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, 1997 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 May 6, 1997: 3,427,741. <Page 2> NATIONAL DENTEX CORPORATION FORM 10-Q Quarter Ended March 31, 1997 Table of Contents Page PART I. Financial Information Item 1. Financial Statements: Consolidated Balance Sheets as of December 31, 1996 and March 31, 1997 (Unaudited) 3 Consolidated Statements of Income for the three months ended March 31, 1996 and March 31, 1997 (Unaudited) 4 Consolidated Statements of Stockholders' Equity for the three months ended March 31, 1997 (Unaudited) 5 Consolidated Statements of Cash Flows for the three months ended March 31, 1996 and March 31, 1997 (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 13 <Page 3> NATIONAL DENTEX CORPORATION CONSOLIDATED BALANCE SHEETS December 31, March 31, 1996 1997 ------------ ----------- ASSETS (Unaudited) CURRENT ASSETS: Cash and equivalents $ 4,959,038 $ 3,253,282 Accounts receivable: Trade, less allowance of $204,000 in 1996 and $183,000 in 1997 6,149,448 6,752,650 Other 198,481 211,612 Inventories 2,929,898 2,976,202 Prepaid expenses 668,606 853,792 Deferred tax asset 402,703 421,821 ------------- ------------- Total current assets 15,308,174 14,469,359 ------------- ------------- PROPERTY AND EQUIPMENT: Land and buildings 3,773,720 3,773,720 Leasehold and building improvements 2,380,010 2,466,528 Laboratory equipment 5,734,432 5,867,064 Furniture and fixtures 1,592,657 1,623,200 Capital leases 342,819 342,819 ------------- ------------- 13,823,638 14,073,331 Less - Accumulated depreciation and amortization 7,352,321 7,526,524 ------------- ------------- Net property and equipment 6,471,317 6,546,807 ------------- ------------- OTHER ASSETS, net: Goodwill 5,346,757 7,631,150 Other 3,107,873 3,815,678 ------------- ------------- 8,454,630 11,446,828 ------------- ------------- $30,234,121 $32,462,994 ------------- ------------- LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Current portion of long-term obligations $ 204,213 $ 204,981 Accounts payable 973,080 1,425,872 Accrued liabilities: Payroll and employee benefits 2,604,909 2,252,421 Deferred purchase price 1,244,629 1,895,301 Other 422,693 835,184 ------------- ------------- Total long-term liabilities 5,449,524 6,613,759 ------------- ------------- LONG-TERM LIABILITIES: Deferred tax liability 304,819 246,559 Deferred purchase price 443,300 603,667 ------------- ------------- Total long-term liability 748,119 850,226 ------------- ------------- COMMITMENTS AND CONTINGENCIES STOCKHOLDERS EQUITY: Preferred stock, $.01 par value Authorized - 500,000 shares None issued and outstanding --- --- Common stock, $.01 par value Authorized - 800,000 shares Issued and outstanding - 3,440,738 shares at December 31, 1996, and 3,441,355 shares at March 31, 1997 34,407 34,414 Paid-in capital 13,683,615 13,689,697 Retained earnings 10,318,456 11,274,898 ------------- ------------- Total stockholders' equity 24,036,478 24,999,009 ------------- ------------- $30,234,121 $32,462,994 ------------- ------------- The accompanying notes are an integral part of these consolidated financial statements. <Page 4> NATIONAL DENTEX CORPORATION CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) Three Months Ended --------------------------------------- March 31, March 31, 1996 1997 -------------- -------------- Net sales $12,348,598 $13,980,931 Cost of goods sold 7,024,606 7,999,524 -------------- -------------- Gross profit 5,323,992 5,981,407 Total operating expenses 4,024,087 4,442,453 -------------- -------------- Operating income 1,299,905 1,538,954 Other income 41,421 31,152 Interest income 36,694 18,669 -------------- -------------- Income before provision for income taxes 1,378,020 1,588,775 Provision for income taxes 551,208 632,333 -------------- -------------- Net income $ 826,812 $ 956,442 ============== ============== Net income per share $ .24 $ .27 ============== ============== Weighted average shares outstanding 3,503,066 3,498,813 ============== ============== The accompanying notes are an integral part of these consolidated financial statements. <Page 5> NATIONAL DENTEX CORPORATION CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (Unaudited) BALANCE, December 31, 1996 --- $ --- 3,440,738 $ 34,407 $13,683,615 $10,318,456 $24,036,478 Issuance of 617 shares of common stock under the employee stock purchase plan --- --- 617 7 6,082 --- 6,089 Net income --- --- --- --- --- 956,442 956,442 ----------- ----------- ----------- ----------- ----------- ----------- ----------- BALANCE, March 31, 1997 --- --- 3,441,355 $ 34,414 $13,689,697 $11,274,898 $24,999,009 =========== =========== =========== =========== =========== =========== =========== The accompanying notes are an integral part of these consolidated financial statements. <Page 6> NATIONAL DENTEX CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) FOR THE THREE MONTHS ENDED MARCH 31, -------------------------- 1996 1997 -------- -------- Cash flows from operating activities: Net income $826,812 $956,442 Adjustments to reconcile net income to net cash provided by operating activities, net of effects of acquisitions: Depreciation and amortization 321,738 400,220 Increase in accounts receivable (54,595) (311,246) Increase in inventories (142,578) (11,609) Increase in prepaid expenses (268,415) (182,000) Increase in deferred tax asset (2,062) (9,118) Increase in other assets (52,866) (34,292) (Increase) decrease in accounts payable and accrued liabilities (71,139) 365,000 Decrease in deferred tax liability (33,402) (58,260) ------------ ------------ Net cash provided by operating activities 523,493 1,115,137 ------------ ------------ Cash flows from investing activities: Payment for acquisitions, net of cash acquired --- (2,425,863) Payment of deferred purchase price (774,558) (238,961) Additions to property and equipment, net (151,006) (162,925) ------------ ------------ Net cash used in investing activities (925,564) (2,827,749) ------------ ------------ Cash flows from financing activities: Net payments of current and long-term obligations 2,835 767 Proceeds from issuance of common stock 98,022 6,089 ------------ ------------ Net cash provided by financing activities 100,857 6,856 ------------ ------------ Net decrease in cash (301,214) (1,705,756) Cash at beginning of period 4,193,394 4,959,038 ------------ ------------ Cash at end of period $3,892,180 $3,253,282 ------------ ------------ Supplemental disclosures of cash flow information: Interest paid $13,205 $2,776 ------------ ------------ Income taxes paid $89,500 $115,569 ------------ ------------ The accompanying notes are an integral part of these consolidated financial statements. <Page 7> NATIONAL DENTEX CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS March 31, 1997 (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, 1996 as filed with the Securities and Exchange Commission on Form 10-K. (2) Earnings Per Share Net earnings per share ("EPS") amounts have been computed using the weighted average number of common and common equivalent shares outstanding during each year. In March 1997, the Financial Accounting Standards Board (FASB) released SFAS 128, "Earnings Per Share", which will become effective December 31, 1997. As a result, the Company's reported earnings per share for 1996 and 1997 will be restated in the Company's annual report on Form 10-K for the year ending December 31, 1997. The pro forma effect of this accounting change on previously reported earnings per share is as follows: For the Three Months Ended Year Ended -------------------------- ----------- Per Share Amounts March 31 March 31 December 31 1997 1996 1996 -------- -------- ----------- Primary EPS as reported $ .27 $ .24 $ 1.06 Effect of SFAS No. 128 .01 .01 .03 -------- -------- ----------- Basic EPS as restated $ .28 $ .25 $ 1.09 -------- -------- ----------- Fully diluted EPS as reported $ .27 $ .24 $ 1.06 Effect of SFAS No. 128 -- -- -- -------- -------- ----------- Diluted EPS as restated $ .27 $ .24 $ 1.06 -------- -------- ----------- (3) Acquisitions In January, 1997 the Company acquired all of the capital stock of Scrimpshire Dental Studio, Inc. in Hunstville, Alabama. The acquisition, which has been reflected in the accompanying consolidated balance sheet as of March 31, 1997 has been accounted for as a purchase in accordance with Accounting Principle Board Opinion No. 16. <Page 8> Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Liquidity and Capital Resources Working capital decreased from $9,859,000 at December 31, 1996 to $7,856,000 at March 31, 1997. Cash and equivalents decreased $1,706,000 from $4,959,000 at December 31, 1996. Operating activities provided $1,115,000 in cash flow for the three months ended March 31,1997. Cash outflows related to dental laboratory acquisitions totaled $2,665,000 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 March 31, 1997, the full principal amount was available to the Company under both revolving lines of credit. The Company and the Bank are in the process of rewriting these agreements. 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. <Page 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: Three Months Ended --------------------------------------- March 31, March 31, 1996 1997 -------------- -------------- Net sales 100.0% 100.0% Cost of goods sold 56.9 57.2 -------------- -------------- Gross profit 43.1 42.8 Total operating expenses 32.6 31.8 -------------- -------------- Operating income 10.6 11.0 Other income 0.3 0.2 Interest income 0.3 0.1 -------------- -------------- Income before provision for income taxes 11.2 11.4 Provision for income taxes 4.5 4.5 -------------- -------------- Net income 6.7% 6.8% -------------- -------------- Three Months Ended March 31, 1997 Compared with Three Months Ended March 31, 1996 Net Sales Net sales increased $1,632,000 or 13.2% in the three months ended March 31, 1997 over the corresponding period of the prior year. Approximately $1,236,000 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, 1997 and the comparable three months ended March 31, 1996. <Page 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 $975,000. As a percentage of sales, cost of goods sold increased from 56.9% to 57.2%, representing a gross margin decrease of .3%. Increases in materials costs were partially offset by improvements in labor productivity and a decrease in laboratory overhead expenses. 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 $418,000 or 10.4% during the three months ended March 31, 1997 over the corresponding period in 1996. Operating expenses decreased as a percentage of net sales from 32.6% to 31.8% during the three months ended March 31, 1997 over the corresponding period in 1996. Decreases as a percentage of sales in administrative and corporate field support services were partially offset by increased amortization of intangible assets acquired in acquisitions subsequent to March 31, 1996. Operating Income Operating income increased by $211,000 or 15.3% for the three months ended March 31, 1997 over the corresponding period in 1996. The increase was the result of higher sales volume and reductions in operating expenses as a percentage of net sales, partially offset by a slight increase in cost of goods sold. Interest Income Interest income decreased by $18,000 or 49.1% in the three months ended March 31, 1997 over the corresponding period in 1996. The decrease was primarily due to decreased investment principal. Provision for Income Taxes The Company's provision for income taxes for three months ended March 31, 1997 increased to $632,000 from $551,000 in the corresponding period in 1996. The effective tax rate decreased slightly from 40.0% to 39.8%. Net Income As a result of the factors discussed above, net income for the three months ended March 31, 1997 increased by $130,000 or 15.7% over the corresponding period in 1996. Net income per share increased from $0.24 per share to $0.27 per share. <Page 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: The Company's Annual Meeting of Stockholders was held on April 8, 1997. On the record date for the meeting, there were 3,441,321 shares of Common Stock outstanding, of which 3,046,329 shares 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 four and to elect the following persons as directors. Number of Votes Cast Number of Votes Withheld Name FOR Nominee FROM Nominee - ------------------- -------------------- ------------------------ William M. Mullahy 2,913,375 132,954 Jack R. Crosby			2,913,275			133,054 William H. McClurg 2,913,275 133,054 David V. Harkins 2,913,375 132,954 (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 100,000. Number of Votes Cast Number of Votes Cast Number of Votes FOR Proposal AGAINST Proposal ABSTAINED - -------------------- -------------------- --------------- 2,977,762 14,808 53,759 <Page 12> (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 - -------------------- -------------------- --------------- 3,044,229 300 1,800 Item 5. Other Information: On April 8, 1997, Norman F. Strate was appointed to the Company's Board of Directors. 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 <Page 13> 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 May 14, 1997 By:/s/ William M. Mullahy ------------------------------------ William M. Mullahy, President Chief Executive Officer and Director (Principal Executive Officer) May 14, 1997 By:/s/ David L. Brown ------------------------------------ David L. Brown, Vice President, Chief Financial Officer, Treasurer and Assistant Clerk (Principal Financial Officer) EXHIBIT 11 NATIONAL DENTEX CORPORATION COMPUTATION OF NET INCOME PER SHARE Three Months Ended ---------------------------------- March 31, March 31, 1996 1997 ---------------------------------- Computation of Primary Net Income per Share: Net Income applicable to common stock $ 826,812 $ 956,442 ---------------------------------- Shares: Weighted average common shares outstanding 3,341,119 3,441,088 ADD: Shares issuable from assumed exercise of options and warrants (as determined by the application of the treasury stock method) 161,947 57,725 ---------------------------------- Weighted average common shares outstanding as adjusted 3,503,066 3,498,813 ---------------------------------- Primary net income per share $0.24 $0.27 ================================== Three Months Ended ---------------------------------- March 31, March 31, 1996 1997 ---------------------------------- Computation of Fully Diluted Net Income per Share: Net Income per primary computation above $ 826,812 $ 956,442 Shares: Weighted average common shares outstanding 3,341,119 3,441,088 ADD: Shares issuable from assumed exercise of options and warrants (as determined by the application of the treasury stock method) 161,947 57,725 ---------------------------------- Weighted average common shares outstanding as adjusted 3,503,066 3,498,813 ---------------------------------- Fully diluted net income per share $0.24 $0.27 ==================================