ITEM 1. BUSINESS
General
Rock of Ages Corporation ("Rock of Ages" or the "Company") was founded in 1885 and is an integrated granite quarrier, manufacturer and retailer whose principal product is granite memorials used primarily in cemeteries. The Company believes that it is the largest quarrier, manufacturer and retailer of finished granite memorials and granite blocks for memorial use in North America, based on revenues. The Company owns and operates 13 active quarry properties and 12 manufacturing and sawing facilities in North America, principally in Vermont, Georgia and the Province of Quebec. The Company markets and distributes its memorials on a retail basis through 73 owned retail sales outlets as of March 22, 1999 (57 as of December 31, 1998) in the states indicated in Item 2
ITEM 2. PROPERTIES
The Company owns the following quarry and manufacturing properties:
In addition, the Company owns 73 retail sales outlets and 15 associated sand blasting facilities in the states of Georgia, Iowa, Illinois, Minnesota, Nebraska, New Jersey, Pennsylvania, Ohio, South Dakota, Kentucky, Wisconsin and Missouri. In certain cases, the Company leases under customary lease arrangements the land or other real estate associated with these outlets and facilities.
The following table sets forth certain information relating to the Company's quarry properties. Each of the quarries listed below: (i) is owned by the Company (other than the Kershaw quarry, which is leased with 39 years remaining on the lease); (ii) is an open-pit quarry; (iii) contains granite that is suitable for extraction as dimension granite for memorial or other use; (iv) is serviced by electricity provided by local utility companies (other than the Bethel quarry which is serviced by internal generators); and (v) has adequate and modern extraction and other equipment. The Company presently has no exploration plans.
- ---------- (1) Net saleable reserves are based on internal Company estimates, except for the reserves for the E.L. Smith, Adam-Pirie and Bethel quarries, which are based on independent assessments by CA Rich Consultants, Inc., and for the Gardenia White quarry, which are based on an independent assessment by Geomapping Associates.
(2) Based on internal Company estimates using current production levels.
The estimates of saleable reserves of the Company are based on historical quarry operations, workable reserves in the existing quarries and immediately adjacent areas, current work force sizes and current demand. While quarry operations decrease the granite deposits, the size of the granite deposits in which the Company's quarries are located are large and extend well beyond existing working quarry perimeters. The Company has historically expanded quarry perimeters or opened other quarries in the deposit as necessary to utilize reserves and the Company believes it has adequate acreage for expansions as and when necessary. The Company has no reason to believe that it will deplete its granite reserves at any time in the foreseeable future.
Dimension granite is not considered a valuable mineral or commodity such as gold, nor is it traded on any commodities exchange. The prices charged by the Company to third parties for granite blocks depend on the characteristics such as color of and costs to quarry each granite block. The price per cubic foot currently charged by the Company for its granite blocks is generally comparable to other granite suppliers and typically does not exceed $30.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
The Company is a party to legal proceedings that arise from time to time in the ordinary course of its business. While the outcome of these proceedings cannot be predicted with certainty, management does not expect these matters to have a material adverse effect on the Company.
The Company carries insurance with coverages that it believes to be customary in its industry. Although there can be no assurance that such insurance will be sufficient to protect the Company against all contingencies, management believes that its insurance protection is reasonable in view of the nature and scope of the Company's operations.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's security holders, through the solicitation of proxies or otherwise, during the fourth quarter of the fiscal year covered by this Annual Report on Form 10-K.
PART II
ITEM 5.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Class A Common Stock is traded on the Nasdaq(R) National Market under the symbol "ROAC." There is currently no established public trading market for the Class B Common Stock. The Class A Common Stock commenced public trading on October 21, 1997. The table below sets forth the quarterly high and low sales quotations for the Class A Common Stock for each full quarterly period during the Company's 1998 fiscal year, compiled from information supplied by Nasdaq(R). All prices represent inter dealer quotations without retail mark ups, mark downs or commissions, and may not necessarily represent actual transactions.
High Low ---- ---
First Quarter . . . . . . . . . . . . . . 18 1/4 14 1/4 Second Quarter. . . . . . . . . . . . . . 18 1/4 15 1/8 Third Quarter . . . . . . . . . . . . . . 16 1/2 9 1/8 Fourth Quarter . . . . . . . . . . . . . . 16 10
As of March 25, 1999, based upon information provided by the Company's transfer agent, there were 165 record holders of Class A Common Stock and 34 record holders of Class B Common Stock, which numbers do not include stockholders who beneficially own shares held in street name by brokers.
The Company has not declared or paid, and does not anticipate paying, cash dividends in the foreseeable future, but intends to retain any future earnings for reinvestment in its business. Any future determination to pay cash dividends will be at the discretion of the Board of Directors and will be dependent upon the Company's financial condition, results of operations, capital requirements, contractual restrictions and such other factors as the Board of Directors deems relevant.
Recent Sales of Unregistered Securities
During fiscal 1998, in connection with the 1998 Retail Acquisitions, the Company issued and sold to the respective individual owners of the acquired retailers (the "Acquired Retail Owners"), as partial consideration for such acquisitions, a total of 90,537 shares of Class A Common Stock (the "1998 Acquisition Shares"). The respective issuances and sales of the 1998 Acquisition Shares were not registered under the Securities Act of 1933, as amended (the "Securities Act"), in reliance on the exemption provided by Section 4(2) thereof as transactions by an issuer not involving any public offering, in that (i) the 1998 Acquisition Shares were issued and sold to the respective Acquired Retail Owners who, at the respective times of entering into the respective agreements providing for the respective 1998 Retail Acquisitions, represented to the Company that they were "accredited investors" as such term is defined in the Securities Act and that they were acquiring the respective 1998 Acquisition Shares solely for investment for their own account and not with a view toward the resale or distribution thereof, (ii) at such respective times the Company provided written disclosure to the respective Acquired Retail Owners stating, and the respective Acquired Retail Owners acknowledged, that the respective 1998 Acquisition Shares were not registered under the Securities Act and would be subject to certain restrictions on transfer, (iii) the Company placed a restricted share legend to such effect on the certificates representing the respective 1998 Acquisition Shares and (iv) the Company did not engage in any general solicitation or advertising in connection with entering into the respective agreements providing for the 1998 Retail Acquisitions or the issuance and sale of the respective 1998 Acquisition Shares.
ITEM 6.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated historical financial data presented below under the captions "Statement of Operations Data" and "Balance Sheet Data" for and as of the end of each of the years in the five-year period ended December 31, 1998 are derived from the consolidated financial statements of the Company, which financial statements have been audited by KPMG LLP, independent certified public accountants ("KPMG"). The following selected consolidated financial data should be read in conjunction with Item 7
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
Rock of Ages is an integrated quarrier, manufacturer, distributor and retailer of granite and products manufactured from granite. The quarry division sells granite blocks both to the manufacturing division and to outside manufacturers, as well as to distributors in Europe and Japan. The manufacturing division's principal product is granite memorials used primarily in cemeteries, although it also manufactures some specialized granite products for industrial applications. The retail division primarily sells granite memorials directly to consumers.
In June 1997, the Company acquired the successor to Keystone Memorials, Inc. ("Keystone") and in October 1997, acquired Childs & Childs Granite Company Inc. ("C&C"), both granite memorial manufacturers in Elberton, Georgia. In connection with the Keystone and C&C acquisitions, the Company also acquired Southern Mausoleums, Inc., (collectively referred to as the "Acquired Manufacturing Operations"). Also in connection with the Keystone and C&C acquisitions, the Company acquired three granite quarrying companies operating quarries located in Georgia, Pennsylvania, North Carolina, South Carolina and Oklahoma. In November 1998, the Company acquired another quarry company in North Carolina which produces a white granite that will be a companion stone for the Bethel White Quarry. These quarry companies are referred to as the "Acquired Quarrying Operations". In October 1997, the Company acquired the Keith Monument Company and related companies that are engaged in the retail sales of granite memorials to consumers in the State of Kentucky. In addition, during the year ended December 31, 1998, the Company made thirteen more acquisitions of retail monument companies, thereby expanding its retail presence to locations in Georgia, Iowa, Illinois, Minnesota, Nebraska, New Jersey, Pennsylvania, Ohio and South Dakota. The aforementioned retailers acquired in 1997 and 1998 are collectively referred to as the "Acquired Retailing Operations".
The Company records revenues from quarrying, manufacturing and retailing. The granite quarried by the Company is sold both to outside customers and used by the Company's manufacturing division. The Company records revenue and gross profit related to the sale of granite sold to an outside customer either when the granite is shipped or when the customer selects and identifies the blocks at the quarry site. The Company does not record a sale, nor does the Company record gross profit, at the time granite is transferred to the Company's manufacturing division. The Company records revenue and gross profit related to internally transferred granite only after the granite is manufactured into a finished product and sold to an outside customer. Manufacturing revenues related to outside customers are recorded when the finished product is shipped from Company facilities. Manufacturing revenues related to internally transferred finished products are recorded when ultimately sold at retail to an outside customer. Retailing revenues are recorded when the finished monument is placed in the cemetery.
The following table sets forth certain historical statement of operations data as a percentage of net revenues with the exception of quarrying, manufacturing and retailing gross profit, which are shown as a percentage of quarrying, manufacturing and retailing revenues respectively.
Year Ended December 31, 1996 1997 1998 ---- ---- ---- Statement of Operations Data: Net Revenues: Quarrying 27.1% 26.0% 23.2% Manufacturing 72.9% 70.7% 54.3% Retailing 0.0% 3.3% 22.5% Total net revenues 100.0% 100.0% 100.0%
Gross Profit: Quarrying 42.7% 39.8% 45.7% Manufacturing 25.3% 24.3% 24.1% Retailing 0.0% 67.3% 58.1% Total gross profit 30.0% 29.7% 36.7%
Selling, general & administrative expenses 20.4% 20.3% 24.6%
Income from operations 9.6% 9.4% 12.1%
Interest expense 3.9% 2.9% 0.6%
Income before provision for income taxes 5.7% 6.5% 11.5%
Provision for income taxes 1.4% 1.6% 2.8%
Net income 4.3% 4.9% 8.7% ==== ==== ====
Year Ended December 31, 1998 Compared to Year Ended December 31, 1997.
Revenues for the fiscal year ended December 31, 1998 increased 52.6% to $82.7 million from $54.2 million for the year ended December 31, 1997. Quarrying revenues increased $5.1 million, of which $.7 million was from existing quarry operations and the remaining $4.4 million from Acquired Quarrying Operations, primarily due to strong exports from the Salisbury quarry. Manufacturing revenues increased $6.6 million primarily from the Acquired Manufacturing Operations. Monument manufacturing revenue increases of $1.0 million from existing operations were more than offset by a reduction of $2.7 million in precision products revenues. The Company's Acquired Retailing Operations accounted for the entire increase of $16.8 million in revenues for the retailing segment.
Gross profit for the fiscal year ended December 31, 1998 increased 88.9% to $30.4 million from $16.1 million for the fiscal year ended December 31, 1997. Quarrying gross profit from existing operations increased $1.2 million reflecting increased productivity at all major quarry locations. The Company's Acquired Quarrying Operations reported an increase in gross profit of $2.0 million for a total increase of $3.2 million from quarrying operations. The quarrying gross profit percentage increased to 45.7% in 1998 from 39.8% in 1997.
Manufacturing gross profit increased $1.5 million, which was attributable to the Acquired Manufacturing Operations. Monumental manufacturing gross profit increases of $2.2 million were offset by reductions in precision products gross profit of $.7 million. The manufacturing gross profit percentage decreased from 24.3% in 1997 to 24.1% in 1998 due to a decrease in sales of higher margin precision products.
The Company's Acquired Retailing Operations accounted for all of the 1998 gross profit of $10.8 million as prior to the Keith Monument acquisition in October 1997 the Company had no retailing presence. The gross profit percentage for these operations decreased to 58.1% in 1998 from 67.3% in 1997 principally because 1997 results for these operations reflected the Company's highest margin sales (by Keith Monument) and only for a partial year which did not include the low seasonal first quarter.
Selling, general and administrative expenses for 1998 increased 84.6% to $20.4 million from $11.0 million in 1997. Acquired operations accounted for all of this increase as the existing operations reported a reduction in selling, general and administrative expenses of $.6 million. As a percentage of net sales, these expenses for 1998 increased to 24.6% from 20.3% in 1997. This increase is attributable to the introduction of retailing activities, which have a higher
level of selling, general and administrative expenses, and the Company's investment in people in anticipation of continued growth.
Interest expense for the fiscal year ended December 31, 1998 decreased to $.5 million from $1.6 million for the fiscal year ended December 31, 1997. This decrease is the result of the reduction of debt levels from the net proceeds of the IPO. Debt levels did increase during the final two quarters of 1998 due to the implementation of the retail acquisition strategy.
Income taxes as a percent of earnings before taxes decreased from 24.3% in 1997 to 24.1% in 1998. The Company's taxable income exceeded alternative minimum tax ("AMT") levels in 1998; however, available AMT credits resulted in the Company's effective tax rate remaining at historical levels.
Year Ended December 31, 1997 Compared to Year Ended December 31, 1996.
Revenues for the fiscal year ended December 31, 1997 increased 21.4% to $54.2 million from $44.7 million for the year ended December 31, 1996. Quarrying revenues increased $2.0 million, of which $1.3 million was from existing quarry operations due to stronger monumental markets and increased exports to Japan. The remaining $671,000 increase was generated by acquired quarrying operations. Manufacturing revenues increased $5.7 million primarily from the acquired manufacturing operations in Elberton, Georgia, with existing operations showing a modest increase of $285,000. The Company's retail operations, consisting of Keith Monument, which was acquired in October 1997, accounted for $1.8 million in revenues.
Gross profit for 1997 increased 20.1% to $16.1 million from $13.4 million in 1996. Quarrying gross profit increased $357,000 from existing operations and $91,000 from acquired operations for a total of $448,000. The quarry gross margin percentage fell from 42.7% in 1996 to 39.8% in 1997. This was the result of increased sales volumes from lower margin products. In addition, the acquired quarry operations reported a gross profit percentage of 13.6% for 1997. The acquired operations were included for the months of November and December that are normally periods of reduced operating margins.
Manufacturing gross profit increased by $1.1 million from 1996, resulting from an increase of $386,000 from existing operations due to improved product mix plus efficiencies achieved by consolidating manufacturing operations, and an increase of $668,000 from acquired operations. The manufacturing gross profit percentage decreased from 25.3% in 1996 to 24.3% in 1997. This decrease was the result of a lower gross profit percentage from acquired operations, which offset increases at existing operations. Price increases and work force adjustments have been implemented in 1998 to improve operating margins at the acquired operations.
Retailing gross profit was $1.2 million for 1997. Prior to October 1997, the Company had no retailing presence. The gross profit percentage for this segment was 67.3%.
Selling, general and administrative expenses for 1997 increased 20.9% to $11.0 million from $9.1 million in 1996. Existing operations accounted for $371,000 of the increase consisting of charges for previously deferred organization and financing costs and settlement of a legal action, and an increase to the provision for doubtful accounts. Acquired operations resulted in an increase of another $1.5 million. As a percentage of net sales, selling, general and administrative expenses for 1997 decreased to 20.3% from 20.4% in 1996.
Interest expense for 1997 decreased 8.5% to $1.6 million from $1.7 million in 1996, as a result of the retirement of all existing bank debt, with the exception of a revolving line of credit with the Royal Bank of Canada, from the net proceeds of the IPO in October 1997.
Income taxes as a percent of earnings before taxes decreased from 25.2% in 1996 to 24.3% in 1997. The Company continues to be in an AMT position for Federal income tax purposes. The decrease in the effective rate resulted from Canadian income being applied against a tax-loss carry back.
Liquidity and Capital Resources
Liquidity. The Company considers its liquidity to be adequate to meet its long and short-term cash requirements. Historically the Company has met these requirements primarily from cash generated by operating activities and periodic borrowings under commercial credit facilities. The Company's recent acquisitions have increased its
requirements for external sources of liquidity, and the Company anticipates that this trend will continue as it further implements its growth strategy.
Year Ended December 31, 1998. For 1998, net cash provided by operating activities was $3.7 million. This result was primarily attributable to net income of $7.2 million and depreciation, depletion and amortization of $3.3 million, reduced by an increase in inventories of $4.0 million. Net cash used in investing activities was $23.9 million primarily for net acquisitions of $20.5 million and the purchase of property, plant and equipment of $3.5 million. Net cash provided by financing activities was $16.5 million. This result was primarily attributable to proceeds from long-term debt of $12.0 million and net borrowings under lines of credit of $5.4 million.
Capital Resources. The Company has a credit facility with the CIT Group/Business Credit. The facility consists of an acquisition term loan line of credit of up to $25.0 million and a revolving credit facility of up to another $25.0 million based on eligible accounts receivable and inventory. As of December 31, 1998, the Company had $12.0 million outstanding and $13.0 million available under the term loan line of credit and $6.4 million outstanding and $6.8 million available under the revolving credit facility. The interest rate under the revolving credit facility as of such date was 7.25% based on a formula of prime less .50%. The interest rate under the term loan as of such date was 6.97% based on a formula of LIBOR plus 1.75%. As of December 31, 1998, the Company also had $.3 million outstanding and $2.0 million available under a demand revolving line of credit with the Royal Bank of Canada. The interest rate on this facility as of such date was 7.50% based on a formula of Canadian prime plus .75%. The Company's primary need for capital will be to maintain and improve its manufacturing and quarrying facilities and to finance acquisitions as part of its growth strategy. The Company has approximately $3.0 million budgeted for capital expenditures in 1999. The Company believes that the combination of cash flow from operations and its existing credit facilities will be sufficient to fund its operations for at least the next twelve months.
Seasonality
Historically, the Company's operations have experienced certain seasonal patterns. Generally the Company's net sales have been highest in the third quarter and lowest in the first quarter of each year due primarily to weather. Cemeteries in northern areas generally do not accept granite memorials during winter months when the ground is frozen because they cannot be properly set. In addition, the Company typically closes certain of its Vermont and Canadian quarries during these months because of increased operating costs attributable to adverse weather conditions. As a result, the Company has historically incurred a net loss during the first three months of each calendar year.
Inflation
The Company believes that the relatively moderate rates of inflation experienced in recent years have not had a significant effect on its results of operations.
Year 2000
The Company has developed a plan to address the Year 2000 issue and is currently in the process of implementing that plan.
Scope of Readiness. A large part of the Company's legacy IT systems would require substantial resources to become Year 2000 compliant. Instead of remediating those core systems, the Company decided to replace those systems with a purchased package that is Year 2000 compliant in addition to software written in house that is also Year 2000 compliant. This decision was based on Year 2000 compliance requirements as well as the need to upgrade the software to meet current and future business requirements. Installation of the purchased software was complete in 1998 and implementation of those systems is expected to be complete by mid-1999. In house programming and the installation and implementation of purchased software packages is being performed by three information technology employees as well as two external programmer/analysts. Other IT infrastructure equipment is generally Year 2000 compliant, however, some hardware systems will be replaced by year end 1999. Support software is being evaluated by in-house personnel and will be remediated or replaced by mid-1999.
Non-IT systems (HVAC systems, machine controls, and other similar systems) have been evaluated and are not materially affected by the Year 2000 compliance issue. Suppliers to the Company have been evaluated and management believes that critical suppliers do not have any Year 2000 compliance issues. The Company believes that products sourced from a non-critical supplier facing a Year 2000 compliance issue could be sourced elsewhere.
Products manufactured by the Company do not utilize programmable logic to function and are not affected by Year 2000 compliance issues.
Costs to Address Year 2000 Issues. Expenditures for Year 2000 remediation are not separable from the costs of software and hardware associated with the normal course of business. Year 2000 remediation costs are not expected to be material to the Company's financial position.
Risk of Year 2000 Issues. The timing of a Year 2000 related disruption would coincide with a seasonal low in the Company's business cycle and thus have less impact on the business than it otherwise would during other parts of the cycle. The Company estimates the most likely worst case Year 2000 scenarios as follows:
1. A portion of non-core IT systems experience temporary disruption. Such disruption is not expected to have a material impact on the Company's ability to function.
2. A portion of the manufacturing operations experience temporary disruption. Such disruption is not expected to have a material impact on the Company's ability to function.
3. A portion of the supplier base experiences disruption. Such disruption is not expected to have a material impact on the Company's ability to function.
Contingency Plans. Although the Company has not yet developed a contingency plan for each of the scenarios above, the Company would respond to those scenarios as follows:
1. A contingency plan will be developed if the perceived risk increases.
2. It is expected that normal safety block levels would cover such a scenario. Appropriate levels will be determined by business conditions and perceived risk.
3. The Company would source materials from alternative suppliers.
New Accounting Pronouncements
SOP 98-5, Reporting on the costs of start-up activities, will be effective for periods beginning after December 15, 1998. Implementation of the SOP will result in the remaining net book value of organization costs of $220,513 at December 31, 1998 being expensed on January 1, 1999.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company has financial instruments that are subject to interest rate risk, principally debt obligations under its credit facilities. Historically, the Company has not experienced material gains or losses due to interest rate changes. Based on the Company's current variable rate debt obligations, the Company believes its exposure to interest rate risk is not material.
The Company is subject to foreign currency exchange rate risk primarily from the operations of its Canadian subsidiary. Based on the size of this subsidiary and the Company's corresponding exposure to changes in the Canadian/U.S. dollar exchange rate, the Company does not consider its market exposure relating to currency exchange to be material.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
The information required for this item is included in this Annual Report on Form 10-K on Pages 26 through 56, inclusive, and is incorporated herein by reference.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
The Company believes, and it has been advised by KPMG that KPMG concurs with the Company's belief that during the period of its engagement, the Company and KPMG did not have any disagreement on any matter of accounting principles or practices, financial statement disclosure or auditing scope or procedures, which disagreement, if not resolved to the satisfaction of KPMG, would have caused it to make reference in connection with its report on the Company's financial statements to the subject matter of the disagreement.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
Certain information concerning directors and executive officers of the Company is set forth below:
Names of Directors and Executive Officers(1) Age Positions with the Company - -------------------------------- --- ---------------------------------------
George R. Anderson (2) 59 Senior Vice President, Director John L. Forney (3) 36 Chief Financial Officer, Treasurer James L. Fox 47 Director Mark A. Gherardi 40 Senior Vice President/ Manufacturing/Memorials Division Jon M. Gregory 49 President and Chief Operating Officer/Quarries Division, Director John E. Keith 51 President/Memorials Division Richard C. Kimball 58 Chief Operating Officer/Memorials Division, Vice Chairman of the Board of Directors Kurt M. Swenson 54 President and Chief Executive Officer, Chairman of the Board of Directors Charles M. Waite 66 Director Frederick E. Webster, Jr 61 Director
- ----------
(1) Each executive officer serves for a term of one year (and until his successor is chosen and qualified). (2) Mr. Anderson resigned as Chief Financial Officer and Treasurer, effective February 1, 1999. (3) Mr. Forney assumed the position of Chief Financial Officer and Treasurer, effective February 1, 1999.
George R. Anderson has been a Senior Vice President and a director of the Company since 1984. From 1984 until February 1999, Mr. Anderson was also Chief Financial Officer and Treasurer. Mr. Anderson joined the Company in 1969 as Chief Accountant and subsequently held the position of Controller. He has been a director of the Barre Granite Association and a trustee of the Granite Group Insurance Trust and the Barre Belt Multi-Employer Pension Plan. Mr. Anderson's current term as a director will expire in 1999.
John L. Forney has been Chief Financial Officer and Treasurer of the Company since February 1999. Prior to assuming that position and since 1996, Mr. Forney was Senior Vice President of Finance at Raymond James & Associates, Inc. From 1994 to 1996, Mr. Forney was a Vice President at Morgan Stanley & Company.
James L. Fox has been Executive Vice President and General Manager of First Data Investor Services Group, a division of First Data Corporation, since 1989. Mr. Fox has been a director of the Company since October 1997. Mr. Fox's current term as a director of the Company will expire in 2001.
Mark A. Gherardi has been Senior Vice President/Manufacturing/Memorials Division of the Company since March 1999. Prior to that time and since 1996, Mr. Gherardi was Senior Vice President - Barre and Canada Manufacturing Operations of the Company. Prior to 1996, Mr. Gherardi held various sales and production positions over a 20-year period with Lawson Granite Company.
Jon M. Gregory has been President and Chief Operating Officer/Quarries Division of the Company since 1993. Mr. Gregory was elected by the Board of Directors to his current directorship in October 1998. Since joining the Company in 1975, Mr. Gregory has served in various positions including Senior Vice President - Memorials Division, Manager of Manufacturing and line production supervisor. Mr. Gregory's current term as a director will expire in 2000.
John E. Keith has been President/Memorials Division of the Company since October 1997. Prior to that time and since 1989, Mr. Keith was an owner and the President of Keith Monument. From 1965 to 1989, Mr. Keith held various officer positions with Keith Monument.
Richard C. Kimball has been Chief Operating Officer/Memorials Division of the Company and Vice Chairman of the Company's Board of Directors since 1993, and a director of the Company since 1986. Prior to joining the Company, Mr. Kimball served as a director, principal and President of The Bigelow Company, Inc., a strategic planning and investment banking firm from 1972 until 1993. Mr. Kimball's current term as a director will expire in 2000.
Kurt M. Swenson has been President, Chief Executive Officer and Chairman of the Board of Directors of the Company since 1984. Prior to the IPO, Mr. Swenson had been the Chief Executive Officer and a director of Swenson Granite Company, Inc. since 1974, and currently serves as non-officer Chairman of the Board of Swenson Granite Company, LLC, a Delaware limited liability company engaged in the granite curb and landscaping business. He is also a director of the American Monument Association, the Funeral and Memorial Information Council, the National Building Granite Quarries Association and Group Polycor International. Mr. Swenson's current term as a director will expire in 2000.
Charles M. Waite has been a director of the Company since 1985. Since 1989, Mr. Waite has been managing partner of Chowning Partners, a financial consulting firm that provides consulting services to New England companies. Mr. Waite's current term as a director will expire in 2001.
Frederick E. Webster, Jr., Ph.D. has been a Professor of Management at the Amos Tuck School of Business Administration of Dartmouth College since 1965. He is also a management consultant and lecturer. Dr. Webster serves as a director of Vermont Public Radio and the American Marketing Association. He is also a member of the Corporation of Mary Hitchcock Memorial Hospital. Mr. Webster has been a director of the Company since October 1997. Mr. Webster's current term as a director will expire in 1999.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth information with respect to the Chief Executive Officer of the Company and each of the four other most highly compensated executive officers of the Company (the "Named Executive Officers") for the year ended December 31, 1998.
Summary Compensation Table
- ---------- (1) In each case, represents a matching contribution under the Company's 401K plan. (2) Mr. Anderson resigned as Chief Financial Officer and Treasurer, effective February 1, 1999.
Stock Option Grants
No grants of stock options were made during the year ended December 31, 1998 by the Company to the Named Executive Officers.
The following table sets forth information concerning options to purchase Class B Common Stock (except for John E. Keith who has options to purchase Class A Common Stock) held by the Named Executive Officers. The Class B Common Stock is convertible on a share-for-share basis into Class A Common Stock. During 1998, no stock options were exercised by any of the Named Executive Officers. The Company has not granted any stock appreciation rights.
Fiscal Year-End Option Values
(1) These values are calculated using the $14 1/4 per share closing price of the Class A Common Stock on the Nasdaq(R) National Market on December 31, 1998.
Pension Plans
The Company maintains a qualified pension plan (the "Pension Plan"), and has entered into non-qualified salary continuation agreements (the "Salary Continuation Agreements") with certain officers of the Company, including the Named Executive Officers listed in the table on the next succeeding page. The Company's Pension Plan is noncontributory and provides benefits based upon length of service and final average earnings. Generally, employees age 21 with one year of continuous service are eligible to participate in the Pension Plan. The annual pension benefits shown for the Pension Plan assume a participant attains age 65 during 1999 and retires immediately. The Employee Retirement Income Security Act of 1974 places limitations on the compensation used to calculate pensions and on pensions which may be paid under federal income tax qualified plans, and some of the amounts shown on the following table may exceed the applicable limitations. Such limitations are not currently applicable to the Salary Continuation Agreements.
The following table shows the total estimated annual retirement benefits payable upon normal retirement under the Pension Plan for the Named Executive Officers at the specified executive remuneration and years of continuous service.
Pension Plan Table
These calculations are based on the retirement formula in effect as of December 31, 1998, which provides an annual life annuity at age 65 equal to 1.8% of a participant's final five-year average compensation (excluding bonus) plus .4% of a participant's final five-year average compensation in excess of social security covered compensation times years of service to a maximum of 30 years. Estimated years of continuous service for each of the Named Executive Officers, as of December 31, 1998 and rounded to the full year, are: Mr. Anderson, 30 years; Mr. Gregory, 23 years; Mr. Keith, 1 year; Mr. Kimball, 6 years; and Mr. Swenson, 15 years.
In addition, the Company's Salary Continuation Agreements provide for supplemental pension benefits to certain officers of the Company, including the Named Executive Officers listed in the table below. The following table sets forth the supplemental pension benefits for the specified Named Executive Officers under their respective Salary Continuation Agreements.
Annual Total Years Retirement Annual Base of Service Benefit Name Compensation at Age 65 at Age 65 - ---- ------------ --------- ---------
G. Anderson............... $166,320 35 35,925 R. Kimball................ $210,360 12 27,347 K. Swenson................ $310,320 26 92,165 J. Gregory................ $171,920 39 41,261
These calculations are based on individual Salary Continuation Agreements, which provide a 100% joint and survivor annuity at age 65 equal to a percentage, ranging from .6% to 1.1%, of a participant's highest annual base compensation times full years of service. The percentage range has been determined by the Board of Directors. There is no compensation increases assumed in these calculations.
Compensation of Directors
Directors who are not also officers of the Company are paid annual directors' retainers of $5,000, and $250 for each meeting of the Board, including committee meetings. Directors are also eligible for stock option grants under the Company's Amended and Restated 1994 Stock Plan.
Employment Agreements
The Company has an employment agreement with Kurt M. Swenson (the "Swenson Employment Agreement") for retention of his services as President and Chief Executive Officer of the Company. The term of the Swenson Employment Agreement commenced on October 24, 1997, the date of consummation of the IPO (the "Commencement Date"), and continues until the fifth anniversary thereof, provided that on the third and each subsequent anniversary of the Commencement Date such term will automatically be extended for one additional year, unless, not later than ninety days prior to the expiration of the term, the Company or Mr. Swenson gives notice that the term will not be extended. The Swenson Employment Agreement provides for continued payment of salary and benefits over the remainder of the term if Mr. Swenson's employment is terminated by the Company without Cause (as defined in the Swenson Employment Agreement) or as a result of death or disability or by Mr. Swenson for Good Reason (as defined in the Swenson Employment Agreement). The Swenson Employment Agreement also provides for a lump sum payment to Mr. Swenson equal to the sum of (i) accrued but unpaid salary, and a prorated bonus amount equal to the greater of the largest annual bonus paid to Mr. Swenson during the prior three years and the annual bonus payable in respect of the most recently completed fiscal year (the "Highest Annual Bonus"), through the date of termination and (ii) three times the sum of (A) his then annual salary and (B) Highest Annual Bonus, and for continuation of benefits for three years, if Mr. Swenson's employment is terminated by the Company (other than for Cause, death or disability) during the twelve-month period following, or prior to but in connection with, or by Mr. Swenson during the twelve-month period following, a Change in Control (as defined in the Swenson Employment Agreement). In the event of a termination related to a Change in Control, Mr. Swenson may elect in lieu of the lump sum payment described above, to receive in a lump sum or over the then remaining term of the Swenson Employment Agreement, an amount equal to the total amount he would have been entitled to receive if his employment had been terminated by the Company without Cause or by Mr. Swenson for Good Reason. If any payment or distribution by the Company to or for the benefit of Mr. Swenson under the Swenson Employment Agreement would be subject to the
excise tax imposed by Section 4999 of the Code or any interest or penalties are incurred by Mr. Swenson with respect to such excise tax, then Mr. Swenson will generally be entitled to receive an additional payment such that after payment by Mr. Swenson of all taxes, Mr. Swenson retains an amount of the additional payment equal to the excise tax imposed.
The Company also has employment agreements with each of the other Named Executive Officers (such employment agreements being referred to collectively as the "Other Employment Agreements") , each of which provides for an initial five-year employment term commencing on October 24, 1997, the date of consummation of the IPO. The Other Employment Agreements provide for benefits of the type generally provided to key executives of the Company, and for continued payment of salary and benefits over the remainder of the term if the employee's employment is terminated by the Company without Cause (as defined in the Other Employment Agreements). The Other Employment Agreements or related undertakings generally prohibit the employee from competing with the Company during the term of employment and for two years thereafter, and contain customary confidentiality provisions in favor of the Company. As noted above under Item 10, George R. Anderson resigned as the Company's Chief Financial Officer and Treasurer, effective February 1, 1999.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of March 25, 1999, certain information with respect to the beneficial ownership of the Common Stock by each (i) director, (ii) executive officer and (iii) beneficial owner of more than 5% of either class of the outstanding Common Stock known to the Company, based on Securities and Exchange Commission filings and other available information, and (iv) by all directors and executive officers of the Company as a group. The Class B Common Stock is convertible on a share-for-share basis into Class A Common Stock. The Class B Common Stock is entitled to ten votes per share and the Class A Common Stock is entitled to one vote per share.
- ---------- + Executive Officer and/or Director * Less than 1%
(1) The business address of each director and executive officer of the Company is c/o Rock of Ages Corporation, 772 Graniteville Road, Graniteville, Vermont 05654.
(2) For each beneficial owner (and directors and executive officers as a group), (i) the number of shares of Class A Common Stock listed includes (or is comprised solely of) a number of shares equal to the number of shares of Class B Common Stock, if any, listed as beneficially owned by such beneficial owner(s) and (ii) the percentage of Class A Common Stock listed assumes the conversion on March 25, 1999 of all shares of Class B Common Stock, if any, listed as beneficially owned by such beneficial owner(s) into Class A Common Stock and also that no other shares of Class B Common Stock beneficially owned by others are so converted.
(3) According to an Amendment No. 1 to Schedule 13G dated February 14, 1999, the shares listed are owned by Goldman Sachs Performance Partners, L.P. and Goldman Sachs Performance Partners (Offshore), L.P., or are owned or may deem to be beneficially owned by Goldman Sachs & Co., a registered broker or dealer and investment advisor.
(4) According to a Schedule 13G dated February 11, 1999, the shares listed are owned by certain subsidiaries of First Union Corporation which are either investment advisors or hold the securities in a fiduciary capacity for their respective customers.
(5) According to an Amendment No. 1 to Schedule 13G dated February 26, 1999, Wellington Management Company LLP, in its capacity as an investment advisor, may be deemed to be the beneficial owner of the listed shares which are held of record its clients.
(6) According to a Schedule 13G dated February 23, 1999, the shares listed are owned by certain bank and investment advisor subsidiaries of J.P. Morgan & Co. Incorporated.
(7) The 263,441 shares of Class B Common Stock listed are owned of record by Missouri Red Quarries, Inc. Missouri Red Quarries, Inc. is 100% owned by G. Thomas Oglesby, Jr. who is its President and sole director. Includes 30,000 shares of Class A Common Stock subject to currently exercisable stock options.
(8) Kurt M. Swenson is the brother of Kevin C. Swenson.
(9) Kevin C. Swenson is the brother of Kurt M. Swenson.
(10) Includes 60,000 shares of Class B Common Stock subject to currently exercisable stock options.
(11) Includes 60,000 shares of Class B Common Stock subject to currently exercisable stock options.
(12) Includes 60,000 shares of Class B Common Stock subject to currently exercisable stock options.
(13) Includes 25,000 shares of Class A Common Stock subject to currently exercisable stock options.
(14) All 65,000 shares of Class B Common Stock listed are subject to currently exercisable stock options.
(15) All 30,000 shares of Class B Common Stock listed are subject to currently exercisable stock options.
(16) All 15,000 shares of Class A Common Stock listed are subject to currently exercisable stock options.
(17) Includes 11,650 shares of Class A Common Stock subject to currently exercisable stock options.
(18) All 11,650 shares of Class A Common Stock listed are subject to currently exercisable stock options.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In connection with and prior to the IPO, the Company effected a reorganization whereby, among other things, the Company's then parent corporation Swenson Granite Company, Inc. ("Swenson Granite") was merged with and into the Company, with the Company as the surviving corporation, and, immediately prior to such merger, Swenson Granite distributed its curb and landscaping business to its stockholders through a pro rata distribution of all of the member interests in a newly formed limited liability company named Swenson Granite Company LLC ("Swenson LLC"). Kurt M. Swenson, the Company's Chairman, President and Chief Executive Officer, and his brother Kevin C. Swenson, each own approximately 30.3% of Swenson Granite LLC. Certain other executive officers and directors of the Company collectively own approximately 9% of Swenson LLC. Kurt M. Swenson serves as a non-officer Chairman of the Board of Swenson LLC, but has no involvement with its day-to-day operations. Robert Pope, a holder of more than five percent of the Class B Common Stock, is the President and Chief Executive Officer, and owns approximately 5% of Swenson LLC. Neither Kurt M. Swenson nor any other officer of the Company, receives salary, bonus, expenses or other compensation from Swenson LLC, except for any pro rata share of earnings attributable to their ownership interest in Swenson LLC.
Swenson LLC owns two granite quarries, one in Concord, New Hampshire and another in Woodbury, Vermont. Both have been owned by Swenson LLC (or its predecessor Swenson Granite) for more than 40 years. The Company purchases Woodbury granite from Swenson LLC at the same price Swenson LLC charges its landscape manufacturing operations. Because of the proximity of the Woodbury quarry to Barre, Vermont, the Company provides, and may continue to provide, certain maintenance services and equipment to the Woodbury quarry. Both the Company and Swenson LLC have the right to terminate these services at any time and the Company has no obligation to purchase or continue to purchase Woodbury granite from Swenson LLC. The Company also purchases Concord blocks from Swenson LLC at market prices. The Company's purchases of granite provided by Swenson LLC in 1998 were approximately $579,000. The Company believes these arrangements with Swenson LLC are as favorable, or more favorable, to the Company than would be available from an unrelated party for comparable granite blocks.
In connection with the Keystone acquisition in 1997, the Company entered into the Supply Agreements with Missouri Red and its subsidiary KGCI. G. Thomas Oglesby, Jr. is the sole owner of Missouri Red and the trustee of a trust for the benefit of his mother and others which hold 100% of KGCI. G. Thomas Oglesby, Jr. is an officer of the Company. The Company believes the terms and conditions of the Supply Agreements are as favorable to the Company as would be available from unrelated suppliers. In 1998, the Company's purchases from Missouri Red were approximately $790,000.
In connection with the acquisition of Keith Monument in 1997, the Company entered into a five year triple net lease agreement with John E. Keith, who is an executive officer of the Company, and Mr. Keith's nephew, for office buildings and retail locations. The lease provides for, and in 1998 the Company paid, annual rental payments of $120,000.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of or are included in this Annual Report on Form 10-K and are incorporated herein by reference:
1. The financial statements listed in the Index to Consolidated Financial Statements and Financial Statement Schedule, filed as part of this Annual Report on Form 10-K.
2. The financial statement schedule listed in the Index to Consolidated Financial Statements and Financial Statement Schedule, filed as part of this Annual Report on Form 10-K.
3. The exhibits listed in the Exhibit Index filed as part of this Annual Report on Form 10- K.
(b) Reports on Form 8-K: No reports on Form 8-K were filed by the Company during the last quarter of the fiscal year ended December 31, 1998.
ROCK OF AGES CORPORATION AND SUBSIDIARIES
Page
Independent Auditors' Report 27
Consolidated Balance Sheets 28
Consolidated Statements of Operations 30
Consolidated Statements of Stockholders' Equity and Comprehensive Income 31
Consolidated Statements of Cash Flows 32
Notes to Consolidated Financial Statements 34
Supplementary Information:
Independent Auditors' Report on Supplementary Information 55
Schedule II - Valuation and Qualifying Accounts and Reserves 56
Independent Auditors' Report
The Board of Directors Rock of Ages Corporation and Subsidiaries:
We have audited the accompanying consolidated balance sheets of Rock of Ages Corporation and Subsidiaries as of December 31, 1998 and 1997 and the related consolidated statements of operations, stockholders' equity and comprehensive income and cash flows for each of the years in the three-year period ended December 31, 1998. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Rock of Ages Corporation and Subsidiaries as of December 31, 1998 and 1997, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1998, in conformity with generally accepted accounting principles.
KPMG LLP
March 12, 1999 Burlington, Vermont
ROCK OF AGES CORPORATION AND SUBSIDIARIES Consolidated Balance Sheets December 31, 1998 and 1997
See accompanying notes to consolidated financial statements.
ROCK OF AGES CORPORATION AND SUBSIDIARIES Consolidated Statements of Operations Years ended December 31, 1998, 1997 and 1996
See accompanying notes to consolidated financial statements.
ROCK OF AGES CORPORATION AND SUBSIDIARIES Consolidated Statements of Stockholders' Equity and Comprehensive Income Years ended December 31, 1998, 1997 and 1996
Accumulated Other Total Comprehensive Stockholders' Income Equity ------------ ------------ Balance at December 31, 1995 $ 22,445 $ 15,479,206
Comprehensive income: Net income -- 1,908,164 Cumulative translation adjustment (15,884) (15,884)
Total comprehensive income 1,892,280 ------------ ------------ Balance at December 31, 1996 6,561 17,371,486
Comprehensive income: Net income -- 2,644,933 Cumulative translation adjustment (174,808) (174,808)
Total comprehensive income 2,470,125
Dividends -- (1,069,136) Swenson merger (note 17) -- (3,650,000) Issuance of stock (note 15) -- 57,122,510
Acquisitions (note 16) -- 5,598,927 ------------ ------------ Balance at December 31, 1997 (168,247) 77,843,912
Comprehensive income: Net income -- 7,236,027 Cumulative translation adjustment (286,259) (286,259) Minimum liability adjustment (30,742) (30,742)
Total comprehensive income 6,919,026
Conversion of common stock -- -- Exercise of options -- 7,480 Purchase of options -- (381,200) Acquisitions (note 16) -- 1,447,476 ------------ ------------ Balance at December 31, 1998 $ (485,248) $ 85,836,694 ============ ============
See accompanying notes to consolidated financial statements.
ROCK OF AGES CORPORATION AND SUBSIDIARIES Consolidated Statements of Cash Flows Years ended December 31, 1998, 1997 and 1996
See accompanying notes to consolidated financial statements.
ROCK OF AGES CORPORATION AND SUBSIDIARIES Consolidated Statements of Cash Flows
Supplemental non-cash investing and financing activities: See Note 16 for non-cash activities relating to the acquisitions.
During 1998, the Company adjusted goodwill and income tax payable for the 1997 acquisitions in the amount of $163,439 upon filing of final tax returns.
During 1997, the Company dividended certain assets of $1,069,136 to a related party, converted 275,482 shares of Class B common stock into Class A common stock, and incurred a capital lease obligation of $555,687 in exchange for property, plant and equipment. See Note 17 for non-cash activities relating to the Swenson merger.
See accompanying notes to consolidated financial statements.
ROCK OF AGES CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 1998, 1997 and 1996
(1) Summary of Significant Accounting Policies
Rock of Ages Corporation and Subsidiaries (the "Company") is an integrated quarrier, manufacturer, wholesaler and retailer of granite and products manufactured from granite.
(a) Principles of Consolidation
The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.
(b) Cash and Cash Equivalents
For purposes of the statement of cash flows, the Company considers all highly liquid investments purchased with a maturity of three months or less to be cash equivalents.
(c) Inventories
Inventories are stated at the lower of cost or market. Cost is determined using the first-in, first-out (FIFO) method.
(d) Depreciation, Depletion and Amortization
Property, plant and equipment are stated at cost. Depreciation is calculated using the straight-line and declining balance methods, based upon the following estimated useful lives:
Buildings and land improvements 5 to 40 years Machinery and equipment 3 to 20 years Furniture and fixtures 5 to 12 years
Depreciation expense amounted to $2,547,300, $1,720,810 and $1,659,160 in 1998, 1997 and 1996, respectively, which includes depreciation related to equipment under capital leases.
Cost depletion and amortization of granite reserves and development costs is provided by charges to operations based on cubic feet produced in relation to estimated reserves of the property. Cost depletion and amortization charged to operations amounted to $58,080, $66,906 and $54,013 in 1998, 1997 and 1996, respectively.
(e) Foreign Currency Translation
The Company translates the accounts of its foreign subsidiary in accordance with Statement of Financial Accounting Standards (SFAS) No. 52, Foreign Currency Translation, under which all assets and liabilities are translated at the rate of exchange in effect at year end. Revenue and expense accounts are translated using weighted average exchange rates in effect during the year. Gains or losses from foreign currency translation are charged to accumulated other comprehensive income which is included in stockholders' equity in the accompanying consolidated balance sheets.
34 (Continued)
ROCK OF AGES CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 1998, 1997 and 1996
(f) Income Taxes
The Company files its U.S. Federal income tax returns on a consolidated basis. Rock of Ages Canada, Inc., a wholly-owned subsidiary, is responsible for income taxes in Canada.
Deferred tax assets and liabilities are recognized for the future tax consequences attributable to the differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
The Company is allowed to claim percentage depletion, under IRS Code Section 613, for tax purposes based upon income derived from quarrying operations.
The Company intends to reinvest the unremitted earnings of its non-U.S. subsidiaries and postpone their remittance indefinitely. Accordingly, no provision for U.S. income taxes was required on such earnings during the three years ended December 31, 1998.
(g) Names and Reputations
Names and reputations, essentially goodwill, was recorded as a result of acquisitions and is being amortized over 40 years using the straight-line method. Amortization expense amounted to $615,389 in 1998, $111,039 in 1997 and $30,450 in 1996. The Company assesses the recoverability of this intangible asset by determining whether the amortization over its remaining life can be recovered through undiscounted future operating cash flows of the acquired operations. The amount of impairment, if any, is measured based on projected discounted future operating cash flows using a discount rate reflecting the Company's average cost of funds. The assessment of the recoverability of names and reputations will be impacted if estimated future operating cash flows are not achieved.
(h) Debt Issuance Costs
Debt issuance costs are amortized using the straight-line method over the term of the related borrowing. Amortization expense amounted to $34,595, $131,046 and $70,141 in 1998, 1997 and 1996, respectively.
(i) Organization Costs
Organization costs are amortized using the straight-line method over 60 months. Amortization expense amounted to $53,013, $76,841 and $32,534 in 1998, 1997 and 1996, respectively.
(j) Investments
Investments consist of certificates of deposit with initial terms of six years with maturities through 1999. Certificates of deposit are valued at cost plus accrued interest.
35 (Continued)
ROCK OF AGES CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 1998, 1997 and 1996
(k) Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of
The Company adopted the provisions of SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, on January 1, 1996. This Statement requires that long-lived assets and certain identifiable intangibles be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceed the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. Adoption of the Statement did not have a material impact on the Company's financial position, results of operations, or liquidity.
(l) Deferred Income
Deferred income represents revenues received in 1992 in relation to a distribution agreement. Revenue is being recognized over six years beginning in 1993, per the terms of the agreement.
(m) Common Stock
The shares of Class A common stock and Class B common stock are substantially identical, except for voting rights and certain conversion rights, as described below:
Voting Rights - Each share of Class A common stock entitles the holder to one vote on each matter submitted to a vote of the Company's stockholders and each share of Class B common stock entitles the holder to ten votes on each such matter, in each case including the election of directors. Neither the Class A common stock nor the Class B common stock has cumulative voting rights.
Conversion - Class A common stock has no conversion rights. Class B common stock is convertible into Class A common stock, in whole or in part, at any time and from time to time at the option of the holder on the basis of one share of Class A common stock for each share of Class B common stock converted. Each share of Class B common stock will also automatically convert into one share of Class A common stock upon transfer to any person or entity other than a Permitted Transferee, as defined in the Company's Amended and Restated Certificate of Incorporation.
(n) Revenue Recognition
The manufacturing division recognizes revenue upon shipment of finished orders. The retailing division recognizes revenue upon the setting of the memorial. In certain instances, the Company may enter into an agreement with a customer which provides for extended payment terms, generally up to two years from either the date of setting of the memorial or, in certain instances, upon the settlement of an estate.
36 (Continued)
ROCK OF AGES CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 1998, 1997 and 1996
The quarry division recognizes revenue from sales of granite blocks when the customer is invoiced for the block. At that time, the block is removed from the Company's inventory, the customer's name is printed on the block, and title and risk of ownership passes to the buyer. In many cases, granite blocks owned by customers remain on the Company's property for varying periods of time after title passes to the buyer. Payment terms are less 5% 30 days, net 30 days, except the December terms described below. Sales of the Company's blocks are FOB quarry and the Company retains the obligation to load customer's blocks on trucks. At its Barre, Vermont location, sales are FOB Barre, Vermont and the Company retains a delivery obligation on the Company's trucks to block customers in Barre. The customer may take delivery at any time determined by the customer, but all invoices must be paid in accordance with their terms when due whether or not the customer requests delivery.
The Company considers the earnings process substantially complete despite the Company's obligations to load the blocks, and, in the case of its Barre customers, deliver the blocks, because the cost of delivery service is inconsequential (less than 3%) in relation to the selling price. Further, under industry terms of trade, title passes and the payment obligation is established when the block is identified to a particular transaction.
In December each year, the Company provides special 90 day payment terms at its Barre quarries for all block purchased in the month of December. The reason for this is that the Barre quarries are closed from mid-December through mid-March. The customer's manufacturing plants remain open during most of this period, and most prefer to assure they own blocks of a size and quality selected by them prior to the closure. All blocks purchased in December on deferred payment terms are invoiced on or about December 31 and removed from the Company's inventory with title passing to the buyer. Payment terms are one-third of the invoice amount on January 15, one-third on February 15, and one-third on March 15. The program provides essentially the normal 30 day payment terms during the months when the quarry is closed notwithstanding the customer's purchase of a three months supply in December. Customers need not use these terms and may buy from inventory during the closure period on a first come first served basis with normal 30 day terms.
The Company does not require collateral or other security on trade receivables. The credit risk on trade receivables is controlled by requiring significant deposits. The Company continuously monitors outstanding trade receivables.
(o) Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to use estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates.
(p) Stock-Based Employee Compensation
The Company uses the intrinsic value based method per Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees, for all of its stock-based employee compensation arrangements.
37 (Continued)
ROCK OF AGES CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 1998, 1997 and 1996
(q) Pension and Other Postretirement Plans
On January 1, 1998, the Company adopted SFAS No. 132, Employers' Disclosures about Pension and Other Postretirement Benefits. SFAS No. 132 revises employers' disclosures about pension and other postretirement benefit plans. SFAS No. 132 does not change the method of accounting for such plans.
(r) Net Income Per Share
Net income per share, or basic earnings per share, is computed by dividing earnings available for common shares by the weighted average number of common shares outstanding during each year. Net income per share - diluted, or diluted earnings per share, is computed by dividing earnings available for common shares by the weighted average number of common shares outstanding during each year, adjusted to include the additional number of common shares that would have been outstanding if the dilutive potential common shares had been issued. Potential common shares are not included in the diluted earnings per share calculations where the effect of their inclusion would be antidilutive.
(s) Comprehensive Income
On January 1, 1998, the Company adopted SFAS No. 130, Reporting Comprehensive Income. SFAS No. 130 establishes standards for reporting and presentation of comprehensive income and its components in a full set of financial statements. Comprehensive income consists of net income, a cumulative translation adjustment, and a minimum liability adjustment and is presented in the consolidated statements of stockholders' equity and comprehensive income. The Statement requires only additional disclosures in the consolidated financial statements; it does not affect the Company's financial position or results of operations. Prior year financial statements have been reclassified to conform to the requirements of SFAS No. 130.
(t) Reclassifications
Certain reclassifications have been made to 1997 in order to conform to the 1998 presentation.
(2) Inventories
Inventories consist of the following at December 31, 1998 and 1997:
1998 1997 ------------ -----------
Raw materials $ 9,814,621 9,013,974 Work-in-process 5,724,011 2,261,444 Finished goods and supplies 8,535,990 4,828,439 ------------ ----------- $ 24,074,622 16,103,857 ============ ===========
38 (Continued)
ROCK OF AGES CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 1998, 1997 and 1996
(3) Lines of Credit
The Company's financing with the CIT Group/Business Credit, Inc. provides for an acquisition term loan line of credit of $25 million and a revolving credit facility of an additional $25 million. Effective July 1, 1998, 50% of each facility has been assigned to the Bank of Boston, consistent with the initial agreement. Such loans and advances under the revolving credit facility shall be in amounts up to 75% of the outstanding eligible accounts receivable of the Company and 50% of the aggregate value of eligible inventory of the Company; however, advances against eligible inventory may not exceed $12,500,000 at any one time. The acquisition term loans are limited to two per calendar quarter and must be at least $1,000,000 each. The interest rate on this agreement is based on a formula of prime less .50%, or at the Company's election, the sum of 1-3/4% plus LIBOR. However, if the Company chooses the latter option, the elections must be in multiples of $1,000,000, and no more than four LIBOR elections may be in effect at any one time. Fees include a one time fee of $125,000, a line of credit fee of $4,167 per month and a collateral management fee of $1,000 per month. Amounts outstanding as of December 31, 1998 were $6,379,511 and $12,000,000 on the revolving credit facility and term loan line of credit, respectively. The weighted average interest rate was 7.96% on the revolving credit facility in 1998. As of December 31, 1997, both credit lines were unused and available in their entirety.
A subsidiary of the Company also has a line of credit agreement with a lending institution. Under the terms of this agreement, a maximum of approximately $2,400,000 may be advanced based on percentages of eligible accounts receivable, eligible inventory, and tangible fixed assets. The line of credit agreement will be reviewed at least annually for any revisions to the agreement, bears interest at the Canadian prime rate plus 3/4%, and is secured by substantially all assets of the subsidiary. Amounts outstanding as of December 31, 1998 and 1997 were $307,145 and $1,328,480, respectively. The weighted average interest rates were 7.35% and 7.02% in 1998 and 1997, respectively.
(4) Long-Term Debt
Long-term debt at December 31, 1998 and 1997 consists of the following:
39 (Continued)
ROCK OF AGES CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 1998, 1997 and 1996
Future maturities of the December 31, 1998 long-term debt are as follows:
40 (Continued)
ROCK OF AGES CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 1998, 1997 and 1996
The cost of the equipment under capital leases was $742,554 and $794,482 and related accumulated depreciation was $107,760 and $39,831 as of December 31, 1998 and 1997, respectively.
The financing agreements with banks contain various restrictive covenants with respect to the maintenance of financial ratios, capital additions, and other items. As of December 31, 1998 all covenants have been complied with or waived by the banks.
(5) Investment in Affiliated Company
Investment in affiliated company, accounted for under the equity method, at December 31, 1998 and 1997 consists of the Company's 50% equity interest in Rock of Ages of Asia.
The Company has recorded losses on its investment in Rock of Ages Asia of $0, $87,326 and $160,661 in 1998, 1997 and 1996, respectively. Net revenues with Rock of Ages Asia were $0, $2,161,891 and $837,842 in 1998, 1997 and 1996, respectively. Trade receivables due from Rock of Ages Asia were $662,659 and $1,113,549 as of December 31, 1998 and 1997, respectively.
(6) Income Taxes
A summary of the significant components of the provision for income taxes for the years ended December 31, 1998, 1997 and 1996 is as follows:
1998 1997 1996 ----------- ------------ ------------
Current $2,095,780 922,016 626,857 Deferred 207,044 (72,980) 16,486 ---------- --------- --------- Total $2,302,824 849,036 643,343 ========== ========= =========
Included in income before provision for income taxes is foreign income (loss) of $1,346,338, $379,736 and ($303,374) for the years ended December 31, 1998, 1997 and 1996, respectively.
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 1998 and 1997 are presented below:
41 (Continued)
ROCK OF AGES CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 1998, 1997 and 1996
1998 1997 ------------ ------------ Deferred tax liabilities: Quarry development $ (657,235) (412,169) Names and reputations (204,693) -- Other liabilities (909,303) (816,794) ----------- ---------- Total gross deferred tax liabilities (1,771,231) (1,228,963) ----------- ---------- Net deferred tax assets $ 462,522 728,105 =========== ==========
SFAS No. 109, Accounting for Income Taxes, requires a valuation allowance against deferred tax assets if, based on the weight of available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized. Management believes that it is more likely than not that the results of future operations will generate sufficient taxable income to realize the net deferred tax assets.
Deferred tax assets and liabilities have been computed utilizing a tax rate of 39.3% and 27.8% for 1998 and 1997, respectively. The deferred tax rate used prior to 1998 reflected the Company being subjected to only a 20% Federal alternative minimum tax rate, as the Company was generating minimum tax credits in those years.
The reconciliation of differences between the statutory U.S. federal income tax rate and the Company's effective tax rate follows:
1998 1997 1996 -------- -------- --------
U.S. statutory rate 34.0% 34.0% 34.0% State taxes 5.3 6.0 6.1 Names and reputations amortization 1.6 0.0 0.0 Minimum tax credits (2.3) 0.0 0.0 Other, primarily tax depletion (14.5) (15.7) (14.9) ------ ------ ------ Effective tax rate 24.1% 24.3% 25.2% ====== ====== ======
The Company has approximately $2 million in minimum tax credits which may be carried forward indefinitely.
(7) Leases
The Company has several noncancellable operating leases for vehicles, equipment and office space which expire over the next five years. Rental expense for all operating leases was $596,912, $207,646 and $161,607 during 1998, 1997 and 1996, respectively. Rental expense includes amounts for related party operating leases of $320,330, $29,500 and $0 in 1998, 1997 and 1996, respectively.
42 (Continued)
ROCK OF AGES CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 1998, 1997 and 1996
Future minimum lease payments under noncancellable operating leases (with initial or remaining lease terms in excess of one year) are as follows:
Year ended December 31: Related Party Other ----------------------- ------------- ---------
1999 $ 560,220 373,960 2000 543,649 231,487 2001 541,949 126,046 2002 516,816 95,650 2003 255,401 49,977 Thereafter 200,750 17,600 --------- --------- $ 2,618,785 894,720 ========= =========
The Company also acts as the lessor of various parcels of land. Rental income was $36,031, $32,133 and $32,210 in 1998, 1997 and 1996, respectively. Future minimum rentals to be received under noncancellable leases are as follows:
Year ended December 31: ----------------------- 1999 $ 34,952 2000 32,527 2001 31,927 2002 19,827 2003 16,227 Thereafter 12,150 --------- $ 147,610 ========= (8) Pension and Other Benefits
The Company has a defined pension plan covering substantially all of its Vermont based non-union employees. The benefits are based on years of service and the employee's compensation. The cost of this program is being funded currently.
The Company has a salary continuation plan which covers certain employees who have deferred compensation agreements with the Company. The Company measures the costs of its obligations based on actuarial estimates. The net periodic costs are recognized as employees render the necessary services to earn the deferred compensation benefits.
The Company also sponsors a defined benefit postretirement health care plan for certain early retirees and defined benefit postretirement group life insurance plans for all Vermont based union and non-union employees. The Company measures the costs of its obligation based on actuarial estimates. The net periodic costs are recognized as retirees and employees render the services necessary to earn the postretirement benefits.
43 (Continued)
ROCK OF AGES CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 1998, 1997 and 1996
For measurement purposes, a 7 percent annual rate of increase in the per capita cost of covered health care benefits was assumed for 1998. The rate was assumed to decrease gradually to 4 percent for 2001 and remain at that level thereafter.
44 (Continued)
ROCK OF AGES CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 1998, 1997 and 1996
Other Benefits ----------------------------------------- 1998 1997 1996 ----------- ----------- ----------- Components of net periodic benefit cost: Service cost 22,159 13,619 17,454 Interest cost 117,122 117,876 118,168 Expected return on plan assets -- -- -- Amortization of prior service cost -- -- -- Amortization of transition obligation 63,136 63,136 63,136 Recognized net actuarial (gain)/loss (1,688) (6,334) (10,682) ----------- ----------- ----------- Net periodic benefit cost 200,729 188,297 188,076 ----------- ----------- ----------- ----------- ----------- -----------
(1) In addition, there was a special charge under SFAS No. 88 of $58,115 due to the spin-off of the Swenson Granite Company LLC salaried employees as of December 1, 1998.
The Company has multiple postretirement benefit plans. The health care plan covers a closed group of retirees selected by the Company and benefits for all but two of the participants cease at age 65. The life insurance plan covers all Vermont based employees; non-union employee coverage is 50% of the group insurance coverage which the employee had prior to retirement (but not more than $60,000) and union employee coverage is $6,000. The life insurance plan assumes a 4.50% rate of compensation increase for all years.
Assumed health care trend rates have a significant effect on the amounts reported for the health care plan. A one-percentage-point change in assumed health care cost trend rates would have the following effects:
1-Percentage- 1-Percentage- Point Increase Point Decrease -------------- --------------
Effect on total of service and interest cost components $ 342 (327) Effect on postretirement benefit obligation 5,174 (4,945)
Union Pension Benefits
Vermont based union employees participate in a multi-employer defined benefit pension plan. The Company contributes amounts as required by the union contract. At the present time, there is not sufficient information to accurately determine the Company's share of the liability for unfunded vested benefits of the plan. If the Company terminated its operations or withdrew from the plan, it would be required, under federal law, to accelerate funding of its proportionate share of the plan's unfunded vested benefits. The amount charged to operations in the accompanying consolidated statements of operations was $740,941, $786,217 and $713,738 in 1998, 1997 and 1996, respectively.
45 (Continued)
ROCK OF AGES CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 1998, 1997 and 1996
Deferred Compensation Benefits
In addition to the deferred compensation benefits under its salary continuation plan, the Company has deferred compensation agreements with three former stockholders of acquired companies. The present value of the future payments under these agreements was $2,070,171 and $2,294,031 as of December 31, 1998 and 1997, respectively. Total annual payments of $260,200 begin and end at various dates from 1997 to 2016. One of these agreements is partially paid through benefits paid by the Company into the defined pension plan, therefore the payment amount changes annually based on actuarial estimates.
401(k) Benefits
The Company's contributions were $93,263, $72,303 and $51,949 in 1998, 1997 and 1996, respectively. The acquisitions during 1998 and 1997 have significantly increased the number of participants in the plans.
(9) Stock-Based Employee Compensation
Under the terms of the Amended and Restated 1994 Stock Plan, 1,500,000 options were reserved for issuance to key employees and directors to purchase equivalent shares of common stock. The options granted have a five year term and vest at 20% per year.
The following table sets forth the stock option transactions for the years ended December 31, 1998, 1997 and 1996: Weighted Number Average of Options Exercise Price ---------- --------------
Outstanding, December 31, 1995 275,000 $ 2.49 Granted during 1996 587,500 3.69 ---------- ----------
Outstanding, December 31, 1996 862,500 3.31 Granted during 1997 383,252 18.50 ---------- ----------
Outstanding, December 31, 1997 1,245,752 7.98 Granted during 1998 125,000 14.44 Lapsed during 1998 (40,500) (3.57) Exercised during 1998 (42,000) (3.10) ---------- ----------
Outstanding, December 31, 1998 1,288,252 $ 8.90 ========== ==========
Exercisable, December 31, 1998 746,301 $ 6.69 Weighted average remaining contractual life 2.1 years
46 (Continued)
ROCK OF AGES CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 1998, 1997 and 1996
The Company has adopted the disclosure-only provisions of SFAS No. 123, Accounting for Stock-Based Compensation. Accordingly, no compensation cost has been recognized for stock options granted under the plan as the options were all granted at exercise prices which equaled the fair market value at the date of the grant. Had compensation cost for the Company's stock option plan been determined based on the fair value at the grant date for awards during 1998, 1997 and 1996 consistent with the provisions of SFAS No. 123, the Company's net income would have been reduced to the pro forma amount indicated below:
Pro forma net income reflects only options granted subsequent to December 31, 1995 and is not necessarily indicative of future effects on net income. Therefore, the full impact of calculating compensation cost for stock options under SFAS No. 123 is not reflected in the pro forma net income amounts presented because compensation cost is reflected over the options' vesting periods and compensation cost for options granted prior to January 1, 1996 is not considered.
The fair value of each option grant is estimated on the date of the grant. Options granted prior to 1997 were valued using the Minimum Value Method with the following weighted-average assumptions: risk-free interest rate of 6%; dividend yield of $0; and expected lives of five (5) years. The 1998 and 1997 options were valued using the Black-Scholes option-pricing model with the following weighted-average assumptions: risk-free interest rate of 6%; dividend yield of $0; expected volatility of 49% and 16%, respectively; and expected lives of five (5) years.
(10) Related Party Transactions
The Company is related through common ownership with several companies. The transactions with related parties, included in the consolidated statements of operations, are as follows for the years ended December 31, 1998, 1997 and 1996:
47 (Continued)
ROCK OF AGES CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 1998, 1997 and 1996
Amounts due to (from) related parties as of December 31, 1998 and 1997 are as follows:
See note 7 for operating lease obligations with related parties.
(11) Fair Value of Financial Instruments
SFAS No. 107, Disclosures About the Fair Value of Financial Instruments, requires disclosure of information about the fair value of certain financial instruments for which it is practicable to estimate that value. For purposes of the following disclosure the fair value of a financial instrument is the amount at which the instrument could be exchanged in a current transaction between willing parties other than in a forced sale or liquidation. Management has determined that the carrying values of its financial assets and liabilities approximate fair value at December 31, 1998.
(12) Unaudited Quarterly Summary Information
The following is a summary of unaudited quarterly summary information for the years ended December 31, 1998 and 1997 (in thousands, except per share data):
48 (Continued)
ROCK OF AGES CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 1998, 1997 and 1996
Note
The Company has historically experienced certain seasonal patterns, primarily due to weather conditions affecting operations in Vermont and Canada and the setting of memorials in cemeteries located in northern regions. The Company made a significant number of acquisitions in the third and fourth quarters of 1997 and the second and third quarters of 1998.
(13) Earnings Per Share
Effective December 31, 1997 the Company adopted SFAS No. 128, Earnings per Share. This adoption resulted in the restatement of per share information for 1996.
The following is a reconciliation of the numerators and denominators of the basic and diluted earnings per share (EPS) computations for net income for the years ended December 31, 1998, 1997 and 1996:
Options to purchase 478,252 and 383,252 shares of Class A common stock at exercises prices ranging from $13.688 to $18.50 per share were outstanding in 1998 and 1997, respectively, but were not included in the computation of diluted EPS because the options' exercise price was greater than the average market price of the common shares.
49 (Continued)
ROCK OF AGES CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 1998, 1997 and 1996
(14) Segment Information
On December 31, 1998 the Company adopted SFAS No. 131, Disclosures about Segments of and Enterprise and Related Information. SFAS No. 131 established standards for reporting information about operating segments in annual financial statements and requires selected information about operating segments in interim financial reports issued to stockholders. It also established standards for related disclosures about products and services and geographic areas.
The Company is organized based on the products and services that it offers. Under this organizational structure, the Company operates in three segments: quarrying, manufacturing, and retailing.
The quarrying segment extracts granite from the ground and sells it to both the manufacturing segment and to outside manufacturers, as well as to distributors in Europe and Japan.
The manufacturing segment's principal product is granite memorials used primarily in cemeteries, although it also manufactures some specialized granite products for industrial applications.
The retailing segment engraves and sells memorials and other granite products at various locations throughout the United States.
Inter-segment revenues are accounted for as if the sales were to third parties.
The following is the segment information for the years ended December 31, 1998 and 1997 (in thousands):
50 (Continued)
ROCK OF AGES CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 1998, 1997 and 1996
Comparative reportable segment information is not readily available for 1996 and the Company does not maintain its asset records by segment.
Net revenues by geographic area is as follows for the years ended December 31, 1998, 1997 and 1996 (in thousands):
1998 1997 1996 ------------ ------------- ------------- Net revenues (1): United States $ 74,174 46,138 42,617 Canada 8,572 8,069 2,052 ---------- ----------- ----------- Total net revenues $ 82,746 54,207 44,669 ========== =========== ===========
(1) Net revenues are attributed to countries based on where product is produced.
Long-lived assets by geographic area is as follows as of December 31, 1998 and 1997 (in thousands):
1998 1997 ------------ ------------- Long-lived assets: United States $ 42,810 34,570 Canada 1,660 1,866 Japan 5 -- ---------- ----------- $ 44,475 36,436 ========== ===========
Comparative reportable geographic area information is not readily available for 1996.
(15) Initial Public Offering
Effective October 21, 1997 the Company made an initial public offering (IPO) of 3,225,000 shares of Class A common stock at $18.50 per share, inclusive of 275,482 shares being sold by the selling shareholders. On November 21, 1997 the underwriters exercised their option to purchase an additional 483,750 shares of Class A common stock at $18.50 per share. The issuance of stock has been recorded net of underwriting fees and other IPO expenses incurred of $6,392,948.
51 (Continued)
ROCK OF AGES CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 1998, 1997 and 1996
(16) Acquisitions
On June 30, 1997 the Company acquired all of the outstanding stock of KSGM, a successor to Keystone Memorials, Inc. for 263,441 shares of the Company's Class B common stock in a transaction which was accounted for under the purchase method. The fair market value of KSGM on the date of acquisition was $3,898,927. As of June 30, 1997 investment in affiliated company included Keystone's 50% equity investment in four Quarry Companies (QC's) and Southern Mausoleums, Inc. (SMI).
On October 24, 1997 the Company acquired Childs & Childs Granite Company, Inc. and a related company for $6,600,000 in cash and 10,810 shares of Class A common stock at the IPO price of $18.50 per share in a transaction which was accounted for under the purchase method. The assets acquired included the remaining 50% equity investment in four QC's and SMI. The purchase price has been allocated to the assets acquired and liabilities assumed based upon their respective fair market values, resulting in $5,690,032 of cost in excess of net assets acquired of which $4,167,254 was allocated to property, plant and equipment with the remaining $1,522,778 to names and reputations.
Also on October 24, 1997 the Company acquired Keith Monument Company and its affiliated companies for $16,375,000, consisting of 81,081 shares of Class A common stock at the IPO price of $18.50 per share and $14,875,000 in cash in a transaction which was accounted for under the purchase method. The purchase price has been allocated to the assets acquired and liabilities assumed based upon their respective fair market values, resulting in $13,202,181 of cost in excess of net assets acquired of which $1,014,000 was allocated to property, plant and equipment, $246,211 for the conversion of inventory previously accounted for under LIFO, and the remaining $11,941,970 to names and reputations.
Proceeds from the purchases of $100,000 and $250,000 for the Keith and Childs acquisitions, respectively, were held by the Company per the purchase and sale agreements for the settlement of certain conditions. These amounts were recorded as accrued expenses as of December 31, 1997 and have been paid by the Company during 1998.
For the period April through December 1998 the Company, through its subsidiary Rock of Ages Memorials, Inc., acquired Clark Memorials, Inc., Watertown Monument Works, Inc., Aberdeen Monument Works, Inc., Owatonna Granite Works, Inc., Desch-Paine Monuments, Inc., Mount Rushmore Granite Corp., Gallagher & Sons Monuments, Inc., Owatonna Granite & Monument Works, Inc. and all of the outstanding stock of Maumee Valley Memorials, Inc., Miller Bros. Monument, Inc., Sioux Falls Monument Co., Portage Marble & Granite Co., Nor-Por Granite, Inc., North Hill Marble & Granite Co., Kotecki Monuments, Inc., Edward T. Christiansen & Sons, Inc., and Joseph Uras Monument Corp. In connection with these acquisitions, certain assets were acquired and liabilities assumed of Fremont Forsberg, JUM Corporation and Joseph Uras Management Cemeteries, Inc.
In November 1998 the Company, through its subsidiary Carolina Quarries, Inc., acquired the Gardenia White Quarry, its related operating entity, Piedmont Quarries Limited Liability Company, and certain undeveloped land in proximity to the Company's existing Salisbury Pink Quarry.
52 (Continued)
ROCK OF AGES CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 1998, 1997 and 1996
The aggregate consideration for the 1998 acquisitions was $21,075,175 in cash and $1,447,476 representing 90,537 shares of the Company's Class A common stock ranging from $14.6875 to $17.625 per share in a transaction which was accounted for under the purchase method of accounting. The aggregate purchase price has been allocated to the assets acquired and liabilities assumed based upon their respective fair market values, resulting in $16,547,323 of cost in excess of net assets acquired of which $2,274,392 has been allocated to property, plant and equipment and the remaining $14,272,931 to names and reputations.
Proceeds of $261,022 from certain of the 1998 purchases are being held by the Company for a period of one year per the purchase and sale agreements for the settlement of certain conditions. These amounts are recorded as accrued expenses as of December 31, 1998.
The following unaudited pro forma information has been prepared assuming that the acquisitions occurred at the beginning of the current and immediately preceding periods, if presented. The pro forma information is presented for information purposes only and is not necessarily indicative of what would have occurred if the acquisitions had been made as of those dates.
The Company also acquired certain assets and assumed certain liabilities of Adru Granite, Inc. for $238,310 in 1996. The results of operations were not material in relation to the Company's consolidated results of operations, therefore pro forma information has not been provided.
(17) Reorganization/Recapitalization
In August 1997, in connection with the reincorporation merger of Rock of Ages Corporation, a Vermont corporation and the immediate predecessor to the Company ("ROA Vermont") with and into a newly-formed Delaware corporation, with the Company surviving as a Delaware corporation, (i) the Company authorized 30,000,000 shares of $.01 par value Class A Common Stock, 15,000,000 shares of $.01 par value Class B Common Stock, and 2,500,000 shares of $.01 par value Preferred Stock and (ii) each outstanding share of common stock of ROA Vermont was converted into one half of a share of Class B Common Stock of the Company. The Common Stock outstanding and weighted average shares outstanding for all periods presented have been adjusted for the new stock capitalization.
53 (Continued)
ROCK OF AGES CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 1998, 1997 and 1996
Prior to the initial public offering, the Company went through a reorganization (the "Reorganization") as follows: (i) the merger of Swenson Granite Company, Inc. ("Swenson Granite") with and into the Company, with the Company as the surviving corporation (the "Swenson Merger"), in which Swenson Granite's stockholders received 1,618.123 shares of Class B Common Stock for each share of Swenson Granite common stock (immediately prior to the Swenson Merger, a total of 2,163 shares of Swenson Granite were outstanding); and (ii) immediately prior to the Swenson Merger, Swenson Granite distributed its curb and landscaping business (essentially all of its operating assets and operating liabilities) to its stockholders (the "Swenson Granite Distribution") through a pro rata distribution of all of the member interests in a newly formed limited liability company named Swenson Granite Company LLC ("Swenson LLC").
Following the Swenson Granite Distribution and prior to the Swenson Merger, the sole asset of Swenson Granite was a 93% stock interest in the Company and its only liabilities were a $3,340,000 intercompany payable to the Company and a $310,000 note payable. Pursuant to the Swenson Merger, the Swenson Granite stockholders received a total of 3,499.998 shares of Class B Common Stock which represented 93% of the Company's total shares outstanding prior to the offering, the shares of Class B Common Stock held by Swenson Granite were cancelled, the intercompany payable was forgiven and the Company assumed the note payable. The minority interest in the Company is the same both before and after the Swenson Merger. The only effect on the Company's financial statements was a reduction in stockholders' equity of $3,650,000. This effect is due solely to the forgiveness of the aforesaid intercompany payable and the assumption of the aforesaid note payable.
(18) Subsequent Event
In January 1999 the Company acquired Toledo Monument Works Co. and J.W. Reynolds Monument Co. and all of the outstanding stock of Milwaukee Monuments Co., Inc. for $3,771,094 in cash and 32,045 shares of the Company's Class A common stock at $13.2625 per share. The aggregate purchase price has been allocated to the assets acquired and liabilities assumed based upon their respective fair market values. The amount of cost in excess of net assets acquired has been allocated to names and reputations.
Also in January 1999 employees exercised 216,100 options and the Company granted options to purchase 75,000 shares of Class A common stock to a key employee under the Amended and Restated 1994 Stock Plan at the market price on the date of grant of $13.25 per share.
54 (Continued)
Independent Auditors' Report On Supplementary Information
The Board of Directors Rock of Ages Corporation and Subsidiaries:
Under date of March 12, 1999, we reported on the consolidated balance sheets of Rock of Ages Corporation and subsidiaries as of December 31, 1998 and 1997, and the related consolidated statements of operations, stockholders' equity and comprehensive income, and cash flows for each of the years in the three-year period ended December 31, 1998. In connection with our audits of the aforementioned consolidated financial statements, we also audited the related consolidated financial statement schedule referred to as "Schedule II - Valuation and Qualifying Accounts and Reserves". This financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion on this financial statement schedule based on our audits.
In our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
KPMG LLP
March 12, 1999 Burlington, Vermont
Rock of Ages Corporation and Subsidiaries
Schedule II - Valuation and Qualifying Accounts and Reserves
Years ended December 31, 1998, 1997 and 1996
(In Thousands)
See accompanying independent auditors' report on supplementary information.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Rock of Ages Corporation
By: /s/ Kurt M. Swenson ------------------------------- Kurt M. Swenson President, Chief Executive Officer and Chairman of the Board of Directors Date: March 31, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated as of March 31, 1999.
Signature Title --------- -----
/s/ Kurt M. Swenson President, Chief Executive Officer and - ------------------------ Chairman of the Board of Directors Kurt M. Swenson (Principal Executive Officer)
/s/ John L. Forney Chief Financial Officer and Treasurer - ------------------------ (Principal Financial Officer and John L. Forney Principal Accounting Officer)
/s/ Richard C. Kimball Vice Chairman and Chief Operating Officer, - ------------------------ Memorials Division, Director Richard C. Kimball
/s/ Jon M. Gregory President and Chief Operating Officer, - ------------------------ Quarry Division, Director Jon M. Gregory
/s/ George R. Anderson Senior Vice President, Director - ------------------------ George R. Anderson
/s/ James L. Fox Director - ------------------------ James L. Fox
/s/ Charles M. Waite Director - ------------------------ Charles M. Waite
/s/ Frederick Webster Director - ------------------------ Frederick Webster
EXHIBIT INDEX
Exhibit Number Description - ------ -----------
3.1 Form of Amended and Restated Certificate of Incorporation of the Company (incorporated herein by reference to Exhibit 3.1 to the Company's Registration Statement on Form S-1 (Registration No. 333-33685) filed with the Securities and Exchange Commission on August 15, 1997 and declared effective on October 20, 1997)
3.2 By-laws of the Company (incorporated herein by reference to Exhibit 3.2 to the Company's Registration Statement on Form S-1 (Registration No. 333-33685) filed with the Securities and Exchange Commission on August 15, 1997 and declared effective on October 20, 1997)
4. Specimen Certificate representing the Class A Common Stock (incorporated herein by reference to Exhibit 4. to the Company's Registration Statement on Form S-1 (Registration No. 333-33685) filed with the Securities and Exchange Commission on August 15, 1997 and declared effective on October 20, 1997)
10.1* Rock of Ages Corporation Amended and Restated 1994 Stock Plan (as amended through October 26, 1998)
10.2* Employment Agreement of Kurt M. Swenson (incorporated herein by reference to Exhibit 10.2 to the Company's Registration Statement on Form S-1 (Registration No. 333-33685) filed with the Securities and Exchange Commission on August 15, 1997 and declared effective on October 20, 1997)
10.3* Employment Agreement of Peter Friberg (incorporated herein by reference to Exhibit 10.4 to the Company's Registration Statement on Form S-1 (Registration No. 333-33685) filed with the Securities and Exchange Commission on August 15, 1997 and declared effective on October 20, 1997)
10.4* Employment Agreement of Mark Gherardi (incorporated herein by reference to Exhibit 10.6 to the Company's Registration Statement on Form S-1 (Registration No. 333-33685) filed with the Securities and Exchange Commission on August 15, 1997 and declared effective on October 20, 1997)
10.5* Form of Employment Agreement with G. Thomas Oglesby, Jr., George T. Oglesby, III, Robert Otis Childs, III and John E. Keith (incorporated herein by reference to Exhibit 10.7 to the Company's Registration Statement on Form S-1 (Registration No. 333-33685) filed with the Securities and Exchange Commission on August 15, 1997 and declared effective on October 20, 1997)
10.6* Form of Employment Agreement with each of Richard C. Kimball, George R. Anderson and Jon M. Gregory (incorporated herein by reference to Exhibit 10.8 to the Company's Registration Statement on Form S-1 (Registration No. 333-33685) filed with the Securities and Exchange Commission on August 15, 1997 and declared effective on October 20, 1997)
10.7 Supply and Distribution Agreement dated as of June 27, 1997 by and among Keystone Granite Company, Inc., the Estate of George T. Oglesby and Rock of Ages Corporation (incorporated herein by reference to Exhibit 10.9 to the Company's Registration Statement on Form S-1 (Registration No. 333-33685) filed with the Securities and Exchange Commission on August 15, 1997 and declared effective on October 20, 1997)
10.8 Supply and Distribution Agreement dated as of June 27, 1997 by and among Missouri Red Quarries, Inc., George T. Oglesby, Jr. and Rock of Ages Corporation (incorporated herein by reference to Exhibit 10.10 to the Company's Registration Statement on Form S-1 (Registration No. 333-33685) filed with the Securities and Exchange Commission on August 15, 1997 and declared effective on October 20, 1997)
10.9* Form of Salary Continuation Agreement (incorporated herein by reference to Exhibit 10.15 to the Company's Registration Statement on Form S-1 (Registration No. 333-33685) filed with the Securities and Exchange Commission on August 15, 1997 and declared effective on October 20, 1997)
10.10 Credit Facility dated as of June 25, 1997 between Royal Bank of Canada and Rock of Ages Canada, Inc., Rock of Ages Quarries Inc. and Rock of Ages Canada Inc. (incorporated herein by reference to Exhibit 10.20 to the Company's Registration Statement on Form S-1 (Registration No. 333-33685) filed with the Securities and Exchange Commission on August 15, 1997 and declared effective on October 20, 1997)
10.11 Financing Agreement dated December 17, 1997 by and between The CIT Group/Business Credit, Inc., Rock of Ages Corporation, Royalty Granite Corporation, Carolina Quarries, Inc., Pennsylvania Granite Corp., Childs & Childs Granite Company, Inc., Southern Mausoleums, Inc. and Rock of Ages Memorials LLC (incorporated herein by reference to Exhibit 10.19 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1997 filed with the Securities and Exchange Commission on March 31, 1998)
10.12 Exclusive Supply Agreement dated as of December 8, 1997 by and between Rock of Ages Corporation and Eurimex (incorporated herein by reference to Exhibit 10.21 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1997 filed with the Securities and Exchange Commission on March 31, 1998)
11. Statement re: computation of per share earnings (incorporated herein by reference to Note (1)(r) of the Company's consolidated financial statements (filed herewith))
21. Subsidiaries of the Company
23. Consent of KPMG LLP
27. Financial Data Schedule
- --------------------------- * This exhibit is a management contract or compensatory plan or arrangement.