1 ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 -------------------- FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTER ENDED JUNE 30, 1998 COMMISSION FILE NUMBER: 000-23092 NATIONAL DENTEX CORPORATION --------------------------- MASSACHUSETTS 04-2762050 ------------- ---------- (STATE OF INCORPORATION) (I.R.S. IDENTIFICATION NO.) 526 BOSTON POST ROAD, WAYLAND, MA 01778 --------------------------------- ----- (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE) (508) - 358 - 4422 ------------------ (REGISTRANT'S TELEPHONE NUMBER) INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES X NO ----- ----- NUMBER OF SHARES OF COMMON STOCK OUTSTANDING AS OF AUGUST 7, 1998: 3,493,160. ------------- ================================================================================ 2 NATIONAL DENTEX CORPORATION FORM 10-Q QUARTER ENDED JUNE 30, 1998 TABLE OF CONTENTS ----------------- PAGE PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS: CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 1997 AND JUNE 30, 3 1998 (UNAUDITED) CONSOLIDATED STATEMENTS OF INCOME FOR THE THREE MONTHS AND SIX MONTHS 4 ENDED JUNE 30, 1997 AND JUNE 30, 1998 (UNAUDITED) CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE SIX 5 MONTHS ENDED JUNE 30, 1998 (UNAUDITED) CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE SIX MONTHS ENDED 6 JUNE 30, 1997 AND JUNE 30, 1998 (UNAUDITED) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 7 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND 9 RESULTS OF OPERATIONS ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 11 PART II. OTHER INFORMATION 12 SIGNATURES 13 3 NATIONAL DENTEX CORPORATION CONSOLIDATED BALANCE SHEETS December 31, June 30, 1997 1998 ------------ ----------- (Unaudited) ASSETS CURRENT ASSETS: Cash and equivalents ................................. $ 4,912,097 $ 5,527,946 Accounts receivable: Trade, less allowance of $146,000 in 1997 and $174,000 in 1998 .................................. 6,708,260 7,494,185 Other .............................................. 208,799 246,043 Inventories .......................................... 3,091,800 3,205,945 Prepaid expenses ..................................... 493,781 693,314 Deferred tax asset ................................... 364,979 369,242 ----------- ----------- Total current assets ................................ 15,779,716 17,536,675 ----------- ----------- PROPERTY AND EQUIPMENT: Land and buildings ................................... 3,590,720 3,683,403 Leasehold and building improvements .................. 3,142,342 3,245,843 Laboratory equipment ................................. 6,491,244 6,744,623 Furniture and fixtures ............................... 1,832,982 1,961,433 Capital leases ....................................... 342,819 342,819 ----------- ----------- 15,400,107 15,978,121 Less - Accumulated depreciation and amortization ..................................... 7,981,989 8,411,122 ----------- ----------- Net property and equipment ........................... 7,418,118 7,566,999 ----------- ----------- OTHER ASSETS, net: Goodwill ............................................. 8,254,191 9,559,483 Noncompetition agreements ............................ 3,508,875 3,520,794 Other ................................................ 768,953 946,261 ----------- ----------- 12,532,019 14,026,538 ----------- ----------- $35,729,853 $39,130,212 ----------- ----------- LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable ..................................... $ 1,137,701 $ 1,290,168 Accrued liabilities: Payroll and employee benefits ...................... 3,112,943 2,705,197 Current portion of deferred purchase price ......... 1,868,577 1,686,355 Other .............................................. 49,807 615,416 ----------- ----------- Total current liabilities .......................... 6,169,028 6,297,136 ----------- ----------- LONG TERM LIABILITIES: Deferred tax liability ............................... 195,827 115,527 Deferred purchase price .............................. 696,367 1,101,634 ----------- ----------- Total long-term liabilities ........................ 892,194 1,217,161 ----------- ----------- 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 3,488,627 shares at June 30, 1998 ...................................... 34,608 34,886 Paid-in capital ...................................... 13,968,731 14,366,710 Retained earnings .................................... 14,665,292 17,214,319 ----------- ----------- Total stockholders' equity ......................... 28,668,631 31,615,915 ----------- ----------- $35,729,853 $39,130,212 ----------- ----------- The accompanying notes are an integral part of these consolidated financial statements. 3 4 NATIONAL DENTEX CORPORATION CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) Three months ended Six months ended ------------------------------ ----------------------------- June 30, June 30, June 30, June 30, 1997 1998 1997 1998 ----------- ------------ ----------- ----------- Net sales ........................................ $15,266,540 $ 16,710,055 $29,247,471 $31,850,428 Cost of goods sold ............................... 8,393,593 9,268,325 16,393,117 17,986,013 ----------- ------------ ----------- ----------- Gross profit .................................. 6,872,947 7,441,730 12,854,354 13,864,415 Total operating expenses ......................... 4,677,995 4,982,514 9,120,448 9,697,603 ----------- ------------ ----------- ----------- Operating income .............................. 2,194,952 2,459,216 3,733,906 4,166,812 Other income (expense) ........................... 28,696 (3,676) 59,848 10,724 Interest income .................................. 16,702 27,448 35,371 56,729 ----------- ------------ ----------- ----------- Income before provision for income taxes ...... 2,240,350 2,482,988 3,829,125 4,234,265 Provision for income taxes ....................... 891,660 988,229 1,523,993 1,685,238 ----------- ------------ ----------- ----------- Net income .................................... $ 1,348,690 $ 1,494,759 $ 2,305,132 $ 2,549,027 =========== ============ =========== =========== Net income per share - Basic ..................... $ .39 $ .43 $ .67 $ .73 =========== ============ =========== =========== Net income per share - Diluted ................... $ .38 $ .42 $ .66 $ .71 =========== ============ =========== =========== Weighted average shares outstanding - Basic ...... 3,457,549 3,484,304 3,449,364 3,473,104 =========== ============ =========== =========== Weighted average shares outstanding - Diluted .... 3,509,545 3,589,490 3,504,191 3,577,621 =========== ============ =========== =========== 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 12,237 shares of common stock under the employee stock option plan ................. -- -- 12,237 122 160,524 -- 160,646 Issuance of 14,601 shares of common stock under the employee stock purchase plan ............... -- -- 14,601 146 213,465 213,611 Issuance of 960 shares of common stock as director's fees ................................. -- -- 960 10 23,990 24,000 Net income ....................................... -- -- -- -- -- 2,549,027 2,549,027 -- --- --------- ------- ----------- ----------- ----------- BALANCE, June 30, 1998 ........................... -- $-- 3,488,627 $34,886 $14,366,710 $17,214,319 $31,615,915 == === ========= ======= =========== =========== =========== The accompanying notes are an integral part of these consolidated financial statements. 5 6 NATIONAL DENTEX CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) For the six months ended June 30, --------------------------------- 1997 1998 ----------- ----------- Cash flows from operating activities: Net income ............................................ $ 2,305,132 $ 2,549,027 Adjustments to reconcile net income to net cash provided by operating activities, net of effects of acquisitions: Depreciation and amortization ..................... 779,681 979,795 Increase in accounts receivable ................... (732,095) (588,412) Increase in inventories ........................... (94,700) (49,145) Increase in prepaid expenses ...................... (137,327) (198,385) (Increase) decrease in deferred tax asset ......... 15,639 (4,263) Increase in other assets .......................... (34,293) (189,152) Increase (decrease) in accounts payable and accrued liabilities .............................. (379,663) 88,517 Decrease in deferred tax liability ................ (102,317) (80,300) ----------- ----------- Net cash provided by operating activities ......... 1,620,057 2,507,682 ----------- ----------- Cash flows from investing activities: Payment for acquisitions, net of cash acquired ...... (2,425,864) (1,340,357) Payment of deferred purchase price .................. (300,681) (433,690) Additions to property and equipment, net ............ (428,960) (516,043) ----------- ----------- Net cash used in investing activities ............. (3,155,505) (2,290,090) ----------- ----------- Cash flows from financing activities: Net payments of current and long-term obligations ... 1,554 -- Proceeds from issuance of common stock .............. 226,093 398,257 ----------- ----------- Net cash provided by financing activities ......... 227,647 398,257 ----------- ----------- Net increase (decrease) in cash ....................... (1,307,801) 615,849 Cash at beginning of period ........................... 4,959,038 4,912,097 ----------- ----------- Cash at end of period ................................. $ 3,651,237 $ 5,527,946 ----------- ----------- Supplemental disclosures of cash flow information: Interest paid ....................................... $ 5,915 $ 5,056 ----------- ----------- Income taxes paid ................................... $ 1,599,391 $ 1,333,150 ----------- ----------- The accompanying notes are an integral part of these consolidated financial statements. 6 7 NATIONAL DENTEX CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 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) 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 calculation of basic earnings per share and diluted earnings per share is as follows: Three Months Ended Three Months Ended Six Months Ended Six Months Ended June 30, 1997 June 30, 1998 June 30, 1997 June 30, 1998 ------------- ------------- ------------- ------------- Net income applicable to common stock $1,348,690 $1,494,759 $2,305,132 $2,549,027 ========== ========== ========== ========== COMPUTATION OF BASIC EARNINGS PER SHARE: Weighted average common shares outstanding 3,457,549 3,484,304 3,449,364 3,473,104 Basic earnings per share $.39 $.43 $.67 $.73 COMPUTATION OF DILUTED EARNINGS PER SHARE: Weighted average common shares outstanding 3,457,549 3,484,304 3,449,364 3,473,104 Shares issuable from assumed exercise of options and warrants (as determined by the application of the treasury stock method) 51,996 105,186 54,827 104,517 ---------- ---------- ---------- ---------- Weighted average common shares outstanding as adjusted 3,509,545 3,589,490 3,504,191 3,577,621 Diluted earnings per share $.38 $.42 $.66 $.71 7 8 Options to purchase 1,500 shares of common stock at $ 25.00 per share were outstanding during the second quarter of 1998 but were not included in the computation of diluted earnings per share because the options' exercise price was greater than the average market price of the common shares. The options, which expire April 2008, were still outstanding on June 30, 1998. (3) COMPREHENSIVE INCOME Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income," establishes standards for reporting and displaying comprehensive income and its components. The Company adopted the statement in its quarter ending March 31, 1998. The Company does not have any other items of comprehensive income. As such, comprehensive income is equal to net income as presented in the consolidated statements of income. 8 9 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ================================================================================ LIQUIDITY AND CAPITAL RESOURCES Working capital increased from $9,611,000 at December 31, 1997 to $11,240,000 at June 30, 1998. Cash and equivalents increased $616,000 from $4,912,000 at December 31, 1997. Operating activities provided $2,508,000 in cash flow for the six months ended June 30,1998. Cash outflows related to dental laboratory acquisitions totaled $1,774,000 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 June 30, 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: Six Months Ended --------------------- June 30, June 30, 1997 1998 -------- -------- Net sales 100.0% 100.0% Cost of goods sold 56.0 56.5 ----- ----- Gross profit 44.0 43.5 Total operating expenses 31.2 30.4 ----- ----- Operating income 12.8 13.1 Other income 0.2 -- Interest income 0.1 0.2 ----- ----- Income before provision for income taxes 13.1 13.3 Provision for income taxes 5.2 5.3 ----- ----- Net income 7.9% 8.0% ----- ----- SIX MONTHS ENDED JUNE 30, 1998 COMPARED WITH SIX MONTHS ENDED JUNE 30, 1997 Net Sales Net sales increased $2,603,000 or 8.9% in the six months ended June 30, 1998 over the corresponding period of the prior year. Approximately $1,851,000 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 six months ended June 30, 1998 and the comparable six months ended June 30, 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 $1,593,000. As a percentage of sales, cost of goods sold increased from 56.0% to 56.5%, representing a gross margin decrease of .5%. 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 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 $577,000 or 6.3% during the six months ended June 30, 1998 over the corresponding period in 1997. Operating expenses decreased as a percentage of net sales from 31.2% to 30.4% during the six months ended June 30, 1998 compared with the corresponding period in 1997. Declines in laboratory incentive compensation, field selling expenses and corporate administrative expenses were partially offset by increased amortization expense. Operating Income Operating income increased by $433,000 or 11.6% for the six months ended June 30, 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 $49,000 in the six months ended June 30, 1998 compared to the same period in 1997. This decrease was primarily due to increased usage of credit cards by customers and a reduction in accounts receivable service charge income on past due balances. Interest Income Interest income increased by $21,000 or 60.4% in the six months ended June 30, 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 the six months ended June 30, 1998 increased to $1,685,000 from $1,524,000 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 six months ended June 30, 1998 increased by $244,000 or 10.6% over the corresponding period in 1997. Net income per share, on a diluted basis, increased from $0.67 per share to $0.73 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." The Company expects to complete installation of these software upgrades by the end of the second quarter in 1999, at which time 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. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Not applicable. 11 12 PART II. OTHER INFORMATION ITEM 1. Legal Proceedings: No material legal proceedings are pending to which the Company is a party or of which any of its property is subject. ITEM 2. Changes in Securities and Use of Proceeds: Not applicable. ITEM 3. Defaults upon Senior Securities: Not applicable. ITEM 4. Submission of Matters to a Vote of Security Holders: Not applicable. ITEM 5. Other Information: Not applicable. ITEM 6. Exhibits and Reports on form 8-K: a. Exhibits: (27) Financial Data Schedule b. Reports on Form 8-K: None 12 13 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 August 10, 1998 By: /s/ William M. Mullahy ------------------------------------ William M. Mullahy, President Chief Executive Officer and Director (Principal Executive Officer) August 10, 1998 By: /s/ David L. Brown ------------------------------------ David L. Brown, Vice President, Chief Financial Officer, Treasurer and Assistant Clerk (Principal Financial Officer) August 10, 1998 By: /s/ Richard F. Becker ------------------------------------ Richard F. Becker, Jr. Vice President, Finance (Principal Accounting Officer) 13