- --------------------------------------------------------------------------------
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
<Table>
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2005
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
</Table>
Commission file number 1-10638
CAMBREX CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<Table>
DELAWARE 22-2476135
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
ONE MEADOWLANDS PLAZA, 07073
EAST RUTHERFORD, NEW JERSEY (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
</Table>
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (201) 804-3000
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
<Table>
<Caption>
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
------------------- -----------------------------------------
COMMON STOCK, $.10 PAR VALUE NEW YORK STOCK EXCHANGE
</Table>
(SECURITIES REGISTERED PURSUANT TO SECTION 12 (G) OF THE ACT: NONE)
Indicate by check mark whether the Registrant is a well-known seasoned
issuer, as defined in Rule 405 of the Securities Act. Yes [ ]. No [X].
Indicate by check mark if the Registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act. Yes [ ]. No [X].
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X]. No [ ].
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
Indicate by check mark whether the registrant is a large accelerated filer,
an accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer"in Rule 12b-2 of the Exchange Act. (Check
one):
Large accelerated filer [ ] Accelerated filer [X] Non-accelerated filer [ ]
Indicate by check mark whether the Registrant is a shell company (as
defined in Rule 12b-2 of the Act). Yes [ ]. No [X].
The aggregate market value of the voting stock held by non-affiliates of
the registrant was approximately $489,694,176 as of June 30, 2005.
APPLICABLE ONLY TO CORPORATE REGISTRANTS
As of April 30, 2006, there were 26,764,501 shares outstanding of the
registrant's Common Stock, $.10 par value.
DOCUMENTS INCORPORATED BY REFERENCE
None
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CAMBREX CORPORATION
INDEX TO ANNUAL REPORT ON
FORM 10-K FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION
FOR THE YEAR ENDED DECEMBER 31, 2005
<Table>
<Caption>
ITEM PAGE
NO. NO.
- ---- ----
PART I
1 Business.................................................... 2
1A Risk Factors................................................ 8
1B Unresolved Staff Comments................................... 18
2 Properties.................................................. 19
3 Legal Proceedings........................................... 19
4 Submission of Matters to a Vote of Security Holders......... 20
PART II
5 Market for the Registrant's Common Equity, Related
Stockholder Matters and Issuer Purchases of Equity
Securities.................................................. 21
6 Selected Financial Data..................................... 22
7 Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 24
7A Quantitative and Qualitative Disclosures about Market
Risk........................................................ 41
8 Financial Statements and Supplementary Data................. 42
9 Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................... 89
9A Controls and Procedures..................................... 89
9B Other Information........................................... 90
PART III
10 Directors and Executive Officers of the Registrant.......... 91
11 Executive Compensation...................................... 100
12 Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters.................. 108
13 Certain Relationships and Related Transactions.............. 111
14 Principal Accounting Fees and Services...................... 112
PART IV
15 Exhibits, Financial Statement Schedules..................... 113
</Table>
1
PART I
ITEM 1 BUSINESS
GENERAL
Cambrex Corporation (the "Company" or "Cambrex"), a Delaware corporation,
began business in December 1981. Cambrex is a life sciences company dedicated to
providing products and services that accelerate and improve the discovery and
commercialization of human therapeutics. The Company primarily supplies its
products and services worldwide to pharmaceutical and biopharmaceutical
companies, generic drug companies, biotechnology companies and research
organizations. The Company reports financial results in three segments:
Bioproducts, Biopharma and Human Health. The Company's overall strategy is to
focus on niche life sciences markets with global opportunities, support
state-of-the-art technology, and demonstrate excellence in regulatory
compliance, environmental, health and safety performance, and customer service.
The Company uses a consistent business approach in each of its segments:
- Niche Market Focus: The Company participates in niche markets where
significant technical expertise provides competitive advantage and market
differentiation.
- Market Leadership: The Company secures leading market positions through
excellent customer service, proprietary technologies, specialized
capabilities and an outstanding regulatory record and leverages these
capabilities across the market segments in which it participates.
- New Products and Services: The Company continues to invest in research
and product development in order to introduce innovative products and
services to accelerate revenue growth, provide competitive advantage and
maintain its leading market positions. The new products and services are
developed to address the changing needs of life sciences customers for
increased automation, speed-to-market and testing relevance.
- Operational Excellence: The Company maintains its commitment to
continually improve productivity and customer service levels and
maintains excellent quality and regulatory compliance systems.
- Acquisition and Licensing: The Company may drive growth in strategic
business segments through the prudent acquisition of products, product
lines, technologies and capabilities to enhance the Company's position in
its niche markets.
MARKET OVERVIEW AND GROWTH DRIVERS
The Company participates in markets that serve the healthcare industry.
Customers include companies and institutions that discover and commercialize
therapeutics such as traditional drugs (made using organic chemistry), biologics
and cell based therapies.
The aging population, continued investment in healthcare research and drug
development and the necessity to develop life saving therapeutics to address
unmet needs drives business growth in life sciences companies serving the
healthcare market. Aging "baby boomers" in the United States, Europe and Japan
may provide an enormous healthcare opportunity. This group typically has more
education, a higher socio-economic level, and higher demands for healthcare
services than previous generations.
Continuing healthcare investment increases demand for Cambrex products and
services by providing its customers the financial resources to advance their
research and development projects for therapeutic candidates from the laboratory
to the clinic, and eventually, to the patient. Healthcare investment comes from
a variety of sources. Large pharmaceutical and biotechnology companies spend
billions on drug discovery and development. Research institutions may be funded
by the government, business or private sectors. Venture capital and initial
public offering investments remained robust in 2005 allowing companies to
continue to spend on drug development and commercialization.
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(dollars in thousands, except share data)
2
It is estimated that getting a drug to market may take up to sixteen years.
With the need to get new drugs to market faster, pharmaceutical companies make
huge investments in drug discovery and require a continuing stream of innovative
research tools to accelerate the drug discovery process. More and more cellular
models are being used to understand the mechanism of disease and the efficacy
and toxicity of drug candidates. Demand for rapid, accurate tests to assess drug
candidates is growing. Cambrex is a leading provider of the tools and testing
products used in the drug discovery process.
Once a drug is identified, companies need to develop a robust process for
the manufacture of clinical and commercial quantities. Product testing and
quality processes need to be integrated into the manufacturing process. This is
a critical step to getting a commercially viable drug to market. Cambrex excels
in the manufacture and testing of active pharmaceutical ingredients ("APIs") and
drug substances at laboratory, clinical and commercial scale and specializes in
optimizing manufacturing processes.
Demand for outsourced services from pharmaceutical companies continues to
grow. Large pharmaceutical and biotechnology companies may outsource the
development and manufacturing of a drug substance to manage multiple internal
priorities, access new technologies or additional capacity, preserve needed
capital or ensure multiple sources of supply. Emerging pharmaceutical,
biotechnology and many generic drug companies outsource all process development
and manufacturing. Cambrex is particularly well positioned to assist drug
companies with these much needed services for traditional APIs, biologics and
cell therapies.
New drugs are typically patented. When the patent expires, the drug may be
manufactured and marketed in its generic form. Growth in the generic drug market
is driven by the continuing stream of drug patents that will expire in the
future and favorable market forces that encourage the use of generic
pharmaceuticals as a more cost effective health care alternative to
higher-priced branded drugs. In the United States and many countries in Europe,
governments and prescription benefit management companies provide incentives for
generic substitution to reduce costs. Cambrex's active pharmaceutical
ingredients are used in over 100 niche generic drugs globally.
The market for human therapeutics is regulated by the Food and Drug
Administration ("FDA") and other regulatory agencies through the development,
manufacturing and commercialization process. The FDA approves human therapeutics
and regulates manufacturing. Excellent regulatory and quality systems are
essential to serve the industry.
Competition from Asia has increased their capabilities in drug substance
manufacturing and finished dosage form drugs in recent years. Although there has
been limited direct impact on the Company's niche products, the presence of
these competitors in the market has resulted in downward pricing pressure on
generic active pharmaceutical ingredients. Regulatory compliance and product
quality may determine the long term impact of these competitors.
STRATEGY
As announced earlier this year, the Company has engaged an investment
banker to examine strategic alternatives including the potential sale of certain
assets. Any proceeds from an asset sale may be used to support further growth in
the remaining business, pay down debt, repurchase Cambrex stock or make
complementary strategic acquisitions as deemed appropriate. The Company expects
to continue to provide innovative life sciences products and services for the
bioresearch and therapeutics markets. The Company will use its expertise in drug
discovery tools, testing reagents, kits and services and the manufacture of drug
substances to expand its product portfolio. Through internal development and
targeted acquisitions, the Company intends to broaden its current list of
products and services. The introduction of complementary offerings will drive
organic growth and expand the Company's footprint in the life sciences markets.
New technologies, products, and infrastructure may also come from licensing or
targeted acquisition.
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(dollars in thousands, except share data)
3
DEVELOPMENT OF THE BUSINESS
The discussion below provides insight to the general development of our
business, including the material acquisitions and disposition of assets over the
past five years.
On June 4, 2001, the Company acquired Bio Science Contract Production Corp.
in Baltimore, Maryland for approximately $125,000 in cash. Bio Science Contract
Production Corp., now renamed Cambrex Bio Science Baltimore, Inc., manufactures
purified bulk biologics and pharmaceutical ingredients. The acquisition provided
the Company with entry into the contract bioprocessing market.
On October 31, 2001, the Company acquired Marathon Biopharmaceuticals Inc.
in Hopkinton, Massachusetts for approximately $26,000 in cash through a share
purchase of CoPharma Inc. Marathon, now renamed Cambrex Bio Science Hopkinton,
Inc., is a full-service cGMP manufacturer of biopharmaceutical ingredients and
purified bulk biologics for pre-clinical evaluation, clinical trials and
commercial scale quantities.
On January 1, 2002, the Company realigned the organization to focus on life
sciences. The operating units that primarily produced specialty and fine
chemicals, and animal health and agriculture products were combined to form a
new subsidiary, Rutherford Chemicals, Inc.
On November 10, 2003, the Company sold its Rutherford Chemicals business
for a sale price of up to $65,000, consisting of $55,000 in cash paid at
closing, a $2,000 subordinated 12% interest bearing note, and an $8,000
performance-based cash earn-out if certain future operating profit targets are
achieved. The sale of Rutherford Chemicals represents the completion of the
transformation from a specialty chemical organization into a leading life
sciences company.
On October 2, 2004, Cambrex France SARL, one of the Company's subsidiaries,
acquired Genolife SA for approximately $6,000 in cash. Genolife, now renamed
Cambrex Bio Science Clermont Ferrand SAS, located in Saint Beauzire, France,
specializes in rapid microbial detection testing for the pharmaceutical,
agriculture, food, and cosmetic industries. The acquisition complements the
Company's endotoxin and mycoplasma detection product lines and builds upon its
testing reagent and service franchise.
PRODUCTS
The Company uses its technical expertise in a wide range of chemical and
biological processes to meet the needs of its customers for high quality
products and services for specialized applications. The following table presents
gross sales from the Company's three segments:
<Table>
<Caption>
YEARS ENDED DECEMBER 31
--------------------------------
2005 2004 2003
-------- -------- ----------
Bioproducts........................................ $149,498 $136,108 $ 119,298
Biopharma.......................................... 41,698 43,270 44,128
Human Health....................................... 260,790 259,737 242,165
-------- -------- ----------
Gross Sales........................................ $451,986 $439,115 $ 405,591
======== ======== ==========
</Table>
Bioproducts: The Bioproducts segment consists of research products
(including cell biology products, cell based assays and molecular biology
products) and therapeutic applications (including endotoxin detection products,
biotherapeutic media and serum products and cell therapy and related services).
The Company manufactures more than 1,800 products which are sold to more than
14,000 customers worldwide with no one customer accounting for over 10% of 2005
sales in this segment.
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(dollars in thousands, except share data)
4
This table summarizes the gross sales by product category for this segment:
<Table>
<Caption>
$ %
2005 2004 CHANGE CHANGE
-------- -------- ------- ------
Research products............................. $ 75,810 $ 70,657 $ 5,153 7.3%
Therapeutic applications...................... 73,688 65,451 8,237 12.6%
-------- -------- -------
Total Bioproducts................... $149,498 $136,108 $13,390 9.8%
======== ======== ======= ====
</Table>
Gross sales of $149,498 were $13,390 or 9.8% above 2004. Bioproducts sales
were unfavorably impacted 0.1% due to exchange rates reflecting a stronger U.S.
dollar.
Research products of $75,810 were $5,153 or 7.3% higher than prior year due
primarily to increased sales in cell biology products resulting from new
products, market growth and price increases, and higher media/serum product
sales as a result of a gain in market share helped by increased raw material
supply.
Therapeutic applications sales of $73,688 were $8,237 or 12.6% higher than
prior year due to higher sales of cell therapy services due to the addition of
new customers and endotoxin detection products reflecting increased purchasing
levels primarily in North America and continued market growth.
Biopharma: The Biopharma segment consists of the Company's contract
biopharmaceutical process development and manufacturing business. Biopharma
sales of $41,698 were $1,572 or 3.6% below 2004. The sales decrease primarily
reflects lower suite revenue and process development partially offset by higher
reimbursed materials and labor fees. There are two customers that individually
account for more than 10% of 2005 sales in this segment. They represent 30.5%
and 13.6% of 2005 sales in this segment.
Human Health: The Human Health segment is primarily comprised of the
custom development and manufacture of pharmaceutical ingredients derived from
organic chemistry. Products and services are supplied globally to innovative and
generic drug companies. Products include active pharmaceutical ingredients and
advanced pharmaceutical intermediates. Services include development and GMP
manufacturing services.
The Human Health segment is classified into three product groups: (1)
active pharmaceutical ingredients ("APIs"), (2) pharmaceutical intermediates and
custom development, and (3) other. These products and services are sold to a
diverse group of more than 1,100 customers, with two customers individually
accounting for more than 10% of 2005 sales in this segment; one, a
pharmaceutical company with which a long-term sales contract is in effect that
is scheduled to expire at the end of 2008, accounted for 14.4%, and a second, a
distributor representing multiple customers, accounted for 14.1%. Many of these
products are also sold through agents. One active pharmaceutical ingredient
makes up 16.4% of 2005 sales in this segment.
This table summarizes the gross sales for this product segment:
<Table>
<Caption>
$ %
2005 2004 CHANGE CHANGE
-------- -------- ------- ------
Active pharmaceutical ingredients............. $199,935 $200,555 $ (620) (0.3)%
Pharmaceutical intermediates and custom
development................................. 30,578 27,365 3,213 11.7%
Other......................................... 30,277 31,817 (1,540) (4.8)%
-------- -------- -------
Total Human Health.................. $260,790 $259,737 $ 1,053 0.4%
======== ======== ======= ====
</Table>
Human Health sales of $260,790 increased $1,053 or 0.4% including a 0.7%
unfavorable impact due to exchange rates reflecting the stronger U.S. dollar.
Sales of APIs of $199,935 were $620 or 0.3% below the prior year due
primarily to lower demand for certain central nervous system and cardiovascular
APIs due to increasing competition resulting in lower
- ---------------
(dollars in thousands, except share data)
5
volumes sold and continued pricing pressure, partially offset by higher sales of
a gastrointestinal API and nicotine polacrilex resin (used in smoking cessation
products) due to stronger demand.
Pharmaceutical intermediates and custom development sales of $30,578 were
$3,213 or 11.7% above 2004 primarily due to higher sales of custom development
products and an end-stage kidney treatment product due to increased demand.
Other sales of $30,277 were $1,540 or 4.8% below the prior year due
primarily to lower volumes of a crop protection additive and fine chemicals,
partially offset by higher sales of feed additive products.
MARKETING AND DISTRIBUTION
The Company's Human Health and Biopharma segments generally include higher
value, low-to-medium volume niche products requiring significant technical
expertise to develop and manufacture. Marketing generally requires significant
cooperative effort among a highly trained sales and marketing staff, a
scientific staff that can assess the technical fit and estimate manufacturing
economics and the business unit management to determine the strategic and
business fit. The process to take a client's project from the clinical trial
stage to a commercial, approved therapeutic may take from two to ten years. The
Company uses sales agents in those areas where direct sales efforts are not
economical.
For the Bioproducts segment, the Company markets and sells its products in
the United States and Europe principally through its own direct sales force. The
remaining international markets are served principally through an extensive
network of independent distributors. The Company has also implemented an
e-commerce website to market and sell these products in the United States and
Europe.
RAW MATERIALS
The Company uses a wide array of raw materials in the conduct of its
businesses.
For its Human Health products, the Company generally will have a primary
and secondary supplier for its critical raw materials. Prices for these raw
materials are generally stable except for the petroleum-based solvents where
prices can vary with market conditions.
For its Bioproducts products, the Company buys materials from many
suppliers and is generally not dependent on any one supplier or group of
suppliers. There is a well-established market for raw fetal bovine serum but
price and supply are cyclical and fluctuate. Bovine spongiform encephalopathy,
also known as mad cow disease, can periodically restrict the locations from
which the Company can import fetal bovine serum. The Company also has a
long-term contract with one company to supply agarose, the key raw material used
to make electrophoresis media products.
The other key raw materials used by all segments of the Company are
advanced organic intermediates that generally have been in adequate supply from
multiple suppliers.
RESEARCH AND DEVELOPMENT
The Company's research and development program is designed to increase the
Company's competitiveness by improving its technology and developing processes
for the manufacture of new products to meet customer requirements. The goals are
to introduce innovative products; improve manufacturing processes to reduce
costs, improve quality and increase capacity; to identify market opportunities
that warrant significant technical expertise, and offer the prospects of a
long-term, profitable business relationship. Research and development activities
are performed at most of the Company's manufacturing facilities in both the
United States and Europe. Approximately 150 employees are involved directly in
research and development activities worldwide.
The Cambrex Center of Technical Excellence, a research and development
organization located in The Technology Centre of New Jersey in North Brunswick,
NJ, helps place the Company in a unique position to
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(dollars in thousands, except share data)
6
be a full-service resource for pharmaceutical and biotechnology companies
throughout the drug development cycle.
The Company spent $22,331, $19,659 and $17,123 in 2005, 2004 and 2003,
respectively, on research and development efforts.
PATENTS AND TRADEMARKS
The Company has patent protection in many of its product areas. In
addition, the Company also relies on know-how and trade secrets related to many
of its manufacturing processes and techniques not generally known to other life
sciences companies for developing and maintaining its market position.
The Company currently owns approximately 185 worldwide patents which have
various expiration dates through 2023 and which cover selected items in each of
the Company's major product areas. The Company also owns foreign equivalents of
many of its United States patents. In addition, the Company has applied for
patents for various inventions and is in the process of preparing patent
applications for other inventions. The Company owns patent and other proprietary
rights to the endotoxin detection products which are material to the product
lines.
The Company has trademarks registered in the United States and a number of
other countries for use in connection with the Company's products and business.
The Company believes that many of its trademarks are generally recognized in its
industry. Such trademarks include Poietics(R), Clonetics(R), MYCOAlert(R),
NuSieve(R), Reliant(R), Latitude(R), PAGEr(R), MetaPhor(R), AccuGENE(R) and
BioWhittaker(R).
The Company requires employees to sign confidentiality and ownership of
inventions agreements where appropriate.
COMPETITION
In the Bioproducts segment, no one company is known to compete with the
Company in all of its product groups, but in each group competition is offered
by a number of companies, including in some cases, firms substantially larger
and with greater financial resources than the Company. The markets in which the
Company competes are generally concentrated and are highly competitive, with
competition centering on product specifications and performance, quality, depth
of product line, price, technical support, innovative product development and on
time delivery.
In the Biopharma segment, the competitors include therapeutic companies and
other companies that supply contract biopharmaceutical development and
manufacturing services to biotech companies. Generally, the competition focuses
on larger quantities and scale of manufacturing capacity. Cambrex differentiates
its services by concentrating on small to medium scale process development and
manufacturing services, an excellent regulatory compliance record, experience
producing vaccines and approved drugs, a commitment to quality, and world-class
early development services.
In the Human Health segment, the Company has two primary groups of
competitors; those that produce generic active pharmaceutical ingredients and
those that provide development and manufacturing services for branded active
pharmaceutical ingredients and intermediates. For generic active pharmaceutical
ingredients, there are approximately five primary competitors which are located
in Europe. For competitors that provide custom development and manufacturing
services for branded active pharmaceutical ingredients, there are approximately
twenty competitors, six of which are large multinational companies that also
produce fine chemicals. More recently, competitors from Asia have entered the
market for larger active pharmaceutical ingredients. While there has been
limited impact on the specific products the Company produces, it is expected
that regulatory compliance, product quality and logistics will determine the
long term impact of these competitors in the market. If the Company perceives
significant competitive risk and a need for technical or financial commitment,
it generally negotiates long term contracts or guarantees from its customers.
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(dollars in thousands, except share data)
7
ENVIRONMENTAL AND SAFETY REGULATIONS AND PROCEEDINGS
General: Certain products manufactured by the Company involve the use,
storage and transportation of toxic and hazardous materials. The Company's
operations are subject to extensive international and domestic federal, state
and local laws and regulations relating to the storage, handling, emission,
transportation and discharge of materials into the environment and the
maintenance of safe working conditions. The Company maintains environmental and
industrial safety and health compliance programs at its plants and believes that
its manufacturing operations are in general compliance with all applicable
safety, health and environmental laws.
The Company conducts detailed environmental due diligence on all
acquisitions. The Company's acquisitions were made with consideration of any
known environmental conditions. Also, as with other companies engaged in our
industry, risks of substantial costs and liabilities are inherent in certain
plant operations and certain products produced at the Company's plants.
Additionally, prevailing legislation tends to hold companies primarily
responsible for the proper disposal of their wastes even after transferal to
third party waste disposal facilities. Moreover, other future developments, such
as increasingly strict environmental, safety and health laws and regulations,
and enforcement policies thereunder, could result in substantial costs and
liabilities to the Company and could subject the Company's handling,
manufacture, use, reuse, or disposal of substances or pollutants at its plants
to more rigorous scrutiny than at present. Although the Company has no direct
operations and conducts its business through subsidiaries, certain legal
principles that provide the basis for the assertion against a parent company of
liability for the actions of its subsidiaries may support the direct assertion
against the Company of environmental liabilities of its subsidiaries.
Known environmental matters which may result in liabilities to the Company
and the related estimates and accruals are summarized in Note #19 to the Cambrex
Corporation and Subsidiaries Consolidated Financial Statements.
Present and Future Environmental Expenditures: The Company's policy is to
comply with all legal requirements of applicable environmental, health and
safety laws and regulations. The Company believes it is in general compliance
with such requirements and has adequate professional staff and systems in place
to remain in compliance. In some cases, compliance can only be achieved by
capital expenditures and the Company made capital expenditures of $4,371 in
2005, $6,725 in 2004, and $4,032 in 2003 for environmental projects. As the
environmental proceedings in which the Company is involved progress from the
remedial investigation and feasibility study stage to implementation of remedial
measures, related expenditures may increase. The Company considers costs for
environmental compliance to be a normal cost of doing business and includes such
costs in pricing decisions.
ITEM 1A RISK FACTORS
FACTORS THAT MAY AFFECT FUTURE RESULTS
The following risk factors and other information included in this Annual
Report on Form 10-K should be carefully considered. If any of the following
risks occur, the Company's business, financial condition, operating results and
cash flows could be materially adversely effected. The risks and uncertainties
described below are not the only ones the Company faces. Additionally, risks and
uncertainties not presently known to the Company or that it currently deems
immaterial also may impair its business, financial condition, operating results
and cash flows in the future.
THE COMPANY'S ANALYSIS, CONSIDERATION AND IMPLEMENTATION OF STRATEGIC
ALTERNATIVES MAY MATERIALLY ADVERSELY AFFECT OUR BUSINESS, FINANCIAL CONDITION
OR RESULTS OF OPERATIONS.
As previously announced, the Company has retained Bear Stearns & Co., Inc.
to act as advisors to the Board of Directors in the analysis and consideration
of strategic alternatives to maximize shareholder value, including the potential
sale of certain assets. There are several strategic alternatives that may be
pursued.
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(dollars in thousands, except share data)
8
However, we are presently unable to assess what impact any particular strategic
alternative will have on our stock price if accomplished, and our consideration
and implementation of strategic alternatives may not be successful.
Uncertainties and risks relating to our analysis and consideration of strategic
alternatives include but are not limited to:
- the analysis and consideration of strategic alternatives may disrupt
operations and distract members of management and other employees, which
could adversely affect our results of operations;
- the process of exploring strategic alternatives may be more time
consuming and expensive than currently anticipated;
- we may not be able to successfully achieve the benefits of the strategic
alternative undertaken; and
- perceived uncertainties as to the future direction of the Company may
result in the loss of employees, customers, clients or business partners.
WE MAY PURSUE TRANSACTIONS THAT MAY CAUSE US TO EXPERIENCE SIGNIFICANT CHARGES
TO EARNINGS THAT MAY ADVERSELY AFFECT OUR STOCK PRICE AND FINANCIAL CONDITION.
We regularly review potential transactions related to technologies,
products, product rights and businesses complementary to our business. These
transactions could include mergers, acquisitions, divestitures, strategic
alliances or licensing agreements. In the future, we may choose to enter into
these transactions at any time. As a result of acquiring businesses or entering
into other significant transactions, we have previously experienced, and may
continue to experience, significant charges to earnings for merger and related
expenses that may include transaction costs, closure costs or costs related to
the write-off of acquired in-process research and development. These costs may
also include substantial fees for investment bankers, attorneys, accountants,
financial printing costs, severance and other closure costs associated with the
elimination of duplicate or discontinued products, employees, operations and
facilities. Although we do not expect these charges to have a material adverse
effect upon our overall financial condition, these charges could have a material
impact on our results of operations for particular quarters or years and they
could possibly have an adverse impact upon the market price of our common stock.
IF WE MAKE ACQUISITIONS, WE MAY EXPERIENCE DIFFICULTY INTEGRATING THE BUSINESSES
WHICH COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS, FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
An important part of our business growth strategy is to acquire products,
product lines, technologies and capabilities, including through the acquisition
of businesses and to enhance the Company's position in its niche markets. We
continually explore and conduct discussions with many third parties regarding
possible acquisitions. Our ability to continue to achieve our goals may depend
upon our ability to effectively integrate such businesses, to achieve cost
efficiencies and to manage these businesses as part of our company. However, we
may experience difficulty integrating the merged companies which could have a
material adverse effect on the operating results or financial condition of the
combined company. As a result of uncertainty following an acquisition and during
the integration process, we could experience disruption in our business or
employee base. There is also a risk that key employees of the combined company
may seek employment elsewhere, including with competitors, or that valued
employees may be lost upon the elimination of duplicate functions. If we are not
able to successfully blend our products and technologies with the acquired
business to create the advantages the acquisition was intended to create, it may
effect our results of operations, our ability to develop and introduce new
products and the market price of our common stock. Furthermore, there may be
overlap between our products, services or customers, and the combined company
may create conflicts in relationships or other commitments detrimental to the
integrated businesses.
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IF WE FAIL TO IMPROVE THE OPERATIONS OF FUTURE ACQUIRED BUSINESSES, WE MAY BE
UNABLE TO ACHIEVE OUR GROWTH STRATEGY.
Some of the businesses we have acquired or will acquire had or may have
significantly lower operating margins than we do and/or operating losses prior
to the time we acquired them. In the past, we have occasionally experienced
temporary delays in improving the operating margins of these acquired
businesses. In the future, if we are unable to improve the operating margins of
acquired businesses or operate them profitably, we may be unable to achieve our
growth strategy.
PHARMACEUTICAL, BIOPHARMACEUTICAL AND BIOTECHNOLOGY COMPANIES MAY DISCONTINUE OR
DECREASE THEIR USAGE OF OUR SERVICES.
We depend on pharmaceutical, biopharmaceutical and biotechnology companies
that use our services for a large portion of our revenues. Although there has
been a trend among these companies to outsource therapeutic production
functions, this trend may not continue. We have observed increasing pressure on
the part of our customers to reduce spending, including the use of our services,
as a result of negative economic trends generally and in the pharmaceutical
industry. If these companies discontinue or decrease their usage of our
services, including as a result of an economic slowdown in the overall United
States or foreign economies, our revenues and earnings could be lower than we
expect and our revenues may decrease or not grow at historical rates.
COMPETITION IN THE LIFE SCIENCES RESEARCH MARKET, AND/OR A REDUCTION IN DEMAND
FOR OUR PRODUCTS, COULD REDUCE SALES.
The markets for our products are competitive and price sensitive. Other
life science suppliers have significant financial, operational, sales and
marketing resources, and experience in research and development. These and other
companies may have developed or could in the future develop new technologies
that would compete with our products or render our products obsolete. If a
competitor develops superior technology or cost-effective alternatives to our
products or services, our business, operating results, and financial condition
could be seriously harmed. In addition, demand for our products may weaken due
to reduction in research and development budgets, loss of distributors or other
factors, which would have an adverse effect on our financial condition.
The markets for certain of our products are also subject to specific
competitive risks and can be highly price competitive. Our competitors have
competed in the past by lowering prices on certain products. Our competitors may
lower prices on these or other products in the future and we may, in certain
cases, respond by lowering our prices. This would reduce revenues and profits.
Conversely, failure to anticipate and respond to price competition may hurt our
market share.
We believe that customers in our markets display loyalty to their initial
supplier of a particular product. Therefore, it may be difficult to generate
sales to potential customers who have purchased products from competitors. To
the extent we are unable to be the first to develop and supply new products, our
competitive position may suffer.
OUR FAILURE TO OBTAIN NEW CONTRACTS OR RENEWED CONTRACTS OR CANCELLATION OF
EXISTING CONTRACTS MAY ADVERSELY EFFECT OUR BUSINESS, FINANCIAL CONDITION AND
RESULTS OF OPERATIONS AND MAKE OUR REVENUE DIFFICULT TO PREDICT.
Many of our contracts are short-term in duration. As a result, we must
continually replace our contracts with new contracts to sustain our revenue. In
addition, many of our long-term contracts may be cancelled or delayed by clients
for any reason upon notice. Contracts may be terminated for a variety of
reasons, including termination of product development, failure of products to
satisfy safety requirements, unexpected or undesired results from use of the
product or the client's decision to forego a particular study. The Company
currently has a long-term sales contract within the Human Health segment that
accounts for more than 10%
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10
of segment sales that is scheduled to expire at the end of 2008. There is no
guarantee that this contract will be renewed. Our failure to obtain new
contracts or renew contracts or the cancellation or delay of existing contracts
could have a material adverse effect on our business, financial condition and
results of operations.
Furthermore, because our revenue is primarily generated on a
contract-by-contract or purchase order basis, our revenue is difficult to
predict and contributes to the variability of our financial results from period
to period. In addition, we do not believe that a backlog of contracts is a
meaningful indicator of our future revenue because much of our revenue is
resulting from short-term contracts or purchase orders and these contracts can
often be terminated for many reasons.
THE BIOPHARMA BUSINESS SEGMENT HAS EXPERIENCED AND MAY CONTINUE TO EXPERIENCE
SIGNIFICANT VOLATILITY IN PROFITABILITY AND THERE ARE NO ASSURANCES THAT IT WILL
RETURN TO ITS HISTORIC PROFITABILITY LEVEL.
The Company's Biopharma segment provides process development and
manufacturing services on a contract basis to biopharmaceutical companies. This
business has a very high fixed cost structure and its customers are often
dependent on the availability of funding and pursuing drugs that are in earlier
stages of clinical trials, and thus have high failure rates. Losses of one or
more customers can result in significant swings in profitability from quarter to
quarter and year to year. Returning to historic profitability levels is
dependent on the Company generating significant additional revenues from
existing and new customers, which can not be assured.
THE COMPANY COULD BE SUBJECT TO ADDITIONAL IMPAIRMENT CHARGES IN THE FUTURE.
During 2004 and 2005, the Company recorded impairment charges to reduce
goodwill and long-lived assets in 2005. The Company may be subject to additional
impairment charges if the business units do not perform at or near projected
levels in the future. Should the profit forecast for these businesses be revised
significantly downward, the Company may incur additional impairment charges.
OUR OPERATING RESULTS MAY UNEXPECTEDLY FLUCTUATE IN FUTURE PERIODS.
The Company's revenue and operating results have fluctuated, and could
continue to fluctuate, on a quarterly basis. The operating results for a
particular quarter may be lower than expected as a result of a number of
factors, including the timing of contracts; the delay or cancellation of a
contract; the mix of services provided; seasonal slowdowns in different parts of
the world; the timing of start-up expenses for new services and facilities; and
changes in government regulations. Because a high percentage of the Company's
costs are relatively fixed in the short term (such as the cost of maintaining
facilities and compensating employees), any one of these factors could have a
significant impact on the Company's quarterly results. In some quarters, the
Company's revenue and operating results may fall below the expectations of
securities analysts and investors due to any of the factors described above. In
such event, the trading price of the Company's common stock would likely
decline, even if the decline in revenue did not have any long-term adverse
implications for the Company's business.
OUR MARKET SHARE DEPENDS ON NEW PRODUCT INTRODUCTIONS AND ACCEPTANCE.
Rapid technological change and frequent new product introductions are
typical of the market for certain of our products and services. Our future
success will depend in part on continuous, timely development and introduction
of new products that address evolving market requirements and are attractive to
customers. We believe successful new product introductions provide a significant
competitive advantage because customers make an investment of time in selecting
and learning to use a new product, and are reluctant to switch thereafter. We
spend significant resources on internal research and development, as well as on
technology development elsewhere to support our effort to develop and introduce
new products. To the extent that we fail to introduce new and innovative
products, we could fail to obtain an adequate return on these investments and
could lose market share to our competitors, which may be difficult to regain. An
inability, for technological or
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other reasons, to develop successfully and introduce new products could reduce
our growth rate or otherwise damage our business.
In the past, we have experienced, and may experience in the future, delays
in the development and introduction of products. We cannot be assured that we
will keep pace with the rapid change in life sciences research, or that our new
products will adequately meet the requirements of the marketplace or achieve
market acceptance. Some of the factors effecting market acceptance of our
products include:
- availability, quality and price as compared to competitive products;
- the functionality of new and existing products;
- the timing of introduction of our products as compared to competitive
products;
- scientists' and customers' opinions of the product's utility and our
ability to incorporate their feedback into future products;
- general trends in life sciences research.
The expenses or losses associated with unsuccessful product development
activities or lack of market acceptance of our new products could adversely
effect our business, financial condition and results of operations.
FAILURE TO OBTAIN PRODUCTS AND COMPONENTS FROM THIRD-PARTY MANUFACTURERS COULD
EFFECT OUR ABILITY TO MANUFACTURE AND DELIVER OUR PRODUCTS.
We rely on third-party manufacturers to supply many of our raw materials,
product components, and in some cases, entire products. In addition, we have a
single source for supplies of some raw materials and components to our products.
Manufacturing problems may occur with these and other outside sources. If such
problems occur, we cannot ensure that we will be able to manufacture our
products profitably or on time.
ANY SIGNIFICANT REDUCTION IN GOVERNMENT REGULATION OF THE DRUG DEVELOPMENT
PROCESS COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS, FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
The design, development, testing, manufacturing and marketing of
biotechnology and pharmaceutical products are subject to extensive regulation by
governmental authorities, including the FDA and comparable regulatory
authorities in other countries. The Company's business depends in part on strict
government regulation of the drug development process. Legislation may be
introduced and enacted from time to time to modify regulations administered by
the FDA and governing the drug approval process. Any significant reduction in
the scope of regulatory requirements or the introduction of simplified drug
approval procedures could have a material adverse effect on the Company's
business, financial condition and results of operations.
VIOLATIONS OF CGMP AND OTHER GOVERNMENT REGULATIONS COULD HAVE A MATERIAL
ADVERSE EFFECT ON OUR BUSINESS, FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
All facilities and manufacturing techniques used for manufacturing of
products for clinical use or for commercial sale in the United States must be
operated in conformity with current Good Manufacturing Practices ("cGMP")
regulations as required by the FDA. The Company's facilities are subject to
scheduled periodic regulatory and customer inspections to ensure compliance with
cGMP and other requirements applicable to such products. A finding that the
Company had materially violated these requirements could result in regulatory
sanctions, the loss of a customer contract, the disqualification of data for
client submissions to regulatory authorities and/or a mandated closing of the
Company's facilities. Any such material violations would have a material adverse
effect on the Company's business, financial condition and results of operations.
The Securities and Exchange Commission ("SEC") is currently conducting an
investigation into the Company's inter-company accounting issue. The
investigation began during the first half of 2003 after the
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12
Company voluntarily disclosed certain matters related to inter-company accounts
for the five-year period ending December 31, 2001 that resulted in the
restatement of the Company's financial statements for those years. The Company
is fully cooperating with the SEC and does not expect further revisions to its
historical financial statements relating to these issues. This investigation
could lead to an adverse outcome and adversely effect our business, financial
condition, results of operations and cash flows.
LITIGATION MAY HARM OUR BUSINESS OR OTHERWISE NEGATIVELY IMPACT OUR MANAGEMENT
AND FINANCIAL RESOURCES.
Substantial, complex or extended litigation could cause the Company to
incur large expenditures and distract our management. For example, lawsuits by
employees, stockholders, counterparties to acquisition and divestiture
contracts, collaborators, distributors, customers, or end-users of our products
or services could be very costly and substantially disrupt our business.
Disputes from time to time with such companies or individuals are not uncommon,
and we cannot assure you that we will always be able to resolve such disputes
out of court or on terms favorable to the Company.
The Company is involved in a number of lawsuits including a class action
lawsuit filed against Cambrex and certain current Company officers alleging the
failure to disclose in a timely fashion the restatement of results for the
five-year period ending December 31, 2001 as discussed in the risk factor above,
as well as the loss of a significant contract at our Baltimore facility. If this
matter, or any of the Company's other lawsuits, is resolved in an unfavorable
manner, they could have a material adverse effect on the operating results and
cash flows in future periods.
LOSS OF KEY PERSONNEL COULD HURT OUR BUSINESS.
The Company depends on a number of key executives. The loss of services of
any of the Company's key executives could have a material adverse effect on the
Company's business.
The Company also depends on its ability to attract and retain qualified
scientific and technical employees. There can be no assurance the Company will
be able to retain its existing scientific and technical employees, or to attract
and retain additional qualified employees. The Company's inability to attract
and retain qualified scientific and technical employees would have a material
adverse effect on the Company's business, financial condition and results of
operations.
POTENTIAL PRODUCT LIABILITY CLAIMS, ERRORS AND OMISSIONS CLAIMS IN CONNECTION
WITH SERVICES WE PERFORM AND POTENTIAL LIABILITY UNDER INDEMNIFICATION
AGREEMENTS BETWEEN US AND OUR OFFICERS AND DIRECTORS COULD ADVERSELY EFFECT OUR
EARNINGS AND FINANCIAL CONDITION.
The Company manufactures products intended for use by the public. In
addition, the Company's services include the manufacture of pharmaceutical and
biologic products to be tested in human clinical trials and for consumption by
humans. These activities could expose the Company to risk of liability for
personal injury or death to persons using such products, although the Company
does not presently market or sell the products to end users. The Company seeks
to reduce its potential liability through measures such as contractual
indemnification provisions with clients (the scope of which may vary from
client-to-client, and the performances of which are not secured), exclusion of
services requiring diagnostic or other medical services, and insurance
maintained by clients. The Company could be materially and adversely effected if
it were required to pay damages or incur defense costs in connection with a
claim that is outside the scope of the indemnification agreements, if the
indemnity, although applicable, is not performed in accordance with its terms or
if the Company's liability exceeds the amount of applicable insurance or
indemnity. In addition, the Company could be held liable for errors and
omissions in connection with the services it performs. The Company currently
maintains product liability and errors and omissions insurance with respect to
these risks. There can be no assurance, however, that the Company's insurance
coverage will be adequate or that insurance coverage will continue to be
available on terms acceptable to the Company.
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13
The Company also indemnifies its officers and directors for certain events
or occurrences while the officer or director is, or was serving, at the
Company's request in such capacity. The maximum potential amount of future
payments the Company could be required to make under these indemnification
agreements is unlimited; however, the Company has a "Director and Officer"
insurance policy that covers a portion of any potential exposure. The Company
could be materially and adversely effected if it were required to pay damages or
incur legal costs in connection with a claim above its insurance limits.
ASSESSMENTS BY VARIOUS TAX AUTHORITIES MAY BE MATERIALLY DIFFERENT THAN WE HAVE
PROVIDED FOR AND WE MAY EXPERIENCE SIGNIFICANT VOLATILITY IN OUR ANNUAL AND
QUARTERLY EFFECTIVE TAX RATE.
As a matter of course, the Company is regularly audited by federal, state,
and foreign tax authorities. From time to time, these audits result in proposed
assessments. While the Company believes that it has adequately provided for any
such assessments, future settlements may be materially different than we have
provided for and negatively effect our earnings.
During 2005, the geographic shift of forecasted income resulted in the
recording of a valuation allowance against all net domestic deferred tax assets.
Going forward, until such time as the Company's domestic profitability is
restored and considered by management to be sustainable for the foreseeable
future, the Company will not record the income tax benefit or expense for
domestic pre-tax losses and income respectively, and as such may experience
significant volatility in its effective tax rate. At December 31, 2005 the
Company has recorded a valuation allowance against domestic indefinite lived
intangible deferred tax assets of $16,926, because the Company could no longer
preserve the utilization of certain tax planning strategies.
WE HAVE A SIGNIFICANT AMOUNT OF DEBT THAT COULD ADVERSELY EFFECT OUR FINANCIAL
CONDITION.
The Company has a $277,500 revolving credit facility of which $81,943 was
outstanding at December 31, 2005. In addition, the Company had privately placed
notes of $100,000 (repaid in January 2006 by drawing down our existing revolving
credit facility). If we are unable to generate sufficient cash flow or otherwise
obtain funds necessary to make required payments on the notes, including from
cash and cash equivalents on hand, we will be in default under the terms of the
loan agreements and indentures under which we have outstanding debt securities.
Even if we are able to meet our debt service obligations, the amount of
debt we have could adversely effect us in a number of ways, including:
- limiting our ability to obtain any necessary financing in the future for
working capital, capital expenditures, debt service requirements, or
other purposes;
- limiting our flexibility in planning for, or reacting to, changes in our
business;
- placing us at a competitive disadvantage relative to our competitors who
have lower levels of debt;
- making us more vulnerable to a downturn in our business or the economy
generally;
- requiring us to use a substantial portion of our cash to pay principal
and interest on our debt, instead of contributing those funds to other
purposes such as working capital and capital expenditures.
INTERNATIONAL UNREST OR FOREIGN CURRENCY FLUCTUATIONS COULD ADVERSELY EFFECT OUR
RESULTS.
Our international revenues, which include revenues from our non-U.S.
subsidiaries and export sales from the U.S., represented 62% of our product
revenues in 2005 and 61% of our product revenues in 2004. We
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expect that international revenues will continue to account for a significant
percentage of our revenues for the foreseeable future.
There are a number of risks arising from our international business,
including:
- foreign currencies we receive for sales outside the U.S. could be subject
to unfavorable exchange rates with the U.S. dollar and reduce the amount
of revenue that we recognize;
- the possibility that unfriendly nations or groups could boycott our
products;
- general economic and political conditions in the markets in which we
operate;
- potential increased costs associated with overlapping tax structures;
- more limited protection for intellectual property rights in some
countries;
- unexpected changes in regulatory requirements;
- the difficulties of compliance with a wide variety of foreign laws and
regulations;
- longer accounts receivable cycles in certain foreign countries; and
- import and export licensing requirements.
A significant portion of our business is conducted in currencies other than
the U.S. dollar, which is our reporting currency. We recognize foreign currency
gains or losses arising from our operations in the period incurred. As a result,
currency fluctuations between the U.S. dollar and the currencies in which we do
business have caused and will continue to cause foreign currency transaction
gains and losses. We cannot predict the effects of exchange rate fluctuations
upon our future operating results because of the number of currencies involved,
the variability of currency exposures, and the potential volatility of currency
exchange rates. We engage in limited foreign exchange hedging transactions to
manage our foreign currency exposure, but our strategies are short-term in
nature and may not adequately protect our operating results from the full
effects of exchange rate fluctuations.
THE MARKET PRICE OF OUR STOCK COULD BE VOLATILE.
The market price of our common stock has been subject to volatility and, in
the future, the market price of our common stock may fluctuate substantially due
to a variety of factors, including:
- quarterly fluctuations in our operating income and earnings per share
results;
- technological innovations or new product introductions by us or our
competitors;
- economic conditions;
- disputes concerning patents or proprietary rights;
- changes in earnings estimates and market growth rate projections by
market research analysts;
- sales of common stock by existing holders;
- loss of key personnel; and
- securities class actions or other litigation.
The market price for our common stock may also be effected by our ability
to meet analysts' expectations. Any failure to meet such expectations, even
slightly, could have an adverse effect on the market price of our
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common stock. In addition, the stock market is subject to extreme price and
volume fluctuations. This volatility has had a significant effect on the market
prices of securities issued by many companies for reasons unrelated to the
operating performance of these companies.
INCIDENTS RELATED TO HAZARDOUS MATERIALS COULD ADVERSELY EFFECT OUR BUSINESS.
Portions of our operations require the controlled use of hazardous
materials. Although we are diligent in designing and implementing safety
procedures to comply with the standards prescribed by federal, state, and local
regulations, the risk of accidental contamination of property or injury to
individuals from these materials cannot be completely eliminated. In the event
of such an incident, we could be liable for any damages that result, which could
adversely effect our business.
Additionally, any incident could partially or completely shut down our
research and manufacturing facilities and operations.
We generate waste that must be transported to approved storage, treatment
and disposal facilities. The transportation and disposal of such waste are
required to meet applicable state and federal statutes and regulations. The
storage, treatment and disposal of such waste potentially exposes us to
environmental liability if, in the future, such transportation and disposal are
deemed to have violated such statues and/or regulations or if the storage,
treatment and disposal facilities are inadequate and are proved to have damaged
the environment.
The Company is also party to several environmental remediation
investigations and cleanups and, along with other companies, has been named a
"potential responsible party" for certain waste disposal sites. The Company has
also retained the liabilities with respect to certain pre-closing environmental
matters associated with the sale of the Rutherford Chemicals business. After
reviewing information currently available, management believes any amount paid
in excess of accrued liabilities will not have a material effect on its
business, financial condition or results of operations. However, these matters,
if resolved in a manner different from the estimates, could have a material
adverse effect on the financial condition, operating results and cash flows when
resolved in future reporting periods.
THE POSSIBILITY WE WILL BE UNABLE TO PROTECT OUR TECHNOLOGIES COULD EFFECT OUR
ABILITY TO COMPETE.
Our success depends to a significant degree upon our ability to develop
proprietary products and technologies. However, we cannot be assured that
patents will be granted on any of our patent applications. We also cannot be
assured that the scope of any of our issued patents will be sufficiently broad
to offer meaningful protection. We only have patents issued in selected
countries. Therefore, third parties can make, use, and sell products covered by
our patents in any country in which we do not have patent protection. In
addition, our issued patents or patents we license could be successfully
challenged, invalidated or circumvented so that our patent rights would not
create an effective competitive barrier. We provide our customers the right to
use our products under label licenses that are for research purposes only. These
licenses could be contested, and we cannot be assured that we would either be
aware of an unauthorized use or be able to enforce the restrictions in a
cost-effective manner.
If a third party claimed an intellectual property right to technology we
use, we may need to discontinue an important product or product line, alter our
products and processes, defend our right to use such technology in court or pay
license fees. Although we may, under these circumstances, attempt to obtain a
license to such intellectual property, we may not be able to do so on favorable
terms, or at all. Additionally, if our products are found to infringe on a third
party's intellectual property, we may be required to pay damages for past
infringement, and lose the ability to sell certain products or receive licensing
revenues.
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COMPLIANCE WITH CHANGING REGULATION OF CORPORATE GOVERNANCE AND PUBLIC
DISCLOSURE MAY RESULT IN ADDITIONAL EXPENSE.
Changing laws, regulations and standards relating to corporate governance
and public disclosure, including the Sarbanes-Oxley Act of 2002, are creating
uncertainty for companies. These new or changed laws and standards are subject
to multiple interpretations, in many cases due to their lack of specification.
As a result, their application in practice may evolve over time as new guidance
is provided by regulatory and governing bodies which could result in higher
costs necessitated by revisions to disclosures and governance practices. We are
committed to maintaining high standards of corporate governance and public
disclosure. As a result of the efforts to comply with the evolving laws and
regulations increased general and administrative expenses have been experienced
and are likely to continue. In particular, our efforts to comply with Section
404 of the Sarbanes-Oxley Act of 2002, and the related assessments have required
commitment of significant internal and external financial and operational
resources.
EMPLOYEES
At December 31, 2005, the Company had 2,041 employees worldwide (965 of
whom were from international operations) compared with 1,938 employees at
December 31, 2004 and 1,861 at December 31, 2003.
Cambrex Karlskoga AB, Cambrex Profarmaco Landen NV, Cambrex Cork Limited,
and Cambrex Profarmaco Milano S.r.l. production, administration, scientific and
technical employees are represented by various local and national unions. The
Company believes its labor relations are satisfactory.
SEASONALITY
The Company experiences some seasonality primarily due to planned plant
shutdowns by the Company and certain customers in the third quarter. Operating
results for any quarter, however, are not necessarily indicative of results for
any future period. In particular, as a result of various factors such as
acquisitions, plant shutdowns, and the timing of large contract revenue streams,
the Company believes that period-to-period comparisons of its operating results
should not be relied upon as an indication of future performance.
EXPORT AND INTERNATIONAL SALES
The Company exports numerous products to various areas, principally Western
Europe, Asia and Canada. Export sales from the Company's domestic operations in
2005, 2004 and 2003 amounted to $47,115, $29,945 and $22,100, respectively.
Sales from international operations were $234,199 in 2005, $238,673 in 2004, and
$223,666 in 2003. Refer to Note #17 to the Cambrex Corporation and Subsidiaries
Consolidated Financial Statements.
AVAILABLE INFORMATION
This annual report on Form 10-K, the Company's quarterly reports on Form
10-Q, the Company's current reports on Form 8-K, and amendments to those reports
filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange
Act of 1934, are made available free of charge on the Company's Internet website
www.cambrex.com as soon as reasonably practicable after such material is
electronically filed with or furnished to the SEC. The most recent
certifications by the Company's Chief Executive Officer and Chief Financial
Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 are filed as
exhibits to this Annual report on Form 10-K. Last year the Company filed with
the New York Stock Exchange the Annual Chief Executive Officer Certification as
required by Section 303A.12.(a) of the New York Stock Exchange Listed Company
Manual.
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Reports filed by the Company with the SEC may be read and copied at the
SEC's Public Reference Room at 100 F Street, NE, Washington, DC 20549.
Information on the operation of the Public Reference Room may be obtained by
calling the SEC at 1-800-SEC-0330. The SEC also maintains an Internet site at
www.sec.gov that contains reports, proxy and information statements and other
information regarding issuers that file electronically with the SEC.
The following corporate governance documents are available free of charge
on the Company's website: the charters of our Audit, Regulatory Affairs,
Compensation and Governance Committees, our Corporate Governance Guidelines and
our Code of Business Conduct and Ethics. These corporate governance documents
are also available in print to any stockholder requesting a copy from our
corporate secretary at our principal executive offices. Information contained on
our website is not part of this report. We will also post on our website any
amendments to or waivers of our Code of Business Conduct and Ethics that relate
to our Chief Executive Officer, Chief Financial Officer and Principal Accounting
Officer.
ITEM 1B UNRESOLVED STAFF COMMENTS
None.
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ITEM 2 PROPERTIES.
Set forth below is information relating to the Company's manufacturing
facilities:
<Table>
<Caption>
LOCATION ACREAGE OPERATING SUBSIDIARY PRODUCT LINES MANUFACTURED
- -------- ------- -------------------- --------------------------
Charles City, IA 57 acres Cambrex Charles Active Pharmaceutical Ingredients,
City, Inc. Pharmaceutical Intermediates, Imaging
Chemicals, Animal Health Products and Fine
Custom Chemicals
Karlskoga, Sweden 42 acres Cambrex Karlskoga AB Active Pharmaceutical Ingredients,
Pharmaceutical Intermediates, Imaging Chemicals
and Fine Custom Chemicals
Paullo (Milan), Italy 13 acres Cambrex Profarmaco Active Pharmaceutical Ingredients
Milano S.r.l.
Walkersville, MD 116 acres Cambrex Bio Science Cells and Media and Endotoxin Detection
Walkersville, Inc.
Verviers, Belgium 9 acres Cambrex Bio Science Cells and Media
Verviers Sprl
Cork, Ireland 21 acres Cambrex Cork Limited Active Pharmaceutical Ingredients and
Pharmaceutical Intermediates
Rockland, ME 93 acres Cambrex Bio Science Electrophoresis and Chromatography
Rockland, Inc.
Landen, Belgium 40 acres Cambrex Profarmaco Active Pharmaceutical Ingredients
Landen NV
Copenhagen, Denmark Leased Cambrex Bio Science Electrophoresis and Chromatography
Copenhagen ApS
Baltimore, MD Leased Cambrex Bio Science Contract Biopharmaceutical Services
Baltimore, Inc.
Hopkinton, MA Leased Cambrex Bio Science Contract Biopharmaceutical Services
Hopkinton, Inc.
Saint-Beauzire, France Leased Cambrex Bio Science Microbial and GMO Detection Kits and BioAssay
Clermont Ferrand SAS Products
Gaithersburg, MD Leased Cambrex Bio Science Poietics(TM)
Walkersville, Inc.
Salisbury, MD Leased Cambrex Bio Science Endotoxin Detection
Walkersville, Inc.
</Table>
The Company also leases 42,000 square feet in North Brunswick, New Jersey
for its Center of Technical Excellence, which has a 10 year term ending March
27, 2010. In addition, the Company owns a four acre site and buildings in North
Haven, CT and thirty-one acres of undeveloped land adjacent to the North Haven
facility, eighty-one acres in Walkersville, Maryland and a three acre site in
Carlstadt, New Jersey. The Company believes its facilities to be in good
condition, well-maintained and adequate for its current needs.
Most of the Company's products and services are provided from multi-purpose
facilities. Each product has a unique requirement for equipment, and occupies
such equipment for varying amounts of time. It is generally possible, with
proper lead time and customer and regulatory approval (if required), to transfer
the manufacturing of a particular product to another facility should capacity
constraints dictate.
ITEM 3 LEGAL PROCEEDINGS
In mid-2004 the USEPA conducted a hazardous waste inspection of the
Company's Charles City facility. Thereafter, the USEPA notified the facility of
several alleged violations of the hazardous waste laws related to management of
hazardous waste and requested additional information related to the alleged
violations. The Company responded and provided information which questioned the
conclusion that the violations occurred. Nevertheless, the USEPA concluded that
several violations existed at the time of the inspection, and on October 3, 2005
issued the facility an order and penalty assessment in the amount of $189. On
October 31,
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19
2005 the Company filed a request for a hearing and an informal conference to
discuss settlement. Settlement discussions have been on-going as we prepare for
the hearing.
In March 2006, the Company received notice from the United States
Environmental Protection Agency ("USEPA") that two former operating subsidiaries
are considered potentially responsible parties ("PRPs") at the Berry's Creek
Superfund Site, Bergen County, New Jersey. Our operating companies are among
many other PRPs that were listed in the notice. Pursuant to the notice the PRPs
have been asked to perform a remedial investigation and feasibility study of the
Berry's Creek Site. The Company has met with the other PRPs. Both operating
companies joined the groups of PRPs and filed a joint response to the USEPA
agreeing to jointly negotiate to conduct or fund along with other PRPs an
appropriate remedial investigation and feasibility study of the Berry's Creek
Site. At this time it is too early to predict the extent of any liabilities,
consequently we have not recorded any reserves for this matter.
See "Environmental and Safety Regulations and Proceedings" under Item 1 and
Note #19 to the Cambrex Corporation and Subsidiaries Consolidated Financial
Statements with respect to various proceedings involving the Company in
connection with environmental matters. The Company is party to a number of other
proceedings also discussed in Note #19. Management is of the opinion that while
the ultimate liability resulting from those proceedings, as well as
environmental matters, may have a material effect upon the results of operations
in any given year, they will not have a material adverse effect upon the
Company's liquidity nor its financial position.
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
- ---------------
(dollars in thousands, except share data)
20
PART II
ITEM 5 MARKET FOR THE REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES
The Company's common stock, $.10 par value is listed on the New York Stock
Exchange (NYSE) under the symbol CBM. The following table sets forth the closing
high and low sales price of the common stock as reported on the NYSE:
<Table>
<Caption>
2005 HIGH LOW
- ---- ------ ------
First Quarter............................................... $26.22 $20.70
Second Quarter.............................................. 21.20 17.51
Third Quarter............................................... 20.96 18.46
Fourth Quarter.............................................. 19.41 16.88
</Table>
<Table>
<Caption>
2004 HIGH LOW
- ---- ------ ------
First Quarter............................................... $28.10 $24.18
Second Quarter.............................................. 27.25 21.64
Third Quarter............................................... 24.69 20.59
Fourth Quarter.............................................. 27.10 21.70
</Table>
As of April 30, 2006, the Company estimates that there were approximately
2,561 beneficial holders of the outstanding common stock of the Company.
The quarterly dividend on common stock was $0.03 for 2005 and 2004.
2005 EQUITY COMPENSATION TABLE
The following table provides information as of December 31, 2005 with
respect to shares of common stock that may be issued under the Company's
existing equity compensation plans.
<Table>
<Caption>
COLUMN (A) COLUMN (B) COLUMN (C)
-------------------- -------------------- --------------------
NUMBER OF SECURITIES
REMAINING FOR FUTURE
NUMBER OF SECURITIES ISSUANCE UNDER
TO BE ISSUED UPON WEIGHTED AVERAGE EQUITY COMPENSATION
EXERCISE OF EXERCISE PRICE OF PLANS (EXCLUDING
OUTSTANDING OPTIONS, OUTSTANDING OPTIONS, SECURITIES REFLECTED
PLAN CATEGORY WARRANTS AND RIGHTS WARRANTS AND RIGHTS IN COLUMN (A))
- ------------- -------------------- -------------------- --------------------
Equity compensation plans approved by
security holders....................... 3,562,847 $26.08 577,746
Equity compensation plans not approved by
security holders....................... 458,400 $30.64 37,434
--------- -------
Total.................................... 4,021,247 $26.60 615,180
========= =======
</Table>
- ---------------
(dollars in thousands, except share data)
21
ITEM 6 SELECTED FINANCIAL DATA
The following selected consolidated financial data of the Company for each
of the years in the five year period ended December 31, 2005 are derived from
the audited financial statements. The consolidated financial statements of the
Company as of December 31, 2005 and December 31, 2004 and for each of the years
in the three year period ended December 31, 2005 and the report of independent
registered public accounting firm thereon are included elsewhere in this annual
report. On November 10, 2003, the Company completed the sale of the Rutherford
Chemicals business. As a result, the businesses comprising the Rutherford
Chemicals segment are being reported as a discontinued operation for all periods
presented. The data presented below should be read in conjunction with the
financial statements of the Company and the notes thereto and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included elsewhere herein.
<Table>
<Caption>
YEARS ENDED DECEMBER 31,
-------------------------------------------------------
2005(1) 2004(2) 2003(3) 2002(4) 2001(5)(6)
--------- -------- -------- -------- ----------
INCOME DATA:
Gross sales............................ $ 451,986 $439,115 $405,591 $394,430 $356,555
Net revenues........................... 455,097 443,657 410,644 399,066 356,830
Gross profit........................... 161,337 170,740 162,406 177,718 157,972
Selling, general and administrative.... 107,610 102,769 95,117 85,762 80,099
Research and development............... 22,331 19,659 17,123 15,794 17,379
Impairment and other charges........... 107,177 48,720 11,342 4,238 2,022
Operating (loss)/profit................ (75,781) (408) 38,824 71,924 58,472
Interest expense, net.................. 10,815 10,950 11,840 11,264 10,602
Other expense/(income), net............ 40 73 139 7,890 (323)
(Loss)/income before income taxes...... (86,636) (11,431) 26,845 52,770 48,193
Provision for taxes.................... 23,822 14,461 26,600 12,815 13,205
(Loss)/income from continuing
operations........................... (110,458) (25,892) 245 39,955 34,988
Loss from discontinued operations...... -- (978) (54,308) (6,546) (9,676)
Net (loss)/income...................... (110,458) (26,870) (54,063) 33,409 25,312
EARNINGS PER SHARE DATA:
(Loss)/earnings per common share
(basic):
(Loss)/income from continuing
operations........................ $ (4.18) $ (0.99) $ 0.01 $ 1.54 $ 1.36
Loss from discontinued operations.... $ -- $ (0.04) $ (2.11) $ (0.25) $ (0.37)
Net (loss)/income.................... $ (4.18) $ (1.03) $ (2.10) $ 1.29 $ 0.99
(Loss)/earnings per common share
(diluted):
(Loss)/income from continuing
operations........................ $ (4.18) $ (0.99) $ 0.01 $ 1.51 $ 1.32
Loss from discontinued operations.... $ -- $ (0.04) $ (2.08) $ (0.25) $ (0.36)
Net (loss)/income.................... $ (4.18) $ (1.03) $ (2.07) $ 1.26 $ 0.96
Weighted average common share
outstanding:
Basic................................ 26,456 26,094 25,775 25,954 25,648
Diluted.............................. 26,456 26,094 26,174 26,520 26,495
</Table>
- ---------------
(dollars in thousands, except share data)
22
<Table>
<Caption>
YEARS ENDED DECEMBER 31,
-------------------------------------------------------
2005(1) 2004(2) 2003(3) 2002(4) 2001(5)(6)
--------- -------- -------- -------- ----------
DIVIDENDS PER COMMON SHARE............. $ 0.12 $ 0.12 $ 0.12 $ 0.12 $ 0.12
BALANCE SHEET DATA: (AT END OF PERIOD)
Working capital...................... $ 137,380 $182,915 $138,458 $154,324 $159,224
Total assets......................... 612,472 791,985 778,503 835,283 818,375
Long-term obligations................ 186,819 226,187 212,369 267,434 312,524
Total stockholders' equity........... 243,251 391,316 396,630 410,954 345,098
</Table>
- ---------------
(1) Results include pre-tax charges for goodwill impairment of $76,385,
long-lived asset impairment charge of $30,792 and a tax benefit related to
the long-lived asset impairment of $1,673, recorded within the provision for
income taxes in the Biopharma and Human Health segments. Results also
include pre-tax charges for executive severance of $4,223 and an increase in
an environmental reserve of $1,300 recorded in operating expenses and a tax
benefit due to a favorable Swedish court decision of $3,329 and an increase
in valuation allowances against domestic deferred tax assets totaling
$16,926 within the provision for income taxes.
(2) Results include a pre-tax charge of $48,720 for goodwill impairment related
to the Baltimore reporting unit of the Biopharma segment.
(3) Results include a pre-tax charge of $11,342 recorded in operating expenses
for the settlement of certain class action lawsuits involving Mylan
Laboratories and the establishment of valuation allowances against net
domestic deferred tax assets totaling $21,487 within the provision for
income taxes.
(4) Results include a pre-tax charge of $4,238 for asset impairment and
severance related to the closure of a small manufacturing facility and a
$7,344 pre-tax charge for investment impairments recorded in other expense.
(5) Includes the results of Cambrex Bio Science Baltimore, Inc. from the date of
acquisition effective June 2001 and the results of Cambrex Bio Science
Hopkinton, Inc. from the date of acquisition effective October 2001.
(6) Results include a pre-tax charge of $2,022 related to the closure of a small
manufacturing facility and $2,000 for inventory write-offs in the
Bioproducts segment.
- ---------------
(dollars in thousands, except share data)
23
ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
EXECUTIVE OVERVIEW
The Company's business consists of three segments -- Bioproducts, Biopharma
and Human Health. The Bioproducts segment consists of research products and
services and therapeutic applications. The Biopharma segment consists of the
Company's biopharmaceutical process development and manufacturing business. The
Human Health segment is primarily comprised of active pharmaceutical ingredients
derived from organic chemistry and pharmaceutical intermediates.
During 2005, Cambrex achieved varying levels of success in its business
segments. The Bioproducts segment attained an important breakthrough with its
third consecutive year of 10% or greater sales growth. The number of Biopharma
development projects increased 53% in 2005 but this achievement was overshadowed
by the continuing challenge to restore profitability to the business and manage
project timing. In the Human Health segment, a record number of new development
projects and higher volumes of branded APIs and intermediates were offset by
lower volumes and pricing for generic APIs.
The following significant events occurred during 2005 which affected
reported results:
- A $76,385 goodwill impairment and a $30,792 charge to reduce the carrying
value of long-lived assets were recorded in operating expenses and a tax
benefit of $1,673 related to the long-lived asset impairment charge was
recorded within the provision for income taxes. The goodwill and asset
impairments were recorded as the result of lower long-term profitability
projections for the Biopharma segment and two small European reporting
units in the Human Health segment.
- A $16,926 valuation allowance recorded within the income tax provision to
write down the carrying value of certain U.S. tax assets that had
previously been preserved by tax strategies. The valuation allowance
results from the Company's recent history of domestic losses and its
short-term projections for continued domestic losses.
- A $4,223 charge recorded within administrative expenses primarily due to
the severance agreement with the Company's former CEO.
- A tax benefit of $3,329 due to a favorable Swedish court decision.
- An environmental charge of $1,300 for the expected cost of environmental
remediation of a former site.
Sales in 2005 increased 2.9% to $451,986, including a 0.4% unfavorable
impact resulting from foreign currency, from $439,115 in 2004 due to higher
sales in the Bioproducts and Human Health segments partially offset by lower
sales in the Biopharma segment.
Gross margins in 2005 decreased to 35.7% from 38.9% in 2004 due to lower
Bioproducts margins resulting from increased production labor to support current
and future activity levels, lower Biopharma margins caused by higher fixed plant
costs and adverse product mix and lower Human Health margins due to unfavorable
absorption and lower pricing. Foreign currency unfavorably impacted gross margin
by 0.1 percentage point in 2005.
The Company recorded tax expense of $23,822 in 2005 compared to $14,461 in
2004. The tax rate in 2005 was (27.5)% compared to (126.5)% in 2004. The tax
rate variations result from valuation allowances recorded in 2005 on the tax
benefit from pre-tax losses in the U.S. and Ireland due to the Company's recent
history of losses in these jurisdictions. The 2005 tax expense also includes a
Swedish tax benefit of $3,329 resulting from a favorable court decision and a
benefit from the settlement of interest rate swaps previously deferred in
accumulated other comprehensive income of $2,368.
The Company reported a net loss of $110,458, or $4.18 per diluted share in
2005, compared to a net loss of $26,870, or $1.03 per diluted share, in 2004.
- ---------------
(dollars in thousands, except share data)
24
CRITICAL ACCOUNTING POLICIES
The Company's critical accounting policies are those that require the most
subjective or complex judgments, often as a result of the need to make estimates
about the effect of matters that are inherently uncertain. The Company bases its
estimates on historical experience and on other various assumptions that are
deemed reasonable by management under each applicable circumstance. Actual
results or amounts could differ from estimates and the differences could have a
material impact on the consolidated financial statements. A discussion of the
Company's critical accounting policies, the underlying judgments and
uncertainties affecting their application and the likelihood that materially
different amounts would be reported under different conditions or using
different assumptions, is as follows:
Revenue Recognition
Revenues in the Bioproducts and Human Health segments are generally
recognized when title to products and risk of loss are transferred to customers.
Additional conditions for recognition of revenue are that collection of sales
proceeds is reasonably assured and the Company has no further performance
obligations.
Sales terms to certain customers include remittance of discounts if certain
conditions are met. Additionally, sales are generally made with a limited right
of return under certain conditions. The Company estimates these rebates and
estimated returns at the time of sale based on the terms of agreements with
customers and historical experience and recognizes revenue net of these
estimated costs which are classified as allowances and rebates.
Some contracts in the Bioproducts and Biopharma segments are based on time
and materials and revenue for those are recognized as services are performed.
For contracts that contain milestone based payments the Company utilizes the
EITF-91-6 "Revenue Recognition of Long-term Power Sales Contracts" model for
recording revenue. Under this method, revenue is based on the cost of efforts
(since contract commencement) up to the reporting date, divided by the total
estimated contractual cost (from the contract commencement to the end of the
development arrangement), multiplied by the total expected contractual payments
under the arrangement. However, revenue is limited to the amount of
nonrefundable cash payments received or contractually receivable at the
reporting date.
In each of the segments the Company has certain contracts that contain
multiple deliverables. These deliverables often include process development
services and commercial production. The Company follows the guidance contained
in EITF 00-21 "Accounting for Revenue Arrangements with Multiple Deliverables".
Revenue for each element is recognized when delivered to the customer based on
the fair value of the element as determined based on sales price when sold
separately.
Amounts billed in advance are recorded as deferred revenue within accrued
liabilities on the balance sheet.
Asset Valuations and Review for Potential Impairments
In accordance with FAS 144, our review of long-lived assets, principally
fixed assets and other amortizable intangibles, requires us to estimate the
undiscounted future cash flows generated from these assets whenever events or
changes in circumstances indicate that the carrying value may not be fully
recoverable. If undiscounted cash flows are less than carrying value, the
long-lived assets are written down to fair value.
Our review of the carrying value of goodwill and indefinite lived
intangibles is done annually or whenever events or changes in circumstances
indicate that the carrying value may not be fully recoverable in accordance with
FAS 142 utilizing a two-step process. In the first step, the fair value of the
reporting units is determined using a discounted cash flow model and compared to
the carrying value. If such analysis indicates that impairment may exist, we
then estimate the fair value of the other assets and liabilities utilizing
appraisals and discounted cash flow analyses to calculate an impairment charge.
- ---------------
(dollars in thousands, except share data)
25
The determination of fair value for both FAS 144 and FAS 142 is judgmental
in nature and involves the use of significant estimates and assumptions,
including projected future cash flows primarily based on operating plans,
discount rates, determination of appropriate market comparables and perpetual
growth rates. These estimates and assumptions could have a significant impact on
whether or not an impairment charge is recognized and the magnitude of any such
charge.
Environmental and Litigation Contingencies
The Company periodically assesses the potential liabilities related to any
lawsuits or claims brought against us. See Note #19 in the accompanying
financial statements for a discussion of our current environmental and
litigation matters, reserves recorded and our position with respect to any
related uncertainties. While it is typically very difficult to determine the
timing and ultimate outcome of these actions, the Company uses its best judgment
to determine if it is probable that the Company will incur an expense related to
a settlement for such matters and whether a reasonable estimation of such
probable loss, if any, can be made. If probable and estimable, the Company
accrues for the costs of clean-up, settlements and legal fees. If the aggregate
amount of the liability and the timing of the payment is fixed or reasonably
determinable, the Company discounts the amount to reflect the time value of
money. Given the inherent uncertainty related to the eventual outcome of
litigation and environmental matters, it is possible that all or some of these
matters may be resolved for amounts materially different from any provisions
that the Company may have made with respect to their resolution.
Income Taxes
The Company applies an asset and liability approach to accounting for
income taxes. Deferred tax assets and liabilities are recognized for the
expected future tax consequences of temporary differences between the financial
statement and tax basis of assets and liabilities using enacted tax rates in
effect for the year in which the differences are expected to reverse. The
recoverability of deferred tax assets is dependent upon the Company's assessment
that it is more likely than not that sufficient future taxable income will be
generated in the relevant tax jurisdiction to utilize the deferred tax asset. In
the event the Company determines that future taxable income will not be
sufficient to utilize the deferred tax asset, a valuation allowance is recorded.
The Company's valuation allowances primarily relate to net operating loss
carryforwards, foreign tax credits, and alternative minimum tax credits in the
U.S., where profitability is uncertain and net operating loss carryforwards in
certain state and foreign jurisdictions with little or no history of generating
taxable income or where future profitability is uncertain.
Employee Benefit Plans
The Company provides a range of benefits to employees and retired
employees, including pensions, post-retirement, post employment and health care
benefits. The Company records annual amounts relating to these plans based on
calculations, which include various actuarial assumptions, including discount
rates, assumed rates of return, compensation increases, turnover rates, and
health care cost trend rates. The Company reviews its actuarial assumptions on
an annual basis and makes modifications to the assumptions based on current
rates and trends when it is deemed appropriate to do so. The effect of the
modifications is generally recorded and amortized over future periods. The
Company believes that the assumptions utilized for recording obligations under
its plans are reasonable.
The discount rate used to measure pension liabilities and costs is selected
by projecting cash flows associated with plan obligations which were matched to
a yield curve of high quality bonds. The Company then selected the single rate
that produces the same present value as if each cash flow were discounted by the
corresponding spot rate on the yield curve.
- ---------------
(dollars in thousands, except share data)
26
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain items
from the selected consolidated financial information as a percentage of gross
sales:
<Table>
<Caption>
YEARS ENDED DECEMBER 31,
--------------------------
2005 2004 2003
------ ------ ------
Gross sales....................................... 100.0% 100.0% 100.0%
Net revenues...................................... 100.7 101.0 101.2
Gross profit...................................... 35.7 38.9 40.0
Selling, general and administrative expenses...... 23.9 23.4 23.4
Research and development expenses................. 4.9 4.5 4.2
Impairment and other charges...................... 23.7 11.1 2.8
Operating (loss)/profit........................... (16.8) (0.1) 9.6
Interest expense, net............................. 2.4 2.5 2.9
Provision for income taxes........................ 5.3 3.3 6.6
(Loss)/income from continuing operations.......... (24.4) (5.9) 0.1
Loss on discontinued operations................... -- (0.2) (13.4)
Net loss.......................................... (24.4) (6.1) (13.3)
</Table>
The following tables show the gross sales of the Company's three segments,
in dollars and as a percentage of the Company's total gross sales for the years
ended December 31, 2005, 2004 and 2003, as well as the gross profit by product
segment for 2005 and 2004.
<Table>
<Caption>
YEARS ENDED DECEMBER 31,
--------------------------------
2005 2004 2003
-------- -------- --------
GROSS SALES
Bioproducts............................................ $149,498 $136,108 $119,298
Biopharma.............................................. 41,698 43,270 44,128
Human Health........................................... 260,790 259,737 242,165
-------- -------- --------
Total Gross Sales........................................ $451,986 $439,115 $405,591
======== ======== ========
Total Net Revenues....................................... $455,097 $443,657 $410,644
======== ======== ========
Total Gross Profit....................................... $161,337 $170,740 $162,406
======== ======== ========
GROSS SALES DISTRIBUTION
Bioproducts............................................ 33.1% 31.0% 29.4%
Biopharma.............................................. 9.2 9.9 10.9
Human Health........................................... 57.7 59.1 59.7
-------- -------- --------
Total Gross Sales Distribution........................... 100.0% 100.0% 100.0%
======== ======== ========
</Table>
2005-2004 GROSS SALES & GROSS PROFIT BY PRODUCT SEGMENT
<Table>
<Caption>
2005 2004
------------------------------ ------------------------------
GROSS GROSS GROSS GROSS GROSS GROSS
SALES PROFIT PROFIT % SALES PROFIT PROFIT %
-------- -------- -------- -------- -------- --------
Bioproducts...................... $149,498 $ 77,908 52.1% $136,108 $ 74,930 55.1%
Biopharma........................ 41,698 (3,811) (9.1) 43,270 4,880 11.3
Human Health..................... 260,790 87,240 33.5 259,737 90,930 35.0
-------- -------- -------- --------
Total............................ $451,986 $161,337 35.7% $439,115 $170,740 38.9%
======== ======== ======== ========
</Table>
- ---------------
(dollars in thousands, except share data)
27
2005 COMPARED TO 2004
Gross sales for 2005 increased 2.9% to $451,986 from $439,115 in 2004.
Sales in the Bioproducts and Human Health segments increased compared to 2004,
more than offsetting the decrease in the Biopharma segment. Gross sales were
unfavorably impacted 0.4% due to exchange rates reflecting strength in the U.S.
dollar primarily versus the Euro and Swedish krona.
Gross profit in 2005 was $161,337 compared to $170,740 in 2004. Gross
margin in 2005 decreased to 35.7% from 38.9% in 2004, reflecting lower margins
in all segments.
The following table shows gross sales by geographic area for the years
ended December 31, 2005 and 2004:
<Table>
<Caption>
2005 2004
-------- --------
North America............................................... $204,421 $213,668
Europe...................................................... 219,728 198,540
Asia........................................................ 18,927 17,723
Other....................................................... 8,910 9,184
-------- --------
Total....................................................... $451,986 $439,115
======== ========
</Table>
The Bioproducts Segment gross sales in 2005 of $149,498 were $13,390 or
9.8% above 2004. Bioproducts sales were unfavorably impacted 0.1% due to
exchange rates reflecting a stronger U.S. dollar. The increased sales, before
the impact of foreign currency, are primarily due to higher sales in both the
research products and therapeutics applications categories including cell
biology, cell therapy, rapid microbial detection, testing services, serum, media
and assays due to stronger demand, higher pricing and the addition of new
customers.
Bioproducts gross margins decreased to 52.1% in 2005 from 55.1% in 2004 due
primarily to increased production labor to support current and future activity
levels and higher utilities partially offset by higher sales volume and
increased pricing in most product categories.
The Biopharma Segment gross sales in 2005 of $41,698 were $1,572 or 3.6%
below 2004 reflecting lower suite and process development revenues partially
offset by higher reimbursed materials and labor fees. Foreign currency had no
impact on Biopharma sales.
Biopharma gross margins decreased to (9.1%) in 2005 from 11.3% in 2004 due
primarily to a higher percentage of revenues from reimbursed materials which
have virtually no profit margin, lower revenues and higher production costs.
The Human Health Segment gross sales in 2005 of $260,790 increased $1,053
or 0.4% above 2004. Human Health sales were unfavorably impacted 0.7% due to
exchange rates reflecting a stronger U.S. dollar. The increase in sales is due
mainly to stronger demand of a gastrointestinal API, nicotine polacrilex resin
(used in smoking cessation products), a pharmaceutical intermediate used for
end-stage kidney treatment and higher sales of a diuretic API. These sales were
partially offset by lower sales of certain central nervous system and
cardiovascular APIs due to increasing competition resulting in lower volumes
sold and lower sales of a gastrointestinal API and crop additive.
Human Health gross margins decreased to 33.5% in 2005 from 35.0% in 2004
due primarily to higher production costs, lower pricing on certain APIs, and
unfavorable impact of foreign currency partially offset by favorable product mix
and increased sales volume.
Selling, general and administrative expenses of $107,610 or 23.9% of gross
sales in 2005 increased from $102,769 or 23.4% in 2004. Sales and marketing
expenses increased primarily due to additional sales and marketing personnel
within the Bioproducts segment. Higher administrative costs are primarily due to
executive severance, increased personnel and higher environmental costs related
to a former site, partially offset by lower valuation of stock appreciation
rights and legal expenses.
- ---------------
(dollars in thousands, except share data)
28
Research and development expenses of $22,331 were 4.9% of gross sales in
2005, compared to $19,659 or 4.5% of gross sales in 2004. The increase primarily
reflects investments in new product technologies for pathogen testing and higher
custom development costs.
During the fourth quarter of 2005 the Company performed an impairment
assessment of long-lived assets, which includes amortizable intangible assets as
well as property, plant and equipment. As a result of lower long-term
profitability projections, the Company determined that the sum of the
undiscounted expected future operating cash flows were less than the carrying
value of the related assets. The Company recorded an impairment charge for
long-lived assets in the fourth quarter of $14,433 in the Biopharma segment and
$16,359 in the Human Health segment to write-down these assets to their fair
value as determined primarily based on appraisals. During the performance of the
annual goodwill impairment test in the fourth quarter of 2005, the Company
determined that the goodwill of four reporting units was impaired utilizing the
steps as outlined in Critical Accounting Policies, "Asset Valuation and Review
for Potential Impairment." The goodwill impairment charge recorded in the fourth
quarter of 2005 was $67,950 in the Biopharma segment and $8,435 in the Human
Health segment. The goodwill impairment charge is primarily due to lower long
term profitability projections due to current market factors. In the third
quarter of 2004, the Company recorded an impairment charge of $48,720 to reduce
the carrying value of goodwill in the Biopharma segment.
Operating loss in 2005 was $75,781 compared to $408 in 2004. The results
reflect lower gross margins in all segments and higher operating expenses. In
addition to the impairment charges, 2005 results include a charge for executive
severance of $4,223 and a $1,300 charge for an environmental remediation reserve
at a former site. The 2004 results include the $48,720 charge for the goodwill
impairment discussed above, $2,863 of income due to early termination of a
Bioproducts customer contract and an unrelated $1,000 charge associated with the
reorganization and related workforce reduction at a European facility.
Net interest expense of $10,815 in 2005 decreased $135 from 2004. Average
debt balance, year over year, was slightly lower in 2005, while the average
interest rate was 5.5% in 2005 and 2004.
The Company recorded tax expense of $23,822 in 2005 compared to $14,461 in
2004. The tax expense for 2005 includes a $16,926 valuation allowance to write
down the carrying value of certain U.S. tax assets that had been previously
preserved by tax strategies. This valuation allowance results from the Company's
recent history of domestic losses and its short-term projections for continued
domestic losses. Since 2003, the Company has maintained a full valuation
allowance on the tax benefits arising from domestic pre-tax losses. The Company
has recorded a valuation allowance of $120,022 on certain foreign and domestic
net deferred tax assets as of December 31, 2005. The majority of the 2004 tax
expense represents taxes on international profits.
The Company will continue to record a full valuation allowance on its
domestic net deferred tax assets and indefinite lived intangibles until an
appropriate level of domestic profitability is sustained or tax strategies can
be developed that would enable the Company to conclude that it is more likely
than not that a portion of the domestic net deferred assets would be realized.
If the Company continues to report pre-tax losses in the United States, income
tax benefits associated with those losses will not be recognized and, therefore,
those losses would not be reduced by such income tax benefits. The carryforward
periods for foreign tax credits, research and experimentation tax credits, net
operating losses, and the federal alternative minimum tax credits are 10 years,
20 years, 20 years and an indefinite period, respectively. As such, improvements
in domestic pre-tax income in the future may result in these tax benefits
ultimately being realized. However, there is no assurance that such improvements
will be achieved.
Loss from continuing operations in 2005 was $110,458, or $4.18 per diluted
share, versus $25,892, or $0.99 per diluted share in 2004.
2004 COMPARED TO 2003
Gross sales for 2004 increased 8.3% to $439,115 from $405,591 in 2003.
Sales in the Bioproducts and Human Health segments increased compared to 2003
more than offsetting the decrease in the Biopharma
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(dollars in thousands, except share data)
29
segment. Gross sales were favorably impacted 4.5% due to the exchange rates
reflecting the weakness in the U.S. dollar primarily versus the Euro and Swedish
krona.
Gross profit in 2004 was $170,740 compared to $162,406 in 2003. Gross
margin in 2004 decreased to 38.9% from 40.0% in 2003, reflecting lower margins
in the Biopharma and Human Health segments partially offset by higher margins in
the Bioproducts segment.
The following table shows gross sales by geographic area for the years
ended December 31, 2004 and 2003:
<Table>
<Caption>
2004 2003
-------- --------
North America............................................... $213,668 $206,079
Europe...................................................... 198,540 173,035
Asia........................................................ 17,723 16,401
Other....................................................... 9,184 10,076
-------- --------
Total....................................................... $439,115 $405,591
======== ========
</Table>
The Bioproducts Segment gross sales in 2004 of $136,108 were $16,810 or
14.1% above 2003. Bioproducts sales were favorably impacted 4.0% due to exchange
rates reflecting a weaker U.S. dollar. The increased sales before the impact of
foreign currency are primarily due to higher sales across most product
categories including research products, endotoxin detection products,
bioservices sales and process development products due to stronger demand,
higher pricing, new products and customers and investments in sales and
marketing. These higher sales were partially offset by lower sales in
biotherapeutic serum mainly due to timing of shipments and stronger sales in
2003.
The Bioproducts segment gross margins increased primarily due to higher
sales volume, increased pricing in most product categories, lower bad debt
reserves due to favorable collections and favorable impact of foreign currency
partly offset by higher costs for raw materials.
The Biopharma Segment gross sales in 2004 of $43,270 were $858 or 1.9%
below 2003. The sales decrease primarily reflects reduced billings in our
biopharmaceutical manufacturing business driven by the completion or timing of
projects and a change in contract terms from time and material to milestone
payments. This decrease was partially offset by higher reimbursable materials
revenue due to timing of current projects. Foreign currency had no impact on
Biopharma sales.
The Biopharma segment gross margins were down significantly compared to the
prior year due to higher production costs, increased fixed costs associated with
the addition of the 2800 liter fermentation suite (a new suite which will
increase the production capabilities in the facility) and higher reimbursable
materials revenue which has very low margins.
The Human Health Segment gross sales in 2004 of $259,737 were $17,572 or
7.3% above 2003. Human Health sales were favorably impacted 5.6% due to exchange
rates reflecting a weaker U.S. dollar. Excluding the currency impact, the
increase in sales is due mainly to higher sales of custom development products,
a pharmaceutical intermediate used for end-stage kidney treatment, higher sales
of cardiovascular, gastrointestinal and Alzheimer treatment APIs, and higher
sales of amphetamines due to higher volumes. These sales were partially offset
by lower sales of central nervous system APIs due to increasing competition
resulting in lower volumes sold.
The Human Health segment gross margins decreased due to pricing pressures
on APIs and other fine custom chemicals, unfavorable impact of foreign currency
and higher production costs partially offset by increased sales volume and
favorable product mix.
Selling, general and administrative expenses of $102,769 or 23.4% as a
percentage of gross sales in 2004 increased from $95,117 or 23.4% in 2003. Sales
and marketing expenses increased primarily due to additional
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(dollars in thousands, except share data)
30
sales and marketing personnel in our Human Health and Bioproducts segments and
the impact of foreign currency exchange. Higher administrative costs are
primarily due to the impact of currency translation due to the weaker U.S.
dollar, regulatory compliance costs associated with the Sarbanes-Oxley Act and
higher information technology, legal and environmental costs, partially offset
by lower medical claims, the vesting of stock appreciation rights in the fourth
quarter 2003 and lower pension expense.
Research and development expenses of $19,659 were 4.5% of gross sales in
2004, compared to $17,123 or 4.2% of gross sales in 2003. The increase primarily
reflects investments in new product technologies for pathogen testing, higher
custom development costs and the impact of foreign currency exchange partially
offset by decreased spending for endotoxin detection technologies.
The 2004 results include the $48,720 charge for the goodwill impairment
discussed above, $2,863 of income due to early termination of a Bioproducts
customer contract and an unrelated $1,000 charge associated with the
reorganization and related workforce reduction at a European facility.
The 2003 results include a charge of $11,342 (discounted to the present
value of the five year pay-out) related to an agreement reached with Mylan
Laboratories under which Cambrex will contribute $12,415 to the settlement of
consolidated litigation brought by a class of direct purchasers. In exchange,
Cambrex received from Mylan a release and full indemnity against future costs or
liabilities in related litigation brought by the purchasers, as well as
potential future claims related to this matter.
The operating loss in 2004 was $408 compared to income of $38,824 in 2003.
The results reflect lower gross margins in the Biopharma and Human Health
segments partially offset by higher margins in the Bioproducts segment, the
$48,720 charge for the goodwill impairment discussed above and higher operating
expenses. The 2003 operating profit includes the $11,342 charge for the Mylan
settlement discussed above.
Net interest expense of $10,950 in 2004 decreased $890 from 2003. The 2004
net interest expense was reduced by interest income accrued on an income tax
refund, while in 2003 interest expense also included a write off of deferred
charges in 2003 associated with the 364-day renewable senior revolving credit
facility that was not renewed. Average debt balance, year over year, was
virtually unchanged, while the average interest rate, net of the items discussed
above, was 5.5% in 2004 versus 4.8% in 2003. The higher average rate in 2004 was
due to the full year impact of $100 million of privately placed long-term debt,
which carries a fixed rate that is currently higher than the Company's revolving
credit facility and the impact of slightly higher variable interest rates on the
revolver.
The Company recorded tax expense of $14,461 in 2004 compared to $26,600 in
2003. During 2003, the Company concluded that $21,487 of domestic deferred tax
assets were deemed unlikely to be realized, and as such, valuation allowances
for this amount were recorded against these assets. Since that time, the Company
has maintained a full valuation allowance on any domestic net deferred tax
assets created since 2003 and as such no tax benefit has been recognized for
domestic pre-tax losses. Accordingly, for the year ended December 31, 2004 a
valuation allowance of $24,047 was recorded against the Company's domestic net
deferred tax assets, including amounts related to the goodwill impairment
charge. The majority of the 2004 tax expense represents taxes on international
profits.
The loss from continuing operations in 2004 was $25,892, or $0.99 per
diluted share versus income of $245, or $0.01 per diluted share in 2003. The
2004 loss from continuing operations includes a goodwill impairment charge of
$48,720 discussed above. The 2003 income from continuing operations includes a
charge of approximately $21,487 for the deferred tax valuation allowance and an
$11,342 charge for the Mylan settlement both discussed above.
LIQUIDITY AND CAPITAL RESOURCES
During 2005 cash and cash equivalents on hand decreased $45,600 to $45,932.
The stronger U.S. dollar negatively impacted the translated cash balances by
$9,861. During 2005, the Company generated cash flows from operations totaling
$42,435, a decrease of $6,298 versus the same period a year ago. The decrease in
cash
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(dollars in thousands, except share data)
31
flows generated from operations in 2005 versus 2004 is due primarily to a
decrease in net income, excluding the impairment and tax valuation allowance
charges recorded against certain deferred tax assets, an increase in inventories
resulting from increased production based on forecasted requirements and an
increase in accounts receivable due to higher sales volume in the fourth quarter
of 2005 versus the fourth quarter of 2004. These decreases were partially offset
by the timing of foreign tax payments and of payments made to Rutherford
Chemicals in 2004.
Capital expenditures from continuing operations were $40,307 in 2005 as
compared to $39,480 in 2004. Part of the funds in 2005 were used for capital
improvements to existing facilities, a new warehouse and purification lab at a
Human Health facility, cell therapy manufacturing capabilities at a Bioproducts
facility and suite improvements at Biopharma manufacturing plants. In 2004, the
funds were primarily used for suite improvements at a Biopharma manufacturing
plant, cell therapy manufacturing capabilities, upgrades to powder media
facilities and a large scale media preparation suite at our Bioproducts
facilities and new research and development labs at a Human Health facility.
During 2005, the Company repatriated approximately $92,000 as a dividend
from its foreign subsidiaries pursuant to the American Jobs Creation Act of
2004, approximately $36,000 of which was from proceeds of a European-based loan,
and the balance from foreign subsidiary cash on hand. The Company used the
repatriated cash primarily to pay down domestic debt.
Cash flows used in financing activities in 2005 of $38,535 include a net
reduction of debt of $39,210 and dividends paid of $3,176 partially offset by
proceeds from stock options exercised of $3,906. In 2004 the Company increased
borrowings by $13,510, generated proceeds from the exercise of stock options of
$6,284 and paid dividends of $3,113.
In October 2005, the Company entered into a $277,500 five-year Syndicated
Senior Revolving Credit Facility ("5-Year Agreement"), which expires in October
2010.
The 5-Year Agreement allows the Company to choose among various interest
rate options and to specify the portion of the borrowing to be covered by
specific interest rates. Under the 5-Year Agreement the interest rate options
available to the Company are the following: (i) LIBOR plus an applicable margin
that ranges from .475% to .85%, (ii) higher of U.S. Prime Rate or Federal Funds
Rate plus .5% or (iii) Money Market rate as quoted by the Administrative Agent
of the Agreement. The applicable margin is based upon the ratio of consolidated
funded indebtedness to consolidated earnings before interest, taxes,
depreciation and amortization ("EBITDA") (as defined in the 5-Year Agreement,
"Leverage Rates"). The Company also pays a facility fee between .15% to .275% on
the entire credit facility which is based upon the leverage ratio. The 5-Year
Agreement is subject to financial covenants requiring the Company to maintain
certain levels of interest coverage ratio, leverage ratios and limitations on
indebtedness. The Company complied with all covenants in this 5-Year Agreement
during 2005. The Company is required to provide audited financial statements to
its lenders under the 5-Year Agreement within 100 days after its fiscal
year-end. The Company has received a waiver from its lenders through June 9,
2006 relating to this requirement for the year ended December 31, 2005.
The 5-Year Agreement is collateralized by dividend and distribution rights
associated with a pledge of a portion of stock that the Company owns in a
foreign holding company. This foreign holding company owns a majority of the
Company's non-U.S. operating subsidiaries.
As of December 31, 2005, there was $81,943 outstanding and $195,557 undrawn
under the 5-Year Agreement. Of the undrawn amount, $106,358 was available to be
borrowed as of December 31, 2005 due to limits established in the 5-Year
Agreement.
As of December 31, 2005, the Company had outstanding two Senior notes, a
$75,000 7-year note due in June 2010 with a rate of 5.31%, and a $25,000 10-year
note due in October 2013 with an annual rate of 7.05%. These Senior notes ranked
equal with the Company's 5-Year Agreement. On January 27, 2006, the Company
elected to prepay these Senior notes with funds provided by borrowing under the
5-Year Agreement. An expense of $5,272 will be recorded during the first quarter
of 2006 related to a make whole payment of $4,809
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(dollars in thousands, except share data)
32
paid to the Senior note holders concurrent with the January 27, 2006 payment,
and the related acceleration of $463 of unamortized origination fees. The
undrawn amount under the 5-Year Agreement was $95,643 as of January 27, 2006, of
which the entire amount was available to be borrowed at that time.
The 2005 and 2004 weighted average interest rate for long-term bank debt
was 5.5%.
CONTRACTUAL OBLIGATIONS
At December 31, 2005, our contractual obligations with initial or remaining
terms in excess of one year were as follows:
<Table>
<Caption>
TOTAL 2006 2007 2008 2009 2010+
-------- ------- ------- ------- ------- --------
Long Term Debt,
including Capital
Leases............. $188,290 $ 1,471 $ 1,731 $ 1,502 $ 1,595 $181,991
Interest on Debt*.... 49,581 10,630 10,519 10,519 10,472 7,441
Operating Leases..... 23,072 4,607 4,418 3,917 3,630 6,500
Purchase
Obligations........ 13,417 7,590 1,857 1,015 985 1,970
Mylan Settlement..... 4,800 1,600 1,600 1,600 -- --
-------- ------- ------- ------- ------- --------
Contractual Cash
Obligations........ $279,160 $25,898 $20,125 $18,553 $16,682 $197,902
======== ======= ======= ======= ======= ========
</Table>
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* Amounts include fixed interest under Senior Notes which was refinanced in
January 2006 under the 5-Year Agreement at a variable rate.
See Notes #9, #10 and #18 for additional information regarding our debt and
other commitments.
Management believes that existing sources of capital, together with cash
flows from operations, will be sufficient to meet foreseeable cash flow
requirements. A key to our access to liquidity is the maintenance of our
long-term credit ratings and ability to meet debt covenants to maintain certain
levels of an interest coverage ratio and leverage ratio. The Company met all
covenants related to the 5-Year Agreement during 2005. Any events that change
the status of our ability to meet debt covenants or maintain our credit ratings
could adversely impact our ability to fund operations.
Our forecasted cash flow from future operations may be adversely affected
by various factors including, but not limited to, declines in customer demand,
increased competition, the deterioration in general economic and business
conditions, as well as other factors. See the Risk Factors section of this
document for further explanation of factors that may negatively impact our cash
flows. Any change in the current status of these factors could adversely impact
the Company's ability to fund operating cash flow requirements.
MARKET RISKS
In the normal course of business, the Company uses a variety of techniques
and instruments, including derivatives, as part of its overall risk management
strategy to lower its exposure to market risks arising from adverse changes in
interest rates and foreign currency exchange rates.
Currency Risk Management
The Company's primary market risk relates to exposure to foreign currency
exchange rate fluctuations on transactions entered into by international
operations which are primarily denominated in the U.S. dollar, Euro, Swedish
krona and British pound sterling. The Company currently uses foreign currency
exchange forward contracts to mitigate the effect of short-term foreign exchange
rate movements on the Company's operating results. The notional amount of these
contracts as of December 31, 2005 was $16,741. Unrealized foreign exchange
contract losses do not subject the Company's actual results to risk as gains or
losses on these contracts are undertaken to offset gains or losses on the
transactions that are hedged.
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(dollars in thousands, except share data)
33
With respect to the contracts outstanding at December 31, 2005, a 10%
fluctuation of the local currency over a one-year period would cause $1,690
pre-tax earnings to be at risk. This is based on the notional amount of the
contracts, adjusted for unrealized gains and losses, of $16,906. These
calculations do not include the impact of exchange gains or losses on the
underlying positions that would offset the gains and losses of the derivative
instruments.
Interest Rate Management
As of December 31, 2005, the Company had $100,000 in fixed interest
borrowings (privately placed Notes) and the rest of its borrowings of $81,943
were based on short-term variable interest rates in the new 5-Year Agreement.
With the repayment of the privately placed Notes in January 2006, the
Company's entire bank debt is based on short-term interest rates in the 5-Year
Agreement.
CONTINGENCIES
The Company is subject to various investigations, claims and legal
proceedings covering a wide range of matters that arise in the ordinary course
of its business activities. The Company continually assesses all known facts and
circumstances as they pertain to all legal and environmental matters and
evaluates the need for reserves and disclosures as deemed necessary based on
these facts and circumstances and as such facts and circumstances develop.
Environmental
In connection with laws and regulations pertaining to the protection of the
environment, the Company and/or its subsidiaries is a party to several
environmental proceedings and remediation investigations and cleanups and, along
with other companies, has been named a potentially responsible party for certain
waste disposal sites ("Superfund sites"). Additionally, as discussed in the
"Sale of Rutherford Chemicals" section of this Note, the Company has retained
the liability for certain environmental proceedings, associated with the
Rutherford Chemicals business. Each of these matters is subject to various
uncertainties, and it is possible that some of these matters will be decided
unfavorably against the Company. The resolution of such matters often spans
several years and frequently involves regulatory oversight or adjudication.
Additionally, many remediation requirements are not fixed and are likely to be
affected by future technological, site, and regulatory developments.
Consequently, the ultimate extent of liabilities with respect to such matters,
as well as the timing of cash disbursements cannot be determined with certainty.
In matters where the Company has been able to reasonably estimate its
liability, the Company has accrued for the estimated costs associated with the
study and remediation of Superfund sites not owned by the Company and the
Company's current and former operating sites. These accruals were $6,413 and
$6,247 at December 31, 2005 and December 31, 2004, respectively. The increase in
the accrual is primarily due to estimated remediation costs at the Clifton site
(see below) based on information developed during the third quarter of 2005 of
$1,300 offset by a decrease in a reserve at an international site of $207,
currency fluctuation of $581 and payments of $413. Based upon currently
available information and analysis, the Company's current accrual represents
management's best estimate of what it believes are the probable and estimable
costs associated with environmental proceedings including amounts for legal and
investigation fees where remediation costs may not be estimable at the reporting
date.
As a result of the sale of the Bayonne, New Jersey facility (see "Sale of
Rutherford Chemicals" section of this Note), an obligation to investigate site
conditions and conduct required remediation under the New Jersey Industrial Site
Recovery Act was triggered and the Company has retained the responsibility for
such obligation. The Company completed a Preliminary Assessment of the site and
submitted the preliminary assessment to the New Jersey Department of
Environmental Protection ("NJDEP"). The preliminary assessment identified
potential areas of concern based on historical operations and sampling of such
areas
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(dollars in thousands, except share data)
34
commenced. The Company has completed a second phase of sampling and determined
that a third phase of sampling is necessary to determine the extent of
contamination and any necessary remediation. The results of the completed and
proposed sampling, and any additional sampling deemed necessary, will be used to
develop an estimate of the Company's future liability for remediation costs, if
required. The Company submitted its plan for the third phase of sampling to the
NJDEP during the fourth quarter. The sampling will commence in the next few
months.
In March 2000, the Company completed the acquisition of the Cambrex
Profarmaco Landen facility in Belgium. At the time of acquisition, Cambrex was
aware of certain site contamination and recorded a reserve for the estimated
costs of remediation. This property has been the subject of an extensive
on-going environmental investigation. The investigation has been completed and
the Company concluded that no change to the reserve was necessary based on the
information developed through the investigation. The health risk assessment
related to the site contamination is on-going, and is expected to be completed
in the near future, and the results of such assessment may affect the reserves.
The Company's Cosan subsidiary conducted manufacturing operations in
Clifton, New Jersey from 1968 until 1979. Prior to the acquisition by the
Company, the operations were moved to another location and thereafter Cambrex
purchased the business. In 1997, Cosan entered into an Administrative Consent
Order with the NJDEP. Under the Administrative Consent Order, Cosan is required
to complete an investigation of the extent of the contamination related to the
Clifton site and conduct remediation as may be necessary. During the third
quarter 2005, the Company completed the investigation related to the Clifton
site, which extends to adjacent properties. The results of the investigation
caused the Company to increase its related reserves by $1,300. The Company
submitted the results of the investigation and proposed remedial action plan to
the NJDEP. The increase in the reserves is based on the proposed remedial action
plan. In February 2005, the New Jersey Federal District Court ruled that a
lawsuit claiming property damages against Cosan by the owners of contaminated
property adjacent to the Clifton location could be placed on the active
calendar. Discovery in this matter is ongoing. The outcome of this matter could
also affect the reserves.
In mid-2004 the USEPA conducted a hazardous waste inspection of the
Company's Charles City facility. Thereafter, the USEPA notified the facility of
several alleged violations of the hazardous waste laws related to management of
hazardous waste and requested additional information related to the alleged
violations. The Company responded and provided information which questioned the
conclusion that the violations occurred. Nevertheless, the USEPA concluded that
several violations existed at the time of the inspection, and on October 3, 2005
issued the facility an order and penalty assessment in the amount of $189. On
October 31, 2005 the Company filed a request for a hearing and an informal
conference to discuss settlement. Settlement discussions have been on-going as
we prepare for the hearing.
In March 2006, the Company received notice from the United States
Environmental Protection Agency ("USEPA") that two former operating subsidiaries
are considered potentially responsible parties ("PRPs") at the Berry's Creek
Superfund Site, Bergen County, New Jersey. Our operating companies are among
many other PRPs that were listed in the notice. Pursuant to the notice the PRPs
have been asked to perform a remedial investigation and feasibility study of the
Berry's Creek Site. The Company has met with the other PRPs. Both operating
companies joined the groups of PRPs and filed a joint response to the USEPA
agreeing to jointly negotiate to conduct or fund along with other PRPs an
appropriate remedial investigation and feasibility study of the Berry's Creek
Site. At this time it is too early to predict the extent of any liabilities,
consequently we have not recorded any reserves for this matter.
The Company is involved in other matters where the range of liability is
not reasonably estimable at this time and it is not determinable when
information will become available to provide a basis for recording an accrual,
should an accrual be required. If any of the Company's environmental matters are
resolved in a more unfavorable manner than presently estimated, these matters
either individually or in the aggregate, could have a material adverse effect on
the Company's financial condition, operating results and cash flows when
resolved in a future reporting period.
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35
LITIGATION AND OTHER MATTERS
Mylan Laboratories
In 1998 the Company and its subsidiary Profarmaco S.r.l. (currently known
as Cambrex Profarmaco Milano S.r.l.") ("Profarmaco") were named as defendants
(along with Mylan Laboratories, Inc. ("Mylan") and Gyma Laboratories of America,
Inc., Profarmaco's distributor in the United States) in a proceeding instituted
by the Federal Trade Commission ("FTC") in the United States District Court for
the District of Columbia (the "District Court"). Suits were also commenced by
several State Attorneys General. The suits alleged violations of the Federal
Trade Commission Act arising from exclusive license agreements between
Profarmaco and Mylan covering two APIs. The FTC and Attorneys' General suits
were settled in February 2001, with Mylan (on its own behalf and on behalf of
Profarmaco and Cambrex) agreeing to pay over $140,000 and with Mylan, Profarmaco
and Cambrex agreeing to monitor certain future conduct.
The same parties including the Company and Profarmaco have also been named
in purported class action complaints brought by private plaintiffs in various
state courts on behalf of purchasers of the APIs in generic form, making
allegations similar to those raised in the FTC's complaint and seeking various
forms of relief including treble damages.
In April 2003, Cambrex reached an agreement with Mylan under which Cambrex
would contribute $12,415 to the settlement of litigation brought by a class of
direct purchasers. In exchange, Cambrex and Profarmaco received from Mylan a
release and full indemnity against future costs or liabilities in related
litigation brought by purchasers, as well as potential future claims related to
this matter. In accordance with the agreement $7,615 has been paid through
December 31, 2005, with the remaining $4,800 to be paid over the next three
years. Cambrex recorded an $11,342 charge (discounted to the present value due
to the five year pay-out) in the first quarter of 2003 as a result of this
settlement. As of December 31, 2005 the outstanding balance for this liability
was $4,520.
Vitamin B-3
In May 1998, the Company's subsidiary, Nepera, which formerly operated the
Harriman facility and manufactured and sold niacinamide (Vitamin B-3), received
a Federal Grand Jury subpoena for the production of documents relating to the
pricing and possible customer allocation with regard to that product. In 2000,
Nepera reached agreement with the Government as to its alleged role in Vitamin
B-3 violations from 1992 to 1995. The Canadian government claimed similar
violations. All government suits in the U.S. and Canada have now been concluded.
Nepera has been named as a defendant, along with several other companies,
in a number of private civil actions brought on behalf of alleged purchasers of
Vitamin B-3. The actions seek injunctive relief and unspecified but substantial
damages. All cases have been settled within established reserve amounts.
Settlement documents will be finalized and payments will be made during the next
several months. The balance of the reserves recorded within accrued liabilities
related to this matter was $1,627 as of December 31, 2005.
Litigation in the United States under the U.S. antitrust laws was commenced
some years ago by a group of European purchasers. On motion by the Vitamin B-3
defendants, the District Court dismissed the litigation under the long-standing
rule that foreign purchasers cannot sue in U.S. courts under U.S. antitrust
statutes. Thereafter, the Federal Circuit Court for the District of Columbia
reversed the District Court's decision. The Vitamin B-3 defendants, supported by
the U.S. Department of Justice, appealed to the United States Supreme Court and
oral arguments were heard on April 29, 2004. In June 2004, the United States
Supreme Court ruled that foreign purchasers could not sue in U.S. courts under
U.S. antitrust statutes if the conduct at issue resulted in purely foreign harm.
However, the Court left open potential claims where foreign injuries suffered by
foreign plaintiffs were dependent upon domestic harm resulting from conduct that
violates the U.S. antitrust laws and remanded the matter to the Circuit Court
for further proceedings. In June 2005, the
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(dollars in thousands, except share data)
36
District Court's finding against the plaintiffs was affirmed and the matter
dismissed. During the fourth quarter 2005, the United States Supreme Court
dismissed plaintiff's final appeal. This matter can be considered concluded.
Sale of Rutherford Chemicals
The Company completed the sale of its Rutherford Chemicals business in
November 2003. Under the agreement for the sale ("Purchase Agreement"), the
Company provided standard representations and warranties and included various
covenants concerning the business, operations, liabilities and financial
condition of the Rutherford Chemicals business ("Rutherford Business"). Most of
such representations and warranties survived for a period of thirty days after
the preparation of the audited financial statements for year-end 2004 by the
purchasers of the Rutherford Business ("Buyers"). Therefore, claims for breaches
of such representations would have to be brought during that time frame. Certain
specified representations, warranties and covenants, such as those relating to
employee benefit matters and certain environmental matters, survive for longer
periods and claims under such representations, warranties and covenants could be
brought during such longer periods. Under the Purchase Agreement, the Company
has indemnified the Buyer for breaches of representations, warranties and
covenants. Indemnifications for certain but not all representations and
warranties are subject to a deductible of $750 and a cap at 25 percent of the
purchase price.
Under the Purchase Agreement, the Company has retained the liabilities
associated with existing general litigation matters related to Rutherford
Chemicals, including the Vitamin B-3 matter as stated above. With respect to
certain pre-closing environmental matters, the Company retains the
responsibility for: (i) certain existing matters including violations,
environmental testing for the New York facility incinerator and off-site
liabilities; and (ii) completing the on-going remediation at the New York
facility. Further, as a result of the sale of the Bayonne, New Jersey facility
within Rutherford Chemicals, and as discussed in the Environmental Section
above, the obligation to investigate site conditions and conduct required
remediation under the provisions of the New Jersey Industrial Site Recovery Act
was triggered; and the Company has retained the responsibility for completion of
any such investigation and remediation. With respect to all other pre-closing
environmental liabilities, whether known or unknown, the Buyer is responsible
for the management of potential future matters; however, the Buyer and the
Company may share the costs of associated remediation with respect to such
potential future matters, subject to certain limitations defined in the
agreement for sale. The Company has accrued for exposures which are deemed
probable and estimable.
In March 2005, the Company received a claim from the Buyers claiming breach
of certain representations, warranties and covenants contained in the Purchase
Agreement. In April 2005 the Company responded rejecting the claim. Thereafter,
the Buyers submitted an amended claim. The amended claim alleges breaches of
representations, warranties and covenants covering each of the five operating
sites sold pursuant to the Purchase Agreement and are related primarily to
facility structures, utilities and equipment and alleges damages of $26,407. To
the extent the alleged damages arise from breaches of representations and
warranties, the claim would be subject to a cap of between approximately $14,000
and $16,250, depending on whether certain contingent payments are made, and is
subject to the deductible of $750 which is the responsibility of the Buyers. In
May 2005, the Company responded to the Buyers and rejected the claim entirely.
Management currently believes that the foregoing claims are without merit and
will vigorously defend against the claim. As such, the Company has no reserves
related to this matter.
In September 2005, the Company received a request for indemnity ("September
Notice") from the Buyers related to an arbitration claim filed by a Rutherford
Business customer ("Customer"). The arbitration claim arises from a claimed
breach of a supply agreement that was assigned to and assumed by the Buyers
pursuant to the Purchase Agreement. Thereafter, the Company was also served with
an arbitration claim by the Customer related to the same matter. In the
arbitration claim, the Customer claims $30,000 in damages arising from Buyers'
breach of the supply agreement. The Buyers claim that the September Notice
amends the earlier claims that they filed in March and April 2005, as discussed
above, and that the Customer's claimed breach of the supply agreement should be
treated as part of a breach of a representation, warranty or
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(dollars in thousands, except share data)
37
covenant set forth in the earlier notices. The supply agreement was assigned to
and assumed by the Buyers, and the Company has now been dismissed from the
Customer's arbitration claim. In October 2005, the Company rejected the Buyers'
claim for indemnity under the September Notice in its entirety.
In October 2005, the Company received a notice from the Buyers ("October
Notice") that summarized the claims previously received in March and April 2005,
and included the Buyers' response to the Company's April and May rejection of
the earlier notices. The October Notice also set forth additional claims for
environmental matters related to the Rutherford Business that relate to
environmental matters at each of the five operating sites sold pursuant to the
Purchase Agreement. In December 2005 the Buyers added two additional
environmental claims related to the former operating sites ("December Notices").
The Company has now responded to the October and December Notices disputing the
environmental claims on various grounds, including that the Company believes
most claims relate to Buyers' obligations under the Purchase Agreement. The
Company also requested additional information because some environmental claims
may be covered by sections of the Purchase Agreement where the parties share
liability concerning environmental matters (see above). Management continues its
evaluation of the Buyers' information and is in discussions concerning
resolution of the claims.
In April 2006, the Company and its Seller subsidiaries received a summons
and complaint (the Complaint) from the Buyers, which was filed in the Supreme
Court of the State of New York, County of New York. The Complaint seeks
indemnification, declaratory and injunctive relief for alleged (i) breaches of
presentations, warranties and covenants covering each of the former operating
sites related to facility structures, utilities and equipment included in the
March, April and October Notices mentioned above and the allegedly related
breach of the Customer Supply Agreement arising from a breach of warranty at the
Harriman facility included in September Notice mentioned above (collectively
Equipment Matters); and (ii) claims related to environmental matters at each of
the five operating locations, most of which related to the former Harriman
location included in the October Notice and December Notices mentioned above
(collectively Environmental Matters).
The Company continues its evaluation of Buyers' allegations and intends to
defend itself against these claims vigorously. The Company continues to believe
that the Equipment Matters are without merit. Further, the Company continues to
believe that based on current information the majority of the claims are either
Buyers' responsibility or without merit and the remaining are otherwise not
reasonably estimable at this time. As such the Company has recorded no reserves
for this matter.
Class Action Matter
In October 2003, the Company was notified of a securities class action
lawsuit filed against Cambrex and five former and current Company officers. Five
class action suits were filed with the New Jersey Federal District Court ("the
Court"). In January 2004, the Court consolidated the cases, designated the lead
plaintiff and selected counsel to represent the class. An amended complaint was
filed in March 2004. The lawsuit has been brought as a class action in the names
of purchasers of the Company's common stock from October 21, 1998 through July
25, 2003. The complaint alleges that the Company failed to disclose in timely
fashion the January 2003 accounting restatement and subsequent SEC
investigation, as well as the loss of a significant contract at the Baltimore
facility.
The Company filed a Motion to Dismiss in May 2004. Thereafter the plaintiff
filed a reply brief. In October 2005, the Court denied the Company's Motion to
Dismiss against the Company and two current Company officers. The Company has
reached its deductible under its insurance policy and further costs, expenses
and any settlement is expected to be paid by the Company's insurers. The Company
continues to believe that the complaints are without merit and will vigorously
defend against them. As such, the Company has recorded no reserves related to
this matter.
- ---------------
(dollars in thousands, except share data)
38
Securities and Exchange Commission
The SEC is currently conducting an investigation into the Company's
inter-company accounting procedures from the period 1997 through 2001. The
investigation began in the first half of 2003 after the Company voluntarily
disclosed certain matters related to inter-company accounts for the five-year
period ending December 31, 2001 that resulted in the restatement of the
Company's financial statements for those years. To the Company's knowledge, the
investigation is limited to this inter-company accounting matter, and the
Company does not expect further revisions to its historical financial statements
relating to these issues. The Company is fully cooperating with the SEC.
Baltimore Litigation
In 2001, the Company acquired the biopharmaceutical manufacturing business
in Baltimore. The sellers filed suit against the Company alleging that the
Company made false representations during the negotiations on which the sellers
relied in deciding to sell the business and that the Company breached its
obligation to pay additional consideration as provided in the purchase agreement
which was contingent on the performance of the purchased business. Management
believes the matter to be without merit and has been vigorously defending the
suit.
Other
The Company has commitments incident to the ordinary course of business
including corporate guarantees of financial assurance obligations under certain
environmental laws for remediation, closure and/or third party liability
requirements of certain of its subsidiaries and a former operating location;
contract provisions for indemnification protecting its customers and suppliers
against third party liability for manufacture and sale of Company products that
fail to meet product warranties and contract provisions for indemnification
protecting licensees against intellectual property infringement related to
licensed Company technology or processes.
Additionally, as permitted under Delaware law, the Company has agreements
whereby we indemnify our officers and directors for certain events or
occurrences while the officer or director is, or was serving, at our request in
such capacity. The term of the indemnification period is for the officer's or
director's lifetime. The maximum potential amount of future payments we could be
required to make under these indemnification agreements is unlimited; however,
we have a Director and Officer insurance policy that covers a portion of any
potential exposure.
The Company currently believes the estimated fair value of its
indemnification agreements is not significant based on currently available
information, and as such, the Company has no liabilities recorded for these
agreements as of December 31, 2005.
In addition to the matters identified above, Cambrex's subsidiaries are
party to a number of other proceedings. While it is not possible to predict with
certainty the outcome of the Company's litigation matters and various other
lawsuits and contingencies, it is the opinion of management based on information
currently available that the ultimate resolution of these matters should not
have a material adverse effect on the Company's results of operations, cash
flows and financial position. These matters, if resolved in an unfavorable
manner, could have a material effect on the operating results and cash flows
when resolved in a future reporting period.
IMPACT OF RECENT ACCOUNTING PRONOUNCEMENTS
Inventory Costs
In November 2004, the Financial Accounting Standards Board ("FASB")
published FAS 151 "Inventory Costs -- an amendment of ARB No. 43, Chapter 4".
FAS 151 amends the guidance in ARB No. 43, Chapter 4, "Inventory Pricing" to
clarify the accounting for abnormal amounts of idle facility expense, freight,
- ---------------
(dollars in thousands, except share data)
39
handling costs, and wasted material (spoilage). This Statement requires that
those items be recognized as current-period charges regardless of whether they
meet the criteria of "so abnormal". In addition, this Statement requires that
allocation of fixed production overheads to the cost of conversion be based on
the normal capacity of the production facility. This Statement will be effective
for inventory costs incurred during fiscal years beginning after June 15, 2005.
The Company has reviewed FAS 151 and determined its impact will not have a
material effect on the Company's financial position or results of operations.
Share-Based Payment
In December 2004, the FASB published FAS 123(R) (revised 2004) "Share-Based
Payment". FAS 123(R) supersedes APB Opinion No. 25 "Accounting for Stock Issued
to Employees" and its related implementation guidance. This Statement eliminates
the alternative to use APB Opinion No. 25's intrinsic value method of accounting
that was provided in FAS 123 as originally issued. This Statement requires
entities to recognize the cost of employee services received in exchange for
awards of equity instruments based on the grant-date fair value of those awards
(with limited exceptions). This Statement applies to all awards granted after
the required effective date and to awards modified, repurchased, or cancelled
after that date. During 2005 all unvested options outstanding as well as all
options granted during 2005 were fully vested by the Compensation Committee of
the Board of Directors. This represents approximately 2,650,000 options which
resulted in the acceleration of pro forma compensation expense of $12,711. The
purpose of the accelerated vesting was to eliminate compensation expense in the
income statement that the Company would otherwise have recorded with respect to
these accelerated options subsequent to the January 1, 2006 effective date of
FAS 123(R). The Company adopted FAS 123(R) on January 1, 2006 and as a result of
the accelerated vesting of options as discussed in Note #2, the impact was not
material.
Conditional Asset Retirement Obligations
In March 2005, the FASB issued Interpretation No. 47, "Accounting for
Conditional Asset Retirement Obligations" ("FIN 47"). This Statement clarifies
the meaning of the term "conditional asset retirement" as used in FAS 143,
"Accounting for Asset Retirement Obligations" and clarifies when an entity has
sufficient information to reasonably estimate the fair value of an asset
retirement obligation. FIN 47 requires the accelerated recognition of certain
asset retirement obligations when the fair value of such obligation can be
estimated. FIN 47 became effective for the Company in the fourth quarter of
2005. The adoption of FIN 47 did not have a material effect on the Company's
financial position or results of operations.
FORWARD-LOOKING STATEMENTS
This document may contain "forward-looking statements" within the meaning
of the Private Securities Litigation Reform Act of 1995 and Rule 3b-6 under The
Securities Exchange Act of 1934, including, without limitation, statements
regarding expected performance, especially expectations with respect to sales,
research and development expenditures, earnings per share, capital expenditures,
acquisitions, divestitures, collaborations, or other expansion opportunities.
These statements may be identified by the fact that they use words such as
"expects," "anticipates," "intends," "estimates," "believes" or similar
expressions in connection with any discussion of future financial and operating
performance. Any forward-looking statements are qualified in their entirety by
reference to the factors discussed throughout this Form 10-K. The
forward-looking statements contained herein are based on current plans and
expectations and involve risks and uncertainties that could cause actual
outcomes and results to differ materially from current expectations including,
but not limited to, global economic trends, pharmaceutical outsourcing trends,
competitive pricing or product developments, government legislation and/or
regulations (particularly environmental issues), tax rate, interest rate,
technology, manufacturing and legal issues, changes in foreign exchange rates,
performance of minority investments, uncollectable receivables, loss on
disposition of assets, cancellation or delays in renewal of contracts, lack of
suitable raw materials or packaging materials, the possibility that the value of
the acquisition of PermaDerm cultured skin may not be realized or that our plans
to obtain a Humanitarian Device
- ---------------
(dollars in thousands, except share data)
40
Exemption, completion of clinical trials and commercialization of PermaDerm
cultured skin in the United States may not be successful, and the Company's
ability to receive regulatory approvals for its products, and the risks and
other factors described under the caption "Risk Factors That May Affect Future
Results" in this Form 10-K. Any forward-looking statement speaks only as of the
date on which it is made, and the Company undertakes no obligation to publicly
update any forward-looking statement, whether as a result of new information,
future events or otherwise. New factors emerge from time to time and it is not
possible for us to predict which will arise. In addition, we cannot assess the
impact of each factor on our business or the extent to which any factor, or
combination of factors, may cause actual results to differ materially from those
contained in any forward-looking statements.
ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information required in this section can be found in the "Market Risks"
section of Item 7 on page 33 of this Form 10-K.
- ---------------
(dollars in thousands, except share data)
41
ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following consolidated financial statements and selected quarterly
financial data of the Company are filed under this item:
<Table>
<Caption>
PAGE NUMBER
(IN THIS REPORT)
----------------
Report of Independent Registered Public Accounting Firm..... 43
Consolidated Balance Sheets as of December 31, 2005 and
2004...................................................... 45
Consolidated Income Statements for the Years Ended December
31, 2005, 2004 and 2003................................... 46
Consolidated Statements of Stockholders' Equity for the
Years Ended December 31, 2005, 2004 and 2003.............. 47
Consolidated Statements of Cash Flows for the Years Ended
December 31, 2005, 2004 and 2003.......................... 48
Notes to Consolidated Financial Statements.................. 49
</Table>
The consolidated financial statements and financial statement schedule are
filed pursuant to Item 15 of this report.
- ---------------
(dollars in thousands, except share data)
42
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
Cambrex Corporation
We have completed integrated audits of Cambrex Corporation's 2005 and 2004
and consolidated financial statements and of its internal control over financial
reporting as of December 31, 2005, and an audit of its 2003 consolidated
financial statements in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Our opinions, based on our audits,
are presented below.
Consolidated financial statements and financial statement schedule
In our opinion, the consolidated financial statements listed in the index
appearing under Item 15 (a) (1) present fairly, in all material respects, the
financial position of Cambrex Corporation and its subsidiaries at December 31,
2005 and 2004, and the results of their operations and their cash flows for each
of the three years in the period ended December 31, 2005 in conformity with
accounting principles generally accepted in the United States of America. In
addition, in our opinion, the financial statement schedule listed in the index
appearing under Item 15 (a) (2) presents fairly, in all material respects, the
information set forth therein when read in conjunction with the related
consolidated financial statements. These financial statements and financial
statement schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
financial statement schedule based on our audits. We conducted our audits of
these statements in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit of financial statements
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
Internal control over financial reporting
Also, we have audited management's assessment, included in Management's
Report on Internal Control Over Financial Reporting appearing under Item 9A,
that Cambrex Corporation did not maintain effective internal control over
financial reporting as of December 31, 2005, because the Company did not
maintain effective controls over the accounting for income taxes based on
criteria established in Internal Control -- Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO). The
Company's management is responsible for maintaining effective internal control
over financial reporting and for its assessment of the effectiveness of internal
control over financial reporting. Our responsibility is to express opinions on
management's assessment and on the effectiveness of the Company's internal
control over financial reporting based on our audit.
We conducted our audit of internal control over financial reporting in
accordance with the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether effective internal control over
financial reporting was maintained in all material respects. An audit of
internal control over financial reporting includes obtaining an understanding of
internal control over financial reporting, evaluating management's assessment,
testing and evaluating the design and operating effectiveness of internal
control, and performing such other procedures as we consider necessary in the
circumstances. We believe that our audit provides a reasonable basis for our
opinions.
A company's internal control over financial reporting is a process designed
to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (i) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (ii)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial
43
statements in accordance with generally accepted accounting principles, and that
receipts and expenditures of the company are being made only in accordance with
authorizations of management and directors of the company; and (iii) provide
reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the company's assets that could have a
material effect on the financial statements.
Because of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may deteriorate.
A material weakness is a control deficiency, or combination of control
deficiencies, that results in more than a remote likelihood that a material
misstatement of the annual or interim financial statements will not be prevented
or detected. The following material weakness has been identified and included in
management's assessment. As of December 31, 2005, the Company did not maintain
effective controls over the accounting for income taxes. Specifically, the
Company did not have a sufficient level of experienced personnel to enable the
Company to properly consider and apply generally accepted accounting principles
to the accounting for income taxes. Additionally, the Company did not maintain
effective controls to determine the completeness and accuracy of the components
of the income tax provision calculations and the related deferred income taxes
and income taxes payable, including the monitoring of the differences between
the tax basis and the financial reporting basis of assets and liabilities to
effectively reconcile the deferred tax balances. This control deficiency
resulted in audit adjustments to the 2005 consolidated financial statements.
Additionally, this control deficiency could result in a misstatement of other
comprehensive income, income taxes payable, deferred income taxes assets and
liabilities and the related income tax provision that would result in a material
misstatement to annual or interim consolidated financial statements that would
not be prevented or detected. Accordingly, management has determined that this
control deficiency constitutes a material weakness.
This material weakness was considered in determining the nature, timing,
and extent of audit tests applied in our audit of the 2005 consolidated
financial statements, and our opinion regarding the effectiveness of the
Company's internal control over financial reporting does not affect our opinion
on those consolidated financial statements.
In our opinion, management's assessment that Cambrex Corporation did not
maintain effective internal control over financial reporting as of December 31,
2005, is fairly stated, in all material respects, based on criteria established
in Internal Control -- Integrated Framework issued by the COSO. Also, in our
opinion, because of the effect of the material weakness described above on the
achievement of the objectives of the control criteria, Cambrex Corporation has
not maintained effective internal control over financial reporting as of
December 31, 2005, based on criteria established in Internal
Control -- Integrated Framework issued by the COSO.
/s/ PRICEWATERHOUSECOOPERS LLP
Florham Park, New Jersey
May 26, 2006
44
CAMBREX CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
<Table>
<Caption>
DECEMBER 31,
-------------------
2005 2004
-------- --------
ASSETS
Current assets:
Cash and cash equivalents................................. $ 45,932 $ 91,532
Trade receivables, less allowances of $2,767 and $2,304 at
respective dates....................................... 74,425 68,370
Inventories, net.......................................... 93,617 91,039
Prepaid expenses and other current assets................. 15,552 23,430
-------- --------
Total current assets.............................. 229,526 274,371
Property, plant and equipment, net.......................... 229,410 280,790
Goodwill.................................................... 96,368 176,275
Other intangible assets, net................................ 51,183 54,381
Other assets................................................ 5,985 6,168
-------- --------
Total assets...................................... $612,472 $791,985
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 38,813 $ 38,552
Accrued expense and other current liabilities............. 51,819 51,504
Short-term debt and current portion of long-term debt..... 1,514 1,400
-------- --------
Total current liabilities......................... 92,146 91,456
Long-term debt.............................................. 186,819 226,187
Deferred tax liabilities.................................... 28,543 21,686
Other non-current liabilities............................... 61,713 61,340
-------- --------
Total liabilities................................. 369,221 400,669
Commitments and contingencies (see Notes 18 and 19)
Stockholders' equity:
Common Stock, $.10 par value; issued 29,118,141 and
28,825,603 shares at respective dates.................. 2,912 2,883
Additional paid-in capital................................ 219,236 213,120
Retained earnings......................................... 62,170 175,804
Treasury stock, at cost, 2,443,313 and 2,593,129 shares at
respective dates....................................... (20,768) (21,991)
Deferred compensation..................................... (2,131) (1,982)
Accumulated other comprehensive (loss)/income............. (18,168) 23,482
-------- --------
Total stockholders' equity........................ 243,251 391,316
-------- --------
Total liabilities and stockholders' equity........ $612,472 $791,985
======== ========
</Table>
See accompanying notes to consolidated financial statements.
45
CAMBREX CORPORATION AND SUBSIDIARIES
CONSOLIDATED INCOME STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
<Table>
<Caption>
YEARS ENDED DECEMBER 31,
-------------------------------
2005 2004 2003
--------- -------- --------
Gross Sales................................................. $ 451,986 $439,115 $405,591
Allowances and rebates.................................... 3,437 2,258 3,780
--------- -------- --------
Net sales................................................... 448,549 436,857 401,811
Other revenues............................................ 6,548 6,800 8,833
--------- -------- --------
Net revenues................................................ 455,097 443,657 410,644
Cost of goods sold........................................ 293,760 272,917 248,238
--------- -------- --------
Gross profit................................................ 161,337 170,740 162,406
Selling, general and administrative expenses.............. 107,610 102,769 95,117
Research and development expenses......................... 22,331 19,659 17,123
Asset impairments......................................... 107,177 48,720 --
Legal settlement.......................................... -- -- 11,342
--------- -------- --------
Operating (loss)/profit..................................... (75,781) (408) 38,824
Other (income)/expenses
Interest income........................................... (942) (1,103) (1,164)
Interest expense.......................................... 11,757 12,053 13,004
Other -- net.............................................. 40 73 139
--------- -------- --------
(Loss)/income before income taxes........................... (86,636) (11,431) 26,845
Provision for income taxes.................................. 23,822 14,461 26,600
--------- -------- --------
(Loss)/income from continuing operations.................... $(110,458) $(25,892) $ 245
Discontinued operations:
Loss from discontinued operations, net of tax............... -- (978) (54,308)
--------- -------- --------
Net loss.................................................... $(110,458) $(26,870) $(54,063)
========= ======== ========
Basic (loss)/earnings per share
(Loss)/income from continuing operations.................. $ (4.18) $ (0.99) $ 0.01
Loss from discontinued operations......................... $ -- $ (0.04) $ (2.11)
--------- -------- --------
Net loss.................................................. $ (4.18) $ (1.03) $ (2.10)
Diluted (loss)/earnings per share
(Loss)/income from continuing operations.................. $ (4.18) $ (0.99) $ 0.01
Loss from discontinued operations......................... $ -- $ (0.04) $ (2.08)
--------- -------- --------
Net loss.................................................. $ (4.18) $ (1.03) $ (2.07)
Weighted average shares outstanding:
Basic..................................................... 26,456 26,094 25,775
Diluted................................................... 26,456 26,094 26,174
</Table>
See accompanying notes to consolidated financial statements.
46
CAMBREX CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
<Table>
<Caption>
COMMON STOCK
---------------------- ADDITIONAL
SHARES PAR VALUE PAID-IN RETAINED DEFERRED TREASURY COMPREHENSIVE
ISSUED ($.10) CAPITAL EARNINGS COMPENSATION STOCK LOSS
---------- --------- ---------- --------- ------------ -------- -------------
BALANCE AT DECEMBER 31, 2002......... 28,323,059 $2,832 $203,444 $ 262,950 $(1,561) $(19,841)
Comprehensive income/(loss)
Net loss.......................... (54,063) (54,063)
Other comprehensive income/(loss)
Foreign currency translation
adjustments................... 41,340
Unrealized gains on hedging
contracts, net of tax of
$52........................... 2,532
Minimum pension liability
adjustment, net of tax of
$0............................ (1,545)
---------
Other comprehensive income........ 42,327
---------
Total Comprehensive loss............. $ (11,736)
=========
Cash dividends at $0.12 per share.... (3,100)
Purchase of treasury stock........... (2,420)
Exercise of stock options............ 122,750 12 1,118
Restricted Stock..................... 865
Other................................ 25,843 3 829 (55) 160
---------- ------ -------- --------- ------- --------
BALANCE AT DECEMBER 31, 2003......... 28,471,652 $2,847 $206,256 $ 205,787 $(1,616) $(22,101)
Comprehensive income/(loss)
Net loss.......................... (26,870) (26,870)
Other comprehensive income/(loss)
Foreign currency translation
adjustments................... 20,224
Unrealized gains on hedging
contracts, net of tax of
$716.......................... 1,276
Minimum pension liability
adjustment, net of tax of
$513.......................... (3,488)
Unrealized gains on available
for sale marketable
securities, net of tax expense
of$7.......................... 13
---------
Other comprehensive income........ 18,025
---------
Total Comprehensive loss............. $ (8,845)
=========
Cash dividends at $0.12 per share.... (3,113)
Purchase of treasury stock........... (219)
Exercise of stock options............ 353,951 36 6,248
Restricted Stock..................... 372 (366) 205
Other................................ 244 -- 124
---------- ------ -------- --------- ------- --------
BALANCE AT DECEMBER 31, 2004......... 28,825,603 $2,883 $213,120 $ 175,804 $(1,982) $(21,991)
Comprehensive income/(loss)
Net loss.......................... (110,458) (110,458)
Other comprehensive income/(loss)
Foreign currency translation
adjustments................... (40,188)
Unrealized losses on hedging
contracts, net of tax of
$883.......................... (984)
Minimum pension liability
adjustment, net of tax of
$217.......................... (117)
Unrealized losses on available
for sale marketable
securities, net of tax expense
of $0......................... (361)
---------
Other comprehensive loss.......... (41,650)
---------
Total Comprehensive loss............. $(152,108)
=========
Cash dividends at $0.12 per share.... (3,176)
Purchase of treasury stock........... (75)
Exercise of stock options............ 292,538 29 3,877
Restricted Stock..................... 2,239 (149) 1,298
---------- ------ -------- --------- ------- --------
BALANCE AT DECEMBER 31, 2005......... 29,118,141 $2,912 $219,236 $ 62,170 $(2,131) $(20,768)
========== ====== ======== ========= ======= ========
<Caption>
ACCUMULATED
OTHER TOTAL
COMPREHENSIVE STOCKHOLDERS'
INCOME/(LOSS) EQUITY
------------- -------------
BALANCE AT DECEMBER 31, 2002......... $(36,870) $ 410,954
Comprehensive income/(loss)
Net loss.......................... (54,063)
Other comprehensive income/(loss)
Foreign currency translation
adjustments...................
Unrealized gains on hedging
contracts, net of tax of
$52...........................
Minimum pension liability
adjustment, net of tax of
$0............................
Other comprehensive income........ 42,327 42,327
Total Comprehensive loss.............
Cash dividends at $0.12 per share.... (3,100)
Purchase of treasury stock........... (2,420)
Exercise of stock options............ 1,130
Restricted Stock..................... 865
Other................................ 937
-------- ---------
BALANCE AT DECEMBER 31, 2003......... $ 5,457 $ 396,630
Comprehensive income/(loss)
Net loss.......................... (26,870)
Other comprehensive income/(loss)
Foreign currency translation
adjustments...................
Unrealized gains on hedging
contracts, net of tax of
$716..........................
Minimum pension liability
adjustment, net of tax of
$513..........................
Unrealized gains on available
for sale marketable
securities, net of tax expense
of$7..........................
Other comprehensive income........ 18,025 18,025
Total Comprehensive loss.............
Cash dividends at $0.12 per share.... (3,113)
Purchase of treasury stock........... (219)
Exercise of stock options............ 6,284
Restricted Stock..................... 211
Other................................ 368
-------- ---------
BALANCE AT DECEMBER 31, 2004......... $ 23,482 $ 391,316
Comprehensive income/(loss)
Net loss.......................... (110,458)
Other comprehensive income/(loss)
Foreign currency translation
adjustments...................
Unrealized losses on hedging
contracts, net of tax of
$883..........................
Minimum pension liability
adjustment, net of tax of
$217..........................
Unrealized losses on available
for sale marketable
securities, net of tax expense
of $0.........................
Other comprehensive loss.......... (41,650) (41,650)
Total Comprehensive loss.............
Cash dividends at $0.12 per share.... (3,176)
Purchase of treasury stock........... (75)
Exercise of stock options............ 3,906
Restricted Stock..................... 3,388
-------- ---------
BALANCE AT DECEMBER 31, 2005......... $(18,168) $ 243,251
======== =========
</Table>
See accompanying notes to consolidated financial statements.
47
CAMBREX CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<Table>
<Caption>
YEARS ENDED DECEMBER 31,
-------------------------------
2005 2004 2003
--------- -------- --------
Cash flows from operating activities:
Net loss.................................................. $(110,458) $(26,870) $(54,063)
Asset impairment charges.................................. 107,177 48,720 --
Depreciation and amortization............................. 38,900 40,858 35,834
Stock based compensation included in net income........... 1,936 1,228 1,589
Deferred income tax provision............................. 11,727 466 8,005
Allowance for doubtful accounts........................... 877 (369) 1,584
Inventory reserve......................................... 4,536 3,390 163
Loss on sale of assets.................................... 1,126 -- --
Changes in assets and liabilities:
Trade receivables......................................... (12,709) (6,362) 3,446
Inventories............................................... (16,551) (7,942) 854
Prepaid expenses and other current assets................. 8,151 826 (1,497)
Accounts payable and other current liabilities............ 9,248 4,330 10,599
Other non-current assets and liabilities.................. (1,525) (8,469) 1,595
Discontinued operations:
Non-cash charges and changes in operating assets and
liabilities............................................. -- (1,073) 12,079
Writedown of assets held for sale......................... -- -- 53,098
--------- -------- --------
Net cash provided from operating activities............... 42,435 48,733 73,286
--------- -------- --------
Cash flows from investing activities:
Capital expenditures...................................... (40,307) (39,480) (37,857)
Acquisition of businesses (net of cash acquired).......... (814) (5,256) --
Other investing activities................................ 1,482 223 (1,548)
Discontinued operations:
Capital expenditures, net of insurance proceeds........... -- -- 671
Proceeds from sale of Rutherford Chemicals................ -- -- 50,215
--------- -------- --------
Net cash (used in)/ provided from investing activities.... (39,639) (44,513) 11,481
--------- -------- --------
Cash flows from financing activities:
Dividends................................................. (3,176) (3,113) (3,100)
Net increase/(decrease) in short-term debt................ 45 -- (1,071)
Long-term debt activity (including current portion):
Borrowings.............................................. 212,074 86,218 359,611
Repayments.............................................. (251,329) (72,708) (414,793)
Proceeds from the stock options exercised................. 3,906 6,284 1,130
Purchase of treasury stock................................ (75) (219) (2,420)
Other..................................................... 20 212 55
--------- -------- --------
Net cash (used in)/provided by financing activities..... (38,535) 16,674 (60,588)
--------- -------- --------
Effect of exchange rate changes on cash..................... (9,861) 6,344 6,819
--------- -------- --------
Net (decrease)/increase in cash and cash equivalents........ (45,600) 27,238 30,998
Cash and cash equivalents at beginning of year.............. 91,532 64,294 33,296
--------- -------- --------
Cash and cash equivalents at end of year.................... $ 45,932 $ 91,532 $ 64,294
========= ======== ========
Supplemental disclosure:
Interest paid, net of capitalized interest................ $ 11,185 $ 11,848 $ 11,725
Income taxes paid......................................... $ 12,181 $ 20,182 $ 18,107
</Table>
See accompanying notes to consolidated financial statements.
48
CAMBREX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
(1) THE COMPANY
Cambrex Corporation and Subsidiaries (the "Company" or "Cambrex") primarily
provides products and services worldwide to pharmaceutical and biopharmaceutical
companies, generic drug companies, biotech companies and research organizations.
The Company is dedicated to providing essential products and services to
accelerate drug discovery, development and manufacturing processes for human
therapeutics. The Company reports results in three segments: Bioproducts,
consisting of research products and therapeutic application products; Biopharma
segment, consisting of contract biopharmaceutical process development and
manufacturing services; and Human Health segment, consisting of active
pharmaceutical ingredients and pharmaceutical intermediates produced under Food
and Drug Administration cGMP for use in the production of prescription and
over-the-counter drug products and other fine custom chemicals derived from
organic chemistry.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries. All significant inter-company balances and
transactions have been eliminated in consolidation.
Cash Equivalents
Temporary cash investments with an original maturity of less than three
months are considered cash equivalents. The carrying amounts approximate fair
value.
Derivative Instruments
Derivative financial instruments are used by the Company primarily for
hedging purposes to mitigate a variety of working capital, investment and
borrowing risks. The use and mix of hedging instruments can vary depending on
business and economic conditions and management's risk assessments. The Company
uses a variety of strategies, including foreign currency forward contracts and
transaction hedging, to minimize or eliminate foreign currency exchange rate
risk associated with foreign currency transactions. Gains and losses on these
hedging transactions are generally recorded in earnings in the same period as
they are realized, which is usually the same period as the settlement of the
underlying transactions. The Company uses interest rate derivative instruments
only as hedges or as an integral part of borrowings. As such, the differential
to be paid or received in connection with these instruments is accrued and
recognized in income as an adjustment to interest expense.
The Company formally documents all relationships between hedging
instruments and hedged items, as well as its risk management objectives and
strategies for undertaking various hedging relationships. All cash flow hedges
are linked to transactions and the Company assesses effectiveness at inception
and on a quarterly basis. If it is determined that a derivative instrument is
not highly effective or the transaction is no longer deemed probable of
occurring, the Company discontinues hedge accounting.
Inventories
Inventories are stated at the lower of standard cost, which approximates a
first-in, first-out basis, or market. The determination of market value involves
assessment of numerous factors, including costs to dispose of inventory and
estimated selling prices. Reserves are recorded to reduce carrying value for
inventory determined to be damaged, obsolete or otherwise unsaleable.
49
CAMBREX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) -- (CONTINUED)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
Property, Plant and Equipment
Property, plant and equipment is stated at cost, net of accumulated
depreciation. Plant and equipment are depreciated on a straight-line basis over
the estimated useful lives for each applicable asset group as follows:
<Table>
Buildings and improvements....... 20 to 30 years, or
term of lease
if applicable
Machinery and equipment.......... 7 to 15 years
Furniture and fixtures........... 5 to 7 years
Computer hardware and software... 3 to 7 years
</Table>
Expenditures for additions, major renewals or betterments are capitalized
and expenditures for maintenance and repairs are charged to income as incurred.
When assets are retired or otherwise disposed of, the cost and related
accumulated depreciation are removed from the accounts, and any resulting gain
or loss is reflected in operating expenses. Interest is capitalized in
connection with the construction and acquisition of assets. The capitalized
interest is recorded as part of the cost of the asset to which it relates and is
amortized over the asset's estimated useful life. Total interest capitalized in
connection with ongoing construction activities in 2005, 2004 and 2003 amounted
to $786, $400 and $339, respectively.
Intangible Assets
Intangible assets are recorded at cost and amortized on a straight-line
basis as follows:
<Table>
Patents................................. Amortized over the remaining
life of individual patents
Product technology...................... 5 to 18 years
Non-compete agreements.................. 5 years
Trademarks and other.................... up to 40 years
</Table>
Impairment of Goodwill
The Company reviews the carrying value of acquired intangible assets,
including goodwill, to determine whether impairment may exist on an annual basis
or whenever it has reason to believe goodwill may not be recoverable. The annual
impairment test of goodwill is performed during the fourth quarter of each
fiscal year.
Goodwill impairment is determined using a two-step process. The first step
of the goodwill impairment test is used to identify potential impairment by
comparing the fair value of each reporting unit, determined using various
valuation techniques, with the primary technique being a discounted cash flow
analysis, to its carrying value. A discounted cash flow analysis requires one to
make various judgmental assumptions including assumptions about cash flows,
growth rates and discount rates. The assumptions about future cash flows and
growth rates are based on the Company's budget and long-term plans. Discount
rate assumptions are based on market participant comparables. If the fair value
of a reporting unit exceeds its carrying amount, goodwill of the reporting unit
is considered not impaired and the second step of the impairment test is
unnecessary. If the carrying amount of a reporting unit exceeds its fair value,
the second step of the goodwill impairment test is performed to measure the
amount of impairment loss, if any. The second step of the goodwill impairment
test compares the implied fair value of the reporting unit's goodwill with the
carrying amount of that goodwill. If the carrying amount of the reporting unit's
goodwill exceeds the implied fair value
50
CAMBREX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) -- (CONTINUED)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
of that goodwill, an impairment loss is recognized in an amount equal to that
excess. The implied fair value of goodwill is determined in the same manner as
the amount of goodwill recognized in a business combination. That is, the fair
value of the reporting unit is allocated to all of the assets and liabilities of
that unit as if the reporting unit had been acquired in a business combination
and the fair value of the reporting unit was the purchase price paid to acquire
the reporting unit.
The impairment test for other intangible assets not subject to amortization
consists of a comparison of the fair value of the intangible asset with its
carrying value. If the carrying value of the intangible asset exceeds its fair
value, an impairment loss is recognized in an amount equal to that excess.
Impairment of Long-Lived Assets
The Company assesses the impairment of its long-lived assets, including
amortizable intangible assets, and property, plant and equipment, whenever
economic events or changes in circumstances indicate that the carrying amounts
of the assets may not be recoverable. Long lived assets are considered to be
impaired when the sum of the undiscounted expected future operating cash flows
is less than the carrying amounts of the related assets. If impaired, the assets
are written down to fair market value.
Revenue Recognition
Revenues in the Bioproducts and Human Health segments are generally
recognized when title to products and risk of loss are transferred to customers.
Additional conditions for recognition of revenue are that collection of sales
proceeds is reasonably assured and the Company has no further performance
obligations.
Sales terms to certain customers include remittance of discounts if certain
conditions are met. Additionally, sales are generally made with a limited right
of return under certain conditions. The Company estimates these rebates and
estimated returns at the time of sale based on the terms of agreements with
customers and historical experience and recognizes revenue net of these
estimated costs which are classified as allowances and rebates.
Some contracts in the Bioproducts and Biopharma segments are based on time
and materials and revenue for those contracts is recognized as services are
performed. For contracts that contain milestone based payments the Company
utilizes the EITF-91-6 "Revenue Recognition of Long-term Power Sales Contracts"
model for recording revenue. Under this method, revenue is based on the cost of
efforts (since the contract's commencement) up to the reporting date, divided by
the total estimated contractual costs (from the contract's commencement to the
end of the development arrangement), multiplied by the total expected
contractual payments under the arrangement. However, revenue is limited to the
amount of nonrefundable cash payments received or contractually receivable at
the reporting date.
In each of the segments the Company has certain contracts that contain
multiple deliverables. These deliverables often include process development
services and commercial production. The Company follows the guidance contained
in EITF 00-21 "Accounting for Revenue Arrangements with Multiple Deliverables".
Revenue for each element is recognized when that element is delivered to the
customer based on the fair value for each element as determined based on sales
price when sold separately.
Amounts billed in advance are recorded as deferred revenue on the balance
sheet.
Income Taxes
The Company and its eligible subsidiaries file a consolidated U.S. income
tax return. Certain subsidiaries which are consolidated for financial reporting
are not eligible to be included in the consolidated U.S. income
51
CAMBREX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) -- (CONTINUED)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
tax return. Cambrex has adopted a policy to indefinitely reinvest the
un-remitted earnings of certain non-U.S. subsidiaries, and as such, U.S. taxes
have not been provided on their un-remitted earnings. The earnings are intended
to support business expansion, either through acquisition of new businesses or
investments in the existing businesses. At December 31, 2005, the cumulative
amount of un-remitted earnings of non-U.S. subsidiaries was approximately
$5,000.
The Company repatriated approximately $92,000 during 2005 pursuant to
Section 965 of the Internal Revenue Code (introduced by the American Jobs
Creation Act of 2004) which provided a one time benefit in 2005 of exempting
from U.S. tax 85% of qualified repatriated foreign earnings.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Environmental Costs
In the ordinary course of business, the Company is subject to extensive and
changing federal, state, local and foreign environmental laws and regulations,
and has made provisions for the estimated financial impact of environmental
cleanup related costs. The Company's policy is to accrue environmental cleanup
related costs of a non-capital nature, including estimated litigation costs,
when those costs are believed to be probable and can be reasonably estimated.
The quantification of environmental exposures requires an assessment of many
factors, including changing laws and regulations, advancements in environmental
technologies, the quality of information available related to specific sites,
the assessment stage of each site investigation, preliminary findings and the
length of time involved in remediation or settlement. Such accruals are adjusted
as further information develops or circumstances change. For certain matters,
the Company expects to share costs with other parties. Costs of future
expenditures for environmental remediation obligations are not discounted to
their present value unless the aggregate amount of the liability and the timing
of cash payments are fixed or reasonably determinable. Recoveries of
environmental remediation costs from other parties are recorded as assets when
their receipt is deemed certain.
Foreign Currency
The functional currency of the Company's foreign subsidiaries is the
applicable local currency. The translation of the applicable foreign currencies
into U.S. dollars is performed for balance sheet accounts using current exchange
rates in effect at the balance sheet date and for revenue and expense accounts
and cash flows using average rates of exchange prevailing during the year.
Adjustments resulting from the translation of foreign currency financial
statements are accumulated in a separate component of stockholders' equity until
the entity is sold or substantially liquidated. Gains or losses relating to
transactions of a long-term investment nature are accumulated in stockholders'
equity. Gains or losses resulting from foreign currency transactions are
included in the results of operations as a component of other revenues in the
consolidated income statement. Foreign currency net transaction gains were
$1,105, $1,161 and $2,600 in 2005, 2004 and 2003, respectively.
52
CAMBREX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) -- (CONTINUED)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
Earnings Per Common Share
All diluted earnings per share are computed on the basis of the weighted
average shares of common stock outstanding plus common equivalent shares arising
from the effect of dilutive stock options, using the treasury stock method.
Earnings per share calculations are as follows:
<Table>
<Caption>
FOR THE YEARS ENDED,
-------------------------------
2005 2004 2003
--------- -------- --------
Net (loss)/income:
(Loss)/income from continuing operations............ $(110,458) $(25,892) $ 245
Loss from discontinued operations................... -- (978) (54,308)
--------- -------- --------
Net loss............................................ $(110,458) $(26,870) $(54,063)
========= ======== ========
Weighted average shares outstanding:
Basic weighted average shares outstanding........... 26,456 26,094 25,775
Effect of dilutive stock options *.................. -- -- 399
--------- -------- --------
Diluted weighted average shares outstanding......... 26,456 26,094 26,174
(Loss)/Earnings per share (basic):
(Loss)/income from continuing operations............ $ (4.18) $ (0.99) $ 0.01
Loss from discontinuing operations.................. $ -- $ (0.04) $ (2.11)
--------- -------- --------
Net loss............................................ $ (4.18) $ (1.03) $ (2.10)
========= ======== ========
(Loss)/Earnings per share (diluted):
(Loss)/income from continuing operations............ $ (4.18) $ (0.99) $ 0.01
Loss from discontinued operations................... $ -- $ (0.04) $ (2.08)
--------- -------- --------
Net loss............................................ $ (4.18) $ (1.03) $ (2.07)
========= ======== ========
</Table>
* For 2005 and 2004, the effect of stock options would be anti-dilutive and is
therefore excluded.
For the year ended December 31, 2005, 2004 and 2003, 3,317,847, 2,083,716,
and 2,095,939 shares respectively, were not included in the calculation of
diluted shares outstanding because the option price was greater than the average
market price for the year.
Freight Billing and Costs
The Company bills a portion of freight cost incurred on shipments to
customers. Freight costs are reflected in cost of goods sold and amounts billed
to customers are recorded within net revenues. These amounts are not material to
the Company's operating results.
Stock Based Compensation
At December 31, 2005, the Company has seven active stock-based employee
compensation plans currently in effect, which are described more fully in Note
#13. The Company accounts for those plans under the recognition and measurement
principles of APB Opinion No. 25, Accounting for Stock Issued to Employees, and
related interpretations. No stock-based employee compensation cost related to
the stock
53
CAMBREX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) -- (CONTINUED)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
option plans is reflected in net income, as all options granted under those
plans had an exercise price equal to the market value of the underlying common
stock on the date of grant. The following table illustrates the effect on net
income and earnings per share if the Company had applied the fair value
recognition provisions of FAS 123 as amended by FAS 148, Accounting for
Stock-Based Compensation, to stock-based employee compensation.
<Table>
<Caption>
YEARS ENDED DECEMBER 31,
-------------------------------
2005 2004 2003
--------- -------- --------
Net loss, as reported............................... $(110,458) $(26,870) $(54,063)
Add: stock based compensation expense included in
reported net loss................................. 1,936 1,228 1,589
Deduct: stock-based compensation expenses determined
using fair value method........................... 21,504 5,969 6,570
--------- -------- --------
Pro forma net loss.................................. $(130,026) $(31,611) $(59,044)
Loss per share:
Basic -- as reported.............................. $ (4.18) $ (1.03) $ (2.10)
Basic -- pro forma................................ $ (4.91) $ (1.21) $ (2.29)
Diluted -- as reported............................ $ (4.18) $ (1.03) $ (2.07)
Diluted -- pro forma.............................. $ (4.91) $ (1.21) $ (2.26)
</Table>
The pro-forma compensation expense pertaining to stock options was $19,568,
$4,741, and $4,981 for 2005, 2004 and 2003, respectively.
During 2005 all unvested options outstanding as well as all options granted
during 2005 were fully vested by the Compensation Committee of the Board of
Directors. This represents approximately 2,650,000 options which resulted in the
acceleration of pro forma compensation expense of $12,711 in 2005. The Company
has imposed a holding period that will require all optionees to refrain from
selling shares acquired upon the exercise of these options until certain future
dates. The purpose of the accelerated vesting was to eliminate compensation
expense in the income statement that the Company would otherwise have recorded
with respect to these accelerated options subsequent to the January 1, 2006
effective date of FAS 123(R). Due to this acceleration of stock options, the pro
forma disclosures are not likely to be representative of the effects on reported
net income for future periods.
The pro forma compensation expense for 2005, 2004 and 2003 were calculated
based on recognizing ratably over the vesting period the fair value of each
option determined using the Black-Scholes option-pricing model for
non-performance options and a path dependent model for performance options.
The following assumptions were used in the Black-Scholes model to determine
fair value on grant date of grants issued in 2005, 2004 and 2003, respectively:
(i) average dividend yield of 0.57%, 0.55% and 0.57% (ii) expected volatility of
41.20%, 41.75% and 40.81%, (iii) risk-free interest rate ranging from 2.75% to
4.47% , 2.75% to 3.95%, and 2.75% to 3.95%, and (iv) expected life of 6-7 years.
Comprehensive Income
FAS 130, "Reporting Comprehensive Income," requires foreign currency
translation adjustments and certain other items, which were reported separately
in stockholders' equity, to be included in other comprehensive income. Included
within accumulated other comprehensive income for the Company are foreign
currency translation adjustments, changes in the fair value related to
derivative instruments classified
54
CAMBREX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) -- (CONTINUED)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
as cash flow hedges, net of related tax benefit, unrealized gain on available
for sales securities and changes in the minimum pension liability, net of
related tax benefit. Total comprehensive income for the years ended 2005 and
2004 is included in the Statement of Stockholders' Equity.
The components of Accumulated Other Comprehensive Income in Stockholders'
Equity are as follows:
<Table>
<Caption>
2005 2004
-------- --------
Foreign currency translation................................ $ (7,084) $ 33,104
Unrealized (loss)/gain on hedging contracts, net of tax..... (192) 792
Unrealized (loss)/gain on available for sale securities..... (348) 13
Minimum pension liability, net of tax....................... (10,544) (10,427)
-------- --------
Total..................................................... $(18,168) $ 23,482
======== ========
</Table>
Software and Development Costs
In 2005, 2004 and 2003, the Company capitalized purchased software from a
third party vendor and software development costs incurred under the provisions
of SOP 98-1, "Accounting for the Cost of Computer Software Developed or Obtained
for Internal Use." Capitalized costs include only (1) external direct costs of
materials and services incurred in developing or obtaining internal use
software, (2) payroll and payroll-related costs for employees who are directly
associated with and who devote substantial time to the internal-use software
project, and (3) interest costs incurred, while developing internal-use
software. Amortization begins when assets are ready for their intended purpose
and are placed in service. Capitalized software and development costs were
$2,178, $1,725 and $2,113 for 2005, 2004 and 2003, respectively. Software and
development costs are being amortized using the straight-line method over the
expected life of the product, which ranges from 3 to 7 years.
Research and development costs, business process re-engineering costs,
training and computer software maintenance costs are expensed as incurred.
(3) IMPACT OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
Inventory Costs
In November 2004, the FASB published FAS 151 "Inventory Costs -- an
amendment of ARB No. 43, Chapter 4". FAS 151 amends the guidance in ARB No. 43,
Chapter 4, "Inventory Pricing" to clarify the accounting for abnormal amounts of
idle facility expense, freight, handling costs, and wasted material (spoilage).
This Statement requires that those items be recognized as current-period charges
regardless of whether they meet the criteria of "so abnormal". In addition, this
Statement requires that allocation of fixed production overheads to the cost of
conversion be based on the normal capacity of the production facility. This
Statement will be effective for inventory costs incurred during fiscal years
beginning after June 15, 2005. The Company has reviewed FAS 151 and determined
its impact will not have a material effect on the Company's financial position
or results of operations.
Share-Based Payment
In December 2004, the FASB published FAS 123(R) (revised 2004) "Share-Based
Payment." FAS 123(R) supersedes APB Opinion No. 25 "Accounting for Stock Issued
to Employees" and its related implementation guidance. This Statement eliminates
the alternative to use APB Opinion No. 25's intrinsic value method of accounting
that was provided in FAS 123 as originally issued. This Statement requires
55
CAMBREX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) -- (CONTINUED)
(3) IMPACT OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS -- (CONTINUED)
entities to recognize the cost of employee services received in exchange for
awards of equity instruments based on the grant-date fair value of those awards
(with limited exceptions). This Statement applies to all awards granted after
the required effective date and to awards modified, repurchased, or cancelled
after that date. During 2005 all unvested options outstanding as well as all
options granted during 2005 were fully vested by the Compensation Committee of
the Board of Directors. This represents approximately 2,650,000 options which
resulted in the acceleration of pro forma compensation expense of $12,711. The
purpose of the accelerated vesting was to eliminate compensation expense in the
income statement that the Company would otherwise have recorded with respect to
these accelerated options subsequent to the January 1, 2006 effective date of
FAS 123(R). The Company adopted FAS 123(R) on January 1, 2006 and as a result of
the accelerated vesting of options as discussed in Note #2, the impact was not
material.
Conditional Asset Retirement Obligations
In March 2005, the FASB issued Interpretation No. 47, "Accounting for
Conditional Asset Retirement Obligations" ("FIN 47"). This Statement clarifies
the meaning of the term "conditional asset retirement" as used in FAS 143,
"Accounting for Asset Retirement Obligations" and clarifies when an entity has
sufficient information to reasonably estimate the fair value of an asset
retirement obligation. FIN 47 requires the accelerated recognition of certain
asset retirement obligations when the fair value of such obligation can be
estimated. FIN 47 became effective for the Company in the fourth quarter of
2005. The adoption of FIN 47 did not have a material effect on the Company's
financial position or results of operations.
(4) GOODWILL AND INTANGIBLE ASSETS
In accordance with FAS 142, "Goodwill and Other Intangible Assets" the
Company has established reporting units based on its current segment structure
for purposes of testing goodwill for impairment. Goodwill has been assigned to
the reporting units to which the value of the goodwill relates. The Company
evaluates goodwill and other intangible assets not subject to amortization at
least on an annual basis and whenever events and changes in circumstances
suggest that the carrying amount may not be recoverable based on the estimated
future cash flows.
During the performance of the annual goodwill impairment test in the fourth
quarter of 2005, the Company determined that the goodwill of three reporting
units was impaired. The Company tested for impairment and determined that the
carrying value exceeded its fair value by using a discounted cash flow model.
Management then computed the fair value of its tangible and intangible assets
for purposes of determining the implied fair value of goodwill. The goodwill
impairment charge recorded in the fourth quarter of 2005 was $67,950 for two
reporting units in the Biopharma segment and $8,435 for one reporting unit in
the Human Health segment. The goodwill impairment charge is primarily due to
lower long term profitability projections due to current market factors. The
Company also recorded a write-down of certain amortizable intangible assets as
follows: product technology of $662 in the Biopharma segment, patents of $385 in
the Biopharma and Human Health segments and license agreements of $55 in the
Biopharma segment, due to the lower future cash flow projections. Additionally,
in the third quarter of 2004, the Company recorded an impairment charge of
$48,720 to reduce the carrying value of goodwill in the Biopharma segment.
56
CAMBREX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) -- (CONTINUED)
(4) GOODWILL AND INTANGIBLE ASSETS -- (CONTINUED)
The changes in the carrying amount of goodwill for the years ended December
31, 2005 and 2004, are as follows:
<Table>
<Caption>
HUMAN
BIOPRODUCTS BIOPHARMA HEALTH
SEGMENT SEGMENT SEGMENT TOTAL
----------- --------- ------- --------
Balance as of January 1, 2004...... $53,787 $125,338 $41,617 $220,742
Acquisitions....................... 2,063 -- -- 2,063
Other, including purchase price
adjustment....................... (865) -- -- (865)
Translation effect................. 321 -- 2,734 3,055
Goodwill impairment................ -- (48,720) -- (48,720)
------- -------- ------- --------
Balance as of December 31, 2004.... $55,306 $ 76,618 $44,351 $176,275
======= ======== ======= ========
Other, including purchase price
adjustment....................... 2,319 195 -- 2,514
Translation effect................. (983) -- (5,053) (6,036)
Goodwill impairment................ -- (67,950) (8,435) (76,385)
------- -------- ------- --------
Balance at December 31, 2005....... $56,642 $ 8,863 $30,863 $ 96,368
======= ======== ======= ========
</Table>
Other intangible assets that are not subject to amortization consist of the
following:
<Table>
<Caption>
AS OF AS OF
DECEMBER 31, DECEMBER 31,
2005 2004
--------------- ---------------
Trademarks.......................................... $33,898 $33,898
Proprietary Process................................. 2,052 1,675
------- -------
Total............................................. $35,950 $35,573
======= =======
</Table>
Intangible Assets:
Other intangible assets, which will continue to be amortized, consist of
the following:
<Table>
<Caption>
AS OF DECEMBER 31, 2005
--------------------------------------------
GROSS CARRYING ACCUMULATED NET CARRYING
AMOUNT AMORTIZATION AMOUNT
-------------- ------------ ------------
Product Technology..................... $12,326 $(4,257) $ 8,069
Patents................................ 5,685 (2,097) 3,588
Supply Agreements...................... 2,110 (1,152) 958
License Agreement...................... 2,005 (401) 1,604
Other.................................. 1,974 (960) 1,014
------- ------- -------
Total................................ $24,100 $(8,867) $15,233
======= ======= =======
</Table>
57
CAMBREX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) -- (CONTINUED)
(4) GOODWILL AND INTANGIBLE ASSETS -- (CONTINUED)
<Table>
<Caption>
AS OF DECEMBER 31, 2004
--------------------------------------------
GROSS CARRYING ACCUMULATED NET CARRYING
AMOUNT AMORTIZATION AMOUNT
-------------- ------------ ------------
Product Technology..................... $13,230 $(2,574) $10,656
Patents................................ 5,433 (1,199) 4,234
Supply Agreements...................... 2,110 (936) 1,174
License Agreement...................... 836 (65) 771
Trademarks............................. 785 (236) 549
Other.................................. 2,057 (633) 1,424
------- ------- -------
Total................................ $24,451 $(5,643) $18,808
======= ======= =======
</Table>
Amortization expense amounted to $2,282, $1,921 and $1,626 for the years
ended December 31, 2005, 2004 and 2003, respectively.
The expected future amortization expense related to current intangible
assets is as follows:
<Table>
For the year ended December 31, 2006........................ $1,915
For the year ended December 31, 2007........................ $1,884
For the year ended December 31, 2008........................ $1,636
For the year ended December 31, 2009........................ $1,496
For the year ended December 31, 2010........................ $1,304
</Table>
(5) NET INVENTORIES
Net inventories consist of the following:
<Table>
<Caption>
DECEMBER 31,
-----------------
2005 2004
------- -------
Finished goods............................................ $46,134 $45,002
Work in process........................................... 24,615 23,658
Raw materials............................................. 18,159 17,222
Supplies.................................................. 4,709 5,157
------- -------
Total........................................... $93,617 $91,039
======= =======
</Table>
(6) PROPERTY, PLANT AND EQUIPMENT
During the fourth quarter of 2005 the Company performed an impairment
assessment of long-lived assets, which includes amortizable intangible assets as
well property, plant and equipment. As a result of lower long term profitability
projections, the Company determined that the sum of the undiscounted expected
future operating cash flows were less than the carrying value of certain
long-lived assets within the Biopharma and Human Health segments. The Company
recorded an impairment charge for long-lived assets in the fourth quarter of
$13,581 in the Biopharma segment and $16,109 in the Human Health segment to
write down these assets to their fair value as determined primarily based on
appraisals.
58
CAMBREX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) -- (CONTINUED)
(6) PROPERTY, PLANT AND EQUIPMENT -- (CONTINUED)
Property, plant and equipment consist of the following:
<Table>
<Caption>
DECEMBER 31,
---------------------
2005 2004
--------- ---------
Land.................................................. $ 11,147 $ 12,022
Buildings and improvements............................ 137,670 132,091
Machinery and equipment............................... 318,941 334,367
Furniture and fixtures................................ 20,020 19,345
Construction in progress.............................. 32,954 43,113
--------- ---------
Total....................................... 520,732 540,938
Accumulated depreciation.............................. (291,322) (260,148)
--------- ---------
Net................................................. $ 229,410 $ 280,790
========= =========
</Table>
Depreciation expense was $36,618, $38,937 and $34,208 for the years ended
December 31, 2005, 2004 and 2003, respectively.
(7) ACCRUED EXPENSE AND OTHER CURRENT LIABILITIES
The components of accrued expenses and other current liabilities are as
follows:
<Table>
<Caption>
YEARS ENDED
DECEMBER 31,
-----------------
2005 2004
------- -------
Salaries and employee benefits payable.................... $20,669 $23,344
Deferred revenue.......................................... 8,978 2,733
Advances from suppliers................................... 4,293 5,737
Other..................................................... 17,879 19,690
------- -------
Total........................................... $51,819 $51,504
======= =======
</Table>
(8) INCOME TAXES
(Loss)/income from continuing operations before income taxes consisted of
the following:
<Table>
<Caption>
YEARS ENDED DECEMBER 31,
------------------------------
2005 2004 2003
-------- -------- --------
Domestic............................................. $(98,203) $(60,058) $(20,211)
International........................................ 11,567 48,627 47,056
-------- -------- --------
Total...................................... $(86,636) $(11,431) $ 26,845
======== ======== ========
</Table>
59
CAMBREX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) -- (CONTINUED)
(8) INCOME TAXES -- (CONTINUED)
The provision for income taxes for continuing operations consists of the
following provision/(benefits):
<Table>
<Caption>
YEARS ENDED DECEMBER 31,
---------------------------
2005 2004 2003
------- ------- -------
Current:
Federal............................................... $(2,424) $ -- $ 2,060
State................................................. 659 347 232
International......................................... 13,860 13,648 16,303
------- ------- -------
12,095 $13,995 $18,595
======= ======= =======
Deferred:
Federal............................................... $17,238 $ -- $ 8,980
State................................................. (5) (17) 186
International......................................... (5,506) 483 (1,161)
------- ------- -------
$11,727 $ 466 $ 8,005
------- ------- -------
Total......................................... $23,822 $14,461 $26,600
======= ======= =======
</Table>
The provision for income taxes for continuing operations differs from the
statutory federal income tax rate of 35% for 2005, 2004 and 2003 as follows:
<Table>
<Caption>
YEARS ENDED DECEMBER 31,
----------------------------
2005 2004 2003
-------- ------- -------
Income tax (benefit)/provision at federal statutory
rate................................................. $(30,322) $(4,001) $ 9,396
State and local taxes, net of federal income tax
benefits............................................. 423 208 232
Difference between federal statutory rate and statutory
rates on non-U.S. income............................. 380 (2,888) (3,480)
Goodwill impairment.................................... 2,952 -- --
Net change in valuation allowance...................... 40,126 21,142 21,487
Interest rate swaps.................................... (2,368) -- --
Indefinite-lived intangibles........................... 16,926 -- --
Research and experimentation credits................... -- -- (1,100)
Change in tax reserve.................................. (2,960) -- --
Other.................................................. (1,335) -- 65
-------- ------- -------
Total........................................ $ 23,822 $14,461 $26,600
======== ======= =======
</Table>
60
CAMBREX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) -- (CONTINUED)
(8) INCOME TAXES -- (CONTINUED)
The components of deferred tax assets and liabilities as of December 31,
2005 and 2004 relate to temporary differences and carryforwards as follows:
<Table>
<Caption>
DECEMBER 31,
--------------------
2005 2004
--------- --------
Current deferred tax assets:
Inventory............................................ $ 1,349 $ 1,273
Receivables.......................................... 493 254
Vitamin B-3, legal and related reserves.............. 5,213 5,104
Other................................................ 3,169 3,275
--------- --------
Current deferred tax assets.......................... 10,224 9,906
Valuation allowances................................. (10,039) (7,301)
--------- --------
Total current deferred tax assets............ $ 185 $ 2,605
========= ========
Non-current deferred tax assets:
Foreign tax credits.................................. $ 31,698 $ 15,712
Environmental........................................ 1,166 745
Net operating loss carryforwards (domestic).......... 33,223 42,248
Net operating loss carryforwards (foreign)........... 6,023 3,996
Employee benefits.................................... 5,860 5,765
Restructuring........................................ -- 74
Impairment of investment in securities............... 2,764 2,764
Research & experimentation tax credits............... 5,629 5,697
Alternative minimum tax credits...................... 4,155 4,155
Italian substitute tax benefit....................... 3,720 1,922
Depreciation......................................... 2,775 --
Intangibles.......................................... 16,755 --
Other -- non-current assets.......................... 3,438 3,752
--------- --------
Non-current deferred tax assets...................... 117,206 86,830
Valuation allowances................................. (109,983) (71,711)
--------- --------
Total non-current deferred tax assets*....... $ 7,223 $ 15,119
--------- --------
Non-current deferred tax liabilities:
Depreciation......................................... $ 10,460 $ 22,621
Intangibles.......................................... 6,986 11,954
Indefinite-lived intangible.......................... 16,926 --
Other................................................ 1,394 2,230
--------- --------
Total non-current deferred tax liabilities... $ 35,766 $ 36,805
========= ========
Total net non-current deferred tax
liabilities................................ $ 28,543 $ 21,686
========= ========
</Table>
* Does not include deferred tax asset and corresponding valuation allowance of
$342 for 2004 discontinued operations.
FAS 109, Accounting for Income Taxes, requires the Company to establish a
valuation allowance against deferred tax assets when it is more likely than not
that the Company will be unable to realize those deferred
61
CAMBREX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) -- (CONTINUED)
(8) INCOME TAXES -- (CONTINUED)
tax assets in the future. Based on the Company's current and past performance,
cumulative losses in recent years resulting from domestic operations, the market
environment in which the Company operates, and the utilization of past tax
attributes, the Company has established a valuation allowance of $115,612
against a portion of its domestic deferred tax assets. However, the Company has
not recorded a valuation allowance against domestic tax assets which are offset
by domestic deferred tax liabilities that are expected to reverse in the future.
In addition, the Company has recorded a valuation allowance against deferred tax
assets relating to domestic indefinite lived intangible assets of $16,926 at
December 31, 2005 that had been previously preserved by tax strategies. This
valuation allowance results from the Company's recent history of domestic losses
and increased uncertainty regarding the timing and extent of a return to
domestic profitability. With respect to the Company's foreign deferred tax
assets, the Company has recorded a valuation allowance of $4,410 as of December
31, 2005.
The Company expects to maintain a full valuation allowance against its net
domestic deferred tax assets, subject to the consideration of all prudent and
feasible tax planning strategies, until such time as the Company attains an
appropriate level of future domestic profitability and the Company is able to
conclude that it is more likely than not that its domestic deferred tax assets
are realizable. The change in the domestic valuation allowance for the years
ended December 31, 2005 and 2004 was $39,934 and $24,047, respectively. The
change in the foreign valuation allowance for the years ended December 31, 2005
and 2004 was $1,076 and $1,196, respectively.
Under the tax laws of the various jurisdictions in which the Company
operates, net operating losses ("NOLs") may be carried forward, subject to
statutory limitations, to reduce taxable income in future years. The domestic
NOLs total approximately $93,541 and the foreign NOLs total approximately
$19,611. The domestic NOLs will expire during the period from 2019 through 2025.
NOLs in foreign jurisdictions will carryforward indefinitely.
As of December 31, 2005, approximately $31,698 of foreign tax credits,
$5,629 of Research and Experimental Research credits and $4,155 of Alternative
Minimum Tax Credits were available as credits against future U.S. income taxes.
Under the U.S. Internal Revenue Code, these will expire respectively as follows
2006 through 2015, and 2020 through 2025. The alternative minimum tax credit
carryforwards have no expiration date. All domestic credits are offset by a full
valuation allowance.
On October 22, 2004, the President signed the American Jobs Creation Act of
2004 which created Section 965 of the Internal Revenue Code ("Section 965"). On
June 2, 2005, the Company adopted a Domestic Reinvestment Plan ("DRP") as
described under Section 965 of the Internal Revenue Code introduced by the
American Jobs Creation Act of 2004. The DRP states that the Company may
repatriate up to $209,000 and invest in permitted investments. The Company
repatriated approximately $92,000 and recorded the corresponding additional tax
expense of $368. By virtue of the dividend, the Company reduced its domestic
deferred tax asset related to net operating loss carryforwards by $14,280, with
corresponding adjustments to the full valuation allowances previously recorded
against this asset. The Company also utilized $3,192 of currently generated
Foreign Tax Credits as allowed under Section 965.
As a matter of course, the Company is regularly audited by federal, state
and foreign tax authorities. From time to time, these audits result in proposed
assessments. The Company believes that its positions comply with applicable law
and intends to continue to defend its positions. The Company believes that it
has adequately provided for the estimated outcome related to these matters.
62
CAMBREX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) -- (CONTINUED)
(9) SHORT-TERM DEBT
The Company has lines of credit in Italy with local banks that provide
three types of financing with the following limits: Overdraft protection of
approximately $8,000, export financing of approximately $7,700 and advances on
uncleared deposits of approximately $300. The overdraft protection and export
financing facilities bear interest at varying rates when utilized, however,
advances on uncleared deposits bear no interest. There was $43 outstanding as of
December 31, 2005 and no amount outstanding as of December 31, 2004. The 2005
and 2004 weighted average interest rates were 2.0% and 1.6%, respectively.
Also included in short-term debt at December 31, 2005 and 2004 was the
current portion of long-term debt of $1,471 and $1,400, respectively.
(10) LONG-TERM DEBT
Long-term debt consists of the following:
<Table>
<Caption>
DECEMBER 31,
-------------------
2005 2004
-------- --------
Bank credit facilities.................................. $ 81,943 $120,000
Senior notes............................................ 100,000 100,000
Capitalized leases...................................... 6,056 7,280
Notes payable........................................... 291 307
-------- --------
Subtotal...................................... 188,290 227,587
Less: current portion................................... 1,471 1,400
-------- --------
Total......................................... $186,819 $226,187
======== ========
</Table>
In October 2005, the Company entered into a $277,500 five-year Syndicated
Senior Revolving Credit Facility ("5-Year Agreement"), which expires in October
2010.
The 5-Year Agreement allows the Company to choose among various interest
rate options and to specify the portion of the borrowing to be covered by
specific interest rates. Under the 5-Year Agreement the interest rate options
available to the Company are the following: (i) LIBOR plus an applicable margin
that ranges from .475% to .85%, (ii) higher of U.S. Prime Rate or Federal Funds
Rate plus .5% or (iii) Money Market rate as quoted by the Administrative Agent
of the Agreement. The applicable margin is based upon the ratio of consolidated
funded indebtedness to consolidated EBITDA (as defined in the 5-Year Agreement,
"Leverage Rate"). The Company also pays a facility fee between .15% to .275% on
the entire credit facility which is based upon the leverage ratio. The 5-Year
Agreement is subject to financial covenants requiring the Company to maintain
certain levels of interest coverage ratio, leverage ratios and limitations on
indebtedness. The Company complied with all covenants in this 5-Year Agreement
during 2005. The Company is required to provide audited financial statements to
its lenders under the 5-Year Agreement within 100 days after its fiscal
year-end. The Company has received a waiver from its lenders through June 9,
2006 relating to this requirement for the year ended December 31, 2005.
The 5-Year Agreement is collateralized by dividend and distribution rights
associated with a pledge of a portion of stock that the Company owns in a
foreign holding company. This foreign holding company owns a majority of the
Company's non-U.S. operating subsidiaries. As of December 31, 2005, there was
$81,943 outstanding and $195,557 undrawn under the 5-Year Agreement. Of the
undrawn amount, $106,358 was available to be borrowed as of December 31, 2005
due to limits established in the 5-Year Agreement.
63
CAMBREX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) -- (CONTINUED)
(10) LONG-TERM DEBT -- (CONTINUED)
As of December 31, 2005, the Company had outstanding two Senior notes, a
$75,000 7-year note due in June 2010 with a rate of 5.31%, and a $25,000 10-year
note due in October 2013 with an annual rate of 7.05%. These Senior notes ranked
equal with the Company's 5-Year Agreement. On January 27, 2006, the Company
elected to prepay these Senior notes with funds provided by borrowing under the
5-Year Agreement. An expense of approximately $5,272 will be recorded during the
first quarter of 2006 related to a make whole payment of $4,809 paid to the
Senior note holders concurrent with the January 27, 2006 payment, and the
related acceleration of $463 of unamortized origination fees. The outstanding
amount under the 5-Year Agreement was $95,643 as of January 27, 2006, of which
the entire amount was available to be borrowed at that time.
The Company assumed three capital leases as part of the acquisition of
Cambrex Bio Science Baltimore, Inc. in June 2001 of $12,100. The leases are for
buildings and improvements. There is $6,056 outstanding at December 31, 2005.
All capital leases are collateralized by their underlying assets.
The 2005 and 2004 weighted average interest rate for long-term bank debt
was 5.5%.
Aggregate maturities of long-term debt are as follows:
<Table>
2006........................................................ $ 1,471
2007........................................................ 1,731
2008........................................................ 1,502
2009........................................................ 1,595
2010........................................................ 156,991
Thereafter.................................................. 25,000
--------
Total............................................. $188,290
========
</Table>
(11) DERIVATIVES AND FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company uses derivative financial instruments to reduce exposures to
market risks resulting from fluctuations in interest rates and foreign exchange
rates. The Company does not enter into financial instruments for trading or
speculative purposes. The Company is exposed to credit loss in the event of
nonperformance by the counter parties to the contracts. However, the Company
does not anticipate non-performance by the counterparties.
The Company adopted FAS 133 "Accounting for Derivative Instruments and
Hedging Activities" ("FAS 133"), and its corresponding amendments, which
establishes accounting and reporting standards for derivative financial
instruments. The Company's policy is to enter into forward exchange contracts or
currency options to hedge foreign currency transactions. This hedging strategy
mitigates the impact of short-term foreign exchange rate movements on the
Company's operating results primarily in Sweden, Belgium, and Italy. The
Company's primary market risk relates to exposures to foreign currency exchange
rate fluctuations on transactions entered into by these international operations
that are denominated primarily in U.S. dollars, Swedish krona, British pound
sterling and Euros. As a matter of policy, the Company does not hedge to protect
the translated results of foreign operations.
The Company's forward exchange contracts substantially offset gains and
losses on the transactions being hedged. The forward exchange contracts have
varying maturities with none exceeding twelve months. The Company makes net
settlements for forward exchange contracts at maturity, based upon negotiated
rates at inception of the contracts. The Company has also utilized interest rate
swap agreements to reduce the impact
64
CAMBREX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) -- (CONTINUED)
(11) DERIVATIVES AND FAIR VALUE OF FINANCIAL INSTRUMENTS -- (CONTINUED)
of changes in interest rates on its floating rate debt. The swap agreements are
contracts to exchange floating rates for fixed interest payments periodically
over the life of the agreements without the exchange of the underlying notional
debt amounts. As of December 31, 2005, the Company did not have any interest
rate swap arrangements in place.
All forward contracts outstanding at December 31, 2005 have been designated
as cash flow hedges and, accordingly, changes in the fair value of derivatives
are recorded each period in accumulated other comprehensive income. Changes in
the fair value of the derivative instruments reported in accumulated other
comprehensive income will be reclassified into earnings in the period in which
earnings are impacted by the variability of the cash flows of the hedged item.
The ineffective portion of all hedges is recognized in current-period earnings
and is immaterial to the Company's financial results. The unrealized net loss
recorded in accumulated other comprehensive income at December 31, 2005 was
$192. This amount will be reclassified into earnings as the underlying
forecasted transactions occur. The net gain recognized in earnings related to
foreign currency forward contracts during the twelve months ended December 31,
2005 was $72. The net loss on interest rate swap contracts recognized in
interest expense was $1,003 for the twelve months ended December 31, 2005.
The table below reflects the notional and fair value amounts of foreign
exchange contracts at December 31, 2005 and 2004.
<Table>
<Caption>
2005 2004
---------------- -----------------
NOTIONAL FAIR NOTIONAL FAIR
AMOUNTS VALUE AMOUNTS VALUE
-------- ----- -------- ------
Forward exchange contracts....................... $16,741 $(166) $16,692 $1,189
</Table>
The carrying amount reported in the consolidated balance sheets for cash
and cash equivalents, accounts receivable, and accounts payable approximates
fair value because of the immediate or short-term maturity of these financial
instruments. The carrying amount for short-term debt approximates fair value
because all of this underlying debt is at variable rates. The fair value of the
Senior Notes was approximately $101,000 at December 31, 2005.
(12) STOCKHOLDERS' EQUITY
The Company has two classes of common shares which are Common Stock and
Nonvoting Common Stock. Authorized shares of Common Stock were 100,000,000 at
December 31, 2005 and 2004. Authorized shares of Nonvoting Common Stock were
730,746 at December 31, 2005 and 2004.
At December 31, 2005 there were 615,180 of authorized shares of Common
Stock reserved for issuance for stock option plans.
Nonvoting Common Stock with a par value of $.10, has equal rights with
Common Stock, with the exception of voting power. Nonvoting Common Stock is
convertible, share for share, into Common Stock, subject to any legal
requirements applicable to holders restricting the extent to which they may own
voting stock. As of December 31, 2005 and 2004, no shares of Nonvoting Common
Stock were outstanding.
The Company held treasury stock of 2,443,313 and 2,593,129 shares at
December 31, 2005 and 2004, respectively, which are used for issuance to
employee benefit plans.
The Company has authorized 5,000,000 shares of Series Preferred Stock, par
value $.10, issuable in series and with rights, powers and preferences as may be
fixed by the Board of Directors. At December 31, 2005 and 2004, there was no
preferred stock outstanding.
65
CAMBREX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) -- (CONTINUED)
(13) STOCK BASED COMPENSATION
The Company has seven stock-based compensation plans currently in effect.
The 1994 Stock Option Plan ("1994 Plan"), the 1996 Performance Stock Option Plan
("1996 Plan"), the 1998 Performance Stock Option Plan ("1998 Plan"), the 2001
Performance Stock Option Plan ("2001 Plan"), the 2003 Performance Stock Option
Plan ("2003 Plan"), and the 2004 Omnibus Incentive Plan ("2004 Plan") provide
for the granting of non-qualified and incentive stock options (ISOs), restricted
stock and other equity based vehicles intended to qualify as additional
incentives to management and other key employees. The 2000 Employee Performance
Stock Option Plan ("2000 Plan") provides for the granting of non-qualified stock
options and ISOs intended to qualify as additional incentives to non-executive
employees. The 1996 Plan, the 1998 Plan, the 2001 Plan, the 2003 Plan and the
2004 Plan also provide for the granting of non-qualified stock options to
non-employee directors.
Certain options under the 1996 Plan, the 1998 Plan, the 2000 Plan, the 2001
Plan, and the 2003 Plan may become exercisable six years after the date of
grant, subject to acceleration if the publicly traded share price of the
Company's Common Stock equals or exceeds levels determined by the Compensation
Committee of the Board of Directors within certain time periods or in the event
of a change in control. Options may also become exercisable based on the passage
of time, such that the option becomes fully exercisable in a series of
cumulating portions over a four-year period. Options have a term of no more than
ten years from the date of grant. In addition, stock option awards may be
transferred to a member of the Participant's immediate family or to a trust or
similar vehicle for the benefit of such transferee.
The Company applies the provisions of APB Opinion No. 25 and related
Interpretations in accounting for its stock-based compensation plans. FAS 123
establishes financial accounting and reporting standards for stock-based
employee compensation plans. The Company has adopted the disclosure only
provisions available under FAS 123. Accordingly, no compensation cost has been
recognized for stock option plans under FAS 123.
Shares of Common Stock subject to outstanding options under the stock
option plans were as follows:
<Table>
<Caption>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------------------------- --------------------
WEIGHTED AVERAGE
---------------------- WEIGHTED
REMAINING AVERAGE
AUTHORIZED NUMBER OF OPTION PRICE CONTRACTUAL EXERCISE NUMBER OF EXERCISE
FOR ISSUANCE SHARES PER SHARE $ LIFE (YRS) PRICE $ SHARES PRICE $
------------ --------- ------------- ----------- -------- --------- --------
1994 Plan.................. 300,000 14,000 26.67 5.31 26.67 14,000 26.67
1996 Plan.................. 3,000,000 231,950 14.25 - 20.72 3.61 17.28 231,950 17.28
267,100 21.90 - 29.75 3.98 24.58 267,100 24.58
381,182 34.75 - 43.63 4.26 41.88 381,182 41.88
1998 Plan.................. 1,180,000 478,249 18.75 - 27.56 2.00 22.50 478,249 22.50
137,839 34.75 - 43.63 4.55 41.50 137,839 41.50
2000 Plan.................. 500,000 251,900 18.30 - 20.72 6.62 20.34 251,900 20.34
206,500 34.75 - 46.85 4.40 43.20 206,500 43.20
2001 Plan.................. 750,000 291,000 18.30 - 25.88 5.96 22.60 291,000 22.60
439,612 29.75 - 42.87 5.01 33.85 439,612 33.85
8,582 46.85 5.57 46.85 8,582 46.85
2003 Plan.................. 500,000 446,683 18.68 - 25.56 4.24 20.11 446,683 20.11
2004 Plan.................. 1,500,000 866,650 18.15 - 21.90 5.75 21.56 866,650 21.56
--------- --------- ---------
7,730,000 4,021,247 14.25 - 46.85 26.60 4,021,247 26.60
========= ========= =========
</Table>
66
CAMBREX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) -- (CONTINUED)
(13) STOCK BASED COMPENSATION -- (CONTINUED)
Information regarding the Company's stock option plans is summarized below:
<Table>
<Caption>
WEIGHTED AVERAGE
------------------------------
NUMBER OF EXERCISE PRICE OPTIONS
SHARES $ EXERCISABLE
--------- ---------------- -----------
Outstanding at December 31, 2002........................ 3,162,715 29.65 1,791,383
---------
Granted............................................... 715,900 20.99
Exercised............................................. (122,750) 8.97
Cancelled............................................. (53,000) 37.71
Outstanding at December 31, 2003........................ 3,702,865 28.62 1,867,331
---------
Granted............................................... 1,029,350 22.08
Exercised............................................. (353,951) 17.48
Cancelled............................................. (425,907) 35.76
Outstanding at December 31, 2004........................ 3,952,357 27.07 1,790,467
---------
Granted............................................... 653,033 20.07
Exercised............................................. (292,538) 13.32
Cancelled............................................. (291,605) 31.45
---------
Outstanding at December 31, 2005........................ 4,021,247 26.60 4,021,247
=========
</Table>
The weighted-average grant-date fair value of options granted during 2005,
2004 and 2003 was $8.56, $9.68 and $9.09 per share, respectively.
Cambrex senior executives participate in a long-term incentive plan which
rewards achievement of long-term strategic goals with restricted stock units.
Awards are made annually to key executives and vest in one-third increments on
the first, second and third anniversaries of the grant. On the third anniversary
of the grant, restrictions on sale or transfer are removed and shares are issued
to executives. In the event of termination of employment or retirement, the
participant is entitled to the vested portion of the restricted stock units and
forfeits the remaining amount; the three-year sale and transfer restriction
remains in place. In the event of death or permanent disability, all shares vest
and the deferred sales restriction lapses. For the years ended December 31,
2005, 2004 and 2003 the Company recorded $892, $725 and $695 respectively, in
compensation expense for this plan. In addition, the Company recorded $2,214,
$227 and $0 in compensation expense in 2005, 2004 and 2003, respectively, for
restricted stock in accordance with the CEO's sign-on agreement. Shares are held
in trust for the restricted stock unit grants. The number of shares held at
December 31, 2005 and 2004 was 213,465 and 87,314, respectively. The fair value
of these shares was $4,007 and $2,366 as of December 31, 2005 and 2004,
respectively.
At December 31, 2005, the Company has outstanding 150,000 incentive stock
appreciation rights fully-vested at a price of $19.30 issued to the current CEO.
These rights will be marked to market until the rights are exercised or expire
with the amount being recorded as compensation expense or benefit in the
applicable period. For the years ended December 31, 2005, 2004 and 2003 the
Company recorded ($1,170), $276 and $894, respectively, in compensation
(benefit)/expense.
67
CAMBREX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) -- (CONTINUED)
(14) RETIREMENT PLANS
Domestic Pension Plans
The Company maintains two U.S. defined-benefit pension plans: the Nepera
Hourly Pension Plan which covers the union employees at the formerly-owned
Harriman, New York plant, and the Cambrex Pension Plan which covers all other
eligible employees. Generally, all employees hired after December 31, 2002 are
not eligible for these benefits.
Benefits for the salaried and certain hourly employees are based on salary
and years of service, while those for employees covered by a collective
bargaining agreement are based on negotiated benefits and years of service.
The Company's policy is to fund pension costs currently to the full extent
required by the Internal Revenue Code. Pension plan assets consist primarily of
balanced fund investments.
The net periodic pension expense for both 2005 and 2004 is based on a
twelve month period and on valuations of the plans as of January 1. However, the
reconciliation of funded status is determined as of the September 30 measurement
date.
The funded status of these plans, incorporating fourth quarter
contributions, as of September 30, 2005 and 2004 is as follows:
<Table>
<Caption>
2005 2004
------- -------
CHANGE IN BENEFIT OBLIGATION
Benefit obligation at October 1........................... $53,253 $47,267
Service cost.............................................. 2,751 2,395
Interest cost............................................. 3,166 3,010
Actuarial loss............................................ 1,393 2,494
Benefits paid............................................. (2,112) (1,913)
------- -------
Benefit obligation at September 30........................ $58,451 $53,253
======= =======
</Table>
<Table>
<Caption>
2005 2004
-------- --------
CHANGE IN PLAN ASSETS
Fair value of plan assets at October 1.................... $ 34,887 $ 28,951
Actual return on plan assets.............................. 3,861 3,411
Contributions............................................. 1,801 4,438
Benefits paid............................................. (2,112) (1,913)
-------- --------
Fair value of plan assets at September 30................. $ 38,437 $ 34,887
-------- --------
Funded status............................................. (20,014) (18,366)
Unrecognized prior service cost........................... 476 522
Unrecognized net loss..................................... 14,272 14,266
Additional minimum liability.............................. (9,442) (9,601)
-------- --------
Accrued benefit cost at September 30,..................... (14,708) (13,179)
Fourth quarter contributions.............................. -- 901
-------- --------
Accrued benefit cost at December 31,...................... $(14,708) $(12,278)
======== ========
</Table>
68
CAMBREX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) -- (CONTINUED)
(14) RETIREMENT PLANS -- (CONTINUED)
Major assumptions used in determining the benefit obligation as of
September 30 for the Company's domestic pension plans are presented in the
following table:
<Table>
<Caption>
2005 2004
---- ----
Discount rate............................................... 5.75% 5.75%
Rate of compensation increase............................... 5.00% 5.00%
</Table>
The components of net periodic pension cost are as follows:
<Table>
<Caption>
2005 2004 2003
------ ------ ------
COMPONENTS OF NET PERIODIC PENSION COST
Service cost............................................. $2,751 $2,395 $2,598
Interest cost............................................ 3,166 3,010 2,841
Expected return on plan assets........................... (2,939) (2,768) (2,098)
Amortization of prior service cost....................... 46 46 68
Recognized actuarial loss................................ 466 592 519
Curtailment loss on sale of Rutherford................... -- -- 351
------ ------ ------
Net periodic benefit cost................................ $3,490 $3,275 $4,279
====== ====== ======
</Table>
Major assumptions used in determining the net cost for the Company's
domestic pension plans are presented in the following table:
<Table>
<Caption>
2005 2004 2003
---- ---- ----
Discount rate............................................... 5.75% 6.00% 6.75%
Expected return on plan assets.............................. 8.50% 8.50% 8.50%
Rate of compensation increase............................... 5.00% 4.50% 4.50%
</Table>
In making its assumption for the long-term rate of return, the Company has
utilized historical rates earned on securities allocated consistently with its
investments.
The aggregate Accumulated Benefit Obligation (ABO) of $53,145 exceeds plan
assets by $14,708 as of September 30, 2005 for all domestic plans.
The Company expects to contribute approximately $4,250 in cash to its two
U.S. defined-benefit pension plans in 2006.
69
CAMBREX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) -- (CONTINUED)
(14) RETIREMENT PLANS -- (CONTINUED)
Estimated Future Benefit Payments
The following benefit payments, which reflect expected future service, as
appropriate, are expected to be paid:
<Table>
<Caption>
PENSION
BENEFITS
--------
2006........................................................ $ 2,154
2007........................................................ $ 2,256
2008........................................................ $ 2,359
2009........................................................ $ 2,489
2010........................................................ $ 2,607
2011-2015................................................... $16,531
</Table>
The investment objective for plan assets is to achieve long-term growth of
capital with exposure to risk set at an appropriate level. The objective shall
be accomplished through the utilization of a diversified asset mix consisting of
equities (domestic and international) and taxable fixed income securities. The
account is to be managed on a fully discretionary basis to obtain the highest
total rate of return in keeping with a moderate level of risk.
The allocation of pension plan assets is as follows:
<Table>
<Caption>
PERCENTAGE OF PLAN
ASSETS
TARGET -------------------
ASSET CATEGORY: ALLOCATION 2005 2004
- --------------- ---------- -------- --------
U.S. equities........................................... 30%-70% 49.9% 50.2%
International equities.................................. 0%-20% 11.2% 10.4%
U.S. fixed income....................................... 20%-60% 36.9% 37.6%
Cash.................................................... N/A 2.0% 1.8%
------ ------
100.0% 100.0%
====== ======
</Table>
The Company has a Supplemental Executive Retirement Plan ("SERP") for key
executives. This plan is non-qualified and unfunded. It consists of two plans,
the Corporate SERP plan and the BioWhittaker SERP Plan.
70
CAMBREX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) -- (CONTINUED)
(14) RETIREMENT PLANS -- (CONTINUED)
The benefit obligation for these plans as of December 31, 2005 and 2004 is
as follows:
<Table>
<Caption>
2005 2004
------- -------
CHANGE IN BENEFIT OBLIGATION
Benefit obligation at beginning of year..................... $ 7,422 $ 7,021
Service cost................................................ 224 215
Interest cost............................................... 434 440
Actuarial loss/(gain)....................................... 280 (29)
Benefits paid............................................... (330) (225)
------- -------
Benefits obligation at end of year.......................... 8,030 7,422
======= =======
Funded status............................................... $(8,030) $(7,422)
Unrecognized prior service cost............................. 20 24
Unrecognized net transition obligation...................... 199 300
Unrecognized net loss....................................... 1,747 1,507
Additional minimum liability................................ (1,649) (1,536)
------- -------
Accrued benefit at December 31,............................. $(7,713) $(7,127)
======= =======
</Table>
Major assumptions used in determining the benefit obligation as of December
31 for the Company's SERP Plans are presented in the following table:
<Table>
<Caption>
2005 2004
----- -----
Discount rate............................................... 5.75% 5.75%
Rate of compensation increase............................... 5.00% 5.00%
</Table>
The components of net periodic benefit cost are as follows:
<Table>
<Caption>
2005 2004 2003
---- ---- ----
COMPONENTS OF NET PERIODIC BENEFIT COST
Service cost................................................ $224 $215 $251
Interest cost............................................... 434 440 423
Amortization of prior service cost.......................... 4 4 4
Recognized actuarial loss................................... 140 159 132
---- ---- ----
Net periodic benefit cost................................... $802 $818 $810
==== ==== ====
</Table>
Major assumptions used in determining the net cost for the Company's SERP
plans are presented in the following table:
<Table>
<Caption>
2005 2004 2003
----- ----- -----
Discount rate............................................... 5.75% 6.00% 6.75%
Rate of compensation increase............................... 5.00% 5.00% 5.00%
</Table>
71
CAMBREX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) -- (CONTINUED)
(14) RETIREMENT PLANS -- (CONTINUED)
Estimated Future Benefit Payments
The following benefit payments, which reflect expected future service, as
appropriate, are expected to be paid:
<Table>
<Caption>
SERP
BENEFITS
--------
2006........................................................ $ 344
2007........................................................ $ 427
2008........................................................ $ 584
2009........................................................ $ 579
2010........................................................ $ 582
2011-2015................................................... $2,766
</Table>
International Pension Plans
Certain foreign subsidiaries of the Company maintain pension plans for
their employees that conform to the common practice in their respective
countries. Based on local laws and customs, some of those plans are not funded.
For those plans that are funded, the amount in the trust, supporting the plan,
is actuarially determined, and where applicable, in compliance with local
statutes.
72
CAMBREX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) -- (CONTINUED)
(14) RETIREMENT PLANS -- (CONTINUED)
The funded status of these plans, as of December 31, 2005 and 2004 is as
follows:
<Table>
<Caption>
2005 2004
-------- --------
CHANGE IN BENEFIT OBLIGATION
Benefit obligation at beginning of year................... $ 25,698 $ 20,146
Service cost.............................................. 1,274 882
Interest cost............................................. 1,088 990
Plan participants' contributions.......................... 136 169
Actuarial loss............................................ 1,032 1,777
Benefits paid............................................. (586) (219)
Foreign exchange.......................................... (4,049) 1,953
-------- --------
Benefit obligation at end of year......................... $ 24,593 $ 25,698
======== ========
CHANGE IN PLAN ASSETS
Fair value of plan assets at beginning of year............ $ 5,678 $ 4,226
Actual return on plan assets.............................. 1,001 354
Company contributions..................................... 605 551
Plan participants' contributions.......................... 179 169
Benefits paid............................................. (345) (17)
Foreign exchange.......................................... (836) 395
-------- --------
Fair value of plan assets at end of year.................. $ 6,282 $ 5,678
-------- --------
Funded status............................................. $(18,311) $(20,020)
Unrecognized actuarial loss............................... 8,190 7,952
Unrecognized prior service cost........................... (80) (87)
Unrecognized net gain..................................... (381) (433)
Additional minimum liability.............................. (4,171) (3,919)
Foreign exchange.......................................... (195) 352
-------- --------
Accrued benefit........................................... $(14,948) $(16,155)
======== ========
</Table>
Major assumptions used in determining the benefit obligation as of December
31, for the Company's international pension plans are presented in the following
table:
<Table>
<Caption>
2005 2004
------------- -------------
Discount rate.......................................... 4.25% - 5.00% 4.50% - 5.26%
Rate of compensation increase.......................... 3.00% - 3.50% 3.00% - 3.50%
</Table>
73
CAMBREX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) -- (CONTINUED)
(14) RETIREMENT PLANS -- (CONTINUED)
The components of the net periodic pension cost are as follows:
<Table>
<Caption>
2005 2004 2003
------ ------ ------
COMPONENTS OF NET PERIODIC PENSION COST
Service cost............................................... $1,274 $ 882 $ 633
Interest cost.............................................. 1,088 990 828
Expected return on plan assets............................. (416) (288) (182)
Amortization of unrecognized net obligation................ (35) (35) (32)
Amortization of prior service cost......................... 197 166 127
------ ------ ------
Net periodic benefit cost.................................. $2,108 $1,715 $1,374
====== ====== ======
</Table>
Major assumptions used in determining the net cost for the Company's
international pension plans are presented in the following table:
<Table>
<Caption>
2005 2004 2003
------------- ------------- -------------
Discount rate........................... 4.25% - 5.00% 4.50% - 5.26% 5.20% - 5.50%
Expected return on plan assets.......... 4.50% - 6.26% 6.89% 7.34%
Rate of compensation increase........... 3.00% - 3.50% 3.00% - 3.50% 3.00% - 3.75%
</Table>
The aggregate ABO of $21,016 for international plans exceeds plan assets by
$14,734 in 2005.
The Company expects to contribute approximately $548 in cash to its
international pension plans in 2006.
Estimated Future Benefit Payments
The following benefit payments, which reflect expected future service, as
appropriate, are expected to be paid:
<Table>
<Caption>
PENSION
BENEFITS
--------
2006........................................................ $ 266
2007........................................................ $ 309
2008........................................................ $ 383
2009........................................................ $ 439
2010........................................................ $ 510
2011-2015................................................... $3,318
</Table>
The allocation of pension plan assets is as follows:
<Table>
<Caption>
PERCENTAGE OF
PLAN ASSETS
-------------
ASSET CATEGORY: 2005 2004
- --------------- ----- -----
Equities.................................................... 83.5% 92.2%
Fixed income................................................ 13.2% 3.6%
Property.................................................... 1.6% 1.4%
Cash........................................................ 1.7% 2.8%
----- -----
100.0% 100.0%
===== =====
</Table>
74
CAMBREX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) -- (CONTINUED)
(14) RETIREMENT PLANS -- (CONTINUED)
Savings Plan
Cambrex makes available to all employees a savings plan as permitted under
Sections 401(k) and 401(a) of the Internal Revenue Code. Employee contributions
are matched in part by Cambrex. The cost of this plan amounted to $2,095, $2,092
and $2,113 in 2005, 2004 and 2003, respectively.
Other
The Company has a non-qualified Compensation Plan for Key Executives ("the
Deferred Plan"). Under the Deferred Plan, officers and key employees may elect
to defer all or any portion of their pre-tax annual bonus and/or annual base
salary. Included within other liabilities at December 31, 2005 and 2004 there is
$2,472 and $2,050, respectively, representing the Company's obligation under the
plan. To assist in the funding of this obligation, the Company invests in
certain mutual funds and as such, included within other assets at December 31,
2005 and 2004 is $2,472 and $2,050, respectively, representing the fair value of
these funds. During 1995, the Board amended the Deferred Plan to permit officers
and key employees to elect to defer receipt of the Company's stock which would
otherwise have been issued upon the exercise of the Company's options. Total
shares held in trust as of December 31, 2005 and 2004 are 224,075 and 228,677,
respectively, and are included as a reduction of equity at cost. The value of
the shares held in trust and the corresponding liability of $4,206 at December
31, 2005 has been recorded in equity. The Deferred Plan is not funded by the
Company, but the Company has established a Deferred Compensation Trust Fund
which holds the shares issued.
(15) OTHER POSTRETIREMENT BENEFITS
Cambrex provides postretirement health and life insurance benefits
("postretirement benefits") to all eligible retired employees. Employees who
retire at or after age 55 with ten years of service are eligible to participate
in the postretirement benefit plans. The Company's responsibility for such
premiums for each plan participant is based upon years of service subject to an
annual maximum of one thousand dollars. Such plans are self-insured and are not
funded. Certain subsidiaries and all employees hired after December 31, 2002
(excluding those covered by collective bargaining) are not eligible for these
benefits. Effective January 1, 2006, the Cambrex Retiree Medical Plan will no
longer provide prescription coverage to retirees or dependents age 65 or over.
75
CAMBREX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) -- (CONTINUED)
(15) OTHER POSTRETIREMENT BENEFITS -- (CONTINUED)
The benefit obligation of the plan as of September 30, 2005 and 2004,
incorporating fourth quarter payments, is as follows:
<Table>
<Caption>
2005 2004
------- -------
CHANGE IN BENEFIT OBLIGATION
Accumulated benefit obligation at October 1................. $ 2,655 $ 2,532
Service cost................................................ 60 53
Interest cost............................................... 154 154
Actuarial (gain)/loss....................................... (766) 207
Plan amendments............................................. (51) --
Benefits paid............................................... (180) (291)
------- -------
Accumulated benefit obligation at September 30.............. $ 1,872 $ 2,655
Unrecognized net loss....................................... (1,343) (2,227)
Unrecognized prior service cost............................. 1,046 1,146
------- -------
Accrued benefit cost at September 30,....................... $ 1,575 $ 1,574
Fourth quarter benefits paid................................ (29) (36)
------- -------
Accrued benefit obligation at December 31................... $ 1,546 $ 1,538
======= =======
</Table>
The periodic postretirement benefit cost includes the following components:
<Table>
<Caption>
YEARS ENDED DECEMBER 31,
--------------------------
2005 2004 2003
------ ------ --------
COMPONENTS OF NET PERIODIC BENEFIT COST
Service cost............................................... $ 60 $ 53 $ 124
Interest cost.............................................. 154 154 198
Actuarial loss recognized.................................. 118 119 211
Amortization of unrecognized prior service cost............ (152) (151) (175)
Curtailment gain on Rutherford............................. -- -- (1,046)
----- ----- -------
Total periodic postretirement benefit cost................. $ 180 $ 175 $ (688)
===== ===== =======
</Table>
Major assumptions used in determining the benefit obligation and net cost
for the Company's postretirement benefits are presented in the following table
as weighted averages:
<Table>
<Caption>
BENEFIT
OBLIGATION NET COST
----------- ------------------
2005 2004 2005 2004 2003
---- ---- ---- ---- ----
WEIGHTED-AVERAGE ASSUMPTIONS:
Discount rate....................................... 5.75% 5.75% 5.75% 6.00% 6.75%
</Table>
76
CAMBREX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) -- (CONTINUED)
(15) OTHER POSTRETIREMENT BENEFITS -- (CONTINUED)
Estimated Future Benefit Payments
The following benefit payments, which reflect expected future service, as
appropriate, are expected to be paid:
<Table>
<Caption>
OPEB
BENEFITS
--------
2006........................................................ $ 73
2007........................................................ $ 78
2008........................................................ $ 83
2009........................................................ $ 88
2010........................................................ $ 93
----
2011-2015................................................... $545
====
</Table>
The assumed health care cost trend rate used to determine the accumulated
postretirement benefit obligation is 9% in 2005 decreasing 1% per year to an
ultimate rate of 5% in 2009 (10% in 2004). A one-percentage-point increase in
the assumed health care cost trend rate would increase the accumulated
postretirement benefit obligation by $29 and would increase the sum of interest
and service cost by $3. A one-percentage-point decrease would lower the
accumulated postretirement benefit obligation by $22 and would decrease the sum
of interest and service cost by $2.
(16) SEGMENT INFORMATION
The Company classifies its business units into three reportable segments:
Bioproducts, consisting of research products and other therapeutic application
products, Biopharma, consisting of contract biopharmaceutical process
development and manufacturing services and Human Health, consisting of active
pharmaceutical ingredients and pharmaceutical intermediates produced under FDA
cGMP for use in the production of prescription and over-the-counter drug
products and other fine custom chemicals derived from organic chemistry.
Information as to the operations of the Company in each of its business
segments is set forth below based on the nature of the products and services
offered. Cambrex evaluates performance based on gross profit and operating
profit. Intersegment sales are not material. The Company allocates certain
corporate expenses to each of the segments.
In 2005 no single customer accounted for more than 10% of total
consolidated gross sales. In 2004 one customer, a distributor which represents
multiple customers, accounted for 10.1% of consolidated gross sales. This
customer is in the Human Health segment.
The Company currently has a long-term sales contract within the Human
Health segment that accounts for more than 10% of segment sales that is
scheduled to expire at the end of 2008. There is no guarantee that this contract
will be renewed.
77
CAMBREX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) -- (CONTINUED)
(16) SEGMENT INFORMATION -- (CONTINUED)
The following is a summary of business segment information:
<Table>
<Caption>
2005 2004 2003
-------- -------- --------
GROSS SALES
Bioproducts.......................................... $149,498 $136,108 $119,298
Biopharma............................................ 41,698 43,270 44,128
Human Health......................................... 260,790 259,737 242,165
-------- -------- --------
$451,986 $439,115 $405,591
======== ======== ========
</Table>
GROSS PRODUCT SALES DETAIL FOR EACH SEGMENT
<Table>
<Caption>
2005 2004 2003
-------- -------- --------
BIOPRODUCTS:
Research products.................................. $ 75,810 $ 70,657 $ 62,650
Therapeutic application............................ 73,688 65,451 56,648
-------- -------- --------
Total Bioproducts.......................... $149,498 $136,108 $119,298
======== ======== ========
BIOPHARMA:
Contract biopharmaceutical manufacturing........... $ 41,698 $ 43,270 $ 44,128
-------- -------- --------
Total Biopharma............................ $ 41,698 $ 43,270 $ 44,128
======== ======== ========
HUMAN HEALTH:
Active pharmaceutical ingredients.................. $199,935 $200,555 $183,632
Pharmaceutical intermediates and custom
development..................................... 30,578 27,365 24,349
Other.............................................. 30,277 31,817 34,184
-------- -------- --------
Total Human Health......................... $260,790 $259,737 $242,165
======== ======== ========
</Table>
<Table>
<Caption>
2005 2004 2003
-------- -------- --------
GROSS PROFIT
Bioproducts.......................................... $ 77,908 $ 74,930 $ 60,056
Biopharma............................................ (3,811) 4,880 11,829
Human Health......................................... 87,240 90,930 90,521
-------- -------- --------
$161,337 $170,740 $162,406
======== ======== ========
</Table>
<Table>
<Caption>
2005 2004 2003
-------- -------- --------
OPERATING (LOSS)/PROFIT
Bioproducts.......................................... $ 25,670 $ 26,386 $ 17,205
Biopharma............................................ (97,245) (53,813) 2,256
Human Health......................................... 20,711 50,651 56,818
Corporate............................................ (24,917) (23,632) (37,455)
-------- -------- --------
Total operating (loss)/profit...................... $(75,781) $ (408) $ 38,824
======== ======== ========
</Table>
78
CAMBREX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) -- (CONTINUED)
(16) SEGMENT INFORMATION -- (CONTINUED)
<Table>
<Caption>
2005 2004
-------- ----------
TOTAL ASSETS
Bioproducts.......................................... $231,965 $220,791
Biopharma............................................ 58,652 134,591
Human Health......................................... 301,771 399,538
Corporate............................................ 20,084 37,065
-------- --------
$612,472 $791,985
======== ========
</Table>
<Table>
<Caption>
2005 2004 2003
-------- ---------- --------
CAPITAL EXPENDITURES
Bioproducts.......................................... $ 12,392 $ 10,601 $ 8,477
Biopharma............................................ 5,536 9,167 12,319
Human Health......................................... 21,223 18,593 15,646
Corporate............................................ 1,156 1,119 1,415
-------- -------- --------
$ 40,307 $ 39,480 $ 37,857
======== ======== ========
</Table>
<Table>
<Caption>
2005 2004 2003
-------- ---------- --------
DEPRECIATION
Bioproducts.......................................... $ 6,066 $ 5,514 $ 5,125
Biopharma............................................ 4,840 4,239 2,277
Human Health......................................... 24,533 27,950 25,072
Corporate............................................ 1,179 1,234 1,734
-------- -------- --------
$ 36,618 $ 38,937 $ 34,208
======== ======== ========
</Table>
<Table>
<Caption>
2005 2004 2003
-------- ---------- --------
AMORTIZATION
Bioproducts.......................................... $ 1,295 $ 1,455 $ 1,206
Biopharma............................................ 903 431 413
Human Health......................................... 84 35 7
-------- -------- --------
$ 2,282 $ 1,921 $ 1,626
======== ======== ========
</Table>
79
CAMBREX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) -- (CONTINUED)
(17) FOREIGN OPERATIONS AND EXPORT SALES
The following summarized data represents the gross sales and long lived
tangible assets for the Company's domestic and foreign entities for 2005, 2004
and 2003:
<Table>
<Caption>
DOMESTIC FOREIGN TOTAL
-------- -------- --------
2005
Gross sales.......................................... $217,787 $234,199 $451,986
Long-lived tangible assets........................... 112,500 116,910 229,410
2004
Gross sales.......................................... $200,442 $238,673 $439,115
Long-lived tangible assets........................... 124,595 156,195 280,790
2003
Gross sales.......................................... $181,925 $223,666 $405,591
Long-lived tangible assets........................... 118,509 150,638 269,147
</Table>
Export sales, included in domestic gross sales, in 2005, 2004 and 2003
amounted to $47,115, $29,945, and $22,100, respectively.
Sales by geographic area consist of the following:
<Table>
<Caption>
2005 2004 2003
-------- -------- --------
North America........................................ $204,421 $213,668 $206,079
Europe............................................... 219,728 198,540 173,035
Asia................................................. 18,927 17,723 16,401
Other................................................ 8,910 9,184 10,076
-------- -------- --------
Total.............................................. $451,986 $439,115 $405,591
======== ======== ========
</Table>
(18) COMMITMENTS
The Company has operating leases expiring on various dates through the year
2013. The leases are primarily for the rental of office space, office and
laboratory equipment and vehicles. At December 31, 2005, future minimum
commitments under non-cancelable operating lease arrangements were as follows:
<Table>
Year ended December 31:
2006...................................................... $ 4,607
2007...................................................... 4,418
2008...................................................... 3,917
2009...................................................... 3,630
2010 and thereafter....................................... 6,500
-------
Total commitments......................................... $23,072
=======
</Table>
Total operating lease expense was $4,826, $4,815 and $4,205 for the years
ended December 31, 2005, 2004 and 2003, respectively.
The Company is party to several unconditional purchase obligations
resulting from contracts that contain legally binding provisions with respect to
quantities, pricing and timing of purchases. The Company's purchase obligations
include commitments to purchase raw materials and equipment and for the
construction of a new
80
CAMBREX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) -- (CONTINUED)
(18) COMMITMENTS -- (CONTINUED)
warehouse and R&D laboratory. At December 31, 2005 future commitments under
these obligations were as follows:
<Table>
Year ended December 31:
2006...................................................... $ 7,590
2007...................................................... 1,857
2008...................................................... 1,015
2009...................................................... 985
2010 and thereafter....................................... 1,970
-------
Total commitments......................................... $13,417
=======
</Table>
In the first quarter 2003, the Company reached an agreement with Mylan
Laboratories, Inc. under which the Company would contribute $12,415 to the
settlement of consolidated litigation brought by a class of direct purchasers.
As of December 31, 2005, $7,615 was paid in accordance with the agreement, with
the remaining $4,800 to be paid over the next three years. At December 31, 2005
future commitments under this agreement were as follows:
<Table>
Year ended December 31:
2006...................................................... $1,600
2007...................................................... 1,600
2008...................................................... 1,600
------
Total Commitments......................................... $4,800
======
</Table>
(19) CONTINGENCIES
The Company is subject to various investigations, claims and legal
proceedings covering a wide range of matters that arise in the ordinary course
of its business activities. The Company continually assesses all known facts and
circumstances as they pertain to all legal and environmental matters and
evaluates the need for reserves and disclosures as deemed necessary based on
these facts and circumstances and as such facts and circumstances develop.
Environmental
In connection with laws and regulations pertaining to the protection of the
environment, the Company and/or its subsidiaries is a party to several
environmental proceedings and remediation investigations and cleanups and, along
with other companies, has been named a potentially responsible party for certain
waste disposal sites ("Superfund sites"). Additionally, as discussed in the
"Sale of Rutherford Chemicals" section of this Note, the Company has retained
the liability for certain environmental proceedings, associated with the
Rutherford Chemicals business. Each of these matters is subject to various
uncertainties, and it is possible that some of these matters will be decided
unfavorably against the Company. The resolution of such matters often spans
several years and frequently involves regulatory oversight or adjudication.
Additionally, many remediation requirements are not fixed and are likely to be
affected by future technological, site, and regulatory developments.
Consequently, the ultimate extent of liabilities with respect to such matters,
as well as the timing of cash disbursements cannot be determined with certainty.
In matters where the Company has been able to reasonably estimate its
liability, the Company has accrued for the estimated costs associated with the
study and remediation of Superfund sites not owned by the
81
CAMBREX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) -- (CONTINUED)
(19) CONTINGENCIES -- (CONTINUED)
Company and the Company's current and former operating sites. These accruals
were $6,413 and $6,247 at December 31, 2005 and December 31, 2004, respectively.
The increase in the accrual is primarily due to estimated remediation costs at
the Clifton site (see below) based on information developed during the third
quarter of 2005 of $1,300 offset by a decrease in a reserve at an international
site of $207, currency fluctuation of $581 and payments of $413. Based upon
currently available information and analysis, the Company's current accrual
represents management's best estimate of what it believes are the probable and
estimable costs associated with environmental proceedings including amounts for
legal and investigation fees where remediation costs may not be estimable at the
reporting date.
As a result of the sale of the Bayonne, New Jersey facility (see "Sale of
Rutherford Chemicals" section of this Note), an obligation to investigate site
conditions and conduct required remediation under the New Jersey Industrial Site
Recovery Act was triggered and the Company has retained the responsibility for
such obligation. The Company completed a Preliminary Assessment of the site and
submitted the preliminary assessment to the New Jersey Department of
Environmental Protection ("NJDEP"). The preliminary assessment identified
potential areas of concern based on historical operations and sampling of such
areas commenced. The Company has completed a second phase of sampling and
determined that a third phase of sampling is necessary to determine the extent
of contamination and any necessary remediation. The results of the completed and
proposed sampling, and any additional sampling deemed necessary, will be used to
develop an estimate of the Company's future liability for remediation costs, if
required. The Company submitted its plan for the third phase of sampling to the
NJDEP during the fourth quarter. The sampling will commence in the next few
months.
In March 2000, the Company completed the acquisition of the Cambrex
Profarmaco Landen facility in Belgium. At the time of acquisition, Cambrex was
aware of certain site contamination and recorded a reserve for the estimated
costs of remediation. This property has been the subject of an extensive
on-going environmental investigation. The investigation has been completed and
the Company concluded that no change to the reserve was necessary based on the
information developed through the investigation. The health risk assessment
related to the site contamination is on-going, and is expected to be completed
in the near future, and the results of such assessment may affect the reserves.
The Company's Cosan subsidiary conducted manufacturing operations in
Clifton, New Jersey from 1968 until 1979. Prior to the acquisition by the
Company, the operations were moved to another location and thereafter Cambrex
purchased the business. In 1997, Cosan entered into an Administrative Consent
Order with the NJDEP. Under the Administrative Consent Order, Cosan is required
to complete an investigation of the extent of the contamination related to the
Clifton site and conduct remediation as may be necessary. During the third
quarter 2005, the Company completed the investigation related to the Clifton
site, which extends to adjacent properties. The results of the investigation
caused the Company to increase its related reserves by $1,300. The Company
submitted the results of the investigation and proposed remedial action plan to
the NJDEP. The increase in the reserves is based on the proposed remedial action
plan. In February 2005, the New Jersey Federal District Court ruled that a
lawsuit claiming property damages against Cosan by the owners of contaminated
property adjacent to the Clifton location could be placed on the active
calendar. Discovery in this matter is ongoing. The outcome of this matter could
also affect the reserves.
In mid-2004 the USEPA conducted a hazardous waste inspection of the
Company's Charles city facility. Thereafter, the USEPA notified the facility of
several alleged violations of the hazardous waste laws related to management of
hazardous waste and requested additional information related to the alleged
violations. The Company responded and provided information which questioned the
conclusion that the violations occurred. Nevertheless, the USEPA concluded that
several violations existed at the time of the inspection, and on October 3, 2005
issued the facility an order and penalty assessment in the amount of $189. On
October 31,
82
CAMBREX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) -- (CONTINUED)
(19) CONTINGENCIES -- (CONTINUED)
2005 the Company filed a request for a hearing and an informal conference to
discuss settlement. Settlement discussions have been on-going as we prepare for
the hearing.
In March 2006, the Company received notice from the United States
Environmental Protection Agency ("USEPA") that two former operating subsidiaries
are considered potentially responsible parties ("PRPs") at the Berry's Creek
Superfund Site, Bergen County, New Jersey. Our operating companies are among
many other PRPs that were listed in the notice. Pursuant to the notice the PRPs
have been asked to perform a remedial investigation and feasibility study of the
Berry's Creek Site. The Company has met with the other PRPs. Both operating
companies joined the groups of PRPs and filed a joint response to the USEPA
agreeing to jointly negotiate to conduct or fund along with other PRPs an
appropriate remedial investigation and feasibility study of the Berry's Creek
Site. At this time it is too early to predict the extent of any liabilities,
consequently we have not recorded any reserves for this matter.
The Company is involved in other matters where the range of liability is
not reasonably estimable at this time and it is not determinable when
information will become available to provide a basis for recording an accrual,
should an accrual be required. If any of the Company's environmental matters are
resolved in a more unfavorable manner than presently estimated, these matters
either individually or in the aggregate, could have a material adverse effect on
the Company's financial condition, operating results and cash flows when
resolved in a future reporting period.
Litigation and Other Matters
Mylan Laboratories
In 1998 the Company and its subsidiary Profarmaco S.r.l. (currently known
as Cambrex Profarmaco Milano S.r.l.") ("Profarmaco") were named as defendants
(along with Mylan Laboratories, Inc. ("Mylan") and Gyma Laboratories of America,
Inc., Profarmaco's distributor in the United States) in a proceeding instituted
by the Federal Trade Commission ("FTC") in the United States District Court for
the District of Columbia (the "District Court"). Suits were also commenced by
several State Attorneys General. The suits alleged violations of the Federal
Trade Commission Act arising from exclusive license agreements between
Profarmaco and Mylan covering two APIs. The FTC and Attorneys' General suits
were settled in February 2001, with Mylan (on its own behalf and on behalf of
Profarmaco and Cambrex) agreeing to pay over $140,000 and with Mylan, Profarmaco
and Cambrex agreeing to monitor certain future conduct.
The same parties including the Company and Profarmaco have also been named
in purported class action complaints brought by private plaintiffs in various
state courts on behalf of purchasers of the APIs in generic form, making
allegations similar to those raised in the FTC's complaint and seeking various
forms of relief including treble damages.
In April 2003, Cambrex reached an agreement with Mylan under which Cambrex
would contribute $12,415 to the settlement of litigation brought by a class of
direct purchasers. In exchange, Cambrex and Profarmaco received from Mylan a
release and full indemnity against future costs or liabilities in related
litigation brought by purchasers, as well as potential future claims related to
this matter. In accordance with the agreement $7,615 has been paid through
December 31, 2005, with the remaining $4,800 to be paid over the next three
years. Cambrex recorded an $11,342 charge (discounted to the present value due
to the five year pay-out) in the first quarter of 2003 as a result of this
settlement. As of December 31, 2005 the outstanding balance for this liability
was $4,520.
83
CAMBREX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) -- (CONTINUED)
(19) CONTINGENCIES -- (CONTINUED)
Vitamin B-3
In May 1998, the Company's subsidiary, Nepera, which formerly operated the
Harriman facility and manufactured and sold niacinamide (Vitamin B-3), received
a Federal Grand Jury subpoena for the production of documents relating to the
pricing and possible customer allocation with regard to that product. In 2000,
Nepera reached agreement with the Government as to its alleged role in Vitamin
B-3 violations from 1992 to 1995. The Canadian government claimed similar
violations. All government suits in the U.S. and Canada have now been concluded.
Nepera has been named as a defendant, along with several other companies,
in a number of private civil actions brought on behalf of alleged purchasers of
Vitamin B-3. The actions seek injunctive relief and unspecified but substantial
damages. All cases have been settled within established reserve amounts.
Settlement documents will be finalized and payments will be made during the next
several months. The balance of the reserves recorded within accrued liabilities
related to this matter was $1,627 as of December 31, 2005.
Litigation in the United States under the U.S. antitrust laws was commenced
some years ago by a group of European purchasers. On motion by the Vitamin B-3
defendants, the District Court dismissed the litigation under the long-standing
rule that foreign purchasers cannot sue in U.S. courts under U.S. antitrust
statutes. Thereafter, the Federal Circuit Court for the District of Columbia
reversed the District Court's decision. The Vitamin B-3 defendants, supported by
the U.S. Department of Justice, appealed to the United States Supreme Court and
oral arguments were heard on April 29, 2004. In June 2004, the United States
Supreme Court ruled that foreign purchasers could not sue in U.S. courts under
U.S. antitrust statutes if the conduct at issue resulted in purely foreign harm.
However, the Court left open potential claims where foreign injuries suffered by
foreign plaintiffs were dependent upon domestic harm resulting from conduct that
violates the U.S. antitrust laws and remanded the matter to the Circuit Court
for further proceedings. In June 2005, the District Court's finding against the
plaintiffs was affirmed and the matter dismissed. During the fourth quarter
2005, the United States Supreme Court dismissed plaintiff's final appeal. This
matter can be considered concluded.
Sale of Rutherford Chemicals
The Company completed the sale of its Rutherford Chemicals business in
November 2003. Under the agreement for the sale ("Purchase Agreement"), the
Company provided standard representations and warranties and included various
covenants concerning the business, operations, liabilities and financial
condition of the Rutherford Chemicals business ("Rutherford Business"). Most of
such representations and warranties survived for a period of thirty days after
the preparation of the audited financial statements for year-end 2004 by the
purchasers of the Rutherford Business ("Buyers"). Therefore, claims for breaches
of such representations would have to be brought during that time frame. Certain
specified representations, warranties and covenants, such as those relating to
employee benefit matters and certain environmental matters, survive for longer
periods and claims under such representations, warranties and covenants could be
brought during such longer periods. Under the Purchase Agreement, the Company
has indemnified the Buyers for breaches of representations, warranties and
covenants. Indemnifications for certain but not all representations and
warranties are subject to a deductible of $750 and a cap at 25 percent of the
purchase price.
Under the Purchase Agreement, the Company has retained the liabilities
associated with existing general litigation matters related to Rutherford
Chemicals, including the Vitamin B-3 matter as stated above. With respect to
certain pre-closing environmental matters, the Company retains the
responsibility for: (i) certain existing matters including violations,
environmental testing for the New York facility incinerator and off-site
84
CAMBREX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) -- (CONTINUED)
(19) CONTINGENCIES -- (CONTINUED)
liabilities; and (ii) completing the on-going remediation at the New York
facility. Further, as a result of the sale of the Bayonne, New Jersey facility
within Rutherford Chemicals, and as discussed in the Environmental Section
above, the obligation to investigate site conditions and conduct required
remediation under the provisions of the New Jersey Industrial Site Recovery Act
was triggered; and the Company has retained the responsibility for completion of
any such investigation and remediation. With respect to all other pre-closing
environmental liabilities, whether known or unknown, the Buyer is responsible
for the management of potential future matters; however, the Buyer and the
Company may share the costs of associated remediation with respect to such
potential future matters, subject to certain limitations defined in the
agreement for sale. The Company has accrued for exposures which are deemed
probable and estimable.
In March 2005, the Company received a claim from the Buyers claiming breach
of certain representations, warranties and covenants contained in the Purchase
Agreement. In April 2005 the Company responded rejecting the claim. Thereafter,
the Buyers submitted an amended claim. The amended claim alleges breaches of
representations, warranties and covenants covering each of the five operating
sites sold pursuant to the Purchase Agreement and are related primarily to
facility structures, utilities and equipment and alleges damages of $26,407. To
the extent the alleged damages arise from breaches of representations and
warranties, the claim would be subject to a cap of between approximately $14,000
and $16,250, depending on whether certain contingent payments are made, and is
subject to the deductible of $750 which is the responsibility of the Buyers. In
May 2005, the Company responded to the Buyers and rejected the claim entirely.
Management currently believes that the foregoing claims are without merit and
will vigorously defend against the claim. As such, the Company has no reserves
related to this matter.
In September 2005, the Company received a request for indemnity ("September
Notice") from the Buyers related to an arbitration claim filed by a Rutherford
Business customer ("Customer"). The arbitration claim arises from a claimed
breach of a supply agreement that was assigned to and assumed by the Buyers
pursuant to the Purchase Agreement. Thereafter, the Company was also served with
an arbitration claim by the Customer related to the same matter. In the
arbitration claim, the Customer claims $30,000 in damages arising from Buyers'
breach of the supply agreement. The Buyers claim that the September Notice
amends the earlier claims that they filed in March and April 2005, as discussed
above, and that the Customer's claimed breach of the supply agreement should be
treated as part of a breach of a representation, warranty or covenant set forth
in the earlier notices. The supply agreement was assigned to and assumed by the
Buyers, and the Company has now been dismissed from the Customer's arbitration
claim. In October 2005, the Company rejected the Buyers' claim for indemnity
under the September Notice in its entirety.
In October 2005, the Company received a notice from the Buyers ("October
Notice") which summarized the claims previously received in March and April
2005, along with the Buyer's response to the Company's April and May rejection
of the earlier notices. The October Notice also set forth additional claims for
environmental matters related to the Rutherford Business that relate to
environmental matters at each of the five operating sites sold pursuant to the
Purchase Agreement. In December 2005 Buyers added two additional environmental
claims related to the former operating sites ("December Notices"). The Company
has now responded to the October and December Notices disputing the
environmental claims on various grounds, including that the Company believes
most claims relate to Buyers' obligations under the Purchase Agreement. The
Company also requested additional information because some environmental claims
may be covered by sections of the Purchase Agreement where the parties share
liability concerning environmental matters (see above). Management continues its
evaluation of the Buyers' information and is in discussions concerning
resolution of the claims.
In April 2006, the Company and its Seller subsidiaries received a summons
and complaint (the Complaint) from the Buyers, which was filed in the Supreme
Court of the State of New York, County of
85
CAMBREX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) -- (CONTINUED)
(19) CONTINGENCIES -- (CONTINUED)
New York. The Complaint seeks indemnification, declaratory and injunctive relief
for alleged (i) breaches of presentations, warranties and covenants covering
each of the former operating sites related to facility structures, utilities and
equipment included in the March, April and October Notices mentioned above and
the allegedly related breach of the Customer Supply Agreement arising from a
breach of warranty at the Harriman facility included in September Notice
mentioned above (collectively Equipment Matters); and (ii) claims related to
environmental matters at each of the five operating locations, most of which
related to the former Harriman location included in the October Notice and
December Notices mentioned above (collectively Environmental Matters).
The Company continues its evaluation of Buyers' allegations and intends to
defend itself against these claims vigorously. The Company continues to believe
that the Equipment Matters are without merit. Further, the Company continues to
believe that based on current information the majority of the claims are either
Buyers' responsibility or without merit and the remaining are otherwise not
reasonably estimable at this time. As such the Company has recorded no reserves
for this matter.
Class Action Matter
In October 2003, the Company was notified of a securities class action
lawsuit filed against Cambrex and five former and current Company officers. Five
class action suits were filed with the New Jersey Federal District Court ("the
Court"). In January 2004, the Court consolidated the cases, designated the lead
plaintiff and selected counsel to represent the class. An amended complaint was
filed in March 2004. The lawsuit has been brought as a class action in the names
of purchasers of the Company's common stock from October 21, 1998 through July
25, 2003. The complaint alleges that the Company failed to disclose in timely
fashion the January 2003 accounting restatement and subsequent SEC
investigation, as well as the loss of a significant contract at the Baltimore
facility.
The Company filed a Motion to Dismiss in May 2004. Thereafter the plaintiff
filed a reply brief. In October 2005, the Court denied the Company's Motion to
Dismiss against the Company and two current Company officers. The Company has
reached its deductible under its insurance policy and further costs, expenses
and any settlement is expected to be paid by the Company's insurers. The Company
continues to believe that the complaints are without merit and will vigorously
defend against them. As such, the Company has recorded no reserves related to
this matter.
Securities and Exchange Commission
The SEC is currently conducting an investigation into the Company's
inter-company accounting procedures from the period 1997 through 2001. The
investigation began in the first half of 2003 after the Company voluntarily
disclosed certain matters related to inter-company accounts for the five-year
period ending December 31, 2001 that resulted in the restatement of the
Company's financial statements for those years. To the Company's knowledge, the
investigation is limited to this inter-company accounting matter, and the
Company does not expect further revisions to its historical financial statements
relating to these issues. The Company is fully cooperating with the SEC.
Baltimore Litigation
In 2001, the Company acquired the biopharmaceutical manufacturing business
in Baltimore. The sellers filed suit against the Company alleging that the
Company made false representations during the negotiations on which the sellers
relied in deciding to sell the business and that the Company breached its
obligation to pay additional consideration as provided in the purchase agreement
which was contingent on the performance of
86
CAMBREX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) -- (CONTINUED)
(19) CONTINGENCIES -- (CONTINUED)
the purchased business. Management believes the matter to be without merit and
has been vigorously defending the suit.
Other
The Company has commitments incident to the ordinary course of business
including corporate guarantees of financial assurance obligations under certain
environmental laws for remediation, closure and/or third party liability
requirements of certain of its subsidiaries and a former operating location;
contract provisions for indemnification protecting its customers and suppliers
against third party liability for manufacture and sale of Company products that
fail to meet product warranties and contract provisions for indemnification
protecting licensees against intellectual property infringement related to
licensed Company technology or processes.
Additionally, as permitted under Delaware law, the Company has agreements
whereby we indemnify our officers and directors for certain events or
occurrences while the officer or director is, or was serving, at our request in
such capacity. The term of the indemnification period is for the officer's or
director's lifetime. The maximum potential amount of future payments we could be
required to make under these indemnification agreements is unlimited; however,
we have a Director and Officer insurance policy that covers a portion of any
potential exposure.
The Company currently believes the estimated fair value of its
indemnification agreements is not significant based on currently available
information, and as such, the Company has no liabilities recorded for these
agreements as of December 31, 2005.
In addition to the matters identified above, Cambrex's subsidiaries are
party to a number of other proceedings. While it is not possible to predict with
certainty the outcome of the Company's litigation matters and various other
lawsuits and contingencies, it is the opinion of management based on information
currently available that the ultimate resolution of these matters should not
have a material adverse effect on the Company's results of operations, cash
flows and financial position. These matters, if resolved in an unfavorable
manner, could have a material effect on the operating results and cash flows
when resolved in a future reporting period.
87
CAMBREX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) -- (CONTINUED)
(20) CONSOLIDATED SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
<Table>
<Caption>
1ST 2ND 3RD 4TH
QUARTER QUARTER QUARTER QUARTER YEAR(1)
---------- ---------- ------------- --------- ---------
2005
Gross sales.................................... $110,462 $116,171 $104,500 $ 120,853 $ 451,986
Net revenues................................. 111,933 116,746 104,585 121,833 455,097
Gross profit................................... 43,262 40,270 36,822 40,983 161,337
Net income/(loss)............................ 4,090 7,080 (48) (121,580) (110,458)
Basic earnings per share:(4)
Net income/(loss)............................ 0.16 0.27 (0.00) (4.56) (4.18)
Diluted earnings per share:(4)
Net income/(loss)............................ 0.15 0.27 (0.00) (4.56) (4.18)
Average shares:
Basic........................................ 26,346 26,402 26,418 26,654 26,456
Diluted...................................... 26,630 26,510 26,418 26,654 26,456
</Table>
<Table>
<Caption>
1ST 2ND 3RD 4TH
QUARTER(2) QUARTER(2) QUARTER(2)(3) QUARTER YEAR
---------- ---------- ------------- ---------- --------
2004
Gross sales..................................... $113,549 $108,951 $ 99,250 $117,365 $439,115
Net revenues.................................... 115,632 110,049 100,336 117,640 443,657
Gross profit.................................... 45,471 42,006 39,194 44,069 170,740
Income/(loss) from continuing operations........ 7,759 6,339 (44,861) 4,871 (25,892)
Loss on discontinued operations................. (742) -- (236) -- (978)
Net income/(loss)............................... 7,017 6,339 (45,097) 4,871 (26,870)
Basic earnings per share:(4)
Income/(loss) from continuing operations...... 0.30 0.24 (1.72) 0.19 (0.99)
Loss on discontinued operations............... (0.03) -- (0.01) -- (0.04)
Net income/(loss)............................. 0.27 0.24 (1.73) 0.19 (1.03)
Diluted earnings per share:(4)
Income/(loss) from continuing operations...... 0.29 0.24 (1.72) 0.18 (0.99)
Loss on discontinued operations............... (0.03) -- (0.01) -- (0.04)
Net income/(loss)............................. 0.26 0.24 (1.73) 0.18 (1.03)
Average shares:
Basic......................................... 26,001 26,112 26,109 26,154 26,094
Diluted....................................... 26,605 26,383 26,109 26,540 26,094
</Table>
(1) Results for 2005 include pre-tax charges for goodwill impairment of $76,385,
long-lived asset impairment of $30,792 and a tax benefit related to the
long-lived asset impairment of $1,673, recorded within the provision for
income taxes in the Biopharma and Human Health segments (fourth quarter).
The 2005 results also include pre-tax charges for executive severance of
$4,223 (fourth quarter) and an increase in an environmental reserve of
$1,300 recorded in operating expenses (third quarter) and a tax benefit due
to a favorable Swedish court decision of $3,329 (second quarter) and an
increase in valuation allowances against domestic deferred tax assets
totaling $16,926 (fourth quarter) within the provision for income taxes. The
Company also recorded a net decrease to the tax provision of $524 relating
to prior period adjustments (fourth quarter).
(2) During the 2004 year-end financial reporting process, the Company identified
certain accounting adjustments principally related to amortization of
leasehold improvements, employee benefit accruals, inventory and taxes that
impacted prior years and prior quarters within 2004. The aggregate impact of
the prior years' adjustments was a reduction to net income of $475 and is
not considered material to any prior period. The impact on net income for
the first, second and third quarters of 2004 was an increase of $36, an
increase of $229 or $0.01 per fully diluted share and a decrease of $666 or
$0.03 per fully diluted share, respectively. The Company has restated the
results of the first three quarters of 2004 to reflect these adjustments.
The prior years' adjustment of $475 has been reflected in the restated first
quarter results, netting to a $439 reduction to net income or $0.02 per
fully diluted share.
(3) The third quarter 2004 includes a goodwill impairment charge related to the
Baltimore reporting unit of the Biopharma segment of $48,720.
(4) Earnings per share calculations for each of the quarters are based on the
weighted average number of shares outstanding for each period, as such, the
sum of the quarters may not necessarily equal the earnings per share amount
for the year.
88
ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 9A CONTROLS AND PROCEDURES
CONCLUSION REGARDING THE EFFECTIVENESS OF DISCLOSURE CONTROLS AND PROCEDURES
The Company maintains disclosure controls and procedures as defined in
Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as
amended (the "Exchange Act") that are designed to ensure that information
required to be disclosed in its reports filed or submitted under the Exchange
Act is processed, recorded, summarized and reported within the time periods
specified in the SEC's rules and forms, and that such information is accumulated
and communicated to the Company's management, including the Company's Chief
Executive Officer and Chief Financial Officer, as appropriate, to allow for
timely decisions regarding required disclosure. In designing and evaluating the
disclosure controls and procedures, management recognizes that any controls and
procedures, no matter how well designed and operated, can provide only
reasonable assurance of achieving the desired control objectives, and management
is required to apply its judgment in evaluating the cost-benefit relationship of
possible controls and procedures.
As required by SEC Rule 13a-15(b), the Company carried out an evaluation,
under the supervision and with the participation of management, including the
Company's Chief Executive Officer and Chief Financial Officer, of the
effectiveness of the design and operation of the Company's disclosure controls
and procedures as of the end of the period covered by this Annual Report. Based
on this evaluation, our Chief Executive Officer and Chief Financial Officer
concluded that the Company's disclosure controls and procedures were not
effective as of December 31, 2005, at the reasonable assurance level, because of
the material weakness described in Management's Report on Internal Control over
Financial Reporting.
Notwithstanding the existence of the material weakness described below,
management has concluded that the consolidated financial statements in this Form
10-K fairly present, in all material respects, the Company's financial position,
results of operations and cash flows for the periods presented.
MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Our management is responsible for establishing and maintaining adequate
internal control over financial reporting, as defined in Exchange Act Rule
13a-15(f). Internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with accounting principles generally accepted in the United States, and include
those policies and procedures that:
- Pertain to the maintenance of records, that in reasonable detail,
accurately and fairly represent the transactions and dispositions of the
assets of the Company,
- Provide reasonable assurance that transactions are recorded as necessary
to permit preparation of financial statements in accordance with
generally accepted accounting principles, and that receipts and
expenditures are being made only in accordance with authorizations of
management and the Board of Directors of the Company, and
- Provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of the Company's assets that
could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may deteriorate.
Under the supervision and with the participation of our management,
including our principal executive officer and principal financial officer, we
carried out an evaluation of the effectiveness of our internal control over
financial reporting as of December 31, 2005 based on the Internal
Control -- Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission ("COSO").
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A material weakness is a control deficiency, or combination of control
deficiencies, that results in more than a remote likelihood that a material
misstatement of the annual or interim financial statements will not be prevented
or detected. As of December 31, 2005, the Company did not maintain effective
controls over the accounting for income taxes. Specifically, the Company did not
have a sufficient level of experienced personnel to enable the Company to
properly consider and apply generally accepted accounting principles to the
accounting for income taxes. Additionally, the Company did not maintain
effective controls to determine the completeness and accuracy of the components
of the income tax provision calculations and the related deferred income taxes
and income taxes payable, including the monitoring of the differences between
the tax basis and the financial reporting basis of assets and liabilities to
effectively reconcile the deferred taxes balances. This control deficiency
resulted in audit adjustments to the 2005 consolidated financial statements.
Additionally, this control deficiency could result in a misstatement of other
comprehensive income, income taxes payable, deferred income tax assets and
liabilities and the related income tax provision that would result in a material
misstatement to the annual or interim consolidated financial statements that
would not be prevented or detected. Accordingly, management has determined that
this control deficiency constitutes a material weakness.
As a result of the material weakness described above, the Company's
management has concluded that, as of December 31, 2005, the Company's internal
control over financial reporting was not effective based on the criteria in
Internal Control -- Integrated Framework issued by the COSO.
Management's assessment of the effectiveness of the Company's internal
control over financial reporting as of December 31, 2005 has been audited by
PricewaterhouseCoopers LLP, an independent registered public accounting firm, as
stated in their report, which is included herein under Item 8.
REMEDIATION OF MATERIAL WEAKNESS
The Company has taken and is taking the following actions to address this
material weakness in its accounting for income taxes:
- Strengthened procedures whereby the current income tax payable account
and deferred income tax asset and liability accounts will be reconciled
on a regular and timely basis.
- Reorganized the corporate tax department; the Vice President of Tax has
elected to leave the Company, created and filled a new position- Senior
Tax Director, and aligned the corporate tax department to report to the
Vice President of Finance.
- Increased level of review and discussion of significant tax matters and
supporting documentation with senior finance management.
- Hired a Tax Director in January of 2006 to fill a vacancy within the
corporate tax department.
- Identifying interim personnel to augment existing corporate tax staff to
ensure there are adequate resources to reconcile all tax-related accounts
for each reporting period.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
Our management carried out an evaluation, with the participation of our
principal executive officer and principal financial officer, of changes in our
internal control over financial reporting, as defined in Exchange Act Rule 13a
- -15(f). Based on this evaluation, our management determined that no change in
our internal control over financial reporting occurred during the fourth quarter
of fiscal 2005 that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.
ITEM 9B OTHER INFORMATION
The Company has updated the December 31, 2005 financial information
included in its February 22, 2006 Form 8-K and the related exhibit. Revisions
were made to the Consolidated Income Statement and Segment Information for asset
impairment charges, and provision for income taxes for the year ended December
31, 2005 as well as the December 31, 2005 Consolidated Balance Sheet primarily
for goodwill and property plant and equipment. The Financial Statements and
Supplementary Data are included in Item 8 of this Form 10-K.
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PART III
ITEM 10 DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table lists the officers of the Company:
<Table>
<Caption>
NAME AGE OFFICE
- ---- --- ------
James A. Mack*............................ 68 Chairman of the Board of Directors,
President and Chief Executive Officer
Gary L. Mossman*.......................... 65 Executive Vice President and Chief
Operating Officer
Luke M. Beshar*........................... 47 Executive Vice President and Chief
Financial Officer
Thomas N. Bird*........................... 61 Vice President, Corporate Development
Ronnie D. Carroll, PhD*................... 65 Vice President and Chief Technology
Officer, Pharmaceutical Technologies
Shawn P. Cavanagh*........................ 40 Senior Vice President and General Manager,
Bioproducts Business Unit
Robert J. Congiusti*...................... 52 Vice President, Information Technology
Mary E. Fletcher.......................... 44 Assistant General Counsel and Assistant
Corporate Secretary
Anup Gupta................................ 41 Vice President, Financial Planning and
Treasurer
Steven M. Klosk*.......................... 48 Executive Vice President and Chief
Operating Officer, Biopharma Business Unit
Melissa M. Lesko.......................... 43 Vice President, Human Resources
Gary P. Morrison.......................... 51 Vice President, Tax
Paolo Russolo*............................ 61 President, Cambrex Profarmaco Business Unit
Gregory P. Sargen*........................ 40 Vice President, Finance
Charles W. Silvey......................... 47 Vice President, Internal Audit
Peter E. Thauer*.......................... 66 Senior Vice President, Law and Environment,
General Counsel and Corporate Secretary
</Table>
* Executive Officer
The Company's executive officers are elected by the Board of Directors and
serve at the Board's discretion.
Mr. Mack joined Cambrex in February 1990 and was reappointed President and
Chief Executive Officer of Cambrex in February 2006. Mr. Mack had retired as
President and Chief Executive Officer in August 2004. He joined the Company as
President and Chief Operating Officer and was appointed to the position of
President and Chief Executive Officer in April 1995. Mr. Mack has been a
director of the Cambrex Board of Directors since joining the Company in 1990 and
was appointed Chairman of the Board of Directors in October 1999. Prior to
joining Cambrex, Mr. Mack was Vice President in charge of the worldwide
Performance Chemicals business of Olin Corporation. Mr. Mack was Executive Vice
President of Oakite Products, Inc. from 1982 to 1984. Prior to joining Oakite,
he held various positions with The Sherwin-Williams Company, most recently as
President and General Manager of the Chemicals Division from 1977 to 1981. Mr.
Mack is a past Chairman of the Board of Governors of the Synthetic Organic
Chemical Manufacturing Association and is a member of the Board of Trustees of
the Michigan Tech Alumni Fund.
Mr. Mossman joined Cambrex in February 2003 and currently serves in the
role of Executive Vice President and Chief Operating Officer. He joined the
Company as President of the Pharmaceuticals Business Unit and was appointed to
the position of President and Chief Executive Officer of the Cambrex
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Pharmaceutical and Biopharmaceutical Business Units in October 2003. In August
2004, he was appointed to his current position of Executive Vice President and
Chief Operating Officer. Prior to joining Cambrex, Mr. Mossman was with Dixie
Chemical Company, Inc. from 1983 through 2003 and served in the role of
President since 1990. From 1979 through 1980, Mr. Mossman was General Manager,
Thiokol Specialty Chemicals Division and from 1972 through 1979, he was
President and Cofounder of Southwest Specialty Chemical Company, Inc.
Mr. Beshar joined Cambrex in December 2002 and currently serves in the role
of Executive Vice President and Chief Financial Officer. He joined the Company
as Senior Vice President and Chief Financial Officer and in February 2004 was
appointed to his current position. Prior to joining Cambrex, Mr. Beshar was
Senior Vice President and Chief Financial Officer with Dendrite International.
Prior to Dendrite, he was Executive Vice President, Finance and Chief Financial
Officer for Exp@nets, Inc. from 1998 through 2002. Mr. Beshar has served as
Chief Financial Officer for other businesses in his career and has been the
President and Chief Financial Officer of a company privately owned by Merrill
Lynch Capital Partners. Mr. Beshar is a member of the Board of Directors of PNY
Technologies, Inc.
Mr. Bird joined Cambrex in 1997 and currently serves in the role of Vice
President, Corporate Development. He joined the Company as President and Chief
Operating Officer -- Nepera Inc. and was appointed to the position of President,
Biotechnology Group in July 1998. In December 2000, he was appointed to the
position of Vice President Business Development -- Life Sciences. In December
2002, he was appointed to his current position of Vice President, Corporate
Development. Prior to joining Cambrex, Mr. Bird was President of Bavier, Bulger
& Goodyear, a management consulting firm, from 1994 to 1997. From 1989 to 1994,
he was with Commercial Intertech Corporation, serving in various management
roles, most recently as Group Vice President, Fluid Purification Group. From
1984 to 1989, he served as Founder and President of W.M.A Incorporated. Mr. Bird
also served in various general management roles with Sherwin Williams Company
from 1979 to 1984.
Dr. Carroll joined Cambrex in September 1997 and currently serves in the
role of Vice President and Chief Technology Officer, Pharmaceutical
Technologies. He joined the Company as Vice President Technology and was
appointed to his current position in January 2002. Prior to joining Cambrex, Dr.
Carroll had been with Bristol-Myers Squibb from 1983 to 1997, most recently in
the role of Vice President, Chemical Development for Bristol-Myers Squibb
Technical Operations. Dr. Carroll was with Pfizer, Inc. from 1966 to 1983 in
various research and development roles.
Mr. Cavanagh joined Cambrex in October 1999 and currently serves in the
role of Senior Vice President and General Manager, Bioproducts Business Unit.
Mr. Cavanagh joined Cambrex with the acquisition of FMC BioProducts where he
served as Site Director. In October 2000, he was appointed Global Director,
Endotoxin Detection and in February 2004, to the position of Vice President,
Bioproducts. He was appointed to his current position in September 2005. Prior
to joining Cambrex, Mr. Cavanagh held various management and engineering
positions with FMC.
Mr. Congiusti joined Cambrex in September 1994 and currently serves in the
role of Vice President, Information Technology. He joined the Company as
Director, Information Services and was appointed to his current position in
November 1998. Prior to joining the Company, he held various senior information
systems management positions from 1984 to 1994 at International Specialty
Products and American Cyanamid Company.
Ms. Fletcher joined Cambrex in September 1992 and currently serves in the
role of Assistant General Counsel and Assistant Corporate Secretary. She joined
the Company as Associate Counsel. Ms. Fletcher was appointed Senior Counsel in
January 1997 and Assistant General Counsel in May 2000. She was appointed to her
current role in November 2005. Prior to joining Cambrex, Ms. Fletcher was with
the New Jersey Department of Environmental Protection from 1985 to 1989, serving
in various environmental compliance and enforcement roles.
Mr. Gupta joined Cambrex in October 2003 and currently serves as Vice
President, Financial Planning and Treasurer. He joined the Company as Director,
Financial Planning and Analysis and was appointed
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Director, Finance in September 2005. In February 2006, he was promoted to his
current position. Prior to joining Cambrex, Mr. Gupta was with Satyam Computer
Services as Vice President, Automotive Vertical Business Unit from 2002 to 2003.
From 1987 to 2002, he worked in various capacities at Planet One, Scient,
Trilogy, The Boston Consulting Group and Andersen Consulting (now known as
Accenture).
Mr. Klosk joined Cambrex in October 1992 and currently serves in the role
of Executive Vice President and Chief Operating Officer, Biopharma Business
Unit. Mr. Klosk joined the Company as Vice President, Administration. He was
appointed Executive Vice President, Administration in October 1996 and was
promoted to the position of Executive Vice President, Administration and Chief
Operating Officer for the Cambrex Pharma and Biopharmaceutical Business Unit in
October 2003. In January 2005, Mr. Klosk assumed direct responsibility for the
leadership of the Biopharmaceutical Business Unit as Chief Operating Officer.
From 1988 until he joined Cambrex, Mr. Klosk was Vice President, Administration
and Corporate Secretary for The Genlyte Group, Inc. From 1985 to 1988, he was
Vice President, Administration for Lightolier, Inc., a subsidiary of The Genlyte
Group, Inc.
Ms. Lesko joined Cambrex in August 1995 and currently serves in the role of
Vice President, Human Resources. She joined Cambrex as Manager, Human Resources
and was promoted to the position of Director, Compensation, Staffing and
Development in October 2001. In October 2004, she was promoted to her current
position. Prior to joining Cambrex, Ms. Lesko held various human resources
management positions at The Genlyte Group, Inc. and RCA Records.
Mr. Morrison joined Cambrex in July 2004 as Vice President, Tax. From 2000
until 2004, he held the position of Vice President, Corporate Taxation with
Movado Group, Inc. From 1998 to 2000, he was with Calvin Klein, Inc., as Tax
Director and Ernst & Young as Senior Tax Manager, U.S. Corporate Tax from 1996
to 1998. Prior experience includes BCE Telecom Corporation from 1988 to 1995 and
Pirelli Cable Corporation from 1986 to 1988, serving in various management roles
in corporate taxation.
Dr. Russolo is President, Cambrex Profarmaco Business Unit and joined the
Company in 1994 with the acquisition of Profarmaco Nobel S.r.l. in Milan Italy,
where he served as Managing Director since 1982. Dr. Russolo joined Profarmaco
Nobel S.r.l. in 1971. Upon the acquisition of Profarmaco Nobel S.r.l., Dr.
Russolo continued serving in the role of Managing Director until 2000, when he
was appointed to his current position.
Mr. Sargen joined Cambrex in February 2003 as Vice President, Finance.
Previously, he was with Exp@nets, Inc. from 1999 through 2002, serving in the
roles of Executive Vice President, Finance/Chief Financial Officer and Vice
President/Corporate Controller. From 1996 to 1998, he was with Fischer
Scientific International's Chemical Manufacturing Division, serving in the roles
of Vice President, Finance and Controller. Mr. Sargen has also held various
positions in finance, accounting and audit with Merck & Company, Inc., Heat and
Control, Inc., and Deloitte & Touche.
Mr. Silvey joined Cambrex in August 2004 as Vice President, Internal Audit.
Prior to joining the Company, he was with Automatic Data Processing (ADP) from
2002 to 2004 as Vice President, Financial and Operational Audit. From 1998 to
2002, he was with Lucent Technologies, most recently in the role of Chief
Financial Officer, Americas' -- Lucent Worldwide Services. From 1995 to 1998, he
was with CR Bard, Inc., serving in various finance and audit roles. From 1990 to
1995, he was with KPMG Peat Marwick LLP as Audit Manager.
Mr. Thauer joined Cambrex in August 1989 and currently serves in the role
of Senior Vice President, Law and Environment, General Counsel, and Corporate
Secretary. He joined the Company as General Counsel and Corporate Secretary and
was appointed Vice President, Law and Environment in December
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1992. He was appointed to his current position in January 2001. From 1987 until
1989, he was Counsel to the business and finance group of the firm of Crummy,
Del Deo, Dolan, Griffinger and Vecchione. From 1971 to 1987, Mr. Thauer held
various positions with Avon Products, Inc., including U.S. Legal Department Head
and Corporate Assistant Secretary.
BOARD OF DIRECTORS
The Board of Directors is responsible for directing the management of the
business and affairs of the Company. The Board holds regular meetings five times
each year and holds additional special meetings as required. During 2005 the
Board held ten meetings.
Non-management directors have regularly scheduled executive sessions in
which they meet without the presence of members of management. These executive
sessions occur before or after each regularly scheduled meeting of our Board and
may also occur in conjunction with special meetings. The Lead Director of these
executive sessions is John R. Miller.
Our Board has affirmatively determined, after considering all of the
relevant facts and circumstances, that all of the directors, other than James A.
Mack and Ilan Kaufthal, are independent from our management under the standards
set forth in the Company's Independence Standards for Directors, which was
adopted by the Board in January 2004 and is attached to this proxy statement as
Exhibit 1. This means that none of the independent directors have any direct or
indirect material relationship with the Company, either directly or as a
partner, stockholder or officer of an organization that has a relationship with
us. As a result, the Company has a majority of independent directors on our
Board as required by the listing standards of the New York Stock Exchange.
The Board has established four standing committees: the Audit Committee,
the Compensation Committee, the Governance Committee and the Regulatory Affairs
Committee. The Charters of such Committees as well as the Corporate Governance
Guidelines and Code of Business Conduct & Ethics are available on our website
(www.cambrex.com), under the "Investors-Governance" captions.
The Company will also provide any of the foregoing information in print
without charge upon written request to the Corporate Secretary, Cambrex
Corporation, One Meadowlands Plaza, 15(th) Floor, East Rutherford, New Jersey
07073.
The Audit Committee, comprised of four independent directors, appoints
(subject to stockholder ratification) the accounting firm to act as the
independent accountants for the Company, consults with the accounting firm
concerning the scope of the audit, reviews the audit results and reviews the
Company's internal financial controls and procedures with the independent
accountants and with members of management. The Charter of the Audit Committee
has been adopted by the Committee and approved by the Board. All of the members
of the Audit Committee are independent within the meaning of SEC regulations,
the listing standards of the New York Stock Exchange and the Company's
Independence Standards for Directors. The Audit Committee held eleven meetings
in 2005.
The Compensation Committee, comprised of four independent directors,
oversees the Company's executive compensation programs and policies and
administers the Company's Equity and Incentive Plans. The Charter of the
Compensation Committee has been adopted by the Committee and approved by the
Board. All of the members of the Compensation Committee are independent within
the meaning of the listing standards of the New York Stock Exchange and the
Company's Independence Standards for Directors. The Compensation Committee held
seven meetings in 2005.
The Governance Committee, comprised of four independent directors, is
responsible for reporting to the Board of Directors concerning its evaluation of
the performance of the Chief Executive Officer, individual directors and the
Board as a whole. The Governance Committee makes recommendations to the Board of
Directors concerning nominees for election to the Board at Annual Stockholder
Meetings and candidates for newly created directorships and vacancies on the
Board. The Charter of the Governance Committee has been adopted by the Committee
and approved by the Board. All of the members of the Governance Committee are
94
independent within the meaning of the listing standards of the New York Stock
Exchange and the Company's Independence Standards for Directors. The Governance
Committee held three meetings in 2005.
The Regulatory Affairs Committee, comprised of three non-management
directors, oversees the Company's compliance with Food and Drug Regulations and
environmental and safety affairs. The Regulatory Affairs Committee held four
meetings during 2005.
Under the retirement policy for non-employee directors established by the
Board of Directors in 1989, a non-employee director (other than incumbent
directors when the policy was adopted) must not have attained age 72 at the time
of election and may not serve as a director beyond the Annual Meeting next
following such person's 72nd birthday.
CONSIDERATION OF DIRECTOR NOMINEES
STOCKHOLDER NOMINEES
The Governance Committee will consider nominees recommended by
stockholders. Such recommendations for the 2007 Annual Meeting should be sent to
the Corporate Secretary of the Company not later than January 24, 2007, and
should include such information as specified in the Company's By-Laws.
DIRECTOR QUALIFICATIONS
The Company's Corporate Governance Guidelines set forth Board membership
criteria. Under these criteria, members of the Board should possess the highest
personal and professional ethics, integrity and values, and be committed to
representing the long-term interests of the stockholders. Their skills and
backgrounds should include, among other things, experience in making decisions,
a track record of competent judgment, the ability to function rationally and
objectively, and experience in different businesses and professions. Directors
must be willing to devote sufficient time to carrying out their duties and
responsibilities effectively, and should be committed to serve on the Board for
an extended period of time. Directors should not serve on more than four other
boards of public companies in addition to the Cambrex Board. Current positions
in excess of these limits may be maintained unless the Board determines that
doing so would impair the director's service on the Cambrex Board.
IDENTIFYING AND EVALUATING NOMINEES FOR DIRECTORS
The Governance Committee utilizes a variety of methods for identifying and
evaluating nominees for director. The Governance Committee regularly assesses
the appropriate size of the Board, and whether any vacancies on the Board are
expected due to retirement or otherwise. In the event that vacancies are
anticipated, or otherwise arise, the Governance Committee considers various
candidates for director. Candidates may come to the attention of the Governance
Committee through current Board members, professional search firms, stockholders
or other persons. These candidates are evaluated at regular or special meetings
of the Governance Committee, and may be considered at any point during the year.
As described above, the Governance Committee considers properly submitted
stockholder nominations for candidates for the Board. In addition to the
standards and qualifications set out in the Company's Corporate Governance
Guidelines, the Governance Committee also considers such other relevant factors
as it deems appropriate, including the current composition of the Board, the
balance of management and independent directors, the need for Audit Committee
expertise and the evaluations of other prospective nominees. There are no
differences in the manner in which the Governance Committee evaluates nominees
for director based on whether or not the nominee is recommended by a
stockholder.
COMPENSATION OF DIRECTORS
From January until July 1, 2005, the Company paid each non-employee
director of the Company an annual fee of $23,000, as well as $1,000 for each
Board, Committee and Stockholders' Meeting attended, except that the Chairperson
of the Compensation, Audit, Regulatory Affairs and Governance Committees
95
received $1,500 for each Committee meeting chaired. On June 2, 2005, the Board
of Directors approved a new Directors' Compensation Program, effective July 1,
2005. Under the new Directors' Compensation Program, effective July 1, 2005, the
annual fee was increased to $26,000 and was prorated for 2005 service. The
additional Annual Retainer fee of $5,000 for the Chairman of the Audit Committee
which was approved by the Board in January 2004 remains effective. Further,
under the new Directors' Compensation Program, effective January 1, 2005, (i)
each non-employee director of the Company (i) will receive $1,000 for each
telephonic Board and Committee meeting, except that the Chairperson of the
Compensation, Audit, Regulatory Affairs and Governance Committees will each
receive $1,500 for each telephonic Committee meeting chaired; (ii) will receive
$1,500 for each in-person Board and Committee meeting attended, except that the
Chairperson of the Compensation, Audit, Regulatory Affairs and Governance
Committees will each receive $2,000 for each in-person Committee meeting chaired
and the lead director shall receive $2,000 for each Board meeting attended.
Under the new Director's Compensation Program all retainer and meeting fees for
2005 were paid in cash. Directors also receive reimbursement for expenses
incurred in connection with meeting attendance. Employees of the Company who are
also directors will not receive any separate fees for acting as directors.
In 1995 the Board adopted a policy that each director, within three years
after joining the Board, shall have acquired an amount of Company Common Stock
equal in value to the annual Board retainer. This policy remains effective. In
1995, the Board adopted a Non-Employee Directors' Deferred Compensation Plan
permitting non-employee Directors to defer receipt of Board fees including
Company Common Stock otherwise issuable in payment of Board fees beginning with
fees payable after January 1, 1996.
Pursuant to the terms of the Non-Employee Director Program of the 1996,
1998, 2001, 2003 and 2004 Plans (the "Plans"), each new non-employee director
shall be awarded an option to purchase 2,000 shares of the Company's Common
Stock upon election as a director. The Plans further provide that each
non-employee director will receive a grant of options to purchase 2,000 shares
of Common Stock at the first meeting of the Board of Directors following each
Annual Meeting of Stockholders of the Company. Each such option will have a per
share exercise price equal to the fair market value of the Company's Common
Stock on the date of grant. Options granted to non-employee directors shall be
non-qualified options with a seven-year term. Each option will become
exercisable six months after the date of grant, subject to acceleration upon a
change in control. In April 2005 the Board of Directors granted options to
purchase 2,000 shares of Common Stock under the Plans to Rosina B. Dixon, Roy W.
Haley, Kathryn Rudie Harrigan, Leon J. Hendrix, Jr., Ilan Kaufthal, William B.
Korb, James A. Mack, John R. Miller and Peter G. Tombros.
ELECTION OF DIRECTORS
The Board of Directors of the Company is divided into three classes. The
term of office of the directors in Class I expires at this Annual Meeting with
the terms of office of the directors in Class II and Class III ending at
successive Annual Meetings. At this Annual Meeting two directors in Class I will
be elected to hold office until the 2009 Annual Meeting and until their
successors shall be elected and qualified. Each of the nominees has consented to
serve as a director if elected. To be elected, each nominee for director
requires a plurality of the votes cast. Abstentions and broker non-votes will
not be counted in connection with the election of directors. A properly executed
proxy marked "Withhold" with respect to the election of one or more directors
will not be voted with respect to the director or directors indicated. The
following sets forth with respect to the two persons who have been nominated by
the Board of Directors for election at this Annual Meeting and the other
directors of the Company certain information concerning their positions with the
Company (including its predecessor and now wholly-owned subsidiary CasChem,
Inc.) and principal outside occupations and other directorships held. Except as
otherwise disclosed herein, none of the corporations or organizations listed
below is a parent, subsidiary or other affiliate of the Company.
NOMINEES FOR ELECTION TO SERVE AS DIRECTORS UNTIL 2009 ANNUAL MEETING (CLASS I)
David R. Bethune (age 65). Director since June 2005. Member of the
Compensation and Governance Committees of the Board of Directors. Retired
Chairman and Chief Executive Officer of Atrix Laboratories, a
96
drug delivery and product development company, where he has been a director of
the company for the past ten years. Prior to Atrix Laboratories, he was
President and Chief Operating Officer of IVAX Corporation, a pharmaceutical
company. Before joining IVAX, began a start-up pharmaceutical company venture
formed by Mayo Medical Ventures, a business unit of Mayo Clinics of Rochester.
He previously served as group Vice President of American Cyanamid Company and a
member of the Executive Committee where he had executive authority for human
biologicals, consumer health products, pharmaceuticals and ophthalmics as well
as global medical research. He was also President of the Lederle Laboratories
Division of American Cyanamid Company and President of GD Searle's North
American operations in the 1980's. He currently serves on the Boards of Zila
Incorporated and Female Health Company.
Kathryn Rudie Harrigan (age 55). Director since 1994. Member of the Audit
Committee of the Board of Directors. Since 1981, Professor, Management of
Organizations Division of the Columbia University Business School, and, since
1993, the Henry R. Kravis Professor of Business Leadership at Columbia
University Business School. Member of the Board of Active International.
DIRECTORS SERVING UNTIL 2007 ANNUAL MEETING (CLASS II)
Rosina B. Dixon, M.D. (age 63). Director since 1995 and Chairperson of the
Compensation Committee and member of the Regulatory Affairs Committee of the
Board of Directors. Dr. Dixon has been a consultant to the pharmaceutical
industry since May 1986. Prior to that time, she was Vice President and
Secretary of Medical Market Specialties Incorporated, as well as a member of its
Board of Directors. Dr. Dixon previously served as Medical Director, Schering
Laboratories, Schering-Plough Corporation. Prior to that, she was Executive
Director Biodevelopment, Pharmaceuticals Division, CIBA-GEIGY Corporation. She
is a member of the Board of Directors of Church & Dwight Co., Inc.
Roy W. Haley (age 59). Director since 1998. Chairman of the Audit
Committee of the Board of Directors. Chairman, President and Chief Executive
Officer of WESCO International, Inc. (NYSE), an electrical products distribution
company. Prior to joining WESCO in 1994, served as President and Chief Operating
Officer of American General Corporation, one of the nation's largest consumer
financial services organizations. Began his career in 1969 with the management
consulting division of Arthur Andersen & Co. and served as a partner from 1980
until 1988. Director of United Stationers, Inc. (NASDAQ), Pittsburgh Branch of
the Federal Reserve Bank of Cleveland and civic organizations generally based in
Western Pennsylvania.
Leon J. Hendrix, Jr. (age 64). Director since 1995 and Chairman of the
Governance Committee and member of the Compensation Committee of the Board of
Directors. Chairman of Remington Arms Co. since December 1997 and from December
1997 until April 1999 was also Chief Executive Officer. From 1993 to 2000, Mr.
Hendrix was a Principal of Clayton, Dubilier & Rice, Inc., a private investment
firm. Prior thereto, Mr. Hendrix was with Reliance Electric Company, a
manufacturer and seller of industrial and telecommunications equipment and
services, since 1973, where he held a series of executive level positions, most
recently Chief Operating Officer and a member of the Board of Directors since
1992. Mr. Hendrix is a member of the Boards of Directors of Keithley
Instruments, Inc., and NACCO Industries, Inc. He is also Chairman of the Clemson
University Board of Trustees.
Ilan Kaufthal (age 58). Director since the Company commenced business in
1981. Member of the Regulatory Affairs Committee of the Board of Directors. Vice
Chairman of Investment Banking at Bear, Stearns & Co., Inc. since joining that
firm in May 2000. Until joining Bear, Stearns & Co., Inc., he was with Schroder
& Co. Incorporated as Vice Chairman and head of mergers and acquisitions for
thirteen years. Prior thereto, he was with NL Industries, Inc., a firm in the
chemicals and petroleum services businesses, as its Senior Vice President and
Chief Financial Officer. Director of United Retail Group, Inc. and Russ Berrie &
Company, Inc.
DIRECTORS SERVING UNTIL 2008 ANNUAL MEETING (CLASS III)
William B. Korb (age 65). Director since 1999 and member of the Audit and
Chairman of the Regulatory Affairs Committees of the Board of Directors.
Director, President and Chief Executive Officer
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since 1987 of Marconi Commerce Systems, Inc., formerly Gilbarco Inc., prior to
his retirement on March 1, 2001. Prior to joining Gilbarco, the world's leading
gasoline pump and dispenser manufacturing company, was an Operating Vice
President of Reliance Electric Company, a position he held from 1979 to 1987.
Currently serves on the Board of Premier Farnell plc.
James A. Mack (age 68). Director since 1990, President and Chief Operating
Officer of the Company since joining the Company in February 1990 and Chief
Executive Officer since 1995. Appointed Chairman of the Board of Directors in
October 1999. In August 2004 he retired as President and Chief Executive Officer
and became Executive Chairman of the Board of Directors. In December 2005 he was
named Acting President and Chief Executive Officer and on February 1, 2006 he
was elected as President and Chief Executive Officer. Prior thereto was with
Olin Corporation, a manufacturer of chemical and other products, since 1984 as
Vice President, Specialty Chemicals and, more recently, Vice President,
Performance Chemicals. Executive Vice President of Oakite Products, Inc. from
1982 to 1984. Prior to joining Oakite held various positions with The
Sherwin-Williams Company, most recently as President and General Manager of the
Chemicals Division from 1977 to 1981. Past Chairman of the Board of Governors of
the Synthetic Organic Chemical Manufacturing Association. Member of the Board of
Trustees of the Michigan Tech Alumni Fund and serves on the Board of Directors
of Research Corporation Technologies Inc.
John R. Miller (age 68). Director since 1998. Lead Director, member of the
Compensation and Governance Committees of the Board of Directors. Mr. Miller
currently serves as non-executive Chairman of the Board of SIRVA, Inc., a
provider of relocation and moving services to consumers, corporations and
governments, and is also a Director of Eaton Corporation, a diversified
industrial manufacturing company and Graphic Packaging Corporation, a provider
of paperboard packaging solutions. Past Director and Chairman of the Federal
Reserve Bank of Cleveland. Mr. Miller served with The Standard Oil Company as a
Director, President and Chief Operating Officer from 1980 until 1986. From 2000
to 2003, he was Chairman and Chief Executive Officer of Petroleum Partners,
Inc., a provider of outsourcing services to the petroleum industry.
Peter Tombros (age 63). Director since 2002. Member of the Audit and
Governance Committees of the Board of Directors. Professor, Distinguished
Executive in residence, Eberly College of Science, Pennsylvania State
University. Former Chairman of the Board and Chief Executive Officer of
VivoQuest, a private biopharmaceutical company from 2001 until 2005. Served as
President and Chief Executive Officer from 1994 to 2001 of Enzon Pharma. Before
joining Enzon, spent 25 years with Pfizer, Inc. as Vice President of Marketing,
Senior Vice President and General Manager and as Executive Vice President of
Pfizer Pharmaceuticals, Inc. He also served as Vice President Corporate
Strategic Planning. He also serves as Director of Alpharma, Inc., NPS
Pharmaceuticals, Dendrite International and Protalex.
During 2005, each incumbent director attended more than 90% of the
aggregate of the meetings of the Board and Committees of the Board of which such
director was a member. Eight directors attended the Company's annual meeting of
stockholders in April of 2005.
COMMUNICATIONS WITH OUR BOARD
The Company is committed to providing stockholders and other interested
persons with an open line of communication for bringing issues of concern to the
Company's non-management directors. In January 2004, the Board approved the
following process by which such communications may be made and for handling any
such communications received by the Company:
Any stockholder or interested person may communicate with the
Company's non-management directors as a group by sending a communication to
the Board of Directors, c/o Corporate Secretary, Cambrex Corporation, One
Meadowlands Plaza, 15(th) Floor, East Rutherford, New Jersey 07073. All
communications will be reviewed by the Company's Corporate Secretary who
will send such communications to the non-management directors unless the
Corporate Secretary determines that the communication does not relate to
the business or affairs of the Company, or the function of the Board or its
Committees, or relates to insignificant matters that do not warrant the
non-management directors' attention or is not otherwise appropriate for
delivery to the non-management directors.
98
The non-management directors who receive such communication will have
discretion to determine the handling of such communication, and if
appropriate, respond to the person sending the communication, and
disclosure, which shall be consistent with the Company's policies and
procedures and applicable law regarding the disclosure of information.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
directors and executive officers, and persons who own more than ten percent of a
registered class of the Company's securities, to file reports of ownership and
transactions in the Company's securities with the Securities and Exchange
Commission and the New York Stock Exchange. Such directors, executive officers
and ten percent stockholders are also required to furnish the Company with
copies of all Section 16(a) forms they file.
Based solely on a review of the copies of such forms received by it, and on
written representation from certain of the Company's directors and executive
officers that no other reports were required, the Company believes that during
2005 all Section 16(a) filing requirements applicable to its directors,
executive officers and ten percent stockholders were complied with during the
2005 fiscal year except that Robert J. Congiusti, Vice President of Information
Technology, and Gregory P. Sargen, Vice President of Finance, each filed one
Form 4 late reporting a transaction in Company stock.
CODE OF ETHICS
The Company has a Code of Business Conduct and Ethics, which is applicable
to all directors, officers and employees of the Company, including the Chief
Executive Officer, the Chief Financial Officer and the principal accounting
officer.
AUDIT COMMITTEE REPORT
The following Report of the Audit Committee of the Board of Directors of
Cambrex Corporation does not constitute soliciting material and should not be
deemed filed or incorporated by reference into any other Company filing under
the Securities Act of 1933 or the Securities Exchange Act of 1934, except to the
extent the Company specifically incorporates this Report by reference.
The Audit Committee consists of four directors, who were appointed by the
Board. The Board has determined that each member of the Audit Committee (i) is
independent as currently defined by Cambrex policy, the Securities and Exchange
Commission Rules and the New York Stock Exchange listing standards; and (ii)
satisfies the financial literacy requirements of the NYSE listing standards.
Further, the Board has determined that at least one member of the Audit
Committee satisfies the financial expertise requirements of the NYSE listing
standards. The Board has also determined that Mr. Roy Haley, Audit Committee
Chairperson is an Audit Committee Financial Expert, as that term is defined by
current SEC rules.
The Audit Committee acts under a written charter adopted by the Committee
and approved by the Board.
The role of the Audit Committee is to assist the Board in fulfilling its
responsibility to oversee (i) the integrity of the Company's financial reporting
process; (ii) the Company's systems of internal accounting and financial
controls; (iii) the annual independent audit of the Company's financial
statements; (iv) the independent auditors' qualifications and independence; and
(v) the Company's compliance with legal and regulatory requirements. The Audit
Committee's role is one of oversight and it recognizes that the Company's
Management is responsible for preparing the Company's financial statements and
that the Company's independent auditors are responsible for auditing those
financial statements. The Audit Committee's specific responsibilities are set
forth in the Audit Committee Charter.
In fiscal year 2003, the Audit Committee established a policy (the
"Policy") for pre-approval of all audit and permissible non-audit services
performed by the independent auditors. Under the Policy, the Audit Committee
will approve the following Audit and Audit-Related Services prior to each
engagement, along with
99
a fee amount: (i) domestic quarterly reviews and the annual financial statement
audit; (ii) statutory or financial audits for international subsidiaries or
affiliates of the Company; (iii) the attestation engagement for the independent
auditor's report on Management's assertion on internal controls for financial
reporting; (iv) financial audits of employee benefit plans; and (v) due
diligence services pertaining to potential business acquisitions and
dispositions. On an annual basis, the Audit Committee will pre-approve a blanket
amount to authorize the following Audit and Audit-Related Services: (i)
consultations related to accounting, financial reporting or disclosure matters;
(ii) assistance with understanding and implementing new accounting and financial
reporting guidance; and (iii) assistance with internal control reporting
requirements and also Permissible Non-Audit Services, including tax services.
Management will provide a quarterly update to the Committee detailing actual
spending by quarter and year-to-date for any services rendered under such pre-
approval. Under the Policy, the Audit Committee has delegated pre-approval
authority to the Committee Chairperson for permissible services and fees up to a
maximum of $25,000. The Committee Chairperson will report to the entire Audit
Committee any services and fees approved pursuant to such delegation of
authority.
The Audit Committee met eleven (11) times in 2005. The Audit Committee met
individually with Management, with PricewaterhouseCoopers LLP ("PwC"), the
Company's independent public accountants, and with the Company's internal
auditors, as appropriate. The Audit Committee also reviewed and had discussions
with Company Management and PwC regarding the audited financial statements,
including a discussion of accounting principles, the reasonableness of
significant judgments, and the clarity of disclosures in the financial
statements. Further, the Audit Committee has been updated quarterly on
management's process to assess the adequacy of the Company's system of internal
control over financial reporting, the framework used to make the assessment, and
management's conclusions on the effectiveness of the Company's internal control
over financial reporting. The Audit Committee has also discussed with the
independent auditor the Company's internal control assessment process,
management's assessment with respect thereto and the independent auditor's
evaluation of the Company's system of internal control over financial reporting.
Additionally, the Audit Committee reviewed and had discussions with PwC
regarding the matters required to be discussed by Statement of Auditing
Standards No. 61. Further, the Audit Committee received the letter from PwC
required by Independence Standards Board Standard No. 1 (Independence
Discussions with Audit Committees) and has discussed with representatives of PwC
their independence.
The Committee also received PwC's Report dated May 26, 2006 concerning the
Company's financial statements and PwC's assessment of the Company's internal
controls (the "PwC Opinion"), which is included in the Company's Annual Report
on Form 10-K for fiscal year ended December 31, 2005. Based on the reviews and
discussions with PwC and Management, and the PwC Opinion, and subject to the
limitations on the role and responsibilities of the Audit Committee as set forth
in the Audit Committee Charter, the Audit Committee recommended to the Board,
and the Board approved, that the audited financial statements for the fiscal
year ended December 31, 2005 be included in Cambrex's 2005 Annual Report on Form
10-K.
AUDIT COMMITTEE
Roy W. Haley, Chairperson
Kathryn Rudie Harrigan
William B. Korb
Peter G. Tombros
ITEM 11 EXECUTIVE COMPENSATION
The Company's executive compensation program involves several components.
Annual compensation is in the form of base salary plus an incentive award which
consists of cash and restricted stock units with a multi-year vesting period and
which is awarded to executives based on the achievement of individual and
corporate goals. In addition to the restricted stock unit grants, long-term
compensation consists of stock options, which are intended to reward executives
when improvements in performance increase the market value of the Company for
its stockholders.
100
The attainment of results measured against the executives' goals and
objectives is reviewed by the Compensation Committee subsequent to review and
recommendation from the Office of the Chairman. Executives are rewarded for
accomplishments that contribute to desired results, e.g., sales, net income,
earnings per share, return on capital employed and other assigned goals
including but not limited to: service and quality improvement, product and
marketing development, technology development, and personnel development. The
Company uses independent salary surveys of its Peer Group, as well as national
compensation surveys, to assist in determining appropriate levels of
compensation for each executive position. The Company targets annual executive
salaries at the median levels in companies surveyed.
The Company's annual executive incentive compensation program is designed
to provide a better than average individual award when the Company's financial
performance is improved and its long-range prospects are enhanced. This program
currently includes individual measurements against agreed upon annual operating
and financial goals and longer-term strategic growth objectives. Under this
program two-thirds of the award pool is based on annual operating and financial
goals and is generally paid in cash, while the remaining one-third is based on
strategic, longer-term growth objectives and is generally awarded in the form of
restricted stock units having a three-year holding period. The Committee may in
its discretion apportion the aggregate award pool between cash and stock and may
increase or reduce individual awards. For 2005, despite the fact that the
Company's financial performance was disappointing, management continued to make
progress with regard to the strategic positioning of the Company's core
businesses within the life sciences industry.
In addition to the restricted stock unit grants, long-term compensation for
executives includes Company stock option grants, which are awarded based on an
individual's position in the Company, the individual's performance, and the
number of outstanding stock option awards held by the individual. Options
granted to the Company's key employees in 2005, including those individuals
named in the Summary Compensation Table (below), are typically exercisable based
on the passage of time. During 2005, all unvested stock options, including those
granted in 2005, were fully vested by the Compensation Committee of the Board of
Directors as of December 31, 2005, resulting in an acceleration of proforma
compensation expense. The Company has imposed holding periods that will require
executives to refrain from selling shares acquired upon the exercise of these
options.
CHIEF EXECUTIVE OFFICERS' COMPENSATION
On January 4, 2006, the Company announced that its Board of Directors
decided to discontinue the Company's acquisition program aimed at transforming
Cambrex into a specialty therapeutics enterprise. As a result of this change in
strategy, effective December 31, 2005, Mr. James A. Mack rejoined the Company
when he was appointed by the Board of Directors of Cambrex to the positions of
Acting President and Chief Executive Officer of Cambrex. Mr. Mack had retired as
President and Chief Executive Officer, a position he held since April 1995, and
became Executive Chairman of the Cambrex Board of Directors in August 2004 until
April 2005 when he retired as Executive Chairman. During 2005 Mr. Mack received
$108,333 in annual salary which was determined based on the same factors used in
determining other executive salaries. After retiring as Executive Chairman, Mr.
Mack provided consulting services to the Company, for which he received $67,583
in consulting fees pursuant to his consulting agreement discussed below in the
Management Contracts and Programs section. Effective February 1, 2006, Mr. Mack
was elected by the Board as President and Chief Executive Officer of Cambrex and
the Board of Directors approved (i) an annual salary for Mr. Mack of $500,000,
(ii) a car allowance and driving service; (iii) the extension of the exercise
period of Mr. Mack's Stock Appreciation Rights until December 31, 2006
(described below), and (iv)an incentive payment for Mr. Mack of up to four times
his annual salary upon the achievement of certain strategic objectives in
connection with the Board of Directors' decision announced on January 4, 2006 to
change the Company's strategic focus and to consider all available strategic
alternatives. Payments to Mr. Mack under the Company's qualified and
non-qualified pension plans and under a consulting agreement, aggregating
approximately $360,000 per year, are also being surrendered or deferred.
At its July 27(th), 2000 meeting and based on the Compensation Committee's
recommendation, the Board adopted the 2000 Succession Planning Incentive Program
to ensure effective succession planning and transition. Under the Program Mr.
Mack was awarded 175,000 Incentive Appreciation Units at the traded
101
closing price of the Company's common stock on the date of the award. With the
departure of the Company's Chief Operating Officer early in 2003, Mr. Mack
agreed to remain with the Company for an additional two year period. At its May
21(st), 2003 meeting and considering Mr. Mack's commitment to continue for a two
year period, and based on the Compensation Committee's recommendation, the Board
adopted a new Incentive Appreciation Unit Plan for Mr. Mack replacing the Plan
adopted in 2000. Under the new plan, 150,000 appreciation units were awarded to
Mr. Mack valued initially at the closing price of the Company's traded share
price on the date of the award which was $19.30. Upon a finding by the Board
that a successful management transition has occurred, the vested award would be
exercisable on and after December 31, 2004, if the Company's common stock trades
at or above an average price of $25 per share for twenty consecutive days prior
to December 31, 2004, representing an increase of more than 29% over the grant
price. During 2004 the stock traded above $25 per share for more the twenty
consecutive days and the award vested. At a meeting held on January 27, 2005 the
Company's Board of Directors, based on the hiring of John R. Leone as President
and Chief Executive Officer and his performance during his first five months
with the Company, determined that a successful management transition had
occurred. Thereafter, Mr. Mack was entitled to exercise the award in whole or in
part and receive in cash from the Company the difference between the grant price
and the traded share price on the date of exercise times the number of units
exercised. The award was due to expire on the earlier of (i) December 31, 2007,
or (ii) a date one year after Mr. Mack's retirement from active service on April
27, 2005. On February 1, 2006, the Board of Directors extended the expiration
date of Mr. Mack's award to December 31, 2006, due to his election as President
and Chief Executive Officer.
In connection with the Board of Directors' decision to change the Company's
strategic focus it was mutually agreed that John R. Leone, President and Chief
Executive Officer would leave the Company and the Company entered into a
Separation and General Release Agreement with Mr. Leone which is filed as an
Exhibit to the Company's Current Report on Form 8-K dated January 4, 2006. Mr.
Leone joined Cambrex in August 2004 for the purpose of leading the Company's
entry into the specialty therapeutics market. During 2005, Mr. Leone received
$575,000 in annual salary which was determined based on the same factors used in
determining other executive salaries. Mr. Leone's incentive award for 2005
consisted of a cash award of $86,250 and a restricted stock unit award of 2,732
shares of Company stock valued at $59,297, both of which were paid in 2006.
POLICY REGARDING SECTION 162(M)
The Company's policy on the tax deductibility of compensation is to
maximize deductibility to the extent possible without negating all of its
discretionary power. To this end the Company has submitted complying plans for
stockholder approval. Nevertheless, the Committee has occasionally taken actions
that result in non-deductible compensation and it may do so again in the future
when the Committee determines that such actions are in the Company's best
interests.
COMPENSATION COMMITTEE
Rosina B. Dixon, M.D., Chairman
David R. Bethune
Leon J. Hendrix, Jr.
John R. Miller
Compensation Committee Interlocks and Insider Participation
The members of the Compensation Committee during 2005 were Rosina B. Dixon,
David R. Bethune, Leon J. Hendrix, Jr. and John R. Miller, each of whom are
non-employee directors.
102
EXECUTIVE AND OTHER COMPENSATION
The following table summarizes the compensation earned by the current and
former Chief Executive Officer during 2005 and each of the four other most
highly compensated executive officers (collectively, the "Named Executive
Officers") for services in such capacities to the Company and its subsidiaries
during the previous three fiscal years.
SUMMARY COMPENSATION TABLE
<Table>
<Caption>
ANNUAL COMPENSATION LONG TERM COMPENSATION
------------------------------------- ---------------------------------------
OTHER RESTRICTED SECURITIES
ANNUAL STOCK UNDERLYING PAYOUTS- ALL OTHER
COMPENSATION AWARD(S) OPTIONS/SARS LTIP COMPENSATION
NAME AND PRINCIPAL POSITION YEAR SALARY ($) BONUS ($) ($)(1) ($)(2) (#) PAYOUTS ($) ($)(10)
- --------------------------- ---- ---------- --------- ------------ ---------- ------------ ----------- ------------
James A. Mack............ 2005 108,333 -0 - -0 - -0 -(3) -0 - -0 - 4,875
Chairman, President 2004 650,000 182,813 -0 - 414,375 -0 - -0 - 9,225
and Chief Executive 2003 650,000 100,000 -0 - 200,000 -0 - -0 - 9,000
Officer(2)
John R. Leone............ 2005 575,000 86,250 -0 - 59,297(4) 33,333 -0 - 9,450
President, Chief 2004 207,147 350,000 -0 - 2,441,227 400,000 -0 - 5,794
Executive Officer
Gary L. Mossman.......... 2005 417,000 137,610 -0 - 213,435(5) -0 - -0 - 9,450
Executive Vice 2004 337,983 142,864 -0 - 133,857 117,000 -0 - 9,225
President, Chief 2003 217,949 125,000 -0 - 50,000 162,500 -0 - 9,000
Operating Officer
Luke Beshar.............. 2005 363,333 44,400 -0 - 183,150(6) 17,000 -0 - 9,450
Executive Vice 2004 347,917 78,750 -0 - 178,500 17,000 -0 - 7,225
President, Chief 2003 325,000 90,000 -0 - 90,000 62,500 -0 - 6,147
Financial Officer
Steven M. Klosk.......... 2005 338,333 16,560 -0 - 145,418(7) 17,000 -0 - 9,450
Executive Vice 2004 322,917 81,331 -0 - 93,313 17,000 -0 - 9,225
President, 2003 300,000 80,000 -0 - 80,000 12,500 -0 - 9,000
Administration & Chief
Operating Officer, Pharma
& Biopharma Business
Units
Paolo Russolo............ 2005 307,063 8,173 64,666(8) 163,453(9) 17,000 -0 - -0 -
President, Cambrex 2004 299,374 136,703 66,527(8) 102,910 17,000 -0 - -0 -
Profarmaco Business 2003 259,807 113,000 61,278(8) 60,000 12,500 -0 - -0 -
Unit
</Table>
- ---------------
(1) The rules require disclosure of perquisites and other personal benefits
only when the aggregate value of these items exceeds the lesser of $50,000
or 10% of salary and bonus.
(2) Mr. Mack retired on April 27, 2005. After his retirement, he provided
consulting services to Cambrex, for which he was paid $67,583 in consulting
fees.
(3) As of 12/31/2005, Mr. Mack held 7,318 shares of restricted stock units and
25,101 unvested shares of restricted stock units, with a combined value of
$608,505.
(4) As of 12/31/2005, Mr. Leone held 31,066 vested shares of restricted stock
units and 80,395 unvested shares of restricted stock units, with a combined
value of $2,092,123.
(5) As of 12/31/2005, Mr. Mossman held 652 vested shares of restricted stock
units and 6,967 unvested shares of restricted stock units, with a combined
value of $143,009.
(6) As of 12/31/2005, Mr. Beshar held 1,173 vested shares of restricted stock
units and 9,899 unvested shares of restricted stock units, with a combined
value of $207,821.
(7) As of 12/31/2005, Mr. Klosk held 3,128 vested shares of restricted stock
units and 7,289 unvested shares of restricted stock units, with a combined
value of $195,527.
103
(8) Paid pursuant to an employment arrangement assumed by the Company as part
of its acquisition of Cambrex Profarmaco Milano S.r.l.
(9) As of 12/31/05, Dr. Russolo held 1,534 vested shares of restricted stock
units and 6,295 unvested shares of restricted stock units, with a combined
vlue of $146,950.
(10) Amounts indicated are attributable to Company contributions under the
Company's Savings Plan.
OPTION GRANTS IN FISCAL 2005
INDIVIDUAL GRANTS
<Table>
<Caption>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
ANNUAL RATES OF
% OF TOTAL RETURN OF STOCK
OPTIONS PRICE APPRECIATION
GRANTED TO EXERCISE OR FOR OPTION TERM(2)
OPTIONS EMPLOYEES IN BASE PRICE EXPIRATION ---------------------
NAME GRANTED (#)(1) FISCAL YEAR ($/SHARE) DATE 5% ($) 10% ($)
- ---- -------------- ------------- ----------- ---------- --------- ---------
James A. Mack........ -0 - 0.0% N/A N/A N/A N/A
John R. Leone........ 33,333(3) 5.0% 20.72 1/30/2006 281,168 655,241
Gary L. Mossman...... -0 - 0.0% N/A N/A N/A N/A
Luke M. Beshar....... 17,000 2.5% 20.72 7/25/2012 143,397 334,176
Steven M. Klosk...... 17,000 2.5% 20.72 7/25/2012 143,397 334,176
Paolo Russolo........ 17,000 2.5% 20.72 7/25/2012 143,397 334,176
</Table>
- ---------------
(1) Options granted on 07/25/05 became fully exercisable on 12/31/05 but are
subject to holding periods, such that shares became 25% saleable on 12/31/05
and the remaining shares will be saleable in 25% increments on 12/31/06,
12/31/07, and 12/31/08. The vesting in 2005 eliminated future compensation
expense the Company would otherwise recognize in its consolidated statement
of operations with respect to these options when the Statement of Financial
Accounting Standards No. 123(R) "Share-Based Payment", issued by the
Financial Accounting Standards Board, was implemented for reporting periods
beginning January 1, 2006. Options were granted at fair market value and
have a term of seven years, subject to earlier forfeiture in the event of
termination of employment.
(2) Realizable value is presented net of option exercise price, but before taxes
associated with exercise. These amounts represent assumed compounded rates
of appreciation and exercise of the options immediately prior to the
expiration of their term. Actual gains are dependent on the future
performance of Cambrex Stock, overall stock market conditions, and continued
employment through the exercise period.
(3) Mr. Leone terminated his employment in January 2006. Options granted to him
on 07/25/05 were cancelled thirty days after his termination of employment.
104
The following table sets forth information for each Named Executive Officer
with regard to the aggregate options exercised during 2005 and the aggregate
stock options held as of December 31, 2005.
AGGREGATE OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION/SAR VALUES
(1)
<Table>
<Caption>
VALUE OF UNEXERCISED
NUMBER OF SECURITIES IN-THE-MONEY
UNDERLYING UNEXERCISED OPTIONS/SARS AT FY-END
SHARES OPTIONS/SARS AT ($)
ACQUIRED ON VALUE REALIZED FY-END (#) ----------------------------
NAME EXERCISE (#) ($)(1) EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE(2)
- ---- ------------ --------------- ------------------------- ----------------------------
James A. Mack............ -0 - -0 - 456,482/0 $ 100/$0
John R. Leone............ -0 - -0 - 433,333/0 $ 0/$0
Gary L. Mossman.......... -0 - -0 - 279,500/0 $ 1,187/$0
Luke M. Beshar........... -0 - -0 - 326,500/0 $ 1,187/$0
Steven M. Klosk.......... 125,000 682,188 176,500/0 $ 1,187/$0
Paolo Russolo............ -0 - -0 - 156,500/0 $181,988/$0
</Table>
(1) Based upon the market value of underlying securities at exercise less the
exercise price.
(2) Based upon the closing price on December 31, 2005 of $18.77.
With respect to shares of Common Stock that may be issued under the
Company's existing equity compensation plans, see Item 5 of this 2005 Form 10K.
2000 EMPLOYEE PERFORMANCE STOCK OPTION PLAN
The 2000 Employee Performance Stock Option Plan provides for the grant of
stock options (both incentive stock options and non-qualified stock options)
primarily to key employees of the Company and its subsidiaries who are not
executive officers. The plan is generally administered by the Compensation
Committee of the Board, which has full authority, subject to the terms of the
plan, to determine the provision of awards, including the amount and type of the
awards and vesting schedules, and to interpret the plan.
Individual award agreements set forth the applicable vesting schedule for
such awards, which are based on the Company's publicly traded share price but
which may also be based on the passage of time or otherwise. In general,
following a "change in control" (as defined in the plan), each stock option will
be canceled in exchange for a cash settlement equal to the excess of the "change
in control price," which means the highest price per share paid or offered in
any bona fide transaction related to a change in control (as determined by the
Compensation Committee), over the exercise price of the stock option.
Stock options are granted with an exercise price of not less than one
hundred percent of the fair market value of the underlying Cambrex common stock
on the date of grant. Stock options are not exercisable more than ten years from
the date of grant.
RETIREMENT PLANS
Retirement benefits are based on an employee's years of service and
compensation for such years. "Compensation" for the purposes of the computation
of benefits, includes regular compensation, bonuses and overtime, but excludes
income attributable to fringe benefits and perquisites. The retirement benefit
earned for a given year of service is calculated by multiplying the
participant's compensation for the year by 1% and adding to that amount 0.6% of
such compensation in excess of the participant's social security covered
compensation. Similar amounts are calculated for each year of service and are
aggregated to obtain the annual retirement benefit, subject to the limitations
imposed by the Employee Retirement Income Security Act of 1974 and related
regulations ("ERISA"). For this purpose social security covered compensation is
the 35-year average of the social security wage bases ending with the wage base
for the year in which the participant reaches age 65.
Although compensation includes the items mentioned above, the Company's
qualified non-contributory pension plan (the "Qualified Plan") limits the
maximum amount of compensation which may be taken into
105
account for the purposes of calculating benefits to the ERISA limit, which was
$210,000 during 2005. Therefore, any compensation received by any of the Named
Executive Officers which exceeds this amount will not be taken into account in
the calculation of their benefits under this Plan. A Supplemental Non-Qualified
Pension Plan, which became effective on January 1, 1994, provides benefits based
on compensation levels above the ERISA maximum compensation level. Employees
hired after December 31, 2002 are not eligible to participate in the Retirement
Plan.
The following table shows the estimated aggregate annual retirement
benefits payable under the Company's Qualified and Supplemental pension plans to
employees listed, assuming they retire at normal retirement age (65), with
benefits payable in the form of a life annuity and that pensionable compensation
for all years after 2005 will be the same as 2005 pensionable compensation.
PENSION PLAN TABLE
<Table>
<Caption>
PROJECTED ANNUAL
BENEFITS AT THE LATER
2005 PENSIONABLE OF AGE 65 OR
NAME COMPENSATION ($) JANUARY 1, 2005 ($)
- ---- ---------------- ----------------------
James A. Mack(1)................................... $487,746.92 $235,964.40
John R. Leone...................................... $ -0 - $ -0 -(2)
Gary L. Mossman.................................... $ -0 - $ -0 -(2)
Luke M. Beshar..................................... $444,374.97 $128,599.32
Steven M. Klosk.................................... $482,588.91 $205,773.24
Paolo Russolo...................................... $ -0 - $ -0 -(3)
</Table>
(1) Mr. Mack was rehired at February 1, 2006 and is currently over age 65.
Therefore, the annual benefit shown is his single life annuity as of
February 1, 2006.
(2) Mr. Leone and Mr. Mossman were employed by the Company after December 31,
2002 which therefore makes them ineligible for benefits under the Company's
pension plan.
(3) Mr. Russolo does not receive pensionable compensation from the Company but
does receive a retirement benefit from the government of Italy.
DEFERRED COMPENSATION PLAN
The Company has established a Non-qualified Deferred Compensation Plan for
Key Executives (the "Deferred Plan"). Under the Deferred Plan, officers and key
employees may elect to defer all or any portion of their pre-tax annual bonus
and/or annual base salary (other than the minimum required Social Security
contributions and $10,000). The deferred amount is invested in Fidelity Mutual
Funds available under the Cambrex Savings Plan, except for the Cambrex Stock
Fund. The Deferred Plan is not funded by the Company, but the Company has
established a Deferred Compensation Trust Fund to protect the account balance in
the case of a change of control of the Company. The Plan is administered in
compliance with the new rules and guidance under IRC Section 409A.
CHANGE IN CONTROL ARRANGEMENTS
The Company has entered into agreements with a number of key employees,
including certain Named Executive Officers, with the objective of preserving
management stability in the event of a threatened or actual change of control of
the Company. Under each agreement, in the event of a change of control of the
Company (defined in the agreement to include certain events involving changes in
ownership of the Company's stock or the composition of the Company's Board of
Directors or other structural changes, but, in any case, with the Board having
discretion to find other events to constitute a change of control) the employee
is awarded a three-year contract of employment in substantially the same
position he had prior to the start of the employment contract term. The contract
of employment is at a monthly salary not less than the highest monthly salary
earned by the employee during the 12 months preceding the start of the
employment contract
106
term and provides for an annual bonus and benefits comparable to those
pertaining to the employee prior to the start of the employment contract term.
In addition, in the event of a change of control, performance options will
become immediately exercisable regardless of the publicly traded share price.
In the event that at any time during the employment contract term, the
employee's employment is terminated (i) by the Company (other than by reason of
disability or for cause), or (ii) by the employee by reason of the Company's
violation of the terms of the employment contract, or (iii) by the employee
during the thirteenth month of the employment contract term, with or without
reason, the employee will be entitled to a lump sum payment in an amount equal
to the sum of (a) a ratable portion of the amount of the highest annual bonus
paid to the employee during the three years prior to the year of termination,
based upon the elapsed time in the year of termination, (b) up to three times
the annual salary under the contract and three times such highest annual bonus,
which amount declines ratably over a 36 month term for each month the employee
remains employed by the Company following the first anniversary of the start of
the employment contract term, and (c) the present value of the pension benefit
lost by the employee by reason of the early termination of employment. In the
event of such termination the employee will also be entitled to the employment
benefits, such as health insurance and life insurance, to which he would have
been entitled had his employment not been terminated, and to the immediate right
to exercise any employee stock options notwithstanding their stated
exercisability in installments. Additionally, the employment contracts provide
for an additional payment to the employee to cover any excise tax payable by the
employee on so-called excess golden parachute payments under Section 4999 of the
Internal Revenue Code of 1986, as amended.
Effective February 1, 2006, the Board of Directors of the Company approved
changes to the Company's executive employment agreements (for certain
executives), such that a sale of thirty five percent or more of the Company,
calculated on an enterprise value basis (market capitalization plus debt minus
cash) will constitute a change of control of the Company. The agreement also now
contains a one-year non-competition provision, a provision under which all
equity awards will vest upon a change of control, and a provision for the
deferral of certain payments for six months in the event of termination of
employment, to avoid imposition of a tax penalty under Section 490A of the Tax
Code. The amended agreement and schedule of parties thereto was filed as an
Exhibit with the Company's Annual Report on Form 10-K for fiscal year ending
December 31, 2005.
107
ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The following sets forth information with respect to the only persons of
which the Company is aware as of February 15, 2006, who may be deemed to
beneficially own more than 5% of the outstanding Common Stock of the Company:
<Table>
<Caption>
NUMBER OF SHARES PERCENT OF
NAME AND ADDRESS BENEFICIALLY OWNED(1) CLASS(2)
- ---------------- --------------------- -----------
Transamerica Investment................................ 2,214,804(3) 8.30%
Management, LLC
1150 South Olive Street, Suite 2700
Los Angeles, CA 90015
Dimensional Fund Advisors Inc. ........................ 2,192,782(4) 8.22%
1299 Ocean Avenue, 11(th) Floor
Santa Monica, CA 90401
Snyder Capital Management, L.P. ....................... 1,808,400(5) 6.78%
Snyder Capital Management, Inc.
One Market Plaza
Steuart Tower, Suite 1200
San Francisco, CA 94105
Cramer Rosenthal McGlynn, LLC.......................... 1,437,436(6) 5.39%
520 Madison Avenue
New York, NY 10022
Wentworth, Hauser & Violich, Inc. ..................... 1,408,443(7) 5.30%
353 Sacramento Street, Suite 600
San Francisco, CA 94111
</Table>
(1) Unless otherwise indicated (a) share ownership is based upon information
furnished as of February 15, 2006, by the beneficial owner, and (b) each
beneficial owner has sole voting and investment power with respect to the
shares shown.
(2) For the purpose of this table, the percent of issued and outstanding shares
of Common Stock of the Company held by each beneficial owner has been
calculated on the basis of (i) 26,696,151 shares of Common Stock issued and
outstanding (excluding treasury shares) on February 15, 2006, and (ii)
23,922 shares still to be issued in connection with the 1993 conversion of
the Company's 9% Convertible Subordinated Notes.
(3) In a Schedule 13G under the Securities Exchange Act of 1934 dated January
10, 2006 and filed by Transamerica Investment Management, LLC
("Transamerica"), Transamerica reported that it has sole dispositive power
over 2,214,804 shares and sole voting power over 2,088,456 shares. The
shares reported on Transamerica's Schedule 13G are reported beneficially
owned as a result of acting as an investment adviser.
(4) In a Schedule 13G under the Securities Exchange Act of 1934 dated February
1, 2006 and filed by Dimensional Fund Advisors Inc. ("Dimensional"),
Dimensional reported that it has sole dispositive power and sole voting
power over 2,192,782 shares. The shares reported on Dimensional's 13G are
reported beneficially owned as a result of acting as investment advisor to
four investment companies registered under the Investment Company act of
1940 and as investment manager to certain other commingled group trusts and
separate accounts known as the "Funds". Dimensional may be deemed to be the
beneficial owner of the shares held by the Funds and all securities reported
in Dimensional's 13G are owned by the Funds. Dimensional disclaims
beneficial ownership of such securities.
(5) In a Schedule 13G under the Securities Exchange Act of 1934 dated February
15, 2006 and filed by Snyder Capital Management, L.P. ("SCMLP") and Snyder
Capital Management, Inc. ("SCMI"), SCMLP and SCMI reported that it has
shared voting power over 1,571,300 shares and shared dispositive power over
1,808,400 shares. SCMLP and SCMI have reported the shares as beneficially
owned as a result of acting as an investment advisor. SCMI and its direct
parent company, IXIS Asset Management
108
North America, L.P. (formerly known as CDC IXIS Asset Management North
America, L.P.) operate under an understanding that all investment and voting
decisions regarding managed accounts are to be made by SCMI and SCMLP and
not by IXIS Asset Management North America or any entity controlling it.
Accordingly, SCMI and SCMLP do not consider IXIS Asset Management North
America or any entity controlling it to have any direct or indirect control
over the securities held in managed accounts.
(6) In a Schedule 13G under the Securities Exchange Act of 1934 dated January
31, 2006 and filed by Cramer Rosenthal McGlynn, LLC ("Cramer"), Cramer
reported that it has solve voting power over 1,024,400 shares, sole
dispositive power of 1,067,300 shares, shared voting power over 365,536
shares and shared dispositive power over 370,136 shares. Cramer is deemed to
be the beneficial owner of 1,437,436 shares as a result of acting as an
Investment Adviser registered under section 203 of the Investment Advisers
Act of 1940.
(7) In a Schedule 13G under the Securities Exchange Act of 1934 dated February
7, 2006 and filed by Wentworth, Hauser & Violich, Inc. ("Wentworth"),
Wentworth reported that it has shared voting and shared dispositive power
over 1,408,443 shares. Wentworth is deemed to be the beneficial owner of the
1,408,443 shares pursuant to separate arrangements whereby Wentworth acts as
investment adviser to certain persons.
COMMON STOCK OWNERSHIP BY DIRECTORS AND EXECUTIVE OFFICERS
The following table gives information concerning the beneficial ownership
of the Company's Common Stock on February 15, 2006, by (i) each director and
nominee for election as a director, (ii) each of the executive officers named in
the Summary Compensation Table (below) and (iii) all directors and executive
officers of the Company as a group.
<Table>
<Caption>
SHARES BENEFICIALLY
BENEFICIAL OWNERS OWNED(1) PERCENT OF CLASS(2)
- ----------------- ------------------- --------------------
David R. Bethune..................................... 2,000(3) *
Rosina B. Dixon, M.D................................. 32,346(4) *
Roy W. Haley......................................... 26,576(5) *
Kathryn Rudie Harrigan............................... 31,885(4) *
Leon J. Hendrix, Jr. ................................ 36,802(6) *
Ilan Kaufthal........................................ 47,108(7) *
William B. Korb...................................... 26,075(8) *
John R. Leone........................................ 520,047(9) 1.95%
James A. Mack........................................ 996,452(10) 3.73%
John R. Miller....................................... 22,273(11) *
Peter Tombros........................................ 17,206(12) *
Luke M. Beshar....................................... 347,090(13) 1.30%
Steven M. Klosk...................................... 273,287(14) 1.02%
Gary L. Mossman...................................... 316,213(15) 1.18%
Paolo Russolo........................................ 180,736(16) *
All Directors and Executive Officers as a group (23
Persons)........................................... 3,566,558(17) 13.36%
</Table>
* Beneficial Ownership is less than 1% of the Common Stock outstanding
(1) Except as otherwise noted, reported share ownership is as of February 15,
2006. Unless otherwise stated, each person has sole voting and investment
power with respect to the shares of Common Stock he or she beneficially
owns.
(2) For the purpose of this table, the percent of issued and outstanding shares
of Common Stock of the Company held by each beneficial owner has been
calculated on the basis of (i) 26,696,151 shares of
109
Common Stock issued and outstanding (excluding treasury shares) on February
15, 2006, (ii) all shares of Common Stock subject to stock options which
are held by such beneficial owner and are exercisable within 60 days of
February 15, 2006, and (iii) 23,922 shares still to be issued in connection
with the 1993 conversion of the Company's 9% Convertible Subordinated
Notes.
(3) The number of shares reported is 2,000 shares issuable upon exercise of an
option granted under the Company's 2004 Incentive Plan.
(4) The number of shares reported includes 19,000 shares issuable upon exercise
of options granted under the Company's 1994, 1996, 2001 and 2004 stock
option Plans.
(5) The number of shares reported includes 16,000 shares issuable upon exercise
of options granted under the Company's 1994, 1996, 2001 and 2004 stock
option Plans and 10,576 share equivalents held at February 15, 2006 in the
Company's Directors' Deferred Compensation Plan.
(6) The number of shares reported includes 19,000 shares issuable upon exercise
of options granted under the Company's 1994, 1996, 2001 and 2004 stock
option Plans and 13,302 share equivalents held at February 15, 2006 in the
Company's Directors' Deferred Compensation Plan.
(7) The number of shares reported includes 17,500 shares issuable upon exercise
of options granted under the Company's 1994, 1996, 2001 and 2004 stock
option Plans.
(8) The number of shares reported includes 16,000 shares issuable upon exercise
of options granted under the Company's 1994, 1996, 2001 and 2004 stock
option Plans, 1,000 shares held by a family member for which beneficial
ownership of such shares is disclaimed, and 9,075 share equivalents held at
February 15, 2006 in the Company's Directors' Deferred Compensation Plan.
(9) The number of shares reported includes 400,000 shares issuable upon
exercise of an option granted under the Company's Stock Option Plans and
119,655 restricted stock units and 392 shares held at December 31, 2005 in
the Company's Savings Plan.
(10) The number of shares reported includes 456,483 shares issuable upon
exercise of options granted under the Company's Stock Option Plans, 25,354
restricted stock units, 94,364 share equivalents held at February 15, 2006
in the Company's Deferred Compensation Plan, and 150,000 Stock Appreciation
Rights (see Management Contracts and Programs).
(11) The number of shares reported includes 16,000 shares issuable upon exercise
of options granted under the Company's 1996, 1998, 2001 and 2004 stock
option Plans.
(12) The number of shares reported includes 10,000 shares issuable upon exercise
of options granted under the Company's 1996, 2001 and 2004 stock option
Plans and 6,206 share equivalents held at February 15, 2006 in the
Company's Directors' Deferred Compensation Plan.
(13) The number of shares reported includes 326,500 shares issuable upon
exercise of options granted under the Company's Stock Option Plans, 19,509
restricted stock units and 1,081 shares held at December 31, 2005 in the
Company's Savings Plan.
(14) The number of shares reported includes 176,500 shares issuable upon
exercise of options granted under the Company's Stock Option Plans, 13,988
restricted stock units, 8,386 shares held at December 31, 2005 in the
Company's Savings Plan, and 48,785 share equivalents held at February 15,
2006 in the Company's Deferred Compensation Plan.
(15) The number of shares reported includes 279,500 shares issuable upon
exercise of options granted under the Company's Stock Option Plans, 18,280
restricted stock units and 1,254 shares held at December 31, 2005 in the
Company's Savings Plan.
(16) The number of shares reported includes 156,500 shares issuable upon
exercise of options granted under the Company's Stock Option Plans and
14,230 restricted stock units.
(17) The number of shares reported includes 2,554,315 shares issuable upon
exercise of options that are currently exercisable or will become
exercisable within 60 days, 236,230 restricted stock units, 27,955 shares
held at December 31, 2005 in the Company's Savings Plan, 39,159 share
equivalents held at February 15, 2006 in the Director's Deferred
Compensation Plan and 224,075 share equivalents held
110
at February 15, 2006 in the Company's Deferred Compensation Plan. Shares
held by immediate family members are not included and beneficial ownership
of such shares is disclaimed.
ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
MANAGEMENT CONTRACTS AND PROGRAMS
At a meeting held on January 26, 1995, the Board of Directors authorized an
agreement with Mr. Mack pursuant to which he might, at his election, enter into
a consulting arrangement with the Company upon his resignation as an employee at
an annual rate of $100,000. The Company later restated this arrangement under
which Mr. Mack entered into two agreements at the prior rate, the first
providing for consulting services while he is able to provide such services and
the second providing an additional retirement benefit for the remainder of his
lifetime.
At its July 27(th), 2000 meeting and based on the Compensation Committee's
recommendation, the Board adopted the 2000 Succession Planning Incentive Program
to ensure effective succession planning and transition. Under the Program Mr.
Mack was awarded 175,000 Incentive Appreciation Units at the traded closing
price of the Company's common stock on the date of the award. With the departure
of the Company's Chief Operating Officer early in 2003, Mr. Mack agreed to
remain with the Company for an additional two year period. At its May 21(st),
2003 meeting and considering Mr. Mack's commitment to continue for a two year
period, and based on the Compensation Committee's recommendation, the Board
adopted a new Incentive Appreciation Unit Plan for Mr. Mack replacing the Plan
adopted in 2000. Under the new plan, 150,000 appreciation units were awarded to
Mr. Mack valued initially at the closing price of the Company's traded share
price on the date of the award which was $19.30. Upon a finding by the Board
that a successful management transition has occurred, the vested award would be
exercisable on and after December 31, 2004, if the Company's common stock trades
at or above an average price of $25 per share for twenty consecutive days prior
to December 31, 2004, representing an increase of more than 29% over the grant
price. During 2004 the stock traded above $25 per share for more than twenty
consecutive days and the award vested. At a meeting held on January 27, 2005 the
Company's Board of Director, based on the hiring of John R. Leone as President
and Chief Executive Officer and his performance during his first five months
with the Company, determined that a successful management transition had
occurred. Thereafter, Mr. Mack was entitled to exercise the award in whole or in
part and receive in cash from the Company the difference between the grant price
and the traded share price on the date of exercise times the number of units
exercised. The award was due to expire on the earlier of (i) December 31, 2007,
or (ii) a date one year after Mr. Mack's retirement from active service on April
27, 2005. On February 1, 2006, the Board of Directors extended the expiration
date of Mr. Mack's award to December 31, 2006, due to his election as President
and Chief Executive Officer.
As previously disclosed, the Board of Directors' decided to change the
Company's strategic focus and to consider all available strategic alternatives.
In connection with such decision in February 2006, the Board of Directors
approved a number of measures designed to enhance the retention of employees,
including the retention of certain Executive Officers. This retention program
was previously disclosed in the Company's February 7, 2006 Current Report on
Form 8-K. With respect to the Executive Officers, the Board approved a special
retention pool, in the total amount of up to $2.5 million, to retain the
services of Gary L. Mossman, Steven M. Klosk, Paolo Russolo and Luke Beshar,
each a Named Executive Officer herein and certain other Executive Officers.
Payment under such retention pool is to be apportioned in the President and
Chief Executive Officer's discretion and dependent on the achievement of certain
strategic objectives.
111
ITEM 14 PRINCIPAL ACCOUNTING FEES AND SERVICES
The following table sets forth the aggregate fees billed to Cambrex for
each of the fiscal years ended December 31, 2005 and December 31, 2004, by the
Company's independent public accounting firm, PricewaterhouseCoopers LLP for
Audit, Audit-Related, Tax and All Other Fees:
<Table>
<Caption>
DECEMBER 31, DECEMBER 31,
2005 2004
--------------- ---------------
Audit Fees.................................................. $2,915,670 $2,886,000
Audit-Related Fees.......................................... $ 60,000 $ 278,000
Tax Fees.................................................... $ 0 $ 0
All Other................................................... $ 0 $ 0
---------- ----------
Totals...................................................... $2,975,670 $3,164,000
========== ==========
</Table>
AUDIT FEES
Aggregate Audit fees billed for professional services rendered by
PricewaterhouseCoopers, LLP in connection with its audit of the Company's
financial statements were $2,915,670 for fiscal year-ended 2005. Aggregate Audit
fees for fiscal year ended 2004 were $2,886,000. Such fees also include PwC's
internal control review and attestation now required pursuant to the
Sarbanes-Oxley Act and the securities regulations.
AUDIT-RELATED FEES
Aggregate Audit-Related fees billed for professional services rendered by
PricewaterhouseCoopers, LLP in connection with assurance and related services
reasonably related to the audit and review of the Company's financial statements
were $60,000 and $278,000 for fiscal years-ended 2005 and 2004, respectively.
Such services include the financial audits of the Company's employee benefit
plans; due diligence services pertaining to an acquisition and other commercial
transactions; and general accounting, financial reporting and disclosure
matters; and assistance with understanding and implementing new accounting and
financial reporting guidance and internal control requirements.
TAX FEES
There were no Tax fees billed for professional tax services rendered by
PricewaterhouseCoopers, LLP for fiscal years ended 2005 and 2004.
ALL OTHER FEES
PricewaterhouseCoopers, LLP did not perform any services classified as
Other Services during fiscal years-ended 2005 and 2004, and as such, there were
no billings for such services.
As discussed above in the Audit Committee Report, in May of 2003 the Audit
Committee established a policy (the "Policy") for pre-approval of all audit and
permissible non-audit services performed by the independent auditors. During
fiscal year 2005, all services rendered were approved pursuant to the Policy.
Further during fiscal years 2005 and 2004, there were no services performed or
fees incurred by PricewaterhouseCoopers, LLP where pre-approval was waived
pursuant to the statutory de minimis exception.
The Audit Committee has reviewed the billings by PricewaterhouseCoopers LLP
and has determined that they do not affect the auditor's independence.
112
PART IV
ITEM 15 EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a) 1. The following consolidated financial statements of the Company are
filed as part of this report:
<Table>
<Caption>
PAGE NUMBER
(IN THIS REPORT)
----------------
Report of Independent Registered Public Accounting Firm..... 43
Consolidated Balance Sheets as of December 31, 2005, and
2004...................................................... 45
Consolidated Income Statements for the Years Ended December
31, 2005, 2004 and 2003................................... 46
Consolidated Statement of Stockholders' Equity for the Years
Ended December 31, 2005, 2004 and 2003.................... 47
Consolidated Statements of Cash Flows for the Years Ended
December 31, 2005, 2004 and 2003.......................... 48
Notes to Consolidated Financial Statements.................. 49
</Table>
(a) 2. (i) The following schedule to the consolidated financial statements
of the Company as filed herein and the Report of Independent Registered Public
Accounting Firm are filed as part of this report.
<Table>
<Caption>
PAGE NUMBER
(IN THIS REPORT)
----------------
Schedule II -- Valuation and Qualifying Accounts............ 114
</Table>
All other schedules are omitted because they are not applicable or not
required or because the required information is included in the consolidated
financial statements of the Company or the notes thereto.
(a) 3. The exhibits filed in this report are listed in the Exhibit Index on
pages 117-119.
113
SCHEDULE II
CAMBREX CORPORATION
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003
(DOLLARS IN THOUSANDS)
<Table>
<Caption>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
--------- ---------- ---------- ---------- --------
ADDITIONS
-----------------------
BALANCE CHARGED TO CHARGED TO
BEGINNING COST AND OTHER END OF
CLASSIFICATION OF YEAR EXPENSES ACCOUNTS DEDUCTIONS YEAR
- -------------- --------- ---------- ---------- ---------- --------
Year Ended December 31, 2005:
Doubtful trade receivables and returns
and allowances..................... $ 2,304 $ 877 $ (47) $367 $ 2,767
Deferred tax valuation allowance...... 79,012 40,126 884 -- 120,022
Year Ended December 31, 2004:
Doubtful trade receivables and returns
and allowances..................... $ 3,281 $ (369) $ 91 $699 $ 2,304
Deferred tax valuation allowance...... 53,769 24,550 693 -- 79,012
Year Ended December 31, 2003:
Doubtful trade receivables and returns
and allowances..................... $ 1,672 $ 1,584 $ 222 $197 $ 3,281
Deferred tax valuation allowance...... 2,821 49,502 1,446 -- 53,769
</Table>
114
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
CAMBREX CORPORATION
By /s/ JAMES A. MACK
------------------------------------
James A. Mack
Chairman of the Board of Directors
President and Chief Executive
Officer
Date: May 26, 2006
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<Table>
<Caption>
SIGNATURE TITLE DATE
--------- ----- ----
/s/ JAMES A. MACK Chairman of the Board of )
------------------------------------------------ Directors President and Chief
James A. Mack Executive Officer
/s/ LUKE M. BESHAR Executive Vice President and )
------------------------------------------------ Chief Financial Officer
Luke M. Beshar (Principal Financial Officer and
Accounting Officer)
/s/ DAVID R. BETHUNE Director )
------------------------------------------------
David R. Bethune
/s/ ROSINA B. DIXON* Director )
------------------------------------------------
Rosina B. Dixon, M.D.
/s/ ROY W. HALEY* Director )
------------------------------------------------
Roy W. Haley
/s/ KATHRYN RUDIE HARRIGAN* Director )
------------------------------------------------
Kathryn Rudie Harrigan PhD
/s/ LEON J. HENDRIX, JR.* Director ) May 26, 2006
------------------------------------------------
Leon J. Hendrix, Jr.
/s/ ILAN KAUFTHAL* Director )
------------------------------------------------
Ilan Kaufthal
/s/ WILLIAM KORB* Director )
------------------------------------------------
William Korb
/s/ JOHN R. MILLER* Director )
------------------------------------------------
John R. Miller
</Table>
115
<Table>
<Caption>
SIGNATURE TITLE DATE
--------- ----- ----
/s/ PETER G. TOMBROS* Director )
------------------------------------------------
Peter G. Tombros
*By /s/ JAMES A. MACK )
------------------------------------------
James A. Mack
Attorney-in-Fact
</Table>
116
EXHIBIT INDEX
<Table>
<Caption>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
3.1 -- Restated Certificate of Incorporation of registrant, as
amended.(W).
3.2 -- By Laws of registrant.(X).
4.1 -- Form of Certificate for shares of Common Stock of
registrant.(A) -- Exhibit 4(a).
10.1 -- Purchase Agreement dated July 11, 1986, as amended, between
the registrant and ASAG, Inc.(A) -- Exhibit 10(r).
10.2 -- Asset Purchase Agreement dated as of June 5, 1989 between
Whittaker Corporation and the registrant.(B) -- Exhibit
10(a).
10.3 -- Asset Purchase Agreement dated as of July 1, 1991 between
Solvay Animal Health, Inc. and the registrant.(C).
10.4 -- Asset Purchase Agreement dated as of March 31, 1992 between
Hexcel Corporation and the registrant.(E).
10.5 -- Stock Purchase Agreement dated as of September 15, 1994
between Akzo Nobel AB, Akzo Nobel NV and the registrant, for
the purchase of Nobel Chemicals AB.(H).
10.6 -- Stock Purchase Agreement dated as of September 15, 1994
between Akzo Nobel AB, Akzo Nobel and the registrant, for
the purchase of Profarmaco Nobel, S.r.l.(H).
10.7 -- Stock purchase agreement dated as of October 3, 1997 between
BioWhittaker and the registrant.(M).
10.8 -- Asset purchase agreement dated as of August 7, 2003 between
Rutherford Acquisition Corporation and Cambrex Corporation
and The Sellers listed in the asset Purchase agreement.(O).
10.9 -- Credit Agreement dated as of October 7, 2005 between Cambrex
Corporation, the subsidiary borrowers party hereto, the
subsidiary guarantors party hereto, the lenders party hereto
and JP Morgan Chase Bank, N.A., as Administrative Agent.(T).
10.14 -- Retention and Enhanced Severance Program.(Y).
10.15 -- James A. Mack Compensation Agreement.(Y).
10.16 -- 1994 Stock Option Plan.(G).
10.17 -- 1996 Performance Stock Option Plan.(L).
10.18 -- 1998 Performance Stock Option Plan.(N).
10.19 -- 2000 Employee Performance Stock Option Plan.(N).
10.20 -- Form of Employment Agreement (amended and restated) between
the registrant and its executive officers named in the
Revised Schedule of Parties thereto.(J).
10.21 -- Revised Schedule of Parties to Employment Agreement (Exhibit
10.20 hereto).(J).
10.22 -- Cambrex Corporation Savings Plan.(F).
10.23 -- Cambrex Corporation Supplemental Retirement Plan.(I).
10.24 -- Deferred Compensation Plan of Cambrex Corporation (as
amended and restated as of March 1, 2001).(J).
10.27 -- Consulting Agreement dated December 15, 1994 between the
registrant and Arthur I. Mendolia.(I).
10.28 -- Consulting Agreement dated December 15, 1995 between the
registrant and Cyril C. Baldwin, Jr.(I).
10.29 -- Consulting Agreement between the registrant and James A.
Mack.(I).
10.30.1 -- Additional Retirement Payment Agreement dated December 15,
1994 between the registrant and Arthur I. Mendolia.(I).
</Table>
- ---------------
See legend on following page
117
EXHIBIT INDEX
<Table>
<Caption>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
10.31 -- Additional Retirement Payment Agreement dated December 15,
1994 between the registrant and Cyril C. Baldwin, Jr.(I).
10.32 -- Additional Retirement Payment Agreement between the
registrant and James A. Mack.(I).
10.33 -- 2001 Performance Stock Option Plan.(P).
10.34 -- 2003 Performance Stock Option Plan.(P).
10.35 -- 2004 Performance Incentive Plan.(Q).
10.36 -- Directors' Common Stock Fee Payment Plan.(Q).
10.37 -- Directors' Compensation Arrangements.(S).
10.38 -- 2004 Incentive Plan.(U).
10.39 -- Separation and General Release Agreement.(V).
10.40 -- Registration Rights Agreement dated as of June 6, 1985
between the registrant and the purchasers of its Class D
Convertible Preferred stock and 9% Convertible Subordinated
Notes due 1997.(A) -- Exhibit 10(m).
10.41 -- Administrative Consent Order dated September 16, 1985 of the
New Jersey Department of Environmental Protection to Cosan
Chemical Corporation.(A) -- Exhibit 10(q)
10.42 -- Registration Rights Agreement dated as of June 5, 2006
between the registrant and American Stock Transfer and Trust
Company.(K).
10.50 -- Manufacturing Agreement dated as of July 1, 1991 between the
registrant and A.L. Laboratories, Inc.(D).
21 -- Subsidiaries of registrant.(J).
23 -- Consent of PricewaterhouseCoopers LLP to the incorporation
by reference of its report herein in Registration Statement
Nos. 333-57404, 333-22017, 33-21374, 33-37791, 33-81780,
33-81782, 333-113612, 333-113613 and 333-129473 on Form S-8
of the registrant.(J).
24 -- Powers of Attorney to sign this report.(J)
31.1 -- CEO Certification pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.(J).
31.2 -- CFO Certification pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.(J).
32.1 -- CEO Certification pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.(R).
32.2 -- CFO Certification pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.(R).
</Table>
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See legend on following page
118
EXHIBIT INDEX
(A) Incorporated by reference to the indicated Exhibit to registrant's
Registration Statement on Form S-1 (Registration No. 33-16419).
(B) Incorporated by reference to registrant's Annual Report on Form 8-K dated
June 5, 1989.
(C) Incorporated by reference to registrant's Current Report on Form 8-K dated
July 1, 1991.
(D) Incorporated by reference to the registrant's Annual Report on Form 10-K
for 1991.
(E) Incorporated by reference to the registrant's Current Report on Form 8-K
dated April 10, 1992 and Amendment No. 1 to its Current Report.
(F) Incorporated by reference to registrant's Registration Statement on Form
S-8 (Registration No. 33-81780) dated July 20, 1994.
(G) Incorporated by reference to registrant's Registration Statement on Form
S-8 (Registration No. 33-81782) dated July 20, 1994.
(H) Incorporated by reference to registrant's Current Report on Form 8-K dated
October 26, 1994.
(I) Incorporated by reference to the registrant's Annual Report on Form 10-K
for 1994.
(J) Filed herewith.
(K) Incorporated by reference to the registrant's Current Report on Form 8-A
dated May 25, 2006.
(L) Incorporated by reference to registrant's Registration Statement on Form
S-8 (Registration No. 333-22017) dated February 19, 1997.
(M) Incorporated by reference to the registrant's Current Report on Form 8-K
dated October 8, 1997.
(N) Incorporated by reference to registrant's Registration Statement on Form
S-8 (Registration No. 333-57404) dated March 22, 2001.
(O) Incorporated by reference to the registrant's Current Report on Form 8-K
dated November 10, 2003.
(P) Incorporated by reference to registrant's Registration Statement on Form
S-8 (Registration No. 333-113612) dated March 15, 2004.
(Q) Incorporated by reference to registrant's Registration Statement on Form
S-8 (Registration No. 333-113613) dated March 15, 2004.
(R) Furnished herewith.
(S) Incorporated by reference to the registrant's Current Report on Form 8-K
dated June 6, 2005.
(T) Incorporated by reference to the registrant's Quarterly Report on Form
10-Q dated August 4, 2005.
(U) Incorporated by reference to registrant's Registration Statement on Form
S-8 (Registration No. 333-129473) dated November 4, 2005.
(V) Incorporated by reference to the registrant's Current Report on Form 8-K
dated January 4, 2006.
(W) Incorporated by reference to registrant's Annual Report on Form 10-K dated
March 31, 2005.
(X) Incorporated by reference to registrant's Current Report on Form 8-K dated
August 3, 2005.
(Y) Incorporated by reference to registrant's Current Report on Form 8-K dated
February 7, 2006.
119