Earnings per share for 2005 were affected by a reduction in gross margins due to the start-up of new facilities and equipment, the increased cost of direct labor, higher overhead expenses, and new product launches as well as a 1.4% decline resulting from the new procedure tray business in Richmond. Net income for 2004 included a severance expense, costs relating to Sarbanes-Oxley compliance, and a gain from a litigation settlement for a total of approximately $792,000 (net of tax), or $0.03 per share.
Sales of every category of Merit’s products grew for the year ended December 31, 2005, compared with the year ended December 31, 2004. Catheter sales rose 17%; stand-alone devices increased 9%; custom kits rose 6%; and inflation devices rose 5%. Sales of procedure trays contributed 2.4% to total sales.
  
Gross margins were down from 44.6% of sales for calendar year 2004 to 41.5% of sales for calendar year 2005. The gross margin decline was due primarily to the factors listed above, compared to the year ended December 31, 2004.
Selling, general and administrative expenses were 23.2% of sales for the calendar year 2005, compared with 23.2% of sales for the year 2004.
Merit’s effective tax rate for the calendar year 2005 was 34.0%, compared to 36.0% for the year 2004. The decrease in the effective tax rate for 2005 over 2004 was the result of the reimbursement by the Company of costs incurred by its Irish operation for the development of two new products that are taxed at a lower income tax rate than in the United States.
Research and development costs were 4.2% of sales for the year ended December 31, 2005, compared to 3.4% of sales for the year 2004. The increase in R&D was related primarily to R&D head count additions and indirect costs to support an increase in the number of products launched by the Company.