Goodwill amortization increased by 47.1% for the six months ended June 30, 2001, compared to the same period in 2000, primarily due to our acquisitions during the past twelve months.  However, due to the increase in revenue over the same period, goodwill amortization remained equal to 0.5% of revenue for the six months ended June 30, 2001.

Interest expense increased by $305, or 67.9%, to $754 for the six months ended June 30, 2001 from $449 for the corresponding period in the prior year.  This was primarily due to the additional borrowing incurred to fund our acquisitions made over the past twelve months.

The effective income tax rate for the six months ended June 30, 2001 was 39.0%, which represents an increase from the 37.7% effective income tax rate in the six months ended June 30, 2000.  This increase is a result of the growth in our pre-tax income in 2001 versus 2000, which would increase our statutory federal income tax rate from 34% to 35%.

Net income improved 34.3% to $4,472, or $0.35 cents per diluted share for the six months ended June 30, 2001, compared to $3,331, or $0.27 cents per diluted share for the six months ended June 30, 2000.  This was due to increased revenue, and a reduction in selling, general and administrative expense as a percentage of revenue, which decreased from 27.8% to 24.0% for the six months ended June 30, 2001, more than offsetting the decline in operating margins and net income as a percentage of revenue.

Total diluted shares for the six months ended June 30, 2001 increased to 12,792 from 12,434 for the six months ended June 30, 2000.  This 2.9% increase was primarily due to two factors: an increase in the number of nonqualified stock options that are “in the money” and the issuance of shares under the 2000 Employee Stock Purchase Plan.

Net cash flow used by operations for the six months ended June 30, 2001 was $4,321, compared to $2,199 provided by operations during the same period in 2000.  Of the overall $4,321 cash used in the six months just ended, acquisitions completed over the past twelve months used $5,769, while existing offices acquired before January 1, 2000 provided $1,538 in positive cash flow.  The major cause of our overall use of operating cash flow for the six months just ended was an increase in accounts receivable. Of the $9,585 increase in accounts receivable in the current year, $6,331 was attributable to new acquisitions and $3,254 to offices acquired before January 1, 2000.  For most of our recent acquisitions, accounts receivable were not acquired.  Therefore, as our new offices generated revenue, their accounts receivable grew, resulting in negative operational cash flows.  The $3,254 increase in accounts receivable for offices acquired before January 1, 2000 can be directly attributed to the increased revenue of those offices for the six months ended June 30, 2001 versus the same period in 2000. 

Net cash flow used in investing activities in the six months ended June 30, 2001 was $11,537, an increase of $8,673 over the $2,864 cash used in the same period in 2000.  The major reason for the increased use of cash was payments for acquisitions, net of cash acquired, of $10,320, consisting of $10,029 paid at closing, plus $291 in subsequent payments.  For the six months ended June 30, 2000, $2,255 of cash was used for acquisitions, of which $223 related to a new acquisition and $2,032 consisted of additional consideration paid on 1996 and 1997 acquisitions.  Payments for equipment increased by $767, to $1,329 in the six months ended June 30, 2001 over the $562 spent in the six months ended June 30, 2000.  Of the $1,329 spent in the current year, $597 was spent on infrastructure improvements such as computer upgrades and leasehold improvements, $293 was spent for revenue-producing equipment (home medical rental equipment) and $439 was spent on new software development projects.

Net cash flow provided by financing activities was $15,768 in the six months ended June 30, 2001 compared to $665 provided in the first six months of 2000.  The increase was primarily due to additional borrowings of $7,250 on the term loan and an overall increase of $7,491 on our revolving credit facility to fund the cash purchase price and short-term operating cash flow needs of new acquisitions completed in the first six months of 2001.

LIQUIDITY AND CAPITAL RESOURCES

We have financed our operations and acquisitions from operating cash flows and borrowings.  Our principal demands for liquidity are working capital, acquisition activities and debt service.

As of June 30, 2001, our loan facility provided for a secured revolving credit facility of up to $25,000 and an unsecured term loan facility of up to $15,000.  Under the term loan facility, we were able to enter into unsecured term loans until June 30, 2001.  Repayment under the term loan facility will be made on a four-year amortization schedule, with the first payment due July 1, 2001.  However, the entire balance is due February 2002.

Availability under the revolving credit facility is related to percentages of our outstanding accounts receivable and inventory balances, less certain ineligible amounts, as defined in the facility. Overall borrowings allowable under the revolving credit facility were limited to the lesser of $25,000 or the total allowable collateral base.

The loan facility requires us to meet certain financial covenants including a fixed charge coverage ratio, a debt ratio, and a debt to operating cash flow ratio.  We are also subject to limitations on annual capital expenditures, our ability to make acquisitions, our ability to declare cash dividends and various other matters.

As of June 30, 2001, we had an aggregate of $17,101 outstanding under the revolving credit facility with an average interest rate for the first six months of 2001 of 7.5%.  Also, as of June 30, 2001, we had an aggregate of $10,250 outstanding under the term loan with an average interest rate for the first six months of 2001 of 8.7%.

As of June 30, 2001, we had no cash and cash equivalents, which equals the amount of cash and cash equivalents on hand as of December 31, 2000.  Under our revolving credit facility, we can borrow or pay down on our existing debt on a daily basis.  We have instituted a policy of using excess cash balances, if any, to retire outstanding debt under our loan facility.

Total debt outstanding was $27,522 as of June 30, 2001, which represents an increase of $14,738, or 115.3%, over the amount of debt outstanding as of December 31, 2000.  The increase was largely the result of borrowings made by us in the first six months of 2001 to fund acquisitions and their associated working capital needs.  Also, the increase in accounts receivable during the first quarter of 2001, which was the result of higher company revenue from internal and acquisition growth during that period, resulted in reduced cash flows from operations and higher borrowing requirements.

We believe that cash flow from operations, amounts available under our revolving credit facility, and cash generated from the proceeds of the sale of our equity securities will be sufficient to meet our operating cash for the immediate future, including interest and principal repayments due under our existing term loan.  In the event that additional capital is required or we are unsuccessful in accessing the market for our common equity, management cannot assure that such capital can be obtained from other sources on terms acceptable to us, if at all.