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Section 4Financial Statements: Somero Enterprises, Inc. and SubsidiariesNotes to the Consolidated Financial Statements continued15 Income Taxes continuedThe statutory federal income tax rate was 34% for the period from 11 August 2005 through 31 December 2005, and the year ended31 December 2006. Differences between the income tax expense reported in the statement of operations and the amount computedby applying the statutory federal income tax rate to earnings before tax are due to the following items:2005 2006US$ 000 US$ 000Consolidated income before tax 1,510 8,237Statutory rate 34% 34%Statutory tax expense 513 2,801State taxes 53 164IRC Section 199 deduction (17) (74)Meals and entertainment 13 53Other (14) (88)Actual tax expense 548 2,856In assessing the ability to realise net deferred tax assets, management considers whether it is more likely than not that some portionof the deferred tax assets will be realised. The ultimate realisation of deferred tax assets is dependent upon the generation of future taxableincome during the periods in which those temporary differences become deductible. Management considers projected future taxableincome and tax planning strategies in making this assessment, but must give greater weight to recent historical operating losses. Basedon those considerations, management believes it is more likely than not that the Company will realise the benefits of the deferred taxasset at 31 December 2006, and has not recognised a valuation allowance against the total net deferred tax asset.The Company intends to reinvest the undistributed earnings of its foreign subsidiary and accordingly has not provided for taxes on thisundistributed amount.16 Initial Public OfferingOn 1 November 2006, the Company offered 4,281,968 shares of common stock at US$2.34 per share in its initial public offering. All shareswere purchased and the Company received US$5,878,000, net of fees. Total fees for the transaction were US$5,570,000.Prior to the initial public offering, the Board declared a dividend of US$1,790,000, which was paid concurrent with the initial public offeringto shareholders of record as of 5 October, 2006. Immediately after the offering and upon receipt of the dividend, Somero Holdings LLCreimbursed the Company US$1,700,000 for costs related to the transaction. The dividend and subsequent reimbursement have beenrecorded as components of paid in capital.17 Research and DevelopmentThe Company expenses research and development costs as incurred. Total research and development expense for the research anddevelopment tax credit was approximately US$214,000 and US$752,000 for the period 11 August 2005 through 31 December 2005, and theyear ended 31 December 2006, respectively.18 Sales by Geographic LocationThe Somero Business sells its product to customers throughout the world. The breakdown by location is as follows:2005 2006US$ 000 US$ 000United States and US possessions 11,503 38,354Canada 569 2,262Rest of World 4,477 15,278Total 16,549 55,89442Somero Enterprises, Inc.Annual Report and Accounts 2006
Section 4Financial Statements: Somero Enterprises, Inc. and Subsidiaries19 Stock Based CompensationThe Company accounts for its stock option issuances under Statement of Financial Accounting Standard No. 123 (revised 2004), “Share-Based Payment,” (“SFAS No. 123R”) which was issued by the FASB in December 2004. SFAS No. 123R requires recognition of the cost ofemployee services received in exchange for an award of equity instruments in the financial statements over the period the employee isrequired to perform the services in exchange for the award (presumptively the vesting period). SFAS No. 123R also requires measurementof the cost of employee services received in exchange for an award based on the grant-date fair value of the award.The Company has one share-based compensation plan, which is described below. The compensation cost that has been charged againstincome for the plan was approximately US$59,000 for the year ended 31 December 2006. The income tax benefit recognised for share-basedcompensation arrangements was approximately US$21,000 for the year ended 31 December 2006.In October 2006, the Company implemented the 2006 Stock Incentive Plan (the “Plan”). The Plan authorises the Board of Directors to grantincentive and non-qualified stock options to employees, officers, service providers and directors of the Company for up to 3,400,000 sharesof its common stock. Options granted under the Plan have a term of up to ten years and generally vest over a three-year period beginningon the date of the grant. Options under the Plan must be granted at a price not less than the fair market value at the date of grant.The fair value of each option award is estimated on the date of grant using the Black-Scholes-Merton option pricing model. The risk-freeinterest rate is based on the US Treasury rate for the expected life at the time of grant, volatility is based on the average long-term impliedvolatilities of peer companies as our Company has limited trading history and the expected life is based on the average of the life of theoptions of ten years and a average vesting period of three years. The following table illustrates the assumptions for the Black-Scholes modelused in determining the fair value of options granted to employees for the year ended 31 December 2006.Year ended31 December2006Dividend yield 2.96%Risk-free interest rate 4.52%Volatility 25.10%Expected life (in years) 4.4A summary of option activity under the stock option plans as of 31 December 2006, and changes during the year then endedis presented below:Weighted-Weightedaverageaverage Aggregateexercise remaining intrinsicprice contractual valueOptions Shares US$ term (yrs) US$Outstanding at 1 January 2006 – – – –Granted 2,656,832 2.34 9.84 745,166Exercised – – – –Forfeited or expired – – – –Outstanding at 31 December 2006 2,656,832 2.34 9.84 745,166Exercisable at 31 December 2006 – – – –The weighted-average grant-date fair value of options granted during the year ended 31 December 2006 was US$0.48.43Somero Enterprises, Inc.Annual Report and Accounts 2006
Page 2 and 3: Section 1 Overview01 Who We Are02 A
Page 4 and 5: Section 1OverviewAt a GlanceBusines
Page 6 and 7: Section 1OverviewChairman’s State
Page 8 and 9: Section 2Business ReviewPresident a
Page 10 and 11: Section 2Business ReviewWm Morrison
Page 12 and 13: Section 2Business ReviewThe complic
Page 14 and 15: Section 2Business ReviewBase slabs
Page 16 and 17: Section 2Business ReviewFinancial R
Page 18 and 19: Section 2Business ReviewFinancial R
Page 20 and 21: Section 3Management and GovernanceB
Page 22 and 23: Section 3Management and GovernanceD
Page 26 and 27: Section 3Management and GovernanceC
Page 28 and 29: Section 3Management and GovernanceC
Page 32 and 33: Section 4Financial Statements: Some
Page 62 and 63: Section 5Additional InformationAdvi
Page 64: Somero Enterprises, Inc.82 Fitzgera

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