UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549 

FORM 10-Q

Quarterly Report Pursuant to Section 13 or 15(d)
of the
Securities Exchange Act of 1934

For the Quarter Ended March 31, 2004

Commission file number 000-23092

NATIONAL DENTEX CORPORATION
(Exact name of registrant as specified in its charter)

(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 May 3, 2004, 3,459,041 shares of the registrant’s Common Stock, par value $.01 per share, were outstanding.

NATIONAL DENTEX CORPORATION

FORM 10-Q

QUARTER ENDED MARCH 31, 2004

TABLE OF CONTENTS

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NATIONAL DENTEX CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

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

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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 STATEMENT OF STOCKHOLDERS’ EQUITY

(Unaudited)

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

5

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, 2004

(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, 2003 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 months ended March 31, 2003 and 2004 are as follows:

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:

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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, 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:

(4) Recent Accounting Pronouncements

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, as revised in December 2003, must be applied at the end of periods ending after March 15, 2004, and is effective immediately for all new variable interest entities created or acquired after January 31, 2003.  The adoption of the revised FIN 46 did not have a material impact on the Company’s results of operations or financial position, as at this time the Company is not a party to any variable interest entities. 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.

(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.

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Notes to Condensed Consolidated Financial Statements (Continued)

(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.

During the three months ended March 31, 2003 and 2004, the Company acquired the following dental laboratory operation:

Nobilium Dental Laboratory             March 2003

This acquisition has been reflected in the accompanying condensed consolidated financial statements from the date of acquisition and has been accounted for as a purchase in accordance with SFAS No.141, “Business Combinations”. The total purchase price, while not material to the consolidated financial position, results of operations or cash flows in any of the periods presented, 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 this acquisition had been made as of January 1, 2003. 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.

(7) Lines of Credit

The Company maintains a financing agreement (the “Agreement”) with Citizens Bank of Massachusetts (the “Bank”). The Agreement, as amended on December 31, 2001, 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”) plus 1.5%, at the Company’s option. Both revolving lines of credit mature on June 30, 2004. The Company is currently completing negotiations to extend and expand its current credit facility to support its acquisition strategy. The Company’s management anticipates that it will conclude these negotiations successfully.

A commitment fee of one-eighth of 1% is payable on the unused amount of both revolving lines of credit. At March 31, 2004, the full principal amount was available to the Company under the $8,000,000 line of credit facility and the outstanding balance under the $4,000,000 line of credit facility was $869,000 with $3,131,000 available. The Agreement requires compliance with certain covenants, including the maintenance of specified net worth and other financial ratios. As of March 31, 2004, the Company was in compliance with these covenants.

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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 37 dental laboratories located in 29 states, serving an active customer base of over 18,000 dentists. Our business consists of a single industry segment, which is the design, fabrication, marketing and sale of custom dental prosthetic appliances for dentists located primarily in the domestic marketplace. Product offerings include:

Restorative products that are permanently affixed by a dentist to a patients’ existing dental anatomy, including traditional porcelain fused to metal crowns and bridges and dental implants.

Reconstructive products that are removable prosthesis that replace missing teeth and associated structures, including partial and full dentures.

Cosmetic products that consist primarily of porcelain veneers designed to enhance the appearance of the front of a tooth as well as all ceramic crowns that are made without a traditional metal substructure and more closely replicates the appearance of natural teeth. This category also includes 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 over the last three years. Early in 2001, we noted 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 direct and indirect composite fillings, for which we recognize no revenue. As a result, sales of restorative products were unfavorably impacted. We believe that while a portion of this segment can be temporarily deferred by patients, the work will eventually be required and will be done. During 2003, the economic situation was much like that in 2002, although we have seen some recent favorable signs in the marketplace that industry growth may be returning to more positive trends. During the first quarter of 2004, we have seen internal sales growth stabilize and begin to grow. We are guardedly optimistic that sales growth will continue as economic conditions continue to improve.

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 $99,274,000 in 2003. 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 drive these costs higher. These increased costs combined with flat internal sales growth contributed to lower operating margins. During 2003, we reviewed and adjusted staffing levels at each of our locations to minimize the costs of the slowdown in sales growth. 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. Beginning in the fourth quarter of 2001 and continuing through 2003, we first developed and subsequently continued to invest in the “NDX Reliance Program™”, a national marketing and branding campaign that we believe holds long term value and will help us attain our sales objectives.

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Liquidity and Capital Resources

Our working capital increased from $12,252,000 at December 31, 2003 to $12,452,000 at March 31, 2004. Cash and equivalents decreased $603,000 from $1,835,000 at December 31, 2003 to $1,232,000 at March 31, 2004. Operating activities provided $1,315,000 in cash flow for the three months ended March 31, 2004 compared to consuming $58,000 during the three months ended March 31, 2003. Cash outflows related to dental laboratory acquisitions including deferred purchase price payments totaled $686,000 for the three months ended March 31, 2004 compared to $949,000 for the three months ended March 31, 2003. Additions to property plant and equipment, including the purchase of a $2,000,000 replacement facility for our dental laboratory in Houston, Texas, were $2,247,000 for the three months ended March 31, 2004 compared to $669,000 for the three months ended March 31, 2003.

We maintain a financing agreement (the “Agreement”) with Citizens Bank of Massachusetts (the “Bank”). The Agreement includes a revolving credit facility of $4,000,000 and a line of credit facility of $8,000,000. The interest rate on both lines of credit is the prime rate minus 0.5% or the London Interbank Offered Rate (“LIBOR”) plus 1.5%, at our option. Both lines of credit mature on June 30, 2004. We are currently completing negotiations to extend and expand our current credit facility to support our acquisition strategy. We anticipate that we will conclude these negotiations successfully.

A commitment fee of one eighth of 1% is payable on the unused amount of both lines of credit. At March 31, 2004, the full principal amount was available to us under the $8,000,000 line of credit facility and the outstanding balance under the $4,000,0000 revolving credit facility was $869,000 with $3,131,000 available. The Agreement requires compliance with certain covenants, including the maintenance of specified net worth and other financial ratios. We were in compliance with these covenants as of March 31, 2004.

Our management believes that cash flow from operations and available financing arrangements will be sufficient to meet contemplated operating and capital requirements, including deferred payments associated with prior acquisitions and costs associated with anticipated acquisitions, if any, in the foreseeable future.

Commitments and Contingencies

The following table represents a list of our contractual obligations and commitments as of March 31, 2004:

The laboratory purchase obligations totaling $2,046,000 above are classified as deferred acquisition costs and are presented in the liability section of the balance sheet. Contingent laboratory purchase price includes amounts subject to acquisition agreements that are tied to earnings performance, as defined by the individual agreements, over a three year period. As payments become determinable, they are recorded as goodwill. 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.

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 on April 22, 2004 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, 2004 Compared with Three Months Ended March 31, 2003

Net Sales

For the three months ended March 31, 2004, net sales increased $3,963,000 or 16.5% from the prior year. Net sales increased by approximately $2,783,000, or 11.6%, as a result of acquisitions, measured by business at dental laboratories owned less than one year. Net sales increased approximately $1,180,000, an increase of 4.9%, at dental laboratories owned for both the three months ended March 31, 2004 and the comparable three months ended March 31, 2003. The number of business days in the comparable quarters was consistent with 63 days in both.

Cost of Goods Sold

Cost of goods sold as a percentage of sales was 58.5% in the quarter ended March 31, 2004 compared with 60.1% in the same period of 2003. Headcount reductions, productivity improvements and purchasing cost savings helped improve our gross margin by more than offsetting increases in employee benefit and general insurance costs and the occupancy costs related to four acquisitions completed in the last half of 2003.

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 $8,679,000 or 31.0% of sales in 2004 compared to $7,344,000 or 30.6% in 2003. The increase of $1,335,000 was related to the added administrative and delivery costs for recent acquisitions as well as the overall increases in insurance, benefits and utility costs.

Operating Income

As a result of the factors discussed above, our operating income increased by $708,000 to $2,919,000 for the three months ended March 31, 2004 from $2,211,000 for the comparable three months ended March 31, 2003. As a percentage of net sales, operating income increased from 9.3% in 2003 to 10.5% for 2004.

Interest Expense

Interest expense was $11,000 in the first quarter of 2004 compared with interest income of $9,000 in the first quarter of 2003. This increase of $20,000 was primarily due to outstanding borrowings under the line of credit and a decrease in the average cash and cash equivalents balance.

Provision for Income Taxes

The provision for income taxes increased to $1,137,000 in 2004 from $835,000 in 2003 due to an increase in operating income and a higher effective tax rate. The effective tax rate increased to 40% in 2004 from 38.5% in 2003 due to expected increases in non-deductible expenses.

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Net Income

As a result of all of the factors discussed above, net income increased to $1,705,000 or $.48 per share on a diluted basis in the first quarter of 2004 from $1,332,000 or $.39 per share on a diluted basis in the first quarter of 2003.

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:

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.

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 March 31, 2004. 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 CEO and CFO concluded that, as of March 31, 2004, 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 March 31, 2004 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 its 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.

Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities:

Item 3.

Defaults upon Senior Securities:

Not Applicable

Item 4.

Submission of Matters to a Vote of Security Holders:

Our Special Meeting in Lieu of an Annual Meeting of Stockholders was held on April 13, 2004. On February 20, 2004, the record date of the meeting, there were 3,433,701 shares of our common stock outstanding, of which 2,849,759 shares or 83.0% were represented at the meeting in person or by proxy. At the meeting, the following matters were voted upon and approved:

(a)

Proposal to elect the following persons as directors.

(b)

Proposal to ratify and approve an amendment to the 2001 Stock Plan, increasing the number of shares of our common stock reserved for issuance under the Plan by 250,000 shares, from 300,000 to 550,000 shares.

(c)

Proposal to approve the appointment of PricewaterhouseCoopers LLP as our auditors for the fiscal year ending December 31, 2004.

Item 5. Other Information:

Not Applicable

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Item 6. Exhibits and Reports on Form 8-K:

(a)

Exhibits

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

(b)

Reports on Form 8-K

On February 9, 2004, we furnished a Current Report on Form 8-K under Item 9, pursuant to Item 12, containing a press release announcing our financial results for the fiscal quarter ended December 31, 2003.

On April 28, 2004, we furnished a Current Report on Form 8-K under Item 9, pursuant to Item 12, containing a press release announcing our financial results for the fiscal quarter ended March 31, 2004.          

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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.

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Exhibit Index

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