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 September 30, 1996 Commission File Number: 0-23092 NATIONAL DENTEX CORPORATION Massachusetts 04-2762050 - ------------------------ --------------------------- (State of Incorporation) (I.R.S. Identification No.) 111 Speen Street, Framingham, MA 01701 - ---------------------------------------- ---------- (Address of Principal Executive Offices) (Zip Code) (508) 820-4800 ------------------------------- (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 8, 1996: 3,440,158. 2 NATIONAL DENTEX CORPORATION FORM 10-Q Quarter Ended September 30, 1996 Table of Contents Page PART I. Financial Information Item 1. Financial Statements: Consolidated Balance Sheets as of December 31, 1995 and September 30, 1996 (Unaudited) 3 Consolidated Statements of Income for the three months and nine months ended September 30, 1995 and September 30, 1996 (Unaudited) 4 Consolidated Statements of Stockholders' Equity for the nine months ended September 30, 1996 (Unaudited) 5 Consolidated Statements of Cash Flows for the nine months ended September 30, 1995 and September 30, 1996 (Unaudited) 6 Notes to Consolidated Financial Statements 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 8 Part II. Other Information 11 Signatures 12 3 NATIONAL DENTEX CORPORATION CONSOLIDATED BALANCE SHEETS December 31, September 30, 1995 1996 ------------ ------------- (Unaudited) ASSETS CURRENT ASSETS: Cash and equivalents $4,193,394 $4,500,414 Accounts receivable: Trade, less allowance of $180,000 in 1995 and $207,000 in 1996 6,024,953 6,200,658 Other 176,099 207,258 Inventories 2,519,143 2,855,890 Prepaid expenses 664,812 742,805 Deferred tax asset 367,275 442,142 ---------- ---------- Total current assets 13,945,676 14,949,167 ---------- ---------- PROPERTY AND EQUIPMENT: Land and buildings 3,773,720 3,773,720 Leasehold and building 2,270,753 2,340,905 improvements Laboratory equipment 5,360,351 5,679,367 Furniture and fixtures 1,264,513 1,575,124 Capital leases 342,819 342,819 ---------- ---------- 13,012,156 13,711,935 Less - Accumulated depreciation and amortization 6,891,909 7,182,891 ---------- ---------- Net property and equipment 6,120,247 6,529,044 ---------- ---------- OTHER ASSETS, net: Goodwill 5,035,911 5,299,926 Other 3,019,950 3,119,104 ---------- ---------- 8,055,861 8,419,030 ---------- ---------- $28,121,784 $29,897,241 ---------- ---------- LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Current portion of long-term obligations $ 110,119 $ 199,340 Accounts payable 1,363,142 931,161 Accrued liabilities: Payroll and employee benefits 2,558,845 2,752,373 Deferred purchase price 1,728,565 1,206,270 Other 627,847 280,150 ---------- ---------- Total current liabilities 6,388,518 5,369,294 ---------- ---------- LONG TERM LIABILITIES: Deferred tax liability 452,195 333,088 Long-term obligations, less current portion 188,343 3,645 Deferred purchase price 1,137,147 1,021,979 ---------- ---------- Total long-term liabilities 1,777,685 1,358,712 ---------- ---------- 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 - 3,271,468 shares at December 31, 1995, and 3,440,137 shares at September 30, 1996 32,715 34,401 Paid-in capital 13,309,336 13,678,718 Retained earnings 6,613,530 9,456,116 ---------- ---------- Total stockholders' equity 19,955,581 23,169,235 ---------- ---------- $28,121,784 $29,897,241 ---------- ---------- The accompanying notes are an integral part of these consolidated financial statements. 4 NATIONAL DENTEX CORPORATION CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) Three Months Ended Nine Months Ended ------------------------------- ------------------------------ September 30, September 30, September 30, September 30, 1995 1996 1995 1996 ------------- ------------- ------------- ------------- Net Sales $10,729,001 $12,987,428 $32,070,656 $39,041,261 Cost of goods sold 6,155,898 7,561,389 17,924,252 22,160,984 ------------- ------------- ------------- ------------- Gross profit 4,573,103 5,426,039 14,145,404 16,880,277 Total operating expenses 3,369,969 4,124,172 10,418,760 12,378,139 ------------- ------------- ------------- ------------- Operating income 1,203,134 1,301,867 3,726,644 4,502,138 Other income 14,686 27,691 119,389 112,889 Interest income 70,150 31,805 208,015 90,559 ------------- ------------- ------------- ------------- Income before provision for income taxes 1,287,970 1,361,363 4,054,048 4,705,586 Provision for income taxes 515,188 525,311 1,621,619 1,863,000 ------------- ------------- ------------- ------------- Net income $ 772,782 $ 836,052 $ 2,432,429 $ 2,842,586 ============= ============= ============= ============= Net income per share .23 .24 .72 .81 =============== =============== =============== =============== Weighted average shares oustanding 3,433,826 3,510,464 3,385,944 3,510,282 ============= ============= ============= ============= The accompanying notes are an integral part of these consolidated financial statements. 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, 1995 --- $ --- 3,271,468 $ 32,715 $13,309,336 $6,613,530 $19,955,581 Issuance of 154,427 shares of common stock under the stock option plan and upon exercise of outstanding warrants --- --- 154,427 1,544 212,331 --- 213,874 Issuance of 13,634 shares of common stock under the employee stock purchase plan --- --- 13,634 136 145,049 --- 145,186 Issuance of 608 shares of common stock as director's fees --- --- 608 6 12,002 --- 12,008 Net income --- --- --- --- --- 2,842,586 2,842,586 ------- ------- ---------- ---------- ---------- ---------- ---------- BALANCE, September 30, 1996 --- $ --- 3,440,137 $34,401 $13,678,718 $9,456,116 $23,169,235 ======= ======= ========== ========== ========== ========== ========== The accompanying notes are an integral part of these consolidated financial statements. 6 NATIONAL DENTEX CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) FOR THE NINE MONTHS ENDED SEPTEMBER 30, --------------------------------------- 1995 1996 ------------ ---------- Cash flows from operating activities Net income $2,432,429 $2,842,586 Adjustments to reconcile net income to net cash provided by operating activities, net of effects of acquisitions: Depreciation and amortization 599,711 999,420 Increase in accounts receivable (192,955) (24,198) Increase in inventories (103,744) (310,996) Increase in prepaid expenses (113,034) (71,023) Increase in deferred tax asset (13,576) (65,667) Decrease in other assets 33,656 168,892 Decrease in accounts payable and accrued liabilities (1,308,806) (796,234) Decrease in deferred tax liability (43,233) (41,107) ----------- ----------- Net cash provided by operating activities 1,290,458 2,701,673 ----------- ----------- Cash flows from investing activities: Payment for acquisitions, net of cash acquired (2,414,559) (839,017) Payment of deferred purchase price --- (978,629) Additions to property and equipment, net (451,352) (852,597) ----------- ----------- Net cash used in investing activities (2,865,911) (2,670,243) ----------- ----------- Cash flows from financing activities: Net payments of current and long-term obligations (8,851) (95,477) Proceeds from issuance of common stock 781,104 371,067 ----------- ----------- Net cash provided by financing activities 772,253 275,590 ----------- ----------- Net increase (decrease) in cash (803,200) 307,020 Cash at beginning of period 6,027,104 4,193,394 ----------- ----------- Cash at end of period $5,223,904 $4,500,414 ----------- ----------- Supplemental disclosures of cash flow information: Interest paid $9,832 $18,741 ----------- ----------- Income taxes paid $1,422,340 $2,143,128 ----------- ----------- The accompanying notes are an integral part of these consolidated financial statements. 7 NATIONAL DENTEX CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS September 30, 1996 (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, 1995 as filed with the Securities and Exchange Commission on Form 10-K. 8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Liquidity and Capital Resources Working capital increased from $7,557,000 at December 31, 1995 to $9,580,000 at September 30, 1996. Cash and equivalents increased $307,000 from $4,193,000 at December 31, 1995. Operating activities provided $2,702,000 in cash flow for the nine months ended September 30,1996. Cash outflows related to dental laboratory acquisitions totaled $1,818,000 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, 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 or Libor rate plus 2%, at the Company's option. The first revolving line of credit matures on June 1, 1998 and the second revolving line of credit matures on June 1, 1997. A commitment fee of one quarter of 1% is payable on the unused amount of the first revolving line of credit. In addition, a draw down fee equal to 3/8 of 1% of each advance under the second revolving line of credit is payable at the time of such advance. At September 30, 1996, the full principal amount was available to the Company under both revolving lines of credit. Management believes that existing working capital and 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 and the costs associated with anticipated acquisitions 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, other factors affecting patient visits to the Company's clients, and other risks indicated in filings with the Securities and Exchange Commission. 9 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 September 30, September 30, Net sales 100.0% 100.0% Cost of goods sold 55.9 56.8 ----- ----- Gross profit 44.1 43.2 Total operating expenses 32.5 31.7 ----- ----- Operating income 11.6 11.5 Other income 0.4 0.3 Interest income 0.7 0.2 ----- ----- Income before provision for income taxes 12.7 12.1 Provision for income taxes 5.1 4.8 ----- ----- Net income 7.6% 7.3% ----- ----- Nine Months Ended September 30, 1996 Compared with Nine Months Ended September 30, 1995 Net Sales Net sales increased $6,971,000 or 21.7% in the nine months ended September 30, 1996 over the corresponding period of the prior year. Approximately $6,023,000 of this increase is attributable to businesses owned less than one year, with the remaining increase representing unit growth at dental laboratories owned during both the nine months ended September 30, 1996 and the comparison nine months ended September 30, 1995. During the three month period ended September 30, 1996, net sales increased $2,258,000 or 21.1% over the corresponding period of the prior year. Approximately $1,843,000 of this increase is attributable to businesses owned less than one year, with the remaining increase representing unit growth at dental laboratories owned during both the three months ended September 30, 1996 and the comparison three months ended September 30, 1995. 10 Cost of Goods Sold Cost of goods sold, which consists principally of labor and related benefits, cost of materials, and laboratory overhead, increased by $4,236,000. As a percentage of sales, cost of goods sold increased from 55.9% to 56.8%, representing a gross margin decrease of .9%. A portion of the gross margin decrease is attributable to the integration of laboratories acquired after September 30, 1995 with the Company's other laboratories. 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 $1,959,000 or 18.8% during the nine months ended September 30, 1996 over the corresponding period in 1995. The increase is primarily attributable to the operating and amortization expense associated with acquired dental laboratories. Operating expenses decreased as a percentage of net sales from 32.5% to 31.7% during the nine months ended September 30, 1996 over the corresponding period in 1995. Operating Income Operating income increased by $775,000 or 20.8% for the nine months ended September 30, 1996 over the corresponding period in 1995. The increase was the result of higher sales volume and reductions in operating expenses as a percentage of net sales, offset by a slight increase in cost of goods sold. Interest Income Interest income decreased by $117,000 or 56.5% in the nine months ended September 30, 1996 over the corresponding period in 1995. The decrease was due to lower interest rates for short-term liquid investments and decreased investment principal. Provision for Income Taxes The Company's provision for income taxes for nine months ended September 30, 1996 increased to $1,863,000 from $1,622,000 in the corresponding period in 1995. The effective tax rate decreased slighly from 40.0% to 39.6%. Net Income As a result of the factors discussed above, net income for the nine months ended September 30, 1996 increased by $410,000 or 16.9% over the corresponding period in 1995. Net income per share increased from $0.72 per share to $0.81 per share. 11 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: Not applicable. Item 3. Defaults upon Senior Securities: Not applicable. Item 4. Submission of Matters to a Vote of Security Holders: None. Item 5. Other Information: None. Item 6. Exhibits and Reports on form 8-K: a. Exhibits: (11) Statement Regarding Computation of Per Share Earnings (27) Financial Data Schedule b. Reports on Form 8-K: None 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 Registrant November 14, 1996 By:/s/ William M. Mullahy William M. Mullahy, President Chief Executive Officer and Director (Principal Executive Officer) November 14, 1996 By:/s/ David L. Brown David L. Brown, Vice President - Finance Chief Financial Officer, Treasurer and Assistant Clerk (Principal Financial Officer) EXHIBIT 11 NATIONAL DENTEX CORPORATION COMPUTATION OF NET INCOME PER SHARE Three Months Ended Nine Months Ended ------------------------------- ------------------------------ September 30, September 30, September 30, September 30, 1995 1996 1995 1996 ------------- ------------- ------------- ------------- Computation of Primary Net Income per Share: Net Income applicable to common stock $772,782 $836,052 $2,432,429 $2,842,586 ----------- ----------- ----------- ----------- Shares: Weighted average common shares outstanding 3,206,978 3,439,904 3,144,870 3,405,721 Add: Shares issuable from assumed exercise of options and warrants (as determined by the 226,848 70,560 241,074 104,561 application of the treasury stock method) ----------- ----------- ----------- ----------- Weighted average common shares outstanding as 3,433,826 3,510,464 3,385,944 3,510,282 adjusted ----------- ----------- ----------- ----------- Primary net income per share $0.23 $0.24 $0.72 $0.81 ============= ============= ============== ============== Three Months Ended Nine Months Ended ------------------------------- ------------------------------ September 30, September 30, September 30, September 30, 1995 1996 1995 1996 ------------- ------------- ------------- ------------- Computation of Fully Diluted Net Income per Share: Net Income per primary computation above $772,782 $836,052 $2,432,429 $2,842,586 Shares: Weighted average common shares outstanding 3,206,978 3,439,904 3,144,870 3,405,721 Add: Shares issuable from assumed exercise of options and warrants (as determined by the application of the treasury stock method) 248,376 70,560 290,852 104,561 Weighted average common shares outstanding as adjusted 3,455,354 3,510,464 3,435,722 3,510,282 ----------- ----------- ----------- ----------- Fully diluted net income per share $0.22 $0.24 $0.71 $0.81 ============== ============= ============== ==============