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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED SEPTEMBER 30, 1998 COMMISSION FILE NUMBER: 000-23092
NATIONAL DENTEX CORPORATION
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MASSACHUSETTS 04-2762050
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(STATE OF INCORPORATION) (I.R.S. IDENTIFICATION NO.)
526 BOSTON POST ROAD, WAYLAND, MA 01778
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(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(508) - 358 - 4422
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(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 NOVEMBER 6, 1998: 3,500,380.
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NATIONAL DENTEX CORPORATION
FORM 10-Q
QUARTER ENDED SEPTEMBER 30, 1998
TABLE OF CONTENTS
PAGE
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS:
CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 1997
AND SEPTEMBER 30, 1998 (UNAUDITED) 3
CONSOLIDATED STATEMENTS OF INCOME FOR THE THREE
MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 1997 AND
SEPTEMBER 30, 1998 (UNAUDITED) 4
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY FOR 5
THE NINE MONTHS ENDED SEPTEMBER 30, 1998 (UNAUDITED)
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE NINE
MONTHS ENDED SEPTEMBER 30, 1997 AND SEPTEMBER 30, 1998
(UNAUDITED) 6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS 9
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 12
PART II. OTHER INFORMATION 13
SIGNATURES 14
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NATIONAL DENTEX CORPORATION
CONSOLIDATED BALANCE SHEETS
December 31, September 30,
1997 1998
----------- ------------
(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and equivalents .............................................. $ 4,912,097 $ 6,633,560
Accounts receivable:
Trade, less allowance of $146,000 in 1997 and
$170,000 in 1998 ............................................. 6,708,260 7,080,095
Other ........................................................... 208,799 215,647
Inventories ....................................................... 3,091,800 3,186,363
Prepaid expenses .................................................. 493,781 751,745
Deferred tax asset ................................................ 364,979 368,821
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Total current assets ............................................. 15,779,716 18,236,231
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PROPERTY AND EQUIPMENT:
Land and buildings ................................................ 3,590,720 3,683,403
Leasehold and building improvements ............................... 3,142,342 3,313,788
Laboratory equipment .............................................. 6,491,244 6,831,142
Furniture and fixtures ............................................ 1,832,982 1,940,873
Capital leases .................................................... 342,819 342,819
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15,400,107 16,112,025
Less - Accumulated depreciation and amortization ................ 7,981,989 8,626,676
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Net property and equipment ........................................ 7,418,118 7,485,349
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OTHER ASSETS, net:
Goodwill .......................................................... 8,254,191 9,460,935
Non competition agreements ........................................ 3,508,875 3,394,086
Other ............................................................. 768,953 994,860
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12,532,019 13,849,881
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$35,729,853 $39,571,461
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LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable .................................................. $ 1,137,701 $ 891,121
Accrued liabilities:
Payroll and employee benefits ................................... 2,826,089 2,933,466
Current portion of deferred purchase price ...................... 1,868,577 1,538,042
Other ........................................................... 336,661 257,859
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Total current liabilities ....................................... 6,169,028 5,620,488
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LONG TERM LIABILITIES:
Deferred tax liability ............................................ 195,827 177,068
Deferred purchase price ........................................... 696,367 1,061,634
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Total long-term liabilities ..................................... 892,194 1,238,702
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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 3,496,270
shares at September 30, 1998 .................................... 34,608 34,963
Paid-in capital ................................................... 13,968,731 14,446,667
Retained earnings ................................................. 14,665,292 18,230,641
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Total stockholders' equity ...................................... 28,668,631 32,712,271
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$35,729,853 $39,571,461
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The accompanying notes are an integral part of these consolidated financial
statements.
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NATIONAL DENTEX CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
Three months ended Nine months ended
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September 30, September 30, September 30, September 30,
1997 1998 1997 1998
------------ ------------ ------------ ------------
Net sales ........................................ $15,117,547 $15,800,533 $44,365,018 $47,650,961
Cost of goods sold ............................... 8,784,726 9,434,612 25,177,843 27,420,625
----------- ----------- ----------- -----------
Gross profit .................................. 6,332,821 6,365,921 19,187,175 20,230,336
Total operating expenses ......................... 4,707,234 4,752,640 13,827,682 14,450,243
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Operating income .............................. 1,625,587 1,613,281 5,359,493 5,780,093
Other income ..................................... 17,742 12,902 77,590 23,626
Interest income .................................. 21,941 62,058 57,312 118,787
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Income before provision for income taxes ...... 1,665,270 1,688,241 5,494,395 5,922,506
Provision for income taxes ....................... 662,777 671,919 2,186,770 2,357,157
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Net income .................................... $ 1,002,493 $ 1,016,322 $ 3,307,625 $ 3,565,349
=========== =========== =========== ===========
Net income per share - Basic ..................... $ .29 $ .29 $ .96 $ 1.02
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Net income per share - Diluted ................... $ .28 $ .29 $ .94 $ 1.00
=========== =========== =========== ===========
Weighted average shares outstanding - Basic ...... 3,459,072 3,493,441 3,452,638 3,479,954
=========== =========== =========== ===========
Weighted average shares outstanding - Diluted .... 3,524,872 3,555,919 3,510,948 3,572,046
=========== =========== =========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
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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 19,880 shares of common stock
under the employee stock option plan....... -- -- 19,880 199 240,481 -- 240,680
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................................... -- -- -- -- -- 3,565,349 3,565,349
---- ----- --------- -------- ----------- ----------- -----------
BALANCE, September 30, 1998.................. -- $ -- 3,496,270 $ 34,963 $14,446,667 $18,230,641 $32,712,271
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The accompanying notes are an integral part of these consolidated financial
statements.
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NATIONAL DENTEX CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
For the nine months ended
September 30,
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1997 1998
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Cash flows from operating activities:
Net income ..................................................... $ 3,307,625 $ 3,565,349
Adjustments to reconcile net income to net cash
provided by operating activities, net of effects
of acquisitions:
Depreciation and amortization .............................. 1,266,938 1,479,994
Increase in accounts receivable ............................ (376,874) (143,926)
Increase in inventories .................................... (140,971) (28,618)
Increase in prepaid expenses ............................... (108,702) (256,816)
(Increase) decrease in deferred tax asset .................. 3,841 (3,842)
Increase in other assets ................................... (166,577) (237,750)
Increase (decrease) in accounts payable and
accrued liabilities ....................................... 149,772 (435,668)
Decrease in deferred tax liability ......................... (60,231) (18,759)
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Net cash provided by operating activities .................. 3,874,821 3,919,964
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Cash flows from investing activities:
Payment for acquisitions, net of cash acquired ............... (3,691,799) (1,385,357)
Payment of deferred purchase price ........................... (604,329) (646,153)
Additions to property and equipment, net ..................... (864,509) (645,282)
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Net cash used in investing activities ...................... (5,160,637) (2,676,792)
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Cash flows from financing activities:
Net payments of current and long-term obligations ............ (200,568) --
Proceeds from issuance of common stock ....................... 267,183 478,291
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Net cash provided by financing activities .................. 66,615 478,291
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Net increase (decrease) in cash ................................ (1,219,201) 1,721,463
Cash at beginning of period .................................... 4,959,038 4,912,097
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Cash at end of period .......................................... $ 3,739,837 $ 6,633,560
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Supplemental disclosures of cash flow information:
Interest paid ................................................ $ 8,599 $ 9,333
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Income taxes paid ............................................ $ 2,518,566 $ 2,330,266
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The accompanying notes are an integral part of these consolidated financial
statements.
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NATIONAL DENTEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 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 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 Nine months Ended Nine months Ended
September 30, 1997 September 30, 1998 September 30, 1997 September 30, 1998
------------------ ------------------ ------------------ ------------------
Net income applicable to common stock $1,002,493 $1,016,322 $3,307,625 $3,565,349
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COMPUTATION OF BASIC EARNINGS PER SHARE:
Weighted average common shares outstanding 3,459,072 3,493,441 3,452,638 3,479,954
Basic earnings per share $ .29 $ .29 $ .96 $ 1.02
COMPUTATION OF DILUTED EARNINGS PER SHARE:
Weighted average common shares outstanding 3,459,072 3,493,441 3,452,638 3,479,954
Shares issuable from assumed exercise of
options and warrants (as determined by the
application of the treasury stock method) 65,800 62,478 58,310 92,092
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Weighted average common shares outstanding
as adjusted 3,524,872 3,555,919 3,510,948 3,572,046
Diluted earnings per share $ .28 $ .29 $ .94 $ 1.00
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Options to purchase 1,500 shares of common stock at $ 25.00 per share were
outstanding during the third 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 September 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.
(4) SUBSEQUENT EVENTS
On November 2, 1998 the Company acquired all of the outstanding capital stock of
Excel Berger Dental Laboratories, Inc. of North Brunswick, New Jersey.
On November 9, 1998 the Company acquired certain assets of Hearn Dental
Laboratory of Indianapolis, Indiana.
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ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
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LIQUIDITY AND CAPITAL RESOURCES
Working capital increased from $9,611,000 at December 31, 1997 to
$12,616,000 at September 30, 1998. Cash and equivalents increased $1,721,000
from $4,912,000 at December 31, 1997. Operating activities provided $3,920,000
in cash flow for the nine months ended September 30,1998. Cash outflows related
to dental laboratory acquisitions totaled $2,032,000 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
September 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 from time to
time in filings with the Securities and Exchange Commission.
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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:
Nine Months Ended
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September 30, September 30,
1997 1998
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Net sales 100.0% 100.0%
Cost of goods sold 56.8 57.5
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Gross profit 43.2 42.5
Total operating expenses 31.2 30.3
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Operating income 12.1 12.1
Other income 0.2 --
Interest income 0.1 0.2
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Income before provision for income taxes 12.4 12.4
Provision for income taxes 4.9 4.9
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Net income 7.5% 7.5%
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NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED WITH NINE MONTHS
ENDED SEPTEMBER 30, 1997
Net Sales
Net sales increased $3,286,000 or 7.4% in the nine months ended
September 30, 1998 over the corresponding period of the prior year.
Approximately $2,298,000 of this increase is attributable to business at dental
laboratories owned less than one year, with the remaining increase representing
sales growth at dental laboratories owned during both the nine months ended
September 30, 1998 and the comparable nine months ended September 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 $2,243,000.
As a percentage of sales, cost of goods sold increased from 56.8% to 57.5%,
representing a gross margin decrease of .7%. 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.
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Total Operating Expenses
Total operating expenses, which consist of (i) selling expenses, the
cost of the Company's pick-up and delivery services and administrative expenses
at the dental laboratory level, (ii) costs of operation by the Company's
corporate headquarters and field support services and (iii) amortization
expense, increased by $623,000 or 4.5% during the nine months ended September
30, 1998 over the corresponding period in 1997. This increase was primarily
attributable to the operating and amortization expenses associated with acquired
dental laboratories.
Operating expenses decreased as a percentage of net sales from 31.2%
to 30.3% during the nine months ended September 30, 1998 compared with the
corresponding period in 1997.
Operating Income
Operating income increased by $421,000 or 7.9% for the nine months
ended September 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 $54,000 in the nine months ended September 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 $61,000 or 107.3% in the nine months ended
September 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 nine months ended
September 30, 1998 increased to $2,357,000 from $2,187,000 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 nine
months ended September 30, 1998 increased by $258,000 or 7.8% over the
corresponding period in 1997. Net income per share, on a diluted basis,
increased from $0.94 per share to $1.00 per share.
YEAR 2000 (Y2K) COMPLIANCE
The company faces Y2K issues in the areas of computerized data processing using
the Company's own equipment along with third party software, and to a lesser
extent, vendor issues in procuring raw materials and difficulties with embedded
microprocessors in communications systems and dental laboratory equipment.
Information Technology Issues
The central focus of the Company's Y2K plan has been to mitigate the data
processing issues. The areas that are being addressed are the Company's
centralized corporate financial systems along with individual laboratory billing
systems. The corporate systems embody the Company's general ledger and accounts
payable systems. The laboratory systems handle production scheduling, billing
and accounts receivable. Purchasing and inventory control records are generally
kept manually.
The Company is in the final testing phase of its central corporate financial
systems. The company has licensed and installed an upgrade from an existing
vendor. While the vendor has represented that the software is Y2K compliant, the
Company intends to complete testing to gain further confidence in the vendor's
representations.
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It is expected that this testing will be completed during the first quarter of
1999.
The Company has also licensed an upgrade for each laboratory system. The Company
has successfully implemented the upgrade at a number of locations and expects to
complete implementation by June 1999. While the vendor has represented that the
software is Y2K compliant, the Company intends to complete its own internal
testing to gain further confidence in the vendor's representations. It is
expected that this testing will be completed by June 1999.
The costs of both the upgrade of the central corporate financial systems and the
laboratory systems of approximately $60,000 have been incurred and will be
amortized according to standard Company practice over an estimated useful life
of five years. While the Company is currently unable to estimate a cost for the
replacement of non-compliant hardware, management is confident that these costs
when identified and prioritized will not materially increase the Company's
normal capital expenditure requirements.
The Company's laboratories use personal computers for word processing and
spreadsheets. An effort is underway to identify non-compliant hardware and
software. While these computers are not critical to business operations, the
Company expects to upgrade necessary equipment during the course of 1999.
Business Partners
The Company does business with a multitude of vendors and is in the process of
gathering Y2K assurances from its key business partners. The Company does not
rely on a single vendor for raw materials inventory. The Company does not
operate a "Just In Time" inventory system. Company inventory levels are
sufficient to absorb temporary delays in raw materials shipments. Alternative
materials and vendors are readily available.
Embedded Systems
The Company uses equipment in manufacturing. While some equipment uses computer
chips for the purpose of temperature regulation and timing, most of the
manufacturing process does not rely on computerized machinery. In most cases,
the equipment uses timers operating at an hourly level. The Company has not yet
identified equipment which is date sensitive. Should equipment fail an
individual laboratory can make use of older backup equipment. The Company is now
in the process of identifying communications equipment and other systems which
may lose needed functionality due to Y2K issues.
ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
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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:
In a press release on October 22, 1998 the Company announced that, due
to health reasons, Mr. William Mullahy will be stepping aside as President and
CEO. He will remain on the Management Committee and retain his seat on the Board
of Directors. The Board of Directors is reviewing the situation and will work
with Mr. Mullahy on an orderly succession in a time frame appropriate for all
parties.
See footnote 4 to the Consolidated Financial Statements for information
regarding recent acquisitions.
ITEM 6. Exhibits and Reports on form 8-K:
a. Exhibits: (27) Financial Data Schedule
b. Reports on Form 8-K: None
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, there unto duly authorized.
NATIONAL DENTEX CORPORATION
Registrant
November 12, 1998 By: /s/ William M. Mullahy
--------------------------------------------
William M. Mullahy, President
Chief Executive Officer and Director
(Principal Executive Officer)
November 12, 1998 By: /s/ David L. Brown
--------------------------------------------
David L. Brown, Vice President, Chief
Financial Officer, Treasurer and Assistant
Clerk (Principal Financial Officer)
November 12, 1998 By: /s/ Richard F. Becker
--------------------------------------------
Richard F. Becker, Jr.
Vice President, Finance
(Principal Accounting Officer)
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