National Dentex (NADX) 10-Q 2006 Q3 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 September 30, 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 November 2, 2006, 5,508,966 shares of the registrant’s Common Stock, par value $.01 per share, were outstanding.

NATIONAL DENTEX CORPORATION

FORM 10-Q

QUARTER ENDED SEPTEMBER 30, 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 September 30, 2006	3
Unaudited Condensed Consolidated Statements of Income for the three and nine month periods ended September 30, 2005 and 2006	4
Unaudited Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 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	15-23
Item 3. Quantitative and Qualitative Disclosures About Market Risk	23
Item 4. Controls and Procedures	23
PART II. Other Information
Item 1. Legal Proceedings	24
Item 1A. Risk Factors	24
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	24
Item 3. Defaults Upon Senior Securities	24
Item 4. Submission of Matters to a Vote of Security Holders	24
Item 5. Other Information	24
Item 6. Exhibits	24
Signatures	25
Exhibit Index	26
Ex-31.1 Certification of CEO
Ex-31.2 Certification of CFO
Ex-32.1 Certification of CEO
Ex-32.2 Certification of CFO

2

NATIONAL DENTEX CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)

	December 31,		September 30,
	2005		2006
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	401,251	$	3,968,390
Accounts receivable:
Trade, less allowance of $300,000 in 2005 and $241,000 in 2006		14,468,140		14,216,993
Other		595,481		757,700
Inventories		6,700,283		7,008,463
Prepaid expenses		3,127,157		3,152,467
Deferred tax asset		8,646		50,200
Property held for sale		508,596		—
Total current assets		25,809,554		29,154,213
PROPERTY, PLANT AND EQUIPMENT:
Land and buildings		8,531,337		8,534,543
Leasehold and building improvements		10,433,008		11,963,394
Laboratory equipment		15,331,829		16,620,554
Furniture and fixtures		6,170,476		6,589,698
		40,466,650		43,708,189
Less — Accumulated depreciation and amortization		16,854,004		18,876,134
Net property, plant and equipment		23,612,646		24,832,055
OTHER ASSETS:
Goodwill		48,242,149		49,261,238
Trade names		5,644,443		5,644,443
Customer relationships, net		5,718,864		5,204,934
Non-competition agreements, net		2,656,329		2,030,722
Other assets		5,435,025		5,858,913
Total other assets		67,696,810		68,000,250
Total assets	$	117,119,010	$	121,986,518
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt	$	2,840,621	$	3,117,780
Accounts payable		3,449,227		3,025,346
Accrued liabilities:
Payroll and employee benefits		5,505,811		6,316,692
Current portion of deferred acquisition liabilities		1,338,224		1,360,610
Other accrued expenses		1,549,703		1,977,145
Total current liabilities		14,683,586		15,797,573
LONG-TERM LIABILITIES:
Long-term debt		15,860,133		13,797,980
Deferred compensation		2,956,417		3,186,677
Deferred acquisition liabilities		2,052,630		987,710
Deferred tax liability, non-current		5,492,163		5,231,200
Total long-term liabilities		26,361,343		23,203,567
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 5,508,263 shares at September 30, 2006		54,114		55,083
Paid-in capital		15,603,188		17,119,150
Retained earnings		60,416,779		65,811,145
Total stockholders’ equity		76,074,081		82,985,378
Total liabilities and stockholders’ equity	$	117,119,010	$	121,986,518

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				Nine Months Ended
	September 30,		September 30,		September 30,		September 30,
	2005		2006		2005		2006
Net sales	$	33,343,559	$	34,613,284	$	101,504,126	$	109,518,333
Cost of goods sold		19,799,781		21,145,079		58,054,516		63,830,584
Gross profit		13,543,778		13,468,205		43,449,610		45,687,749
Selling, general and administrative expenses		11,038,166		11,542,245		33,129,867		35,456,377
Operating income		2,505,612		1,925,960		10,319,743		10,231,372
Other expense		72,937		157,808		362,434		595,623
Interest expense		191,075		278,759		539,711		848,401
Income before provision for income taxes		2,241,600		1,489,393		9,417,598		8,787,348
Provision for income taxes		863,135		564,440		3,672,863		3,392,982
Net income	$	1,378,465	$	924,953	$	5,744,735	$	5,394,366
Net income per share — basic	$	.26	$	.17	$	1.08	$	.98
Net income per share — diluted	$	.25	$	.16	$	1.03	$	.94
Weighted average shares outstanding — basic		5,334,068		5,508,966		5,309,621		5,476,887
Weighted average shares outstanding — diluted		5,578,056		5,754,629		5,563,621		5,751,980

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 Nine Months Ended
	September 30,			September 30,
	2005			2006
Cash flows from operating activities:
Net income	$	5,744,735		$	5,394,366
Adjustments to reconcile net income to net cash provided by operating activities, net of effects of acquisitions:
Depreciation and amortization		2,837,279			3,363,010
Loss (gain) on disposal of property, plant and equipment		29,206			(285,926	)
Benefit for deferred income taxes		(208,465	)		(302,517	)
Provision for bad debts		72,655			22,819
Losses on write-down of inventories		—			130,613
Stock-based compensation expense		—			154,881
Changes in operating assets and liabilities, net of effects of acquisitions:
Decrease in accounts receivable		189,392			66,109
Increase in inventories		(530,686	)		(438,793	)
Increase in prepaid expenses		(654,563	)		(25,310	)
(Increase) decrease in other assets		(42,408	)		41,837
Increase in accounts payable and accrued liabilities		6,111,411			478,056
Net cash provided by operating activities		13,548,556			8,599,145
Cash flows from investing activities:
Payment for acquisitions, net of cash acquired		(25,670,113	)		—
Payment of deferred purchase price		(965,815	)		(1,917,660	)
Premiums paid for life insurance policies		(504,425	)		(494,811	)
Additions to property, plant and equipment		(4,741,803	)		(2,997,659	)
Sales of property, plant and equipment		—			919,694
Net cash used in investing activities		(31,882,156	)		(4,490,436	)
Cash flows from financing activities:
Repayments of revolving line of credit		(2,000,000	)		—
Borrowings of long-term debt		19,884,346			—
Repayments of long-term debt		(473,438	)		(1,903,618	)
Proceeds from issuance of common stock		1,771,887			1,362,048
Net cash provided by (used in) financing activities		19,182,795			(541,570	)
Net increase in cash and cash equivalents		849,195			3,567,139
Cash and cash equivalents at beginning of period		2,215,742			401,251
Cash and cash equivalents at end of period	$	3,064,937		$	3,968,390

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

5

NATIONAL DENTEX CORPORATION

Notes to Condensed Consolidated Financial Statements
September 30, 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 nine months ended September 30, 2006. Acquisitions completed after September 30, 2006 are discussed in Note 11“Subsequent Events”. During the nine months ended September 30, 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
Midtown Brunswick Dental Laboratory, Inc	Certain Assets	Brunswick, ME	May, 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.

6

Notes to Condensed Consolidated Financial Statements (Continued)

	Nine Months Ended
	September 30,		September 30,
	2005		2006
	(unaudited)
Net sales	$	104,736,000	$	109,518,000
Net income		6,112,000		5,394,000
Net income per share:
Basic	$	1.15	$	.98
Diluted	$	1.10	$	.94

(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 nine months ended September 30, 2006 are as follows:

	Nine Months Ended
	September 30, 2006
Balance as of January 1	$	48,242,000
Adjustments related to contingent consideration		1,019,000
Balance as of September 30	$	49,261,000

     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 $1,687,000 at September 30, 2006. As the contingencies are resolved, any payments required 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 were no trade name impairment charges recorded for the nine month periods ended September 30, 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.

	As of
	September 30, 2006
Customer relationships, gross	$	6,663,000
Less: Accumulated amortization		(1,458,000	)
Customer relationships, net — end of period	$	5,205,000

     Amortization expense associated with customer relationships totaled approximately $514,000 for the nine months ended September 30, 2006 and is recorded in selling, general and administrative expenses. Future amortization expense of the current customer relationship balance will be approximately:

For the remainder of fiscal 2006	$	165,000
2007		660,000
2008		660,000
2009		660,000
2010		660,000
2011		660,000
Thereafter		1,740,000
	$	5,205,000

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 lives of the agreements.

	As of
	September 30, 2006
Non-competition agreements, gross	$	10,003,000
Less: Accumulated amortization		(7,972,000	)
Non-competition agreements, net	$	2,031,000

     Amortization expense associated with non-competition agreements totaled approximately $630,000 for the nine months ended September 30, 2006 and is recorded in selling, general and administrative expenses.

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

For the remainder of fiscal 2006	$	194,000
2007		431,000
2008		262,000
2009		238,000
2010		229,000
2011		191,000
Thereafter		486,000
	$	2,031,000

8

Notes to Condensed Consolidated Financial Statements (Continued)

(4) Earnings per Share

     In accordance with the disclosure requirements of SFAS 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 and the Company’s Employee Stock Purchase Plan. 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 and nine months ended September 30, 2006 and 2005 are as follows:

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2005		2006		2005		2006
Weighted average number of shares used in basic earnings per share calculation		5,334,068		5,508,966		5,309,621		5,476,887
Incremental shares under option plans		243,988		245,663		254,000		275,093
Weighed average number of shares used in diluted earnings per share calculation		5,578,056		5,754,629		5,563,621		5,751,980
Shares under option plans excluded in computation of diluted earnings per share due to anti-dilutive effects	None		None		None		None

(5) Stock-Based Compensation

     The Company adopted the provisions of Statement of Financial Accounting Standard No. 123 (Revised 2004) (“SFAS 123R”),Share Based Paymentson January 1, 2006.SFAS 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”). The estimated fair value of stock compensation cost is recognized over the employees’ or directors’ service vesting period. In March 2005, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 107 (“SAB 107”) relating to SFAS 123R. The Company considered the provisions of SAB 107 when it adopted SFAS 123R. SAB 107 provides guidance in the area of valuation techniques, expected volatility and expected term calculations and disclosure requirements. The Company implemented SFAS 123R using the modified prospective approach. All stock options issued prior to January 1, 2006 were fully vested upon implementation of SFAS 123R.

     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 measurement 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 nine months ended September 30, 2006 includes $155,000 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 share rights 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.

     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 shareholders approved an amendment to the 2001 Plan on May 16, 2006 to allow for the issuance of restricted stock and restricted stock units. The maximum number of shares or units that may be issued under the 2001 Plan is 825,000, subject to a sub-limit of 82,500 shares for restricted stock awards and restricted stock unit awards. At September 30, 2006, options to purchase a total of 332,700 shares were outstanding and there were 395,662 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 September 30, 2006, options to purchase a total of 309,263 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.

9

Notes to Condensed Consolidated Financial Statements (Continued)

     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 September 30, 2006, June 30, 2006, March 31, 2006 and the year ended December 31, 2005 is as follows:

	LTIP Plan					2001 Plan
				Weighted-					Weighted-
	Shares			Average		Shares			Average
	underlying			Exercise		Underlying			Exercise
	Options			Price		Options			Price
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
Granted		—			—		—			—
Exercised		(15,717	)		12.02		(4,600	)		15.89
Forfeited		(3,494	)		12.97		—			—
Outstanding June 30, 2006		309,675		$	12.10		334,200		$	14.52
Granted		—			—		—			—
Exercised		—			—		(1,500	)		14.03
Forfeited		(412	)		13.21		—			—
Outstanding September 30, 2006		309,263		$	12.10		332,700		$	14.52
Exercisable at end of period:		309,263		$	12.10		332,700		$	14.52

     Under the 2001 Plan, as amended, in June 2006 the Company issued 1,596 shares of restricted stock and 3,192 restricted stock units as directors’ fees. The Company recorded stock-based compensation expense related to these shares and units of $45,000 for the nine months ended September 30, 2006.

     The following table summarizes restricted stock and restricted stock unit awards for the nine months ended September 30, 2006 and year ended December 31, 2005 as follows:

	Restricted Stock				Restricted Stock Units
			Weighted-				Weighted-
			Average				Average
	Number		Grant Date		Number		Grant Date
	of Shares		Fair Value		of Shares		Fair Value
Outstanding December 31, 2005		—		—		—		—
Granted		1,596	$	22.55		3,192	$	22.55
Vested		—		—		—		—
Outstanding September 30, 2006		1,596	$	22.55		3,192	$	22.55

     As of September 30, 2006, there was $21,000 and $42,000 of total unrecognized compensation cost for restricted stock and restricted stock units, respectively. That cost will be recognized over a weighted average period of seven months.

     The total aggregate intrinsic value of awards outstanding as of September 30, 2006, excluding restricted stock and restricted stock unit grants, is $4,042,000. Aggregate intrinsic value is calculated by subtracting the exercise price of the option from the closing price of the Company’s common stock on September 30, 2006 multiplied by the number of shares per each option. In addition, the weighted average remaining contractual life of options outstanding as of September 30, 2006 is 4.3 years. The total intrinsic value of options exercised during the nine months ended September 30, 2006 was $462,000.

10

Notes to Condensed Consolidated Financial Statements (Continued)

The following table summarizes the significant assumptions used to estimate stock compensation costs for the periods indicated:

	January 1 — March 31, 2006			April 1 — September 30, 2006
Weighted-Average Grant Date Fair Value	$	4.41		$	6.69
Risk-free interest rate		1.61	%		5.27	%
Expected Volatility		26.77	%		33.19	%
Expected Holding Period	1.0 Year			1.0 Year
Expected Forfeiture Rate		5.70	%		5.70	%
Expected Dividends	None			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 FAS 123R, 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 and nine months ended September 30, 2005, as required by FAS 148.

	Three Months Ended		Nine Months Ended
	September 30, 2005		September 30, 2005
Net income, as reported:	$	1,378,465	$	5,744,735
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		19,728		59,109
Pro forma net income		1,358,737		5,685,626
Earnings per share: As reported, basic	$	.26	$	1.08
Pro forma, basic		.25		1.07
As reported, diluted		.25		1.03
Pro forma, diluted		.24		1.02

     There were no options granted during the nine months ended September 30, 2005. The following table summarizes the significant assumptions used to estimate stock compensation using the Black-Scholes option-pricing model costs for the nine month period ended September 30, 2005.

	January 1 — September 30, 2005
Weighted-Average Grant Date Fair Value	$	4.41
Risk-free interest rate		1.61	%
Expected Volatility		26.77	%
Expected Holding Period	1.0 Year
Expected Dividends	None

11

Notes to Condensed Consolidated Financial Statements (Continued)

(6) Inventories

     Inventories consist of the following:

	December 31, 2005		September 30, 2006
Raw Materials	$	5,482,280	$	5,458,463
Work in Process		995,111		1,321,696
Finished Goods		222,892		228,304
	$	6,700,283	$	7,008,463

     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 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 became 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 required 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 required compliance with certain covenants, including the maintenance of specified net worth and other financial ratios. As of September 30, 2006, $5,000,000 was available under the first line of credit and $20,000,000 was available under the acquisition line of credit.

	September 30, 2006
Total long-term debt	$	16,916,000
Less: Current maturities		3,118,000
Long-term debt, less current portion	$	13,798,000

The table below reflects the expected repayment terms associated with this long-term debt at September 30, 2006. The interest rate associated with the Company’s current borrowings as of September 30, 2006 is 6.91%.

	Principal Due
For the remainder of fiscal 2006	$	954,000
Fiscal 2007		2,878,000
Fiscal 2008		2,872,000
Fiscal 2009		2,871,000
Fiscal 2010		7,341,000
Total	$	16,916,000

12

Notes to Condensed Consolidated Financial Statements (Continued)

     In October 2006 the Company borrowed against the acquisition line of credit to finance the acquisition of Keller Group, Incorporated (“Keller”) See Note 11,“Subsequent Events”.Following this acquisition, the Company and the Bank executed a Second Amended and Restated Loan Agreement on November 7, 2006 (the “Second Agreement”). The Second Agreement amends and restates the Amended Agreement (a) to increase the term loan facility to an aggregate principal amount of $35,000,000 and use the proceeds of the increase in the term loan to repay the portion of the outstanding principal balance under the acquisition line of credit and (b) to adjust the allocation of availability under the lines of credit by increasing the revolving line of credit to $10,000,000 ($5,000,000 of which may be used for future acquisitions) and decreasing the acquisition line of credit from $20,000,000 to $15,000,000. The interest rate on both 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 3.00%, depending on the ratio of consolidated total funded debt to consolidated “EBITDA”, as defined in the Second Agreement. The term loan facility portion of the Second Agreement requires monthly interest payments and monthly payments of principal, based on a seven year amortization schedule, with a final payment due on the fifth anniversary of the Second Agreement. The acquisition line of credit and the first line of credit mature on the third anniversary of the Second Agreement. The Second Agreement requires compliance with certain covenants, including the maintenance of specified net worth and other financial ratios.

(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, 2005, the Company acquired Green Dental Laboratories, Inc. of Heber Springs, Arkansas. In accordance with SFAS 131, the Company identified Green as a separate operating segment. As a result, the Company has two reportable segments. The accounting policies of the Green 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 and nine months ended September 30, 2006 and 2005. The year-to-date results for Green include only seven months in 2005 compared against nine months in 2006.

	Three Months Ended		Three Months Ended			Nine Months Ended		Nine Months Ended
	September 30, 2005		September 30, 2006			September 30, 2005		September 30, 2006
Revenue:
NDX Laboratories	$	29,108,232	$	30,043,942		$	91,211,393	$	95,374,326
Green Dental Laboratory		4,249,922		4,599,070			10,312,923		14,234,590
Subtotal		33,358,154		34,643,012			101,524,316		109,608,916
Inter-segment Revenues:
Green Dental Laboratory		14,595		29,728			20,190		90,583
Net Sales	$	33,343,559	$	34,613,284		$	101,504,126	$	109,518,333
Laboratory Operating Income:
NDX Laboratories	$	4,168,807	$	3,253,305		$	15,416,503	$	13,945,653
Green Dental Laboratory		1,048,214		1,182,232			2,735,944		3,615,730
	$	5,217,021	$	4,435,537		$	18,152,447	$	17,561,383
Total Assets:
NDX Laboratories	$	80,606,229	$	83,608,850		$	80,606,229	$	83,608,850
Green Dental Laboratory		26,911,990		26,878,222			26,911,990		26,878,222
Corporate		9,945,337		11,499,446			9,945,337		11,499,446
	$	117,463,556	$	121,986,518		$	117,463,556	$	121,986,518
Capital Expenditures:
NDX Laboratories	$	2,623,231	$	1,613,379	��	$	3,989,024	$	2,836,697
Green Dental Laboratory		28,302		253,200			53,218		298,639
Corporate		583,566		73,022			699,561		285,009
	$	3,235,099	$	1,939,601		$	4,741,803	$	3,420,345
Depreciation & Amortization on Property, Plant & Equipment:
NDX Laboratories	$	404,994	$	513,055		$	1,162,603	$	1,567,662
Green Dental Laboratory		63,978		64,179			159,212		193,614
Corporate		114,133		141,866			327,506		433,111
	$	583,105	$	719,100		$	1,649,321	$	2,194,387

13

Notes to Condensed Consolidated Financial Statements (Continued)

Reconciliation of Laboratory Operating Income with reported Consolidated Operating Income:

	Three Months Ended		Three Months Ended		Nine Months Ended		Nine Months Ended
	September 30, 2005		September 30, 2006		September 30, 2005		September 30, 2006
Laboratory Operating Income	$	5,217,021	$	4,435,537	$	18,152,447	$	17,561,383
Less:
Corporate Selling, General and Administrative Expenses		2,355,209		2,294,136		7,007,180		6,757,010
Amortization Expense – Intangible Assets		429,137		373,249		1,187,958		1,168,624
Add:
Other Expense		72,937		157,808		362,434		595,623
Consolidated Operating Income	$	2,505,612	$	1,925,960	$	10,319,743	$	10,231,372

(9) Recent Accounting Pronouncements

     In June 2006, the FASB issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes-an Interpretation of FASB Statement No. 109”, (“FIN 48”). FIN 48 clarifies the uncertainty in income taxes recognized in a company’s financial statements in accordance with FASB Statement No. 109, “Accounting for Income Taxes.” FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. Additionally, FIN 48 provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. This interpretation is effective for fiscal years beginning after December 15, 2006 and is required to be adopted by the Company effective January 1, 2007. The Company is currently evaluating the impact of this Interpretation on its financial statements.

     In September 2006, the SEC released Staff Accounting Bulletin No. 108“Considering the Effects of Prior Year Misstatements When Quantifying Misstatements in Current Year Financial Statements” (“SAB 108”). SAB 108 provides interpretative guidance on how public companies quantify financial statement misstatements. There have been two common approaches used to quantify such errors. Under an income statement approach, the “roll-over” method, the error is quantified as the amount by which the current year income statement is misstated. Alternatively, under a balance sheet approach, the “iron curtain” method, the error is quantified as the cumulative amount by which the current year balance sheet is misstated. In SAB 108, the SEC established an approach that requires quantification of financial statement misstatements based on the effects of the misstatements on each of the company’s financial statements and the related financial statement disclosures. This model is commonly referred to as a “dual approach” because it requires quantification of errors under both the roll-over and iron curtain methods. SAB 108 is effective for the Company as of December 31, 2006. The adoption of SAB 108 is not expected to have a material impact on the Company’s consolidated financial statements.

(10) 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.

(11 ) Subsequent Events

     Effective as of October 2, 2006, the Company acquired all of the outstanding capital stock of Impact Dental Laboratory Limited of Ottawa, Ontario, Canada (“Impact”). Impact reported sales in excess of CDN $4,000,000 in its last fiscal year ended December 31, 2005.

     Effective as of October 2, 2006, the Company acquired all of the outstanding capital stock of Keller Group, Incorporated (“Keller”), a privately-held dental laboratory business with production facilities in both St. Louis, Missouri and Louisville, Kentucky, and sales offices in Kansas City, Missouri and Indianapolis, Indiana. Keller reported sales in excess of $17,000,000 in its last fiscal year ended December 31, 2005. The cost of the acquisition, net of cash acquired, was approximately $20,000,000. See Note 7, “Lines of Credit and Term Loan Facility”

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 Quarterly 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 47 dental laboratories located in 31 states and one Canadian province, serving an active customer base of over 24,000 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.

     The general economic conditions affecting our operations and the dental laboratory industry in general have remained less than favorable over the past several years as many patients and dentists continue to postpone optimal treatment plans, such as crowns, and pursue less expensive alternatives such as amalgam fillings, for which we recognize no revenue. 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. During the first nine months of 2006, internal sales growth was 3.8%, including the effect of increased prices due to underlying increases in the prices 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 those located in China, makes inroads into the domestic marketplace. While our business has not focused on this segment of the market we do see some price pressure from other laboratories in our market places that has generally made it more difficult for us to increase our prices. 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, and have been inhibiting our results from

15

operations. Technology based dental laboratory CAD-CAM manufacturing solutions have required additional investments in capital equipment. While we expect these capital expenditures will benefit future periods, they have not yet positively impacted net income in recent periods.

     The main components of our costs are labor and related employee benefits. Over the past several years, competition for labor resources as well as increases in medical insurance premiums have 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 compliance within the internal controls framework required by the Sarbanes-Oxley Act.

     We have also continued to pursue our acquisition strategy, which has played an important role in helping us increase sales from $85,725,000 in 2001 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 both the customer relationships and the trade names). On a prospective basis, our future amortization expense will increase based upon our recent and any future acquisition activity. The amount recognized for customer relationships and subsequent amortization expense will depend on the expected profitability and customer retention characteristics of our recently acquired businesses together with those, if any, that we may subsequently acquire.

     Effective March 1, 2005 we completed what was then our largest acquisition to date, Green Dental Laboratories, Inc. (“Green”). 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 retains 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. Future acquisitions may also be financed using available debt financing. Interest expense has therefore become a more significant component of our pre-tax earnings. Interest expense for the nine months ended September 30, 2006 was $848,000 compared to $540,000 for the nine months ended September 30, 2005 and $28,000 for the nine months ended September 30, 2004.

     The earnings performance of Green and other acquisitions from 2004 and 2005 have contributed positively to our sales and gross margins, although our gross margins declined in the third quarter of 2006 by 1.4% to 38.9% compared to the year ago quarter and decreased the first nine months of 2006 by 1.0% to 41.8% compared to the first nine months of 2005. 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 percentage points of the growth in sales and 22.6 percentage points of the growth in gross profit was attributable to acquisitions. During the nine months ended September 30, 2006, net sales increased $8,014,000 with $4,183,000 attributable to acquired laboratories with the remainder primarily attributable to price increases. Green’s results for 2006 included three full quarters of sales compared to seven months in 2005.

     Subsequent to the end of our third quarter, effective October 2, 2006, we completed our largest acquisition to date, Keller Group, Incorporated (“Keller”) of St. Louis, Missouri. Keller will become a separate operating segment in our segment reporting. With annual revenues in excess of $17,000,000, Keller differs from National Dentex in its approach to marketing and to the marketplace. In recent years Keller has broadened its focus from local markets in the Midwest to the national marketplace. In order to sustain this strategy, Keller invests significantly in product advertising, primarily in dental print publications. As a result, we expect Keller to return lower net margins than our other operating segments but conversely expect it to obtain significantly stronger sales growth. We believe that the addition of the Keller management team will create value for our organization as a whole. In order to finance the acquisition of Keller, we borrowed approximately $19,200,000 in long-term debt under our acquisition line of credit.

16

Liquidity and Capital Resources

     Our working capital increased $2,231,000 from $11,126,000 at December 31, 2005 to $13,357,000 at September 30, 2006, primarily as a result of $906,000 in cash proceeds from the sale of our former facility in Houston, Texas and other increases in cash associated with our operating results. Cash and cash equivalents increased $3,567,000 from $401,000 at December 31, 2005 to $3,968,000 at September 30, 2006. Operating activities provided $8,599,000 in cash flow for the nine months ended September 30, 2006 compared to $13,549,000 during the nine months ended September 30, 2005, a decrease of $4,949,000. This decrease was primarily attributable to decreases in accounts payable of $1,815,000, decreases in accrued liabilities of $3,819,000, primarily due to reduced accruals for bonus plans of $1,394,000, associated with our performance requirements in our bonus plans and a decrease in accruals for deferred acquisition costs related to the acquisition of Green in 2005, and 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 $1,918,000 for the nine months ended September 30, 2006 compared to $26,636,000 for the nine months ended September 30, 2005. The significantly higher figure for 2005 was 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 became the prime rate or, at our 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 required 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 required compliance with certain covenants, including the maintenance of specified net worth and other financial ratios. As of September 30, 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.

	September 30, 2006
Total long-term debt	$	16,916,000
Less: Current maturities		3,118,000
Long-term debt, less current portion	$	13,798,000

     The table below reflects the expected repayment terms associated with long term debt at September 30, 2006. The interest rate associated with our current borrowings as of September 30, 2006 is 6.91%.

	Principal Due
For the remainder of fiscal 2006	$	954,000
Fiscal 2007		2,878,000
Fiscal 2008		2,872,000
Fiscal 2009		2,871,000
Fiscal 2010		7,341,000
Total	$	16,916,000

     In October 2006 we borrowed against our acquisition line of credit to finance the acquisition of Keller Group, Incorporated (“Keller”). Following this acquisition, we and the Bank executed a Second Amended and Restated Loan Agreement on November 7, 2006 (the “Second Agreement”). The Second Agreement amends and restates the Amended Agreement (a) to increase the term loan facility to an aggregate principal amount of $35,000,000 and use the proceeds of the increase in the term loan to repay the portion of the outstanding principal balance under the acquisition line of credit and (b) to adjust the allocation of availability under the lines of credit by increasing the revolving line of credit to $10,000,000 ($5,000,000 of which may be used for future acquisitions) and decreasing the acquisition line of credit from $20,000,000 to $15,000,000. The interest rate on both lines of credit

17

and the term loan is now the prime rate or, at our option, LIBOR, a cost of funds rate or the Bank’s fixed rate plus, in each case, a range of 1.25% to 3.00%, depending on the ratio of consolidated total funded debt to consolidated “EBITDA”, as each is defined in the Second Agreement. The term loan facility portion of the Second Agreement requires monthly interest payments and monthly payments of principal, based on a seven year amortization schedule, with a final payment due on the fifth anniversary of the Second Agreement. The acquisition line of credit and the first line of credit mature on the third anniversary of the Second Agreement. The Second Agreement requires compliance with certain covenants, including the maintenance of specified net worth and other financial ratios.

     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 September 30, 2006:

					Payments Due By Period
			Less Than						Greater Than
	Total		1 Year		1 — 3 Years		4 — 5 Years		5 Years
Term Loan Facility	$	16,807,000	$	3,077,000	$	8,522,000	$	5,208,000	$	—
Interest Expense		2,806,000		1,012,000		1,794,000		—		—
Capital Leases : Vehicles		109,000		41,000		58,000		10,000
Operating Leases:
Real Estate		12,779,000		2,545,000		3,774,000		2,779,000		3,681,000
Vehicles		1,100,000		733,000		367,000		—		—
Equipment		129,000		60,000		63,000		6,000		—
Construction Contracts		488,000		488,000		—		—		—
Laboratory Purchase Obligations		2,348,000		1,360,000		988,000		—		—
Contingent Laboratory Purchase Price		1,687,000		1,387,000		300,000		—		—
Total	$	38,253,000	$	10,703,000	$	15,866,000	$	8,003,000	$	3,681,000

     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 is at variable rates, has been projected using the interest rate associated with current borrowings. The table presented above does not include $19,625,000 of borrowings from the Bank, on October 5, 2006 under the acquisition line of credit, that are associated with the acquisition of Keller.

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

     Laboratory purchase obligations totaling $2,348,000, 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.

     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. We believe this issue will be favorably resolved without requiring additional employer contributions or jeopardizing the tax-qualified status of the Plan.

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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:

	Nine Months Ended September 30, 2005						Nine Months Ended September 30, 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		57.7		52.3		57.2		59.2		52.2		58.3
Gross profit		42.3		47.7		42.8		40.8		47.8		41.7
Selling, general and administrative expenses		25.2		22.5		24.9		26.2		22.4		25.6
Laboratory Operating Income		17.1		25.2		17.9		14.6		25.4		16.1
Add:
Other Expense						0.4						0.5
Less:
Corporate Selling
General & Administrative
Expenses						6.9						6.2
Amortization Expense						1.2						1.1
Consolidated Operating
Income						10.2						9.3
Other expense						0.4						0.5
Interest expense						0.5						0.8
Income before provision for Income Taxes						9.3						8.0
Provision for income taxes						3.6						3.1
Net income						5.7						4.9

Nine Months Ended September 30, 2006 Compared with Nine Months Ended September 30, 2005

Net Sales

     For the nine months ended September 30, 2006, net sales increased $8,014,000 or 7.9% from the prior year nine months. Net sales increased by approximately $4,183,000 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 $3,831,000, or 3.8% at dental laboratories owned for more than one year during the nine months ended September 30, 2006 and the comparable nine months ended September 30, 2005, primarily as a result of price increases, most of which passed along some, but not all of our higher precious metal costs to our customers. Approximately $1,500,000 of this sales increase was related to price increases tied to underlying precious metal cost increases. Competitive pressures from offshore laboratories that can produce crowns at fees lower than crowns manufactured in the United States have limited our ability to raise our fees during a time when have experienced higher than usual costs for precious metals used in manufacturing. As a result, gross and net margins were unfavorably impacted.

Cost of Goods Sold

     Our cost of goods sold increased by $5,776,000 or 10.0% in the nine months ended September 30, 2006 over the year-ago nine months. As a percentage of sales, cost of goods sold increased from 57.2% to 58.3%. The increase, primarily attributable to the NDX Laboratories segment due to product mix, was the result of increases in the cost of precious metals. The cost of raw materials as a percentage of sales increased from 13.7% in the first nine months of 2005 to 15.1% in the first nine months of 2006. The average cost of precious metals used as components of many dental alloys, including gold and palladium, increased approximately 39% for gold and 70% for palladium, over average costs in the nine months ended September 30, 2005. Although we are able to pass most precious metal cost increases on to our customers, prolonged higher metal costs have had and likely will continue to have a negative impact on gross profit percentages.

     Green produced a gross profit of 47.8%, compared to a gross profit of 40.8% 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. Overall, labor productivity in the first nine months of 2006 improved over the first nine months of 2005. As a percentage of sales, production labor and related benefits declined from 36.0% in 2005 to 35.2% in 2006. Green’s labor costs of 29.3% of sales for the nine months lowered the overall percentage and the portion attributable to NDX Laboratories declined to 36.1% of sales for 2006 from 36.6% for 2005.

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Selling, General and Administrative Expenses

     Operating expenses, which consist of selling, delivery and administrative expenses both at the laboratory and corporate level, increased by $2,327,000 or 7.0% compared to the first nine months of 2005. Operating expenses decreased as a percentage of net sales from 32.6% as a percentage of sales in the first nine months of 2005 to 32.4% in 2006. As a percentage of sales, delivery expenses increased from 7.7% in the first nine months of 2005 to 8.8% in the first nine months of 2006, due to delivery costs, rising fuel costs and additional salaries. Selling expenses increased from 4.0% of sales in the first nine months of 2005 to 4.6% in the first nine months of 2006 partially attributable to a full nine months of operations in 2006 at Green. Green operated with higher overall selling expenses in the first nine months of 2006 of 7.2% of sales. Green operates with higher selling costs as a result of differing marketing strategies and resource commitments. Administrative expenses decreased from 16.1% of sales in the first nine months of 2005 to 15.1% in the first nine months of 2006 and laboratory incentive compensation decreased as a result of decreased earnings performance at certain laboratories.

     The net increase of $2,327,000 in operating expenses was primarily attributable to the following items:

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

• Increases in salaries and benefits at the corporate and lab level, in part due to additional finance and management staff — $595,000;

• Increases in benefit costs, including health and life insurance —$248,000;

• Increases in rent expense, including additional rent related to facilities under construction —$259,000;

• Increases in spending on voluntary OSHA training and maintenance programs —$125,000;

• Increases in delivery costs — $1,640,000,

partially offset by;

• Decreases in laboratory and executive incentive compensation as a result of laboratory profit performance — $908,000

• Decreases in consulting expenses and professional fees, including audit and compliance costs — $166,000;

• Decreases in bad debt expense due to overall reductions in the age of receivables — $171,000;

• 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 decreased by $88,000 to $10,231,000 for the nine months ended September 30, 2006 from $10,320,000 for the nine months ended September 30, 2005. As a percentage of net sales, operating income decreased from 10.2% in the first nine months of 2005 to 9.3% in the first nine months of 2006.

Interest Expense

     Net interest increased $308,000 from $540,000 in the first nine months of 2005 to $848,000 in the first nine months 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 decreased $280,000 from $3,673,000 in the first nine months of 2005 to $3,393,000 in the first nine months of 2006. The 39.0% effective tax rate for the first nine months of 2005 decreased slightly to 38.6% for the first nine months of 2006.

Net Income

     As a result of all of the factors discussed above, net income decreased to $5,394,000 in the first nine months of 2006 from $5,745,000 in the first nine months of 2005. Net income decreased to $.94 per share on a diluted basis in the first nine months of 2006 from $1.03 per share on a diluted basis in the first nine months of 2005.

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     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 September 30, 2005								Three Months Ended September 30, 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		60.2		53.5		59.4		62.5		52.2		61.1
Gross profit		39.8		46.5		40.6		37.5		47.8		38.9
Selling, general and administrative expenses		25.3		23.2		25.0		26.7		22.1		26.1
Laboratory Operating Income		14.5		23.3		15.6		10.8		25.7		12.8
Add:
Other expense						0.2						0.5
Less:
Corporate Selling
General & Administrative
Expenses						7.0						6.6
Amortization Expense						1.3						1.1
Consolidated Operating
Income						7.5						5.6
Other Expense						0.2						0.5
Interest expense						0.6						0.8
Income before provision for income taxes						6.7						4.3
Provision for income taxes						2.6						1.6
Net income						4.1						2.7

Three Months Ended September 30, 2006 Compared with Three Months Ended September 30, 2005

Net Sales

     For the three months ended September 30, 2006, net sales increased $1,270,000 or 3.8% from the prior year quarter, primarily as a result of price increases most of which passed along some, but not all of our higher precious metal costs to our customers. Approximately $500,000 of this sales increase was related to price increases tied to underlying precious metal cost increases. Offshore laboratories that can produce crowns at fees lower than crowns manufactured in the United States have limited our ability to raise our fees during a time when we have experienced higher than usual costs for precious metals used in manufacturing. As a result, gross and net margins were unfavorably impacted.

Cost of Goods Sold

     Our cost of goods sold increased by $1,345,000 or 6.8% in the quarter ended September 30, 2006 over the year-ago quarter. As a percentage of sales, cost of goods sold increased from 59.4% to 61.1%. The increase, primarily attributable to the NDX Laboratories segment due to product mix, was the result of increases in the cost of precious metals. The cost of raw materials as a percentage of sales increased from 13.8% in the third quarter of 2005 to 15.0% in the third quarter of 2006. The average cost of precious metals used as components of many dental alloys, including gold and palladium, increased approximately 41% for gold and 73% for palladium, over average costs in the quarter ended September 30, 2005. Although we are able to pass most precious metal cost increases on to our customers, prolonged higher metal costs have had and likely will continue to have a negative impact on gross profit percentages.

     Green produced a gross profit of 47.8%, compared to a gross profit of 37.5% 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. Overall, labor productivity in the third quarter of 2006 was similar to the third quarter of 2005. As a percentage of sales, production labor and related benefits declined from 37.5% in 2005 to 37.4% in 2006. Green’s labor costs of 29.7% of sales for the quarter lowered the overall percentage and the portion attributable to NDX Laboratories increased to 38.6% of sales for the third quarter of 2006 from 37.5% for the same quarter in 2005.

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Selling, General and Administrative Expenses

     Operating expenses, which consist of selling, delivery and administrative expenses both at the laboratory and corporate level, increased by $504,000 or 4.6% compared to the third quarter of 2005. Operating expenses as a percentage of net sales were 33.1% in the third quarter of 2005 compared to 33.3% in the third quarter of 2006. As a percentage of sales, delivery expenses increased from 8.2% in the third quarter of 2005 to 9.4% in the third quarter of 2006, due to rising fuel costs and additional salaries. Selling expenses increased from 4.7% of sales in the third quarter of 2005 to 4.9% in the third quarter of 2006 as a result of increases in promotional advertising and customer loyalty rewards. Green operated with higher overall selling expenses in the third quarter of 2006 of 7.5% of sales compared to 4.2% 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 16.5% of sales in the third quarter of 2005 to 16.1% in the third quarter of 2006 and laboratory incentive compensation decreased as a result of decreased earnings performance at certain laboratories.

     The net increase of operating expenses of $504,000 was primarily attributable to the following items:

• Increases in salaries and benefits at the corporate and laboratory level, in part due to the addition of financial and management
staff — $226,000;

• Increases in delivery costs, — $526,000:

• Increases in rent expense, including additional rent related to facilities under construction —$86,000;

partially offset by;

• Decreases in consulting expenses and professional fees, including audit and compliance costs — $78,000;

• Decreases in laboratory and executive incentive compensation as a result of laboratory profit performance — $302,000;

Operating Income

     As a result of the factors discussed above, our operating income decreased by $580,000 to $1,926,000 for the quarter ended September 30, 2006 from $2,506,000 for the quarter ended September 30, 2005. As a percentage of net sales, operating income decreased from 7.5% in the third quarter of 2005 to 5.6% in the third quarter of 2006.

Interest Expense

     Net interest increased $88,000 from $191,000 in the third quarter of 2005 to $279,000 in the third quarter of 2006 due to our borrowing levels.

Provision for Income Taxes

     The provision for income taxes decreased $299,000 from $863,000 in the third quarter of 2005 to $564,000 in the third quarter of 2006. The 38.5% effective tax rate for the third quarter of 2005 decreased to 37.9% for the third quarter of 2006.

Net Income

     As a result of all of the factors discussed above, net income decreased to $925,000 or $.16 per share on a diluted basis in the third quarter of 2006 from $1,378,000 or $.25 per share on a diluted basis in the third quarter of 2005.

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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 September 30, 2006, we had variable rate debt of $16,900,000. 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 $104,000, 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 September 30, 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 September 30, 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 September 30, 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:

     Except as noted below, there have been no material changes to the risk factors previously 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.

     We supplement the risk factors,“We operate in highly competitive and fragmented markets”and“We face increased competitive pressures from larger competitors, foreign-sourced products and technology based solutions”which appear on page 4 of our Annual Report. The industry in which we operate has continued to change and evolve over the course of 2006. Increasing competitive pressures from offshore laboratories based in China and elsewhere are impacting sales growth and selling prices of partial frames and traditional crowns. Technology-based dental laboratory computer-assisted design and computer-assisted manufacturing (CAD-CAM) solutions have required us to make additional investments in capital equipment. While we expect these capital investments will benefit our operations in future periods, there is no assurance that they will be able to do so. Moreover, the dental laboratory industry has continued to consolidate and is increasingly drawing the attention of private equity investors. Several of our competitors, including Sentage Corporation d/b/a Dental Services Group and Dental Technologies, Inc. have been recently acquired. While the consequences of these changes in the dental laboratory industry are not yet fully known, these competitors may now have greater financial and other resources than previously available to them, which could increase competitive pressures on our operations. In addition, we understand that additional entities or funds have been formed with the intention of acquiring dental laboratories. This development could impact the availability of suitable acquisition candidates or otherwise increase the costs of acquiring dental laboratories.

     We also supplement the risk factor,“Risks associated with our strategic acquisitions could adversely affect our business”which appears on pages 4 and 5 of our Annual Report. In October 2006 we completed our first non-U.S. acquisition (of a laboratory in Canada) and also completed our acquisition of the Keller Group, our largest acquisition to date.

     We also supplement the risk factor,“Our operating results can be adversely affected by changes in the cost or availability of raw materials, particularly precious metals like gold, platinum and palladium”which appears on page 6 of our Annual Report. The combination of higher precious metal prices and increasing offshore competition has made it increasingly difficult for us to pass on these additional costs without impacting our customer base.

     We also supplement the risk factor,“Our failure to generate sufficient cash to meet our liquidity needs may affect our ability to service our indebtedness and grow our business”which appears on page 6 of our Annual Report. The amounts that we have borrowed under our senior credit facility has increased significantly as a result of the Keller acquisition, from $16,916,000 to $36,116,000. Increased borrowings will increase substantially the amount of cash that we need to generate from our operations in order to meet our principal and interest payment obligations.

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 September 30, 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:

     Not Applicable

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
November 9, 2006
	By:	/s/ DAVID L. BROWN
	David L. Brown
	President, CEO and Director
	(Principal Executive Officer)
November 9, 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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