- -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 --------------------- FORM 10-K <Table> (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO </Table> COMMISSION FILE NUMBER 000-23092 --------------------- NATIONAL DENTEX CORPORATION (Exact name of registrant as specified in its charter) <Table> MASSACHUSETTS 04-2762050 (State or Other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification No.) 526 BOSTON POST ROAD, WAYLAND, MA 01778 (Address of Principal Executive Offices) (Zip Code) </Table> (508) 358-4422 (Registrant's Telephone No., including Area Code) SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: COMMON STOCK, PAR VALUE $.01 PER SHARE (Title of Class) 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 [ ] Indicated by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] As of February 19, 2002, the aggregate market value of the 3,362,775 outstanding shares of voting stock held by non-affiliates of the registrant was $86,625,084. As of February 19, 2002, 3,449,881 shares of the registrant's Common Stock, par value $.01 per share, were issued and outstanding. DOCUMENTS INCORPORATED BY REFERENCE The Registrant's definitive Proxy Statement for the Registrant's Special Meeting in Lieu of Annual Meeting of Stockholders to be held on April 9, 2002 is incorporated by reference into Part III. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- PART I ITEM 1. BUSINESS GENERAL National Dentex Corporation (the "Company") was founded in 1982 as H&M Laboratories Services, Inc., a Massachusetts corporation, which acquired six full-service dental laboratories and related branch laboratories from Healthco, Inc. In 1983, the Company changed its name to National Dentex Corporation and acquired 20 additional full-service dental laboratories and related branch laboratories from Lifemark Corporation. The Company today owns and operates 36 dental laboratories, consisting of 33 full-service dental laboratories and three branch laboratories located in 27 states through the United States. The Company's dental laboratories custom design and fabricate dentures, crowns and fixed bridges, and other dental prosthetic appliances. Each dental laboratory operates under its own business name. The Company's principal executive offices are located at 526 Boston Post Road, Wayland, MA 01778, telephone number (508) 358-4422. Its corporate web site is located at www.nationaldentex.com. INFORMATION AS TO INDUSTRY SEGMENTS The Company's business consists of only one industry segment, which is the design, fabrication, marketing and sale of custom dental prosthetic appliances for and to dentists. DESCRIPTION OF BUSINESS The Company's dental laboratories design and fabricate custom dental prosthetic appliances such as dentures, crowns and bridges. These products are produced by trained technicians working in dental laboratories in accordance with work orders and cases (consisting of impressions, models and occlusal registrations of a patient's teeth) provided by the dentist. Dentists are the direct purchasers of the Company's products. The Company's products are grouped into the following three main categories: Restorative Products. Restorative products sold by the Company's dental laboratories consist primarily of crowns and bridges. A crown replaces the part of a tooth which is visible, and is usually made of gold or porcelain. A bridge is a restoration of one or more missing teeth which is permanently attached to the natural teeth or roots. In addition to the traditional crown, the Company also makes 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. The Company also makes inlays, which are restorations made to fit a prepared tooth cavity and then cemented into place. Reconstructive Products. Reconstructive products sold by the Company's dental laboratories consist primarily of partial dentures and full dentures. Partial dentures are removable dental prostheses which replace missing teeth and associated structures. Full dentures are dental prostheses which substitute for the total loss of teeth and associated structures. The Company also sells 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 the Company's 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 which most closely replicate natural teeth. The Company also sells 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. 1 LABORATORY AND CORPORATE OPERATIONS The Company's full-service dental laboratories design and fabricate a full range of custom-made dental prosthetic appliances. These custom products are manufactured from raw materials, such as high noble, noble and predominantly base alloys, dental resins, composites and porcelain. There are different production processes for the various types of prosthetic appliances depending upon the product and the materials used in the type of appliance being fabricated, each of which requires different skills and levels of training. The Company's dental laboratories perform numerous quality control checks throughout the production cycle to improve the quality of its products and to make certain the design and appearance satisfy the needs of the dentist and the patient. The Company's branch dental laboratories are smaller in size and offer a limited number of products. When a branch receives an order that it cannot fill, the branch refers the business to its affiliated full-service dental laboratory. The Company operates each of its dental laboratories as a stand-alone facility under the direction of a local manager responsible for operation of the dental laboratory, supervision of its technical and sales staff and delivery of quality products and services. Each of the Company's dental laboratories markets and sells its products through its own direct sales force, supported by regional managers and Company-wide marketing programs. Employees at each dental laboratory have a direct stake in the financial success of the dental laboratory through participation in the Company's cash and stock incentive plans. The Company's corporate management provides overall strategy, direction and financial management for the Company and negotiates all acquisitions. Corporate personnel also support the operations of its dental laboratories by performing functions which are not directly related to the production and sale of dental laboratory products, such as processing payroll and related benefit programs, obtaining insurance and procuring financing. The Company's corporate management provides marketing, financial and administrative services, negotiates Company-wide purchasing arrangements, and sets quality and performance standards for the dental laboratories. SALES AND MARKETING The Company's local dental laboratories market and sell their products through their own direct sales force. The sales force interacts with dentists within its market area, primarily through visits to dentists' offices, to introduce the dental laboratory's services and products offered, and to promote new products and techniques that can assist dentists in expanding their practices. The Company's customer-focused marketing and sales program entitled the "NDX Reliance Program"(TM) is specifically designed to make choosing a dental laboratory a risk free decision for dentists. Its five components -- Practice Support, Laboratory Systems, Quality Assurance, Reliance Restorations and a Continuing Education Series -- differentiate its qualified laboratories from their many competitors. The Company believes that this unique approach to assist the dentist and his or her staff to improve chairtime efficiencies while providing unsurpassed service, superior quality and product delivery every time they deliver a case, will enhance its ability to expand its base of business by establishing lasting professional relationships with its customers. The Company presently has a total of 32 sales representatives. In addition, the dental laboratories, either alone or with local dental societies, dental schools or study clubs, sponsor technical training clinics for dentists on topics such as advanced clinical techniques. The local dental laboratories also exhibit at state and local dental conventions. COMPETITION The dental laboratory industry is highly competitive and fragmented. A typical dental laboratory's business originates from dentists located within 50 miles of the dental laboratory. There are approximately 12,000 dental laboratories in the United States, ranging in size from one to approximately 200 technicians. The Company estimates that presently its sales represent less than 3% of the total sales of custom-made dental prosthetic appliances in the United States. Competition is primarily from other dental laboratories in the respective local market areas. The vast majority of dental laboratories consist of single units, although the Company believes there is one national chain, the Sentage Corporation Dental Services Group, which competes with the Company in two market areas. There is also limited competition from mail order dental laboratories. 2 Most dentists use a limited number of dental laboratories, relying on those laboratories which produce quality products delivered on a timely basis and which carry all of the products which the dentist may need, even if a particular item is a newer specialty product used only sporadically by the dentist. While price is one of the competitive factors in the dental laboratory industry, the Company believes that most dentists consider product quality and service to be more important. The Company believes that it competes favorably with respect to these factors. The Company considers that its ability to produce quality products locally and to deliver such products on a timely basis, the breadth of its product line, the use of innovative marketing programs, and its sponsorship of educational clinics provide a competitive advantage over other dental laboratories in the local markets in which its dental laboratories operate. The Company's ability to provide newer specialty products for implantology, adult orthodontics and cosmetic dentistry, which require highly skilled technicians, more extensive inventories, additional working capital, and investment in both training and capital equipment, also distinguishes it from many smaller dental laboratories which do not have comparable resources to provide these products. While such specialty products presently represent less than 20% of the Company's business, the Company believes that the ability to offer these products is essential for dental laboratories to remain competitive. EMPLOYEES As of December 31, 2001, the Company had 1,513 employees, 1,488 of whom worked at individual laboratories. Corporate management and administrative staff totaled 25 people. None of the Company's employees is covered by a collective bargaining agreement. Management considers the Company's employee relations to be good. INTELLECTUAL PROPERTY The Company's general technological know-how and experience are important to the conduct of the Company's business. The Company has several trademarks and licenses to use trademarks, but does not deem any of such trademarks or licenses to be material to the conduct of its business. Each of its dental laboratories operates under its own trade name, and the Company considers these trade names to be important to the goodwill of its dental laboratories. ITEM 2. PROPERTIES The Company currently leases a total of approximately 183,000 square feet of space. As of December 31, 2001, the aggregate minimum annual rent payable for all of its leased real properties was approximately $1,608,000. The Company considers these properties to be modern, well maintained and suitable for its purposes and believes that its current facilities are adequate to meet its needs for the foreseeable future. The Company also believes that suitable substitute or replacement space is readily available. The Company's principal executive and administrative offices occupy approximately 10,200 square feet of space in Wayland, Massachusetts. Its 29 leased dental laboratories range in size from 1,000 to 26,000 square feet and average $53,000 in annual base rent. The Company owns seven dental laboratory facilities, which are located in Denver, Colorado; Metairie, Louisiana; Dallas, Texas; Houston, Texas; Jacksonville, Florida; Waukesha, Wisconsin and Shreveport, Louisiana. These locations total approximately 100,000 square feet and range in building size from 4,000 to 33,000 square feet. ITEM 3. 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. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. 3 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company's Common Stock, $.01 par value, is traded on the over-the-counter market, on the Nasdaq National Market System, under the symbol "NADX". The following table presents low and high bid information for the time periods specified. The over-the-counter market quotations reflect inter-dealer prices, without retail markup, markdown or commission and may not necessarily represent actual transactions. The over-the-counter market quotations have been furnished by the Nasdaq Stock Market, Inc. The Company's Common Stock became publicly-traded on December 21, 1993. <Table> <Caption> PRICE ------------------ QUARTER ENDING LOW BID HIGH BID - -------------- ------- -------- 03/31/00.................................................... $10.125 $17.375 06/30/00.................................................... $11.625 $17.000 09/30/00.................................................... $14.250 $18.000 12/31/00.................................................... $17.750 $19.875 03/31/01.................................................... $19.375 $22.250 06/30/01.................................................... $17.990 $24.300 09/30/01.................................................... $20.010 $23.450 12/31/01.................................................... $19.510 $24.600 </Table> The Company has paid no cash dividends in the past and has no plans to pay cash dividends in the foreseeable future. As of February 19, 2002, there were approximately 352 registered record holders of the Company's Common Stock, which the Company believes represented approximately 1,600 beneficial holders. As of February 19, 2002, the low and high bid prices of the Common Stock were $25.76 and $26.15, respectively. 4 ITEM 6. SELECTED FINANCIAL DATA The following selected financial data for the five years ended December 31, 2001 are derived from the audited consolidated financial statements of the Company. The data should be read in conjunction with the consolidated financial statements and the related notes included in this Report and in conjunction with Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations." <Table> <Caption> 1997 1998 1999 2000 2001 ------- ------- ------- ------- ------- (IN THOUSANDS EXCEPT PER SHARE DATA) CONSOLIDATED STATEMENTS OF INCOME: Net sales............................ $59,196 $63,817 $69,639 $75,680 $85,725 Cost of goods sold................... 33,755 36,697 40,396 44,203 50,278 ------- ------- ------- ------- ------- Gross profit......................... 25,441 27,120 29,243 31,477 35,447 Total operating expenses............. 18,370 19,545 20,803 22,133 25,631 ------- ------- ------- ------- ------- Operating income..................... 7,071 7,575 8,440 9,344 9,816 Other income (expense)............... 69 18 (57) (83) (128) Interest income...................... 81 187 336 568 229 ------- ------- ------- ------- ------- Income before provision for income taxes.............................. 7,221 7,780 8,719 9,829 9,917 Provision for income taxes........... 2,874 3,097 3,457 3,868 3,939 ------- ------- ------- ------- ------- Net income........................... $ 4,347 $ 4,683 $ 5,262 $ 5,961 $ 5,978 ======= ======= ======= ======= ======= Net income per share -- basic........ $ 1.26 $ 1.34 $ 1.48 $ 1.67 $ 1.72 ======= ======= ======= ======= ======= Net income per share -- diluted...... $ 1.24 $ 1.32 $ 1.48 $ 1.66 $ 1.68 ======= ======= ======= ======= ======= Weighted average shares outstanding- basic.............................. 3,454 3,486 3,544 3,569 3,479 Weighted average shares outstanding- diluted............................ 3,517 3,560 3,566 3,601 3,562 CONSOLIDATED BALANCE SHEET DATA: Working capital...................... $ 9,611 $13,652 $16,713 $19,455 $15,060 Total assets......................... 35,730 42,470 49,205 55,390 62,083 Long-term debt, including current portion............................ -- -- -- -- -- Stockholders' equity................. $28,669 $33,877 $39,549 $45,596 $49,027 </Table> 5 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS LIQUIDITY AND CAPITAL RESOURCES The Company's working capital decreased from $19,455,000 at December 31, 2000 to $15,060,000 at December 31, 2001. Cash and equivalents decreased $5,923,000 from $12,301,000 at December 31, 2000 to $6,378,000 at December 31, 2001. Operating activities provided $7,435,000 in cash flow for the year ended December 31, 2001. Cash outflows related to dental laboratory acquisitions totaled $9,106,000 for the year ended December 31, 2001. Capital expenditures for the same period were $1,641,000. During the year ended December 31, 2001, the Company repurchased an aggregate of 161,600 shares of common stock, at a total cost of $3,232,000, under its stock repurchase program. 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 December 31, 2001, includes a revolving line of credit of $4,000,000 and a term facility of $8,000,000. The interest rate on both lines of credit is the prime rate minus 0.5% or the London Interbank Offered Rate (LIBOR) rate plus 1.5%, at the Company's option. Both lines of credit mature on June 30, 2004. A commitment fee of one eighth of 1% is payable on the unused amount of both lines of credit. At December 31, 2001, the full principal amount was available to the Company under both lines of credit. The Agreement requires compliance with certain covenants, including the maintenance of specified net worth and other financial ratios. As of December 31, 2001, the Company was in compliance with these covenants. Management believes that cash flow from operations and existing financing will be sufficient to meet contemplated operating and capital requirements, including costs associated with anticipated acquisitions, if any, in the foreseeable future. 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: <Table> <Caption> YEARS ENDED DECEMBER 31, ------------------------ 1999 2000 2001 ------ ------ ------ Net sales................................................... 100.0% 100.0% 100.0% Cost of goods sold.......................................... 58.0 58.4 58.7 ----- ----- ----- Gross profit................................................ 42.0 41.6 41.3 Total operating expenses.................................... 29.9 29.3 29.9 ----- ----- ----- Operating income............................................ 12.1 12.3 11.4 Other income (expense)...................................... (0.1) (0.1) (0.1) Interest income............................................. 0.5 0.8 0.3 ----- ----- ----- Income before provision for income taxes.................... 12.5 13.0 11.6 Provision for income taxes.................................. 5.0 5.1 4.6 ----- ----- ----- Net income.................................................. 7.5% 7.9% 7.0% ===== ===== ===== </Table> 6 YEAR ENDED DECEMBER 31, 2001 COMPARED WITH YEAR ENDED DECEMBER 31, 2000 Net Sales For the year ended December 31, 2001, net sales increased $10,045,000 or 13.3% over the prior year. Approximately $8,615,000 of this increase was attributable to business at dental laboratories owned less than one year, with the remaining increase representing sales growth at dental laboratories owned both the year ended December 31, 2001 and the comparable year ended December 31, 2000. Cost of Goods Sold The Company's cost of goods sold increased by $6,075,000 or 13.7% in the fiscal year ended December 31, 2001 over the prior fiscal year, attributable primarily to increased unit sales. As a percentage of sales, cost of goods sold increased from 58.4% to 58.7%. Increases in labor and laboratory overhead expenses were partially offset by decreases in materials costs. Materials costs decreased as the cost of palladium, a component of dental alloys, declined after several years of steep increases. Additionally, during 2001 the Company reduced its reliance on palladium through the substitution of alternative metals. Total Operating Expenses Operating expenses, which consist of selling, delivery and administrative expenses both at the laboratory and corporate level, increased by $3,498,000 or 15.8% in the year ended December 31, 2001 over 2000. During this same period operating expenses increased as a percentage of net sales from 29.3% in 2000 to 29.9% in 2001. Selling and Corporate Overhead expenses increased as the Company developed a national marketing program, " The NDX Reliance Program". During 2001, the Company absorbed staffing and training expenses necessary for the successful implementation of the program. Operating Income Due to the increase in net sales, partially offset by increases in operating expenses as a percent of net sales, operating income increased $472,000 or 5.1% in fiscal year 2001 over fiscal year 2000. Interest (Income) Expense Interest income decreased by $339,000 in the year ended December 31, 2001 from 2000. The decrease was due to lower investment principal and falling interest rates. Provision for Income Taxes The provision for income taxes increased to $3,939,000 in 2001 from $3,869,000 in 2000. This $70,000 increase was the result of increased income and a higher effective tax rate. The 39.4% effective tax rate for fiscal year 2000 increased to 39.7% for fiscal year 2001. Net Income As a result of all the factors discussed above, net income increased to $5,978,000 or $1.68 per share on a diluted basis in 2001 from $5,961,000 or $1.66 per share on a diluted basis in 2000. YEAR ENDED DECEMBER 31, 2000 COMPARED WITH YEAR ENDED DECEMBER 31, 1999 Net Sales For the year ended December 31, 2000, net sales increased $6,041,000 or 8.7% over the prior year. Approximately $940,000 of this increase was attributable to business at dental laboratories owned less than one year, with the remaining increase representing sales growth at dental laboratories owned both the year ended December 31, 2000 and the comparable year ended December 31, 1999. 7 Cost of Goods Sold The Company's cost of goods sold increased by $3,807,000 or 9.4% in the fiscal year ended December 31, 2000 over the prior fiscal year, attributable primarily to increased unit sales. As a percentage of sales, cost of goods sold increased from 58.0% to 58.4%. Increases in labor and material costs were partially offset by decreases in laboratory overhead expenses. The rising cost of palladium, a component of dental alloys used in the manufacture of many of the Company's products, continued to be a factor in the increased material costs. During 2000, the average cost of this precious metal rose 89% over the average cost during 1999, and this rate accelerated in the fourth quarter. The Company attempted to address this issue in each marketplace by instituting price increases, temporary surcharges and the use of substitute metals. Since the cost of this commodity has continued to increase for several years, each of the Company's laboratories have instituted a program to either switch its current palladium customers to less expensive metals, such as gold, or to make the surcharges permanent by eliminating all unit pricing and charging a fee per unit plus metal. Total Operating Expenses Operating expenses, which consist of selling, delivery and administrative expenses both at the laboratory and corporate level, increased by $1,330,000 or 6.4% in the year ended December 31, 2000 over 1999. During this same period operating expenses decreased as a percentage of net sales from 29.9% in 1999 to 29.3% in 2000. Operating Income Due to the increase in net sales and a reduction in operating expenses as a percent of net sales, operating income increased $903,000 or 10.7% in fiscal year 2000 over fiscal year 1999. Interest (Income) Expense Interest income increased by $233,000 in the year ended December 31, 2000 from 1999. The increase was due to increased investment principal and rising interest rates. Provision for Income Taxes The provision for income taxes increased to $3,868,000 in 2000 from $3,456,000 in 1999. This $412,000 increase was the result of increased income. The 39.6% effective tax rate for fiscal year 1999 declined to 39.4% for fiscal year 2000. Net Income As a result of all the factors discussed above, net income increased to $5,961,000 or $1.66 per share on a diluted basis in 2000 from $5,262,000 or $1.48 per share on a diluted basis in 1999. GENERAL This Form 10-K 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 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. 8 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Not applicable. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA QUARTERLY RESULTS The following table sets forth certain selected financial information for the Company for its eight most recent fiscal quarters. In the opinion of the Company, this unaudited information has been prepared on the same basis as the audited financial information and includes all adjustments (consisting of only normal, recurring adjustments) necessary to present this information fairly when reviewed in conjunction with the Company's Consolidated Financial Statements and notes thereto contained herein. <Table> <Caption> THREE MONTHS ENDED ----------------------------------------------------------------------------------------- MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31, JUNE 30, SEPT. 30, DEC. 31, 2000 2000 2000 2000 2001 2001 2001 2001 --------- -------- --------- -------- --------- -------- --------- -------- (DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA) Net sales.................. $18,960 $19,866 $18,049 $18,805 $20,606 $21,861 $21,007 $ 22,251 Gross profit............... $ 8,082 $ 8,556 $ 7,129 $ 7,710 $ 8,471 $ 9,301 $ 8,296 $ 9,379 Gross margin............... 42.6% 43.1% 39.5% 41.0% 41.1% 42.5% 39.5% 42.2% Operating income........... $ 2,321 $ 2,833 $ 2,050 $ 2,140 $ 2,405 $ 2,925 $ 2,098 $ 2,388 Operating margin........... 12.2% 14.3% 11.4% 11.4% 11.7% 13.4% 10.0% 10.7% Net income................. $ 1,453 $ 1,757 $ 1,305 $ 1,446 $ 1,485 $ 1,783 $ 1,269 $ 1,441 Net income per share....... $ 0.41 $ 0.49 $ 0.36 $ 0.40 $ 0.42 $ 0.50 $ 0.36 $ 0.41 </Table> The Company's results of operations have historically fluctuated on a quarterly basis and are expected to be subject to quarterly fluctuations in the future. As a result, the Company believes that the results of operations for the interim periods are not necessarily indicative of the results to be expected for any future period or for a full year. Quarterly results are subject to fluctuations resulting from a number of factors, including the number of working days in the quarter for both dentists and Company employees, the number of paid vacation days and holidays in the period and general economic conditions. Historically, the second quarter has generated the highest quarterly net sales for the year and has been the most profitable for the Company due to the greater number of working days in the quarter and more patients scheduling visits with their dentists before departing for summer vacation. LOCATION OF FINANCIAL STATEMENTS The consolidated financial statements furnished in connection with this Report are attached immediately following the Signatures. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 9 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT (a) Directors. The information with respect to directors required by this item is incorporated herein by reference from the Company's Proxy Statement dated March 8, 2002 for the Special Meeting in Lieu of Annual Meeting of Shareholders to be held on April 9, 2002 (the "2002 Proxy Statement"). (b) Executive Officers. The information with respect to executive officers required by this item is incorporated herein by reference from the 2002 Proxy Statement. ITEM 11. EXECUTIVE COMPENSATION The information required by this item is incorporated herein by reference from the 2002 Proxy Statement. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this item is incorporated herein by reference from the 2002 Proxy Statement. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this item is incorporated herein by reference from the 2002 Proxy Statement. 10 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a), (d) Financial Statements and Schedules. (1) The financial statements set forth in the list below are filed as part of this Report. (2) The financial statement schedules set forth in the list below are filed as part of this Report. (3) Exhibits filed herewith or incorporated herein by reference are set forth in Item 14(c) below. List of Financial Statements and Schedules Referenced in this Item 14 The historical consolidated financial statements of National Dentex Corporation included herein are as listed below: <Table> <Caption> PAGE ---- Report of Independent Public Accountants.................... F-2 Consolidated Balance Sheets as of December 31, 2000 and 2001...................................................... F-3 Consolidated Statements of Income for the three years ended December 31, 2001......................................... F-4 Consolidated Statements of Stockholders' Equity for the three years ended December 31, 2001....................... F-5 Consolidated Statements of Cash Flows for the three years ended December 31, 2001................................... F-6 Notes to Consolidated Financial Statements.................. F-7 </Table> Financial Statement Schedule included herewith: SCHEDULE II: VALUATION AND QUALIFYING ACCOUNTS All other schedules are omitted because they are not applicable or not required, or because the required information is shown either in the financial statements or in the notes thereto. (b) Reports on Form 8-K. During the Company's fiscal quarter ended December 31, 2001, the Company did not file any Current Reports on Form 8-K. (c) Exhibits. (i) The following exhibits, required by Item 601 of Regulation S-K, are filed herewith: <Table> <Caption> EXHIBIT NO. TITLE - ------- ----- 10 2001 Amended and Restated Loan Agreement with Citizens Bank, dated December 31, 2001. 23 Consent of Arthur Andersen LLP. </Table> (ii) The following exhibit was filed with the Company's Form S-8 Registration Statement on August 1, 2001 (File No. 333-66446) and is herein incorporated by reference: <Table> <Caption> EXHIBIT NO. TITLE - ------- ----- *10a 2001 Stock Plan, as amended. </Table> 11 (iii) The following exhibits were filed with the Company's Annual Report on Form 10-K for the year ended December 31, 2000 and are herein incorporated by reference: <Table> <Caption> EXHIBIT NO. TITLE - ------- ----- *10b Change of Control Severance Agreement between the Company and David L. Brown, dated January 23, 2001. *10c Form of Change of Control Severance Agreements between the Company and each of Arthur Champagne, James F. Dodd III, Richard G. Mariacher, Donald E. Merz and Eloy V. Sepulveda, dated January 23, 2001. </Table> (iv) The following exhibits were filed with the Company's Annual Report on Form 10-K for the year ended December 31, 1999 and are herein incorporated by reference: <Table> <Caption> EXHIBIT NO. TITLE - ------- ----- *10d Employment Agreement between the Company and Donald E. Merz, dated November 1, 1983 *10e Employment Agreement between the Company and Eloy V. Sepulveda, dated June 15, 1983. </Table> (v) The following exhibits were filed with the Company's Annual Report on Form 10-K for the year ended December 31, 1995 and are herein incorporated by reference: <Table> <Caption> EXHIBIT NO. TITLE - ------- ----- *10f Long Term Incentive Plan, as amended. *10g Employment Agreement between the Company and Richard F. Becker, Jr., dated April 1, 1995. *10h Change of Control Severance Agreement between the Company and Richard F. Becker, Jr., dated April 1, 1995. *10i Employment Agreement between the Company and David L. Brown, dated April 1, 1995. *10j Change of Control Severance Agreement between the Company and David L. Brown dated April 1, 1995. *10k Employment Agreement between the Company and William M. Mullahy, dated April 1, 1995. </Table> (vi) The following exhibits were filed as part of the Company's Form S-1 Registration Statement (File No. 33-70440) declared effective by the Securities and Exchange Commission on December 21, 1993 and are herein incorporated by reference: <Table> <Caption> EXHIBIT NO. TITLE - ------- ----- 3a Restated Articles of Organization of the Company, filed with Massachusetts Secretary of State on October 14, 1993. 3b By-Laws of the Company, as amended on December 31, 1982 and May 26, 1992. *10l Salary Continuation Agreement, dated April 1, 1985, between the Company and William M. Mullahy. *10m Salary Continuation Agreement, dated April 1, 1985, between the Company and Donald E. Merz. *10n National Dentex Corporation Laboratory Incentive Compensation Plan. *10o National Dentex Corporation Corporate Executives Incentive Compensation Plan. *10p National Dentex Corporation Group Managers Incentive Compensation Plan. *10q National Dentex Corporation Dollars Plus Plan, as amended on January 3, 1986. *10r National Dentex Corporation Employees' Stock Purchase Plan. </Table> - --------------- * These exhibits relate to a management contract or to a compensatory plan or arrangement. 12 SIGNATURES Pursuant to the requirements of Section 13 and 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. NATIONAL DENTEX CORPORATION BY: /s/ DAVID L. BROWN ------------------------------------ DAVID L. BROWN President & CEO March 8, 2002 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. <Table> <Caption> SIGNATURE TITLE DATE --------- ----- ---- /s/ DAVID V. HARKINS Chairman of the Board and Director March 8, 2002 ------------------------------------------------ David V. Harkins /s/ JACK R. CROSBY Director March 8, 2002 ------------------------------------------------ Jack R. Crosby /s/ DANIEL A. GRADY Director March 8, 2002 ------------------------------------------------ Daniel A. Grady /s/ WILLIAM H. MCCLURG Director March 8, 2002 ------------------------------------------------ William H. McClurg /s/ NORMAN F. STRATE Director March 8, 2002 ------------------------------------------------ Norman F. Strate /s/ DAVID L. BROWN Director, President and CEO March 8, 2002 ------------------------------------------------ (Principal Executive Officer) David L. Brown /s/ RICHARD F. BECKER, JR, Vice President, Treasurer and CFO March 8, 2002 ------------------------------------------------ (Principal Financial Officer) Richard F. Becker, Jr, </Table> 13 NATIONAL DENTEX CORPORATION INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE <Table> <Caption> PAGE ---- Financial Statements: The historical consolidated financial statements of National Dentex Corporation included herein are as listed below. Report of Independent Public Accountants.................. F-2 Consolidated Balance Sheets as of December 31, 2000 and 2001................................................... F-3 Consolidated Statements of Income for the three years ended December 31, 2001................................ F-4 Consolidated Statements of Stockholders' Equity for the three years ended December 31, 2001.................... F-5 Consolidated Statements of Cash Flows for the three years ended December 31, 2001................................ F-6 Notes to Consolidated Financial Statements................ F-7 Schedule: Valuation and Qualifying Accounts......................... Schedule II </Table> F-1 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Shareholders of National Dentex Corporation: We have audited the accompanying consolidated balance sheets of National Dentex Corporation (a Massachusetts corporation) as of December 31, 2001 and 2000, and the related consolidated statements of income, stockholders' equity and cash flows for each of the three years in the period ended December 31, 2001. These consolidated financial statements and the schedule referred to below are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and schedule based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of National Dentex Corporation as of December 31, 2001 and 2000, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States. Our audits were made for the purpose of forming an opinion on the basic consolidated financial statements taken as a whole. The schedule listed in the index to consolidated financial statements is presented for purposes of complying with the Securities and Exchange Commission's rules and is not a part of the basic consolidated financial statements. The schedule has been subjected to the auditing procedures applied in the audits of the basic consolidated financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. ARTHUR ANDERSEN LLP Boston, Massachusetts February 8, 2002 F-2 NATIONAL DENTEX CORPORATION CONSOLIDATED BALANCE SHEETS <Table> <Caption> DECEMBER 31, DECEMBER 31, 2000 2001 ------------ ------------ ASSETS Current Assets: Cash and cash equivalents................................. $12,300,606 $ 6,378,026 Accounts receivable: Trade, less allowance of $274,000 in 2000 and $307,000 in 2001............................................... 8,457,113 9,582,266 Other................................................... 520,294 491,120 Inventories............................................... 4,576,919 5,220,462 Prepaid expenses.......................................... 1,264,219 1,792,607 Deferred tax asset, current............................... 383,750 369,195 ----------- ----------- Total current assets.................................... 27,502,901 23,833,676 ----------- ----------- Property and Equipment: Land and buildings........................................ 3,891,705 4,585,731 Leasehold and building improvements....................... 4,851,336 5,191,126 Laboratory equipment...................................... 8,064,102 8,880,778 Furniture and fixtures.................................... 2,660,024 3,012,380 ----------- ----------- 19,467,167 21,670,015 Less -- Accumulated depreciation and amortization....... 10,097,602 11,346,581 ----------- ----------- Net property and equipment.............................. 9,369,565 10,323,434 ----------- ----------- Other Assets, net: Goodwill.................................................. 12,847,790 21,645,288 Non-competition agreements................................ 3,545,660 3,568,480 Deferred tax asset, noncurrent............................ 358,321 362,701 Other Assets.............................................. 1,765,991 2,349,685 ----------- ----------- 18,517,762 27,926,154 ----------- ----------- $55,390,228 $62,083,264 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Accounts payable.......................................... $ 1,474,487 $ 1,889,234 Accrued liabilities: Payroll and employee benefits........................... 3,752,687 3,540,899 Current portion of deferred purchase price.............. 2,322,254 2,778,160 Other accrued expenses.................................. 498,708 565,042 ----------- ----------- Total current liabilities............................... 8,048,136 8,773,335 ----------- ----------- Long-term Liabilities: Payroll and employee benefits............................. 829,915 1,224,231 Deferred purchase price................................... 915,778 3,058,609 ----------- ----------- Total long-term liabilities............................. 1,745,693 4,282,840 ----------- ----------- Commitments and Contingencies (Note 7) 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 -- 3,580,874 shares at December 31, 2000, and 3,625,663 shares at December 31, 2001 Outstanding -- 3,563,674 shares at December 31, 2000, and 3,446,863 shares at December 31, 2001................... 35,809 36,257 Paid-in capital........................................... 15,297,934 15,982,448 Retained earnings......................................... 30,571,525 36,549,253 Treasury stock at cost -- 17,200 shares at December 31, 2000, and 178,800 shares at December 31, 2001........... (308,869) (3,540,869) ----------- ----------- Total stockholders' equity.............................. 45,596,399 49,027,089 ----------- ----------- $55,390,228 $62,083,264 =========== =========== </Table> The accompanying notes are an integral part of these consolidated financial statements. F-3 NATIONAL DENTEX CORPORATION CONSOLIDATED STATEMENTS OF INCOME <Table> <Caption> YEARS ENDED ------------------------------------------ DECEMBER 31, DECEMBER 31, DECEMBER 31, 1999 2000 2001 ------------ ------------ ------------ Net sales............................................. $69,639,240 $75,679,824 $85,725,076 Cost of goods sold.................................... 40,396,188 44,203,153 50,278,363 ----------- ----------- ----------- Gross profit........................................ 29,243,052 31,476,671 35,446,713 Selling, general and administrative expenses.......... 20,802,705 22,132,962 25,631,096 ----------- ----------- ----------- Operating income.................................... 8,440,347 9,343,709 9,815,617 Other income (expense)................................ (57,491) (82,754) (128,061) Interest income....................................... 335,722 568,496 229,497 ----------- ----------- ----------- Income before provision for income taxes............ 8,718,578 9,829,451 9,917,053 Provision for income taxes............................ 3,456,431 3,868,781 3,939,325 ----------- ----------- ----------- Net income.......................................... $ 5,262,147 $ 5,960,670 $ 5,977,728 =========== =========== =========== Net income per share -- basic......................... $ 1.48 $ 1.67 $ 1.72 =========== =========== =========== Net income per share -- diluted....................... $ 1.48 $ 1.66 $ 1.68 =========== =========== =========== Weighted average shares outstanding -- basic.......... 3,543,752 3,568,528 3,479,056 =========== =========== =========== Weighted average shares outstanding -- diluted........ 3,566,332 3,600,649 3,562,413 =========== =========== =========== </Table> The accompanying notes are an integral part of these consolidated financial statements. F-4 NATIONAL DENTEX CORPORATION CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY <Table> <Caption> COMMON STOCK -------------------- NUMBER OF $.01 PAR PAID-IN RETAINED TREASURY SHARES VALUE CAPITAL EARNINGS STOCK TOTAL --------- -------- ----------- ----------- ----------- ----------- BALANCE, DECEMBER 31, 1998.... 3,513,148 $35,131 $14,493,655 $19,348,708 -- $33,877,494 Issuance of 19,483 shares of common stock under the stock option plans................ 19,483 195 187,919 -- -- 188,114 Issuance of 16,624 shares of common stock under the employee stock purchase plan........................ 16,624 166 209,547 -- -- 209,713 Issuance of 828 shares of common stock as director's fees........................ 828 8 11,998 -- -- 12,006 Net income.................... -- -- -- 5,262,147 -- 5,262,147 --------- ------- ----------- ----------- ----------- ----------- BALANCE, DECEMBER 31, 1999.... 3,550,083 35,500 14,903,119 24,610,855 -- 39,549,474 --------- ------- ----------- ----------- ----------- ----------- Issuance of 12,450 shares of common stock under the stock option plans................ 12,450 125 166,887 -- -- 167,012 Issuance of 17,528 shares of common stock under the employee stock purchase plan........................ 17,528 176 215,944 -- -- 216,120 Issuance of 813 shares of common stock as director's fees........................ 813 8 11,984 -- -- 11,992 Net income.................... -- -- -- 5,960,670 -- 5,960,670 Repurchase of 17,200 shares of common stock under the stock repurchase plan............. -- -- -- -- (308,869) (308,869) --------- ------- ----------- ----------- ----------- ----------- BALANCE, DECEMBER 31, 2000.... 3,580,874 35,809 15,297,934 30,571,525 (308,869) 45,596,399 --------- ------- ----------- ----------- ----------- ----------- Issuance of 25,826 shares of common stock under the stock option plans................ 25,826 259 419,363 -- -- 419,622 Issuance of 15,823 shares of common stock under the employee stock purchase plan........................ 15,823 158 201,142 -- -- 201,300 Issuance of 3,140 shares of common stock as director's fees........................ 3,140 31 64,009 -- -- 64,040 Net income.................... -- -- -- 5,977,728 -- 5,977,728 Repurchase of 161,600 shares of common stock under the stock repurchase plan....... -- -- -- -- (3,232,000) (3,232,000) --------- ------- ----------- ----------- ----------- ----------- BALANCE, DECEMBER 31, 2001.... 3,625,663 $36,257 $15,982,448 $36,549,253 $(3,540,869) $49,027,089 ========= ======= =========== =========== =========== =========== </Table> The accompanying notes are an integral part of these consolidated financial statements. F-5 NATIONAL DENTEX CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS <Table> <Caption> YEARS ENDED ------------------------------------------ DECEMBER 31, DECEMBER 31, DECEMBER 31, 1999 2000 2001 ------------ ------------ ------------ Cash flows from operating activities: Net income......................................... $ 5,262,147 $ 5,960,670 $ 5,977,728 Adjustments to reconcile net income to net cash provided by operating activities, net of effects of acquisitions: Depreciation and amortization.............. 2,286,977 2,491,349 2,922,091 (Benefit) provision for deferred income taxes.................................... (399,565) (53,983) 10,175 Issuance of common stock as director's fees..................................... 12,006 11,992 64,040 Changes in operating assets and liabilities, net of effects of acquisitions: (Increase) decrease in accounts receivable............................... (220,969) (342,901) 101,053 Increase in inventories.................... (413,416) (615,708) (236,418) (Increase) decrease in prepaid expenses.... (598,673) 52,307 (510,672) Increase in other assets................... (97,878) (798,551) (677,119) Decrease in accounts payable and accrued liabilities.............................. (123,662) (503,510) (215,512) ----------- ----------- ------------ Net cash provided by operating activities............................... 5,706,967 6,201,665 7,435,366 ----------- ----------- ------------ Cash flows from investing activities: Payment for acquisitions, net of cash acquired..... (2,172,123) (967,117) (7,532,377) Payment of deferred purchase price................. (508,063) (2,290,879) (1,573,660) Additions to property and equipment, net........... (1,751,948) (1,932,505) (1,640,831) Proceeds from officer's life insurance policy...... 1,016,871 -- -- ----------- ----------- ------------ Net cash used in investing activities...... (3,415,263) (5,190,501) (10,746,868) ----------- ----------- ------------ Cash flows from financing activities: Net proceeds from issuance of common stock......... 397,827 383,132 620,922 Payments for repurchases of common stock........... -- (308,869) (3,232,000) ----------- ----------- ------------ Net cash provided by (used in) financing activities............................... 397,827 74,263 (2,611,078) ----------- ----------- ------------ Net increase (decrease) in cash and equivalents...... 2,689,531 1,085,427 (5,922,580) Cash and equivalents at beginning of period.......... 8,525,648 11,215,179 12,300,606 ----------- ----------- ------------ Cash and equivalents at end of period................ $11,215,179 $12,300,606 $ 6,378,026 =========== =========== ============ Supplemental disclosures of cash flow information: Interest paid...................................... $ 10,139 $ 87,422 $ 11,900 =========== =========== ============ Income taxes paid.................................. $ 3,897,742 $ 4,184,484 $ 3,848,969 =========== =========== ============ Supplemental schedule of non-cash investing and financing activities: The Company purchased the operations of certain dental laboratories in 1999, 2000 and 2001. In connection with these acquisitions, liabilities were assumed as follows: Fair value of assets acquired........................ $ 3,352,000 $ 3,560,000 $ 12,889,000 Cash paid............................................ (2,172,000) (1,029,000) (7,838,000) Deferred purchase price at date of acquisition....... (883,000) (2,190,000) (4,183,000) ----------- ----------- ------------ Liabilities assumed............................. $ 297,000 $ 341,000 $ 868,000 =========== =========== ============ </Table> The accompanying notes are an integral part of these consolidated financial statements. F-6 NATIONAL DENTEX CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2001 (1) ORGANIZATION National Dentex Corporation (the "Company") owned and operated 33 full-service dental laboratories and three branch laboratories in 27 states throughout the United States as of December 31, 2001. Working from dentists' work orders, the Company's dental laboratories custom design and fabricate dentures, crowns and fixed bridges, and other dental prosthetic appliances. (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation The consolidated financial statements include all operations of the Company. Acquisitions are reflected from the date acquired by the Company (see Note 3) to December 31, 2001. All significant intercompany balances and transactions have been eliminated in consolidation. Revenue Recognition Revenue is recognized as the dentists' orders are shipped. In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements". This bulletin established additional guidelines for revenue recognition. The Company's revenue recognition policy complies with this pronouncement. Advertising and Promotional Costs Advertising, promotional and marketing costs are charged to earnings in the period in which they are incurred, in accordance with AICPA Statement of Position (SOP) 93-7, "Reporting on Advertising Costs." Cash and Cash Equivalents The Company considers all highly liquid investments purchased with maturities of 90 days or less to be cash equivalents. Inventories Inventories, consisting principally of raw materials, are stated at the lower of cost (first-in, first-out) or market. Property and Equipment Property and equipment are stated at cost, less accumulated depreciation. Depreciation is calculated using the straight-line method over the following estimated depreciable lives: <Table> Buildings............................................... 25 years Furniture and fixtures.................................. 5-10 years Laboratory equipment.................................... 5-10 years Computer equipment...................................... 3-5 years </Table> Leasehold improvements and capital leases are amortized over the lesser of the assets' estimated useful lives or the lease terms. Gains and losses are recognized upon the disposal of property and equipment, and the related accumulated depreciation and amortization are removed from the accounts. Maintenance, repairs and F-7 NATIONAL DENTEX CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) betterments that do not enhance the value of or increase the life of the assets are charged to operations as incurred. Other Assets Included in other assets are the costs of noncompetition agreements, which are deferred and amortized on a straight-line basis according to the terms of the agreements over 5 to 10 years. Goodwill is being amortized using the straight-line method over a period of 20 years, the estimated useful life. The Company continually evaluates whether events and circumstances have occurred that indicate the remaining estimated useful life of goodwill may warrant revision or that the remaining balance of goodwill may not be recoverable. When factors indicate that goodwill should be evaluated for possible impairment, the Company uses an estimate of the related business segment's undiscounted operating income over the remaining life of the goodwill in measuring whether the goodwill is recoverable. As of December 31, 2001, there have been no impairments of goodwill. Accumulated amortization on these intangible assets was approximately $6,691,000 and $8,348,000 at December 31, 2000 and 2001, respectively. Income Taxes The Company follows Statement of Financial Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes". Under SFAS No. 109, deferred tax assets and liabilities are recognized for the expected future tax consequences of events that have been included in the financial statements or tax returns. The amount of deferred tax asset or liability is based on the difference between the financial statement and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. Earnings Per Share In accordance with the 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 warrants. The pro forma weighted average number of shares outstanding, the dilutive effects of outstanding stock options and warrants, and the shares under option plans that were antidilutive for the years ended December 31, 1999, 2000 and 2001 are as follows: <Table> <Caption> YEARS ENDED DECEMBER 31 --------------------------------- 1999 2000 2001 --------- --------- --------- Weighted average number of shares used in basic earnings per share calculation......................................... 3,543,752 3,568,528 3,479,056 Incremental shares under option plans....................... 22,580 32,121 83,357 --------- --------- --------- Weighed average number of shares used in diluted earnings per share calculation..................................... 3,566,332 3,600,649 3,562,413 ========= ========= ========= Shares under option plans excluded in computation of diluted earnings per share due to antidilutive effects............ 187,851 125,092 10,300 ========= ========= ========= </Table> Stock-Based Compensation Effective January 1, 1996, the Company adopted the provisions of SFAS No. 123, "Accounting for Stock-Based Compensation." The Company has elected to continue to account for employee stock options at intrinsic value, in accordance with Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to Employees," with disclosure of the effects of fair value accounting on net income and earnings per share on a pro forma basis. F-8 NATIONAL DENTEX CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Treasury Stock Purchases The Company has implemented a stock repurchase program as approved by the Company's Board of Directors. The program authorizes the purchase of up to 200,000 shares of common stock in open market or privately negotiated transactions, subject to market conditions. For the years ended December 31, 2000 and 2001, the Company repurchased 17,200 shares and 161,600 shares respectively, which have been classified as treasury stock on the accompanying consolidated balance sheet. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles 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. Disclosures About the Fair Value of Financial Instruments The Company's financial instruments mainly consist of cash and equivalents, accounts receivable, accounts payable, accrued liabilities and long-term liabilities. The carrying amounts of the Company's cash and equivalents, accounts receivable, accounts payable and accrued liabilities approximate their fair value due to the short-term nature of these instruments. The carrying amounts of the long-term liabilities also approximates their fair value, based on rates available to the Company for debt with similar terms and remaining maturities. Reclassifications Certain amounts in the 1999 and 2000 financial statements and notes have been reclassified to conform with the 2001 presentation. Comprehensive Income SFAS No. 130, "Reporting Comprehensive Income," requires disclosure of all components of comprehensive income on an annual and interim basis. Comprehensive income is defined as the change in equity of a business enterprise during a period from transactions and other events and circumstances from nonowner sources. The Company's comprehensive income is equal to its net income for all periods presented. Disclosures about Segments of an Enterprise The Company adopted SFAS No. 131, "Disclosures About Segments of an Enterprise and Related Information," in the fiscal year ended December 31, 2000. SFAS No. 131 establishes standards for reporting information regarding operating segments in annual financial statements and requires selected information for those segments to be presented in interim financial reports issued to stockholders. SFAS No. 131 also establishes standards for related disclosures about products and services and geographic areas. Operating segments are identified as components of an enterprise about which separate financial information is available for the evaluation by the chief decision maker, or decision-making group, in making decisions how to allocate resources and assess performance. To date, the Company has viewed its operations and manages its business principally as one operating segment. Recent Accounting Pronouncements 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 F-9 NATIONAL DENTEX CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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 eliminate the use of the pooling-of-interest method. Additionally, they require that goodwill no longer be amortized but instead be subject to impairment tests at least annually. The Company is required to adopt SFAS No. 141 and SFAS No. 142 on a prospective basis as of January 1, 2002. However, effective July 1, 2001, the Company implemented certain provisions, specifically the discontinuation of goodwill amortization on acquisitions completed after June 30, 2001, and will be implementing the remaining provisions effective January 1, 2002. Goodwill amortization, which will cease effective January 1, 2002, was $653,000, $699,000 and $911,000 during the years ended December 31, 1999, 2000 and 2001, respectively. The Company is currently evaluating the remaining provisions of SFAS No. 142 to determine the effect, if any, they may have on the Company's consolidated results of operations, financial position or cash flows. In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." This statement supercedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," and the accounting and reporting provisions of APB Opinion No. 30, "Reporting the Results of Operations - Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions." This statement requires that one accounting model be used for long-lived assets to be disposed of by sale, whether previously held and used or newly acquired, and it broadens the presentation of discontinued operations to include more disposal transactions. The provisions of this statement are effective for fiscal years beginning after December 15, 2001, and interim periods within those fiscal years, with early adoption permitted. The Company believes the adoption of SFAS No. 144 will not have a material impact on its results of operations or financial position. (3) ACQUISITIONS During 2000, the Company acquired the following dental laboratory operations: <Table> Pro Dental................................................. April 2000 Emmets Dental.............................................. August 2000 Oral Arts.................................................. October 2000 Ideal Dental............................................... November 2000 </Table> During 2001, the Company acquired the following dental laboratory operations: <Table> Creative Dental Ceramics................................... March 2001 Bauer Dental Laboratory.................................... May 2001 Aronovitch Dental Laboratory............................... July 2001 New Mexico Dental Laboratory............................... August 2001 Crown Dental Laboratory.................................... November 2001 The Freeman Center......................................... November 2001 </Table> Acquisitions completed prior to July 1, 2001 have been reflected in the accompanying consolidated financial statements from the dates of acquisition, and have been accounted for as purchases in accordance with APB Opinion No. 16, "Accounting for Business Combinations." Acquisitions completed after June 30, 2001 have been reflected in the accompanying consolidated financial statements from the dates of acquisition, and have been accounted for as purchases in accordance with SFAS No. 141, "Business Combinations." F-10 NATIONAL DENTEX CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The total purchase price has been allocated to the acquired assets and liabilities based on preliminary estimates of their related fair values, which are subject to revision. The total purchase price was allocated as follows as of December 31, 2000 and 2001: <Table> <Caption> 2000 2001 ---------- ----------- Total Purchase Price................................ $3,219,000 $12,021,000 Less Fair Market Values Assigned to Assets and Liabilities: Cash.............................................. 61,000 305,000 Accounts receivable............................... 475,000 1,204,000 Inventories....................................... 120,000 407,000 Property and equipment............................ 104,000 577,000 Noncompete agreements............................. 412,000 720,000 Other assets...................................... 4,000 12,000 Accounts payable.................................. (124,000) (477,000) Accrued liabilities and other..................... (217,000) (391,000) ---------- ----------- Goodwill............................................ $2,384,000 $ 9,664,000 ========== =========== </Table> In connection with these acquisitions, the Company has incurred certain deferred purchase costs relating to noncompete agreements with certain individuals, ranging over periods of 5 to 10 years, and other contingent payments provided for in the purchase agreements. The following unaudited pro forma operating results of the Company assume the acquisitions had been made as of January 1, 2000. Such information includes adjustments to reflect additional depreciation, noncompete amortization, amortization of goodwill and interest expense, and is not necessarily indicative of what the results of operations would actually have been, or of the results of operations in future periods. <Table> <Caption> YEAR ENDED --------------------------- DECEMBER 31, DECEMBER 31, 2000 2001 ------------ ------------ (UNAUDITED) Net sales.......................................... $91,834,000 $93,357,000 Net income......................................... 6,886,000 6,409,000 Net income per share: Basic............................................ $ 1.93 $ 1.84 Diluted.......................................... $ 1.91 $ 1.80 </Table> For all acquisitions completed prior to July 1, 2001, the pro forma results presented above were calculated assuming that amortization expense related to goodwill was incurred throughout fiscal years 2000 and 2001. For acquisitions completed after June 30, 2001, the pro forma results from operations presented above were calculated assuming that no amortization expense related to goodwill was incurred for fiscal years 2000 and 2001, in accordance with SFAS No. 141, which was effective on July 1, 2001. F-11 NATIONAL DENTEX CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (4) INCOME TAXES The following is a summary of the provision for income taxes: <Table> <Caption> YEARS ENDED ------------------------------------------ DECEMBER 31, DECEMBER 31, DECEMBER 31, 1999 2000 2001 ------------ ------------ ------------ Federal -- Current............................... $3,261,696 $3,234,702 $3,192,325 Deferred.............................. (353,230) (45,886) 8,649 ---------- ---------- ---------- 2,908,466 3,188,816 3,200,974 ---------- ---------- ---------- State -- Current............................... 610,300 688,062 736,825 Deferred.............................. (62,335) (8,097) 1,526 ---------- ---------- ---------- 547,965 679,965 738,351 ---------- ---------- ---------- $3,456,431 $3,868,781 $3,939,325 ========== ========== ========== </Table> Deferred income taxes are comprised of the following at December 31, 2000 and 2001: <Table> <Caption> 2000 2001 ---------- ---------- Deferred Tax Assets: Non compete agreements............................... $ 434,337 $ 538,214 Other liabilities.................................... 375,954 275,779 Vacation benefits.................................... 201,903 201,600 Inventory basis differences.......................... 30,597 30,551 Receivables basis differences........................ 72,110 58,022 Other reserves....................................... 79,140 79,021 ---------- ---------- Total deferred tax assets.......................... 1,194,041 1,183,187 ---------- ---------- Deferred Tax Liabilities: Property basis differences........................... (451,970) (451,291) ---------- ---------- Total deferred tax liabilities..................... (451,970) (451,291) ---------- ---------- Net deferred tax asset............................... $ 742,071 $ 731,896 ========== ========== </Table> A reconciliation between the provision for income taxes computed at statutory rates and the amount reflected in the accompanying statements of income is as follows: <Table> <Caption> YEARS ENDED ------------------------------------------ DECEMBER 31, DECEMBER 31, DECEMBER 31, 1999 2000 2001 ------------ ------------ ------------ Statutory federal income tax rate............... 34.0% 34.0% 34.0% State income tax, net of federal income tax benefit....................................... 4.6 4.6 4.9 Other........................................... 1.0 0.8 0.8 ---- ---- ---- Effective income tax rate....................... 39.6% 39.4% 39.7% ==== ==== ==== </Table> F-12 NATIONAL DENTEX CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (5) LINES OF CREDIT 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 on December 31, 2001, includes a revolving lines of credit of $4,000,000 and a term facility of $8,000,000. The interest rate on both lines of credit is the prime rate minus 0.5% or the London Interbank Offered Rate (LIBOR) rate plus 1.5%, at the Company's option. Both lines of credit mature on June 30, 2004. A commitment fee of one-eighth of 1% is payable on the unused amount of both lines of credit. As of December 31, 2001, the full principal amount was available to the Company under both lines of credit. The Agreement requires compliance with certain covenants, including the maintenance of net worth and other financial ratios. As of December 31, 2001, the Company was in compliance with these covenants. (6) BENEFIT PLANS The Company has an employee savings plan (the "Plan") under Internal Revenue Service (IRS) Code Section 401(k). The Plan allows contributions of up to 10% of a participant's salary, a portion of which is matched in cash by the Company. The Company contributes this amount once a year, within 120 days after December 31, the Plan's year-end. All employees are eligible to participate in the Plan after completing one year of service with the Company and the attainment of age 21. Participants become fully vested after six years of service or upon attaining age 65. The Company has incurred charges to operations of approximately $401,000, $412,000 and $398,000 to match contributions for the years ended December 31, 1999, 2000 and 2001, respectively. The Company has an incentive plan, the Laboratory Plan, for dental laboratory management and other designated key employees who could directly influence the financial performance of an individual dental laboratory. Eligibility is determined annually for each laboratory. Each participant is eligible to receive an amount based on the achievement of certain earnings levels of the participant's laboratory, as defined. The Company has incurred charges to operations of approximately $2,157,000, $2,472,000 and $2,725,000 for the years ended December 31, 1999, 2000 and 2001, respectively, under the Laboratory Plan. The Company has an executive bonus plan (the "Executive Plan") for key executives and management of the Company, and a management bonus plan (the "Managers Plan") for laboratory group managers. Eligibility to participate in each plan is determined annually. Participants are eligible to receive a bonus, based on a percentage of salary, dependent upon the achievement of earnings targets, as defined. The bonus is distributed within 90 days after year-end. The Company has incurred aggregate charges to operations of approximately $507,000, $465,000 and $216,000, for the years ended December 31, 1999, 2000 and 2001, respectively, with respect to these plans. The Company established a Supplemental Executive Retirement Plan ("SERP") for certain key employees providing for annual benefits payable over a period of 10 years beginning at age 65 or date of retirement. Benefits will be funded by life insurance contracts purchased by the Company. The cost of these benefits is being charged to expense and accrued using a present value method over the expected terms of employment. The charges to expense for the years ended December 31, 1999, 2000 and 2001, were approximately $171,000, $197,000 and $284,000, respectively. (7) COMMITMENTS AND CONTINGENCIES Operating Leases The Company is committed under various noncancelable operating lease agreements covering its office space and dental laboratory facilities and certain equipment. Certain of these leases also require the Company to pay maintenance, repairs, insurance and related taxes. The total rental expense for the years ended F-13 NATIONAL DENTEX CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) December 31, 1999, 2000 and 2001 was approximately $2,015,000, $2,068,000 and $2,278,000, respectively. The approximate aggregate minimum lease commitments under these leases as of December 31, 2001 are as follows: <Table> <Caption> YEAR AMOUNT - ---- ---------- 2002.................................................... $2,176,000 2003.................................................... 1,785,000 2004.................................................... 1,314,000 2005.................................................... 1,144,000 2006.................................................... 777,000 Thereafter.............................................. 2,357,000 ---------- $9,553,000 ========== </Table> Employment Contracts and Change-in-Control Arrangements In April 1995 and January 2001, the Company entered into employment contracts and change-in-control arrangements with certain key executives. The initial term of these employment contracts expired in April 1998, and the contracts by their terms renew automatically thereafter until termination by the Company or the executive. The change-in-control arrangements provide certain severance benefits in the event that the executive is terminated by the Company without cause or the executive terminates his employment contract for certain specified reasons. (8) STOCK OPTIONS AND EMPLOYEE STOCK PURCHASE PLAN Stock Option Plans In May 1992, the Company's Board of Directors (the "Board") adopted the 1992 Long-Term Incentive Plan (the "LTIP"). Under the LTIP, the Board may grant stock options, stock appreciation rights, restricted stock, deferred stock, stock purchase rights and other stock-based compensation to key employees, officers and directors of the Company. In August 1995, the Board amended the LTIP to increase the number of shares of common stock reserved for issuance under the plan from 150,000 to 235,000, in April 1997 to 335,000 and in April 1998 to 485,000. As of December 31, 2001, 388,743 options were outstanding, at exercise prices ranging between $12.25 and $21.88 per share, which represent the fair market values on the respective dates of grant. Of these options, 235,692 were exercisable at December 31, 2001. F-14 NATIONAL DENTEX CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The following summarizes the transactions of the Company's LTIP for the years ended December 31, 1999, 2000 and 2001: <Table> <Caption> 1999 2000 2001 ------------------- ------------------- ------------------- WEIGHTED WEIGHTED WEIGHTED AVERAGE AVERAGE AVERAGE EXERCISE EXERCISE EXERCISE SHARES PRICE SHARES PRICE SHARES PRICE -------- -------- -------- -------- -------- -------- Outstanding at beginning of year........................... 370,138 $17.28 325,624 $17.51 315,751 $16.33 Granted........................ 6,980 16.75 74,650 13.09 104,500 20.25 Exercised...................... (19,483) 9.66 (12,450) 13.41 (25,826) 16.25 Canceled....................... (32,011) 18.66 (72,073) 18.83 (5,682) 16.46 -------- ------ -------- ------ -------- ------ Outstanding at end of year....... 325,624 $17.51 315,751 $16.33 388,743 $17.39 ======== ====== ======== ====== ======== ====== Exercisable at end of year....... 233,096 $17.66 216,762 $17.53 235,692 $16.99 Weighted average fair value of options granted................ $ 3.76 $ 2.72 $ 3.69 </Table> Of the options outstanding at December 31, 2001, 110,409 have exercise prices between $12.25 and $15.00, with a weighted average price of $12.97 and a weighted average remaining contractual life of 6.4 years. Of these options, 64,526 are exercisable at a weighted average exercise price of $12.94. Another 103,159 of the options outstanding have exercise prices between $15.25 and $20.13, with a weighted average exercise price of $16.97 and a weighted average remaining contractual life of 6.1 years. Of these options, 100,491 are exercisable at a weighted average exercise price of $16.97. The remaining 175,175 options have exercise prices between $20.25 and $21.88, with a weighted average exercise price of $20.43 and a weighted average remaining contractual life of 7.6 years. Of these options, 70,675 are exercisable at a weighted average exercise price of $20.70. In January, 2001, the Company's Board of Directors adopted the 2001 Stock Plan. Under this plan, the Board may grant stock options, stock appreciation rights, restricted stock, deferred stock, stock purchase rights and other stock-based compensation to key employees, officers and directors of the Company. The Board reserved 300,000 shares of common stock for issuance under the Plan. The following summarizes the transactions of the Company's 2001 Stock Plan for the year ended December 31, 2001: <Table> <Caption> 2001 ------------------------- WEIGHTED AVERAGE SHARES EXERCISE PRICE -------- -------------- Outstanding at beginning of year..................... -- $ -- Granted............................................ 116,750 20.47 Exercised.......................................... -- -- Canceled........................................... -- -- -------- ------ Outstanding at end of year........................... 116,750 $20.47 ======== ====== Exercisable at end of year........................... -- $ 0.00 Weighted average fair value of options granted....... $ 3.76 </Table> The options outstanding at the end of December 31, 2001 have exercise prices between $20.05 and $21.05, with a weighted average price of $20.47 and a weighted average remaining contractual life of 9.3 years. None of these options are exercisable at December 31, 2001. F-15 NATIONAL DENTEX CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Also, the Company has the 1992 Employees' Stock Purchase Plan (the "Stock Purchase Plan"), as amended in April 2000, under which an aggregate of 200,000 shares of the Company's common stock may be purchased, through a payroll deduction program, primarily at a price equal to 85% of the fair market value of the common stock on either April 1, 2001 or March 31, 2002, whichever is lower. The number of shares of common stock purchased through the Stock Purchase Plan for 1999, 2000 and 2001 were 16,624, 17,528 and 15,823, respectively. The Company accounts for the LTIP, 2001 Stock Plan and the Stock Purchase Plan under APB Opinion No. 25, under which no compensation cost has been recognized. Had compensation costs for these plans been determined consistent with SFAS No. 123, the Company's net income and earnings per share would have been reduced to the following pro forma amounts: <Table> <Caption> DECEMBER 31, ------------------------------------ 1999 2000 2001 ---------- ---------- ---------- Net Income: As reported.................. $5,262,147 $5,960,670 $5,977,728 Pro forma.................... 4,852,296 5,646,801 5,411,534 Earnings per share: As reported, basic........... $1.48 $1.67 $1.72 As reported, diluted......... 1.48 1.66 1.68 Pro forma, basic............. 1.37 1.58 1.56 Pro forma, diluted........... 1.37 1.58 1.53 </Table> In calculating the pro forma information set forth above, the fair value of each option grant under the LTIP, the 2001 Stock Plan and the Stock Purchase Plan is estimated as of the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions used for grants in 1999, 2000 and 2001, respectively: risk-free interest rates of between 5.56% and 6.47% for the 1999 option grants, between 4.56% and 5.49% for the 2000 option grants and between 0.48% and 3.68% for the 2001 option grants; no expected dividend yield for any plan year; expected lives of between one and three years for the 1999, 2000 and 2001 option grants, based on vesting periods; expected volatility of between 30.96% and 32.78% for option grants in 1999, between 30.45% and 30.75% for option grants in 2000, and between 28.61% and 29.65% for option grants in 2001. F-16 SCHEDULE II NATIONAL DENTEX CORP0RATION VALUATION AND QUALIFYING ACCOUNTS <Table> <Caption> BALANCE AT CHARGED TO BALANCE AT BEGINNING COSTS AND END OF OF PERIOD EXPENSES WRITE-OFFS DEDUCTION PERIOD --------- ---------- ---------- --------- ---------- Allowance for Doubtful Accounts: December 31, 1999....................... 144,549 94,059 42,850 -- 195,758 December 31, 2000....................... 195,758 137,567 59,311 -- 274,014 December 31, 2001....................... 274,014 105,763 72,310 -- 307,467 </Table> NOTES - --------------------------------------------------------------------------------