Recent Trends
We believe that the economic recession in the United States has negatively impacted the entire dental laboratory industry, as price-sensitive consumers postpone elective dental work. The increasing severity of the current economic crisis, coupled with rising unemployment and problems in the housing and credit markets has further eroded consumer confidence. Additionally, we believe that the low cost segment for United States manufactured dental prosthetics has declined as competition from offshore laboratories, primarily those located in China, has become more intensive. While our business has not traditionally focused on this low cost segment of the market, certain customers are sensitive to price competition. As a result, these increasing competitive pressures have restrained somewhat our ability to increase prices. Since 2007, these increasing competitive pressures in the form of low price competition have been partially responsible for decreasing revenues or revenue growth in several marketplaces. In 2008, we partnered with Dentsply-Prident to offer a high quality, economical restoration manufactured in China with FDA registered materials for those practices that are more price focused than our typical customer. We believe that this strategic product offering, which has been made available in select marketplaces based upon individual customer needs and is coupled with patient level disclosures regarding country of origin, materials and our satisfaction guarantee, provides our dentists with a risk-free, outsourced restoration. In addition, we face growing competition from technology-based solutions that allow dentists to fabricate their own restorations without the use of a dental laboratory. These trends appear to be restraining industry growth, and have impacted our results of operations.
The main components of our costs are labor and related employee benefits as well as raw materials, including precious metals such as gold and palladium. Over the past several years competition for labor resources and increases in medical insurance costs, as well as volatility in the prices of many precious metals that we use have driven these costs higher. In 2007, we evaluated and adjusted staffing levels, as appropriate, at each of our locations, while continuing to recognize the need to maintain an available and properly trained workforce. Beginning in the fourth quarter of 2008 and continuing into 2009, we have continued to proactively reduce staffing levels to improve profitability and eliminate excess capacity in response to the economic recession and the decline in consumer discretionary spending. As a result of reductions in staffing levels, our costs for labor and related benefits in the first quarter of 2009 were significantly lower than in 2008. We have also focused on reducing discretionary operating expenses to manage through the current recessionary environment, and as a result our operating expenses were reduced in the first quarter of 2009. Additionally, technology-based dental laboratory CAD-CAM manufacturing solutions have required us to make additional investments in capital equipment. Our ability to afford and utilize these CAD-CAM systems provides us the opportunity to centrally produce product for many of our laboratories at more efficient and profitable levels. We believe we have begun to recognize these efficiencies and will continue to focus on more completely leveraging this technology investment to reduce labor costs. Therefore, we believe that these investments are critical to our long-term business strategy. Acquisitions
We continue to pursue strategic acquisitions, which have played an important role in helping us increase sales from $111,753,000 in 2004 to $171,674,000 in 2008. In March 2005, we completed the acquisition of Green Dental Laboratories, Inc. ("Green"). Green is treated as a separate reportable segment for financial reporting purposes. In October 2006, we completed our largest acquisition to date, that of Keller Group, Incorporated ("Keller") of St. Louis, Missouri. Keller is also treated as a separate reportable segment for financial reporting purposes. Most recently, in September 2008, we completed the acquisition of Dental Art Laboratories, Inc. ("Dental Art") of Lansing, Michigan.
The acquisition of Keller has broadened our marketing strategies and product offerings. In recent years Keller has changed its focus from local markets in the Midwest to the national marketplace. In order to sustain this strategy, Keller invests significantly in product advertising, primarily in dental print publications and direct mail, on products that can generate strong revenue growth. One of these products is the NTI-tss plustm device, an alternative to full-coverage bite guards that is also approved by the FDA for use in the treatment of medically diagnosed migraine pain and jaw disorders.

We have used long-term debt to finance the purchase of Green, Keller and Dental Art. Future acquisitions may also be funded using available debt financing. As a result of these acquisitions, we are more highly leveraged than we were previously. Our interest expense has therefore become a more significant component of our pre-tax earnings. Interest expense in 2006 was $1,523,000 compared to $2,803,000 in 2007 and $2,110,000 in 2008. The decline in 2008 was primarily a result of decreases in interest rates. Similarly, for the quarter ended March 31, 2009, interest expense declined $163,000 to $345,000 from $508,000 for the quarter ended March 31, 2008. Overview of Results of Operations
Sales for the quarter ended March 31, 2009 decreased by $2,269,000 from the quarter ended March 31, 2008. For the period, gross profit decreased by $589,000. Within our cost of sales, labor costs decreased by approximately $769,000 and employee benefits costs decreased by $357,000, as a result of reduced staffing levels. Materials costs declined by $706,000, as a result of lower volume and lower costs for precious metals. Operating expenses declined $1,097,000 in the first quarter of 2009, including decreases in labor and benefits of $1,480,000 and various other expense items as a result of cost reduction efforts and lower fuel prices. Decreases in interest expense also contributed $163,000 to pre-tax earnings. Primarily as a result of reductions in staffing levels, enhanced cost control efforts, and declines in commodity prices and interest rates, net income increased by $378,000, or 22.5% over the results from the first quarter of 2008.
For our most recent fiscal year ended December 31, 2008, sales increased $1,314,000 to $171,674,000. Net sales increased by approximately $2,665,000 as a result of the Dental Art acquisition. Net sales decreased approximately $1,351,000 at dental laboratories owned for the full year ended December 31, 2008 and 2007. Furthermore, approximately $550,000 of sales growth was attributable to the effect of increased prices due to the underlying increases in the prices of precious metals passed through to customers, without which sales growth would have been further negative. The decline in sales was primarily attributable to decreased patient demand, particularly in the fourth quarter of 2008, resulting from the drop in consumer discretionary spending as the recession deepened. Excluding the acquisition of Dental Art, sales declined $2,112,000 in the fourth quarter of 2008 and $4,173,000 in the first quarter of 2009.
For the year ended December 31, 2008, gross profit decreased by $3,132,000 compared to the year ended December 31, 2007. Within our cost of sales, employee benefits costs, primarily health insurance costs, increased by $489,000, as a result of higher claims experience. Labor costs increased by approximately $1,675,000, including $995,000 in cost of sales, over the prior year as a result of base pay increases, including raises related to a modification of the Laboratory Incentive Compensation plan (the "Laboratory Plan"). The former plan was designed to reward operating efficiency. The modified plan is now designed to provide incentives for growth in profits. As a result of these and other design changes, the reported amounts of laboratory incentive compensation were significantly less in 2008 than in the past. Laboratory incentive compensation decreased by $3,281,000 for the year ended December 31, 2008 compared to the prior year. Conversely, labor expenses were somewhat higher within both cost of goods sold and operating expenses.
Our annual goodwill impairment assessment has historically been completed at the end of the second quarter. Based on our initial assessment for 2008, the fair value of our business units exceeded their carrying value and therefore our goodwill was not impaired. As economic conditions worsened in the fourth quarter and our business performance and outlook was not as strong as anticipated at the end of the second quarter, management determined that circumstances had changed enough to perform an additional goodwill impairment test as of December 31, 2008. Based on our evaluation of goodwill, we determined that the fair value of ten dental laboratories in the NDX Laboratories operating segment was less than their carrying value, resulting in goodwill impairment of $6,950,000. As a result of the factors discussed above, particularly the impairment of goodwill, income before provision for income taxes decreased by $9,391,000 or 89.6% to $1,095,000 for the year ended December 31, 2008 compared to 2007.

Liquidity and Capital Resources
On August 9, 2005, we entered into an amended and restated financing agreement (the "Amended Agreement") with Bank of America, N.A. (the "Bank"). The Amended Agreement included a revolving line of credit of $5,000,000, a revolving acquisition line of credit of $20,000,000 and a term loan facility of $20,000,000. The interest rate on both revolving lines of credit and the term loan was the prime rate or, at our option, LIBOR, a cost of funds rate, or the Bank's fixed rate plus a range of 1.25% to 2.25% depending on the ratio of consolidated funded debt to consolidated "EBITDA", as defined in the Amended Agreement. The Amended Agreement required monthly payments of principal on the term loan, based on a seven year amortization schedule, with a final payment due on the fifth anniversary of the Amended Agreement. The Amended Agreement required compliance with certain covenants, including the maintenance of specified net worth, income and other financial ratios.
In October 2006 we borrowed against our acquisition line of credit to finance our acquisition of Keller. In order to refinance the borrowings incurred for the Keller acquisition, we and the Bank executed a Second Amended and Restated Loan Agreement as of November 7, 2006 (the "Second Agreement") comprising uncollateralized senior credit facilities totaling $60,000,000. The Second Agreement amended and restated the Amended Agreement (a) to increase the term loan facility to an aggregate principal amount of $35,000,000 and used the proceeds of the increase in the term loan to repay the portion of the outstanding principal balance under the acquisition line of credit and (b) to adjust the allocation of availability under the lines of credit by increasing the revolving line of credit to $10,000,000 ($5,000,000 of which may be used for future acquisitions) and decreasing the acquisition line of credit from $20,000,000 to $15,000,000. The interest rate on both lines of credit and the term loan was the prime rate or, at our option, LIBOR, a cost of funds rate or the Bank's fixed rate, plus, in each case, a range of 1.25% to 3.00%, depending on the ratio of consolidated total funded debt to consolidated "EBITDA", as each is defined in the Second Agreement. The term loan facility portion of the Second Agreement requires monthly interest payments and monthly payments of principal, based on a seven year amortization schedule, with a final payment due on the fifth anniversary of the Second Agreement. The Second Agreement requires compliance with certain covenants, including the maintenance of specified net worth, minimum consolidated total "EBITDA", debt to income ratio and other financial ratios.
The Second Agreement was amended on May 9, 2008, effective March 31, 2008, to revise certain financial targets within these covenants. Additionally, we and the Bank agreed to consolidate the revolving line of credit with the acquisition line of credit into a single line of credit of $25,000,000 to be used by us for general corporate purposes, including potential acquisitions. The Second Agreement was also amended on September 2, 2008 on account of the acquisition of Dental Art, which increased our outstanding debt and therefore required an adjustment to an affected financial covenant. We further amended the agreement on December 16, 2008 to extend the maturity of the line of credit to November 7, 2011. The amendment changed the interest rate on both the line of credit and the term loan to prime rate or, at our option, LIBOR, a cost of funds rate, or the Bank's fixed rate, plus, in each case, a range of 2.50% to 3.50%, depending on the ratio of consolidated total funded debt to consolidated "EBITDA," as each is defined in the Second Agreement and also increased the commitment fee on the unused portion of the line of credit from 0.125% to 0.50%. In addition, the amendment revised certain financial targets within the covenants. Finally, on March 13, 2009, we amended the Second Agreement to exclude the $6,950,000 goodwill impairment discussed previously from the calculation of "EBITDA," used in determining our compliance with certain financial covenants. These amendments did not change the total availability under the Second Agreement.
As of March 31, 2009, $11,080,000 was available under the consolidated revolving line of credit.

Long-Term Debt:

                                                                  December 31,          March 31,
                                                                      2008                 2009
Term note                                                         $  24,583,000        $ 23,333,000
Borrowings classified as long term under the revolving line
of credit                                                            13,800,000          13,920,000
Borrowings classified as short term under the revolving line
of credit                                                             2,940,000                   -
Other long-term debt                                                    875,000             844,000

Total debt                                                           42,198,000          38,097,000
Less: current maturities                                              5,115,000           5,106,000

Long-term debt, less current portion                              $  37,083,000        $ 32,991,000

The table below reflects the expected repayment terms associated with the long-term debt at March 31, 2009. The weighted average interest rate on all of our borrowings was 3.4% as of March 31, 2009.

                                                   March 31, 2009
                                                   Principal Due

               For the remainder of fiscal 2009   $      5,083,000
               Fiscal 2010                               5,083,000
               Fiscal 2011                              27,338,000
               Fiscal 2012                                  84,000
               Fiscal 2013                                  85,000
               Thereafter                                  424,000

               Total                              $     38,097,000

Liquidity:
Operating activities provided $4,598,000 in cash flow for the three months ended March 31, 2009 compared to $3,114,000 during the three months ended March 31, 2008, an increase of $1,484,000. Our working capital increased by $1,758,000 from $9,527,000 at December 31, 2008 to $11,285,000 at March 31, 2009. The increase was primarily attributable to decreases in current bank debt of $2,950,000, as a result of repayments of borrowings under our credit line, increases in accounts receivable of $488,000, increases in inventory of $451,000 resulting primarily from increased work in process, offset by decreases in other receivables of $837,000, decreases in prepaid expenses of $292,000, increases in accrued liabilities of $379,000, and increases in accounts payable of $551,000 due to timing.
Investing activities consumed $624,000 in cash flow for the three months ended March 31, 2009 compared to $4,140,000 during the three months ended March 31, 2008, a decrease of $3,516,000. Cash outflows related to deferred purchase price payments associated with prior period dental laboratory acquisitions totaled $1,278,000 for the three months ended March 31, 2008, while there were no payments in 2009. Capital expenditures decreased from $2,858,000 at March 31, 2008 to $651,000 at March 31, 2009, primarily due to lower spending on new facilities.
For the three months ended March 31, 2009, financing activities consumed $4,100,000 compared to providing $1,406,000 for the three months ended March 31, 2008. The increased use of cash in financing activities of $5,506,000 is attributable to repayments on our revolving line of credit as a result of greater availability of cash, primarily due to lower investing activities and increases in cash provided by operating activities, as discussed above.
We believe that cash flow from operations and available financing will be sufficient to meet contemplated operating and capital requirements such as those discussed below, for the foreseeable future.