<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______________ to ______________
Commission file number: 0-29464
ROCK OF AGES CORPORATION
(Exact name of Registrant as Specified in its Charter)
Delaware 03015320
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
772 Graniteville Road
Graniteville, Vermont 05654
(Address of principal executive offices) (Zip Code)
(802) 476-3121
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period than the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
As of November 10, 1999, 4,327,171 shares of Class A Common Stock, par value
$0.01 per share, and 3,115,746 shares of Class B Common Stock, par value $0.01
per share, of Rock of Ages Corporation were outstanding.
<PAGE> 2
ROCK OF AGES CORPORATION
INDEX
Form 10-Q for the Quarterly Period
Ended September 30, 1999
PART I FINANCIAL INFORMATION
- ------ ---------------------
Item 1. Financial Statements
Condensed Consolidated Balance Sheets - September 30, 1999
and December 31, 1998
Condensed Consolidated Statements of Operations - Three
Months Ended and the Nine Months Ended September 30, 1999
and 1998
Condensed Consolidated Statements of Cash Flows - Nine Months Ended
September 30, 1999 and 1998
Notes to Condensed Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
PART II OTHER INFORMATION
- ------- -----------------
Item 6. Exhibits and Reports on Form 8-K
Signature
<PAGE> 3
PART I: FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
ROCK OF AGES CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
($ in thousands)
<TABLE>
<CAPTION>
(Unaudited)
September 30, December 31,
1999 1998
------------ -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 5,773 4,701
Trade receivables, net of allowance for bad debt
of $1,822 in 1999 and $2,124 in 1998 16,295 14,004
Inventories 24,402 24,075
Prepaid & refundable income taxes 475 586
Due from affiliate 117
Deferred tax assets 308 352
Other current assets 2,734 1,549
--------- --------
Total current assets 50,104 45,267
Property, plant and equipment, net 44,833 44,475
Cash surrender value of life insurance, net 1,450 1,426
Intangibles, net 35,959 29,487
Deferred tax assets 572 110
Investments in and advances to affiliated company 131 131
Intangible pension asset 219 219
Other investments 343
Other 894 436
--------- --------
Total assets $ 134,162 121,894
========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Borrowings under lines of credit $ 16,378 6,687
Current installments of long-term debt 474 803
Trade payables 2,837 2,674
Accrued expenses 3,927 3,478
Due to related parties 4
Customer deposits 8,143 5,100
--------- --------
Total current liabilities 31,759 18,746
Long-term debt, excluding current installments 12,751 12,880
Deferred compensation 3,973 3,692
Accrued pension cost 34 34
Accrued postretirement benefit cost 570 570
Other 120 135
--------- --------
Total liabilities 49,207 36,057
Commitments
Stockholder's equity:
Preferred stock - $.01 par value;
2,500,000 shares authorized
No shares issued or outstanding
Common stock - Class A, $.01 par value;
30,000,000 shares authorized
4,324,671 and 3,896,178 shares
issued and outstanding 43 39
Common stock - Class B, $.01 par value;
15,000,000 shares authorized
3,115,746 and 3,484,957 shares
issued and outstanding 31 35
Additional paid-in capital 67,893 69,350
Retained earnings 17,284 16,898
Accumulated other comprehensive loss (296) (485)
--------- --------
Total stockholder's equity 84,955 85,837
--------- --------
Total liabilities and stockholder's equity $ 134,162 121,894
========= ========
</TABLE>
** SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
Page 1
<PAGE> 4
ROCK OF AGES CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
($ in thousands except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
1999 1998 1999 1998
-------- ------- ------- ------
<S> <C> <C> <C> <C>
Net Revenues:
Quarrying $ 6,285 4,787 15,379 13,757
Manufacturing 8,921 11,579 30,349 35,608
Retailing 9,207 5,640 25,189 10,767
------- ------- ------- ------
Total net revenues 24,413 22,006 70,917 60,132
Gross profit:
Quarrying 3,236 2,344 6,248 5,994
Manufacturing 2,338 3,274 6,820 8,820
Retailing 4,766 3,250 13,204 6,192
------- ------- ------- ------
Total gross profit 10,340 8,868 26,272 21,006
Selling, general and administrative expenses 8,335 5,407 22,916 13,949
------- ------- ------- ------
Income from operations 2,005 3,461 3,356 7,057
Loss on sale of assets 723
Interest expense 541 113 1,529 244
------- ------- ------- ------
Income before provision for income taxes
and a cumulative effect of a change in
accounting principle 1,464 3,348 1,104 6,813
Income tax expense 402 594 568 1,703
------- ------- ------- ------
Net income before cumulative effect of
a change in accounting principle $ 1,062 2,754 536 5,110
Cumulative effect in prior years of a
change in accounting principle
(net of taxes of $48) (150)
------- ------- ------- ------
Net income $ 1,062 2,754 $ 386 5,110
Per share information:
Net income per share-basic:
Net income before cumulative effect of
a change in accounting principle $ 0.14 0.37 $ 0.07 0.70
Cumulative effect in prior year of a
change in accounting principle
(net of taxes of $48) -- -- (0.02) --
------- ------- ------- ------
Net income per share $ 0.14 0.37 $ 0.05 0.70
Net income per share - diluted:
Net income before cumulative effect
of a change in accounting principle: $ 0.14 0.35 $ 0.07 0.64
Cumulative effect in prior year of a
change in accounting principle
(net of taxes of $48) -- (0.02) --
------- ------- ------- ------
Net income $ 0.14 0.35 $ 0.05 0.64
Weighted average number of common shares
outstanding-basic 7,440 7,377 7,532 7,339
Weighted average number of common shares
outstanding - diluted 7,727 7,970 7,891 7,993
</TABLE>
** SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
Page 2
<PAGE> 5
ROCK OF AGES CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
($ in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
---------------------
1999 1998
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 386 5,110
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation, depletion and amortization 3,246 2,477
Loss (gain) on sale of assets 695 (15)
Decrease (increase) in cash surrender value (23) 20
Cumulative effect of a change in accounting principle 150
Deferred taxes 1 (30)
Changes in assets and liabilities:
Increase in trade receivables (1,918) (1,472)
Increase in due from related parties (127) (111)
Decrease (increase) in inventories 285 (3,948)
Increase in other assets (796) (513)
Increase in trade payables, accrued
expenses and income taxes payable 514 1,611
Increase in customer deposits 2,544 1,019
Increase in deferred compensation 144 135
Decrease in other liabilities (15)
Increase(decrease) in deferred income 12 (300)
-------- --------
Net cash provided by operating activities 5,098 3,983
Cash flows from investing activities:
Purchases of property, plant and equipment (3,192) (2,819)
Increase in intangibles (599)
Proceeds from sale of property, plant and equipment 40 25
Cash included in sale of subsidiary (250)
Acquisitions, net of cash acquired (1) (9,975) (11,427)
-------- --------
Net cash used in investing activities (13,976) (14,221)
Cash flows from financing activities:
Net borrowings under lines of credit 9,691 6,385
Net stock option transactions 702 (374)
Increase in debt issuance costs (75)
Principal payments on long-term debt (508) (223)
-------- --------
Net cash provided by financing activities 9,810 5,788
Effect of exchange rate changes on cash 140 (261)
-------- --------
Net increase (decrease) in cash and cash equivalents 1,072 (4,711)
Cash and cash equivalents, beginning of period 4,701 8,637
-------- --------
Cash and cash equivalents, end of period $ 5,773 3,926
======== ========
** SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
(1) Acquisitions:
Assets acquired $11,883 $19,560
Liabilities assumed and issued (940) (6,109)
Common stock issued (640) (1,448)
-------- --------
Cash paid 10,303 12,003
Less cash acquired (328) 576
-------- --------
Net cash paid for acquisitions $ 9,975 11,427
======== ========
</TABLE>
Page 3
<PAGE> 6
Supplemental non-cash investing and financing activities:
On May 28, 1999 the Company exchanged all of the outstanding shares of Keystone
Memorial Inc., a newly formed subsidiary, containing land, buildings and
equipment of $2,281,458, inventory of $1,750,000, Deferred tax liabilities of
$417,564, prepaids of $9,351, intangibles of $47,974 and cash of $250,000 for
shares valued at $2,799,061 and a note receivable with a net present value of
399,538.
See Note 7 for further discussion.
ROCK OF AGES CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(1) Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been
prepared pursuant to the rules and regulations for reporting on Form 10-Q.
Accordingly, certain information and notes required by generally accepted
accounting principles for complete financial statements are not included herein.
In the opinion of management, all adjustments of a normal recurring nature
considered necessary for a fair presentation have been included. Results of
operations for the interim periods are not necessarily indicative of the results
that may be expected for a full year. For further information, refer to the
consolidated financial statements and footnotes thereto included in the
Company's Annual Report on Form 10-K 405 (SEC File No. 000-29464, filed March
31, 1999).
(2) Inventories
<TABLE>
<CAPTION>
($ in thousands)
Inventories consist of the following at
September 30, 1999 and December 31, 1998: September 30, December 31,
1999 1998
------------ -----------
<S> <C> <C>
Raw materials $10,082 $ 9,815
Work-in-process 2,810 5,724
Finished goods and supplies 11,510 8,536
------- -------
$24,402 $24,075
======= =======
</TABLE>
(3) Pro Forma Information
During the nine months ended September 30, 1999, the Company acquired ten retail
monument companies. The Company paid a total of $10,302,863 in cash and issued
52,623 shares of Class A Common Stock with a value of $639,986 for the acquired
companies. In addition, various employment, noncompetition and lease agreements
were entered into.
The acquisitions have been 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 approximately $6,997,134
of cost in excess of net assets acquired which has been allocated to intangible
assets, primarily names and reputations.
The following unaudited pro forma information has been prepared assuming that
the acquisitions during 1998 (refer to specifics in the footnotes of Form 10-K
405 mentioned above) and 1999 occurred at the beginning of the periods
presented. The pro forma information is presented for information purposes only
and is not necessarily indicative of what would have occurred if the
acquisitions had been made as of those dates.
<TABLE>
<CAPTION>
($ in thousands except per share data)
(Unaudited)
Nine Months Ended
September 30,
-----------------
1999 1998
------- -------
<S> <C> <C>
Net revenues $74,507 77,969
Net income $ 760 5,546
Net income per share-basic $ 0.10 0.76
Net income per share - diluted $ 0.10 0.69
</TABLE>
<PAGE> 7
(4) Earnings Per Share
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
three and nine month periods ended September 30, 1999 and 1998:
<TABLE>
<CAPTION>
($ in thousands except ($ in thousands except
per share data) per share data)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
1999 1998 1999 1998
----- ----- ---- -----
<S> <C> <C> <C> <C>
Numerator:
Income available to common shareholders
used in basic and diluted earnings per share 1,062 2,754 386 5,110
===== ===== ===== =====
Denominator:
Denominator for basic earnings per share:
Weighted average shares 7,440 7,377 7,532 7,339
Effect of dilutive securities:
Stock options 287 593 359 654
----- ----- ----- -----
Denominator for diluted earnings per share:
Adjusted weighted average shares 7,727 7,970 7,891 7,993
===== ===== ===== =====
Basic earnings per share 0.14 0.37 0.05 0.70
Diluted earnings per share 0.14 0.35 0.05 0.64
</TABLE>
Options to purchase 488,252 shares of Class A common stock at prices ranging
from $9.875 to $18.50 per share were outstanding in 1999, 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.
(5) Segment Information
The Company is organized based on the products and services that it offers.
Under this organizational structure, the Company operates in three segments:
quarrying, manufacturing, and retailing.
The quarrying segment extracts 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.
Page 5
<PAGE> 8
The following is the unaudited segment information for the three and nine month
periods ending September 30, 1999 and 1998 (in thousands):
<TABLE>
<CAPTION>
Three month period:
1999 Quarrying Manufacturing Retailing Total
--------- ------------- --------- -----
<S> <C> <C> <C> <C>
Total net revenues $7,825 11,052 9,207 28,084
Inter-segment net revenues 1,540 2,131 3,671
------ ------ ------- ------
Net revenues 6,285 8,921 9,207 24,413
Total gross profit 4,129 1,637 4,574 10,340
Inter-segment gross profit 893 (701) (192) 0
------ ------ ------- ------
Gross profit 3,236 2,338 4,766 10,340
Selling, general and administrative expenses 972 1,983 5,380 8,335
------ ------ ------- ------
Income (loss) from operations 2,264 355 (614) 2,005
Interest expense 1 27 513 541
------ ------ ------- ------
Income (loss) before provision for income taxes $2,263 328 (1,127) 1,464
====== ====== ======= ======
<CAPTION>
1998 Quarrying Manufacturing Retailing Total
--------- ------------- --------- -----
<S> <C> <C> <C> <C>
Total net revenues $6,830 12,927 5,640 25,397
Inter-segment net revenues 2,043 1,348 3,391
------ ------ ------- ------
Net revenues 4,787 11,579 5,640 22,006
Total gross profit 3,159 2,459 3,250 8,868
Inter-segment gross profit 815 (815) 0
Gross profit 2,344 3,274 3,250 8,868
------ ------ ------- ------
Selling, general and administrative expenses 999 1,628 2,780 5,407
Income from operations 1,345 1,646 470 3,461
Interest expense -- 44 69 113
------ ------ ------- ------
Income before provision for income taxes $1,345 1,602 401 3,348
====== ====== ======= ======
Nine month period:
<CAPTION>
1999 Quarrying Manufacturing Retailing Total
--------- ------------- --------- -----
<S> <C> <C> <C> <C>
Total net revenues $20,325 35,764 25,189 81,278
Inter-segment net revenues 4,946 5,415 10,361
------- ------ ------ ------
Net revenues 15,379 30,349 25,189 70,917
Total gross profit 8,237 5,119 12,916 26,272
Inter-segment gross profit 1,989 (1,701) (288) 0
------- ------ ------ ------
Gross profit 6,248 6,820 13,204 26,272
Selling, general and administrative expenses 3,562 5,316 14,038 22,916
------- ------ ------ ------
</TABLE>
Page 6
<PAGE> 9
<TABLE>
<S> <C> <C> <C> <C>
Income (loss) from operations 2,686 1,504 (834) 3,356
Loss on sale of assets 723 723
Interest expense 2 93 1,434 1,529
------- ------ ------ ------
Income (loss) before provision (benefit) for income taxes $ 2,684 688 (2,268) 1,104
======= ====== ====== ======
<CAPTION>
1998 Quarrying Manufacturing Retailing Total
--------- ------------- --------- -----
<S> <C> <C> <C> <C>
Total net revenues $19,706 39,430 10,767 69,903
Inter-segment net revenues 5,949 3,822 9,771
------- ------ ------ ------
Net revenues 13,757 35,608 10,767 60,132
Total gross profit 7,874 6,940 6,192 21,006
Inter-segment gross profit 1,880 (1,880) 0
------- ------ ------ ------
Gross profit 5,994 8,820 6,192 21,006
Selling, general and administrative expenses 3,567 5,035 5,347 13,949
------- ------ ------ ------
Income from operations 2,427 3,785 845 7,057
Interest expense 138 106 244
------- ------ ------ ------
Income before provision for income taxes $ 2,427 3,647 739 6,813
======= ====== ====== ======
</TABLE>
Net revenues by geographic area is as follows:
<TABLE>
<CAPTION>
($ in thousands) ($ in thousands)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
1999 1998 1999 1998
------- ------ ------ ------
<S> <C> <C> <C> <C>
Net revenues (1):
United States $22,008 20,769 63,412 53,365
Canada 2,405 1,237 7,505 6,767
------- ------ ------ ------
Total net revenues $24,413 22,006 70,917 60,132
======= ====== ====== ======
</TABLE>
(1) Net revenues are attributed to countries based on where product is
produced.
Long-lived assets by geographic area is as follows:
<TABLE>
<CAPTION>
($ in thousands)
September 30, December 31,
1999 1998
------------ -----------
<S> <C> <C>
Long-lived assets:
United States $42,863 42,811
Canada 1,964 1,660
Japan 6 4
------- ------
$44,833 44,475
======= ======
</TABLE>
Page 7
<PAGE> 10
(6) Accounting Change
The Company adopted "SOP 98-5, Reporting on the Costs of Start-Up Activities",
as of January 1, 1999. The SOP requires the costs of start-up activities,
including organization costs, to be expensed as incurred. As a result,
acquisition costs of $149,781 (net of taxes of $47,559), were expensed in the
period ending September 30, 1999 as the cumulative effect of a change in
accounting principle.
The following table summarizes the pro forma net income and per share amounts
assuming a change in application of accounting principles applied retroactively:
<TABLE>
<CAPTION>
($ in thousands)
(Unaudited)
Nine Months Ended
September 30,
1999
-----------------
<S> <C>
Net income $ 536
Net income per share - basic 0.07
Net income per share - diluted 0.07
</TABLE>
Pro forma information for the three and nine month periods ended September 30,
1998 is not readily available.
(7) Significant Event
On May 28, 1999 the Company exchanged all of the outstanding shares of Keystone
Memorial Inc., a newly formed subsidiary, containing land, buildings and
equipment of its Keystone and Keywest manufacturing plants and certain inventory
at those locations, for 263,441 shares of Rock of Ages Class B Commons Stock and
a note receivable with a net present value of $399,538. The net assets of
Keystone Memorial Inc. had a net book value of $3,921,219. A loss on the sale
was recorded of $722,620, included in loss on sale of assets. The loss was
considered a tax free event for purposes of calculating the provision for income
taxes.
(8) Comprehensive Income
Comprehensive income is as follows:
<TABLE>
<CAPTION>
($ in thousands) ($ in thousands)
(Unaudited) (Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income $1,062 2,754 536 5,110
Cumulative translation adjustment (43) (178) 189 (258)
------ ----- --- -----
Comprehensive income $1,019 2,576 725 4,852
====== ===== === =====
</TABLE>
(9) Subsequent Events
Subsequent to September 30, 1999, the Company acquired two additional retail
monument companies for approximately $2,009,000 in cash.
Page 8
<PAGE> 11
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
This Form 10-Q contains certain "forward-looking statements" within the meaning
of Section 21E of the Securities Exchange Act of 1934, as amended, including but
not limited to those that discuss strategies, goals, outlook or other
non-historical matters, or projected or anticipated revenues, income, returns or
other financial measures. These forward-looking statements are subject to
numerous risks and uncertainties that may cause actual results to differ
materially from those contained in or indicated by such statements, including
but not limited to the ability of the Company to continue to identify suitable
retail acquisition candidates, to consummate additional retail acquisitions on
acceptable terms and to successfully integrate the operations of such acquired
entities, demand for the Company's products, as well as general economic,
competitive, key employee and other factors described in the Company's Annual
Report on Form 10-K or other filings with the Securities and Exchange
Commission. The Company assumes no obligation to update these forward-looking
statements to reflect actual results or changes in factors or assumptions
affecting such forward-looking statements.
Rock of Ages Corporation (the "Company") 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"), granite memorial manufacturers in Elberton, Georgia. In connection with
the Keystone and C&C acquisitions, the Company acquired Southern Mausoleums,
Inc. ("SMI" and, together with C&C and Keystone, the "Elberton 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 (the "Quarry
Companies"). 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 Company's Bethel White Quarry ("Gardenia" and, together with the Quarry
Companies, the "Acquired Quarry Operations"). In October 1997, the Company
acquired the Keith Monument Company and related companies, which are engaged in
the retailing of granite memorials to consumers in the State of Kentucky
("Keith"). In 1998, the Company made acquisitions of thirteen additional retail
monument companies (the "1998 Retail Acquisitions"), thereby expanding its
retail presence to locations in Georgia, Iowa, Illinois, Minnesota, Nebraska,
Ohio, South Dakota, Wisconsin, Pennsylvania and New Jersey. In the nine months
ended September 30, 1999, the Company acquired an additional ten monument
retailers (the "1999 Retail Acquisitions").
In May 1999, the Company sold certain Keystone assets back to the original
owners from whom it had purchased them in June 1997. In exchange for these
assets, the Company received
<PAGE> 12
263,441 shares of its Class B stock held by the Keystone owners. These shares
were then retired. In connection with this transaction, the Company recognized a
loss on disposal of assets of approximately $723,000, or $.09 per diluted share,
in the nine months ended September 30, 1999. This nonrecurring charge had no
impact on the Company's tax liability or overall cash position.
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
<PAGE> 13
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 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 their respective revenues.
STATEMENT OF OPERATIONS DATA
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -------------------
1999 1998 1999 1998
----- ----- ----- -----
<S> <C> <C> <C> <C>
NET SALES
Quarrying 25.7% 21.8% 21.7% 22.9%
Manufacturing 36.5% 52.6% 42.8% 59.2%
Retail 37.7% 25.6% 35.5% 17.9%
----- ----- ----- -----
TOTAL NET SALES 100.0% 100.0% 100.0% 100.0%
GROSS PROFIT
Quarrying 51.5% 49.0% 40.6% 43.6%
Manufacturing 26.2% 28.3% 22.5% 24.8%
Retail 51.8% 57.6% 52.4% 57.5%
----- ----- ----- -----
TOTAL GROSS PROFIT 42.4% 40.3% 37.0% 34.9%
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES 34.1% 24.6% 32.3% 23.2%
INCOME FROM OPERATIONS 8.2% 15.7% 4.7% 11.7%
OTHER EXPENSES
Interest Expense 2.2% 0.5% 2.2% 0.4%
Loss on Disposal of Assets 1.0%
INCOME BEFORE INCOME TAXES AND CUMULATIVE
EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE 6.0% 15.2% 1.6% 11.3%
Income Taxes 1.6% 2.7% 0.8% 2.8%
INCOME BEFORE CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE 4.4% 12.5% 0.8% 8.5%
Cumulative effect on prior years of change in
accounting principle -0.2%
NET INCOME 4.4% 12.5% 0.5% 8.5%
===== ===== ===== =====
</TABLE>
<PAGE> 14
THREE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1998
Revenues for the three months ended September 30, 1999 increased $2.4 million,
or 10.9%, to $24.4 million from $22.0 million for the three months ended
September 30,1998. This increase was primarily attributable to increased
quarrying revenues and revenues from the 1998 Retail Acquisitions and 1999
Retail Acquisitions, most of which the Company did not own during the 1998
period. These increases were partially offset by lower manufacturing revenues.
The Company's retailing net revenues increased to 37.7% of total net revenues in
the 1999 period from 25.6% in the 1998 period as a result of these acquisitions.
Gross profit for the three months ended September 30, 1999 increased $1.5
million, or 16.6%, to $10.3 million from $8.9 million for the three months ended
September 30, 1998. The gross profit percentage increased to 42.4% for the 1999
period from 40.3% for the 1998 period. These increases were attributable to the
absolute and relative increases in retailing net revenues during the 1999 period
as described above. The Company's retailing operations historically have
experienced a higher gross profit percentage than either quarrying or
manufacturing. However, the small increase in the gross profit percentage
despite the large relative increase in retailing net revenues was caused by
lower gross margins in the Company's retailing operations in the 1999 period.
Quarrying gross profit increased $892,000, or 38.1%, to $3.2 million from $2.3
million for the 1998 period. The quarrying gross profit percentage increased to
51.5% from 49.0% for the 1998 period. These increases were primarily
attributable to improved profitability at the Company's Salisbury and Laurentian
rose quarries.
Manufacturing gross profit decreased $936,000, or 28.6%, to $2.3 million from
$3.3 million for the 1998 period. The manufacturing gross profit percentage
decreased to 26.2% from 28.3% for the 1998 period. These decreases were
primarily attributable to lower profitability at the Company's Barre
manufacturing operations, including both monumental and press rolls.
Retailing gross profit increased $1.5 million, or 46.6%, to $4.8 million from
$3.3 million for the 1998 period. This increase was attributable to the 1998
Retail Acquisitions and 1999 Retail Acquisitions, most of which the Company did
not own during the 1998 period. The retailing gross profit percentage decreased
to 51.8 % from 57.6% for the 1998 period. This decrease was due to the fact that
the 1998 Retail Acquisitions and 1999 Retail Acquisitions as a group have a
lower gross profit percentage historically than Keith, which accounted for the
majority of the Company's retailing revenue and gross profit for the 1998
period.
Selling, general, and administrative expenses ("SGA expenses") increased $2.9
million, or 54.1%, to $8.3 million from $5.4 million for the 1998 period. As a
percentage of net revenues, SGA expenses increased to 34.1% from 24.6% for the
1998 period. These increases were primarily attributable to SGA expenses of the
1998 Retail Acquisitions and the 1999 Retail Acquisitions and to expenditures on
marketing materials and programs to support the Company's branding strategy at
retail.
Interest expense increased $428,000, or 378.8%, to $541,000 from $113,000 for
the 1998 period. This increase was caused by increased borrowing under the
Company's credit facilities to
<PAGE> 15
support its retail acquisition strategy.
NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1998
Revenues for the nine months ended September 30, 1999 increased $10.8 million,
or 17.9%, to $70.9 million from $60.1 million for the nine months ended
September 30,1998. This increase was primarily attributable to revenues from the
1998 Retail Acquisitions and 1999 Retail Acquisitions, most of which the Company
did not own during the 1998 period. The Company's retailing net revenues
increased to 35.5% of total net revenues in the 1999 period from 17.9% in the
1998 period as a result of these acquisitions.
Gross profit for the nine months ended September 30, 1999 increased $5.3
million, or 25.1%, to $26.3 million from $21.0 million for the nine months ended
September 30, 1998. The gross profit percentage increased to 37.0% for the 1999
period from 34.9% for the 1998 period. These increases were attributable to the
absolute and relative increases in retailing net revenues during the 1999 period
as described above. The Company's retailing operations historically have
experienced a higher gross profit percentage than either quarrying or
manufacturing. However, the small increase in the gross profit percentage
despite the large relative increase in retailing net revenues was caused by
lower gross margins in the Company's retailing operations in the 1999 period.
Quarrying gross profit increased $254,000, or 4.2%, to $6.2 million from $6.0
million for the 1998 period. The quarrying gross profit percentage decreased to
40.6% from 43.6% for the 1998 period. The increase in absolute gross profit was
primarily due to higher quarry revenues in the 1999 period, mostly as a result
of increased sales from the Company's Bethel and Gardenia white quarries. The
decrease in gross profit percentage was primarily attributable to increased
development costs at the Company's Salisbury quarry during the 1999 period, and
to the Company's Barre quarries being closed for a longer time during the 1999
period than during the 1998 period. The Barre quarries are usually closed during
the winter months; however during the 1999 period the Company reopened them
approximately three weeks later than during the 1998 period.
Manufacturing gross profit decreased $2.0 million, or 22.7%, to $6.8 million
from $8.8 million for the 1998 period. The manufacturing gross profit percentage
decreased to 22.5% from 24.8% for the 1998 period. These decreases were
primarily attributable to poor results at the Elberton Manufacturing Operations
and the company's Barre monumental manufacturing operations. During the 1999
period, the Company took several actions to address this situation, including
the sale in May, 1999 of certain assets of the Elberton Manufacturing Operations
back to the original owners from whom it had purchased them in June, 1997. This
sale contributed to the subsequent decrease in manufacturing revenues and
therefore gross profit during the 1999 period.
Retailing gross profit increased $7.0 million, or 113.2%, to $13.2 million from
$6.2 million for the 1998 period. This increase was attributable to the 1998
Retail Acquisitions and 1999 Retail Acquisitions, most of which the Company did
not own during the 1998 period. The retailing gross profit percentage decreased
to 52.4% from 57.5% for the 1998 period. This decrease was due to the fact that
the 1998 Retail Acquisitions and 1999 Retail Acquisitions as a group have a
lower gross profit percentage historically than Keith, which accounted for the
majority of the
<PAGE> 16
Company's retailing revenue and gross profit for the 1998 period.
Selling, general, and administrative expenses ("SGA expenses") increased $9.0
million, or 64.3%, to $22.9 million from $13.9 million for the 1998 period. As a
percentage of net revenues, SGA expenses increased to 32.3% from 23.2% for the
1998 period. These increases were primarily attributable to SGA expenses of the
1998 Retail Acquisitions and the 1999 Retail Acquisitions and to expenditures on
marketing materials and programs to support the Company's branding strategy at
retail.
Interest expense increased $1.3 million, or 527.0%, to $1.5 million from
$244,000 for the 1998 period. This increase was caused by increased borrowing
under the Company's credit facilities to support its retail acquisition
strategy.
LIQUIDITY AND CAPITAL RESOURCES
The Company considers liquidity to be its ability 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.
For the nine months ended September 30, 1999, net cash provided by operating
activities was $5.1 million. This was primarily caused by an increase in
customer deposits and a slight decrease in inventory levels. Net cash used in
investing activities was $14 million. This was mostly due to acquisitions of
monument retailers during the period. Net cash provided by financing activities
was $9.8 million, most of which was provided by borrowings under the Company's
credit facilities.
The Company has credit facilities pursuant to a financing agreement with the CIT
Group/Business Credit ("CIT"). The agreement provides for an acquisition term
loan line of credit of $25 million and a revolving credit facility of another
$25 million. As of September 30, 1999 the revolving credit facility had $16.0
million outstanding and the term loan facility had $12 million outstanding.
Given the covenants contained in that agreement, the Company's effective
incremental credit availability as of that date was approximately $12 million.
The interest rate on the revolving facility as of such date was 7.25% based on a
formula of prime less .50%. The interest rate on the term loan as of such date
was 7.25% based on a formula of LIBOR plus 1.75%. As of September 30, 1999, the
Company also had $372,000 outstanding and $2.3 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 6.50% based on a formula of Canadian prime
plus .25%. The Company is in the process of negotiating a revised and expanded
credit facility with a group of lenders. The Company's primary need for capital
will be to finance acquisitions of monument retailers as part of its growth
strategy and to maintain and improve its existing manufacturing, quarrying and
retailing facilities. The Company has $3.0 million budgeted for capital
expenditures in 1999. The Company believes that the combination of cash flow
from operations, its existing credit facilities, and cash on hand will be
sufficient to fund its operations for the next twelve months.
<PAGE> 17
SEASONALITY
Historically, the Company's operations have experienced certain seasonal
patterns. Generally the Company's net sales have been 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
substantially complete. Other IT infrastructure equipment is generally Year 2000
compliant.
Non-IT systems (HVAC systems, machine controls, and other similar systems) have
been evaluated and should not be 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 material Year 2000 compliance issues. The
Company believes that any products currently 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.
<PAGE> 18
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.
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company has financial instruments that are subject to interest rate risk,
principally debt obligations under its credit facilities. Historically, the
Company has not experienced material gains or losses due to interest rate
changes. Based on the Company's current variable rate debt obligations, the
Company believes its exposure to interest rate risk is not material.
The Company is subject to foreign currency exchange rate risk primarily from the
operations of its Canadian subsidiary. Based on the size of this subsidiary and
the Company's corresponding exposure to changes in the Canadian/U.S. dollar
exchange rate, the Company does not consider its market exposure relating to
currency exchange to be material.
<PAGE> 19
Part II
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Number Exhibits
------ --------
27 Financial Data Schedule
(b) Reports Submitted on Form 8-K:
The Registrant did not file any reports on Form 8-K during the quarter
ended September 30, 1999.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
ROCK OF AGES CORPORATION
Dated: November 15, 1999 By: /s/ John L. Forney
------------------------------
John L. Forney
Vice President, Chief Financial
Officer and Treasurer
<PAGE> 20
Exhibit Index
- -------------
Exhibits
- --------
27 Financial Data Schedule
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