UNITED STATES SECURITIES AND EXCHANGE COMMISSION

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, 2005

Commission file number 000-23092

NATIONAL DENTEX CORPORATION

(508) 358-4422
(Registrant’s Telephone No., including Area Code)

     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  þ     No  o

     Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2).

Yes  þ     No  o

     As of May 2, 2005, 5,326,415 shares of the registrant’s Common Stock, par value $.01 per share, were outstanding.

NATIONAL DENTEX CORPORATION

FORM 10-Q

QUARTER ENDED MARCH 31, 2005

TABLE OF CONTENTS

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NATIONAL DENTEX CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)

The accompanying notes are an integral part of these condensed consolidated financial statements.

3

NATIONAL DENTEX CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)

The accompanying notes are an integral part of these condensed consolidated financial statements.

4

NATIONAL DENTEX CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

The accompanying notes are an integral part of these condensed consolidated financial statements.

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NATIONAL DENTEX CORPORATION

Notes to Condensed Consolidated Financial Statements
March 31, 2005

(1) Interim Financial Statements

     The accompanying unaudited financial statements include all adjustments (consisting only of normal recurring adjustments) that are, in the opinion of management, necessary for a fair statement 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.

     The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

     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 in accordance with the rules and regulations of the Securities and Exchange Commission (“SEC”). The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the Company’s condensed consolidated financial statements for the year ended December 31, 2004 as filed with the SEC on Form 10-K. Certain amounts in the financial statements for the year ended December 31, 2004 have been classified to conform to the current period presentation.

(2) Restatement of Prior Financial Information

     The fiscal 2004 amounts presented in this Form 10-Q have been restated to correct our historical accounting for certain intangible assets. In connection with its accounting for purchase business combinations, the Company had not historically recognized certain identifiable intangible assets, specifically customer relationships and trade names, apart from goodwill. However, in 2004 based upon a re-examination of the applicable accounting literature, FASB Statement No. 141 (“SFAS 141”) “Business Combinations”, FASB Statement No. 142 (“SFAS 142”), “Goodwill and Other Intangible Assets” and Emerging Issues Task Force Abstract 02-17 “Recognition of Customer Relationship Intangible Assets Acquired in a Business Combination” (“EITF 02-17”), the Company determined that the proper accounting practice is to recognize customer relationships and trade names as separate identifiable intangible assets apart from goodwill in acquisitions consummated by the Company subsequent to the applicable effective dates of SFAS 141 and EITF 02-17.

     As a result of the issues discussed above, the Company restated its condensed consolidated financial statements for the quarters ended March 31, 2004, June 30, 2004 and September 30, 2004 as reported in Forms 10-Q/A, as filed with the Securities and Exchange Commission.

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Notes to Condensed Consolidated Financial Statements (Continued)

(3) Acquisitions

     The Company’s acquisition strategy is to consolidate within the dental laboratory industry and use its financial and operational synergies to create a competitive advantage. Certain factors, such as the laboratory’s technical skills, reputation in the local marketplace and value as a going concern result in the recognition of goodwill.

     In connection with certain acquisition agreements, the Company has incurred certain contractual obligations associated with deferred purchase price payments, which are not contingent on any future actions or performance measures. These deferred payments are recorded as a liability upon consummation of the acquisition and are included in the acquisition purchase price. Also, certain acquisition agreements contain provisions which require additional purchase price payments, contingent upon certain specified events. These contingent payments are recorded as an increase to goodwill upon the resolution of the contingency. In addition, in certain transactions, the Company executes non-compete agreements with the former owners and other key employees. The fair value of these agreements is recognized in purchase accounting as an identifiable intangible asset and is amortized over the estimated economic life of the agreement. All acquisitions have been reflected in the accompanying condensed consolidated financial statements from the date of acquisition and have been accounted for as purchase business combinations in accordance with SFAS No.141, “Business Combinations”.

     During the three months ended March 31, 2005, the Company acquired the following dental laboratory operations:

     Effective March 1, 2005, the Company acquired all of the outstanding capital stock of Green Dental Laboratories, Inc. of Heber Springs, Arkansas (“Green”). Green reported sales in excess of $16,000,000 in its last fiscal year ended December 31, 2004. The cost of the acquisition, net of cash acquired, was approximately $22,328,000. The total purchase price has been allocated to the acquired assets and liabilities based on preliminary estimates of their related fair values, which will be subject to revision pending the completion of a valuation analysis by a third party:

     Effective February 1, 2005, the Company acquired all of the outstanding capital stock of Wornson-Polzin Dental Laboratory, Inc. of Mankato, MN (“Wornson-Polzin”).The total purchase price for Wornson-Polzin was not material to the condensed consolidated financial statements and has been allocated to the acquired assets and liabilities based on preliminary estimates of their fair values.

     The following pro forma operating results of the Company assume these acquisitions had been made as of January 1, 2004. Such information includes adjustments to reflect additional depreciation, amortization and interest expense and is not necessarily indicative of what the results of operations would actually have been, or the results of operations to be expected in future periods.

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Notes to Condensed Consolidated Financial Statements (Continued)

(4) Goodwill and Other Intangible Assets

     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 eliminates the use of the pooling-of-interest method. Additionally, these standards require that goodwill and intangible assets with indefinite lives no longer be amortized. The Company was required to adopt SFAS No. 141 and SFAS No. 142 on a prospective basis as of July 1, 2001 and January 1, 2002, respectively. In accordance with the provisions of SFAS No. 142, the Company no longer amortizes goodwill.

     The changes in the carrying amount of goodwill for the three months ended March 31, 2005 are as follows:

     The Company’s contingent laboratory purchase price liabilities subject to acquisition agreements that are tied to earnings performance, as defined in the purchase agreements, generally over a three year period are approximately $4,104,000. As the contingency is resolved, the payments are recorded as goodwill.

     In connection with dental laboratory acquisitions, the Company has identified certain other intangible assets including trade names, customer relationships and non-competition agreements. The Company has applied the provisions of SFAS No. 141 and SFAS No. 142 as well as EITF No. 02-17 “Recognition of Customer Relationship Intangible Assets Acquired in a Business Combination” (“EITF 02-17”) in its purchase price allocations.

Trade Names

     Trade names as acquired are valued using a quantification of the income generated based on the recognition afforded by the trade name in the marketplace, using the relief-from-royalty valuation approach. Company practice is to use existing and acquired trade names in perpetuity, therefore there is no legal limit to their life and consequently they have been treated as indefinite-lived intangibles. While these assets are not subject to amortization, they are tested for impairment on an annual basis in accordance with SFAS No. 142. The Company uses the relief–from-royalty valuation approach at each fiscal year end to determine the value of the asset. Trade name impairment charges result from a decline in forecasted revenue at specific laboratories in comparison to revenue forecasts used in previous valuation calculations. Impairment charges, when recognized, are a component of selling, general and administrative expense.

     The changes in the carrying amount of trade names for the three months ended March 31, 2005 are as follows:

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Notes to Condensed Consolidated Financial Statements (Continued)

Customer Relationships

     Acquired dental laboratories have customer relationships in place with dentists within their market areas. Based on the criteria of EITF 02-17, the Company recognizes customer relationship assets when established relationships exist with customers through contract or other contractual relationships such as purchase orders or sales orders. Customer relationships are valued based on an analysis of revenue and customer attrition data and amortized over their useful life. The weighted-average amortization period was 9 years. The amounts assigned to customer relationships are amortized on a straight-line basis over their useful lives. The Company has determined that the straight-line method is appropriate based on an analysis of customer attrition statistics.

     Amortization expense associated with customer relationships totaled approximately $151,000 for the three months ended March 31, 2005. Future amortization expense of the current customer relationship balance will be approximately:

Non-competition Agreements

     The Company has incurred certain deferred purchase costs relating to non-compete agreements with certain individuals, ranging over periods of 2 to 10 years, The weighted-average amortization period for acquisitions completed in 2005 was 10 years. The amounts assigned to non-competition agreements are amortized on a straight-line basis over the term of the agreement.

     Amortization expense associated with non-competition agreements totaled approximately $228,000 for the three months ended March 31, 2005.

     Future amortization expense of non-competition agreements will be approximately:

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Notes to Condensed Consolidated Financial Statements (Continued)

(5) Stock Split

     On December 10, 2004 the Company announced a three-for-two stock split in the form of a stock dividend on its common stock to be paid on December 31, 2004 to stockholders of record on December 20, 2004. All references in the financial statements and the related notes as to the number of shares, per share amounts, stock option data and market prices have been adjusted to reflect this stock split.

(6) Earnings per Share

     In accordance with the disclosure requirements of SFAS Statement No. 128, “Earnings per Share,” basic earnings per share is computed by dividing net income by the weighted average number of shares outstanding and diluted earnings per share reflects the dilutive effect of stock options. The weighted average number of shares outstanding, the dilutive effects of outstanding stock options, and the shares under option plans that were anti-dilutive for the three months ended March 31, 2005 and 2004 are as follows:

(7) Stock-Based Compensation

     The Company adopted the disclosure provisions of SFAS No. 123, “Accounting for Stock-Based Compensation.” The Company has elected to continue to account for employee stock options at intrinsic value, in accordance with Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees,” with disclosure of the effects of fair value accounting on net income and earnings per share on a pro forma basis. Had compensation costs for the Company’s 1992 Long-Term Incentive Plan, 2001 Stock Plan and 1992 Employees’ Stock Purchase Plan been determined consistent with SFAS No. 123, the Company’s net income and earnings per share would have been reduced to the following pro forma amounts:

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Notes to Condensed Consolidated Financial Statements (Continued)

(8) Inventories

     Inventories consist of the following:

     Inventories are stated at the lower of cost (first-in, first-out) or market. Work in process represents an estimate of the value of specific orders in production yet incomplete at period end. Finished goods consist of completed orders that were shipped to customers immediately subsequent to period end.

(9) Lines of Credit

     The Company has executed a financing agreement (the “Agreement”) with Fleet National Bank, a Bank of America Company (the “Bank”). The Agreement, dated June 30, 2004, includes a revolving line of credit of $5,000,000 and a revolving acquisition line of credit of $20,000,000. The interest rate on both revolving lines of credit is the prime rate or, at the Company’s option, the London Interbank Offered Rate (“LIBOR”) or a cost of funds rate plus a range of .75% to 1.5% depending on the ratio of total liabilities to tangible net worth. Both revolving lines of credit terminate on June 30, 2007.

     An unused facility fee of one eighth of 1% per annum is payable on the unused amount of the first revolving line of credit. A facility fee of $10,000 per year is required on the acquisition line of credit. At March 31, 2005, the Company had borrowed $19,884,000 on the revolving acquisition line of credit with $116,000 remaining available and $3,300,000 on the revolving line of credit with $1,700,000 remaining available. As of March 31, 2005, the interest rate associated with current borrowings was 5.50% and 3.61%, respectively.

     The Agreement requires compliance with certain covenants, including the maintenance of specified net worth and other financial ratios. As a result of lower than expected earnings in the fourth quarter of 2004, the Company, as of December 31, 2004, was not in compliance with the “EBITDA” covenant that requires specified minimum earnings before interest, taxes, depreciation and amortization. The Company was in compliance with this “EBITDA” covenant at March 31, 2005. However, in March 2005, the Company borrowed against the majority of its existing acquisition facility to finance the acquisition of Green Dental Laboratories, Inc. (“Green”). As a result of this acquisition and the related borrowings, the Company failed a tangible net worth financial covenant as of March 31, 2005. The Bank granted relief from our financial covenants in the form of a waiver through April 1, 2006.

     During the first quarter of 2005, the Bank committed to an additional five year credit facility of $20,000,000, pending the completion of an executed definitive agreement, which will include modified financial covenants. The Company expects to execute a definitive agreement within a reasonable period of time in 2005. The Company expects to convert the borrowings on the acquisition line of credit to this new facility. The Company anticipates principal payments associated with this new agreement will total approximately $1,732,000 in the next twelve months, and accordingly has been presented as a current liability in the condensed consolidated balance sheet.

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Notes to Condensed Consolidated Financial Statements (Continued)

(10) Segment Information

     The Company follows Statement of Financial Accounting Standards No. 131 (“SFAS 131”), “Disclosures about Segments of an Enterprise and Related Information”. SFAS 131 establishes standards for disclosing information about reportable segments in financial statements. The company owns and operates 45 dental laboratories throughout the United States which custom design and fabricate dentures, crowns and fixed bridges, and other dental appliances.

     In March of 2005, the Company acquired Green Dental Laboratories, Inc. of Heber Springs, Arkansas. Green is now the Company’s largest laboratory with sales in excess of $16,000,000 per year. In accordance with SFAS 131, the Company identified Green as a separate operating segment that did not meet the aggregation criteria of SFAS 131. As a result, the Company has two reportable segments. The accounting policies of this segment are consistent with those described for the consolidated financial statements in the summary of significant accounting policies.

     The following table sets forth information about the Company’s operating segments for the quarter ended March 31, 2005. Comparison data is not presented as Green was acquired during the current quarter.

     Reconciliation of Laboratory Operating Income with reported Consolidated Operating Income:

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Notes to Condensed Consolidated Financial Statements (Continued)

(11) Recent Accounting Pronouncements

     In November 2004, the FASB issued SFAS No. 151, “Inventory Costs – An Amendment of ARB No. 43, Chapter 4”. SFAS No. 151 amends the guidance in Accounting Research Bulletin (ARB) No. 43, Chapter 4, “Inventory Pricing,” to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material (spoilage). Among other provisions, the new rule requires that items such as idle facility expense, excessive spoilage, double freight, and rehandling costs be recognized as current-period charges regardless of whether they meet the criterion of “so abnormal” as stated in ARB No. 43. Additionally, SFAS No. 151 requires that the allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities. SFAS No. 151 is effective for fiscal years beginning after June 15, 2005, and is required to be adopted by the Company effective January 1, 2006. The Company does not expect SFAS No. 151 to have a material impact on its consolidated results of operations or financial condition.

     In December 2004, the FASB issued SFAS No. 123 (revised 2004), “Share-Based Payment”. SFAS No. 123R supersedes APB Opinion No. 25, which requires recognition of an expense when goods or services are provided. SFAS No. 123R requires the determination of the fair value of the share-based compensation at the grant date and the recognition of the related expense over the period in which the share-based compensation vests. SFAS No. 123R permits a prospective or two modified versions of retrospective application under which financial statements for prior periods are adjusted on a basis consistent with the pro forma disclosures required for those periods by the original SFAS No. 123. The Company is required to adopt the provisions of SFAS No. 123R effective January 1, 2006, at which time the Company will begin recognizing an expense for unvested share-based compensation that has been issued or will be issued after that date. The Company has not yet finalized its decision concerning the transition option it will utilize to adopt SFAS No. 123R. Based on pro-forma financial statements, the Company expects the impact of the adoption of SFAS No. 123R to be immaterial as it relates to the Company’s currently outstanding options. The Company will continue to assess the impact SFAS No. 123R will have on any future grants.

(12) 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.

(13) Subsequent Events

     National Dentex was notified by the Nasdaq National Market on April 5, 2005 that its securities are subject to delisting owing to its failure to timely file its Annual Report on Form 10-K for the year ended December 31, 2004 by the extended due date of March 31, 2005. On May 24, 2005, National Dentex filed its Annual Report on Form 10-K for the year ended December 31, 2004 with the SEC.

     In addition, on May 18, 2005, National Dentex received an additional delinquency notice from Nasdaq because of its inability to timely file its Quarterly Report on Form 10-Q for the quarter ended March 31, 2005 by the due date of May 10, 2005. National Dentex had previously discussed this anticipated additional delinquency notice at a Nasdaq listing qualifications panel hearing held on May 5, 2005 in response to the Annual Report filing delinquency. Nasdaq’s additional delinquency notice indicated that it would consider the Quarterly Report delinquency within the context of the Annual Report delinquency notification and the proceedings initiated thereby.

     On May 24, 2005 National Dentex received the Nasdaq hearing panel’s decision. The panel decision granted National Dentex’s request for relief and permitted the continued listing of National Dentex’s securities on Nasdaq, subject to a requirement that National Dentex file the delinquent Annual Report and Quarterly Report on or before June 30, 2005.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Forward Looking Statements

     This Quarterly Report on Form 10-Q, including this discussion and analysis by management, contains or incorporates 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 forward-looking statements are based on current expectations, estimates, forecasts and projections about the industry and markets in which we operate and our management’s beliefs and assumptions. In addition, other written or oral statements that constitute forward-looking statements may be made by or on our behalf. Words such as “expect,” “anticipate,” “intend,” “plan,” “believe,” “seek,” “estimate,” variations of such words and similar expressions are intended to identify such forward-looking statements. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions that are difficult to predict. We have included important factors in the cautionary statements below under the heading “Factors That May Affect Future Results” that we believe could cause our actual results to differ materially from the forward-looking statements we make. We do not intend to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise.

Overview

     We own and operate 45 dental laboratories located in 30 states, serving an active customer base of over 22,000 dentists. Our business consists of the design, fabrication, marketing and sale of custom dental prosthetic appliances for dentists located primarily in the domestic marketplace.

     Our products are grouped into the following three main categories:

     Restorative Products. Restorative products that our dental laboratories sell consist primarily of crowns and bridges. A crown replaces the part of a tooth that is visible, and is usually made of gold or porcelain. A bridge is a restoration of one or more missing teeth that is permanently attached to the natural teeth or roots. In addition to the traditional crown, we also make porcelain jackets, which are crowns constructed entirely of porcelain; onlays, which are partial crowns which do not cover all of the visible tooth; and precision crowns, which are restorations designed to receive and connect a removable partial denture. We also make inlays, which are restorations made to fit a prepared tooth cavity and then cemented into place.

     Reconstructive Products. Reconstructive products sold by our dental laboratories consist primarily of partial dentures and full dentures. Partial dentures are removable dental prostheses that replace missing teeth and associated structures. Full dentures are dental prostheses that substitute for the total loss of teeth and associated structures. We also sell precision attachments, which connect a crown and an artificial prosthesis, and implants, which are fixtures anchored securely in the bone of the mouth to which a crown, partial or full denture is secured by means of screws or clips.

     Cosmetic Products. Cosmetic products sold by our dental laboratories consist primarily of porcelain veneers and ceramic crowns. Porcelain veneers are thin coverings of porcelain cemented to the front of a tooth to enhance personal appearance. Ceramic crowns are crowns made from ceramic materials that most closely replicate natural teeth. We also sell composite inlays and onlays, which replace silver fillings for a more natural appearance, and orthodontic appliances, which are products fabricated to move existing teeth to enhance function and appearance.

     Internal revenue growth has been relatively flat since 2001, when we made note that the economic climate appeared to be impacting the dental laboratory industry. In 2002, we began to believe that many patients and dentists were postponing optimal treatment plans, such as crowns, and pursuing less expensive alternatives such as amalgam fillings, for which we recognize no revenue. As a result, sales of restorative products were unfavorably impacted. The general economic conditions affecting our operations in the dental laboratory industry have remained essentially unchanged since 2002, as consumers continue this conservative practice. As a result, our internal sales growth for the first quarter of 2005 has not appreciably improved from the trends of the last few years.

     We have also continued to pursue an acquisition strategy, which has played an important role in helping us increase sales from $75,680,000 in 2000 to $111,753,000 in 2004. However, operating margins as measured as a percentage of sales declined over this period. The main cost drivers for us are the cost of labor and related employee benefits. Competition for labor resources and increases in medical insurance costs have driven these costs higher. These increased costs combined with somewhat flat internal sales growth have contributed to lower operating margins. While we continually review and adjust staffing levels as appropriate at each of our locations, we have been cautious about labor reductions due to the need to maintain an available and properly trained workforce in anticipation of future sales growth and to properly handle production spikes and the breadth and volume of the business we have.

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     In 2004 we experienced growth of over $5,000,000 in gross profit, primarily due to acquisition activity in the latter half of 2003. We also experienced cost pressure resulting from the implementation costs to comply with Section 404 of the Sarbanes Oxley Act. Due in large part to the decentralized nature of our business, approximately half of our laboratories were subject to detailed onsite testing. The scope and complexity of the project required us to engage the accounting firm of Deloitte and Touche, LLP. In addition, external audit fees for PricewaterhouseCoopers, LLP were significantly higher than in the prior years. The impact on these various 404 implementation costs on earnings in 2004 was approximately $1,027,000, or approximately $0.11 per diluted share, net of taxes, with most of that occurring in the fourth quarter. While we have a reasonable expectation that these compliance costs will decrease during 2005, we nevertheless believe that significant ongoing expenditures will be required to maintain our efforts in the internal controls framework required by the Sarbanes-Oxley Act.

     Beginning in 2004 we recognized acquired customer relationships and trade names as intangible assets which requires the recognition of amortization expense and impairment testing, respectively. On a prospective basis, amortization expense will increase dependent on our acquisition activity in rough proportions with the expected profitability of the acquired businesses.

     In the first quarter of 2005 we completed our largest acquisition to date, Green Dental Laboratories, Inc (“Green”), effective March 1, 2005. Green is notable for several reasons. We believe that the synergies created by the addition of this unique laboratory will create value for the organization as a whole. Annual sales are expected to approximate $16,000,000, making Green our largest laboratory, and operating margins are better than our average, thereby making Green our largest single contributor to earnings. Green will be treated as a separate operating segment for reporting purposes and will retain a separate company identity as a wholly owned subsidiary. In order to finance the purchase of Green, we borrowed approximately $20,000,000 in long term debt and as a result, are more highly leveraged than we were before the Green acquisition. We therefore expect that interest expense will become a more significant component of our pre-tax earnings in future periods.

Liquidity and Capital Resources

     Our working capital decreased from $13,750,000 at December 31, 2004 to $11,627,000 at March 31, 2005. Cash and cash equivalents increased $111,000 from $2,216,000 at December 31, 2004 to $2,327,000 at March 31, 2005. Operating activities provided $4,445,000 in cash flow for the three months ended March 31, 2005 compared to $1,376,000 during the three months ended March 31, 2004, an increase of $3,069,000. This increase was primarily attributable to timing differences related to accrued liabilities ($1,335,000, including increases in accrued payroll and related benefits of $1,600,000, offset by a decrease in income taxes of $678,000), decreases in prepaid expenses ($854,000, primarily prepaid income taxes) and accounts receivable ($718,000, resulting primarily from higher sales volume) offset by an increase in inventory ($435,000, including $233,000 of work in process).

     Cash outflows related to dental laboratory acquisitions, including deferred purchase price payments associated with prior period acquisitions, totaled $24,839,000 for the three months ended March 31, 2005 compared to $686,000 for the three months ended March 31, 2004, primarily due to the acquisition of Green and Wornson-Polzin Dental Laboratory. Additions to property, plant and equipment, were $757,000 for the three months ended March 31, 2005, significantly less than the $2,247,000 spent for the three months ended March 31, 2004. In the first quarter of 2004 we purchased a $2,000,000 replacement facility for our dental laboratory in Houston, Texas. We expect that facility to be placed in service in the third quarter of 2005, at the completion of a build-out project expected to require an additional investment in building improvements and equipment of approximately $3,000,000 in 2005.

     We have executed a financing agreement (the “Agreement”) with Fleet National Bank, a Bank of America Company (the “Bank”). The Agreement, dated June 30, 2004, includes a revolving line of credit of $5,000,000 and a revolving acquisition line of credit of $20,000,000. The interest rate on both revolving lines of credit is the prime rate or, at our option, the London Interbank Offered Rate (“LIBOR”) or a cost of funds rate plus a range of .75% to 1.5% depending on the ratio of total liabilities to tangible net worth. Both revolving lines of credit terminate on June 30, 2007.

     An unused facility fee of one eighth of 1% per annum is payable on the unused amount of the first revolving line of credit. A facility fee of $10,000 per year is required on the acquisition line of credit. At March 31, 2005, we had borrowed $19,884,000 on the revolving acquisition line of credit with $116,000 remaining available and $3,300,000 on the first revolving line of credit with $1,700,000 remaining available. As of March 31, 2005, the interest rate associated with current borrowings was 5.50% and 3.61%, respectively.

     The Agreement requires compliance with certain covenants, including the maintenance of specified net worth and other financial ratios. As a result of lower than expected earnings in the fourth quarter of 2004, due mainly to the implementation costs resulting from the compliance requirements of Section 404 of the Sarbanes-Oxley Act, as of December 31, 2004 we were not in compliance with the “EBITDA” covenant that requires specified minimum earnings before interest, taxes, depreciation and amortization. We were in compliance with the “EBITDA” covenant at March 31, 2005. However, in March 2005 we borrowed against the majority of our existing acquisition facility to finance the acquisition of Green Dental Laboratories, Inc. (“Green”). As a result of this acquisition and the related borrowings, we failed a tangible net worth financial covenant as of March 31, 2005. The Bank granted relief from our financial covenants in the form of a waiver through April 1, 2006.

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     During the first quarter of 2005 the Bank committed to an additional five year credit facility of $20,000,000 pending the completion of executed, definitive documentation which will include modified financial covenants. We expect to execute a definitive agreement within a reasonable period of time in 2005. We expect to convert our borrowings on the acquisition line of credit to this new facility.

     We believe that cash flow from operations and available financing will be sufficient to meet contemplated operating and capital requirements and deferred payments associated with prior acquisitions for the foreseeable future.

Commitments and Contingencies

     The following table represents a list of our contractual obligations and commitments as of March 31, 2005 :

     Bank borrowings on the revolving working capital line of credit are classified as short-term debt on the balance sheet. The interest rate associated with this borrowing was 3.61%. Bank borrowings on the acquisition line of credit, net of the current portion, are classified as long-term debt on the balance sheet. The interest rate associated with this borrowing is 5.50%. As previously discussed, we anticipate the completion of an additional five year credit facility, providing an additional $20,000,000 in available financing, at which time we expect to convert the borrowings on the acquisition line of credit to this new facility. The above table reflects the expected payment terms associated with the previously discussed new credit facility.

     We are committed under various non-cancelable operating lease agreements covering office space and dental laboratory facilities, vehicles and certain equipment. Certain of these leases also require us to pay maintenance, repairs, insurance and related taxes. We also have contractual commitments related to construction projects currently in process at certain dental laboratory facilities.

     Laboratory purchase obligations totaling $3,804,000, classified as deferred acquisition costs, are presented in the liability section of the balance sheet. These obligations represent purchase price commitments arising from dental laboratory acquisitions, irrespective of the acquired laboratory’s earnings performance, including deferred obligations associated with non-competition agreements. Contingent laboratory purchase price includes amounts subject to acquisition agreements that are tied to laboratory earnings performance, as defined within the acquisition agreements, generally over a three year period. As payments become determinable, they are recorded as goodwill.

     As sponsor of the National Dentex Corporation Dollars Plus Plan, (the “Plan”), a qualified plan under Section 401(a) of the Internal Revenue Code, we filed a retroactive plan amendment under the Internal Revenue Service’s Voluntary Correction Program to clarify the definition of compensation in the Plan. Based on our consultation with our ERISA counsel, we believe this issue will be favorably resolved without requiring additional employer contributions or jeopardizing the tax-qualified status of the Plan.

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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 our condensed consolidated financial statements:

Three Months Ended March 31, 2005 Compared with Three Months Ended March 31, 2004

Net Sales

     For the three months ended March 31, 2005, net sales increased $4,018,000 or 14.4% from the prior year. Net sales increased by approximately $3,236,000, or 11.6%, as a result of acquisitions, measured by business at dental laboratories owned less than one year. Net sales increased approximately $782,000 an increase of 2.8%, at dental laboratories owned for both the three months ended March 31, 2005 and the comparable three months ended March 31, 2004, primarily due to moderate price increases.

Cost of Goods Sold

     Cost of goods sold as a percentage of sales was 56.4% in the quarter ended March 31, 2005 compared with 58.5% in the same period of 2004. Materials costs of 13.2% decreased as a percentage of sales in 2005 compared to 14.7% in 2004. This decrease was attributable to declines in the cost of the precious metal palladium, a key component in many dental alloys, and other purchasing cost savings measures. Labor productivity improvements also helped improve our gross margin, offsetting increases in employee health insurance costs.

Selling, General and Administrative Expenses

     Selling, general and administrative expenses, which consist of selling, delivery and administrative expenses both at the laboratory and corporate level, were $10,764,000 or 33.7% of sales in 2005 compared to $8,885,000 or 31.8% in 2004. As a percentage of sales, delivery and selling expenses declined while administrative expenses at the corporate level rose sharply in 2005 compared to 2004. The increase of $1,879,000 was primarily attributable to the following items: additional operating and amortization expense associated with acquisitions completed subsequent to March 31, 2004 ($745,000); increases in salaries and benefits at the corporate and lab level ($685,000, in part due to the addition of accounting and management staff and increases in health insurance); increases in audit and compliance costs ($200,000); increases in laboratory incentive compensation ($135,000, as a result of improved laboratory profit performance); and increases in training and recruiting expenses ($115,000).

Operating Income

     As a result of the factors discussed above, our operating income increased by $451,000 to $3,164,000 for the three months ended March 31, 2005 from $2,713,000 for the comparable three months ended March 31, 2004. As a percentage of net sales, operating income increased from 9.7% in 2004 to 9.9% in 2005.

Interest Expense

     Interest expense was $72,000 in the first quarter of 2005 compared with $11,000 in the first quarter of 2004. The change of $61,000 was primarily due to the use of the line of credit to fund dental laboratory acquisitions.

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Provision for Income Taxes

     The provision for income taxes increased to $1,186,000 in 2005 from $1,054,000 in 2004 while the effective tax rate remained at 40.0% in 2005.

Net Income

     As a result of all of the factors discussed above, net income increased to $1,779,000 or $.32 per share on a diluted basis in the first quarter of 2005 from $1,581,000 or $.29 per share on a diluted basis in the first quarter of 2004.

Factors That May Affect Future Results

     Various risks, uncertainties and contingencies could cause our actual results, performance or achievements to differ materially from those expressed in, or implied by, statements contained in this Quarterly Report on Form 10-Q, including, but not limited to, the following:

	•	the timing, duration and effects of adverse changes in overall economic conditions, particularly those affecting employment patterns or likely to cause individuals to defer needed or elective dental work,
	•	our ability to acquire and successfully operate additional laboratories,
	•	governmental regulation of health care,
	•	trends in the dental industry towards managed care,
	•	competition within the dental laboratory industry, including from foreign competitors,
	•	increases in labor and benefits costs,
	•	increases in material costs, particularly related to the purchase of dental alloys, which contain gold, palladium, and other precious metals,
	•	product development risks,
	•	technological innovations by third parties,
	•	compliance with evolving federal securities, accounting, and marketplace rules and regulations applicable to publicly-traded companies on the Nasdaq National Market; and
	•	other risks indicated from time to time in our filings with the Securities and Exchange Commission.

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Item 3. Quantitative and Qualitative Disclosures About Market Risk

     Our market risk exposure includes potential price volatility of commodities we use in our manufacturing processes. We purchase dental alloys that contain gold, palladium and other precious metals. We have not participated in hedging transactions. We have relied on pricing practices that attempt to pass increased costs on to the customer, in conjunction with materials substitution strategies.

     At March 31, 2005, we had variable rate debt of $23.2 million. Based on this amount, the earnings and cash flows impact for the next year resulting from a one percentage point increase in interest rates would be approximately $140,000, net of tax, holding other variables constant.

Item 4. Controls and Procedures

(a) Evaluation of Disclosure Controls and Procedures.

     We carried out an evaluation, with the participation of our principal executive officer and principal financial officer, of the effectiveness of our disclosure controls and procedures as of March 31, 2005. In designing and evaluating our disclosure controls and procedures, our management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives, and our management necessarily applied its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on this evaluation, our principal executive officer and principal financial officer concluded that, as of March 31, 2005, our disclosure controls and procedures, as defined in the Securities Exchange Act (the “Exchange Act”) Rule 13a-15(e) and 15d-15(e), were not effective to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act are recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms because of the control deficiency related to the accounting for business combinations, as more fully discussed in the our Annual Report on Form 10-K for the year ended December 31, 2004. As a result of this deficiency, our ability to file this Quarterly Report on Form 10-Q was necessarily delayed.

(b) Changes in Internal Controls.

No change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the fiscal quarter ended March 31, 2005 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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PART II. OTHER INFORMATION

Item 1. Legal Proceedings:

We are involved from time to time in litigation incidental to our business. Our management believes that the outcome of current litigation will not have a material adverse effect upon our operations or financial condition and will not disrupt our normal operations.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds:

We did not repurchase any of our equity securities during the fiscal quarter ended March 31, 2005 or engage in any transactions during such period reportable pursuant to Item 703 of Regulation S-K.

Item 3. Defaults upon Senior Securities:

Not Applicable

Item 4. Submission of Matters to a Vote of Security Holders:

Not Applicable

Item 5. Other Information:

Not Applicable

Item 6. Exhibits:

The exhibits listed in the Exhibit Index immediately preceding the exhibits are filed as part of this Quarterly Report of Form 10-Q.

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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, thereunto duly authorized.

	NATIONAL DENTEX CORPORATION Registrant
June 3, 2005	By:	/s/ DAVID L. BROWN
		David L. Brown
		President, CEO and Director (Principal Executive Officer)

June 3, 2005	By:	/s/ RICHARD F. BECKER, JR.
		Richard F. Becker, Jr.
		Vice President, Treasurer and Chief Financial Officer (Principal Financial Officer)

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Exhibit Index

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