| | Our
research and development (R&D) expenses for 2005 increased 37.7% to $7.0 million,
compared to $5.1 million in 2004; increased 9.8% to $5.1 million, compared to
$4.6 million in 2003; increased 15.4% to $4.6 million in 2003, compared to $4.0
million in 2002. The increase in R&D in 2005, 2004, and 2003 was related primarily
to R&D head count additions and indirect costs, to support an increase in the
number of new products we launched. Our research and development costs as a percentage
of sales were 4.2% for 2005 and 3.4% for 2004 and 2003. We believe that the development
of 10-12 projects at any given time is an appropriate level of R&D for our current
capabilities, and are likely to provide six to eight new products a year through
R&D, regulatory, manufacturing, marketing, and sales introduction. Our
effective tax rates for 2005, 2004, and 2003 were 34%, 36%, and 36%, respectively.
The decrease in the effective tax rate for 2005 over 2004 was the result of the
reimbursement by the U.S. parent of costs incurred by its Irish operation for
the development of two new products which are taxed at a lower income tax rate
than the U.S. The increase in the effective tax rate for 2003 over 2002 was mostly
due to lower taxable income in 2003 for our Irish operations, which are taxed
at a lower rate than our U.S. operations. The change in taxable income for Irish
operations from 2003 to 2002 was the result of increased costs associated with
the development of a new product. Our other operating
income for 2003 was the result of a gain of $507,928 on sale of land adjacent
to our Company’s South Jordan, Utah facility. Our
other income for 2005, 2004, and 2003 was approximately $379,000, $666,000, and
$885,000, respectively. The decrease in other income for 2005 over 2004 was affected
by a net decrease in a litigation settlement of $100,000, an increase in foreign
currency transaction loss of approximately $67,000 and a decrease in interest
income of approximately $65,000. The decrease in other income for 2004 over 2003
was affected by a net decrease in a litigation settlement of approximately $375,000,
offset by an increase in 2004 of interest income of approximately $170,000. The
increase in other income for 2003 over 2002 related mostly to the settlement of
a legal dispute of $475,000, an increase in interest income of approximately $289,000,
and a decrease in interest expense of approximately $84,00 compared to the same
period in 2002. Our net income for 2005 was $15.8
million, compared to $17.9 million for 2004. Net income for 2004 was $17.9 million,
compared to $17.3 million for 2003. Net income for 2003 was $17.3 million, compared
to $11.3 million for 2002. Net income for 2005 and 2004 was negatively affected
by lower gross margins, higher research and development spending, selling, general
and administrative expenses, and positively affected by increased sales volumes.
Net income for 2003 and 2002 was favorably affected by higher sales, gross profits
and an increase in other income. Under the recently
issued Financial Accounting Standard Board Statement (FASB) No. 123R, Share-based
Payment, we will be required to apply the expense recognition provisions of this
pronouncement to equity-based incentives such as stock options. In anticipation
of this pronouncement, during 2005 and 2004 we made grants to management and employees
for a total of 774,976 and 807,296 shares of our common stock, respectively, which
vested immediately upon grant, rather than over five years as has been our historical
practice. Additionally, subsequent to December 31, 2004, we accelerated the vesting
on 427,448 options with an exercise price of $21.67, which was in excess of the
current market price. The immediate vesting of options and the acceleration of
options which have exercise prices that are above the current market value of
our common stock are anticipated to reduce our compensation expense by approximately
$2.8 million and $3.2 million, respectively, in future periods under the provisions
of FAS No. 123R, which we believe is in the best interest of Merit and its shareholders.
Effective January 1, 2002, we adopted Statement
of Financial Accounting Standards (SFAS) No. 142, Goodwill and Other Intangible
Assets. Under SFAS No. 142, we no longer amortize goodwill from business acquisitions,
but review annually the impairment of goodwill, or more frequently if impairment
indicators arise. We completed its initial testing of goodwill as of January 1,
2002 and determined that there was no impairment. We have elected to perform our
annual testing of goodwill impairment as of July 1 of the applicable fiscal year.
As of July 1, 2005, we updated our testing of goodwill for impairment and determined
that there was no impairment. The unamortized amount of goodwill at December 31,
2005, was approximately $6.5 million. | |
