-------------------------------------------------------------------------------
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 June 30, 2003
Commission file number 000-23092
NATIONAL DENTEX CORPORATION
(Exact name of registrant as specified in its charter)
MASSACHUSETTS 04-2762050
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
526 Boston Post Road, Wayland, MA 01778
(Address of Principal Executive Offices) (Zip Code)
(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 __X__ No _____
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2).
Yes __X__ No _____
As of August 5, 2003, 3,428,204 shares of the registrant's Common Stock, par
value $.01 per share, were outstanding.
- --------------------------------------------------------------------------------
NATIONAL DENTEX CORPORATION
FORM 10-Q
QUARTER ENDED JUNE 30, 2003
TABLE OF CONTENTS
PART I. Financial Information Page
-------
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets as of December 31, 2002 and June 30,
2003 (Unaudited).............................................................. 3
Condensed Consolidated Statements of Income for the three and six month
periods ended June 30, 2002 (Unaudited) and 2003 (Unaudited).................. 4
Condensed Consolidated Statements of Stockholders' Equity for the six month
period ended June 30, 2003 (Unaudited)........................................ 5
Condensed Consolidated Statements of Cash Flows for the six months ended
June 30, 2002 (Unaudited) and 2003 (Unaudited)................................ 6
Notes to Condensed Consolidated Financial Statements.......................... 7-9
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations......................................................... 10-13
Item 3. Quantitative and Qualitative Disclosures About Market Risk............ 13
Item 4. Controls and Procedures.............................................. 13
PART II. Other Information
--------
Item 6. Exhibits and Reports on Form 8-K...................................... 14
Signatures.................................................................... 15
Certifications of Principal Executive Officer and Principal Financial Officer
regarding facts and circumstances relating to quarterly reports............... 16-17
2
NATIONAL DENTEX CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
December 31, June 30,
2002 2003
------------- ------------
ASSETS (Unaudited)
------
CURRENT ASSETS:
Cash and cash equivalents..................................... $ 5,808,435 $ 5,676,938
Accounts receivable:
Trade, less allowance of $307,000 in 2002 and $330,000 in 2003 10,041,989 11,084,837
Other....................................................... 442,154 382,860
Inventories of raw materials.................................. 5,558,316 5,557,110
Prepaid expenses.............................................. 2,178,002 2,318,812
Deferred tax asset, current................................... 270,829 274,970
----------- -----------
Total current assets........................................ 24,299,725 25,295,527
----------- -----------
PROPERTY, PLANT AND EQUIPMENT:
Land and buildings............................................ 4,585,731 4,612,050
Leasehold and building improvements........................... 5,969,018 6,459,794
Laboratory equipment.......................................... 10,192,772 10,730,972
Furniture and fixtures........................................ 3,392,192 3,994,364
---------- ----------
24,139,713 25,797,180
Less-- Accumulated depreciation and amortization............ 12,613,976 13,362,064
----------- -----------
Net property, plant and equipment........................... 11,525,737 12,435,116
----------- -----------
OTHER ASSETS, net:
Goodwill...................................................... 24,123,203 24,454,469
Non-competition agreements.................................... 2,640,657 2,430,970
Deferred tax asset, non-current............................... 186,895 180,542
Other assets.................................................. 3,040,654 3,558,569
----------- -----------
Total other assets.......................................... 29,991,409 30,624,550
----------- -----------
Total assets............................................... $65,816,871 $68,355,193
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Accounts payable.............................................. $ 1,961,915 $ 1,804,932
Accrued liabilities:
Payroll and employee benefits............................... 4,285,269 4,420,468
Current portion of deferred purchase price.................. 2,325,932 2,133,194
Other accrued expenses...................................... 227,922 223,529
----------- -----------
Total current liabilities................................... 8,801,038 8,582,123
----------- -----------
LONG-TERM LIABILITIES:
Payroll and employee benefits................................. 1,525,903 1,715,353
Deferred purchase price....................................... 1,543,959 819,790
----------- -----------
Total long-term liabilities................................. 3,069,862 2,535,143
----------- -----------
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 -- 3,665,209 shares at December 31, 2002 and
3,685,759 shares at June 30, 2003.
Outstanding -- 3,403,009 shares at December 31, 2002 and
3,423,559 shares at June 30, 2003........................... 36,652 36,857
Paid-in capital............................................... 16,643,963 16,953,744
Retained earnings............................................. 42,430,900 45,412,870
Treasury stock at cost-- 262,200 shares at December 31, 2002 and
June 30, 2003.....................................................(5,165,544) (5,165,544)
----------- -----------
Total stockholders' equity.................................. 53,945,971 57,237,927
----------- -----------
Total liabilities and stockholders' equity.................. $65,816,871 $68,355,193
=========== ===========
The accompanying notes are an integral part of
these condensed consolidated financial statements.
3
NATIONAL DENTEX CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended Six Months Ended
------------------ ----------------
June 30, June 30, June 30, June 30,
2002 2003 2002 2003
------------- ------------- ------------- ------------
Net sales............................. $25,197,082 $25,181,837 $48,611,261 $49,147,132
Cost of goods sold.................... 14,461,645 14,876,595 28,092,199 29,286,411
----------- ----------- ----------- -----------
Gross profit........................ 10,735,437 10,305,242 20,519,062 19,860,721
Selling, general and administrative
expenses.............................. 7,537,210 7,527,718 14,687,530 14,872,162
----------- ----------- ----------- -----------
Operating income.................... 3,198,227 2,777,524 5,831,532 4,988,559
Other expense......................... 62,802 75,702 92,593 128,494
Interest income...................... 9,681 6,994 43,310 15,622
----------- ----------- ----------- -----------
Income before provision for income taxes 3,145,106 2,708,816 5,782,249 4,875,687
Provision for income taxes............ 1,273,767 1,058,469 2,341,810 1,893,717
----------- ----------- ----------- -----------
Net income.......................... $ 1,871,339 $ 1,650,347 $ 3,440,439 $ 2,981,970
=========== =========== =========== ===========
Net income per share - basic.......... $ .54 $ .48 $ .99 $ .87
=========== =========== =========== ===========
Net income per share - diluted........ $ .52 $ .48 $ .95 $ .86
=========== =========== =========== ===========
Weighted average shares outstanding -
basic................................. 3,479,104 3,421,470 3,464,850 3,412,300
=========== =========== =========== ===========
Weighted average shares outstanding -
diluted............................... 3,615,262 3,463,565 3,602,877 3,454,833
=========== =========== =========== ===========
The accompanying notes are an integral part of
these condensed consolidated financial statements.
4
NATIONAL DENTEX CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Unaudited)
Common Stock
-------------------
Number of $.01 Par Paid-in Retained Treasury
Shares Value Capital Earnings Stock Total
---------- -------- ------------ ------------ ------------ ------------
BALANCE, December 31, 2002.................... 3,665,209 $36,652 $16,643,963 $42,430,900 $(5,165,544) $53,945,971
Issuance of 3,900 shares of common stock under
the stock option plans....................... 3,900 39 49,286 -- -- 49,325
Issuance of 16,650 shares of common stock under
the stock purchase plan...................... 16,650 166 260,495 -- -- 260,661
Net income.................................... -- -- -- 2,981,970 -- 2,981,970
---------- -------- ------------ ------------ ------------ ------------
BALANCE, June 30, 2003........................ 3,685,759 $36,857 $16,953,744 $45,412,870 $(5,165,544) $57,237,927
========== ======== ============ ============ ============ ============
The accompanying notes are an integral part of
these condensed consolidated financial statements.
5
NATIONAL DENTEX CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
For the Six Months Ended
-----------------------------
June 30, June 30,
2002 2003
------------- --------------
Cash flows from operating activities:
Net income $3,440,439 $2,981,970
Adjustments to reconcile net income to
net cash provided by operating
activities, net of effects of
acquisitions:
Depreciation and amortization...... 1,109,172 1,128,805
Deferred income taxes.............. (16,984) 2,212
Provision for bad debts............ 13,639 50,864
Issuance of common stock as
directors' fees................... 64,083 -
Changes in operating assets and
liabilities, net of effects of
acquisitions:
Increase in accounts receivable.... (917,635) (952,004)
(Increase) decrease in inventories. (179,216) 14,960
Increase in prepaid expenses....... (66,324) (140,811)
Increase in other assets........... (628,972) (607,993)
Increase in accounts payable and
accrued liabilities............... 789,997 60,523
------------- --------------
Net cash provided by operating
activities........................ 3,608,199 2,538,526
------------- --------------
Cash flows from investing activities:
Payment for acquisitions, net of cash
acquired............................. (1,681,585) (507,414)
Payment of deferred purchase price (1,573,085) (915,925)
Additions to property, plant and
equipment, net....................... (1,030,856) (1,556,670)
------------- --------------
Net cash used in investing
activities........................ (4,285,526) (2,980,009)
------------- --------------
Cash flows from financing activities:
Net proceeds from issuance of common
stock................................ 563,639 309,986
------------- --------------
Net cash provided by financing
activities........................ 563,639 309,986
------------- --------------
Net decrease in cash and cash
equivalents............................ (113,688) (131,497)
Cash and cash equivalents at beginning
of period.............................. 6,378,026 5,808,435
------------- --------------
Cash and cash equivalents at end of
period................................. $6,264,338 $5,676,938
============= ==============
Supplemental disclosures of cash flow
information:
Interest paid......................... $3,666 $5,937
============= ==============
Income taxes paid..................... $2,070,900 $1,286,353
============= ==============
The accompanying notes are an integral part of
these condensed consolidated financial statements.
6
NATIONAL DENTEX CORPORATION
Notes to Condensed Consolidated Financial Statements
June 30, 2003
(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 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.
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 as allowed by
Form 10-Q. 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, 2002 as filed
with the Securities and Exchange Commission on Form 10-K.
(2) Earnings Per Share
- ----------------------
In accordance with the disclosure requirements of Statement of Financial
Accounting Standard ("SFAS") 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 and six months ended June 30, 2002 and
2003 are as follows:
Three Months Ended Six Months Ended
June 30, June 30,
2002 2003 2002 2003
----------- ----------- ----------- -----------
Weighted average number of shares used in basic earnings per
share calculation........................................... 3,479,104 3,421,470 3,464,850 3,412,300
Incremental shares under option plans........................ 136,158 42,095 138,027 42,533
----------- ----------- ----------- -----------
Weighed average number of shares used in diluted earnings per share
calculation................................................. 3,615,262 3,463,565 3,602,877 3,454,833
=========== =========== =========== ===========
Shares under option plans excluded in computation of diluted earnings
per share due to anti-dilutive effects...................... - 503,833 - 503,833
=========== ===========
The following table summarizes options that were outstanding but were not
included in the computation of diluted earnings per share because the options'
exercise price was greater than the average market price of the common shares:
Three Months Ended June 30, Six Months Ended June 30,
2002 2003 2002 2003
---- ---- ---- ----
Number of Options for Common Shares None 503,833 None 503,833
Range of Exercise Prices - $19.52-$24.88 - $19.52-$24.88
Expire Through: - January 2013 - January 2013
7
Notes to Condensed Consolidated Financial Statements (Continued)
(3) Stock-Based Compensation
Effective January 1, 1996, 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 (the "LTIP"),
2001 Stock Plan and 1992 Employees' Stock Purchase Plan ("The 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:
Three Months Ended Six Months Ended
June 30, June 30,
----------------------- -----------------------
2002 2003 2002 2003
----------- ----------- ----------- -----------
Stock-based employee compensation expense, as reported $- $- $- $-
=========== =========== =========== ===========
Net income, as reported: $1,871,339 $1,650,347 $3,440,439 $2,981,970
Deduct: Total stock-based employee compensation expense determined under
fair value based method for all awards, net of related tax effects
165,016 127,584 358,563 278,837
----------- ----------- ----------- -----------
Pro forma net income $1,706,323 $1,522,763 $3,081,876 $2,703,133
=========== =========== =========== ===========
Earnings per share: As reported, basic $.54 $.48 .99 .87
Pro forma, basic .49 .45 .89 .79
As reported, diluted .52 .48 .95 .86
Pro forma, diluted .47 .44 .86 .78
(4) Recent Accounting Pronouncements
- ------------------------------------
In November 2002, the Financial Accounting Standards Board ("FASB") issued
FASB Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements
for Guarantees, Including Indirect Guarantees of Indebtedness of Others"("FIN
45"). FIN 45 elaborates on the disclosures to be made by a guarantor in its
interim and quarterly financial statements about its obligations under certain
guarantees that it has issued. It also clarifies that a guarantor is required to
recognize, at the inception of a guarantee, a liability for the fair value of
the obligation undertaken in issuing the guarantee. FIN 45 does not prescribe a
specific approach for subsequently measuring the guarantor's recognized
liability over the term of the related guarantee. This Interpretation also
incorporates, without change, the guidance in FASB Interpretation No. 34,
"Disclosure of Indirect Guarantees of Indebtedness of Others", which is being
superseded. The Company has adopted the disclosure provisions of this
pronouncement as of December 31, 2002. The adoption of the financial provisions
of this pronouncement on January 1, 2003 did not have a material effect on the
results of the Company.
In January 2003, the FASB issued FASB Interpretation No. 46,"Consolidation
of Variable Interest Entities" ("FIN 46"). This interpretation of Accounting
Research Bulletin No. 51, "Consolidated Financial Statements," addresses
consolidation by business enterprises of variable interest entities that possess
certain characteristics. FIN 46 requires that if a business enterprise has a
controlling financial interest in a variable interest entity, the assets,
liabilities, and results of the activities of the variable interest entity must
be included in the consolidated financial statements with those of the business
enterprise. FIN 46 applies immediately to variable interest entities created
after January 31, 2003 and to variable interest entities in which an enterprise
obtains an interest after that date. The Company does not have any ownership in
any variable interest entities as of June 30, 2003. The Company will apply the
consolidation requirement of FIN 46 in future periods if the Company should own
any interest in any variable interest entity.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities", which amends and clarifies
financial accounting and reporting for derivative instruments, including certain
derivative instruments embedded in other contracts and for hedging activities
under SFAS No. 133. SFAS No. 149 is effective for contracts entered into or
modified after June 30, 2003 except for the provisions that were cleared by the
FASB in prior pronouncements. The adoption of SFAS No. 149 did not have a
material effect on the results of the Company.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity". SFAS No. 150
requires the classification of certain financial instruments, previously
classified within the equity section of the balance sheet, to be included in
liabilities. SFAS No. 150 is effective for financial instruments entered into or
modified after May 31, 2003 and at the beginning of the first interim period
beginning after June 15, 2003 for all other financial instruments. The adoption
of SFAS No. 150 on July 1, 2003 did not have a material effect on the results of
the Company.
8
(5) 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.
(6) 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 these acquisitions, The Company has incurred certain
deferred purchase costs relating to non-competition agreements with certain
individuals, ranging over periods of 2 to 10 years, and other contingent
payments provided for in the purchase agreements.
Effective April 1, 2003, the Company acquired certain assets of Accurate
Dental Laboratory, Inc. of Albuquerque, New Mexico and Dan Jackson Laboratory of
Sanford, Florida. These laboratories were merged into the Company's existing
operations during the month of April and have been reflected in the accompanying
condensed consolidated financial statements from the date of acquisition.
During the six months ended June 30, 2002 and 2003, the Company acquired the
following dental laboratory operations:
Fox Dental................................. April 1, 2002
Nobilium Dental Laboratory................. March 1, 2003
Accurate Dental Laboratory, Inc............ April 1, 2003
Dan Jackson Laboratory..................... April 1, 2003
These acquisitions have been reflected in the accompanying condensed
consolidated financial statements from the date of acquisition and have been
accounted for as purchases in accordance with SFAS No.141, "Business
Combinations". The following pro forma operating results of the Company assume
the acquisitions had been made as of January 1, 2002. Such information includes
adjustments to reflect additional depreciation, non-compete 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.
Six Months Ended
------------------------------
June 30, June 30
2002 2003
------------- ---------------
(unaudited)
Net sales.......... $50,532,000 $49,388,000
Net income......... 3,487,000 3,014,000
Net income per share:
Basic $ 1.01 $ .88
Diluted $ .97 $ .87
(7) Subsequent Events
- ---------------------
Effective July 1, 2003, the Company acquired all of the outstanding capital
stock of Salem Dental Laboratory, Inc. of Cleveland, Ohio ("Salem"). Salem
reported sales in excess of $2,000,000 in its last fiscal year ended March 31,
2003.
9
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Forward-Looking Statements and Risk Factors
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. Such forward-looking statements
include statements regarding the Company's future financial performance,
acquisition activity, and marketplace competitiveness, that are based on the
Company's current expectations, beliefs, assumptions, estimates, forecasts and
projections about the industry and markets in which National Dentex operates.
The statements contained in this release are not guarantees of future
performance and involve certain risks, uncertainties and assumptions that are
difficult to predict. Therefore, actual outcomes and results may differ
materially from what is expressed in such forward-looking statements. Important
factors that may affect future operating and financial results include the
timing, duration and effects of adverse changes in overall economic conditions,
the Company's ability to acquire and successfully operate additional
laboratories, governmental regulation of health care, trends in the dental
industry towards managed care, increases in labor, benefits and material costs,
product development risks, technological innovations, and other risks indicated
from time to time in the Company's filings with the Securities and Exchange
Commission.
Liquidity and Capital Resources
The Company's working capital increased from $15,499,000 at December 31,
2002 to $16,713,000 at June 30, 2003. Cash and equivalents decreased $131,000
from $5,808,000 at December 31, 2002 to $5,677,000 at June 30, 2003. Operating
activities provided $2,539,000 in cash flow for the six months ended June 30,
2003 compared to $3,608,000 during the six months ended June 30, 2002. Cash
outflows related to dental laboratory acquisitions including deferred purchase
price payments totaled $1,423,000 for the six months ended June 30, 2003
compared to $3,255,000 for the six months ended June 30, 2002.
The Company maintains a financing agreement (the "Agreement") with Citizens
Bank of Massachusetts (the "Bank"). The Agreement includes revolving lines of
credit of $4,000,000 and $8,000,000. The interest rate on both revolving lines
of credit is the prime rate minus 0.5% or the London Interbank Offered Rate
("LIBOR") rate plus 1.5%, at the Company's option. Both revolving 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 June 30, 2003, the full principal amount was available to
the Company under both revolving lines of credit. The Agreement requires
compliance with certain covenants, including the maintenance of specified net
worth and other financial ratios. As of June 30, 2003, the Company was in
compliance with these covenants.
Management believes that cash flow from operations and 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 June 30, 2003:
Payments Due By Period
Greater
Less Than 1 - 3 4 - 5 Than
Total 1 Year Years Years 5 Years
------------ ----------- ----------- --------- -----------
Operating Leases:
Real Estate..... $ 7,927,000 $1,767,000 $3,867,000 $890,000 $1,403,000
Vehicles........ 904,000 581,000 323,000 - -
Equipment....... 194,000 97,000 87,000 10,000 -
Laboratory Purchase
Obligations 2,953,000 2,133,000 820,000 - -
----------- ---------- ---------- -------- ----------
TOTAL $11,978,000 $4,578,000 $5,097,000 $900,000 $1,403,000
=========== ========== ========== ======== ==========
The laboratory purchase obligations totaling $2,953,000 above are classified as
deferred acquisition costs and are presented in the liability section of the
balance sheet. The Company is committed under various non-cancelable operating
lease agreements covering its office space and dental laboratory facilities,
vehicles and certain equipment. Certain of these leases also require the Company
to pay maintenance, repairs, insurance and related taxes.
10
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 condensed consolidated
financial statements:
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -----------------------------
2002 2003 2002 2003
--------------------------- -----------------------------
Net sales................... 100.0% 100.0% 100.0% 100.0%
Cost of goods sold.......... 57.4 59.1 57.8 59.5
--------------------------- -----------------------------
Gross profit................ 42.6 40.9 42.2 40.5
Selling, general and
administrative expenses.... 29.9 29.9 30.2 30.3
--------------------------- -----------------------------
Operating income............ 12.7 11.0 12.0 10.2
Other expense............... 0.2 0.2 0.2 0.3
Interest income............. 0.0 0.0 0.1 0.0
--------------------------- -----------------------------
Income before provision for
income taxes............... 12.5 10.8 11.9 9.9
Provision for income taxes.. 5.1 4.2 4.8 3.8
--------------------------- -----------------------------
Net income.................. 7.4% 6.6% 7.1% 6.1%
=========================== =============================
Six Months Ended June 30, 2003 Compared with Six Months Ended June 30, 2002
Net Sales
For the six months ended June 30, 2003, net sales increased $536,000 or 1.1%
over the prior year. Net sales increased by approximately $1,335,000, or 2.7%,
as a result of acquisitions, measured by business at dental laboratories owned
less than one year. Net sales declined approximately $799,000, a decline of
1.6%, at dental laboratories owned for both the six months ended June 30, 2003
and the comparable six months ended June 30, 2002. Management believes that both
the Company's revenues and industry revenues as a whole have been unfavorably
impacted as a result of uncertainties within the current economic climate.
Cost of Goods Sold
The Company's cost of goods sold increased by $1,194,000 or 4.3% in the six
months ended June 30, 2003 compared with the six months ended June 30, 2002. As
a percentage of sales, cost of goods sold increased from 57.8% to 59.5%. The
increase was primarily attributable to increased labor and benefit costs.
Relatively flat sales caused continued overcapacity while higher than expected
medical insurance claims combined to reduce the Company's gross profit. As a
result of overcapacity and continuing economic uncertainty, the Company has
completed a review of staffing costs and has taken steps to reduce labor and
related expenses beginning in July 2003. The Company has also taken steps to
contain increasing medical claim costs by restructuring certain insurance plans.
Management anticipates that these efforts will begin to impact operating results
in the second half of the year.
Increased capacity also led to higher overhead costs as a percentage of
sales. Finally, materials costs were slightly lower than the comparable
six-month period ended June 30, 2002 due to the Company's selling price
increases and a more stable metal market influenced by declines in the cost of
palladium, a component of most dental alloys.
Selling, General and Administrative Expenses
Operating expenses, which consist of selling, delivery and administrative
expenses both at the laboratory and corporate level, increased by $185,000, or
1.3%, over the comparable six month period ended June 30, 2002. During the same
period, operating expenses increased as a percentage of net sales from 30.2% in
2002 to 30.3% in 2003. Selling costs declined by approximately $187,000 compared
to the six months ended June 30, 2002, primarily due to a planned reduction in
marketing expenditures related to "The NDX Reliance Program". Marketing costs
were higher in the six months ended June 30, 2002 since expenditures related to
the initial launch of the program were incurred at that time. Combined, other
administrative expenses at both laboratory and corporate levels increased
$813,000. In addition to the added administrative costs from recent
acquisitions, the Company continued to invest in its field management and sales
management teams. Expenses related to the Company's Laboratory Incentive
Compensation Plan declined by approximately $374,000, generally as a result of
lower laboratory profitability.
11
Operating Income
As a result of the factors discussed above, which include relatively flat
sales growth, increases in labor and medical insurance costs, and investments in
the expansion of the Company's management team, coupled with the current
economic climate, the Company's operating income declined by $843,000 to
$4,989,000 for the six months ended June 30, 2003 from $5,832,000 for the
comparable six months ended June 30, 2002. As a percentage of net sales,
operating income declined from 12.0% in 2002 to 10.2% for 2003.
Interest Income
Interest income decreased by $28,000 for the six months ended June 30, 2003
from 2002. The decrease was primarily due to lower interest rates.
Provision for Income Taxes
The provision for income taxes decreased to $1,894,000 in 2003 from
$2,342,000 in 2002. This $448,000 decrease was the result of decreased income
and a lower effective tax rate. The 40.5% effective tax rate for 2002 decreased
to 38.9% for six months ended June 30, 2003 to more accurately reflect the
Company's expected 2003 tax rate.
Net Income
As a result of all of the factors discussed above, net income decreased to
$2,982,000 or $.86 per share on a diluted basis in the first half of 2003 from
$3,440,000 or $.95 per share on a diluted basis in the first half of 2002.
Three Months Ended June 30, 2003 Compared with Three Months Ended June 30, 2002
Net Sales
For the three months ended June 30, 2003, net sales decreased $15,000 or
0.1% from the prior year. Net sales increased by approximately $408,000, or
1.6%, as a result of acquisitions, measured by business at dental laboratories
owned less than one year. Net sales declined approximately $423,000, a decline
of 1.7%, at dental laboratories owned for both the three months ended June 30,
2003 and the comparable three months ended June 30, 2002, for reasons comparable
to the six month period discussed above.
Cost of Goods Sold
The Company's cost of goods sold increased by $415,000 or 2.9% in the three
months ended June 30, 2003 compared with the three months ended June 30, 2002.
As a percentage of sales, for reasons comparable to the six-month period
discussed above, cost of goods sold increased from 57.4% to 59.1%.
Selling, General and Administrative Expenses
Operating expenses, which consist of selling, delivery and administrative
expenses both at the laboratory and corporate level, decreased by $9,000, or
0.1%, from the comparable three month period ended June 30, 2002. During the
same period, operating expenses were unchanged at 29.9% of net sales.
Selling costs declined slightly compared to the three months ended June 30,
2002. Increases in administrative expenses at both laboratory and corporate
levels offset a decline in expenses related to the Company's Laboratory
Incentive Compensation Plan, for reasons comparable to the six-month period
discussed above.
Operating Income
As a result of the factors discussed above, and for reasons comparable to
the six-month period discussed above, the Company's operating income declined by
$420,000 to $2,778,000 for the three months ended June 30, 2003 from $3,198,000
for the comparable three months ended June 30, 2002. As a percentage of net
sales, operating income declined from 12.7% in 2002 to 11.0% for 2003.
Interest Income
Interest income decreased by $3,000 for the three months ended June 30, 2003
from 2002. The decrease was primarily due to lower interest rates.
12
Provision for Income Taxes
The provision for income taxes decreased to $1,058,000, or 39.1% in 2003
from $1,274,000, or 40.5% in 2002. The decrease was for reasons comparable to
the six-month period discussed above.
Net Income
As a result of all of the factors discussed above, net income decreased to
$1,650,000 or $.48 per share on a diluted basis in the second quarter of 2003
from $1,871,000 or $.52 per share on a diluted basis in the second quarter of
2002.
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 that contain gold, palladium and other precious metals.
The Company has not participated in hedging transactions. The Company has relied
on pricing practices that attempt to pass increased costs on to the customer, in
conjunction with materials substitution strategies.
Item 4. Controls and Procedures
(a) Explanation of disclosure 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 and
pursuant to Rule 13a-14 and 15d-14 of the Securities Exchange Act of 1934. Based
on that evaluation, such officers concluded that the Company's disclosure
controls and procedures are designed to ensure that information required to be
disclosed by the Company in reports it files or submits under the Securities and
Exchange Act of 1934 is recorded, processed, summarized, and reported within the
time periods specified in Securities and Exchange Commission rules and forms and
are operating in an effective manner.
(b) Changes in 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.
13
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:
Not Applicable
Item 6. Exhibits and Reports on Form 8-K:
(a) Exhibits
Exhibit 99.1 Certification of David L. Brown, Chief Executive
Officer pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
Exhibit 99.2 Certification of Richard F. Becker, Jr., Chief
Financial Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K
On July 24, 2003, a Form 8-K was filed by the Company
under Item 9, Regulation FD Disclosure and Item 12,
Disclosure of Results of Operations and Financial
Condition.
14
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
August 12, 2003 /s/ DAVID L. BROWN
By:....................................................
David L. Brown
President, CEO and Director
(Principal Executive Officer)
August 12, 2003 /s/ RICHARD F. BECKER,JR.
By:....................................................
Richard F. Becker, Jr.
Vice President, Treasurer and Chief Financial Officer
(Principal Financial Officer)
15
CERTIFICATION
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 our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: August 12, 2003 By:/s/ DAVID L. BROWN
------------------
David L. Brown
President, Chief Executive Officer
and Director
16
CERTIFICATION
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 our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: August 12, 2003 By:/s/ RICHARD F. BECKER, JR.
--------------------------
Richard F. Becker, Jr.
Vice President, Treasurer and Chief
Financial Officer