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 current economic crisis, coupled with high unemployment, tight credit and continued problems in the housing market continues to dampen consumer confidence and purchasing activities. 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 somewhat constrained 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 disclosures regarding country of origin, materials and our satisfaction guarantee, provides our dentists with a low-risk, outsourced restoration alternative. 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. Beginning in the fourth quarter of 2008 and continuing into 2009, we proactively reduced 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 six months of 2009 were significantly lower than incurred during the same period 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 six months 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.
As described in more detail below, our focus on controlling costs has resulted in improved profitability, even in the current environment of declining sales primarily due to the economic recession. As the economy comes out of this recessionary period, we anticipate that our new cost structure and improvements in productivity will allow us to capitalize on the expected increase in demand for dental services, as patients who deferred these types of expenditures no longer do so.
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, which is a part of our NADX Laboratory segment.
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, for which we hold exclusive rights for the production of the laboratory fabricated version of this product through March 2023.
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 six months ended June 30, 2009, interest expense declined $296,000 to $725,000 from $1,021,000 for the six months ended June 30, 2008. Overview of Results of Operations
Sales for the six months ended June 30, 2009 decreased by $4,094,000 or 4.7% to $84,014,000 for the six months ended June 30, 2009 from $88,108,000 for the six months ended June 30, 2008. Excluding sales of $3,873,000 from the acquisition of Dental Art in September 2008, sales decreased $7,967,000 or 9.0%. On a sales per day basis, with two less business days in the first six months of 2009 as compared to the first six months of 2008, this decrease in sales was 7.6%. The decline in sales for laboratories held more than one year was primarily attributable to decreased patient demand, beginning in the fourth quarter of 2008, as consumers started to delay certain dental work due to the economic recession, and this trend has continued into 2009.
Despite the decline in revenues of $4,094,000, gross profit for the six month period ended June 30, 2009 decreased by only $426,000, and our gross margins increased from 41.9% in the first six months of 2008 to 43.4% in the first six months of 2009. Within our cost of sales, production labor costs decreased by $1,398,000 and production employee benefits costs decreased by $493,000, as a result of reduced staffing levels and reduced overtime. Materials costs declined by $1,591,000, as a result of lower volume and lower costs for precious metals. Laboratory overhead expenses decreased $190,000 primarily as a result of cost reduction efforts.
Operating expenses decreased $1,450,000 or 4.9% in the first six months of 2009, including decreases in labor and benefits of $758,000 at our laboratories, as a result of reduced staffing levels and various other expense items including delivery service, travel, and advertising expenses, as a result of cost reduction efforts and lower fuel prices. As a result of our improved profitability at certain laboratories, laboratory incentive compensation increased $745,000 to $1,134,000 for the six months ended June 30, 2009 from $389,000 for the six months ended June 30, 2008. Accruals for corporate incentive compensation increased by $465,000 as a result of the achievement of defined earnings targets. Amortization expense increased $181,000 to $731,000 for the six months ended June 30, 2009 from $550,000 for the six months ended June 30, 2008. As a result of these factors, operating income increased $1,025,000 or 14.1% to $8,276,000 for the six months ended June 30, 2009 from $7,251,000 for the six months ended June 30, 2008.
Due primarily to lower interest rates, decreases in interest expense contributed $296,000 to pre-tax earnings. As a result of reductions in staffing levels, enhanced cost control efforts, and declines in commodity prices and interest rates, net income increased by $771,000, or 21.3% to $4,389,000 for six months ended June 30, 2009 from $3,618,000 for the six months ended June 30, 2008. Our second quarter net income improvement of $393,000, an increase of 20.3% as compared to the same quarter of the prior year, follows an improvement of $378,000 in the first quarter.

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% per anum, 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% per anum, 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 in connection with 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% per anum, 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% per anum. 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 in the fourth quarter of 2008 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. While we were in compliance with our debt covenants as of June 30, 2009; we continue to closely monitor our compliance with these covenants in future periods, particularly minimum consolidated total "EBITDA", which may be negatively impacted by, among other things, potential declines in future earnings, including declines attributable to additional goodwill impairment.
As of June 30, 2009, $12,739,000 was available under the consolidated revolving line of credit.

Long-Term Debt:

                                                                  December 31,           June 30,
                                                                      2008                 2009
Term note                                                         $  24,583,000        $ 22,083,000
Borrowings classified as long term under the revolving line
of credit                                                            13,800,000          12,261,000
Borrowings classified as short term under the revolving line
of credit                                                             2,940,000                   -
Other long-term debt                                                    875,000             812,000

Total debt                                                           42,198,000          35,156,000
Less: current maturities                                              8,055,000           5,095,000

Long-term debt, less current portion                              $  34,143,000        $ 30,061,000

The table below reflects the expected repayment terms associated with the long-term debt at June 30, 2009. The weighted average annual interest rate on all of our borrowings was 3.5% as of June 30, 2009.

                                                    June 30, 2009
                                                    Principal Due

                For the remainder of fiscal 2009   $     3,803,000
                Fiscal 2010                              5,082,000
                Fiscal 2011                             25,678,000
                Fiscal 2012                                 84,000
                Fiscal 2013                                 85,000
                Thereafter                                 424,000

                Total                              $    35,156,000

Liquidity:
Our working capital increased by $2,663,000 to $12,190,000 at June 30, 2009 from $9,527,000 at December 31, 2008. Operating activities provided $7,453,000 in cash flow for the six months ended June 30, 2009 compared to $7,282,000 during the six months ended June 30, 2008, an increase of $171,000. The increase in cash flow provided by operating activities during the six months ended June 30, 2009 is due primarily to increased net income of $771,000, increased depreciation and amortization of $265,000, increased payroll and bonus accruals of $980,000, offset by decreases in accounts payable of $1,995,000, due to timing, relative to the six months ended June 30, 2008.
Investing activities consumed $1,070,000 in cash flow for the six months ended June 30, 2009 compared to $7,501,000 during the six months ended June 30, 2008, a decrease of $6,431,000. Capital expenditures decreased $3,354,000 to $1,031,000 for the six month period ended June 30, 2009 from $4,385,000 for the six month period ended June 30, 2008, primarily due to lower spending on new facilities. In addition, for the six months ended June 30, 2008, cash outflows related to deferred purchase price payments associated with prior period dental laboratory acquisitions totaled $1,278,000 and cash outflows related to notes receivable totaled $2,000,000, while there were no such outflows in 2009.
For the six months ended June 30, 2009, financing activities consumed $6,726,000 compared to providing $574,000 for the six months ended June 30, 2008. The increased use of cash in financing activities of $7,300,000 is attributable to repayments on our revolving line of credit primarily as a result of greater availability of cash, due in large part 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.