| NATIONAL DENTEX CORP /MA/ Item 1A Risk Factors Our business is subject to certain risks that could materially affect our financial condition, results of operations, and the value of our common stock |
| These risks include, but are not limited to, the ones described below |
| Additional 3 _________________________________________________________________ [43]Table of Contents risks and uncertainties that we are unaware of, or that we may currently deem immaterial, may become important factors that harm our business, financial condition, results of operations, or the value of our common stock |
| Our success depends on economic and other external factors that affect consumer decisions about whether and when to have dental procedures performed |
| Our business success depends in large measure on consumer decisions to have dental procedures performed |
| In this respect, demand for our products and our business results are sensitive to external factors that, directly or indirectly, affect consumer confidence, affect levels of disposable consumer income, or otherwise lead consumers to defer or elect not to have dental procedures performed |
| Examples of such external factors include the timing, duration and effects of adverse changes in overall economic conditions, including rates of job loss or growth, rising energy prices, and increases in medical and dental costs, nationally or regionally in the markets we serve |
| Increased governmental regulation of health care and trends in the dental industry towards managed care may also result in decreased consumer access to dental services and thereby adversely affect demand for our products and our sales and profitability |
| The precise impact of these external factors is difficult to predict in advance, but one or more of these factors could adversely affect our business to the extent they adversely affect consumer spending on dental procedures |
| We operate in highly competitive and fragmented markets |
| The dental laboratory industry is highly competitive and fragmented |
| We believe there are currently approximately 12cmam000 dental laboratories in the United States, ranging in size from one to approximately 200 technicians |
| We estimate that our sales presently represent less than 3prca of the total sales of custom-made dental prosthetic appliances in the United States |
| Competition is primarily from other dental laboratories in the respective local market areas |
| The vast majority of dental laboratories consist of single business units, although there are several other multiple-location operators, including, the Sentage Corporation d/b/a Dental Services Group, Dental Technologies, Inc |
| These groups compete with us in several market areas |
| We also face competition from various mail order dental laboratories, most notably Glidewell Laboratories |
| Our success thus depends on our ability to be competitive against many different competitors in each market area we serve |
| If we fail to anticipate evolving technological innovations and product offerings from our competitors and fail to offer products that appeal to the changing needs and preferences of our customers in the various markets we serve, demand for our products could decline and our operating results would be adversely affected |
| While the competitive importance of product quality, price, service and innovation varies from product to product, price is a factor, and we experience pricing pressures from competitors in our markets |
| We face increased competitive pressures from larger competitors, foreign-sourced products and technology based solutions |
| The industry in which we operate faces growing competition as it begins to confront globalization |
| We expect competition for business to intensify as United States based and foreign companies increasingly look at ways to benefit from the developing manufacturing capabilities of countries such as China, India, and others |
| For example, in February 2006, Dentsply International Inc |
| (“Dentsply”), one of the largest suppliers of raw materials to us and the worldwide dental laboratory industry, announced its intention to manufacture partial frames and traditional crowns in China for sale to United States based dental laboratories at prices reflecting significant labor cost differentials |
| Prior to this announcement, Dentsply did not seek to derive revenue from the sale and manufacture of dental restorations |
| Price pressures from such new sources of competition could erode our margins and cause our financial results of operations to suffer |
| Certain current technology solutions allow dentists to fabricate restorations without the use of a dental laboratory |
| Our success depends on our ability to evaluate and respond to the threats arising from growing foreign competition, changing marketplaces and new technology and our ability to identify ways in which we can competitively provide the products and services demanded by our customers |
| Risks associated with our strategic acquisitions could adversely affect our business |
| We have completed a number of acquisitions in recent years |
| Our acquisition strategy depends on our ability to identify laboratories that are suitable acquisition candidates, successfully negotiate and enter into transactions on 4 _________________________________________________________________ [44]Table of Contents acceptable terms, and our capacity to integrate and successfully operate newly acquired as well as our previously acquired laboratories |
| If we fail to locate suitable acquisition candidates, reach mistaken conclusions as to the suitability of laboratories as acquisition candidates, enter into transactions on terms that prove unfavorable to us, or fail to integrate new laboratories following an acquisition, our ability to operate and grow our business in the ways we would like could be materially and adversely effected |
| While we will continue to consider acquisitions as a means of enhancing shareowner value, acquisitions involve risks and uncertainties, including: • difficulties integrating the acquired company, retaining the acquired laboratories’ customers, and achieving the expected benefits of the acquisition, such as revenue increases, cost savings, and increases in geographic or product presence, in the desired time frames, if at all; • loss of key employees from the acquired company; • implementing and maintaining consistent standards, controls, procedures, policies and information systems; and • diversion of management’s attention from other business concerns |
| Future acquisitions could cause us to incur additional debt, contingent liabilities, increased interest expense and higher amortization expense related to intangible assets, as well as experience dilution in earnings per share |
| Impairment losses on goodwill and intangible assets with an indefinite life, or restructuring charges, could also occur as a result of acquisitions |
| If we fail to develop new or expand existing customer relationships, our ability to grow our business will be impaired |
| Our growth depends on our ability to develop new customer relationships and to expand existing relationships with current customers |
| We cannot guarantee that new customers will be found, that any such new relationships will be successful when they are in place, or that business with current customers will increase |
| Failure to develop and expand such relationships could have a material adverse effect on our business, results of operations and financial condition |
| Our failure to attract and retain qualified personnel would adversely affect our business |
| Our success depends in part on the efforts and abilities of our senior management team and key employees, a number of which are approaching retirement age |
| Their skills, experience and industry contacts significantly benefit our operations and administration |
| The failure to attract, retain, and properly motivate the members of our senior management team and key employees, or to find suitable replacements for them in the event of death, ill health, or retirement, would have a negative effect on our operating results |
| Our business results are adversely affected by increases in labor, benefits and related costs |
| The costs of medical and others benefits have increased in recent years |
| The increased usage of medical benefits has intensified medical inflation in the United States |
| If such trends continue, then our business could be negatively affected |
| Changes in law that may increase the funding of, and the expense reflected for, employee benefits, would also adversely affect our financial results of operations, financial position, and competitiveness |
| If we cannot continue to respond to technical innovations we may not be able to compete effectively |
| We believe that our future success will depend, in part, upon our ability to continue to respond to technological innovations by the dental industry and introduce innovative design extensions for our existing products and to manufacture and market new products |
| We cannot assure you that we will be successful in the introduction, manufacturing and marketing of any new products or product innovations, or develop and introduce, in a timely manner, innovations to our existing products that satisfy our dentist customers’ needs or achieve market acceptance |
| Our failure to introduce new products successfully and in a timely manner, and at favorable margins, would harm our ability to successfully grow our business and could have a material adverse effect on our business, results of operations and financial condition |
| 5 _________________________________________________________________ [45]Table of Contents Our operating results can be adversely affected by changes in the cost or availability of raw materials, particularly precious metals like gold, platinum and palladium |
| Pricing and availability of raw materials for use in our businesses — most especially precious metals, like gold, platinum and palladium which are components of many dental alloys — can be volatile due to numerous factors beyond our control, including domestic and international economic and geopolitical conditions, production levels, competition, consumer demand, and investor speculation |
| This volatility can significantly affect the availability and cost of raw materials for us, and may, therefore, have a material adverse effect on our business, results of operations and financial condition |
| During periods of rising prices of raw materials, there can be no assurance that we will be able to pass any portion of such increases on to customers |
| Prolonged higher metal costs may thus have a negative impact on gross profit percentages |
| Conversely, when raw material prices decline, customer demands for lower prices could result in lower sale prices and, to the extent we have existing inventory, lower margins |
| As a result, fluctuations in raw material prices could have a material adverse effect on our business, results of operations and financial condition |
| Our failure to generate sufficient cash to meet our liquidity needs may affect our ability to service our indebtedness and grow our business |
| Our ability to make payments on and to refinance our indebtedness, principally the amounts borrowed under our senior credit facility, and to fund planned capital expenditures and expansion efforts and strategic acquisitions we may make in the future, if any, will depend on our ability to generate cash in the future |
| This, to a certain extent, is subject to general economic, financial, competitive and other factors that are beyond our control |
| Based on our current level of operations, we believe our cash flow from operations, together with available cash and available borrowings under our senior credit facility, will be adequate to meet future liquidity needs for at least the next twelve months |
| However, we cannot assure you that our business will generate sufficient cash flow from operations in the future, that our currently anticipated growth in revenues and cash flow will be realized on schedule or that future borrowings will be available to us under the senior credit facility in an amount sufficient to enable us to service indebtedness, undertake strategic acquisitions to grow our business, or to fund other liquidity needs |
| If we need to refinance all or a portion of our indebtedness, we cannot assure you that we will be able to do so on commercially reasonable terms or at all |
| An impairment in the carrying value of goodwill or other acquired intangibles could negatively affect our operating results and net worth |
| The carrying value of goodwill represents the fair value of acquired businesses in excess of identifiable assets and liabilities as of the acquisition date |
| The carrying value of other intangibles represents the fair value of trademarks, trade names and other acquired intangibles as of the acquisition date |
| Goodwill and other acquired intangibles expected to contribute indefinitely to our cash flows are not amortized, but must be evaluated by our management at least annually for impairment |
| If carrying value exceeds current undiscounted cash flows, an impairment is identified |
| The impairment is then measured based on the difference of fair value (discounted cash flow) and carrying value |
| Events and conditions that could result in impairment include changes in the industry in which we operate, as well as competition and advances in technology, or other factors leading to reduction in expected sales, profitability or cash flows |
| If the value of goodwill or other acquired intangibles is impaired, our earnings and net worth could be adversely affected |
| Compliance with changing regulation of corporate governance, public disclosure, and accounting standards may result in additional expenses and risks |
| Changing laws, regulations and standards relating to corporate governance, public disclosure and changes to accounting standards and practices, including the Sarbanes-Oxley Act of 2002, new Securities and Exchange Commission regulations and evolving rules applicable to publicly-traded companies on the Nasdaq National Market, are creating uncertainty, and hence risks, for companies such as ours |
| These new or changed laws, regulations and standards are subject to varying interpretations due to the fact that they are new and there is has not yet emerged a well-developed body of interpretation |
| As a result, their application in practice may evolve over time 6 _________________________________________________________________ [46]Table of Contents as new guidance is provided by regulatory and governing bodies |
| This development could result in continuing uncertainty regarding compliance matters and higher costs necessitated by ongoing revisions to disclosure, governance and accounting practices |
| Our efforts to comply with evolving laws, regulations and standards have resulted in, and are likely to continue to result in, increased general and administrative expenses and an investment of management time and attention from revenue-generating activities to compliance activities |
| In particular, our efforts to comply with Section 404 of the Sarbanes-Oxley Act of 2002 and the related regulations regarding our required assessment of our internal controls over financial reporting and our external auditors’ audit of that assessment has required the commitment of significant financial and managerial resources |
| If our efforts to comply with new or changed laws, regulations and standards differ from the activities intended by regulatory or governing bodies, we could face many material and adverse consequences, including, a possible delisting of our common stock |
| Forward Looking Statements Certain statements in this Annual Report, particularly statements contained in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” constitute “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 |
| The words “anticipate”, “believe”, “estimate”, “expect”, “plan”, “intend” and other similar expressions are intended to identify these forward-looking statements, but are not the exclusive means of identifying them |
| Forward-looking statements included in this Annual Report or hereafter included in other publicly available documents filed with the Securities and Exchange Commission (“SEC”), reports to our stockholders and other publicly available statements issued or released by us involve known and unknown risks, uncertainties, and other factors which could cause our actual results, performance (financial or operating) or achievements to differ from the future results, performance (financial or operating) or achievements expressed or implied by such forward looking statements |
| Such future results are based upon our best estimates based upon current conditions and the most recent results of operations |
| Various risks, uncertainties and contingencies could cause our actual results, performance or achievements to differ materially from those expressed in, or implied by, the forward-looking statements contained in this Annual Report |
| These include, but are not limited to, those listed above in this Item 1A, “Risk Factors |