ModivCare Inc (MODV) 2006 Q1 法說會逐字稿

Good day ladies and gentlemen and welcome to the first-quarter 2006 Providence Service Corporation earnings conference call. My name is Jackie and I will be your coordinator for today. At this time all participants are in a listen-only mode. We will be facilitating a question-and-answer session towards the end of today's conference. (OPERATOR INSTRUCTIONS) I would now like to turn the presentation over to your host for today's conference, Ms. Alison Ziegler from Cameron Associates. You may proceed, ma’am.

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 first quarter ended March 31, 2006. 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 conclusion and will remain available until May 18. The replay number is 888-286-8010 with the pass code 13640228. 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 revenues 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 SBC. The Company's forecasts are dynamic and subject to change. Therefore these forecasts speak only as of the date of this webcast, May 11, 2006. The Company may choose from time to time to update them and if they do will disseminate the updates to the investing public.

I would now like to turn the call over to Fletcher McCusker, Chairman and CEO. Go ahead, Fletcher.

Thank you, Alison and Jackie. Good morning everyone. Here in Tucson today with me is Michael Deitch, our CFO and Craig Norris, our COO. And as usual we will all be available to you for questions following our statements.

This was a record quarter for us as we indicated in our press release. Our highest revenue quarter ever reflecting over 30% growth. Our highest census to date. It's also a good sequential quarter for us, about 5% revenue growth from Q4 to Q1, about a 6% management revenue growth and about a 13% growth in census. So we are pleased with where we are. We've completed as you know a very successful follow-on offering and have paid off most of all our debt now and remain active in consolidating our sector.

We're very pleased with these results, the quality and predictability of our revenue and moreover the quality of our earnings. As you all know this is a complex business and a difficult business to model. I believe we are the only public company to embrace the not-for-profit sector and have remained a very important piece of our business.

We did have 21 new institutional buyers of our stock in our recent offering and over the last couple of weeks we have had a lot of questions from shareholders about the nature of our relationships with the entities we manage and the manner in which we deliver services on the owned side of our business when we operate on our fee-for-service basis without a contract or above a contract cap. So we thought we'd spend some time this morning educating people about our business and then answering any questions you might have following our written comments.

It's important to remember that the traditional providers of government paid social services have been the not-for-profit agencies or governmental units themselves. We represent a very small piece of this market today, less than 1%. Our for-profit predecessors and others still operating have left the landscape littered with poor quality programs and intolerable profits. Consequently many of our payers' states and counties today continue to refuse to work with the for-profit sector. They remain suspicious of our motives and suspicious of our morals. We break these barriers down every day and are pleased with the growth of our own business.

But we also recognized years ago that in many markets the not-for-profit sector will be the dominant and connected provider. And in fact we may never gain market share in some of these markets. Consequently we've elected to partner now with 17 not-for-profit agencies. And I will tell you and I think I said it before that except for these relationships, we would have no business in these markets in states like New Mexico, Maine, Florida, Massachusetts, Ohio, where we've entered into management contracts to combine our expertise, our home-based delivery model and back office with a dominant not-for-profit provider.

Collectively this sector of our business produced $14.5 million of revenue in 2005 and $4.3 million of revenue in Q1 of 2006. We expect over $18 million of managed entity revenue in 2006. These relationships are delicate, sometimes political, have to be mutually beneficial and are dependent upon our ability to deliver a valued service. We are pleased that this side of our business continues to grow and that the not-for-profit sector has recognized us as a kindred spirit in terms of how we run our business. We believe this is a huge part of our success. And as we indicated, we currently manage 17 such organizations and have many numerous opportunities most of them coming to us unsolicited.

Some of the not-for-profit organizations we manage are tax exempt, 5013 (c) corporations and one or two others are not. And the rules vary depending on with whom we are dealing. There are some clear rules that we steadfastly adhere to in negotiating and managing these relationships. The federal tax exempt organizations must abide by IRS regulations. We will do nothing that risks the not-for-profit's federal tax exemption. For us this means that these entities must be controlled by independent boards. Yes, we can take a seat on their board, could be even elected chairman by the independent directors. But we cannot control their board numeric.

We require the economics of our relationships to be reviewed by a third party and that the not-for-profit board obtain a fairness opinion regarding our fees. Our fees are a fixed percentage of revenue or a flat fee. Our contracts, these entities used to provide for a fixed fee and an automatic bonus that was representative of our ability to create new profits for our managed entities.

Coincidental to our registration as a public company, all of our contracts were amended to be a percentage of revenue or a flat fee. In the aggregate we have grown the revenue of our managed entities by over 50%. Many of them were close to being insolvent or struggling when they came to us. Their solvency issues have all dramatically improved today. If they were indeed insolvent, we could not book our fee for fear of not getting paid. We typically take over the back office, provide the CEO as the Providence employee, institute our programs and outcome criteria and help build the reputation for our managed entities. In a couple of situations the independent boards have suggested they would rather employ the CEO themselves rather than have us hire the CEO through the management contract.

Some of the recent concerns expressed to us is that these entities may not be arm's length. And because they are off-balance sheet entities, we can utilize them to enhance our earnings. Remember we cannot and do not control these federal tax exempt entities. Our fees are fixed, bonuses are discretionary, voted on by independent directors. We abstain, refuse ourselves from any vote that has anything to do with the economics between our organization and a managed federal tax exempt not-for-profit.

Once a year we may ask the successful entities we manage to consider a bonus if we've been successful in improving their operations. In 2005 bonuses we received from our not-for-profit managed entities equaled about $1.2 million. While we had no bonus activity in 2004, we did enjoy about $1 million of bonus activity in 2003. We cannot control nor do we predict this bonus activity. In the case of the not-for-profits which are not tax-exempt for federal taxes and thus not governed by the IRS, for 501 C3 purposes, applicable state law governs the influence we have as the manager. One of our managed entities currently falls under this category and we do control the board of Maple Star of Oregon and Maple Star Colorado. These are taxpaying entities and precisely the way they were set up when we acquired the management company.

There is a lot of give and take between us and our managed entities. We often defer our fees to their own cash flow issues, payroll, rent, etc. We have on occasion deferred fees to allow a managed entity to post a performance bond. This means for us that we've helped them win a new contract and that their revenue will go up and so will our fee. We do not and cannot advance our managed entities working capital. We can, have and will advance not-for-profits money for nonworking capital issues provided that the loans are secured or at market rates and are at a reasonable term. Any loan falling outside of these criteria would have to be fully reserved.

You will see us report every now and then that we negotiated a bonus, our return to loan, deferred our fee, renegotiated a management fee or hired a CEO as our employee. In every case involving a federally tax-exempt organization, these decisions were driven by independent directors and our board members where we are a board member have to abstain from those decisions. Our payers understand the value of these relationships and we are viewed as a pioneer in combining the for-profit and the not-for-profit sectors. Congress last year eliminated language that restricted certain foster care funds to go to not-for-profits exclusively. That bill was introduced by one of the Congressman from a state where we operate.

The other policy that we've had several questions over the last couple of weeks is how we recognize revenue for those entities that we treat on a consolidated basis. If you invest in the healthcare system at all, you'll know that our policies are no different than a hospital, a clinic or any other human service organization. We recognize revenue every time we see a client and create what is in our business called an encounter. We turned note referred clients down. By that I mean a government entity calls us and refers the client to us, we will admit that client. Whether we have a contract, whether we don't have a contract, whether we're over or under our cap contract, it has been our experience time and time again that we will sooner or later be paid by any government entity that refers us eligible clients.

Over the last 10 years we have created, when we have created a client encounter we have been paid 99.5% of the time. States cannot ration these entitlement services without the scrutiny and possible intervention of various client advocacy organizations like the ACLU. We have learned over time and there is very little exposure for us to see a referred client and chase the dollars. To consider this revenue as collectible, our accountants and the company management look to the history of the relationship with the payer.

With that I will ask Michael to walk us through the quarter.

Thanks, Fletcher and good morning everyone. In our first quarter of 2006, revenue totaled $43 million up from $32 million for the first quarter of 2005, a 34% increase. 15% of this increase was from organic growth. 19% of the increase was from companies we acquired in Georgia, Kentucky, Pennsylvania, North Carolina and Nevada since the first quarter of 2005.

First-quarter operating income totaled $4.8 million which was 11.2% of our revenue. This compares with $3.5 million and about 11% of revenue for the first quarter of last year. First quarter net income totaled $2.6 million which was 6.1% of our revenue. This compares with almost $2.1 million at 6.5% of revenue for the first quarter of last year. First quarter diluted earnings per share totaled $0.26, compared with $0.22 for the first quarter of last year. In our first quarter we recognized approximately $304,000 of expense for our 2005 audit and Sarbanes-Oxley compliance cost. This compares with $593,000 of expense for Q1 in 2005.

At the end of our first quarter, our days sales outstanding from home and community-based services and foster care services was 71 days, down from 75 days at the end of the first quarter of last year but up from 68 days at the end of our fourth quarter 2005. During the first quarter we made progress in reducing our management fees outstanding. Management fees days sales outstanding was 157 days in March 31, 2006, down from 183 days at December 31, 2005. As always, we continue to focus our efforts on reducing the outstanding management fees receivable with the not-for-profit companies under our management.

At the end of our first quarter we had almost $9 million in cash. All of our debt going to our lender, CIC Healthcare Finance, totaling approximately $18.4 million at March 31, 2006 was paid off in April 2006 with the proceeds from our following offering that closed on April 17, 2006.

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

Thanks, Michael. During this quarter we transitioned the A to Z In-Home Tutoring Company which we closed on February 1. We are now in the process of replicating this educational product into our existing locations across the country. We will continue to prepare for the fall school session in those Providence states that qualify for No Child Left Behind funding.

On February 27, we acquired Family-Based Strategies in North Carolina and New Jersey. This is a small startup company specializing in case management and in-home services. With this acquisition we now have a statewide geographic presence in North Carolina along with our other subsidiary. For New Jersey, this is our initial entry into the state and we are working to become established while evaluating potential opportunities in that market. Also recently we acquired W.D. Management in Missouri who manages a large not-for-profit organization who provide workforce development programs across that state. This is Providence's first systemic movement into the workforce development job training arena and we look forward to this evolving line of business.

Overall we ended Q1 with a total combined census of over 40,000 clients. These clients are being served from 212 local offices in 32 states and the District of Columbia. Compared to Q1 of 2005, this represents a total census increase of over 8000 clients and an addition of 11 new states to our operations. Combined between our owned and managed entities we have over 5000 employees serving 610 government contracts. This represents an increase in 290 contracts as compared to Q1 of 2005.

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

Thank you Craig. Those of you that have seen our press release you'll notice we have issued new guidance reflective of the share count given our follow-on offering and given the actual performance of the first quarter. We've guided up $0.02 in consideration I think as we've vindicated with the $0.07 that was dilutive to the deal. As it relates to our acquisition activity, it's been our policy not to guide to acquisitions so you notice our guidance is silent as it relates to when we closed and the nature of their accretion. We have indicated I think during the roadshow and publicly before and since that our intent in raising money is to continue this tuck-in acquisition strategy. And in that regard, we have indicated we do expect to make up the $0.05 dilution with acquisitions in the remainder of 2006.

If you look at the math of our acquisitions, a $2 million revenue business will produce about $800,000 of net income to us or about $0.07 on an annualized basis. So theoretically if we close one in July and one in September, we offset the dilution from the follow-on offering and that is clearly our intent. It is important to remind you that we will not announce letter of intent activity. We will only announce the deal when we fund and close those transactions and we're not necessarily in control of the timing of most of our acquisition activity.

With that, operator, we are happy to open up the line for questions.

(OPERATOR INSTRUCTIONS) Bob Labick, CJS Securities.

Good morning and congratulations on a strong quarter. First question I wanted to ask was related to the recent announcements in California. You've obviously had some good early success there. Could you give us a sense of the landscape there? You've announced some small acquisitions. Are there 800 $1 million contracts out there or are there some larger ones, some smaller ones? What does the landscape look like and what are your thoughts on that state?

Orange County is the first one to get their plan approved by the state and the first one to actually procure and announce awards. They tend to be pretty small $2 million types of contracts. So it may very likely be, Bob, that you see 400 $2 million contracts across the state. Of this initial pocket of money we have estimated and been identified that there is probably about 20 to $40 million in the first round of procurement of those that have been announced. The three that we bid on, we won two and lost one. All of them around $1.5 million to $2 million contracts.

The other announcements, the ones that we have responded to over a dozen are still coming probably between now in July 1. We would expect to have a win-loss record to report as it relates to the initial round of California contracts by July 1 and then they will probably continue to procure for January 1 and then again for July of '07 is the way we see it rolling out.

Great, that is very helpful. And then just sticking with the cycles for my second question. Could you update us on the July cycle in general and progress and thoughts on Florida?

We have not had any notification of any terminations. So at this juncture we don't expect to lose any contracts. We're not in a position yet to identify that we have 100% renewal but our guidance anticipates them. Historically over the last nine years that has been the case with the exception of last summer I think we've all talked about the small Texas contract that we lost and ultimately was reinstated. So our assumptions are today, Bob, that we will renew everything that we had and that we would expect to procure some new business in some of the states that procure to July 1. And we are expecting a small cost of living increase along with our renewals, 1 point, 1.5 point kind of increase. And we'll know better all that at this time next quarter.

Great. Congratulations again. I will get back in queue.

Richard Close, Jefferies & Company.

Great, thank you. Richard Close here. Congratulations on a good quarter. I was curious going through your 10-Q last night looking at the different buckets of revenue, you had mentioned I guess, Michael, in your commentary that you had 15% I guess organic growth in the quarter. If you ex out the items that are in your description on the revenue, it looks as though you had about 6% organic growth. And I was just curious if you can sort of help me out there on the difference? Are you including consulting service as organic growth?

No, we would not. Let may correct that. Yes it would be. So let me give you, Richard, if it will help you by product, quarter over quarter. Home based revenue grew 30%, 12% organic and 18% from acquisitions; foster care revenue 40% growth, 8% organic and 32% from acquisitions; management fee revenue 71%, 57% organic leaving 14% from acquisitions. And again, yes, consulting revenue if we didn't pay anything for it, which we would not, would be all organic.

Okay. And then maybe if you could talk to me a little bit about the consulting services revenue? That would seem like it would be pretty lumpy. What is that exactly? How was that determined? And maybe what are your expectations of consultant services revenue going forward?

We classify consulting revenue in our management fee income line. The difference between a management fee to us and a consultant agreement is that the management arrangements are long-term, typically a fixed-rate or a percentage of revenue. These are typically 10-year contracts. We will use a consulting agreement or purchase services agreement, Richard, as a startup relationship with many of the not-for-profits that approach us. It is a way to get in the business together quickly. We do not ask for or require a fairness opinion if they're just using us on a short-term basis. These are typically contracts that might have a six-month window to them and our objective is to go in and review a business, make recommendations regarding a business line but these are clearly entities that are targets to us for long-term management relations.

In fact, I think anytime Michael we've had a consultant agreement, it has openly become a long-term management agreement. Can you think of any that we've just been a consultant for that were terminated without evolving into a management contract?

I can think of one in California where it was short-term, it was small, it lasted a month. They asked us to come in and help them. Other than that these arrangements have been going on even before we went public. This has been our history for a long time.

They are in the budget. They are in our forecast, Richard, they tend to be a small piece of our management income. But I think for '06, we have somewhere in the neighborhood of maybe $1 million in the budget for consulting fees. And this is again small, short-term kind of contracts with entities that have approached us where we hope we might evolve into a longer term relationship.

Okay. So it I look at management fee revenue and you ex out the consulting fees and then the I guess $544,000 from the reinsurance programs I guess and then the maintenance --

-- we fill the exact expenses onto the not-for-profits under our insurance program. So that is just a pass-through.

Okay. But if I ex that out, and then ex out the Maple Star management fee, it looks as though your management fee revenue year-over-year actually declined slightly if I'm not mistaken. And I was just trying to get a sense of are you readjusting these management fees down some and maybe the reason why I know in the 10-Q you talk about a 1% adjustment in Florida that began in January '06. And just if you could give us some clarity on those?

I think we had better sequential growth if you look at Q4 management fees to Q1 management fees. I think you are right in terms of organic growth year-over-year. Most of those are holding steady. We have not had to renegotiate fees downward. In Florida we have an overhead issue in Florida. We are very careful not to exceed third benchmarks regarding our overhead particularly under these large CVC contracts and at the 12% level, we were bumping it up against or slightly over our anticipated target and the not-for-profit board negotiated a 1% decrease in that. That is more demonstrative of our willingness and ability to kind of stay within tolerable levels as opposed to really anything that is going on with them. Those are three-year contracts down there, Richard, so they are not experiencing revenue decline.

But I think we've talked about it before they are not really seeing revenue increases particularly on the management side in Florida. To the extent that a large part of our managed revenue comes from Florida which we have acknowledged as relatively flat. Some of the flatness you see in the management fee side is the direct result of that.

Again we continue to look at managed entity growth and we like that because they are relying on those of course is very high, we typically don't have to pay to obtain a management contract. But they do take very long. Our history in terms of nurturing these relationships it would not be unusual for it to take a year to finalize those. So you do see some year-to-year flatness. It's a little better sequentially. We're expecting them to grow at about 20% in 2006. So we at expect the management fee side and the managed revenue side to grow about the same that were seeing on the owned side for 2006.

Okay. So Florida went from 12% management fee to 11%?

That is exactly right.

Okay. And then Michael, do you have a target for management fee receivable days at sales outstanding? You showed show good progress here in this quarter. Is there -- do you want to get that down to 125 or is there --?

Richard, I've said in the past that I'm comfortable with six months, 180 days. If we could keep it right there I would be satisfied. We looked at each one of them individually, we worked with the management there. Their growth needs whether they require some extra capital to fund a bond or something such as that. So it's a give and take as Fletcher said, the relationships with these not-for-profit entities.

Yes, we would not even expect it to stay at this level. I think it's safe to say that one of the things that has e helped win and keep these contracts, Richard, is our generosity as it pertains to deferring our fee. Many of our contracts we will build a six-month deferral into the initial signing of the contract. So to a large extent this 180 day receivable gets loaded into the negotiations and then we stay current beyond that.

And as Michael said, we will defer to payroll if they need to do something to post the bond. Many of our bidding requirements now require bonds to be posted. If they are having solvency issues in terms of how their own balance sheet looks and you saw this in Maine I think last year, is we actually reduced our fee retroactively so that Maine was not jeopardizing itself in terms of continuing bidding activity in there. So we will give back and forth what we gain from these relationships as market share and what they gain from us is the ability to provide continuity and expand their services and create working capital. Without us, they would not have the capability of doing that. So I would expect it probably go back toward the 180 day level.

Okay. And then final. Michael, do you have sort of guide -- any guidance on what you think cash from operations will be for the year?

I really haven't projected that, Richard. I know what you're getting at. At the end of the quarter we -- and our money goes into a lock box with our lender, CIC Healthcare. And at the end of the quarter, we had $3.5 million sitting in the lock box. Our highest amount ever. And it is simply a timing issue, that was up $1.3 million from last quarter. So we continue to try to manage that. We spend a lot of time on cash management. Two days later it looked a whole lot different because we settled up with them on Monday.

Okay, thank you.

Mark Hughes, SunTrust.

Thank you very much. I think you might have alluded to this, Fletcher, in talking about organic growth. But what would your anticipation be that that will shape up for the full year? I know your target has been 20%. Where do you think the full year will shake out?

We guided to 20%. The first-quarter sequentially was really good for us. So we're comfortable there. We've upped our guidance really only by the actual performance of Q1. We anticipate that we will be able to hit those 20% organic growth numbers. The outperformance of Q1 is really the $0.02 difference in our guidance. So we are not anticipating anything that we see today that's going to lend itself to increased organic growth.

However, clearly these California wins, Richard, are all organic and we get to really pencil out what the census increases will be now that's about $4 million of new revenue that we've announced just in the last couple of weeks. When we're all said and done that will be -- that is an unbudgeted organic growth for us. So that should be gravy to our current guidance.

Got you. How about the companies that you acquired in the back half of '05? Can you talk about their run rate or revenue? I know the entities that you'd acquired sooner you've disclosed that their performance has been very good. How about the recent acquisitions, how are they doing?

A to Z is doing well. Craig, their census is up to --?

It's up 1600.

1600. Kids, I think is about 700 when we acquired them. The other two acquisitions we posted in this quarter are very much for us upside type acquisitions as Craig indicated. You will notice in our disclosures both of those have earn out components so they had optimistic projections in to some extent they are selling us their business off of those projections. There is no reason that we believe today they won't meet those expanded projections.

Georgia, which we talked about last quarter is now profitable. So I think generally as Craig indicated, we continue to integrate these small acquisitions well. We haven't seen anything really blow up on us. We don't see anything currently that is struggling and anticipate that they will continue to meet their projections.

Correct. So when those roll into the same organic base of revenue that ought to have a upward bias to it, is that right?

Yes. One of the slides that you saw from us on the roadshow we were quite impressed with. If you go back and look at our acquired entities in the aggregate, the day we closed them versus the most recent quarter their revenue is up 86% over the last three years. So our acquisitions for us still tend to be an opportunity to grow their business. And I think we talked about it in the past we typically will go in and keep the number two or three persons intact, spread some stock around, incentivize this entity to grow horizontally and most of them have been vertical providers. And I think without exception now we've been able to organically grow these programs after we've acquired them. To the point I've even challenged Michael in terms of how we define organic growth.

When you look at acquired growth, Mark, we typically identify that as an entity that we acquire. But if you look at their revenue the day we closed on them versus their revenue six months later, nine months later or a year later without exception all of them have grown organic.

Right, exactly. And then you had, Fletcher, at the end of your prepared remarks you had used I think a sample acquisition size and shared a couple of numbers. Could you walk through that again?

Sure. And I think your model is pretty close to ours. We buy margins that are very similar to ours, at the operating income level it's about 12%; it's about 8% after-tax; we're paying about six times trailing EBITDA for these or about 1 times revenue a little less than 1 times revenue. So if you look at a theoretical XYZ organization with $10 million of revenue on an annualized basis, that will produce $800,000 of net income. And that is a little under $0.07 a share on an annualized basis.

So if we close on that XYZ corporate July 1, we should have $0.03 or $0.035 of accretion for the remainder of the year. And you close on a similar size company September 1, you've got $0.015 or so of accretion for the remainder of the year. So in terms of the $0.05, that we've advertised that we're looking for, it would take one $10 million acquisition in July and one $10 million acquisition in September to achieve that. And that has been consistent with our kind of one and a quarter history in closing these acquisitions and we may in fact do a little better than that.

Right. Okay, I understand. Thank you.

Patrick Swindle, Avondale Partners.

Good morning. First question on the direct clients census you were up sequentially about 17%. Could you characterize that growth during the quarter? I guess independent of the contribution from A to Z, did you see an acceleration as you came through the quarter and was the bulk of that in March?

I don't know about the March question. We'd probably have to do some research for you, Patrick, and get back to you off-line. This is not typical Q1 growth for us. It's more the kind of growth we're used to seeing in Q3. And we've talked about it I think in previous calls. We anticipated and were pleased you see that post the congressional budget issues of last fall that what we've described as our county and state payers are kind of back to business as usual. So if there was a pent-up demand, they've released most of that in this current quarter.

But the one thing to be careful about is we probably wouldn't see this in Q1 of next year for any reason that we can think of other than there was we know pent-up demand, counties that were kind of backing off of new census commitments given the uncertainty of the congressional budget in the fall. We don't hear those conversations today. And this is particularly crucial in the end migration states, California, Arizona and Nevada and Florida where this population is migrating toward.

Part of our issue with this Tucson contract is that we're at 2500 clients versus 1200 clients this time last year. And Arizona continues to be plagued with this end migration of the indigent population and they bring their eligibility with them. So what happens with that contract and the way they contract with the state and the way the state deals with federal Medicaid, we estimate our population at the beginning of the year and we've been blowing through those numbers time and time and again because of this end migration issue. And again we've stated publicly we will not turn an eligible client down. So a large part of that census growth is in the end migration state.

When you look at your acquisition pipeline right now I think you all have characterized it recently as robust and I think specifically in a public filing you said that the acquisition revenue target range was between $0.5 million and $19 million as far as what was actually in the pipeline today. Does that still pretty fairly actually characterize the pipeline you are looking at?

Robust is the only word the lawyers have allowed me to use. We had not identified them numerically. You are dead on in terms of the range. The companies who we are looking at are from $1 million -- I think the $0.5 one, we've probably closed on. And so they range from $1 million to $20 million in revenue. There is nothing in the pipeline today, Patrick, that has anything of greater scale than that. Although we occasionally will see a company that comes to us with 26 million or more. But generally these acquisitions will probably be of 5 to $10 million kind of operators where the seller is exiting the business and looks to us as a consolidator.

How is the competition for acquisitions currently? Has it changed materially or are there still plenty out there at six times trailing?

It's not as fierce as it was a couple of quarters ago. We have talked about some of the public companies in our space now that have been relatively aggressive, ResCare and of course Maximus has, [Cornall] has kind of cooled off. Some of the private companies like Mentor we do see in the acquisition space. Our sellers have made it clear to us that we are not the only option any longer, Patrick. So we used to talk about our range in the 4 to 6 X of trailing EBITDA where I clearly we're at the high-end of that range, we're trying to keep our discipline to not go above that. And so far it doesn't look like competitive activity has bid above us.

There is at least one occasion where a competitor bid a targeted entity up to eight times trailing but moreover they tend to be contingency free kind of letters of intent. And one of the reasons that we were in the market raising money is when we use our credit line we have to identify financing contingencies and any proposal we make to a seller where other companies were not having to do that. So that created a competitive issue with us in the acquisition market that we think the follow on offering is soft.

The current pipeline I would say a quarter of those are brokered businesses where they are clearly shopping them to everybody, more than half of them, however, we're probably still the exclusive negotiator involved with particularly the smaller entities where we have a nice history now of closing and integrating and maintaining these legacy businesses.

Perfect. And then one final question. Going back to the census. Do you expect that because of the pent-up demand that was released in 1Q that we will see an impact obviously year-over-year we would not see that again in first quarter of next year. But do you think that will impact at all the seasonal uptick that you typically see in the third quarter?

It shouldn't. But we've kind of given up trying to predict these census spikes. As we had disclosed in our filings we now have some summer seasonality that we have not enjoyed in the past, Patrick, given our expansion into school-based services. So A to Z will virtually be out of business over the summer and CBH and some of our school-based programs in Virginia. So you'll see actually a census decline in those entities.

We would not expect, we've not guided to anything like a 13% or 15% census spike in Q3 of '06. We have enjoyed those in the past but we're not sure that that is going to be business as usual going forward. The only thing we can do is wait and see.

Thank you.

[David Ross], [Praxis].

My question has been answered already, thank you.

(OPERATOR INSTRUCTIONS) Richard Close. Jefferies & Company.

Great, thank you. Fletcher, I was wondering if you could give us some details with respect to California in terms of any startup costs associated with those operations?

We tend not to investment spend so we're not staffing up in anticipation of wins. We normally, our MO is to bid on a contract and then ramp up to that upon the award. I think in our guidance we suggested that the two that we've won so far are immaterial to '06 chiefly because of this ramp up phenomenon, Richard, where we will be staffing up and we don't expect them to be necessarily profitable as they start up.

But likewise our history in that regard is we typically breakeven in a new contract like this by the third month. So we don't expect them to be a serious drain to earnings as they ramp up. These contracts do not include start-up funds typically. They are fee for service kind of contracts and in fact they've restricted the bidding to existing incumbent providers knowing that they will not pay for start-up kinds of programs. And except for our Aspen acquisition, we would not have been viewed as an incumbent in California. So that gave us the opportunity to bid in this environment.

Okay, and then on the acquisitions that you completed in the first quarter, A to Z and I'm not sure what the other one's name is, I guess that in the 10-Q if you pro forma them through being in the whole quarter they were slightly dilutive, slightly. But would you expect those to -- are they going to be accretive for the year or when should they start contributing?

We would expect WD certainly to be accretive for the year. The South Carolina operation is a much smaller operation. There is more on the come if you with that entity. But again I think we've guided to those being immaterial to the year because of the ramp up effect and the startup costs associated with those entities. When we do integrate an entity we do tend to be overstaffed for awhile while we're making transitions from say their bark office to ours. Generally particularly these smaller acquisitions don't make money in the first three or four months. So I think that is safe to say. We expect all of them to make money in '07 clearly.

Okay, thank you.

With no further questions, I'm going to turn the call back over to Fletcher McCusker. You may proceed, sir.

Jackie, thank you very much. Thank you everyone. And again if we did not get to your question, please feel free to call us off line. We are very proud of our accomplishments and continued growth. For those of you that are new to us we welcome your calls and questions. We've had a number of shareholders visit us and we encourage you to do that because of the unique nature of what we do. We're used to doing that from Maine to California. So if you are out and about and would like to visit one of our programs, please call either Alison at Cameron Associates or Kate Blute in my office. We'd be happy to arrange for you to do that. And of course if any of you ever get close to Tucson, we'd love to show you our big fancy glass corporate office of about 3000 square feet.

It's going to be 100 degrees today and will be that way until October. So we may not see any of you until the fall. But please take advantage of our willingness for you to learn about our programs. Michael, Craig and I are always available. We try to attend every conference that we're invited to. And if you do have a question, concern or comment, please contact us. And we expect to see many of you on the road shortly. And again thank you very much. We will see you all next quarter.