ModivCare Inc (MODV) 2005 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Providence Service Corporation third-quarter 2005 earnings corporation (ph) conference call. My name is Carlo and I will be your coordinator for today's presentation. At this time all participants are in a listen-only mode. We will be facilitating a question-and-answer session towards the end of the group's prepared remarks. (OPERATOR INSTRUCTIONS)

I would now like to turn the presentation over to your host for today's conference, Alison Ziegler from Cameron Associates. Please proceed, ma'am.

Thank you, Carlo. Good morning everyone and thank you for joining us this morning for Providence's conference call and webcast for its financial results for the third quarter ending September 30, 2005. You should have all received a copy of the press release yesterday. If you did not, please call Devon (ph) at Cameron Associates at 212-554-5461, and she will send one out and confirm your name on our fax or e-mail list.

Before we begin, please note that we have arranged for a tape replay of this call, which may be accessed by telephone. This replay will be available approximately 1 hour after the call's conclusion and will remain available until November 14. The replay number is 888-286-8010, with the pass code 76586773.

This call is also being webcast live, with a replay available. To access the webcast, go to www.provcorp.com and look under the event calendar on the IR page.

Before we get started, I'd like to remind everyone of the Safe Harbor statement included in the press release and that the cautionary statements apply to today's conference call as well. During the course of this call, the Company will make projections or other forward-looking statements regarding future events or the Company's beliefs about its revenue and earnings for 2005. We wish to caution you that such statements are just predictions and involve risks and uncertainties. Actual results may differ materially.

Factors which may affect actual results are detailed in the Company's filings with the SEC. The Company's forecasts are dynamic and subject to change; therefore, these forecasts speak only as of the date of this webcast, November 7, 2005. The Company may choose from time to time to update them, and if they do, will disseminate the updates to the investing public.

I'd now like to turn the call over to Fletcher McCusker, Chairman and CEO. Fletcher?

Thank you very much, Alison. We have a number of items that we want to discuss this morning and then we will take your questions. I am actually in New York, where I present tomorrow at the annual SunTrust Robinson Humphrey conference. Michael Deitch, our CFO, and Craig Norris, our COO, are in Tucson.

You've probably read that we filed an S3 registration statement this morning with the SEC, and we are obviously therefore in registration and cannot take any questions related to the offering. We would refer you to the S3 and the 10-Q that we filed this morning.

It should not be a surprise for those of you that know us that the Company is coming back to the equity market, given our acquisition pace recently. We have been pretty public consistently about our continued interest in strategic acquisitions. Currently, we fund these acquisitions utilizing our debt facilities, and as a result, a significant portion of what otherwise would be profit margin for us goes to service our LIBOR-based debt facility.

The intent of our equity round (ph) is to pay off approximately $20 million of this debt, which should leave us with a substantial amount of cash dedicated primarily to our acquisition strategy.

We have completed 13 acquisitions since the founding of the Company in 1997, nine of those since we went public in August of 2003. As Craig can tell you, they have all integrated well for us and in many cases established a new geographic location from where we have grown the business.

As an example of how we've grown these acquired facilities, when you look at our acquisitions that we've owned for longer than a year, in the aggregate, monthly revenue has grown from $4.1 million a month in the first month that we owned the facilities to $8 million a month in September. Management contracts that we have acquired have also grown from 6.3 million of revenue in month 1 to 9.9 million of revenue in September.

For the nine months just ended versus the same period last year, our revenue was up 55%. For the quarter, revenue growth was 32% and 6% higher than Q2. This quarterly year-over-year comparison is without the benefit of our Aspen, our most major acquisition.

Our current client census has grown to 33,903 clients at the end of September, a 22% increase over the prior year and a 7% increase from the second quarter. This is probably the slowest increase we've reported since going public and there are a number of external reasons for that, most namely the current uncertainty regarding the federal budget. You combine this with Katrina, the escalation in Iraq and the President's tax relief and we have never seen a more contentious time regarding budget priorities.

If you’ve been watching the federal budget in the last several weeks, you will notice there are a number of radical budget proposals that have sought across the board cuts, changes in Medicaid enrollment, the elimination of foster children from federal Medicaid, rolling back the new pharmacy benefit, etc. As a result, we believe states and counties have been slow to deal with our typical anniversary cost of living increases and new census commitments, particularly if there are going to be across-the-board cuts.

Remember in places where states can prioritize their own dollars, our Company has thrived. We've always cautioned about across-the-board cuts where we would be penalized along with any other provider.

The good news today is that all attempts to cut more than the $35 billion from the budget that they agreed to in April have been defeated at the committee level. Also, the more radical proposals, including the across-the-board cuts, have not survived Congressional committees. For further details and our perspective on this, please review the outlook section in the MD&A portion of the 10-Q that we released this morning.

The federal budget does contemplate a $4.2 billion reduction through the increase in Medicaid. Remember, Medicaid is an entitlement program. It automatically increases year-to-year. The increase slated for this year was about $9 billion. So, in other words, Congress has reduced that increase in about half, targeting primarily accounting regulations in terms of how states determine their state match.

It also provides good news for us in that some 1 billion new dollars are being appropriated for the poorest of the poorest Medicaid families -- that is families that are at 300% or greater than the federal guidelines for poverty will also have some new benefits if this current budget is approved.

We've made a decision early on not to contract with Medicare. If you're following the Medicare budget, you know it does include some drastic cuts, across-the-board cuts for providers, primarily physicians.

In spite of these external factors, we have increased our 2005 revenue guidance to $143 million from 135 million, and we are right where we expected to be on an earnings per share basis and consistent with Wall Street estimates. Our analysts, all five of them, however, assume a different diluted share count than what we presently use and, as we stated in this morning's press release, we are guiding to a diluted share count that's right at 10 million shares.

Consequently, we expect our earnings for 2005 to be $0.99; this is guided up a little bit, using the higher 10 million share count. I think you know -- we've talked about it consistently -- that we will guide to 2006 after the appropriations rounds at our state legislatures give us some comfort with the process. We expect that will be Spring 2006.

Michael, I'll let you walk through the details of the quarter.

Thanks, Fletcher, and good morning, everyone. Our third-quarter revenue totaled 37.3 million, up from 28.2 million for the third quarter of 2004, a 32% increase. 20% of this increase was from organic growth. 12% of the increase was from the Children's Behavioral Health acquisition announced in June, the Maple Star acquisition announced in August and the AlphaCare Resources and Transitional Family Resources (ph) acquisitions announced in September.

Comparing the third quarter of 2005 with the third quarter of 2004, home-based revenues grew 31%. 20% was from organic growth and 11% from acquisitions. Foster Care revenue grew 30%, 7% of which was from organic growth and 23% from acquisitions. Management fees grew 44%, 32% of which was from organic growth and 12% related to acquisitions.

Our third-quarter operating income totaled 4.6 million, which was 12.4% of our revenue. This compares with operating income of 3.6 million, or 12.6% of revenues for the third quarter of last year. Third-quarter net income totaled almost 2.6 million, which was 6.9% of our revenue. This compares with net income of 2.1 million at 7.5% of revenue for the third quarter of last year.

Third-quarter diluted earnings per share totaled $0.26 compared with $0.22 for the third quarter of last year. Cash provided by operating activities for the nine months ended September 30, 2005 totaled almost 7.4 million. This was up from 3 million for the same nine-month period last year.

At September 30, 2005, days sales outstanding from Home and Community-Based Services and Foster Care services was 65 days. Management Fee's days sales outstanding was 187 days.

At the end of our third quarter, we had 10 million in cash, we had almost 20 million in total debt, all of which relates to our acquisition activity.

With that, I'll turn the call over to Craig Norris, our Chief Operating Officer.

Thanks, Michael. We have of course been busy operationally this quarter with the transitions of the Maple Star entities in Nevada, Colorado, Oregon and the Georgia-based AlphaCare companies. The Maple Star acquisition was effective August 1st, and we quickly began assimilating three distinct state operations in Nevada, Colorado and Oregon, while initiating our back office support out of our Western division in Tucson.

Management and staff have done a nice job transitioning three different states simultaneously. Since our acquisition, the Maple Star entities have exceeded expectations, and we are fully transitioned as of today's call.

On September 21st, Providence acquired the AlphaCare Company to provide in-home services across 34 Georgia counties. While we are still in our transition period of this acquisition, our Southeast regional leadership team, as well as the AlphaCare management team, have integrated nicely. Our transition is on track here and we are excited about our future opportunities in the state of Georgia.

We ended Q3 with a total combined census of 34,202 clients. These clients are being served from 204 local offices in 24 states and the District of Columbia. Compared to Q3 of 2004, this represents a total census increase of 6456 clients and an addition of three new states to our operations.

Combined between our owned and managed entities, we have approximately 4800 employees serving 505 government contracts. This represents an increase in 204 contracts as compared to Q3 of 2004. As usual, we are all grateful to our program and clinical staff for all their efforts on behalf of our clients.

Thank you and I will turn the call back over to Fletcher.

Craig and Michael, thank you very much. We are carefully watching the federal budget; we would encourage you to do as well. Again, the current Budget Reconciliation Act is through both houses. It will have to be reconciled and then obviously signed by the President. It has abandoned any across-the-board language in social services or Medicaid.

In spite of these dynamic and evolving external forces, we have demonstrated great flexibility in keeping our contracts small and diverse, avoiding bricks-and-mortar expense and going to our clients' homes rather than requiring them to come to us.

This was a real challenge recently in Florida, where I think most of you know Hurricane Wilma substantially damaged Florida's capacity to produce electricity. Without electricity, obviously, gas stations can't pump gas, a precious commodity to us in a field-based environment. We ended up making a deal directly with one of the largest gas distributors in Florida so that our employees can fill up directly at the plant as opposed to having to wait in line for the scarce gas stations. We believe as a consequence we're back in the field calling on our clients and are very positive about our outlook for Q4 and the calendar year 2006.

With that, operator, we are ready to open the line for questions. Please remember we are restricted from commenting on the S3 registration.

(OPERATOR INSTRUCTIONS) Bob Labick with CJS Securities.

Good morning. First question I wanted to ask -- looks like Management Fees as a percent of managed revenue, we've bumped it back up to about 10.8% from 7.5 last quarter. I was wondering if you could update us how much of this is the Rio Grande, how much was consulting. And with the mix as it is now, where should we expect it to go forth? Obviously, you said it would rebound (indiscernible). Just give us the details there please.

Let me just comment on the changes in New Mexico and then, Michael, I will let you answer the specific economic questions.

We have contracted with the Rio Grande Behavioral Health organization in New Mexico since 1998. They have gone through a number of very radical and some controversial changes in New Mexico Medicaid. Effective July 1st under Governor Bill Richardson, they went through yet another gyration of Medicaid procurement in that the state solicited one large managed Medicaid organization on behalf of the state. That contract was won by ValueOptions.

So as a consequence, Rio Grande Behavioral Health was no longer required to participate as a direct managed care entity. Rio Grande is comprised of 10 not-for-profit community mental health centers around the state, so as a consequence of that, you will see our contracts jump up, Bob, in that we now contract directly with that Rio Grande agencies, not through the umbrella organization of Rio Grande Behavioral Health.

The economic impact to us was not material except for the overly dramatic increase in our number of contracts, and it might have also increased managed contract revenue to some extent. Michael, is that a safe answer to that question?

From Q2 to Q3, Fletcher, Rio was up 100,000 in management fees. And to answer your question, Bob, about 460 in consulting fees --.

And should we expect -- I know we have been modeling about 10% on a full-year basis, kind of going forward. It seems like we'll probably get close to there. Is that still the expectations going forward?

Yes. The only model change, our Home-Based revenue has increased to about 80% of our base, with Foster Care and Management Revenue representing about 10% each. So I think you are still good with the 10% number for Management Fees.

Okay. Great. And then just one question. And I know you said you can't comment on the deal, but let me just ask a question about your acquisition pipeline. Obviously, part of the proceeds from the deal potentially is likely to go to acquisitions. But the fact of the size of this deal, does it suggest anything in terms of the robustness of the pipeline or even the size of the acquisitions in the pipeline? Might they be bigger than they have been in the past, or how does the pipeline look?

The pipeline looks pretty much the way it has for the past couple of years. It remains busy. We now have three people dedicated to M&A, Bob -- I think you know that. We have obviously accelerated the pace of acquisitions here in the last few months.

We do have some acquisitions targets of scale in the pipeline, but we would fully expect that our strategy would remain the same. That is to target these small proprietary businesses that give us new geography and give us incumbency. We have found no shortage of those targets and occasionally will surprise ourselves with a target with some scale.

Great, I will get back in queue. Thank you very much.

Richard Close with Jefferies.

Yes. Quick, I guess, housekeeping. Michael, what was the 2.4 million in other receivable in the quarter?

I will tell you, Richard. That is related to our Lockbox (ph) and Healthcare Business Credit Corporation, where they sweep our cash daily, and we reborrow from them every week. So it's a timing difference for just the cash that went through the Lockbox that they are holding that we will then reborrow.

Okay. And then when you talked about the DSOs, just remind me how that compares to the second quarter.

Second-quarter, DSO for regular business was 64 days last quarter and 65 days this quarter, Q3. Management Fees was 180 days at the end of Q2 and 187 days end of this quarter.

Okay. And then just hitting that Management Fee revenue again, sequentially, a pretty big jump there -- and that is all the changes in Rio Grande. Is that correct?

We did have some consulting fees in the quarter, I think, too that may not occur. Our strategy with consulting fees is many times we will be invited, Richard, into a not-for-profit organization, especially one that we don't know very well, and we will do a short-term consulting contract. That revenue we identify in our Management Fee line.

I think we had, Michael, a couple hundred thousand bucks of that in that quarter. It's our hope, obviously, that this would generate a long-term management agreement and we had more of that activity, I think, in 3 than usual.

So I guess if we look at in the second quarter it was 2.8 million, 4.3 million in the third quarter. How much should we back out of that as sort of onetime consulting fees?

460,000, Richard.

460,000. Okay. And then final question, I guess, and then I'll jump back in the queue. When we look at the Home and Community-Based, sequentially it went down and I'm just curious why that happened, considering you had a growth in census from second quarter to third quarter. Just if you could help me out with the logistics on that.

Sure. Home-based is probably the only place we have any seasonal issues. That seasonality usually occurs for us in this summer. That has historically been offset by cost of living increases and new client census increases. That is what's been delayed, Richard, as a result, I think, of the confusion regarding the federal budget.

We have had little or no activity in the COLA, or cost of living increase area. We've not seen the kind of census increases that we would expect to see over the summer. We believe that states and counties will not be forthcoming on that until they understand what's happening to their budgets, which we think is still a couple of weeks away.

There was a great deal of reservation, I think it's a safe to say, on behalf of many of our payors, particularly when there was a lot of budget rhetoric around across-the-board cuts. So what we are hearing from our counties is that they're not going to commit, obviously, to new census, new rates just to have them rolled back by the federal government. So we expect we will see more of that activity then in Q4 and in Q1. Typically, that occurs for us in Q3.

So you are saying that in the next couple quarters, they're going to come to grips with what the changes are and then flow through census to you --?

Yes, we would hope to see any cost of living increases that have been delayed effective for us in 4 and 1, and then any kind of reservations they have about their own census, we would begin to see 4 and 1.

Typically, the federal budget argument occurs in April, so the timing of our guidance and release and renewals is much more predictable than it is in this current quarter. What happened in April of this year is Congress approved a budget with the caveat that they would come back in October and cut $35 billion from that.

During the summer, of course, we had continued escalation in Iraq, Katrina, Wilma, etc., along with the $70 billion tax relief. So when Congress reconvened, the first conversations were, gee, we've got to cut more like $50 billion. And there was a significant push, particularly by conservative Republicans, that the increases be greater.

And that was kind of the first bullet out of the cannon, and then you saw a lot of proposals that could prospectively damage social services budgets. So I think our payors kind of took a sideline position, waiting for that to be finalized, as we have as well.

The news from Congress now has -- again, the $50 billion cut proposals have been defeated and any serious, radical changes to Medicaid have been defeated, including the across-the-board cuts, which would punish us along with every other provider. So that was pretty much the phenomenon in Q3.

Okay. I'll jump back in the queue.

(OPERATOR INSTRUCTIONS) Patrick Swindle with Avondale Partners.

Good morning. My question is, following up on Richard's question, did you see any counties or contracting entities that actually reduced your census or your revenue per client?

No, we had no reductions in census contractual commitments or rates. But remember, this is the season where we would typically enjoy rate increases and census increases, and we've not necessarily seen those either. We believe that is primarily just delayed, Patrick, because of the unusual timing regarding the federal budget argument -- normally would not occur in October and November.

Would you expect the rate and the census increases to come -- I guess if they come in Q4 or Q1 -- to come over the course of those periods, or would they have a tendency to come all at once, as they do during the third quarter when we typically get the uptick?

It's hard to predict how this will impact our flowthrough to states. But the typical pattern is that states will not deal with their contractors until they understand and appreciate their federal budget. So our assumption is once the federal budget is finalized and states understand how that is going to affect their match or if there are any radical propositions coming out of that, like provider cuts, etc., then you will see more of what you would typically see in a July period occur whenever that happens.

And it looks like now that should be finalized by Christmas, so I think it's safe to assume that if it gets finalized sooner than that, we'd see impact of that in Q4; if it gets finalized around Christmas, you would see that in '06.

Right. Great. Then my next question -- some of the decision-making process around which new markets enter through acquisition is a function of the relative attractiveness of reimbursement in individual states. Does this slow down any of your movement into states until there is more budget certainty in those states, or would you say that you've seen nothing that would cause you to change your view of acquisitions based on the pipeline you currently have in place?

We have thrived in budget tightness. Budget tightness does not concern us. Reductions in federal or state budgets don't concern us, so long as they stay away from these across-the-board cuts. You remember that our watching and waiting in California was specifically related to that conversation at the California legislature. The Governor proposed across-the-board cuts for the state. That was defeated in the democratic legislature. Subsequent to that, Patrick, we entered the State of California.

There is nothing going on at the state level in any of the states that we are involved with or in any of the states that we would target regarding across-the-board provider cuts. States enjoy the opportunity to determine their own priorities. So we've seen very little support, no support at the state level for across-the-board provider cuts or across-the-board program cuts.

That only came out of a Congressional debate as a result of how are we going to pay for the war and the hurricanes and the tax relief and everything, we've got to treat everybody the same. That has been defeated soundly even at Congress. So there does not appear to be any serious political movement toward across-the-board cuts. And as long as that is the case, we will thrive in any state and any county under any kind of budget.

So no, we don't anticipate slowing down any of our growth nor do we anticipate slowing down any of our acquisitions, unless you were to see some sort of across-the-board provider disruption.

Thank you, Fletcher.

Josh Stewart with Sidoti & Company.

Fletcher, I just wanted to ask you a little bit more about your organic growth rate. It sounded like you did about 20% organic growth in Home-Based revenues. Is that still what you think you can do going forward?

We are comfortable with that, Josh; that is what most of the analysts have us at in '06. We've obviously done much better than that. We think the timing of organic growth in Q3 is really related to the federal budget issues, which appear to be behind us and favor us. So we are entirely comfortable with your model and others that show us growing at the 25% kind of rate, which is what we did in this quarter.

We're not necessarily happy with that, because we've had a history of doing better than that. And again, we encourage you not to guide to acquisitions, which obviously we have seen a busier pipeline in that regard. So we believe we will still grow, we will be the beneficiary of this budget tightness.

Historically, what county payors can eke out of their state legislature annually is about 20 or 25%, and that seems -- maybe that's the worst case for us, and we are comfortable with that, again, with acquisitions being accretive to that model.

So that would be in both Home-Based related segments, so Managed Care and also in Home --.

Now, the budget tightness may not necessarily impact our Management Fees, because we're not dealing directly with a government entity there; we are dealing with a not-for-profit organization that is the direct contractor with the payor. You've seen that growth keep pace with our other growth, so it's not really subject to appropriations issues.

But appropriation tightness does encourage the boards of some of those target organizations maybe to be a little more aggressive about seeking out a partner. So we expect that business model will continue to grow, along with both Home-Based, which is really our core business -- that's gone up from about 75% of our revenue to about 80% of our revenue. We are seeing growth in the Foster Care side now. You remember that has been relatively flat over the last quarters.

We have begun to offer medical benefits to our foster parents to step up the recruitment there, and that has had dramatic consequences for us in those states where we are doing that. And of course the Management Fees have continued to grow proportionately. So we see all three aspects of that business continuing to grow.

Okay, thank you.

Richard Close.

Thank you. When I look at the number of contracts, I guess, in Managed, both on the Managed side and the Direct side, and look at what your census are, it looks as though sort of the average census per contract went down, I guess, on the Direct side about 11%, about 43% on the Managed side. I was wondering if you could give us some clarity what's going on there.

It just seems like the contract growth really outstripped the census growth in this last period, sort of reversing what the trend has been.

We discourage you from trying to model our business with average clients per contract because they are really all over the place. But I would think most of that is specifically related to Rio Grande. Craig, Michael, I don't know if you have a number of contracts Q2 versus Q3 in terms of the overall Rio conglomerate.

Approximately an increase of 80 from end of Q2 to the end of Q3.

So some 80 of those contracts, Richard, are basically artificially increasing the number of contracts amount without any impact to client census or revenue. It's just the manner in we count those.

When we contracted directly with Rio Grande Behavioral Health, the umbrella organization, we did not count in our contracts nor in our Managed revenue the downstream organizations. So now that we contract directly with the agencies, we report statistically the total number of contracts to their total revenue. So I think that creates a disproportionate look at clients per contract.

So the 80 additional contracts does that all come under the Managed side?

Exactly. That is all on the Managed side.

Okay. And how much in additional revenue were those Managed contracts? You are saying that that revenue wasn't in Management Fee revenue previously?

I don't believe the revenue was, nor the Management Fee change. It is basically just -- the only thing I think changed is the number of contracts. Is that a correct statement, Michael?

Yes. Revenue from the whole mix in that business is up 100,000 from Q2 to Q3.

Okay. And then tax rate going forward?

Right now, it's unchanged, Richard. We are still sorting it out. For us, stock option expense is a nondeductible for tax purposes, so that's going to impact our rate for '06. Stock-based compensation, I should say. So we're in the process of evaluating that.

Through the year, though, Michael, 40% is probably a good number.

It has held constant all year, yes, sir.

Okay. And then just a commentary, I guess, a question surrounding the acquisition pipeline. If I remember correctly following the last earnings release and conference call, you sort of stepped away from saying that there was larger -- you seemed inclined, I guess, there's maybe a shortage of larger type institutions. You see more the mom and pops.

In today's commentary, you did mention some larger type of opportunities. Has something changed since the last time or maybe an update there?

Remember, companies come in and off of our pipeline all the time. Numerically, it remains robust. Elise Adams (ph), my attorney, will be proud of me for using "robust." We don't describe it numerically. We haven't really discussed it in terms of between this size and that size. So it's difficult for me to describe it without pinning me down.

But it's safe to say that it is as busy as it ever was. Our primary target, you are exactly right, is a $5 million type of organization, with $0.5 million of EBITDA. That's been our bread and butter acquisition. Aspen was unusually large. So of the 13 that we've done, one of those has scale. So I think you can make that kind of assumption, Richard, going forward, that one out of every dozen might be bigger than the average there.

Okay, thank you.

Mark Hughes with SunTrust.

Thank you very much. Fletcher, last quarter your feedback was that you thought the enrollment or the census increases this year would be comparable to last year. Was it just the, I guess, reopening the budget cycle that made the difference? Are those dollars still there and just not being spent because of the uncertainty or have those dollars gone away and you're hoping they'll come back?

I think it is safe to say that the feedback we've gotten from our county payors is nothing, Mark, short of panic. When Congress reconvened -- and you've seen the headlines -- the first conversations were, we're going to cut Medicare, we're going to cut Medicaid, we have to. Katrina is going to cost us $200 billion; where is that money going to come from?

You saw some of the most radical proposals we've ever seen in 30 years lofted at the committee level. Eliminating foster children from Medicaid, eliminating the medical benefit for foster children, cutbacks to children's social services programs, changing the eligibility for Medicaid, across-the-board provider cuts, etc.

That created some real concern amongst the payors, that if they stayed with their typical timeframe, commit to cost of living increases, commit to certain clients because of known eligibility factors and then the rules were changed, they would just have to go in and cut even deeper.

So I think, yes, there was definitely a pause that was clearly related to this current budget rhetoric. And this is the only season, fall season, where budget issues at the federal level were this contentious that I can think of in 35 years. Because of the footnote that was attached to the federal budget in April, because they couldn't agree on the cuts back then, they just said, okay, fine, we will punt this until October.

And I think everyone assumed that the October wrestling wouldn't be any different than it would have been in the spring. And you have some serious impact, obviously, to the federal budget, the deficit, the President's popularity ratings, there are a number of political factors obviously that weight into that. And I think people -- and we were concerned -- I think people were the most concerned that Congress would approve some sort of across-the-board provider cut.

You have seen this happen in Medicare. In fact, it is happening to the physicians in Medicare as we speak, where Congress just mandates that they all take 4% reductions. That would eliminate our cost of living increase and in fact reduce rates to us as contracts were renewed.

So counties have held off in terms of negotiating our rates and negotiating commitments to us in terms of census. And that usually does not occur in the third quarter. That debate occurs in the first and second quarters. So it is unusual this year to have any delays in our Q3 assignments in terms of both rate and client census.

If the budget cutters are successful in getting some of these cuts through, does that mean a reduction going forward or we just are stuck at these more normalized levels?

As it stands right now, when the media describes cuts to Medicaid, what they're talking about is an actual reduction in the increase of Medicaid spending. Medicaid is an entitlement program. Its design is to increase automatically in accordance with inflation, and only Congress can change that. So there has been no reduction, if you will, to the principal Medicaid program, which is about a $200 billion program. They have attempted to slow down the increase in that for '06 by reducing the amount of the increase. And that obviously flows through to the states.

However, it was not on the backs of providers, which was the thing that was making us the most nervous. It has to do with mostly how states calculate their match and whether or not they can use multiple jurisdictions when they count match for Medicaid. So right now, it has nothing to do with program services, it should not affect rates, it should not affect client increase, it should not affect cost of living increases.

Now having said that, the budget is not done yet. It is done at the committee level, it's approved at the floor level, the House and the Senate have to reconcile their differences, and of course the President has to sign it. So there is still some uncertainty regarding the federal budget. But you have seen any of the more radical proposals soundly defeated by a pretty reasonable Congress, who seems to support, even in spite of budget issues, increases in social services.

They clearly have to acknowledge this incredible increase in the number of people in Medicaid. Katrina alone added 1 million eligible people to Medicaid. So they are struggling with this balancing act.

And again remember, this rhetoric was very visible in '97 when we started the Company, and 2000. So as long as they don't implement some sort of across-the-board cut, our instincts are that we will thrive as part of the solution to budget issues, not part of the problem.

So the only word of caution we've given the investor public over these last couple of quarters is really watch the conversations regarding across-the-board cuts. That appears to be the case with Medicare; it does not appear to be the case with Medicaid.

Right. It looks like you did about 8% sequentially this quarter versus high teens last year. How much of that lower growth this year do you think you could make up over the next couple of quarters?

Well, last year, the sequential growth was about 16%, you are right. So we are about half of where we would have expected to be, and we should see that in 4 and in '06. There is no reason for us to believe that this is anything other than an interim issue that's related to the summer and the budget issues.

Got you. And then anything noteworthy on Texas and California? I know there are opportunities, but anything -- any new developments to speak of?

There are new developments in California. This is public information, and I think you can find it or we can help you find it. Three of the five counties that we operate in have submitted their white papers to the State, which basically describe intellectually their priorities. The other two counties we believe will finish that up here shortly.

In each of those county proposals, our types of services are identified as either the number one or the number two priority. So that all bodes well for us. Again, we would expect this to translate into real dollars in July of '06.

In Texas, as we all know, they have approved a very aggressive privatization legislation. The rollout of that is not mandated, however, until 2011. So you are not seeing immediate short-term impact to us on that, except that we have had some conversations with the more enlightened counties to say we might want to get after this a little earlier than everybody else. But we would expect that to evolve over a two- or three- or four-year period as opposed to any serious impact in any one quarter.

Great, thank you very much.

Dan Hagan (ph) with Paradigm.

Fletcher, I was going to ask about Texas and California also, but it looks that we already dealt with that. In terms of Hurricane Wilma, I just want to clarify that that negative impact in the quarter has already been taken into account into your guidance.

Yes. And we've been very lucky with weather -- and that is me knocking on wood. We did not have any contracts in Louisiana or Mississippi, so we had no disruption from Katrina. In fact, we were the beneficiary of many of those evacuees coming to states where we had contracts.

We've been through, I think, 13 Florida hurricanes in the last 18 months. None of those have seriously impacted revenue, which has been astonishing to us. We were getting reports early after Wilma, which is really an outlook issue for the fourth quarter more than anything else, in that our people couldn't buy gasoline. And of course, when you are dependent on them to see their clients, we struggled with a number of remedies.

Again, they were buying gas in 5-gallon cans because that's all a gas station would release to you after sitting in line for 3 hours. We talked to Georgia about trucking gas in for us, and ultimately we were directed to a processing plant where we could buy gas directly. So yes, you are right -- we believe the impact of any of the weather-related issues for this season are indeed behind us.

Okay, thank you very much.

Laurie Burstein with Roxbury Capital.

Hi, Fletcher. I was going to ask you about the hurricanes also. But I do have another question. Could you talk about what level of debt you are comfortable with for acquisitions and why?

Not to be facetious, we are the most comfortable with zero debt, because it dramatically affects the profitability of our acquisition targets. And you've seen that in the last couple of acquisitions. If we're buying something that produces $0.5 million of EBITDA in a 10% or 11% margin environment and we have to pay 8% interest on our debt, you could see we lose a large part of the value of that acquisition to service the debt. So we have always seen our debt as a short-term vehicle to keep the acquisitions flowing. But we clearly would prefer to use stock and our cash to make those so that the accretion is much more dramatic.

Richard Close.

Just a point of clarification on the census. You had mentioned to Mark it was 8% this year sequentially, I guess, and 16% last year. Maybe if I look at second to third-quarter, I think we are showing like a 7% growth rate. Unless I'm missing something there, so --.

That was Mark's number, Richard. I didn't correct him. That 7% is wrong (ph).

Okay. So on an organic basis, you made a number of acquisitions near the end of the quarter. Do you ever give what the census is of the acquired entities, or maybe if we could strip out and see what the organic growth is?

We can because you asked a question specifically. Craig, I think the only acquisitions would have been Maple Star and Alpha. Do you have census for those?

That's right. The census for those two entities was 980 clients.

Okay.

Does that help you?

Yes, thank you.

Patrick Swindle.

Thank you. As we moved into the fourth quarter, have you all seen any movement yet, either on census or COLA, or would it be too early to see that? And how would that be consistent with your typical expectations for the fourth quarter?

The mood is better. We've actually not seen the direct impact of that, but it did give us enough comfort to guide up. We've guided up revenue, we've guided up earnings. So I would think it is safe to assume that our perspective about the issues in the third quarter don't carry over to the fourth quarter.

Thank you, Fletcher.

Sir, we have no further questions. Back over to the group for any further remarks.

Thank you everyone. Craig and Michael, thanks for your help in Tucson. We obviously feel optimistic about the Company's performance. We have demonstrated incredible flexibility in dealing with these kind of budgetary concerns in the past. It is precisely the reason we don't own any buildings, because it really limits our ability to be flexible in the face of government funding challenges.

So long as there is not an across-the-board provider cut, we expressly believe we will continue to be thriving in that kind of environment. If you have any questions that we missed specifically, please call any of us individually; we are happy to talk to you. Remember we are in registration and until we are cleared from the SEC, we won't be talking about the deal. And we hope to see you all on the road soon. Thank you and goodbye.

Ladies and gentlemen, we thank you for your participation in today's conference. This concludes your presentation and you may now disconnect.