Overview

The Company designs, develops, manufactures, sells and distributes products and components, primarily for the medical and healthcare industry. The Company markets components to other equipment manufacturers for incorporation in their products and sells finished devices to physicians, hospitals, clinics and other treatment centers. The Company's medical products primarily serve the fluid delivery, cardiovascular, and ophthalmology markets. The Company's other medical and non-medical products include instrumentation and disposables used in dialysis, contract manufacturing and valves and inflation devices used in marine and aviation safety products. In 2008 approximately 35 percent of the Company's sales were outside the United States.

The Company's products are used in a wide variety of applications by numerous customers. The Company encounters competition in all of its markets and competes primarily on the basis of product quality, price, engineering, customer service and delivery time.

The Company's strategy is to provide a broad selection of products in the areas of its expertise. Research and development efforts are focused on improving current products and developing highly-engineered products that meet customer needs in niche markets that are large enough to provide meaningful increases in sales for the Company. Proposed new products may be subject to regulatory clearance or approval prior to commercialization and the time period for introducing a new product to the marketplace can be unpredictable. The Company also focuses on controlling costs by investing in modern manufacturing technologies and controlling purchasing processes. The Company has been successful in consistently generating cash from operations and has used that cash to reduce indebtedness, to fund capital expenditures, to make investment purchases, to repurchase stock and to pay dividends.

The Company's strategic objective is to further enhance its position in its served markets by:

· Focusing on customer needs;

· Expanding existing product lines and developing new products;

· Maintaining a culture of controlling cost; and

· Preserving and fostering a collaborative, entrepreneurial management structure.

For the year ended December 31, 2008, the Company reported revenues of $95.9 million, operating income of $23.0 million and net income of $15.7 million, up 8 percent, 14 percent and 12 percent, respectively, from 2007.

Results of Operations

The Company's net income was $15.7 million, or $8.03 per basic and $7.82 per diluted share, in 2008, compared to net income of $14.0 million, or $7.42 per basic and $7.06 per diluted share, in 2007 and $10.8 million, or $5.82 per basic and $5.51 per diluted share, in 2006. The 2007 results included a special net benefit of $695,000, or $0.35 per diluted share, attributable to a favorable dispute resolution offset partially by certain initial costs related to the termination of the Company's defined benefit pension plans, as described below. Revenues were $95.9 million in 2008, compared with $88.5 million in 2007 and $81.0 million in 2006. The 8 percent revenue increase in 2008 over 2007 and the 9 percent revenue increase in 2007 over 2006 were generally attributable to higher sales volumes.

Annual revenues by product lines were as follows (in thousands):

                   2008         2007         2006

Fluid Delivery   $ 32,209     $ 28,745     $ 25,809
Cardiovascular     29,263       23,577       23,290
Ophthalmology      15,192       17,614       13,744
Other              19,231       18,604       18,177
Total            $ 95,895     $ 88,540     $ 81,020

The Company's cost of goods sold was $53.3 million in 2008, compared with $50.8 million in 2007 and $48.6 million in 2006. Increased sales volume, increased material costs, and increased manufacturing overhead costs were the primary contributors to the 5 percent increase in cost of goods sold for 2008 over 2007. The 5 percent increase in cost of goods sold for 2007 over 2006 was primarily related to increased sales volume, increased material costs and increased manufacturing overhead costs.

Gross profit in 2008 increased $4.7 million to $42.5 million, compared with $37.8 million in 2007 and $32.4 million in 2006. The Company's gross profit was 44 percent of revenues in 2008, 43 percent of revenues in 2007 and 40 percent of revenues in 2006. The increase in gross profit percentage in 2008 from the prior year was primarily due to improvements in manufacturing efficiencies.

Operating expenses were $19.6 million in 2008, compared with $17.6 million in 2007 and $18.1 million in 2006. The increase in operating expenses in 2008 from 2007 was primarily due to the recordation in 2007 of a special $1.4 million benefit, net of expenses, related to a dispute settlement. This benefit was reflected in 2007 as a decrease in operating expenses. Additionally, increases in general and administrative ("G&A") expenses and research and development
("R&D") expenses were partially offset by decreases in selling ("Selling")
expenses. In 2008, G&A expenses increased $496,000 primarily related to compensation costs. G&A expenses consist primarily of salaries and other related expenses of administrative, executive and financial personnel and outside professional fees. R&D expenses increased $191,000 in 2008 as compared to 2007 primarily related to increased compensation costs and increased outside services. R&D expenses consist primarily of salaries and other related expenses of the research and development personnel as well as costs associated with regulatory matters. In 2008, Selling expenses decreased $85,000 primarily related to decreased outside services, advertising and promotional expenses partially offset by increased travel expenses. Selling expenses consist primarily of salaries, commissions and other related expenses for sales and marketing personnel, marketing, advertising and promotional expenses.

The decrease in operating expenses in 2007 from 2006 was primarily related to the special item described above, partially offset by increases in selling and general and administrative expenses. Selling expenses increased $286,000 in 2007, primarily as a result of increased outside services, promotion and advertising expenses. In 2007, G&A expenses increased $592,000, primarily attributable to a $329,000 charge related to the termination of certain pension plans, increased compensation and benefit costs partially offset by lower costs for outside services.

The Company's operating income for 2008 was $23.0 million, compared with $20.2 million in 2007 and $14.3 million in 2006. The increase in gross profit partially offset by the increase in operating expenses was the major contributor to the 13.9 percent operating income improvement in 2008. The increase in gross profit and the decrease in operating expenses described above were the major contributors to the operating income improvement in 2007.

The Company's interest income for 2008 was $299,000 compared with $57,000 in 2007 and $91,000 in 2006. The increase in 2008 was primarily related to the increased level of investments during 2008.

Interest expense was $10,000 in 2008 compared to $251,000 in 2007 and $253,000 in 2006. The decrease in 2008 was primarily the result of reduced borrowing levels. The decrease in 2007 was primarily related to lower interest rates and reduced borrowing levels. Interest of $326,000 was capitalized in 2006 during the construction of the new facility for Halkey-Roberts.

Income tax expense in 2008 totaled $7.6 million, compared with $6.0 million in 2007 and $3.6 million in 2006. The effective tax rates for 2008, 2007 and 2006 were 32.7 percent, 30.0 percent and 25.2 percent, respectively. Benefits from tax incentives for domestic production, exports and R&D expenditures totaled $896,000 in 2008, $1.0 million in 2007 and $1.6 million in 2006. Expenses from changes in uncertain tax positions totaled $218,000 in 2008. Benefits from changes in uncertain tax positions totaled $168,000 in 2007. The lower effective tax rate in 2006 was primarily a result of a review and documentation of the Company's R&D tax credits for 2005 and prior-year tax returns which indicated that the Company was entitled to higher credits than had been claimed. The Company expects the effective tax rate for 2009 to be approximately 33.0 percent.

Over the past ten years, the Company has achieved meaningful annual increases in operating revenues, operating income, net income from continuing operations and diluted earnings per share from continuing operations. During this ten-year period, the Company has been able to achieve this growth even during declines in economic activity. The United States and world economies have recently been deteriorating at an unprecedented pace. This resulting decline in global demand makes it difficult to make accurate predictions for 2009 results. The Company hopes to achieve at least modest growth in 2009, but is unable to predict at what level.

Discontinued Operations

During 2006, the Company recorded a gain of $165,000 after tax, on the disposal of discontinued operations related to the 1997 sale of its natural gas operations. This gain represented $.09 per basic share in 2006 and $.08 per diluted share in 2006. This amount is net of income tax expense of $85,000. Under the terms of the 1997 agreement, the Company received a contingent deferred payment of $250,000, before-tax, from the purchaser in April 2006. No payments were due under this agreement after 2006.

Liquidity and Capital Resources

The Company has a $25.0 million revolving credit facility (the "Credit Facility") with a money center bank to be utilized for the funding of operations and for major capital projects or acquisitions, subject to certain limitations and restrictions (see Note 5 of Notes to Consolidated Financial Statements). Borrowings under the Credit Facility bear interest that is payable monthly at 30-day, 60-day or 90-day LIBOR, as selected by the Company, plus one percent. The Company had no outstanding borrowings under its Credit Facility at December 31, 2008 or at December 31, 2007. The Credit Facility, which expires November 12, 2012, and may be extended under certain circumstances, contains various restrictive covenants, none of which is expected to impact the Company's liquidity or capital resources. At December 31, 2008, the Company was in compliance with all financial covenants and had $25.0 million available for borrowing under the Credit Facility. The Company believes that the bank providing the Credit Facility is highly-rated and that the entire $25.0 million under the Credit Facility is currently available to the Company. If that bank were unable to provide such funds, the Company does not expect such inability to impact the Company's ability to fund operations.

At December 31, 2008, the Company had cash and cash equivalents of $12.1 million compared with $3.5 million at December 31, 2007. The Company had short-term investments of $4.7 million at December 31, 2008.

Cash flows from continuing operations of $19.5 million in 2008 were primarily comprised of net income plus the net effect of non-cash expenses offset by net changes in working capital items. Accounts receivable and inventories were the primary contributors to the net change in working capital items. The change in inventories was related to increased stocking levels necessary to support current operations. In addition, in mid-2008 the Company began a program to purchase critical raw material in large volumes to hedge against future price increases and take advantage of volume discounts. Given the dramatic change in the economics for raw material, advance purchasing to hedge against price increase was discontinued in the fall of 2008. The increase in accounts receivable was primarily related to increased revenues in 2008 as compared with the same period in 2007. However, the Company did not experience a significant change in the number of day's sales outstanding or inventory turns. Cash provided by operating activities consisted primarily of net income adjusted for certain non-cash items and changes in working capital items. Non-cash items included depreciation and amortization and deferred income taxes. Working capital items consisted primarily of accounts receivable, short-term investments, accounts payable, inventories and other current assets and other current liabilities.

At December 31, 2008, the Company had working capital of $42.9 million, including $12.1 million in cash and cash equivalents and $4.7 million in short-term investments. The $17.2 million increase in working capital during 2008 was primarily related to increases in cash and cash equivalents, short-term investments, accounts receivable and inventories. The increase in cash and short-term investments was primarily related to amounts generated from operations. The increase in accounts receivable and inventory were described above.

Capital expenditures for property, plant and equipment totaled $5.4 million in 2008, compared with $7.9 million in 2007 and $20.9 million in 2006. The $5.4 million expended in 2008 and the $7.9 million expended in 2007 were primarily for the addition of machinery and equipment. Of the $20.9 million expended for the addition of property, plant and equipment during 2006, the Company expended $15.5 million toward the construction of the new St. Petersburg facility for its Halkey-Roberts operation. The Company completed the construction of its St. Petersburg facility and moved Halkey-Roberts operations into the new facility during the third quarter of 2006. The total cost of the new facility was $20.0 million and the cost of the land was $3.8 million. The Company expects 2009 capital expenditures, primarily machinery and equipment, to increase slightly over the average of the levels expended during each of the past two years.

The Company decreased its outstanding borrowings under the Credit Facility by $11.4 million in 2007. During 2006, the Company increased its outstanding borrowings under the Credit Facility by $8.9 million and repurchased 24,000 shares of its common stock for approximately $1.6 million.

The Company paid dividends totaling $2.1 million, $1.7 million and $1.4 million during 2008, 2007 and 2006, respectively. The Company expects to fund future dividend payments with cash flows from operations.

The table below summarizes debt, lease and other contractual obligations outstanding at December 31, 2008:

                                              Payments due by period

Contractual Obligations    Total       2009         2010 - 2011      2012 and thereafter
                                                  (In thousands)
Purchase Obligations      $ 7,770     $ 7,644     $          95     $                  31
Total                     $ 7,770     $ 7,644     $          95     $                  31

In the current credit and financial markets, many companies are finding it difficult to gain access to capital resources. In spite of the current economic conditions, the Company believes that its $16.7 million in cash, cash equivalents and short-term investments, cash flows from operations and available borrowings of up to $25.0 million under the Company's Credit Facility will be sufficient to fund the Company's cash requirements for at least the foreseeable future. The Company believes that its strong financial position would allow it to access equity or debt financing should that be necessary. The Company believes that its capital resources should not be materially impacted by the current economic crisis. Additionally, the Company believes that its cash and cash equivalents and short-term investments will continue to increase in 2009.

Off Balance Sheet Arrangements

The Company has no off-balance sheet financing arrangements.

Impact of Inflation

The Company experiences the effects of inflation primarily in the prices it pays for labor, materials and services. Over the last three years, the Company has experienced the effects of moderate inflation in these costs. At times, the Company has been able to offset a portion of these increased costs by increasing the sales prices of its products. However, competitive pressures have not allowed for full recovery of these cost increases.

New Accounting Pronouncements

In September 2006, the Financial Accounting Standards Board ("FASB") issued SFAS No. 157, Fair Value Measurements ("SFAS 157"). SFAS 157 defines fair value, establishes a framework for measuring fair value and expands fair value measurement disclosures. In February 2008, the FASB issued FASB Staff Position ("FSP") FAS 157-2, Effective Date of FASB Statement No. 157 ("FSP FAS 157-2"). The FSP defers the effective date of SFAS 157 to fiscal years beginning after November 15, 2008 for nonfinancial assets and nonfinancial liabilities except for items that are recognized or disclosed at fair value on a recurring basis at least annually and amends the scope of SFAS 157. The Company adopted SFAS 157 in 2008 except for those items specifically deferred under FSP FAS 157-2. The Company is currently evaluating the impact of the full adoption of SFAS 157 on its consolidated financial statements. The Company believes that SFAS 157 will not result in a material impact on its consolidated financial statements upon adoption.

In December 2007, the FASB issued SFAS No. 141(R), Business Combinations ("SFAS 141R"). SFAS 141R amends accounting and reporting standards associated with business combinations and requires the acquiring entity to recognize the assets acquired, liabilities assumed and noncontrolling interests in the acquired entity at the date of acquisition at their fair values. In addition, SFAS 141R requires that direct costs associated with an acquisition be expensed as incurred and sets forth various other changes in accounting and reporting related to business combinations. SFAS 141R applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. An entity may not apply SFAS 141R before that date. The Company will apply SFAS 141R to any acquisition after the date of adoption.

In April 2008, the FASB issued FSP FAS 142-3, Determination of the Useful Life of Intangible Assets ("FSP FAS 142-3"), to provide guidance for determining the useful life of recognized intangible assets and to improve consistency between the period of expected cash flows used to measure the fair value of a recognized intangible asset and the useful life of the intangible asset as determined under FASB Statement 142, Goodwill and Other Intangible Assets ("FAS 142"). The FSP requires that an entity consider its own historical experience in renewing or extending similar arrangements. However, the entity must adjust that experience based on entity-specific factors under FAS 142. FSP FAS 142-3 is effective for fiscal years and interim periods that begin after November 15, 2008. The Company intends to adopt FSP FAS 142-3 effective January 1, 2009 and to apply its provisions prospectively to recognized intangible assets acquired after that date.

From time to time, new accounting pronouncements applicable to the Company are issued by the FASB or other standards setting bodies, which the Company will adopt as of the specified effective date. Unless otherwise discussed, the Company believes the impact of recently issued standards that are not yet effective will not have a material impact on its consolidated financial statements upon adoption.

Critical Accounting Policies

The discussion and analysis of the Company's financial condition and results of operations are based on the Company's consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. In the preparation of these financial statements, the Company makes estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities. The Company believes the following discussion addresses the Company's most critical accounting policies and estimates, which are those that are most important to the portrayal of the Company's financial condition and results and require management's most difficult, subjective and complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. Actual results could differ significantly from those estimates under different assumptions and conditions.

During 2008, the Company accrued for legal costs associated with certain litigation. In making determinations of likely outcomes of litigation matters, the Company considers the evaluation of legal counsel knowledgeable about each matter, case law and other case-specific issues. The Company believes these accruals are adequate to cover the legal fees and expenses associated with litigating these matters. However, the time and cost required to litigate these matters as well as the outcomes of the proceedings may vary from what the Company has projected.

The Company maintains an allowance for doubtful accounts to reflect estimated losses resulting from the failure of customers to make required payments. On an ongoing basis, the collectibility of accounts receivable is assessed based upon historical collection trends, current economic factors and the assessment of the collectibility of specific accounts. The Company evaluates the collectibility of specific accounts and determines when to grant credit to its customers using a combination of factors, including the age of the outstanding balances, evaluation of customers' current and past financial condition, recent payment history, current economic environment, and discussions with appropriate Company personnel and with the customers directly. Accounts are written off when it is determined the receivable will not be collected. If circumstances change, the Company's estimates of the collectibility of amounts could be changed by a material amount.

The Company is required to estimate its provision for income taxes in each of the jurisdictions in which it operates. This process involves estimating its actual current tax exposure, including assessing the risks associated with tax audits, together with assessing temporary differences resulting from the different treatment of items for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included within the balance sheet. The Company assesses the likelihood that its deferred tax assets will be recovered from future taxable income and to the extent it believes that recovery is more likely than not, does not establish a valuation allowance. In the event that actual results differ from these estimates, the provision for income taxes could be materially impacted.

Pension plan benefits are expensed as applicable employees earn benefits. The recognition of expenses is significantly impacted by estimates made by management such as discount rates used to value certain liabilities and expected return on assets. The Company uses third-party specialists to assist management in appropriately measuring the expense associated with pension plan benefits. In the event that actual results differ from these estimates, pension plan expenses could be materially impacted.

The Company liquidated all pension plan investments in September 2007 in conjunction with the decision to terminate the plan. At December 31, 2008, all remaining assets were invested in a money market account. The Company did not make any contributions to the plan during 2008, and it believes that no further contributions to the plan will be required to finalize the plan termination based upon the plan's year-end funded status. The Company estimates that future benefit payments will be less than $50,000 in 2009 prior to the final payout for the plan termination which will likely occur in mid- 2009 after all regulatory approvals are received. The Company currently projects benefit payments for the final payout to be approximately $3.7 million. After all plan obligations are settled, the Company intends to move all remaining plan assets into its 401(k) plan to offset future contributions to that plan.

The Company assesses the impairment of its long-lived identifiable assets, excluding goodwill which is tested for impairment pursuant to SFAS 142 as explained below, whenever events or changes in circumstances indicate that the carrying value may not be recoverable. This review is based upon projections of anticipated future cash flows. While the Company believes that its estimates of future cash flows are reasonable, different assumptions regarding such cash flows or future changes in the Company's business plan could materially affect its evaluations. No such changes are anticipated at this time.

The Company assesses goodwill for impairment pursuant to SFAS 142 which requires that goodwill be assessed whenever events or changes in circumstances indicate that the carrying value may not be recoverable, or, at a minimum, on an annual basis by applying a fair value test.

During 2006, 2007 and 2008, none of the Company's critical accounting policy estimates required significant adjustments. The Company did not note any events or changes in circumstances indicating that the carrying value of material long-lived assets were not recoverable.