 2003 have led to increased sales in our retail segment in the first quarter of 2004 compared to the first quarter of 2003. This increase in revenue, coupled with the higher gross margins and decreases in SG&A expenses, resulted in less of a loss for the first quarter of 2004 compared to 2003. We believe the increase in orders and sales is a result of several factors including an improving economy and increased efforts by ROA personnel to market and sell our products.
Critical Accounting Policies
Critical accounting policies are as follows: Revenue recognition, impairment of long-lived assets, valuation of deferred income taxes, contingencies and accounting for pensions.
Revenue Recognition
The Company records revenues from quarrying, manufacturing and retailing.
Quarry Division
The granite we quarry is sold both to outside customers and used by our manufacturing group. Our quarry division recognizes revenue from sales of granite blocks to outside customers when the granite is shipped from the quarry. We provide a 5% discount for domestic customers if payment is made within 30 days of purchase, except in the case of December terms described below. Sales to foreign customers are typically secured by a letter of credit.

13

At our Barre, Vermont quarries, we allow customers to purchase granite blocks and request that we store the blocks for them. Many of our customers do not have adequate storage space at their facilities and want to ensure an adequate supply of blocks, especially when the Barre quarries are closed from mid-December through mid-March because of weather. Our quarry division recognizes revenue from blocks purchased when the customer selects and identifies the block at the quarry site and the customer requests the block be stored. At that time, the block is removed from inventory, the customer's name is printed on the block, and title and risk of ownership passes to the buyer. The customer is invoiced and normal payment terms apply, except in the case of December terms described below. Granite blocks owned by customers remain on our property for varying periods of time after title passes to the buyer. We retain a delivery obligation using our trucks. However, we consider the earnings process substantially complete because the cost of delivery service is inconsequential (less than 3%) in relation to the selling price. Further, under industry terms of trade, title passes and the payment obligation is established when the block is identified at the quarry.

Each December, we offer special December payment terms to our Barre quarries' customers. As noted above, from approximately mid-December to approximately mid-March, our Barre quarries are closed due to weather. During this time, the quarry customers' manufacturing plants remain open, and many prefer to ensure they own blocks of a size and quality selected by them prior to the quarries' closure. All blocks purchased in December are invoiced on or about December 31 and, at that time, the blocks are removed from inventory, the customer's name is printed on the blocks, and title and risk of ownership passes to the buyer. Payment terms are one-third of the invoice amount on January 15, one-third on February 15, and one-third on March 15. The program provides essentially the normal 30-day payment terms during the months when the Barre quarries are closed notwithstanding the customer purchases a three-month supply in December and makes payments over 90 days. Customers need not use these special December terms and may buy from inventory during the closure period on a first-come, first-served basis with the normal 30-day payment terms.

Manufacturing

Rock of Ages does not record a sale, nor do we record gross profit, at the time granite is transferred to the manufacturing division from our quarries. We record revenue and gross profit related to internally transferred granite only after the granite is manufactured into a finished product and sold to an outside customer. Manufacturing revenues related to outside customers are recorded when the finished product is shipped from our facilities. Manufacturing revenues related to internally transferred finished products to our owned retail outlets are recorded when ultimately sold at retail to an outside customer.

Retail

Retailing revenues are recorded when the finished monument is set in the cemetery. In certain instances, we may enter into an agreement with a customer that provides for extended payments terms, generally up to two years from either the date of setting the memorial or, in certain instances, upon the settlement of an estate.

Impairment of long-lived assets

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

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

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

We have entered into arrangements whereby we accepted a promissory note as partial or full payment for certain transactions, particularly the sale of an operation. Such notes have varying terms with principal and interest paid to the Company over a period of generally not more than 5 years. While most notes are secured by an interest in real property and/or assets, management must make estimates and judgments as to the collectibility of such promissory notes. Such judgments depend on many factors including current and future economic conditions, the financial condition of the debtor as well as our estimate of the net realizable value of the security interest securing the note. We believe we have accurately assessed the collectibility of these assets, however, the above factors and other factors may cause our accounting estimates concerning the collectibility of the notes to change and future operating results could be materially impacted.

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Valuation of deferred income taxes

As of March 31, 2004, we had net deferred tax assets of $5,852,000. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets depends upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. We have recorded a valuation allowance of $4,130,000 against the alternative minimum tax credit carry-forwards and other deferred tax assets. Based upon the projections for future taxable income over the periods for which the deferred tax assets are deductible, we believe it is more likely than not we will realize the benefit of these unreserved net deferred tax assets. The amount of the deferred tax assets considered realizable, however, could be reduced in the near term if estimates of future taxable income are reduced.

Contingencies

We are involved in various types of legal proceedings from time to time. Due to their nature, such legal proceedings involve inherent uncertainties and risks, including, but not limited to, court rulings, judgments, negotiations between affected parties and government action. Management, with the assistance of its outside advisors, assesses the probability of loss for such contingencies and accrues a liability and/or discloses the relevant circumstances, as appropriate

As described in Part 2, Item 1-Legal Proceedings, we are currently involved in an ICC arbitration proceeding in which Eurimex, our former distributor outside the United States, has brought claims against us alleging, among other things, breach of contract and violation of antitrust laws under the European Community Treaty. We believe the claims are without merit and we will prevail in this case. Accordingly, we have not accrued a reserve for adverse judgment. However, if the arbitral tribunal were to decide in favor of Eurimex and award substantial damages, our business and financial condition would likely be materially and adversely affected.

Accounting for pensions

We provide defined benefit pension and other postretirement benefit plans for certain of our employees. Accounting for these plans requires the use of actuarial assumptions including estimates on the expected long-term rate of return on assets and discount rates. In order to make informed assumptions, we rely on outside actuarial experts as well as public market data and general economic information. Any changes in one or more of these assumptions may materially affect certain amounts reported on our balance sheet. In particular, a decrease in the expected long-term rate of return on plan assets could result in an increase in our pension liability and a charge to equity as well as increases in pension expenses over time. See Note 8 of the Notes to Consolidated Financial Statements.

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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 and retailing gross profit, and selling, general and administrative expenses which are shown as a percentage of their respective revenues.

	Three Months Ended
	March 31,
	2004		2003
Statement of Operations Data:
Net Revenues:
Quarrying	37.2%		29.8%
Manufacturing	26.6%		37.4%
Retailing	36.2%		32.8%
Total net revenues	100.0%		100.0%
Gross Profit:
Quarrying	7.7%		(21.6%)
Manufacturing	19.9%		24.4%
Retailing	50.1%		39.0%
Total gross profit	26.3%		15.5%
Selling, general & administrative expenses:
Quarrying	18.6%		46.5%
Manufacturing	26.5%		23.4%
Retailing	104.1%		138.4%
Corporate overhead	10.6%		13.0%
Total SG&A expenses	62.2%		81.0%
Loss from continuing operations before interest and income taxes	(35.9%	)	(65.5%	)
Interest expense	1.1%		1.6%
Loss from continuing operations before income taxes	(37.0%	)	(67.1%	)
Income tax benefit	(9.2%	)	(16.1%	)
Net loss from continuing operations	(27.8%	)	(51.0%	)
Discontinued operations	(0.3%	)	0.0%
Net loss	(28.1%	)	(51.0%	)

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Three Months Ended March 31, 2004 Compared to Three Months Ended March 31, 2003

On a consolidated basis for all segments for the three-month period ended March 31, 2004, compared to the same period in 2003, revenue increased 27%, gross profit increased 116% and total SG&A costs decreased 2% for reasons discussed in detail in the segment analyses below.

Quarry Segment Analysis

Revenues in our quarry operations for the three-month period ended March 31, 2004 were up 59% from the same period last year primarily as a result of increased shipments from our Barre Gray and Salisbury Pink quarries. We believe the increase in Barre Gray shipments from the same quarter last year is the result of having unusually low shipments in the first quarter of 2003. In addition, we had fewer customers purchasing blocks at the end of 2003 under our winter terms policy and we believe those purchases were deferred into 2004 when those customers needed the blocks. The increase in Salisbury shipments is a result of a large shipment in January for an export customer. We also had increased shipments from our Gardenia White and Pennsylvania Black quarries primarily as a result of improved yields in both quarries which provided an increase in quality saleable stone

Gross profit dollars from our quarry operations for the three-month period ended March 31, 2004 increased 157% and gross profit as a percentage of revenue increased from negative 21.6% of revenue to a positive 7.7% of revenue. The increases in gross profit dollars and gross profit as a percentage of revenue, are largely a result of the increase in revenues discussed above and the improved operational efficiencies associated with such increases.

SG&A costs in our quarry segment decreased 37% for the three-month period ended March 31, 2004 primarily as a result of incurring no expenses in connection with the Eurimex litigation in 2004.

Manufacturing Segment Analysis

Revenues in our manufacturing operations for the three-month period ended March 31, 2004 decreased 10% from the same period last year as a result of a delay in shipment of some memorial products due to customer and cemetery requirements and a decrease in shipments of press rolls. Press roll shipments declined significantly from the same period last year. We do not actively market our press roll products as it is not within our core memorial business and our customers (paper mills) are increasingly favoring synthetic press rolls over our natural granite rolls for operational reasons. Shipments of memorial products from our manufacturing group for the first quarter of 2004 were essentially equal to the same period last year when we had roughly $700,000 in shipments for the World War II Memorial. Considering we had no such large projects in this year's first quarter, we are pleased with our revenue levels.

Gross profit dollars from the manufacturing group decreased 26% and gross profit as a percentage of manufacturing revenue decreased by 4.5 percentage points for the three month period ended March 31, 2004 compared to the same period last year. The decrease in gross profit was primarily attributable to the decrease in press roll revenue.

SG&A costs for the three-month period ended March 31, 2004 for the manufacturing group increased 2% compared to the same period last year.

Retail Segment Analysis

Revenues in our retail operations for the three-month period ended March 31, 2004 increased 40% from the same period last year. Our retail operations had a very difficult first quarter of 2003 due to several factors including a poor economy and a more severe than usual 2002-2003 winter. Our retail revenues for the first quarter of this year were among the highest levels on record which we believe is a result of favorable weather conditions allowing us to set memorials in the cemetery earlier in the year as well as positive demand for our product.

Gross profit dollars from the retail operations increased 80% and gross profit as a percentage of revenue increased 11.1 percentage points. These increases in gross profit are a result of the increase in revenues and the improvement in efficiencies our operations experience at those higher revenue levels.

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SG&A costs from our retail operations increased 5% for the three-month period ended March 31, 2004 compared to last year however SG&A costs as a percentage of retail revenue decreased 34.3 percentage points from the same period last year. The increase in SG&A cost in dollars is largely a result of additional variable compensation for our sales force based on the increased revenue levels. The decrease in SG&A costs as a percentage of revenue is due to the fact that a portion of our SG&A costs are fixed and generally do not increase with increased revenue.

Consolidated Items

Unallocated Corporate overhead increased 4% for the three-month period ended March 31, 2004 compared to the same period last year primarily from normal inflationary increases.

Interest expense decreased 9% for the three-month period ended March 31, 2004 compared to the same period last year as a result of the decrease in debt associated with the sale of the cemeteries.

Income tax benefit as a percentage of the net loss from continuing operations before taxes, for the three-month period ended March 31, 2004 increased 1 percentage point from 24% to 25% primarily due to the elimination in 2004 of the Earned Income Exclusion deduction for foreign sales.

Liquidity and Capital Resources

We consider our liquidity to be adequate to meet our long and short-term cash requirements to fund operations and pursue our growth strategy. Historically, we have met these requirements primarily from cash generated by operating activities and periodic borrowings under the commercial credit facilities described below. We anticipate there may be future acquisitions, as we pursue our growth strategy that may require additional financing compared to our existing credit facility.

In January 2003, we repurchased 500,500 shares of our common stock for a total of $2,602,600 as part of our share buy back program. Upon completion of this transaction, we have repurchased a total of 676,200 shares for $3,359,269 under the share buy back program. All shares have subsequently been retired. There remains 323,800 shares authorized to be purchased under the current repurchase program. We will continue to repurchase shares on an opportunistic basis determined by, among other things, current debt levels, anticipated uses of capital, the price of the stock and the general market conditions.

In 2003, the funded status of our defined benefit pension plan improved by approximately $1.2 million primarily as a result of payments to fund the plan of $1.0 million in 2003. We have historically contributed between $800,000 and $1.0 million per year and expect to make annual contributions in this range, which, we believe, we will be able to fund either from cash from operations or borrowing under our credit facilities.

Cash Flow. At March 31, 2004, we had cash and cash equivalents of $3.3 million and working capital of $28.4 million, compared to $1.0 million and $28.5 million, at March 31, 2003.

Cash from Operations. Cash flows from operating activities provided cash of $1.5 million in the three-month period ended March 31, 2004 compared to a use of $2.1 million in the same period in 2003. The primary reason for the change is the lower net loss in 2004 coupled with a larger increase in customer deposits and a smaller decrease in accounts payable and accruals, which had the effect of increasing cash from operations.

Cash from Investing Activities. Cash flows from investing activities provided cash of $3.4 million in the three-month period ended March 31, 2004 compared to a use of $1.2 million in the same period in 2003. The difference was primarily due to the collection of the note receivable due from Saber, LLC on the sale of the cemeteries in 2004, which was somewhat offset by slightly higher capital expenditures.

Cash from Financing Activities. Financing activities used $4.7 million in cash in the three-month period ended March 31, 2004 primarily as a result of repayments of the lines of credit as compared to a use of $2.2 million in the same period in 2003, primarily due to the repurchase of 500,500 shares of the Company's common stock.

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Capital Resources. We have a credit facility with the CIT Group/Business Credit ("CIT") that expires in October 2007. The facility consists of an acquisition term loan line of credit of up to $30.0 million and a revolving credit facility of up to another $20.0 million based on eligible accounts receivable, inventory and certain fixed assets. As of March 31, 2004, we had $12.5 million outstanding and $17.5 million available under the term loan line of credit and $0 outstanding and $20 million available under the revolving credit facility. Our loan agreement with CIT places restrictions on our ability to, among other things, sell assets, participate in mergers, incur debt, pay dividends, repurchase stock, and make investments or guarantees. The agreement also contains certain covenants for a minimum Operating Cash Flow to Debt Service Ratio and a limit on the Total Liabilities to Net Worth Ratio of the Company as described below.

Debt Service Coverage Ratio. The facility requires the ratio of the sum of earnings before interest, taxes, depreciation and amortization (EBITDA) less taxes and capital expenditures to the sum of interest and scheduled debt repayments be at least 1.25 for any trailing twelve-month period at the end of a quarter. As of March 31, 2004, this ratio was a negative 2.82 as a result of significant legal expenses in the Eurimex litigation and decreased earnings in our retail operations which lowered EBITDA, as well as much higher than normal capital expenditures in 2003. We have received a waiver of this covenant until September 30, 2004 when we believe we will be in compliance with the Debt Service Coverage Ratio. The waiver requires we meet a minimum interim EBITDA target for the three-month period ended December 31, 2003 of $3.1 million, for the six-month period ending March 31, 2004 of negative $2.0 million, and for the nine-month period ending June 30, 2004 of $2.3 million. As of March 31, 2004, we were in compliance with the amended covenants as our EBITDA for the six-month period ended March 31, 2004 was $3.0 million, as outlined in the table below, which exceeded by $5 million our minimum requirement of negative $2.0 million. Finally, the waiver requires that our Capital Expenditures for the twelve-month period ending December 31, 2004 not exceed $4.5 million, which historically is a typical level of our annual capital expenditures.

EBITDA consists of: (in thousands)		Six Months Ended March 31, 2004
Net income	$	640
Interest		350
Income taxes		407
Depreciation and amortization		1,642
EBITDA		3,039

Total Liabilities to Net Worth Ratio. The facility also requires that the ratio of the Company's total liabilities to net worth not exceed 2.0. As of March 31, 2004, the Company was in compliance with this covenant as our total liabilities to net worth ratio was 0.64.

Interest Rates. We have a multi-tiered interest rate structure on our outstanding debt with CIT. We can elect the interest rate structure under the credit facility based on the prime rate or LIBOR for both the revolving credit facility and the term loan. As a result of the waiver noted above, the incremental rate above or below prime and above LIBOR is based on our Funded Debt to Net Worth Ratio and the Company is currently at the most favorable increments available since we substantially exceeded the interim EBITDA minimum for the six months ended March 31, 2004. The rates in effect as of March 31, 2004 were as follows:

		Amount Outstanding	Formula	Effective Rate
Revolving Credit Facility	$	0	Prime - 0.50%	N/A
Revolving Credit Facility		0	LIBOR + 1.50%	N/A
Term Loans		0	Prime - 0.25%	N/A
Term Loans		12.5 million	LIBOR + 1.75%	3.12%

Canadian Credit Facility

As of March 31, 2004, we also had $4.0 million CDN available and $0 outstanding under a demand revolving line of credit with the Royal Bank of Canada.

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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)	$	12,819	$	32	$	28	$	12,522	$	237
Operating Leases (2)		2,502		798		1,125		554		25
Purchase Obligations (3)		11,250		2,250		4,500		4,500		—
Total Obligations	$	26,571	$	3,080	$	5,653	$	17,576	$	262

(1)	Long-Term Debt consists of various notes payable for general business use and strategic acquisitions, which will be funded from a combination of cash flow from operations and our existing credit facilities.
(2)	Operating Leases are principally for real estate and will be funded from a combination of cash flow from operations and our existing credit facilities.
(3)	The purchase obligation is a supply agreement with Adams Granite Co. The Company has agreed to purchase a minimum of $2,250,000 (+/- 10%) of monuments from Adams Granite each year for a term of seven years with various stipulations as to variations from the "minimum order" and pricing agreements, and will be funded from a combination of cash flow from operations and our existing credit facilities. The agreement was entered into on January 11, 2002 and the remaining term is five years.

Our primary need for capital will be to maintain and improve our manufacturing, quarrying, and retail facilities and to finance acquisitions as part of our growth strategy. We have approximately $4.5 million budgeted for capital expenditures in 2004. We believe the combination of cash flow from operations and our credit facility will be sufficient to fund our operations for at least the next twelve months.

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.

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Risk Factors That May Affect Future Results

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

Our continued growth depends, at least in part, on our ability to form relationships with funeral directors, cemeteries and other death care providers.

Our ability to continue to grow our retail business depends in part on our ability to develop referral relationships with funeral homes, cemeteries and other death care professionals. We cannot assure you we will be able to successfully form these relationships in all of the areas in which we have retail businesses. In certain areas, we may be unable to form such relationships where our stores are in direct competition with funeral homes and cemeteries that sell granite memorials.

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

Our ability to continue to grow depends in part upon the acquisition of additional companies. We cannot assure you we will identify suitable acquisition candidates, or we will be able to consummate transactions on acceptable terms. Further, even if we successfully acquire additional companies, we cannot assure you we will be able to successfully integrate the operations of such companies with our own. We intend to finance acquisitions through a combination of available cash resources, bank borrowings, and, in appropriate circumstances, the issuance of equity and/or debt securities. Acquiring additional companies will have a significant effect on our financial position, and could cause substantial fluctuations in our quarterly and yearly operating results. Also, acquisitions may result in the recording of significant goodwill and intangible assets on the Company's financial statements, the write-off of which would reduce reported earnings at the point in time the goodwill is deemed impaired. With respect to retail acquisitions, and as a result of our definition of reporting units under SFAS 142, goodwill impairment could be incurred at the closing of the acquisition.

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

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

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

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

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

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

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

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

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

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

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

Our quarrying and manufacturing competitors include both domestic and international companies, some of which may have greater financial, technical, manufacturing, marketing and other resources. Foreign competitors may have access to lower cost labor and better commercial deposits of memorial grade granite, and may be subject to less restrictive regulatory requirements. For example, companies in South Africa, India, China and Portugal also manufacture and export finished granite memorials into North America which compete with our products.

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

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

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

There is an increasing trend toward cremation in the United States. According to the Cremation Association of North America, or CANA, cremation was used in approximately 27% of the deaths in the United States in 2001, compared to approximately 17% in 1990, and CANA expects this rate to rise to approximately 36% by 2010. While we continue to believe that many families will choose to permanently memorialize their loved-ones, regardless of whether they choose cremation over a traditional burial, to the extent increases in cremation rates result in decreases in memorialization rates, this decrease will result in a decline in our memorial sales, which will adversely affect our business and results of operations.

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

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

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

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

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

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

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

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

We derived approximately 28% of our revenues in fiscal 2003 from sales to customers outside the United States, with approximately 8% of revenues in fiscal 2003 from sales in Canada by the Company's Canadian subsidiary. Foreign sales are subject to numerous risks, including currency conversion risks, limitations (including taxes) on the repatriation of earnings, slower and more difficult accounts receivable collection and greater complication and expense in complying with foreign laws.

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

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

Existing stockholders are able to exercise significant control over us.

Kurt M. Swenson and his brother, Kevin C. Swenson, collectively have 64% of the total voting power of all outstanding shares of our common stock, and will therefore be in a position to control the outcome of most corporate actions requiring stockholder approval, including the election of directors and the approval of transactions involving a change in control of the Company.

We may incur substantial costs to comply with government regulations.

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

No-Call Legislation may adversely affect our retail marketing efforts.

Our retail stores and sales counselors are subject to the so-called "No-Call" laws, which allow consumers to place their telephone number on a "no-call" list maintained by various states and the federal government. At present, there are "No-Call" laws in a majority of states in which we do business and the federal "No-Call" law went into effect in the Fall of 2003. Counselors are unable to make telephone calls to any consumer whose number has been placed on the applicable no-call list, subject to certain limited exceptions. Making telephone calls to introduce the Company and set appointments has been an important part of marketing our retail products and services. While we are taking steps to decrease our reliance on telephone marketing calls, compliance with the "No-Call" laws could adversely affect our retail business and results of operations.

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

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

• grant ten votes per share to each share of Class B Common Stock;
• divide the Board of Directors into three classes, each of which will have a different three-year term;
• provide the stockholders may remove directors from office only for cause and by a supermajority vote;
• provide special meetings of the stockholders may be called only by the Board of Directors or certain Company officers and not by stockholders;
• establish certain advance notice procedures for nomination of candidates for election as directors and for stockholder proposals to be considered at annual stockholders' meetings;
• authorize the issuance of preferred stock. Accordingly, the Board of Directors is empowered, without stockholder approval, to issue preferred stock with dividend, liquidation, conversion, voting or other rights that could materially adversely affect the voting power or other rights of, or be dilutive to, the holders of our Common Stock.

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

Item 3.	Quantitative and Qualitative Disclosure About Market Risk
The Company has financial instruments that are subject to interest rate risk, principally debt obligations under its credit facilities. Historically, the Company has not experienced material gains or losses due to interest rate changes. Based on the Company's current variable rate debt obligations, the Company believes its exposure to interest rate risk is not material.
The Company is subject to foreign currency exchange rate risk primarily from the operations of its Canadian subsidiary. Based on the size of this subsidiary and the Company's corresponding exposure to changes in the Canadian/U.S. dollar exchange rate, the Company does not consider its market exposure relating to currency exchange to be material.
Item 4.	Controls and Procedures
	(a) Disclosure Controls and Procedures. The Company's management, with the participation of the Company's Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company's disclosure controls and procedures (as such term is defined in Rules 13a-15(c) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act)) as of the end of the period covered by this report. Based on such evaluation, the Company's Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, the Company's disclosure controls and procedures are effective in recording, processing, summarizing and reporting, on a timely basis, information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act.
	(b) Internal Control Over Financial Reporting. There have not been any changes in the Company's internal control over financial reporting (as such term is defined in Rules 13a-15(f) under the Exchange Act) during the fiscal quarter to which this report relates that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.

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PART II	OTHER INFORMATION
Item 1.	Legal Proceedings

We are a party to legal proceedings that arise from time to time in the ordinary course of our business. While the outcome of these proceedings cannot be predicted with certainty, we do not expect these matters to have a material adverse effect on our business or financial condition. In addition, we are involved in the arbitration proceeding described below.

Granite Stone Business International Sarl (f/k/a Eurimex SA) (Luxembourg) vs Rock of Ages Corporation (USA) ICC Arbitration 11502/KGA/MS. On April 18, 2001, we received a Request for Arbitration ("Request") from our former distributor outside the United States, Eurimex S.A. (now known as Granite Stone Business International), in connection with our termination of the distribution agreement for our Salisbury Pink granite. Eurimex has also claimed damages in connection with a distribution agreement for our Bethel White granite, which agreement expired by its terms in 1998. Pursuant to those agreements, the arbitration is taking place under the International Chamber of Commerce ("ICC") rules.

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

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

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

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

Kurtz Monument Company (Pennsylvania) v. Rock of Ages Corporation (Delaware) Case No. 03-510 U.S. District Court for the Western District of Pennsylvania. On April 22, 2003, Kurtz Monument Company filed a complaint against Rock of Ages alleging we breached certain terms of a sealed settlement agreement by engaging in conduct constituting commercial disparagement. Damages have not been specified. On October 3, 2003, the Court dismissed all four of the counts of Kurtz's complaint, without prejudice to Kurtz to file an amended complaint. On November 10, 2003, Kurtz filed an amended complaint setting forth essentially the same facts as in the first complaint and alleging breach of contract, commercial disparagement, defamation and tortuous interference with prospective business advantage. Damages have not been specified. The parties are currently engaged in the discovery process. We believe this action by Kurtz Monument Company is without merit, deny liability and will continue to vigorously defend claims made by Kurtz Monument Company.

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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 19, 2004, the Board of Directors declared a dividend of $.02 per share of common stock, payable on March 30, 2004 to holders of record as of March 1, 2004. On May 3, 2004, the Board of Directors declared a dividend of $.02 per share of common stock, payable on June 15, 2004 to holders of record as of May 15, 2004.

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.
	10.1	Employment Agreement of Rudolph R. Wrabel dated as of May 17, 2004.
	10.2	Letter Agreement re: Expense Reimbursement to Rudolph R. Wrabel dated May 3,2004.
	31.1	Certification of CEO pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
	31.2	Certification of CFO pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
	32.1	Certification of CEO pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
	32.2	Certification of CFO pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
(b)	Reports Submitted on Form 8-K:
	On February 19, 2004, the Registrant filed a report on Form 8-K pursuant to Item 5. (Other Events), Item 7. (Financial Statements and Exhibits) and Item 12. (Results of Operations) to report the board of directors had declared a quarterly cash dividend of $0.02 per share payable on March 30, 2004 to shareholders of record on March 1, 2004. The Registrant also reported the deadline for a decision in the pending ICC arbitration, Granite Stone International, Sarl (f/k/a Eurimex) v. Rock of Ages Corporation was extended from February 28, 2004 to May 31, 2004.
	On February 19, 2004, the Registrant filed a report on Form 8-K pursuant to Item 7. (Financial Statements and Exhibits) and Item 9. (Regulation FD Disclosure) to report it would be issuing a press release to disclose that the board of directors had authorized the investment of up to $5 million in FFS Holdings, Inc.
	On February 27, 2004, the Registrant filed a report on Form 8-K/A pursuant to Item 2. (Acquisition or Disposition of Assets) and Item 7. (Pro Forma Financial Statements and Exhibits) to amend the Current Report on Form 8-K filed by the Registrant on December 17, 2003.

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SIGNATURE

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

	ROCK OF AGES CORPORATION
Dated: May 14, 2004	By:/s/ Douglas S. Goldsmith      Douglas S. Goldsmith      Vice President, Chief Financial Officer      and Treasurer

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Exhibit Index

Number	Exhibits
3.1	Amended and Restated Certificate of Incorporation of the Registrant incorporated by reference to Exhibit 3.1 to the Company's Registration Statement on Form S-1 (File No. 333-33685) filed with the Securities and Exchange Commission on August 15, 1997 and declared effective on October 20, 1997.
3.2	Amended and Restated By-Laws of the Registrant (as amended through April 6, 1999) incorporated by 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.
10.1	Employment Agreement of Rudolph R. Wrabel dated as of May 17, 2004.
10.2	Letter Agreement re: Expense Reimbursement to Rudolph R. Wrabel dated May 3,2004.
31.1	Certification of CEO pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	Certification of CFO pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1	Certification of CEO pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2	Certification of CEO pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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INDEX

CONSOLIDATED BALANCE SHEETS
CONSOLIDATED STATEMENTS OF OPERATIONS
CONSOLIDATED STATEMENTS OF CASH FLOWS
NOTES TO 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
Exhibits and Reports on Form 8-K
SIGNATURE