Somero Regulatory News (SOM)

1 Apr 2008 07:01

Somero Enterprises Inc.01 April 2008 Tuesday, 1 April 2008 THIS ANNOUNCEMENT MAY NOT BE RELEASED, PUBLISHED OR DISTRIBUTED IN OR INTO THE UNITED STATES, CANADA, JAPAN OR AUSTRALIA OR TO US PERSONS (AS DEFINED IN REGULATION S UNDER THE US SECURITIES ACT OF 1933, AS AMENDED) OR TO RESIDENTS, NATIONALS OR CITIZENS OF CANADA, JAPAN OR AUSTRALIA. Somero Enterprises, Inc. (R) Full year results for the twelve months to 31 December 2007 Revenues up over 18% and pre-tax profits up by 30% Strong performance across all product lines Somero Enterprises, Inc. (R), ("Somero" or "the Company") is pleased to reportresults for the twelve months to 31 December 2007. Somero is a North Americanmanufacturer of patented laser guided equipment used for the spreading andlevelling of high volumes of concrete for floors in the construction industry.Somero has operations worldwide and is primarily focused on the non-residentialconstruction industry. Financial Highlights • Revenue increased 18.8% to US$66.4m (2006: US$55.9m) • EBITDA increased 12.2% to US$16.5m (2006: US$14.7m) • Pre-tax income increased 30.5% to US$10.7m (2006: US$8.2m) • Net income before amortisation increased 38.5% to US$10.8m (2006: US$7.8m) • EPS before amortisation of US$0.31 (basic EPS: US$0.20) • Dividend of 3.0c per share declared for the period 1 July 2007 to 31 December 2007, resulting in a full year dividend of 6.0c per share (2006: 0.33c) Business Highlights Another strong performance across all product lines: • Large line equipment sales increased 20.1% to US$30.5m (2006: US$25.4m) • Small line equipment sales increased 13.8% to US$18.1m (2006: US$15.9m) • Other revenues, including the sale of spare parts, refurbished machines and accessories increased 21.9% to US$17.8m (2006: US$14.6m) Strategic growth and expansion plans continue apace: • Revenue balance improved, with international sales accounting for 40.2% of Group revenue (2006: 27.4%) • Units sold into 47 countries outside of North America • Sales into diverse new markets: Aruba, Chile, India, Trinidad & Tobago and Tunisia • New offices opened in key markets of Dubai, China, Germany and Spain • Sales College and senior management relocation within the US to enhance sales efficiency Continued focus on product enhancement: • New Mini-Screed product launched to tap into opportunities in residential market • Enhanced Copperhead and PowerRake models launched Commenting on the results Stuart Doughty, Non-Executive Chairman of Somero said: "I am delighted with the progress we have made in 2007, both in growing ourlines of business and in extending our global reach. International sales nowrepresent over 40% of Group revenues, and we expect to increase this further inthe year ahead. "Whilst we are seeing some signs of slowing equipment purchases in the US, thenon-residential construction market itself in the US remains strong and sales inthe Rest of the World continue to grow in line with our expectations. We remaincommitted to investing in the development of important new markets, whilst beingmindful of the need to regularly review our cost base against prevailing marketconditions. We continue to focus on maximising our cash generation, maintaininghigh levels of customer support and developing new products to keep Somero atthe forefront of this industry." Jack Cooney, President and Chief Executive Officer commented: "In 2008 we will look to expand our presence in emerging markets with newproducts and new sales personnel. Our Group's attractive fundamentals includingstrong cash flow, market position and products, together with an experiencedmanagement team, provide us with a solid platform on which to continue to groworganically and, where appropriate, through selective acquisitions. We lookforward to delivering further on our strategic goals in the year ahead." For further information contact: Financial Dynamics +44 (0)20 7831 3113Harriet Keen / Matt Dixon / Erwan Gouraud Hawkpoint Partners Limited +44 (0)20 7665 4500Christopher Kemball Collins Stewart +44 (0)20 7523 8000Nick Ellis About Somero: Somero(R) designs, manufactures and sells equipment that automates the processof spreading and leveling large volumes of concrete for commercial flooring andother horizontal surfaces, such as paved parking lots. Somero's innovative,proprietary products, including the large SXP(R) Laser Screed(R), CopperHead(R)and new Mini ScreedTM employ laser-guided technology to achieve a high level ofprecision. Somero's products have been sold primarily to concrete contractors for use innon-residential construction projects in over 50 countries across every timezone around the globe. Laser Screed equipment has been specified for use inconstructing warehouses, assembly plants, retail centres and in other commercialconstruction projects requiring extremely flat concrete slab floors by a varietyof companies, such as Costco, Home Depot, B&Q, DaimlerChrysler, variousCoca-Cola bottling companies, the United States Postal Service, Lowe's and Toys'R' Us. Somero's headquarters are located in New Hampshire, USA, and are due to relocateto Florida in July 2008. It operates a manufacturing facility in Michigan, USA,and has a sales and service office in Chesterfield, England. Somero has over 150employees and markets and sells its products through a direct sales force,external sales representatives and independent dealers in North America, LatinAmerica, Europe, the Middle East, South Africa, Asia and Australia. Somero islisted on the Alternative Investment Market of the London Stock Exchange and itstrading symbol is SOM.L. This announcement does not constitute or form part of any offer or invitation tosell, or any solicitation of any offer to purchase, any securities of SomeroEnterprises, Inc. (the "Company"). This announcement may not be released, published or distributed in or into theUnited States, Canada, Japan or Australia or to US Persons (as defined inRegulation S under the US Securities Act of 1933, as amended (the "US SecuritiesAct")) or to residents, nationals or citizens of Canada, Japan or Australia. Thedistribution of this announcement in certain other jurisdictions may also berestricted by law and persons into whose possession this announcement or anydocument or other information referred to herein comes should inform themselvesabout and observe any such restriction. Any failure to comply with theserestrictions may constitute a violation of the securities laws of any suchjurisdiction. No securities of the Company have been registered under the US Securities Act.No securities of the Company may be offered or sold in the United States or toUS persons (as defined in Regulation S under the US Securities Act) exceptpursuant to an effective registration statement under the US Securities Act orpursuant to an available exemption from the registration requirements under theUS Securities Act. No securities of the Company have been registered under the applicablesecurities laws of Australia, Canada or Japan and may not be offered or soldwithin Australia, Canada or Japan or to, or for the account or benefit ofcitizens or residents of Australia, Canada or Japan. Somero Enterprises, Inc. (R) Full year results for the twelve months to 31 December 2007 Chairman's Statement 2007 was an excellent year for Somero, with growth across all product lines andparticularly strong growth in Europe and emerging markets. During the period wesignificantly reduced our debt and have started to realise the benefits of ourinvestment in resources in those areas of the world where we have identifiedconsiderable, long-term growth potential for our business. Overview Our continued focus on high-quality engineering, coupled with a commitment tocontinuous product development and high levels of customer service, has enabledus to deliver a very successful year with financial results at the high end ofthe market's expectations. Somero's products have helped to revolutionise theconcrete placing industry, so much so that they are increasingly recognised byblue chip logistics and retail customers as essential to achieving greaterlevels of operating efficiency in their own highly competitive markets. Our policy of providing spares and service back-up, coupled with a comprehensivetraining programme, and making customers' needs our top priority is helping usmaintain our strong market position and clearly differentiates us from anycompetition. In line with our strategic ambitions for our business, we began to take realadvantage in 2007 of growth in the economies of the Middle East, Far East andthe former Eastern Bloc. We employed significantly more resources in sales andmarketing in those territories, helping to drive Group revenue which increased18.8% on the prior year. Markets As major retailers and logistics companies refurbish their existing assets andexpand globally, they are increasingly recognising that a significantcontributing factor to the efficiency of their operations is the standard of thefloor surface from which they work. As a result we are enjoying the benefits ofbeing specified by these companies as a 'supplier of choice'. The development of markets in this way, and our concentration on the provisionof a high-quality service, means that we are very well positioned to gain marketpenetration at a much greater rate in the years ahead than if we were simply tofollow the infrastructure market and contractors alone. The infrastructure market continues to grow across virtually all economies,including the US. Growth in the commercial and retail construction market alsocontinues. Whilst our core market focus has been and remains thenon-residential construction market, we remain of the view that opportunities doexist for us to successfully expand our product offering into the residentialarena, despite concerns over the current economic climate. As a consequence, inDecember 2007 we introduced a new product, the Mini Screed, which addresses thisotherwise untapped market. The Board On behalf of the Board, I would like to pay particular thanks to Ian Weingarten,the independent, Non-Executive Director representing the Company's previousowner who stepped down from the Board in the second half of 2007. Nominated Advisor Hawkpoint Partners will become the Company's NOMAD with effect from 1 April 2008and Collins Stewart will continue as the Company's sole broker. People I continue to be impressed by the considerable strength and depth of the Someroteam at all levels of the business. On behalf of the Board I would like totake this opportunity to thank all our employees for their continued hard work,commitment and motivation throughout the past year. Current Trading and Outlook Whilst we are seeing some signs of slowing in equipment purchases in the US, thenon-residential construction market itself in the US remains strong and sales inthe Rest of the World continue to grow in line with our expectations. We remaincommitted to investing in the development of important new markets, whilst beingmindful of the need to regularly review our cost base against prevailing marketconditions. We continue to focus on maximising our cash generation, maintaining high levelsof customer support and developing new products to keep Somero at the forefrontof this industry. Stuart Doughty Non-Executive Chairman President and Chief Executive Officer's Review I am very pleased to report today full year results for the twelve months to 31December 2007. Revenues were US$66.4m, 18.8% above 2006 levels (2006: US$55.9m)and the Company reported EBITDA for the period of US$16.5m, an increase of 12.2%on the previous year (2006: US$14.7m). Net Income before amortisation stood atUS$10.8m, 38.5% higher than 2006. EPS on a Net Income before amortisation basiswere 24.0% higher than 2006. These are outstanding results of which we are very proud. To achieve them, wefocused during the year on the three main tenets of our business strategy,namely to expand our geographic footprint into new and emerging markets; toenhance and expand our product offering; and to maintain our keen focus on cashgeneration and cost control. Performance Results during the period were strong across all product lines and saw growth inalmost all of the geographies in which we operate. By product line, small line equipment sales stood at US$18.1m for the year, anincrease of 13.8% over 2006 (2006: US$15.9m). North America saw a small declinein small line sales to US$10.6m, although the second half recorded animprovement, as expected, over the second half of 2006. Our efforts to addsales and demonstration personnel in Europe along with independent salesrepresentatives helped to deliver a significant increase in European small linesales, up 54.3% to US$5.4m (2006: US$3.5m). Small line sales in the rest of theworld showed equally impressive growth, up by 61.5% to US$2.1m (2006: US$1.3m). Total large line sales continued to demonstrate strong growth in 2007 with salesup 20.1% to US$30.5m (2006: US$25.4m). European sales were up 87.0% to US$10.1m(2006: US$5.4m), driven by new independent sales representatives in Russia andEastern Europe and the continuing replacement demand in the UK where the Companyhas had a presence for some 20 years. Large line sales in the US and Canada declined slightly with sales of US$17.5min 2007 compared to US$18.8m in 2006, itself a 44.5% increase on the previousyear. This performance was achieved against significant growth a year earlieras a result of continued strong non-residential construction and the replacementcycle. Large line sales in the Rest of the World continued to grow with a salesincrease of US$1.6m to US$2.9m. North America saw stable business during the year as large line sales continuedto be driven by replacement demand and small line sales improved in the secondhalf, as planned, as a result of new hires in our small line sales team. Strategic Expansion We continued to expand during the year into new geographic markets and tobenefit from strong commercial building trends worldwide. In 2007 we addedsales representation in Dubai, Germany and Spain. Internationally, during theyear we sold units into 47 countries outside North America, with new sales thisyear into markets as diverse as Aruba, Chile, India, Trinidad & Tobago andTunisia. During the first half of the year, as reported, we experienced a number ofchanges in our sales force. As a result, and to improve our sales recruitmentand training programme more generally, we established the Somero Sales Collegein the second half of the year. This Sales College will enhance ourcapabilities as we continue to focus on future growth. To further increase theeffectiveness of the Sales College, and to embed it more deeply into theorganisational and cultural structure of the Somero business, both the Collegeand Senior Management Group will move in July 2008 to Fort Myers, Florida. Thiswill allow us to conduct outdoor training on a year-round basis. The Group willlease back until September 2008 its current Corporate Headquarters facility inNew Hampshire which was sold in January 2008. We have retained our focus on building capacity for future expansion into thecurrent financial year. Since the year end, we have reorganised our salesmanagement team and hired a sales manager in China to capitalise on emergingmarket opportunities and the growing importance of China as a logistics hub. Agents and distributors outside of North America are also being recruited toexpand our sales and service presence in other markets. We have had earlysuccess in South America and Europe and are optimistic that our new distributorsin China and India will be equally successful. Product Development Our product development process continues to produce innovative equipment forthe concrete industry. The newest of these products, the Mini ScreedTM, wasintroduced in December 2007. The Mini Screed is the Company's first productoffering directed toward the US residential screeding market which, we believe,is a significant market opportunity for Somero. Additionally, during the period we continued to focus on our commitment toproduct enhancement by introducing new, improved versions of our popularCopperhead and PowerRake products. Competition and Market Drivers The competitive landscape did not change significantly in 2007. Our fieldresearch and experience show that alternative low-technology or manual methodsof placing and screeding concrete continue to be our main competition. An additional driver for the sale of our products is the poor quality ofconcrete in some of the emerging markets where we are starting to operate. Inthese markets customers need to use topping hardeners to obtain an acceptablefinish and are purchasing Somero Topping Spreaders in partnership with theirLaser Screed(R). In addition, high oil prices have made the use of concretemore competitive, particularly on parking lots, which has driven increased salesof our 3D systems which allow for the screeding of contoured surfaces. At thesame time, there is a significant push on the part of US ready mix suppliers forthe use of pervious concrete which is an emerging trend that will increase thesales of large line Laser Screeds. Against this supportive backdrop, continuingreplacement demand has allowed the Company to take additional machines on tradeas the market for refurbished machines increased substantially in 2007. Whilst we are aware of current economic reports, the global non-residentialconstruction market is expected to continue to be robust throughout this yearand the next. One key driver is the rebuilding and upgrading of logistics spacein the global supply chain. The emergence of China as a major supplier ofcomponents has caused global supply chain logistics space to be relocated,enlarged and enhanced. We are playing a part in this evolution. We were encouraged by the strong attendance at the annual industry trade show inJanuary which often acts as a barometer for our sales outlook for the year.International attendance was particularly high and we secured a number of salesleads in new territories. In the first quarter, we also reorganised our US andEuropean sales organisations to develop further sales in China, the Middle Eastand other emerging markets. In 2008 we will look to expand our presence in emerging markets with newproducts and new sales personnel. The Company's attractive fundamentalsincluding strong cash flow, market position and products, together with anexperienced management team, provide us with a solid platform on which tocontinue to grow the business both organically and, where appropriate, throughselective acquisitions. We look forward to delivering further on our strategic goals in the year ahead. Jack Cooney President and Chief Executive Officer Financial Review Summary of Financial Results (1) (2) (3) (4) Somero Enterprises Inc. 12 months 12 months ended ended 31-Dec-06 31-Dec-07 US$ 000 US$ 000Revenue 55,894 66,436Cost of sales 25,708 28,828Gross profit 30,186 37,608Operating expenses:Selling expense 9,066 11,949Engineering expense 1,202 1,831General and administrative expense 8,046 10,514Total operating expenses 18,314 24,294Operating income 11,872 13,314Other income (expense)Interest expense (3,714) (1,472)Interest income 157 74Foreign exchange gain/(loss) 247 279Other (325) (1,479)Income before taxes 8,237 10,716Provision for income taxes 2,856 3,789Net income 5,381 6,927Other data:EBITDA(1) (2) (4) 14,696 16,494Net income beforeamortisation (1) (3) (4) 7,764 10,792Depreciation expense 382 378Amortisation of intangibles 2,383 2,384Capital expenditures 398 491 Notes: 1. EBITDA and Net Income Before Amortisation are not measurements of theCompany's financial performance under GAAP and should not be considered as analternative to net income, operating income or any other performance measuresderived in accordance with GAAP or as an alternative to GAAP cash flow fromoperating activities as a measure of profitability or liquidity. EBITDA and NetIncome Before Amortisation are presented herein because management believes theyare useful analytical tools for measuring the profitability and cash generationof the business. EBITDA is also used to determine pricing and covenantcompliance under the Company's credit facility and as a measurement forcalculation of management incentive compensation. The Company understands thatalthough EBITDA is frequently used by securities analysts, lenders and others intheir evaluation of companies, its calculation of EBITDA may not be comparableto other similarly titled measures reported by other companies. 2. EBITDA as used herein is a calculation of Operating Income plus DeprecationExpense, Amortisation of Intangibles and non-cash stock based compensation. 3. Net income before amortization as used herein is a calculation of Net Incomeplus Amortisation of Intangibles plus Loss on extinguishment of debt. 4. The Company uses non-US GAAP financial measures in order to providesupplemental information regarding the Company's operating performance. Thenon-US GAAP financial measures presented herein should not be considered inisolation from, or as a substitute to, financial measures calculated inaccordance with US GAAP. Investors are cautioned that there are inherentlimitations associated with the use of each non-US GAAP financial measure. Inparticular, non-US GAAP financial measures are not based on a comprehensive setof accounting rules or principles, and many of the adjustments to the US GAAPfinancial measures reflect the exclusion of items that may have a materialeffect on the Company's financial results calculated in accordance with US GAAP. Net income to EBITDA reconciliation and net income before amortisationreconciliation Somero Enterprises, Inc. 12 months 12 months ended ended 31-Dec-06 31-Dec-07 US$ 000 US$ 000EBITDA reconciliationNet income 5,381 6,927Tax provision 2,856 3,789Interest expense 3,714 1,472Interest income (157) (74)Foreign exchange gain (247) (279)Other expense 325 1,479Depreciation 382 378Amortisation 2,383 2,384Stock based compensation 59 418EBITDA 14,696 16,494Net income before amortisation reconciliationNet income 5,381 6,927Amortisation 2,383 2,384Loss on extinguishment of debt - 1,481Net income before amortisation 7,764 10,792 Notes: References to "Net Income Before Amortisation" in this document are to Somero'snet income plus amortisation of intangibles plus loss on extinguishment of debt.Although net income before amortisation is not a measure of operating income,operating performance or liquidity under US GAAP, this financial measure isincluded because management believes it will be useful to investors whencomparing Somero's results of operations both before and after the SomeroAcquisition, including by eliminating the effects of increases in amortisationof intangibles that have occurred as a result of the write-up of these assets inconnection with the Somero Acquisition. Net income before amortisation shouldnot, however, be considered in isolation or as a substitute for operating incomeas determined by US GAAP, or as an indicator of operating performance, or ofcash flows from operating activities as determined in accordance with US GAAP.Since net income before amortisation is not a measure determined in accordancewith US GAAP and is thus susceptible to varying calculations, net income beforeamortisation, as presented, may not be comparable to other similarly titledmeasures of other companies. A reconciliation of net income to EBITDA and NetIncome Before Amortisation is presented above. Revenues Somero's consolidated revenues for the 12 months ended 31 December 2007wereUS$66.4m, which represented an 18.8% increase from US$55.9m in revenues for the12 months ended 31 December 2006. Somero's revenues consist primarily of salesof new large line products (the SXP Large Laser Screed and its predecessors),sales of new small line products (the CopperHead and PowerRake) and otherrevenues, which consist of, among other things, revenue from sales of spareparts, refurbished machines, Topping Spreaders, 3D systems and accessories. Theoverall increase in revenues for the 12 months ended 31 December 2007 ascompared to the 12 month period ended 31 December 2006 was driven by growth ineach of large line sales, small line sales and other revenues. The table below shows the breakdown between large line sales, small line salesand other revenues during the 12 months ended 31 December 2006 and 2007: 12 months ended 12 months ended 31 December 2006 31 December 2007 Percentage of Percentage of (US$ in millions) net sales (US$ in millions) net salesLarge line sales 25.4 45.4% 30.5 45.9%Small line sales 15.9 28.5% 18.1 27.3%Other revenues 14.6 26.1% 17.8 26.8%Total 55.9 100% 66.4 100% Large line sales increased from US$25.4m for the 12 months ended 31 December2006 to US$30.5m for the 12 month period ended 31 December 2007. This increasein revenue was caused by a 13.8% increase in unit volume (from 94 units to 107units) and increases in average selling prices. The higher unit volume wasdriven by a 96.4% increase in international sales. Small line sales increased from US$15.9m for the 12 months period 31 December2006 to US$18.1m for the 12 month period ended 31 December 2007. This increasewas driven entirely by increases in non-US sales. Total Small Line unitsincreased from 383 in 2006 to 394 in 2007 as the average selling prices alsorose US small line sales declined 4.2% in 2007 as substantial turnover in thesales group required a significant training period for new personnel; however,Small line sales in the second half of 2007 exceeded the second half of 2006. Other revenues, including sales of spare parts, refurbished machines, Toppingspreaders, 3Dsystems and accessories, increased from US$14.6m during the 12months ended 31 December 2006 to US$17.8m during the 12 months ended 31 December2007 This revenue growth resulted primarily from the sales of Topping Spreadersused in emerging markets to compensate for poor quality concrete, and increasedsales of 3D used for increasingly popular concrete parking lots. International sales growth has driven the increases in sales revenue. Sales tocustomers located in North America comprises the majority of Somero's revenue,constituting 59.9% and 72.6% of total revenue for the 12 months ended 31December 2007 and 2006, respectively, while sales to customers in Europe, SouthAfrica and the Middle East combined contributed 31.2% and 21.8%, respectively.The remaining sales in these periods were to customers in Asia, Australia,Central America and South America. The Company has been focused on expandinginternational sales, with revenues outside North America increasing to US$26.6mduring the 12 months ended 31 December 2007, an increase of 70.5% over revenuesof US$15.6m during the 12 months ended 31 December 2006. Sales in Europe, SouthAfrica and the Middle East generated US$20.7m during the 12 months ended 31December 2007, compared with US$12.2m during the 12 months ended 31 December2006. Sales of the Large Laser Screed and the small line product in theseregions increased by 87.0% and 54.3% respectively between these two periods.Sales in Asia, Australia and Central and South America represented US$5.9mduring the 12 months ended 31 December 2007, as compared to US$3.4m during the12 months ended 31 December 2006. This increase was driven by an increase insales of Large Laser Screed to 12 units during the 12 months ended 31 December2007, compared with five units during the corresponding period of 2006 and by anincrease in Small line units to 52 from 34 over the comparable periods. Despite the sizable improvements internationally, North America (the UnitedStates and Canada) experienced nearly flat revenues. Sales to customers in NorthAmerica were US$39.8m during the 12 months ended 31 December 2007, a 1.5%decrease over North American sales of US$40.3m during the 12 months ended 31December 2006. The non-residential construction environment has continued strongand is forecast to remain stable over the next two years. Gross Profit Somero's gross profit for the 12 months ended 31 December 2007 was US$37.6m, a24.5% increase over US$30.2m for the 12 months ended 31 December 2006. As apercentage of revenue, gross profit increased to 56.6% for the 12 months ended31 December 2007, from 54.0% for the 12 months ended 31 December 2006. Theincrease in gross profit as a percentage of revenue has been due to increasedsales volumes, increasing list prices, an improvement in product mix, and thebenefit from higher realised prices that came from exchange rate changes, (seeoperating expenses for discussion of offsetting increases in cost due toexchange rates) and management's strategy of implementing manufacturing costreduction initiatives. Operating Expenses Operating expenses were US$24.3m for the 12 months ended 31 December 2007, a32.8% increase over US$18.3m for the 12 months ended 31 December 2007. Thisincrease included $0.6m in expenses related to opening offices in Dubai, China,Germany and Spain. Additionally, the increase in operating expenses (whichconsist of selling, engineering and general and administrative expenses)resulted primarily from higher selling expenses as the Company aggressivelyadded to it sales and demonstration group to increase the capacity fordemonstrating small line products, and an increase in costs as a result ofbeing a public company, with operating expenses equaling 36.6% and 32.8% ofrevenues for the 12 months ended 31 December 2007 and for the 12 months ended 31December 2006, respectively. Selling expense increased by US$2.8m, or 30.8%, to US$11.9m for the 12 monthsended 31 December 2007, as compared with US$9.1m for the 12 months ended 31December 2006. The increase in selling expense was primarily due to increasedinternational sales, which resulted in increased commissions, and the effect ofexchange rates as the Company has a significant sale and service presence in theUK and Europe. Engineering expense increased by US$0.6m, or 50.0%, to US$1.8m for the 12 monthsended 31 December 2007 from US$1.2m for the 12 months ended 31 December 2006.The main increase was due to greater focus on identifying opportunities andbuilding prototype products which included the Mini Screed introduced inDecember 2007. General and administrative expense increased US$2.5m, or 31.3% to US$10.5m forthe 12 months ended 31 December 2007 from US$8.0m for the 12 months ended 31December 2006. A substantial amount of the increase in general andadministrative expense resulted from increased costs from a full year of being apublic company which were US$1.0m for the year ended 31 December 2007.Additionally, US$0.6m was spent to open additional sales offices in Dubai,China, Germany, and Spain. Other Income (Expense) Other expenses included US$2.6m for the 12 months ended 31 December 2007,compared to expenses of US$3.6m for the 12 months ended 31 December 2006. Otherexpenses consisted of interest income and expenses, foreign exchange gains andlosses, gains and losses on disposal of assets, and other expenses consistingprimarily of management fees paid to Gores. The decrease in other expenses hasresulted primarily from reduced interest expense. Interest expense was US$1.5m for the 12 months ended 31 December 2007 comparedto US$3.7m in the 12 months ended 31 December 2006, resulting primarily fromdecreased indebtedness following the IPO in November 2006 the continuedreductions in debt as excess cash has been used to pay down additional debt, andthe companies refinance of debt which reduced the interest rate paid from LIBORplus 3.0 to LIBOR plus 0.9. The new financing resulted in a one time charge ofUS$1.5m in un-amortised loan origination fees being written off in the firsthalf of 2007. Foreign exchange gain was US$0.3m for the 12 months ended 31 December 2007,compared with a foreign exchange gain of US$0.2m for the 12 months ended 31December 2006 resulting primarily from sales made to Europe, combined with aweakening US Dollar compared to the Pound Sterling and the Euro. Other expenses included US$1.5m for the 12 months ended 31 December 2007,compared with US$0.3m for the 12 months ended 31 December 2006, primarilyresulting from the write off of unamortised loan origination fees when theCompany refinanced in March 2007, and the elimination of US$0.3m in managementfees that had been paid to the former owner of Somero before the November 2006IPO. Provision for Income Taxes The provision for income taxes increased by US$0.9m, or 31.0%, to US$3.8m in the12 months ended 31 December 2007, as compared with US$2.9m for the 12 monthsended 31 December 2006. Overall, Somero's effective tax rate increased from34.7% to 35.4% due to an increase in federal income tax due to an increase insubpart F income and a decrease in credits and deductions. Net Income Net income increased by US$1.5m, or 27.8%, to US$6.9m in the 12 months ended 31December 2007 as compared with US$5.4m for the 12 months ended 31 December 2006.The primary cause of the increase in net income was increased sales and grossmargin offset by increased operating expenses. Earnings Per Share Basic earnings per share represents income available to common stockholdersdivided by the weighted average number of shares outstanding during the period.Diluted earnings per share reflect additional common shares that would have beenoutstanding if dilutive potential common shares had been issued, as well as anyadjustment to income that would result from the assumed issuance. Potentialcommon shares that may be issued by the Company relate to outstanding stockoptions. Earnings per common share have been computed based on the following: 2006 2007 US$ 000 US$ 000Net income 5,381 6,927Basic weighted averageshares outstanding 30,714 34,282Net dilutive effect ofstock options 47 -Diluted weighted averageshares outstanding 30,761 34,282 The Company had 34,281,968 shares outstanding at 31 December 2007. Earnings Per Share and Dividend Earnings per share at 31 December 2007 is as follows: US$Basic earnings per share 0.20Diluted earnings per share 0.20Net Income before amortisation earnings per share 0.31 The Company's Board of Directors resolved to declare a dividend of 3.0c pershare of common stock payable to shareholders on the register as of 25 April2008 and payable on 12 May 2008. This dividend relates to the period from 1July 2007 to the fiscal year end at 31 December 2007. Consolidated Balance Sheets As of 31 December 2006 and 2007 2006 2007 US$ 000 US$ 000AssetsCurrent assets: Cash and cash equivalents 1,895 3,842 Accounts receivable - net 4,101 4,279 Inventories - net 4,912 6,948 Prepaid expenses and other assets 584 860 Income tax receivable 211 - Deferred tax asset 152 594 Assets held for sale - 618 Total current assets 11,855 17,141Property, plant and equipment - net 4,712 4,103Intangible assets - net 21,616 19,236Goodwill 16,400 16,400Deferred financing costs 1,349 94Other assets 113 135Total assets 56,045 57,109 Liabilities and stockholders' equityCurrent liabilities: Notes Payable - current portion 2,400 1,429 Accounts payable 2,842 4,051 Accrued expenses 3,125 2,453 Income taxes payable - 374 Obligations under capital leases - current portion 657 - Other liabilities 0 152 Total current liabilities 9,024 8,459Notes payable, net of current portion 18,600 13,500Deferred income taxes 146 467Other liabilities, net of current portion - 455 Total liabilities 27,770 22,881Commitments and contingencies - -Stockholders' equity Preferred stock, US$.001 par value, 50,000,000 shares authorised, no shares issued and outstanding - - Common stock, US$.001 par value, 80,000,000 shares authorised, 34,281,968 shares issued and outstanding at 31 December 2007 4 4 Additional paid in capital 21,926 22,344 Retained earnings 6,343 12,128 Other comprehensive income (loss) 2 (248) Total stockholders' equity 28,275 34,228 Total liabilities and stockholders' equity 56,045 57,109 See notes to consolidated financial statements. Consolidated Statements of Income For the years ended 31 December 2006 and 2007 Year ended Year ended 31 December 31 December 2006 2007 US$ 000 US$ 000 Revenue 55,894 66,436Cost of sales 25,708 28,828 Gross profit 30,186 37,608 Operating expenses Selling expenses 9,066 11,949 Engineering expenses 1,202 1,831 General and administrative expenses 8,046 10,514 Total operating expenses 18,314 24,294 Operating income 11,872 13,314Other income (expense) Interest expense (3,714) (1,472) Interest income 157 74 Foreign exchange gain 247 279 Other (325) (1,479) Income before income taxes 8,237 10,716 Provision for income taxes 2,856 3,789 Net income 5,381 6,927 Earnings per common share Basic 0.18 0.20 Diluted 0.17 0.20 Weighted average number of common shares outstanding Basic 30,714 34,282 Diluted 30,761 34,282 See notes to consolidated financial statements. Consolidated Statements of Changes in Stockholders' Equity For the years ended 31 December 2006 and 2007 Common Stock - Common Stock - Series A Series B Common Stock Shares Amount Shares Amount Shares Amount US$ 000 US$ 000 US$ 000Balance - 31 December2005 1,000 - 94,000 - - -Amended andrestated certificateof incorporation(10/05/06) (1,000) - (94,000) - 30,000,000 -Issuance of commonstock (11/01/06) netof issuance costs 4,281,968 4Cumulative translationadjustment - - - - - -Net income - - - - - -Share basedcompensationDividends paid - - - - - -Balance - 31 December2006 - - - - 34,281,968 4Cumulative translationadjustmentChange in fair valueof derivativeinstrumentsNet incomeShare basedcompensationDividends paidBalance - 31 December2007 - - - - 34,281,968 4 Other compre- Additional hensive Total Compre- paid In Retained Income stockholders' hensive capital earnings (loss) equity income US$ 000 US$ 000 US$ 000 US$ 000 US$ 000Balance - 31 December2005 17,783 962 (3) 18,742 959Amended andrestated certificateof incorporation(10/05/06) - - - - -Issuance of commonstock (11/01/06) netof issuance costs 5,874 - - 5,878 -Cumulative translationadjustment - - 5 5 5Net income - 5,381 - 5,381 5,381Share basedcompensation 59 59Dividends paid (1,790) - - (1,790) -Balance - 31 December2006 21,926 6,343 2 28,275 5,386Cumulative translationadjustment (5) (5) (5)Change in fair valueof derivativeinstruments (245) (245) (245)Net income 6,927 6,927 6,927Share basedcompensation 418 418Dividends paid (1,142) (1,142)Balance - 31 December2007 22,344 12,128 (248) 34,228 6,677 See notes to consolidated financial statements. Consolidated Statements of Cash Flows For the years ended 31 December 2006 and 2007 Year ended Year ended 31 December 31 December 2006 2007 US$ 000 US$ 000Cash flows from operating activities: Net income 5,381 6,927 Adjustments to reconcile net income to net cash provided by operating activities: Deferred taxes 26 91 Depreciation and amortisation 2,765 2,762 Amortisation of deferred financing costs 477 1,380 Gain on sale of assets (15) (5) Share based compensation 59 418 Working capital changes: Accounts receivable (1,457) (178) Inventories (394) (2,036) Prepaid expenses and other assets (7) (276) Income taxes receivable (211) - Other assets (68) (22) Accounts payable and other liabilities 1,210 686 Income taxes payable (374) 587 Net cash provided by operating activities 7,392 10,334 Cash flows from investing activities: Proceeds from sale of property and equipment 132 25 Property and equipment disposals - 78 Property and equipment purchases (398) (491) Net cash used in investing activities (266) (388) Cash flows from financing activities: Borrowings from additional financing - 22,254 Payment for financing costs (5) (125) Repayment of notes payable (11,000) (28,325) Payment of capital lease - (657) Repayment of working capital advance from parent (710) - Payment of dividends (1,790) (1,142) Contribution from parent 1,700 - Proceeds from initial public offering of common stock, net of costs 4,178 - Net cash used in financing activities (7,627) (7,995) Effect of exchange rates on cash and cash equivalents 5 (4) Net increase (decrease) in cash and cash equivalents (496) 1,947 Cash and cash equivalents:Beginning of period 2,391 1,895End of period 1,895 3,842 See notes to consolidated financial statements. Notes to the Consolidated Financial Statements As of 31 December 2006 and 2007 1. Organisation and Description of Business Nature of Business Somero Enterprises, Inc. (the "Company" or "Somero") designs,manufactures, refurbishes, sells and distributes concrete levelling, contouringand placing equipment, related parts and accessories, and training servicesworldwide. The operations are conducted from a corporate office in Jaffrey, NewHampshire, a single assembly facility located in Houghton, Michigan, a Europeandistribution office in the United Kingdom, and sales offices in Canada andGermany. 2. Summary of Significant Accounting Policies Basis of Presentation The consolidated financial statements of the Company havebeen prepared in accordance with accounting principles generally accepted in theUnited States of America. Principles of Consolidation The consolidated financial statements include theaccounts of Somero Enterprises, Inc. and its subsidiaries. All significantintercompany transactions and accounts have been eliminated in consolidation. Cash and Cash Equivalents Cash includes cash on hand, cash in banks, andtemporary investments with a maturity of three months or less when purchased. Accounts Receivable and Allowances for Doubtful Accounts Financial instrumentswhich potentially subject the Company to concentrations of credit risk consistprimarily of accounts receivable. The Company's accounts receivable are derivedfrom revenue earned from a diverse group of customers primarily located in theUnited States. The Company performs credit evaluations of its commercialcustomers and maintains an allowance for doubtful accounts receivable based uponthe expected ability to collect accounts receivable. Reserves, if necessary,are established for amounts determined to be uncollectible based on specificidentification and historical experience. As of 31 December 2006 and 2007, theallowance for doubtful accounts was approximately US$97,000 and US$191,000,respectively. Inventories Inventories are stated at the lower of cost, using the first in,first out ("FIFO") method, or market. Provision for potentially obsolete orslow-moving inventory is made based on management's analysis of inventory levelsand future sales forecasts. Deferred Financing Costs Deferred financing costs incurred in relation tolong-term debt, are reflected net of accumulated amortisation and are amortisedover the expected repayment term of the debt instrument, which is four yearsfrom the debt inception date. These financing costs are being amortised usingthe effective interest method. Intangible Assets and Goodwill Intangible assets consist principally of customerrelationships and patents, and are carried at their fair value, less accumulatedamortisation. Intangible assets are amortised using the straight-line methodover a period of three to twelve years, which is their estimated period ofeconomic benefit. Goodwill is not amortised but is subject to impairment testson an annual basis, and the Company has chosen 31 December as its periodicassessment date. The Company evaluates the carrying value of long-lived assets, excludinggoodwill, whenever events and circumstances indicate the carrying amount of anasset may not be recoverable. For the years ended 31 December 2006 and 2007, nosuch events or circumstances were identified. The carrying value of a long-livedasset is considered impaired when the anticipated undiscounted cash flows fromsuch asset (or asset group) are separately identifiable and less than theasset's (or asset group's) carrying value. In that event, a loss is recognisedto the extent that the carrying value exceeds the fair value of the long-livedasset. Fair value is determined primarily using the anticipated cash flowsdiscounted at a rate commensurate with the risk involved. Revenue Recognition The Company recognises revenue on sales of equipment, partsand accessories when persuasive evidence of an arrangement exists, delivery hasoccurred or services have been rendered, the price is fixed or determinable, andcollectibility is reasonably assured. For product sales where shipping termsare F.O.B. shipping point, revenue is recognised upon shipment. Forarrangements which include F.O.B. destination shipping terms, revenue isrecognised upon delivery to the customer. Standard products do not havecustomer acceptance criteria. Revenues for training are deferred until thetraining is completed unless the training is deemed inconsequential orperfunctory. Warranty Reserve The Company provides warranties on all equipment sales rangingfrom three months to one year, depending on the product. Warranty reserves areestimated net of the warranty passed through to the Company from vendors, basedon specific identification of issues and historical experience. Property, Plant and Equipment Property, plant and equipment is stated atestimated market value based on an independent appraisal at the acquisition dateor at cost for subsequent acquisitions, net of accumulated depreciation andamortisation. Land is not depreciated. Depreciation is computed on buildingsusing the straight-line method over the estimated useful lives of the assets,which is 31.5 to 40 years for buildings (depending on the nature of thebuilding), 15 years for improvements, and 2 to 5 years for machinery andequipment. Assets Held For Sale Assets held for sale are recorded at the lower of theirbook value or net realisable value. Depreciation is not recorded on theseassets once they are classified as held for sale. In November 2007, the Companyreceived an offer for the sale of its Corporate Office in Jaffrey, New Hampshirewhich it eventually accepted. The sale was completed in January 2008 and a gainof US$5,000 was recorded. Income Taxes The Company accounts for income taxes in accordance with Statementof Financial Accounting Standards ("SFAS") No. 109, Accounting for Income Taxes.Deferred tax assets and liabilities are recognised for the future taxconsequences attributable to temporary differences between the financialstatement carrying amounts of existing assets and liabilities and theirrespective tax basis and operating loss and tax credit carryforwards. Deferredtax assets and liabilities are measured using enacted tax rates expected toapply to taxable income in the years in which those temporary differences areexpected to be recovered or settled. The effect on deferred tax assets andliabilities of a change in tax rates is recognised in income in the period thatincludes the enactment date. Deferred tax assets are reduced by a valuationallowance, if necessary, to the extent that it appears more likely than not,that such assets will be unrecoverable. In June 2006, the Financial Accounting Standards Board ("FASB") issued FIN 48,Accounting for Uncertainty in Income Taxes - an interpretation of FASB StatementNo. 109, Accounting for Income Taxes ("FIN 48"), effective for fiscal yearsbeginning after 15 December 2006. This interpretation clarifies the accountingfor uncertainty in income taxes recognised in financial statement in accordancewith SFAS No. 109, Accounting for Income Taxes. Under FIN 48, the Company mayrecognise the tax benefit from an uncertain tax position only if it is morelikely than not that the tax position will be sustained on examination by thetaxing authorities, based on the technical merits of the position. The taxbenefits recognised in the financial statements from such a position should bemeasured based on the largest benefit that has a greater than fifty percentlikelihood of being realised upon ultimate settlement. FIN 48 also providesguidance on derecognition of income tax assets and liabilities, classificationof current and deferred income tax assets and liabilities, accounting forinterest and penalties associated with tax positions, and accounting for incometaxes in interim periods, and requires increased disclosures. FIN 48, asamended, had a US$170,000 impact in the year ended 31 December 2007. Use of Estimates The preparation of financial statements in conformity withaccounting principles generally accepted in the United States of Americarequires management to make estimates and assumptions that affect the amountsreported in the financial statements and accompanying notes. Actual resultscould differ from those estimates. Accounting Pronouncements to be Adopted In September 2006, the FASB issued Statement of Financial Accounting Standard ("SFAS") No. 157, Fair Value Measurements ("SFAS 157"). SFAS 157 clarifies theprinciple that fair value should be based on the assumptions market participantswould use when pricing an asset or liability and establishes a fair valuehierarchy that prioritises the information used to develop those assumptions.Under the standard, fair value measurements would be separately disclosed bylevel within the fair value hierarchy. SFAS 157 is effective for fiscal yearsbeginning after November 2007, with early adoption permitted. Somero iscurrently in the process of evaluating any potential impact of SFAS 157. In February 2007, the FASB issued SFAS No. 159, The Fair Value Option forFinancial Assets and Financial Liabilities (SFAS 159), which provides companieswith an option to report selected financial assets and liabilities at fairvalue. The objective of SFAS 159 is to reduce both the complexity in accountingfor financial instruments and the volatility in earnings caused by measuringrelated assets and liabilities differently. SFAS 159 also establishespresentation and disclosure requirements designed to facilitate comparisonsbetween companies that choose different measurement attributes for similar typesof assets and liabilities. SFAS 159 is effective fiscal years beginning after 15November 2007. Somero did not make a fair value election for any financial assetor liability as of 1 January 2008. Stock Based Compensation The Company accounts for its stock option issuanceunder SFAS No. 123R, Share Based Payment ("SFAS 123R"). SFAS 123R requiredrecognition of the cost of employee services received in exchange for an awardof equity instruments in the financial statements over the period the employeeis required to perform the services in exchange for the award (presumptively thevesting period). SFAS 123R also requires measurement of the cost of employeeservices in exchange for an award based on the grant-date fair value of theaward. Transactions in and Translation of Foreign Currency The functional currency forthe Company's subsidiaries outside the United States is the applicable localcurrency. Balance sheet amounts are translated at 31 December exchange ratesand statement of operations accounts are translated at average rates. Theresulting gains or losses are charged directly to accumulated othercomprehensive income. The Company is also exposed to market risks related tofluctuations in foreign exchange rates because some sales transactions, and someassets and liabilities of its foreign subsidiaries, are denominated in foreigncurrencies other than the designated functional currency. Gains and losses fromtransactions are included in the Company's net income as foreign exchange gain(loss) in the accompanying consolidated statements of income. Comprehensive Income Comprehensive income, which is the combination of reportednet income and other comprehensive income, was composed only of the Company'snet income and foreign exchange gains (losses) for the years ending 31 December2006 and 2007. Total comprehensive income for the years was approximatelyUS$5,386,000 and US$6,677,000, respectively. Earnings Per Share Basic earnings per share represents income available tocommon stockholders divided by the weighted average number of shares outstandingduring the year. Diluted earnings per share reflect additional common sharesthat would have been outstanding if dilutive potential common shares had beenissued, as well as any adjustment to income that would result from the assumedissuance. Potential common shares that may be issued by the Company relate tooutstanding stock options. 84,210 shares have been excluded from thecalculation because they are anti-dilutive. Earnings per common share have beencomputed based on the following: 2006 2007 US$ 000 US$ 000 Net income 5,381 6,927 Basic weighted average shares outstanding 30,714 34,282 Net dilutive effect of stock options 47 - Diluted weighted average shares outstanding 30,761 34,282 The Company had 95,000 shares outstanding at 31 December 2005 and issued a stocksplit of 315.79:1 in 2006, prior to its initial public offering. Share and pershare amounts have been adjusted to reflect the stock split for the periodsended 31 December 2006 and 2007. 3. Inventories Inventories consisted of the following at 31 December: 2006 2007 US$ 000 US$ 000 Raw materials 2,422 3,358Finished goods and work in process 2,679 3,725 5,101 7,083Less: reserve for excess and obsolete inventory (189) (135) Total 4,912 6,948 4. Goodwill and Intangible Assets The following table reflects intangible assets that are subject to amortisationunder the provisions of SFAS No. 142: Weighted average amortisation period 2006 2007 US$ 000 US$ 000 Capitalised costCustomer relationships 8 years 6,300 6,300Patents 12 years 18,538 18,538Other intangibles 3 years 155 159 24,993 24,997Accumulated amortisationCustomer relationships 8 years 1,116 1,903Patents 12 years 2,189 3,735Other intangibles 3 years 72 123 3,377 5,761 Net carrying costsCustomer relationships 8 years 5,184 4,397Patents 12 years 16,349 14,803Other intangibles 3 years 83 36 21,616 19,236 Amortisation expense associated with the intangible assets for the years ended31 December 2006 and 2007 was approximately US$2,376,000 and US$2,384,000,respectively. Future amortisation on intangible assets is as follows at: 31 December US$ 000 2008 2,3622009 2,3322010 2,3322011 2,332Thereafter 9,878 19,236 5. Property, Plant and Equipment Property, plant and equipment consists of the following at 31 December: 2006 2007 US$ 000 US$ 000 Land 207 207Buildings and improvements 3,432 3,574Machinery and equipment 732 975Property and equipment held under capital leases 657 -(see Note 7)Equipment sold under recourse contracts 178 178 5,206 4,934Less: accumulated depreciation and amortisation (494) (831) 4,712 4,103 Depreciation expense for the years ended 31 December 2006 and 2007, wasapproximately US$382,000 and US$378,000, respectively. The Company previously offered a facility to customers whereby the Companyguaranteed the financing on the sale of equipment. Equipment previously soldunder recourse contracts continues to be included in Property, Plant andEquipment at a net book value at 31 December 2006 and 2007 of approximatelyUS$78,000 and US$21,000, respectively. Revenue under these arrangements hasbeen deferred and recognised over the life of the financing arrangement,approximately 5 years. Deferred revenue of approximately US$84,000 andUS$20,000 related to these transactions was included in accrued expenses at 31December 2006 and 2007, respectively. The Company has made no further salesunder recourse arrangements since. 6. Debt Obligations Summary The Company executed a credit facility with a financial institution inMarch 2007 (see section entitled "Credit Facility" below). The proceeds of thenew term loan and the revolving line of credit were used to pay off in fullexisting debt balances. The Company incurred a loss in the early extinguishmentof debt of approximately US$1,481,000 which included deferred financing cost ofapproximately US$1,245,000. The Company's debt obligations consisted of thefollowing at 31 December: 2006 2007 US$ 000 US$ 000 Bank debt: Term loans 21,000 Five year secured term loan 8,929 Five year secured reducing revolving line of credit 6,000Less debt obligations due within one year (2,400) (1,429) Obligations due after one year 18,600 13,500 Credit Facility The Company has a credit facility with a financial institutiondated 16 March 2007 composed of the following at 31 December 2007: • US$14,000,000 five year secured reducing revolving line of credit • US$10,000,000 five year secured reducing term loan The Company has fixed the interest rate for the term loan and the revolvingfacility through a series of interest rate swaps. These swaps have beendesegregated as cash flow hedges. The revolver loan's interest rate swapsinitial notional amount is US$6,000,000, pays a fixed 5.20%, and had a 31December 2007 fair market value of approximately (US$96,000) which will amortisedown by approximately US$53,000 in the next 12 months. The term loan's interestrate swap's initial notional amount is US$10,000,000, pays a fixed 5.15%, andhad a 31 December 2007 fair market value of approximately (US$286,000) whichwill amortise down by approximately US$88,000 in the next 12 months. Theinterest rate swaps are designated as cash flow hedges. The revolver and termloan interest rates are Libor (fixed by the interest rate swaps) plus an amountdetermined by the ratio of "funded debt/last 12 months EBITDA," as defined inthe loan agreement. The effective interest rate at 31 December 2007 for therevolving line of credit was 6.05% and for the term loan 6.10%. The creditfacilities are secured by substantially all of the Company's assets and containa number of restrictive covenants that among other things limit the ability ofthe Company to incur debt, issue capital stock, change ownership and dispose ofcertain assets. The revolving line of credit available reduces over the fiveyear term and as of 31 December 2007 the borrowed balance is below the creditline available. Future Payments The future payments by year under the Company's debt obligationsare as follows: 31 December US$ 000 2008 1,4292009 1,4292010 1,4292011 1,429Thereafter 9,213 Total payments 14,929 Interest Interest expense on the credit facility for the years ended 31 December2006 and 2007, was approximately US$3,618,000 and US$1,392,000, respectively,related to the debt obligation. Interest expense paid by the Company's U.K.subsidiary was approximately US$13,000 and US$73,000 for the years ending 31December 2006 and 2007, respectively. 7. Capital Lease Obligations Summary The Company previously leased a building in Jaffrey, New Hampshire whichwas owned by a former co-owner of the Somero Business and accounted for as acapital lease. During 2007, the Company purchased the building. At 31 December2006 and 2007, the gross amount of property and related accumulated depreciationrecorded under the capital lease were as follows: 2006 2007 US$ 000 US$ 000 Building 657 -Less: accumulated depreciation (23) 634 - Interest Interest paid during the year 31 December 2006 was approximatelyUS$83,000 related to the capital lease obligation. 8. Retirement Programme The Company has a savings and retirement plan for its employees, which isintended to qualify under Section 401(k) of the Internal Revenue Code ("IRC").This savings and retirement plan provides for voluntary contributions byparticipating employees, not to exceed maximum limits set forth by the IRC. TheCompany matches 75% of the employee's contribution, up to the first 4% of theemployee's salary, for the year ended 31 December 2006 and matches 75% of theemployee's contribution, up to the first 6% for the year ended 31 December 2007.The Company match vests after one year of service with the Company. The Companycontributed approximately US$133,000 and US$178,000 to the savings andretirement plan during the years ended 31 December 2006 and 2007, respectively. 9. Operating Leases The Company leases property, vehicles and office equipment under leasesaccounted for as operating leases. Future minimum payments by year under noncancellable operating leases with initial terms in excess of one year were asfollows: 31 December US$ 0002008 2922009 1622010 622011 -After 2011 -Total 516 Total rent expense under operating leases was approximately US$172,000 andUS$238,000 for the years ended 31 December 2006 and 2007, respectively. 10. Supplemental Cash Flow Disclosures 2006 2007 US$ 000 US$ 000 Cash paid for interest 3,710 1,294 Cash paid for taxes 3,573 3,061 11. Business and Credit Concentration The Company's line of business could be significantly impacted by, among otherthings, the state of the general economy, the Company's ability to continue toprotect its intellectual property rights, and the potential future growth offoreign competitors. Any of the foregoing may significantly affect management'sestimates and the Company's performance. At 31 December 2006 and 2007, theCompany had receivables from two customers which represented approximately 16%and 22% of total accounts receivable, respectively. 12. Commitments and Contingencies The Company has entered into employment agreements with certain members ofsenior management. The terms of these agreements range from six months to oneyear and include non-compete and nondisclosure provisions as well as providingfor defined severance payments in the event of termination or change in control. The Company has entered into a 5 year or minimum purchase obligation ofUS$625,000 with a supplier as of 31 December 2007. There is a relatedcontingent liability of US$55,000 to cancel the contract as of 31 December 2007which declines over 5 years on a pro-rated basis. The Company is subject to various unresolved legal actions which arise in thenormal course of its business. Although it is not possible to predict withcertainty the outcome of these unresolved legal actions or the range of possiblelosses, the Company believes these unresolved legal actions will not have amaterial effect on its financial statements. 13. Income Taxes The FASB issued FIN 48, Accounting for Uncertainty in Income Taxes aninterpretation of FASB Statement No. 109, which the Company adopted as ofJanuary 1, 2007. The Interpretation addresses the determination of whether taxbenefits claimed or expected to be claimed on a tax return should be recorded inthe financial statements. Under FIN 48, the Company may recognise the taxbenefit from an uncertain tax position only if it is more likely than not thatthe tax position will be sustained on examination by the taxing authorities,based on the technical merits of the position. The tax benefits recognised inthe financial statements should be measured based on the largest benefit thathas a greater than fifty percent likelihood of being realised upon ultimatesettlement. FIN 48 also provides guidance on de-recognition, classification,interest and penalties on income taxes, accounting in interim periods andrequires increased disclosures. The impact of the Company's reassessment of itstax positions in accordance with the requirements of FIN 48 has resulted in acharge of US$170,000. In assessing the ability to realise net deferred taxassets, management considers whether it is more likely than not that someportion of the deferred tax assets will be realised. The ultimate realisationof deferred tax assets is dependent upon the generation of future taxable incomeduring the periods in which those temporary differences become deductible.Management considers projected future taxable income and tax planning strategiesin making this assessment, but must give greater weight to recent historicaloperating losses. Based on those considerations, management believes it is morelikely than not that the Company will realise the benefits of the deferred taxasset at 31 December 2007, and has not recognised a valuation allowance againstthe total net deferred tax asset. At the end of the year, the Company had a gross unrecognised tax benefit(including interest and penalties) of US$128,000. Of this total, US$76,000represents the amount of unrecognised tax benefits (net of the federal benefiton state issues) that, if recognised, would favorably affect the effectiveincome tax rate in a future period. As part of its continuing practice, the Company has accrued interest related tounrecognised tax benefits in interest expense. Total accrued interest forunrecognised tax benefits at the end of the year was US$6,000. The Company elected to include accrued penalties related to unrecognised taxbenefits in other expense. Total accrued penalties related to unrecognised taxbenefits at the end of the year were US$35,000. The Company is subject to U.S. federal income tax as well as income tax ofmultiple state jurisdictions. The Company began business in 2005 and thereforeall federal, foreign and state income tax returns for tax years from 2005forward are still open. The Company has no Federal, foreign or state income taxreturns currently under examination. A reconciliation of the beginning and ending amounts of the Company's grossunrecognised tax benefits is as follows: Balance at 1 January 2007 US$ -Additions related to tax positions of prior years US$ 81,000Additions related to tax positions of the current year US$ 47,000Adjustments due to settlements US$ -Reductions due to lapse of statute of limitations US$ -Balance at 31 December 2007 US$ 128,000 Included in the balance at 31 December 2007 are US$125,211 of tax positionswhich will decrease within the next 12 months. The Company will be filingamended returns for the years ended 31 December 2005 and 2006 to eliminate thetax exposure related to these items. The provision for income taxes at 31 December 2006 and 2007 includes thefollowing: 2006 2007 US$ 000 US$ 000Current income tax Federal 2,314 3,021 State 193 315 Foreign 323 362Total current income tax expense 2,830 3,698 Deferred tax expense Federal 23 88 State 3 3 Foreign - -Total deferred tax expense 26 91 Total tax expense 2,856 3,789 The components of the net deferred income tax asset at 31 December were asfollows: 2006 2007 US$ 000 US$ 000Deferred tax asset (liability) Depreciation 28 (24) Intangibles (195) (345) Share based compensation 21 173 Interest rate swap - 159 Other 152 164 Net deferred tax asset 6 127 Current 152 164Non-current (146) (37) 6 127 The statutory federal income tax rate was 34% for the years ended 31 December2006 and 2007. Differences between the income tax expense reported in thestatement of operations and the amount computed by applying the statutoryfederal income tax rate to earnings before tax are due to the following items: 2006 2007 US$ 000 US$ 000Consolidated income before tax 8,237 10,716Statutory rate 34% 34%Statutory tax expense 2,801 3,644 State taxes 164 210IRC Section 199 deduction (74) (197)Meals and entertainment 53 60Other (88) 72 Actual tax expense 2,856 3,789 The Company expenses research and development costs as incurred. Total researchand development expense for the research and development tax credit wasapproximately US$752,000 and US$866,000 for the years ended 31 December 2006 and2007, respectively. 14. Sales by Geographic Region The Company sells its product to customers throughout the world. The breakdownby location is as follows: 2006 2007 US$ 000 US$ 000 United States and US possessions 38,354 38,395Canada 2,262 1,449Rest of world 15,278 26,592 Total 55,894 66,436 15. Stock Based Compensation The Company has one share-based compensation plan, which is described below. Thecompensation cost that has been charged against income for the plan wasapproximately US$59,000 and US$418,000 for the years ended 31 December 2006 and2007, respectively. The income tax benefit recognised for share-basedcompensation arrangements was approximately US$21,000 and US$152,000 for theyears ended 31 December 2006 and 2007, respectively. In October 2006, the Company implemented the 2006 Stock Incentive Plan (the "Plan"). The Plan authorises the Board of Directors to grant incentive andnonqualified stock options to employees, officers, service providers anddirectors of the Company for up to 3,400,000 shares of its common stock. Optionsgranted under the Plan have a term of up to ten years and generally vest over athree-year period beginning on the date of the grant. Options under the Planmust be granted at a price not less than the fair market value at the date ofgrant. The fair value of each option award is estimated on the date of grant using theBlack-Scholes-Merton option pricing model. The risk-free interest rate is basedon the U.S. Treasury rate for the expected life at the time of grant, volatilityis based on the average long-term implied volatilities of peer companies as ourCompany has limited trading history and the expected life is based on theaverage of the life of the options of 10 years and an average vesting period of3 years. The following table illustrates the assumptions for the Black-Scholesmodel used in determining the fair value of options granted to employees for theyears ended 31 December 2006 and 2007. 2006 2007 Dividend yield 2.96% 4.37%Risk-free interest rate 4.52% 2.93%Volatility 25.10% 25.00%Expected life (in years) 4.4 3.0 A summary of option activity under the stock option plans as of 31 December2007, and changes during the year then ended is presented below: Weighted - Weighted- Average Average Remaining Aggregate Exercise Contractual IntrinsicOptions Shares Price Term (yrs) ValueOutstanding at1 January 2007 2,656,832 2.34 - -Granted 101,484 1.97Exercised - -Forfeited (92,270) 2.39Outstanding at31 December 2007 2,666,046 2.32 8.87 4,898,904Exercisable at31 December 2007 862,757 2.34 8.84 1,585,330 The weighted-average grant-date fair value of options granted was US$.48 andUS$.24 for the years ended December 31, 2006 and 2007, respectively. A summary of the status of the Company's non-vested shares as of 31 December2007, and changes during the year then ended is presented below: Weighted Average Shares Grant-Date Fair ValueNon-vested shares as of 31 December 2006 2,656,832 1,284,000Granted 101,484 24,356Vested (862,757) (414,123) Forfeited (92,270) (44,290)Non-vested shares as of 31 December 2007 1,803,289 849,943 As of 31 December 2007, there was US$789,000 of total unrecognised compensationcost related to non-vested share-based compensation arrangements granted underthe Company's stock option plan. That cost is expected to be recognised over aperiod of 3 years. This information is provided by RNS The company news service from the London Stock Exchange