1 ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTER ENDED JUNE 30, 2000 COMMISSION FILE NUMBER: 000-23092 NATIONAL DENTEX CORPORATION MASSACHUSETTS 04-2762050 - ------------------------ --------------------------- (STATE OF INCORPORATION) (I.R.S. IDENTIFICATION NO.) 526 BOSTON POST ROAD, WAYLAND, MA 01778 - ---------------------------------------- ---------- (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE) (508) - 358 - 4422 ------------------------------- (REGISTRANT'S TELEPHONE NUMBER) 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. YES X NO --- --- NUMBER OF SHARES OF COMMON STOCK OUTSTANDING AS OF AUGUST 4, 2000: 3,580,607. ---------- ================================================================================ 2 NATIONAL DENTEX CORPORATION FORM 10-Q QUARTER ENDED JUNE 30, 2000 TABLE OF CONTENTS PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS: PAGE CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 1999 AND JUNE 30, 3 2000 (UNAUDITED) 3 CONSOLIDATED STATEMENTS OF INCOME FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 1999 AND JUNE 30, 2000 (UNAUDITED) 4 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE SIX MONTHS ENDED JUNE 30, 2000 (UNAUDITED) 5 CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND JUNE 30, 2000 (UNAUDITED) 6 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 7 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 9 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 12 PART II. OTHER INFORMATION 13 SIGNATURES 14 3 NATIONAL DENTEX CORPORATION CONSOLIDATED BALANCE SHEETS December 31, June 30, 1999 2000 ----------- ----------- (Unaudited) ASSETS ------ CURRENT ASSETS: Cash and equivalents ............................. $11,215,179 $11,021,641 Accounts receivable: Trade, less allowance of $196,000 in 1999 and $177,000 in 2000 ....................... 7,722,729 9,085,566 Other ............................................ 436,401 269,132 Inventories ...................................... 3,840,821 3,869,277 Prepaid expenses ................................. 912,513 1,050,266 Deferred tax asset ............................... 350,820 365,382 ----------- ----------- Total current assets ............................ 24,478,463 25,661,264 ----------- ----------- PROPERTY AND EQUIPMENT: Land and buildings ............................... 3,887,402 3,887,402 Leasehold and building improvements .............. 3,976,361 4,487,764 Laboratory equipment ............................. 7,356,055 7,764,006 Furniture and fixtures ........................... 2,228,775 2,352,167 Capital leases ................................... -- -- ----------- ----------- 17,448,593 18,491,339 Less - Accumulated depreciation and amortization ................................... 9,020,264 9,536,969 ----------- ----------- Net property and equipment ....................... 8,428,329 8,954,370 ----------- ----------- OTHER ASSETS, net: Goodwill ......................................... 11,111,435 10,846,030 Non competition agreements ....................... 3,539,947 3,261,683 Deferred tax asset ............................... 337,268 332,897 Other ............................................ 1,310,044 1,483,427 ----------- ----------- 16,298,694 15,924,037 ----------- ----------- $49,205,486 $50,539,671 ----------- ----------- LIABILITIES AND STOCKHOLDERS' EQUITY ------------------------------------ CURRENT LIABILITIES: Accounts payable ................................. $ 1,491,285 $ 1,157,234 Accrued liabilities: Payroll and employee benefits ................... 3,764,657 3,786,505 Current portion of deferred purchase price ...... 2,403,888 1,111,783 Other ........................................... 104,977 92,958 ----------- ----------- Total current liabilities ....................... 7,764,807 6,148,480 ----------- ----------- LONG TERM LIABILITIES: Payroll and employee benefits .................... 1,159,871 880,395 Deferred purchase price .......................... 731,334 380,612 ----------- ----------- Total long-term liabilities ..................... 1,891,205 1,261,007 ----------- ----------- 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 - 3,550,083 shares at December 31, 1999, and 3,579,238 shares at June 30, 2000 ................................ 35,500 35,792 Paid-in capital .................................. 14,903,119 15,273,607 Retained earnings ................................ 24,610,855 27,820,785 ----------- ----------- Total stockholders' equity ...................... 39,549,474 43,130,184 ----------- ----------- $49,205,486 $50,539,671 ----------- ----------- The accompanying notes are an integral part of these consolidated financial statements. 3 4 NATIONAL DENTEX CORPORATION CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) THREE MONTHS ENDED SIX MONTHS ENDED ----------------------------- ----------------------------- JUNE 30, JUNE 30, JUNE 30, JUNE 30, 1999 2000 1999 2000 ----------- ----------- ----------- ----------- Net sales .................................................. $18,233,360 $19,866,098 $35,245,232 $38,826,273 Cost of goods sold ......................................... 10,427,794 11,309,893 20,241,797 22,187,852 ----------- ----------- ----------- ----------- Gross profit ............................................ 7,805,566 8,556,205 15,003,435 16,638,421 Total operating expenses ................................... 5,282,567 5,723,169 10,479,223 11,484,491 ----------- ----------- ----------- ----------- Operating income ........................................ 2,522,999 2,833,036 4,524,212 5,153,930 Other expense .............................................. 21,236 34,953 23,972 63,775 Interest income ............................................ 50,828 129,713 119,985 259,728 ----------- ----------- ----------- ----------- Income before provision for income taxes ................ 2,552,591 2,927,796 4,620,225 5,349,883 Provision for income taxes ................................. 999,263 1,171,118 1,857,331 2,139,953 ----------- ----------- ----------- ----------- Net income .............................................. $ 1,553,328 $ 1,756,678 $ 2,762,894 $ 3,209,930 =========== =========== =========== =========== Net income per share - Basic ............................... $ .44 $ .49 $ .78 $ .90 =========== =========== =========== =========== Net income per share - Diluted ............................. $ .44 $ .49 $ .78 $ .90 =========== =========== =========== =========== Weighted average shares outstanding - Basic ................ 3,548,927 3,576,628 3,537,589 3,564,531 =========== =========== =========== =========== Weighted average shares outstanding - Diluted .............. 3,566,469 3,601,048 3,555,845 3,584,834 =========== =========== =========== =========== The accompanying notes are an integral part of these consolidated financial statements. 4 5 NATIONAL DENTEX CORPORATION CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (Unaudited) PREFERRED STOCK COMMON STOCK -------------------- -------------------- NUMBER OF $.01 PAR NUMBER OF $.01 PAR PAID-IN RETAINED SHARES VALUE SHARES VALUE CAPITAL EARNINGS TOTAL -------- -------- --------- --------- ------- -------- ----- BALANCE, December 31, 1999..... -- $ -- 3,550,083 $35,500 $14,903,119 $24,610,855 $39,549,474 Issuance of 10,850 shares of common stock under the employee stock option plan................... -- -- 10,850 109 143,003 -- 143,112 Issuance of 17,492 shares of common stock under the employee stock purchase plan .................. -- -- 17,492 175 215,501 -- 215,676 Issuance of 813 shares of common stock as director's fees................. -- -- 813 8 11,984 -- 11,992 Net income....................... -- -- -- -- -- 3,209,930 3,209,930 ----- -------- --------- ------- ----------- ----------- ----------- BALANCE, June 30, 2000........... -- $ -- 3,579,238 $35,792 $15,273,607 $27,820,785 $43,130,184 ===== ======== ========= ======= =========== =========== =========== The accompanying notes are an integral part of these consolidated financial statements. 5 6 NATIONAL DENTEX CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) For the six months ended June 30, --------------------------------- 1999 2000 ----------- ------------ Cash flows from operating activities: Net income ................................... $ 2,762,894 $ 3,209,930 Adjustments to reconcile net income to net cash provided by operating activities, net of effects of acquisitions: Depreciation and amortization ............ 1,118,145 1,197,153 Increase in accounts receivable .......... (622,504) (1,195,568) Increase in inventories .................. (96,699) (26,656) Increase in prepaid expenses ............. (79,611) (137,753) Increase in deferred tax asset ........... (17,960) (10,191) Increase in other assets ................. (112,191) (208,386) Decrease in accounts payable and accrued liabilities ...................... (880,818) (603,697) Decrease in deferred tax liability ....... (79,863) -- ----------- ------------ Net cash provided by operating activities .............................. 1,991,393 2,224,832 ----------- ------------ Cash flows from investing activities: Payment for acquisitions, net of cash acquired .................................. (2,112,123) (25,000) Payment of deferred purchase price ......... (350,165) (1,727,827) Additions to property and equipment, net ... (676,624) (1,036,323) ----------- ------------ Net cash used in investing activities ..... (3,138,912) (2,789,150) ----------- ------------ Cash flows from financing activities: Proceeds from issuance of common stock ..... 400,443 370,780 ---------- ------------ Net cash provided by financing activities ............................... 400,443 370,780 ---------- ------------ Net decrease in cash ......................... (747,076) (193,538) Cash at beginning of period .................. 8,525,648 11,215,179 ---------- ------------ Cash at end of period ........................ $ 7,778,572 $ 11,021,641 ----------- ------------ Supplemental disclosures of cash flow information: Interest paid .............................. $ 5,056 $ 82,338 ----------- ------------ Income taxes paid .......................... $ 2,071,415 $ 2,154,188 ----------- ------------ The accompanying notes are an integral part of these consolidated financial statements. 6 7 NATIONAL DENTEX CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2000 (1) INTERIM FINANCIAL STATEMENTS The accompanying unaudited financial statements include all adjustments (consisting only of normal recurring accruals) which are, in the opinion of management, necessary for fair presentation 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. Certain information and footnote disclosures normally included in financial statements, prepared in accordance with generally accepted accounting principles, have been condensed or omitted as allowed by Form 10-Q. The accompanying unaudited consolidated financial statements should be read in conjunction with the Company's consolidated financial statements for the year ended December 31, 1999 as filed with the Securities and Exchange Commission on Form 10-K. (2) EARNINGS PER SHARE Basic earnings per share was computed by dividing net income by the weighted-average common shares outstanding. Diluted earnings per share was computed by giving effect to all dilutive potential common shares outstanding. These shares include shares issuable upon the exercise of options as determined by the application of the treasury stock method. The calculation of basic earnings per share and diluted earnings per share is as follows: THREE MONTHS THREE MONTHS SIX MONTHS SIX MONTHS ENDED ENDED ENDED ENDED JUNE 30, 1999 JUNE 30, 2000 JUNE 30, 1999 JUNE 30, 2000 ------------- ------------- ------------- ------------- Net income applicable to common stock $1,553,328 $1,756,678 $2,762,894 $ 3,209,930 ========== ========== ========== ============= COMPUTATION OF BASIC EARNINGS PER SHARE: Weighted average common shares outstanding 3,548,927 3,576,628 3,537,589 3,564,531 Basic earnings per share $ .44 $ .49 $ .78 $ .90 COMPUTATION OF DILUTED EARNINGS PER SHARE: Weighted average common shares outstanding 3,548,927 3,576,628 3,537,589 3,564,531 Shares issuable from assumed exercise of options (as determined by the application of the treasury stock method) 17,542 24,420 18,256 20,303 ---------- ---------- ---------- ------------- Weighted average common shares outstanding as adjusted 3,566,469 3,601,048 3,555,845 3,584,834 Diluted earnings per share $ .44 $ .49 $ .78 $ .90 7 8 Options to purchase 148,846 shares of common stock at exercise prices ranging from $16.25 to $21.875 per share were outstanding during the second quarter of 2000 but were not included in the computation of diluted earnings per share because the options' exercise price was greater than the average market price of the common shares. The options, which expire through January 2009, were still outstanding at June 30, 2000. (3) COMPREHENSIVE INCOME Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income," establishes standards for reporting and displaying comprehensive income and its components. The Company adopted the statement in its quarter ending March 31, 1998. The Company does not have any other items of comprehensive income. As such, comprehensive income is equal to net income as presented in the consolidated statements of income. (4) RECENT ACCOUNTING PRONOUNCEMENTS The Securities and Exchange Commission issued SAB No. 101, "Revenue Recognition", in December 1999. This bulletin established guidelines for revenue recognition and is effective no later then the fourth fiscal quarter of fiscal years beginning after December 15, 1999. The Company believes that the adoption of the guidance provided in SAB No. 101 will not have a material impact on future operating results. The Financial Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities", in June 1998. SFAS No. 133 establishes accounting and reporting standards for derivative instruments and for hedging activities. The standard is effective for all fiscal quarters of fiscal years beginning after June 15, 2000. The Company believes that the adoption of the guidance provided in SFAS 133 will not have a material impact on future operating results. (5) ACQUISITIONS In April, 2000 the Company acquired certain assets of Pro-Dental Laboratory in West Caldwell, New Jersey. The acquisition, which has been reflected in the accompanying consolidated balance sheet as of June 30, 2000, has been accounted for as a purchase in accordance with Accounting Principles Board Opinion No. 16. 8 9 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ====================================================== LIQUIDITY AND CAPITAL RESOURCES Working capital increased from $16,713,000 at December 31, 1999 to $19,513,000 at June 30, 2000. Cash and equivalents decreased $194,000 from $11,215,000 at December 31, 1999. Operating activities provided $2,137,000 in cash flow for the six months ended June 30, 2000. Cash outflows related to dental laboratory acquisitions totaled $1,665,000 for the six months ended June 30, 2000 compared to $2,462,000 for the same period in 1999. Capital expenditures totaled $1,036,000 for the six months ended June 30, 2000 compared to $677,000 for the same period in 1999. The Company maintains a financing agreement (the "Agreement") with Citizens Bank of Massachusetts (formerly State Street Bank and Trust Company) (the "Bank"). The Agreement, as amended and extended on June 27, 1998, includes revolving lines of credit of $4,000,000 and $8,000,000. The interest rate on both revolving lines of credit is the prime rate minus 0.5% or the LIBOR rate plus 1.5%, at the Company's option. Both revolving lines of credit mature on June 1, 2001. A commitment fee of one eighth of 1% is payable on the unused amount of both revolving lines of credit. At June 30, 2000 the full principal amount was available to the Company under both revolving lines of credit. Management believes that cash flow from operations and the Company's existing financing will be sufficient to meet contemplated operating and capital requirements, including costs associated with anticipated acquisitions, if any, in the foreseeable future. This Form 10-Q contains 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 Company's actual results could differ materially from those set forth in the forward-looking statements. Certain factors that could affect capital expenditures, the Company's requirements for capital, the costs associated with anticipated acquisitions and the Company's results of operations include general economic conditions, the availability of laboratories for purchase by the Company, the ability of the Company to acquire and successfully operate additional dental laboratories, governmental regulation of health care, trends in the dental industry towards managed care, other factors affecting patient visits to the Company's clients, increases in labor and materials costs and other risks indicated from time to time in filings with the Securities and Exchange Commission. 9 10 RESULTS OF OPERATIONS The following table sets forth for the periods indicated the percentage of net sales represented by certain items in the Company's Consolidated Financial Statements: Six Months Ended -------------------------- June 30, June 30, 1999 2000 -------- -------- Net sales 100.0% 100.0% Cost of goods sold 57.4 57.1 ----- ----- Gross profit 42.6 42.9 Total operating expenses 29.7 29.6 ----- ----- Operating income 12.9 13.3 Other income (expense) (0.1) (0.2) Interest income 0.3 0.7 ----- ----- Income before provision for income taxes 13.1 13.8 Provision for income taxes 5.3 5.5 ----- ----- Net income 7.8% 8.3% ----- ----- SIX MONTHS ENDED JUNE 30, 2000 COMPARED WITH SIX MONTHS ENDED JUNE 30, 1999 Net Sales Net sales increased $3,581,000 or 10.2% in the six months ended June 30, 2000 over the corresponding period of the prior year. Approximately $289,000 of this increase was attributable to acquisitions, with the remaining increase representing same laboratory sales growth. Cost of Goods Sold Cost of goods sold, which consists principally of labor and related benefits, cost of materials, and laboratory overhead, increased by $1,946,000. As a percentage of sales, cost of goods sold decreased from 57.4% to 57.1%, representing a gross margin increase of .3%. Increases in materials costs were offset by improvements in labor productivity and decreases in laboratory overhead on a percentage basis. The continued rising cost of palladium, a component of dental alloys used in the manufacture of many of the Company's products, continues to be a factor in the increased materials costs. Since the cost of this commodity shows no sign of returning to historical levels, each of the Company's laboratories has implemented a program to either switch its current palladium customers to alternative metals, such as gold, or to recover a portion of the cost increase by eliminating all unit pricing and charging a fee per unit plus metal cost. 10 11 Total Operating Expenses Total operating expenses, which consist of (i) selling expenses, the cost of the Company's pick-up and delivery services and administrative expenses at the dental laboratory level, (ii) costs of operation by the Company's corporate headquarters and field support services and (iii) amortization expense, increased by $1,005,000 or 9.6% during the six months ended June 30, 2000 over the corresponding period in 1999. Expenses related to the Laboratory Incentive Compensation plan and the Executive Incentive Compensation plan increased as a result of increased operating income. In addition, expenses attributable to the amortization expenses associated with acquired dental laboratories increased. The remainder of the increase was attributable to rising costs associated with pick-up and delivery services. Operating expenses decreased as a percentage of net sales from 29.7% to 29.6% during the six months ended June 30, 2000 compared with the corresponding period in 1999 as a result of the higher sales volume. Operating Income Operating income increased by $630,000 or 13.9% for the six months ended June 30, 2000 over the corresponding period in 1999. The increase was mainly the result of higher sales volume and reductions in cost of goods sold as a percentage of net sales. Additionally, operating expenses slightly decreased as a percentage of net sales for the same period. Other Expense Other expense increased by $40,000 in the six months ended June 30, 2000 compared to the same period in 1999. The increase was primarily attributable to customer use of credit cards. This expense alone increased by $39,000. Additionally, there was a decrease in rental income. Interest Income Interest income increased by $140,000 or 116.5% in the six months ended June 30, 2000 over the corresponding period in 1999. The increase was primarily due to increased investment principal as well as higher short-term interest rates. Provision for Income Taxes The Company's provision for income taxes for the six months ended June 30, 2000 increased to $2,140,000 from $1,857,000 in the corresponding period in 1999. The effective tax rate has decreased slightly from 40.2% to 40.0%. The tax provision in future periods may increase depending in part on the level and nature of the Company's acquisition activities. Net Income As a result of the factors discussed above, net income for the six months ended June 30, 2000 increased by $447,000 or 16.2% over the corresponding period in 1999. Net income per share, on a diluted basis, increased from $0.78 per share to $0.90 per share. 11 12 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Not applicable. 12 13 PART II. OTHER INFORMATION ITEM 1. Legal Proceedings: - ------- No material legal proceedings are pending to which the Company is a party or of which any of its property is subject. ITEM 2. Changes in Securities and Use of Proceeds: - ------- Not applicable. 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: - ------- See footnote 5 to the Consolidated Financial Statements for information regarding a recent acquisition. ITEM 6. Exhibits and Reports on Form 8-K: - ------- a. Exhibits: (27) Financial Data Schedule b. Reports on Form 8-K: None 13 14 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, there unto duly authorized. NATIONAL DENTEX CORPORATION --------------------------- Registrant August 11, 2000 By: /s/ David L. Brown ------------------------------------- David L. Brown President, Treasurer and Director (Principal Executive Officer) August 11, 2000 By: /s/ Richard F. Becker ------------------------------------ Richard F. Becker, Jr. Chief Financial Officer, Vice President of Finance and Assistant Treasurer (Principal Financial and Accounting Officer) 14