National Dentex (NADX) 10-Q 2006 Q1 Quarterly report

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20004

FORM 10-Q

(Mark One)

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

For the quarterly period ended March 31, 2006

OR

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

For the transition period from                    to                    .

Commission file number 000-23092

NATIONAL DENTEX CORPORATION

(Exact name of registrant as specified in its charter)

MASSACHUSETTS	04-2762050
(State or Other Jurisdiction of	(I.R.S. Employer Identification No.)
Incorporation or Organization)
526 Boston Post Road, Wayland, MA	01778
(Address of Principal Executive Offices)	(Zip Code)

(508) 358-4422
(Registrant’s Telephone No., 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 that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yesþ          Noo

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act (Check one).

Large accelerated filero Accelerated filerþ Non-accelerated filero

     Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yeso          Noþ

     As of May 2, 2006, 5,500,010 shares of the registrant’s Common Stock, par value $.01 per share, were outstanding.

NATIONAL DENTEX CORPORATION

FORM 10-Q

QUARTER ENDED MARCH 31, 2006

TABLE OF CONTENTS

	Page(s)
PART I. Financial Information
Item 1. Financial Statements:
Unaudited Condensed Consolidated Balance Sheets as of December 31, 2005 and March 31, 2006	3
Unaudited Condensed Consolidated Statements of Income for the three month periods ended March 31, 2005 and 2006	4
Unaudited Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2005 and 2006	5
Notes to Condensed Consolidated Financial Statements	6-14
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	15-19
Item 3. Quantitative and Qualitative Disclosures About Market Risk	20
Item 4. Controls and Procedures	20
PART II. Other Information
Item 1. Legal Proceedings	21
Item 1A. Risk Factors	21
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	21
Item 3. Defaults Upon Senior Securities	21
Item 4. Submission of Matters to a Vote of Security Holders	21
Item 5. Other Information	21
Item 6. Exhibits	21
Signatures	22
Exhibit Index	23
Ex-31.1 Section 302 Certification of CEO
Ex-31.2 Section 302 Certification of CFO
Ex-32.1 Section 906 Certification of CEO
Ex-32.2 Section 906 Certification of CFO

2

NATIONAL DENTEX CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)

	December 31,		March 31,
	2005		2006
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	401,251	$	2,418,802
Accounts receivable:
Trade, less allowance of $300,000 in 2005 and $251,000 in 2006		14,468,140		15,330,392
Other		595,481		754,590
Inventories		6,700,283		7,177,577
Prepaid expenses		3,127,157		2,440,843
Deferred tax asset		8,646		9,017
Property held for sale		508,596		—
Total current assets		25,809,554		28,131,221
PROPERTY, PLANT AND EQUIPMENT:
Land and buildings		8,531,337		8,530,593
Leasehold and building improvements		10,433,008		10,837,231
Laboratory equipment		15,331,829		15,721,411
Furniture and fixtures		6,170,476		6,287,875
		40,466,650		41,377,110
Less — Accumulated depreciation and amortization		16,854,004		17,543,588
Net property, plant and equipment		23,612,646		23,833,522
OTHER ASSETS:
Goodwill		48,242,149		48,321,993
Trade names		5,644,443		5,644,443
Customer relationships, net		5,718,864		5,534,832
Non-competition agreements, net		2,656,329		2,436,196
Other assets		5,435,025		5,339,562
Total other assets		67,696,810		67,277,026
Total assets	$	117,119,010	$	119,241,769
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt	$	2,840,621	$	3,314,058
Accounts payable		3,449,227		3,331,678
Accrued liabilities:
Payroll and employee benefits		5,505,811		5,196,454
Current portion of deferred acquisition liabilities		1,338,224		1,509,991
Other accrued expenses		1,549,703		2,319,732
Deferred tax liability, current		—		—
Total current liabilities		14,683,586		15,671,913
LONG-TERM LIABILITIES:
Long-term debt		15,860,133		15,149,978
Deferred compensation		2,956,417		3,056,117
Deferred acquisition liabilities		2,052,630		1,035,249
Deferred tax liability, non-current		5,492,163		5,435,479
Total long-term liabilities		26,361,343		24,676,823
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS’ EQUITY:
Preferred stock, $.01 par value Authorized — 500,000 shares None issued and outstanding		—		—
Common stock, $.01 par value Authorized — 8,000,000 shares Issued and Outstanding — 5,411,463 shares at December 31, 2005 and 5,460,463 shares at March 31, 2006		54,114		54,605
Paid-in capital		15,603,188		16,272,134
Retained earnings		60,416,779		62,566,294
Total stockholders’ equity		76,074,081		78,893,033
Total liabilities and stockholders’ equity	$	117,119,010	$	119,241,769

The accompanying notes are an integral part of these condensed consolidated financial statements.

3

NATIONAL DENTEX CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

	Three Months Ended
	March 31,		March 31,
	2005		2006
Net sales	$	31,946,345	$	36,788,847
Cost of goods sold		18,018,398		20,861,193
Gross profit		13,927,947		15,927,654
Selling, general and administrative expenses		10,764,095		11,967,009
Operating income		3,163,852		3,960,645
Other expense		127,636		210,630
Interest expense		71,668		288,639
Income before provision for income taxes		2,964,548		3,461,376
Provision for income taxes		1,185,819		1,311,861
Net income	$	1,778,729	$	2,149,515
Net income per share — basic	$	.34	$	.40
Net income per share — diluted	$	.32	$	.38
Weighted average shares outstanding — basic		5,272,453		5,429,903
Weighted average shares outstanding — diluted		5,556,769		5,727,342

The accompanying notes are an integral part of these condensed consolidated financial statements.

4

NATIONAL DENTEX CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

	For the Three Months Ended
	March 31,			March 31,
	2005			2006
Cash flows from operating activities:
Net income	$	1,778,729		$	2,149,515
Adjustments to reconcile net income to net cash provided by operating activities, net of effects of acquisitions:
Depreciation and amortization		877,326			1,106,083
Loss (gain) on disposal of property, plant and equipment		22,270			(393,937	)
Benefit for deferred income taxes		(83,573	)		(57,055	)
Provision for bad debts		29,464			2,284
Losses on write-down of inventories		—			58,739
Stock-based compensation expense		—			20,000
Changes in operating assets and liabilities, net of effects of acquisitions:
Increase in accounts receivable		(852,584	)		(1,023,645	)
Increase in inventories		(308,222	)		(536,033	)
Decrease in prepaid expenses		538,844			689,948
Decrease in other assets		218,765			11,135
Increase in accounts payable and accrued liabilities		2,246,396			442,822
Net cash provided by operating activities		4,467,415			2,469,856
Cash flows from investing activities:
Payment for acquisitions, net of cash acquired		(24,697,705	)		—
Payment of deferred purchase price		(141,357	)		(845,614	)
Premiums paid for life insurance policies		(167,488	)		(7,734	)
Additions to property, plant and equipment		(779,740	)		(921,710	)
Sales of property, plant and equipment		—			910,033
Net cash used in investing activities		(25,786,290	)		(865,025	)
Cash flows from financing activities:
Borrowings of revolving line of credit		3,055,052			—
Borrowings of long-term debt		18,152,257			—
Repayments of long-term debt		—			(236,718	)
Net proceeds from issuance of common stock		222,719			649,438
Net cash provided by financing activities		21,430,028			412,720
Net increase in cash and cash equivalents		111,153			2,017,551
Cash and cash equivalents at beginning of period		2,215,742			401,251
Cash and cash equivalents at end of period	$	2,326,895		$	2,418,802

The accompanying notes are an integral part of these condensed consolidated financial statements.

5

NATIONAL DENTEX CORPORATION

Notes to Condensed Consolidated Financial Statements

March 31, 2006
(Unaudited)

(1) Interim Financial Statements

     The accompanying unaudited financial statements include all adjustments (consisting only of normal recurring adjustments) that are, in the opinion of management, necessary for a fair statement of the results of operations for the periods presented. Interim results are not necessarily indicative of the results to be expected for a full year. The year-end condensed balance sheet data was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America.

     The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make 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 those estimates.

     Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted in accordance with the rules and regulations of the Securities and Exchange Commission (“SEC”). The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the Company’s condensed consolidated financial statements for the year ended December 31, 2005 as filed on March 16, 2006 with the SEC on Form 10-K.

(2) Acquisitions

     The Company’s acquisition strategy is to consolidate within the dental laboratory industry and use its financial and operational abilities to create a competitive advantage. Certain factors, such as the laboratory’s technical skills, reputation in the local marketplace and value as a going concern result in the recognition of goodwill.

     In connection with certain acquisition agreements, the Company has incurred certain contractual obligations associated with deferred purchase price payments, which are not contingent on any future actions or performance measures. These deferred payments are recorded as a liability upon consummation of the acquisition and are included in the acquisition purchase price. Also, certain acquisition agreements contain provisions which require additional purchase price payments, contingent upon certain specified events. These contingent payments are recorded as an increase to goodwill upon the resolution of the contingency. Acquired goodwill for acquisitions completed in 2005 is not tax deductible.

     In addition, in certain transactions, the Company executes non-compete agreements with the former owners and other key employees. The fair value of these agreements is recognized in the Company’s purchase accounting as an identifiable intangible asset and is amortized over the estimated economic life of the agreement. All acquisitions have been reflected in the accompanying condensed consolidated financial statements from the date of acquisition and have been accounted for as purchase business combinations in accordance with SFAS No. 141,“Business Combinations”.

     There were no acquisitions completed during the three months ended March 31, 2006. During the three months ended March 31, 2005, the Company acquired the following dental laboratory operations:

Acquisition	Form of Acquisition	Location	Period Acquired
Wornson-Polzin Dental Laboratory, Inc.	All Outstanding Capital Stock	Mankato, MN	February, 2005
Green Dental Laboratory, Inc	All Outstanding Capital Stock	Heber Springs, AR	March, 2005

     The following pro forma operating results of the Company assume these acquisitions had been made as of January 1, 2005. Such information includes adjustments to reflect additional depreciation, amortization and interest expense and is not necessarily indicative of what the results of operations would actually have been, or the results of operations to be expected in future periods.

	Three Months Ended
	March 31,		March 31,
	2005		2006
	(unaudited)
Net sales	$	35,173,000	$	36,789,000
Net income		2,105,000		2,149,000
Net income per share:
Basic	$	.40	$	.40
Diluted	$	.38	$	.38

6

Notes to Condensed Consolidated Financial Statements (Continued)

(3) Goodwill and Other Intangible Assets

     In July 2001, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 141,“Business Combinations”and SFAS No. 142,“Goodwill and Other Intangible Assets.”SFAS No. 141 addresses the initial recognition and measurement of goodwill and other intangible assets acquired in a business combination. SFAS No. 142 addresses the initial recognition and measurement of intangible assets acquired outside of a business combination, whether acquired individually or with a group of other assets, and the accounting and reporting for goodwill and other intangibles subsequent to their acquisition. These standards require that the purchase method of accounting be used for business combinations and eliminates the use of the pooling-of-interest method. Additionally, these standards require that goodwill and intangible assets with indefinite lives no longer be amortized. The Company was required to adopt SFAS No. 141 and SFAS No. 142 on a prospective basis as of July 1, 2001 and January 1, 2002, respectively. In accordance with the provisions of SFAS No. 142, the Company no longer amortizes goodwill.

     The changes in the carrying amount of goodwill for the three months ended March 31, 2006 are as follows:

	Three Months Ended
	March 31, 2006
Balance as of January 1	$	48,242,000
Adjustments related to the finalization of preliminary purchase estimates		80,000
Balance as of March 31	$	48,322,000

     The Company’s contingent laboratory purchase price liabilities as defined in the purchase agreements are tied to earnings performance, generally over a three year period, and are approximately $3,122,000. As the contingencies are resolved, the payments are recorded as goodwill.

     In connection with dental laboratory acquisitions, the Company has identified certain other intangible assets including trade names, customer relationships and non-competition agreements. The Company has applied the provisions of SFAS No. 141 and SFAS No. 142 as well as EITF No. 02-17“Recognition of Customer Relationship Intangible Assets Acquired in a Business Combination”(“EITF 02-17”) in its purchase price allocations.

Trade Names

     Trade names are valued as they are acquired using a quantification of the income generated based on the recognition afforded by the trade name in the marketplace, using the relief-from-royalty valuation approach. Company practice is to use existing and acquired trade names in perpetuity, therefore there is no legal limit to their life and consequently they have been treated as indefinite-lived intangibles. While these assets are not subject to amortization, they are tested for impairment at least on an annual basis in accordance with SFAS No. 142. The Company uses the relief-from-royalty valuation approach at each fiscal year end to determine the fair value of the asset. Trade name impairment charges generally result from a decline in forecasted revenue at specific laboratories in comparison to revenue forecasts used in previous valuation calculations. Impairment charges, when recognized, are a component of selling, general and administrative expense. There has been no trade name impairment charges recorded for the three month periods ended March 31, 2006 or 2005.

7

Notes to Condensed Consolidated Financial Statements (Continued)

Customer Relationships

     Acquired dental laboratories have customer relationships in place with dentists within their market areas. Based on the criteria of EITF 02-17, the Company recognizes customer relationship assets when established relationships exist with customers through contract or other contractual relationships such as purchase orders or sales orders. Customer relationships are valued based on an analysis of revenue and customer attrition data and amortized over their useful life. The amounts assigned to customer relationships are amortized on a straight-line basis over their useful lives. The Company has determined that the straight-line method is appropriate based on an analysis of customer attrition statistics.

	Three Months Ended
	March 31, 2006
Customer relationships, gross		6,663,000
Less: Accumulated amortization		(1,128,000	)
Customer relationships, net — end of period	$	5,535,000

     Amortization expense associated with customer relationships totaled approximately $184,000 for the three months ended March 31, 2006 and is recorded in operating expenses. Future amortization expense of the current customer relationship balance will be approximately:

For the remainder of fiscal 2006	$	495,000
2007		660,000
2008		660,000
2009		660,000
2010		660,000
2011		660,000
Thereafter		1,740,000
	$	5,535,000

Non-competition Agreements

     The Company has incurred certain deferred purchase costs relating to non-compete agreements with certain individuals, ranging over periods of 2 to 15 years. The amounts assigned to non-competition agreements are amortized on a straight-line basis over the estimated economic life of the agreement.

	Three Months Ended
	March 31, 2006
Non-competition agreements, gross		9,998,000
Less: Accumulated amortization		(7,562,000	)
Non-competition agreements, net	$	2,436,000

     Amortization expense associated with non-competition agreements totaled approximately $220,000 for the three months ended March 31, 2006 and is recorded in operating expenses.

     Future amortization expense of non-competition agreements will be approximately:

For the remainder of fiscal 2006	$	603,000
2007		429,000
2008		260,000
2009		238,000
2010		229,000
2011		191,000
Thereafter		486,000
	$	2,436,000

8

Notes to Condensed Consolidated Financial Statements (Continued)

(4) Earnings per Share

     In accordance with the disclosure requirements of SFAS Statement No. 128,“Earnings per Share,” basic earnings per share is computed by dividing net income by the weighted average number of shares outstanding and diluted earnings per share reflects the dilutive effect of stock options. The weighted average number of shares outstanding, the dilutive effects of outstanding stock options, and the shares under option plans that were anti-dilutive for the three months ended March 31, 2006 and 2005 are as follows:

	Three Months Ended
	March 31,
	2005		2006
Weighted average number of shares used in basic earnings per share calculation		5,272,453		5,429,903
Incremental shares under option plans		284,316		297,439
Weighed average number of shares used in diluted earnings per share calculation		5,556,769		5,727,342
Shares under option plans excluded in computation of diluted earnings per share due to anti-dilutive effects	None		None

(5) Stock-Based Compensation

     The Company adopted the provisions of Statement of Financial Accounting Standard No. 123 (Revised 2004) (“FAS 123R”),Share Based Paymentson January 1, 2006.FAS 123R requires the Company to measure and recognize in its consolidated statement of income the expense associated with all share-based payment awards made to employees and directors including stock option awards and awards granted under the terms of the Company’s Employee Stock Purchase Plan (“ESPP”). Stock compensation cost is recognized based on the estimated fair value over the employees’ or directors’ service period. In March 2005, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 107 (“SAB 107”) relating to FAS 123R. The Company considered the provisions of SAB 107 when it adopted FAS 123R. SAB 107 provides guidance in the area of valuation techniques, expected volatility and expected term calculations and disclosure requirements. The Company implemented FAS123R using the modified prospective approach. All stock options issued prior to January 1, 2006 were fully vested.

     Prior to January 1, 2006, the Company accounted for share-based payments under APB Opinion No. 25,Accounting for Stock Issued to Employees(“APB 25”). Under APB 25 compensation cost was not recognized for options granted because the exercise price of options granted was equal to the market value of the Company’s common stock on the grant date and the ESPP plan was deemed non-compensatory.

     As a result of the adoption of FAS 123R, the accompanying consolidated statement of income for the three months ended March 31, 2006 includes $20,000 of stock based compensation expense. Compensation cost is measured on the grant date of the option, which is the date the Company’s Board of Directors approves the granting of the option. Compensation cost on discounts associated with ESPP purchases is estimated on the date that shares are granted. To measure the fair value of stock option grants, the Company utilizes the Black-Scholes option valuation method. The Black-Scholes option valuation method considers the following factors when calculating fair value – the exercise price of the option, the stock price on the date of the grant, the expected term of the option, the expected volatility during the expected term of the option, the expected dividends to be paid and the risk free interest rate expected during the option’s term. The requisite service period for substantially all of the Company’s stock options is the explicit vesting period included in the terms of the stock option award. Accordingly, the Company will estimate compensation expense based on the number of options it believes will ultimately vest, which includes an estimate of the number of options expected to be forfeited. The estimated fair value of future stock option grants will be recognized on a straight line basis over the requisite service period of the award. The Company periodically reviews its estimate of forfeitures and revises the estimate as facts and circumstances warrant.

9

Notes to Condensed Consolidated Financial Statements (Continued)

     In April, 2001 the Company’s shareholders approved the 2001 Stock Plan (the “2001 Plan”), under which awards may be granted to key employees, officers and directors in the form of stock options. The Company’s Board of Directors approved an amendment to the 2001 Plan on January 17, 2006 to allow for the issuance of restricted stock and restricted stock units, subject to the approval of the Company’s shareholders at its annual meeting of stockholders scheduled to be held on May 16, 2006. The maximum number of shares or units that may be issued under the 2001 Plan is 825,000. At March 31, 2006, options to purchase a total of 338,800 shares were outstanding and there were 400,450 shares available for grant under the 2001 Plan. The Company also has the 1992 Long Term Incentive Plan (the “LTIP”) under which similar stock options also were granted. At March 31, 2006, options to purchase a total of 328,886 shares were outstanding under the LTIP. No further awards will be made under the LTIP. Stock option awards granted under the 2001 Plan and the LTIP generally vest ratably over three years on the anniversary date of the grants and are exercisable generally over a period of ten years. No award grants were authorized during the three months ended March 31, 2006.

     In 1992, shareholders approved the establishment of the ESPP commencing April 1, 1992. Upon enrollment, employees purchase shares of the Company’s common stock at the end of each plan year, through payroll deductions, at a discount of 15% of the lower of the market price on the date of grant or the date of exercise, as quoted on NASDAQ.

     A summary of stock option activity and related information for the three months ended March 31, 2006 and year ended December 31, 2005 is as follows.

	LTIP Plan							2001 Plan
				Weighted-		Weighted-					Weighted-		Weighted-
	Shares			Average		Average		Shares			Average		Average
	underlying			Exercise		Fair Value		Underlying			Exercise		Fair Value
	Options			Price		of Grants		Options			Price		of Grants
Outstanding December 31, 2004		449,069		$	11.95				407,350		$	14.55
Granted		—			—		—		—			—		—
Exercised		(80,917	)		11.21		—		(41,425	)		15.04		—
Forfeited		(8,971	)		10.97		—		(7,000	)		13.56		—
Outstanding December 31, 2005		359,181			12.14		—		358,925			14.52		—
Granted		—			—		—		—			—		—
Exercised		(29,875	)		12.52		—		(19,125	)		14.24		—
Forfeited		(420	)		11.67		—		(1,000	)		13.37		—
Outstanding March 31, 2006		328,886		$	12.11		—		338,800		$	14.54		—
Exercisable at end of period:		328,886		$	12.11		—		338,800		$	14.54		—

     The total aggregate intrinsic value of awards outstanding as of March 31, 2006 is $6,603,416. Aggregate intrinsic value is calculated by subtracting the exercise price of the option from the closing price of the Company’s common stock on March 31, 2006 multiplied by the number of shares per each option. In addition, the weighted average remaining contractual life of options outstanding as of March 31, 2006 is 4.7 years. The total intrinsic value of options exercised during the three months ended March 31, 2006 was $491,914.

10

Notes to Condensed Consolidated Financial Statements (Continued)

     The following table summarizes the significant assumptions used to estimate stock compensation costs for the three month period ended March 31, 2006.

Weighted Average	Risk-Free	Expected		Expected Holding	Expected Forfeiture	Expected
Grant Date Fair Value	Interest Rate	Volatility		Period	Rate	Dividends
$4.41	1.61%	26.77%	1.0 Year		5.70%	None

     The weighted average grant date fair value was calculated under the Black-Scholes option-pricing model. The risk free interest rate is based on the yield of U.S. Treasury securities that correspond to the expected holding period of the options. The Company reviewed the historic volatility of its common stock, and the implied volatility for at-the-money options to purchase shares of the Company’s common stock. Based on this data, the Company will use the 1-year historic volatility of the Company’s common stock and the average implied volatility of at-the-money options. The 1-year historical volatility period was selected since that period corresponds with the expected holding period. The expected forfeiture rate was determined based on the historical ESPP forfeiture data. The dividend yield was based on the Company’s expected dividend rate.

     Prior to adopting FAS123R, the Company had disclosed the pro forma effects of stock-based compensation in accordance with FAS 148“Accounting for Stock-Based Compensation—Transition and Disclosure—an amendment of FASB Statement No. 123”.The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of FASB Statement No. 123,Accounting for Stock-Based Compensation,to stock-based employee compensation during the three months ended March 31, 2005, as required by FAS 148.

Three Months Ended March 31, 2005

Net income, as reported:	$	1,778,729
Add: Stock-based employee compensation expense included in reported net income		—
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects		19,352
Pro forma net income	$	1,759,377
Earnings per share: As reported, basic	$	.34
Pro forma, basic		.33
As reported, diluted		.32
Pro forma, diluted		.32

     There were no options granted during the three months ended March 31, 2005. The following table summarizes the significant assumptions used to estimate stock compensation using the Black-Scholes option-pricing model costs for the three month period ended March 31, 2005.

Weighted Average	Risk-Free	Expected	Expected Holding	Expected
Grant Date Fair Value	Interest Rate	Volatility	Period	Dividends
$4.41	1.61%	26.77%	1.0 Year	None

11

Notes to Condensed Consolidated Financial Statements (Continued)

(6) Inventories

     Inventories consist of the following:

	December 31, 2005		March 31, 2006
Raw Materials	$	5,482,280	$	5,564,943
Work in Process		995,111		1,446,941
Finished Goods		222,892		165,693
	$	6,700,283	$	7,177,577

     Inventories are stated at the lower of cost (first-in, first-out) or market. Work in process represents an estimate of the value of specific orders in production yet incomplete at period end. Finished goods consist of completed orders that were shipped to customers immediately subsequent to period end.

(7) Lines of Credit and Term Loan Facility

     The Company executed a financing agreement dated June 30, 2004 (the “Agreement”) with Fleet National Bank, now known as Bank of America N.A. (the “Bank”). The Agreement included a revolving line of credit of $5,000,000 and a revolving acquisition line of credit of $20,000,000. The interest rate on both revolving lines of credit was the prime rate or, at the Company’s option, the London Interbank Offered Rate (“LIBOR”) or a cost of funds rate plus a range of .75% to 1.5% depending on the ratio of total liabilities to tangible net worth. Both revolving lines of credit were to terminate on June 30, 2007. An unused facility fee of one eighth of 1% per annum was payable on the unused amount of the first revolving line of credit. A facility fee of $10,000 per year was required on the acquisition line of credit.

     On August 9, 2005 the Agreement was superseded by an Amended and Restated Agreement (the “Amended Agreement”) with the Bank that added a five year credit facility in the form of a term loan in the principal amount of $20,000,000. Amounts previously borrowed under the revolving acquisition line of credit were repaid under the term loan facility, creating $20,000,000 of availability under the acquisition line of credit. Additionally, certain terms and conditions of the original Agreement were amended. The interest rate on both revolving lines of credit and the term loan is now the prime rate or, at the Company’s option, LIBOR, a cost of funds rate or the Bank’s fixed rate plus a range of 1.25% to 2.25%, depending on the ratio of consolidated funded debt to consolidated “EBITDA”, as defined in the Amended Agreement. The Amended Agreement requires monthly payments of principal, based on a seven year amortization schedule, with a final payment due on the fifth anniversary of the Amended Agreement. The Amended Agreement requires compliance with certain covenants, including the maintenance of specified net worth and other financial ratios. As of March 31, 2006, $5,000,000 was available under the first line of credit and $20,000,000 was available under the acquisition line of credit.

	March 31, 2006
Total long-term debt	$	18,464,000
Less: Current maturities		3,314,000
Long-term debt, less current portion	$	15,150,000

     The table below reflects the expected repayment terms associated with this new term loan facility at March 31, 2006. The interest rate associated with the Company’s current borrowings as of March 31, 2006 is 6.39%.

	Principal Due
For the remainder of fiscal 2006	$	2,604,000
Fiscal 2007		2,841,000
Fiscal 2008		2,841,000
Fiscal 2009		2,841,000
Fiscal 2010		7,337,000
Total	$	18,464,000

12

Notes to Condensed Consolidated Financial Statements (Continued)

(8) Segment Information

     The Company follows Statement of Financial Accounting Standards No. 131 (“SFAS 131”),“Disclosures about Segments of an Enterprise and Related Information”. SFAS 131 establishes standards for disclosing information about reportable segments in financial statements. Laboratory operating income includes the direct profits generated by laboratories owned by the Company and excludes general and administrative expenses of the Company’s corporate location and amortization expenses associated with the Company’s intangible assets and interest expense.

     In March of 2005, the Company acquired Green Dental Laboratories, Inc. of Heber Springs, Arkansas. Green is now the Company’s largest laboratory with expected sales in excess of $16,000,000 per year. In accordance with SFAS 131, the Company identified Green as a separate operating segment as it met the quantitative thresholds of SFAS 131. As a result, the Company has two reportable segments. The accounting policies of this segment are consistent with those described for the consolidated financial statements in the summary of significant accounting policies.

     The following table sets forth information about the Company’s operating segments for the three months ended March 31, 2005 and the three months ended March 31, 2006. The results for Green include only one month in 2005 compared against three months in 2006.

	Three Months Ended		Three Months Ended
	March 31, 2005		March 31, 2006
Revenue:
NDX Laboratories	$	30,351,928	$	32,091,063
Green Dental Laboratory		1,594,417		4,722,204
Subtotal		31,946,345		36,813,267
Inter-segment Revenues:
Green Dental Laboratory		—		24,420
Net Sales	$	31,946,345	$	36,788,847
Laboratory Operating Income:
NDX Laboratories	$	5,437,836	$	5,304,055
Green Dental Laboratory		484,693		1,225,088
	$	5,922,529	$	6,529,143
Total Assets:
NDX Laboratories	$	79,311,950	$	83,667,785
Green Dental Laboratory		28,289,989		26,922,602
Corporate		6,600,745		8,651,382
	$	114,202,684	$	119,241,769
Capital Expenditures:
NDX Laboratories	$	732,039	$	835,176
Green Dental Laboratory		11,708		13,530
Corporate		35,993		73,004
	$	779,740	$	921,710
Depreciation & Amortization on Property, Plant & Equipment:
NDX Laboratories	$	375,630	$	487,400
Green Dental Laboratory		15,773		65,510
Corporate		104,826		140,423
	$	496,229	$	693,333

13

Notes to Condensed Consolidated Financial Statements (Continued)

Reconciliation of Laboratory Operating Income with reported Consolidated Operating Income:

	Three Months Ended		Three Months Ended
	March 31, 2005		March 31, 2006
Laboratory Operating Income	$	5,922,529	$	6,529,143
Less:
Corporate Selling, General and Administrative Expenses		2,505,216		2,366,378
Amortization Expense – Intangible Assets		381,097		412,750
Add:
Other Expense		127,636		210,630
Consolidated Operating Income	$	3,163,852	$	3,960,645

(9) Legal Proceedings

     The Company is involved from time to time in litigation incidental to its business. Management believes that the outcome of current litigation will not have a material adverse effect upon the operations or financial condition of the Company and will not disrupt the normal operations of the Company.

14

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Forward Looking Statements

The following discussion should be read in conjunction with the Consolidated Financial Statements
and the related notes that appear elsewhere in this document.

     Certain statements in this Quarterly Report, particularly statements contained in this Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. The words “anticipate”, “believe”, “estimate”, “expect”, “plan”, “intend” and other similar expressions are intended to identify these forward-looking statements, but are not the exclusive means of identifying them. Forward-looking statements included in this Annual Report or hereafter included in other publicly available documents filed with the Securities and Exchange Commission (“SEC”), reports to our stockholders and other publicly available statements issued or released by us involve known and unknown risks, uncertainties, and other factors which could cause our actual results, performance (financial or operating) or achievements to differ from the future results, performance (financial or operating) or achievements expressed or implied by such forward looking statements. Such future results are based upon our best estimates based upon current conditions and the most recent results of operations. Various risks, uncertainties and contingencies could cause our actual results, performance or achievements to differ materially from those expressed in, or implied by, the forward-looking statements contained in this Quarterly Report. These include, but are not limited to, those described under the heading “Factors That May Affect Future Results”, as well as under Part II, Item 1A, “Risk Factors” of this Quarterly Report onForm 10-Q and under Item 1A of our most recently filed Annual Report onForm 10-K. We do not intend to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise.

Overview

     We own and operate 45 dental laboratories located in 30 states, serving an active customer base of over 22,000 dentists. Our business consists of the design, fabrication, marketing and sale of custom dental prosthetic appliances for dentists located primarily in the domestic marketplace.

     Our products are grouped into the following three main categories:

     Restorative Products.Restorative products that our dental laboratories sell consist primarily of crowns and bridges. A crown replaces the part of a tooth that is visible, and is usually made of gold or porcelain. A bridge is a restoration of one or more missing teeth that is permanently attached to the natural teeth or roots. In addition to the traditional crown, we also make porcelain jackets, which are crowns constructed entirely of porcelain; onlays, which are partial crowns which do not cover all of the visible tooth; and precision crowns, which are restorations designed to receive and connect a removable partial denture. We also make inlays, which are restorations made to fit a prepared tooth cavity and then cemented into place.

     Reconstructive Products.Reconstructive products sold by our dental laboratories consist primarily of partial dentures and full dentures. Partial dentures are removable dental prostheses that replace missing teeth and associated structures. Full dentures are dental prostheses that substitute for the total loss of teeth and associated structures. We also sell precision attachments, which connect a crown and an artificial prosthesis, and implants, which are fixtures anchored securely in the bone of the mouth to which a crown, partial or full denture is secured by means of screws or clips.

     Cosmetic Products.Cosmetic products sold by our dental laboratories consist primarily of porcelain veneers and ceramic crowns. Porcelain veneers are thin coverings of porcelain cemented to the front of a tooth to enhance personal appearance. Ceramic crowns are crowns made from ceramic materials that most closely replicate natural teeth. We also sell composite inlays and onlays, which replace silver fillings for a more natural appearance, and orthodontic appliances, which are products fabricated to move existing teeth to enhance function and appearance.

     Internal sales growth was relatively flat from 2001 to 2004, when we made note that the economic climate appeared to be impacting the dental laboratory industry. We believe that over the past several years many patients and dentists have postponed optimal treatment plans, such as crowns, and have been pursuing less expensive alternatives such as amalgam fillings, for which we recognize no revenue. The general economic conditions affecting our operations in the dental laboratory industry have remained less than favorable as consumers continue this conservative practice. In 2005, we experienced internal sales growth of 3.7%, which included selling price increases during the period ranging from 3.5% to 10.0% at various laboratories and on various product lines and therefore indicates a decline in unit volume. In the first quarter of 2006, internal sales growth was 5.0%, including the effect of sales growth driven by increases in the underlying costs of precious metals. We believe that the low cost segment for United States based dental laboratories has stopped growing and has begun to shrink as competition from offshore laboratories, primarily located in China, makes inroads into the domestic marketplace. In addition, we face growing competition from technology based solutions that allow dentists to fabricate their own restorations without the use of a dental lab. Both of these trends appear to be impacting industry growth.

15

     The main components of costs for us are labor and related employee benefits. Over the last few years, competition for labor resources as well as increases in medical insurance premiums has driven these costs higher. We continually review and adjust staffing levels as appropriate at each of our locations while recognizing the need to maintain an available and properly trained workforce. In 2004 we experienced cost pressure resulting from the implementation expenditures necessary to comply with Section 404 of the Sarbanes Oxley Act. The impact of these various Section 404 implementation costs on earnings for fiscal year 2004 was approximately $1,027,000, or approximately $0.11 per diluted share, net of taxes, with most of that occurring in the fourth quarter. For fiscal 2005, the cost of maintaining our compliance with Section 404 was approximately $720,000,or approximately $0.08 per diluted share, net of taxes. We believe that these compliance costs will decrease somewhat during 2006, although significant ongoing expenditures will be required to maintain our efforts within the internal controls framework required by the Sarbanes-Oxley Act.

     We have also continued to pursue an acquisition strategy, which has played an important role in helping us increase sales from $75,680,000 in 2000 to $135,843,000 in 2005. We recognize acquired customer relationships and trade names as intangible assets which require the recognition of amortization expense (for the customer relationships) and impairment testing (for the trade names). On a prospective basis, amortization expense will increase based upon our acquisition activity. The amount recognized for customer relationships and subsequent amortization expense will be dependent upon the expected profitability and customer retention characteristics of the acquired businesses.

     Effective March 1, 2005 we completed our largest acquisition to date, Green Dental Laboratories, Inc (“Green”). Green is notable for several reasons. We believe that the synergies created by the addition of this laboratory will create value for the organization as a whole. Green is treated as a separate operating segment for reporting purposes and will retain a separate company identity as a wholly owned subsidiary. In order to finance the purchase of Green, we borrowed approximately $20,000,000 in long-term debt and as a result, are more highly leveraged than we were prior to the Green acquisition. Interest expense has therefore become a more significant component of our pre-tax earnings. Interest expense in for the quarter ended March 31, 2006 was $289,000 compared to $72,000 for the quarter ended March 31, 2005.

     The earnings performance of Green and other recent acquisitions have allowed us to increase our sales and gross margin significantly. For the year ended December 31, 2005, net sales increased $24,090,000 or 21.6% with $19,980,000 attributable to recent acquisitions, measured by business at dental laboratories owned less than one year; gross profit increased $12,662,000, or 28.3%, with $10,090,000 attributable to acquisitions; and approximately 17.9% of the growth in sales and 22.6% of the growth in gross profit was attributable to acquisitions. During the quarter ended March 31, 2006, net sales increased $4,843,000 with $3,448,000 attributable to acquired laboratories with the remainder primarily attributable to price increases. Green’s results for 2006 included a full quarter of sales compared to one month in 2005.

Liquidity and Capital Resources

     Our working capital increased $1,333,000 from $11,126,000 at December 31, 2005 to $12,459,000 at March 31, 2006, primarily as a result of $906,000 in cash proceeds from the sale of our former facility in Houston, Texas. Cash and cash equivalents increased $2,018,000 from $401,000 at December 31, 2005 to $2,419,000 at March 31, 2006. Operating activities provided $2,450,000 in cash flow for the three months ended March 31, 2006 compared to $4,467,000 during the three months ended March, 2005, a decrease of $2,017,000. This decrease was primarily attributable to decreases in accounts payable and accrued liabilities of $1,803,000, primarily due to timing differences and increased net income before depreciation and amortization of $600,000 offset by a gain of $397,000 from the sale of our former Houston, Texas facility.

     Cash outflows related to dental laboratory acquisitions, including deferred purchase price payments associated with prior period acquisitions, totaled $846,000 for the three months ended March 31, 2006 compared to $24,839,000 for the three months ended March 31, 2005, primarily due to the acquisition of Green Dental Laboratories, Inc on March 1, 2005.

     We executed a financing agreement dated June 30, 2004 (the “Agreement”) with Fleet National Bank, now known as Bank of America, N.A. (the “Bank”). The Agreement included a revolving line of credit of $5,000,000 and a revolving acquisition line of credit of $20,000,000. The interest rate on both revolving lines of credit was the prime rate or, at our option, the London Interbank Offered Rate (“LIBOR”), or a cost of funds rate plus a range of .75% to 1.5% depending on the ratio of total liabilities to tangible net worth. Both revolving lines of credit were to terminate on June 30, 2007. An unused facility fee of one eighth of 1% per annum was payable on the unused amount of the first revolving line of credit. A facility fee of $10,000 per year was required on the acquisition line of credit.

     On August 9, 2005 the Agreement was superseded by an Amended and Restated Agreement (the “Amended Agreement”) with the Bank that added a five year credit facility in the form of a term loan in the principal amount of $20,000,000. Amounts previously borrowed under the revolving acquisition line of credit were repaid under the term loan facility, creating $20,000,000 of availability under the acquisition line of credit. Additionally, certain terms and conditions of the original Agreement were amended. The interest rate on both revolving lines of credit and the term loan is now the prime rate or, at our option, LIBOR, a cost of funds rate, or the

16

Bank’s fixed rate plus a range of 1.25% to 2.25% depending on the ratio of consolidated funded debt to consolidated “EBITDA”, as defined in the Amended Agreement. The Amended Agreement requires monthly payments of principal on the term loan, based on a seven year amortization schedule, with a final payment due on the fifth anniversary of the Amended Agreement. The Amended Agreement requires compliance with certain covenants, including the maintenance of specified net worth and other financial ratios. As of March 31, 2006, the full $5,000,000 was available under the first line of credit and the full $20,000,000 was available under the acquisition line of credit.

	March 31, 2006
Total long-term debt	$	18,464,000
Less: Current maturities		3,314,000
Long-term debt, less current portion	$	15,150,000

     The table below reflects the expected repayment terms associated with the term loan facility at March 31, 2006. The interest rate associated with our current borrowings as of March 31, 2006 is 6.39%.

	Principal Due
For the remainder of fiscal 2006	$	2,604,000
Fiscal 2007		2,841,000
Fiscal 2008		2,841,000
Fiscal 2009		2,841,000
Fiscal 2010		7,337,000
Total	$	18,464,000

     We believe that cash flow from operations and available financing will be sufficient to meet contemplated operating and capital requirements and deferred payments associated with prior acquisitions for the foreseeable future.

Commitments and Contingencies

The following table represents a list of our contractual obligations and commitments as of March 31, 2006:

	Payments Due By Period
			Less Than						Greater Than
	Total		1 Year		1 – 3 Years		4 – 5 Years		5 Years
Term Loan Facility	$	18,464,000	$	3,314,000	$	8,522,000	$	6,628,000		—
Interest Expense		3,058,000		1,006,000		1,932,000		120,000		—
Operating Leases:
Real Estate		14,294,000		2,634,000		4,196,000		3,026,000		4,438,000
Vehicles		1,021,000		657,000		360,000		4,000		—
Equipment		137,000		62,000		65,000		10,000		—
Laboratory Purchase Obligations		2,545,000		1,510,000		1,035,000		—		—
Contingent Laboratory Purchase Price		3,122,000		2,305,000		817,000		—		—
Total	$	42,641,000	$	11,488,000	$	16,927,000	$	9,788,000	$	4,438,000

     In August, 2005 we converted borrowings on the acquisition line of credit to our new term loan facility. Bank borrowings on the term loan facility, net of the current portion of long-term debt are classified as long-term debt on the balance sheet. Interest expense related to the term loan facility, which are at variable rates, has been projected using the interest rate associated with current borrowings.

     We are committed under various non-cancelable operating lease agreements covering office space and dental laboratory facilities, vehicles and certain equipment. Certain of these leases also require us to pay maintenance, repairs, insurance and related taxes.

     Laboratory purchase obligations totaling $2,545,000, classified as deferred acquisition costs, are presented in the liability section of the balance sheet. These obligations, including deferred obligations associated with non-competition agreements, represent purchase price commitments arising from dental laboratory acquisitions that are payable, irrespective of the acquired laboratory’s earnings performance. Contingent laboratory purchase price includes amounts subject to acquisition agreements that are tied to laboratory earnings performance, as defined within the acquisition agreements, generally over a three year period. As payments become determinable, they are recorded as goodwill.

17

     As sponsor of the National Dentex Corporation Dollars Plus Plan, (the “Plan”), a qualified plan under Section 401(a) of the Internal Revenue Code, we filed a retroactive plan amendment under the Internal Revenue Service’s Voluntary Correction Program to clarify the definition of compensation in the Plan. Based on our consultation with our ERISA counsel, we believe this issue will be favorably resolved without requiring additional employer contributions or jeopardizing the tax-qualified status of the Plan.

Results of Operations

     Our results are required to be reported within two operating segments, NDX Laboratories and Green. The following table sets forth for the periods indicated the percentage of net sales represented by certain items in our condensed consolidated financial statements:

	Three Months Ended March 31, 2005							Three Months Ended March 31, 2006
	NDX Laboratories		Green Dental		Consolidated			NDX Laboratories		Green Dental		Consolidated
Net sales		100.0		100.0		100.0			100.0		100.0		100.0
Cost of goods sold		56.7		51.1		56.4			57.5		51.5		56.7
Gross profit		43.3		48.9		43.6			42.5		48.5		43.3
Selling, general and administrative expenses		25.4		18.5		24.7			26.0		22.6		25.0
Laboratory Operating Income		17.9		30.4		18.9			16.5		25.9		18.3
Add:
Other expense						(0.4	)						(0.6	)
Less:
Corporate Selling General & Administrative Expenses						7.8							6.4
Amortization Expense						1.2							1.1
Interest expense						0.2							0.8
Income before provision for income taxes						9.3							9.4
Provision for income taxes						3.7							3.6
Net income						5.6							5.8

Three Months Ended March 31, 2006 Compared with Three Months Ended March 31, 2005

Net Sales

     For the three months ended March 31, 2006, net sales increased $4,843,000 or 15.2% from the prior year quarter. Net sales increased by approximately $3,245,000 as a result of acquisitions, measured by business at dental laboratories owned less than one year, including $2,984,000 attributable to Green for the period of January 1, 2006 to February 28, 2006. Net sales increased approximately $1,598,000, or 5.0% at dental laboratories owned for more than one year during the quarter ended March 31, 2006 and the comparable quarter ended March 31, 2005, primarily as a result of price increases.

Cost of Goods Sold

     Our cost of goods sold increased by $2,843,000 or 13.6% in the quarter ended March 31, 2006 over the year-ago quarter. As a percentage of sales, cost of goods sold increased from 56.4% to 56.7%. The increase, primarily attributable to the NDX Laboratories segment due to product mix variables, was the result of increases in the cost of precious metals and increases in outsourced manufacturing costs. The cost of raw materials as a percentage of sales increased from 12.3% in the first quarter of 2005 to 13.4% in the first quarter of 2006. The average cost of precious metals used as components of many dental alloys, including gold and palladium, increased approximately 25% for gold and 15% for palladium, over average costs in the quarter ended March 31, 2005. Although we are able to pass most precious metal cost increases on to our customers, prolonged higher metal costs will continue to have a negative impact on gross profit percentages.

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     Green produced a gross profit of 48.5%, compared to a gross profit of 42.5% for the NDX Laboratories. Green’s scale of operations within a single location provides efficiencies in overhead costs and greater labor productivity, offset by higher materials costs due to product mix variables. Overall, labor productivity in the first quarter of 2006 improved over the first quarter of 2005. As a percentage of sales, production labor and related benefits declined from 35.8% in 2005 to 34.2% in 2006. Green’s labor costs of 29.2% of sales for the quarter lowered the overall percentage and the portion attributable to NDX Laboratories declined to 34.9% of sales for the quarter.

Selling, General and Administrative Expenses

     Operating expenses, which consist of selling, delivery and administrative expenses both at the laboratory and corporate level, increased by $1,203,000 or 11.2% compared to the first quarter of 2005. Operating expenses decreased as a percentage of net sales from 33.7% as a percentage of sales in the first quarter of 2005 to 32.5% in 2006. As a percentage of sales, delivery expenses increased from 7.7% in the first quarter of 2005 to 8.6% in the first quarter of 2006, due to rising fuel costs. Selling expenses increased from 3.8% of sales in the first quarter of 2005 to 4.5% in the first quarter of 2006 partially attributable to a full quarter of operations in 2006 at Green Dental. Green operated with higher overall selling expenses in the first quarter of 2006 of 7.4% of sales compared to 4.1% of sales for NDX Laboratories. Green operates with higher selling costs as a result of differing marketing strategies and resource commitments in comparison to NDX Laboratories. Administrative expenses decreased from 9.4% of sales in the first quarter of 2005 to 8.9% in the first quarter of 2006 and laboratory incentive compensation decreased as a result of decreased earnings performance at certain laboratories.

     The net increase of $1,203,000 was primarily attributable to the following items:

• Additional operating and amortization expense associated with recent acquisitions — $767,000;

• Increases in salaries and benefits at the corporate and lab level, in part due to the addition of financial and management staff — $230,000;

• Increases in consulting expenses and professional fees, including audit and compliance costs — $153,000;

• Increases in delivery costs, including additional salaries, cost increases related to higher fuel prices — $475,000.

• Decreases in laboratory incentive compensation as a result of laboratory profit performance — $214,000;

• The gain from the sale of our former laboratory facility in Houston, Texas — $397,000;

Operating Income

     As a result of the factors discussed above, our operating income increased by $797,000 to $3,961,000 for the quarter ended March 31, 2006 from $3,164,000 for the quarter ended March 31, 2005. As a percentage of net sales, operating income increased from 9.9% in the first quarter of 2005 to 10.8% in the first quarter of 2006.

Interest Expense

     Net interest increased $217,000 from $72,000 in the first quarter of 2005 to $289,000 in the first quarter of 2006, primarily as a result of bank borrowings to fund the acquisition of Green and rising interest rates.

Provision for Income Taxes

     The provision for income taxes increased $126,000 from $1,186,000 in the first quarter of 2005 to $1,312,000 in the first quarter of 2006. The 40.0% effective tax rate for the first quarter of 2005 decreased to 37.9% for the first quarter of 2006. The decrease in effective tax rate for 2006 was due in part to recognition of lower federal tax expense resulting from the domestic manufacturing tax credit provisions of the American Jobs Creation Act of 2004.

Net Income

     As a result of all of the factors discussed above, net income increased to $2,150,000 or $.38 per share on a diluted basis in the first quarter of 2006 from $1,779,000 or $.32 per share on a diluted basis in the first quarter of 2005.

19

Factors That May Affect Future Results

     Various risks, uncertainties and contingencies could cause our actual results, performance or achievements to differ materially from those expressed in, or implied by, statements contained in this Quarterly Report on Form 10-Q, including, but not limited to those described in Part II, Item 1A, “Risk Factors” of this Quarterly Report and in Item 1A, “Risk Factors” in our most recently filed Annual Report on Form 10-K.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

     Our market risk exposure includes potential price volatility of commodities we use in our manufacturing processes. We purchase dental alloys that contain gold, palladium and other precious metals. We have not participated in hedging transactions. We have relied on pricing practices that attempt to pass increased costs on to the customer, in conjunction with materials substitution strategies.

     At March 31, 2006, we had variable rate debt of $18,464,000. Based on this amount, the earnings and cash flows impact for the next year resulting from a one percentage point increase in interest rates would be approximately $115,000, net of tax, holding other variables constant.

Item 4. Controls and Procedures

(a)Evaluation of Disclosure Controls and Procedures.

     We carried out an evaluation, with the participation of our principal executive officer and principal financial officer, of the effectiveness of our disclosure controls and procedures as of March 31, 2006. In designing and evaluating our disclosure controls and procedures, our management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives, and our management necessarily applied its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on this evaluation, our principal executive officer and principal financial officer concluded that, as of March 31, 2006, our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e), were effective to ensure that information required to be disclosed by us in the reports that we file or submit to the Securities and Exchange Commission’s rules and forms and such information is accumulated and communicated to management, including the CEO and CFO, to allow timely decisions regarding required disclosure.

(b)Changes in Internal Controls.

     No change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the fiscal quarter ended March 31, 2006 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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PART II. OTHER INFORMATION

Item 1. Legal Proceedings:

We are involved from time to time in litigation incidental to our business. Our management believes that the outcome of current litigation will not have a material adverse effect upon our operations or financial condition and will not disrupt our normal operations.

Item 1A. Risk Factors:

There have been no material changes to the factors disclosed in Item 1A, “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2005, as filed with the SEC on March 16, 2006.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds:

We did not repurchase any of our equity securities during the fiscal quarter ended March 31, 2006 or engage in any transactions during such period reportable pursuant to Item 703 of Regulation S-K.

Item 3. Defaults upon Senior Securities:

Not Applicable

Item 4. Submission of Matters to a Vote of Security Holders:

Not Applicable

Item 5. Other Information:

On January 11, 2006, National Dentex increased the annual base salaries for fiscal 2006 of four of its five “named executive officers” (as defined under applicable SEC rules and regulations) in connection with its customary, year-end review process. The annual base salary of Donald E. Merz (Senior Vice President) was increased by $15,000 to $200,000 and that of Richard F. Becker, Jr. (Executive Vice President, Treasurer, and Chief Financial Officer) was increased by $20,000 to $220,000. The annual base salary of Arthur B. Champagne (Vice President) was increased by $15,000 to $185,000 and that of Richard G. Mariacher (Vice President Technical Services) was increased by $10,000 to $135,000.

Item 6. Exhibits:

The exhibits listed in the Exhibit Index immediately preceding the exhibits are filed as part of this Quarterly Report of Form 10-Q.

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SIGNATURES

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, thereunto duly authorized.

	NATIONAL DENTEX CORPORATION Registrant
May 10, 2006	By:	/s/ DAVID L. BROWN
	David L. Brown
	President, CEO and Director
	(Principal Executive Officer)
May 10, 2006	By:	/s/ RICHARD F. BECKER, JR.
	Richard F. Becker, Jr.
	Executive Vice President, Treasurer and Chief Financial Officer
	(Principal Financial Officer)

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Exhibit Index

Exhibit
No.	Description
31.1	Certification Pursuant to Rules 13a-14(a) and 15d-14(a) of the Securities Exchange Act, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act (Chief Executive Officer).
31.2	Certification Pursuant to Rules 13a-14(a) and 15d-14(a) of the Securities Exchange Act, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act (Chief Financial Officer).
32.1	Certification pursuant to 18 U.S.C. Section 1350 (Chief Executive Officer).
32.2	Certification pursuant to 18 U.S.C. Section 1350 (Chief Financial Officer).

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