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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2008
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
Commission file number 1-10638
CAMBREX CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (201) 804-3000
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NAME OF EACH EXCHANGE ON WHICH
TITLE OF EACH CLASS REGISTERED
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COMMON STOCK, $.10 PAR VALUE NEW YORK STOCK EXCHANGE
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, a non-accelerated filer, or a smaller reporting company.
See the definitions of "large accelerated filer," "accelerated filer" and
"smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer [ ] Accelerated filer [X] Non-accelerated filer [ ]
(Do not check if a smaller reporting company)
Large accelerated filer [ ] Smaller reporting company [ ]
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 $168,064,886 as of June 30, 2008.
APPLICABLE ONLY TO CORPORATE REGISTRANTS
As of January 31, 2009, there were 29,207,831 shares outstanding of the
registrant's Common Stock, $.10 par value.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's definitive Proxy Statement for the 2009 Annual
Meeting are incorporated by reference into Part III of this Report.
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CAMBREX CORPORATION AND SUBSIDIARIES
INDEX TO ANNUAL REPORT ON
FORM 10-K FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION
FOR THE YEAR ENDED DECEMBER 31, 2008
ITEM PAGE
NO. NO.
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PART I
1 Business.......................................... 2
1A Risk Factors...................................... 6
1B Unresolved Staff Comments......................... 13
2 Properties........................................ 13
3 Legal Proceedings................................. 14
4 Submission of Matters to a Vote of Security
Holders........................................... 14
PART II
5 Market for the Registrant's Common Equity, Related
Stockholder Matters and Issuer Purchases of Equity
Securities........................................ 14
6 Selected Financial Data........................... 17
7 Management's Discussion and Analysis of Financial
Condition and Results of Operations............... 19
7A Quantitative and Qualitative Disclosures about
Market Risk....................................... 34
8 Financial Statements and Supplementary Data....... 35
9 Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure............... 80
9A Controls and Procedures........................... 80
9B Other Information................................. 81
PART III
10 Directors, Executive Officers and Corporate
Governance........................................ 82
11 Executive Compensation............................ 83
12 Security Ownership of Certain Beneficial Owners
and Management and Related Stockholder Matters.... 83
13 Certain Relationships and Related Transactions and
Director Independence............................. 83
14 Principal Accountant Fees and Services............ 83
PART IV
15 Exhibits and Financial Statement Schedules........ 84
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
growing its portfolio of commercial small molecule therapeutics and providing
products and services that accelerate and improve the discovery and
commercialization of new therapeutics. The Company primarily supplies its
products and services worldwide to pharmaceutical and generic drug companies.
Cambrex has three operating segments, which are manufacturing facilities that
have been aggregated as one reportable segment. The Company's overall strategy
is to: grow its portfolio of custom development projects, especially those in
the later stages of the clinical trial process, secure long-term supply
agreements for newly approved drug products utilizing the Company's active
pharmaceutical ingredients ("APIs") and advanced intermediates; expand sales of
products and projects based on its proprietary technologies; and partner with
generic drug companies to grow the Company's extensive portfolio of generic
APIs. The Company also seeks to demonstrate excellence in regulatory compliance,
environmental, health and safety performance, and customer service. As part of
the process of evaluating strategic alternatives to enhance shareholder value,
the sale of two businesses within the former Human Health segment was completed
in October 2006 and the sale of the businesses that comprised the Bioproducts
and Biopharma segments was completed in February 2007, and accordingly, these
businesses are being reported as discontinued operations in all periods
presented.
The Company uses a consistent business approach:
- Niche Market Focus: The Company participates in niche markets where
significant technical expertise provides a 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 a competitive advantage
and maintain its leading market positions.
- 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
human therapeutics using organic chemistry and generic drug companies.
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.
Demand for Cambrex products and services is increased by its customers'
continuing access to financial resources to advance their research and
development ("R&D") projects for therapeutic candidates from the laboratory to
the clinic, and eventually, to the patient. Healthcare investment comes from a
variety of sources. Large
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(dollars in thousands, except share data)
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pharmaceutical and biotechnology companies spend billions on drug discovery and
development. Research institutions may be funded by the government, business or
private sectors. Macro-economic conditions can have an impact on the
availability of funding for the Company's customers, especially those customers
dependent upon venture capital and other private sources of funding.
Once a drug is identified, companies need to develop a robust process for
the manufacture of clinical and commercial quantities. Product testing,
analytical methods 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 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. Many emerging pharmaceutical and
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.
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 manufactures nearly 70 generic
APIs, typically in relatively small quantities for use in niche therapeutics.
The market for human therapeutics is regulated by the Food and Drug
Administration ("FDA") in the United States and other regulatory agencies
throughout the world. These agencies oversee and regulate the development,
manufacturing and commercialization process for APIs and regulated
intermediates. Excellent regulatory and quality systems are essential to serve
the industry.
Asian competitors have increased their capabilities in drug substance
manufacturing and finished dosage form drugs in recent years. There has been a
growing impact on the volumes sold of the Company's niche products and the
presence of these competitors in the market has resulted in downward pricing
pressure on generic APIs and certain development services for clinical phase
products. Regulatory compliance and product quality may determine the long term
impact of these competitors.
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.
In October 2006, the Company sold two businesses within the former Human
Health segment for nominal consideration. As a result of this transaction, these
businesses are being reported as discontinued operations in all periods
presented.
In February 2007, the Company completed the sale of the businesses that
comprised the Bioproducts and Biopharma segments (excluding certain liabilities)
to Lonza for total cash consideration of $463,914, including working capital
adjustments. As a result of this transaction, these businesses are being
reported as discontinued operations in all periods presented.
In January 2008, the Company acquired AS ProSyntest, a privately held API
research and development company located in Tallinn, Estonia. ProSyntest,
renamed Cambrex Tallinn, has strengths in cost effective chemical route
selection and sample generation, rapid scale up of products at kilo lab scale,
as well as chiral and organometallic chemistries.
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PRODUCTS
The Company uses its technical expertise in a wide range of chemical
processes to meet the needs of its customers for high quality products and
services for specialized applications.
The Company's business 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 APIs and advanced pharmaceutical intermediates.
Services include custom development and current Good Manufacturing Practices
("cGMP") manufacturing services.
Products and services are sold to a diverse group of more than 500
customers, with two customers individually accounting for more than 10% of 2008
sales. One, a pharmaceutical company with which a long-term sales contract is in
effect, accounted for 10.0%. A second customer, a distributor representing
multiple customers, accounted for 11.8%. The Company's products are sold through
a combination of direct sales and independent agents. One API accounted for
13.6% of 2008 sales, the majority of which is sold under a long-term sales
contract.
This table summarizes gross sales by product groups:
2008 2007 2006
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APIs and pharmaceutical intermediates.......... $220,722 $220,386 $206,193
Other.......................................... 28,896 32,188 30,466
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Total................................ $249,618 $252,574 $236,659
======== ======== ========
Sales in 2008 of $249,618 decreased $2,956 or 1.2% including a 2.5%
favorable impact due to exchange rates reflecting a weaker U.S. dollar when
compared to 2007.
Sales of APIs and pharmaceutical intermediates in 2008 of $220,722 were
$336 or 0.2% above the prior year. Excluding the favorable impact due to foreign
exchange rates, sales were down 2.4%. Lower sales were driven by lower volumes
of a diuretic API, lower demand for custom development and drug delivery
products as well as lower pricing of a gastro-intestinal API due to the
renegotiation of a long-term contract. These decreases were partially offset by
higher sales of controlled substances and higher demand for a central nervous
system API.
Other sales in 2008 of $28,896 were $3,292 or 10.2% below the prior year.
Excluding the favorable impact due to foreign exchange, these sales were down
12.1%. The decrease in sales is due primarily to lower sales of a feed additive
product line that the Company exited in the third quarter of 2008 and lower
sales of polymer products.
MARKETING AND DISTRIBUTION
The Company's products 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 business unit management
to determine the strategic and operational 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 and independent
distributors in those areas where they are deemed to be more effective or
economical than direct sales efforts.
RAW MATERIALS
The Company uses a wide array of raw materials in its businesses.
For its products, the Company generally will attempt to 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.
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RESEARCH AND DEVELOPMENT
The Company's R&D 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 and proprietary 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. R&D activities are
performed at all of the Company's manufacturing facilities in both the United
States and Europe. Approximately 98 employees are at least partially involved in
R&D activities worldwide.
In December 2007 the Company consolidated its United States R&D activities
and small scale API production into its facility in Charles City, Iowa. As a
result of the consolidation, the Company's Center of Technical Excellence in
North Brunswick, New Jersey ("New Jersey R&D facility") was closed as of
December 31, 2008.
The Company spent $7,590, $12,157 and $10,813 in 2008, 2007 and 2006,
respectively, on R&D efforts.
PATENTS AND TRADEMARKS
The Company has patent protection covering certain products, processes and
services. 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 companies) for developing and maintaining its market position.
Worldwide, the Company currently owns approximately 15 granted/in-force
patents which have various expiration dates, the latest of which is in 2025. In
addition, the Company currently has several pending patent applications and, as
decisions are made to patent new inventions, prepares new patent applications.
The Company has registered trademark rights in the United States and select
foreign countries for use in connection with the Company's products and
services. The Company also holds common law trademark rights for certain other
marks.
The Company requires employees to sign confidentiality and ownership of
inventions agreements where appropriate.
COMPETITION
The Company has at least 25 primary API and advanced intermediate
competitors throughout Western Europe and the U.S. and many more competitors
within various segments of the markets the Company serves, including a growing
number of competitors in Asia, Eastern Europe and other low-cost areas. The
Company believes that low cost providers have had the impact of driving prices
down for many products and services for which the Company competes to provide,
and the Company anticipates that it will face increased competition from these
providers in the future. It is expected that regulatory compliance, product
quality and logistics will determine the extent of the long term impact of these
competitors in the primary markets that the Company serves. If the Company
perceives significant competitive risk and a need for technical or financial
commitment, it generally attempts to negotiate long term contracts or guarantees
from its customers.
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 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, health compliance programs and
training at its plants and believes that its manufacturing operations are in
compliance with all applicable safety, health and environmental laws.
Prevailing legislation tends to hold companies primarily responsible for
the proper disposal of their wastes even after transfer to third party waste
disposal facilities. Moreover, other future developments, such as increasingly
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5
strict environmental, safety and health laws and regulations, and enforcement
policies there under, 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.
Known environmental matters which may result in liabilities to the Company
and the related estimates and accruals are summarized in Note 18 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 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 $1,760 in 2008, $2,060
in 2007, and $2,784 in 2006 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.
EMPLOYEES
At December 31, 2008, the Company had 856 employees worldwide (609 of whom
were from international operations) compared with 844 employees at December 31,
2007 and 858 at December 31, 2006.
Non-U.S. 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 including, but
not limited to, 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
2008, 2007 and 2006 amounted to $24,602, $28,821 and $28,825, respectively.
Sales from international operations were $167,911 in 2008, $171,145 in 2007, and
$154,197 in 2006. Refer to Note 16.
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 affected. 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.
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THE COMPANY MAY PURSUE TRANSACTIONS THAT MAY CAUSE IT TO EXPERIENCE SIGNIFICANT
CHARGES TO EARNINGS THAT MAY ADVERSELY AFFECT ITS STOCK PRICE AND FINANCIAL
CONDITION.
The Company regularly reviews potential transactions related to
technologies, products, product rights and businesses complementary to its
business. These transactions could include mergers, acquisitions, divestitures,
strategic alliances or licensing agreements. In the future, the Company may
choose to enter into these transactions at any time. As a result of acquiring
businesses or entering into other significant transactions, the Company has
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.
IF THE COMPANY MAKES ACQUISITIONS, IT MAY EXPERIENCE DIFFICULTY INTEGRATING THE
BUSINESSES.
The Company continually explores and conducts discussions with many third
parties regarding possible acquisitions. The Company's ability to continue to
achieve its goals may depend upon its ability to effectively integrate such
businesses, to achieve cost efficiencies and to manage these businesses as part
of Cambrex. However, the Company may experience difficulty integrating the
merged companies. As a result of uncertainty following an acquisition and during
the integration process, the Company could experience disruption in its business
or employee base. If the Company is not able to successfully blend its products
and technologies with the acquired business to create the advantages the
acquisition was intended to create, it may affect the Company's results of
operations, its ability to develop and introduce new products and the market
price of its common stock. Furthermore, there may be overlap between the
Company's products, services or customers, and the combined company may create
conflicts in relationships or other commitments detrimental to the integrated
businesses.
IF THE COMPANY FAILS TO IMPROVE THE OPERATIONS OF FUTURE ACQUIRED BUSINESSES, IT
MAY BE UNABLE TO ACHIEVE OUR GROWTH STRATEGY.
Some of the businesses the Company may acquire could have significantly
lower operating margins than the Company does prior to the time of acquisition.
In the past, the Company has occasionally experienced temporary delays in
improving the operating margins of these acquired businesses. In the future, if
the Company is unable to improve the operating margins of acquired businesses or
operate them profitably, it may be unable to achieve its growth strategy.
COMPANIES MAY DISCONTINUE OR DECREASE THEIR USAGE OF CAMBREX'S SERVICES.
The Company has observed increasing pressure on the part of its customers
to reduce spending, including the use of its services and products, as a result
of negative macro-economic trends and various market dynamics specifically
affecting the pharmaceutical industry. These customers could discontinue or
decrease their usage of Cambrex's services and products, including as a result
of an economic slowdown in the overall United States or foreign economies.
COMPETITION OR A REDUCTION IN DEMAND FOR CAMBREX'S PRODUCTS COULD REDUCE SALES.
The markets for the Company's products are competitive and price sensitive.
Other suppliers have significant financial, operational, sales and marketing
resources, and experience in R&D. These and other companies may have developed
or could in the future develop new technologies that would compete with the
Company's products or render its products obsolete. Several of Cambrex's
customers, especially those that buy its generic APIs, have recently vertically
integrated and now have internal capabilities similar to Cambrex's. In addition,
demand for the Company's products may weaken due to a reduction in research and
development budgets, loss of distributors or other factors.
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The markets for certain Cambrex products are also subject to specific
competitive risks and can be highly price competitive. The Company's competitors
have competed in the past by lowering prices on certain products. The Company's
competitors may lower prices on these or other products in the future and the
Company may, in certain cases, respond by lowering its prices. Conversely,
failure to anticipate and respond to price competition may hurt Cambrex's market
share.
The Company believes that customers in its 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 the Company is unable to be the first to develop and
supply new products, our competitive position may suffer.
THE COMPANY'S FAILURE TO OBTAIN NEW CONTRACTS OR RENEW EXISTING CONTRACTS MAY
ADVERSELY AFFECT ITS BUSINESS.
Many of Cambrex's contracts are short-term in duration. As a result, the
Company must continually replace its contracts with new contracts to sustain its
revenue. In addition, certain of the Company's long-term contracts may be
cancelled or delayed by clients for any reason upon notice. The Company
currently has a long-term sales contract that accounts for 10% of sales that is
scheduled to expire at the end of 2013. There is no guarantee that this contract
will be renewed. The Company also has a contract for certain drug delivery
products that accounts for nearly 4% of sales that expires in September of 2009.
While the Company currently believes it will renew the contract, and that it has
intellectual property that increases the likelihood of renewal, there is no
guarantee that this contract will be renewed and that if it is renewed, that the
profitability will not be negatively impacted going forward.
CAMBREX'S 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, but not limited to, 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; changes in government regulations; and unfavorable exchange
rates with the U.S. dollar. 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.
FAILURE TO OBTAIN PRODUCTS AND RAW MATERIALS FROM THIRD-PARTY MANUFACTURERS
COULD AFFECT CAMBREX'S ABILITY TO MANUFACTURE AND DELIVER ITS PRODUCTS.
The Company relies on third-party manufacturers to supply many of its raw
materials, and in some cases, entire products. In addition, the Company has a
single source for supplies of some raw materials to our products. Manufacturing
problems may occur with these and other outside sources. If such problems occur,
the Company cannot ensure that it will be able to manufacture its products
profitably or on time.
ANY SIGNIFICANT CHANGE IN GOVERNMENT REGULATION OF THE DRUG DEVELOPMENT PROCESS
COULD HAVE A MATERIAL ADVERSE EFFECT ON THE COMPANY.
The manufacturing of pharmaceutical products is 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.
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VIOLATIONS OF CGMP AND OTHER GOVERNMENT REGULATIONS COULD HAVE A MATERIAL
ADVERSE EFFECT ON THE COMPANY.
All facilities and manufacturing techniques used for manufacturing products
for clinical use or for commercial sale in the United States must be operated in
conformity with cGMP regulations as required by the FDA and for certain
products, the Drug Enforcement Agency. 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 a mandated closing of the
Company's facilities. Any such violations would have a material adverse effect
on the Company's business. Cambrex's customers are typically subject to the
same, or similar, regulations and any such violations or other actions by
regulatory agencies, including, but not limited to, plant shutdowns or product
recalls, that eliminate or reduce the Company's sale of it's products or
services could negatively impact the Company's business.
LITIGATION MAY HARM THE COMPANY OR OTHERWISE NEGATIVELY IMPACT ITS MANAGEMENT
AND FINANCIAL RESOURCES.
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 the Company
cannot be assured that it will always be able to resolve such disputes out of
court or on terms favorable to the Company.
Refer to Note 18 for a discussion of the Company's environmental and legal
matters.
LOSS OF KEY PERSONNEL COULD HURT THE COMPANY.
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.
POTENTIAL PRODUCT LIABILITY CLAIMS, ERRORS AND OMISSIONS CLAIMS IN CONNECTION
WITH SERVICES THE COMPANY PERFORMS AND POTENTIAL LIABILITY UNDER INDEMNIFICATION
AGREEMENTS BETWEEN THE COMPANY AND ITS OFFICERS AND DIRECTORS COULD ADVERSELY
AFFECT THE COMPANY.
The Company manufactures products intended for use by the public. 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 affected 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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(dollars in thousands, except share data)
9
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 affected 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 THE
COMPANY HAS PROVIDED FOR AND IT MAY EXPERIENCE SIGNIFICANT VOLATILITY IN ITS
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. In recent years, the Company utilized significant tax attributes in
the form of foreign tax credits and U.S. net operating loss ("NOLs")
carryforwards to reduce or eliminate potential tax expense related to the
repatriation of funds into the U.S. resulting from the 2005 Jobs Creation Act
and from a large divestiture of its biotechnology-related businesses in 2007.
While the Company believes that it has adequately provided for any taxes related
to these items, and taxes related to all other aspects of its business, any such
assessments or future settlements may be materially different than it has
provided.
In recent years, as described more fully in Note 9, the Company has
recorded a valuation allowance against all net domestic and certain foreign
deferred tax assets. Until such time as the Company's domestic and certain
foreign 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 will
likely experience significant volatility in its effective tax rate.
THE COMPANY HAS A SIGNIFICANT AMOUNT OF DEBT.
The Company has a $200,000 revolving credit facility of which $123,800 was
outstanding at December 31, 2008. This facility expires in April of 2012. If the
Company is unable to generate sufficient cash flow or otherwise obtain funds
necessary to make required payments on the credit facility, it will be in
default.
Even if the Company is able to meet its debt service obligations, the
amount of debt it has could adversely affect the Company in a number of ways,
including:
- limiting its ability to obtain any necessary financing in the future for
working capital, capital expenditures, debt service requirements, or
other purposes;
- limiting its flexibility in planning for, or reacting to, changes in the
Company;
- placing it at a disadvantage relative to its competitors who have lower
levels of debt;
- making it more vulnerable to a downturn in its business or the economy
generally; and
- requiring it to use a substantial portion of its cash to pay principal
and interest on its debt, instead of investing those funds in the
business.
VOLATILE FINANCIAL MARKETS COULD AFFECT THE COMPANY'S CASH FLOWS
The Company believes that cash flows from operations along with funds
available from a revolving line of credit will be adequate to meet the
operational and debt servicing needs of the Company, but no assurances can be
given that this will continue to be the case. Given the current state of the
worldwide credit markets, there is a risk that the funds available to be drawn
under the Company's revolving line of credit may not be available in the event
of the failure of one or more participant banks.
The Company's 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, returns on assets within the Company's domestic pension plans that
are significantly below expected performance, as well as other factors.
--------
(dollars in thousands, except share data)
10
INTERNATIONAL UNREST OR FOREIGN CURRENCY FLUCTUATIONS COULD ADVERSELY AFFECT THE
COMPANY'S RESULTS.
The Company's international revenues, which include revenues from its non-
U.S. subsidiaries and export sales from the U.S., represented 77% and 79% of its
product revenues in 2008 and 2007, respectively.
There are a number of risks arising from the Company's international
business, including:
- foreign currencies it receives 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 the Company recognizes;
- the possibility that unfriendly nations or groups could boycott its
products;
- general economic and political conditions in the markets in which it
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 the Company's business is conducted in currencies
other than the U.S. dollar, which is its reporting currency. The Company
recognizes foreign currency gains or losses arising from its operations in the
period incurred. As a result, currency fluctuations between the U.S. dollar and
the currencies in which the Company does business have caused, and will continue
to cause, foreign currency transaction gains and losses. The Company 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. The
Company engages in limited foreign exchange hedging transactions to mitigate the
impact of this volatility on its operations, but its strategies are short-term
in nature and may not adequately protect its operating results from the full
effects of exchange rate fluctuations.
THE MARKET PRICE OF CAMBREX'S STOCK COULD BE VOLATILE.
The market price of the Company's common stock fluctuates substantially due
to a variety of factors, including:
- quarterly fluctuations in its operating income and earnings per share
results;
- technological innovations or new product introductions by the Company or
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 the Company's common stock may also be affected by the
Company's ability to meet any guidance that it may, from time to time, publicly
announce related to our expected sales growth, profitability and other financial
and operational metrics, and its ability to meet analysts' expectations. 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.
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(dollars in thousands, except share data)
11
INCIDENTS RELATED TO HAZARDOUS MATERIALS COULD ADVERSELY AFFECT THE COMPANY.
Portions of the Company's operations require the controlled use of
hazardous materials. Although the Company is 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, the Company could be liable for
any damages that result, which could adversely affect its business.
Additionally, any incident could partially or completely shut down the
Company's research and manufacturing facilities and operations.
The Company generates 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 the Company to
environmental liability if, in the future, such transportation and disposal are
deemed to have violated such statues 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. Refer to
Note 18 for a discussion of the Company's environmental matters.
THE POSSIBILITY THE COMPANY WILL BE UNABLE TO PROTECT ITS TECHNOLOGIES COULD
AFFECT ITS ABILITY TO COMPETE.
The Company's success depends to a significant degree upon its ability to
develop proprietary products and technologies. However, the Company cannot be
assured that patents will be granted on any of its patent applications. The
Company also cannot be assured that the scope of any of its issued patents will
be sufficiently broad to offer meaningful protection. The Company has patents
issued in selected countries, therefore, third parties can make, use, and sell
products covered by its patents in any country in which the Company does not
have patent protection. In addition, issued patents or patents the Company
licenses could be successfully challenged, invalidated or circumvented so that
its patent rights would not create an effective competitive barrier. The Company
provides its customers the right to use its products under label licenses that
are for research purposes only. These licenses could be contested, and the
Company cannot be assured that it 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 the
Company uses, it may need to discontinue an important product or product line,
alter its products and processes, defend its right to use such technology in
court or pay license fees. Although the Company may, under these circumstances,
attempt to obtain a license to such intellectual property, it may not be able to
do so on favorable terms, or at all. Additionally, if Cambrex's products are
found to infringe on a third party's intellectual property, the Company may be
required to pay damages for past infringement, and lose the ability to sell
certain products or receive licensing revenues.
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, 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. The Company is 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.
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(dollars in thousands, except share data)
12
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.
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.
ITEM 2 PROPERTIES.
Set forth below is information relating to the Company's manufacturing
facilities as of December 31, 2008:
OPERATING
LOCATION ACREAGE SUBSIDIARY PRODUCT LINES MANUFACTURED
-------- -------- ---------- --------------------------
Charles City, IA 57 acres Cambrex APIs, Pharmaceutical Intermediates,
Charles City, Imaging Chemicals, Animal Health
Inc. Products and Fine Custom Chemicals
Karlskoga, Sweden 42 acres Cambrex APIs, Pharmaceutical Intermediates,
Karlskoga AB Imaging Chemicals and Fine Custom
Chemicals
Paullo (Milan), Italy 13 acres Cambrex APIs and Pharmaceutical Intermediates
Profarmaco
Milano S.r.l.
The Company leases 10,000 square feet in Tallinn, Estonia which has a lease
term ending May 2014. In addition, the Company owns a six acre site and
buildings in North Haven, CT, 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.
In December 2007 the Company consolidated its United States R&D activities
and small scale API production into its facility in Charles City, Iowa. As a
result of the consolidation, the Company's New Jersey R&D facility was closed as
of December 31, 2008. The lease will continue through December 2010.
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.
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(dollars in thousands, except share data)
13
ITEM 3 LEGAL PROCEEDINGS
See "Environmental and Safety Regulations and Proceedings" under Item 1 and
Note 18 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 18.
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
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:
2008 HIGH LOW
---- ------ ------
First Quarter............................................. $10.96 $6.93
Second Quarter............................................ 7.28 5.51
Third Quarter............................................. 7.97 5.45
Fourth Quarter............................................ 6.14 2.45
2007 HIGH LOW
---- ------ ------
First Quarter............................................. $25.04 $21.46
Second Quarter............................................ 25.89 11.67
Third Quarter............................................. 14.35 10.15
Fourth Quarter............................................ 11.69 7.44
As of February 9, 2009, the Company estimates that there were approximately
3,967 beneficial holders of the outstanding common stock of the Company.
During May 2007, the Company paid a special dividend of $14.00 per share of
common stock. The quarterly dividend on common stock was $0.03 for the first
quarter of 2007 and discontinued thereafter.
2008 EQUITY COMPENSATION TABLE
The following table provides information as of December 31, 2008 with
respect to shares of common stock that may be issued under the Company's
existing equity compensation plans.
COLUMN(A) COLUMN(B) COLUMN(C)
-------------------- ----------------- ---------------------
NUMBER OF SECURITIES
REMAINING FOR FUTURE
NUMBER OF SECURITIES WEIGHTED AVERAGE ISSUANCE UNDER EQUITY
TO BE ISSUED UPON EXERCISE PRICE OF COMPENSATION PLANS
EXERCISE OF OUTSTANDING (EXCLUDING SECURITIES
OUTSTANDING OPTIONS, OPTIONS, WARRANTS REFLECTED IN COLUMN
PLAN CATEGORY WARRANTS AND RIGHTS AND RIGHTS (A))
------------- -------------------- ----------------- ---------------------
Equity compensation plans approved by
security holders..................... 1,313,595 $13.45 47,046
Equity compensation plans not approved
by security holders.................. 277,274 $17.05 5,546
--------- ------
Total.................................. 1,590,869 $14.07 52,592
========= ======
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(dollars in thousands, except share data)
14
The material features of the equity compensation plan under which equity
securities are authorized for issuance that was adopted without stockholder
approval are described below:
2000 EMPLOYEE PERFORMANCE STOCK OPTION PLAN
The 2000 Employee Stock Option Plan (the "2000 Plan") is used to fund
awards for Non-Executive Employees of the Company. The 2000 Plan is administered
by the Compensation Committee of the Board of Directors, and that Committee may
delegate responsibilities to others to assist in administering the 2000 Plan.
The total number of shares of Common Stock which may be issued on exercise of
stock options shall not exceed 500,000 shares, subject to adjustment in
accordance with the Plan. No participant shall be granted options to purchase
more than 100,000 shares of common stock in any twelve month period. The options
shall be priced at fair market value on the date of grant and shall expire 10
years after the date of grant. If the employment of a participant terminates,
other than as a result of death, disability or retirement, all unexercised
awards shall be cancelled immediately. In the event of death, disability or
retirement, the options will expire one year from the date of the event.
--------
(dollars in thousands, except share data)
15
COMPARISON OF FIVE-YEAR CUMULATIVE TOTAL RETURNS
The following graph compares the Company's cumulative total stockholder
return for a five-year period, with a performance indicator of the overall stock
market, the S&P 500 Index and the S&P 1500 Pharmaceuticals Index which the
Company believes more closely reflects the industry within which the Company
operates. Prices are as of December 31 of the year indicated.
COMPARISON OF CUMULATIVE FIVE YEAR TOTAL RETURN
(PERFORMANCE GRAPH)
The Company's commercial activities are focused on manufacturing and
marketing to customers concentrated in the Life Sciences Industry (including
pharmaceutical chemicals and intermediates). Although the Company's products are
diverse, making it difficult to select a comparative peer group, the Company
believes that the S&P 1500 Pharmaceuticals Index is a reasonable, publicly
available comparison group for the commercial activities on which it currently
focuses. The S&P 1500 Pharmaceuticals Index is comprised of 22 pharmaceutical
companies within the S&P 1500 Composite Index as of December 31, 2008.
--------
(dollars in thousands, except share data)
16
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, 2008 are derived from
the audited financial statements for 2008, 2007 and 2006 and the books and
records of the Company for 2005 and 2004, respectively, each including all
adjustments necessary for discontinued operations presentation. The consolidated
financial statements of the Company as of December 31, 2008 and 2007 and for
each of the years in the three year period ended December 31, 2008 and the
reports of independent registered public accounting firms thereon are included
elsewhere in this annual report. In October 2006, the Company sold two
businesses within the former Human Health segment and in February 2007 the
Company completed the sale of the businesses that comprised the Bioproducts and
Biopharma segments (excluding certain liabilities). See Note 19. As a result,
these businesses are being reported as discontinued operations 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.
YEARS ENDED DECEMBER 31,
-------------------------------------------------
2008(1) 2007(2) 2006(3) 2005(4) 2004(5)
-------- -------- -------- --------- --------
INCOME DATA:
Gross sales................................ $249,618 $252,574 $236,659 $ 223,565 $216,528
Net revenues............................... 249,228 252,505 235,073 224,213 217,065
Gross profit............................... 73,743 91,232 83,858 86,911 84,857
Selling, general and administrative
expenses................................. 40,521 48,858 58,279 56,109 53,312
Research and development expenses.......... 7,590 12,157 10,813 11,946 10,434
Restructuring expenses..................... 4,695 6,073 -- -- --
Strategic alternative costs................ 1,515 31,127 2,958 -- --
Operating profit/(loss).................... 19,422 (6,983) 11,808 18,856 21,111
Interest expense/(income), net............. 3,668 (485) 5,478 3,089 3,134
Other expense/(income), net................ 754 725 (17) 201 336
Income/(loss) before income taxes.......... 15,000 (7,223) 6,347 15,566 17,641
Provision for income taxes................. 7,071 6,288 14,513 25,322 11,050
Income/(loss) from continuing operations... 7,929 (13,511) (8,166) (9,756) 6,591
Income/(loss) from discontinued operations,
including gains/(losses) from
dispositions, net of tax................. -- 222,759 (21,706) (100,702) (33,461)
Income/(loss) before cumulative effect of a
change in accounting principle........... 7,929 209,248 (29,872) (110,458) (26,870)
Cumulative effect of a change in accounting
principle................................ -- -- (228) -- --
Net income/(loss).......................... 7,929 209,248 (30,100) (110,458) (26,870)
EARNINGS PER SHARE DATA:
Earnings/(loss) per common share (basic):
Income/(loss) from continuing
operations............................ $ 0.27 $ (0.47) $ (0.30) $ (0.37) $ 0.25
Income/(loss) from discontinued
operations, including gains/(losses)
from dispositions, net of tax......... $ -- $ 7.77 $ (0.81) $ (3.81) $ (1.28)
Cumulative effect of a change in
accounting principle.................. $ -- $ -- $ (0.01) $ -- $ --
-------- -------- -------- --------- --------
Net income/(loss)........................ $ 0.27 $ 7.30 $ (1.12) $ (4.18) $ (1.03)
--------
(dollars in thousands, except share data)
17
YEARS ENDED DECEMBER 31,
-------------------------------------------------
2008(1) 2007(2) 2006(3) 2005(4) 2004(5)
-------- -------- -------- --------- --------
Earnings/(loss) per common share (diluted):
Income/(loss) from continuing
operations............................ $ 0.27 $ (0.47) $ (0.30) $ (0.37) $ 0.25
Income/(loss) from discontinued
operations, including gains/(losses)
from dispositions, net of tax......... $ -- $ 7.77 $ (0.81) $ (3.81) $ (1.27)
Cumulative effect of a change in
accounting principle.................. $ -- $ -- $ (0.01) $ -- $ --
-------- -------- -------- --------- --------
Net income/(loss)........................ $ 0.27 $ 7.30 $ (1.12) $ (4.18) $ (1.02)
Weighted average shares outstanding:
Basic.................................... 29,116 28,683 26,816 26,456 26,094
Diluted.................................. 29,161 28,683 26,816 26,456 26,462
DIVIDENDS PER COMMON SHARE................. $ -- $ 14.03 $ 0.12 $ 0.12 $ 0.12
BALANCE SHEET DATA: (AT END OF PERIOD)
Working capital.......................... $ 74,376 $ 69,148 $117,616 $ 139,207 $182,915
Total assets............................. 341,072 373,462 606,376 612,472 791,985
Long-term debt........................... 123,800 101,600 158,600 182,060 219,999
Total stockholders' equity............... 74,786 102,057 246,646 243,251 391,316
--------
(1) Income from continuing operations include pre-tax charges of $1,515
within operating expenses for the costs related to strategic
alternatives, $4,695 within operating expenses for restructuring costs
and $1,040 within operating expenses related to a former CEO's
retirement.
(2) Loss from continuing operations include pre-tax charges of $31,127 within
operating expenses for the costs related to strategic alternatives,
$6,073 within operating expenses for restructuring costs and $841 within
interest expense for the write-off of unamortized debt costs. Income from
discontinued operations include the gain on sale of the businesses that
comprised the Bioproducts and Biopharma business segments of $235,489,
expense of $4,636 for the Rutherford litigation settlement and expense of
$1,000 for an adjustment to an environmental reserve at a Rutherford
Business site.
(3) Loss from continuing operations include pre-tax charges of $2,958 within
operating expenses for external advisor costs related to divestitures,
$5,272 within interest expense due to the pre-payment of a portion of the
Company's long-term debt and tax expense of $1,696 related to prior years
returns included in the provision for income taxes. Loss from
discontinued operations include the loss on the sale of two businesses
within the former Human Health segment of $23,244, expense of $200 for an
adjustment to an environmental reserve at a Rutherford Business site,
$2,092 for a goodwill impairment charge, $1,791 due to the acquisition of
Cutanogen and $1,475 for the write-down of an investment in equity
securities.
(4) Loss from continuing operations include pre-tax charges for executive
severance of $4,223 and an increase in an environmental reserve of $1,300
recorded in operating expenses, 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. Loss from discontinued operations 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.
(5) Loss from discontinued operations includes a pre-tax charge of $48,720
for goodwill impairment. As a result of the adjustments for discontinued
operations, the calculation of diluted weighted average shares
outstanding includes common equivalent shares previously excluded as
anti-dilutive.
--------
(dollars in thousands, except share data)
18
ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
EXECUTIVE OVERVIEW
The Company's business consists of three manufacturing facilities. These
facilities primarily manufacture APIs, ingredients derived from organic
chemistry and pharmaceutical intermediates.
The following significant events, which are explained in detail on the
following pages, occurred during 2008 which affected results from continuing
operations:
- A charge of $4,695 recorded within operating expenses for restructuring
expenses.
- A charge of $1,515 recorded within operating expenses for strategic
alternatives costs.
- A benefit of $726 recorded within cost of goods sold for an insurance
settlement related to business interruption.
Sales in 2008 decreased 1.2% to $249,618 from $252,574 in 2007. Sales in
2008 were favorably impacted 2.5% as a result of foreign currency exchange.
The Company experienced lower demand for custom development products during
2008 due to macro-economic conditions and certain project delays. The Company
also experienced lower generic API sales due to competitive pricing pressures
and a lack of new generic API products due to prior European legislation. This
legislation was recently overturned and the Company expects to generate sales of
new generic products in 2010 and beyond. Sales of controlled substances showed
strong growth in 2008. The Company also continues to develop several new
products utilizing its proprietary polymeric drug delivery technology.
The Company maintained a robust custom development pipeline during 2008 and
its portfolio currently includes 14 products in phase III clinical trials. With
a broad portfolio of products and services in the API market, the Company
remains profitable and has a solid platform for future growth.
Gross margins in 2008 decreased to 29.5% from 36.1% in 2007. The decrease
is due primarily to lower pricing and higher production costs partially offset
by proceeds from an insurance settlement related to business interruption. The
insurance settlement contributed 0.3% to gross margins. The impact of foreign
currency exchange was negligible.
Two customers accounted for 10% or more of 2008 gross sales. A distributor
representing multiple customers, accounted for 11.8% and a pharmaceutical
company, with which a long-term sales contract is in effect, accounted for
10.0%.
Many of the Company's contracts are short-term in duration. As a result,
the Company must continually replace its contracts with new contracts to sustain
its revenue. In addition, certain of the Company's long-term contracts may be
cancelled or delayed by clients for any reason upon notice. The Company
currently has a long-term sales contract that accounts for 10% of sales that is
scheduled to expire at the end of 2013. There is no guarantee that this contract
will be renewed. The Company also has a contract for certain drug delivery
products that accounts for nearly 4% of sales that expires in September of 2009.
While the Company currently believes it will renew the contract, and that it has
intellectual property that increases the likelihood of renewal, there is no
guarantee that this contract will be renewed and that if it is renewed, that the
profitability will not be negatively impacted going forward.
The Company recorded tax expense of $7,071 in 2008 compared to $6,288 in
2007. Tax expense in 2007 includes $7,915 of benefit related to the recognition
of certain tax attributes as a result of the sale of the businesses that
comprised the Bioproducts and Biopharma segments. The tax provisions in 2008 and
2007 are primarily affected by the non-recognition of tax benefits in the U.S.
where losses are incurred and the Company records valuation allowances against
the benefits. The 2008 provision also includes benefits due to the expiration of
statutes of limitations on certain tax positions, benefits for tax loss
carrybacks and credits, and incremental benefits of the project to streamline
the Company's legal structure.
--------
(dollars in thousands, except share data)
19
The Company reported income from continuing operations of $7,929, or $0.27
per diluted share in 2008, compared to a loss of $13,511, or $0.47 per diluted
share, in 2007.
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 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 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.
The Company has certain contracts that contain multiple deliverables. These
deliverables often include process development services and commercial
production and are divided into separate units of accounting if certain criteria
are met, including whether the delivered element has stand-alone value to the
customer and whether there is objective and reliable evidence of the fair value
of the undelivered items. The consideration the Company receives is allocated
among the separate units based on their respective fair values, and the
applicable revenue recognition criteria are applied to each of the separate
units.
For contracts that contain milestone-based payments, the Company recognizes
revenue using the proportional performance method based on the percentage of
costs incurred relative to the total costs estimated to be incurred to complete
the contract. Revenue recognition computed under this methodology is compared to
the amount of non-refundable cash payments received or contractually receivable
at the reporting date and the lesser of the two amounts is recognized as revenue
at each reporting date. The proportional performance methodology applied by the
Company for revenue recognition, utilizes an input based measure, specifically
labor costs, because the Company believes the use of an input measure is a
better surrogate of proportional performance than an output based measure, such
as milestones.
Amounts billed in advance are recorded as deferred revenue on the balance
sheet. Since payments received are typically non-refundable, the termination of
a contract by a customer prior to its completion could result in an immediate
recognition of deferred revenue relating to payments already received not
previously recognized as revenue.
Sales terms to certain customers include rebates 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 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.
The Company bills a portion of freight cost incurred on shipments to
customers. Freight costs are reflected in cost of goods sold. Amounts billed to
customers are recorded within net revenues.
Asset Valuations and Review for Potential Impairments
The review of long-lived assets, principally fixed assets and other
amortizable intangibles, requires the Company 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.
--------
(dollars in thousands, except share data)
20
The 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 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, the Company then
estimates the fair value of the other assets and liabilities utilizing
appraisals and discounted cash flow analyses to calculate an impairment charge.
The determination of fair value is judgmental 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 18 for a discussion of the
Company's 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 certain 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, 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)
21
RESULTS OF OPERATIONS
2008 COMPARED TO 2007
Gross sales for 2008 decreased 1.2% to $249,618 from $252,574 in 2007.
Gross sales were favorably impacted in 2008 by 2.5% due to the weakness in the
U.S. dollar primarily versus the Euro and Swedish krona.
The following table shows gross sales to geographic area for the years
ended December 31, 2008 and 2007:
2008 2007
-------- --------
North America.......................................... $ 86,631 $ 85,644
Europe................................................. 143,542 150,692
Asia................................................... 11,440 9,125
Other.................................................. 8,005 7,113
-------- --------
Total.................................................. $249,618 $252,574
======== ========
Sales of APIs and pharmaceutical intermediates of $220,722 were comparable
to the prior year. Excluding the favorable impact due to foreign exchange rates,
sales were down 2.4%. Lower sales were driven by lower volumes of a diuretic
API, lower demand for custom development and drug delivery products as well as
lower pricing of a gastro-intestinal API due to the renegotiation of a long-term
contract. These decreases were partially offset by strong sales of controlled
substances and higher demand for a central nervous system API.
Other sales of $28,896 were $3,292 or 10.2% below the prior year. Excluding
the favorable impact due to foreign exchange, these sales were down 12.1%. The
decrease in sales is due primarily to lower sales of a feed additive product
line that the Company exited in the third quarter of 2008 and lower sales of
polymer products.
Gross profit in 2008 was $73,743 compared to $91,232 in 2007. Gross margins
in 2008 decreased to 29.5% from 36.1% in 2007. The lower margins are due
primarily to lower pricing and higher production costs partially offset by
proceeds from an insurance settlement related to business interruption. The
insurance settlement contributed 0.3% to gross margins. The impact of foreign
currency exchange was negligible.
Selling, general and administrative ("SG&A") expenses of $40,521 or 16.2%
of gross sales in 2008 decreased from $48,858 or 19.3% in 2007. Administrative
expenses decreased primarily due to lower personnel costs resulting from reduced
staffing at corporate headquarters (approximately $3,200), lower bonus expense
(approximately $2,500) and lower legal fees (approximately $2,500) partially
offset by an unfavorable impact from foreign currency (approximately $1,100).
Total restructuring expenses for 2008 and 2007 were $4,695 and $6,073,
respectively. Restructuring expenses include the reduction of employee positions
at the corporate office and the consolidation of the Company's R&D activities
and small scale API production with its facility in Iowa.
During 2007, the Company announced plans to eliminate certain employee
positions at the corporate office upon completion of the sale of the businesses
that comprised the Bioproducts and Biopharma segments. This plan included
certain one-time benefits for terminated employees. Costs related to these plans
are recorded as restructuring expenses in the income statement. The Company
recognized expense of $805 and $4,014 in 2008 and 2007, respectively, related to
this plan.
In December of 2007, the Company consolidated its United States R&D
activities and small scale API production with its facility in Charles City,
Iowa. The Company recognized restructuring expenses in 2007 of $2,059 related to
this consolidation. This charge included the present value of the remaining
lease payments under the Company's current operating lease at the New Jersey R&D
facility (reduced by estimated sublease rentals) of $998. The operating lease
expires in December 2010. In accordance with accounting guidance, the fair value
of the liability recorded at the cease-use date factored in the remaining lease
rentals, reduced by estimated sublease rentals that could be reasonably obtained
for the property. The Company consulted with local real estate brokers at that
time to determine what reasonable sublease rentals could be obtained. During the
past year, the Company has not been
--------
(dollars in thousands, except share data)
22
able to sublease the property and interest dramatically decreased during the
fourth quarter of 2008. Due to the lack of interest, the Company consulted with
its real estate broker and determined that the possibility of obtaining a
sublease was extremely low. As a result, during the fourth quarter of 2008, the
Company increased the reserve related to the remaining lease payments by $2,388.
This amount assumes the Company will not obtain a sublease for the facility. In
addition to increasing the reserve, the Company incurred costs of $1,502 related
to lease payments, utilities and severance during 2008. Costs related to this
consolidation are recorded as restructuring expenses on the income statement.
Total strategic alternative costs for 2008 and 2007 were $1,515 and
$31,127, respectively. Strategic alternative costs include expenses that the
Company has incurred related to the decision to sell the businesses that
comprised the Bioproducts and Biopharma segments in February 2007, costs
associated with a project to streamline the Company's legal structure and costs
associated with the exit of a feed additives product line. These costs are not
considered part of the restructuring program or a part of discontinued
operations under current accounting guidance.
Strategic alternative costs for 2008 include $1,385 related to the project
to streamline the Company's legal structure, costs associated with the
modification of employee stock options due to the payment of the special
dividend in connection with the divestiture of $102 and change of control
expense of $28. Costs for 2007 include change of control expenses totaling
$20,025 related to the 2007 divestiture of the businesses that comprised the
Bioproducts and Biopharma segments, retention bonuses of $6,780, costs
associated with the stock option modification of $2,854 and external advisor
costs of $456.
During the fourth quarter of 2007 the Company committed to a plan to exit a
feed additive product line. The equipment used in producing this product will be
dismantled and disposed subsequent to the completion of production. Production
continued through the third quarter of 2008. In accordance with FASB
Interpretation No. 47, Accounting for Conditional Asset Retirement Obligations
("FIN 47"), the Company recorded $1,012 for the asset retirement obligation in
2007. This charge is recorded as strategic alternative costs in the income
statement.
Research and development expenses of $7,590 were 3.0% of gross sales in
2008, compared to $12,157 or 4.8% of gross sales in 2007. The decrease is
primarily due to the Company's decision in 2007 to consolidate its New Jersey
R&D facility with its R&D operations in Iowa to create increased operating
efficiencies. The Company also utilized certain R&D personnel on custom
development projects resulting in these costs being classified as cost of goods
sold. The impact of foreign currency was negligible.
Operating profit was $19,422 in 2008 compared to an operating loss of
$6,983 in 2007. The increase is due to lower strategic alternative and
restructuring costs and lower corporate spending partially offset by lower gross
margins. The 2008 results include strategic alternative and restructuring costs
of $1,515 and $4,695, respectively. The 2007 results include strategic
alternative and restructuring costs of $31,127 and $6,073, respectively.
Net interest expense was $3,668 in 2008 compared to net interest income of
$485 in 2007 primarily reflecting interest income in 2007 due to interest earned
on the proceeds from the sale of the businesses that comprised the Bioproducts
and Biopharma segments. Higher average debt partially offset by lower interest
rates contributed to higher interest expense. Additionally, 2007 includes the
acceleration of unamortized origination fees related to the repayment of a prior
credit facility of $841. The average interest rate was 4.9% and 6.9% in 2008 and
2007, respectively.
The Company recorded tax expense of $7,071 in 2008 compared to $6,288 in
2007. The tax expense for 2008 includes a $5,537 valuation allowance to offset
benefits generated from U.S. tax credits and losses in certain non-U.S.
jurisdictions. These valuation allowances result from the Company's recent
history of domestic and certain foreign losses and its short-term projections
for losses from continuing operations in the relative jurisdictions. Since 2003,
the Company has maintained a full valuation allowance on the tax benefits
arising from domestic pre-tax losses.
The Company will continue to record a full valuation allowance, primarily
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
--------
(dollars in thousands, except share data)
23
of the domestic net deferred assets would be realized. If the Company continues
to report pre-tax losses in the United States and certain foreign jurisdictions,
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 and the federal alternative minimum tax credits are 10 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.
In connection with the sale of the businesses that comprised the
Bioproducts and Biopharma businesses in 2007, the Company utilized domestic
federal NOLs and foreign tax credits for which a full valuation allowance was
provided for at December 31, 2007, to eliminate the U.S. tax on this
transaction. U.S. income tax related to distributions from non-U.S. entities
repatriated in 2008 has been offset by foreign tax credits.
Income from continuing operations in 2008 was $7,929, or $0.27 per diluted
share, versus a loss of $13,511, or $0.47 per diluted share in 2007.
2007 COMPARED TO 2006
Gross sales for 2007 increased 6.7% to $252,574 from $236,659 in 2006.
Gross sales were favorably impacted 4.7% due to the impact of foreign currency
reflecting weakness in the U.S. dollar primarily versus the Euro and Swedish
krona.
The following table shows gross sales to geographic area for the years
ended December 31, 2007 and 2006:
2007 2006
-------- --------
North America.......................................... $ 85,644 $ 85,944
Europe................................................. 150,692 136,545
Asia................................................... 9,125 8,041
Other.................................................. 7,113 6,129
-------- --------
Total.................................................. $252,574 $236,659
======== ========
Sales of APIs and pharmaceutical intermediates of $220,386 were $14,193 or
6.9% above the prior year due primarily to higher demand for a diuretic API,
nicotine polacrilex resin (used in smoking cessation products), amphetamines,
and a neurological API. The increase in 2007 sales was partially offset by lower
sales of three custom development products.
Other sales of $32,188 were $1,722 or 5.7% above the prior year due
primarily to higher volumes of a crop protection product and x-ray media,
partially offset by lower sales of feed additive products.
Gross profit in 2007 was $91,232 compared to $83,858 in 2006. Gross margins
in 2007 increased to 36.1% from 35.4% in 2006. On a performance basis (excluding
foreign currency impact), gross margins were 35.5% in 2007. The marginal
increase is due primarily to favorable mix mostly offset by lower pricing.
SG&A expenses of $48,858 or 19.3% of gross sales in 2007 decreased from
$58,279 or 24.6% in 2006. Administrative expenses decreased primarily due to
lower personnel costs resulting from reduced staffing at corporate headquarters
(approximately $3,000) and lower audit (approximately $2,200), insurance
(approximately $1,900) and legal fees (approximately $1,500) partially offset by
an unfavorable impact from foreign currency (approximately $1,500).
The Company announced plans to eliminate certain employee positions at the
corporate office upon completion of the sale of the businesses that comprised
the Bioproducts and Biopharma segments. This plan included certain one-time
benefits for employees terminated and is substantially completed as of December
31, 2007. Costs related to these plans are recorded as restructuring expenses in
the income statement. The Company recognized expense of $4,014 during 2007.
--------
(dollars in thousands, except share data)
24
The Company also consolidated its United States R&D activities and small
scale API production with its facility in Charles City, Iowa. As a result of the
consolidation, the Company's New Jersey R&D facility was substantially closed as
of December 31, 2007. The Company recognized restructuring expenses in 2007 of
$2,059, of which approximately $1,354 will be in cash. The charge of $2,059
consists of the present value of the remaining lease payments under the
Company's current operating lease at the New Jersey R&D facility (reduced by
estimated sublease rentals) of $998, leasehold improvement write-offs of $705
and employee retention and severance of $356. Costs related to this plan are
recorded as restructuring expenses on the income statement. The operating lease
expires in December 2010. In accordance with accounting guidance, the severance
and retention charges are being recognized ratably over the remaining service
period. Lease payments are approximately $1,400 per year.
Strategic alternative costs include costs that the Company has incurred
related to the decision to sell the businesses that comprised the Bioproducts
and Biopharma segments in February 2007 and costs associated with the exit of a
product line that manufactures a feed additive. These costs are not considered
part of the restructuring program or a part of discontinued operations under
current accounting guidance.
As a result of the sale of the businesses that comprise the Bioproducts and
Biopharma segments, certain benefits became payable under change of control
agreements between the Company and four of its current or former executives.
These costs totaled $20,025 in 2007. Also included in strategic alternative
costs are retention bonuses of $6,780; this includes amounts paid to certain
current employees for continued employment, generally through September 30, 2007
and December 31, 2007, costs associated with the modification of employee stock
options due to the payment of the special dividend in connection with the
divestiture of $2,854 and external advisor costs of $456. Substantially all of
these charges have been paid in cash.
During the fourth quarter of 2007 the Company committed to a plan to exit a
feed additive product line. The equipment used in producing this product will be
dismantled and disposed subsequent to the completion of production. Production
continued through the third quarter of 2008. In accordance with FIN 47, the
Company now has the information needed to estimate a range of potential
settlement dates and the potential methods of settlement for the dismantling and
disposal of this equipment. Upon adopting FIN 47 in the fourth quarter of 2005,
the Company did not have the information needed to estimate the fair market
value of the asset retirement obligation and as such did not record a liability.
During the fourth quarter of 2007, the Company recorded $1,012 for the asset
retirement obligation. This charge is recorded as strategic alternative costs in
the income statement.
Total strategic alternative costs for 2007 were $31,127. Strategic
alternative costs for 2006 totaled $2,958 consisting of external advisor costs
related to divestitures.
Research and development expenses of $12,157 were 4.8% of gross sales in
2007, compared to $10,813 or 4.6% of gross sales in 2006. The increase in
expense primarily reflects higher personnel costs to invest in the growth and
development of proprietary technology platforms ($400), higher costs at the New
Jersey R&D facility due to lower billings of fixed costs to customers resulting
from fewer projects ($400) and depreciation expense associated with the new R&D
facility in Milano ($100). The impact of foreign currency also contributed to
higher expense ($500).
The Company incurred an operating loss in 2007 of $6,983 compared to
operating income of $11,808 in 2006 due to higher strategic alternative and
restructuring costs, partially offset by lower corporate spending and higher
gross margins. The 2007 results include strategic alternative and restructuring
costs of $31,127 and $6,073, respectively. The 2006 results include strategic
alternative costs of $2,958.
Net interest income was $485 in 2007 compared to net interest expense of
$5,478 in 2006 primarily reflecting higher interest income in 2007 compared to
2006 due to interest earned on the proceeds from the sale of the businesses that
comprised the Bioproducts and Biopharma segments. Lower average debt partially
offset by higher interest rates contributed to lower interest expense.
Additionally, 2007 includes the acceleration of unamortized origination fees
related to the repayment of a prior credit facility of $841. Included in 2006 is
approximately $5,272 related to the make whole payment of $4,809 and the related
acceleration of $463 of unamortized origination fees
--------
(dollars in thousands, except share data)
25
due to the prepayment of the Senior Notes partially offset by the allocation of
interest expense to discontinued operations. The average interest rate was 6.9%
and 5.8% in 2007 and 2006, respectively.
The Company recorded tax expense of $6,288 in 2007 compared to $14,513 in
2006. Tax expense in 2007 includes $7,915 of benefit related to the recognition
of certain tax attributes as a result of the sale of the businesses that
comprised the Bioproducts and Biopharma segments. The tax expense for 2007 also
includes a $7,816 valuation allowance to offset benefits generated from U.S. tax
losses and tax credits and losses in certain non-U.S. jurisdictions. These
valuation allowances result from the Company's recent history of domestic and
certain foreign losses and its short-term projections for losses from continuing
operations in the relative jurisdictions. Since 2003, the Company has maintained
a full valuation allowance on the tax benefits arising from domestic pre-tax
losses.
The Company will continue to record a full valuation allowance, primarily
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
and certain foreign jurisdictions, 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, NOLs, 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.
In connection with the sale of the businesses that comprised the
Bioproducts and Biopharma businesses, the Company utilized domestic NOLs and
foreign tax credits for which a full valuation allowance was provided for at
December 31, 2006. The NOLs and foreign tax credits were utilized to reduce all
the domestic tax on this transaction.
Loss from continuing operations in 2007 was $13,511 or $0.47 per diluted
share, versus $8,166 or $0.30 per diluted share in 2006.
LIQUIDITY AND CAPITAL RESOURCES
During 2008 cash and cash equivalents on hand decreased $5,948 to $32,540.
The year over year decline in the Euro and Swedish krona unfavorably impacted
the translated cash balances by $2,410. During 2008, cash flows from operations
provided $4,989, compared to using $793 in the same period a year ago. The
change in cash flows from operations in 2008 versus 2007 is due primarily to
higher income from continuing operations and improved accounts receivable
collections partially offset by the pay down of several year end 2007 accruals.
Cash flows used in investing activities in 2008 of $30,637 primarily
reflect cash payments related to capital expenditures of $29,378 compared to
$25,927 in 2007. Capital expenditures in 2008 primarily consisted of a new mid-
scale Pharma manufacturing facility in Karlskoga, Sweden, an API purification
facility in Milan, Italy and capital improvements to existing facilities. For
2009, capital expenditures are expected to be approximately $13,000 to $16,000.
Cash flows provided by financing activities in 2008 of $22,110 mainly
reflect a net increase in bank debt of $22,142. In 2007 the Company had a net
reduction of debt of $57,255 and paid dividends of $402,389 which was partially
offset by proceeds from stock options exercised of $21,898.
In April 2007, the Company entered into a $200,000 five-year Syndicated
Senior Revolving Credit Facility which expires in April 2012. The Company pays
interest on this credit facility at LIBOR plus 1.25% -- 2.00% based upon certain
measurements of the Company's financial performance. The credit facility also
includes financial covenants regarding interest coverage and leverage ratios.
The Company was in compliance with all financial covenants at December 31, 2008.
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
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(dollars in thousands, except share data)
26
foreign holding company owns a majority of the Company's non-U.S. operating
subsidiaries. As of December 31, 2008, there was $123,800 outstanding under the
five-year Syndicated Senior Revolving Credit Facility.
The Company has employed a plan to mitigate interest rate risk by entering
into interest rate swap agreements to convert floating rates to fixed interest
rates. As of December 31, 2008, the Company had three interest rate swaps in
place with an aggregate notional value of $60,000, at an average fixed rate of
4.48%, and with maturity dates of October 2010. The Company's strategy has been
to cover a portion of outstanding bank debt with interest rate protection. At
December 31, 2008, the coverage was approximately 48% of our variable interest
rate debt.
The Company used the proceeds from the sale of the businesses that
comprised the Bioproducts and Biopharma segments, which closed during the first
quarter of 2007, to repay outstanding debt and in May 2007, paid a special
dividend of $14.00 per share, totaling $401,970. Approximately $94,000 was
borrowed from the Company's 5-Year Agreement to pay the dividend. The Company
also discontinued its quarterly dividend payment.
The Company did not pay a quarterly dividend during 2008. During 2007, the
Company paid its quarterly dividend on common stock of $0.03 only for the first
quarter.
The 2008 and 2007 weighted average interest rate for long-term bank debt
was 4.9% and 6.9%, respectively.
CONTRACTUAL OBLIGATIONS
At December 31, 2008, the Company's contractual obligations with initial or
remaining terms in excess of one year were as follows:
TOTAL 2009 2010 2011 2012 2013+
-------- ------- ------- ------ -------- -----
Long term debt................... $123,800 $ -- $ -- $ -- $123,800 $ --
Interest on debt................. 14,054 4,775 4,568 3,533 1,178 --
Operating leases................. 6,132 2,265 2,164 707 672 324
Purchase obligations............. 14,136 6,819 3,410 2,425 1,482 --
Strategic
alternatives/restructuring..... 5,628 5,628 -- -- -- --
Vitamin B-3 settlement........... 1,577 1,577 -- -- -- --
-------- ------- ------- ------ -------- ----
Contractual cash obligations..... $165,327 $21,064 $10,142 $6,665 $127,132 $324
======== ======= ======= ====== ======== ====
In addition to the contractual obligations listed above, the Company
expects to contribute approximately $1,205 in cash to its two U.S. defined-
benefit pension plans in 2009. Also not included in the table above is $1,697 of
uncertain tax positions due to uncertainties surrounding the timing of the
obligation. See Note 9.
See Notes 10, 12, 15, 17 and 18 for additional information regarding our
pension plans, debt and other commitments.
The Company's 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, returns on assets within the Company's domestic pension
plans that are significantly below expected performance, as well as other
factors. See the Risk Factors section of this document for further explanation
of factors that may negatively impact the Company's 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
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 and Swedish
krona. The Company currently uses foreign currency exchange forward contracts to
mitigate the effect of
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(dollars in thousands, except share data)
27
short-term foreign exchange rate movements on the Company's local operating
results. As a matter of policy, the Company does not hedge to protect the
translated results of foreign operations. The notional amount of these contracts
as of December 31, 2008 was $20,568. 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. The foreign exchange contracts have varying maturities with none
exceeding twelve months.
With respect to the contracts outstanding at December 31, 2008, a 10%
fluctuation of the local currency over a one-year period would cause $2,113 pre-
tax earnings to be at risk. This is based on the notional amount of the
contracts, adjusted for unrealized gains and losses, of $21,131. 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
The Company has employed a plan to mitigate interest rate risk by entering
into interest rate swap agreements to convert floating rates to fixed interest
rates. As of December 31, 2008, the Company had three interest rate swaps in
place with an aggregate notional value of $60,000, at an average fixed rate of
4.48%, and with maturity dates of October 2010. The Company's strategy has been
to cover a portion of outstanding bank debt with interest rate protection. At
December 31, 2008, the coverage was approximately 48% of our variable interest
rate debt. At December 31, 2008 the Company had variable debt of $123,800, of
which $60,000 is fixed by an interest rate swap. Holding all other variables
constant, if the LIBOR portion of the weighted average interest rates in the
variable rate debt increased by 100 basis points, the effect on our earnings and
cash flows would have been higher interest expense of $638.
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. 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 in
a future reporting period.
Environmental
In connection with laws and regulations pertaining to the protection of the
environment, the Company and its subsidiaries are a party to several
environmental proceedings and remediation investigations and cleanups and, along
with other companies, have been named potentially responsible parties ("PRP")
for certain waste disposal sites ("Superfund sites"). Additionally, the Company
has retained the liability for certain environmental proceedings, associated
with the sale of 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 $6,226 and
$6,905 at December 31, 2008 and December 31, 2007, respectively. The decrease in
the accrual includes payments of $633 and the impact of currency of $303
partially offset by adjustments to reserves of $257. Based upon available
information and analysis, the
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28
Company's current accrual represents management's best estimate of the probable
and estimable costs associated with environmental proceedings including amounts
for investigation fees where remediation costs may not be estimable at the
reporting date.
CasChem ISRA
As a result of the sale of the Bayonne, New Jersey facility, the Company
became obligated to investigate site conditions and conduct required remediation
under the New Jersey Industrial Site Recovery Act ("ISRA"). 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 any. The Company submitted
its plan for the third phase of sampling to the NJDEP during the fourth quarter
of 2005. The sampling will commence upon approval of the sampling plan.
Cosan
The Company's Cosan subsidiary conducted manufacturing operations in
Clifton, New Jersey from 1968 until 1979. Prior to the acquisition of Cosan 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 was
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 of 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 in
2005 based on the proposed remedial action plan. The Company submitted the
results of the investigation and proposed remedial action plan to the NJDEP. In
late 2006, the NJDEP requested that an additional investigation be conducted at
the site. The Company estimated that the additional work will cost approximately
$240, and as such, increased the related reserve in the first quarter of 2007.
The Company submitted its plan for additional work to the NJDEP in April 2007.
In August 2007 the NJDEP approved the Company's work plan and the additional
investigation has been partially completed. The Company has submitted an interim
report to NJDEP and is proceeding to complete the investigation. As of December
31, 2008, the reserve was $1,260. The results of the additional investigation
may impact the remediation plan and costs.
Additionally, there is a reserve of $929 as of December 31, 2008 for the
Cosan Carlstadt, N.J. site related to an Administrative Consent Order with the
NJDEP entered into in 1985 in connection with the acquisition of Cosan. In
September 2004, the reserve was increased based on the investigations completed
to date and the proposed Remedial Action Work Plan ("RAW") submitted to the
NJDEP for their approval. The NJDEP subsequently rejected the RAW and required
the Company to perform additional investigative work prior to approval of a new
RAW. The Company's reserves were increased to cover the additional investigative
work. The results of this additional investigative work may impact the RAW and
costs.
Berry's Creek
In March 2006, the Company received notice from the United States
Environmental Protection Agency ("USEPA") that two former operating subsidiaries
are considered PRPs at the Berry's Creek Superfund Site, Bergen County, New
Jersey. The 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 group
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. The PRPs have engaged technical
and allocation consultants to evaluate investigation and remedial alternatives
and develop a method to allocate related
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29
costs among the PRPs. In December 2007 the PRPs reached a tentative agreement on
the allocation of the site investigation costs and at December 31, 2008 the
Company's reserve was $498. The investigation is expected to take several years
and at this time it is too early to predict the extent of any additional
liabilities.
Nepera, Inc. -- Maybrook and Harriman Sites
In 1987, Nepera, Inc. ("Nepera") was named a PRP along with certain prior
owners of the Maybrook Site in Hamptonburgh, New York by the USEPA in connection
with the disposition, under appropriate permits, of wastewater at that site
prior to Cambrex's acquisition of Nepera in 1986. The Maybrook Site is on the
USEPA's National Priorities List for remedial work. A prior owner of the Nepera
facility has participated with Nepera in the performance of a remedial
investigation and feasibility study for the Maybrook Site. In September 2007,
the USEPA issued the Record of Decision ("ROD") which describes the remedial
plan for the Maybrook Site. The USEPA also issued the Company and the prior
owner a Notice of Potential Liability and the recipients have signed a Consent
Decree to complete the ROD and pay the USEPA certain past oversight costs and
have provided the USEPA with appropriate financial assurance, including a letter
of credit to guarantee the recipient's obligation under the Consent Decree.
In 1987, Nepera was also named as a responsible party along with certain
prior owners of the Harriman, New York production facility by the New York State
Department of Environmental Conservation in connection with contamination at the
Harriman Site. A prior owner of the Nepera facility has participated with Nepera
in the performance of the remedial investigation and feasibility study for the
Harriman Site. In 1997, a final ROD was issued which describes the remediation
plan for the site. Nepera and the prior owner have been implementing the ROD
since 1997.
Until 1997, reserves were assessed and established based on the information
available. In November 1997, a settlement was reached between Nepera, Inc., the
former owner mentioned above, and the original owner of the Harriman operations,
pertaining to past and future costs of remediating the Maybrook and Harriman
Sites ("the Sites"). Under the terms of the settlement, the original site owner
paid approximately $13,000 to provide for past and future remediation costs at
the two sites in exchange for a release from the requirement to clean up the two
sites, and the settlement funds were placed in a trust for the benefit of
remediating the two sites on behalf of Nepera and the other former site owner.
Nepera and the prior owner were reimbursed their past costs from the trust.
Nepera had believed that the remaining funds available in the trust would be
sufficient to provide for the future remediation costs for the Sites.
Accordingly, the estimated range of liability for the Sites was offset against
the settlement funds.
Based on available information, Nepera believed that the current trust
balance would not cover the remaining work to be completed at Harriman and under
the final Maybrook ROD issued in September 2007. As such the Company increased
its reserve by $1,000 during 2007, which was recorded in discontinued
operations. As of December 31, 2008, the reserve recorded on the books was
$1,200.
Solvent Recoveries Superfund Site
In 1992, the USEPA notified Humphrey Chemical Co., Inc. ("Humphrey") of its
possible involvement as one of approximately 1,300 PRPs at a Superfund site
("the site") in Southington, Connecticut, once operated by Solvent Recoveries,
Inc. Humphrey joined the PRP group, which has agreed with the USEPA to perform a
Remedial Investigation/Feasibility Study ("RIFS"). The RIFS has been completed
and the USEPA has proposed remediation of the Site. In September 2008, Humphrey
agreed to enter into a consent decree and settlement with the other PRPs and the
USEPA whereby Humphrey agreed to pay a settlement amount of $353 with an initial
payment of $106 and the remaining $247 to be paid in installments over time as
the remediation proceeds. The Company has reserved for the unpaid portion of the
settlement and has entered into a letter of credit to guarantee the payment
obligation under the settlement.
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 adjusting or recording
an accrual, should an accrual ultimately be required.
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30
Newark Bay Complex Litigation
CasChem and Cosan have been named as two of several hundred third-party
defendants in a third-party complaint filed in February 2009, by Maxus Energy
Corporation ("Maxus") and Tierra Solutions, Inc. ("Tierra"). The original
plaintiffs include the NJDEP, the Commissioner of the NJDEP and the
Administrator of the NJ Spill Compensation Fund, which originally filed suit in
2005 against Maxus, Tierra and other defendants seeking recovery of cleanup and
removal costs for alleged discharges of dioxin and other hazardous substances
into the Passaic River, Newark Bay, Hackensack River, Arthur Kill, Kill Van Kull
and adjacent waters (the "Newark Bay Complex"). Maxus and Tierra are now seeking
contribution from third-party defendants for any cleanup and removal costs for
which each may be held liable in the lawsuit. Maxus and Tierra also seek
recovery for cleanup and removal costs, that each has incurred or will incur
relating to the Newark Bay Complex. The Company expects to vigorously defend
against the lawsuit. At this time it is too early to predict whether the Company
will have any liability in this matter.
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., ("Gyma") 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. All of these cases have been resolved
except for one brought by three health care insurers known as In Re Lorazepam &
Clorazepate Antitrust Litigation.
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 which has been fully paid as of December 31, 2008. 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 February 2008 the District Court, in the In Re Lorazepam & Clorazepate
Antitrust Litigation, entered judgment after trial against Mylan, Gyma and
Cambrex in the amount of $8,355, payable jointly and severally, and also a
punitive damage award against each of Mylan, Gyma and Cambrex in the amount of
$16,709. In addition, in October 2008, the District Court ruled that Mylan, Gyma
and Cambrex were also subject to a total of approximately $7,000 in prejudgment
interest. The parties will appeal the awards. Cambrex expects any payment of the
judgment against it to be made by Mylan under the indemnity described above.
Vitamin B-3
In May 1998, Nepera, which 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 an 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 been concluded.
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31
Nepera was 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.
The balance of the reserves recorded within accrued liabilities related to
this matter is $1,577 as of December 31, 2008 and is sufficient to cover the
settlement.
Baltimore Litigation
In 2001, the Company acquired a biopharmaceutical manufacturing business in
Baltimore (the "Baltimore Business"). The sellers of the Baltimore Business
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 Baltimore Business.
In August 2007 the United States District Court, Southern District of New
York, granted the Company's pending Motion for Summary Judgment in the Baltimore
Litigation. The Sellers have filed a notice of appeal and oral arguments on the
appeal are scheduled for March 2009. Management continues to believe the matter
to be without merit and continues its defense of this matter.
Other
The Company has commitments incident to the ordinary course of business
including corporate guarantees of certain subsidiary obligations to the
Company's lenders related to financial assurance obligations under certain
environmental laws for remediation, closure and 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 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 term
of the indemnification period is for the officer's or director's lifetime. 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 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, 2008.
In addition to the matters identified above, Cambrex's subsidiaries are
party to a number of other proceedings that are not considered material at this
time.
IMPACT OF RECENT ACCOUNTING PRONOUNCEMENTS
Fair Value Measurements
In September 2006, the FASB issued Statement No. 157 "Fair Value
Measurements" ("FAS 157"). This statement defines fair value, establishes a
framework for measuring fair value in GAAP, and expands disclosures about fair
value measurements. This statement will apply whenever another standard requires
(or permits) assets or liabilities to be measured at fair value. The standard
does not expand the use of fair value to any new circumstances. FAS 157 is
effective for financial statements issued for fiscal years beginning after
November 15, 2007, and interim periods within those fiscal years. Relative to
FAS 157, the FASB issued FASB Staff Positions ("FSP") 157-2, which defers the
effective date of FAS 157 for all nonfinancial assets and nonfinancial
liabilities, except those that are recognized or disclosed at fair value in the
financial statements on a recurring basis, until fiscal years beginning after
November 15, 2008, and interim periods within those fiscal years. The effect of
adopting this pronouncement
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(dollars in thousands, except share data)
32
(related to financial assets and financial liabilities) did not have a material
impact on the Company's financial position or results of operations. The Company
is currently evaluating the potential impact of this pronouncement (related to
nonfinancial assets and nonfinincial liabilities).
Employers' Accounting for Defined Benefit Pension and Other Postretirement
Plans
The Company adopted FASB Statement No. 158 "Employers' Accounting for
Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB
Statements No. 87, 88, 106 and 132(R)" ("FAS 158") for the year ended December
31, 2006. FAS 158 requires an employer to recognize the overfunded or
underfunded status of a defined benefit postretirement plan as an asset or
liability in the balance sheet and to recognize changes in that funded status in
the year in which the changes occur through comprehensive income. This statement
does not impact the amounts recognized in the income statement.
FAS 158 also requires an employer to measure the funded status of a plan as
of the date of the fiscal year end balance sheet. The Company's fiscal year end
is December 31 and its pension plans and postretirement benefits plan previously
had a September 30 measurement date. The Company adopted this measurement
requirement as of December 31, 2008. The effect of adopting this pronouncement
did not have a material impact on the Company's financial position or results of
operations.
Fair Value Option for Financial Assets and Financial Liabilities
The Company adopted FASB Statement No. 159 "The Fair Value Option for
Financial Assets and Financial Liabilities -- Including an amendment of FASB
Statement No. 115" ("FAS 159") effective January 1, 2008. This Statement permits
entities to choose to measure many financial instruments and certain other items
at fair value. Unrealized gains and losses on items for which the fair value
option has been elected should be reported in earnings at each subsequent
reporting date. The effect of adopting this pronouncement did not have a
material impact on the Company's financial position or results of operations.
Amendment of FAS 141
In December 2007, the FASB issued Statement No. 141 (Revised 2007),
"Business Combinations" ("FAS 141R") which requires an acquirer to recognize the
assets acquired, the liabilities assumed and any non-controlling interest in the
acquiree at the acquisition date, measured at their fair values as of that date,
with limited exceptions. This Statement also requires the acquirer in a business
combination, achieved in stages, to recognize the identifiable assets and
liabilities, as well as the non-controlling interest in the acquiree, at the
full amounts of their fair values. FAS 141R makes various other amendments to
authoritative literature intended to provide additional guidance or to confirm
the guidance in that literature to that provided in this Statement. FAS 141R
applies prospectively to business combinations for which the acquisition date is
on or after the beginning of the first annual reporting period beginning on or
after December 15, 2008. Earlier adoption is prohibited. Accordingly, the
Company adopted this statement on January 1, 2009.
Amendment of FAS 133
In March 2008, the FASB issued Statement No. 161 "Disclosures about
Derivative Instruments and Hedging Activities -- an amendment of FASB Statement
No. 133" ("FAS 161"). This statement requires enhanced disclosures about
derivative and hedging activities and thereby improves the transparency of
financial reporting. FAS 161 encourages, but does not require, comparative
disclosures for earlier periods at initial adoption. This statement is effective
for fiscal years beginning after November 15, 2008. The effect of adopting this
pronouncement will not have an impact on the Company's financial position or
results of operations.
Employers' Disclosures about Postretirement Benefit Plan Assets
In December 2008, the FASB issued FSP 132(R)-1 "Employers' Disclosures
about Postretirement Benefit Plan Assets" ("FSP 132(R)-1"). This statement
provides guidance on additional disclosures about plan assets of a defined
benefit pension or other postretirement plan. This statement is effective for
fiscal years ending after
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(dollars in thousands, except share data)
33
December 15, 2009. Upon initial application, the provisions of FSP 132(R)-1 are
not required for earlier periods that are presented for comparative purposes.
The effect of adopting this pronouncement will not have an impact 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, as amended, 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. Any
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
regulations (particularly environmental issues), tax rate, interest rate,
technology, manufacturing and legal issues, including the outcome of outstanding
litigation disclosed in the Company's public filings, changes in foreign
exchange rates, uncollectable receivables, loss on disposition of assets,
cancellation or delays in renewal of contracts, lack of suitable raw materials
or packaging materials, the Company's ability to receive regulatory approvals
for its products 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 the Company to predict which will arise. In
addition, the Company cannot assess the impact of each factor on the Company's
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 27 of this Form 10-K.
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(dollars in thousands, except share data)
34
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:
PAGE NUMBER
(IN THIS REPORT)
----------------
Reports of Independent Registered Public Accounting Firms......... 36
Consolidated Balance Sheets as of December 31, 2008 and 2007...... 39
Consolidated Statements of Operations for the Years Ended December
31, 2008, 2007 and 2006......................................... 40
Consolidated Statements of Stockholders' Equity for the Years
Ended December 31, 2008, 2007 and 2006.......................... 41
Consolidated Statements of Cash Flows for the Years Ended December
31, 2008, 2007 and 2006......................................... 42
Notes to Consolidated Financial Statements........................ 43
Selected Quarterly Financial and Supplementary Data (unaudited)... 78
The consolidated financial statements and financial statement schedule are
filed pursuant to Item 15 of this report.
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(dollars in thousands, except share data)
35
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
Cambrex Corporation
We have audited the accompanying consolidated balance sheets of Cambrex
Corporation as of December 31, 2008 and 2007 and the related consolidated
statements of operations, stockholders' equity, and cash flows for the years
then ended. In connection with our audits of the financial statements, we have
also audited the financial statement schedule. The financial statements and
schedule are the responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements and schedule based on our
audits.
We conducted our audits 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 also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements and schedule, assessing the accounting principles used
and significant estimates made by management, as well as evaluating the overall
presentation of the financial statements and schedule. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Cambrex
Corporation at December 31, 2008 and 2007, and the results of its operations and
its cash flows for the years then ended, in conformity with accounting
principles generally accepted in the United States of America.
Also, in our opinion, the financial statement schedule, when considered in
relation to the basic consolidated financial statements taken as a whole,
present fairly, in all material respects, the information set forth therein for
the years ended December 31, 2008 and 2007.
As described in Note 3, in 2007 the Company adopted Financial Accounting
Standards Board Interpretation No. 48, Accounting for Uncertainty in Income
Taxes -- an interpretation of FASB Statement No. 109.
We also have audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States), Cambrex Corporation's
internal control over financial reporting as of December 31, 2008, based on
criteria established in Internal Control -- Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO) and our
report dated February 19, 2009 expressed an unqualified opinion thereon.
/s/ BDO Seidman, LLP
Woodbridge, NJ
February 19, 2009
36
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
Cambrex Corporation
We have audited Cambrex Corporation's internal control over financial
reporting as of December 31, 2008, based on criteria established in Internal
Control -- Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (the COSO criteria). Cambrex
Corporation'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, included in the accompanying "Item
9A, Management's Report on Internal Control Over Financial Reporting". Our
responsibility is to express an opinion on the Company's internal control over
financial reporting based on our audit.
We conducted our audit 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. Our audit included obtaining an understanding of internal
control over financial reporting, assessing the risk that a material weakness
exists, and testing and evaluating the design and operating effectiveness of
internal control based on the assessed risk. Our audit also included performing
such other procedures as we considered necessary in the circumstances. We
believe that our audit provides a reasonable basis for our opinion.
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 (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
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 of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) 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.
In our opinion, Cambrex Corporation maintained, in all material respects,
effective internal control over financial reporting as of December 31, 2008,
based on the COSO criteria.
We also have audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States), the accompanying
consolidated balance sheets of Cambrex Corporation as of December 31, 2008 and
2007 and the related consolidated statements of operations, stockholders'
equity, and cash flows for the years then ended and our report dated February
19, 2009 expressed an unqualified opinion thereon.
/s/ BDO Seidman, LLP
Woodbridge, NJ
February 19, 2009
37
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
Cambrex Corporation
In our opinion, the consolidated financial statements listed in the index
appearing under Item 15(a) (1) present fairly, in all material respects, the
results of their operations and their cash flows of Cambrex Corporation and its
subsidiaries for the year ended December 31, 2006, in conformity with accounting
principles generally accepted in the United States of America. In addition, in
our opinion, the information with respect to 2006 included in the financial
statement schedule listed in the accompanying 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.
As discussed in Notes 3 and 14 to the consolidated financial statements, in
2006 the Company changed the manner in which it accounts for pension and other
postretirement benefit plans and the manner in which it accounts for share-based
compensation.
/s/ PRICEWATERHOUSECOOPERS LLP
Florham Park, NJ
March 15, 2007, except for the effects of the
discontinued operations with respect to 2006
described in Note 19, as to which the date
is February 27, 2008
38
CAMBREX CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
DECEMBER 31,
-------------------
2008 2007
-------- --------
ASSETS
Current assets:
Cash and cash equivalents.................................. $ 32,540 $ 38,488
Trade receivables, less allowances of $1,150 and $560 at
respective dates........................................ 36,685 45,003
Inventories, net........................................... 61,133 61,440
Prepaid expenses and other current assets.................. 8,798 20,104
-------- --------
Total current assets............................... 139,156 165,035
Property, plant and equipment, net........................... 161,500 165,657
Goodwill..................................................... 35,374 35,552
Other non-current assets..................................... 5,042 7,218
-------- --------
Total assets....................................... $341,072 $373,462
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable........................................... $ 19,700 $ 26,185
Accrued expense and other current liabilities.............. 45,080 69,702
-------- --------
Total current liabilities.......................... 64,780 95,887
Long-term debt............................................... 123,800 101,600
Deferred income tax.......................................... 16,138 19,086
Accrued pension and postretirement benefits.................. 44,165 32,104
Other non-current liabilities................................ 17,403 22,728
-------- --------
Total liabilities.................................. 266,286 271,405
Commitments and contingencies (see Notes 17 and 18)
Stockholders' equity:
Common Stock, $.10 par value; authorized 100,000,000 issued
31,406,778 and 31,399,700 shares at respective dates.... 3,140 3,140
Additional paid-in capital................................. 99,881 98,793
Retained earnings.......................................... 11,960 4,031
Treasury stock, at cost, 2,224,613 and 2,385,066 shares at
respective dates........................................ (19,014) (20,386)
Accumulated other comprehensive (loss)/income.............. (21,181) 16,479
-------- --------
Total stockholders' equity......................... 74,786 102,057
-------- --------
Total liabilities and stockholders' equity......... $341,072 $373,462
======== ========
See accompanying notes to consolidated financial statements.
39
CAMBREX CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
YEARS ENDED DECEMBER 31,
------------------------------
2008 2007 2006
-------- -------- --------
Gross Sales.......................................... $249,618 $252,574 $236,659
Allowances and rebates............................. 2,099 1,368 1,026
-------- -------- --------
Net sales............................................ 247,519 251,206 235,633
Other revenues..................................... 1,709 1,299 (560)
-------- -------- --------
Net revenues......................................... 249,228 252,505 235,073
Cost of goods sold................................. 175,485 161,273 151,215
-------- -------- --------
Gross profit......................................... 73,743 91,232 83,858
Selling, general and administrative expenses....... 40,521 48,858 58,279
Research and development expenses.................. 7,590 12,157 10,813
Restructuring expenses............................. 4,695 6,073 --
Strategic alternative costs........................ 1,515 31,127 2,958
-------- -------- --------
Operating profit/(loss).............................. 19,422 (6,983) 11,808
Other (income)/expenses
Interest income.................................... (802) (5,199) (514)
Interest expense................................... 4,470 4,714 5,992
Other expenses/(income), net....................... 754 725 (17)
-------- -------- --------
Income/(loss) before income taxes.................... 15,000 (7,223) 6,347
Provision for income taxes........................... 7,071 6,288 14,513
-------- -------- --------
Income/(loss) from continuing operations............. $ 7,929 $(13,511) $ (8,166)
Income/(loss) from discontinued operations, including
gains/(losses) from dispositions, net of tax....... -- 222,759 (21,706)
-------- -------- --------
Income/(loss) before cumulative effect of a change in
accounting principle............................... 7,929 209,248 (29,872)
Cumulative effect of a change in accounting
principle.......................................... -- -- (228)
-------- -------- --------
Net income/(loss).................................... $ 7,929 $209,248 $(30,100)
======== ======== ========
Basic earnings/(loss) per share
Income/(loss) from continuing operations........... $ 0.27 $ (0.47) $ (0.30)
Income/(loss) from discontinued operations,
including gains/(losses) from dispositions, net
of tax.......................................... $ -- $ 7.77 $ (0.81)
Cumulative effect of a change in accounting
principle....................................... $ -- $ -- $ (0.01)
-------- -------- --------
Net income/(loss).................................. $ 0.27 $ 7.30 $ (1.12)
Diluted earnings/(loss) per share
Income/(loss) from continuing operations........... $ 0.27 $ (0.47) $ (0.30)
Income/(loss) from discontinued operations,
including gains/(losses) from dispositions, net
of tax.......................................... $ -- $ 7.77 $ (0.81)
Cumulative effect of a change in accounting
principle....................................... $ -- $ -- $ (0.01)
-------- -------- --------
Net income/(loss).................................. $ 0.27 $ 7.30 $ (1.12)
Weighted average shares outstanding:
Basic.............................................. 29,116 28,683 26,816
Diluted............................................ 29,161 28,683 26,816
See accompanying notes to consolidated financial statements.
40
CAMBREX CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
COMMON STOCK
--------------------- ADDITIONAL
SHARES PAR VALUE PAID-IN RETAINED DEFERRED TREASURY
ISSUED ($.10) CAPITAL EARNINGS COMPENSATION STOCK
---------- --------- ---------- --------- ------------ --------
BALANCE AT DECEMBER 31, 2005....... 29,118,141 $2,912 $ 219,236 $ 62,170 $(2,131) $(20,768)
Comprehensive loss
Net loss...................... (30,100)
Other comprehensive
income/(loss)
Foreign currency translation
adjustment...............
Unrealized losses on hedging
contracts, net of tax of
$177.....................
Pensions, net of tax of
$(20)....................
Unrealized losses on
available for sale
marketable securities,
net of tax of $0 ........
Reclass adjustment for loss
on marketable securities
included in net earnings,
net of tax of $0.........
Other comprehensive income.......
Total comprehensive loss...........
Adjustment to initially apply FASB
Statement
No. 158, net of tax of $376........
Disposition of
business -- pension..............
Cash dividends at $0.12 per share.. (3,210)
Purchase of treasury stock......... (113)
Exercise of stock options.......... 1,069,876 103 20,977 230
Deferred compensation.............. 222 159
Vested restricted stock............ (563) 2,131 (340)
Stock option expense............... 448
Restricted stock expense........... 1,040
---------- ------ --------- --------- ------- --------
BALANCE AT DECEMBER 31, 2006....... 30,188,017 $3,015 $ 241,360 $ 28,860 $ -- $(20,832)
Comprehensive income
Net income.................... 209,248
Other comprehensive
income/(loss)
Foreign currency translation
adjustment...............
Unrealized losses on hedging
contracts, net of tax of
$107.....................
Pensions, net of tax of
$346.....................
Reclass adjustment for gain
on marketable
securities included in net
earnings, net of tax of
$0.......................
Other comprehensive income.......
Total comprehensive income.........
Disposition of
business -- pension..............
Cash dividends and return of
capital at $14.03 per share...... (169,782) (234,077)
Purchase of treasury stock......... (59)
Exercise of stock options.......... 1,175,101 121 21,777
Deferred compensation.............. 8,771 1 207 62
Vested restricted stock............ 27,811 3 (446) 443
Stock option modification.......... 2,535
Stock option expense............... 711
Restricted stock expense........... 2,431
---------- ------ --------- --------- ------- --------
BALANCE AT DECEMBER 31, 2007....... 31,399,700 $3,140 $ 98,793 $ 4,031 $ -- $(20,386)
Comprehensive loss
Net income.................... 7,929
Other comprehensive loss
Foreign currency translation
adjustment..................
Unrealized losses on hedging
contracts, net of tax of
$322.....................
Pensions, net of tax of
$145.....................
Other comprehensive loss.........
Total comprehensive loss...........
Purchase of treasury stock......... (50)
Exercise of stock options.......... 2,301 -- 18
Deferred compensation.............. 4,777 -- 59 170
Vested restricted stock............ (1,252) 1,252
Stock option modification.......... 102
Stock option expense............... 582
Restricted stock expense........... 1,545
Performance stock expense.......... 34
---------- ------ --------- --------- ------- --------
BALANCE AT DECEMBER 31, 2008....... 31,406,778 $3,140 $ 99,881 $ 11,960 $ -- $(19,014)
========== ====== ========= ========= ======= ========
ACCUMULATED
OTHER TOTAL
COMPREHENSIVE COMPREHENSIVE STOCKHOLDERS'
(LOSS)/GAIN (LOSS)/INCOME EQUITY
------------- ------------- -------------
BALANCE AT DECEMBER 31, 2005....... $(18,168) $ 243,251
Comprehensive loss
Net loss...................... (30,100) (30,100)
Other comprehensive
income/(loss)
Foreign currency translation
adjustment............... 14,443
Unrealized losses on hedging
contracts, net of tax of
$177..................... 280
Pensions, net of tax of
$(20).................... 839
Unrealized losses on
available for sale
marketable securities,
net of tax of $0 ........ (10)
Reclass adjustment for loss
on marketable securities
included in net earnings,
net of tax of $0......... 1,475
--------
Other comprehensive income....... 17,027 17,027 17,027
--------
Total comprehensive loss........... $(13,073)
========
Adjustment to initially apply FASB
Statement
No. 158, net of tax of $376........ (7,088) (7,088)
Disposition of
business -- pension.............. 2,472 2,472
Cash dividends at $0.12 per share.. (3,210)
Purchase of treasury stock......... (113)
Exercise of stock options.......... 21,310
Deferred compensation.............. 381
Vested restricted stock............ 1,228
Stock option expense............... 448
Restricted stock expense........... 1,040
-------- ---------
BALANCE AT DECEMBER 31, 2006....... $ (5,757) $ 246,646
Comprehensive income
Net income.................... 209,248 209,248
Other comprehensive
income/(loss)
Foreign currency translation
adjustment............... 15,684
Unrealized losses on hedging
contracts, net of tax of
$107..................... (1,385)
Pensions, net of tax of
$346..................... 7,734
Reclass adjustment for gain
on marketable
securities included in net
earnings, net of tax of
$0....................... (1,117)
--------
Other comprehensive income....... 20,916 20,916 20,916
--------
Total comprehensive income......... $230,164
========
Disposition of
business -- pension.............. 1,320 1,320
Cash dividends and return of
capital at $14.03 per share...... (403,859)
Purchase of treasury stock......... (59)
Exercise of stock options.......... 21,898
Deferred compensation.............. 270
Vested restricted stock............ --
Stock option modification.......... 2,535
Stock option expense............... 711
Restricted stock expense........... 2,431
-------- ---------
BALANCE AT DECEMBER 31, 2007....... $ 16,479 $ 102,057
Comprehensive loss
Net income.................... 7,929 7,929
Other comprehensive loss
Foreign currency translation
adjustment.................. (16,830)
Unrealized losses on hedging
contracts, net of tax of
$322..................... (2,962)
Pensions, net of tax of
$145..................... (17,868)
--------
Other comprehensive loss......... (37,660) (37,660) (37,660)
--------
Total comprehensive loss........... $(29,731)
========
Purchase of treasury stock......... (50)
Exercise of stock options.......... 18
Deferred compensation.............. 229
Vested restricted stock............ --
Stock option modification.......... 102
Stock option expense............... 582
Restricted stock expense........... 1,545
Performance stock expense.......... 34
-------- ---------
BALANCE AT DECEMBER 31, 2008....... $(21,181) $ 74,786
======== =========
See accompanying notes to consolidated financial statements.
41
CAMBREX CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
YEARS ENDED DECEMBER 31,
--------------------------------
2008 2007 2006
-------- --------- ---------
Cash flows from operating activities:
Net income/(loss)...................................... $ 7,929 $ 209,248 $ (30,100)
Adjustments to reconcile net income/(loss) to cash
flows:
Depreciation and amortization.......................... 21,055 19,878 19,028
Inventory reserve...................................... 2,916 2,709 2,548
Stock based compensation included in net
income/(loss)....................................... 1,967 3,142 1,281
Deferred income tax provision.......................... (23) 4,209 1,486
Strategic alternative and restructuring charges........ 2,987 17,693 --
Write-off of debt origination fees..................... -- 841 463
Stock option modification.............................. 102 2,535 --
Other.................................................. 1,884 447 494
Changes in assets and liabilities:
Trade receivables...................................... 5,547 (4,542) (2,399)
Inventories............................................ (8,612) (6,329) (10,117)
Prepaid expenses and other current assets.............. 7,264 1,131 (6,452)
Accounts payable and other current liabilities......... (36,509) (17,919) 16,831
Other non-current assets and liabilities............... (1,518) 550 (2,433)
Discontinued operations:
(Gain)/loss on sale of businesses...................... -- (235,489) 23,244
Rutherford settlement, net of tax...................... -- 4,172 --
Changes in operating assets and liabilities............ -- (5,428) (5,398)
Other non-cash charges................................. -- 2,359 24,152
Writedown of assets.................................... -- -- 2,092
-------- --------- ---------
Net cash provided by/(used) in operating activities.... 4,989 (793) 34,720
-------- --------- ---------
Cash flows from investing activities:
Capital expenditures................................... (29,378) (25,927) (23,183)
Acquisition of business, net of cash................... (1,271) -- --
Other investing activities............................. 12 887 233
Discontinued operations:
Capital expenditures................................... -- (530) (15,975)
Proceeds from sale of business......................... -- 466,277 --
Acquired in-process research and development........... -- -- (1,392)
Divestiture of business, net of cash................... -- -- (636)
Other investing activities............................. -- 11 (301)
-------- --------- ---------
Net cash (used) in/provided by in investing
activities.......................................... (30,637) 440,718 (41,254)
-------- --------- ---------
Cash flows from financing activities:
Dividends and return of capital........................ -- (402,389) (3,210)
Long-term debt activity (including current portion):
Borrowings.......................................... 61,600 151,500 225,069
Repayments.......................................... (39,458) (208,755) (250,555)
Proceeds from stock options exercised.................. 18 21,898 21,310
Other financing activities............................. (50) (59) (113)
Discontinued operations:
Long-term debt activity (including current portion):
Borrowings.......................................... -- -- 258
Repayments.......................................... -- (254) (1,450)
-------- --------- ---------
Net cash provided by/(used) in financing
activities........................................ 22,110 (438,059) (8,691)
-------- --------- ---------
Effect of exchange rate changes on cash and cash
equivalents............................................ (2,410) 2,876 3,629
-------- --------- ---------
Net (decrease)/increase in cash and cash equivalents..... (5,948) 4,742 (11,596)
Cash and cash equivalents at beginning of year........... 38,488 33,746 45,342
-------- --------- ---------
Cash and cash equivalents at end of year................. $ 32,540 $ 38,488 $ 33,746
======== ========= =========
Supplemental disclosure:
Interest paid, net of capitalized interest............. $ 4,126 $ 5,003 $ 13,613
Income taxes paid...................................... $ 10,342 $ 17,869 $ 16,690
See accompanying notes to consolidated financial statements.
42
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 companies and generic
drug companies. The Company is dedicated to providing essential products and
services to accelerate drug discovery, development and manufacturing processes
for human therapeutics. The Company's products consist of active pharmaceutical
ingredients ("APIs") and pharmaceutical intermediates produced under Food and
Drug Administration current Good Manufacturing Practices for use in the
production of prescription and over-the-counter drug products and other fine
custom chemicals derived from organic chemistry. Cambrex has three operating
segments, which are manufacturing facilities, that have been aggregated as one
reportable segment.
In October 2006 the Company sold two businesses within the former Human
Health segment for nominal consideration. As a result of this transaction, the
Company reported a non-cash charge of $23,244 in the fourth quarter of 2006, and
the results of these businesses are presented as discontinued operations.
In February 2007, the Company completed the sale of the businesses that
comprised the Bioproducts and Biopharma segments (excluding certain liabilities)
for total cash consideration of $463,914, including working capital adjustments.
As a result of this transaction, the Company reported a gain of $235,489 in 2007
and all periods presented reflect the results of these businesses as
discontinued operations. Refer to Note 19 for a complete discussion of
discontinued operations.
Interest expense is allocated to discontinued operations based upon net
assets consistent with EITF 87-24 "Allocations of Interest on Discontinued
Operations."
(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 Company primarily uses foreign currency forward contracts
to minimize 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 swap instruments only as hedges or as an integral part of
borrowing. 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 and recognizes the
ineffective portion in current period earnings.
43
CAMBREX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
Inventories
Inventories are stated at the lower of cost, determined on 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.
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:
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
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 that are capitalized
over longer periods of time for larger amounts. 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 2008, 2007 and 2006 amounted to $2,032,
$1,123 and $443, respectively.
Impairment of Goodwill
The Company reviews the carrying value of 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. 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 of that goodwill, an impairment loss is recognized in an
amount equal to that excess.
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.
44
CAMBREX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
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 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.
The Company has certain contracts that contain multiple deliverables. These
deliverables often include process development services and commercial
production and are divided into separate units of accounting if certain criteria
are met, including whether the delivered element has stand-alone value to the
customer and whether there is objective and reliable evidence of the fair value
of the undelivered items. The consideration the Company receives is allocated
among the separate units based on their respective fair values, and the
applicable revenue recognition criteria are applied to each of the separate
units.
For contracts that contain milestone-based payments, the Company recognizes
revenue using the proportional performance method based on the percentage of
costs incurred relative to the total costs estimated to be incurred to complete
the contract. Revenue recognition computed under this methodology is compared to
the amount of non-refundable cash payments received or contractually receivable
at the reporting date and the lesser of the two amounts is recognized as revenue
at each reporting date. The proportional performance methodology applied by the
Company for revenue recognition, utilizes an input based measure, specifically
labor costs, because the Company believes the use of an input measure is a
better surrogate of proportional performance than an output based measure, such
as milestones.
Amounts billed in advance are recorded as deferred revenue on the balance
sheet. Since payments received are typically non-refundable, the termination of
a contract by a customer prior to its completion could result in an immediate
recognition of deferred revenue relating to payments already received not
previously recognized as revenue.
Sales terms to certain customers include rebates 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 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.
The Company bills a portion of freight cost incurred on shipments to
customers. Freight costs are reflected in cost of goods sold. Amounts billed to
customers are recorded within net revenues.
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 tax return.
Cambrex has not provided U.S. federal income and withholding taxes on its
undistributed earnings from non-U.S. operations as of December 31, 2008 because
it intends to reinvest such earnings indefinitely outside of the United States.
If Cambrex were to distribute these earnings, it is anticipated that foreign tax
credits would be
45
CAMBREX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
available under current law to significantly reduce the resulting U.S. income
tax liability. Determination of the amount of unrecognized deferred tax related
to these earnings is not practical.
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
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/(losses)
were $1,183, $260 and ($1,042) in 2008, 2007 and 2006, respectively.
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.
46
CAMBREX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
Earnings per share calculations are as follows:
FOR THE YEARS ENDED,
-----------------------------
2008 2007 2006
------- -------- --------
Net income/(loss):
Income/(loss) from continuing operations........ $ 7,929 $(13,511) $ (8,166)
Income/(loss) from discontinued operations,
including gains/(losses) from dispositions,
net of tax.................................... -- 222,759 (21,706)
Cumulative effect of a change in accounting
principle..................................... -- -- (228)
------- -------- --------
Net income/(loss)............................... $ 7,929 $209,248 $(30,100)
======= ======== ========
Weighted average shares outstanding:
Basic weighted average shares outstanding....... 29,116 28,683 26,816
Effect of dilutive stock options and restricted
stock*........................................ 45 -- --
------- -------- --------
Diluted weighted average shares outstanding..... 29,161 28,683 26,816
Income/(loss) per share (basic):
Income/(loss) from continuing operations........ $ 0.27 $ (0.47) $ (0.30)
Income/(loss) from discontinued operations,
including gains/(losses) from dispositions,
net of tax.................................... $ -- $ 7.77 $ (0.81)
Cumulative effect of a change in accounting
principle..................................... $ -- $ -- $ (0.01)
------- -------- --------
Net income/(loss)............................... $ 0.27 $ 7.30 $ (1.12)
======= ======== ========
Income/(loss) per share (diluted):
Income/(loss) from continuing operations........ $ 0.27 $ (0.47) $ (0.30)
Income/(loss) from discontinued operations,
including gains/(losses) from dispositions,
net of tax.................................... $ -- $ 7.77 $ (0.81)
Cumulative effect of a change in accounting
principle..................................... $ -- $ -- $ (0.01)
------- -------- --------
Net income/(loss)............................... $ 0.27 $ 7.30 $ (1.12)
======= ======== ========
* For 2007 and 2006, the effect of stock options and restricted stock would
be anti-dilutive and is therefore excluded.
For the years ended December 31, 2008, 2007 and 2006, shares of 1,648,193,
1,171,895, and 2,157,470, respectively, were not included in the calculation of
diluted shares outstanding because the effect would be anti-dilutive.
Marketable Securities
The Company determines the appropriate classification of all marketable
securities as held-to-maturity, available-for-sale or trading at the time of
purchase, and re-evaluates such classification as of each balance sheet date.
Unrealized gains and losses are reflected as a net amount under the caption of
accumulated other comprehensive (loss)/income in stockholders' equity. Realized
gains and losses are recorded in other expenses. For purposes of computing gains
or losses, cost is identified on a specific identification basis. As of December
31, 2008 and 2007 the Company did not hold any marketable securities.
Comprehensive (Loss)/Income
Included within accumulated other comprehensive (loss)/income for the
Company are foreign currency translation adjustments, changes in the fair value
related to derivative instruments classified as cash flow hedges, net
47
CAMBREX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
of related tax benefit and changes in the pensions, net of tax. Total
comprehensive (loss)/income for the years ended December 31, 2008 and 2007 are
included in the Statements of Stockholders' Equity.
The components of accumulated other comprehensive (loss)/income in
stockholders' equity are as follows:
2008 2007
-------- -------
Foreign currency translation............................ $ 6,210 $23,040
Unrealized loss on hedging contracts, net of tax........ (4,256) (1,294)
Pensions, net of tax.................................... (23,135) (5,267)
-------- -------
Total................................................. $(21,181) $16,479
======== =======
(3) IMPACT OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
Fair Value Measurements
In September 2006, the FASB issued Statement No. 157 "Fair Value
Measurements" ("FAS 157"). This statement defines fair value, establishes a
framework for measuring fair value in GAAP, and expands disclosures about fair
value measurements. This statement will apply whenever another standard requires
(or permits) assets or liabilities to be measured at fair value. The standard
does not expand the use of fair value to any new circumstances. FAS 157 is
effective for financial statements issued for fiscal years beginning after
November 15, 2007, and interim periods within those fiscal years. Relative to
FAS 157, the FASB issued FASB Staff Positions ("FSP") 157-2, which defers the
effective date of FAS 157 for all nonfinancial assets and nonfinancial
liabilities, except those that are recognized or disclosed at fair value in the
financial statements on a recurring basis, until fiscal years beginning after
November 15, 2008, and interim periods within those fiscal years. The effect of
adopting this pronouncement (related to financial assets and financial
liabilities) did not have a material impact on the Company's financial position
or results of operations. The Company is currently evaluating the potential
impact of this statement (related to nonfinancial assets and nonfinancial
liabilities).
Employers' Accounting for Defined Benefit Pension and Other Postretirement
Plans
The Company adopted FASB Statement No. 158 "Employers' Accounting for
Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB
Statements No. 87, 88, 106 and 132(R)" ("FAS 158") for the year ended December
31, 2006. FAS 158 requires an employer to recognize the overfunded or
underfunded status of a defined benefit postretirement plan as an asset or
liability in the balance sheet and to recognize changes in that funded status in
the year in which the changes occur through comprehensive income. This statement
does not impact the amounts recognized in the income statement.
FAS 158 requires an employer to measure the funded status of a plan as of
the date of the fiscal year end balance sheet. The Company's fiscal year end is
December 31 and its pension plans and postretirement benefits plan previously
had a September 30 measurement date. The Company adopted this measurement
requirement as of December 31, 2008. The effect of adopting this pronouncement
did not have a material impact on the Company's financial position or results of
operations.
Fair Value Option for Financial Assets and Financial Liabilities
The Company adopted FASB Statement No. 159 "The Fair Value Option for
Financial Assets and Financial Liabilities -- Including an amendment of FASB
Statement No. 115" ("FAS 159") effective January 1, 2008. This Statement permits
entities to choose to measure many financial instruments and certain other items
at fair value. Unrealized gains and losses on items for which the fair value
option has been elected should be reported in earnings
48
CAMBREX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
(3) IMPACT OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS -- (CONTINUED)
at each subsequent reporting date. The effect of adopting this pronouncement did
not have a material impact on the Company's financial position or results of
operations.
Amendment of FAS 141
In December 2007, the FASB issued Statement No. 141 (Revised 2007),
"Business Combinations" ("FAS 141R") which requires an acquirer to recognize the
assets acquired, the liabilities assumed and any non-controlling interest in the
acquiree at the acquisition date, measured at their fair values as of that date,
with limited exceptions. This Statement also requires the acquirer in a business
combination, achieved in stages, to recognize the identifiable assets and
liabilities, as well as the non-controlling interest in the acquiree, at the
full amounts of their fair values. FAS 141R makes various other amendments to
authoritative literature intended to provide additional guidance or to confirm
the guidance in that literature to that provided in this Statement. FAS 141R
applies prospectively to business combinations for which the acquisition date is
on or after the beginning of the first annual reporting period beginning on or
after December 15, 2008. Earlier adoption is prohibited. Accordingly, the
Company adopted this statement on January 1, 2009.
Amendment of FAS 133
In March 2008, the FASB issued Statement No. 161 "Disclosures about
Derivative Instruments and Hedging Activities -- an amendment of FASB Statement
No. 133" ("FAS 161"). This statement requires enhanced disclosures about
derivative and hedging activities and thereby improves the transparency of
financial reporting. FAS 161 encourages, but does not require, comparative
disclosures for earlier periods at initial adoption. This statement is effective
for fiscal years beginning after November 15, 2008. The effect of adopting this
pronouncement will not have an impact on the Company's financial position or
results of operations.
Employers' Disclosures about Postretirement Benefit Plan Assets
In December 2008, the FASB issued FSP 132(R)-1 "Employers' Disclosures
about Postretirement Benefit Plan Assets" ("FSP 132(R)-1"). This statement
provides guidance on additional disclosures about plan assets of a defined
benefit pension or other postretirement plan. This statement is effective for
fiscal years ending after December 15, 2009. Upon initial application, the
provisions of FSP 132(R)-1 are not required for earlier periods that are
presented for comparative purposes. The effect of adopting this pronouncement
will not have an impact on the Company's financial position or results of
operations.
(4) ACQUISITIONS
In January 2008, Cambrex completed the acquisition of AS ProSyntest,
located in Tallinn, Estonia for approximately $1,271, net of cash. ProSyntest is
an active pharmaceutical ingredient ("API") research and development company and
has strengths in cost effective chemical route selections and sample generation,
rapid scale up of products at kilo lab scale, as well as chiral and
organometallic chemistries.
The purchase price was allocated to the acquired assets and liabilities on
the basis of their respective fair values. As a result the Company recognized
goodwill of $1,489.
Acquisitions are included in the accompanying consolidated financial
statements from the date of acquisition. The acquisition would not have had a
material impact on the results of operations had the acquisition occurred at the
beginning of 2008 and as such no proforma results have been presented.
49
CAMBREX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
(5) GOODWILL
The changes in the carrying amount of goodwill for the years ended December
31, 2008 and 2007 are as follows:
Balance as of January 1, 2007............................. $32,573
Translation effect........................................ 2,979
-------
Balance as of December 31, 2007........................... 35,552
-------
Acquisition of business................................... 1,489
Translation effect........................................ (1,667)
-------
Balance as of December 31, 2008........................... $35,374
=======
(6) NET INVENTORIES
Inventories are stated at the lower of cost, determined on a first-in,
first-out basis, or market.
Net inventories consist of the following:
DECEMBER 31,
-----------------
2008 2007
------- -------
Finished goods..................................... $24,657 $25,646
Work in process.................................... 22,372 21,301
Raw materials...................................... 10,688 11,058
Supplies........................................... 3,416 3,435
------- -------
Total............................................ $61,133 $61,440
======= =======
(7) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following:
DECEMBER 31,
---------------------
2008 2007
--------- ---------
Land............................................ $ 4,127 $ 3,451
Buildings and improvements...................... 83,939 77,459
Machinery and equipment......................... 282,119 287,602
Furniture and fixtures.......................... 1,954 1,729
Construction in progress........................ 31,451 45,129
--------- ---------
Total...................................... 403,590 415,370
Accumulated depreciation........................ (242,090) (249,713)
--------- ---------
Net........................................... $ 161,500 $ 165,657
========= =========
Depreciation expense was $21,051, $19,799 and $18,989 for the years ended
December 31, 2008, 2007 and 2006, respectively. The Company made major capital
improvements to two facilities in 2008. Total capital expenditures in 2008 were
$32,722, which includes $3,344 that was not paid as of December 31, 2008.
50
CAMBREX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
(8) ACCRUED EXPENSE AND OTHER CURRENT LIABILITIES
The components of accrued expenses and other current liabilities are as
follows:
DECEMBER 31,
-----------------
2008 2007
------- -------
Salaries and employee benefits payable............. $12,369 $18,035
Legal services..................................... 660 4,741
Deferred revenue................................... 4,426 5,190
Restructuring and strategic alternatives........... 8,131 18,414
Rutherford settlement.............................. -- 4,421
Deferred tax liabilities........................... 116 4,971
Taxes payable...................................... 1,948 3,444
Hedges payable..................................... 5,027 1,435
Commissions........................................ 3,759 492
Other.............................................. 8,644 8,559
------- -------
Total............................................ $45,080 $69,702
======= =======
(9) INCOME TAXES
Income/(loss) before income taxes consist of the following:
DECEMBER 31,
------------------------------
2008 2007 2006
-------- -------- --------
Domestic.................................. $(15,756) $(48,634) $(32,954)
International............................. 30,756 41,411 39,301
-------- -------- --------
Total................................... $ 15,000 $ (7,223) $ 6,347
======== ======== ========
The provision for income taxes consist of the following
provisions/(benefits):
DECEMBER 31,
--------------------------
2008 2007 2006
------ ------- -------
Current:
Federal................................... $ (897) $(8,317) $ 680
State..................................... 120 380 (614)
International............................. 7,871 10,016 12,961
------ ------- -------
7,094 2,079 13,027
------ ------- -------
Deferred:
Federal................................... $ 204 $ 172 $ 337
International............................. (227) 4,037 1,149
------ ------- -------
(23) 4,209 1,486
------ ------- -------
Total.................................. $7,071 $ 6,288 $14,513
====== ======= =======
51
CAMBREX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
(9) INCOME TAXES -- (CONTINUED)
The provision for income taxes differs from the statutory federal income
tax rate of 35% for 2008, 2007 and 2006 as follows:
DECEMBER 31,
---------------------------
2008 2007 2006
------- ------- -------
Income tax provision/(benefit) at U.S
federal statutory rate.................... $ 5,250 $(2,528) $ 2,220
State and local taxes, net of federal income
tax benefits.............................. 33 73 7
Effect of foreign income taxed at rates
other than the U.S. federal statutory
rate...................................... (2,744) (27) (1,082)
Permanent items (primarily compensation).... -- 9,225 --
Tax credits................................. (788) -- --
Net change in valuation allowance........... 5,537 7,816 11,804
GAAP benefit in continuing operations....... -- (7,915) --
Indefinite-lived intangibles................ 204 172 337
Adjustments for prior years' taxes.......... (562) (536) 1,393
Other....................................... 141 8 (166)
------- ------- -------
Total..................................... $ 7,071 $ 6,288 $14,513
======= ======= =======
The components of deferred tax assets and liabilities as of December 31,
2008 and 2007 relate to temporary differences and carryforwards as follows:
DECEMBER 31,
-----------------
2008 2007
------- -------
Current deferred tax assets:
Inventory........................................ $ 1,266 $ 507
Receivables...................................... 106 145
Legal and related reserves....................... 1,737 4,959
Disposition reserve.............................. -- 1,860
Other............................................ 955 3,755
------- -------
Current deferred tax assets...................... 4,064 11,226
Valuation allowances............................. (3,616) (6,026)
------- -------
Total current deferred tax assets............. $ 448 $ 5,200
======= =======
Current deferred tax liabilities:
Unremitted foreign earnings...................... $ -- $ 4,618
Other............................................ 116 353
------- -------
Total current deferred tax liabilities........ $ 116 $ 4,971
======= =======
52
CAMBREX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
(9) INCOME TAXES -- (CONTINUED)
DECEMBER 31,
-------------------
2008 2007
-------- --------
Non-current deferred tax assets:
Foreign tax credits carryforwards............... $ 50,523 $ 44,270
Environmental................................... 1,689 1,921
Net operating loss carryforwards (state)........ 2,661 --
Net operating loss carryforwards (foreign)...... 227 1,858
Employee benefits............................... 14,143 7,412
Restructuring................................... 1,172 --
Research & experimentation tax credits
carryforwards................................ 1,309 1,237
Alternative minimum tax credits carryforwards... 3,266 4,054
Property, plant and equipment................... 1,187 1,088
Intangibles..................................... -- 16
Other........................................... 4,714 1,163
-------- --------
Non-current deferred tax assets................. 80,891 63,019
Valuation allowances*........................... (75,614) (58,816)
-------- --------
Total non-current deferred tax assets........ 5,277 4,203
Non-current deferred tax liabilities:
Property, plant and equipment................... 6,750 6,978
Intangibles..................................... 7,488 6,348
Indefinite-lived intangibles.................... 1,736 1,531
Foreign tax allocation reserve.................. 5,441 8,061
Other........................................... -- 371
-------- --------
Total non-current deferred tax liabilities... $ 21,415 $ 23,289
-------- --------
Total net non-current deferred tax
liabilities................................ $ 16,138 $ 19,086
======== ========
* In addition to the effect of the domestic and foreign valuation allowances
reflected in the current effective tax rate, the valuation allowance has
changed due to currency translation adjustments.
The Company establishes a valuation allowance against deferred tax assets
when it is more likely than not that the Company will be unable to realize those
deferred 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 $78,989 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. With respect to the Company's foreign deferred tax
assets, the Company has recorded a valuation allowance of $241 as of December
31, 2008.
The Company expects to maintain a full valuation allowance against its net
domestic deferred tax assets (primarily foreign tax credits), 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, 2008 and 2007 was
$15,095 and $26,506
53
CAMBREX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
(9) INCOME TAXES -- (CONTINUED)
respectively. The change in the foreign valuation allowance for the years ended
December 31, 2008 and 2007 was ($707) and $55, respectively.
Under the tax laws of the various jurisdictions in which the Company
operates, net operating losses ("NOLs") may be carried forward or back, subject
to statutory limitations, to reduce taxable income in future or prior years. The
domestic federal NOLs were fully utilized in 2007 as a result of the sale of the
businesses that comprised the Bioproducts and Biopharma segments. The domestic
state NOLs were approximately $28,430, and will expire in 2015. The foreign NOLs
were approximately $791. NOLs in foreign jurisdictions will carryforward
indefinitely.
As of December 31, 2008, $50,523 of foreign tax credits, $1,309 of research
& experimentation tax credits and $3,266 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 in 2015 through 2018, and 2020 through 2027,
respectively. The alternative minimum tax credit carryforwards have no
expiration date. All domestic credits are offset by a full valuation allowance.
The Company has not provided U.S. federal income and withholding taxes on
its undistributed earnings from non-U.S. operations as of December 31, 2008
because it intends to reinvest such earnings indefinitely outside of the United
States. Determination of the amount of unrecognized deferred tax related to
these earnings is not practical. However, in 2008, the Company did repatriate
$16,263 of cash resulting from the sale of its non-U.S. businesses that
comprised the Bioproducts segments and the sale of two non-U.S. businesses
within the former Human Health segment. The Company provided for the tax effect
of this in its 2007 tax provision. The Company also settled several intercompany
loans in 2008 as part of its project to streamline the Company's legal
structure, and provided for the tax effects in its 2008 tax provision.
The Company adopted the provisions of FASB Interpretation No. 48
"Accounting for Uncertainty in Income Taxes -- an interpretation of FASB
Statement No. 109" as of January 1, 2007. As of December 31, 2007 the Company
had approximately $5,116 of unrecognized tax benefits. During 2008, the Company
increased its unrecognized tax benefits by $96 for current year positions which
is offset by a decrease in unrecognized tax benefits of $3,515, due to amended
return filings, settlement of positions with state and foreign taxing
authorities, the expiration of statute of limitation periods and foreign
currency translation. Of the $3,515, the current year's provision includes
$1,332 of benefit. Of the total balance of unrecognized benefits at December 31,
2008 $967, if recognized, would affect the effective tax rate.
In the next twelve months the Company may decrease its reserve for
unrecognized tax benefits for intercompany transactions by approximately $250
mainly due to the expiration of a statute of limitation period. This item could
impact the income tax provision.
The following table summarizes the activity related to the Company's
unrecognized tax benefits as of December 31, 2008 and 2007:
2008 2007
------- ------
Balance at January 1..................................... $ 5,116 5,522
Gross increases related to current period tax positions.. 96 128
Gross decreases related to prior period tax positions.... (2,896) (109)
Expiration for statute of limitations for the assessment
of taxes............................................... (401) (377)
Foreign currency translation............................. (218) (48)
------- ------
Balance at December 31................................... $ 1,697 $5,116
======= ======
54
CAMBREX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
(9) INCOME TAXES -- (CONTINUED)
Gross interest and penalties for 2008 and 2007 of $333 and $420,
respectively, related to the above unrecognized tax benefits are not reflected
in the table above. In 2008 and 2007, the Company accrued $79 and $142,
respectively, of interest and penalties in the income statement. Consistent with
prior periods, the Company recognizes interest and penalties within its income
tax provision.
In 2007, the Company finalized an IRS examination for the periods 2001-
2003. In September 2008, the Company was selected for a random IRS examination
for tax year 2006. Tax years 2005 and 2007 remain open to examination within the
U.S. The Company is also subject to exams in its significant non-U.S.
jurisdictions for 2004 and 2006 forward.
The Company is also subject to audit in numerous states for various years
in which it has filed income tax returns. In February 2009, the Company was
notified that New Jersey would, in the near future, begin an examination of its
open tax years. Recently finalized state audits resulted in immaterial
adjustments. Open years for the majority of states where the Company files are
for 2005 and forward.
(10) LONG-TERM DEBT
In February 2007, proceeds from the sale of the businesses that comprised
the Bioproducts and Biopharma segments, as discussed in Note 19, were used to
repay all outstanding debt under a prior credit facility. In April 2007, the
Company entered into a $200,000 five-year Syndicated Senior Revolving Credit
Facility which expires in April 2012. The Company pays interest on this credit
facility at LIBOR plus 1.25% -- 2.00% based upon certain financial measurements.
The credit facility also includes financial covenants regarding interest
coverage and leverage ratios. The Company was in compliance with all financial
covenants at December 31, 2008. 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, 2008 there was $123,800 outstanding. The 2008 and 2007 weighted average
interest rate for long-term bank debt was 4.9% and 6.9%, respectively.
(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 is exposed to credit losses 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'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 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, 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 also enters into interest rate
swap agreements to reduce the impact of changes in interest rates on its
floating rate debt. The swap agreements are contracts to exchange floating rate
for fixed interest payments periodically over the life of the agreements without
the exchange of the underlying notional debt amounts.
55
CAMBREX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
(11) DERIVATIVES AND FAIR VALUE OF FINANCIAL INSTRUMENTS -- (CONTINUED)
All forward and swap contracts outstanding at December 31, 2008 have been
designated as cash flow hedges and, accordingly, changes in the fair value of
derivatives are recorded each period in accumulated other comprehensive
(loss)/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 loss at
December 31, 2008 was $715 and $3,541 for forwards and swaps, respectively.
These amounts will be reclassified into earnings as the underlying forecasted
transactions occur. The net loss recognized in earnings related to foreign
currency forward contracts during the twelve months ended December 31, 2008 was
$1,275.
Interest Rate Swap Agreements
The Company has employed a plan to mitigate interest rate risk by entering
into interest rate swap agreements to convert floating rates to fixed interest
rates. As of December 31, 2008, the Company had three interest rate swaps in
place with an aggregate notional value of $60,000, at an average fixed rate of
4.48%, and with maturity dates of October 2010. The Company's strategy has been
to cover a portion of outstanding bank debt with interest rate protection. At
December 31, 2008, the coverage was approximately 48% of our variable interest
rate debt. At December 31, 2008 the Company had variable debt of $123,800, of
which $60,000 is fixed by an interest rate swap. Holding all other variables
constant, if the LIBOR portion of the weighted average interest rates in the
variable rate debt increased by 100 basis points, the effect on our earnings and
cash flows would have been higher interest expense of $638. Interest expense
under these agreements, and the respective debt instruments that they hedge, are
recorded at the net effective interest rate of the hedged transactions. The fair
value of these agreements was based on quoted market prices and was in a loss
position of $3,541 at December 31, 2008.
Foreign Exchange Instruments
The table below reflects the notional and fair value amounts of foreign
exchange contracts at December 31, 2008 and 2007:
2008 2007
---------------- ----------------
NOTIONAL FAIR NOTIONAL FAIR
AMOUNTS VALUE AMOUNTS VALUE
-------- ----- -------- -----
Forward exchange contracts.................... $20,568 $(678) $22,078 $(74)
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 long-term debt approximates fair value
because all of this underlying debt is at variable rates.
56
CAMBREX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
(12) STRATEGIC ALTERNATIVE AND RESTRUCTURING CHARGES
Strategic Alternative Costs
Strategic alternative costs include expenses that the Company has incurred
related to the decision to sell the businesses that comprised the Bioproducts
and Biopharma segments in February 2007, costs associated with a project to
streamline the Company's legal structure and costs associated with the exit of a
feed additives product line. These costs are not considered part of the
restructuring program or a part of discontinued operations under current
accounting guidance.
Strategic alternative costs for 2008 include $1,385 related to the project
to streamline the Company's legal structure, costs associated with the
modification of employee stock options due to the payment of the special
dividend in connection with the divestiture of $102 and change of control
expense of $28. Costs for 2007 include change of control expense totaling
$20,025 related to the 2007 divestiture of the businesses that comprised the
Bioproducts and Biopharma segments, retention bonuses of $6,780, costs
associated with the stock option modification of $2,854 and external advisor
costs of $456.
During the fourth quarter of 2007 the Company committed to a plan to exit a
feed additive product line. The equipment used in producing this product will be
dismantled and disposed of upon completion of production. Production continued
through the third quarter of 2008. In accordance with FASB Interpretation No.
47, Accounting for Conditional Asset Retirement Obligations, the Company
recorded $1,012 for the asset retirement obligation in 2007. This charge is
recorded as a strategic alternative cost in the income statement.
Total strategic alternative costs for 2008, 2007 and 2006 were $1,515,
$31,127 and $2,958, respectively. Strategic alternative costs for 2006 consisted
of external advisor costs related to divestitures.
Corporate Office Restructuring
During 2007, The Company announced plans to eliminate certain employee
positions at the corporate office upon completion of the sale of the businesses
that comprised the Bioproducts and Biopharma segments. This plan included
certain one-time benefits for terminated employees. Costs related to these plans
are recorded as restructuring expenses in the income statement. The Company
recognized expense of $805 and $4,014 in 2008 and 2007, respectively, related to
this plan.
The following table reflects the activity related to the severance reserve
through December 31, 2008:
JANUARY 1, 2007 ACTIVITY DECEMBER 31, 2008 ACTIVITY DECEMBER 31,
2007 ------------------ 2007 ------------------ 2008
RESERVE CASH RESERVE CASH RESERVE
BALANCE EXPENSE PAYMENTS BALANCE EXPENSE PAYMENTS BALANCE
---------- ------- -------- ------------ ------- -------- ------------
Employee termination costs.. $-- $3,787 $(2,975) $812 $734 $(1,084) $462
=== ====== ======= ==== ==== ======= ====
This reserve is expected to be paid in full during 2009.
Consolidation of Domestic Research and Development Activities
In December of 2007, the Company consolidated its United States research
and development ("R&D") activities and small scale API production with its
facility in Charles City, Iowa. The Company recognized restructuring expenses in
2007 of $2,059 related to this consolidation. This charge included the present
value of the remaining lease payments under the Company's current operating
lease at the New Jersey R&D facility of $998. The operating lease expires in
December 2010. In accordance with accounting guidance, the fair value of the
liability recorded at the cease-use date factored in the remaining lease
rentals, reduced by estimated sublease rentals that could be reasonably obtained
for the property. The Company consulted with local real estate brokers at that
time to determine what reasonable sublease rentals could be obtained. During the
past year, the Company has not been
57
CAMBREX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
(12) STRATEGIC ALTERNATIVE AND RESTRUCTURING CHARGES -- (CONTINUED)
able to sublease the property and interest dramatically decreased during the
fourth quarter of 2008. Due to the lack of interest, the Company consulted with
its real estate broker and determined that the possibility of obtaining a
sublease was extremely low. As a result, during the fourth quarter of 2008, the
Company increased the reserve related to the remaining lease payments by $2,388.
This amount assumes the Company will not obtain a sublease for the facility. In
addition to increasing the reserve, the Company incurred costs of $1,502 related
to lease payments, utilities and severance during 2008. Costs related to this
consolidation are recorded as restructuring expenses on the income statement.
The following table reflects the activity related to the restructuring
reserve through December 31, 2008:
JANUARY 1, 2007 ACTIVITY DECEMBER 31, 2008 ACTIVITY DECEMBER 31,
2007 ------------------ 2007 ------------------ 2008
RESERVE CASH RESERVE CASH RESERVE
BALANCE EXPENSE PAYMENTS BALANCE EXPENSE PAYMENTS BALANCE
---------- ------- -------- ------------ ------- -------- ------------
Employee termination costs...... $-- $ 356 $-- $ 356 $ 115 $(471) $ --
Present value of lease
payments...................... -- 998 -- 998 2,396 (373) 3,021
--- ------ --- ------ ------ ----- ------
$-- $1,354 $-- $1,354 $2,511 $(844) $3,021
=== ====== === ====== ====== ===== ======
This reserve will be paid in full by December 31, 2010. Total restructuring
expenses for 2008 and 2007 were $4,695 and $6,073, respectively.
(13) 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, 2008 and 2007. Authorized shares of Nonvoting Common Stock were
730,746 at December 31, 2008 and 2007. 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, 2008 and 2007, no shares
of Nonvoting Common Stock were outstanding. 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, 2008 and 2007, there was no preferred stock outstanding.
On May 3, 2007, the Company paid a special dividend of $14.00 per share to
its shareholders resulting in a reduction in stockholders' equity of $403,026.
The effect on stockholders' equity was a reduction to retained earnings of
$233,244, representing total accumulated earnings as of the date of declaration,
with the remainder representing a return of capital of $169,782. As of December
31, 2008, cash disbursements were $401,970 and $1,056 was accrued related to
dividends on unvested restricted stock. The Company no longer pays a quarterly
dividend.
The Company held treasury stock of 2,224,613 and 2,385,066 shares at
December 31, 2008 and 2007, respectively, which are primarily used for issuance
to employee compensation plans.
At December 31, 2008 there were 52,592 authorized shares of Common Stock
reserved for issuance through stock option plans.
(14) STOCK BASED COMPENSATION
Beginning January 1, 2006, the Company began recognizing compensation costs
for stock option awards to employees based on their grant-date fair value. The
value of each stock option is estimated on the date of grant using the Black-
Scholes option-pricing
58
CAMBREX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
(14) STOCK BASED COMPENSATION -- (CONTINUED)
model. The weighted-average fair value per share for the stock options granted
to employees for the years ended December 31, 2008, 2007 and 2006 were $1.72,
$5.44 and $8.00, respectively.
The following assumptions were used in determining the fair value of stock
options for grants issued in 2008, 2007 and 2006:
2008 2007 2006
--------------- ----------------- -----------------
Expected volatility............. 33.30% - 38.78% 34.38% - 36.90% 36.49% - 38.28%
Average dividend yield.......... 0.00% 0.00% 0.55% - 0.56%
Expected term................... 4.75 years 3.75 - 4.75 years 3.75 - 4.75 years
Risk-free interst rate.......... 2.77% - 3.08% 4.30% - 4.85% 4.42% - 4.96%
The Company does not have any publicly traded stock options; therefore,
expected volatilities are based on historical volatility of the Company's stock.
The risk-free interest rate is based on the yield of a zero-coupon U.S. Treasury
bond whose maturity period approximates the option's expected term. The expected
term was utilized based on the "simplified" method for determining the expected
term of stock options in Staff Accounting Bulletin ("SAB") No. 107, "Share-Based
Payment." The Company also considered SAB No. 110 when determining the expected
term of stock options.
FASB Statement No. 123(R) "Share-Based Payment" ("FAS 123(R)") requires
companies to estimate the expected forfeitures for all unvested awards and
record compensation costs only for those awards that are expected to vest. As of
December 31, 2008, the total compensation cost related to unvested stock option
awards granted to employees but not yet recognized was $1,606. The cost will be
amortized on a straight-line basis over the remaining weighted-average vesting
period of 3.5 years.
For 2008, 2007 and 2006, the Company recorded $555, $379 and $383,
respectively, in selling, general and administrative expenses for stock options.
In addition the Company recorded $27 in restructuring expenses in 2008 and $282
and $50 in strategic alternative costs and restructuring expenses, respectively,
in 2007 for stock options related to the change in control agreements and the
reduction in workforce in 2007 and 2008.
In addition, for 2008 and 2007 the Company recorded $102 and $2,535,
respectively, in strategic alternative costs for expenses associated with a
stock option modification due to the special dividend paid on May 3, 2007. The
modification reduced the exercise price of all stock options outstanding as of
the dividend payment date by $14.00 per share, the amount of the special
dividend. As of December 31, 2008, the total compensation cost related to
unvested stock option awards that were modified but not yet recognized was $153.
The cost will be amortized on a straight-line basis over the remaining weighted-
average vesting period of 1.6 years.
Cambrex senior executives participate in an executive incentive plan which
rewards achievement with restricted stock units. Awards are made annually if
certain targets are met 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. For certain employees with employment contracts, all shares
vest upon certain events, including a change in control. In the event of death
or permanent disability, all shares vest and the deferred sales restriction
lapses. These awards are classified as equity awards as defined in FAS 123(R).
Historically, only senior executives participated in this plan. As of January 1,
2006, certain other employees are eligible to receive restricted stock as part
of a redesigned stock-based compensation plan. These awards cliff vest on the
third anniversary of the grant date.
59
CAMBREX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
(14) STOCK BASED COMPENSATION -- (CONTINUED)
For 2008, 2007, and 2006, the Company recorded $1,327, $705, and $898,
respectively, in selling, general and administrative expenses for restricted
stock. In addition, the Company recorded $24 in restructuring expenses in 2008
and $1,554 and $172 in strategic alternative costs and restructuring expenses,
respectively, in 2007 for restricted stock. As of December 31, 2008 the total
compensation cost related to unvested restricted stock granted but not yet
recognized was $897. The cost will be amortized on a straight-line basis over
the remaining weighted-average vesting period of 1.4 years.
In May 2008 the Company granted a target award of 43,000 performance
shares, with a potential award of up to 86,000 shares to the current CEO. These
performance shares are dependent upon the Company's performance measured against
certain financial metrics over a three year period beginning July 1, 2008, as
compared to an external peer group. Any payment of the performance shares will
be made in three years. In accordance with FAS 123(R) the Company is currently
recognizing expense related to 43,000 shares over the vesting period, which
assumes that the CEO will be compensated at target. The Company will assess
performance at each reporting period and adjust accordingly. For 2008 the
Company recorded $34 in selling, general and administrative expense related to
these performance shares.
The following table is a summary of the Company's stock option activity
issued to employees and related information:
WEIGHTED AVERAGE
----------------------
NUMBER OF EXERCISE OPTIONS
SHARES PRICE EXERCISABLE
---------- -------- -----------
Outstanding at December 31, 2005............... 4,013,647 $26.60 4,013,647
----------
Granted...................................... 249,367 21.39
Exercised.................................... (1,069,876) 19.91
Forfeited or expired......................... (438,245) 28.11
----------
Outstanding at December 31, 2006............... 2,754,893 28.48 2,517,941
----------
Granted...................................... 152,675 14.99
Exercised.................................... (1,202,752) 18.21
Forfeited or expired......................... (233,059) 22.52
----------
Outstanding at December 31, 2007............... 1,471,757 20.15 1,293,108
----------
Granted...................................... 744,000 4.82
Exercised.................................... (2,301) 7.47
Forfeited or expired......................... (622,587) 19.17
----------
Outstanding at December 31, 2008............... 1,590,869 14.07
==========
Exercisable at December 31, 2008............... $22.01 757,050
On May 3, 2007, the Company paid a special dividend of $14.00 per share. As
a result, the market price of the stock declined by approximately $14.00 per
share from the prior day's close and therefore, all outstanding options were
modified to reduce the exercise price by $14.00 per share.
The aggregate intrinsic value for all stock options exercised for the years
ended December 31, 2008, 2007 and 2006 were $4, $2,866 and $2,684, respectively.
The aggregate intrinsic value for all stock options outstanding as of December
31, 2008 was $109. The aggregate intrinsic value for all stock options
exercisable as of December 31, 2008 was $1.
60
CAMBREX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
(14) STOCK BASED COMPENSATION -- (CONTINUED)
A summary of the Company's nonvested stock options and restricted stock as
of December 31, 2008 and changes during the years ended December 31, 2008 and
2007 are presented below:
NONVESTED RESTRICTED
NONVESTED STOCK OPTIONS STOCK
----------------------- ------------------------
WEIGHTED- WEIGHTED-
AVERAGE AVERAGE
NUMBER OF GRANT-DATE NUMBER OF GRANT-DATE
SHARES FAIR VALUE SHARES FAIR VALUE
--------- ---------- --------- ----------
Nonvested at January 1, 2007............... 236,952 $21.39 165,868 $22.02
Granted.................................... 152,675 $14.99 125,489 $17.09
Vested during period....................... (137,145) $16.57 (123,494) $21.55
Forfeited.................................. (73,833) $19.79 (33,962) $20.91
-------- --------
Nonvested at December 31, 2007............. 178,649 $11.34 133,901 $18.11
-------- --------
Granted.................................... 744,000 $ 4.82 122,872 $ 8.74
Vested during period....................... (69,963) $10.95 (102,858) $12.52
Forfeited.................................. (18,867) $11.50 (10,588) $16.52
-------- --------
Nonvested at December 31, 2008............. 833,819 $ 5.55 143,327 $13.38
======== ========
(15) RETIREMENT PLANS AND OTHER POSTRETIREMENT BENEFITS
Domestic Pension Plans
The Company maintains two U.S. defined-benefit pension plans. 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 2008, 2007 and 2006 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 a December 31 measurement
date for 2008 and a September 30 measurement date for 2007. FAS 158 eliminated
the Company's option to measure the pension and other postretirement benefits
plans' benefit obligations, assets and net periodic cost at a date prior to
December 31. Therefore, the pension and postretirement benefits plans, which
were measured as of September 30 in 2007, have been measured as of December 31,
2008. The Company elected to use the 15-month alternative to determine 2008
pension cost. The portion of expense attributed to the remaining three months of
2007 was charged directly to retained earnings, with accumulated other
comprehensive (loss)/income adjusted to reflect the amortization amounts. The
change in measurement date did not have a material impact on the Company's
financial position or results of operations.
61
CAMBREX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
(15) RETIREMENT PLANS AND OTHER POSTRETIREMENT BENEFITS -- (CONTINUED)
The funded status of these plans, incorporating fourth quarter
contributions, as of December 31, 2008 and September 30, 2007 is as follows:
2008 2007
------- -------
CHANGE IN BENEFIT OBLIGATION
Benefit obligation, beginning of period............... $57,451 $61,517
Service cost.......................................... -- 1,000
Interest cost......................................... 3,513 3,597
Actuarial gain........................................ 1,234 (2,203)
Benefits paid......................................... (3,431) (2,433)
Plan amendments....................................... -- 2,102
Curtailments.......................................... -- (6,129)
Effect of eliminating early measurement date.......... (238) --
------- -------
Benefit obligation, end of period..................... $58,529 $57,451
======= =======
2008 2007
-------- -------
CHANGE IN PLAN ASSETS
Fair value of plan assets, beginning of period........ $ 49,985 $42,761
Actual return on plan assets.......................... (12,342) 4,966
Contributions......................................... 3,194 4,691
Benefits paid......................................... (3,431) (2,433)
Effect of eliminating early measurement date.......... (95) --
-------- -------
Fair value of plan assets at end of period............ $ 37,311 $49,985
-------- -------
Funded status......................................... (21,218) (7,466)
-------- -------
Accrued benefit cost, end of period................... $(21,218) $(7,466)
======== =======
The amounts recognized in accumulated other comprehensive (loss)/income as
of December 31, 2008 and 2007 consist of the following:
2008 2007
------- ------
Actuarial loss........................................... $20,690 $3,148
Prior service cost....................................... 1,368 1,912
------- ------
$22,058 $5,060
======= ======
62
CAMBREX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
(15) RETIREMENT PLANS AND OTHER POSTRETIREMENT BENEFITS -- (CONTINUED)
The components of net periodic pension cost are as follows:
2008 2007 2006
------- ------- -------
COMPONENTS OF NET PERIODIC PENSION COST
Service cost.................................... $ -- $ 1,000 $ 2,571
Interest cost................................... 3,513 3,597 3,448
Expected return on plan assets.................. (4,086) (3,733) (3,041)
Amortization of prior service cost.............. 532 206 46
Recognized actuarial loss....................... -- 209 448
Curtailments.................................... -- 414 --
------- ------- -------
Net periodic benefit cost....................... $ (41) $ 1,693 $ 3,472
======= ======= =======
The sale of the businesses that comprised the Bioproducts and Biopharma
segments in February 2007 required the Company to recognize a curtailment charge
of $337 for the pension plans in 2007 which is recorded in discontinued
operations. In April 2007, the Board of Directors of the Company approved the
suspension of the domestic pension plans effective August 31, 2007. As a result,
the Company was required to recognize a curtailment charge of $77 for the
pension plan in 2007.
The estimated amounts that will be amortized from accumulated other
comprehensive loss into net periodic cost in 2009 are as follows:
PENSION
BENEFITS
--------
Actuarial loss.................................................. $544
Prior service cost.............................................. 436
----
Total......................................................... $980
====
Major assumptions used in determining the benefit obligation and net cost
for the Company's domestic pension plans are presented in the following table:
BENEFIT NET COST
OBLIGATION ------------------
2008 2007 2008 2007 2006
---- ---- ---- ---- ----
Discount rate................................. 6.00% 6.25% 6.25% 6.00% 5.75%
Expected return on plan assets................ N/A N/A 8.00% 8.00% 8.00%
Rate of compensation increase................. N/A 5.00% N/A 5.00% 5.00%
In making its assumption for the long-term rate of return on plan assets,
the Company has utilized historical rates earned on securities allocated
consistently with its investments. The discount rate was selected by projecting
cash flows associated with plan obligations, which were matched to a yield curve
of high quality corporate bonds. The Company then selected the single rate that
produced the same present value as if each cash flow were discounted by the
corresponding spot rate on the yield curve.
The aggregate Accumulated Benefit Obligation ("ABO") of $58,529 exceeds
plan assets by $21,218 as of December 31, 2008 for all domestic plans.
The Company expects to contribute approximately $1,205 in cash to its two
U.S. defined-benefit pension plans in 2009.
63
CAMBREX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
(15) RETIREMENT PLANS AND OTHER POSTRETIREMENT BENEFITS -- (CONTINUED)
The following benefit payments, which reflect expected future service, as
appropriate, are expected to be paid:
PENSION BENEFITS
----------------
2009........................................................ $ 2,873
2010........................................................ $ 2,933
2011........................................................ $ 3,055
2012........................................................ $ 3,263
2013........................................................ $ 3,247
2014-2018................................................... $17,700
The investment objective for plan assets is to achieve long-term growth
with exposure to risk at an appropriate level. The Company invests in a
diversified asset mix consisting of equities (domestic and international) and
taxable fixed income securities. Assets are managed 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:
PERCENTAGE OF
PLAN ASSETS
TARGET ---------------
ASSET CATEGORY: ALLOCATION 2008 2007
--------------- ---------- ------ ------
U.S. equities.................................................... 30%-70% 44.9% 42.2%
International equities........................................... 0%-20% 13.0% 15.4%
U.S. fixed income................................................ 20%-60% 41.7% 34.5%
Cash............................................................. N/A 0.4% 7.9%
------ ------
100.0% 100.0%
====== ======
The Company has a Supplemental Executive Retirement Plan ("SERP") for key
executives. This plan is non-qualified and unfunded.
The benefit obligation for this plan as of December 31, 2008 and 2007 is as
follows:
2008 2007
------- -------
CHANGE IN BENEFIT OBLIGATION
Benefit obligation, beginning of period........ $ 5,207 $ 5,225
Service cost................................... -- 53
Interest cost.................................. 303 300
Actuarial (gain)/loss.......................... (135) 112
Benefits paid.................................. (107) (96)
Plan amendments................................ 516 --
Curtailments................................... -- (387)
------- -------
Benefits obligation, end of period............. 5,784 5,207
======= =======
Funded status.................................. $(5,784) $(5,207)
======= =======
In July 2008, the Board of Directors of the Company amended the SERP plan
to allow for lump sum payments effective January 1, 2009. If the lump sum value
as of January 1, 2009 was greater than $10, it will be paid in 10 equal
actuarial equivalent installments; all others will be paid as a lump sum.
Retirees as of January 1, 2009 were
64
CAMBREX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
(15) RETIREMENT PLANS AND OTHER POSTRETIREMENT BENEFITS -- (CONTINUED)
allowed a one-time election in 2008 to continue under their current form of
payment or switch to the 10 year installment option. All retirees chose the 10
year installment option.
The amounts recognized in accumulated other comprehensive (loss)/income as
of December 31, 2008 and 2007 consist of the following:
2008 2007
------ ----
Actuarial loss............................................. $ 540 $680
Prior service cost......................................... 516 --
------ ----
$1,056 $680
====== ====
The components of net periodic benefit cost are as follows:
2008 2007 2006
---- ---- ----
COMPONENTS OF NET PERIODIC BENEFIT COST
Service cost......................................... $ -- $ 53 $193
Interest cost........................................ 303 300 254
Amortization of prior service cost................... -- 1 4
Recognized actuarial loss............................ 5 17 --
Curtailments......................................... -- 15 --
---- ---- ----
Net periodic benefit cost............................ $308 $386 $451
==== ==== ====
The sale of the businesses that comprised the Bioproducts and Biopharma
segments in February 2007 required the Company to recognize a curtailment charge
of $11 for the SERP plan in 2007 which is recorded in discontinued operations.
In April 2007, the Board of Directors of the Company approved the suspension of
the SERP plan effective August 31, 2007. As a result, the Company was required
to recognize a curtailment charge of $4 in 2007.
The estimated amounts that will be amortized from accumulated other
comprehensive loss into net periodic cost in 2009 is $57 related to prior
service cost.
Major assumptions used in determining the benefit obligation and net cost
for the Company's SERP plan are presented in the following table:
BENEFIT
OBLIGATION NET COST
----------- ------------------
2008 2007 2008 2007 2006
---- ---- ---- ---- ----
Discount rate................................. 5.60% 6.00% 6.00% 6.00% 5.75%
Rate of compensation increase................. N/A 5.00% N/A 5.00% 5.00%
65
CAMBREX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
(15) RETIREMENT PLANS AND OTHER POSTRETIREMENT BENEFITS -- (CONTINUED)
Estimated Future Benefit Payments
The following benefit payments, which reflect expected future service, as
appropriate, are expected to be paid:
SERP BENEFITS
-------------
2009......................................................... $ 800
2010......................................................... $ 720
2011......................................................... $ 720
2012......................................................... $ 720
2013......................................................... $ 720
2014-2018.................................................... $3,600
International Pension Plans
A foreign subsidiary of the Company maintains a pension plan for their
employees that conforms to the common practice in their respective country.
Based on local laws and customs, this plan is not funded.
The funded status of this plan, as of December 31, 2008 and 2007 is as
follows:
2008 2007
-------- --------
CHANGE IN BENEFIT OBLIGATION
Benefit obligation, beginning of period.............. $ 18,563 $ 15,375
Service cost......................................... 520 462
Interest cost........................................ 831 665
Actuarial loss....................................... 757 1,237
Benefits paid........................................ (460) (364)
Foreign exchange..................................... (3,577) 1,188
-------- --------
Benefit obligation, end of period.................... $ 16,634 $ 18,563
======== ========
Funded status........................................ $(16,634) $(18,563)
======== ========
The amounts recognized in accumulated other comprehensive (loss)/income as
of December 31, 2008 and 2007 consist of the following:
2008 2007
------ ------
Actuarial loss............................................ $4,591 $4,079
Prior service credit...................................... (58) (67)
------ ------
$4,533 $4,012
====== ======
66
CAMBREX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
(15) RETIREMENT PLANS AND OTHER POSTRETIREMENT BENEFITS -- (CONTINUED)
The components of the net periodic pension cost are as follows:
2008 2007 2006
------ ------ ------
COMPONENTS OF NET PERIODIC PENSION COST
Service cost...................................... $ 520 $ 462 $ 539
Interest cost..................................... 831 665 539
Amortization of unrecognized net obligation....... -- -- (35)
Amortization of prior service credit.............. (7) (7) (6)
Recognized actuarial loss......................... 125 75 73
------ ------ ------
Net periodic benefit cost......................... $1,469 $1,195 $1,110
====== ====== ======
The estimated amounts that will be amortized from accumulated other
comprehensive loss into net periodic cost in 2009 are as follows:
PENSION
BENEFITS
--------
Actuarial loss.................................................. $(127)
Prior service credit............................................ 6
-----
Total......................................................... $(121)
=====
Major assumptions used in determining the benefit obligation and net cost
for the Company's international pension plan are presented in the following
table:
BENEFIT
OBLIGATION NET COST
----------- ------------------
2008 2007 2008 2007 2006
---- ---- ---- ---- ----
Discount rate................................. 4.40% 4.25% 4.40% 4.25% 4.00%
Rate of compensation increase................. 3.00% 3.00% 3.00% 3.00% 2.70%
The aggregate ABO is $15,860 for the international plan as of December 31,
2008. The international pension plan is unfunded.
The Company does not expect to contribute cash to its international pension
plan in 2009.
The following benefit payments, which reflect expected future service, as
appropriate, are expected to be paid:
PENSION BENEFITS
----------------
2009........................................................ $ 440
2010........................................................ $ 488
2011........................................................ $ 521
2012........................................................ $ 534
2013........................................................ $ 610
2014-2018................................................... $3,564
Savings Plan
Cambrex makes available to all domestic 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 $592, $608 and $606 in 2008, 2007 and 2006, respectively.
67
CAMBREX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
(15) RETIREMENT PLANS AND OTHER POSTRETIREMENT BENEFITS -- (CONTINUED)
Other Postretirement Benefits
Cambrex provides post-retirement health and life insurance benefits
("postretirement benefits") to all eligible retired employees. Employees who
retire at or after age 55 with fifteen years of service are eligible to
participate in the postretirement benefit plans. Certain subsidiaries and all
employees hired after December 31, 2002 (excluding those covered by collective
bargaining) are not eligible for these benefits. The Company's responsibility
for such premiums for each plan participant is based upon years of service. Such
plans are self-insured and are not funded. Effective January 1, 2006, the
Cambrex Retiree Medical Plan will no longer provide prescription coverage to
retirees or dependents age 65 or over.
The benefit obligation of the plan as of December 31, 2008 and September
30, 2007, incorporating fourth quarter payments, is as follows:
2008 2007
------ ------
CHANGE IN BENEFIT OBLIGATION
Accumulated benefit obligation, beginning of period..... $1,757 $1,795
Service cost............................................ 25 21
Interest cost........................................... 109 107
Plan participants' contributions........................ 20 31
Actuarial gain.......................................... (4) (112)
Benefits paid........................................... (65) (85)
Effect of elimination early measurement date............ 16 --
------ ------
Accumulated benefit obligation, end of period........... $1,858 $1,757
====== ======
Amounts recognized in accumulated other comprehensive (loss)/income as of
December 31, 2008 and 2007 consist of the following:
2008 2007
----- -----
Actuarial loss............................................. $ 824 $ 899
Prior service credit....................................... (541) (735)
----- -----
$ 283 $ 164
===== =====
The components of net periodic postretirement benefit cost are as follows:
2008 2007 2006
----- ----- -----
COMPONENTS OF NET PERIODIC POSTRETIREMENT BENEFIT
COST
Service cost....................................... $ 25 $ 21 $ 60
Interest cost...................................... 109 107 109
Actuarial loss recognized.......................... 56 65 85
Amortization of unrecognized prior service cost.... (155) (156) (155)
----- ----- -----
Total periodic postretirement benefit cost......... $ 35 $ 37 $ 99
===== ===== =====
68
CAMBREX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
(15) RETIREMENT PLANS AND OTHER POSTRETIREMENT BENEFITS -- (CONTINUED)
The estimated amounts that will be amortized from accumulated other
comprehensive loss into net periodic pension cost in 2009 are as follows:
OTHER
POSTRETIREMENT
BENEFITS
--------------
Actuarial loss............................................... $ 52
Prior service credit......................................... (155)
-----
Total........................................................ $(103)
=====
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:
BENEFIT
OBLIGATION NET COST
----------- ------------------
2008 2007 2008 2007 2006
---- ---- ---- ---- ----
WEIGHTED-AVERAGE ASSUMPTIONS:
Discount rate.................................. 6.0% 6.25% 6.25% 6.00% 5.75%
The following benefit payments, which reflect expected future service, as
appropriate, are expected to be paid:
OTHER
POSTRETIREMENT
BENEFITS
--------------
2009......................................................... $ 86
2010......................................................... $ 86
2011......................................................... $ 91
2012......................................................... $ 96
2013......................................................... $102
2014-2018.................................................... $593
The assumed health care cost trend rate used to determine the accumulated
postretirement benefit obligation is 8.5% in 2008 (9% in 2007) decreasing
annually to an ultimate rate of 5% in 2013. A 1% increase in the assumed health
care cost trend rate would increase the accumulated postretirement benefit
obligation by $40 and would increase the sum of interest and service cost by $4.
A 1% decrease would lower the accumulated postretirement benefit obligation by
$47 and would decrease the sum of interest and service cost by $5.
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 earnings or to elect to defer
receipt of the Company's stock which would otherwise have been issued upon the
exercise of the Company's options. Included within other liabilities at December
31, 2008 and 2007 there is $3,012 and $4,614, respectively, representing the
Company's obligation under the plan. The Company invests in certain mutual funds
and as such, included within other assets at December 31, 2008 and 2007 is
$3,012 and $4,614, respectively, representing the fair value of these funds.
Total shares held in trust as of December 31, 2008 and 2007 are 195,851 and are
included as a reduction of equity at cost. The value of the shares held in trust
and the corresponding liability of $905 at December 31, 2008 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.
69
CAMBREX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
(16) FOREIGN OPERATIONS AND SALES
The following summarized data represents the gross sales and long lived
tangible assets for the Company's domestic and foreign entities for 2008, 2007
and 2006:
DOMESTIC FOREIGN TOTAL
-------- -------- --------
2008
Gross sales..................................... $81,707 $167,911 $249,618
Long-lived assets............................... 42,621 154,257 196,878
2007
Gross sales..................................... $81,429 $171,145 $252,574
Long-lived assets............................... 42,103 159,106 201,209
2006
Gross sales..................................... $82,462 $154,197 $236,659
Long-lived assets............................... 42,830 131,606 174,436
Export sales, included in domestic gross sales, in 2008, 2007 and 2006
amounted to $24,602, $28,821, and $28,825, respectively.
Sales to geographic area consist of the following:
2008 2007 2006
-------- -------- --------
North America.................................. $ 86,631 $ 85,644 $ 85,944
Europe......................................... 143,542 150,692 136,545
Asia........................................... 11,440 9,125 8,041
Other.......................................... 8,005 7,113 6,129
-------- -------- --------
Total........................................ $249,618 $252,574 $236,659
======== ======== ========
This table summarizes gross sales by product groups:
2008 2007 2006
-------- -------- --------
APIs and pharmaceutical intermediates.......... $220,722 $220,386 $206,193
Other.......................................... 28,896 32,188 30,466
-------- -------- --------
Total........................................ $249,618 $252,574 $236,659
======== ======== ========
Two customers each account for 10% of consolidated gross sales for the
years ended December 31, 2008, 2007 and 2006. One customer is a pharmaceutical
company with which a long-term sales contract is in effect, account for 10.0%,
11.2% and 12.3% for 2008, 2007 and 2006, respectively. The second customer is a
distributor representing multiple customers, accounted for 11.8%, 12.5% and
14.5% for 2008, 2007 and 2006, respectively.
70
CAMBREX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
(17) COMMITMENTS
The Company has operating leases expiring on various dates through the year
2014. The leases are primarily for the rental of office space, office and
laboratory equipment and vehicles. At December 31, 2008, future minimum
commitments under non-cancelable operating lease arrangements were as follows:
Year Ended December 31:
2009............................................................ $2,265
2010............................................................ 2,164
2011............................................................ 707
2012............................................................ 672
2013............................................................ 297
2014 and thereafter............................................. 27
------
Total commitments............................................... $6,132
======
Total operating lease expense was $2,270, $2,270 and $2,363 for the years
ended December 31, 2008, 2007 and 2006, 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
mainly include commitments to purchase raw materials and for the construction of
a new manufacturing facility. At December 31, 2008 future commitments under
these obligations were as follows:
Year Ended December 31:
2009........................................................... $ 6,819
2010........................................................... 3,410
2011........................................................... 2,425
2012........................................................... 1,482
2013........................................................... --
-------
Total commitments.............................................. $14,136
=======
(18) 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. 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 in
a future reporting period.
Environmental
In connection with laws and regulations pertaining to the protection of the
environment, the Company and its subsidiaries are a party to several
environmental proceedings and remediation investigations and cleanups and, along
with other companies, have been named potentially responsible parties ("PRP")
for certain waste disposal sites ("Superfund sites"). Additionally, the Company
has retained the liability for certain environmental proceedings, associated
with the sale of the Rutherford Chemicals business.
71
CAMBREX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
(18) CONTINGENCIES -- (CONTINUED)
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 $6,226 and
$6,905 at December 31, 2008 and December 31, 2007, respectively. The decrease in
the accrual includes payments of $633 and the impact of currency of $303
partially offset by adjustments to reserves of $257. Based upon available
information and analysis, the Company's current accrual represents management's
best estimate of the probable and estimable costs associated with environmental
proceedings including amounts for investigation fees where remediation costs may
not be estimable at the reporting date.
CasChem ISRA
As a result of the sale of the Bayonne, New Jersey facility, the Company
became obligated to investigate site conditions and conduct required remediation
under the New Jersey Industrial Site Recovery Act ("ISRA"). 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 any. The Company submitted
its plan for the third phase of sampling to the NJDEP during the fourth quarter
of 2005. The sampling will commence upon approval of the sampling plan.
Cosan
The Company's Cosan subsidiary conducted manufacturing operations in
Clifton, New Jersey from 1968 until 1979. Prior to the acquisition of Cosan 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 was
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 of 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 in
2005 based on the proposed remedial action plan. The Company submitted the
results of the investigation and proposed remedial action plan to the NJDEP. In
late 2006, the NJDEP requested that an additional investigation be conducted at
the site. The Company estimated that the additional work will cost approximately
$240, and as such, increased the related reserve in the first quarter of 2007.
The Company submitted its plan for additional work to the NJDEP in April 2007.
In August 2007 the NJDEP approved the Company's work plan and the additional
investigation has been partially completed. The Company has submitted an interim
report to NJDEP and is proceeding to complete the investigation. As of December
31, 2008, the reserve was $1,260. The results of the additional investigation
may impact the remediation plan and costs.
Additionally, there is a reserve of $929 as of December 31, 2008 for the
Cosan Carlstadt, N.J. site related to an Administrative Consent Order with the
NJDEP entered into in 1985 in connection with the acquisition of Cosan. In
72
CAMBREX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
(18) CONTINGENCIES -- (CONTINUED)
September 2004, the reserve was increased based on the investigations completed
to date and the proposed Remedial Action Work Plan ("RAW") submitted to the
NJDEP for their approval. The NJDEP subsequently rejected the RAW and required
the Company to perform additional investigative work prior to approval of a new
RAW. The Company's reserves were increased to cover the additional investigative
work. The results of this additional investigative work may impact the RAW and
costs.
Berry's Creek
In March 2006, the Company received notice from the United States
Environmental Protection Agency ("USEPA") that two former operating subsidiaries
are considered PRPs at the Berry's Creek Superfund Site, Bergen County, New
Jersey. The 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 group
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. The PRPs have engaged technical
and allocation consultants to evaluate investigation and remedial alternatives
and develop a method to allocate related costs among the PRPs. In December 2007
the PRPs reached a tentative agreement on the allocation of the site
investigation costs and at December 31, 2008 the Company's reserve was $498. The
investigation is expected to take several years and at this time it is too early
to predict the extent of any additional liabilities.
Nepera, Inc. -- Maybrook and Harriman Sites
In 1987, Nepera, Inc. ("Nepera") was named a PRP along with certain prior
owners of the Maybrook Site in Hamptonburgh, New York by the USEPA in connection
with the disposition, under appropriate permits, of wastewater at that site
prior to Cambrex's acquisition of Nepera in 1986. The Maybrook Site is on the
USEPA's National Priorities List for remedial work. A prior owner of the Nepera
facility has participated with Nepera in the performance of a remedial
investigation and feasibility study for the Maybrook Site. In September 2007,
the USEPA issued the Record of Decision ("ROD") which describes the remedial
plan for the Maybrook Site. The USEPA also issued the Company and the prior
owner a Notice of Potential Liability and the recipients have signed a Consent
Decree to complete the ROD and pay the USEPA certain past oversight costs and
have provided the USEPA with appropriate financial assurance, including a letter
of credit to guarantee the recipient's obligation under the Consent Decree.
In 1987, Nepera was also named as a responsible party along with certain
prior owners of the Harriman, New York production facility by the New York State
Department of Environmental Conservation in connection with contamination at the
Harriman Site. A prior owner of the Nepera facility has participated with Nepera
in the performance of the remedial investigation and feasibility study for the
Harriman Site. In 1997, a final ROD was issued which describes the remediation
plan for the site. Nepera and the prior owner have been implementing the ROD
since 1997.
Until 1997, reserves were assessed and established based on the information
available. In November 1997, a settlement was reached between Nepera, Inc., the
former owner mentioned above, and the original owner of the Harriman operations,
pertaining to past and future costs of remediating the Maybrook and Harriman
Sites ("the Sites"). Under the terms of the settlement, the original site owner
paid approximately $13,000 to provide for past and future remediation costs at
the two sites in exchange for a release from the requirement to clean up the two
sites, and the settlement funds were placed in a trust for the benefit of
remediating the two sites on behalf of Nepera and the other former site owner.
Nepera and the prior owner were reimbursed their past costs from the trust.
Nepera had believed that the remaining funds available in the trust would be
sufficient to provide for the future remediation costs for the Sites.
Accordingly, the estimated range of liability for the Sites was offset against
the settlement funds.
73
CAMBREX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
(18) CONTINGENCIES -- (CONTINUED)
Based on available information, Nepera believed that the current trust
balance would not cover the remaining work to be completed at Harriman and under
the final Maybrook ROD issued in September 2007. As such the Company increased
its reserve by $1,000 during 2007, which was recorded in discontinued
operations. As of December 31, 2008, the reserve recorded on the books was
$1,200. The foregoing matters were retained by Cambrex under the 2003 Purchase
Agreement as well as the settlement reached in the Rutherford matter.
Solvent Recoveries Superfund Site
In 1992, the USEPA notified Humphrey Chemical Co., Inc. ("Humphrey") of its
possible involvement as one of approximately 1,300 PRPs at a Superfund site
("the site") in Southington, Connecticut, once operated by Solvent Recoveries,
Inc. Humphrey joined the PRP group, which has agreed with the USEPA to perform a
Remedial Investigation/Feasibility Study ("RIFS"). The RIFS has been completed
and the USEPA has proposed remediation of the Site. In September 2008, Humphrey
agreed to enter into a consent decree and settlement with the other PRPs and the
USEPA whereby Humphrey agreed to pay a settlement amount of $353 with an initial
payment of $106 and the remaining $247 to be paid in installments over time as
the remediation proceeds. The Company has reserved for the unpaid portion of the
settlement and has entered into a letter of credit to guarantee the payment
obligation under the settlement.
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 adjusting or recording
an accrual, should an accrual ultimately be required.
Newark Bay Complex Litigation
CasChem and Cosan have been named as two of several hundred third-party
defendants in a third-party complaint filed in February 2009, by Maxus Energy
Corporation ("Maxus") and Tierra Solutions, Inc. ("Tierra"). The original
plaintiffs include the NJDEP, the Commissioner of the NJDEP and the
Administrator of the NJ Spill Compensation Fund, which originally filed suit in
2005 against Maxus, Tierra and other defendants seeking recovery of cleanup and
removal costs for alleged discharges of dioxin and other hazardous substances
into the Passaic River, Newark Bay, Hackensack River, Arthur Kill, Kill Van Kull
and adjacent waters (the "Newark Bay Complex"). Maxus and Tierra are now seeking
contribution from third-party defendants for any cleanup and removal costs for
which each may be held liable in the lawsuit. Maxus and Tierra also seek
recovery for cleanup and removal costs, that each has incurred or will incur
relating to the Newark Bay Complex. The Company expects to vigorously defend
against the lawsuit. At this time it is too early to predict whether the Company
will have any liability in this matter.
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., ("Gyma") 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.
74
CAMBREX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
(18) CONTINGENCIES -- (CONTINUED)
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. All of these cases have been resolved
except for one brought by three health care insurers known as In Re Lorazepam &
Clorazepate Antitrust Litigation.
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 which has been fully paid as of December 31, 2008. 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 February 2008 the District Court, in the In Re Lorazepam & Clorazepate
Antitrust Litigation, entered judgment after trial against Mylan, Gyma and
Cambrex in the amount of $8,355, payable jointly and severally, and also a
punitive damage award against each of Mylan, Gyma and Cambrex in the amount of
$16,709. In addition, in October 2008, the District Court ruled that Mylan, Gyma
and Cambrex were also subject to a total of approximately $7,000 in prejudgment
interest. The parties will appeal the awards. Cambrex expects any payment of the
judgment against it to be made by Mylan under the indemnity described above.
Vitamin B-3
In May 1998, Nepera, which 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 an 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 been concluded.
Nepera was 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.
The balance of the reserves recorded within accrued liabilities related to
this matter is $1,577 as of December 31, 2008 and is sufficient to cover the
settlement.
Baltimore Litigation
In 2001, the Company acquired a biopharmaceutical manufacturing business in
Baltimore (the "Baltimore Business"). The sellers of the Baltimore Business
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 Baltimore Business.
In August 2007 the United States District Court, Southern District of New
York, granted the Company's pending Motion for Summary Judgment in the Baltimore
Litigation. The Sellers have filed a notice of appeal and oral arguments on the
appeal are scheduled for March 2009. Management continues to believe the matter
to be without merit and continues its defense of this matter.
Other
The Company has commitments incident to the ordinary course of business
including corporate guarantees of certain subsidiary obligations to the
Company's lenders related to financial assurance obligations under certain
environmental laws for remediation, closure and third party liability
requirements of certain of its subsidiaries and a
75
CAMBREX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
(18) CONTINGENCIES -- (CONTINUED)
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 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 term
of the indemnification period is for the officer's or director's lifetime. 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 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, 2008.
In addition to the matters identified above, Cambrex's subsidiaries are
party to a number of other proceedings that are not considered material at this
time.
(19) DISCONTINUED OPERATIONS
In October 2006, the Company sold two businesses within the former Human
Health segment for nominal consideration. As a result of the transaction, the
Company reported a non-cash charge of $23,244 in the fourth quarter of 2006 and
the results of these businesses are presented as discontinued operations.
In February 2007, the Company completed the sale of the businesses that
comprised the Bioproducts and Biopharma segments (excluding certain liabilities)
to Lonza for total cash consideration of $463,914, including working capital
adjustments. As a result of this transaction, the Company reported a gain of
$235,489 in 2007 and all periods presented reflect the results of these
businesses as discontinued operations.
In July 2007 the Company entered into a Settlement Agreement and a related
Escrow Agreement settling litigation which had been commenced by the purchasers
of the Rutherford Business by the filing of the Complaint in April 2006. As a
result of this settlement, the Company's 2007 results include a charge of
$4,041, net of tax of $595, recorded in discontinued operations. In addition,
during 2007 the Company recorded expense of $1,000 for an adjustment to an
environmental reserve at a Rutherford Business site. Refer to Note 18 for a
complete discussion on these matters. The 2006 pre-tax income of discontinued
operations includes $2,092 for an asset impairment charge, $1,791 due to the
acquisition of Cutanogen and $1,475 for the write-down of an investment in
equity securities.
76
CAMBREX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
(19) DISCONTINUED OPERATIONS -- (CONTINUED)
The following table shows revenues and income/(loss) from the discontinued
operations:
2007 2006
-------- --------
Revenues............................................... $ 20,335 $246,538
======== ========
Pre-tax income of discontinued operations.............. $ 545 $ 5,945
Gain on sale of Bioproducts and Biopharma segments..... 235,489 --
Rutherford litigation settlement....................... (4,636) --
Rutherford environmental reserve adjustment............ (1,000) (200)
Loss on sale of Cork and Landen........................ -- (23,244)
-------- --------
Income/(loss) from discontinued operations before
income taxes......................................... $230,398 $(17,499)
Provision for income taxes............................. 7,639 4,207
-------- --------
Income/(loss) from discontinued operations, including
gains/(losses) from dispositions, net of tax......... $222,759 $(21,706)
======== ========
77
CAMBREX CORPORATION AND SUBSIDIARIES
SELECTED QUARTERLY FINANCIAL AND SUPPLEMENTARY DATA -- UNAUDITED
(IN THOUSANDS, EXCEPT PER SHARE DATA)
1ST 2ND 3RD 4TH
QUARTER(1) QUARTER(2) QUARTER(3) QUARTER(4)
---------- ---------- ---------- ----------
2008
Gross sales............................. $61,706 $66,226 $56,508 $65,178
Net revenues............................ 60,990 65,813 58,292 64,133
Gross profit............................ 21,929 19,811 16,235 15,768
Income/(loss) from continuing
operations............................ 4,246 1,836 2,797 (950)
Net income/(loss)....................... 4,246 1,836 2,797 (950)
Basic earnings per share:(9)
Income/(loss) from continuing
operations......................... 0.15 0.06 0.10 (0.03)
Net income/(loss)..................... 0.15 0.06 0.10 (0.03)
Diluted earnings per share:(9)
Income/(loss) from continuing
operations......................... 0.15 0.06 0.10 (0.03)
Net income/(loss)..................... 0.15 0.06 0.10 (0.03)
Average shares:
Basic................................. 29,035 29,090 29,163 29,175
Diluted............................... 29,093 29,101 29,178 29,175
1ST 2ND 3RD 4TH
QUARTER(5) QUARTER(6) QUARTER(7) QUARTER(8)
---------- ---------- ---------- ----------
2007
Gross sales............................. $ 64,997 $63,081 $54,742 $69,754
Net revenues............................ 65,214 62,855 54,614 69,822
Gross profit............................ 24,395 23,938 18,521 24,378
(Loss)/income from continuing
operations............................ (14,443) 2,455 (2,736) 1,213
Net income.............................. 205,216 2,274 1,493 265
Basic earnings per share:(9)
(Loss)/income from continuing
operations............................ (0.51) 0.09 (0.09) 0.04
Net income............................ 7.31 0.08 0.05 0.01
Diluted earnings per share:(9)
(Loss)/income from continuing
operations......................... (0.51) 0.08 (0.09) 0.04
Net income............................ 7.31 0.08 0.05 0.01
Average shares:
Basic................................. 28,071 28,711 28,934 29,002
Diluted............................... 28,071 28,949 28,934 29,040
The sale of the businesses that comprised the Bioproducts and Biopharma
segments was completed in February 2007, and accordingly, these businesses are
being reported as discontinued operations in all periods presented.
(1) Income from continuing operations include pre-tax charges of $177 within
operating expenses for the costs related to strategic alternatives and $634
within operating expenses for restructuring costs.
(2) Income from continuing operations include pre-tax charges of $398 within
operating expenses for the costs related to strategic alternatives, $514
within operating expenses for restructuring costs and $597 within operating
expenses for the acceleration of equity awards related to the former CEO's
retirement.
78
(3) Income from continuing operations include pre-tax charges of $833 within
operating expenses for the costs related to strategic alternatives, $321
within operating expenses for restructuring costs and $35 within operating
expenses for the modification of equity awards related to the former CEO's
retirement.
(4) Loss from continuing operations include pre-tax charges of $107 within
operating expenses for the costs related to strategic alternatives, $3,226
within operating expenses for restructuring costs and $408 within operating
expenses related to the former CEO's retirement.
(5) Loss from continuing operations include pre-tax charges of $23,130 within
operating expenses for the costs related to strategic alternatives, $1,682
within operating expenses for restructuring costs and $841 within interest
expense for the write-off of unamortized debt costs. Discontinued operations
include the gain on sale of the businesses that comprised the Bioproducts
and Biopharma segments of $232,116.
(6) Income from continuing operations include pre-tax charges of $4,564 within
operating expenses for the costs related to strategic alternatives and
$1,901 within operating expenses for restructuring costs. Discontinued
operations include an adjustment to the gain on sale of the businesses that
comprised the Bioproducts and Biopharma segments of $3,491 (primarily for
the working capital adjustment) and expense of $4,602 for the Rutherford
litigation settlement.
(7) Loss from continuing operations include pre-tax charges of $866 within
operating expenses for the costs related to strategic alternatives and $451
within operating expenses for restructuring costs. Discontinued operations
include a charge of $69 to the gain on sale of the businesses that comprised
the Bioproducts and Biopharma segments businesses and expense of $400 for an
adjustment to a reserve at a Rutherford Business site.
(8) Income from continuing operations include pre-tax charges of $2,567 within
operating expenses for the costs related to strategic alternatives and
$2,039 within operating expenses for restructuring costs. Discontinued
operations include a charge of $49 to the gain on sale of the businesses
that comprised the Bioproducts and Biopharma segments, expense of $600 for
an adjustment to a reserve at a Rutherford Business site and expense of $34
for an adjustment to the Rutherford litigation settlement.
(9) 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.
79
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 as of December 31, 2008 our disclosure controls and procedures
were effective to provide reasonable assurance that information required to be
disclosed by us in the reports that we file or submit under the Securities
Exchange Act of 1934 is recorded, processed, summarized, reported, accumulated
and communicated to management, including the Company's Chief Executive Officer
and Chief Financial Officer within the time periods specified in the Securities
and Exchange Commission's rules and forms.
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, 2008 based on the Internal
Control -- Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission ("COSO"). Our management concluded that
based on its assessment, our internal control over financial reporting was
effective as of December 31, 2008. Effectiveness of
80
our internal control over financial reporting as of December 31, 2008 has been
audited by BDO Seidman, LLP, an independent registered public accounting firm,
as stated in their report which appears elsewhere herein.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
There were no changes in our internal control over financial reporting
identified in connection with the evaluation required by paragraph (d) of
Exchange Act Rules 13a-15 or 15d-15 that occurred during our last fiscal quarter
that have materially affected, or are reasonably likely to materially affect,
our internal control over financial reporting.
ITEM 9B OTHER INFORMATION
None.
81
PART III
ITEM 10 DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.
EXECUTIVE OFFICERS OF THE REGISTRANT
The following table lists the officers of the Company:
NAME AGE OFFICE
---- --- ------
Steven M. Klosk*................. 51 President, Chief Executive Officer
James G. Farrell................. 42 Vice President and Corporate Controller
Paolo Russolo*................... 64 President, Profarmaco Milano
Gregory P. Sargen*............... 43 Vice President & Chief Financial Officer
F. Michael Zachara*.............. 45 Vice President, General Counsel and
Corporate Secretary
* Executive Officer
The Company's executive officers are elected by the Board of Directors and
serve at the Board's discretion.
Mr. Klosk joined Cambrex in October 1992 and has served as President &
Chief Executive Officer since May 2008. He also became a member of the Board of
Directors in May 2008. 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. In August 2006, Mr. Klosk assumed the
responsibility of the Pharma business as Executive Vice President and Chief
Operating Officer -- Biopharma & Pharma and in February 2007 was appointed to
Executive Vice President, Chief Operating Officer & President, Pharmaceutical
Products and Services. 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.
Mr. Farrell joined Cambrex in September 2005 and has served as Vice
President and Corporate Controller since July 2007. Mr. Farrell previously held
the position of Corporate Controller. Mr. Farrell was briefly employed during a
part of 2008 by PDI, Inc. as Vice President and Corporate Controller/Interim
Chief Financial Officer. Mr. Farrell returned to Cambrex in late 2008. From 1994
until 2005, he was with Ingersoll-Rand Company, most recently as Director,
Accounting Policy, Procedures and External Reporting. Mr. Farrell was with Ernst
& Young from 1988 to 1994, most recently as Audit Manager.
Dr. Russolo is President, Profarmaco Milano 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
President, Cambrex Profarmaco Business Unit. Upon the completion of the sale of
the Landen facility Dr. Russolo assumed his current position.
Mr. Sargen joined Cambrex in February 2003 and has served as Vice President
and Chief Financial Officer since February 2007. Mr. Sargen previously held the
position of 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 Fisher 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. Zachara joined Cambrex in June 2008 and has served as Vice President,
General Counsel and Corporate Secretary since February 2009. Mr. Zachara
formerly held the position of Assistant General Counsel and Assistant Corporate
Secretary. Previously, he was with Sun Chemical Corporation from 1997 to 2008 as
Senior Corporate Attorney, Assistant Secretary and Director of Real Estate. From
1994 to 1997, he was with Brown & Wood LLP, a
82
New York firm as Associate, Real Estate/Environmental Department. Mr. Zachara
has also held positions with Shanley & Fisher, P.C. and James C. Anderson
Associates.
ITEM 11 EXECUTIVE COMPENSATION.
ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS.
ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR
INDEPENDENCE.
ITEM 14 PRINCIPAL ACCOUNTANT FEES AND SERVICES.
The remaining information called for by Part III is hereby incorporated by
reference to the information set forth under the captions "Principal
Stockholders," "Common Stock Ownership by Directors and Executive Officers,"
"Board of Directors," "Election of Directors," "Section 16(a) Beneficial
Ownership Reporting Compliance," "Code of Ethics," "Compensation Committee
Interlocks and Insider Participation," "Compensation Committee Report on
Executive Compensation," "Executive and Other Compensation," "Executive and
Other Compensation," "Audit Committee Report" and "Principal Accounting Firm
Fees" in the registrant's definitive proxy statement for the Annual Meeting of
Stockholders, to be held April 23, 2009, which meeting involves the election of
directors, which definitive proxy statement is being filed with the Securities
and Exchange Commission pursuant to Regulation 14A.
83
PART IV
ITEM 15 EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) 1. The following consolidated financial statements of the Company are
filed as part of this report:
PAGE NUMBER
(IN THIS REPORT)
----------------
Financial Statements:
Reports of Independent
Registered Public
Accounting Firms......... 36
Consolidated Balance Sheets
as of December 31, 2008
and 2007................. 39
Consolidated Statements of
Operations for the Years
Ended December 31, 2008,
2007 and 2006............ 40
Consolidated Statements of
Stockholders' Equity for
the Years Ended December
31, 2008, 2007 and 2006.. 41
Consolidated Statements of
Cash Flows for the Years
Ended December 31, 2008,
2007 and 2006............ 42
Notes to Consolidated
Financial Statements..... 43
Selected Quarterly Financial
and Supplementary Data
(unaudited).............. 78
(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 Firms are filed as part of this report.
PAGE NUMBER
(IN THIS REPORT)
----------------
Schedule II -- Valuation and
Qualifying Accounts......... 85
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 88 - 91.
84
SCHEDULE II
CAMBREX CORPORATION
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 2008, 2007 AND 2006
(DOLLARS IN THOUSANDS)
COLUMN C
-----------------------------
ADDITIONS
COLUMN B ----------------------------- COLUMN E
--------- CHARGED/ CHARGED/ --------
COLUMN A BALANCE (CREDITED) TO (CREDITED) TO COLUMN D BALANCE
-------- BEGINNING COST AND OTHER ---------- END OF
DESCRIPTION OF YEAR EXPENSES ACCOUNTS DEDUCTIONS YEAR
----------- --------- ------------- ------------- ---------- --------
Year ended December 31, 2008:
Doubtful trade receivables and
returns and allowances......... $ 560 $ 600 $ (41) $ 14 $ 1,105
Deferred tax valuation allowance.. 64,842 3,762 10,626 -- 79,230
Year ended December 31, 2007:
Doubtful trade receivables and
returns and allowances......... $ 571 $ 55 $ 35 $101 $ 560
Deferred tax valuation allowance.. 91,403 (21,241)* (5,320) -- 64,842
Year ended December 31, 2006:
Doubtful trade receivables and
returns and allowances......... $ 508 $ 53 $ 62 $ 52 $ 571
Deferred tax valuation allowance.. 82,953 11,804 (3,354) -- 91,403
* Includes $(31,584) related to discontinued operations.
85
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/ GREGORY P. SARGEN
-------------------------------------
Gregory P. Sargen
Vice President and Chief Financial
Officer
Date: February 19, 2009
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.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ STEVEN M. KLOSK President and Chief Executive )
Officer
-------------------------------------
Steven M. Klosk
/s/ GREGORY P. SARGEN Vice President and Chief )
Financial Officer (Principal
------------------------------------- Financial Officer and Accounting
Gregory P. Sargen Officer)
/s/ JOHN R. MILLER* Chairman of the Board of )
Directors
-------------------------------------
John R. Miller
/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 ) February 19, 2009
-------------------------------------
Leon J. Hendrix, Jr.
/s/ ILAN KAUFTHAL* Director )
-------------------------------------
Ilan Kaufthal
86
SIGNATURE TITLE DATE
--------- ----- ----
/s/ WILLIAM KORB* Director )
-------------------------------------
William Korb
/s/ PETER G. TOMBROS* Director )
-------------------------------------
Peter G. Tombros
*By /s/ STEVEN M. KLOSK*
--------------------------------
Steven M. Klosk
Attorney-in-Fact
87
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
----------- -----------
3.1 -- Restated Certificate of Incorporation of registrant, as
amended.(W).
3.2 -- By Laws of registrant, as amended.(W).
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 April 6, 2007 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.(JJ).
10.10 -- Settlement Agreement and Release and Environmental Escrow
Agreement dated July 30, 2007 between Rutherford Chemicals LLC,
Vertellus Specialties Holdings UK Ltd. (formerly Rutherford
Chemicals UK Ltd.), Vertellus Specialties UK Ltd. (formerly Seal
Sands Chemicals Ltd.), and Vertellus Specialties Holdings Corp.
(formerly Rutherford Chemicals Holdings Corp.), and Cambrex
Corporation, Nepera, Inc., CasChem Inc., Zeeland Chemicals, Inc.,
Nepcam, Inc., and Cambrex Ltd.(X).
10.11 -- Peter E. Thauer Letter Agreement dated December 21, 2007.(LL).
10.12 -- Supplemental Executive Retirement Plan Change of Control
Amendment.(MM).
10.13 -- Retention and Enhanced Severance Program.(Y).
10.14 -- 2007 Retention Program.(AA).
10.15 -- James A. Mack Compensation Agreement, as amended.(Y)(Z).
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.(BB -- Exhibit 10.20) (as amended (CC)
Exhibit 10.20.1).
10.21 -- Revised Schedule of Parties (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).(BB).
10.25 -- Employment Agreement dated February 6, 2007 between the registrant
and Gregory P. Sargen.(KK).
10.26 -- Consulting Agreement dated December 15, 1994 between the
registrant and Arthur I. Mendolia.(I).
10.27 -- Consulting Agreement dated December 15, 1994 between the
registrant and Cyril C. Baldwin, Jr.(I).
10.28 -- Consulting Agreement dated January 26, 1995 between the registrant
and James A. Mack.(I).
--------
See legend on following page
88
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
----------- -----------
10.29 -- Additional Retirement Payment Agreement dated December 15, 1994
between the registrant and Arthur I. Mendolia.(I).
10.30 -- Additional Retirement Payment Agreement dated December 15, 1994
between the registrant and Cyril C. Baldwin, Jr.(I).
10.31 -- Additional Retirement Payment Agreement between the registrant and
James A. Mack.(I).
10.32 -- Employment Agreement dated February 6, 2007 between the registrant
and Paolo Russolo.(KK).
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).
10.43 -- Share Purchase Agreement between Cambrex AB and International
Chemical Investors II S.A.(CC).
10.44 -- Consulting Agreement dated November 10, 2006 between registrant
and Gary L. Mossman.(DD).
10.45 -- Mr. Thomas Bird Bonus Arrangement.(HH).
10.46 -- Stock Purchase Agreement dated October 23, 2006 between Lonza
America Inc., Lonza Bioproducts AG, Lonza Sales AG, Lonza Group
Limited and Cambrex Corporation and Subsidiaries.(GG -- Exhibit
10.1).
10.47 -- Agreement to Lift Sales Restrictions on Certain Vested
Options.(EE).
10.48 -- Agreement to Accelerate Vesting of Certain Options.(FF).
10.49 -- Directors' Equity Program.(MM).
10.50 -- Manufacturing Agreement dated as of July 1, 1991 between the
registrant and A.L. Laboratories, Inc.(D).
16.1 -- PricewaterhouseCoopers LLP Letter.(II).
21 -- Subsidiaries of registrant.(J).
23.1 -- Consent of BDO Seidman LLP to the incorporation by reference of
its report herein in Registration Statement Nos. 333-57404, 333-
22017, 33-37791, 33-81780, 33-81782, 333-113612, 333-113613, 333-
129473 and 333-136529 on Form S-8 of the registrant.(J).
23.2 -- Consent of PricewaterhouseCoopers LLP to the incorporation by
reference of its report herein in Registration Statement Nos. 333-
57404, 333-22017, 33-37791, 33-81780, 33-81782, 333-113612, 333-
113613, 333-129473 and 333-136529 on Form S-8 of the
registrant.(J).
24 -- Powers of Attorney to sign this report.(J).
31.1 -- CEO Certification pursuant to Rule 13a -- 14(a) and Rule
15d -- 14(a) of the Securities Exchange Act, as amended.(J).
31.2 -- CFO Certification pursuant to Rule 13a -- 14(a) and Rule
15d -- 14(a) of the Securities Exchange Act, as amended.(J).
32.1 -- CEO Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.(R).
32.2 -- CFO Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.(R).
--------
See legend on following page
89
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 Registration Statement on
Form 8-K dated October 27, 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 Registration Statement
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 Current Report on Form
8-K filed October 13, 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 Quarterly Report on Form 10-
Q for the period ending March 31, 2007.
(X) Incorporated by reference to registrant's Quarterly Report on Form 10-
Q for the period ending September 30, 2007.
(Y) Incorporated by reference to Item 1.01 registrant's Current Report on
Form 8-K dated February 7, 2006.
(Z) Incorporated by reference to Item 5.02(e)(1) to registrant's Current
Report on Form 8-K dated February 9, 2007.
(AA) Incorporated by reference to Item 5.02(e) to registrant's Current
Report on Form 8-K dated December 22, 2006.
(BB) Incorporated by reference to registrant's Annual Report on Form 10-K
for year end 2005 filed May 26, 2006.
(CC) Incorporated by reference to registrant's Quarterly Report on Form 10-
Q for the period ending September 30, 2006.
(DD) Incorporated by reference to registrant's Current Report on Form 8-K
dated November 15, 2006.
(EE) Incorporated by reference to registrant's Current Report on Form 8-K
dated November 7, 2006.
(FF) Incorporated by reference to registrant's Current Report on Form 8-K
dated June 7, 2005.
90
EXHIBIT INDEX
(GG) Incorporated by reference to registrant's Current Report on Form 8-K
filed October 24, 2006.
(HH) Incorporated by reference to registrant's Current Report on Form 8-K
filed November 1, 2006.
(II) Incorporated by reference to registrant's Current Report on Form 8-K
filed March 21, 2007.
(JJ) Incorporated by reference to registrant's Current Report on Form 8-K
filed April 11, 2007.
(KK) Incorporated by reference to registrant's Annual Report on Form 10-K
for year end 2006 filed on March 15, 2007.
(LL) Incorporated by reference to registrant's Annual Report on Form 10-K
for year end 2007 filed February 27, 2008.
(MM) Incorporated by reference to registrant's Quarterly Report on Form 10-
Q for the period ending June 30, 2008.
91