**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

 

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**FORM10-Q**

 

| ** ** | **(Mark One)** | ** ** | ** **                                                                                     | ** ** |
|------------|----------------|------------|------------------------------------------------------------------------------------------------|------------|
| ** ** | ** **     | ** ** | ** **                                                                                     | ** ** |
| ** ** | **ý**     | ** ** | **QUARTERLY  REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**  | ** ** |
| ** ** | ** **     | ** ** | ** **                                                                                     | ** ** |
| ** ** | ** **     | ** ** | **For the quarterly period ended September 30,  2005.**                                        | ** ** |
| ** ** | ** **     | ** ** | ** **                                                                                     | ** ** |
| ** ** | ** **     | ** ** | **OR**                                                                                         | ** ** |
| ** ** | ** **     | ** ** | ** **                                                                                     | ** ** |
| ** ** | **o**          | ** ** | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** | ** ** |

 

**For the transition period from                         to                         **

 

**Commission file number: 333-124080**

 

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**INTERDENTSERVICECORPORATION**

(Exact name of registrant as specified in itscharter)

 

| **Washington**                           | ** ** | **91-1577891**                       |
|------------------------------------------|------------|--------------------------------------|
| (State or other jurisdiction of          |       | (I.R.S. Employer Identification No.) |
| incorporation or organization)           |       |                                 |
|                                     |       |                                 |
| **222 No. Sepulveda Blvd., Suite 740,**  |       |                                 |
| **El Segundo, CA**                       | ** ** | **90245**                            |
| (Address of principal executive offices) |       | (Zip Code)                           |

 

Registrant’s telephone number, including areacode:**(310) 765-2400**

 

Indicateby check mark whether the registrant (1) has filed all reports required tobe filed by Section 13 or 15(d) of the Securities Exchange Act of 1934during the preceding 12 months (or for such shorter period that the registrantwas required to file such reports), and (2) has been subject to suchfiling requirements for the past 90 days. Yes  o    No  ý

 

Indicateby check mark whether the registrant is an accelerated filer (as defined inRule 12b-2 of the Exchange Act). Yes  o    No  ý

 

Indicateby check mark whether the registrant is a shell company (as defined in Rule12b-2 of the Exchange Act). Yes  o    No  ý

 

Number of shares of commonstock outstanding as of November 14, 2005: 105,521

 

**TABLE OF ADDITIONAL REGISTRANT**

 
| **Exact  Name of Registrant** | ** ** | **State of  Incorporation** | ** ** | **I.R.S.  Employer  Identification Number** |
|-------------------------------|------------|-----------------------------|------------|---------------------------------------------|
| InterDent, Inc.               |       | Delaware                    |       | 95-4710504                                  |

 

 

 

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INTERDENT SERVICE CORPORATION

 

TABLEOF CONTENTS

 
| PART I  |   | FINANCIAL INFORMATION                                                                                                       |   |
|---------|--------|-----------------------------------------------------------------------------------------------------------------------------|--------|
|    |   |                                                                                                                        |   |
| Item 1. |   | Financial Statements                                                                                                        |   |
|    |   | Condensed Consolidated  Balance Sheets at September 30, 2005 (unaudited) and December 31, 2004                              |   |
|    |   | Condensed Consolidated  Statements of Operations for the three and nine months endedSeptember 30, 2005 and 2004 (unaudited) |   |
|    |   | Condensed Consolidated Statements  of Cash Flows for the nine months endedSeptember 30, 2005 and 2004 (unaudited)           |   |
|    |   | Notes to Condensed  Consolidated Financial Statements (unaudited)                                                           |   |
| Item 2. |   | Management’s Discussion and  Analysis of Financial Condition and Results of Operations                                 |   |
| Item 3. |   | Quantitative and Qualitative  Disclosure About Market Risk                                                                  |   |
| Item 4. |   | Controls and Procedures                                                                                                     |   |
|    |   |                                                                                                                        |   |
| PART II |   | OTHER INFORMATION                                                                                                           |   |
| Item 1. |   | Legal Proceedings                                                                                                           |   |
| Item 2. |   | Unregistered Sales of Equity  Securities and Use of Proceeds                                                                |   |
| Item 3. |   | Defaults Upon Senior  Securities                                                                                            |   |
| Item 4. |   | Submission of Matters to a  Vote of Security Holders                                                                        |   |
| Item 5. |   | Other Information                                                                                                           |   |
| Item 6. |   | Exhibits and Reports on Form  8-K                                                                                           |   |
|    |   | Signatures                                                                                                                  |   |

 

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PART I – FINANCIALINFORMATION

**Item 1.Financial Statements.**

 

**INTERDENT, INC.AND SUBSIDIARIES**

Condensed ConsolidatedBalance Sheets

(Unaudited, dollars in thousands)

 
| ** **                                                                                                            | ** ** | **September 30,  2005** | ** ** | **December 31,  2004** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|------------------------|------------|
| ** **                                                                                                            | ** ** | ** **              | ** ** | ** **             | ** ** |
| **Assets**                                                                                                            | ** ** | ** **              | ** ** | ** **             | ** ** |
| Current  assets:                                                                                                      |       |                    |       |                   |       |
| Cash and cash equivalents                                                                                             |       | $                       | 1,567      |                   | $          | — |   |
| Accounts receivable, net                                                                                              |       | 11,904                  |       | 13,857                 |       |
| Supplies inventory                                                                                                    |       | 6,191                   |       | 5,791                  |       |
| Prepaid expenses and other current assets                                                                             |       | 3,403                   |       | 5,073                  |       |
| Total current assets                                                                                                  |       | 23,065                  |       | 24,721                 |       |
|                                                                                                                  |       |                    |       |                   |       |
| Property and  equipment, net                                                                                          |       | 21,442                  |       | 17,970                 |       |
| Goodwill                                                                                                              |       | 77,142                  |       | 75,889                 |       |
| Intangible  assets, net                                                                                               |       | 16,302                  |       | 17,607                 |       |
| Other assets                                                                                                          |       | 6,143                   |       | 6,628                  |       |
| Total assets                                                                                                          |       | $                       | 144,094    |                   | $          | 142,815 |   |
|                                                                                                                  |       |                    |       |                   |       |
| **Liabilities**                                                                                                       |       |                    |       |                   |       |
| Current  liabilities:                                                                                                 |       |                    |       |                   |       |
| Accounts payable                                                                                                      |       | $                       | 6,121      |                   | $          | 8,179 |   |
| Accrued payroll and related costs                                                                                     |       | 9,005                   |       | 9,363                  |       |
| Accrued interest                                                                                                      |       | 3,017                   |       | 462                    |       |
| Other current liabilities                                                                                             |       | 8,087                   |       | 7,561                  |       |
| Total current liabilities                                                                                             |       | 26,230                  |       | 25,565                 |       |
|                                                                                                                  |       |                    |       |                   |       |
| Long-term  liabilities:                                                                                               |       |                    |       |                   |       |
| Long term debt                                                                                                        |       | 80,000                  |       | 80,000                 |       |
| Mandatorily redeemable preferred stock                                                                                |       | 3,500                   |       | 3,500                  |       |
| Other long-term liabilities                                                                                           |       | 2,115                   |       | 1,414                  |       |
| Total long-term liabilities                                                                                           |       | 85,615                  |       | 84,914                 |       |
| Total liabilities                                                                                                     |       | 111,845                 |       | 110,479                |       |
|                                                                                                                  |       |                    |       |                   |       |
| **Shareholders’  equity**                                                                                        |       |                    |       |                   |       |
| Convertible preferred stock, $0.001 par  value, 281,679 shares authorized:                                            |       |                    |       |                   |       |
| Class A 229,007 shares authorized, 1,000  shares issued and outstanding at September 30, 2005 and December 31, 2004   |       | —                  |       | —                 |       |
| Class B 52,672 shares authorized, issued  and outstanding at September 30, 2005 and December 31, 2004                 |       | 8,650                   |       | 8,650                  |       |
| Common stock, $0.001 par value, 981,679  shares authorized:                                                           |       |                    |       |                   |       |
| Class A 229,007 shares authorized, zero  shares issued and outstanding                                                |       | —                  |       | —                 |       |
| Class B 52,672 shares authorized, zero  shares issued and outstanding                                                 |       | —                  |       | —                 |       |
| Class C 700,000 shares authorized; 105,521  shares issued and outstanding at September 30, 2005 and December 31, 2004 |       | —                  |       | —                 |       |
| Additional paid-in capital                                                                                            |       | 21,585                  |       | 21,565                 |       |
| Retained earnings                                                                                                     |       | 2,014                   |       | 2,121                  |       |
| Total shareholders’ equity                                                                                       |       | 32,249                  |       | 32,336                 |       |
| Total liabilities and shareholders’ equity                                                                       |       | $                       | 144,094    |                   | $          | 142,815 |   |

 

See accompanyingnotes to condensed consolidated financial statements.

 

1

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**INTERDENT, INC.AND SUBSIDIARIES**

Condensed ConsolidatedStatements of Operations

(Unaudited, dollars in thousands)

 
| ** **                                              | ** ** | **Quarter Ended September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|---------------------------------------------------------|------------|---------------------------------|------------|--------------------------------------|------------|
| ** **                                              | ** ** | **2005**                        | ** ** | **2004**                             | ** ** | **2005** | ** ** | **2004** | ** ** |
| Revenues:                                               |       |                            |       |                                 |       |   |   |   |   |
| Dental practice net patient service revenue             |       | $                               | 51,885     |                                 | $          | 51,778 |   | $ | 159,276 |   | $ | 161,556 |   |
| Other fees                                              |       | 284                             |       | 358                                  |       | 865 |   | 1,255 |   |
| Total revenues                                          |       | 52,169                          |       | 52,136                               |       | 160,141 |   | 162,811 |   |
| Costs and  expenses:                                    |       |                            |       |                                 |       |   |   |   |   |
| Cost of revenue:                                        |       |                            |       |                                 |       |   |   |   |   |
| Clinical salaries, benefits, and provider  costs        |       | 25,569                          |       | 25,385                               |       | 77,697 |   | 78,716 |   |
| Practice non-clinical salaries and benefits             |       | 7,432                           |       | 7,828                                |       | 22,436 |   | 22,720 |   |
| Dental supplies and lab expenses                        |       | 5,605                           |       | 5,342                                |       | 16,504 |   | 17,472 |   |
| Practice occupancy expenses                             |       | 3,494                           |       | 3,263                                |       | 10,121 |   | 9,737 |   |
| Practice selling, general and  administrative expenses  |       | 4,685                           |       | 3,989                                |       | 14,193 |   | 12,381 |   |
| Total cost of revenue                                   |       | 46,785                          |       | 45,807                               |       | 140,951 |   | 141,026 |   |
| Corporate selling, general and  administrative expenses |       | 2,192                           |       | 1,990                                |       | 7,333 |   | 6,723 |   |
| Loss on dental location dispositions                    |       | —                          |       | —                               |       | — |   | 918 |   |
| Depreciation and amortization                           |       | 1,346                           |       | 1,323                                |       | 3,925 |   | 4,037 |   |
| Total operating expenses                                |       | 50,323                          |       | 49,120                               |       | 152,209 |   | 152,704 |   |
| Operating income                                        |       | 1,846                           |       | 3,016                                |       | 7,932 |   | 10,107 |   |
| Non-operating  (income) expense:                        |       |                            |       |                                 |       |   |   |   |   |
| Gain on extinguishment of debt                          |       | —                          |       | —                               |       | — |   | (3,324 | ) |
| Interest expense, net                                   |       | 2,586                           |       | 596                                  |       | 7,630 |   | 2,172 |   |
| Other, net                                              |       | 30                              |       | 54                                   |       | (103 | ) | 246 |   |
| Non-operating (income) expense, net                     |       | 2,616                           |       | 650                                  |       | 7,527 |   | (906 | ) |
| Income (loss) before income taxes                       |       | (770                            | )          | 2,366                                |       | 405 |   | 11,013 |   |
| Income tax  provision (benefit)                         |       | (367                            | )          | 910                                  |       | 193 |   | 4,286 |   |
| Net income (loss)                                       |       | (403                            | )          | 1,456                                |       | 212 |   | 6,727 |   |
| Accumulated  dividends on preferred stock               |       | (114                            | )          | (606                                 | )          | (319 | ) | (1,820 | ) |
| Net income (loss) attributable to common  stock         |       | $                               | (517       | )                                    | $          | 850 |   | $ | (107 | ) | $ | 4,907 |   |

 

See accompanying notes to condensed consolidatedfinancial statements.

 

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**INTERDENT, INC.AND SUBSIDIARIES**

Condensed ConsolidatedStatements of Cash Flows

(Unaudited, dollars in thousands)

 
| ** **                                                       | ** ** | **Nine Months Ended September 30,** | ** ** |
|------------------------------------------------------------------|------------|-------------------------------------|------------|
| ** **                                                       | ** ** | **2005**                            | ** ** | **2004** | ** ** |
|                                                             |       |                                |       |   |   |
| Cash flows  from operating activities                            |       | $                                   | 7,743      |   | $ | 8,508 |   |
|                                                             |       |                                |       |   |   |
| Cash flows  from investing activities:                           |       |                                |       |   |   |
| Purchase of property and equipment                               |       | (6,964                              | )          | (3,777 | ) |
| Net proceeds from disposition of dental  locations               |       | —                              |       | 925 |   |
| Cash (paid for) received from acquisitions  and earn-outs        |       | 67                                  |       | (298 | ) |
| Net cash used in investing activities                            |       | (6,897                              | )          | (3,150 | ) |
|                                                             |       |                                |       |   |   |
| Cash flows  from financing activities:                           |       |                                |       |   |   |
| Borrowings on 2004 Term Loan                                     |       | —                              |       | 22,500 |   |
| Payments on 2004 Term Loan                                       |       | —                              |       | (750 | ) |
| Payments on term loan                                            |       | —                              |       | (32,643 | ) |
| Net borrowings on revolver                                       |       | —                              |       | 5,030 |   |
| Payments on long-term debt and obligations  under capital leases |       | (574                                | )          | (1,030 | ) |
| Changes in overdraft balances                                    |       | 1,295                               |       | — |   |
| Net cash provided by (used in) financing  activities             |       | 721                                 |       | (6,893 | ) |
|                                                             |       |                                |       |   |   |
| Increase (decrease) in cash and cash  equivalents                |       | 1,567                               |       | (1,535 | ) |
|                                                             |       |                                |       |   |   |
| Cash and  cash equivalents, beginning of period                  |       | —                              |       | 2,736 |   |
| Cash and  cash equivalents, end of period                        |       | $                                   | 1,567      |   | $ | 1,201 |   |

 

See accompanying notes to condensed consolidatedfinancial statements.

 

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**INTERDENT, INC.**

**AND SUBSIDIARIES**

September 30, 2005 and 2004

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

**Our Company**

 

Weprovide dental practice management services to multi specialty group dentalpractices in the United States. We do not engage in the practice of dentistry,but rather work with affiliated dental practices to jointly provide dentalservices to their patients. We enter into management services agreements (MSAs)with these affiliated dental practices or professional corporations orassociations (PAs) and provide them, on an exclusive basis, with management andadministrative services. Asof September 30, 2005, we provided management services to 126 affiliated dentalpractices in Arizona, California, Hawaii, Kansas, Nevada, Oklahoma, Oregon andWashington and own and operate one dental laboratory in Oklahoma.

 

**Basis of Presentation**

 

Following the rules andregulations of the Securities and Exchange Commission, or SEC, we have omittedfootnote disclosures that would substantially duplicate the disclosures in ourannual audited financial statements. The accompanying condensed consolidatedfinancial statements should be read in conjunction with the financial statementdisclosures from our 2004 Consolidated Financial Statements contained in our RegistrationStatement on Form S-4 filed October 11, 2005 with the SEC.  The sameaccounting policies are followed in preparing quarterly financial data as arefollowed in preparing annual data. In the opinion of management, alladjustments necessary for a fair presentation of quarterly operating resultsare reflected herein and are of a normal, recurring nature.

 

Certain prior year amountshave been reclassified to conform to the current year presentation.

 

We operate in one principalbusiness segment as a provider of dental practice management services to multispecialty group dental practices in the United States.

 

**Summary of Significant Accounting Policies**

 

*Netrevenues*

 

Dental practice net patient service revenue (Net PatientRevenue) represents the consolidated revenue of the affiliated PAs and isrecorded when the related work is completed. Revenue is recorded at theestimated net realizable amount to be received from patients, third party payorsand others, net of a provision for fee schedule adjustments.

 

Net patient revenues include amounts received under capitated managed care contracts from certain wholly owned subsidiaries that are subject to regulatory review and oversight by various state agencies.  The subsidiaries are required to file statutory financial statements with the state agencies and maintain minimum tangible net equity balances and restricted deposits.  We are in compliance with such requirements as of September 30, 2005.  Total revenues subject to regulatory review and oversight by various state agencies were $30.0 million and $27.1 million for the nine months ended September 30, 2005 and 2004, respectively.

 

*Stock-basedcompensation*

 

AtSeptember 30, 2005, we had one stock-based employee compensation plan and weaccount for this plan under Accounting Principals Board, or APB, Opinion No.25, “Accounting for Stock Issued to Employees”, and related interpretations.

 

InDecember 2004, the Financial Accounting Standards Board, or FASB, issued Statementof Financial Accounting Standards, or SFAS, No. 123R, “Share-BasedPayments” (SFAS 123R). This statement will require entities to measure thecost of employee services received in exchange for stock options based on thegrant-date fair value of the award, and to recognize the cost over the periodthe employee is required to provide services for the award.  Share-based payment transactions within thescope of SFAS 123R include stock options, restricted stock plans,performance-based awards, stock appreciation rights, and 

 

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employee share purchaseplans. SFAS 123R permits entities to use any option-pricing model that meetsthe fair value objective as defined. The provisions of SFAS 123R are effectivefor the first interim period beginning after June 15, 2005. However, in April2005, the SEC deferred the effective date of SFAS 123R for SEC registrants tothe first fiscal year beginning after June 15, 2005. Accordingly, we expect toimplement the revised standard in the first quarter of 2006.

 

SFAS 123Rallows two methods for determining the effects of the transition: the modifiedprospective transition method and the modified retrospective method oftransition. No decisions have been made by management as to which transitionmethod or option pricing model is most appropriate for us upon adoption of SFAS123R.  The pro forma compensation costspresented below have been calculated using a Black-Scholes option pricing modeland may not be indicative of amounts which should be expected in future years.

 
| ** **                                                                                                                                   | ** ** | **Quarter Ended September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------|------------|--------------------------------------|------------|
| **(in thousands)**                                                                                                                           | ** ** | **2005**                        | ** ** | **2004**                             | ** ** | **2005** | ** ** | **2004** | ** ** |
|                                                                                                                                         |       |                            |       |                                 |       |   |   |   |   |
| Net income  (loss), as reported                                                                                                              |       | $                               | (403       | )                                    | $          | 1,456 |   | $ | 212 |   | $ | 6,727 |   |
|                                                                                                                                         |       |                            |       |                                 |       |   |   |   |   |
| Add: Stock-based employee compensation  expense included in reported net income, net of related tax effect                                   |       | 7                               |       | 14                                   |       | 20 |   | 14 |   |
| Deduct: Total stock-based employee  compensation expense determined under fair value based method for all awards,  net of related tax effect |       | (31                             | )          | (28                                  | )          | (72 | ) | (85 | ) |
|                                                                                                                                         |       |                            |       |                                 |       |   |   |   |   |
| Net income  (loss), pro forma                                                                                                                |       | $                               | (427       | )                                    | $          | 1,442 |   | $ | 160 |   | $ | 6,656 |   |

 

*Self-insurance*

 

InJanuary 2005, we entered into a new deductible policy for workers’ compensationinsurance that provides coverage for claim amounts in excess of $0.35 millionof retained liability per claim and $3.0 million in the aggregate. Because ofour self-insured retention levels, we recognize a liability for our estimate ofamounts, up to the amount of our retained liability, we believe may be paid toresolve each workers compensation claim. The liability for our self-insuredretention on workers’ compensation claims, including an estimated amount forincurred but not reported claims of $0.5 million at September 30, 2005, isincluded in accrued payroll and relatedcosts.

 

We self-insure a significant portion of our employeemedical benefit plan. We have limited our exposure through the use ofindividual and aggregate stop-loss insurance policies. Claims incurred but notreported are accrued based upon management’s estimates of the aggregateliability for uninsured claims incurred using actuarial assumptions followed inthe insurance industry and historical experience. The liability for claimsincurred but not reported of approximately $0.4 and $0.6 million is recorded inaccrued payroll and related costs as of September 30, 2005 and December 31, 2004,respectively.

 

Although management believes it has the ability toadequately estimate losses related to claims covered in the policies describedabove, it is possible that actual results could differ from recordedself-insurance liabilities.

 

5

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*Income taxes*

 

We recorded an income taxprovision using an effective tax rate of approximately 48.0% and 39.0% for thethree and nine month periods ended September 30, 2005 and 2004,respectively.  We expect to have anominal income tax liability in 2005 as a result of alternative and stateminimum taxes.  The majority of our 2005income tax provision represents benefits realized from utilizingpre-reorganization deferred taxes.  Theincrease in the effective tax rate is due to payment of certain non-deductibleexpenses in 2005, which result in permanent differences.

 

We utilized pre-emergencedeferred tax assets of $0.04 million and $2.2 million for the quarters endedSeptember 30, 2005 and 2004, respectively and $0.1 million and $3.8 million forthe nine months ended September 30, 2005 and 2004, respectively.  Such utilization reduced the valuationallowance previously established and the benefit realized is required to reducereorganization value in excess of amounts allocable to identifiable assets andother intangibles until exhausted under FASB 109 and Statement of Position, or SOP,90-7. Accordingly, we recorded these adjustments to goodwill.

 

*Use ofestimates*

 

The preparation of financialstatements in conformity with generally accepted accounting principles requiresmanagement to make estimates and assumptions that affect reported amounts ofassets and liabilities, revenues and expenses and related disclosures ofcontingent assets and liabilities in the consolidated financial statements andaccompanying notes. There is a possibility that actual results may varysignificantly from those estimates.

 

**Goodwill**

 

Changesin goodwill in the nine months ended September 30, 2005 include a $0.8 millionadjustment to the purchase price allocation from our December 2004 merger. Theadjustment is the result of the final determination of the fair value of ourfixed assets at the time of the merger. Other changes to goodwill include $0.5million of direct and trailing costs related to acquisitions less $0.1 millionrelated to the utilization of pre-emergence deferred tax assets.

 

**Accruedrestructuring costs**

 

At December 31, 2004 we had $0.7 million accrued forthe final settlement of allowed general unsecured claims related to ourbankruptcy in 2003. On January 26, 2005 InterDent, Inc. and InterDentService Corporation (collectively the Debtors) were granted a Final Decree andOrder Closing the Case by the Bankruptcy Court. In March 2005, wedistributed the $0.7 million accrued for allowed general unsecured claims,officially completing the Debtor’s Plan of Reorganization.

 

In December 2004 we recorded a charge of$0.3 million related to the 2004 issuance of bonds and relatedtransactions that were paid in January 2005.

 

**Relatedparty transactions**

 

In April 2005, our board ofdirectors authorized the payment of a management fee in the amount of $0.25 millionto our majority shareholder for certain services to be provided to us over theremainder of the calendar year. In addition, the board fixed the fees fornon-employee directors at $0.25 million in the aggregate for the remainder ofthe calendar year.

 

**Contingencies**

 

*Senior secured revolving creditfacility*

 

As of September 30, 2005, wehad a letter of credit totaling $1.2 million outstanding under our seniorsecured revolving credit facility. The letter of credit was issued to satisfyrequirements under our workers compensation insurance policy. This facilityrequires us to comply with specified financial

 

6

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covenants related to earnings beforeinterest, taxes, depreciation and amortization, and capital expenditures. Wewere in compliance as of September 30, 2005 with all such covenants. There wereno borrowings outstanding on this facility at September 30, 2005.

 

*Legal*

 

Wehave been named as a defendant in various lawsuits in the normal course ofbusiness, primarily for malpractice claims. We, our affiliated dental practicesand associated dentists are insured with respect to dentistry malpractice riskson a claims-made basis. Management believes all of these pending lawsuits,claims, and proceedings against us are without merit or will not have amaterial adverse effect on our consolidated operating results, liquidity orfinancial position, or cash flows.

 

7

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

 

**FORWARD LOOKING STATEMENTS**

 

*Thisdocument includes forward looking statements. Forward looking statements arethose that do not relate solely to historical fact. They include, but are notlimited to, any statements that may predict, forecast, indicate or imply futureresults, performance, achievements or events. They may contain words such as “believe,”“anticipate,” “expect,” “estimate,” “intend,” “project,” “plan,” “will,” orwords or phrases of similar meaning. They may relate to, among other things,our strengths, strategy, growth plans, operations, revenue, earnings, expenses,financing, sources of liquidity and capital requirements.*

 

*Forwardlooking statements involve risks and uncertainties, including, but not limitedto, economic, competitive and governmental factors outside of our control, thatmay cause actual results to differ materially from trends, plans orexpectations set forth in the forward looking statements. Certain factors thatmight cause such a difference include, among other things, dependence upon ouraffiliated dental practices, access to and cost of capital due to our highleverage ratio, cost containment efforts by third party payors, governmentregulation of the dental industry, regulatory challenges to our business modeland professional liability and other claims that may be made against ouraffiliated dental practices. New risks and uncertainties may emerge in thefuture. It is not possible for us to predict all of these risks or uncertainties,nor can we assess the extent to which any factor, or combination of factors,may cause actual results to differ from those contained in forward lookingstatements. Given these risks and uncertainties, we urge you to read thisdocument completely with the understanding that actual future results may bematerially different from what is expressly stated or implicit in any forwardlooking statement.*

 

**OVERVIEW**

 

Weprovide dental practice management services to multi specialty group dentalpractices in the United States. We do not engage in the practice of dentistry,but rather work with affiliated dental practices to jointly provide dentalservices to their patients. We enter into management services agreements (MSAs)with these affiliated dental practices or professional corporations orassociations (PAs) and provide them, on an exclusive basis, with management andadministrative services. Asof September 30, 2005, we provided management services to 126 affiliated dentalpractices in Arizona, California, Hawaii, Kansas, Nevada, Oklahoma, Oregon andWashington and own and operate one dental laboratory in Oklahoma.

 

The126 affiliated dental practices and one dental laboratory we managed atSeptember 30, 2005, is up from 122 affiliated dental practices and one dentallaboratory at December 31, 2004. During the nine months ended September 30,2005, we opened four new offices.

 

**RESULTS OF OPERATIONS FOR QUARTER AND NINE MONTHS**

**ENDED SEPTEMBER 30, 2005 AND 2004**

 
| ** **                                              | ** ** | **Quarter ended September 30,** | ** ** | **Nine months ended  September 30,** | ** ** |
|---------------------------------------------------------|------------|---------------------------------|------------|--------------------------------------|------------|
| ** **                                              | ** ** | **2005**                        | ** ** | **2004**                             | ** ** | **2005** | ** ** | **2004** | ** ** |
| Total  revenue                                          |       | 100.0                           | %          | 100.0                                | %          | 100.0 | % | 100.0 | % |
|                                                    |       |                            |       |                                 |       |   |   |   |   |
| Cost of  revenue                                        |       | 89.7                            |       | 87.9                                 |       | 88.0 |   | 86.6 |   |
| Corporate  selling, general and administrative expenses |       | 4.2                             |       | 3.8                                  |       | 4.6 |   | 4.1 |   |
| Depreciation  and amortization                          |       | 2.6                             |       | 2.5                                  |       | 2.5 |   | 2.5 |   |
| Total operating expenses                                |       | 96.5                            |       | 94.2                                 |       | 95.1 |   | 93.2 |   |
| Operating income                                        |       | 3.5                             |       | 5.8                                  |       | 4.9 |   | 6.8 |   |
| Other  non-operating (income) expense, net              |       | 0.1                             |       | 0.1                                  |       | (0.1 | ) | (1.9 | ) |
| Interest  expense, net                                  |       | 5.0                             |       | 1.1                                  |       | 4.8 |   | 1.3 |   |
| Net (loss) income before income taxes                   |       | (1.6                            | )          | 4.6                                  |       | 0.2 |   | 7.4 |   |
| Income tax  Provision (benefit)                         |       | (0.7                            | )          | 1.7                                  |       | 0.1 |   | 2.6 |   |
| Net income                                              |       | (0.9                            | )          | 2.9                                  |       | 0.1 |   | 4.8 |   |

 

8

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**Revenue**

 

Forour third quarter ended September 30, 2005, we posted net revenues of $52.2million which is consistent with our net revenue for the same period last year.Overall revenue for the year-to-date period ended September 30, 2005 decreased$2.7 million, or 1.6% from the same period last year. The decrease in ouroverall revenue is driven primarily by the effect of our divestitures in 2004,which is offset by revenue contributed from the offices opened under our newoffice growth strategy. Our new offices are typically budgeted to have initialpractice operating expenses in excess of the net patient service revenue asthey develop their respective patient bases. We anticipate emphasizing growththrough the opening of new offices rather than acquiring existing practices.This may have a near term adverse effect on our profitability.

 

Our net revenue from offices open for at least one year, or same-officerevenue, decreased by 0.2% over the same period last year. On a year-to-datebasis, our same-office revenue was flat when compared with the same period lastyear. The negative same-office growth in the quarter is largely attributable tolower patient spending in light of the uncertain economy and a spike inturnover of our affiliated dentists during the quarter. 

 

During the quarter, we experienced an increase in patient appointmentcancellations, deferral of treatment and a decrease in electiveprocedures.  We believe this to be due tothe sharp drop in consumer confidence mid-quarter due to increasing gas and energyprices, rising interest rates and inflation, all of which negatively affectedour patient’s discretionary income. A large part of dentistry, particularly theelective procedures, is funded through a patient’s discretionary income, andthus we are sensitive to patient discretionary income trends. 

 

Additionally, we experienced an increase in turnover among ouraffiliated dentists during the quarter. Based on exit interviews, we found thatmany of the dentists were leaving to start their own practice before increasinginterest rates made opening such a practice significantly less affordable.While the majority of these positions have subsequently been filled, several ofour PAs still have open positions, reducing our ability to provide a fullschedule of dental care. Furthermore, a new dentist is typically less efficientthan the senior dentist they are replacing, which also reduces revenue.

 

**Costsand expenses**

 

**Operating expenses**

 

*Cost of revenue. *Cost of revenue consists of costs directlyassociated with activities of operating and managing the practice facilitylocations, including regional support departments. The components of cost ofrevenue are largely variable or semi-variable costs and include clinical andnon-clinical salaries and benefits, dental supplies and lab expenses, occupancyand general and administrative expenses.

 

Our overall cost of revenue increased to $46.8million from $45.8 million for the quarter ended September 30, 2005 while ouryear-to-date costs remained consistent with prior year at $141.0 million. Costof revenue as a percentage of net revenue increased to 89.7% and 88.0% for thequarter and nine months ended September 30, 2005, respectively compared to87.9% and 86.6% from the same periods last year, respectively. The primarydrivers of the increase in the quarter and nine months are as follows:

 

•      Clinical salaries increased slightly due tosalary guarantees for new doctors and a temporary increase in our medicalbenefit costs which was offset by lower workers compensation costs. Nonclinical salaries decreased due primarily to lower salaries as we manage ouraffiliated dental practices more efficiently.

•      A planned incremental increase in marketingexpenditure designed to build brand equity in our newly rebranded practicescompanywide, and also to generate new patient growth.

•      Occupancy costs increased slightly in eachperiod as a percentage of revenue and are attributed to our new office growth.We expect our occupancy expense, a component of our cost of revenue, toincrease in total dollars in subsequent periods as we add new offices.

 

*Corporate selling, general andadministrative expenses. *Corporate selling,general and administrative expenses include: corporate salaries, general officecosts, investor relations expense, legal and audit fees, general insurance,director and officer liability insurance and other miscellaneous costs at ourcorporate facilities.

 

For the quarter and nine month periods ended September30, 2005 our corporate selling, general and administrative costs increased $0.2million and $0.6 million, respectively from the same periods last year. Thisincrease is due to non-employee director and management fees payable to ourmajority shareholder of a combined $0.2 million and $0.3 million for thequarter and nine month periods, respectively and one time legal fees andsettlement costs of $0.65 million related to a lawsuit with one of our formeraffiliated 

 

9

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professional corporations incurred during the first sixmonths of 2005.

 

Wehave been named as a defendant in various lawsuits in the normal course ofbusiness, primarily for malpractice claims. We, our affiliated dental practicesand associated dentists are insured with respect to dentistry malpractice riskson a claims-made basis. We believe all of these pending lawsuits, claims, andproceedings against us are without merit or will not have a material adverseeffect on our consolidated operating results, liquidity or financial position,or cash flows.

 

*Depreciation and amortization.* Depreciation expense isattributed to depreciation of dental equipment, furniture, fixtures andcomputer equipment and amortization of leasehold improvements and identifiableintangibles. Depreciation and amortization expense was consistent with thequarter and nine months ended September 30, 2005 compared to the same periodprior year as the incremental depreciation and amortization for new equipmentand new office expansion was offset by reduced expense related to the offices closed, sold or merged.

 

We expect to continue to incur capital expenditures,primarily as part of our new office expansion program and the on-going remodelor relocation of offices. Because of this, depreciation and amortizationexpense may increase as a percentage of revenue in future periods depending onthe timing and amount of the capital expenditure.

 

*Losson dental location disposition.* We recorded a loss on the sale of one practice inJune 2004 related to our divestiture from the Idaho market. The loss is theexcess of book value of net assets sold over the proceeds received and isprimarily related to the write off of goodwill in connection with the sale.

 

**Non-operating expenses**

 

*Gain on extinguishment of debt.* We recorded a one-timegain on the extinguishment of debt that we refinanced in June 2004. We do notanticipate similar gains in future periods.

 

*Interest expense.* Net interest expenseincreased primarily due to the issuance in December 2004 of $80.0 million inprincipal of our Senior Secured Notes due 2011, or the Notes, and amortizationof deferred financing costs associated with the Notes.  Our obligations under the Notes will resultin substantial interest expense in future periods. The Notes bear interest at103¤4% per year, payablesemiannually on June 15 and December 15 of each year.

 

**Income taxes**

 

*Provision for income taxes*. Our effective tax rate was approximately 48%and 39% for the quarter and nine month periods ended September 30, 2005 and2004, respectively. We expect to have a nominal income tax liability in 2005 asa result of alternative and state minimum taxes. The majority of our 2005income tax provision represents benefits realized from utilizingpre-reorganization deferred taxes. The increase in the effective tax rate isdue to payment of certain non-deductible expenses in 2005.

 

**LIQUIDITY AND CAPITAL RESOURCES**

 

Historically,we have financed our operating and capital needs through cash generated byoperations and borrowings. Our primary sources of liquidity for the near futurewill be cash flow from our operations and availability under our new $10million senior secured revolving credit facility. Advances under this facilityare limited to the lesser of (i) $10 million or (ii) a borrowing base formulacalculated at 0.75 times our trailing 12 month earnings before interest, taxes, depreciationand amortization, or EBITDA, as definedin the agreement. In addition, we are required to maintain a monthly minimumEBITDA, as measured on a trailing 12 month basis, of at least $12 million. Wehad trailing 12 month EBITDA of $15.3 million and $18.4 million as of September30, 2005 and December 31, 2004, respectively.

 

Asof September 30, 2005, we hadzero outstanding on our revolving credit facility, our borrowing base was $10.0million and the amount available under the revolving credit facility was $8.8million. The $1.2 million reduction on the amount available under our revolvingcredit facility resulted from the issuance on our behalf of a $1.2 millionletter of credit in January 2005. The letter of credit is primarily issued tosatisfy requirements of our new workers compensation insurance policy. Weexpect the letters of

 

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creditissued on our behalf to increase slightly in 2006 for tail coverage as we enterinto the second year of our policy.

 

Ourprimary cash requirements include general operating expenses and debt servicerequirements. Our Senior Secured Notes are interest only, payablesemi-annually, until due in 2011. In addition, our growth strategy calls for usto build new dental offices in leased facilities, depending upon our liquidityand our ability to identify opportunities that meet our expectations. We expectto fund most of these offices on a “pay as you go” basis using our cash flowfrom operations. We may also from time to time consider acquisitions of dentalpractices, although we have no current plans for any acquisitions.

 

We believethat our current sources of liquidity will be sufficient to meet our near termrequirements. However, an unexpected decline in cash flow from operations or inour EBITDA could materially impair our liquidity. In such event, we may not beable to access our revolving credit facility and we may be unable to generatesufficient free cash flow to meet all of our operating requirements. Moreover,the indenture governing our Senior Secured Notes and the terms of our seniorsecured revolving credit facility limit under certain circumstances our abilityto incur additional indebtedness. As a result, in the event of a material declinein our operating performance, we may encounter substantial difficulty insecuring additional sources of liquidity. 

 

Ourcash flow sources and uses by operating, investing and financing activities areshown below:

 
| ** **                                           | ** ** | **Nine Months Ended September,** | ** ** |
|------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                           | ** ** | **2005**                         | ** ** | **2004** | ** ** |
| Net cash  provided by operations                     |       | $                                | 7,743      |   | $ | 8,508 |   |
| Net cash  used in investing activities               |       | $                                | (6,897     | ) | $ | (3,150 | ) |
| Net cash  provided by (used in) financing activities |       | $                                | 721        |   | $ | (6,893 | ) |

 

*Cashflow from operations*.  Thedecrease in cash flow from operations from the same period last year isattributed primarily to a decrease in net income. The decrease in net income isoffset by cash flows from working capital, chiefly reductions in accountsreceivable and prepaid and other current assets as we continue our efforts tomaximize cash available for debt service and our new office growth strategy.

 

*Cashflow used in investing activities*.  Ourspending on property and equipment during the first nine months of 2005increased $3.2 million from the same period in the prior year. During the firstnine months of 2004 we did not open any new offices. Spending during the ninemonths ended September 30, 2005 reflects our new office growth for selectivelybuilding new dental offices to fill out our network of affiliated dentalpractices.  In the nine months endedSeptember 30, 2005 we opened four new offices. We expect to continue to incur significant capital expenditures,primarily as part of our new office growth and the on-going remodel orrelocation of offices. In 2004 we received $0.9 million for the sale of adental practice, which was offset by $0.3 million paid for acquisition earnouts. We expect earn outs for the remainder of 2005 to be approximately $0.6million and zero thereafter.

 

*Cashflow from financing activities*.  InJune 2004, we refinanced our post emergence bankruptcy financing with a newcredit facility. The net uses in the first nine months of 2004 are related topayments on subordinated debt service obligations and capital leases of $1.0 millionand $0.5 million scheduled payment on our term loan versus $0.6 millionpayments on subordinated debt service obligations and capital leases during thefirst nine months of 2005. We will pay the remaining balance on oursubordinated seller debt of $0.1 million in 2005 and the capital leaseobligation of $0.4 million as scheduled through March 2009.

 

**Critical Accounting Policies and Estimates**

 

*Net revenues*

 

Dentalpractice net patient service revenue (Net Patient Revenue) represents theconsolidated revenue of the affiliated PAs and is recorded when the relatedwork is completed. Revenue is recorded at the estimated net realizable amountto be received from patients, third party payors and others, net of a provisionfor fee schedule adjustments.

 

Net patientrevenues include amounts received under capitated managed care contracts fromcertain wholly owned subsidiaries that are subject to regulatory review andoversight by various state agencies.  Thesubsidiaries are required to file statutory financial statements with the stateagencies and maintain minimum tangible net equity balances and restricteddeposits.  We are in compliance with suchrequirements as of September 30, 2005. Total revenues subject to regulatory review and oversight by variousstate agencies were $30.0 million and $27.1 million for the nine months endedSeptember 30, 2005 and 2004, respectively.

 

*Self-insurance*

 

In January2005, we entered into a new deductible policy for workers’ compensationinsurance that provides coverage for claim amounts in excess of $0.35 millionof retained liability per claim and $3.0 million in the aggregate. Because ofour self-insured retention levels, we recognize a liability for our estimate ofamounts, up to the amount of our retained liability, we believe may be paid toresolve each workers compensation claim. The liability for our self-insuredretention on workers’ compensation claims, including an estimated amount forincurred but not reported claims of $0.5 million at September 30, 2005 isincluded in accrued payroll and related costs. 

 

We self-insurea significant portion of our employee medical benefit plan. We have limited ourexposure through the use of individual and aggregate stop-loss insurancepolicies. Claims incurred but not reported are accrued based upon management'sestimates of the aggregate liability for uninsured claims incurred usingactuarial assumptions followed in the insurance industry and historicalexperience. The liability for claims incurred but not reported of approximately$0.4 and $0.6 million is recorded in accrued payroll and related costs as ofSeptember 30, 2005 and December 31, 2004, respectively. 

 

Althoughmanagement believes it has the ability to adequately estimate losses related toclaims covered in the policies described above, it is possible that actualresults could differ from recorded self-insurance liabilities.

 

*Use of estimates*

 

Thepreparation of financial statements in conformity with generally acceptedaccounting principles requires management to make estimates and assumptionsthat affect reported amounts of assets and liabilities, revenues and expensesand related disclosures of contingent assets and liabilities in theconsolidated financial statements and accompanying notes. There is apossibility that actual results may vary significantly from those estimates.

 

**AccountingStandards Not Yet Adopted by the Company**

 

InDecember 2004, the FASB issued SFAS No. 123R, “Share Based Payments” (SFAS123R). This statement will require entities to measure the cost of employeeservices received in exchange for stock options based on the grant-date fairvalue of the award, and to recognize the cost over the period the employee isrequired to provide services for the award. Share-based payment transactions within the scope

 

11

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ofSFAS 123R include stock options, restricted stock plans, performance-basedawards, stock appreciation rights, and employee share purchase plans. SFAS 123Rpermits entities to use any option-pricing model that meets the fair valueobjective as defined. The provisions of SFAS 123R are effective for the firstinterim period beginning after June 15, 2005. However, in April 2005, the SECdeferred the effective date of SFAS 123R for SEC registrants to the firstfiscal year beginning after June 15, 2005. Accordingly, we expect to implementthe revised standard in the first quarter 2006.

 

SFAS 123R allows two methodsfor determining the effects of the transition: the modified prospectivetransition method and the modified retrospective method of transition. Nodecisions have been made by management as to which transition method or optionpricing model is most appropriate for us upon adoption of SFAS 123R.

 

**Off Balance Sheet Arrangements**

 

We do not haveany off balance sheet arrangements.

 

**Item 3.Quantitative and Qualitative Disclosures About Market Risk.**

 

Inthe ordinary course of business, we are exposed to interest rate risk. Forfixed rate debt, interest rate changes affect the fair value but do not impactearnings or cash flow. Conversely, for floating rate debt, interest ratechanges generally do not affect the fair market value but do impact futureearnings and cash flow. We do not believe a one percentage point change ininterest rates would have a material impact on the fair market value of ourfixed rate debt.

 

Whilethe overwhelming majority of our interest expense from our Senior Secured Notesis fixed, a portion of our interest expense is sensitive to changes in thegeneral level of interest rates as our senior revolving credit facility hasinterest rates based upon LIBOR or the prime rate plus for the banks’applicable margins ranging from 1.0% to 3.25%. At September 30, 2005, therewere no borrowings outstanding under this facility. The annual pre-tax earningsand cash flow impact for a one percentage point change in interest rates wouldnot be significant to our operations.  Thehypothetical change used in this analysis may be different from what actuallyoccurs in the future.  We do notpresently undertake any specific actions to cover our exposure to interest raterisk and we are not party to any interest rate risk management transactions.

 

**Item 4.Controls and Procedures**

 

Ourmanagement, with the participation of our Chief Executive Officer and ChiefFinancial Officer, evaluated the effectiveness of our disclosure controls andprocedures (as defined in Rule 13a-15(e) and Rule 15d-15(e)) under theSecurities Exchange Act of 1934, as of the end of the period covered by thisreport. Our management, with the participation of our Chief Executive Officerand Chief Financial Officer, also conducted an evaluation of our internalcontrol over financial reporting to determine whether any changes occurredduring the third quarter of fiscal 2005 that have materially affected, or arereasonably likely to materially affect, our internal control over financialreporting. Based upon these evaluations, our Chief Executive Officer and ChiefFinancial Officer have concluded that, as of the end of such period, our disclosurecontrols and procedures were effective as of the end of the period covered bythis report, and there were no changes in our internal control over financialreporting during the period covered by this report that have materiallyaffected, or are reasonably likely to materially affect, our internal controlover financial reporting.

 

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PARTII – OTHER INFORMATION

 

**Item 1. Legal Proceedings**

 

Wehave been named as a defendant in various lawsuits in the normal course ofbusiness, primarily for malpractice claims. We, our affiliated dental practicesand associated dentists are insured with respect to dentistry malpractice riskson a claims-made basis. We believe all of these pending lawsuits, claims, and proceedingsagainst us are without merit or will not have a material adverse effect on ourconsolidated operating results, liquidity or financial position, or cash flows.

 

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

 

**RecentSales of Unregistered Equity Securities**

 

Not applicable.

 

**Use ofProceeds**

 

On October 13, 2005, the SEC declared effective our Pre-EffectiveAmendment No. 3 to the Registration Statement on Form S-4 filed with theSEC on October 11, 2005 (file no. 333-124080), which was filed toregister $80,000,000 103⁄4% Senior Secured Notes due 2011 which we are issuing inexchange for senior secured notes we sold in a private placement consummated onDecember 15, 2004.  The exchange offercommenced on October 14, 2005 and expired on November 14, 2005.  

 

We made the exchange offer to satisfy our obligations under aregistration rights agreement entered into in connection with the initial noteissuance.  We did notreceive any cash proceeds from the exchange offer.  In consideration of issuing the new notes inthe exchange offer, we received an equal principal amount of original notes.

 

**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**

 

Set forth below is a list of the exhibitsincluded as part of this quarterly report.

 
| ****Exhibit No.**** | **** **** | ****Description****                                                                           |
|---------------------|----------------|-----------------------------------------------------------------------------------------------|
| 31.1                |           | Certification of Chief  Executive Officer under Section 302 of the Sarbanes-Oxley Act of 2002 |
| 31.2                |           | Certification of Chief  Financial Officer under Section 302 of the Sarbanes-Oxley Act of 2002 |
| 32.1                |           | Certification of Chief  Executive Officer under Section 906 of the Sarbanes-Oxley Act of 2002 |
| 32.2                |           | Certification of Chief  Financial Officer under Section 906 of the Sarbanes-Oxley Act of 2002 |

 

**(b)  Reports onForm 8-K**

 

Noreports on Form 8-K were filed in the three months ended September 30, 2005.

 

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**SIGNATURES**

 

In accordance with the requirements of the Exchange Act, the registrantcaused this report to be signed on its behalf by the undersigned, thereuntoduly authorized.

 

 
| ** ** | ** **        | ** ** | ** ** | **INTERDENT SERVICE CORPORATION** | ** **                                                         |
|------------|-------------------|------------|------------|-----------------------------------|--------------------------------------------------------------------|
|       |              |       |       | (Registrant)                      | ** **                                                         |
|       |              |       |       |                              |                                                               |
| Date:      | November 14, 2005 |       |       | By:                               | /s/  IVAR S. CHHINA                                                |   |
|       |              |       |       |                              |  Ivar S. Chhina                                               |
|       |              |       |       |                              |  President, Chief Executive Officer and    Chairman |
|       |              |       |       |                              |                                                               |
|       |              |       |       |                              |                                                               |
|       |              |       |       | By:                               | /s/  ROBERT W. HILL                                                |   |
|       |              |       |       |                              |  Robert W. Hill                                               |
|       |              |       |       |                              |  Chief Financial Officer, Treasurer   and Secretary      |
|            |                   |            |            |                                   |                                                                    |  |  |

 

**SIGNATURES**

 

In accordance with the requirements of the Exchange Act, the registrantcaused this report to be signed on its behalf by the undersigned, thereuntoduly authorized.

 

 
| ** ** | ** **        | ** ** | ** ** | **INTERDENT, INC.** | ** **                                                         |
|------------|-------------------|------------|------------|---------------------|--------------------------------------------------------------------|
|       |              |       |       | (Registrant)        | ** **                                                         |
|       |              |       |       |                |                                                               |
| Date:      | November 14, 2005 |       |       | By:                 | /s/  IVAR S. CHHINA                                                |   |
|       |              |       |       |                |  Ivar S. Chhina                                               |
|       |              |       |       |                |  President, Chief Executive Officer and    Chairman |
|       |              |       |       |                |                                                               |
|       |              |       |       |                |                                                               |
|       |              |       |       | By:                 | /s/  ROBERT W. HILL                                                |   |
|       |              |       |       |                |  Robert W. Hill                                               |
|       |              |       |       |                |  Chief Financial Officer, Treasurer   and Secretary      |
|            |                   |            |            |                     |                                                                    |  |  |

 

 

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