________________________________________________________________________________
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d)
of the
Securities Exchange Act of 1934
For the Quarter Ended September 30, 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 November 5, 2003, 3,429,244 shares of the registrant's Common Stock,
par value $.01 per share, were outstanding.
________________________________________________________________________________
1
NATIONAL DENTEX CORPORATION
FORM 10-Q
QUARTER ENDED SEPTEMBER 30, 2003
TABLE OF CONTENTS
PART I. Financial Information Page
----
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets as of December 31, 2002 and September 30,
2003 (Unaudited)................................................................... 3
Condensed Consolidated Statements of Income for the three and nine month periods
ended September 30, 2002 (Unaudited) and 2003 (Unaudited).......................... 4
Condensed Consolidated Statement of Stockholders' Equity for the nine month
period ended September 30, 2003 (Unaudited)........................................ 5
Condensed Consolidated Statements of Cash Flows for the nine months ended
September 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, September 30,
2002 2003
------------ ------------
ASSETS (Unaudited)
CURRENT ASSETS:
Cash and cash equivalents..................................... $ 5,808,435 $ 3,779,658
Accounts receivable:
Trade, less allowance of $307,000 in 2002 and $378,000 in 2003 10,041,989 10,877,326
Other....................................................... 442,154 338,874
Inventories of raw materials.................................. 5,558,316 5,480,532
Prepaid expenses.............................................. 2,178,002 2,196,178
Deferred tax asset, current................................... 270,829 266,232
---------- ----------
Total current assets........................................ 24,299,725 22,938,800
---------- ----------
PROPERTY, PLANT AND EQUIPMENT:
Land and buildings............................................ 4,585,731 4,620,571
Leasehold and building improvements........................... 5,969,018 6,578,067
Laboratory equipment.......................................... 10,192,772 10,940,258
Furniture and fixtures........................................ 3,392,192 4,347,941
---------- ----------
24,139,713 26,486,837
Less-- Accumulated depreciation and amortization............ 12,613,976 13,750,257
---------- ----------
Net property, plant and equipment........................... 11,525,737 12,736,580
---------- ----------
OTHER ASSETS, net:
Goodwill...................................................... 24,123,203 27,451,163
Non-competition agreements.................................... 2,640,657 2,603,118
Deferred tax asset, non-current............................... 186,895 70,107
Other assets.................................................. 3,040,654 3,648,224
---------- ----------
Total other assets.......................................... 29,991,409 33,772,612
---------- ----------
Total assets............................................... $65,816,871 $69,447,992
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Accounts payable.............................................. $ 1,961,915 $ 1,928,715
Accrued liabilities:
Payroll and employee benefits............................... 4,285,269 3,924,784
Current portion of deferred purchase price.................. 2,325,932 2,147,669
Other accrued expenses...................................... 227,922 237,968
---------- ----------
Total current liabilities................................... 8,801,038 8,239,136
---------- ----------
LONG-TERM LIABILITIES:
Payroll and employee benefits................................. 1,525,903 1,831,115
Deferred purchase price....................................... 1,543,959 770,622
---------- ----------
Total long-term liabilities................................. 3,069,862 2,601,737
---------- ----------
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
3,688,699 shares at September 30, 2003.
Outstanding -- 3,403,009 shares at December 31, 2002 and
3,429,094 shares at September 30, 2003...................... 36,652 36,887
Paid-in capital............................................... 16,643,963 16,999,336
Retained earnings............................................. 42,430,900 46,689,834
Treasury stock at cost-- 262,200 shares at December 31, 2002 and
259,605 shares at September 30, 2003......................... (5,165,544) (5,118,938)
---------- ----------
Total stockholders' equity.................................. 53,945,971 58,607,119
---------- ----------
Total liabilities and stockholders' equity.................. $65,816,871 $69,447,992
========== ==========
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 Nine Months Ended
-------------------------------- --------------------------------
September 30, September 30, September 30, September 30,
2002 2003 2002 2003
------------ ------------ ------------ ------------
Net sales............................. $23,363,944 $24,357,436 $71,975,205 $73,504,568
Cost of goods sold.................... 14,054,277 14,788,311 42,146,476 44,074,722
---------- ---------- ---------- ----------
Gross profit........................ 9,309,667 9,569,125 29,828,729 29,429,846
Selling, general and administrative 7,144,247 7,579,712 21,831,777 22,451,874
expenses.............................. ---------- ---------- ---------- ----------
Operating income.................... 2,165,420 1,989,413 7,996,952 6,977,972
Other expense......................... 56,135 89,301 148,728 217,795
Interest income...................... 13,167 5,292 56,477 20,914
---------- ---------- ---------- ----------
Income before provision for income taxes 2,122,452 1,905,404 7,904,701 6,781,091
Provision for income taxes............ 820,070 628,440 3,161,880 2,522,157
---------- ---------- ---------- ----------
Net income.......................... $ 1,302,382 $ 1,276,964 $ 4,742,821 $ 4,258,934
========== ========== ========== ==========
Net income per share - basic.......... $ .37 $ .37 $ 1.37 $ 1.25
========== ========== ========== ==========
Net income per share - diluted........ $ .37 $ .37 $ 1.32 $ 1.23
========== ========== ========== ==========
Weighted average shares outstanding - 3,475,133 3,427,748 3,468,316 3,417,508
basic................................. ========== ========== ========== ==========
Weighted average shares outstanding - 3,541,391 3,496,824 3,585,799 3,463,547
diluted............................... ========== ========== ========== ==========
The accompanying notes are an integral part of these condensed consolidated financial statements.
4
NATIONAL DENTEX CORPORATION
CONDENSED CONSOLIDATED STATEMENT 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 6,840 shares of
common stock under
the stock option plans........... 6,840 68 93,479 -- -- 93,547
Issuance of 16,650 shares of
common stock under
the stock purchase plan.......... 16,650 167 260,494 -- -- 260,661
Issuance of 2,595 shares of
treasury stock as director's fees -- -- 1,400 -- 46,606 48,006
Net income........................ -- -- -- 4,258,934 -- 4,258,934
---------- --------- ------------ ----------- ----------- ------------
BALANCE, September 30, 2003....... 3,688,699 $ 36,887 $ 16,999,336 $46,689,834 $(5,118,938) $ 58,607,119
========== ========= ============ =========== =========== ============
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 Nine Months Ended
--------------------------------
September 30, September 30,
2002 2003
------------- -------------
Cash flows from operating activities:
Net income $ 4,742,821 $ 4,258,934
Adjustments to reconcile net income to net cash
provided by operating activities, net of
effects of acquisitions:
Depreciation and amortization............... 1,661,699 1,738,956
Deferred income taxes....................... (49,608) 121,385
Provision for bad debts..................... 19,012 77,797
Issuance of common stock as directors' fees. 64,083 48,006
Changes in operating assets and liabilities, net
of effects of acquisitions:
Increase in accounts receivable............. (391,943) (263,697)
(Increase) decrease in inventories.......... (292,224) 146,992
Increase in prepaid expenses................ (204,735) (18,176)
Increase in other assets.................... (273,754) (700,158)
Decrease in accounts payable and accrued
liabilities............................... (987,289) (528,293)
--------- ----------
Net cash provided by operating activities... 4,288,062 4,881,746
--------- ----------
Cash flows from investing activities:
Payment for acquisitions, net of cash acquired. (2,769,490) (3,883,570)
Payment of deferred purchase price............. (1,860,625) (1,222,676)
Additions to property, plant and equipment, net (1,670,590) (2,158,485)
---------- -----------
Net cash used in investing activities....... (6,300,705) (7,264,731)
---------- -----------
Cash flows from financing activities:
Net proceeds from issuance of common stock..... 597,827 354,208
Repurchases of common stock.................... (424,000) --
-------- -------
Net cash provided by financing activities... 173,827 354,208
-------- -------
Net decrease in cash and cash equivalents........ (1,838,816) (2,028,777)
Cash and cash equivalents at beginning of period. 6,378,026 5,808,435
----------- -----------
Cash and cash equivalents at end of period....... $ 4,539,210 $ 3,779,658
=========== ===========
Supplemental disclosures of cash flow information:
Interest paid.................................. $ 8,488 $ 8,509
=========== ===========
Income taxes paid.............................. $ 3,299,900 $ 1,950,920
=========== ===========
The accompanying notes are an integral part of these condensed consolidated financial statements.
6
NATIONAL DENTEX CORPORATION
Notes to Condensed Consolidated Financial Statements
September 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 nine months ended September 30, 2002
and 2003 are as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
2002 2003 2002 2003
Weighted average number of shares used in basic earnings --------- -------- ------- -------
per share calculation................................................. 3,475,133 3,427,748 3,468,316 3,417,508
Incremental shares under option plans................................. 66,258 69,076 117,483 46,039
Weighed average number of shares used in diluted earnings per --------- --------- --------- ---------
share calculation..................................................... 3,541,391 3,496,824 3,585,799 3,463,547
Shares under option plans excluded in computation of diluted ========= ========= ========= =========
earnings per share due to anti-dilutive effects....................... 126,050 117,010 115,750 474,185
========= ========= ========= ========
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 Nine Months Ended
September 30, September 30,
2002 2003 2002 2003
---- ---- ---- ----
Number of Options for Common Shares 126,050 117,010 115,750 474,185
Range of Exercise Prices $21.88-$24.68 $21.88-$24.88 $24.68-$24.88 $20.05-$24.88
Expire Through: May 2012 January 2013 May 2012 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 Nine Months Ended
September 30, September 30,
2002 2003 2002 2003
-------- ------- -------- -------
Stock-based employee compensation expense, as $ $ $ $
reported ========= ========= ========== ==========
Net income, as reported: $1,302,382 $1,276,964 $4,742,821 $4,258,934
Deduct: Total stock-based employee compensation
expense determined under fair value based method
for all awards, net of related tax effects 98,742 83,708 312,087 254,336
------ ------ ------- -------
Pro forma net income $1,203,640 $1,193,256 $4,430,734 $4,004,598
========= ========= ========= =========
Earnings per share: As reported, basic $ .37 $ .37 $ 1.37 $ 1.25
Pro forma, basic .35 .35 1.28 1.17
As reported, diluted .37 .37 1.32 1.23
Pro forma, diluted .34 .34 1.24 1.16
(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 September 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 July 1, 2003 the Company acquired all of the outstanding capital
stock of Salem Dental Laboratory, Inc. of Cleveland, Ohio ("Salem"). Results
from Salem have been reflected in the accompanying condensed consolidated
financial statements from the date of acquisition. Effective September 1, 2003
the Company acquired all of the outstanding capital stock of Top Quality
Partials, Inc. of Apopka, Florida ("Top Quality"). Results from Top Quality have
been reflected in the accompanying condensed consolidated financial statements
from the date of acquisition.
During the nine months ended September 30, 2002 and 2003, the Company acquired
the following dental laboratory operations:
Fox Dental............................................................. April, 2002
Valencia Dental........................................................ July, 2002
E&S Dental............................................................. August, 2002
Nobilium Dental Laboratory............................................. March, 2003
Accurate Dental Laboratory, Inc........................................ April, 2003
Dan Jackson Laboratory................................................. April, 2003
Salem Dental Laboratory, Inc........................................... July, 2003
Top Quality Partials, Inc.............................................. September, 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 total purchase price of $3,457,000 in 2002 and $3,945,000 in
2003 has been allocated to the acquired assets and liabilities based on
preliminary estimates of their fair values, which are subject to revision. 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.
Nine Months Ended
September 30, September 30,
2002 2003
------------ --------------
(unaudited)
Net sales.......... $77,590,000 $76,312,000
Net income......... 5,092,000 4,508,000
Net income per share:
Basic $ 1.47 $ 1.32
Diluted $ 1.42 $ 1.30
(7) Subsequent Events
- ---------------------
Effective October 1, 2003, the Company acquired all of the outstanding
capital stock of Midtown Dental Lab, Inc. of Charleston, West Virginia
("Midtown"). Midtown reported sales of approximately $3,000,000 in its last
fiscal year ended December 31, 2002.
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 decreased from $15,499,000 at December 31,
2002 to $14,700,000 at September 30, 2003. Cash and equivalents decreased
$2,028,000 from $5,808,000 at December 31, 2002 to $3,780,000 at September 30,
2003. Operating activities provided $4,882,000 in cash flow for the nine months
ended September 30, 2003 compared to $4,288,000 during the nine months ended
September 30, 2002. Cash outflows related to dental laboratory acquisitions
including deferred purchase price payments totaled $5,106,000 for the nine
months ended September 30, 2003 compared to $4,630,000 for the nine months ended
September 30, 2002.
The Company maintains a financing agreement (the "Agreement") with Citizens
Bank of Massachusetts (the "Bank"). The Agreement 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. The Company is currently reviewing options to
extend and expand its current credit facility to support its acquisition
strategy.
A commitment fee of one eighth of 1% is payable on the unused amount of
both lines of credit. At September 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 September 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 September 30, 2003:
Payments Due By Period
Less Than Greater Than
Total 1 Year 1 - 3 Years 4 - 5 Years 5 Years
----------------------------------------------- ----------
Operating Leases:
Real Estate.................... $ 8,373,000 $ 1,878,000 $4,173,000 $ 1,004,000 $ 1,318,000
Vehicles....................... 842,000 553,000 289,000 - -
Equipment...................... 188,000 105,000 75,000 8,000 -
Laboratory Purchase Obligations... 2,919,000 2,148,000 771,000 - -
----------------------------------------------------------------
TOTAL $12,322,000 $ 4,684,000 $5,308,000 $ 1,012,000 $ 1,318,000
================================================================
The laboratory purchase obligations totaling $2,919,000 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.
The Company, as sponsor of the National Dentex Corporation Dollars Plus Plan,
(the "Plan"), a qualified plan under Section 401(a) of the Internal Revenue
Code, is preparing to file a retroactive plan amendment under the Internal
Revenue Service's Voluntary
10
Correction Program to clarify the definition of compensation in the Plan. The
Company and its ERISA counsel believe this issue will be favorably resolved and
that the Plan will retain its tax-qualified status.
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 Nine Months Ended
September 30, September 30,
2002 2003 2002 2003
---------------------- ----------------------
Net sales........................... 100.0% 100.0% 100.0% 100.0%
Cost of goods sold.................. 60.2 60.7 58.6 60.0
------ ----- ------ -----
Gross profit........................ 39.8 39.3 41.4 40.0
Selling, general and administrative
expenses............................ 30.6 31.1 30.3 30.5
----- ----- ------ ------
Operating income.................... 9.2 8.2 11.1 9.5
Other expense....................... 0.2 0.4 0.2 0.3
Interest income..................... 0.1 0.0 0.1 0.0
Income before provision for income
taxes 9.1 7.8 11.0 9.2
Provision for income taxes.......... 3.5 2.6 4.4 3.4
------ ------ ------ --------
Net income.......................... 5.6% 5.2% 6.6% 5.8%
======= ======= ====== =======
Nine Months Ended September 30, 2003 Compared with Nine
Months Ended September 30, 2002
Net Sales
For the nine months ended September 30, 2003, net sales increased $1,529,
000 or 2.1% over the prior year. Net sales increased by approximately
$2,150,000, or 3.0%, as a result of acquisitions, measured by business at dental
laboratories owned less than one year. Net sales declined approximately
$621,000, a decline of 0.9%, at dental laboratories owned for both the nine
months ended September 30, 2003 and the comparable nine months ended September
30, 2002. Management believes that both the Company's revenues and industry
revenues, particularly in the crown and bridge product lines, have generally
slowed in the current economy as many patients and dentists have postponed
optimal treatment plans in favor of less expensive temporary alternatives.
Cost of Goods Sold
The Company's cost of goods sold increased by $1,928,000 or 4.6% in the
nine months ended September 30, 2003 compared with the nine months ended
September 30, 2002. As a percentage of sales, cost of goods sold increased from
58.6% to 60.0%. The increase was primarily attributable to increased labor and
benefit costs. Relatively flat sales caused continued overcapacity while higher
than expected medical insurance claims reduced the Company's gross profit. As a
result of overcapacity and continuing economic uncertainty, the Company 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 the Company's medical plan, effective September 1, 2003. These
efforts are expected to continue to improve operating results for the remainder
of the year.
Increased capacity also led to higher overhead costs as a percentage of
sales. Finally, materials costs as a percentage of sales were slightly lower
than the comparable nine-month period ended September 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 $620,000, or
2.8%, over the comparable nine month period ended September 30, 2002. During the
same period, operating expenses increased as a percentage of net sales from
30.3% in 2002 to 30.5% in 2003. Selling costs declined by approximately $190,000
compared to the nine months ended September 30, 2002, primarily due to a planned
reduction in marketing expenditures related to "The NDX Reliance Program". These
costs were higher in the nine months ended September 30, 2002 since expenditures
related to the initial launch of the program were incurred at that time. Other
administrative expenses at both laboratory and corporate levels, when combined,
increased $1,171,000. 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 $319,000, 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 $1,019,000 to $6,978,000 for
the nine months ended September 30, 2003 from $7,997,000 for the comparable nine
months ended September 30, 2002. As a percentage of net sales, operating income
declined from 11.1% in 2002 to 9.5% for 2003.
Interest Income
Interest income decreased by $36,000 for the nine months ended September
30, 2003 from 2002. The decrease was primarily due to lower interest rates.
Provision for Income Taxes
The provision for income taxes decreased to $2,522,000 in 2003 from
$3,162,000 in 2002. This $640,000 decrease was the result of decreased income
and a lower effective tax rate. The 40.0% effective tax rate for 2002 decreased
to 37.2% for the nine months ended September 30, 2003 to more accurately reflect
the Company's expected 2003 tax rate. The Company has recently entered into a
consent agreement with the Internal Revenue Service regarding the treatment of
contingent payments made in connection with its acquisitions of dental
laboratories. The result of that agreement has favorably impacted the Company's
current year tax provision.
Net Income
As a result of all of the factors discussed above, net income decreased to
$4,259,000 or $1.23 per share on a diluted basis in the nine months ended
September 30, 2003 from $4,743,000 or $1.32 per share on a diluted basis in the
nine months ended September 30, 2002.
Three Months Ended September 30, 2003 Compared with
Three Months Ended September 30, 2002
Net Sales
For the three months ended September 30, 2003, net sales increased $993,000
or 4.3% from the prior year. Net sales increased by approximately $815,000, or
3.5%, as a result of acquisitions, measured by business at dental laboratories
owned less than one year. Net sales increased approximately $178,000, an
increase of 0.8%, at dental laboratories owned for both the three months ended
September 30, 2003 and the comparable three months ended September 30, 2002. The
increase was primarily attributable to an additional business day in the quarter
ended September 30, 2003.
Cost of Goods Sold
The Company's cost of goods sold increased by $734,000 or 5.2% in the three
months ended September 30, 2003 compared with the three months ended September
30, 2002. As a percentage of sales, for reasons comparable to the nine-month
period discussed above, cost of goods sold increased from 60.2% to 60.7%.
Selling, General and Administrative Expenses
Operating expenses, which consist of selling, delivery and administrative
expenses both at the laboratory and corporate level, increased by $435,000, or
6.1%, from the comparable three month period ended September 30, 2002. During
the same period, operating expenses as a percentage of sales increased to 31.1%
from 30.6 %, primarily due to increased medical insurance costs. .Selling costs
were unchanged compared to the three months ended September 30, 2002. Increases
in administrative expenses at the laboratory level as well as an increase in
expenses related to the Company's Laboratory Incentive Compensation Plan also
contributed to the increase in operating expenses.
Operating Income
As a result of the factors discussed above, and for reasons comparable to
the nine-month period discussed above, the Company's operating income declined
by $176,000 to $1,989,000 for the three months ended September 30, 2003 from
$2,165,000 for the comparable three months ended September 30, 2002. As a
percentage of net sales, operating income declined from 9.2% in 2002 to 8.2% for
2003.
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Interest Income
Interest income decreased by $8,000 for the three months ended September
30, 2003 from 2002. The decrease was primarily due to lower interest rates and
decreased investment principal.
Provision for Income Taxes
The provision for income taxes decreased to $628,000, or 33.0% in 2003 from
$820,000, or 38.6% in 2002. The decrease was for reasons comparable to the
nine-month period discussed above.
Net Income
As a result of all of the factors discussed above, net income decreased to
$1,277,000 or $.37 per share on a diluted basis in the third quarter of 2003
from $1,302,000 or $.37 per share on a diluted basis in the third 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) Evaluation of Disclosure Controls and Procedures.
Our management, with the participation of our Chief Executive Officer, or CEO,
and Chief Financial Officer, or CFO, evaluated the effectiveness of our
disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e)
under the Securities Exchange Act) as of September 30, 2003. 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, and not absolute, 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 CEO and CFO concluded that, as of September 30, 2003, our
disclosure controls and procedures were (1) designed to ensure that material
information relating to us, including our consolidated subsidiaries, is made
known to our CEO and CFO by others within those entities, particularly during
the period in which this report was being prepared and (2) effective, in that
they provide reasonable assurance that information required to be disclosed by
us in the reports that we file or submit under the Securities Exchange Act is
recorded, processed, summarized and reported within the time periods specified
in the Securities and Exchange Commission's rules and forms.
(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 Securities Exchange Act) occurred during the
fiscal quarter ended September 30, 2003 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:
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 31.1 Certification of CEO pursuant to Section 302 of the
Sarbanes-Oxley Act.
Exhibit 31.2 Certification of CFO pursuant to Section 302 of the
Sarbanes-Oxley Act.
Exhibit 32.1 Certification of CEO pursuant to Section 906 of the
Sarbanes-Oxley Act.
Exhibit 32.2 Certification of CFO pursuant to Section 906 of the
Sarbanes-Oxley Act.
(b) Reports on Form 8-K
On October 23, 2003, the Company furnished a Current Report on Form
8-K under Item 9, pursuant to Item 12 containing a press release
announcing the Company's financial results for the fiscal quarter
ended September 30, 2003.
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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
November 10, 2003 /s/ DAVID L. BROWN
By:.........................
David L. Brown
President, CEO and Director
(Principal Executive Officer)
November 10, 2003 /s/ RICHARD F. BECKER, JR.
By:................................
Richard F. Becker, Jr.
Vice President, Treasurer and Chief Financial
Officer
(Principal Financial Officer)
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