================================================================================ 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, 2002 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 November 12, 2002: 3,465,209. ================================================================================ 1 FORM 10-Q Quarter Ended September 30, 2002 Table of Contents ----------------- PART I. Financial Information - ------ Item 1. Financial Statements: Page Consolidated Balance Sheets as of December 31, 2001 and September 30, 3 2002 (Unaudited) Consolidated Statements of Income for the three and nine months 4 ended September 30, 2001 (Unaudited) and September 30, 2002 (Unaudited) Consolidated Statement of Stockholders' Equity for the nine 5 months ended September 30, 2002 (Unaudited) Consolidated Statements of Cash Flows for the nine months ended 6 September 30, 2001 (Unaudited) and September 30, 2002 (Unaudited) Notes to Consolidated Financial Statements 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 11 Item 3. Quantitative and Qualitative Disclosures About Market Risk 16 Item 4. Controls and Procedures 16 PART II. Other Information 17 - ------- Signatures 18 Certifications 19 2 NATIONAL DENTEX CORPORATION CONSOLIDATED BALANCE SHEETS December 31, September 30, 2001 2002 ------------------- -------------------- (Unaudited) ASSETS CURRENT ASSETS: Cash and cash equivalents..................................... $ 6,378,026 $ 4,539,210 Accounts receivable: Trade, less allowance of $307,000 in 2001 and $228,000 in 2002........................................... 9,582,266 10,311,074 Other....................................................... 491,120 585,119 Raw material inventories...................................... 5,220,462 5,630,513 Prepaid expenses.............................................. 1,792,607 2,023,967 Deferred tax asset............................................ 369,195 304,401 ------------------- -------------------- Total current assets......................................... 23,833,676 23,394,284 ------------------- -------------------- PROPERTY, PLANT AND EQUIPMENT: Land and buildings............................................ 4,585,731 4,585,731 Leasehold and building improvements........................... 5,191,126 5,943,699 Laboratory equipment.......................................... 8,880,778 9,854,107 Furniture and fixtures........................................ 3,012,380 3,320,277 ------------------- -------------------- 21,670,015 23,703,814 Less- Accumulated depreciation and amortization............... 11,346,581 12,251,888 ------------------- -------------------- Net property, plant and equipment............................. 10,323,434 11,451,926 ------------------- -------------------- OTHER ASSETS, net: Goodwill...................................................... 21,645,288 23,762,587 Non-competition agreements.................................... 3,568,480 2,820,047 Deferred tax asset............................................ 362,701 477,103 Other assets.................................................. 2,349,685 3,040,561 ------------------- -------------------- Total other assets.......................................... 27,926,154 30,100,298 ------------------- -------------------- Total assets................................................ $ 62,083,264 $ 64,946,508 ------------------- -------------------- LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable.............................................. $ 1,889,234 $ 1,882,320 Accrued liabilities: Payroll and employee benefits............................... 3,540,899 3,189,788 Current portion of deferred purchase price.................. 2,778,160 1,886,697 Other accrued expenses...................................... 565,042 523,874 ------------------- -------------------- Total current liabilities................................... 8,773,335 7,482,679 ------------------- -------------------- LONG TERM LIABILITIES: Payroll and employee benefits................................. 1,224,231 1,490,593 Deferred purchase price....................................... 3,058,609 1,965,416 ------------------- -------------------- Total long-term liabilities................................. 4,282,840 3,456,009 ------------------- -------------------- 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 - 3,625,663 shares at December 31, 2001, and 3,665,209 shares at September 30, 2002 Outstanding - 3,446,863 at December 31, 2001, and 3,465,209 shares at September 30, 2002................................ 36,257 36,652 Paid-in capital............................................... 15,982,448 16,643,963 Retained earnings............................................. 36,549,253 41,292,074 Treasury Stock at cost - 178,800 shares at December 31, 2001 and 200,000 shares at September 30, 2002...................... (3,540,869) (3,964,869) ------------------- -------------------- Total stockholders' equity.................................. 49,027,089 54,007,820 ------------------- -------------------- Total liabilities and stockholders' equity.................. $ 62,083,264 $ 64,946,508 ------------------- -------------------- The accompanying notes are an integral part of these consolidated financial statements. 3 NATIONAL DENTEX CORPORATION CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) Three months ended Nine months ended September 30, September 30, September 30, September 30, 2001 2002 2001 2002 ------------- ------------- ------------- ------------- Net sales.............................. $ 21,007,815 $ 23,363,944 $ 63,474,465 $ 71,975,205 Cost of goods sold..................... 12,711,992 14,054,277 37,406,463 42,146,476 ------------- ------------- ------------- ------------- Gross profit........................ 8,295,823 9,309,667 26,068,002 29,828,729 Selling, general and administrative expenses............... 6,197,547 7,144,247 18,640,826 21,831,777 ------------- ------------- ------------- ------------- Operating income.................... 2,098,276 2,165,420 7,427,176 7,996,952 Other expense.......................... 39,191 56,135 99,071 148,728 Interest income........................ 60,636 13,167 233,467 56,477 ------------- ------------- ------------- ------------- Income before provision for income taxes................... 2,119,721 2,122,452 7,561,572 7,904,701 Provision for income taxes............. 850,888 820,070 3,024,629 3,161,880 ------------- ------------- ------------- ------------- Net income ......................... $ 1,268,833 $ 1,302,382 $ 4,536,943 $ 4,742,821 ============= ============= ============= ============== Net income per share - Basic $ .36 $ .37 $ 1.30 $ 1.37 ============= ============= ============= ============== Net income per share - Diluted $ .36 $ .37 $ 1.27 $ 1.32 ============= ============= ============= ============== Weighted average shares outstanding - Basic 3,489,873 3,475,133 3,491,006 3,468,316 ============= ============= ============= ============== Weighted average shares outstanding - Diluted 3,565,136 3,541,391 3,568,598 3,585,799 ============= ============= ============= ============== The accompanying notes are an integral part of these consolidated financial statements. 4 NATIONAL DENTEX CORPORATION CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002 (Unaudited) Common Stock ----------------------- Number of $.01 Par Paid-in Retained Treasury Shares Value Capital Earnings Stock Total ----------- -------- ----------- ----------- ------------ ------------ BALANCE, December 31, 2001................ 3,625,663 $36,257 $15,982,448 $36,549,253 $(3,540,869) $49,027,089 Issuance of 24,380 shares of common stock under the stock option plans....... 24,380 243 357,165 -- -- 357,408 Issuance of 12,706 shares of common stock under the employee stock purchase program.................. 12,706 127 240,292 -- -- 240,419 Issuance of 2,460 shares of common stock as directors' fees.......... 2,460 25 64,058 -- -- 64,083 Net income................................ -- -- -- 4,742,821 -- 4,742,821 Repurchase of 21,200 shares of common stock under the stock repurchase program....................... -- -- -- -- (424,000) (424,000) ============ ========= ============ =========== ============ =========== BALANCE, September 30, 2002............... 3,665,209 $ 36,652 $ 16,643,963 $41,292,074 $(3,964,869) $ 54,007,820 ============ ========= ============ =========== ============ ============ The accompanying notes are an integral part of these consolidated financial statements 5 NATIONAL DENTEX CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) For the nine months ended September 30, 2001 2002 ---------- ---------- Cash flows from operating activities: Net income................................................... $4,536,943 $4,742,821 Adjustments to reconcile net income to net cash provided by operating activities, net of effects of acquisitions: Depreciation and amortization............................ 2,152,775 1,661,699 Provision for deferred income taxes...................... Issuance of common stock as directors' fees.............. Changes in operating assets and liabilities, net of effects of acquisitions: Increase in accounts receivable......................... (72,314) (372,931) Increase in inventories................................. (117,256) (292,224) Increase in prepaid expenses ........................... (929,096) (204,735) Increase in other assets................................ (651,402) (273,754) Decrease in accounts payable and accrued liabilities.... (405,018) (987,285) ---------- ---------- Net cash provided by operating activities............... 4,576,516 4,288,062 ---------- ---------- Cash flows from investing activities: Payment for acquisitions, net of cash acquired............. (4,360,992) (2,769,490) Payment of deferred purchase price......................... (1,427,710) (1,860,625) Additions to property, plant and equipment, net............ (911,043) (1,670,590) ---------- ---------- Net cash used in investing activities.................... (6,699,745) (6,300,705) ---------- ---------- Cash flows from financing activities: Proceeds from issuance of common stock..................... 553,343 597,827 Repurchases of common stock................................ (3,232,000) (424,000) ---------- ---------- Net cash (used in) provided by financing activities...... (2,678,657) 173,827 ---------- ---------- Net decrease in cash and cash equivalents.................... (4,801,886) (1,838,816) Cash and cash equivalents at beginning of period............. 12,300,606 6,378,026 ---------- ---------- Cash and cash equivalents at end of period................... $7,498,720 $4,539,210 ---------- ---------- Supplemental disclosures of cash flow information: Interest paid.............................................. $6,033 $8,488 ---------- ---------- Income taxes paid.......................................... $3,054,148 $3,299,900 ---------- ---------- The accompanying notes are an integral part of these consolidated financial statements. 6 NATIONAL DENTEX CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS September 30, 2002 (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 accounting principles generally accepted in the United States of America 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, 2001 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 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 Three Months Nine Months Nine Months Ended Ended Ended Ended September 30, September 30, September 30, September 30, 2001 2002 2001 2002 ------------ ------------- ------------- ------------- Net income applicable to common stock $1,268,833 $1,302,382 $4,536,943 $4,742,821 ------------ ------------- ------------- ------------- Computation of Basic Earnings per Share: - ---------------------------------------- Weighted average common shares outstanding 3,489,873 3,475,133 3,491,006 3,438,316 Basic earnings per share $.36 $.37 $1.30 $1.37 Computation of Diluted Earnings per Share: - ------------------------------------------ Weighted average common shares outstanding 3,489,873 3,475,133 3,491,006 3,468,316 Shares issuable from assumed exercise of options (as determined by the application of the treasury stock method) 75,263 66,258 77,592 117,483 ------------ ------------ ------------ ------------- Weighted average common shares outstanding as adjusted 3,565,136 3,541,191 3,568,598 3,589,799 Diluted earnings per share $.36 $.37 $1.27 $1.32 7 The following table summarizes options that were outstanding but were not included in the computation of diulted earnings per share because the options' exercise price was greater than the average market price of the common shares: Three Months Ended Nine Months Ended ------------------ ----------------- September 30, 2001 September 30, 2002 September 30, 2001 September 30, 2002 ------------------ ------------------ ------------------ ------------------ Number of Options for Common Shares 10,400 126,050 10,300 115,750 Range of Exercise Prices $21.00 - $21.875 $21.875 - $24.68 $21.875 $24.68 - $24.88 Expires Through: September, 2007 May, 2012 September, 2007 May, 2012 (3) Recent Accounting Pronouncements - ------------------------------------ In July 2001, the Financial Accounting Standards Board (FASB) issued SFAS No. 141, "Business Combinations" and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 addresses the initial recognition and measurement of goodwill and other intangible assets acquired in a business combination. SFAS No. 142 addresses the initial recognition and measurement of intangible assets acquired outside of a business combination, whether acquired individually or with a group of other assets, and the accounting and reporting for goodwill and other intangibles subsequent to their acquisition. These standards require that the purchase method of accounting be used for business combinations and eliminate the use of the pooling-of-interest method. Additionally, they require that goodwill no longer be amortized. The Company was required to adopt SFAS No. 141 and SFAS No. 142 on a prospective basis as of January 1, 2002. In accordance with the provisions of SFAS No. 141 and SFAS No. 142, the Company no longer amortizes goodwill. The impact of goodwill amortization on earnings and earnings per share is as follows: Three Months Three Months Nine Months Nine Months Ended Ended Ended Ended September 30, September 30, September 30, September 30, 2001 2002 2001 2002 ------------- ------------- ------------- ------------- Net income applicable to common stock $1,268,833 $1,302,382 $4,536,943 $4,742,821 Add back: Goodwill amortization 241,482 -- 679,180 -- ------------- ------------- ------------- ------------- Adjusted net income $1,510,315 $1,302,382 $5,216,123 $4,742,821 ============= ============= ============= ============= Computation of Basic Earnings per Share: Reported basic earnings per share $.36 $.37 $1.30 $1.37 Add back: Goodwill amortization .07 -- .19 -- ------------- ------------- ------------- ------------- Adjusted basic earnings per share $.43 $.37 $1.49 $1.37 ============= ============= ============= ============= Computation of Diluted Earnings per Share: Reported earnings per share $.36 $.37 $1.27 $1.32 Add back: Goodwill amortization .07 -- .19 -- ------------- ------------- ------------- ------------- Adjusted diluted earnings per share $.43 $.37 $1.46 $1.32 ============= ============= ============= ============= 8 SFAS No. 142 further requires that goodwill be subject to impairment tests at least annually. A two-step process is required to complete such testing with the first step being to identify any potential impairment. The Company was required to perform this first step effective for the quarter ended June 30, 2002. The second step of the goodwill impairment test measures the amount of the impairment loss, if any. This measurement must be as of the beginning of the year of adoption and must be completed by the end of the Company's fiscal year. The Company has completed both steps of the impairment testing and has determined that no impairment exists at this time. In July 2002, the FASB issued Statement of Financial "Accounting Standards No. 146, "Accounting for Costs Associated with Exit or Disposal Activities" (FAS 146), which nullifies Emerging Issues Task Force (EITF) Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)." FAS 146 requires a liability for a cost associated with an exit or disposal activity be recognized and measured initially at its fair value in the period in which the liability is incurred. If fair value cannot be reasonably estimated, the liability shall be recognized initially in the period in which fair value can be reasonably estimated. The provisions of FAS 146 will be effective for the Company prospectively for exit or disposal activities initiated after December 31, 2002. (4) Legal Proceedings - ---------------------- The Company is involved from time to time in litigation incidental to its business. Management believes that the outcome of current litigation will not have a material adverse effect upon the operations or financial condition of the Company and will not disrupt the normal operations of the Company. (5) Acquisitions - ----------------- On August 1, 2002 the Company acquired certain assets of E&S Dental Laboratory of San Diego, California. E&S Dental had sales in excess of $1,500,000 in its last fiscal year ended December 31, 2001. The acquisition has been accounted for as a purchase in accordance with SFAS No. 141. The results of operations and cash flows of E&S Dental Laboratory have been included in the consolidated financial statements of the Company from the date of acquisition. 9 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations ================================================================================ Liquidity and Capital Resources - ------------------------------- The Company's working capital increased from $15,060,000 at December 31, 2001 to $15,912,000 at September 30, 2002. Cash and cash equivalents decreased $1,839,000 from $6,378,000 at December 31, 2001 to $4,539,000 at September 30, 2002. Operating activities provided $4,288,000 in cash flow for the nine-month period ending September 30, 2002. Cash outflows related to dental laboratory acquisitions totaled $4,630,000 for the nine months ended September 30, 2002 compared to $5,789,000 for the same period in 2001. Repurchases of the Company's common stock under the Company's stock repurchase program totaled $424,000 for the nine months ended September 30, 2002. The Company maintains a financing agreement (the "Agreement") with Citizens Bank of Massachusetts (the "Bank"). The Agreement, as amended and extended effective December 31, 2001, includes a revolving line of credit of $4,000,000 and a term facility of $8,000,000. The interest rate on both lines of credit is the prime rate minus 0.5% or the London Interbank Offered Rate (LIBOR) rate plus 1.5%, at the Company's option. Both lines of credit mature on June 30, 2004. A commitment fee of one eighth of 1% is payable on the unused amount of both lines of credit. At September 30, 2002, the full principal amount was available to the Company under both lines of credit. The Agreement requires compliance with certain covenants, including the maintenance of specified net worth and other financial ratios. As of September 30, 2002, the Company was in compliance with these covenants. 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. Commitments and Contingencies - ----------------------------- The following table represents a list of the Company's contractual obligations and commitments as of September 30, 2002: Payments Due By Period Less Than Greater Than Total 1 Year 1 - 3 Years 4 - 5 Years 5 Years ------------ ---------- ------------- ------------ ------------- Operating Leases.................. 10,739,000 2,583,000 4,837,000 1,533,000 1,786,000 Laboratory Purchase Obligations... 3,852,000 1,887,000 1,965,000 -- -- ------------ ---------- ------------- ------------ ------------- TOTAL........................ $14,591,000 $4,470,000 $6,802,000 $1,533,000 $1,786,000 ============ ========== ============= ============ ============= Laboratory purchase obligations totaling $3,852,000 are classified as deferred acquisition costs and are presented in the liability section of the balance sheet. The Company is committed under various noncancelable operating lease agreements covering its office space and dental laboratory facilities and certain equipment. Certain of these leases also require the Company to pay maintenance, repairs, insurance and related taxes. 10 Forward-Looking Statements - -------------------------- 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. These statements are not a guarantee of future performance, and involve certain risks, uncertainties and assumptions that are difficult to predict. 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, expenses associated with the introduction of a national marketing program and other risks indicated from time to time in filings with the Securities and Exchange Commission, including the Company's annual report on Form 10-K and quarterly reports on Form 10-Q. Critical Accounting Policies - ---------------------------- Financial Reporting Release No. 60, which was recently released by the Securities and Exchange Commission, requires all companies to include a discussion of critical accounting policies or methods used in the preparation of financial statements. Note 2 of the notes to consolidated financial statements, in the Company's December 31, 2001 annual report on Form 10-K, includes a summary of our significant accounting policies and methods used in the preparation of our consolidated financial statements. While the preparation of our consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the reported amounts of expenses during the reporting period, we do not believe the Company's financial statements are significantly affected by complex accounting policies and methods. 11 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 Nine Months Ended September 30, September 30, September 30, September 30, 2001 2002 2001 2002 ------------ ------------ ------------- ------------- Net sales 100.0% 100.0% 100.0% 100.0% Cost of goods sold 60.5 60.2 58.9 58.6 ------------ ------------ ------------- ------------- Gross profit 39.5 39.8 41.1 41.4 Selling, general and administrative expenses 29.5 30.6 29.4 30.3 ------------ ------------ ------------- ------------- Operating income 10.0 9.2 11.7 11.1 Other expense 0.2 0.2 0.2 0.2 Interest income 0.3 0.1 0.4 0.1 ------------ ------------ ------------- ------------- Income before provision for income taxes 10.1 9.1 11.9 11.0 Provision for income taxes 4.1 3.5 4.8 4.4 ------------ ------------ ------------- ------------- Net income 6.0% 5.6% 7.1% 6.6% ------------ ------------ ------------- ------------- Nine months Ended September 30, 2002 Compared with Nine Months Ended September 30, 2001 --------------------------------------------------------------------------------------- Net Sales For the nine-month period ended September 30, 2002, net sales increased $8,501,000 or 13.4% over the corresponding period of the prior year. Approximately $8,590,000 of sales growth was attributable to business at dental laboratories owned less than one year. Same laboratory sales decreased slightly during the nine-month period ended September 30, 2002. However, there was one less sales day than during the comparable period ended September 30, 2001. When adjusted to a sales per day basis, same laboratory sales growth was 0.4%. Industry growth has generally slowed in the current economy as many patients and dentists have postponed optimal treatment plans in favor of less expensive alternatives. 12 Cost of Goods Sold The Company's cost of goods sold increased by $4,740,000 or 12.7% for the period ended September 30, 2002 over the same nine-month period ended September 30, 2001, attributable primarily to increased unit sales. As a percentage of sales, cost of goods sold decreased from 58.9% to 58.6%. As a percentage of net sales, increases in labor and benefit costs were more than offset by decreases in laboratory overhead expenses and material costs. The increase in labor and benefit costs were primarily attributable to increases in the cost of providing health insurance for the Company's employees. Material costs have decreased as the cost of palladium, a component of dental alloys, has decreased and stabilized after several years of steep increases. Additionally, during 2001 the Company started to reduce its reliance on palladium through the substitution of alternative materials. Selling, General and Administrative Expenses Operating expenses, which consist of selling, delivery, administrative expense at both the laboratory and corporate level and amortization expense, increased by $3,191,000 or 17.1% during the nine months ended September 30, 2002 over the corresponding period in 2001. Operating expenses increased as a percentage of net sales from 29.4% to 30.3% during the nine months ended September 30, 2002 compared with the corresponding period in 2001. As a percentage of net sales, increases in selling and administrative expenses were offset in part by decreases in delivery expenses and amortization charges. Increases in selling and administrative expenses during the period were primarily related to the continued development and implementation of the Company's national marketing program, "The NDX Reliance Program." The Company has continued to absorb the staffing, training and marketing expenses necessary for the successful implementation of the program. The decline in amortization expense was attributable to the impact of the implementation of SFAS No. 142. Operating Income Due to the increase in net sales, partially offset by increases in operating expenses as a percent of net sales, operating income increased $570,000 or 7.7% for the nine month period ended September 30, 2002 versus the corresponding period for the prior year. While sales increased by 13.4% and cost of goods sold declined from 58.9% to 58.6% of net sales, selling, general and administrative expenses increased from 29.4% to 30.3% of net sales. Interest Income Interest income decreased by $177,000 or 75.9% in the nine months ended September 30, 2002 over the corresponding period in 2001. The decrease was primarily due to lower investment principal and lower interest rates. Provision for Income Taxes The provision for income taxes increased to $3,162,000 for the nine-month period ended September 30, 2002 from $3,025,000 in the corresponding period in 2001. This $137,000 increase was the result of increased income. The effective tax rate for the nine-month period ended September 30, 2002 was 40.0%, which is consistent with the corresponding period in 2001. Net Income As a result of all the factors discussed above, net income increased to $4,743,000 or $1.32 per share on a diluted basis for the nine months ended September 30, 2002 from $4,537,000 or $1.27 per share on a diluted basis for the corresponding period in 2001. 13 Three Months Ended September 30, 2002 Compared with Three Months Ended September 30, 2001 ---------------------------------------------------- Net Sales For the quarter ended September 30, 2002, net sales increased $2,356,000 or 11.2% over the corresponding period of the prior year. Approximately $2,280,000 of sales growth was attributable to business at dental laboratories owned less than one year. Same laboratory sales growth was slightly positive during the quarter ended September 30, 2002. Cost of Goods Sold The Company's cost of goods sold increased by $1,342,000 or 10.6% for the quarter ended September 30, 2002 over the comparable quarter ended September 30, 2001, attributable primarily to increased unit sales. As a percentage of sales, for reasons comparable to the nine-month period discussed above, cost of goods sold decreased from 60.5% to 60.2%. Selling, General and Administrative Expenses Operating expenses increased by $947,000 or 15.3% during the quarter ended September 30, 2002 over the corresponding period in 2001. Operating expenses increased as a percentage of net sales from 29.5% to 30.6% during the quarter ended September 30, 2002 compared with the corresponding quarter in 2001. The reasons for the increase are comparable to the nine-month period discussed above. Operating Income Due to the increase in net sales, partially offset by increases in operating expenses as a percent of net sales, operating income increased $67,000 or 3.2% for the quarter ended September 30, 2002 versus the corresponding period for the prior year. While sales increased by 11.2% and cost of goods sold declined from 60.5% to 60.2% of net sales, selling, general and administrative expenses increased from 29.5% to 30.6% of net sales. Interest Income Interest income decreased by $47,000 or 78.3% in the quarter ended September 30, 2002 over the corresponding period in 2001. The decrease was primarily due to lower investment principal and lower interest rates. Provision for Income Taxes The provision for income taxes decreased to $820,000 for the quarter ended September 30, 2002 from $851,000 in the corresponding quarter in 2001. This $31,000 decrease was the result of a lower effective tax rate. The 40.1% effective tax rate for the quarter ended September 30, 2001 decreased to 38.6% for the current period. Net Income As a result of all the factors discussed above, net income increased to $1,302,000 or $0.37 per share on a diluted basis for the quarter ended September 30, 2002 from $1,269,000 or $0.36 per share on a diluted basis for the corresponding quarter in 2001. 14 Item 3. - ------- Quantitative and Qualitative Disclosures About Market Risk The Company's market risk exposure includes potential price volatility of commodities used by the Company in its manufacturing processes. The Company purchases dental alloys which contain gold, palladium and other precious metals. The Company has not participated in hedging transactions. The Company has relied on pricing practices which attempt to pass increased costs on to the customer, in conjunction with materials substitution strategies. Item 4. - ------- Controls and Procedures Within the 90 days prior to the filing date of this report, the Company carried out an evaluation, under the supervision and with the participation of the Company's management, including the Company's President and Chief Executive Officer and its Chief Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures as defined in Rule 13a-14 of the Securities Exchange Act of 1934. The Company's legal counsel assisted the Company in making this initial evaluation. Based on that evaluation, such officers concluded that the Company's disclosure controls and procedures are effective in timely alerting them to material information relating to the Company required to be included in this report. Internal Controls There have been no significant changes in the Company's internal controls or in other factors which could significantly affect internal controls subsequent to the date the Company carried out its evaluation. 15 PART II. Other Information - --------------------------- Item 1. Legal Proceedings: - ------- The Company is involved from time to time in litigation incidental to its business. Management believes that the outcome of current litigation will not have a material adverse effect upon the operations or financial condition of the Company and will not disrupt the normal operations of the Company. 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: - ------- See footnote 5 to the Consolidated Financial Statements for information regarding recent acquisitions. Item 6. Exhibits and Reports on Form 8-K: - ------- a. Exhibits: Not applicable b. Reports on form 8-K: Not applicable 16 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 November 12, 2002 By:/s/ David L. Brown ----------------------------- David L. Brown President, CEO, and Director (Principal Executive Officer) November 12, 2002 By:/s/ Richard F. Becker, Jr. ----------------------------- Richard F. Becker, Jr. Chief Financial Officer, Vice President of Finance and Treasurer (Principal Financial and Accounting Officer) Quarterly Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 I, David L. Brown, President, Chief Executive Officer and Director, certify that: 1. I have reviewed this quarterly report on Form 10-Q of National Dentex Corporation; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) Designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries (if any), is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) Presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) All significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the Evaluation Date, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: November 12, 2002 By:/s/ David L. Brown --------------------------------------- David L. Brown President, Chief Executive Officer and Director Quarterly Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 I, Richard F. Becker, Jr., Chief Financial Officer, Vice President of Finance and Treasurer, certify that: 1. I have reviewed this quarterly report on Form 10-Q of National Dentex Corporation; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) Designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries (if any), is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) Presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) All significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the Evaluation Date, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: November 12, 2002 By:/s/ Richard F. Becker, Jr. --------------------------------------- Richard F. Becker, Jr. Chief Financial Officer, Vice President of Finance and Treasurer Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 In connection with the Quarterly Report of National Dentex Corporation (the "Company") on Form 10-Q for the fiscal quarter ending September 30, 2002 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, David L. Brown, President, Chief Executive Officer, and Director of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. By:/s/ David L. Brown - ------------------------------- David L. Brown President, Chief Executive Officer and Director November 12, 2002 Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 In connection with the Quarterly Report of National Dentex Corporation (the "Company") on Form 10-Q for the fiscal quarter ending September 30, 2002 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Richard F. Becker, Jr., Chief Financial Officer, Vice President of Finance and Treasurer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. By:/s/ Richard F. Becker, Jr. - ------------------------------------ Richard F. Becker, Jr. Chief Financial Officer, Vice President of Finance and Treasurer November 12, 2002