Rock of Ages (ROAC) 10-Q 2005 Q4 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 October 1, 2005

OR

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

For the transition period from ______________ to ______________

Commission file number: 0-29464

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

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

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

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

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

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

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

ROCK OF AGES CORPORATION

INDEX

Form 10-Q for the Quarterly Period
Ended October 1, 2005

PART I	FINANCIAL INFORMATION		PAGE NO.
Item 1.	Financial Statements (Unaudited)
		Consolidated Balance Sheets - October 1, 2005 and December 31, 2004	4
		Consolidated Statements of Operations - Three Months and Nine Months Ended October 1, 2005 and October 2, 2004	5
		Consolidated Statements of Cash Flows - Nine Months Ended October 1, 2005 and October 2, 2004	6
		Notes to Consolidated Financial Statements	7
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations		17
Item 3.	Quantitative and Qualitative Disclosures About Market Risk		33
Item 4.	Controls and Procedures		33
PART II	OTHER INFORMATION
Item 1.	Legal Proceedings		34
Item 5.	Other Information		34
Item 6.	Exhibits and Reports on Form 8-K		35
Signature			36

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 statements that are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are based on current expectations, estimates and projections about our business or expected events based, in part, on assumptions made by management. These statements are not guarantees of future performance and involve risks, uncertainties, and assumptions that are difficult to predict. Therefore, actual events, results or outcomes may differ materially from what is expressed or forecasted in such forward-looking statements. All statements other than statements of historical fact could be deemed forward-looking statements, and may include projections of revenue, gross profit, expenses, costs savings from productivity initiatives, earnings or losses from operations or other financial items; any statements of the plans, strategies and objectives of management for future operations; any statements regarding future economic conditions or performance; any statements of expectation or belief; and any statements of assumptions underlying any of the foregoing. The risks, uncertainties and assumptions may include the challenge of continuing to build and grow Rock of Ages' retail distribution systems through strategic alliances with other death care professionals, retail acquisitions, independent retailers and new store openings; uncertainties involving quarry yields and demand for Rock of Ages' dimension stone; changes in demand for the Company's products; product mix; the timing of customer orders and deliveries; the impact of competitive products and pricing; the success of the Company's branding program; difficulties encountered in the integration process of newly acquired businesses; weather conditions; our ability to meet the covenants set forth in our credit facility 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 1:  FINANCIAL INFORMATION
Item 1:  Financial Statements

ROCK OF AGES CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands except per share data)
(Unaudited)

		October 1,			December 31,
		2005			2004
ASSETS
Current Assets
Cash and cash equivalents	$	4,103		$	4,298
Trade receivables, net		14,864			15,017
Inventories		26,739			23,858
Deferred tax assets, net		—			708
Investment security		3,500			—
Other current assets		3,895			4,793
Total Current Assets		53,101			48,674
Property, plant and equipment, net		51,112			46,130
Cash surrender value of life insurance, net		743			743
Goodwill		387			163
Other intangibles, net		624			388
Deferred tax assets, net		—			6,740
Intangible pension asset		739			739
Long-term Investments		617			4,112
Other		630			888
Total Assets	$	107,953		$	108,577
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Borrowings under line of credit, net	$	11,220		$	7,287
Current installments of long-term debt		3,808			36
Current installments of deferred compensation		366			372
Accounts payable		2,161			2,433
Accrued expenses		5,429			4,234
Customer deposits		9,712			8,173
Total Current Liabilities		32,696			22,535
Long-term debt, net of current installments		21,964			16,289
Deferred compensation, net of current installments		6,915			6,620
Accrued pension cost		2,180			1,993
Deferred tax liability		31			30
Other		984			924
Total Liabilities		64,770			48,391
Commitments
Stockholders' Equity
Preferred stock - $.01 par value; 2,500,000 shares authorized; no shares issued
Common stock - Class A, $.01 par value; 30,000,000 shares authorized; 4,660,800       and 4,656,800 shares issued as of October 1, 2005 and December       31, 2004, respectively		47			47
Common stock - Class B, $.01 par value; 15,000,000 shares authorized; 2,738,596      shares issued as of October 1, 2005 and December 31, 2004		27			27
Additional paid-in capital		65,736			66,267
Accumulated deficit		(22,105	)		(5,288	)
Accumulated other comprehensive loss		(522	)		(867	)
Total stockholders' equity		43,183			60,186
Total Liabilities and Stockholders' Equity	$	107,953		$	108,577

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 4

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

		Three Months Ended						Nine Months Ended
		October 1,			October 2,			October 1,			October 2,
		2005			2004			2005			2004
Net revenues:
Quarrying	$	6,768		$	8,050		$	16,203		$	22,037
Manufacturing		6,949			6,328			17,503			15,883
Retailing		8,472			9,077			26,635			25,731
Total net revenues		22,189			23,455			60,341			63,651
Gross profit:
Quarrying		2,322			4,282			3,105			8,912
Manufacturing		2,312			1,759			5,137			4,435
Retailing		4,456			5,110			14,116			14,584
Total gross profit		9,090			11,151			22,358			27,931
Selling, general and administrative expenses
Quarrying		957			868			2,703			2,570
Manufacturing		1,305			934			3,788			2,743
Retailing		6,590			5,292			19,448			15,461
Total SG&A expenses		8,852			7,094			25,939			20,774
Divisional operating income (loss)
Quarrying		1,365			3,414			402			6,342
Manufacturing		1,007			825			1,349			1,692
Retailing		(2,134	)		(182	)		(5,332	)		(877	)
Divisional operating income (loss)		238			4,057			(3,581	)		7,157
Unallocated corporate overhead		1,358			1,356			4,153			3,959
Legal settlement and costs		—			—			—			6,500
Income (loss) from continuing operations before interest and taxes		(1,120	)		2,701			(7,734	)		(3,302	)
Interest expense		528			194			1,273			454
Income (loss) from continuing operations before taxes		(1,648	)		2,507			(9,007	)		(3,756	)
Income tax expense (benefit)		70			1,166			7,810			(675	)
Income (loss) from continuing operations		(1,718	)		1,341			(16,817	)		(3,081	)
Discontinued operations, net of income taxes		—			(10	)		—			(62	)
Net income (loss)	$	(1,718	)	$	1,331		$	(16,817	)	$	(3,143	)
Per share information:
Net income (loss) per share — basic
Income (loss) from continuing operations		(0.23	)		0.18			(2.27	)		(0.42	)
Discontinued operations		—			—			—			(0.01	)
Net income (loss) per share - basic	$	(0.23	)	$	0.18		$	(2.27	)	$	(0.43	)
Net income (loss) per share—diluted
Income (loss) from continuing operations		(0.23	)		0.18			(2.27	)		(0.42	)
Discontinued operations		—			—			—			(0.01	)
Net income (loss) per share—diluted	$	(0.23	)	$	0.18		$	(2.27	)	$	(0.43	)
Weighted average number of common shares     outstanding—basic		7,399			7,386			7,398			7,293
Weighted average number of common shares     outstanding—diluted		7,399			7,471			7,398			7,293

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

5

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

		Nine Months Ended
		October 1,			October 2,
		2005			2004
Cash flows from operating activities:
Net loss	$	(16,817	)	$	(3,143	)
Adjustments to reconcile net loss to net cash         used in operating activities:
Depreciation, depletion and amortization		3,424			2,818
Deferred taxes		—			2
Provision for tax valuation allowance		7,449			—
Write-down of goodwill		318			—
Changes in operating assets and liabilities, net of acquisitions:
Trade receivables, net		153			(668	)
Inventories		(2,465	)		(1,694	)
Other assets		1,097			(384	)
Trade payables, accrued expenses and income taxes		923			(771	)
Customer deposits		1,319			3,308
Deferred compensation, pension and postretirement benefits		551			543
Other liabilities		(15	)		(28	)
Net cash used in operating activities		(4,063	)		(17	)
Cash flows from investing activities:
Purchases of property, plant and equipment		(5,131	)		(5,458	)
Acquisitions, net of cash acquired		(4,140	)		(477	)
Purchases of long-term investments		—			(3,658	)
Collection of note receivable		—			5,250
Net cash used in investing activities		(9,271	)		(4,343	)
Cash flows from financing activities:
Net borrowings under line of credit		3,932			1,140
Principal payments on long-term debt		(242	)		—
Borrowings on long-term debt		9,689			3,504
Stock options exercised		24			976
Dividends paid on common stock		(555	)		(438	)
Net cash provided by financing activities		12,848			5,182
Effect of exchange rate changes on cash		291			171
Net (decrease) increase in cash and cash equivalents		(195	)		993
Cash and cash equivalents, beginning of period		4,298			3,227
Cash and cash equivalents, end of period	$	4,103		$	4,220
Supplemental cash flow information:
Cash paid during the period for:
Interest	$	1,240		$	455
Income taxes, net		663			200
Supplemental disclosure of non-cash investing and financing activities:
Acquisition:
Assets acquired		4,361			590
Liabilities assumed		(221	)		(113	)
Common stock issued		—			—
Cash paid		4,140			477
Less cash acquired		—			—
Net cash paid for acquisitions	$	4,140		$	477

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 6

ROCK OF AGES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

(1)	Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared pursuant to the rules and regulations for reporting on Form 10-Q. Accordingly, certain information and notes required by generally accepted accounting principles for complete financial statements are not included herein. In the opinion of management, all adjustments of a normal recurring nature considered necessary for a fair presentation have been included. Results of operations for the interim periods are not necessarily indicative of the results that may be expected for a full year. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company's Annual Report Form 10-K (SEC File No. 000-29464, filed March 30, 2005).
In this report, the terms "Company," "we," "us," or "our" mean Rock of Ages Corporation and all subsidiaries included in our consolidated financial statements.
The Company's fiscal year ends on December 31 and its fiscal quarters are the 13-week period ending on the Saturday nearest March 31, June 30 and September 30. As a result, the first and fourth quarter may be more or less than 13 weeks, by 1 to 6 days, which can affect comparability between periods.

(2)	Discontinued Operations
On November 9, 2004, the Company completed the sale of the assets of the Autumn Rose quarry for a total sale price of $750,000. The decision to sell this quarry represented a disposal of long-lived assets under SFAS No. 144, "Accounting for the Impairment or Disposal of Long Lived Assets." Accordingly, results of this business have been classified as discontinued operations, and prior periods have been restated to reflect this reclassification. For business reporting purposes, the Autumn Rose quarry was previously classified in the Quarry segment.
Operating results from the Autumn Rose Quarry for the three and nine months ended October 2, 2004 were as follows (in thousands):

		Three months ended			Nine months ended
		October 2,			October 2,
		2004			2004
Autumn Rose Quarry
Net revenues	$	—		$	35
Gross profit (loss)		(12	)		(77	)
Pretax loss		(12	)		(77	)
Income tax benefit		(2	)		(15	)
Net loss		(10	)		(62	)

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. If the Company had elected to recognize compensation cost for options granted under its stock plans based upon the fair value at the grant dates of such options, consistent with the method prescribed by SFAS No. 123, net income (loss) and earnings per share would have been changed to the pro forma amounts indicated below (in thousands except per share data):

		Three Months Ended						Nine Months Ended
		October 1,			October 2,			October 1,			October 2,
		2005			2004			2005			2004
Net income (loss), as reported	$	(1,718	)	$	1,331		$	(16,817	)	$	(3,143	)
Deduct total stock-based employee compensation expense determined under fair value based method for all awards		(146	)		(96	)		(406	)		(297	)
Net income (loss), pro forma	$	(1,864	)	$	1,235		$	(17,223	)	$	(3,440	)
Net income (loss) per share, as reported	$	(0.23	)	$	0.18		$	(2.27	)	$	(0.43	)
Net income (loss) per share, pro forma	$	(0.25	)	$	0.17		$	(2.33	)	$	(0.47	)
Net income (loss) per share - assuming dilution, as reported	$	(0.23	)	$	0.18		$	(2.27	)	$	(0.43	)
Net income (loss) per share - assuming dilution, pro forma	$	(0.25	)	$	0.17		$	(2.33	)	$	(0.47	)

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

On October 27, 2005, the Company accelerated the vesting of certain unvested and "out of the money" stock options previously awarded to employees, officers and directors that had exercise prices in excess of $5.29, the closing price of the Company's Class A Common Stock on October 27, 2005, the effective date of the acceleration. Options to purchase 333,600 shares became exercisable immediately as a result of the acceleration. These represented all of the total outstanding unvested option shares and approximately 60% of the 538,000 total outstanding option shares, all of which are now fully vested. The weighted average exercise price of the accelerated options is $6.61 per share. The weighted average exercise price of the 204,000 outstanding options that were not accelerated but had previously vested is $6.32 per share.

In connection with the acceleration in order to prevent unintended personal benefits to officers and directors, restrictions will be imposed on any shares received through the exercise of accelerated options held by those individuals. Those restrictions will prevent the sale of the shares received from the exercise of an accelerated option prior to the original vesting date of the option.

The primary purpose of accelerating the vesting of these options is to reduce the Company's future reported compensation expense upon the planned adoption of Statement of Financial Accounting Standards (SFAS) No. 123R, "Share Based Payment" in the first quarter of 2006. As a result of the acceleration, the Company expects to reduce the pre-tax stock option expense it otherwise would have been required to record by approximately $473,000 in 2006, $318,000 in 2007, $203,000 in 2008, and $54,000 in 2009.

8

(4)	Inventories
Inventories consist of the following (in thousands):

		October 1,		December 31,
		2005		2004
Raw materials	$	13,921	$	12,485
Work-in-process		2,037		1,247
Finished goods and supplies		10,781		10,126
	$	26,739	$	23,858

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

	Three Months Ended		Nine Months Ended
	October 1,	October 2,	October 1,	October 2,
	2005	2004	2005	2004
Basic weighted average shares	7,399	7,386	7,398	7,293
Effect of dilutive stock options	—	85	—	—
Diluted weighted average shares	7,399	7,471	7,398	7,293

Options to purchase 538,000 and 454,000 shares of Class A common stock were outstanding at October 1, 2005 and October 2, 2004, respectively, but were not included in the computation of diluted earnings per share for the three months ended October 1, 2005 and the nine months ended October 1, 2005 and October 2, 2004 because the Company reported a loss and the effect would be anti-dilutive.
Options to purchase 25,000 shares of Class A common stock were outstanding at October 2, 2004 but were not included in the computation of diluted earnings per share for the three and nine months ended October 2, 2004 because the options' exercise price was greater than the average market price of the common shares.
(6)	Segment Information
The Company is organized based on the products and services 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 in North America, as well as to customers in Europe and Asia.
The manufacturing segment's principal products are granite memorials used primarily in cemeteries, although it also manufactures some specialized granite products for industrial applications.
The retailing segment sells memorials and other granite products at various locations in sixteen states in the United States.
Unallocated corporate overhead costs and the cost of the Eurimex adverse judgment and legal expenses are presented separately as “Other”.
Inter-segment revenues are accounted for as if the sales were to third parties and then eliminated in consolidation.

9

The following presents the unaudited segment information for the three and nine-month periods ended October 1, 2005 and October 2, 2004 (in thousands):

Three-month period:

2005		Quarrying			Manufacturing			Retailing			Other			Total
Total net revenues	$	7,781		$	9,404		$	8,472		$	—		$	25,657
Inter-segment net revenues		(1,013	)		(2,455	)		—			—			(3,468	)
Net Revenues		6,768			6,949			8,472			—			22,189
Total gross profit		2,662			2,127			4,301			—			9,090
Inter-segment gross profit		(340	)		185			155			—			—
Gross profit		2,322			2,312			4,456			—			9,090
Selling, general, and administrative expenses		957			1,305			6,590			1,358			10,210
Adverse judgment and legal expenses		—			—			—			—			—
Total operating expenses		957			1,305			6,590			1,358			10,210
Income (loss) from continuing operations before interest and taxes	$	1,365		$	1,007		$	(2,134	)	$	(1,358	)	$	(1,120	)
2004		Quarrying			Manufacturing			Retailing			Other			Total
Total net revenues	$	8,636		$	8,517		$	9,077		$	—		$	26,230
Inter-segment net revenues		(586	)		(2,189	)		—			—			(2,775	)
Net Revenues		8,050			6,328			9,077			—			23,455
Total gross profit		4,531			1,657			4,963			—			11,151
Inter-segment gross profit		(249	)		102			147			—			—
Gross profit		4,282			1,759			5,110			—			11,151
Selling, general, and administrative expenses		868			934			5,292			1,356			8,450
Adverse judgment and legal expenses		—			—			—			—			—
Total operating expenses		868			934			5,292			1,356			8,450
Income (loss) from continuing operations before interest and taxes	$	3,414		$	825		$	(182	)	$	(1,356	)	$	2,701

 10

Nine-month period:

2005		Quarrying			Manufacturing			Retailing			Other			Total
Total net revenues	$	18,622		$	24,921		$	26,635		$	—		$	70,178
Inter-segment net revenues		(2,419	)		(7,418	)		—			—			(9,837	)
Net Revenues		16,203			17,503			26,635			—			60,341
Total gross profit		3,648			5,115			13,595			—			22,358
Inter-segment gross profit		(543	)		22			521			—			—
Gross profit		3,105			5,137			14,116			—			22,358
Selling, general and administrative expenses		2,703			3,788			19,448			4,153			30,092
Adverse judgment and legal expenses		—			—			—			—			—
Total operating expenses		2,703			3,788			19,448			4,153			30,092
Income (loss) from continuing operations before interest and taxes	$	402		$	1,349		$	(5,332	)	$	(4,153	)	$	(7,734	)
2004		Quarrying			Manufacturing			Retailing			Other			Total
Total net revenues	$	24,160		$	22,121		$	25,731		$	—		$	72,012
Inter-segment net revenues		(2,123	)		(6,238	)		—			—			(8,361	)
Net Revenues		22,037			15,883			25,731			—			63,651
Total gross profit		9,492			4,423			14,016			—			27,931
Inter-segment gross profit		(580	)		12			568			—			—
Gross profit		8,912			4,435			14,584			—			27,931
Selling, general, and administrative expenses		2,570			2,743			15,461			3,959			24,733
Adverse judgment and legal expenses		—			—			—			6,500			6,500
Total operating expenses		2,570			2,743			15,461			10,459			31,233
Income (loss) from continuing operations before interest and taxes	$	6,342		$	1,692		$	(877	)	$	(10,459	)	$	(3,302	)

11

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

		Three Months Ended				Nine Months Ended
		October 1,		October 2,		October 1,		October 2,
		2005		2004		2005		2004
Net revenues (1):
United States	$	19,388	$	20,731	$	53,528	$	56,971
Canada		2,648		2,610		6,398		6,135
Ukraine		153		114		415		545
Total net revenues	$	22,189	$	23,455	$	60,341	$	63,651

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

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

		October 1,		December 31,
		2005		2004
Long-lived assets:
United States	$	47,248	$	42,495
Canada		3,785		3,635
Luxembourg		79		—
	$	51,112	$	46,130

(7)	Comprehensive Income (Loss)
Comprehensive income (loss) consists of net income (loss) and the foreign currency translation adjustment. Comprehensive income (loss) for the three and nine month periods ended October 1, 2005 and October 2, 2004 are as follows (in thousands):

		Three Months Ended					Nine Months Ended
		October 1,			October 2,		October 1,			October 2,
		2005			2004		2005			2004
Net income (loss)	$	(1,718	)	$	1,331	$	(16,817	)	$	(3,143	)
Other comprehensive income (loss):
Foreign currency translation adjustment		682			434		345			216
Comprehensive income (loss)	$	(1,036	)	$	1,765	$	(16,472	)	$	(2,927	)

Accumulated other comprehensive income (loss) at October 1, 2005 and December 31, 2004 is comprised of the following (in thousands):

		Foreign Currency Translation		Minimum Pension Liability			Accumulated Other Comprehensive (Loss)
Balance at December 31, 2004	$	1,379	$	(2,246	)	$	(867	)
Changes in 2005		345		—			345
Balance at October 1, 2005	$	1,724	$	(2,246	)	$	(522	)

12 

(8) Components of Net Periodic Benefit Cost

The components of the net periodic benefit cost for the Company's defined benefit and other retirement plans are as follows (in thousands):

		Three Months Ended October 1, 2005 and October 2, 2004
		NON-UNION PENSION BENEFITS						DEFERRED COMPENSATION BENEFITS				OTHER BENEFITS
		2005			2004			2005		2004		2005		2004
Service cost	$	182		$	156		$	73	$	43	$	4	$	5
Interest cost		326			320			83		79		30		28
Expected return on plan assets		(356	)		(340	)		—		—		—		—
Amortization of prior service costs		35			35			32		17		26		20
Amortization of net (gain) loss		49			29			—		—		—		—
Net periodic benefit cost	$	236		$	200		$	188	$	139	$	60	$	53

		Nine Months Ended October 1, 2005 and October 2, 2004
		NON-UNION PENSION BENEFITS						DEFERRED COMPENSATION BENEFITS				OTHER BENEFITS
		2005			2004			2005		2004		2005		2004
Service cost	$	546		$	468		$	219	$	129	$	12	$	15
Interest cost		978			960			249		237		90		84
Expected return on plan assets		(1,068	)		(1,020	)		—		—		—		—
Amortization of prior service costs		105			105			96		51		78		60
Amortization of net (gain) loss		147			87			—		—		—		—
Net periodic benefit cost	$	708		$	600		$	564	$	417	$	180	$	159

The Company previously disclosed in its consolidated financial statements for the year ended December 31, 2004 that it expected to contribute $945,000 to the defined benefit pension plan during 2005. As of October 1, 2005, $473,000 has been contributed. The Company is not required to make any additional contributions in 2005 but is currently evaluating whether to do so.
(9)	Recent Accounting Pronouncements
In November 2004, the FASB issued SFAS No. 151, "Inventory Costs-An Amendment of ARB No. 43, Chapter 4" ("SFAS 151"). SFAS 151 amends the guidance in ARB No. 43, Chapter 4, "Inventory Pricing," to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material (spoilage). Among other provisions, the new rule requires that items such as idle facility expense, excessive spoilage, double freight, and re-handling costs be recognized as current-period charges regardless of whether they meet the criterion of "so abnormal" as stated in ARB No. 43. Additionally, SFAS 151 requires that the allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities. SFAS 151 is effective for fiscal years beginning after June 15, 2005 and is required to be adopted by us in the first quarter of 2006, beginning on January 1, 2006. We are currently evaluating the effect, if any, that the adoption of SFAS 151 will have on our consolidated results of operations.
In December 2004, the FASB issued SFAS No. 123 (revised 2004), "Share-Based Payment" ("SFAS 123R"), which replaces SFAS No. 123, "Accounting for Stock-Based Compensation," ("SFAS 123") and supersedes APB Opinion No. 25, "Accounting for Stock Issued to Employees." SFAS 123R requires that all share-based payments to employees, including grants of employee stock options, be recognized in the financial statements based on their fair values, as of the beginning of our first annual period beginning after June 15, 2005. The pro forma disclosures previously permitted under SFAS 123 no longer will be an alternative to financial statement recognition.  Under SFAS 123R, we must determine the appropriate fair value model and related assumptions to be used for valuing share-based payments, the amortization method for compensation cost and the transition method to be used at date of adoption. The transition methods include modified prospective and modified retrospective adoption options. Under the modified retrospective option, prior periods may be restated either as of the beginning of the year of adoption or for all periods presented. The modified prospective method requires that compensation expense be recorded for all unvested stock options at the beginning of the first quarter of adoption of SFAS 123R, while the modified retrospective method would record compensation expense for all unvested stock options beginning with the first period restated. As noted in the accompanying note 3, we accelerated the vesting of all unvested stock options on October 27, 2005 and currently expect no material adverse impact from SFAS 123R as there are currently no unvested option shares outstanding.

13

In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error Corrections" ("SFAS 154"), which replaces APB No. 20 "Accounting Changes," and FASB Statement No. 3, "Reporting Changes in Interim Financial Statements." The Statement changes the accounting for, and reporting of, a change in accounting principle. It requires retrospective application to prior periods financial statements of voluntary changes in accounting principle and changes required by new accounting standards when the standard does not include specific transition provisions, unless it is impracticable to do so. SFAS No. 154 is effective for fiscal years beginning after December 15, 2005. The Company does not believe the adoption of SFAS No. 154 will have a material impact on its financial statements.

(10)	Credit Facility
We have a credit facility with The CIT Group — Business Credit and Chittenden Trust Company that consists of an acquisition term loan line of credit of up to $30 million and a revolving credit facility of up to another $20 million based on eligible accounts receivable, inventory and certain fixed assets. The credit facility expires in October 2007. As of October 1, 2005, we had $19.3 million outstanding and $10.7 million available under the term loan line of credit and $17.4 million outstanding and $2.6 million available under the revolving credit facility. Pursuant to the Further Amendment (defined below) the Company's lenders have placed a reserve of $2 million against availability under the revolving credit facility with the lenders retaining the right to over advance in their discretion.  The lenders also agreed to transfer $6.2 million of the revolving loan balance to term debt, as that amount was expended for acquisitions and new store openings which qualify under the term credit facility. Accordingly this amount has been classified as long term debt on the balance sheet at October 1, 2005.  In addition, $3.5 million of the proceeds from the sale of our investment in FFS Holdings, Inc. (see note 15) will be credited to term debt, resulting in a net $2.5 million increase in term debt and at the same time increasing the amount available to the Company on its existing revolving line of credit. The credit facility loan agreement places restrictions on our ability to, among other things, sell assets, participate in mergers, incur debt, pay dividends, make capital expenditures, repurchase stock and make investments or guarantees.
The credit facility agreement also contains certain covenants for a minimum Operating Cash Flow to Debt Service Ratio (the Ratio) and a limit on the Total Liabilities to Net Worth Ratio of the Company. Initially, the facility required 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 a result of significant Eurimex arbitration expenses, and operating losses, the Company has been in violation of this covenant and has received waivers and amendments of these covenants from its lenders. On August 10, 2005 we signed an amendment to the agreement (the Amendment) which reduced the Ratio for a period of time, increased the interest rates on the outstanding balances on both the term loans and revolving credit facility by 0.25% and contained other provisions.  As of October 1, 2005, we were in violation of the amended Ratio as set forth in the Amendment primarily as a result of operating results. On November 15, 2005, the Company received and executed a further amendment to the Ratio allowing us to be in compliance with our credit facility at October 1, 2005 (the Further Amendment). Therefore, we continue to classify the term debt as long-term on our Consolidated Balance Sheet at October 1, 2005.  In the Further Amendment the Company and its lenders have agreed to adjust the required covenant levels for the balance of 2005 and 2006, and the Company believes it is probable that it will be in compliance with those adjusted covenants. The Further Amendment limits annual capital expenses to $3 million beginning in 2006 and prohibits the Company from paying dividends in 2006 without the prior consent of the lenders. The Company believes it is unlikely that it will receive bank consent to pay dividends during 2006. The Further Amendment also increases the interest rates on the outstanding balances on both the term loan and the revolving credit facility by a further 0.25% until June 30, 2006, at which time the interest rate will be reduced by 0.25% so long as the Company is not in default. Finally, our lenders imposed a fee of $30,000 in connection with the Further Amendment.
The facility also requires that the ratio of the Company's total liabilities to net worth not exceed 2.0. As of October 1, 2005, the Company was in compliance with this covenant as our total liabilities to net worth ratio was 1.5.
(11)	Acquisitions
In February 2005, we acquired McColly Memorials, a memorial retailer, with four (4) locations in the Pittsburgh, Pennsylvania area, for a net purchase price of $554,000. The acquisition was accounted for by the purchase method of accounting. The assets acquired and liabilities assumed were recorded at estimated fair values as determined by management based on information currently available and on current assumptions as to future operations. We recorded property, plant and equipment of $291,000, inventory and work in process of $329,000 and a liability for customer deposits of $221,000, which has resulted in $155,000 of cost in excess of net assets acquired, which was entirely assigned to goodwill. This goodwill was written off in the third quarter – see note 16.
In February 2005, we also acquired the land and equipment comprising the Rockwell White quarry in Rockwell, North Carolina for a purchase price of $3.5 million. The acquisition was accounted for by the purchase method of accounting. The assets acquired were recorded at estimated fair values as determined by management along with an independent appraisal of the granite reserves performed by Marshall & Stevens, Inc. We evaluated the intangible assets and determined that the customer list had a value of $310,000. We recorded property, plant and equipment of $870,000, inventory of $87,000 and granite reserves of $1.9 million, with the excess of the purchase price of $387,000 assigned to goodwill.

14

(12)	Valuation of Deferred Income Taxes
In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the current and deferred tax assets will not be realized. The ultimate realization of current and deferred tax assets depends upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. This assessment is made each reporting period. At the end of the second quarter of 2005, based on the recent levels of historical taxable income and projections for future taxable income, the Company believed it was not more likely than not that it will generate the required taxable income to fully realize the benefit of the net U.S. deferred tax assets.  As such, we adjusted our valuation allowance against the deferred tax assets to fully reserve for the entire net U.S. deferred tax asset which resulted in a charge to tax expense of $9,194,000 in the second quarter. At the end of the third quarter, we reached a similar conclusion, therefore we have continued to fully reserve for the entire net U.S. deferred tax asset. We will continue to assess the valuation allowance on a regular basis and may reduce the valuation allowance if and/or when the Company has taxable income from its U.S. operations in the future.
(13)	Dividend Declaration
On August 4, 2005, the Board of Directors declared a dividend of $.025 per share of common stock, payable on September 15, 2005 to holders of record as of August 24, 2005.
(14)	Subsequent Events
On October 19, 2005 we sold our investment in FFS Holdings, Inc. for $3,850,000 and recorded a gain on the sale of $350,000 in the fourth quarter. See note 15.
On October 27, 2005, the Board of Directors declared a dividend of $.025 per share of common stock, payable on December 15, 2005 to holders of record as of November 28, 2005.
On October 27, 2005, the Company accelerated the vesting of certain unvested and "out of the money" stock options previously awarded to employees, officers and directors that had exercise prices in excess of $5.29, the closing price of the Company's Class A Common Stock on October 27, 2005, the effective date of the acceleration. See note 3.
On November 15, 2005 the Company received and executed a waiver and amendment to our credit facility (the Further Amendment) wherein the Company's lenders agreed to waive the default caused by the Company's not meeting the minimum operating cash flow covenant at October 1, 2005. In the Further Amendment the Company and its lenders have agreed to adjust the required covenant levels for the balance of 2005 and 2006.The Further Amendment also increases the interest rate on the outstanding balances under the term loans and the revolving credit facility by an additional 0.25%, limits capital expenditures to $3,000,000 beginning in 2006, and prohibits the Company from paying dividends without lender consent in 2006. The lenders also imposed a fee of $30,000 in connection with the Further Amendment. The Company believes it is unlikely that it will receive bank consent to pay dividends during 2006. See note 10.
(15)		Investment in FFS Holdings
In the second quarter of 2004, we made a $3.5 million investment in FFS Holdings, Inc. (FFS) the parent company of Forethought Financial Services, Inc., a leading provider of pre-need insurance currently marketed through funeral homes and cemeteries. The investment in the stock of this non-public company was accounted for as a long-term asset at cost. During the third quarter of 2005 we decided to sell the stock to the other stockholders, as provided by the stock purchase agreement. Therefore at October 1, 2005 we have classified the investment as a current asset. We subsequently sold the stock on October 19, 2005 for $3,850,000 and recorded a gain on the sale of $350,000 in the fourth quarter.
The original purchase of the FFS investment was financed through the term debt, therefore $3.5 million of the proceeds on the sale are required to be credited to the term debt. Since the investment is recorded as a current asset at October 1, 2005 we have also classified the related term debt as a current liability.

(16)

Impairment of Long-Lived Assets

We assess impairment of goodwill in accordance with the provisions of Statement of Financial Accounting Standards (SFAS) No. 142, "Goodwill and Other Intangible Assets." The provisions of SFAS No. 142 require a two-step test be performed. First, the fair value of each reporting unit will be compared to its carrying value. If the fair value exceeds the carrying value, goodwill is not impaired and no further testing is performed. If the carrying value exceeds the fair value, then the implied fair value of the reporting unit's goodwill must be determined and compared to the carrying value of the goodwill. If the carrying value of a reporting unit's goodwill exceeds its implied fair value, then an impairment loss equal to the difference will be recorded.  In the third quarter we performed our annual assessment for the retail unit. We calculated the fair value of the retail unit based on estimated expected discounted future cash flows using the Company's weighted average cost of capital. We concluded that the retail unit could not support the goodwill booked in the last two acquisitions and therefore have written off all of the retail goodwill of $318,000 in the third quarter.

15

(17)

Productivity and Profitability Initiatives

During the third quarter of 2005 we undertook an initiative to improve productivity and profitability in the retail and manufacturing segments through a combination of staff reductions and related operational enhancements. Accordingly, third quarter SG& A expenses include termination expenses of $110,000 and $27,000 for the retail and manufacturing segments, respectively. Additional staff reductions will be communicated in the fourth quarter. We expect that termination costs associated with these reductions will be substantially offset by payroll savings during the fourth quarter. We anticipate annual savings from these staffing actions of approximately $2.5 million beginning in 2006.

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Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations
General
Rock of Ages is an integrated quarrier, manufacturer, distributor and retailer of granite blocks and products manufactured from granite. During 2005, we had three business segments, quarrying, manufacturing, and retail. The quarry division sells granite blocks, the raw material inventory of the granite industry, to both the manufacturing division and to outside manufacturers, as well as to customers outside North America. The manufacturing division's principal product is granite memorials, used primarily in cemeteries, although it also manufactures some specialized granite products for industrial applications. The retail division primarily sells granite memorials and related products and services directly to consumers.
Our quarry group continued to have a difficult year in the third quarter of 2005 compared to the same period last year largely as a result of continued decline in export shipments primarily to our customers in China.  The largest shortfall came from our Salisbury Pink and Gardenia White quarries in North Carolina where shipments are down 76% and 49% respectively year to date due to higher inventories in the supply chain as well as what we believe are more restrictive credit policies for our customers in China. Our Bethel White quarry sales are down 19% as of October 1, 2005, but we expect that by year end sales of Bethel White will recover to a level closer to last year's sales levels. Recently, we have seen some improvement in scheduled inspections of blocks by our customers at Salisbury and Gardenia White and anticipate some modest recovery of export shipments from those quarries in the balance of 2005.  Results from our other, primarily domestic, quarries are down slightly over 10% year to date from last year due in part to short-term demand fluctuations as well as some longer-term negative trends caused by competition from imported granites.  We continue to aggressively market our products in the US and abroad and continue to take cost cutting measures and make productivity improvements to adjust to market conditions.
The manufacturing division had a strong third quarter of 2005 due primarily to increased revenues from mausoleums.  Demand for these and other large memorial projects remains strong and has offset the decline in orders and shipments of the lower end memorials generally sold by our authorized retailers. We have determined that increasing our Selling, General and Administrative (SG&A) expenses in an effort to grow the business with our authorized retailer base has not been effective. We have taken steps to reduce SG&A in line with sales and continue to assess the effectiveness of this program.
The retail segment's third quarter revenue was down slightly compared to last year, but is up slightly year-to-date. We released the first of a planned sequence of new products on October 1, 2005 and expect this and the branding programs, as well as the incentive compensation plan of the Memorials Group will lead to future revenue growth.  Our gross margins are lower than the previous years, primarily due to the mix of product sold, reflecting, in part, the changes in our branding program and a new pricing grid implemented earlier this year. We continue to address this mix issue with our sales force and will be adjusting the price levels for 2006 to meet our 55% minimum gross margin target.  In the third quarter we took aggressive action to improve SG&A productivity. Through a combination of headcount reductions and related operational enhancements developed during the quarter we believe our sales force will be able to operate more efficiently with a smaller managerial staff. We estimate these steps will reduce SG&A at both the store and overhead level in our retail operations by 10% in 2006. While we began implementing these reductions in October of 2005, we do not expect to see any significant decline in SG&A in the fourth quarter of 2005 because severance costs will offset the savings in the short term.

Critical accounting policies

General

Management's Discussion and Analysis of Financial Condition and Results of Operations is based upon our Consolidated Financial Statements, which have been prepared in accordance with generally accepted accounting principles (GAAP). The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. Management bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. Actual results may differ from these estimates.  

An accounting policy is deemed to be critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time the estimate is made, and if different estimates that reasonably could have been used, or changes in the accounting estimates that are reasonably likely to occur periodically, could materially impact the financial statements.

Our critical accounting policies are as follows: revenue recognition, impairment of long-lived assets, valuation of deferred income taxes, contingencies and accounting for pensions.

17

Revenue Recognition

The Company records revenues from quarrying, manufacturing and retailing.

Quarry

The granite we quarry is sold both to outside customers and used by our manufacturing group. Our quarry division recognizes revenue from sales of granite blocks to outside customers when the granite is shipped from the quarry except as described below. We provide a 5% discount for domestic customers if payment is made within 30 days of purchase, except in the case of December terms described below. Sales to foreign customers are typically secured by a letter of credit.

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

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

Manufacturing

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

Impairment of long-lived assets

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

18

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

We assess impairment of goodwill in accordance with the provisions of Statement of Financial Accounting Standards (SFAS) No. 142, "Goodwill and Other Intangible Assets." The provisions of SFAS No. 142 require a two-step test be performed. First, the fair value of each reporting unit will be compared to its carrying value. If the fair value exceeds the carrying value, goodwill is not impaired and no further testing is performed. If the carrying value exceeds the fair value, then the implied fair value of the reporting unit's goodwill must be determined and compared to the carrying value of the goodwill. If the carrying value of a reporting unit's goodwill exceeds its implied fair value, then an impairment loss equal to the difference will be recorded. In the third quarter we performed our annual assessment for the retail unit. We calculated the fair value of the retail unit based on estimated expected discounted future cash flows using the Company's weighted average cost of capital. We concluded that the retail unit could not support the goodwill booked in the last two acquisitions and therefore have written off all of the retail goodwill of $318,000 in the third quarter. As a result, we have no goodwill on our balance sheet for retail operations. We likewise have no goodwill on our balance sheet for our manufacturing operations.  All of the goodwill on our balance sheet at October 1, 2005 of $368,000 relates to the Rockwell quarry acquisition, which was completed in the first quarter of 2005. In connection with quarries that we acquire, any excess of the purchase price over the fair value of net assets acquired is normally applied to identifiable intangible assets, such as customer lists, with any excess assigned to goodwill.

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

Valuation of deferred income taxes

In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the current and deferred tax assets will not be realized. The ultimate realization of current and deferred tax assets depends upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. This assessment is made each reporting period. At the end of the second quarter, based on the recent levels of historical taxable income and projections for future taxable income, the Company believed it was not more likely than not that it will generate the required taxable income to fully realize the benefit of the net U.S. deferred tax assets.  As such, we adjusted our valuation allowance against the deferred tax assets to fully reserve for the entire net U.S. deferred tax asset which resulted in a charge to tax expense of $9,194,000 in the second quarter of 2005. At the end of the third quarter, we reached a similar conclusion, therefore we have continued to fully reserve for the entire net U.S. deferred tax asset. We will continue to assess the valuation allowance on a regular basis and may reduce the valuation allowance if and/or when the Company has taxable income from its U.S. operations in the future.  Based on the levels of taxable income from our US operations, utilization of tax loss carry forwards and potential adjustments in the level of the tax valuation allowance, the Company's effective tax rate may vary considerably from year to year.  

Contingencies

We are involved in various 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. 

19

Accounting for pensions

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

20

Results of Operations

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

	Three Months Ended			Nine Months Ended
	October 1,		October 2,	October 1,		October 2,
	2005		2004	2005		2004
Statement of Operations Data:
Net Revenues:
Quarrying	30.5%		34.3%	26.9%		34.6%
Manufacturing	31.3%		27.0%	29.0%		25.0%
Retailing	38.2%		38.7%	44.1%		40.4%
Total net revenues	100.0%		100.0%	100.0%		100.0%
Gross Profit:
Quarrying	34.3%		53.2%	19.2%		40.4%
Manufacturing	33.3%		27.8%	29.3%		27.9%
Retailing	52.6%		56.3%	53.0%		56.7%
Total gross profit	41.0%		47.5%	37.1%		43.9%
Operating Expenses:
Selling, general and administrative:
Quarrying	14.1%		10.8%	16.7%		11.7%
Manufacturing	18.8%		14.8%	21.6%		17.3%
Retailing	77.8%		58.3%	73.0%		60.1%
Corporate Overhead	6.1%		5.8%	6.9%		6.2%
Total operating expenses	46.0%		36.0%	50.0%		38.9%
Adverse Judgment and legal expenses	0.0%		0.0%	0.0%		10.2%
Total operating and other                       expenses	46.0%		36.0%	49.9%		49.1%
Income (loss)                from continuing operations                before interest and income                taxes	(5.0%	)	11.5%	(12.8%	)	(5.2%	)
Interest expense	2.4%		0.8%	2.1%		0.7%
Income (loss) from                continuing operations before                income taxes	(7.4%	)	10.7%	(14.9%	)	(5.9%	)
Provision (benefit) for income taxes	0.3%		5.0%	12.9%		(1.1%	)
Income (loss) from continuing operations	(7.7%	)	5.7%	(27.8%	)	(4.8%	)
Discontinued operations, net of income taxes	0.0%		0.0%	0.0%		(0.1%	)
Net income (loss)	(7.7%	)	5.7%	(27.8%	)	(4.9%	)

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Three Months Ended October 1, 2005 Compared with Three Months Ended October 2, 2004

On a consolidated basis for all segments for the three-month period ended October 1, 2005, compared with the same period in 2004, revenue decreased 5.4%, gross profit decreased 18.5% and total SG&A and unallocated corporate overhead increased 20.8% for reasons discussed in detail in the segment analyses below.

Quarry Segment Analysis

Revenues in our quarry operations for the three-month period ended October 1, 2005 were down 15.9% from the same period last year primarily as a result of decreased shipments from our Salisbury Pink and Gardenia White quarries to overseas customers. Our export shipments declined as a result of several factors including our customers' existing inventory levels as well as what we believe are credit restrictions in China. 

Gross profit dollars from our quarry operations for the three-month period ended October 1, 2005 decreased 45.8% and gross profit as a percentage of revenue decreased from 53.2% of revenue to 34.3% of revenue. The decreases in gross profit dollars and gross profit as a percentage of revenue were largely a result of additional repair and maintenance expenses, absorption of expenses associated with the Rockwell quarry acquisition and lower operating efficiencies associated with the decrease in revenue.

SG&A costs in our quarry segment increased 10.3% for the three-month period ended October 1, 2005 and increased 3.3 percentage points as a percentage of revenue.  The increases are mainly due to an increase in compensation and benefits relating to the planned retirement of the president of the quarries on March 31, 2006 and transitioning duties to the new president. 

Manufacturing Segment Analysis

Revenues in our manufacturing operations for the three-month period ended October 1, 2005 increased 9.8% from the same period last year as a result of strong shipments of mausoleums as well as an increase in sales of industrial products. Our backlog of mausoleum orders and typical memorial products remains strong compared to the same period last year.

Gross profit dollars from the manufacturing group increased 31.4% and gross profit as a percentage of manufacturing revenue increased by 5.5 percentage points for the three-month period ended October 1, 2005 compared with the same period last year. The significant increase in gross profit was primarily attributable to the higher proportion of shipments of mausoleums and larger memorials from our Barre manufacturing plant as well as to increased sales.

SG&A costs for the three-month period ended October 1, 2005 for the manufacturing group increased 39.7% from the same period last year primarily as a result of the additional people and programs put in place to expand our sales to current authorized retailers and to add new authorized retailers. We have concluded that this effort has not been effective and have taken steps to reduce the SG&A expenses related to this effort.

Retail Segment Analysis

Revenues in our retail operations for the three-month period ended October 1, 2005 decreased 6.7% from the same period last year primarily as a result of lower backlogs at the beginning of the quarter. The backlog at the end of the quarter was 3.6% lower than the 2004 level but increased 21.7% from the beginning of the quarter.

Gross profit dollars from the retail operations decreased 12.8% and gross profit as a percentage of revenue decreased 3.7 percentage points compared with the same period last year. The decrease in gross profit dollars is a result of the decrease in revenues discussed above. The decrease as a percentage of revenue is due to several factors associated with the transition to our new marketing and branding programs. We expect our gross margin as a percentage of revenue will increase as revenues increase, however that will depend on the mix of craftsmanship level consumers choose to purchase in our branded product line. We attribute most of the decline to the pricing matrix established with our new branding program early in the year and expect that pricing will be adjusted to return us to the 55% or higher gross margin target in 2006.

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SG&A costs from our retail operations increased 24.5% for the three-month period ended October 1, 2005 compared with last year and SG&A costs as a percentage of retail revenue increased 19.5 percentage points from the same period last year. The increase in SG&A was a result of the expenses associated with the various investments in people and programs related to changing  our product mix, branding strategy, marketing plan, retail sales counselor compensation structure, pricing policy, and other items.  While we continue to focus on the new branding and pricing programs introduced earlier this year, we have developed a retail store staffing plan that through a combination of headcount reductions and related operational enhancements focuses on the productivity of our sales force and allows us to operate more efficiently with a smaller managerial staff. We expect this will reduce retail SG&A by approximately 10% in 2006 from 2005 levels.

Consolidated Items

Unallocated Corporate overhead was essentially unchanged compared with the same period a year ago.

Interest expense increased 172.2% for the three-month period ended October 1, 2005 compared with the same period last year as a result of the increase in debt associated with the payment of the Eurimex judgment, the investment in Forethought Financial Services and net operating losses, as well as slightly higher interest rates on our credit facilities.

Income tax expense for the three-month period ended October 1, 2005 was $70,000 despite a consolidated loss. This provision is attributable to the Company's profitable Canadian subsidiary. The Company's effective tax rate was 46.5%, for the same three-month period in 2004. The tax expense of the third quarter of 2005 consisted of the benefit of $137,000 from carrying back to prior years a portion of the 2004 tax net operating loss, net of the Canadian income tax expense of $207,000 for the quarter.

In the three-month period ended July 2, 2005, the Company made the determination that, based on the results of the previous three years coupled with current year actual and projected operating results and the guidance in SFAS 109, we could not estimate that the Company will more likely than not generate the required taxable income to fully realize the benefit of the net U.S. deferred tax assets the Company has generated over the years.  As such, we adjusted our valuation allowance against the net U.S. deferred tax assets to fully reserve for the entire net U.S. deferred tax assets. After reviewing the results of the third quarter, we continued to fully reserve for the entire net deferred tax assets. We will continue to assess the valuation allowance on a regular basis and may reduce the valuation allowance if and/or when the Company has taxable income from its U.S. operations in the future as required by SFAS 109. 

Nine Months Ended October 1, 2005 Compared to Nine Months Ended October 2, 2004

On a consolidated basis for all segments for the nine-month period ended October 1, 2005, compared with the same period in 2004, revenue decreased 5.2%, gross profit decreased 20.0% and total SG&A expenses increased 21.7% from the same period last year for reasons discussed in detail in the segment analyses below.

Quarry Segment Analysis

Revenue in our quarry operations for the nine-month period ended October 1, 2005 was down 26.5% from the same period last year primarily as a result of decreased shipments from our Bethel White, Salisbury Pink and Gardenia White quarries to overseas customers. Our export shipments declined as a result of several factors including our customers' existing inventory levels as well as what we believe are credit restrictions in China. 

Gross profit dollars from our quarry operations for the nine-month period ended October 1, 2005 decreased 65.2% and gross profit as a percentage of revenue decreased from 40.4% of revenue to 19.2% of revenue. The decreases in gross profit dollars and gross profit as a percentage of revenue were largely a result of additional repair and maintenance expenses, absorption of additional expenses associated with a quarry acquisition and lower operational efficiencies associated with the decrease in revenue.

SG&A costs in our quarry segment increased 5.2% for the nine-month period ended October 1, 2005. The increases were a result primarily of increased compensation expense relating to the planned retirement of the president of the quarries on March 31, 2006 and transitioning duties to the new president. 

Manufacturing Segment Analysis

Revenues in our manufacturing operations for the nine-month period ended October 1, 2005 increased 10.2% from the same period last year primarily as a result of strong shipments of mausoleums as well as an increase in sales of industrial products. Our backlog of mausoleum orders and typical memorial products remains strong compared to the same period last year.

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Gross profit dollars from the manufacturing group increased 15.8% and gross profit as a percentage of manufacturing revenue increased 1.4 percentage points for the nine-month period ended October 1, 2005 compared with the same period last year. The increase in gross profit margin results from the positive effect increased revenue has on reducing certain fixed costs as a percentage of revenue in our operations, and higher revenues from industrial products which typically have above average gross margins.

SG&A costs for the nine-month period ended October 1, 2005 for the manufacturing group increased 38.1% compared with the same period last year primarily as a result of the additional people and programs put in place to expand our sales to current authorized retailers and to add new authorized retailers. We have concluded that this effort has not been effective and have taken steps to reduce the SG&A expenses related to this effort.

Retail Segment Analysis

Revenues in our retail operations for the nine-month period ended October 1, 2005 increased 3.5% from the same period last year. We believe the increase is a direct result of modifications to our product mix, branding strategy, marketing plan, retail counselor compensation structure, pricing policy, and other items. Our order receipts increased 1.6% over the same period last year and our backlog, which was 14.2% less than the prior year at the end of the second quarter is now 3.6% less than the backlog balance at October 2, 2004.

Gross profit dollars from the retail operations decreased 3.2% and gross profit as a percentage of revenue decreased 3.7 percentage points compared with the same period last year. The decrease in gross profit dollars is a result of the decrease in revenues discussed above. The decrease as a percentage of revenue is due to several factors associated with the transition to our new marketing and branding programs. We expect our gross margin as a percentage of revenue will increase as revenues increase, however that will depend on the mix of craftsmanship level consumers choose to purchase in our branded product line. We attribute most of the decline to the pricing matrix established with our new branding program early in the year and expect that pricing will be adjusted to return us to the 55% or higher gross margin target in 2006.

SG&A costs from our retail operations increased 25.8% for the nine-month period ended October 1, 2005 compared to last year and SG&A costs as a percentage of retail revenue increased 12.9 percentage points from the same period last year. The increase in SG&A was a result of the expenses associated with the various investments in people and programs related to changing  our product mix, branding strategy, marketing plan, retail sales counselor compensation structure, pricing policy, and other items.  While we continue to focus on the new branding and pricing programs introduced earlier this year, we have developed a retail store staffing plan that, through a combination of headcount reductions and related operational enhancements, focuses on the productivity of our sales force and allows us to operate more efficiently with a smaller managerial staff. We expect this will reduce retail SG&A approximately 10% in 2006 from the 2005 annual level.

Consolidated Items

Unallocated Corporate overhead increased 4.9% for the nine-month period ended October 1, 2005 compared with the same period last year primarily as a result of professional fees related to executive searches and amending our debt facility.

In the nine-month period ended October 2, 2004 we recognized a $6.5 million expense associated with the Eurimex legal case, including the judgment and any legal or other related expenses. This case was concluded in 2004.

Interest expense increased 180.4% for the nine-month period ended October 1, 2005 compared with the same period last year as a result of the increase in debt and higher interest rates on our credit facilities. The increase in debt is due, in part to the Rockwell Quarry and the McColly retail operation acquisitions, as well as our operating results and changes in working capital.

Income tax expense for the nine-month period ended October 1, 2005 was $7.8 million despite a consolidated loss.  This provision is primarily attributable to a valuation allowance of $9.2 million recognized in the quarter ended July 2, 2005 to fully reserve against the U.S. deferred tax assets. The Company reported a benefit of $675,000 for the same period in 2004 reflecting the consolidated loss in that period. The tax expense for the first nine months of 2005 consisted of the valuation allowance noted above and the Canadian income tax expense of $500,000 which was partially offset by the tax benefit related to carrying back to prior years a portion of the 2004 tax net operating loss.

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In the three-month period ended July 2, 2005, the Company made the determination that, based on the results of the previous three years coupled with current year actual and projected operating results and the guidance in SFAS 109, we could not estimate that the Company will more likely than not generate the required taxable income to fully realize the benefit of the net U.S. deferred tax assets the Company has generated over the years. As such, we adjusted our valuation allowance against the net U.S. deferred tax assets to fully reserve for the entire net U.S. deferred tax assets. After reviewing the results of the third quarter, we continued to fully reserve for the entire net deferred tax assets. We will continue to assess the valuation allowance on a regular basis and may reduce the valuation allowance if and/or when the Company has taxable income from its U.S. operations in the future as required by SFAS 109. 

Liquidity and Capital Resources

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

In 2004, the funded status of our defined benefit pension plan decreased by approximately $1 million primarily as a result of a decrease in the discount rate used to calculate the pension benefit obligation from 6.25% to 5.79%. We have historically contributed between $800,000 and $1.0 million per year to the plan. The Company previously disclosed in its consolidate financial statements for the year ended December 31, 2004 that it expected to contribute $945,000 to the defined benefit plan during 2005. As of October 1, 2005, $473,000 has been contributed. The Company is not required to make any additional contributions in 2005 but is currently evaluating whether to do so.

Cash Flow

At October 1, 2005, the Company had cash and cash equivalents of $4.1 million and working capital of $20.4 million, compared with $4.3 million and $26.1 million, respectively, at December 31, 2004. The decrease in working capital is primarily the result of the increase in the revolving credit facility.

Cash flows from Operations. Net cash used in operating activities was $4.1 million in the nine-month period ended October 1, 2005 compared with $17,000 in the same nine-month period of 2004. The primary reason for the change is the lower earnings in 2005 coupled with higher inventory levels, and a smaller increase in customer deposits in 2005 than in 2004.

Cash flows from Investing Activities. Cash flows used in investing activities were $9.3 million in the nine-month period ended October 1, 2005. Capital spending was $5.1 million as a result of continued investment in our operations. In addition, we used $3.5 million in cash to acquire the Rockwell quarry and approximately $600,000 in cash to acquire the McColly retail operation. Cash used in investing activities of $4.3 million in the nine-month period ended October 2, 2004 consisted of capital spending of $5.5 million, $477,000 for the Crone acquisition and $3.5 million for the Forethought Financial Services (FFS) investment, partially offset by cash of $5.25 million received from the sale of the cemeteries. Cash used in investing activities usually comes from either borrowings under our credit facilities or from operations.

Cash flows from Financing Activities. Net cash provided by financing activities in the nine-month period ended October 1, 2005 was $12.8 million, which consisted of borrowings under the line of credit of $3.9 million, net long-term debt borrowings of $9.5 million, and proceeds from stock options exercised of $24,000 less dividends paid on common stock of $555,000. $5.2 million was provided by financing activities in the corresponding period of 2004, which consisted of borrowings under the line of credit of $1.1 million, net long-term debt borrowings of $3.5 million used to make the Forethought Financial Services investment and proceeds from stock options exercised of $976,000 less dividends paid on common stock of $438,000.

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CIT Credit Facility

We have a credit facility with The CIT Group — Business Credit and Chittenden Trust Company that consists of an acquisition term loan line of credit of up to $30 million and a revolving credit facility of up to another $20 million based on eligible accounts receivable, inventory and certain fixed assets. The credit facility expires in October 2007. As of October 1, 2005, we had $19.3 million outstanding and $10.7 million available under the term loan line of credit and $17.4 million outstanding and $2.6 million available under the revolving credit facility. Pursuant to the Further Amendment (defined below) the Company's lenders have placed a reserve of $2 million against availability under the revolving credit facility with the lenders retaining the right to over advance in their discretion. The lenders also agreed to transfer $6.2 million of the revolving loan balance to term debt, as that amount was expended for acquisitions and new store openings which qualify under the term credit facility. Accordingly this amount has been classified as long term debt on the balance sheet at October 1, 2005.  In addition, $3.5 million of the proceeds from the sale of our investment in FFS Holdings, Inc (see note 15) will be credited to term debt, resulting in a net $2.5 million increase in term debt and at the same time increasing the amount available to the Company on its existing revolving line of credit. The credit facility loan agreement places restrictions on our ability to, among other things, sell assets, participate in mergers, incur debt, pay dividends, make capital expenditures, repurchase stock and make investments or guarantees.

The credit facility agreement also contains certain covenants for a minimum Operating Cash Flow to Debt Service Ratio (the Ratio) and a limit on the Total Liabilities to Net Worth Ratio of the Company. Initially, the facility required 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 a result of significant Eurimex arbitration expenses, and operating losses, the Company has been in violation of this covenant and has received waivers and amendments of these covenants from its lenders. On August 10, 2005 we signed an amendment to the agreement (the Amendment) which reduced the Ratio for a period of time, increased the interest rates on the outstanding balances on both the term loans and revolving credit facility by 0.25% and contained other provisions.  As of October 1, 2005, we were in violation of the amended Ratio as set forth in the Amendment primarily as a result of operating results. On November 15, 2005, the Company received and executed a further amendment to the Ratio allowing us to be in compliance with our credit facility at October 1, 2005 (the Further Amendment). Therefore, we continue to classify the term debt as long-term on our Consolidated Balance Sheet at October 1, 2005.  In the Further Amendment the Company and its lenders have agreed to adjust the required covenant levels for the balance of 2005 and 2006, and the Company believes it is probable that it will be in compliance with those adjusted covenants. The Further Amendment also limits annual capital expenses to $3 million beginning in 2006, and prohibits the Company from paying dividends without the prior consent of the lenders. The Company believes it is unlikely that it will receive bank consent to pay dividends in 2006. The Further Amendment also increases the interest rates on the outstanding balances of the term loans and the revolving credit facility by a further 0.25% until June 30, 2006, at which time the interest rate will be reduced by 0.25% so long as the Company is not in default. Finally, our lenders imposed a fee of $30,000 in connection with the Further Amendment.

The facility also requires the ratio of the Company's total liabilities to net worth not exceed 2.0. As of October 1, 2005, the Company was in compliance with this covenant as our total liabilities to net worth ratio was 1.5.

We have a multi-tiered interest rate structure on our outstanding debt with CIT. We can elect the interest rate structure under the credit facility based on the prime rate or LIBOR for both the revolving credit facility and the term loan. The incremental rate above or below prime and above LIBOR is based on our Funded Debt to Net Worth Ratio. Based on this ratio, our current rates are 50 basis points higher than the lowest rates available to us.  As a result of the waiver and covenant adjustments noted above, the Company's rate structure will remain 50 basis points higher for both the revolver and term loans until the Company's trailing twelve month coverage ratio is equal to or greater than 1.25. The rates in effect as of October 1, 2005 were as follows:

	Amount	Formula	Effective Rate
Revolving Credit Facility	$5.4 million	Prime	6.75%
Revolving Credit Facility	12.0 million	LIBOR + 1.50%	5.19%
Term Loans	12.5 million	LIBOR + 2.00%	5.86%
Term Loans	3.5 million	LIBOR + 1.75%	5.44%
Term Loans	3.1 million	LIBOR + 2.00%	5.86%
Term Loans	157,000	Prime + .25%	7.00%

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Canadian Credit Facility

As of October 1, 2005, the Company had $4.0 million CDN available and $0 outstanding under a demand revolving line of credit with the Royal Bank of Canada.

Contractual Obligations

Our contractual obligations have not changed materially since December 31, 2004, as disclosed in our annual report on Form 10-K.  Our primary need for capital will be to maintain and improve our manufacturing, quarrying, and retail facilities. We have approximately $5.1 million budgeted for capital expenditures in 2005. $5.1 million has been expended to date. We expect to finish the year approximately $650,000 higher than the budgeted amount. Capital expenditures in 2006 are currently expected to be less than $3 million. We believe the combination of cash flow from operations and our credit facility will be sufficient to fund our operations for the next twelve months.

Seasonality

Historically, the Company's operations have experienced certain seasonal patterns. Generally our net sales have been highest in the second or third quarter and lowest in the first quarter of each year 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, we typically close certain of our Vermont and Canadian quarries during these months because of increased operating costs attributable to adverse weather conditions. As a result, we have historically incurred a net loss during the first three months of each calendar year.

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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. 

The growth and profitability of our retail operations depends, in at least in part, on our ability to successfully execute staff productivity improvements, sales and marketing initiatives, and new product programs.

Our ability to grow our retail business and improve retail profits depends in part on our ability to successfully execute store level staffing plans that will allow us to operate more efficiently and with a smaller managerial staff.  In addition, our ability to grow our retail operations depends in part on the successful execution of recently implemented sales and marketing programs, including the branding program and certain new product introductions.  Our failure to execute these plans and programs may adversely affect our ability to grow revenues and profits, and adversely affect our business and financial results.

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

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

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

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

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

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

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

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

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

Our quarrying and manufacturing competitors include both domestic and international companies, some of which may have greater financial, technical, manufacturing, marketing and other resources. Foreign competitors may have access to lower cost labor and better commercial deposits of granite, and may be subject to less restrictive regulatory requirements.

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

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

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

The terms of our credit facility with CIT restrict our ability to, among other things, consummate asset sales, participate in mergers, incur additional debt, pay dividends, repurchase stock or make investments or guarantees. The terms also contain covenants that require us to meet financial tests, including a minimum Operating Cash Flow to Debt Service Ratio and a maximum Total Liabilities to Net Worth Ratio, in order to continue to borrow under the facility and avoid a default that might lead to an early termination of the facility. The terms of this credit facility, including these covenants, are generally described above in this Item 2 under the caption "Liquidity and Capital Resources-Capital Resources-CIT Credit Facility.

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As described under such caption, we have been and were as of December 31, 2004, in violation of the minimum Operating Cash Flow to Debt Service Coverage Ratio, but were granted a waiver allowing us to exclude certain expenditures from our calculation of EBITDA and capital expenditures in the fourth quarter of 2004 and thereby comply with this covenant at December 31, 2004. Also as described under such caption, the waiver includes modifications to the minimum Operating Cash Flow to Debt Service Coverage Ratio in 2005 based on our projections. For the period ended October 1, 2005, we were in violation of the modified covenant levels primarily as a result of poor operating results for the second quarter and the first half of the year. We received a waiver allowing us to be in compliance with our credit facility at October 1, 2005 and our lenders have agreed to adjust the required covenant levels for the balance of 2005 and 2006.  While we believe we will be in compliance with the adjusted covenants during the remainder of 2005 and for 2006, we cannot provide assurances that we will be able to maintain compliance with this or other covenants in our loan facility or that we will continue to receive waivers of any non-compliance. While we currently maintain excellent relations with our lenders, if we are unable to comply with the financial or other covenants of our loan facility as recently amended,  we will likely be unable to borrow additional amounts under the facility or amounts under the facility could be accelerated and become due and payable immediately, which would adversely affect our liquidity and our business and operations.

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

There is an increasing trend toward cremation in the United States. According to the National Funeral Director's Association, or NFDA, cremation was used in approximately 29% of the deaths in the United States in 2003, compared to approximately 32% in 2005. While we continue to believe many families will choose to permanently memorialize their loved-ones, regardless of whether they choose cremation over a traditional burial, to the extent increases in cremation rates result in decreases in memorialization rates, this decrease will result in a decline in our memorial sales, which will adversely affect our business and results of operations.

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

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

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

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

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

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

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

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

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

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

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

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.

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

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

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

Our internal controls may not be adequate. Section 404 of the Sarbanes-Oxley Act of 2002 requires that we assess and report on our internal control over financial reporting, beginning with our Annual Report on Form 10-K for the year ending December 31, 2007. In addition, our independent registered public accounting firm must audit and report on management's assessment of our internal controls over financial reporting. We are in the process of documenting and testing our system of internal controls to provide the basis for our report. However, at this time, due to the ongoing evaluation and testing, no assurance can be given that there may not be significant deficiencies or material weaknesses in our internal control over financial reporting that would be required to be reported. Accordingly, we cannot assure you that we or out independent registered public accounting firm will be able to report that our internal controls over financial reporting are effective. In this event, investors could lose confidence in the reliability of our financial statements, which could result in a decrease in the market value of our Class A Common Stock.

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

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

Our collective bargaining agreements with the Granite Cutters Association and the United Steelworkers of America,  which together represent approximately 169 employees in our Vermont manufacturing and quarrying operations, expire on April 28, 2006. If we are unable to reach agreement with any of our unionized work groups in future negotiations regarding the terms of their collective bargaining agreement, or if additional segments of our workforce become unionized, we could be subject to work interruptions or stoppages which could adversely affect our operations and our business.

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

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

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

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

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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(e) 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 it files or submits under the Exchange Act.
	(b) Internal Control Over Financial Reporting.  There have not been any changes in the Company's internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal quarter to which this report relates that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.  See the disclosure contained in “Risk Factors that May Affect Future Results” in Item 2 of this Report for disclosure on the status of the Company's efforts to document and test its internal controls.

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PART II	OTHER INFORMATION
Item 1.	Legal Proceedings
We are a party to legal proceedings that arise from time to time in the ordinary course of our business. While the outcome of these ordinary course proceedings cannot be predicted with certainty, we do not expect them to have a material adverse effect on our business or financial condition.
Kurtz Monument Company (Pennsylvania) v. Rock of Ages Corporation (Delaware) Case No. 03-510 U.S. District Court for the Western District of Pennsylvania. On April 22, 2003, Kurtz Monument Company filed a complaint against us alleging that we breached certain terms of a sealed settlement agreement by engaging in conduct constituting commercial disparagement. Damages have not been specified. We believe this action by Kurtz Monument Company is without merit. We deny liability and will continue to vigorously defend claims made by Kurtz Monument Company.
The Company carries insurance with coverages that it believes to be customary in its industry. Although there can be no assurance that such insurance will be sufficient to protect us against all contingencies, management believes that its insurance protection is reasonable in view of the nature and scope of our operations.
Item 5.	Other Information
As previously announced on August 4, 2005, we concluded that it was no longer more likely than not that the Company would generate sufficient U.S. based taxable income in the future to realize the net U.S. deferred tax asset. Accordingly, we recorded a non-cash charge providing a valuation allowance to fully reserve for the entire net U.S. deferred tax asset. The amount of the charge was $9,194,000. The valuation allowance had a direct negative impact on the Company's net income and shareholder's equity for the second quarter and year-to-date periods thereafter and will result in the Company's inability to record tax benefits on future losses of its U.S. operations until it generates sufficient future taxable income to support a reduction of the valuation allowance. The valuation allowance will not impact the Company's cash flow.

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Item 6.	Exhibits and Reports on Form 8-K
(a)	Exhibits
	Number	Exhibits
	3.1	Amended and Restated Certificate of Incorporation of the Registrant incorporated by reference to Exhibit 3.1 to the Company's Registration Statement on Form S-1 (File No. 333-33685) filed with the Securities and Exchange Commission on August 15, 1997 and declared effective on October 20, 1997.
	3.2	Amended and Restated By-Laws of the Registrant (as amended through April 6, 1999) incorporated by reference to Exhibit 3.2 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended March 31.1999.
	4	Specimen Certificate representing the Class A Common Stock incorporated by reference to Exhibit 4 to the Company's Registration Statement on Form S-1 (Registration No. 333-33685) filed with the Securities and Exchange Commission on August 15, 1997and declared effective on October 20, 1997.
	10.1	Retirement Agreement - Jon M. Gregory
	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 August 2, 2005, the Registrant filed a report on Form 8-K pursuant to Item 7.01 (Regulation FD Disclosure) and Item 9.01 (Financial Statements and Exhibits) to report it had issued a press release announcing it would be reporting results for the Second Quarter of 2005 and a conference call had been scheduled for that morning.
	On August 4, 2005, the Registrant filed a report on Form 8-K pursuant to Item 2.02 (Results of Operations and Financial Condition), Item 8.01 (Other Events) and Item 9.01 (Financial Statements and Exhibits) to announce its results of operations for the quarter ended July 2, 2005. The Registrant also announced the Board of Directors of the Company had declared a quarterly cash dividend of $.025 for each share of common stock, payable on September 15, 2005 to shareholders of record on August 15, 2005.
	On August 10, 2005, the Registrant filed a report on Form 8-K pursuant to Item 1.01 (Entry into a Material Definitive Agreement) and Item 9.01 (Financial Statements and Exhibits) to report the Company signed a letter from its lenders, the CIT Group/Business Credit and Chittenden Trust Company (the "Waiver Letter") pursuant to which CIT and Chittenden waived compliance with certain financial covenants contained in the Financing Agreement dated December 17, 1997, as amended, and modified those covenants for 2005 and 2006.
	On October 3, 2005, the Registrant filed a report on Form 8-K pursuant to Item 4.01 (Changes in Registrant's Certifying Accountant) to report that on September 27, 2005, the Registrant dismissed KPMG as its independent registered accounting firm.  The Registrant also reported that on September 29, 2005, the Audit Committee appointed Grant Thornton as the Registrant's new independent registered accounting firm.

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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: November 15, 2005	By: /s/ Nancy Rowden Brock        Nancy Rowden Brock        Senior Vice President, Chief Financial Officer         and Treasurer        (Duly Authorized Officer and Principal Financial and Accounting Officer)

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Number	Exhibits
3.1	Amended and Restated Certificate of Incorporation of the Registrant incorporated by reference to Exhibit 3.1 to the Company's Registration Statement on Form S-1 (File No. 333-33685) filed with the Securities and Exchange Commission on August 15, 1997 and declared effective on October 20, 1997.
3.2	Amended and Restated By-Laws of the Registrant (as amended through April 6, 1999) incorporated by reference to Exhibit 3.2 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended March 31,1999.
4	Specimen Certificate representing the Class A Common Stock incorporated by reference to Exhibit 4 to the Company's Registration Statement on Form S-1 (Registration No. 333-33685) filed with the Securities and Exchange Commission on August 15, 1997and declared effective on October 20, 1997.
10.1	Retirement Agreement - Jon M. Gregory
31.1	Certification of CEO pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	Certification of CFO pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1	Certification of CEO pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2	Certification of CFO pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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Index

Consolidated Balance Sheets
Consolidated Statements Of Operations
Consolidated Statements Of Cash Flows
Notes To 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