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 MARCH 31, 1998 COMMISSION FILE NUMBER: 0-23092 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 May 8, 1998: 3,486,710. --------- ================================================================================ 2 NATIONAL DENTEX CORPORATION FORM 10-Q QUARTER ENDED MARCH 31, 1998 TABLE OF CONTENTS PAGE PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS: Consolidated Balance Sheets as of December 31, 1997 and March 31, 1998 (Unaudited) 3 Consolidated Statements of Income for the three months 4 ended March 31, 1997 and March 31, 1998 (Unaudited) Consolidated Statements of Stockholders' Equity for the 5 three months ended March 31, 1998 (Unaudited) Consolidated Statements of Cash Flows for the three months ended 6 March 31, 1997 and March 31, 1998 (Unaudited) Notes to Consolidated Financial Statements 7 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION 9 AND RESULTS OF OPERATIONS Item 3. Quantitative and Qualitative Disclosures About Market Risk 12 PART II. OTHER INFORMATION 13 Signatures 15 3 NATIONAL DENTEX CORPORATION CONSOLIDATED BALANCE SHEETS December 31, March 31, 1997 1998 ------------ ----------- (Unaudited) ASSETS ------ CURRENT ASSETS: Cash and equivalents ...................................... $ 4,912,097 $ 3,885,580 Accounts receivable: Trade, less allowance of $146,000 in 1997 and $158,000 in 1998 ....................................... 6,708,260 7,033,161 Other ................................................... 208,799 208,753 Inventories ............................................... 3,091,800 3,190,591 Prepaid expenses .......................................... 493,781 936,527 Deferred tax asset ........................................ 364,979 366,742 ----------- ----------- Total current assets ..................................... 15,779,716 15,621,354 ----------- ----------- PROPERTY AND EQUIPMENT: Land and buildings ........................................ 3,590,720 3,681,402 Leasehold and building improvements ....................... 3,142,342 3,224,632 Laboratory equipment ...................................... 6,491,244 6,634,862 Furniture and fixtures .................................... 1,832,982 1,928,580 Capital leases ............................................ 342,819 342,819 ----------- ----------- 15,400,107 15,812,295 Less - Accumulated depreciation and amortization .......................................... 7,981,989 8,193,026 ----------- ----------- Net property and equipment ................................ 7,418,118 7,619,269 ----------- ----------- OTHER ASSETS, net: Goodwill .................................................. 8,254,191 9,697,256 Noncompetition agreements ................................. 3,508,875 3,667,335 Other ..................................................... 768,953 867,594 ----------- ----------- 12,532,019 14,232,185 ----------- ----------- $35,729,853 $37,472,808 ----------- ----------- LIABILITIES AND STOCKHOLDERS' EQUITY ------------------------------------ CURRENT LIABILITIES: Accounts payable .......................................... $ 1,137,701 $ 1,127,598 Accrued liabilities: Payroll and employee benefits ........................... 2,826,089 2,502,726 Current portion of deferred purchase price .............. 1,868,577 1,517,652 Other ................................................... 336,661 1,076,414 ----------- ----------- Total current liabilities ............................... 6,169,028 6,224,390 ----------- ----------- LONG TERM LIABILITIES: Deferred tax liability .................................... 195,827 162,615 Deferred purchase price ................................... 696,367 1,341,634 ----------- ----------- Total long-term liabilities ............................. 892,194 1,504,249 ----------- ----------- 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 - 3,460,829 shares at December 31, 1997, and 3,462,882 shares at March 31, 1998 .......................................... 34,608 34,629 Paid-in capital ........................................... 13,968,731 13,989,980 Retained earnings ......................................... 14,665,292 15,719,560 ----------- ----------- Total stockholders' equity .............................. 28,668,631 29,744,169 ----------- ----------- $35,729,853 $37,472,808 ----------- ----------- 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 --------------------------------- March 31, March 31, 1997 1998 ----------- ----------- Net sales ............................................. $13,980,931 $15,140,373 Cost of goods sold .................................... 7,999,524 8,717,688 ----------- ----------- Gross profit ....................................... 5,981,407 6,422,685 Total operating expenses .............................. 4,442,453 4,715,089 ----------- ----------- Operating income ................................... 1,538,954 1,707,596 Other income .......................................... 31,152 14,400 Interest income ....................................... 18,669 29,281 ----------- ----------- Income before provision for income taxes ........... 1,588,775 1,751,277 Provision for income taxes ............................ 632,333 697,009 ----------- ----------- Net income ......................................... $ 956,442 $ 1,054,268 =========== =========== Net income per share - Basic .......................... $ .28 $ .30 =========== =========== Net income per share - Diluted ........................ $ .27 $ .30 =========== =========== Weighted average shares outstanding - Basic ........... 3,441,088 3,461,780 =========== =========== Weighted average shares outstanding - Diluted ......... 3,498,813 3,568,033 =========== =========== 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, 1997 ................... -- $ -- 3,460,829 $34,608 $13,968,731 $14,665,292 $28,668,631 Issuance of 2,053 shares of common stock under the employee stock purchase plan ..... -- -- 2,053 21 21,249 -- 21,270 Net income ................................... -- -- -- -- -- 1,054,268 1,054,268 ---- ---- --------- ------- ----------- ----------- ----------- BALANCE, March 31, 1998 ...................... -- $ -- 3,462,882 $34,629 $13,989,980 $15,719,560 $29,744,169 ==== ==== ========= ======= =========== =========== =========== 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 Three Months Ended March 31, ------------------------------- 1997 1998 ----------- ----------- Cash flows from operating activities: Net income ..................................................... $ 956,442 $ 1,054,268 Adjustments to reconcile net income to net cash provided by operating activities, net of effects of acquisitions: Depreciation and amortization .............................. 400,220 477,384 Increase in accounts receivable ............................ (311,246) (90,098) Increase in inventories .................................... (11,609) (33,791) Increase in prepaid expenses ............................... (182,000) (441,598) Increase in deferred tax asset ............................. (9,118) (1,763) Increase in other assets ................................... (34,292) (110,484) Increase in accounts payable and accrued liabilities ....................................... 365,000 236,723 Decrease in deferred tax liability ......................... (58,260) (33,213) ----------- ----------- Net cash provided by operating activities .................. 1,115,137 1,057,428 ----------- ----------- Cash flows from investing activities: Payment for acquisitions, net of cash acquired ............... (2,425,863) (1,340,357) Payment of deferred purchase price ........................... (238,961) (414,641) Additions to property and equipment, net ..................... (162,925) (350,217) ----------- ----------- Net cash used in investing activities ...................... (2,827,749) (2,105,215) ----------- ----------- Cash flows from financing activities: Net payments of current and long-term obligations ............ 767 - Proceeds from issuance of common stock ....................... 6,089 21,270 ----------- ----------- Net cash provided by financing activities .................. 6,856 21,270 ----------- ----------- Net decrease in cash ........................................... (1,705,756) (1,026,517) Cash at beginning of period .................................... 4,959,038 4,912,097 ----------- ----------- Cash at end of period .......................................... $ 3,253,282 $ 3,885,580 ----------- ----------- Supplemental disclosures of cash flow information: Interest paid ................................................ $ 2,776 $ 2,500 ----------- ----------- Income taxes paid ............................................ $ 115,569 $ 8,500 ----------- ----------- The accompanying notes are an integral part of these consolidated financial statements. 6 7 NATIONAL DENTEX CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 1998 (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, 1997 as filed with the Securities and Exchange Commission on Form 10-K. (2) ACQUISITIONS In March, 1998 the Company acquired all of the capital stock of Continental Dental Laboratory, Inc. in Phoenix, Arizona. The acquisition, which has been reflected in the accompanying consolidated balance sheet as of March 31, 1998 has been accounted for as a purchase in accordance with Accounting Principles Board Opinion No. 16. (3) 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 the effect to all dilutive potential common shares outstanding. These shares include shares issuable upon the exercise of options and warrants as determined by the application of the treasury stock method. The effect of SFAS No. 128 on previously reported earnings per share data was as follows: Three Months Ended March 31, 1997 ------------------- (Per share amounts) ------------------- Primary EPS as reported $.27 Effect of SFAS No. 128 .01 ---- Basic EPS as restated $.28 ==== Fully diluted EPS as reported $.27 Effect of SFAS No. 128 - ---- Diluted EPS as restated $.27 ==== 7 8 (4) 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 has 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 on the consolidated statements of income. 8 9 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ================================================================================ LIQUIDITY AND CAPITAL RESOURCES Working capital decreased from $9,611,000 at December 31, 1997 to $9,397,000 at March 31, 1998. Cash and equivalents decreased $1,026,000 from $4,912,000 at December 31, 1997. Operating activities provided $1,057,000 in cash flow for the three months ended March 31,1998. Cash outflows related to dental laboratory acquisitions totaled $1,755,000 for the same period. The Company maintains a financing agreement (the "Agreement") with State Street Bank and Trust Company (the "Bank"). The Agreement, as amended and extended on June 27, 1997, 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 March 31, 1998 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 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: Three Months Ended ------------------------ March 31, March 31, 1997 1998 --------- --------- Net sales 100.0% 100.0% Cost of goods sold 57.2 57.6 ----- ----- Gross profit 42.8 42.4 Total operating expenses 31.8 31.1 ----- ----- Operating income 11.0 11.3 Other income 0.2 0.1 Interest income 0.1 0.2 ----- ----- Income before provision for income taxes 11.4 11.6 Provision for income taxes 4.5 4.6 ----- ----- Net income 6.8% 7.0% ----- ----- THREE MONTHS ENDED MARCH 31, 1998 COMPARED WITH THREE MONTHS ENDED MARCH 31, 1997 Net Sales Net sales increased $1,159,000 or 8.3% in the three months ended March 31, 1998 over the corresponding period of the prior year. Approximately $747,000 of this increase is attributable to business at dental laboratories owned less than one year, with the remaining increase representing unit growth at dental laboratories owned during both the three months ended March 31, 1998 and the comparable three months ended March 31, 1997. Cost of Goods Sold Cost of goods sold, which consists principally of labor and related benefits, cost of materials, and laboratory overhead, increased by $718,000. As a percentage of sales, cost of goods sold increased from 57.2% to 57.6%, representing a gross margin decrease of .4%. Increases in materials costs and laboratory overhead expenses were partially offset by improvements in labor productivity. The rising cost of palladium, a component of dental alloys used in the manufacture of many of the Company's goods, was a factor in the increased materials costs. The Company has attempted to address the cost of this material in each marketplace and has made appropriate efforts to recover costs through price increases,temporary surcharges and the use of substitute metals in place of palladium-based materials. 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, and (ii) costs of operation by the Company's corporate headquarters and field support services, increased by $273,000 or 6.1% during the three months ended March 31, 1998 over the corresponding period in 1997. Operating expenses decreased as a percentage of net sales from 31.8% to 31.1% during the three months ended March 31, 1998 over the corresponding period in 1997. Operating Income Operating income increased by $169,000 or 11.0% for the three months ended March 31, 1998 over the corresponding period in 1997. The increase was the result of higher sales volume and reductions in operating expenses as a percentage of net sales, partially offset by an increase in cost of goods sold. Other Income Other income decreased $17,000 in the three months ended March 31, 1998 compared to the same period in 1997. This decrease was primarily due to increased usage of credit cards from customers and a reduction in accounts receivable service charge income on past due balances. Interest Income Interest income increased by $10,000 or 56.8% in the three months ended March 31, 1998 over the corresponding period in 1997. The increase was primarily due to increased investment principal. Provision for Income Taxes The Company's provision for income taxes for three months ended March 31, 1998 increased to $697,000 from $632,000 in the corresponding period in 1997. The effective tax rate remained constant at 39.8%. Net Income As a result of the factors discussed above, net income for the three months ended March 31, 1998 increased by $98,000 or 10.2% over the corresponding period in 1997. Net income per share, on a diluted basis, increased from $0.27 per share to $0.30 per share. Year 2000 Compliance The Company's computer software systems are licensed from outside vendors. The Company's principal outside vendors have released upgrades of their software which the vendors represent are "Year 2000 compliant." Once these software upgrades are installed, the Company believes that its computer systems will be Year 2000 compliant. The Company believes that the costs of such compliance will not be material to the Company's results of operations or financial condition. The Company also has relationships with customers, vendors and other third parties that have computer software systems that may not be Year 2000 compliant. As these systems are outside of the Company's control, there can be no assurance that potential systems interruptions would not have a material adverse effect on the Company. 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: The Company's Annual Meeting of Stockholders was held on April 8, 1998. On February 17, 1998, the record date for the meeting, there were 3,461,623 shares of Common Stock outstanding, of which 2,537,747 shares or 73.3% were represented at the meeting by proxy or in person. At the meeting, the following matters were voted upon and approved: (a) Proposal to fix the number of directors at five and to elect the following persons as directors. Name Number of Votes Cast Number of Votes Withheld ---- FOR Nominee FROM Nominee -------------------- ------------------------ William M. Mullahy 2,533,985 3,762 Jack R. Crosby 2,535,693 2,054 William H. McClurg 2,535,693 2,054 David V. Harkins 2,535,793 1,954 Norman F. Strate 2,535,793 1,954 (b) Proposal to approve the amendment of the Company's 1992 Long Term Incentive Plan to increase the number of shares available for issuance by 150,000. Number of Votes Cast Number of Votes Cast Number of Votes FOR Proposal AGAINST Proposal ABSTAINED -------------------- -------------------- --------------- 2,501,009 32,724 4,014 13 14 (c) Proposal to approve the appointment of Arthur Andersen, LLP as auditors. Number of Votes Cast Number of Votes Cast Number of Votes FOR Proposal AGAINST Proposal ABSTAINED -------------------- -------------------- --------------- 2,531,663 4,845 1,239 ITEM 5. Other Information: Not applicable. ITEM 6. Exhibits and Reports on form 8-K: a. Exhibits: (27) Financial Data Schedule b. Reports on Form 8-K: A current report on Form 8-K , including items 5 and 7, was filed on April 17, 1998 in order to file restated Financial Data Schedules pursuant to Financial Accounting Standards Board Statement No. 128, earnings per share. 14 15 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. NATIONAL DENTEX CORPORATION --------------------------- Registrant May 12, 1998 By: /s/ William M. Mullahy ----------------------------------------------- William M. Mullahy, President Chief Executive Officer and Director (Principal Executive Officer) May 12, 1998 By: /s/ David L. Brown ----------------------------------------------- David L. Brown, Vice President, Chief Financial Officer, Treasurer and Assistant Clerk (Principal Financial Officer) May 12, 1998 By: /s/ Richard F. Becker ----------------------------------------------- Richard F. Becker, Jr. Vice President, Finance (Principal Accounting Officer) 15