margins. Accordingly, our overall gross profit is affected by, among other things, product mix, the amount of processing performed, the availability of steel, volatility in selling prices and material purchase costs. We also perform toll processing of customer-owned steel, the majority of which is performed by our Michigan and Georgia operations. We sell certain products internationally, primarily in Puerto Rico and Mexico. All international sales and payments are made in U.S. dollars. Recent international sales have been immaterial to our consolidated financial results.
Our results of operations are affected by numerous external factors including, but not limited to, general and global business, economic, financial, banking and political conditions, competition, steel pricing and availability, energy prices, pricing and availability of raw materials used in the production of steel, inventory held in the supply chain, customer demand for steel, customers' ability to manage their credit line availability and layoffs or work stoppages by our own, our suppliers' or our customers' personnel. The steel industry also continues to be affected by the global consolidation of our suppliers, competitors and end-use customers.
Like many other steel service centers, we maintain substantial inventories of steel to accommodate the short lead times and just-in-time delivery requirements of our customers. Accordingly, we purchase steel in an effort to maintain our inventory at levels that we believe to be appropriate to satisfy the anticipated needs of our customers based upon customer forecasts, historic buying practices, contracts with customers and market conditions. Our commitments to purchase steel are generally at prevailing market prices in effect at the time we place our orders. We have no long-term, fixed-price steel purchase contracts. When steel prices increase, competitive conditions will influence how much of the price increase we can pass on to our customers. To the extent we are unable to pass on future price increases in our raw materials to our customers, the net sales and profitability of our business could be adversely affected. When steel prices decline, as they did in the fourth quarter of 2008 and have continued to decline in 2009, customer demands for lower prices and our competitors' responses to those demands could result in lower sales prices and, consequently, lower margins as we use existing steel inventory.

As selling prices further declined in March 2009, our average selling prices fell below our average cost of inventory requiring us to recognize an inventory lower of cost or market adjustment effective as of March 31, 2009. We were required to write down the value of our inventory to its net realizable value, less reasonable costs to complete the inventory into finished form, resulting in a $30.6 million charge at the end of the first quarter of 2009.
Due to the ongoing global economic crisis and the unprecedented drop in sales, we have taken significant steps to reduce our operating expenses. We estimate that we have reduced our annual operating expenses for 2009 by approximately $65 million, or 35%, compared to our total annual 2008 operating expenses. The cost reductions have been achieved through various initiatives, including headcount reductions of 21% from peak 2008 levels, elimination of temporary labor and overtime, reduced work hours to match depressed customer production schedules, company-wide base pay reductions ranging from 2.5% to 10%, including cash compensation reductions taken by our executive management team equal to 20% of each executives' base salary, a 20% cash compensation reduction of our Board of Directors' fees, benefits reductions and heightened control over all discretionary spending.
At March 31, 2009, we employed approximately 1,070 people; however, due to the ongoing global economic crisis, some of those employees were temporarily laid-off and many of our hourly employees worked less than 40 hours per week. Approximately 170 of the hourly plant personnel at our Minneapolis and Detroit facilities are represented by four separate collective bargaining units. A collective bargaining agreement covering our Minneapolis plate facility workers was extended to March 31, 2012. Collective bargaining agreements covering Detroit and other Minneapolis employees expire on June 30, 2009 and September 30, 2010, respectively. We have never experienced a work stoppage and we believe that our relationship with employees is good. However, any prolonged work stoppages by our personnel represented by collective bargaining units could have a material adverse impact on our business, financial condition, results of operations and cash flows.

Critical Accounting Policies
This discussion and analysis of financial condition and results of operations is based on our consolidated financial statements, which have been prepared in conformity with accounting principles generally accepted in the United States. The preparation of these financial statements requires management to make estimates and assumptions that affect the amounts reported in the financial statements. Actual results could differ from these estimates under different assumptions or conditions. On an ongoing basis, we monitor and evaluate our estimates and assumptions.
For further information regarding the accounting policies that we believe to be critical accounting policies and that affect our more significant judgments and estimates used in preparing our consolidated financial statements, see Management's Discussion and Analysis of Financial Condition and Results of Operations contained in our Annual Report on Form 10-K for the year ended December 31, 2008.

Results of Operations
The following table sets forth certain income statement data for the three
months ended March 31, 2009 and 2008 (dollars are shown in thousands):

                                                              For the Three Months Ended March 31,
                                                            2009                                2008
                                                                   % of net                            % of net
                                                     $               sales               $               sales
Net sales                                       $ 140,873            100.0 %        $ 274,875            100.0 %
Gross profit before lower of cost or
market adjustment (1)                              20,557             14.6 %           66,268             24.1 %
Gross profit (loss) after lower of cost
or market adjustment                              (10,052 )           (7.1 %)          66,268             24.1 %
Operating expenses (2)                             31,918             22.7 %           45,041             16.4 %
Operating income (loss)                         $ (41,970 )          (29.8 %)       $  21,227              7.7 %

(1) Gross profit is calculated as net sales less the cost of materials sold and excludes the inventory lower of cost or market adjustment.

(2) Operating expenses are calculated as total costs and expenses less the cost of materials sold and the inventory lower of cost or market adjustment.

Tons sold decreased 45.6% to 171 thousand in the first quarter of 2009 from 315 thousand in the first quarter of 2008. Tons sold in the first quarter of 2009 included 151 thousand from direct sales and 20 thousand from toll processing, compared with 280 thousand direct tons and 35 thousand toll tons in the comparable period of last year. Tons sold in the first quarter of 2009 were significantly lower to all markets we sell due to recessionary pressures and unprecedented crises in global financial markets. Many of our large original equipment manufacturers had numerous plant closings and significant reductions in their production schedules during the first quarter of 2009. We expect these market conditions and reduced sales volumes to continue through the second quarter of 2009 and beyond.
Net sales decreased 48.8% to $140.9 million in the first quarter of 2009 from $274.9 million in the first quarter of 2008. The decrease in sales was primarily attributable to lower overall sales volumes and a decline in average selling prices due to recessionary pressures and the ongoing global economic crisis. Average selling prices in the first quarter of 2009 were $822 per ton, compared with $871 per ton in the first quarter of 2008, and $1,109 per ton in the fourth quarter of 2008. Average selling prices have continued to decline in the second quarter of 2009.

As a percentage of net sales, gross profit, before the inventory lower of cost or market adjustment, decreased to 14.6% in the first quarter of 2009 from 24.1% in the first quarter of 2008. The price of steel purchased from steel producers began to decrease in late third quarter of 2008. At the same time, customer demand began to decrease significantly due to the ongoing global economic crisis, which resulted in lower overall selling prices. This condition continued during the fourth quarter of 2008 and first quarter of 2009. Our average cost of goods sold increased during these periods as we sold steel we acquired on earlier dates at higher prices. The higher cost of goods sold, combined with lower selling prices resulted in decreased gross margin. We expect this situation to continue or worsen in the second quarter of 2009. Lower sales volumes and worsening market conditions, also resulted in our inventory levels being higher than expected.
As selling prices further declined in March 2009, our average selling prices fell below our average cost of inventory requiring us to recognize an inventory lower of cost or market adjustment effective as of March 31, 2009. We were required to write down the value of our inventory to its net realizable value (average selling price less reasonable costs to complete the inventory into finished form), resulting in a $30.6 million charge at the end of the first quarter of 2009. We have experienced further declines in average selling prices during April 2009. Further declines in average selling prices in 2009 could result in us incurring additional inventory lower of cost or market adjustments in the future.
Operating expenses in the first quarter of 2009 decreased $13.1 million from the first quarter of 2008. Lower operating expenses in the first three months of 2009 were primarily attributable to decreased levels of variable incentive compensation associated with lower levels of profitability (the majority of which was recorded in general and administrative operating expense captions, with a portion also recorded in the warehouse and processing and selling expense captions), decreased distribution expense resulting from reduced shipping levels (recorded in the distribution expense caption) and decreased warehouse and processing expense associated with lower levels of sales.
Due to the ongoing global economic crisis and the unprecedented drop in sales, we have taken significant steps to reduce our operating expenses. We estimate that we have reduced our annual operating expenses for 2009 by approximately $65 million, or 35%, compared to our total annual 2008 operating expenses. The cost reductions have been achieved through various initiatives, including headcount reductions of 21% from peak 2008 levels, elimination of temporary labor

and overtime, reduced work hours to match depressed customer production schedules, company-wide base pay reductions ranging from 2.5% to 10%, including cash compensation reductions taken by our executive management team equal to 20% of each executive's base salary, a 20% cash compensation reduction of our Board of Directors' fees, benefits reductions and heightened control over all discretionary spending. Continued decline in customer demand may require us to take further expense reduction actions. Bankruptcies of domestic automotive manufacturers and their suppliers could lead to higher bad debt expense in the future.
Interest and other expense on debt totaled $243 thousand for the first quarter of 2009 compared to $27 thousand for the first quarter of 2008. Our effective borrowing rate, exclusive of deferred financing fees and commitment fees, for the first three months of 2009 was 2.0% compared to 5.3% in the first three months of 2008. In April 2009, as a result of deteriorating market conditions and our inventory lower of cost or market adjustment, we obtained a bank amendment to modify certain financial covenants on our revolving credit facility. As part of the amendment, our average cost of borrowings, exclusive of deferred financing fees and commitment fees, is expected to increase to approximately 5% to 6% beginning in April 2009.
For the first quarter of 2009, loss before income taxes totaled $42.2 million compared to income of $21.2 million in the first quarter of 2008. An income tax benefit of 39.7% was recorded for the first three months of 2009, compared to a tax provision of 37.9% for the first three months of 2008. The majority of the 2009 losses can be carried back to prior years, resulting in future income tax refunds. Income taxes paid totaled $0 and $835 thousand for the first three months of 2009 and 2008, respectively.
Net loss for the first quarter of 2009 totaled $25.5 million or $2.34 per basic and diluted share, compared to net income of $13.2 million or $1.21 per diluted share for the first quarter of 2008.
Liquidity and Capital Resources
Our principal capital requirements include funding working capital needs, purchasing, upgrading and acquiring processing equipment, facilities and other businesses and paying dividends. We use cash generated from operations, leasing transactions and our revolving credit facility to fund these requirements. Working capital at March 31, 2009 totaled $260.2 million, a $7.0 million increase from December 31, 2008. The increase was primarily attributable to a decrease in accounts payable of

$27.2 million (associated with lower steel prices and reduced steel purchases), a decrease in accrued expenses of $8.9 million (associated with the payment of 2008 incentives) and an increase in prepaid and other current assets of $15.0 million (associated with income taxes receivable), partially offset by a $15.3 million reduction in accounts receivable (resulting from lower sales volumes) and a $29.2 million reduction in inventories (inclusive of the $30.6 million inventory lower of cost or market adjustment).
For the three months ended March 31, 2009, we used $27.8 million of net cash for operations, of which $3.2 million was related to cash losses and $24.6 million was used for working capital.
During the first three months of 2009, we spent $7.2 million on capital expenditures. The expenditures were primarily attributable to the completion of projects that were started during the second half of 2008, including the expansion of our Chambersburg, Pennsylvania facility, the completion of a new office building in Winder, Georgia, site work for our new Sumter, South Carolina facility and work associated with our new single business system. During the remainder of 2009, we expect to spend approximately $8 million on these projects and maintenance-type capital expenditures. However, if market conditions continue to deteriorate during the remainder of 2009, we may be required to curtail our capital expenditures in order to increase our liquidity. We are continuing the process of implementing a new single business system to replace the existing systems we currently use. During the first three months of 2009, we expensed $459 thousand and capitalized $1.6 million associated with the implementation of the new information system. Since the project began in 2006, we have expensed $6.7 million and capitalized $10.8 million associated with the implementation of the new information system.
During the first three months of 2009, we generated $35.3 million from financing activities, which primarily consisted of $48.9 million of borrowings under our revolving credit facility, partially offset by a $13.1 million decrease in outstanding checks.
In February 2009, our Board of Directors approved a regular quarterly dividend of $0.05 per share, which was paid on March 16, 2009 to shareholders of record as of March 2, 2009. In April 2009, our Board of Directors approved a regularly quarterly dividend of $0.02 per share, which is payable on June 15, 2009 to shareholders of record as of June 1, 2009. This is a reduction of $0.03 per share from our first quarter 2009 dividend. Regular dividend distributions

in the future are subject to the availability of cash, the $2.25 million annual limitation on cash dividends under our credit facility, and continuing determination by our Board of Directors that the payment of dividends remains in the best interest of our shareholders.
Our secured bank-financing agreement is a revolving credit facility collateralized by our accounts receivable, inventories and substantially all of our property and equipment. Borrowings are limited to the lesser of a borrowing base, comprised of eligible receivables and inventories, or $130 million in the aggregate. The credit facility matures on December 15, 2011.
The credit facility, which was amended in April 2009, requires us to comply with various covenants, the most significant of which include: (i) a $20 million reserve on availability, replaced with a minimum availability requirement of $15 million, tested monthly, commencing with the month ending June 30, 2010;
(ii) a minimum consolidated debt service ratio of 1.25, tested monthly, commencing with the month ended June 30, 2010; (iii) a maximum leverage ratio of 1.75, tested quarterly; (iv) commencing with the month ending April 30, 2009, consolidated EBITDA of no less than ($5,000,000) for (a) the one month period ending April 30, 2009, (b) the two month period ending May 31, 2009, and (c) for the three month period ending June 30, 2009 and the three month period ending with each subsequent month thereafter until and including May 31, 2010; commencing with the month ending April 30, 2009 through and including the month ending May 31, 2010, a cumulative consolidated EBITDA for such period of no less than ($10,000,000); (v) limitations on dividends, capital expenditures and investments; and (vi) restrictions on additional indebtedness. As of March 31, 2009, after giving effect to the April 2009 amendment, we were in compliance with our covenants. At May 5, 2009, we had approximately $34 million of availability under the Credit Facility. We believe that funds available under our credit facility and lease arrangement proceeds, together with funds generated from operations, will be sufficient to provide us with the liquidity necessary to fund anticipated working capital requirements, capital expenditure requirements and our dividend declarations over at least the next 12 months. Further, we expect that our working capital and debt levels will decrease in the second quarter of 2009, as we intend to decrease our inventory levels. However, further deterioration of market conditions in 2009 could result in liquidity concerns and adversely impact our ability to remain in compliance with covenants under our credit facility. In the future, we may, as part of our business strategy, acquire and dispose of other companies in the same or complementary lines of business, or enter into and exit

strategic alliances and joint ventures. Accordingly, the timing and size of our capital requirements are subject to change as business conditions warrant and opportunities arise.
Forward-Looking Information
This Quarterly Report on Form 10-Q and other documents we file with the SEC contain various forward-looking statements that are based on current expectations, estimates, forecasts and projections about our future performance, business, our beliefs and management's assumptions. In addition, we, or others on our behalf, may make forward-looking statements in press releases or written statements, or in our communications and discussions with investors and analysts in the normal course of business through meetings, conferences, webcasts, phone calls and conference calls. Words such as "may," "will," "anticipate," "should," "intend," "expect," "believe," "estimate," "project," "plan," "potential," and "continue," as well as the negative of these terms or similar expressions are intended to identify forward-looking statements, which are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements are subject to certain risks and uncertainties that could cause our actual results to differ materially from those implied by such statements including, but not limited to those set forth in Item 1A (Risk Factors), as found in our Annual Report on Form 10-K for the year ended December 31, 2008, and the following:
• further deterioration of steel demand and steel pricing;

• general and global business, economic, financial and political conditions, including the ongoing global credit crisis;

• access to capital and global credit markets;

• competitive factors such as availability and pricing of steel, industry shipping and inventory levels and rapid fluctuations in customer demand and steel pricing;

• the cyclicality and volatility within the steel industry;

• the ability of customers (especially those that may be highly leveraged, those in the domestic automotive industry and those with inadequate liquidity) to maintain their credit availability;

• customer, supplier, and competitor consolidation, bankruptcy or insolvency, especially those in the domestic automotive industry;

• reduced production schedules, layoffs or work stoppages by our own or our suppliers' or customers' personnel;

• the availability and costs of transportation and logistical services;

• equipment installation delays or malfunctions;

• the amounts, successes and our ability to continue our capital investments, including the construction of a new facility in Sumter, South Carolina and our business information system project;

• the successes of our strategic efforts and initiatives to increase sales volumes, maintain or improve working capital turnover and free cash flows, reduce costs, inventory and debt in a declining market, while improving customer service;

• the timing and outcome of inventory lower of cost or market adjustments;

• the adequacy of our existing information technology and business system software;

• the successful implementation of our new enterprise-wide information system;

• the timing and outcome of OLP's efforts and ability to liquidate its remaining assets;

• our ability to pay regular quarterly cash dividends and the amounts and timing of any future dividends; and

• our ability to generate free cash flow through operations, reduce inventory and to repay debt within anticipated timeframes.

Should one or more of these or other risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those anticipated, intended expected, believed, estimated, projected or planned. You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. We undertake no obligation to republish revised forward-looking statements to reflect the occurrence of unanticipated events or circumstances after the date hereof, except as otherwise required by law.
Item 3. Qualitative and Quantitative Disclosures About Market Risk During the past several years, the base price of carbon flat-rolled steel has fluctuated significantly. We witnessed unprecedented steel producer price increases during the first nine months of 2008 followed by unprecedented steel . . .