Insperity Inc (NSP) 2002 Q2 法說會逐字稿

I'd like to announce that all locations are hold that we are still checking the participants for today's call we are scheduled to begin our call in another two minutes, thank you for your patience.

Good day and welcome to Administaff second quarters earnings conference call. All lines are on a listen only mode. Joining us on today's conference call is the President and Chief Executive Officer of Administaff, Mr. Paul Sarvadi. I would now like to turn the program over to the Executive Vice President and Chief Financial Officer of Administaff, Mr. Richard Rawson. Please go ahead.

Thank you very much and thank each one of you for joining us today for our call. Let me outline our plan for this morning's call, which is going to be a little different than from our normal routine.

First I'm going to discuss the reasons for earnings shortfall and the impact of these factors on our financial outlook and then I will return to our normal format which is providing details on our second quarter results.

Paul will then come in and add his comments including an update of the economic environment in the small business community, our progress towards matching price increases to the cost of benefits as well as our outlook going forward.

Then I will come back and give some guidance on financial message to the third and fourth quarters. We will then end the call with a question and answer session. Now I would like to remind you that any statements that Paul or I make today that are not historical facts, it will be considered forward looking statements within the meaning of the Federal Securities Laws.

Words such as expects, intends, plans, , estimates, likely, go and similar expressions are used to identify such forward-looking statements. Forward-looking statements involve a number risks and uncertainties that have been described in detail in the companies filings with the Securities and Exchange Commission.

This risks and uncertainties may cause actual results to differ materially from those stated in such forward-looking statements. To begin we reported a second quarter loss per share of 11 cents compared to an earnings per share of 13 cents for the second quarter of 2001.

Now let me explain what happened. The significant increase in benefits costs during the quarter was the major contributor to our earnings short fall. As you know we came into this second quarter with limited visibility into our benefits costs.

Accounting for costs under our current health insurance contract relies on estimates of the level and trends of health plans. Due to our recent transition to this plan we have had limited data available to make these estimates.

In mid July we received information that allowed us to analyze the first six months of claims experience and the level of detail needed to determine the trend in this new plan.

This information was the key factor in determining our second quarter health care cost which increased 28 percent per covered employee over the second quarter of last year, compared to our previous expected increase of only 20 percent. Now let me spend a little time explaining how claims data is used to determine our benefits cost.

Our ultimate health plan costs during a reporting period include both paid claims and an estimate of claims that have happened in the reporting period but will not be processed or paid until a later period. The amount that is estimated is referred to as IBNR or incurred but not reported plans. Both our first quarter results and our second quarter projections were based upon the first three months of paid claims data. The only data available at that time. This paid claims data totaled $28 million and the IBNR estimate using actual accepted methodology was determined to be another $26 million.

The vast majority of these first quarter incurred but not reported claims were paid during the second quarter so now, we have a clear picture of the plans actual first quarters claims experience which is important for several reasons. First, claims incurred in the first quarter but paid during the second quarter were approximately 2.4 million higher than the 26 million estimate that we recorded in our first quarter cost.

The additional cost associated with the change is reflected in our second quarter benefits cost. Second, in order to accurately estimate the second quarters ultimate cost, we must increase the IBNR component to reflect the pattern that subsequentially emerged from the first quarter claims data. Third, as a result of these changes in estimates, our analysis indicate that our ultimate plans cost for the first two quarters is equal to the amount we planted into the plan through the rates paid to our carrier.

So, this means that there are no additional amounts that have to be funded to cover these increased costs. And most importantly, knowing the amount of claim and the timing of when they are paid allows us to estimate the IBNR with a much greater degree of accuracy. It's this visibility that allows us to project the cost and build in the price increases to cover these costs.

Now, lets look at the effect of these changes and estimates on both the reported and future benefits cost. If we normalize the effect of the change in estimates for the first and second quarter, the benefits cost per work side employee would have been $341 and $356 verses the recorded cost per work side employee of $330 and $366 per work side employee.

Because not all work side employees are covered under our medical plan. These same costs on a per covered work side employee would have been $459 and $483, or a five percent increase, versus the recorded cost of $449 and $492 per covered work site employee.

Our outside consultants and our health carrier, have provided a range of expected trend and claims costs of 18 to 22 percent annually, or four to five percent sequentially, each quarter. And the normalized trend from our most recent experience, now reflects a five percent sequential quarterly increase, we're building this into our forecast as well.

Now, let me report on our routine quarterly information.

Looking at revenues first, the drivers are; number one, the growth in the number of paid work site employees; number two, their average payroll; and number three, our gross mark-up.

Now, paid work site employees increased by 12.7 percent over the second quarter of 2001, averaging 1,000 new work site employees being paid each month. Additionally, the average pay of the work site employees, was down by 2 percent over the same period last year. Which continues to put pressure on our third component of revenue, which is gross mark-up. And in a few minutes Paul will be providing some specific details on unit growth and how we are responding to the declining payroll average.

Our third component, which is gross mark-up, was $866 per work site employee per month, this quarter, a 4.2 percent increase over the same prior year, and about $9 per work site employee per month, below our expectations. $7 of that gross mark-up shortfall, is due to the lower than expected payroll average, which was $3940.

Remember our mark-up is billed to our customers as a percentage of gross pay, therefore when the gross pay of our work site employees declines, our mark-up is adversely affected. The remaining $2 shortfall in the gross mark-up, is due to the lower than expected work site employee bonus's, which were paid during the quarter.

In summary, unit growth achieved at expected levels, offset by lower than expected average pay and mark-up, produced revenue growth of 11 percent over the second quarter of 2001, to $1.2 billion, for this quarter. Bonus payroll's increased 2 percent over the second quarter of last year, to $52 million. And excluding any bonus payroll growth, our revenue growth for the second quarter was still 11.6 percent over the prior year.

Now, looking at revenue growth by region for the second quarter, the Northeast region, which is now represents 13 percent of our total revenue, grew by 31 percent. The Southeast region, which represents 11 percent of our total revenue, grew by 28 percent. The Central region, which represents 14 percent of our total revenue, grew by 17 percent.

The West region, which represents 21 percent of our total revenue, grew by 18 percent. And the Southwest region, which represents 41 percent of our total revenue declined by 2 percent. Now this result is the continuing effect of the two previously reported quarters of unusually high layoffs on this large base of business, which was not quite offset by new sales.

At the end of the second quarter, we had 38 offices in 21 markets. We opened our 38th office in Cleveland, during this quarter. As we continue to make progress towards our 40 market, 90-office expansion plan.

We averaged 249 trained sales reps, for the second quarter, representing a 12 per cent increase over the second quarter of 2001.

Now, moving to gross profit, as you know, our key profitability bench mark is, gross profit per work side employed per month, which was $159 in the second quarter of this year, down significantly from the $204 reported in the second quarter of 2001.

This decline is primarily due to the significant increase in the benefit cost in the quarter, which I just discussed a moment ago.

However, its by the other components, of our direct cost, our effective pay roll tax rate decreased slightly from 7.41 percent of payroll in the second quarter of 2001, to 7.4 percent of payroll in the second quarter of this year.

Workers compensation cost increased slightly from 1.24 percent of payroll, for the first quarter, last year, compared to 1.26 percent this quarter.

Now, let's discuss operating expenses. Excuse me, on a year over year basis, our operating expenses per work site employee, increased by 2.2 percent from $181 in Q 2 of 2001 to $185 of this quarter, or $42.5 million, which was within our expected range.

This increase in operating expense, on a pro work site employee basis, included the following, compensation cost increased $2 per work site employee, due to the ramping up of our sales staff, benefits, support staff and staffing our new subsidiary Administaff Financial Management Services Inc.

Generative administrative costs, increased by $2 per work site employee, due primarily to increased rent and facility costs.

Depreciation and Amortization costs increased by $3 per work site employee, due to our sales and services expansion and implementation of our Internet initiatives.

And commission costs declined by $1 per work site employee, while amortizing costs declined by $2 per work site employee, per month.

Other income was relatively flat, from the first quarter of 2002, however, it declined 47 percent, from the prior year, primarily, as a result of a decrease in interest income, brought about by the level of marketable securities and interest rates.

Now, I'd like to make some comments on our balance sheet information, which we have expanded in our quarterly release announcement.

Total Assets are $275 million, including current assets of $163 million. We met the quarter with $60 million in cash, cash equivalent in marketable securities, and 3.6 million in working capital.

If you were to recalls the $21 million that's been drawn under our $30 million credit facility, which is expected to be converted to long term debt, before the end of this year.

Our working capital, would have been $24.6 million.

Pre paid expenses have increased $17 million, this year, to $21 million, and included the following items, $8 million is related to the prepayment of our workers compensation insurance premiums, $3 million is a note receivable related to the amounts that we funded for our future service center, and $6 million is related to the payment or prepayment of unemployment taxes to the state of Texas, which has been discussed in detail in the press release.

During the quarter, capital expenditures totaled $10 million, including $6 million related to construction in progress on our new corporate office building, and $500,000 in capitalized software development costs.

Year to date capital expenditure totaled 23 million dollars including eight million dollars related to our construction in progress and 700 thousand dollars in capitalized software development costs.

the deposits of 22 million dollars include 20 million dollars to secure a health plan with United Health Care. We also used 2.9 million dollars to repurchase 200 thousand shares of the company's stock during the quarter and have approximately one million shares remaining under that stock repurchase plan.

Finally, stock equity was 111 million dollars before the end of the quarter.

Now, before I turn the call over to Paul , I'd like to comment on our liquidity.

As previously mentioned, working capital at the end of the quarter if adjusted for reclassification of our credit facility which is expected to be converted to long term debt by the end of the year would have been 25 million dollars.

Secondly, there's still nine million dollars available under our current credit facility to be used as needed.

And finally consistent with our quarterly earnings pattern we will be generating operating cash flows for the remainder of the year. Now, these sources of liquidity off set by the remaining 15 million dollars of projected capital expenditures for the year will allow us to continue to operate our business as usual.

At this point, I'd like to turn the call over to Paul.

Thank you Richard, today I'll comment on three areas - first I'll focus on the success we've had execrating our year over year growth rate back into double digits in the second quarter and what our plans are to continue double digit growth as we move to 2003.

Secondly, I'll provide details, which substantiate our progress toward restoring our gross profit per employee to historical levels for 2003, and I will finish with the major themes that are driving our five-year plan for next year through 2007.

Our goal for the first half of 2002 was to average a net gain of one thousand employees per month - we achieved this objective averaging 1158 employees.

Our average net gain for the first quarter fuelled by our successful fall campaign was 1299 employees and for the most recent quarter 1017.

This growth measures determined by taking the number of employees paid in the prior period, adding the number of employees paid from new clients sole to the prior period and subtracting the number of employees that left with the terminating client company, then you either add or subtract the net effective new hires and layouts of employees in the current client base.

So, there are three components to track that determine our visibility for future unit growth the first one is sales of new clients in the current period which are queued up to become paid work side employees in the coming quarter.

Secondly, we look at our most recent results - retaining current clients and the list of clients that have provided the 60 days notice of termination required by our contract and the last factor we consider is the trend in employment driven by general economic climate in the small business community.

Our sales effort has been exceptional this year in the face of some significant distractions and a general lack of an economic rebound in the small business community.

In the second quarter we averaged 27 hundred new employees from sales of new employees from sales of new client - although we're still experiencing some shrinkage from this number sold to the number ultimately enrolled and paid we do see some improvement in this area.

Activity levels are high reflecting continued strong demand for our services. We are pricing into these sales significantly higher benefits cost, and we are building in a mark-up for our services consistent with last years level, so we're not sacrificing price for volume.

Our goal for 2003 is to reach 15 to 20 percent unit growths. 15 percent unit growth is accomplished by simply continuing to average around a thousand employees per month net gain with a balance of this year and next year, just as we have in the first half of this year.

To reach 20 percent we would need to average a net gain of approximately a thousand employees for the balance of 2002 and average 1,500 employees per month during 2003.

Now the key to reaching this objective is in continuing to increase sales efficiency and continue to add the appropriate number of trained sales personnel. I believe we have a sales efficiency increase built in to the next six to 12 months as our sales staff matures. Our sales turnover rate is down into the low 30 percent range compared to 40 percent one year ago and as more sales staff reaches 18 months of experience they typically achieve a 50 percent increase in sales efficiency.

We also have several new initiatives that are supporting our efforts to accelerate growth. We have grown our sales staff substantially over the last year so the emphasis for the coming months is on increasing the number of opportunities for sales staff to be in front of qualified prospects.

Early this we began to operate our own out bound call center to set appointments for our sales staff from client lists provided by American Express. We have harvested twice as many qualified appointments per one hundred names provided during our initial start up period than the third party contractors that were previously used for this program.

This represents an exceptional opportunity to increase productivity. We intend to use this call center also to call other partner lists which we believe will increase the number of opportunities for our sales staff throughout the Fall and going forward.

We also launched HR powerhouse during the second quarter. I expect this initiative to be a substantial contributor to Lee generation while also extending our brand as the HR solution for small businesses.

This human resource site is available to prospects to sample our services and expertise at administaff.com but also through other strong small business sites like IBM and Pitney Bowes. These partners are motivated to drive traffic to the site through a commission arrangement for prospects that become Admini staff clients through their introduction.

Now our client retention for the second quarter was also a real highlight. The average number of employees per month lost due to client attrition was 1227 employees, or 1.6 percent of the employee base, nearly an historical average of 1.5 percent and in our predicted range of 12 to 1400 employees per month.

Last year this number was 1.8 percent for the quarter, for the first half of this year we have retained 84.5 percent of our client base compared to our historical norm at mid-year of 86.3 percent, and last years recession number of 81.2 percent.

Now these numbers emphatically verify the success we are having renewing accounts in spite of passing along significant health increases. Clearly we are returning closer to historical norms in this matter.

Now judging from our notices of termination we have in hand for the coming month, it appears this trend will continue to be positive. Now concerning the third back we're packing unit growth, we continue to see weakness in the economic climate, and layoffs exceeding new hires, and especially as payroll average decline. Layoffs exceeded new hires in the first and last month of the quarter, however new hires exceeded layoffs in May. Now from our vantagepoint, the employment picture continues to reflect what I would characterize as a bouncing along the bottom scenario, so we're not building any improvement in the employment picture in small business community, into our future plans.

The second topic, I want to provide detailed information on, is our effort to restore our gross profit for employee to historical levels for 2003. The two primary areas of focus that will result in restoring our gross profit for employee in setting the foundation for a strong 2003, our correcting of gross mark ups shortfall, and completing the matching of pricing costs in our benefit plan.

Our shortfall in gross mark up was caused by the continuing decline in average pay due to the weak economy, and the high rate of benefit election changes that have occurred this year. Our system invoices clients for each employee on a rate schedule as a percentage of the gross payroll. Now over the last 16 years, prior to this year, average payroll general increase in providing a cushion for our gross mark up collected, and covered the cost of periodic benefit election changes.

In this period of average payroll decline, we collected less gross mark up Dollars than our pricing and billing system anticipated. This factor caused a $1 million shortfall in gross mark up in the first quarter of the year, and in addition $1.5 million in the second quarter.

There are corrective actions well under way directed by this problem for the short-term and prevent any re-occurrence for the long-term. For the short-term, our contracts allow us to adjust our rate during the term of the contract, for instances where changes at the client location cause the raise to be inadequate. We have exercised this provision during the second quarter, after performing the required analysis on an account-by-account basis, and communicating with effected clients. This mid-contract adjustments on over 800 clients have been completed, in these adjustments we covered nearly $2 million per quarter in gross mark up Dollars for the third and fourth quarters.

Now for the long-term we are developing a new pricing and billing system, that reacts immediately to the changes in payroll and benefit elections, as client employees make such changes. We intend to complete development and testing of this system during the third and fourth quarters of this year. We will begin selling new business and renewing current clients on this new system during our fall of sales campaign. We expect to have a significant number of clients on this system by Q1 2003, and move the rest of the client base coincident with their renewal date over the course of next year.

I expect our clients will prefer the new systems for three reasons. First of all, billing will always be accurate for each pay period for the system with the terms we agreed to with these clients, as opposed to our current system now, which is just a renewal for that occurred during the contract period. Secondly, the new system is easier for clients to understand, because rates are presented in a way that fit the client's specific business, and changes effect the client's cost in exactly the same manner they did prior to becoming a client. And thirdly, pricing can be set more tightly without building in any bumpers for these changes during the client contract period. For Administaff, the new system will match taxes and benefit costs accurately even as pay roll and benefit elections change. Locking in our gross profit, our gross mark-up for employee and offering much better visibility into this key method.

The other major initiative that we're still our gross for employee to historical levels for 2003 is the matching of pricing costs of our benefits plan. During the second quarter we made great strides in the collection and analysis of data necessary to make significant improvement in our abilities to exceed in this area over the long term. Our arrow for the short term the new level of costs employed by the recent claims data does make our goal of matching cost in price even more challenging.

But we still expect to meet that goal. We expect to reach a balance of price in cost for benefit by continuing to move price up on new and renewing business and lowering costs to offering new plan design options for clients. Let me give you some specifics on our progress on each side of this important equation.

To evaluate pricing, each month we take a snap shot of our entire employee base and the pricing of each specific employee. The pricing is broken down into allocation for each of the components of our direct costs, including pay roll taxes, workers compensation, employee benefit and our service fee or margin. Over the course of this year we have seen a steady increase in the allocation for benefit, increasing from $407 for covered employee in January to $461 per covered employee on July 1st.

An average increase of over $8 per month. Although we intend to move price up more due to the new information we now have, to be conservative we are only assuming the allocation our pricing will continue to increase approximately $8 per covered employee per month, reaching $501 in December. Now as Richard explained, our true costs for Q2 was $483 per covered employee per month. At a quarterly trend increase in claim cost of five percent, our average benefit cost for the fourth quarter was $532.

However, we have already begun to implement an additional strategy to reduce other benefit component costs such as life insurance and disability premium. We expect a reduction in cost of $1 million per quarter beginning in the fourth quarter, reducing our costs to $528. This still leaves a gap at the end of the year of $27 per covered employee or five percent of the plan.

I plan to ensure that there is a match for 2000, you know we plan to ensure that there is a match for 2003, so we plan to make up the five percent difference on the cost side to plan design changing. We've already identified some areas in our plan design that can be twigged to litigate some of the cost increase while still remaining competitive with Fortune 500 company benefit plan and still being far better then what most small business plans have available.

Our estimates that these changes will reduce next years claims cost an estimated $10 per covered employee. The last strategy we're employing to make up the balance of the cost is to offer some new lower benefit plan design to new and renewing clients. We've already begun to see client opt for lower costs plan that renewal which lowers claim costs for both staff and the client.

I expect to see more clients to gravitate to these plans to a significant increase are passed through for a second year. These new options will be part of our fall sales campaign and should help facilitate the renewal process and new sales for the year end. The final area I'd like to focus on today is the big picture looking out over the year 2003 to 2007. Our management team spends several days during the second quarter, shaping our five-year plan at a retrieve. In this process, it has become clear that Administaff is in an excellent position that we have never been in before. Over the last five years, we've invested heavily in info-structure, technology development, and early expensive phase of our national expansion and adding key functional and technological expertise. With all of these cost drivers in the rare view mirror, it's apparent that we have a tremendous opportunity ahead, with our business to turn out profits.

We are in the enviable position to run significant volume over our info-structure, where the cost to add the volume is and operating margins, naturally improve. We are targeting a compound annual unit growth rate of 20 percent over the five-year period, which will result in reaching critical massive over 200 thousand work site employees.

We also believe our gross profit for employee can grow substantially over this period, due to a variety of possibilities, including potential new revenues from our market place alliance agreement, implementation of our forward key plan business and the addition of financial management services unit.

We also seek potential for direct cost savings for consolidating claim processing across our benefit programs. Over the same period, we expect to grow operating expenses at a slower pace, then the unit growth. Leveraging our web based employees service center technology, as utilization continues to take whole.

We also anticipate capital spending, will be modest, relative to the last five years. We have no need for additional facilities at our corporate headquarters to accommodate our growth, we have no need for new service centers until at least 2005, and our pace for development can be supported without major capital spending.

So that leaves only sales office expansion and general technology spending. This means depreciation expense will crash in 2003 and decline in a pro work side of employee basis thereafter, dropping additional operating incomes to the bottom line.

The next five years of shaping up to the kind of period that we have worked all these years to set up. I believe that this period will be very rewarding for clients, employees and for shareholders.

And this time, I would like to pass the call back over Richard.

Thank you Paul.

Now I would like to discuss financial guidance for the remainder of this year, based on Paul's comments.

To begin with, we would expect our work site employees to grow at an average rate at about a thousand employees per month for the balance of the year, as we had being doing, except for the month of December, because as new customers are sold in October and November, they often deferred to a January start-date. So December is always lower.

As I have stated earlier and Paul talked about it as well, on advice from our outside consultants and our most recent claims experience, would indicate that we should incur about a five percent increase in benefit costs per covered employee, each quarter of the year.

If you assume however, that the range was five to six percent, benefit costs per covered employee would be $507 to $512 in the third quarter and $528 to $538 in the fourth quarter. After taking two account of course, the newly negotiated $1 million reduction in the cost of our other non-help plan related benefit that begins in the fourth quarter.

Therefore, we would expect that our gross profit per work site employee, would be in the range of $187 to $197 per month, for both the third and the fourth quarter.

We expect that our third and fourth quarter operating expenses would be in a range of $42.5 million to $43.5 million.

Net interest income should probably decline by approximately, or to approximately $250,000 a quarter, and finally, we would expect that our effective income tax rate would remain at 39.5 percent.

At this point, we can open up the call for questions.

Very good, if you would like to ask a question, please press one now on your touch-tone telephone.

To withdraw yourself from the queue, you may press pound. Once again, if you want to ask a question, press one now.

We'll take our first question from the site of David Readill, of Solomon Smith Barney.

Hi gentlemen, a couple of questions, if I may. Can you talk a little bit about the dispute that you're in with Texas and whether the conservative thing to do is to accrue the payroll taxes, at the level, that you are today?

Actually, David, the answer to that question is, that, because of the opinion that we have from our outside legal council on this issue, is a very very strong opinion letter, coupled with the fact that the Attorney General of the state of Texas, in 1988, said that as it relates to companies doing partial transfers of experience, that produced a lower unemployment tax rate, that the Texas Workforce Commission, could not refuse a partial transfer, so, this is a kind of a situation, where we're in, where there's a group of people, there is a lot of pressure, obviously, in every state, to keep all the dollars that they can, but, it's illegal for them to do this, based on the grounds, of just because it produces a lower rate for us, so, we have thoroughly evaluated the situation, we're not anywhere close to any scenario to cause us to even have to think about writing that off.

OK, could you also talk a little bit more about the benefit election changes, during the quarter, how they were treated by your old system and how its going to be treated in the new system, am I right in understanding that benefit election changes were made, you weren't collecting appropriately for those changes?

Certain types of changes, David, yes, under our old system, you know, we anticipate to be covered, due to renewing contracts, you know, as the contracts renewed, so during the term of the contract, certain types of benefit election changes, like adding additional dependants and so forth, you don't pick up till later, but in the new system, it actually, bills invoices each employee, based on the actual elections for each pay period, which ties directly to the actual cost associated to that employee, in that pay period.

So, it's really, just a whole lot better system, we're looking forward to getting that in play.

And finally, have you guys signed the SSC letter to the validity of financial statements, yet?

We haven't yet, but we will be, by the appropriate deadline.

Thank you very much.

We'll take our next question from , of Janie MacGumerie Scott.

Yes, good morning, you said that you have and are going to continue to try to re price

END.

You said that you have, and are going to continue, to try to reprise pricing for your clients during the faze of the contract, because of course, your benefits costs are going up, as well as any companies are.

And in the second quarter you reprised 800 clients. Have you, for the short period of time, for the month of July, have you noticed any unusual client attrition due to, you know, reprising during the contract?

I'm glad you brought that up.

We actually, we're very, very pleased with, you know, the effort of really going through the analysis and communicating effectively with each customer. And it's really pretty straightforward.

When the customers see what changes they made, and how it affects the agreement, that we're not changing price, we're just bringing our price current to what they're changes were, in the same manner that they would have been effected if they weren't under our agreement. And so, we lost only a few customers, less than a handful of customers during that process.

And that 800 that we're talking about here, was just specifically related to, you know, that doesn't include customers that were renewing in the normal process. So this is 800 in addition to the normal renewal customers.

Yeah, that right.

There were those that did get a full price increase.

That was a special project to deal with customers whose rates had become inadequate due to the payroll average decline.

Sure. OK. And can we assume that those 800 clients were, you know, roughly inline with your average of, lets say, 20 work site employees. So that affected about 16,000 work site employees, or was there a number in there, you know, one was a very large customer, a handful of large customers? Do you have an idea of how many work site employees?

Well, that was, you know, I can tell you I don't have the number on the top of my head, but it wasn't, there wasn't anything inordinate about which customers they were. So I would say your assumption is probably a safe one.

OK. In the lay-offs versus new - exceeding new hires in the quarter, can you give what that averaged and how it trended?

During the quarter please?

Sure. You know, what I mentioned in the dialogue was, you know, we're still seeing this bouncing along a bottom. You know, you had two months that were negative, and one month was positive. You also had a little bit of noise in this period, 'cause you have summer help coming on, and things like that.

You know, and clients, a lot of times they'll bring on some summer help, a lot of times in small business it's their kids or..

Sure.

And so on.

So, it's a little bit of noise in there, but I can't say that, you know, as we got to the end of the first quarter, in fact all year long, it's been running about a rate of half of what it was last year. But on months that it's been down, it's been in the 3 - 400 range, you know, sometimes it flips off the other way. But it's, you know, it's in a situation where we're not at a point where we're going to build any change into our outlook.

Right.

We're going to continue to expect, kind of, bounces around.

OK. And then, a final question on the competitive front, did you - have you seen that there's been, some of your competitors have gone out of business, others are facing, you know, questionable - questions of whether or not they're going to be able to renew their work this . I mean, are you gaining market share?

I would expect we certainly are. Obviously when companies go out of business altogether, they fall out of the mix, but in addition to that I think, you know, we do work to try to glean any new customers we can out of those kind of situations, which is usually not much, 'cause their client mix is different than ours. But yes, we're continuing to grow and our knowledge from what we hear out in street, is there's a lot of other companies in our business that have had a difficult growing in this period. And I think it is, you know, for us to be accelerating our growth back in the double-digit growth year-over-year is a very strong sign of the demand for our services and how effective the job our sales team is doing right now.

OK thank you very much.

Our next question comes from of Credit Suisse First Boston.

Yeah thanks. Just to follow up on the pricing front a little bit, is there anyway you could quantify for us the, what an average customer would see as far as a price increase goes, you know relative to the total payroll, say one that's renewing, coming up here in August, on a year-over-year basis?

Yeah, I can give you kind of a feel for that. And remember our customers look at it on a percentage of payroll basis. You look at our total gross mark up as a comparison to payroll, it runs about 23 percent. OK? So the customer is looking at 123 percent of payroll. The payroll itself is 23 percent more as their total all in service fee cost to Administaff. Now now benefits component of 23 percent, runs around seven percent. So they're seeing a 25 to 30 percent increase, they're seeing around a two percent on the 23, so the 23 goes to 25 percent, so that's kind of what they're looking at. They're saying "Wow, my total payroll is going from 123 to 125". Does that answer your question?

That answers it spot on! Along the same lines then, can you talk a little bit the timing of the price increases you've taken, in specific, you've talked about the increase in benefits costing a little bit ahead of expectations as you've gotten greater levels of detail on the claims data. As you look back, over, say the last quarter, what is your pricing experience been, and have you continued to have to escalate to make up that gap?

Well like I say, for billing forward, obviously the information about the cost side is fresh mid-July, but we've been moving price up aggressively, will we move up more aggressively? You know, we're going to push as hard as we can on that side of the equation, but the reality is what we now know is, we know what the targets are, so we feel much better about the visability and we have other strategies that we have had in our hip pocket in this eventuality, so what we'll do at this point is keep moving price as much as possible, and as much as is appropriate on a client by client basis, but we're going to snap the picture back into place through the cost side which is also much more reliable, you can make plans, design changes, and you say OK our target is five percent of claim cost, you can, you know exactly what you can tick in the design that generates that much lower claim cost. So that's our approach to it because our commitment is we're not going into 2003 subsidizing healthcare costs.

I think it's also important for everybody to know that, you know people assume that there's a lot of you know, front end of the year, and all our contracts renew at the front end of the year, and that's really kind of not true because in current, where we are right now, there's about 40 percent of our customers that'll be renewing between now and the end of the year, so we still have quite a bit of dollars coming our direction from customers with you know, increased pricing.

OK, thanks guys.

We'll take our next question from of .

Good morning.

Hi Randy.

What are the key differences between the final united contract and last years admin contract?

What is the final difference?

I know there's a price. You know obviously the price, the rates have changed. I'm wondering structurally if there's anything different in terms of your potential liability between the two contracts now?

The only difference between the two policies or the two contracts was the security deposit. That caused us to have to deal on the accounting side and account for the plan as if it were a partially self funded plan. Even though it's a fully insured plan so, lets say that our total cost to the plan this year ended up being $20 million more than we. Lets say total cost of plan this year ended up being $22 million more than what we funded in OK.

United would have the right to come after only the 20 million which is in the security deposit at this point and they would literally have to take care of the rest. So, that's the difference between you know, having a self funded plan verses a fully insured plan and legally in every state that we operate in, we obviously have to have a fully insured plan and in terms, what that simply means is that if the company leaves, then who is on the hook to pay the claims?

That is the health insurance carrier and our plan.

Right, OK.

And I also think it's important to note that what we have funded in in monthly premiums has been sufficient to fully fund all claims, administrative expenses and reserve bills through this period, even at the higher level of claims than what were expected. So, you know, we're still in good shape on that front.

So, was I think I heard this correctly but maybe not. Just to clarify, was the cost or the charge, what United charged you in the first and second quarter combined, have you expensed that same amount through the first half of the year?

Well absolutely. You bet.

OK and then I guess one other question on that. It looks like the current cost of benefits monthly maybe a little bit higher than what was trying to charge in the second half of the year, last year. On a per employee basis, I'm wondering if there's any implications to their counter suit related to that?

We don't believe so although you know, we're advised at this point in the law suit not to comment on you know, anything related to at this point.

OK, thank you very much I appreciate that.

Our next question comes from of .

Heah guys. Just want to clarify the normalized health increase. In your press release you said you had a 28.1 percent benefits cost increase and on the call I believe you said that was a 28 percent health cost increase and I want to know if that is normalized for the fact that some of this related to the first quarter.

Ah well lets go back through that the actual cost increase on a per covered work site employee that we had reported in the first quarter $449 per employee per month. The actual amount of you know taking in with our change of estimates that is now being expensed into the second quarter, it is now produced a mathematical calculation of $492 per works unemployed for months of the second quarter, that's on covered works unemployed. Now but when you look at the claims that were paid for the six months, and regardless of when they were paid, you know the objective is you gotta kinda lay them back into the month they were incurred, and then you look at what your costs would have been and recalculate the covered cost per employee, the first quarter normalized would have been $459 per covered employee per month and the second quarters covered employee cost per month was $483, so that trend is about a five percent sequential increase. Does that answer your question.

Not exactly the, so the normalized the 43 versus last year, is that up 28 percent or is

the 492 is up 28 percent.

OK so I can, your real health care cost is not up 28 percent year over year

Its only 26 percent year over year on a normalized basis.

That's a lot closer to what you were anticipating.

That's correct.

OK and just one other quick question you mentioned in the first quarter, a new client 600 employees, does that client, was that client brought on in the second quarter.

Yes Sir.

Great, in June.

I know it was June but I don't I really don't know if any of them got paid in May or not I it was just June.

Thank you very much.

Thanking you.

Our next question comes from of .

Paul can you give me a little more detail on the stowing system it seems to me if your implementing it starting third and fourth quarter and all that pricing variability that's going on its really not going its not going to be down with us for at least another year. Is that a fair assessment cos if you started doing it now you know on a data kind of process do you understand my question.

Yeah I do David. Let me give you some more clarification, remember there's two things we're doing about that problem, one of them is monitoring monthly any account that gets out of step with their original pricing and doing a mid-term contract correction, just like we did on the 800 accounts we did recently, so that you know will have to be done on fewer and fewer accounts as you bring them on to the new system, but the new system is in development right now and will be well down the fall campaign and we will by January the goal is to have renewing accounts for that period and new accounts sold in the fall campaign coming onto the new system. It is true that over the course of next year we will have you know some accounts that we'll still have to do the month to month catch-up, but I think you know we kind of built that into our expectation.

OK let me see if I can summarize this before I understand it right. So once you get this thing implemented and the clients are using it and all the little old kind of variations we've seen whether its you know unemployment or health care or some of the things that in December all of that should be billed for as it incurs.

Absolutely, it's really exciting this is a watershed event for our company to put this in play to where it snaps the picture in play.

How do you know this thing works, I mean I would usually do a test but I mean these things move around so much you guys have trouble predicting them for quarter to quarter?

The system works and takes out the predicting part.

yeah, David I think it's important to note that - you know we have used this system on over on about 200 customers that because we had over the last couple of years - there were that many customers were their average pay was changing from pay period to pay period because they had you know customer or employees who were - you know had compensation that was tied to performance or sales commissions and stuff like that and so we had to literally develop the kind of system tow years ago and it's applied to those 200 customers every billing cycle right now and has been for over a year.

So, what we're doing now is to refine that system so that we can you know have a structure roll out for all existing and new business coming into the beginning of next year.

David one other thing is what we're gonna be able to do in this process and the reason we're being deliberate about it is once we get the system fully developed I want to run the system across last year and this years data.

So, we have you know billed the testing environment so that we can say what if this pricing and billing system were in effect for 2001 and 2002 and we'll be able to see the difference.

And Paul maybe I didn't hear you so you know - is that include like health care changes or is that just more or less taxes and things like that - salary levels.

No, it includes benefit election changes as employees make those changes.

But only the changes so the costs are going up - OK - I

Yeah, costs will still go up at renewal for a customer but we actually even have some items in there that where customers may be able to for some new things.

But we're still working on some possibilities - you know some customers may prefer a smaller quarterly move than an annual large . Som, we're working on some other possibilities I'll go into a lot more detail about that quarter out once we've got it locked down.

Ok thank you.

Our next question comes from of

t j: Hi Richard, Paul - the question I had was about operating expenses the last few years you spent a lot of money on technology yet your salaries and G&A at per - it works out employee had gone up quiet a bit - you said you were gonna cut back on the expenditures but I would have expected by now that you know the number of employees it takes to handle would be going down and that the cost per work side employee would be going down not up.

I think over the last three years each of those has gone up 16 and 32 percent. Have you realized the savings that you thought would form you r technology spending?

The answer to the question T J is yes the reason that you don't see it in the numbers that your looking at is because included in that salaries and wages is also the base salary of all of our sales people.

So, you know we've had you know a pretty dramatic growth of 100 or so sales people over the last 18 months and so that's been reflected, is reflected in the absolute dollar amount that your looking at.

I think that we've done this before, we just didn't do it on this call but we have talked about the fact that our growth in corporate head count other than sales people have been growing at a lot less write than the number in our sales organization and of course that's by design.

Yes, I guess what's confusing is though commissions have not being going up, in fact they've been kind of trending down, you know work side employee's but your saying your increasing sales meant by a lot I would think that you would you know if that's contributing so much to an increase in salaries and wages I would think that commissions would be effected as well.

Well there's you know, you've got a, obviously for a sales people early on in their career and we got a lot of them early on in their career the bigger component of their compensation is the salary.

The part that in the commission line item is the residual commission, the other line item where they, when they receive an enrolment bonus for new business, actually up as part of our other revenue, up in the top because it's a match against a fee that we charge for an enrolment fee to the customer.

So in our other direct cost is the enrolment fee's, bonus's that we pay when a sales person sales a new account and brings them on so it really kind of got it spread in three different areas.

Back to hit you for a second because it's a very good question. We also over the last couple of years have had some areas of some technical expertise that we just needed to staff up and get them right.

For example we got a just a top or benefits support staff now that obviously necessary for operating the business. So we've had, we've always had other areas we needed to bring up to speed. We had definitely seen tremendous efficiency on the service side of the organization but Richard is right, historically we've used that to grow the sales staff and bolster some other areas of the company.

But that is part of what I was saying is so exciting for going forward. We don't have any of those areas we have to shift that to going forward and you know I think we're seeing time coming ahead of us where we're really, everybody's going to see that leverage come to the bottom instead of us having to explain where we used it.

Great, thank you very much.

And before this call is over I will see if I can get, get that information on how, what this small amount of growth in corporate count excluding sales is so you all can have that as well.

Our next participant is of Morgan Stanley.

Thanks, good morning Paul and Richard.

Hi Chris

Hi Chris.

Just a couple of follow up questions here on the health care side sounds as if obviously the health care inflation rate continues to be relatively high, that's no surprise but in addition the claims experience is also tracking a bit worse than expected and that to me seems a bit surprising and I seems you guys talked for a few quarters now was they thought the claims experience under Etna was distorted upwards and going forward under the new carriers you would see better claims experience. Am I missing something or is in fact the claims experience worse than you expected and what's the driver behind that?

Yeah, Chris no your not, actually the only thing that your missing in that whole dialogue is what you did, what we've never talked about and what we cannot talk about is with the data that we had in the Etna they were using as well to base our 2002 and beyond rates reflected an on going problem on their side of paying claims, or paying claims inaccurately, so that's the only piece of information if you were to sit and compare the two, you would certainly see a pretty dramatic difference.

Yeah, I was certainly disappointed, the level of claims are higher then we expected, but I am really relieved to know, what they really are, because that's what determines our effectives at managing through this into the future.

Did you have a sense for why the claims are higher? Is it maybe a detoriation of the volume in the customer base? Is it kind of?

No, this is back, well what we you know in communicating with our carrier and our outside consultants, what we are finding is that our plan is very much in line with the general small business community. You know, there is nothing in ordinary higher about our plan. You know, so we're comfortable and in good shape there and offering a great value to customers, better then what they can get in the market place and add a tremendous value equation.

OK. Second follow up question, regarding the new pricing structure, is it you'll be better testing in the second half of the year. If I understood this correctly, this will protect Administaff against the changes in the employee mix, cause it will be a real time price adjustment per employee. But by contrast, it won't protect Administaff if cleaned experience is most then forecasted or if healthcare inflation rates continue to be worst then your currently budgeting. Is that a correct assessment?

Yeah, that would be correct, I mean we have to deal with that through our contracting structure, how we project the cost, which of course now we have a lot better information to do that with. And I think you can tell from even our forecasting the balance of the year, you know, you'll have to built in a range that's reasonable to expect and then you got to make sure you've dealt with it on the, you know, using all the levers, to make sure the prices are right in the base.

OK. And I assume, you believe that going forward, you have better visibility on the likely claims experience and the healthcare costs more generally, but in spite of that, increase visibility, do you have any increased thoughts on trying to further modify the pricing structure so much, that the claims experience and the healthcare costs are directly past on, dollar to dollar in real times for the customers?

Well like I say, we have some ideas, on how, how that can happen, closer to real time, but you know, we are not ready to talk about those ideas.

OK. Also with the pricing issue, I guess 800 of 4,000 plus customers have had did contract repriced. Have you effectly repriced every customer word that would be appropriate to do so?

Again that is on an on-going basis, because you know, we took the 800 that we could see, we're out of step during the May period and then every month, we would be looking at any customers that appear to be out of step from that most recent month information.

OK. And then finally, if I could, I guess it sounds as if you have a little bit of excess cash going into the third quarter. What is your current thoughts on sharing purchases on the current stock price?

Well, I can tell you, that you know, we have obviously, we are always, you know in a share repurchase program. We still have about a million shares left on the current authorization. We are also at this point, finishing up you know, the completion of our corporate facilities in this next quarter.

So you know, for us it's kind of like we are always committing excess cash to use in the share repurchase plan and we will continue to do that as well.

OK. All right, thanks guys.

Just to go back before we have our next question. I did want to go back and give and answer one question that was asked earlier. And that was about our compensation costs and our value was increasing. I can tell you that our head count of our corporate staff, this year over last, excluding our sales organization, on the grew of 11 percent. So lower than that reflects the other one.

Next question?

As well seeing that we have time constraints if you could please limit your questions to one, you would be able to wrap this up quickly. I'd like turn the program over actually to our next participant Mr. James Pringle of .

It's actually Tom .

I know this is kind of complicated but is there any sense that you can give us in terms of a how many clients now are kind of at the appropriate level of gross profit. Ye mentioned that 40 percent were re priced between now and the beginning of the year and I think Paul you tell me that everyone in 2003 will kinda be at the appropriate profitability level but can you give us an idea of that other 60 percent, how many of those are?

Ya Tom as far that dynamic obviously you know we have been re-pricing customers at certain rates, we've got some new information about the health care side. You got to look at each customers specific health care experience to say whether theirs is right or not, so we manage it both client by client and in the aggregate. What's more important to the company right now is getting it to snap into place in the aggregate and so its really I don't have that information with me and it wouldn't be that as far as how many customers as this dynamic is changing. What's important is that we get to the end of the year, keep moving that total cost and the aggregate and we twice up in the aggregate and then snap the cost into place due to benefit changes. That's the plan-designed changes.

But would it be fair to say by January 01 that evidently that's it is reasonable to believe that you're cost your gross profit should be kinda back in historical levels, is that fair?

That's our goal and we feel good about that, we have the strategy and the tactics for being executed to do that and we're committed to that which is the most important thing we're committed to making sure that as this experience continues to come forward as we continue to exercise all the proper activities that will bring this together we're committed to doing that in the 2003 we' re going to have a match on price and cost only question left is as we get closer too that what other changes have to be made to be sure that you snap that in place and we intend to do that.

I just want to draw down more specifically on the buy back issue, you have 15 million more of capex I think you said but obviously now your in a careful positive mode. How much capacity do you think you'd have to by back stock and if and when you know cause a million shares is only fortunately about five and half million bucks now when would the board need to consider a larger authorization and specifically how much capacity do you think you have to buy back stock in the next three to six months.

Well first of all the authorization that we have from our board from even our last board meetings you know indicated that until we used up the existing authorization which still has a million shares on it that they wouldn't be discussing the issue again.

Second of all I think it's important that we understand that to operate this company in a safe level you need to maintain a current ratio that at least 1.0 so in other words you've got positive working capital so you can't take all your positive working capital and buy back stock even though that would be a thing that you would think would be the fruit thing to do. So, when the economy has been soft you got to be a little bit more conservative. I just can't let out as much as I want to every dollar to go buy back stock. We've got to keep stuff to make sure that we continue to grow the business into next year.

We're going to take every opportunity that's reasonable.

Yeah, all right guys, thanks you.

Once again, if you could please limit yourself to one question that would be appreciated. We'll take our next question from Jim Wilson of JMP Securities.

Thanks. Good morning all, I'll try to keep it short since it's been on already. Any thoughts or do you have a data, I know you went through the revenues change in percentages per region but, any thoughts or numbers that you have to the rate of salary or pay roll change, particularly looking at where it's been stronger or weaker or any other trends you see there?

We're still working on some of that. Obviously that information is pretty fresh.

OK so.

The initial look is that it's very much across the board.

Oh yeah.

But, we like to drill down further in you know, really see it through any but we're still working on that.

OK so, it could be a reasonable assumption that since the South West revenues were down modestly, it's sort of flat employee base and slightly down income would be a fair assessment?

Yes it would definitely yes.

OK, great. Thanks.

Our next question comes from of .

Yes. Did you kind of any more income for the workers contract that you have in the second quarter?

Did we any income?

You had a rebate last quarter.

Oh you mean the dividend.

Yeah.

No actually we didn't.

OK and one other real quick one. I guess the actual worst sign of pulling numbers and would have with the unemployment conditions out there. If you guys had a flat on an actual basis, is the worst sign employees for flat from this quarter to next quarter, what direction would the average go?

I don't think I understand the question.

Because you guys had averages, is the average worse unemployed numbers different than the average number because you guys in the fourth quarter, the lay offs were still high, but then in the first quarter you guys had a better than expected sign up of actual worst sign employee. My calculation, I'm coming up at the end of the first quarter you guys had about 77,000 employees but at the end of the second quarter you only have about 76,000.

Would that be accurate?

No. I think you got some numbers

We got a higher level today.

Oh yeah.

So the actual is above the average is what I'm asking?

Oh absolutely yes.

OK, all right thank you.

Our next question comes from of ARG.

Yeah thanks for taking my question. Can you hear me OK.

Sure David, go ahead.

OK good. Going back to some comments, you had this asset that you recorded $6 million based on you believe that the Texas commission is issued the denial of your application and it's concerning. I would have to classify that as aggressive. Is there a problem that if you had called an expense, then your current ratio would have dropped below 1 and then that would have caused a load of problems or what would be the implication if indeed this is reversed and then you had negative working capital?

Well the cash is already paid in, one in effect is working capital at all, we don't think the position we're taking on it, is aggressive either, it's a proper accounting for the facts connected to the asset.

Well, in working capital, current assets...

Actually...

You have the six million of current assets?

Yes, the accountant here will answer the question.

All right.

Yes, it would affect the current assets, they would go down, because it is a prepaid item right now, and so, it would reduce those current assets.

But then, do you agree with me, then, you would have negative working capital?

Well no, not necessarily, because I think that there would have been some other things that would have offset that, because of, I mean if you just took that number out, yeah, I guess the answer to your question, would be, yes.

Well obviously, it's yes, I mean, you're an accountant.

On a stand-alone basis, that's exactly correct. The fact of the matter is, though, that the position that looks, we had, the facts of this issue, are very, are very much straight forward.

We have done two reorganizations in our history. And every state has been approved, including Texas. The only reason, that except for this one time, and the only reason that they have in the process that we're in, and it is a process before it ever gets to court, the process that we're in right now, where they are, they can't make a determination because the dollar amount is higher than what the regulatory person would be willing to accept, I mean, they're not, they have a mandate to keep all the dollars in the commission that they possibly can, but the facts of the matter are, very clear, we have an Attorney Generals opinion, from the state of Texas, that says, what they're doing for the reasons of being too a lot of dollars, they can't do.

OK, and then one last clarification point, you're quoted as saying, although we're very disappointed in the higher than expected level of medical claims costs, etcetera, can you explain to me, why you don't know what your premiums are going to be, at the beginning of any quarter, and why in the world, would claims come in from employees...

I think that was explained earlier in the script, and if you'll go back and read through it, it's very plain.

Yeah, it will be on the website in probably in another hour, so, if you want to go back through that.

OK, but you, are you paying premiums, or you paying claims?

No, well actually, no, we pay, we fund a premium, and the carrier pays the claims. So, if there's any confusion about that, I don't want there to be any, the amount of premiums that we have funded, is, what we call our funding caps, but, we have to account for the plan, because there is a security deposit, that's in place, that says that if we were to leave the carrier relationship, and we had not funded in enough to cover the ultimate cost of the plan, then they would have access to the security deposit, while its that treatment of the security deposit, that causes us on the accounting side, to have to account for the plan, like it was a partially self funded plan, when in fact, the contract is a fully insured contract.

OK, so if the amount of these payments that you're making for some type of targeted premium don't match up by year-end, and you stay with United Healthcare, then does the company come up with a difference outside of that security deposit?

No.

OK all right.

So that's why we have to assume that, you know we almost have to, the way we have to account for the plan, the way we're managing the plan is we have to make this assumption like you know we would be leaving at the end of every 90 days. But we're obviously not.

Right. So that is a difference between, going back to another question, that is a big difference between the United contract and the contract, where...

Oh absolutely, yeah, we've had plenty of discussion about that difference in the last three calls.

Right, and then so you actually had a premium that you knew what it was on any one quarter.

Yeah, it's kind of like in the difference between the two is that the contract, the funding cap was our expense cap, and in this relationship, the funding cap is just a funding cap, but our expense could in fact be higher or lower, based on how the planes actually came in.

OK. That's still kind of confusing, but I don't want to take up anymore of your time. Thank you.

OK, well call me back if you got some other questions. I'd be happy to try to answer them for you.

Our next question comes from of .

Hey guys.

Hey Mike.

Just a quick question here. I was reading. Hi can you hear me?

No Sir, you're breaking up on us.

Can you hear me?

I can now.

Can you hear me? Great. A quick question here, on the United Healthcare contract, has that been signed yet?

Yes, it was.

Are we going to see an AK filed, with digital details on it?

No. It'll be in the 10-Q, yes.

It'll be in the 10-Q?

Yeah, and it is actually in our press release, we announced that it had been completed.

And you guys mentioned that you were going to be cash flow from operations positive in Q3 and Q4.

Sure.

Does that include capital expenditures as well? Or can you give some sort of guidance on what you expect free cash flow to be in Q3 and Q4, as we sort of go forward here?

Actually I did that in my script.

OK.

That was talked about during the, just a little while ago. You might want to go back to that, and it'll be on the web site in just a few minutes.

Did you give any specific projections in terms of a number or a target we can shoot for?

I didn't, no I didn't give a specific dollar amount of operating cash flow, but it's always positive in the latter half of the year, because payroll taxes are declining at a pretty rapid rate, and our billing to our customer stays the same. So that's why we actually do have earnings in the third and fourth quarter of the year that are always higher than the first two quarters of the year. And because they don't have to pay those out either, we obviously have the same.

Great. And I assume that we can expect current ratio to be above the one times test after the..

Oh, sure.

The third and fourth quarter as well.

Oh absolutely.

Great. All right, thanks guys.

You bet.

Our next question comes from Greg Powell of Sanford Bernstein.

Hi. I'm still a little confused on the self insured versus fully insured issue. Let me see if I have this right.

OK.

OK. Your using insurance accounting and your PNL are subject to - is subject to big swings in health care costs, as they occur. But from a regulatory standpoint, as long as United will step in and pay claims in the event of your bankruptcy, that's all regulators require for you to be fully insured?

That's exactly correct. That is the definition of full insurance is, is that the carrier is responsible for paying all claims that are incurred during the policy period, regardless of what happens to the insurer - the employer.

OK could you give us operating cash flow for this quarter.

For the second quarter.

Ya.

You probably can but I just don't have here in front of me.

Ok thanks.

Our final question comes from of .

Thanks and a quick housekeeping, can you tell me what payroll taxes was as a percent of payroll costs and what workers was as a percent of fee payroll cost in the quarter.

Ya actually I dealt with those in the script information let me see what they were real quick. Ya payroll taxes were 7.4 percent of payroll and workers compensation cost was 1.26 percent of the payroll.

Thank you.

There are no further questions at this time. I would like to turn the program back over to

: Thank you everyone we appreciate your a participation on the call today and I believe that covers it. Thank you. Bye Bye.

This concludes today's conference call, you may now disconnect your lines and thank you for participating.