ModivCare Inc (MODV) 2005 Q4 法說會逐字稿

Ladies and gentlemen, good day and welcome to the fourth-quarter 2005 Providence Service Corporation earnings conference call. My name is Megan and I will be your coordinator for today. At this time all participants are in a listen-only mode. We will conduct a question-and-answer session towards the end of this conference. (OPERATOR INSTRUCTIONS) I'd like to turn the call over to Ms. Alison Ziegler from Cameron Associates.

Thank you. Good morning everyone and thank you for joining us this morning for Providence's conference call and webcast for its financial results for the fourth quarter and year ended December 31st, 2005. You should have all received a copy of the press release yesterday. If you did not, please call [Devon Rhodes] at Cameron Associates at 212-554-5461 and she will send one out and confirm your name on our e-mail list.

Before we begin please note that we have arranged for a taped replay of this call which may be accessed by telephone. This replay will be available approximately one hour after the call's conclusions and will remain available until March 23rd. The replay number is 888-286-8010 with the pass code 11284686. This call is also being webcast live with a replay available. To access the webcast you can 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 the 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 2006. 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 forecast are dynamic is subject to change therefore these forecasts speak only as of the date of this webcast, March 16, 2006. The Company may choose from time to time to update them and if they do we will disseminate the updates to the investing public. Also you may have seen that the Company is in registration, therefore, we cannot comment on the offering or timing in the question-and-answer period.

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

Thank you, Alison and good morning everyone. In Tucson with me is Michael Deitch, our CFO and Craig Norris, our COO. And all three of us will be available to you for questions following our comments.

We'd like to announce that we've celebrated our ninth anniversary in the most recent quarter. We've now had 35 quarters of steady predictable growth probably with one quarter of some uncertainty, as you know, our third quarter of 2005. We've achieved great success offering our government payers an alternative delivery system for this Nation’s indigent and mandated population. Now over 50 million people are eligible for our services. We currently serve 36,300 clients or in terms of market share less than 1% of the people eligible for our type of services.

With the recent A to Z Tutoring acquisition and a new win in New Jersey, we are now in 31 states plus the District of Columbia with 4,900 employees, 203 locations, 528 government contracts and we've restored our 100% renewal rate, the small contract we announced that we lost last summer in El Paso has since been reinstated.

2005 was a remarkable year for us with nearly a $300 million book of business between our owned and managed entities. GAAP revenue growth was over 50% and fourth-quarter sequential growth was 11%. We've been public now since August of 2003. In our first-year 2004 revenue growth was 60% and of course last year, right at 50% growth. At this time last year, March 15th, last year we released guidance for' 05 expecting a 30% organic growth rate and announced today exactly 30% organic growth. So we have come to appreciate our predictability.

We are the beneficiary of government appropriated dollars only. We still have no retail business, no self-pay, no co-pay. As a result our bad debt experience in 2005 was one-half of 1%. Our expense model has proven to be very predictable with a margin range never varying more than a half a point over the last nine years.

We will continue to manage to about a 12% operating income margin and have designed the Company to operate in the long-term in this low-cost, low-margin space. I'm also pleased to report today that we have also enjoyed now our second year of full Sarbanes-Oxley compliance, our 10-K was released this morning.

2005, as you know, was also an infamous year for the federal budget. Congress punted the budget in April of 2005, only to reconvene in September to a multibillion dollar war, $80 billion request for hurricane relief and the largest projected federal deficit in years. Combined with the current administration's desire to make permanent the tax relief package we all enjoy, it left Congress forced to argue budget priorities. This process was indeed entirely partisan. Not a single Democrat ended up voting for the budget which passed the House by one vote and passed the Senate by only the Vice President's vote.

During the most recent session, very radical proposals designed to reduce social services spending gained traction for the first time in the House. Provider rate freezes, provider fee rollbacks, changes to the Medicaid eligibility, changes in the very definition of poverty all passed Committee or House votes ultimately to be dismantled in the Senate. For the first time, however, in our ten-year history we saw state and county payers holding off on their contracting process fearing the Congress might do something drastic and indeed retroactive to October 1. This was the distraction for us; did delay our third-quarter growth and caused us to postpone our previously announced equity offer.

At the end of the day that federal budget is a net plus for us creating new dollars for community-based care, importantly eliminating the for-profit restrictions on foster care dollars, and allowing Medicaid to increase although at its most modest rate since the Company's formation at about 2%. Medicaid spending about 25% of our business has grown by 85% since we started the Company fueled to a large extent by Welfare reform pushing people into low-paying jobs eligible for Medicaid and other Federal Social Services. U.S. poverty levels have now achieved their all-time high with 38 million Americans at or below the federal poverty guideline.

Consequently today we are releasing revenue guidance for '06 of approximately $180 million, about 25% same-store growth and earnings per share expectation of $1.25. This includes an increased share count if you model our Company, please make note of that. And you'll also notice we are enjoying a higher effective tax rate now expected to be 41% versus the 40% we've historically guided to. That 1% swing is about a $0.02 swing to our EPS guidance for '06. And the share count likewise is about a $0.02 swing to our '06 guidance. That is probably the difference between us and some of the street estimates in terms of the share count and the increased effective income tax rate.

We had a demonstrated history of making small strategic acquisitions averaging about one a quarter and we intend to continue to use our acquisition lines and available cash to continue this pursuit.

With that, I will turn the call over to Michael.

Thanks, Fletcher, and good morning everyone. Our fourth-quarter revenues totaled $41.1 million, up from $29.6 million for the fourth quarter of 2004, a 39% increase. 22% of this increase was from organic growth; 17% of the increase was from the Children's Behavioral Health acquisition announced in June, the Maple Star acquisitions announced in August, the AlphaCare Resources and Transitional Family Resources acquisitions announced in September, and the Drawbridges and Oasis acquisitions announced in October.

Comparing the fourth quarter of 2005 with the fourth quarter of 2004 homebase revenue grew 35%. 20% was from organic growth and 15% from acquisitions. Foster care revenue grew 37%, 5% of which was from organic growth and 32% from acquisitions. Management fees grew 74%, 62% of which was from organic growth and 12% related to acquisitions.

Our fourth-quarter operating income totaled $4.29 million, which was 10.4% of our revenue. This compares with operating income of 3.6 million and 12.2% of revenue for the fourth quarter of last year. In Q4 this year we've recognized $601,000 of stock compensation expense recorded in general and administrative expense compared with $15,000 in stock compensation expense in Q4 of last year.

Fourth-quarter net income totaled almost $2.4 million which was 5.8% of our revenue. This compares with net income of $2.4 million and 8.2% of revenue for the fourth quarter of last year. Fourth-quarter diluted earnings per share totaled $0.235 compared with $0.25 for the fourth quarter of last year. For the year 2005, total net income was $9.4 million or $0.95 per diluted share. The recognition of 601,000 of stock compensation expense reduced diluted earnings per share by $0.04 for the year.

Cash provided by operating activities for the 12 months ended December 31st, 2005, totaled almost $8.5 million. This was up from $2 million for the same twelve-month period last year. In December 31st, 2005, day sales outstanding from home and community-based services and foster care services was 68 days, up from 65 days last quarter. Management fees days sales outstanding was 183 days down from 187 days last quarter. At the end of 2005 we had almost $9 million in cash. We had $18 million in total debt all of which relates to our acquisition activity.

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

Thank you, Michael. We ended Q4 with a total of combined census up 35,646 clients. These clients are being served from 204 local offices in 25 states and the District of Columbia. Compared to Q4 of 2004, this represents a total census increase of 6,580 clients and an addition of four new states to our operation. Combined between our owned and managed entities we have over 4,900 employees serving 527 government contracts. This represents an increase of 215 contracts as compared to Q4 of 2004.

In 2005 by way of acquisitions, we added operations in Oregon, Colorado, Kentucky and Georgia, as well as to our existing Pennsylvania and Nevada markets. Not all of these 2005 acquisitions are fully transitioned into the Providence family. Our operational leaders and back office staff have once again this past year demonstrated their ability to transition and assimilate new acquisitions in an effective and efficient manner.

With the recent announcement of the A to Z acquisition, we continue to be opportunistic in expanding our relationships and services to the school systems which includes counseling programs and now in-home tutoring services. We believe this unique relationship aimed toward increasing emotional stability of students as well as their academic success is an interesting and opportunistic area for us. Oftentimes students who cannot succeed in regular educational placements require costly alternatives such as special education programs and in some cases expensive out of home placement such as residential treatments. This strategy with the schools is yet another way to support states and counties in reducing the utilization of expensive alternatives.

In every region of the country our quality of care is strong. Our credible teams and leadership staff are performing exceptionally and we are producing important outcomes for our clients, payers and communities.

Thank you. And I will turn it back to Fletcher.

Craig, Mike, thank you very much. Those of you that have known the Company for some time noticed that we announced the retirement of our friend and President Boyd Dover following our most recent Board meeting. Boyd, as you know, is one of the founders of the Company. He and I have been together since 1968. We are not buying Boyd a gold watch just yet as he has agreed to stay involved with us in Florida and elsewhere. His leadership in Florida over the last two years has allowed us to become the number two ranked provider in that state and one of the largest players in Florida's privatization initiatives.

He leaves in Florida three very smart seasoned executives minding the Providence Camelot store there. Boyd is ten years older than I am, now I keep reminding him of that and we've been planning for his retirement for some time as you know turning the operational reigns over to Craig last year. Sorry about the civics lesson today and last quarter as it relates to Congress but to truly understand our business, we think it's important that you understand the things that affect us externally. We are prepared to comment on any and all of that.

And with that, Megan, we are happy to open the line for questions.

(OPERATOR INSTRUCTIONS) Robert Labick from CJS Securities.

Good morning. Congratulations on a good quarter and year. First question I wanted to ask relates to your management fees. They were higher as a percent of revenue than they have been in the past. Is there anything unusual related to that?

Hey, Bob, Michael Deitch here. For some outstanding performance we have been awarded certain bonuses by the not-for-profit entities. And that tends to drive -- year-end, that tends to drive that line.

Terrific. So going forward what levels should we look at and then you can deed it with bonuses but what is the general range we should expect?

We continue to add not-for-profits from time to time, too. And we do see some of that activity coming on in this next year.

I think we continue to budget about 10% of their revenue as their kind of average management --

As an average, yes.

We won't budget buy for that bonus activity because we don't know we're going to get it year in and year out. So the current guidance contemplates our kind of consistent management fee base without any bonus activity.

Terrific. Well keep doing a good job in getting those bonuses as well. Next question, could you discuss a little more the A to Z acquisition particularly as it relates to your counselors? Is there any opportunity for them to act as tutors as you get further into this program? Or just give us more of the opportunity there?

We have avoided a number of opportunities to move into the educational space. For the most part our view of that industry has been it is dominated by a few very large providers, the options as Craig described, beyond the kind of traditional tutors where out of home or residential schools or private schools. We met this company last summer and saw them as kind of a little baby Providence. They started in Nashville about a year ago and went to the school district there locally promoting a home-based alternative to traditional in-school or in-office tutoring. As you know, that is very much our mantra. So we saw ourselves as kindred spirits to them relatively quickly.

Over the summer they wrote to and applied for certification in a number of states and have found that they are similarly welcomed in approximately 30 states as a home-based tutor. And you are right, Bob, you do not have to be a certified teacher to tutor under these programs. So in those locations where we have staff indeed our staff can be a tutor under these programs. This is funded by the No Child Left Behind Act. If you understand the way that works your school must meet certain federal guidelines for standardized testing. And a number of schools -- the majority of schools in fact, do not meet those standards. This is particularly crucial in minority schools and in rural schools. And if you fail to meet those standards you are obligated to provide tutoring to your students at no cost.

In spite of this last year, some $1.5 billion was returned to the Federal Government as unutilized by these schools. So we see a huge opportunity here in '06. This is very much an investment spending acquisition for us. You will note that the deal is primarily driven by an earnout target. So we are we going to spend in fact I think in our '06 guidance, Michael, we don't have any income really projected from A to Z in the '06 budget. Anticipating that mostly what we're going to be do is growing that business as rapidly as we can, expanding into as many markets as we can.

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

Mark Hughes with SunTrust.

Thank you, good morning. Let's talk about the outlook in foster care with the lifting of the restrictions on the for profit. What is your thought in terms of either new activities, organic growth going forward and understand there is some development in California. I saw a reference to an article but did not get the gist of it. Could you just give us an update there?

Sure. As it relates to the last part of your question just yesterday the Federal Court in California ordered the state to reduce its dependency on institutional care for the thousands of kids that are in California foster care. And ordered them, Mark, gave them 120 days to basically change the system there removing kids from group care and institutional type programs favoring the therapeutic foster care of our model and mandating wraparound services.

So once again you have seen the ACLU, the Center for Law and Public Interest, etc., on behalf of state wards -- now remember foster children are all wards of their state -- intervene to force the state to develop less restricted programs. That is literally a two-day old piece of information. We can share the details with anybody on the call regarding that law suit.

The congressional change this year presents huge upside for us at which at this point is probably very difficult to quantify. The Federal budget for foster care is about $4.5 billion. That money has historically been earmarked exclusively to the not-for-profit sector. That language was terminated in the most recent session which would allow companies like ours to contract directly with states for foster care services. I will tell you that when we go to our states most of them did not know this legislation was even written, let alone passed. So while it is a Congressional mandate, we get to really see it play out, Mark, in terms of how states intend to adapt their contracting and/or change their own procurement code to approach companies like ours. So it's more of a transitional evolution than something that we believe will have an immediate impact on us.

Foster care is the slowest growing of our segments in that the population of foster care kids has been pretty constant, about 450,000 children in the U.S. in foster care. And for the most part, we are dealing with kids who clearly otherwise would be in some sort of institutional setting. It is also the genesis of many of our management fees where we contract with not-for-profit providers who are earmarked under the historical legislation to receive foster care dollars.

So nothing is in our '06 relief guidance that really contemplates these changes other than to give you some indication that the momentum seems to be ours in terms of both legislative mandate and court mandate toward our kinds of programs.

How much stickiness is there in those foster care contracts if the states do recognize like in the award to you -- how often do those turn over?

They are annual just like everything else that we do. So you would see that play out in July of '06. To the extent anybody wanted to make a change in existing providers you will some bidding activity occur in the late spring for the July 1 start period. We do expect that we would be bidding on some contracts directly now that the prohibition on for profit providers has been lifted. We have not included anything like that, Mark, in our guidance. And again unless we know of it today, we don't guide you to it.

Got you. Then how about just an update on the California, the mental health initiative, how is that looking like it's going to ramp up?

We are bidding in that environment now under the referendum in the counties where we operate. The timing on that, Craig, is probably summer --

Second half of the year.

So we will know more, Mark, on how successful we've been in those counties that we are involved with, San Diego County, Orange County, L.A., Kern, etc., have prioritized our services and have released proposals. It is a competitive bid environment and we are bidding in that environment. Again we've not included that in our guidance.

It is very political. I will tell you that being an incumbent is absolutely important. We wouldn't be after any of this California business except for the Aspen acquisition. And even having said that there are thousands of providers lobbying and trying to clamor for their piece of this pie. So it could be $200,000; it could be $20 million. There is really no way today that we know what the impact of that.

Got you. Thank you.

Patrick Swindle at Avondale Partners.

Good morning. First question, in looking at the trends that you saw and the delay at the county level in late '05, the third quarter you obviously saw the benefit of in-migration states in the fourth quarter. What has been the reaction since the passage of the Federal budget in terms of the customer response and has that resulted in an acceleration in on either census or in rate in the first few months of this year?

It's really a state by state answer, Patrick. Some states remain very conservative regarding their appropriations. They do not view the budget battle as over. And clearly with the vote so close there is not a mandate in one direction or another. And of course the dynamic that led to that argument still exists today. The good news in that regard is the President's budget does not attack the programs that fund us. The current Chairman's mark of the Senate Appropriation Chairman's budget does not attack programs. So it seems like many of those programs that were targeted last year have been exempt for further cuts in '07.

Now having said that, remember Congressional initiatives arrive at any moment. So I think you have some counties that are still concerned there may be some infighting regarding on how we prioritize money. That has, as you suggested, had more impact in the Midwest and the Far East, in Maine, places like that. The Sunbelt, West Coast, Southeast have continued in migration issues and really have not been able to slow down in terms of their procuring services for these beneficiaries. So it appears to be affecting the outmigration states more conservatively than the inmigration states.

We did not have anyone that did not renew with us. We did enjoy very small, if any, cost of living increases and again the primary driver for our business as it has been in the last ten years was census. And we continue to see that ramp up more rapidly in the Sunbelt, the West and the Southeast.

And then the next question, you all have historically targeted roughly one acquisition per quarter on average as you go throughout the year. What does the current pipeline or acquisition environment look like? And are you seeing any changes relative to what we saw over the course of '05?

I'd like to tell you we were that disciplined to do one a quarter. It's really quite by accident that we've done that. We really don't control the closing of many of these small operators; they are proprietary businesses. They probably never have been involved in anything like this. The due diligence is strenuous, many of them are unaudited. We do have a number of those that are currently targeted, Patrick, the attorneys like me to use the word robust. That is how we describe our pipeline.

We do not see many companies of scale, the size of Aspen or north of $20 million. However, there are numerous targets in the 5 to $10 million revenue range which has kind of been our sweet spot. In almost every situation with the possible exception currently of Georgia, we've enjoyed dramatic improvements in our acquired entities post closing. That has been our expectation is that we get new geography. We become an incumbent provider and it allows us to cross sell our services into new areas. And that has panned out in virtually all nine of the acquisitions we've done since the IPO.

So that continues to be part of our strategy. We don't guide to it because it is relatively unpredictable. You are right, we target one a quarter but we can't guide you to that because it could be two quarters, then we end up doing two or three like we did last summer in short order. It is part of our strategy. We don't have any shortage of opportunities and of course we have the credit facility and the pending offering as fuel for that pursuit.

Is there any -- from a competitive standpoint, would you characterize the competitive landscape as pretty consistent with last year? Has there been any change into the multiple expectations on the part of the sellers?

We've not seen anybody bid anything up. We are still operating -- we used to talk about our range being at 4 to 6 times; almost everything we've closed in the last year was at the high end of our range of 6X, six times trailing EBITDA. That's kind of been the benchmark that we've established. We haven't seen competitors such as ResCare, Mentor or Maximus or others that are operating in this space bid up. Clearly there is more activity by some of those named companies. So sellers do have options.

We're very proud of the legacy we have as a buyer and a lot of our strength in dealing with these small entities is more cultural than it is economic. The economics seem to be pretty much the same for any of us. But you are right; we are seeing more interest in this space both from private companies as well as public companies.

Thank you, Fletcher.

(OPERATOR INSTRUCTIONS) Richard Close with Jefferies & Company.

Congratulations. A quick question I guess on the audit fees. Michael, if you could just go over that I guess for the '05 audit fees you're expecting most of that in the first quarter of '06? How does that compare to when you recognize or incurred the expenses last year?

Last year we changed auditors, and they really didn't get started with the SOX work and the audit into early '05, January, February. This year we got an earlier start and our straight up audit fees were about $206,000 and for SOX, $220,000. That's just from McGladrey -- I'm sorry, let me correct that. 206,000 for audit fees and SOX fees of 335,000. That's 220,000 is audit related fees primarily related to our S-3. We were billed about $180,000 in December from McGladrey, about half of it for SOX, half of it for audit planning and some work. The balance is expected in the first quarter and that's about $350,000, or something like that. Also we're going to have legal fees, a legal review of our 10-K etc., of about $120,000 in the first quarter.

Historically, Richard, we had amortized those expenses over the years so there was some parity month-to-month, quarter-to-quarter and under McGladrey's advice we book all those expenses now as invoiced. So that is primarily the reason we've guided down Q1 is that we will book all of our audit or the majority of our audit related expenses in that first quarter.

Richard, last year we had about $900,000 or so for SOX fees. We were able to decrease that this year to about $430,000 excluding the internal cost which I will say we are about $200,000. We had a savings year-over-year 200,000 to $300,000 of SOX cost.

If I look at first quarter in '06, help me understand what the expenses that are going to hit the P&L are versus first quarter '05? To get at apples-to-apples basis.

I'm expecting about $360,000 of cost in Q1 for audit fees.

So $0.04 roughly, $0.03 to $0.04 versus last year --

Last year it would be smaller because you amortized it?

No. Last year was the first year we didn't amortize it and it was probably more like $0.05 or $0.06.

$570,000 last year.

Okay. When I'm looking at last year's proxy statement, it says 571,000, that was all incurred in the first quarter of last year?

Most of it, yes sir.

Yes.

Because of the changeover in auditors primarily and getting a later start.

Okay. Also in looking through the K for this year I guess you did an acquisition on February 27, '06, Family Based Strategies -- I'm sorry if I missed you talking about that. But if you could just give us a little bit of background on that acquisition and what that gives you?

We didn't announce it because it's not a very material or large acquisition but more along the line of opening up some new territory for us. This is also a company, a very young company, with a limited history, Richard, so most of that acquisition as you read in our filings is also presented in terms of an earnout. So these are principles of a company that used to be a competitor of ours, spun out and started their own business. As typical with many startup businesses, we're experiencing some cash issues, rather than to be their venture capital backer we saw the opportunity to acquire them but still give them some upside by paying them on an earned out basis.

We don't see much from that activity. It's North Carolina-based in '06 but are hopeful that they will continue to grow in '07 as the A to Z acquisition. Both of those recent acquisitions I think in the current calendar year -- there is nothing, Michael, in our '06 guidance as a contribution from either of those, A to Z or FBS.

They are very flat.

I noticed I think they were in New Jersey as well. Did that help you win the contract in New Jersey that you mentioned earlier on?

No, we had won that early before we got involved with these people it was protested, Richard, and that protest, that appeal was just resolved in the last week. So that was an independent win of them. But we did see the wisdom of their business combined with ours giving us a larger New Jersey footprint. You've heard us talk about New Jersey a lot. We've always believed that they need us. We've never really had a welcome mat available to us in New Jersey. There has been gubernatorial change there and there's department head change now. And I think they are more interested in private sector.

Is that foster care in New Jersey?

It's mostly wraparound services, home-based, community-based kinds of services. So they do have a FBS, right, Craig, is foster care?

FBS is more of the in-home but the RFP that we just won is foster care.

Oh, it is? Okay.

I had them backwards, yes.

And then you have some language in the 10-K with respect to budget priorities and then it talks about the Deficit Reduction Act that was signed on February 8th I guess of this year. It said something regarding provider taxes on managed care organizations. I was wondering if you could elaborate a little bit on that? Are you guys impacted on that front?

Not directly. But when many of our payers remember, our organizations like Value Option, [Centine], Magellan, so to the extent they get taxed that could reduce their income put some pressure on us as a subcontracted provider. So that is just one of the things to stay aware of in terms of monitoring government trends.

Medicaid is up. The budget for Medicaid this year is $190 billion over $188 billion last year. It is one of the smallest increases in our Company's history in Medicaid but they are still expecting it to increase and they are looking at some of these alternatives, Richard, which are very complicated, technical in terms of how states develop, match, how assets are spent down. And indeed whether or not the for profit providers are taxed on their Medicaid contracts. Those may have some life in the current session and it's hard to say what the impact on that would be to us.

And then maybe quickly moving onto Florida, I believe back in February I saw an article with respect to I guess a competitor down there in a different district from you, ChildNet, was having some discussions with the state or something. Is there opportunities for you guys to take over other districts or maybe have there been any switches in Florida to date since the privatization has occurred? Does that provide an opportunity for you?

We believe the state thinks very highly of us. When one of the networks was in trouble in that regard they asked Boyd to step in as the interim CEO until they replaced him. We were happy to do that. You'll recollect we've actually been called in now to two networks to kind of help stabilize them. You also remember that we won virtually every bid that we either helped write or wrote directly on behalf of one of our own entities. So we anticipated that given that notoriety we would be a hot potato in Florida. And to some extent politically we have flattened out.

We have not won any new business since those '03, '04 awards. We've really concentrated, Richard, on operationalizing those. The state's evaluations of us are very good. We are indeed the second-ranked provider in this space and Florida, the number one provider has been in the state for some 35 years. We are very pleased, as young as we are, to be viewed that highly.

Over time, yes, it will pay off for us. There is nothing in our '06 budget regarding Florida growth other than maybe a cost of living increase or some mild contract wins. But we do not see the kind of aggressive procurement behavior we enjoyed there in '03 and '04.

I think in one of your districts you switched or one of the foster care agencies that you subcontract with is no longer accepting kids and all that. How easy is it to replace people like that that you contract with?

There are dozens, hundreds of agencies available to us as subcontractors in the event that they can't, we would choose to provide those services directly ourselves. One of our strengths has always been to fill in gaps particularly in rural areas, Fort Myers, others where there have been limited provider base. We use a combination strategy, Richard, in those markets where we might provide services directly particularly to the more difficult risky children that other providers may not be as interested in. And then we contract to the extent that we can with existing providers.

So we don't see any shortage if someone were to go under or go out of business or change their minds. They should be pretty replaceable with another entity or again, we would do it direct.

And then just real quick, final question. You had mentioned in your comments that you -- when you make acquisitions you usually are able to increase census but you mentioned except Georgia. I wasn't clear on that.

If you look at the aggregate of our acquisition story, we have doubled revenue in virtually every one we've acquired. Georgia is the only place where we haven't done that. It is fine, it is up in revenue. It has not been as stellar I think it is safe to say as some of our other activities. We are continuing to look at opportunities there in Georgia. We don't see any issues. It's not losing money, but it's not doing as well as many of the other acquisitions that we've done. And we believe that this may be in terms of the dynamics of the state, the payment process, etc.. So if there was something there to be worried about we'd announce it.

I just wasn't sure where your comments from that standpoint. That is very helpful. Thank you very much and congratulations again.

[Chris Beach] with Bayshore Partners.

There was some fairly significant growth in unbilled receivables year-over-year as well as in notes receivable quarter to quarter. I was wondering if you could just shed a little light on those variances?

Hey, Chris, this is Michael. On the unbilled A/R most of that is here in Arizona. Our payer changed computer systems last year and we were challenged to get our billings in and in sync with them. Much of that has been remedied in the first quarter of this year and so I expect to see that unbilled line decrease.

It's probably worth a little bit, Chris, talking about how we recognize revenue and then look again at our bad debt history which is unbelievably good. When we see a client, when we provide direct services to a client in the field we treat that as revenue. The payment of that is processed under which we invoice, monitor, collect, do utilization review, etc. with our payers. Our policies provide that so long as those invoices are paid within a year, 365 days, we treat that as good revenue. To the extent they age beyond that, then we reserve that and that has been the genesis of our bad debt which last in '05, Michael, was -- what was our total bad debt in '05?

$105,000.

$105,000 out of $150 million. This is a government funding. It's not unusual that the process is difficult. And there is no standardization in it. What we do in Virginia has absolutely nothing to do in terms of how we bill or collect in Arizona or Maine. So we've had to develop literally multiple systems to handle that. At the end of the day, we collect 99.5% of our money.

Chris, I think you are speaking too on the notes receivable, the long-term portion of notes receivable. One of our not-for-profits we relaxed a note and extended it. The note is for $875,000. It used to be in the last quarter, Q3, was a short-term notes receivable but we extended that note 18 months and so now it just shows up as long-term.

All right, thanks.

(OPERATOR INSTRUCTIONS) And with no further questions I will turn the call back over to management for closing remarks.

Megan, thank you very much. We believe we continue to be in the right place at the right time, even given these budget issues. The company was always designed to be 100% variable. That's the reason we don't invest in any assets. We don't intend to nor do we today own any hard bricks and mortar buildings. So as the government funding priorities change, we expect to be able to ebb and flow with that.

We've never been challenged to do that. We've found ourselves in the last nine years continually in the sweet spot of government procurement and as this lawsuit in California just the day before yesterday indicates, that continues to be the case for us. Our growth remember is rationed. We are for good or bad subject to government appropriations processes. No county administrator is going to go in and request that their budget double. So this is not a company that next year is going to go from 150 million at $300 million of revenue because we are not in an open market or free enterprise environment.

We have been able to demonstrate consistently, however, that we can enjoy 20, 25% kind of organic growth from our payers which is primarily census driven and we augment that of course with our little tuck-in acquisitions. So that is pretty much our model and we believe it is still very timely.

Again if you have any questions we didn't get to, Michael and I or Craig are available in the office today. Feel free to call us outside of this call. And again thank you all very much.

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