Somero Regulatory News (SOM)

16 Apr 2007 07:01

Somero Enterprises Inc.16 April 2007 Embargoed for 7.00am, Monday 16 April 2007 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 2006 Revenues up over 30% and profits up nearly 50% in maiden results as a listed Company Somero Enterprises, Inc. (R), ("Somero" or "the Company"), is pleased to reportis maiden results as a listed company for the year to 31 December 2006 followingits successful listing on AIM in November 2006. 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. Financial Highlights • Revenue increased 32% at $55.9m (2005: $42.3m*) • EBITDA1 increased 49.9% to $14.7m (2005: $9.8m*) • Pre-tax income increased 31% to $8.2m (2005: $6.3m*) • Net income2 before amortisation increased 38% to $7.8m (2005: $5.6m*) • Dividend of 0.33 cents per share for the period 1 November 2006 to 31 December 2006 Business Highlights Strong results across all product lines • Large line equipment sales (including the SXP Large Laser Screed and its predecessors) increased 43.4% to $25.4m. • Small line equipment sales (including the CopperHead and PowerRake) increased 27.3% to $16.0m • Other revenues, including sales of spare parts, refurbished machines and accessories, increased 20.6% to $14.6m Strong results across all geographic territories • Units sold into 44 countries outside North America • First time sales into the Ukraine, UAE and Iceland • New independent sales representatives in Russia and Eastern Europe • New distributors appointed in China and India • Award winning new 'HoseHog' product launched in August 2006 • Plans to develop dedicated Sales Training College in Michigan in 2007 Commenting, Jack Cooney, President and CEO of Somero, said: "We are delighted to report a very strong first set of results as a listedcompany, with a solid performance across all our product lines and geographicmarkets. Trading in the first three months of this year has been entirely inline with management's expectations. "The outlook for 2007 appears strong in all markets. The non-residentialconstruction market is expected to continue to be strong throughout this yearand next. Somero is focused on continuing its growth in all areas. We willlook to expand our presence in emerging markets, introduce innovative newproducts into new and existing markets, and add small line sales anddemonstration personnel in all regions. The Company's attractive fundamentals,market position and products, together with an experienced management team,provide us with a solid platform on which to continue to grow the business bothorganically and, where appropriate, through selective acquisitions." Stuart Doughty, Non-executive Chairman of Somero, added: "We look forward with great enthusiasm to what I feel sure will be a veryexciting first full financial year post flotation and will continue to focus onmaximising the benefits of our enhanced capital structure." For further information contact: Financial Dynamics +44 (0)20 7831 3113 Harriet Keen / Matt Dixon Jefferies +44 (0)207 968 8000 Charles Cameron / Nandan Shinkre Notes 1 References to EBITDA are to Somero's operating income plus depreciation expense and amortisation expense of intangibles plus non cash stock-based compensation expense. 2 References to Net Income before amortisation are to Somero's net income plus amortisation expense of intangibles. * The combined figures for the year to 31 December 2005 are unaudited. On 10 August 2005, the Company acquired certain assets and assumed certain liabilities from its then parent, Dover. The figures shown for the year to 31 December 2005 represent a combination of the audited results for 1 January 2005 to 10 August 2005 for Somero Enterprises Group and the audited results for 11 August 2005 to 31 December 2005 for Somero Enterprises. Further detail can be found in the Company's Admission Document prepared for its listing on AIM in November 2006. About Somero Somero(R) designs, manufactures and sells equipment that automates the processof spreading and leveling large volumes of concrete for flooring and otherhorizontal surfaces, such as paved parking lots. Somero's innovative,proprietary products, including the Large Laser Screed(R), employ laser-guidedtechnology to achieve a high level of precision. Its products have been sold primarily to concrete contractors for use innon-residential construction projects in over 50 countries. Laser screedingequipment has been specified for use in constructing warehouses, assemblyplants, retail centres and in other commercial construction projects requiringextremely flat concrete slab floors by a variety of companies, such as Costco,Home Depot, B&Q, DaimlerChrysler, various Coca-Cola bottling companies, theUnited States Postal Service, and Toys 'R' Us. Somero's headquarters are located in New Hampshire, USA. It operates amanufacturing facility in Michigan, USA, and has a sales and service office inChesterfield, England. Somero has 124 employees, and markets and sells itsproducts through a direct sales force, external sales representatives, andindependent dealers in North America, Latin America, Europe, the Middle East,South Africa, Asia and Australia. Somero is listed on the Alternative InvestmentMarket of the London Stock Exchange and its trading 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.The distribution 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. ENDS Somero Enterprises, Inc. (R) Full year results for the twelve months to 31 December 2006 Chairman's Statement Overview Our continued focus on high quality engineering, coupled with a policy ofcontinuous product development and customer service, has enabled us to deliver avery successful year with financial results exceeding our expectations.Somero's products have helped revolutionise the concrete placing industry andare increasingly recognised by blue chip Logistics and Retail customers asessential in achieving greater levels of operating efficiency in their ownhighly competitive markets. Our policy of providing spares and service back-up coupled with a comprehensivetraining program and making our customers' needs our top priority, ismaintaining our strong market position and clearly differentiates us from thecompetition. Taking advantage of the growth in the emerging economies in the Middle East, FarEast and the former Eastern Block countries, we have employed significantly moreresources in sales and marketing in those territories, helping to drive theGroup's strong revenue growth of over 32% over the prior year. In November 2006, Somero successfully completed its transition to a publiccompany listed on AIM. Both the Board and management team welcome our newshareholders and thank them for the confidence they have placed in us. We lookforward to working with them. Results Total revenue for the year to 31 December 2006 was $55.9m, 32.1% above 2005 andEBITDA was $14.7m, 49.9% above the previous year. The costs of the flotationwere netted against the proceeds and not included in the results. Corporate Governance and The Board We have appointed three additional non executive directors to the Board. Theyall bring a considerable breadth of experience and knowledge and I believeproduce a very strong, cohesive and complimentary body. As Chairman, I mustcompliment both the Executive and Non-Executive Directors for the manner inwhich the flotation was accommodated into the business in such a seamless wayand I believe this is testament to the competence and resilience of themanagement team. Tom Anderson is currently the President and Managing Partner of Schwing Bioset,Inc. and serves as Chairman of our Remuneration committee. Tom recently retiredafter 30 years of service as president and chief executive officer of SchwingAmerica, Inc. a manufacturer of concrete equipment including concrete pumps,recyclers, truck mixers and accessories, and became the president and managingpartner of Schwing Bioset, Inc. Since 1989, he has served as the president andmanaging partner of Concrete Pump Repair. Tom is also a partner in EngineeredChassis Systems, a speciality truck manufacturer. He spent 22 years on the Boardof the American Concrete Pumping Association and five years as the president ofthe Concrete Pump Manufacturers Association. Ron Maskalunas, who retired from PricewaterhouseCoopers LLP in 2001 afterserving as a Partner for 24 years, serves as Chairman of the Audit Committee.For the past five years, Ron has been a self-employed corporate consultant,advising on a range of corporate issues including the implementation ofSarbanes-Oxley controls and procedures for a company listed on the New YorkStock Exchange. He is a Certified Public Accountant. Ian Weingarten is currently a managing director of The Gores Group LLC, which isthe investment manager of Gores Capital Partners, L.P. and its affiliatedpartnerships. Prior to joining Gores in 2002, Ian was a director at UBS Warburgand was previously an investment professional at Apollo Management, L.P. as wellas a private investment firm investing capital for two high net worth families.Ian has previously been a member of the mergers and acquisitions group withinthe investment banking division at Goldman Sachs & Co. Ian is also a director ofSER Holdings, Inc., which is the ultimate parent company of SER Solutions, Inc.,a contact centre management solutions business owned by Gores, and certain ofits subsidiaries. We have aimed to comply with the combined code and have formally constituted theAudit, Nominations and Remuneration committees. People There is considerable strength and depth in the Company with a high degree ofmotivation arising from a very cohesive and motivated team. We would like totake this opportunity to thank all our employees for their continued hard workand commitment throughout the last year. Markets and Prospects As major retailers and logistics companies expand globally and increasinglyappreciate that a contributing factor to their efficiency is the standard of thefloor surface from which they operate, so we are increasingly enjoying thebenefits of being specified as a nominated equipment provider to enable them toachieve that objective. The development of markets in this way and our concentration on the provision ofa high quality service and product adds considerable value to our business andenables us to gain market penetration at a much greater rate than wouldotherwise be the case were we simply to follow the infrastructure market andcontractors alone. The infrastructure market continues to grow across virtually all economies.Growth in the commercial and retail construction market appears to continuerelatively unabated. We are not currently involved in the residential housingmarket. Given that our product offering is particularly focused on the industrial andcommercial sector, with margin orientation also mirroring that profile, we areconfident that we are well protected against the vagaries of rapidly changingfactors in local economies. We look forward with great enthusiasm to what I feel sure will be a veryexciting first full financial year post flotation and will continue to focus onmaximising the benefits of our enhanced capital structure. Chief Executive's Review I am pleased to report the results of Somero Enterprises, Inc. for the yearended 31 December 2006. Revenues were $55.9m, 32.1% above 2005 levels, and theCompany reported EBITDA of $14.7m, an increase of 49.9% on the previous year.Net Income before amortisation stood at $7.8m, 38% higher than 2005. In achieving these outstanding results, we focused in 2006 on the maincomponents of our business strategy, namely to enhance and expand Somero'sproduct offering, expand our geographic footprint and distribution channels,maintain our focus on cash flow and cost control. Results were strong across all product lines and in all geographic territories.We continue to expand into new geographic markets and to benefit from strongcommercial building trends worldwide. North America saw increased growth drivenby the acceptance of small line equipment, strong non-residential constructionand the large line replacement demand. Internationally, we sold units into atotal of 44 countries outside North America with new sales this year into theUkraine, UAE and Iceland. The addition of small line sales and demonstration personnel and a complete yearof PowerRake sales resulted in small line growth of 28.2% to $11.1m in NorthAmerica. Europe also added sales and demonstration personnel along withindependent sales representatives which increased small line sales by 34.8% to$3.5m. Small line sales in Australia and Asia were flat while in Latin and SouthAmerica we hired a sales manager in the third quarter that generated small linesales of $400K. Large line sales continued with strong growth in 2006 with sales up 43.4% to$25.4m. European sales were up 34.8% to $5.4m driven by new independent salesrepresentatives in Russia and Eastern Europe and the beginning of thereplacement demand in the U.K. where the Company has had a presence for some 20years. Large line sales in the U.S. and Canada were also strong with sales increasing44.5% to $18.8m. This was the result of strong non-residential construction andthe replacement cycle. Large line sales in Australia and Asia continue to growwith a sales increase of $500K to $1.3m. This included our first SXP Large LaserScreed sales to China to support the Costco expansion into China. We reorganised our management team in 2006 to ensure that we have strongmanagement teams in each of our locations and for new territories where we seethe potential for further expansion. Recruiting qualified sales and supportpersonnel in North America was a focus in 2006. We have further enhanced ourrecruitment and selection process and begun to see the result of these actionsadding considerable strength to our marketing and sales force especially inthose new emerging identified markets. In turn, as the year has progressed, wehave seen this product a positive contribution to our financial results. Weexpect to be fully staffed in the field by the end of the first quarter of 2007across all our key markets and, as we develop our dedicated Sales TrainingCollege in Michigan in 2007, we expect new employees to be highly productive ina shorter period of time. Agents and distributors outside of North America are being recruited to expandour sales and service presence in other markets. We have had early success inSouth America and Europe and are optimistic that new distributors in China andIndia will be equally successful. Our biggest industry trade show, World ofConcrete, was held in China for the first time in 2006. Our products were wellreceived and our key distribution partner has committed sales, service andengineering resources to expand the Chinese market for our products. Our product development process continues to produce innovative equipment forthe concrete industry. The newest of these, the HoseHog, was introduced inAugust. The HoseHog was nominated in the Most Innovative Product contestsponsored by Concrete Construction & Masonry Products Magazine in connectionwith World of Concrete in January 2007 and won the award in the "Experts' Choice" category. Previously the CopperHead and the PowerRake have both won awards in this contest in 2003 and 2006 respectively. Our goal of maintaining high margins is key to our product development process.To this end, we continue to assess the value proposition of our products andcarefully control our costs. Manufacturing operations in our Houghton Michiganfacility continued their focus on cost reductions in 2006. The competitive landscape did not change significantly in 2006. Our fieldresearch and experience show that alternative low-technology or manual methodsof placing and screeding concrete continue to be our main competition. The smallhand-held vibratory screeds, primarily sold by small and mid-sized manufacturersof tools and equipment, are still being utilized by concrete contractors. The initial public offering in November 2006 was successfully completed withlimited disruption to daily operations, as reflected in our very strong resultsfor the year to 31 December 2006. Employees met the new corporate structure withenthusiasm and our focus as a Group is firmly on the continued delivery ofshareholder value. Current Trading Trading in the first three months of this year has been entirely in line withmanagement's expectations and the non-residential construction market remainsstrong. We were encouraged by the record attendance at the annual industrytrade show in January which often acts as a barometer for our sales outlook forthe year. International attendance was particularly high and we secured anumber of sales leads in new territories. In the first quarter we alsoreorganised our US and European sales organisation to place increased emphasison developing further sales in China, the Middle East and India. Outlook The outlook for 2007 appears strong in all markets. The non-residentialconstruction market is expected to continue to be strong throughout this yearand next. Somero is focused on continuing its growth in all areas. We willlook to expand our presence in emerging markets, introduce innovative newproducts into new and existing markets, and add small line sales anddemonstration personnel in all regions. The Company's attractive fundamentals,market position and products, together with an experienced management team,provide us with a solid platform on which to continue to grow the business bothorganically and, where appropriate, through selective acquisitions. Financial Review SUMMARY OF FINANCIAL RESULTS (1) SOMERO SOMERO SOMERO ENTERPRISES ENTERPRISES, ENTERPRISES, GROUP INC. Combined (2) INC. January 1, 2005 August 11, 2005 For the Year 12 Months Through Through Ended EndedFigures in US$ Thousands August 10, December 31, December 31, December 31, 2005 2005 2005 2006 REVENUE $ 25,769 $ 16,549 $ 42,318 $ 55,894COST OF SALES 12,661 7,953 20,614 25,708 -GROSS PROFIT 13,108 8,596 21,704 30,186 OPERATING EXPENSES:Selling Expense 3,925 2,542 6,467 9,066Engineering Expense 710 417 1,127 1,202General & Administrative Expense 3,734 2,637 6,371 8,046Total Operating Expenses 8,369 5,596 13,965 18,314 OPERATING INCOME 4,739 3,000 7,739 11,872 OTHER INCOME (EXPENSE)Interest Expense (307) (1,162) (1,469) (3,714)Interest Income 383 - 383 157Foreign Exchange Gain (Loss) (90) (40) (130) 247Other 37 (288) (251) (325) INCOME BEFORE TAXES 4,762 1,510 6,272 8,237 PROVISION FOR INCOME TAXES 1,681 548 2,229 2,856NET INCOME $ 3,081 $ 962 $ 4,043 $ 5,381EPS Diluted $ 0.10 $ 0.03 $ 0.13 $ 0.17Other Data:EBITDA (3)(4) 5,598 4,208 9,806 14,696Net Income Before Amortization 3,662 1,963 5,625 7,764 - - - -Depreciation Expense 278 207 485 382Amortization of Intangibles 581 1,001 1,582 2,383Capital Expenditures 118 79 197 398 Notes: 1. On August 11, 2005, Somero Enterprises Inc., an entity formed by affiliatesof The Gores Group, LLC, acquired certain assets and assumed certain liabilitiesfrom Dover Industries, Inc. For purposes herein and as described in the auditedfinancial statements, (i) the results for Somero Enterprises Group arerepresentative of the Somero Business for periods prior to August 11, 2005 and(ii) the results of Somero Enterprises, Inc. are representative of the SomeroBusiness for periods as of August 11, 2005 and thereafter. 2. The combined 2005 results represent the summation of (i) the results forJanuary 1, 2005 through August 10, 2005 for Somero Enterprises Group and (ii)the results for August 11, 2005 through December 31, 2005 for SomeroEnterprises, Inc. The accounting treatment for both periods is essentially thesame with the exception of amortization of intangibles and immaterialdifferences in depreciation expense. 3. EBITDA and Net Income Before Amortization 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 Amortization 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. 4. EBITDA as used herein is a calculation of Operating Income plus DeprecationExpense, Amortization of Intangibles and non-cash stock based compensation. 5. Net Income Before Amortization is a calculation of Net Income plusAmortization of Intangibles. Net Income to EBITDA reconciliation and Net income before amortization Reconciliation SOMERO SOMERO SOMERO ENTERPRISES ENTERPRISES, ENTERPRISES, GROUP INC. Combined (2) INC. January 1, 2005 August 11, 2005 For the Year For the Year Through Through Ended EndedFigures in US$ Thousands August 10, December 31, December 31, December 31, 2005 2005 2005 2006 EBITDA ReconciliationNET INCOME $ 3,081 $ 962 $ 4,043 $ 5,381 Tax Provision 1,681 548 2,229 2,856 Interest Expense 307 1,162 1,469 3,714 Interest income (383) - (383) (157) Foreign Exchange Gain 90 40 130 (247) Other Expense (37) 288 251 325 Depreciation 278 207 485 382 Amortization 581 1,001 1,582 2,383 Stock based compensation - - - 59 EBITDA $ 5,598 $ 4,208 $ 9,806 $ 14,696 Net Income before AmortizationReconciliationNet Income $ 3,081 $ 962 $ 4,043 $ 5,381 Amortization $ 581 $ 1,001 $ 1,582 $ 2,383 Net Income before Amortization $ 3,662 $ 1,963 $ 5,625 $ 7,764 Revenues Somero's consolidated revenues for the twelve months ended 31 December 2006 were$55.9 million, which represented a 32.1% increase from $42.3 million inconsolidated revenues for the Twelve months ended 31 December 2005. Somero'srevenues consist primarily of sales of new large line products (the SXP LargeLaser Screed and its predecessors), sales of new small line products (theCopperHead and PowerRake) and other revenues, which consist of, among otherthings, revenue from sales of spare parts, refurbished machines and accessories.The overall increase in revenues for the Twelve months ended 31 December 2006 as compared to the Twelve month period ended 30 June 2005 was driven by growth ineach of Large Line Sales, Small Line Sales and Other Revenues. The table belowshows the breakdown between large line sales, small line sales and otherrevenues during the Twelve months ended 31 December 2005 (unaudited) and 2006: 12 Months ended 12 Months ended 31 December 2005 31 December 2006 Percentage Percentage (in millions) of net sales (in millions) of net sales Large line Sales $ 17,705 41.8% $ 25,394 45.4%Small Line Sales $ 12,515 29.6% $ 15,930 28.5%Other Revenues $ 12,098 28.6% $ 14,570 26.1% Total $ 42,318 100% $ 55,894 100% Large line sales increased from $17.7m for the twelve months ended 31 December2005 to $25.4m for the twelve month period ended 31 December 2006. This increasein revenue was driven by a 32.3% increase in unit volume (from 71 units to 94units) and increases in average selling prices. The higher unit volume wasdriven primarily by increased replacement demand in the United States andincreased international sales. Small line sales increased from $12.5m for the twelve months period 31 December2005 to $15.9m for the twelve month period ended 31 December 2006. This increasewas driven largely by the August 2005 introduction of the PowerRake, whichgenerated $5.3m in revenues in the twelve months ended 31 December 2006 from the sale of 127 units. Increased sales of CopperHeads also contributed to revenuegrowth, with 256 units sold during the twelve months ended 31 December 2006(generating revenues of $10.7m), compared with 246 units sold during the twelvemonths ended 31 December 2005 (generating revenues of $10.1m). These increaseshave resulted from changes made in 2005 to the Small line sales team structureto create specialist Small line demonstration teams, which has led to anincrease in the number of demonstrations performed. Other revenues, including sales of spare parts, refurbished machines andaccessories, increased from $12.1 million during the twelve months ended 31December 2005 to $14.6 million during the twelve months ended 31 December 2006.This revenue growth resulted primarily from the increased installed base ofmachines and support kits and accessories available for the CopperHead andPowerRake products. Included in other sales were the sales of 7 sets of the newHose Hog product. The Hose Hog was introduced in August of 2006. International sales growth has also contributed to increases in sales revenue.Sales to customers located in North America comprises the majority of Somero'srevenue, constituting 72.1% and 72.3% of total revenue for the twelve monthsended 31 December 2006 and 2005, respectively, while sales to customers inEurope, South Africa and the Middle East combined contributed 21.8% and 20.7%,respectively. The remaining sales in these periods were to customers in Asia,Australia, Central America and South America. The Company has been focused onexpanding international sales, with revenues outside North America increasing to$15.6m during the twelve months ended 31 December 2006, an increase of 33.3%over revenues of $11.7 million during the twelve months ended 31 December 2005.Sales in Europe, South Africa and the Middle East generated $12.2 million duringthe twelve months ended 31 December 2006, compared with $8.8 million during thetwelve months ended 31 December 2005. Sales of the Large Laser Screed and theSmall line product in these regions increased by 34.8% and 36.1% respectivelybetween these two periods. Sales in Asia, Australia and Central and SouthAmerica represented $3.4 million during the twelve months ended 31 December2006, as compared to $3.0 million during the twelve months ended 31 December2005. This increase was driven by an increase in sales of Large Laser Screed tofive units during the twelve months ended 31 December 2006, compared with threeunits during the corresponding period of 2005. Despite the focus on international expansion, North American (the United Statesand Canada) sales experienced the highest total growth of any individual regionduring these periods. Sales to customers in North America were $40.3m during thetwelve months ended 31 December 2006, a 31.8% increase over North American salesof $30.6m during the twelve months ended 31 December 2005. Gross Profit Somero's gross profit for the twelve months ended 31 December 2006 was $30.2million, a 39.1% increase over $21.7 million for the twelve months ended 31December 2005. As a percentage of revenue, gross profit increased to 54.0% forthe twelve months ended 31 December 2006, from 51.3% for the twelve months ended31 December 2005. The increase in gross profit as a percentage of revenue hasbeen due to increased sales volumes, increasing list prices, an improvement inproduct mix with an increasing percentage of total revenues derived from salesof recently-introduced products that have higher margins, such as theCopperHead, PowerRake, Hose Hog and spare parts, and management's strategy ofimplementing manufacturing cost reduction initiatives. Operating Expenses Operating expenses were $18.3m for the twelve months ended 31 December 2006, a31.1% increase over $14.0m for the twelve months ended 31 December 2005. Theincrease in operating expenses, which consists of selling, engineering andgeneral and administrative expenses, resulted primarily from higher amortisation expenses (an increase of $0.8m), an increase in total sales and the new costsof being a public company, with operating expenses equalling 32.8% and 33.0% ofrevenues for the twelve months ended 31 December 2006 and for the twelve monthsended 31 December 2005, respectively. Selling expense increased by $2.6m, or 40.2%, to $9.1 m for the twelve monthsended 31 December 2006, as compared with $6.5m for the twelve months ended 31December 2005. The increase in selling expense was primarily due to increasedsales, which resulted in increased commissions, additional sales supportrequired for the increased sales of the small line Copperhead and PowerRakeproducts, both of which require more product demonstration efforts in the salesprocess, and increased support and commissions for a higher mix of externalinternational sales representatives. Engineering expense increased by $0.1m, or 6.7%, to $1.2m for the twelve monthsended 31 December 2006 from $1.1m for the twelve months ended 31 December 2005.The main increase was due to the hiring of an additional employee in the secondhalf 2005 engaged in future product development, including the development ofthe HoseHog, which was launched in August 2006. General and administrative expense increased $1.7m, or 26.3% to $8.0m for thetwelve months ended 31 December 2006 from $6.4m for the twelve months ended 31December 2005. A substantial amount of the increase in general andadministrative expense resulted from increased amortisation of intangible assets resulting from the write-up of those intangible assets from historical bookvalue in connection with the Somero Acquisition in August 2005. Depreciation andamortisation increased from $2.1m to $2.8m from the twelve months ended 31December 2005 to the twelve months ended 31 December 2006, resulting primarilyfrom increased amortisation attributable to the write-up of the book value ofintangible assets following the Somero Acquisition. Further detail can be foundin the Company's Admission Document prepared for its listing on AIM in November2006. Other Income (Expense) Other income (expense) was ($3.6)m for the twelve months ended 31 December 2006,compared to ($1.5)m for the twelve months ended 31 December 2005. Other income(expense) consists of interest income and expense, foreign exchange gains andlosses, gains and losses on disposal of assets, and other expenses consistingprimarily of management fees paid to Gores. The increase in other income(expense) has resulted primarily from increased interest expense. Interest expense was $3.7m for the twelve months ended 31 December 2006 comparedto $1.5m in the twelve months ended 31 December 2005, resulting primarily fromincreased indebtedness following the Somero Acquisition and, to a lesser extent,rising interest rates during the 2006. Subsequent to the year end on March 16,Somero has entered into a new financing agreement with Citizens Bank NewHampshire, a wholly owned subsidiary of The Royal Bank of Scotland Group plcwhich reduced the rates to 6.55% (fixed for five years) for $10.0m of the debt,LIBOR plus 1.40% for a revolving portion, and allows for reductions of loanprincipal with excess cash on a revolving basis. The new financing will resultin $1.3m in unamortized loan origination fees being written off in the firsthalf of 2007. Foreign exchange gain was $0.2m for the twelve months ended June 30, 2006,compared with a foreign exchange loss of $0.1m for the twelve months ended 31December 2005 resulting primarily from sales made to Europe, combined with aweakening U.S. Dollar compared to the Pound Sterling and the Euro. Other expense was $0.3m for the twelve months ended 31 December 2006, comparedwith $0.3m for the twelve months ended 31 December 2005, primarily resultingfrom management fees of $0.3m paid to Gores during that period. Provision for Income Taxes Provision for income taxes increased by $0.6m, or 28.1%, to $2.9m in the twelvemonths ended 31 December 2006, as compared with $2.2m for the twelve monthsended 31 December 2005. Overall, Somero's effective tax rate decreased from35.5% to 34.7% due to a decrease in state income tax due to apportionmentchanges, and total taxes in the UK were higher in 2006 at a lower statutory ratethan the US (32% v. 34%). Net Income Net income increased by $1.3m, or 33.1%, to $5.4m in the twelve months ended 31December 2006 as compared with $4.0m for the twelve months ended 31 December2005. The primary cause of the increase in net income was increased sales andgross margin offset by increased operating expenses. SOMERO ENTERPRISES, INC. AND SUBSIDIARIESCONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 2005 and 2006 (in thousands, except share amounts) ASSETS 2005 2006 CURRENT ASSETS: Cash and cash equivalents $ 2,391 $ 1,895 Accounts receivable-net 2,644 4,101 Inventories-net 4,504 4,912 Prepaid expenses and other assets 577 584 Income tax receivable - 211 Deferred tax asset 47 152 Total current assets $ 10,163 $ 11,855 PROPERTY, PLANT AND EQUIPMENT-net 4,834 4,712 INTANGIBLE ASSETS-net 23,987 21,616GOODWILL 16,400 16,400DEFERRED FINANCING COSTS 1,826 1,349OTHER ASSETS 45 113 TOTAL ASSETS $ 57,255 $ 56,045 LIABILITIES AND STOCKHOLDER'S EQUITY CURRENT LIABILITIES: Notes payable-current portion $ 1,500 $ 2,400 Accounts payable 2,384 2,842 Accrued expenses 2,373 3,125 Due to related party 710 - Income taxes payable 374 - Obligations under capital leases current portion - 657 Total current liabilities 7,341 9,024 Notes payable, net of current portion 30,500 18,600 Obligations under capital leases net of current portion 657 - Deferred income taxes 15 146 TOTAL LIABILITIES 38,513 27,770 COMMITMENTS AND CONTINGENCIES - - STOCKHOLDER'S EQUITY Preferred stock, $.001 par value, 50 million shares authorized, no shares issued and outstanding - - Common stock-Series A, $.001 par value, 1,000 shares authorized, 1,000 issued and outstanding at December 31, 2005, cancelled in 2006 - - Common stock-Series B, $.001 par value, 99,000 shares authorized, 94,000 issued and outstanding at December 31, 2005, cancelled in 2006 - - Common stock, $.001 par value, 80 million shares authorized, 34,281,968 shares issued and outstanding at December 31, 2006 - 4 Additional paid in capital 17,783 21,926 Retained earnings 962 6,343 Other comprehensive income (loss) (3) 2 Total stockholder's equity 18,742 28,275 TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $ 57,255 $ 56,045 See notes to consolidated financial statements. SOMERO ENTERPRISES, INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF OPERATIONSFOR THE PERIOD AUGUST 11, 2005 THROUGH DECEMBER 31, 2005AND FOR THE YEAR ENDED DECEMBER 31, 2006(in thousands) August 11, 2005 Year Ended Through December 31, December 31, 2005 2006 REVENUE $ 16,549 $ 55,894COST OF SALES 7,953 25,708 8,596 30,186 GROSS PROFIT OPERATING EXPENSES Selling expenses 2,542 9,066 Engineering expenses 417 1,202 General and administrative expenses 2,637 8,046 Total operating expenses 5,596 18,314 OPERATING INCOME 3,000 11,872 OTHER INCOME (EXPENSE) Interest expense (1,162) (3,714) Interest income - 157 Foreign exchange gain (loss) (40) 247 Other (288) (325) INCOME BEFORE INCOME TAXES 1,510 8,237 PROVISION FOR INCOME TAXES 548 2,856 NET INCOME $ 962 $ 5,381 EARNINGS PER COMMON SHARE Basic $ 0.03 $ 0.18 Diluted $ 0.03 $ 0.17 See notes to consolidated financial statements SOMERO ENTERPRISES, INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITYFOR THE PERIOD AUGUST 11, 2005 THROUGH DECEMBER 31, 2005 ANDFOR THE YEAR ENDED DECEMBER 31, 2006 (in thousands, except share data) Common Stock Common Stock Series A Series B Common Stock Shares Amount Shares Amount Shares Amount BALANCE-August 11,2005 1,000 $ - - $ - - Issuance of shares - - 94,000 - - Contributed capital - - - - - Transfer of loan fromparent to equity - - - - - Cumulative translationadjustment - - - - - Net income - - - - - BALANCE-December 31,2005 1,000 - 94,000 - - - Amended and restatedcertificate of incorporation (10/05/06) (1,000) - (94,000) - 30,000,000 - Issuance of common stock(11/01/06) net of issuance costs 4,281,968 4 Cumulative translationadjustment - - - - - - Net Income - - - - - - Share based compensation Dividends paid - - - - - - BALANCE-December 31,2006 - $ - - $ - 34,281,968 $ 4 See notes to consolidated financial statements. Additional Other Total Paid In Retained Comprehensive Stockholder's Comprehensive Capital Earnings Income (Loss) Equity Income BALANCE-August 11,2005 $ - $ - $ - $ - $ - Issuance of shares - - - - - Contributed capital 1,100 - - 1,100 Transfer of loan fromparent to equity 16,683 - - 16,683 Cumulative translationadjustment - - (3) (3) (3) Net income - 962 - 962 962 BALANCE-December 31,2005 17,783 962 (3) 18,742 $ 959 Amended and restatedcertificate of incorporation (10/05/06) - - - - - Issuance of common stock(11/01/06) net of issuance costs 5,874 - - 5,878 - Cumulative translationadjustment - - 5 5 5 Net Income - 5,381 - 5,381 5,381 Share based compensation 59 59 Dividends paid (1,790) - - (1,790) - BALANCE-December 31,2006 $ 21,926 $ 6,343 $ 2 $ 28,275 $ 5,386 SOMERO ENTERPRISES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWSFOR THE PERIOD AUGUST 11, 2005 THROUGH DECEMBER 31, 2005 ANDTHE YEAR ENDED DECEMBER 31, 2006(in thousands) August 11, 2005 Year Through Ended December 31, 2005 December 31, 2006CASH FLOWS FROM OPERATING ACTIVITIES:Net income $ 962 $ 5,381Adjustments to reconcile net income to net cash provided byoperating activities:Deferred taxes (32) 26Depreciation and amortization 1,208 2,765Amortization of deferred financing costs - 477Gain on sale of assets - (15)Realized gain (loss) on currency exchange 40 -Share based compensation - 59Working capital changes:Accounts receivable (622) (1,457)Inventories (157) (394)Prepaid expenses and other assets (291) (7)Income taxes receivable - (211)Other assets (45) (68)Accounts payable and other liabilities 77 1,210Income taxes payable 375 (374) Net cash provided by operating activities 1,515 7,392 CASH FLOWS FROM INVESTING ACTIVITIES:Proceeds from sale of property and equipment - 132(Expenditures)/Reimbursement for loan and acquisitioncosts-net (1,826) -Payment for purchase of business-net of cash (46,735) -Working capital advance paid to Parent (265) -Property and equipment purchases (79) (398) Net cash used in investing activities (48,905) (266) CASH FLOWS FROM FINANCING ACTIVITIES:Proceeds from initial debt financing from parent 47,000 -Borrowings from additional financing 32,000 -Working capital advance from Parent 41 -Contributed capital 1,100 -Payment for financing costs - (5)Repayment of notes payable - (11,000)Repayment of working capital advance from parent (30,317) (710)Payment of dividends - (1,790)Contribution from parent - 1,700 Proceeds from initial public offering of common stock, net of - 4,178costs Net cash provided by (used in) financing activities 49,824 (7,627) Effect of exchange rates on cash and cash equivalents (43) 5 NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 2,391 (496) CASH AND CASH EQUIVALENTS:Beginning of period - 2,391End of period $ 2,391 $ 1,895 See notes to consolidated financial statements. SOMERO ENTERPRISES, INC. and SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2005 AND 2006 AND FOR THE PERIOD FROM AUGUST 11, 2005 THROUGHDECEMBER 31, 2005 AND THE YEAR ENDED DECEMBER 31, 2006 1. ORGANIZATION AND DESCRIPTION OF BUSINESS Organization-Somero Enterprises, Inc. (formerly GTG Portfolio Holdings Inc. andtogether with its subsidiaries, the "Company"), was incorporated on November 12,2002 and held no assets and conducted no business operations until August 10,2005. On August 10, 2005, Somero Enterprises, Inc. acquired certain assets andassumed certain liabilities from various affiliates of Dover Industries, Inc.(collectively, the "Somero Business"). Nature of Business- The Company designs, manufactures, refurbishes, sells anddistributes concrete leveling, contouring and placing equipment, related partsand accessories, and training services worldwide. The operations are conductedfrom a corporate office in Jaffrey, New Hampshire, a single assembly facilitylocated in Houghton, Michigan, and a European distribution office in the UnitedKingdom. Common Stock - The Company had 95,000 shares of Series A and Series B commonstock issued and outstanding at December 31, 2005. On October 5, 2006, theCompany amended and restated its certificate of incorporation to allow for80,000,000 authorized shares of common stock. The Board of Directors voted on astock split of 315.79:1 prior to its initial public offering, converting thepreviously issued 95,000 shares of common stock into 30,000,000 shares of issuedand outstanding common stock. Series A and Series B shares were cancelled aspart of the amendment to the certificate of incorporation. 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. These financial statements have been presented toreflect the operations of Somero Enterprises, Inc. since the Dover Industriestransaction noted above. 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 December 31, 2005 and December31, 2006, the allowance for doubtful accounts was approximately $110,000 and$97,000, 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 amortization and are amortizedover the expected repayment term of the debt instrument, which is four yearsfrom the debt inception date. Intangible Assets and Goodwill- Long-Lived Assets, Including Goodwill and OtherAcquired Intangible Assets Intangible assets consist principally of customer relationships and patents, andare carried at their fair value, less accumulated amortization. Intangibleassets are amortized using the straight-line method over a period of three totwelve years, which is their estimated period of economic benefit. Goodwill isnot amortized but is subject to impairment tests on an annual basis, and theCompany has chosen December 31 as its periodic assessment date. The Company evaluates the carrying value of long-lived assets, excludinggoodwill, at least annually for impairment or when events and circumstancesindicate the carrying amount of an asset may not be recoverable. For the periodsended December 31, 2005 and December 31, 2006, no such events or circumstanceswere identified. The carrying value of a long-lived asset is considered impairedwhen the anticipated undiscounted cash flows from such asset (or asset group)are separately identifiable and less than the asset's (or asset group's)carrying value. In that event, a loss is recognized to the extent that thecarrying value exceeds the fair value of the long-lived asset. Fair value isdetermined primarily using the anticipated cash flows discounted at a ratecommensurate with the risk involved. Revenue Recognition - products-The Somero Business recognizes revenue on salesof equipment, parts and accessories when persuasive evidence of an arrangementexists, delivery has occurred or services have been rendered, the price is fixedor determinable, and collectibility is reasonably assured. For product saleswhere shipping terms are F.O.B. shipping point, revenue is recognized uponshipment. For arrangements which include F.O.B. destination shipping terms,revenue is recognized upon delivery to the customer. Standard products do nothave customer acceptance criteria. Revenues for training are deferred until thetraining is completed unless the training is deemed inconsequential orperfunctory. Revenue Recognition - sale of equipment under recourse financing-The Companyinitially defers recognition of revenue associated with equipment sold underrecourse financing contracts. Revenue is recognized over the life of thecontractual obligation, as is more fully described in note 6. 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,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 andamortization. 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. 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 recognized 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 recognized 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. 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. Recent Accounting Pronouncements In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option forFinancial Assets and Financial Liabilities", which provides companies with anoption to report selected financial assets and liabilities at fair value. Theobjective of SFAS No. 159 is to reduce both the complexity in accounting forfinancial instruments and the volatility in earnings caused by measuring relatedassets and liabilities differently. SFAS No. 159 also establishes presentationand disclosure requirements designed to facilitate comparisons between companiesthat choose different measurement attributes for similar types of assets andliabilities. SFAS No. 159 is effective fiscal years beginning after November 15,2007. We have not completed our evaluation of SFAS No. 159, but we do not expectthe adoption of SFAS No. 159 to have a material effect on our operating resultsor financial position. In June 2006, the FASB issued Interpretation No. 48, "Accounting for Uncertaintyin Income Taxes" an interpretation of FASB Statement No. 109, which is effectivefor fiscal years beginning after December 15, 2006. The interpretation providesthat a tax position is recognized if the enterprise determines that it is morelikely than not that a tax position will be sustained based on the technicalmerits of the position, on the presumption that the position will be examined bythe appropriate taxing authority that would have full knowledge of all relevantinformation. The tax position is measured at the largest amount of benefit thatis greater than 50% likely of being realized upon ultimate settlement. Theinterpretation also provides guidance on removal from recognition,classification, interest and penalties, accounting for interim periods andtransition. The Company is in the process of evaluating the impact that adoptionof the interpretation will have on its financial statements. Translation of Foreign Currencies - The functional currency for the Company'sforeign subsidiary is the UK Pound Sterling. Balance sheet amounts aretranslated at December 31 exchange rates and statement of operations accountsare translated at average rates. The resulting gains or losses are chargeddirectly to accumulated other comprehensive income. The Company is exposed tomarket risks related to fluctuations in foreign exchange rates because somesales transactions, and the assets and liabilities of its foreign subsidiaries,are denominated in foreign currencies. The Company had no outstanding forwardexchange contracts as of December 31, 2005 and December 31, 2006. Gains andlosses from transactions denominated in foreign currencies and forward exchangecontracts are included in the Company's net income as foreign exchange gain(loss) in the accompanying consolidated statements of operations. Comprehensive Income - Comprehensive income, which is the combination ofreported net income and other comprehensive income, was composed only of theCompany's net income and foreign exchange gains (losses) for the period fromAugust 11, 2005 through December 31, 2005, and the year ended December 31, 2006. Total comprehensive income for the periods was approximately $959,000 and$5,386,000, respectively. Earnings Per Share - Basic earnings per share represents income available tocommon stockholders divided by the weighted average number of shares outstandingduring the period. 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. Earnings per common share have been computed basedon the following (in thousands): 2005 2006 Net Income $ 962 $ 5,381 Basic Weighted Average Shares Outstanding 30,000 30,714Net Dilutive Effect of Stock Options 47Diluted Weighted Average Shares Outstanding 30,000 30,761 The Company had 95,000 shares outstanding at December 31, 2005 and issued astock split of 315.79:1 in 2006, prior to its initial public offering. Shareand per share amounts have been adjusted to reflect the stock split for theperiods ended December 31, 2005 and 2006. 3. BUSINESS COMBINATION On August 10, 2005, the Company acquired certain assets and assumed certainliabilities of the Somero Business from Dover whose results of operations areincluded in the consolidated results of operations presented herein for theperiod from August 11, 2005 to December 31, 2005. The Somero Business wasformerly a division of Dover Industries, Inc. The aggregate purchase price was$46,735,000, and the Company incurred $1,500,000 of transaction costs. The Company accounted for the acquisition using the purchase method ofaccounting in accordance with SFAS No. 141, "Business Combinations". The Companyengaged a third-party valuation specialist to assist in the appraisal ofintangible assets and real and personal property acquired. The total purchaseprice has been allocated based upon the fair value of the assets acquired andliabilities assumed. The excess purchase price above the fair value of theassets acquired and liabilities assumed has been recorded as goodwill.Identifiable intangible assets acquired were valued using assumed cash flowestimates, and applicable discount rates. The Company identified intangibleassets consisting of customer relationships and patents, which will be amortizedover a period of 8 to 12 years, as is more fully described in note 5. Theallocation of the purchase price consideration is as follows (in thousands): Accounts receivable - net $ 2,033Inventory - net 4,517Prepaid expenses 286Property and equipment 4,305Intangible assets 41,388 Total assets acquired 52,529 Total liabilities assumed (5,794) Purchase price $ 46,735 4. INVENTORIES Inventories consisted of the following at December 31, 2005 and December 31,2006 (in thousands): 2005 2006 Raw materials $ 2,266 $ 2,422Finished goods and work in process 2,931 2,679 5,197 5,101Less: reserve for excess and obsolete inventory (693) (189) Total $ 4,504 $ 4,912 5. GOODWILL AND INTANGIBLE ASSETS In 2005 and 2006, the Company performed its annual SFAS No. 142 impairment testand determined that no impairment loss should be recognized. Goodwill in theamount of $16,400,000 was recorded in the acquisition of the Somero Business andthe majority is deductible for tax purposes. The following table reflects intangible assets that are subject to amortizationunder the provisions of SFAS No. 142 (in thousands): Weighted average Amortization Period 2005 2006Capitalized CostCustomer Relationships 8 years 6,300 6,300Patents 12 years 18,538 18,538Other Intangibles 3 years 150 155 $ 24,988 $ 24,993Accumulated AmortizationCustomer Relationships 8 years 328 1,116Patents 12 years 644 2,189Other Intangibles 3 years 29 72 $ 1,001 $ 3,377 Net Carrying CostsCustomer Relationships 8 years 5,972 5,184Patents 12 years 17,894 16,349Other Intangibles 3 years 121 83 $ 23,987 $ 21,616 Amortization expense associated with the intangible assets for the period fromAugust 11, 2005 through December 31, 2005 and the year ended December 31, 2006was approximately $1,001,000 and $2,376,000, respectively. Future amortizationon intangible assets is as follows (in thousands) at: December 31, 2007 $ 2,3822008 2,3622009 2,3322010 2,332Thereafter 12,208 $ 21,616 6. PROPERTY, PLANT, AND EQUIPMENT Property, plant, and equipment consists of the following at December 31, 2005and December 31, 2006 (in thousands): 2005 2006 Land $ 207 $ 207Buildings and improvements 3,398 3,432Machinery and equipment 600 732Property and Equipment held under capital leases 658 657 (See Note 8)Equipment sold under recourse contracts 178 178 5,041 5,206Less: accumulated depreciation and amortization (207) (494) $ 4,834 $ 4,712 Depreciation expense for the period August 11, 2005 through December 31, 2005and the year ended December 31, 2006, was approximately $207,000 and $382,000,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 December 31, 2005 and December 31, 2006 ofapproximately $147,000 and $78,000, respectively. Revenue under thesearrangements has been deferred and recognized over the life of the financingarrangement, approximately 5 years. Deferred revenue of approximately $234,000and $84,000 related to these transactions was included in accrued expenses atDecember 31, 2005 and 2006, respectively. The Company has made no further salesunder recourse arrangements in 2005 or 2006. 7. DEBT OBLIGATIONS Summary-The Company's debt obligations consisted of the following at December31, 2005 and December 31, 2006 (in thousands): 2005 2006 Bank debt: Term loans $ 32,000 $ 21,000 Less debt obligations due within one year 1,500 2,400 Obligations due after one year $ 30,500 $ 18,600 Credit Facility-The Company has a credit facility with a financial institution,dated November 22, 2005 and amended October 4, 2006, that is composed of thefollowing at December 31, 2006: • $3,000,000 revolving working capital line of credit under which amounts borrowed are due on demand • $21,500,000 term loan The working capital line of credit loan bears interest at the Prime Rate (asdefined in the financing agreement) plus 0.75% per annum (8.0% at December 31,2005 and 9.0% at December 31, 2006). The term loan under the credit facilitybears interest at the Prime Rate plus 2.25% per annum (9.5% at December 31, 2005and 10.5% at December 31, 2006). All borrowings are secured by substantially allof the assets of the Company and contain a number of restrictive covenants that,among other things, limit the ability of the Company to make distributions toshareholders, make capital expenditures, and incur indebtedness. In addition,the Company is required to comply with quarterly debt service coverage ratiosand minimum trailing twelve month EBITDA requirements. The credit facilityexpires on November 22, 2010. The amendment to the term loan required the Company to prepay the loan in anaggregate principal amount equal to $9,500,000 no later than three business daysfollowing the receipt of the proceeds from the initial public offering (see Note16). Payment was made on November 7, 2006. See Note 20 for further discussionof debt obligations. Future Payments-The future payments by year under the Company's debt obligationsare as follows (in thousands) at: December 31, 2007 $ 2,4002008 2,4002009 2,4002010 13,800 Total payments $ 21,000 Interest-Interest expense on the credit facility during the period August 11,2005 through December 31, 2005, and the year ended December 31, 2006, wasapproximately $457,000 and $3,618,000, respectively, related to the debtobligation. Interest expense paid by the Company's U.K. subsidiary wasapproximately $0 and $13,000 for the period August 11, 2005 through December 31,2005, and the year ended December 31, 2006, respectively. 8. CAPITAL LEASE OBLIGATIONS Summary-The Company leases a building in Jaffrey, New Hampshire, which is ownedby a former co-owner of the Somero Business. The lease has a condition in whichthe owner of the building can require the Company to purchase the building atfair value at the end of the lease. Accordingly, the lease requires treatmentas a capital lease. At December 31, 2006, the gross amount of property and related accumulatedamortization recorded under the capital lease were as follows (in thousands): 2006 Building $ 657Less: Accumulated Depreciation (23) $ 634 Future Payments-The future payments under the Company's capital lease obligationare as follows at December 31, 2006 (in thousands): 2007 $ 6572008 -2009 -2010 -Thereafter - Net minimum lease payments 657 Interest-Interest paid during the period August 11, 2005 through December 31,2005, and the year ended December 31, 2006, was approximately $40,000 and$83,000, respectively, related to the capital lease obligation. On January 10, 2007, the Company acquired the building for approximately$657,000. 9. RETIREMENT PROGRAM 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 50% of the employee's contribution, up to the first 4% of theemployee's salary, for the period from August 11, 2005 through December 31, 2005and matches 75% of the employee's contribution, up to the first 4% for the yearended December 31, 2006. The Company match vests after one year of service withthe Company. The Company contributed approximately $21,000 and $133,000 to thesavings and retirement plan during the period from August 11, 2005 throughDecember 31, 2005 and the year ended December 31, 2006, respectively. 10. OPERATING LEASES The Company leases property, vehicles and office equipment under leasesaccounted for as operating leases. Future minimum payments by year under noncancelable operating leases with initial terms in excess of one year were asfollows (in thousands): December 31, 2006 2007 $ 1832008 1462009 962010 15After 2010 - Total $ 440 Total rent expense under operating leases was approximately $50,000 and $172,000during the period August 11, 2005 through December 31, 2005, and the year endedDecember 31, 2006, respectively. 11. SUPPLEMENTAL CASH FLOW DISCLOSURES The Company had the following cash and noncash transactions for the years endedDecember 31, 2005 2006 Cash paid for interest $ 1,162 $ 3,710 Cash paid for taxes $ 206 $ 3,573 Noncash transactions Transfer of stockholder loan to equity $ 16,683 $ - 12. TRANSACTIONS WITH RELATED PARTIES During the period from August 11, 2005 through December 31, 2005, the Companyreceived a $47,000,000 loan from its sole shareholder, Somero Holdings, LLC ofwhich $30,317,000 was repaid via the credit facility discussed in Note 7. Theremaining balance of $16,683,000 was contributed to equity as additional paid incapital in 2005. At December 31, 2005 and December 31, 2006, the Company hadpayables due to Somero Holdings, LLC, its majority shareholder, on theaccompanying consolidated balance sheets of approximately $710,000 and $0,respectively. These advances relate to interest on the original acquisitionfinancing and working capital advances not repaid by December 31, 2005. Duringthe period from August 11, 2005 through December 31, 2005, and the year endedDecember 31, 2006, the Company incurred interest in the amount of approximately$706,000 and $2,000 relating to this payable, respectively. This payable wasrepaid in November 2006. The Company has a management fee agreement and a 401(k) retirement plan throughthe investment manager of Somero Holdings, LLC. Fees paid under the managementfee agreement were approximately $167,000 and $336,000 for the period fromAugust 11, 2005 through December 31, 2005, and the year ended December 31, 2006,respectively. The Company took over management of its 401k plan in November2006 and the management fee ended. 13. 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 December 31, 2005, and December31, 2006, the Company had receivables from two customers which representedapproximately 25% and 16% of total accounts receivable, respectively. 14. 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 noncompete and nondisclosure provisions as well as providingfor defined severance payments in the event of termination. 15. INCOME TAXES The Company calculates current and deferred income tax expense and deferredincome tax assets and liabilities in accordance with SFAS No. 109. The provision for income taxes at December 31, 2005 and December 31, 2006includes the following (in thousands): 2005 2006Current income tax Federal $507 $2,314 State 84 193 Foreign (11) 323 Total current income tax expense $580 $2,830 Deferred tax expense Federal ($28) $23 State (4) 3 Foreign - - Total deferred tax (benefit) expense ($32) $26 Total tax expense $548 $2,856 The components of the net deferred income tax asset at December 31 were asfollows (in thousands): 2005 2006 Deferred tax asset (liability) Depreciation $38 $28 Intangibles (53) (195) Share-based compensation - 21 Other 47 152 Net deferred tax asset (Liability) $32 $6 Current $47 $152NonCurrent (15) (146) $32 $6 The statutory federal income tax rate was 34% for the period from August 11,2005 through December 31, 2005, and the year ended December 31, 2006.Differences between the income tax expense reported in the statement ofoperations and the amount computed by applying the statutory federal income taxrate to earnings before tax are due to the following items (in thousands): 2005 2006 Consolidated Income before tax $1,510 $8,237Statutory rate 34% 34% Statutory tax expense $513 $2,801 State taxes 53 164IRC Section 199 Deduction (17) (74)Meals and Entertainment 13 53Other (14) (88) Actual tax expense $548 $2,856 In assessing the ability to realize net deferred tax assets, managementconsiders whether it is more likely than not that some portion of the deferredtax assets will be realized. The ultimate realization of deferred tax assets isdependent upon the generation of future taxable income during the periods inwhich those temporary differences become deductible. Management considersprojected future taxable income and tax planning strategies in making thisassessment, but must give greater weight to recent historical operating losses.Based on those considerations, management believes it is more likely than notthat the Company will realize the benefits of the deferred tax asset at December31, 2006, and has not recognized a valuation allowance against the total netdeferred tax asset. The Company intends to reinvest the undistributed earnings of its foreignsubsidiary and accordingly has not provided for taxes on this undistributedamount. 16. INITIAL PUBLIC OFFERING On November 1, 2006, the Company offered 4,281,968 shares of common stock at$2.34 per share in its initial public offering. All shares were purchased andthe Company received $5,878,000 net of fees. Total fees for the transactionwere $5,570,000. Prior to the initial public offering, the Board declared a dividend of$1,790,000, which was paid concurrent with the initial public offering toshareholders of record as of October 5, 2006. Immediately after the offeringand upon receipt of the dividend, Somero Holdings LLC reimbursed the Company$1,700,000 for costs related to the transaction. The dividend and subsequentreimbursement have been recorded as components of paid in capital. 17. RESEARCH AND DEVELOPMENT The Company expenses research and development costs as incurred. Total researchand development expense for the research and development tax credit wasapproximately $214,000 and $752,000 for the period August 11, 2005 throughDecember 31, 2005, and the year ended December 31, 2006, respectively. 18. SALES BY GEOGRAPHIC LOCATION The Somero Business sells its product to customers throughout the world. Thebreakdown by location is as follows (in thousands): 2005 2006 United States and U.S. Possessions $ 11,503 $ 38,354 Canada 569 2,262 Rest of World 4,477 15,278 Total $ 16,549 $ 55,894 19. STOCK BASED COMPENSATION The Company accounts for its stock option issuances under Statement of FinancialAccounting Standard No. 123 (revised 2004), "Share-Based Payment," ("SFAS No.123R") which was issued by the FASB in December 2004. SFAS No. 123R requiresrecognition 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 No. 123R also requires measurement of the cost of employeeservices received in exchange for an award based on the grant-date fair value ofthe award. The Company has one share-based compensation plan, which is described below. Thecompensation cost that has been charged against income for the plan wasapproximately $59,000 for the year ended December 31, 2006. The income taxbenefit recognized for share-based compensation arrangements was approximately$21,000 for the year ended December 31, 2006. In October 2006, the Company implemented the 2006 Stock Incentive Plan (the "Plan"). The Plan authorizes 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 a average vesting period of 3 years. The following table illustrates the assumptions for the Black-Scholesmodel used in determining the fair value of options granted to employees for theyear ended December 31, 2006. Year Ended December 31, 2006 Dividend yield 2.96%Risk-free interest rate 4.52%Volatility 25.10%Expected life ( in years) 4.4 A summary of option activity under the stock option plans as of December 31,2006, and changes during the year then ended is presented below: Weighted - Weighted- Average Average Remaining Aggregate Exercise Contractual IntrinsicOptions Shares Price Term (yrs) Value Outstanding atJanuary 1, 2006 - $ - $ - $ - Granted 2,656,832 2.34 9.84 745,166Exercised - - - -Forfeited orexpired - - - - Outstanding atDecember 31,2006 2,656,832 $ 2.34 $ 9.84 $ 745,166 Exercisable atDecember 31,2006 - - - - The weighted-average grant-date fair value of options granted during the yearended December 31, 2006 was $.48. A summary of the status of the Company's non-vested shares as of December 31,2006, and changes during the year then ended is presented below: Weighted Average Shares Grant-Date Fair ValueNon-vested shares as of December 31, 2005Granted 2,656,832 $1,284,000Vested - - Forfeited - -Non-vested shares as of December 31, 2006 2,656,832 $1,284,000 As of December 31, 2006, there was $1,225,000 of total unrecognized compensationcost related to non-vested share-based compensation arrangements granted underthe Company's stock option plans. That cost is expected to be recognized over aperiod of 3 years. 20. SUBSEQUENT EVENTS The Company executed a credit facility with a financial institution on March 16,2007 that is composed of the following: • $14,000,000 Five year Secured Reducing Revolving Line of Credit • $10,000,000 Five year Secured Term Loan The Company has fixed the notes for the term loan and the revolving facilitythrough a series of swaps. The new credit facilities are secured bysubstantially all of the Company's assets and contain a number of restrictivecovenants that among other things limit the ability of the company to incurdebt, issue capital stock, change ownership and dispose of certain assets. The new term loan and a portion of the new revolving loan were used to pay offin full the December 31, 2006 term debt which will result in a one time,non-cash write off the unamortized loan origination fee of approximately$1,300,000 and a prepayment penalty of $235,000. Future Payments- The future payments by year under the Company's Revolving Lineof Credit and the Term Loan are as follows (in thousands). December 31, 2007 1,0712008 3,0002009 3,0002010 3,000Thereafter 9,743 Total Payments 19,814 This information is provided by RNS The company news service from the London Stock Exchange