Final Results

RNS Number : 7355R

Somero Enterprises Inc.

06 May 2009

 

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.
6 May 2009
Somero Enterprises, Inc. ®
Full year results for the twelve months to 31 December 2008
Revenue decreased by 21.8% to US$51.9m (2007: US$66.4m)  Significant reduction in net debt to US$9.7m

Somero Enterprises, Inc. ®, ('Somero' or 'the Company') is pleased to report results for the twelve months to 31 December 2008. Somero is a North American manufacturer of patented laser guided equipment used for the spreading and leveling of high volumes of concrete for floors in the construction industry. Somero has operations worldwide and is primarily focused on the non-residential construction industry. Financial Highlights
•	Significant reduction in net debt to US$9.7m (2007: US$11.1m)
•	Revenue decreased by 21.8% to US$51.9m (2007: US$66.4m)
•	Adjusted EBITDA decreased by 63.7% to US$6.0m (2007: US$16.5m) which includes a US$0.6m restructuring charge
•	Pre-tax income decreased by 79.8% to US$2.2m (2007: US$10.7m)
•	Adjusted net income before amortization decreased by 63.1% to US$4.0m (2007: US$10.8m)
•	EPS before amortization down 62.2% to US$0.12 (Basic EPS: US$0.05) vs. US$0.31 in 2007 (Basic EPS: US$0.20)

Business Highlights
•	Successful operational restructuring resulting in a planned US$10.0m reduction in operating costs
•	Successful modification of bank agreements providing added covenant flexibility
•	Continued focus on product development, introduction of the new Mini Screed Commercial in November 2008 and the new SXP-D in January 2009
•	Broadening revenue base, with international sales accounting for 50% of group revenue
•	Continued investment in emerging markets, increasing market penetration

Commenting on the results Stuart Doughty, Non-Executive Chairman of Somero said: 'As the financial crisis intensified during the year, we took immediate and decisive action to reduce our cost base, and achieved a total saving in 2009 operating costs of US$10.0m. This proactive restructuring allowed us to modify our bank agreements to obtain added covenant flexibility and stability in the year ahead. 'Despite the current uncertainty in the markets, and our cautious outlook on the out-turn for 2009, I believe we are well placed to deliver a profitable year. We remain committed to driving improved performance from our growth markets, and expect to continue to make investments in these markets. We also expect to benefit from our new product development program which has developed a new Mini Screed and a redesigned and updated Large line SXP. 'We remain focused on maximizing our cash generation, maintaining high levels of customer support and providing continued training to our employees and clients alike.'  Jack Cooney, President and Chief Executive officer commented: 'There is no doubt that 2008 was a particularly difficult year. I was impressed with how quickly our experienced management team reacted to the rapidly changing market conditions. We finished the year in a position to gain from our investments in growth markets and new products. Our brand recognition, market position and products, together with an experienced management team, provide us with a solid platform to remain profitable, generate cash and continue debt reduction in the year ahead.'
For further information contact:
Hawkpoint
Christopher Kemball	[phone]
Collins Stewart Europe
Piers Coombs	[phone]
About Somero: Somero® designs, manufactures and sells equipment that automates the process of spreading and leveling large volumes of concrete for commercial flooring and other horizontal surfaces, such as paved parking lots. Somero's innovative, proprietary products, including the large SXP®-D, CopperHead®, and new Mini Screed™ C Laser Screed® machines employ laser-guided technology to achieve a high level of precision.   Somero's products have been sold primarily to concrete contractors for use in non-residential construction projects in over 60 countries across every time zone around the globe. Laser Screed equipment has been specified for use in constructing warehouses, assembly plants, retail centers and in other commercial construction projects requiring extremely flat concrete floors by a variety of companies, such as Costco, Home Depot, B&Q, DaimlerChrysler, various Coca-Cola bottling companies, the United States Postal Service, Lowe's, Toys 'R' Us and ProLogis.   Somero's headquarters and manufacturing operations are located in Michigan, USA with Executive offices in Florida. It has a sales and service office in Chesterfield, England. Somero has approximately 90 employees and markets and sells its products through a direct sales force, external sales representatives and independent dealers in North America, Latin America, Europe, the Middle East, South Africa, Asia and Australia. Somero is listed on the Alternative Investment Market 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 to sell, or any solicitation of any offer to purchase, any securities of Somero Enterprises, Inc. (the 'Company'). 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 (the 'US Securities Act')) or to residents, nationals or citizens of Canada, Japan or Australia. The distribution of this announcement in certain other jurisdictions may also be restricted by law and persons into whose possession this announcement or any document or other information referred to herein comes should inform themselves about and observe any such restriction. Any failure to comply with these restrictions may constitute a violation of the securities laws of any such jurisdiction. 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 to US persons (as defined in Regulation S under the US Securities Act) except pursuant to an effective registration statement under the US Securities Act or pursuant to an available exemption from the registration requirements under the US Securities Act.  No securities of the Company have been registered under the applicable securities laws of Australia, Canada or Japan and may not be offered or sold within Australia, Canada or Japan or to, or for the account or benefit of citizens or residents of Australia, Canada or Japan.
Somero Enterprises, Inc. (R) Full year results for the twelve months to 31 December 2008
Chairman's Statement
Overview  As the depth of the financial collapse became more apparent throughout 2008 our focus altered from growth to stability, and we acted quickly to reduce our cost structure while continuing to make investments in our growth markets. Somero's core principles - high-quality engineering, product development and high levels of customer service - have served us well, and our products continue to be in demand and essential to produce quality flooring for projects globally. We are confident that Somero is structured to maintain market share and remains ready to take advantage of opportunities as they present themselves around the world.   Markets  The US led economic downturn particularly affected Large line sales and spares. Small line products were less affected due to their lower capital cost. Europe, Middle East and Africa enjoyed a strong first half, however, sales tailed off in the second half of the year. In line with our strategic ambitions for our business, we remain committed to our development in China and the Middle East, maintaining our position to gain market penetration in both those areas.   Historically, in difficult economic times, we have seen growth in the used equipment line as it becomes increasingly in demand by customers continuing to work but not in a position to add new equipment to their fleets. We have begun an aggressive campaign in this market niche with a refurbishing program suited to all price points in the marketplace. The Somero As Is program, in addition to our traditional refurbishing program, includes a Somero warranty, training and customer service with all equipment. We are confident this program will allow us to prevail in competitive situations in sales of as is equipment.   Whilst we remain of the view that opportunities will again exist for us to successfully expand our product offering into the residential arena, we have re-focused in the non-residential construction market and have introduced a more powerful Mini Screed™. Since its introduction in late 2008, the Mini Screed Commercial has gained wide acceptance.   People  It is often in times of difficult economic and market conditions that the true measure of a team can be assessed. As a Board, we are continually impressed with the ingenuity and resilience of our employees and would like to take this opportunity to thank all employees for their performance, commitment and dedication throughout the past year in these most unusual and unchartered times.   Current Trading and Outlook   Despite the global slowdown, construction demand continues in specific sectors and demand for ever higher building quality standards is rising. We remain committed to investing in important new markets, whilst being mindful of the need to regularly review our cost base against prevailing market conditions. We continue to focus on maximizing our cash generation, maintaining high levels of customer support and developing new products to keep Somero at the forefront of this industry. After the downturn runs its course, I remain confident Somero will emerge as a stronger Company, better-equipped to benefit from the ensuing period of economic recovery.   The first quarter of 2009 was below expectations but still within bank covenants. We did see a progressive increase in activity each month which is the normal springtime trend and countries that had been slow or dormant are showing increased levels of activity. These trends seem to be gaining momentum and whilst it is too early to see if we have experienced the bottom, the increase in activity is encouraging. Notwithstanding these encouraging trends, the Board remains cautious on the out-turn for 2009.
Stuart Doughty  Non-Executive Chairman
President and Chief Executive Officer's Review
Overview  The effect of the sudden and extensive worldwide shutdown of the financial system on construction activity was mitigated with the experience of our management team. We recognized the impact on our customers very early in the process and acted to make swift and significant reductions to our cost structure in the US and Europe. The Group is now sized to the realities of the marketplace as it is operating today and has continued to make investments in China and the Middle East to take advantage of growth opportunities.   Our ability to move quickly has allowed us to meet all our debt obligations and, in early 2009, we modified our banking facilities to provide significant flexibility in the coming years. These are unprecedented times, nevertheless management is confident that Somero's fundamentals remain strong and that the strategies in place combined with our market leading position will result in continued long-term growth for Somero.   Group revenues are US$51.9m, but the Board is pleased that the management has reacted quickly to the changing market conditions by taking out costs, resulting in full year adjusted EBITDA of US$6.0m and maintaining bank covenant compliance at lower turnover levels.   As part of our overall strategic plan, the Company made further progress in 2008 towards our goal of decreasing our dependence on North American markets and broadening our revenue base. International sales now account for 50% of group revenue, up from 40% in 2007. Our focus on cash generation has resulted in a further reduction in net debt at the year end to US$9.7m (2007: US$11.1m).   We continue to invest in training to give our team the tools to help them work effectively and efficiently to get through these difficult times.  Operational Performance  Total revenue decreased US$14.5m to US$51.9m (2007: US$66.4m). As expected the US suffered the vast majority of this revenue reduction (US$13.4m). Out of the product groups, Large line accounted for 65.7% of the reduction with Small line and Other accounting for 15.7% and 18.7% respectively.   We realized strong sales of the three dimensional system for concrete parking lots at US$2.8m (2007: US$2.4m). The introduction of the Mini Screed Commercial product in the final 2 months of the year was strong. Refurbished sales remained robust at US$3.0m (2007: US$3.3m).  EMEA had a very strong H1 with a 27.2% increase. As the financial crises shifted to Europe in H2, sales declined. Full year revenue was US$20.5m, broadly in line with 2007 (US$20.7m). Australia, South Africa and Korea were impacted by a dramatic currency change with 2008 revenue of US$2.3m (2007: US$4.2m) but our emerging markets of China, Middle East and Latin and South America showed strong growth. Latin and South America generated revenue of US$2.9m (2007: US$1.8m) and China and the Middle East benefited from our additional investment in sales personnel to generate total sales of US$2.1m (2007: US$0.4m).   These emerging markets remain a key area of focus for Somero. A central component of our business strategy continues to be our entry into and growth within emerging international markets. We will continue to position ourselves to identify and take advantage of these trends by adding additional investments in these markets.   The implementation of our emerging markets strategy is centered on three core aims:   To identify international logistics companies, development companies and building operators with a view to ensuring Western floor flatness specifications are carried through to new markets;   To target local contractors who are tendering for projects for these major international players and local contractors with a Western joint venture partner; and   To develop a package whereby we can provide in-depth floor construction training, beyond the operator training that we currently provide, and selling this training as part of the overall package of equipment and services to install a concrete floor.   We continue to pursue these three aims and it is encouraging that international refurbished sales - a key indicator of progress in these emerging markets - have remained robust.  Product Development  During the year we continued to invest in product development and launched a new commercial Mini-Screed product in November 2008 and subsequently introduced it at our industry's premier tradeshow, the 2009 World of Concrete, where it was well received. Also at the World of Concrete, we introduced the new SXP-Diagnostic machine. This new innovation gives full-time electrical system, hydraulic system and engine performance diagnostics alerts to the operator instantly should faults occur within the machine while performing on the jobsite. The development of this machine came from customer input as a result of our close relationship with our customers.   Somero Total Care warranty program was also introduced at the World of Concrete. Somero 'Total Care' is an all-inclusive warranty and training package for the SXP™-D Laser Screed® and includes a 3-year warranty on all non-wear parts, scheduled 6 monthly inspection & calibration visits for 3 years, classroom training for up to 4 operators and 1 day on-site advanced/additional operator training per year. This new innovative program is a first in the construction equipment industry and provides a high value benefit to ownership with no costs in the first 3 years of ownership except for wear items and consumables. The Total Care program is only available for purchase at the time of the initial sale of the SXP-D, at a cost of US$15,000.   Additional products are also in the prototyping stage. We remain confident that the launch of these products will continue to provide growth opportunities for Somero over the medium and longer term.  New Training Facility  The Company successfully completed the relocation of its executive offices and customer training to Fort Myers, Florida, in July 2008. The manufacturing plant and majority of customer service personnel remain in Houghton, Michigan. With the training located in Florida, we can now offer year-round classes to our customers who come from all over the world. Combining our executive offices with customer training enables senior management to interact with customers, giving them valuable insight into understanding their businesses and markets. As of December 2008 we had 40 customers come through training.   In 2009 we will look to expand our presence in emerging markets with all product offerings. The Company's attractive fundamentals including strong cash flow, good market position and products, together with an experienced management team, provide us with a solid platform on which to weather the global recession.   We look forward to delivering further on our strategic goals in the year ahead.  Jack Cooney  President and Chief Executive Officer

Summary of Financial Results (1) (2) (3) (4)
Financial Review
	12 months	12 months
	ended	ended
	31-Dec-07	31-Dec-08
	US$ 000	US$ 000
Revenue	66,436	51,941
Cost of sales	28,828	23,116
Gross profit	37,608	28,825
Operating expenses:
Selling expense	11,949	11,518
Engineering expense	1,831	1,384
General and administrative expense	10,514	12,477
Restructuring	-	582
Total operating expenses	24,294	25,961
Operating income	13,314	2,864
Other income (expense)
Interest expense	(1,472)	(856)
Interest income	74	67
Foreign exchange gain/(loss)	279	99
Other	(1,479)	(12)
Income before taxes	10,716	2,162
Provision for income taxes	3,789	505
Net income	6,927	1,657
Other data:
Adjusted EBITDA(1)(2)(4)	16,494	5,984
Adjusted net income before
amortization (1)(3)(4)	10,792	3,989
Depreciation expense	378	373
Amortization of intangibles	2,384	2,332
Capital expenditures	491	589

Notes:
1.	Adjusted EBITDA and adjusted net income before amortization are not measurements of the Company's financial performance under US GAAP and should not be considered as an alternative to net income, operating income or any other performance measures derived in accordance with US GAAP or as an alternative to US GAAP cash flow from operating activities as a measure of profitability or liquidity. Adjusted EBITDA and adjusted net income before amortization are presented herein because management believes they are useful analytical tools for measuring the profitability and cash generation of the business. Adjusted EBITDA is also used to determine pricing and covenant compliance under the Company's credit facility and as a measurement for calculation of management incentive compensation. The Company understands that although adjusted EBITDA is frequently used by securities analysts, lenders and others in their evaluation of companies, its calculation of adjusted EBITDA may not be comparable to other similarly titled measures reported by other companies.
2.	Adjusted EBITDA as used herein is a calculation of its net income plus tax provision, interest expense, interest income, foreign exchange gain, other expense, depreciation, amortization and stock based compensation.
3.	Adjusted net income before amortization as used herein is a calculation of net income plus amortization of intangibles plus loss on extinguishment of debt.
4.	The Company uses non-US GAAP financial measures in order to provide supplemental information regarding the Company's operating performance. The non-US GAAP financial measures presented herein should not be considered in isolation from, or as a substitute to, financial measures calculated in accordance with US GAAP. Investors are cautioned that there are inherent limitations associated with the use of each non-US GAAP financial measure. In particular, non-US GAAP financial measures are not based on a comprehensive set of accounting rules or principles, and many of the adjustments to the US GAAP financial measures reflect the exclusion of items that may have a material effect on the Company's financial results calculated in accordance with US GAAP.
Adjusted net income to adjusted EBITDA reconciliation and adjusted net income before amortization reconciliation

	12 months	12 months
	ended	ended
	31-Dec-07	31-Dec-08
	US$ 000	US$ 000
Adjusted EBITDA reconciliation
Adjusted net income	6,927	1,657
Tax provision	3,789	505
Interest expense	1,472	856
Interest income	(74)	(67)
Foreign exchange gain	(279)	(99)
Other expense	1,479	12
Depreciation	378	373
Amortization	2,384	2,332
Stock based compensation	418	415
Adjusted EBITDA	16,494	5,984
Adjusted net income before amortization reconciliation
Net income	6,927	1,657
Amortization	2,384	2,332
Loss on extinguishment of debt	1,481	-
Net income before amortization	10,792	3,989

Notes:  References to 'Adjusted net income before amortization' in this document are to Somero's net income plus amortization of intangibles plus loss on extinguishment of debt. Although adjusted net income before amortization is not a measure of operating income, operating performance or liquidity under US GAAP, this financial measure is included because management believes it will be useful to investors when comparing Somero's results of operations both before and after the Somero Acquisition, including by eliminating the effects of increases in amortization of intangibles that have occurred as a result of the write-up of these assets in connection with the Somero Acquisition. Adjusted net income before amortization should not, however, be considered in isolation or as a substitute for operating income as determined by US GAAP, or as an indicator of operating performance, or of cash flows from operating activities as determined in accordance with US GAAP. Since adjusted net income before amortization is not a measure determined in accordance with US GAAP and is thus susceptible to varying calculations, adjusted net income before amortization, as presented, may not be comparable to other similarly titled measures of other companies. A reconciliation of net income to adjusted EBITDA and adjusted net income before amortization is presented above. Revenues  Somero's consolidated revenues decreased by 21.8% to US$51.9m (2007: US$66.4m). Somero's revenues consist primarily of sales from new Large line products (the SXP-D Large Laser Screed and its predecessors), sales from new Small line products (the CopperHead and PowerRake) and other revenues, which consist of, among other things, revenue from sales of spare parts, refurbished machines, Topping Spreaders, Mini Screeds, 3D systems and accessories. The overall decrease in revenues for the year was driven by reductions in each of Large line sales, Small line sales and other revenues. The table below shows the breakdown between Large line sales, Small line sales and other revenues during the 12 months ended 31 December 2007 and 2008:

	12 months ended 31 December 2007		12 months ended 31 December 2008
	(US$ in millions)	Percentage of net sales	(US$ in millions)	Percentage of net sales
Large line sales	30.5	45.9%	21.3	41.1%
Small line sales	18.1	27.3%	15.4	29.6%
Other revenues	17.8	26.8%	15.2	29.3%
Total	66.4	100%	51.9	100%

Large line sales decreased to US$21.3m (2007: US$30.5m) as a result of a 33.6% decrease in volume to 71 units (2007: 107), Small line sales decreased to US$15.4m (2007: US$18.1m) as volumes decreased to 320 (2007: 394) and other revenues, including sales of spare parts, refurbished machines, Topping Spreaders, Mini Screeds, 3D systems and accessories, decreased to US$15.2m (2007: US$17.8m).   Sales to customers located in North America comprise the majority of Somero's revenue, constituting 50.5% of total revenue (2007: 59.9%), while sales to customers in Europe, South Africa and the Middle East combined contributed 39.6% (2007: 31.3%). The remaining sales in these periods were to customers in Asia, Australia, Central America and South America. The Company has been focused on international sales, with revenues outside North America decreasing by 3.4% to US$25.7m (2007: US$26.6m). Sales in Europe, South Africa and the Middle East generated US$20.5m (2007: US$20.7m) and sales of Large line and Small line products in these regions increased by 2% and 3.6% in the comparable periods.  Sales in Asia, Australia and Latin and South America decreased to US$5.2m (2007: US$5.9m) driven by a decrease in Large line volumes to 9 units (2007: 12 units) and in Small line units to 28 (2007: 52 units).  Sales to customers in North America decreased by 33.8% to US$26.2m (2007: US$39.6m).   Gross Profit Gross profit decreased by 23.4% to US$28.8m (2007: US$37.6m), with gross margins declining to 55.5% (2007: 56.6%). The decrease in gross margins was a result of several factors including a change in sales mix from higher margin Large line to lower margin Other, and lower production volumes leading to less cost absorption. Operating Expenses Operating expenses increased by 6.9% to US$26.0m (2007: US$24.3m). This increase included US$0.8m of increased legal expenses, US$0.7m in relocation costs and US$0.6m in restructuring expenses.   Selling expenses decreased by 3.6% to US$11.5m (2007: US$11.9m). The decrease in selling expenses was primarily due to lower sales, which resulted in decreased sales commissions.   Engineering expenses decreased by US$0.4m, or 24.4%, to US$1.4m (2007: US$1.8m). The decrease was due to fewer projects being worked on in 2008 as compared to 2007. General and administrative expenses increased US$2.0m, or 18.7% to US$12.5m (2007: US$10.5m). A substantial amount of the increase in general and administrative expenses resulted from US$0.8m in increased legal expenses, US$0.7m in relocation costs and increased bad debt expenses.   Restructuring expenses amounted to US$0.6m as the Company streamlined its operations with the onset of the global credit crises and recession.  Other Income (Expenses) Other expenses were US$0.7m (2007: US$2.6m). Other expenses consisted of interest income, interest expense, foreign exchange gains and losses and gains and losses on the disposal of assets.   Interest expenses were US$0.9m (2007: US$1.5m), resulting primarily from continued reductions in debt as excess cash was used to pay down debt. Foreign exchange gains were US$0.1m (2007: US$0.3m) resulting primarily from a changing US Dollar compared to the Pound Sterling and the Euro. Other expenses included US$12k (2007: US$1.5m), primarily resulting from fewer gains and losses on the disposal of assets.  Provision for Income Taxes  The provision for income taxes decreased by US$3.3m, or 86.7%, to US$0.5m (2007: US$3.8m) due to lower profitability levels. Overall, Somero's effective tax rate decreased from 35.4% to 23.4% due to foreign tax items.   Net Income Net income decreased by 76.1% to US$1.7m (2007: US$6.9m). The primary cause of the decrease in net income was decreased sales and increased operating expenses.   Earnings Per Share   Basic earnings per share represents income available to common stockholders divided by the weighted average number of shares outstanding during the period. Diluted earnings per share reflect additional common shares that would have been outstanding if dilutive potential common shares had been issued. Potential common shares that may be issued by the Company relate to outstanding stock options. Earnings per common share have been computed based on the following:

	2007	2008
	US$ 000	US$ 000
Net income	6,927	1,657
Basic weighted shares outstanding	34,281,968	34,281,968
Net dilutive effect of stock options	-	-
Diluted weighted average shares outstanding	34,281,968	34,281,968
The Company had 34,281,968 shares outstanding at 31 December 2008. Earnings Per Share Earnings per share at 31 December 2008 is as follows:
		US$
Basic earnings per share		0.05
Diluted earnings per share		0.05
Adjusted net income before amortization of earnings per share		0.12
Consolidated Balance Sheets As of 31 December 2007 and 2008
		2007	2008
		US$ 000	US$ 000
Assets
Current assets:
Cash and cash equivalents		3,842	789
Accounts receivable - net		4,279	2,434
Inventories - net		6,948	5,819
Prepaid expenses and other assets		860	800
Income tax receivable		-	137
Deferred tax asset		594	466
Assets held for sale		618	-
Total current assets		17,141	10,445
Property, plant and equipment - net		4,103	4,260
Intangible assets - net		19,236	16,872
Goodwill		16,400	16,400
Deferred financing costs		94	52
Other assets		135	75
Total assets		57,109	48,104
Liabilities and stockholders' equity
Current liabilities:
Notes Payable - current portion		1,429	1,429
Accounts payable		4,051	1,960
Accrued expenses		2,453	1,279
Income taxes payable		374	-
Other liabilities		152	360
Total current liabilities		8,459	5,028
Notes payable, net of current portion		13,500	9,026
Deferred income taxes		467	239
Other liabilities, net of current portion		455	422
Total liabilities		22,881	14,715
Commitments and contingencies		-	-
Stockholders' equity
Preferred stock, US$.001 par value, 50,000,000 shares authorized, no shares issued and outstanding		-	-
Common stock, US$.001 par value, 80,000,000 shares authorized, 34,281,968 shares issued and outstanding at 31 December 2007 and 2008		4	4
Additional paid in capital		22,344	22,759
Retained earnings		12,128	11,728
Other comprehensive income (loss)		(248)	(1,102)
Total stockholders' equity		34,228	33,389
Total liabilities and stockholders' equity		57,109	48,104

See notes to consolidated financial statements.
Consolidated Statements of Income For the years ended 31 December 2007 and 2008
	Year ended 31 December 2007 US$ 000	Year ended 31 December 2008 US$ 000
Revenue	66,436	51,941
Cost of sales	28,828	23,116
Gross profit	37,608	28,825
Operating expenses
Selling expenses	11,949	11,518
Engineering expenses	1,831	1,384
General and administrative expenses	10,514	12,477
Restructuring Expense	0	582
Total operating expenses	24,294	25,961
Operating income	13,314	2,864
Other income (expense)
Interest expense	(1,472)	(856)
Interest income	74	67
Foreign exchange gain	279	99
Other	(1,479)	(12)
Income before income taxes	10,716	2,162
Provision for income taxes	3,789	505
Net income	6,927	1,657
Earnings per common share
Basic	0.20	0.05
Diluted	0.20	0.05
Weighted average number of common shares outstanding
Basic	34,281,968	34,281,968
Diluted	34,281,968	34,281,968

See notes to consolidated financial statements
Consolidated Statements of Changes in Stockholders' Equity For the years ended 31 December 2007 and 2008
	Common Stock Series A		Common Stock Series B		Common Stock				Other
	Shares	Amount	Shares	Amount	Shares	Amount	Additional paid in capital	Retained earnings	Comprehensive Income (loss)	Total Stockholders' equity
	Number	US$ 000	Number	US$ 000	Number	US$ 000	US$ 000	US$ 000	US$ 000	US$ 000
Balance - 31 Dec 2006	-	-	-	-	34,281,968	4	21,926	6,343	2	28,275
Cumulative translation adjustment									(5)	(5)
Change in fair value of derivative instruments									(245)	(245)
Net income								6,927		6,927
Share based compensation							418			418
Dividends paid								(1,142)		(1,142)
Balance - 31 Dec 2007	-	-	-	-	34,281,968	4	22,344	12,128	(248)	34,228
Cumulative translation adjustment									(625)	(625)
Change in fair value of derivative instruments									(229)	(229)
Net income								1,657		1,657
Share based compensation							415			415
Dividends paid								(2,057)		(2,057)
Balance - 31 Dec 2008	-	-	-	-	34,281,968	4	22,759	11,728	(1,102)	33,389

See notes to consolidated financial statements.

Notes to the Consolidated Financial Statements  As of 31 December 2007 and 2008
	Year ended	Year ended
	31 December	31 December
	2007	2008
	US$ 000	US$ 000
Cash flows from operating activities:
Net income	6,927	1,657
Adjustments to reconcile net income to net cash provided by operating activities:
Deferred taxes	91	(100)
Depreciation and amortization	2,762	2,705
Amortization of deferred financing costs	1,380	42
Gain on sale of assets	(5)	10
Share based compensation	418	415
Working capital changes:
Accounts receivable	(178)	1,439
Inventories	(2,036)	222
Prepaid expenses and other assets	(276)	1
Other assets	(22)	60
Accounts payable and other liabilities	686	(2,416)
Income taxes	587	(511)
Net cash provided by operating activities	10,334	3,524
Cash flows from investing activities:
Proceeds from sale of property and equipment	25	680
Property and equipment disposals	78	0
Property and equipment purchases	(491)	(575)
Net cash used in investing activities	(388)	105
Cash flows from financing activities:
Borrowings from additional financing	22,254	5,837
Payment for financing costs	(125)	0
Repayment of notes payable	(28,325)	(10,311)
Payment of capital lease	(657)	0
Payment of dividends	(1,142)	(2,057)
Net cash used in financing activities	(7,995)	(6,531)
Effect of exchange rates on cash and cash equivalents	(4)	(151)
Net increase (decrease) in cash and cash equivalents	1,947	(3,053)
Cash and cash equivalents:
Beginning of period	1,895	3,842
End of period	3,842	789

See notes to consolidated financial statements.
1.	Organization and Description of Business
	Nature of Business Somero Enterprises, Inc. (the 'Company' or 'Somero') designs, manufactures, refurbishes, sells and distributes concrete leveling, contouring and placing equipment, related parts and accessories, and training services worldwide. The operations are conducted from a corporate office in Houghton, Michigan, executive offices in Fort Myers, Florida, a European distribution office in the United Kingdom, and sales offices in Canada, Germany, Dubai and China.
2.	Summary of Significant Accounting Policies
	Basis of Presentation The consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America.  Principles of Consolidation The consolidated financial statements include the accounts of Somero Enterprises, Inc. and its subsidiaries. All significant intercompany transactions and accounts have been eliminated in consolidation. Cash and Cash Equivalents Cash includes cash on hand, cash in banks, and temporary investments with a maturity of three months or less when purchased. Accounts Receivable and Allowances for Doubtful Accounts Financial instruments which potentially subject the Company to concentrations of credit risk consist primarily of accounts receivable. The Company's accounts receivable are derived from revenue earned from a diverse group of customers primarily located in the United States. The Company performs credit evaluations of its commercial customers and maintains an allowance for doubtful accounts receivable based upon the expected ability to collect accounts receivable. Allowances, if necessary, are established for amounts determined to be uncollectible based on specific identification and historical experience. As of 31 December 2007 and 2008, the allowance for doubtful accounts was approximately US$191,000 and US$650,000, respectively. Bad debts expense was US$93,000 and US$313,000 in 2007 and 2008, respectively. Inventories Inventories are stated at the lower of cost, using the first in, first out ('FIFO') method, or market. Provision for potentially obsolete or slow-moving inventory is made based on management's analysis of inventory levels and future sales forecasts.   Deferred Financing Costs Deferred financing costs incurred in relation to long-term debt, are reflected net of accumulated amortization and are amortized over the expected repayment term of the debt instrument, which is four years from the debt inception date. These financing costs are being amortized using the effective interest method.  Intangible Assets and Goodwill Intangible assets consist principally of customer relationships and patents, and are carried at their fair value, less accumulated amortization. Intangible assets are amortized using the straight-line method over a period of three to twelve years, which is their estimated period of economic benefit. Goodwill is not amortized but is subject to impairment tests on an annual basis, and the Company has chosen 31 December as its periodic assessment date. Goodwill represents the excess cost of the business combination over the Group's interest in the fair value of the identifiable assets and liabilities. Goodwill arose from the Company's prior sale from Dover Corporation to The Gores Group in 2005.   The Company evaluates the carrying value of long-lived assets, excluding goodwill, whenever events and circumstances indicate the carrying amount of an asset may not be recoverable. For the years ended 31 December 2007 and 2008, no such events or circumstances were identified. The carrying value of a long-lived asset is considered impaired when 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 the carrying value exceeds the fair value of the long-lived asset. Fair value is determined primarily using the anticipated cash flows discounted at a rate commensurate with the risk involved. (See Footnote 4 for more information.) Revenue Recognition The Company recognizes revenue on sales of equipment, parts and accessories when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the price is fixed or determinable, and collectability is reasonably assured. For product sales where shipping terms are F.O.B. shipping point, revenue is recognized upon shipment. For arrangements which include F.O.B. destination shipping terms, revenue is recognized upon delivery to the customer. Standard products do not have customer acceptance criteria. Revenues for training are deferred until the training is completed unless the training is deemed inconsequential or perfunctory. Warranty Liability The Company provides warranties on all equipment sales ranging from three months to three years, depending on the product. Warranty liabilities are estimated net of the warranty passed through to the Company from vendors, based on specific identification of issues and historical experience. Property, Plant and Equipment Property, plant and equipment is stated at estimated market value based on an independent appraisal at the acquisition date or at cost for subsequent acquisitions, net of accumulated depreciation and amortization. Land is not depreciated. Depreciation is computed on buildings using 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 the building), 15 years for improvements, and 2 to 10 years for machinery and equipment. Assets Held For Sale Assets held for sale are recorded at the lower of their carrying amount or fair value less cost to sell. Depreciation is not recorded on these assets once they are classified as held for sale. In November 2007, the Company received an offer for the sale of its Corporate Office in Jaffrey, New Hampshire which it eventually accepted. The sale was completed in January 2008 and a gain of US$5,000 was recorded. Income Taxes The Company accounts for income taxes in accordance with Statement of Financial Accounting Standards ('SFAS') No. 109, Accounting for Income Taxes. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Deferred tax assets are reduced by a valuation allowance, if necessary, to the extent that it appears more likely than not, that such assets will be unrecoverable The Company accounts for uncertainty in income taxes in accordance with FIN 48, Accounting for Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109, Accounting for Income Taxes ('FIN 48'). See Note 13 for more information. Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.  Stock Based Compensation The Company accounts for its stock option issuance under SFAS No. 123R, Share Based Payment ('SFAS 123R'). SFAS 123R requires recognition of the cost of employee services received in exchange for an award of equity instruments in the financial statements over the period the employee is required to perform the services in exchange for the award (presumptively the vesting period). SFAS 123R also requires measurement of the cost of employee services in exchange for an award based on the grant-date fair value of the award.   Transactions in and Translation of Foreign Currency The functional currency for the Company's subsidiaries outside the United States is the applicable local currency. Balance sheet amounts are translated at 31 December exchange rates and statement of operations accounts are translated at average rates. The resulting gains or losses are charged directly to accumulated other comprehensive income. The Company is also exposed to market risks related to fluctuations in foreign exchange rates because some sales transactions, and some assets and liabilities of its foreign subsidiaries, are denominated in foreign currencies other than the designated functional currency. Gains and losses from transactions are included as foreign exchange gain (loss) in the accompanying consolidated statements of income. Comprehensive Income Comprehensive income, which is the combination of reported net income and other comprehensive income ('OCI'). OCI is changes in equity of a business enterprise during a period from transactions and other events and circumstances from non-owner sources not included in net income. OCI was composed of the following for the years ended 31 December 2007 and 2008. Total comprehensive income for the years was approximately US$6,677,000 and US$803,000, respectively.
		2007 US$ 000	2008 US$ 000
	Net Income	$6,927	$1,657
	Cumulative Translation Adjustment	(5)	(625)
	Change in fair value of derivative instruments	(245)	(229)
	Total Comprehensive Income	$6,677	$ 803

	Earnings Per Share Basic earnings per share represents income available to common stockholders divided by the weighted average number of shares outstanding during the year. Diluted earnings per share reflect additional common shares that would have been outstanding if dilutive potential common shares had been issued, as well as any adjustment to income that would result from the assumed issuance. Potential common shares that may be issued by the Company relate to outstanding stock options. 84,210 shares have been excluded from the calculation because they are anti-dilutive. Earnings per common share have been computed based on the following:
		2007	2008
	Net income	US$ 000 6,927	US$ 000 1,657
	Basic weighted average shares outstanding	34,281,968	34,281,968
	Net dilutive effect of stock options	-	-
	Diluted weighted average shares outstanding	34,281,968	34,281,968

	New Accounting Pronouncements In September 2006, the Financial Accounting Standards Board ('FASB') issued Financial Accounting Standard No. 157, Fair Value Measurements ('SFAS 157'). SFAS 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. SFAS 157 is effective for financial assets and liabilities for fiscal years beginning after November 15, 2007.  In February 2008, the FASB also issued FSP FAS 157-2, Effective Date of FASB Statement No. 157, which delayed the effective date of SFAS 157 to fiscal years beginning after November 15, 2008, for non-financial assets and liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis.  Certain aspects of SFAS 157 were effective as of January 1, 2008 and affected certain note disclosures. We do not anticipate that the adoption of the deferred portion of SFAS 157 will have a material impact on the Company's financial condition, results of operations or cash flows. In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities ('SFAS 159'). SFAS 159 provides reporting entities an option to report selected financial assets and liabilities at fair value. SFAS 159 establishes presentation and disclosure requirements designed to facilitate comparisons between companies that choose different measurement attributes for similar types of assets and liabilities. SFAS 159 also requires additional information to aid financial statement users' understanding of a reporting entity's choice to use fair value on its earnings and also requires entities to display the fair value of those affected assets and liabilities in the primary financial statements. SFAS 159 is effective as of the beginning of a reporting entity's first fiscal year beginning after November 15, 2007. Application of the standard is optional and any impacts are limited to those financial assets and liabilities to which SFAS 159 would be applied. The Company adopted SFAS 159 effective January 1, 2008 and has elected not to measure any of its current eligible financial assets or liabilities at fair value. In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities. This statement requires companies to provide enhanced disclosures about (a) how and why they use derivative instruments, (b) how derivative instruments and related hedged items are accounted for under SFAS No. 133 and its related interpretations, and (c) how derivative instruments and related hedged items affect a company's financial position, financial performance, and cash flows. SFAS No.161 is effective for financial statements for fiscal years and interim periods beginning after November 15, 2008. The Company will adopt the new disclosure requirements in the period beginning January 1, 2009. We do not believe the adoption of SFAS No.161 will have a material impact on the disclosure of the Company's Derivative Instruments and Hedging Activities. In June 2008, the FASB ratified EITF Issue No. 08-3, Accounting for Lessees for Maintenance Deposits Under Lease Arrangements (EITF 08-3). EITF 08-3 provides guidance for accounting for nonrefundable maintenance deposits. It also provides revenue recognition accounting guidance for the lessor. EITF 08-3 is effective for fiscal years beginning after December 15, 2008. We are currently assessing the impact of EITF 08-3 on our financial position and results of operations.
3.	Inventories
	Inventories consisted of the following at 31 December:
		2007	2008
		US$ 000	US$ 000
	Raw materials	3,223	2,078
	Finished goods and work in process	3,725	3,741
	Total	6,948	5,819

4.	Goodwill and Intangible Assets
	The following table reflects intangible assets that are subject to amortization under the provisions of SFAS No. 142, Goodwill and Other Intangible Assets:
			Weighted average amortization period	2007 US$ 000	2008 US$ 000
	Capitalized cost
	Customer relationships		8 years	6,300	6,300
	Patents		12 years	18,538	18,538
	Other intangibles		3 years	159	4
				24,997	24,842
	Accumulated amortization
	Customer relationships		8 years	1,903	2,691
	Patents		12 years	3,735	5,278
	Other intangibles		3 years	123	1
				5,761	7,970
	Net carrying costs
	Customer relationships		8 years	4,397	3,609
	Patents		12 years	14,803	13,260
	Other intangibles		3 years	36	3
				19,236	16,872
	Amortization expense associated with the intangible assets for the years ended 31 December 2007 and 2008 was approximately US$2,384,000 and US$2,332,000, respectively. Future amortization on intangible assets is expected to be as follows at:
		31 December US$ 000
	2009	2,332
	2010	2,332
	2011	2,332
	2012	2,332
		9,328
	Thereafter	7,544
		16,872
	As required, the Company performed its annual goodwill impairment analysis by comparing the fair value of the reporting unit with its carrying amount. As part of this test, the Company computed fair value by preparing a discounted cash flow analysis, and a comparison of its market capitalization to that of other comparable companies.  Under the discounted cash flow analysis, the cash flows were determined based on assumptions for revenue, expenses, working capital requirements, capital expenditures and were discounted at a weighted average cost of capital. These estimates were based on historical results and the available information as of 31 December 2008.  The Company calculated fair value by obtaining market data of comparable companies with similar assets and liabilities. The companies selected for comparison included AIM listed companies with proprietary technology and similar gross margins to that of the Company.  In addition, the Company calculated a weighted average fair value by placing a 90% weighting on the discounted cash flow approach and a 10% weighting on the comparable market approach. The analysis resulted in the weighted average fair value of the Company exceeding the carrying value of the Company. Based upon the fact that the Company's analysis resulted in the fair value of the Company exceeding the book value, management concluded that goodwill is not impaired at 31 December 2008 and no adjustments to goodwill were recorded.

5.	Property, plant and equipment consist of the following at 31 December:
		2007	2008
		US$ 000	US$ 000
	Land	207	207
	Buildings and improvements	3,574	3,572
	Machinery and equipment	975	1,410
	Property and equipment held under capital leases	-	-
	Equipment sold under recourse contracts	178	-
		4,934	5,189
	Less: accumulated depreciation and amortization	(831)	(929)
		4,103	4,260

	Depreciation expense for the years ended 31 December 2007 and 2008, was approximately US$378,000 and US$373,000, respectively.
	The Company previously offered a facility to customers whereby the Company guaranteed the financing on the sale of equipment. Equipment previously sold under recourse contracts continue to be included in Property, Plant and Equipment at a net book value at 31 December 2007 of approximately US$21,000. Revenue under these arrangements has been deferred and recognized over the life of the financing arrangement, approximately five years. Deferred revenue of approximately US$20,000 related to these transactions was included in accrued expenses at 31 December 2007. The Company has made no further sales under recourse arrangements since 2003.
6	Notes payable
	Summary The Company executed a credit facility with a bank in March 2007 (see section entitled 'Credit Facility' below). The proceeds of the new term loan and the revolving line of credit were used to pay off in full existing debt balances. The Company incurred a loss in the early extinguishment of debt of approximately US$1,481,000 which included deferred financing cost of approximately US$1,245,000. Company's debt obligations consisted of the following at 31 December:
	Bank debt:	2007	2008
		US$ 000	US$ 000
	Five year secured reducing revolving line of credit	6,000	2,954
	Five year secured term loan	8,929	7,501
	Less debt obligations due within one year	(1,429)	(1,429)
	Obligations due after one year	13,500	9,026

		Credit Facility The Company has a credit facility with a financial institution dated 16 March 2007 that was amended in December 2008 and composed of the following at 31 December 2008
	- US$8,000,000 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 revolving facility through a series of interest rate swaps and the term loan. The revolver loan's interest rate swaps initial notional amount is US$6,000,000, pays a fixed 5.20%, and had a 31 December 2008 fair market value of approximately (US$140,000) which will amortize down by approximately US$87,000 in the next 12 months. The term loan's interest rate swaps initial notional amount is US$10,000,000, pays a fixed 5.15%, and had a 31 December 2008 fair market value of approximately (US$595,000) which will amortize down by approximately US$262,000 in the next 12 months. The interest rate swaps are designated as cash flow hedges. The revolver and term loan interest rates are Libor 1-month (fixed by the interest rate swaps) plus an amount determined by the ratio of 'funded debt/last 12 months adjusted EBITDA,' as defined in the loan agreement. The effective interest rate at 31 December 2007 and 2008 respectively, for the revolving line of credit was 6.05% and for the term loan 6.10%. The credit facilities are secured by substantially all of the Company's assets and contain a number of restrictive covenants that among other things limit the ability of the Company to incur debt, issue capital stock, change ownership and dispose of certain assets. The revolving line of credit available reduces over the five year term and as of 31 December 2008 the borrowed balance is below the credit line available. All derivative instruments including the interest rate swaps are recognized at each balance sheet date at fair value. . Future Payments The future payments by year under the Company's debt obligations are as follows
			31 December US$ 000
	2009		1,429
	2010		1,429
	2011		1,429
	2012		6,168
	Total payments		10,455

	Interest Interest expense on the credit facility for the years ended 31 December 2007 and 2008, was approximately US$1,392,000 and US$861,000, respectively, related to the debt obligation. In January 2009 the Company renegotiated its loan agreements with the bank to obtain concessions on its debt service covenant and its funded debt to Adjusted EBITDA covenant. In return, the Company agreed to an immediate increase of 1.6% in its interest rate with a changed pricing grid that allows for a further maximum increase of 1.75%. The Company's maximum revolving line of credit is now set at US$8,000,000 and no changes were made to its term loan repayment schedule. The renegotiated loan agreement did not impact the interest rate swap agreements. Fair Value Measurements Effective 1 January 2008, the Company adopted SFAS No. 157. This standard establishes a consistent framework for measuring fair value and expands disclosure requirements about fair value measurements of financial assets and financial liabilities. The Company recorded no change to 1 January 2008 retained earnings as a result of adopting SFAS No. 157 These valuation techniques may be based upon observable and unobservable inputs. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Company's market assumptions. These two types of inputs create the following fair value hierarchy.
	Level 1 - Quoted prices for identical instruments in active markets.
	Level 2 - Quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; and model-derived other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets and liabilities.
	Level 3 -Unobservable inputs for the asset or liability which are supported by little or no market activity and reflect the Company's assumptions that a market participant would use in pricing the asset or liability
	Fair Value Measurements at Reporting Date
	Liabilities:	December 31, 2008	Quoted Prices In Active Markets for Identical Assets (Level 1)	Significant Other Observable Inputs (Level 2)	Significant Unobservable Inputs  (Level 3)
	March 2007 revolver loan interest rate swap arrangement with a base rate of 5.20% and a notional amount of US$3,000,000	($140)		($140)
	March 2007 term loan interest rate swap arrangement with a base rate of 5.15% and a notional amount of US$10,000,000	($595)		($595)
	Total interest rate swap arrangements (1)	($735)		($735)
	(1) The fair value of these instruments is recorded in Other Liabilities.

	The Company holds interest rate swaps which are carried at fair value. The Company determines fair value based upon quoted prices when available or through the use of alternative approaches, such as model pricing, when market quotes are not readily accessible. In determining the fair value of the Company's obligations, various factors are considered including; closing exchange or over-the-counter market price quotations; time value and volatility of factors underlying options and derivative; price activity for equivalent instruments; and the Company's own credit standing. Fair Value of Financial Instruments Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value estimates are made at a specific point in time, based on relevant market information about the financial instrument. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. The assumptions used have a significant effect on the estimated amounts reported. The amounts reported in the accompanying consolidated balance sheets approximate fair value due to the nature and short-term maturities of such assets and liabilities, including cash and cash equivalents, accounts receivable, accounts payable, and accrued liabilities.
7	Retirement Program
	The Company has a savings and retirement plan for its employees, which is intended to qualify under Section 401(k) of the Internal Revenue Code ('IRC'). This savings and retirement plan provides for voluntary contributions by participating employees, not to exceed maximum limits set forth by the IRC. The Company matched 75% of the employee's contribution up to the first 6% of the employee's compensation for the year ended 31 December 2007 and matched 100% of the employee's contribution, up to the first 6% of the employee's compensation for the year ended 31 December 2008. The Company match vests after one year of service with the Company. The Company contributed approximately US$178,000 and US$284,000 to the savings and retirement plan during the years ended 31 December 2007 and 2008, respectively.
8	Operating Leases
	The Company leases property, vehicles and office equipment under leases accounted for as operating leases without renewal options. Future minimum payments by year under non cancellable operating leases with initial terms in excess of one year were as follows
		31 December
		US$ 000
	2009	358
	2010	296
	2011	196
	2012	162
	2013	82
	Total	1,094

	Total rent expense under operating leases was approximately US$238,000 and US$335,000 for the years ended 31 December 2007 and 2008, respectively.
9	Supplemental Cash Flow Disclosures
		2007	2008
		US$ 000	US$ 000
	Cash paid for interest	1,294	856
	Cash paid for taxes	3,061	1,242
	Non-cash financing activities - Change in fair value of derivative instruments	245	229

10	Business and Credit Concentration
	The Company's line of business could be significantly impacted by, among other things, the state of the general economy, the Company's ability to continue to protect its intellectual property rights, and the potential future growth of foreign competitors. Any of the foregoing may significantly affect management's estimates and the Company's performance. At 31 December 2007 and 2008, the Company had receivables from two customers which represented approximately 22% and 16% of total accounts receivable, respectively.
11	Commitments and Contingencies
	The Company has entered into employment agreements with certain members of senior management. The terms of these agreements range from six months to one year and include non-compete and nondisclosure provisions as well as providing for defined severance payments in the event of termination or change in control. The Company has entered into a 5 year or minimum purchase obligation of US$625,000 with a supplier as of 31 December 2007. There is a related contingent liability of US$43,000 to cancel the contract as of 31 December 2008 which declines over 5 years on a pro-rated basis. The Company is subject to various unresolved legal actions which arise in the normal course of its business. Although it is not possible to predict with certainty the outcome of these unresolved legal actions or the range of possible losses, the Company believes these unresolved legal actions will not have a material effect on its financial statements.
12	Income Taxes
	Somero adopted FIN 48 on January 1, 2007. FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise's financial statements in accordance with FASB Statement No. 109, Accounting for Income Taxes. FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. This pronouncement also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition.
	At 31 December 2008, the Company had a gross unrecognized tax benefit (including interest and penalties) of US$4,000. Accrued interest and penalties related to unrecognized tax benefits are not included in tax expense. Somero is subject to U.S. federal income tax as well as income tax of multiple state jurisdictions. The Company began business in 2005 and therefore the statute of limitations for all federal, foreign and state income tax matters for tax years from 2005 forward are still open. Somero has no federal, foreign or state income tax returns currently under examination.   A reconciliation of the beginning and ending amounts of the Company's gross unrecognized tax benefits is as follows:

2007

2008

		US$ 000		US$ 000
	Balance at January 1	-		128,000
	Additions related to tax positions of prior years	81,000
	Additions related to tax positions of the current year	47,000
	Reductions related to tax positions of prior years	-		(124,000)
	Balance at December 31	128,000		4,000

The Company's gross unrecognized tax benefit was reduced during the current period by $47,000 as a result of a settlement with a state and reduced by $78,000 as a result of the filing of amended income tax returns for the years ended December 31, 2005 and December 31, 2006. The provision for income taxes at 31 December, 2007 and 2008 includes the following:
			2007				2008
			US$ 000				US$ 000
Current income tax
Federal			3,021				(33)
State			315				69
Foreign			362				513
Total current income tax provision			3,698				549
Deferred tax expense
Federal			88				62
State			3				10
Foreign			-				(116)
Total deferred tax provision			91				(44)
Total tax provision			3,789				505
The components of the net deferred income tax asset at 31 December were as follows:
					2007			2008
					US$ 000			US$ 000
Deferred tax asset (liability)
Depreciation					(24)			(347)
Intangibles					(345)			(472)
Prepaid expense					(98)			(174)
Share based compensation					173			318
Interest rate swap					159			262
Other					262			640
Net deferred tax asset					127			227
Current					164			466
Non-current					(37)			(239)
					127			227
The statutory federal income tax rate was 34% for the years ended 31 December 2007 and 2008. Differences between the income tax expense reported in the statement of operations and the amount computed by applying the statutory federal income tax rate to earnings before tax are due to the following items:
		2007				2008
		US$ 000				US$ 000
Consolidated income before tax		10,716				2,162
Statutory rate		34%				34%
Statutory tax expense		3,644				735
State taxes		210				52
IRC Section 199 deduction		(197)				(35)
Meals and entertainment		60				57
Foreign tax items						(356)
Other		72				52
Actual tax expense		3,789				505
	The Company expenses research and development costs as incurred. Total research and development expense for the research and development tax credit was approximately US$866,000 and US$683,000 for the years ended 31 December 2007 and 2008, respectively.
13	Revenues by Geographic Region
	The Company sells its product to customers throughout the world. The breakdown by location is as follows:
				2007					2008
				US$ 000					US$ 000
	United States and U.S. possessions			38,395					24,656
	Canada			1,449					1,455
	Rest of world			26,592					25,830
	Total			66,436					51,941

A significant portion of the Company's long-lived assets are located in the United States

14	Stock Based Compensation
	The Company has one share-based compensation plan, which is described below. The compensation cost that has been charged against income for the plan was approximately US$418,000 and US$415,000 for the years ended 31 December 2007 and 2008, respectively. The income tax benefit recognized for share-based compensation arrangements was approximately US$152,000 and US$148,000 for the years ended 31 December 2007 and 2008, respectively.  In October 2006, the Company implemented the 2006 Stock Incentive Plan (the 'Plan'). The Plan authorizes the Board of Directors to grant incentive and nonqualified stock options to employees, officers, service providers and directors of the Company for up to 3,428,197 shares of its common stock. Options granted under the Plan have a term of up to ten years and generally vest over a three-year period beginning on the date of the grant. Options under the Plan must be granted at a price not less than the fair market value at the date of grant.  The fair value of each option award is estimated on the date of grant using the Black-Scholes-Merton option pricing model. The risk-free interest rate is based on the U.S. Treasury rate for the expected term at the time of grant, volatility is based on the average long-term implied volatilities of peer companies as our Company has limited trading history and the expected life is based on the average of the life of the options of 10 years and an average vesting period of 3 years. The following table illustrates the assumptions for the Black-Scholes model used in determining the fair value of options granted to employees for the years ended 31 December 2007 and 2008.
		2007	2008
	Dividend yield	4.37%	1.64%
	Risk-free interest rate	2.93%	2.90%
	Volatility	25.00%	25.50%
	Expected term	3.0	4.6

A summary of option activity under the stock option plans as of 31 December 2008, and changes during the year then ended is presented below:
Options			Shares	Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Term (yrs)	Aggregate Intrinsic Value
Outstanding at 1 January 2008			2,666,046	2.32		-	-
Granted			532,967	1.83
Exercised			-	-
Forfeited			(370,118)	2.28
Outstanding at 31 December 2008			2,828,895	2.24		8.10	--
Exercisable at 31 December 2008			1,646,057	2.33		7.86	--
The weighted-average grant-date fair value of options granted was US$.24 and US$.33 for the years ended December 31, 2007 and 2008, respectively. A summary of the status of the Company's non-vested shares as of 31 December 2008, and changes during the year then ended is presented below:
							Weighted Average
				Shares			Grant-Date Fair Value
Non-vested shares as of 31 December 2007				1,803,289			.47
Granted				532,967			.33
Vested				(783,300)			.48
Forfeited				(370,118)			.45
Non-vested shares as of 31 December 2008				1,182,838			.41
As of 31 December 2008, there was US$496,000 of total unrecognized compensation cost related to non-vested share-based compensation arrangements granted under the Company's stock option plan. That cost is expected to be recognized over the expected term. The fair value of options vested in 2007 and 2008 was US$414,000 and US$375,000, respectively.

 

END

 

 

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