Insperity Inc (NSP) 2002 Q1 法說會逐字稿

Good day, all sides are now on the conference line and listen-only mode. At this time, I'd like to turn it over to Administaff President and Chief Executive Officer Paul Sarvadi and Administaff Executive Vice President and Chief Financial Officer Richard Rawson. Go ahead, please.

Thank you. This is Richard Rawson and we appreciate you joining us today. I'd like to outline our plan for this morning's call. First, I'm going to cover our first quarter results and add some brief comments about our recent guidance that we have been expecting from the Internal Revenue Service. Paul will then add his comments including the update on the economic environment and the small business community and our outlook for the remainder of the year. Then I will come back and provide some financial guidance for the second quarter, the balance of 2002, and some thoughts about 2003. We will end the call with a question-and-answer session. I would like to remind you that statements that Paul or I make today that are not historical facts will be considered forward-looking statements within the meaning of the Federal Securities laws. Words such as expects, intends, plans, believes, estimates, likely, goal, assume and similar expressions are used to identify such forward-looking statements. Forward-looking statements involve a number of risks and uncertainties that have been described in detail in the company's filings with the Securities and Exchange Commission. These risks and uncertainties may cause actual results to differ materially from those stated in such forward-looking statements. Now, let me begin by summarizing the most significant financial highlights from the quarter. The year-over-year unit growth rate accelerated from 6% in the fourth quarter of 2001 two 9% this quarter. Revenue for the quarter increased 10% over Q1 of 2001, exceeding $1 billion. Gross profit per worksite employee of $139 per worksite employee per month was slightly higher than the Q1 of 2001, but less than expected primarily due to lower-than-expected average pay of our worksite employees which, for the first time in our history, actually decreased over the prior year. Finally, operating expenses of $41.1 million, or $185 per worksite employee per month, came in below the low end of our expected range. We reported a first quarter loss per share of 20 cents compared to a loss per share of 16 cents for the first quarter in 2001. Remember that losses are expected during the first quarter of each year due to our quarterly earnings pattern driven by higher payroll tax expense, which subsequently declines as employees earn their wages throughout the year. Now, let's get into the details. Looking at revenues first, the drivers are, Number 1, the growth in the number of paid worksite employees, number 2, their payroll average, and number 3, our gross markup. Paid worksite employees increased by 8.9% over Q1 of 2001. Additionally, the average pay of our worksite employees was down by a half percent over the same period last year. In a few minutes, Paul will provide some specific details on both of these drivers of our business. The third component to revenue growth is the gross markup per worksite employee, which reflects the pricing to our customers for both direct cost and our service fees. Gross markup per employee was $881 per employee per month this quarter, and was lower than expected due primarily to two reasons. First, we experienced a decline in that payroll average of our worksite employees from last year. Remember, our revenue is billed to the customer as a percentage markup above gross pay. Therefore, when the gross pay our worksite employees declines, our markup is adversely affected. Second, although we have seen steady price increases over the quarter, those increases rolled in at a slower pace than we expected. The lower-than-expected unit growth average pay and markup, when combined with higher-than-expected bonus payrolls, produced revenue growth of 10% over Q1 of 2001 to $1.1 billion for the quarter. Bonus payrolls increased 19% over Q1 of last year to $85 million. Now, excluding any bonus payroll growth, our revenue growth for the quarter was still 9.5%. Looking at revenue growth by region for the first quarter, the Northeast region which represents 13% of total revenue grew by 19%. The Southeast region which represents 11% of total revenue grew by 22%. The Central region which represents 15% of total revenue grew by 30%. The West region, which represents 20% of total revenue, grew by 14%. And the Southwest region, which represents 41% of total revenue, declined by 2%. Now, this decline was a result of the unusually high net layoffs on this large base, which were not quite offset by new sales, even though the 26% of our salespeople that are in this region produced 37% of the new paid worksite employees in the quarter. At the end of the first quarter, we had 37 offices in 20 markets. We opened our 37th office in Minneapolis during this quarter as we continue to make progress towards our 40-market and 90-office expansion plan. We continue to have excellent results in recruiting new sales staff, averaging 247 trained sales reps for the first quarter. A 34% increase over 2001. This is very encouraging as the number of trained sales reps and their expected efficiency are the leading indicators for future unit growth. Now, moving to gross profit, as you know, our key profitability benchmark is gross profit per worksite employee per month, which was $139 in Q1 of this year, up slightly from the $138 reported in Q1 of 2001. This less-than-expected increase is primarily due to the lower payroll average and gross markup previously mentioned. As for the components of direct cost, our effective payroll tax rate decreased from 8.65% of payroll in Q1 of '01 to 8.46% of payroll in Q2 of this year. This better-than-expected decrease was primarily due to lower state unemployment tax expense resulting from the entity restructuring that I have discussed in prior quarters. Benefits costs per covered employee, which now represents approximately 74% of our total worksite employees, increased 18.7% over the first quarter of last year as we expected. Workers' compensation costs were 1.12% of fee payroll for the quarter compared to 1.27% in the first quarter of last year. This decline was due to lower-than-expected claims costs for the first 6 months of our workers' compensation insurance policy, which triggered the dividend feature we negotiated into the current contract. Now let's discuss operating expenses. On a year-over-year basis, our operating expenses increased by 12% to $40.7 million, below the low end of our expected range. Operating expense on a per worksite employee basis increased from $180 in Q1 of '01 to $185 in Q1 of '02. Now, this increase in operating expenses included the following: Compensation costs increased $6 per worksite employee per month due to the ramping up of our sales staff, benefits support staff, and staffing of our new subsidiary Administaff Financial Management Services, Inc. General and administrative costs declined by $5 per worksite employee due primarily to a reduction in bad debt expense, professional fees and travel costs. Depreciation and amortization costs increased $5 per worksite employee due to our sales and service expansion and implementation of internet initiatives. Commission costs declined by $2 per worksite employee while advertising costs remain flat on a per worksite employee basis. Other income was flat from the fourth quarter 2001, however it declined by 51% from the prior year as a result of the decrease in interest income brought about by declining interest rates. In summary, the impact of slightly lower-than-expected payroll average in unit growth on our financial results was almost completely offset by the effective management of our direct costs and operating expenses. Now I'd like to make some comments on our balance sheet and cash flow. Total assets are $291 million including current assets of $184 million. We ended the quarter with over $91 million in cash, cash equivalents and marketable securities, and $16 million in working capital. These amounts reflect the use of approximately $12.9 million for capital expenditures, including $2.1 million related to construction in progress on our new building, and $233,000 in capitalized software development costs. Our working capital decline also includes the addition of $5 million increase in the deposit with United Healthcare that we have classified as a long-term asset. We also used a net of $1.1 million to repurchase 526,271 shares of the company's stock from American Express in conjunction with their warrant exercise. We drew $3 million against our $21 million cash secured line of credit, which was secured to finance the new construction of our corporate headquarters. Finally, stockholders equity was $117 million at the end of the quarter. Now, before I turn the call over to Paul, I'd like to comment briefly on the latest developments with the IRS. Last week, they issued guidance to assist [PEOs] on how to maintain 401(K) and other defined contribution plans. As part of that guidance, the IRS will provide relief from retroactive disqualification of any plan as long as the PEO adopts this new guidance prior to January 1st, 2004. As we have always said, our issues with the IRS dealt with which way we would be able to deliver a 401(K) plan to worksite employees. Now, after eight years of ongoing dialogue, we are very pleased that the IRS has put this issue to rest without disrupting our co-employment model. The guidance provides for several options as to how we structure a new plan. And while we are still very early in our analysis of these options, we believe there is an opportunity to provide a wider range of service offerings to our clients. We will pursue an option that ensures compliance, improves client satisfaction, and minimizes or eliminates any impact of expected increases in administrative costs on our earnings. Now, at this point, I'd like to turn the call over to Paul.

Thank you, Richard. Today, I will focus my remarks in three areas. First, I'll discuss specific economic data we have seen most recently within our small business client base, and the effect on our business. Secondly, I will highlight the major initiatives we are implementing to continue to move forward regardless of the economic environment. And finally, I'm going to discuss how I expect our business model to be effective as an economic recovery occurs in the business-to-business segment of the economy. The economic downturn we have seen over the past six quarters has been primarily driven by the business-to-business sector of our economy, while the larger consumer-driven sector has carried the day in preventing a much broader and deeper recession. The cause of this economic cycle and the primary effects are largely within this business-to-business segment which includes the vast majority of our current and target client base. With the benefit of 20/20 hindsight, it's clear that this business recession has been primarily a capital spending and employment-driven economic cycle. Essentially, the business sector was in an overbuilt, overheated state, and after a long technology and productivity-driven run, it was ripe for a correction. Over the past 18 months, we have seen four factors directly affect our business model as a result of the economic slowdown. Number one, we saw CEO resistance to spending on major changes. Number two, several significant rounds of layoffs. Number three, an increase in the business failure rate. And number four, lower average pay per employee. Let me explain how these factors have affected our business model and what we have seen most recently within our client base. First, the clamp-down on spending reduced our sales closing rate from one out of every four prospects we quote to one out of five last year. We also experienced an increase in sold clients delaying enrollment, or backing out altogether. During the first quarter of this year, closing business did not get any harder. But it did not get any easier, either. And we have yet to see any recovery in the closing rate, the lag in enrollment or the backout of sold accounts. However, we have overcome the 20% reduction in closing efficiency by ramping up the number of trained sales personnel by 34% as Richard mentioned earlier. Secondly, layoffs have exceeded new hires of employees within the current client base creating a real head wind against our unit growth. This continued to occur in three out of the four months so far this year, although at a slower pace than we expected. Third, the increase in business -- in the business failure rate affected our client retention, lowering the annual rate from around 80% to 74% last year. So far this year, we have seen a substantial improvement in retention but not all the way back to historical levels. These three factors, new sales, the net effect of layoffs and new hires within the current client base, and client retention, combined to make up our unit growth from one period to the next. Now, for the first quarter, of this year, we had a healthy step up of over 2,000 employees from December to January, resulting from a successful fall sales campaign. Our target for unit growth for the balance of the first half of this year has been an average net gain of 1,000 employees per month. We expect to achieve this target by generating approximately 3,000 employees from sales of new clients in a prior period, offset by 1200 to 1400 employees leaving our account due to client attrition, and subtracting 600 to 800 employees due to layoffs exceeding new hires within the current client base. Now we added only 400 in February. However, added 1500 in March for an average of 950 slightly lower than our target of 1,000. We also sold an average of 3,000 employees during the quarter, and increased the number of employees scheduled to become paid worksite employees in the second quarter. However, the actual number of employees added from new clients for February and March was only 2300 employees. This was due to the continuation of the backing out of some sold accounts and the lag in enrollment I referred to earlier including a 650 employee account that is scheduled for payment in June. Attrition of clients averaged 1500 employees for the two months, slightly above the top of our range which expect to average for the first half of the year. Our forward visibility on this number indicates we have a couple of months ahead of us that may be below our range and bring the average back down. The picture surrounding layoffs and new hires within the current client base is showing some interesting signs of a possible recovery. Layoffs exceeded new hires by approximately 600 employees in January, only 300 employees in February, and for the first time since October new hires exceeded layoffs in March by 500 employees. Now in April, we also know that layoffs exceeded new hires again by 300 employees for an average number of 300 employees subtracted due to layoffs exceeding new hires for the first four months of the year. Now, we did have some indicators to look forward at the scheduled layoffs that are involved -- that we are involved in as a human resource department for our clients. And this measure continues to run at a rate of just under 50% of last year's rate. The last issue affecting our business as a result of the economic slowdown is the trend in average pay per worksite employee which even declined year-over-year for the first time in our history in the first quarter The reason for this decline is the combination of factors. First, the average pay for new clients we have brought on over the course of the last year has been lower than the average pay of clients we lost over the same period by 4%. The most dramatic change of this nature occurred in markets that replaced technology-related clients with very high average pay with other more traditional businesses. Although this is interesting, it's not significant to the business model for two reasons. First this would only affect gross markup or gross profit if the new accounts were priced lower than the accounts that were lost. This is definitely not the case as pricing has increased over the course of the last year. Secondly this phenomenon appears to have run its course as the average pay for each region within our client base now very closely reflects average pay rates for the regions in the marketplace as a whole. The more interesting reason for the downward trend in average pay per worksite employee are revealed when we analyze the slightly more than 3,000 clients that were with us in both periods, the first quarter of 2001 and the first quarter of 2002. First, two-thirds of the employees associated these clients were still with those clients and with us in both periods. The average pay for these employees was up only 2.7%. This year-over-year pay rate comparison report at one time was over 10% in the year 2000, and declined to 9.5% followed by 8 1/2, 6 1/2, 7% and most recently the 2.7% over the last five quarters. Equally as interesting as an economic indicator is the pay rate comparison for employees who were hired to replace terminated employees within the client base. First of all, these clients had a total of 56,000 worksite employees one year ago, compared to 53,000 this year for an average decline of one full employee down from 18 to 17. On average. Secondly, for those employees that were replaced, average pay for the new employee was 11% lower than the terminated employees. This change is more reflective of the supply and demand dynamics in the employment marketplace with many higher paid technology and managerial employees being relieved of their duties and companies finding new hires available at lower starting salaries. Now, both of these pay-related scenarios have a temporary effect on our gross markup and gross profit as billing rates calculated on higher average pay become insufficient until the annual renewal or repricing of the account occurs. Now, once new rates are applied, the gross markup and gross profit returned to the previous levels. The last item I'm monitoring closely is sentiment of CEOs and business leaders. Capital spending, employment and pay raises are all policy decisions that emanate from the top of an organization. The timing and breadth of any recovery will reflect the outlook of these leaders. In this area, I do see signs of optimism in the target market though, through recent survey results and within our client base through direct dialogue with clients at our client conference that we held at the end of the first quarter. In summary, my view is that the business-to-business economy correction cycle surrounding capital spending, employment and pay and business failure rates appears to be ending. But clear signs of a rebound in these measures remains to be seen. In the meantime, we are continuing to focus on several key initiatives that we believe will dramatically improve our business model for the long haul. We are continuing our sales and service expansion although at a slower pace over 2001. In the first quarter we opened our West Coast service center in the Los Angeles area and our first sales office in Minneapolis. We intend to add three more sales office this year and increase our total sales staff by 15 to 20%. We also intend to improve our sales prospect lead development program throughout the year to take advantage of the larger sales staff we currently have. In the first quarter we began operation of our own telemarketing center to increase lead production from our marketing alliance with American Express. We also added a lead development relationship with Pitney-Bowes and anticipate we will add other alliances and strategies over the balance of the year to leverage this new capability. In the service area we have begun an initiative I believe will have a dramatic effect on our business in the future. We are reorganizing our service model around small small, middle market, and major account segments under the leadership of a general manager in each service center. This approach has several distinct advantages and is designed to lead to improved client service and employee satisfaction levels and improved profitability by client and segment. Our focus for this year in your infrastructure is improving our capabilities and opportunities in the benefits area of our business. Our first step was the implementation of our national health insurance carrier network. We effectively made a major change in strategy and reduced our risk as we converted our client base from one carrier to several on the first of the year. Our recent addition of Cigna to United Healthcare, Pacificare, Blue Cross and Kaiser an important step in providing quality options to clients and employees. We are also continuing to increase utilization of our web-based employee service center and developing new opportunities to lower costs by driving administrative and transactional human resources functions to the internet. 81% of our client companies and 43% of employees are now active in the employee service center, both up 20% sequentially over the fourth quarter. We are also continuing to increase the percentage of clients and employees using our web payroll application, which has provided our greatest efficiency gain to date. At the end of the first quarter, over 55% of clients and 62% of all worksite employees were on web payroll. The last item I'd like to discuss today is what I expect to see as economic recovery takes place. Whether it occurs next quarter, or in the next six months or even next year. I believe the same factors that caused a major headwind on growth and profitability will reverse and become a powerful tailwind as we have seen prior to 2001. I expect to see many if not all the following specific benefits from a recovery. Our closing rate on sales should return from one out of four to one out of -- to one out of four instead of one out of five. New hires will exceed layoffs and provide a strong internal growth engine. Our client retention will return to around 80% from 74%. And our average pay rates will return to healthy increases, which improve gross markup and gross profit per employee. We are in a better position today than anytime I recall in our history to benefit from growth as we leverage our infrastructure. I expect to continue to see growth acceleration throughout the balance of the year which will add significantly to our profitability in 2003. Even though the perfect storm of a business-to-business segment, capital spending, employment and pay rate correction cycle, even through that, Administaff continued to grow. Perhaps a measure of how this growth compared in the marketplace is in this year's Fortune 500 ranking published in the first quarter. Wherein Administaff moved up 72 places from number 448 to number 376. This year has begun with a combination of kind of a sense of bouncing along the bottom in the external factors, and a lot of moving parts in the internal factors that affect our company. I expect both of these to improve and resolve themselves over the balance of the year and provide a powerful platform for 2003. At this point, I'll turn the call back over to Richard.

Thank you, Paul. Now, let's discuss some guidance for the second quarter and the remainder of the year. We continue to expect worksite employee growth to grow at a rate of about 1,000 per month for the second quarter and increase to about 1300 per month for the balance of the year. In looking at the current base of our business, we believe that the average pay of our worksite employees will likely end up between $3,950 and $4,000 per employee per month for the second quarter and average about $4,000 per month for the full year. During the first quarter, the short term mismatch between the pricing and cost of our medical plan was largely offset by the positive impact of the lower state unemployment tax rates. Because this positive state unemployment tax rate effect will diminish as worksite employees reach their state unemployment wage limits, the continuing medical pricing mismatch experienced in Q1 will now have an an adverse effect on gross profit in Q2. Therefore, we expect gross profit per worksite employee to be $188 to $196 per worksite employee per month for the second quarter. We expect continued price increases to eliminate the pricing mismatch by year end. As a result, we expect gross profit per worksite employee to gradually return to levels achieved during 2001 and could exceed those levels if our medical and workers' compensation insurance claims experience remains favorable. As expected, second quarter operating expenses should increase by a million and a half to $2 million over Q1 of this year, as the cost of our annual sales conference and incentive trip will be incurred during this quarter. We will be reviewing ways to reduce operating expenses from the second quarter levels for the latter half of the year, so I can't comment any further on that right now. Interest income should remain the same for the remainder of the year. Finally, we would expect that the effective income tax rate to remain at about 39.5%. Before we open up this call for questions, I would like to comment briefly about 2003. Particularly with regard to our pricing and gross profit per worksite employee expectations. As Jeff mentioned the pricing squeeze that we are experiencing in 2002 is expected to be eliminated by the end of the year. In essence, from the point that the mismatch is eliminated, going forward, it's as if it never happened. Therefore, when formulating expectations for 2003, we need to consider what 2002 would have looked like without the pricing squeeze. Had we been able to implement our price increases on the entire client base at the beginning of 2002, we would be generating approximately $11 per worksite employee per month in gross profit throughout this year. Therefore, we believe it's appropriate to project 2003's gross profit by adding this $11 to the 2002 estimate. Now, at this point, I'd like to open up the call for questions.

At this time, if you would like to register for a question, please press the number 1 on your touch tone phone now. You can withdraw your question by pressing the pound key. Once again, if you would like to register for a question, please press the number 1 on your touch tone phone now. We will wait momentarily for questions to queue up. We will take our first question from the site of Randy Mehl at Robert W. Baird. Go ahead, please.

Good morning Paul and Richard. You were scooting pretty quickly when were you talking about some of the metrics and client retention. I'm wonder, you had mentioned 80 to 74%, that was known. Then you said there was improvement so far this year. I'm wondering if you could just provide the additional color in terms of the numbers that you were attaching to that.

Sure. Randy, we don't actually use like a rolling 12 for that annualized rate of 80% which dropped down to 74% last year. Because, of course, there is a you know, monthly pattern to it that, you know, starts with in January where we typically lose around 6% of our business and then it drops down to around 2.5% for February and then down to around 1.5% for the balance of the year. If you remember, last year, that number started out almost 7% in January, around 6.8. And then, uhm, you know, it was higher throughout the year to drop the average for the year down to that 74% client retention number. This year, we started out in January at 6.1. In February, it was, you know, around the 2.5 number. You know, in March, and even into April, it's approaching -- you know, it's less than 2 but wasn't quite down to the 1.5 number, although as I look at our forward visibility, it looks like, you know, we're, uhm, tracking right on track to be down at that number. So... You know, I see it all kind of coming back in the way it's supposed to be. And the way we expect it to be. But it is gradually getting there.

Okay. So at this point, you would expect the full year if things go as planned from here on out? You would expect the full year to be somewhere between 74 and 80?

That's correct.

Okay, and then just a couple housekeeping items here. Richard, you mentioned workers' comp. dividend. Could you quantify that? And then, what was the -- obviously, the benefit was recognized in the quarter. But, you know, how many quarters would that benefit have been earned?

Well, the -- the benefit ended up being about $1.5 million. And that takes into consideration the actual claims experience that -- that have been incurred and applying lost development factors to those for an ultimate payout and then looking at the ultimate payout as compared to what we have paid in. So it was very much within a range that, you know, if our claims experience were to stay at the rateS that we had in the first quarter, what you would see is that we would continue to receive a benefit in subsequent quarters. At the same range.

Okay. But... But the 1 1/2 million was -- that wasn't from good experience in the first quarter, right? It was for the prior 12 months or --

No. It was for the full -- it was for the full six months but... Had we not had good experience in the first quarter, we would not have been able to take it, because that is the new guidance according to the Emerging Issues Task Force Bulletin.

Okay. I understand that. Thanks. And then in terms of the bad debt expense, you mentioned you had a reduction there. What was the expense in the quarter and then what's the reserve balance versus what it was at the end of last quarter?

The -- the expense was -- the expense that we had was about, uhm, I believe it was about 300,000 was the expense. And it was lower than what we had been budgeting for because of the fact that as part of this -- you know, kind of economic, uhm, settling out, uhm, you know, our customers' stability of -- of, uhm, customers that -- you know, we potentially could lose, has -- has settled down and so we can't, you know -- there is not a lot of room for us to accrue a lot of bad debt expense. So I guess that's good news.

Okay. So... So right now, uhm, what's the balance in the allowance account?

I believe it's about -- I believe it's a little over a million.

Okay. And then just final question here, Paul, you had mentioned that there were some customers backing out of sold accounts. What is the -- what's going on there and I don't know if there is a way to quantify the change over the past year in that regard.

Sure, Randy. You know, we saw that happen, you know, really about the first quarter of last year is when we started to see that happen, sales during that quarter that you would expect to come in the next quarter would either delay another month or two, you know, mostly just as they kind of evaluate the changes going on in their business and the kind of weighing whether things are going to get better or not. And you know, some customers as things do change in the business would decide to back out or delay long enough that we just back them out of our numbers. Because if they say to me, uhm, yeah, we're still coming on, you know, they wrote us a check for enrollment, uhm, but they say, we are not coming on for, you know, six months, well, we'll back that out and make sure we sell it -- make sure it really comes in as a new sale later. So we saw this, you know, kind of stretching out and then some companies having changes in their business to where they say, you know, we just really don't want to make this change right now. But a lot of those I think are kind of stacking up out there those are customers that want to do this. You know, they kind of already decided in their mind they are going to do this. But they are kind of waiting to see things rebound some so they feel more confident.

Okay. Very good. Thank you.

Due to time constraints today, we ask that you please limit yourself to one question. We'll take our next question from the site of Wayne Cooperman at Cobalt Capital. Go ahead, please.

Hi, how are you?

Fine.

My question is I guess just sort of the interplay between the price increases and the slower growth and you know, how much do you think maybe you're overpricing the product or pricing yourself away from some of your competitors?

We really haven't seen that kind of pricing pressure. You know, of course, the renewal accounts coming back in line with historical levels or nearly back in line kind of reflects that. Hitting our sales targets... For 5 straight months in a row, I don't think it indicates that there is a issue there about competition. Actually, what we have seen over the last six months or so is a lot of competitors really struggling with the insurance markets and either going out of business or, you know, having their own issues that are affecting their effectiveness. But we don't see ourselves at this point having pricing pressure that's affecting us. We have seen that the price increases we have passed on have had -- have come into the financials a little slower than we had expected. But we expect that to catch up and get to be a smaller and smaller difference as the year progresses.

Thanks.

The we'll take our next question from the site of Jim Janesky at Janney Montgomery Scott. Go ahead, please.

Hi, Richard. Hi, Paul.

Hi, Jim.

Can you give us a little bit more insight into why net layoffs in the Southwest market were higher than -- you have had pretty strong growth, it looks like, in other areas of the country. What was unusual in the Southwest that that came in so much higher?

Well, the reason that the Southwest region, you know, had a 2% decline in the quarter is simply because of the percentage of sales staff that we have there that are out selling and have to replace the customer attrition and mainly layoffs against new hires in that region. And so for this particular period very similar to the fourth quarter, you know, that sales staff was very effective. You know, 25 or 26% of the sales staff produced, I believe, 37% of the new paid worksite employees. But because the base of business is so large, you know, 41% of our business in that market, it wasn't quite enough to offset it. But I think the other thing that we have seen if you look back over the last year and a half, I think the economic issues lagged in Houston a little more so than the rest of the marketplace. Go ahead, Richard.

Yeah. When you look specifically at that clients that we have that where there was the layoffs that I referred to, it was in Austin. And, of course, obviously, Austin being, you know, kind of the technology center for the State of Texas, you would expect that that might happen more so there than anyplace else. But that's where it was.

Okay. So it was centered in Austin.

Yes it was.

And with the productivity difference, the salespeople or the productivity figures you gave of the salespeople in the Southwest, do you have a lot of new salespeople in the Southwest versus other areas of the country?

No. It's been -- remember, as we did our expansion plan, you know, the idea was to get good geographic distribution and try to insulate yourself more from things that happen on a localized or geographic level. We have been effective at that. As a matter of fact, we have a higher percentage of long term, you know, tenured sales staff in the Southwest. that's why they have been able to produce a higher percentage of the paid worksite employees than their numbers would indicate.

Okay. And just a quick follow-up, do you have any new or added visibility on your dispute with Aetna?

No. Not a single thing.

Okay. Thanks a lot.

You bet.

We'll go to our next question from the site of Mark Allen at SunTrust Robinson Humphries. Go ahead, please.

Good morning, guys. Could you elaborate on the plans for the financial services unit? It looked like you had, now acquired some assets from virtual growth and maybe just talk a little bit about what you plan to do at that -- with that business and what your expectations would be over the next 18 months for that?

Sure. What we did was we acquired the assets, which included some very exciting technology, a platform for providing accounting services across the Internet. A similar business to our own, in that you have professionals providing this service in both the professional and the client using of common interface across the web. So we bought the technology. We brought with that 13 or 14 people that have been serving customers and leading that business. We also brought a small group of customers so that we would continue having the business operate and be able to kind of incubate the business while we develop our game plan for going forward. That's where we are now. We are working, taking our staff who have in my view already built a business similar to this one and integrating them in with the staff we brought over and coming up with our best comprehensive game plan for going forward in that new endeavor. What we'll do once we have landed on that game plan, we will go out and test it in a few places, both selling it, changes in the service model as we are looking at a whole new service approach for that. And also the improvements we'll make in the technologies. So we'll roll that out in a kind of a pilot format and then make some mid course corrections and see if we have a -- an exciting new tandem service to provide with our HR service or not. And it will either turn into a very nice complementary business or not.

The you mentioned you are doing a lot more of your service delivery now via the web, things like web-based payroll. What are the implications for your margins over time as more employees migrate to that service delivery?

There is no question, we have already seen on the web payroll, we'll see even more on the online enrollment, as that takes hold, and it is taking hold, but what happens is when we're successful at creating what I call a collaborative application on the web, that actually facilitates a process that has to occur between a party in our operation and either a customer, a supervisor, or a front line employee or even a family member at the client location, it completely eliminates the interaction or facilitates the interaction between the two parties so that it all works better. And then you have, you know, very quick adoption by customers and people that use it because it just is better for them and easier. Now, we saw that with web payroll and it totally changed our service efficiency in that area where we were able to eliminate positions and change the number of accounts of companies that service providers can handle and all kinds of things. On online enrollment, it completely eliminates a process that has a higher error rate in it, of individual employees filling out their forms and filling them out wrong and sending it in and we enter it in and we see a problem and we have to get back with them and go through a real iteration to get people enrolled effectively. Those types of improvements are just like greasing the whole engine and it really improves our operating efficiency. Over time, we see that more and more of that will occur. And our cost to develop those solutions is now in a very comfortable range and we are able to do that at a very comfortable rate.

Thank you.

We will take our next question from the site of Mark McCone at Wachovia Securities. Go ahead, please.

Good morning. I was late on the call so I apologize if you already mentioned this. Could you give us some color with regards to the impact of switching, you know, from Aetna, you know, to the different carriers in terms of the retention rate? Has that there been any sort of impact there? And in addition to that, can you -- did you discuss, you know, what percentage of, you know, the -- if you take a look at the people that you have lost or clients that you have lost, what percentage of that is due to bankruptcies as opposed to other reasons? Thank you.

Last year -- not last year. Last quarter when we evaluated last year, and the retention rate went down the from 80 to 74%, it's very clear to us that that change was, you know, nearly 100% related to financial conditions within the client base and them altering the game plan due to business failure or just businesses nearly failing and going away from us or us having to terminate the relationship. So, you know, that again we see that -- is not occurring nearly like it was last year. And that's why we're seeing an improvement in our client retention rate into this year, although it's not quite back to historical levels. It sure is tracking on its way back to that level. Now, relative to the health insurance change, our staff did a -- just a tremendous job on relatively short notice and our clients cooperated in a phenomenal way to bring everybody from one carrier last fall and then on January First to a network of carriers across the country. When we look at our client retention related to that issue, very few accounts we actually lost over that issue. We actually picked up some and we had some that said now they are not leaving because of the switch from Aetna, obviously there's always some dissatisfaction with whichever carrier you're with, so we feel of like on a net-net basis, no effect on client retention there. The other thing is that we are pleased with the -- our ability to retain clients that we have demonstrated over this period even with the significant price increases on top of changing carriers. So that's all tracking well. The only issue there has been that the price increases haven't flowed into our model quite at the rate we expected. But we expect that to be catching up as the year progresses.

Great. And so I mean, under normal historic terms, when you have, you know, 20% turnover, what percentage of that is normally due to bankruptcy and then, you know, looking at what you're currently, you know, facing this year, what percentage would be due to bankruptcy as opposed to, you know -- and --

That's about half. It's about half. And, of course, it went up from that 10% to 16% last year.

Okay. So it's about half this year in terms of bankruptcy and half the other reasons?

Right.

Okay. Great. Thank you.

You bet.

I would like to make a comment at this point. We have got several people that have been trying to get in on the call. And so I'd like to ask our operator if you would open back up the lines because we have quite a few people that have some very important questions that they would like to ask. So if you could sure do that for us, at the Conference Center, we would appreciate it and let's take our next call.

Okay, we'll take our next question from the site of Greg Powell at Sanford Bernstein, go ahead, please.

All right, good morning. Do you know yet whether United Health is going to raise healthcare premiums in Q3?

No, we don't.

Okay. And then, if you're going to be raising prices why shouldn't that make closing rates actually worse than better?

Well you know, you would think that obviously would put pressure on closing rates. But... That's not what we are seeing. We are seeing that our closing rate is holding in line with what it was last year and that it hasn't been more difficult but it hasn't been any easier yes, either during the first quarter but I believe more of that's related just to the general economic environment in the prospect base that we're after, which is in the business-to-business sector versus, you know, the consumer area where there's been a few more, you know, dialogue about how things are going out there. So we haven't seen it related to that issue at this time.

Okay. As you transition from a tech workforce to a more general workforce, wouldn't you expect workers' comp. costs to go up actually over time?

Well, the actually what we have seen in our customer base is very much the same business segments. We have seen a little bit of what you're describing in -- within the client base where a lot of our customers, you know, have kind of downsized their technology staff. But all that kind of flows through our model fine. And those folks aren't replacing with roofers or something. They are replacing with other administrative people and other types of functions. We don't expect that to have much of appear effect.

Thanks a lot.

We'll take our next question from the site of Jim McDonald at First Analysis. Go ahead, please.

Hi guys, I'll try to be quick. Could you explain the -- your current thoughts on the 20 million going to 30 million with United Healthcare and when that frees up? And when you have a discussion on the rates and how the rates are -- how the experience is looking so far if you have any thoughts so far? Thanks.

Sure. Be happy to, Jim. We will be adding another $5 million to the security deposit at the end of June and another one at the end of September for a total deposit will be $30 million. That's where it is set to stop. And as far as our expectation for rates are in the third quarter, and the fourth quarter, you know, we kind of have some outside parameters that we have obviously had to use in looking at our whole pricing for new and renewing business. But I can tell you from, you know, now we have four months of data -- actually, we have 3 full months. We just closed out April yesterday. So I don't have any detail on that yet. But what we're seeing in the trend is that it's tracking a little bit better than what we thought it was gonna be. You know, I think by the time, Jim, that we finish up the second quarter, which will be, you know, at the end of June, as we look at the four months of specifically April -- or, excuse me, March, April, May and June, because we'll have a full 120 days of kind of real impact, I think we'll be able to see what this trend is going to look like going not only into the third and fourth quarter but even into 2003. Right now, it's just not seeming like it's going to be more dramatic than what we could absorb in, you know, our continued pricing increases.

When do you get your $30 million back?

Okay. We will get the $30 million back probably sometime in the latter half of 2003. Because from United's perspective, their thinking on this is that they just wanted to make sure that as we continue to pay in premiums each month and each quarter that it builds up enough reserve so that if we left the relationship, there would be enough in there to cover any runout.

We'll take our next question from the site of David Reidel at Salomon Smith Barney. Go ahead, please.

Yes, good morning, gentlemen. I'm sorry if I missed this, but did you say what price increases have been year to date on renewing business?

Actually, year it date on renewing business, we have continued to see a pretty nice increase in pricing right around 7%. On the markup component. In addition, in addition to including the increases that are necessary from the healthcare increase. So that's gone very well. Now, we -- you know, so that's gone, you know, better than we even originally expected.

And also, on the Pitney-Bowes relationship, could you get into a little bit of the details of how that's structured and how you see that benefitting you?

Yeah. It's pretty simple. They have a large small business client base. And, uhm, you know, good data about those customers. So we are able to do a better job of selecting from within that base who we want to contact. And so it's basically a lead source and when they become a customer, we're able to, you know, we end up paying them a commission on that customer that comes on, and it is kind of styled after the American Express relationship but it's designed to help us leverage this call center that we put into place. I expect we'll do more of those.

Simply because it's so important, could you touch briefly on - once again on why we should not interpret the decline of salary of worksite employees as any sort of deterioration in the mix? Could you just add a little bit more color to that, please?

Sure, absolutely. You know, what -- we really dug in on that issue because it's obviously very important for us to know what's happening on that average pay. When you look at the components of what affected that, there was a little bit of a wringing out of all the technology companies and so forth over the last year, you know, where pay rates were higher than typical companies. But that difference between the new customers we have added and the customers that went away was only -- was 4% essentially. The bigger issue to look at in terms of economic effect was within the current client base. And, of course, it was about 3,000 clients that were with us in both periods. They had 56,000 employees a year ago those clients had 53,000 by the time we got to this year. Two-thirds of the employees in that group were, you know, were the same people this year as last year and their average raise was down to 2.7%. That probably had more of an effect than anything on the total overall average pay, because historically, that number has been above 6%, you know, for as far back as I can remember. So, you know, historically, we have had that kind of cushion in the model of pay rates moving up. Because we serve the best small businesses in the country and they are moving and developing and growing through this economic period. Obviously, like everybody else, they kind of have cut back and the pay rate increase is down to 2.7%. At the same time, they were, you know, replacing people in their operation and the marketplace changed out there for new hires where the salaries were lower and so that -- replacements came in at 11% below the people they replaced. So that's just kind of an added benefit for the client but has a short-term impact on us. All these pricing issues related to that payroll average in gross markup and gross profit, we see those all correcting over those next few quarters also as we focus more on how rates become insufficient in this dynamic. And as the -- as pay averages go up, you know, start to go back up, it will alleviate that on its own.

Thank you very much.

We will take our next question from the site of Josh Rosen at Credit Suisse First Boston. Go ahead, please.

Thanks. It's Josh and Greg at CSFB. Just to go back to the medical costs mismatch a little bit, I just would be curious for a little more color on how your expectations have changed, say, from the end of January time frame to today in terms of what you have seen. You have talked a little bit about the pricing not flowing through to the same degree. And then, translating that forward, how you expect to handle the situation, you know, as it arises in the future.

Sure. There are two things that change since we came out early in the year. And that was that we have had a quarter to see the prices come in and better equate reality with how we expect those price changes to come in and now we can see how those flow in through the rest of the year. And so it was that lag effect that we couldn't quite see when you are just estimating up front. But now we see it and see how that flows in over the balance of the year. The other thing is, we -- you know, this whole gross markup issue related to the payroll average decline, if we didn't have both of those, I think you would have seen that, you know, that match happen longer and to the degree that there was a mismatch it would have been a shorter period, if at all. But with both the average pay going down and a little bit of a lag between how we estimated to come in and how it did come in, that's what's causing that mismatch that was offset in the first quarter by the unemployment tax rates being lower, but as that effect diminishes because, as people earn their wages throughout the year, taxes are lower, so there is not as much benefit from that. So there's going to be a little period of a mismatch here. But it resolves as we go toward the balance of the year.

You know, Josh, you know, specifically as we think about, you know, in going forward scenarios, that's why it is important for us to always be in a position on these benefit costs to, you know, have accurate data coming in so that we know what the underlying trend is so we can match, you know, pricing new and renewing business since we only get it in segments, to be able to match that as we see those costs start to escalate in the future and that's, you know, kind of goes back to our problem in the fall of last year, with -- when Aetna --

So if you were to summarize that as you go forward, the thought would be if there is a period of mismatch as pricing catches up, your hope is that you can really shorten that quite a bit?

Yeah. If we had have had the right data back then, we would be okay today.

Absolutely.

That's kind of, you know, that's -- Not trying to blame anything on the past, but that is the way our business worked. We have had that situation happen to us in the past about 10 years, as a matter of fact.

And we almost got there through the management of the other direct costs and -- and raising prices aggressively but not quite.

Okay. Thanks, guys.

We will go to our next question from the site of David Einhorn at Green Light Capital. Go ahead, please.

Hi, guys. Could you verify - a little bit - sorry I'm confused about relating to this - the healthcare thing? The deposits -- do you get the -- there's some thought in the market that says you just get the deposits back, you know, whenever you terminate the contract and there's some thought in the market that says that if you just have, you know, routine adverse expense or experience versus what goes on, then United will wind up keeping the deposit. Could you clarify a little better how that works?

Sure, David. And I appreciate you asking the question because the last thing we need is people having mixed views and what happens with the deposit. So let me make it perfectly clear for everyone. The security deposit was designed and was -- and we agreed to give it to United based on two facts. The first fact is, of course, we are getting the interest income on the deposits. So it's still our money, which is why it's still on our books. And moved from current asset to long-term because it rolls over more than one year. But the only way that United would be able to get the security deposit is if we left them at the end of 2002 -- and there was a deficit in the plan. So basically, what we're saying is, is because we have to have a fully insured contract, whatever the dollar amounts that we pay in, in premiums to United throughout the year, plus this $30 million max, is all that they would ever be able to get. And if the claims experience is worse than that, then they are -- they have to pay those claims.

Right. So in the first quarter, was there a deficit in the plan, are you accruing for deficits in the plan as you go, or how do you measure and know what the experience actually is in the first quarter?

Right. That's a great question. What we have had -- we had agreed upon premium caps for the first two quarters. And when we look at the actual claims paid on a developed basis, we actually had a situation whereby our -- our estimation of the incurred but not reported claims in the first quarter based on what was actually paid during the first quarter was a little bit less than what we paid in in the first quarter. Now, our rate as we look into the second quarter, because of, you know, having to base all this information off the old Aetna data, you know, are stepping up in the second quarter. And in fact while we do have a cap for the second quarter, if the experience proves out to be better than that, then we would be paying in more than what the experience required to us do and we would get the benefit of that, as well.

I see. One other question. The ending WSCs for the end of the quarter was about 73-6, did I get that right?

I believe that's correct.

All right.

I don't think we actually --

No, we didn't --

We didn't -- we didn't actually --

Sounds more more like average.

That's the average for the quarter.

The average was 73-6?

Yes. Yes. Because it was higher than that for the end of the quarter.

Well, what was the end of the quarter number?

We generally don't give that out. We did to kind of calibrate everybody to the beginning of the year.

We usually do that once a year.

What was it at the beginning of the year?

For January, we paid 72,700.

Is that the beginning of January?

No, that's what we paid in January. Doesn't matter what we started the month with. It's what we paid in that month. But that 72-7 was a over 2,000 employee step-up from the December number.

So if it was 27-7 plus 400 in February and 1500 in March, it would be 74-7 at the end of the June quarter?

Yeah. That would be -- that's exactly correct.

Okay. Thank you very much.

We will take our next question from the site of David Farina at William Blair. Go ahead, please.

I guess there is concern when you look at this kind of slower roll-in of the healthcare costs, that, you know, it's an indication that maybe people aren't as willing to pay -- can you give us some color on that? Is this a function of -- are-- You're kind of saying it's mismodeling based on previous data. Am I misinterpreting this.

Say that again? Sorry to ask that question --

Sure. Let me -- uhm... I guess you know, some people are concerned about the slow roll-in of the price increases. And that's I guess the questions I'm asking is that's not a function of your customers' balking at the increases? It's just a function of you guys mismodeling, is that correct?

It's a function of us, you know, looking at the whole picture of bid classes, when they were bid, renewed and coming in and trying to gauge -- remember, part of this is when you renew the account, the employees have to choose which plan they're on for a certain number of days for 30 days. And - the invoicing -- the invoicing happens once all these decisions are made. And it isn't a tight time frame. But we didn't quite get it exactly right. There was a little bit of a delay in it. And that coupled with the gross markup being lower from the payroll average, that's what's creating that mismatch in these couple of quarters that resolved itself as we get into the fourth quarter.

As I look at your mismatch, and I think the previous guidance was, you know, 205 to 210 or something like that last -- for the second quarter. Now you're talking almost $20 less. How much of it is kind of pricing mismatch versus, you know, lower pay?

I tell you what, you know, David, the answer to that question is, you know, we're just trying to give you our best estimate. I just -- there is no way I could pinpoint what the difference between those two is going to be. But I would suggest that at this stage of the ballgame, we are assuming that it's more from the pricing mismatch than the payroll average.

Okay. Thank you.

We will go to our next question at the site of Dan Ditler at at Lehman Brothers.

Yes, good morning, it's Adam Waldo and Dan Ditler with a few questions again around this health insurance issue. I wonder if you can give us a sense for I think Paul you alluded to this in your last comment on the last question when the health insurance rate of inflation should be fully recaptured in the gross markup inflation such that gross profit for worksite employee and revenue for worksite employee arising in tandem, is it now your expectation that that's going to be in the fourth quarter?

We certainly do -- you know, we can see that fairly clearly. You know, we know when we started raising price and how the prices on those clients have already been renewed, matches what the cost is. And, you know, the other part of the picture is of course the cost has to play itself out over those quarters. So, you know, based on, uhm, you know, our outlook for cost is -- is actually better than it has been previously now that we're into the contract a little bit. The outlook for the price side is that we're on track with what we're passing through and customers are accepting that price increase. But it just came in a little slow. Not soon enough to match it in these couple intervening quarters.

Paul and Richard, the existing United Healthcare led syndicate for health insurance runs through the end of the year. At the risk of stating the ovens, what gives you the visibility that as we get into 2003, you would recapture the negative variance of about $11 per average worksite employee at the gross profit line caused by the health insurance and pricing mismatch in 2002?

Well, we have already seen for one quarter how the pricing -- and actually more than one quarter now, we saw a little bit in the fourth quarter as we started to kind of know what those price increases needed to be and started to pass them through, that's why we know in the fourth quarter it's passed through in the entire client base. And it's back to a match. And, you know, we have seen enough of it so far to be able to even, you know, give you an approximate number for what that mismatch is for this year that you have to add into this year to look at what we end up with for next year.

So at this point, what sort of inflation are you modeling on your new and renewal business quotations for 2003 in health insurance as you quote gross markups today?

Well, for 2002 over 2001, you're looking at a 20% increase on a period that was stepped up in the last half of the year through the Aetna situation. For next year, I see moderating some. We should be able to have that back into the lower teens. You know, that's just kind of an estimate at this point based on what's happening in the broader marketplace. You know, during this first quarter, kind of a -- uhm, indicator came up on that with -- if you looked at Calper's, a very large buyer of coverage but not a leading indicator. They are more of looking in hindsight because they are able to stave off increases for longer than anybody else because of their size. And their increases were 25% and they reduced the number of providers even to get to that point. So our experience and our numbers for next year will be based off of the experience of our base in this year and based on what we have seen so far, I think our customers are going to do a lot better than what's happening in the marketplace as a whole.

So you would expect in terms of again the way you're quoting new renewal pricing throughout 2002, what sort of rate of health insurance premium increase per covered insured in 2003?

In 2002, again, there's some catch up going on that puts us in the 20% range on average. But you know, for '03, again, that is a little too early to pin a number down for you, but again, we expect it to be lower than this year and lower than what's happening in the marketplace as a whole.

Okay. Turning to two other topics, the sales force and stock buybacks, on the sales force front, I think you said in your prepared remarks, Paul, that you're looking for 15- 20% growth on a year-over-year basis in 2002 in terms of average trained sales force head count. Is that a correct thing for me to surmise? And if so, would that imply you exit the year at around 255 to 260 average trained salespeople?

That would be in the range, yeah.

Okay. And then lastly, on share buyback, about 1.8 million shares or so still remaining on the 2.8 million share buyback program from February 2001, is that fair for us to take away?

No. It's 1.2 million because I used 526,000 of the share buyback when I repurchased the shares that American Express got when they exercised their warrants earlier in the month of March.

Okay. So given that the company's balance sheet remains extremely overcapitalized and only about 1.2 shares remains on the buyback authorization, can you update us with respect to your thinking about potentially proposing a share buyback increase to the board?

Yeah. Absolutely. I would tell you that, uhm, we will be discussing that at our next board meeting.

Okay.

That's next week at our annual shareholders meeting on May 7.

Thank you very much.

You're quite welcome.

Once again, due to time restraints, we ask that you limit yourself to one question per call. We'll go to our next question from the site of Mercedes Sanchez at Raymond James and Associates. Go ahead, please.

Good afternoon, gentlemen. Quick question on the IRS rulings. A quick reminder here. You guys right now, you have a multi-single 401(K) plan, is that right?

We have a single employer plan.

But you -- where you test at each individual site, though, right?

Our own internal management of the plan, yes. We look at entry of new accounts on an account by account basis and looking at the rules that apply and look at testing that way also.

Right. So it's multiple site testing but a single plan.

Right.

And now, the IRS is suggesting, what, a multiple plans?

The IRS is suggesting that there are several options can take. They were very careful not to comment on co-employment in any other venue other than this -- in fact, it's not the comment about co-employment at all. What they did comment on is that they have given us several options on how to structure a plan going forward. They are providing relief on any single employer plans as long as you adopt a either multiple employer plan format, which is very similar, actually, to how we have managed our plan. But not the plan document itself. But they are also allowing to go to basically prototype plans and other potential options. Now, what we see is the net effect is it looks like we are going to be able to provide many more choices and options to our customers which I think is a very good thing. And I don't see any situation where, you know, we have any impact on Administaff. That's what we have been expecting.

And a higher administrative burden?

Yes. I think those -- there will definitely be some more administrative costs. But I got to tell you that regardless of how -- and that's something that we'll be working on, which is why I said very specifically in my remarks, that we will be working on -- working with the options that limit either eliminate or very minimize the increased cost of -- of plan administration going forward. And there are some pretty unique opportunities available that I'm not prepared to comment any further on at this call but we certainly will when it becomes appropriate to do so.

We don't expect to bear those costs.

No.

So, you know, if you look at the costs we have been spending over the years to manage this process with the service, you know, we are comfortable that there is no adverse effect.

And I'm sure it's a relief to have that monkey off your back, off the industry's back.

Well, I tell what you -- [ OVERLAPPING SPEAKERS ]

-- For the industry, and of course, for Administaff.

We'll go to our next question from Thomas Giovene at Giovene Capital Group. Go ahead, sir.

Hi guys. This is a follow-up with regard to the 401(K) plan. Maybe I'm just a little slow on this. Is the IRS saying that you are not the employer of record then for 401(k) plans?

No, sir. They never addressed that question. As a matter of fact, that's been the issue why this thing has taken so long because they don't feel that they are in a position to answer that question.

Well, the reason why this is confusing is why would you need to restructure the plan at all, then --.

The reason they have asked us to restructure the plan is to get it into an environment that until we get our Federal legislation passed and which will define co-employment, this is their kind of -- their safe haven for them to operate in and go forward and make sure that we can still deliver the benefit to worksite employees and their families.

So you feel pretty strongly, then that this is not a harbinger where you would need to restructure your product for clients where you would not be the employer of record?

Absolutely. Not at all. In fact, they were very careful to outline the issue that determining who the employer is a complex issue.

Yeah.

And therefore, they decided not to make a determination at all in this ruling. You know, which is an effort to make sure that they didn't overextend in effect the co-employment model.

Is this true, then, that as a -- you know, if one is a highly compensated within a structure, does this mean that that person would not be able to -- to, uhm, uhm, you know, contribute the -- the cap any longer?

No. Actually, it can go both ways. In our current arrangement, you know, in any plan, highly compensated can only put away two percent above the average of the non-highly compensated in the plan. Now, what happens, uhm, currently in our plan is some highly comped people can't put in the max amount. And you know, some, if you look at them outside of Administaff would be able to put out more and some would be able to put up a little less. But... You know, it's kind of a grab bag, depends on the specific data. But that's never been the intent of our plan. To provide a way for people to put in more than they otherwise could have. Although sometimes that happens and sometimes they are able to put in less. So we have it go both ways.

Right.

And with -- and that part of the options and looking at the future, uhm, is the -- there are certain kinds of fans literally, you know, allow you just to put in up to a certain cap and that's it. You know, you know, there is no testing. So there are some pluses there, too.

Congress has never done anything to screw the small business, but this seems like in a way they are not prohibiting your ability to operate but yet they are doing something that's slightly detrimental here in that you have to change things.

Yes. The IRS is doing that. The legislature has never spoken on this issue. And you can rest assured that we will bring that to the attention of our Congress at the appropriate time about what the regulatory bodies could possibly be doing.

You know, the reality, is that small business is at a disadvantage to large companies in managing deferred compensation plans simply because of the size and expense and complexity of managing these plans. And that's why, you know, less than 40% of small businesses have retirement programs or deferred compensation programs. You know, what we have been able to do for our customer is bear the burden of all those -- all that effort on behalf of the client. We are still able to do that in this format, although there is more administration, therefore more costs. Definitely, you know, it is a move back toward putting more cost and more burden on the client and more liability on a small business and we don't think that's good. But that's the best the service could do absent guidance from the legislature. So, uhm, you know, we're happy with how we have been able to run it up to this point. How we have to do it in the future if we don't get legislation is livable. Not as good as the way we do it now but it's acceptable. But we'll do everything we can to make it better for small business because that's what we are about.

From the fact that there are -- the fact that you have legislation on the state level is I guess irrelevant in this because this is a Federal issue?

That's correct. This is [Erisa] plan.

Thank you very much.

Okay.

Once again, due to time constraints, please limit yourself to one question today. We'll take our next question from the next site at Adam Komora at Interest Capital.

Thanks a lot. Just a quick question. When you boil it down for the second quarter and the rest of the year --sort of -- what are we thinking in terms of earnings?

Well, we don't comment on earnings per share. I gave some very detailed metrics and I think everybody will have to kind of make their own conclusions about what that means. But I can tell you that when you look at the shortfall of the $11 per employee per month, that's coming through kind of the gross profit multiplied by the number of employees we pay each month, will kind of give you a basis for starting to look at the earnings per share impact on that.

When you say that it's going to normalize, do we think it scales up so that we get half of it back in the third quarter and the rest by the fourth quarter?

Oh, no, no.

Longer than that?

No, no. The only re-- in my earlier remarks, said this is going to take the full year to get us back to a perfect match or as close a match as possible. And we see 2003, which is why this is -- you know, this is kind of a valley that we have right going on right now. By the team we get back into 2003 where we match the pricing against the cost, then that will restore quite a bit to the gross profit and earnings for 2003.

Okay, and last question. The mismatch that you are talking about, if the costs are capped right now and your experience is the losses are coming in below where those caps are, where are the costs running ahead of where you thought they were going to be?

Actually, that's -- what we are talking about there is on a prospective basis and I also said that, you know, we could in fact improve on the gross profit squeeze if actual experience in the medical plan and the workers' compensation plan were better than what we are expecting them to be right now. It's leaving potential up side there.

Thanks a lot, guys.

We have no further questions at this time. So I'd like to turn the call back over to management.

All right. Again, we thank everybody for your interest in the conference call today. And that's it. Thank you. Bye bye.

The conference call has ended for today. You may now disconnect your lines.