Cambrex Corporation
Annual Report 2005

Plain-text annual report

---------------------------------------------------------------------------------------------------------------------------------------------------------------- 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, 2005 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: TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED ------------------- ----------------------------------------- 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 seasonedissuer, as defined in Rule 405 of the Securities Act. Yes [ ]. No [X]. Indicate by check mark if the Registrant is not required to file reportspursuant to Section 13 or Section 15(d) of the Act. Yes [ ]. No [X]. Indicate by check mark whether the registrant (1) has filed all reportsrequired 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 theregistrant was required to file such reports), and (2) has been subject to suchfiling requirements for the past 90 days. Yes [X]. No [ ]. Indicate by check mark if disclosure of delinquent filers pursuant to Item405 of Regulation S-K is not contained herein, and will not be contained, to thebest of the registrant's knowledge, in definitive proxy or informationstatements incorporated by reference in Part III of this Form 10-K or anyamendment to this Form 10-K. [ ] Indicate by check mark whether the registrant is a large accelerated filer,an accelerated filer, or a non-accelerated filer. See definition of "acceleratedfiler and large accelerated filer"in Rule 12b-2 of the Exchange Act. (Checkone): Large accelerated filer [ ] Accelerated filer [X] Non-accelerated filer [ ] Indicate by check mark whether the Registrant is a shell company (asdefined in Rule 12b-2 of the Act). Yes [ ]. No [X]. The aggregate market value of the voting stock held by non-affiliates ofthe registrant was approximately $489,694,176 as of June 30, 2005. APPLICABLE ONLY TO CORPORATE REGISTRANTS As of April 30, 2006, there were 26,764,501 shares outstanding of theregistrant's Common Stock, $.10 par value. DOCUMENTS INCORPORATED BY REFERENCE None---------------------------------------------------------------------------------------------------------------------------------------------------------------- CAMBREX CORPORATION INDEX TO ANNUAL REPORT ON FORM 10-K FILED WITH THE SECURITIES AND EXCHANGE COMMISSION FOR THE YEAR ENDED DECEMBER 31, 2005 ITEM PAGENO. NO.---- ---- PART I 1 Business.................................................... 2 1A Risk Factors................................................ 8 1B Unresolved Staff Comments................................... 18 2 Properties.................................................. 19 3 Legal Proceedings........................................... 19 4 Submission of Matters to a Vote of Security Holders......... 20 PART II 5 Market for the Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.................................................. 21 6 Selected Financial Data..................................... 22 7 Management's Discussion and Analysis of Financial Condition and Results of Operations................................... 24 7A Quantitative and Qualitative Disclosures about Market Risk........................................................ 41 8 Financial Statements and Supplementary Data................. 42 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.................................... 89 9A Controls and Procedures..................................... 89 9B Other Information........................................... 90 PART III 10 Directors and Executive Officers of the Registrant.......... 91 11 Executive Compensation...................................... 100 12 Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.................. 108 13 Certain Relationships and Related Transactions.............. 111 14 Principal Accounting Fees and Services...................... 112 PART IV 15 Exhibits, Financial Statement Schedules..................... 113 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 toproviding products and services that accelerate and improve the discovery andcommercialization of human therapeutics. The Company primarily supplies itsproducts and services worldwide to pharmaceutical and biopharmaceuticalcompanies, generic drug companies, biotechnology companies and researchorganizations. The Company reports financial results in three segments:Bioproducts, Biopharma and Human Health. The Company's overall strategy is tofocus on niche life sciences markets with global opportunities, supportstate-of-the-art technology, and demonstrate excellence in regulatorycompliance, environmental, health and safety performance, and customer service. The Company uses a consistent business approach in each of its segments: - Niche Market Focus: The Company participates in niche markets where significant technical expertise provides competitive advantage and market differentiation. - Market Leadership: The Company secures leading market positions through excellent customer service, proprietary technologies, specialized capabilities and an outstanding regulatory record and leverages these capabilities across the market segments in which it participates. - New Products and Services: The Company continues to invest in research and product development in order to introduce innovative products and services to accelerate revenue growth, provide competitive advantage and maintain its leading market positions. The new products and services are developed to address the changing needs of life sciences customers for increased automation, speed-to-market and testing relevance. - Operational Excellence: The Company maintains its commitment to continually improve productivity and customer service levels and maintains excellent quality and regulatory compliance systems. - Acquisition and Licensing: The Company may drive growth in strategic business segments through the prudent acquisition of products, product lines, technologies and capabilities to enhance the Company's position in its niche markets. MARKET OVERVIEW AND GROWTH DRIVERS  The Company participates in markets that serve the healthcare industry.Customers include companies and institutions that discover and commercializetherapeutics such as traditional drugs (made using organic chemistry), biologicsand cell based therapies. The aging population, continued investment in healthcare research and drugdevelopment and the necessity to develop life saving therapeutics to addressunmet needs drives business growth in life sciences companies serving thehealthcare market. Aging "baby boomers" in the United States, Europe and Japanmay provide an enormous healthcare opportunity. This group typically has moreeducation, a higher socio-economic level, and higher demands for healthcareservices than previous generations. Continuing healthcare investment increases demand for Cambrex products andservices by providing its customers the financial resources to advance theirresearch and development projects for therapeutic candidates from the laboratoryto the clinic, and eventually, to the patient. Healthcare investment comes froma variety of sources. Large pharmaceutical and biotechnology companies spendbillions on drug discovery and development. Research institutions may be fundedby the government, business or private sectors. Venture capital and initialpublic offering investments remained robust in 2005 allowing companies tocontinue to spend on drug development and commercialization. ---------------(dollars in thousands, except share data) 2 It is estimated that getting a drug to market may take up to sixteen years.With the need to get new drugs to market faster, pharmaceutical companies makehuge investments in drug discovery and require a continuing stream of innovativeresearch tools to accelerate the drug discovery process. More and more cellularmodels are being used to understand the mechanism of disease and the efficacyand toxicity of drug candidates. Demand for rapid, accurate tests to assess drugcandidates is growing. Cambrex is a leading provider of the tools and testingproducts used in the drug discovery process. Once a drug is identified, companies need to develop a robust process forthe manufacture of clinical and commercial quantities. Product testing andquality processes need to be integrated into the manufacturing process. This isa critical step to getting a commercially viable drug to market. Cambrex excelsin the manufacture and testing of active pharmaceutical ingredients ("APIs") anddrug substances at laboratory, clinical and commercial scale and specializes inoptimizing manufacturing processes. Demand for outsourced services from pharmaceutical companies continues togrow. Large pharmaceutical and biotechnology companies may outsource thedevelopment and manufacturing of a drug substance to manage multiple internalpriorities, access new technologies or additional capacity, preserve neededcapital or ensure multiple sources of supply. Emerging pharmaceutical,biotechnology and many generic drug companies outsource all process developmentand manufacturing. Cambrex is particularly well positioned to assist drugcompanies with these much needed services for traditional APIs, biologics andcell therapies. New drugs are typically patented. When the patent expires, the drug may bemanufactured and marketed in its generic form. Growth in the generic drug marketis driven by the continuing stream of drug patents that will expire in thefuture and favorable market forces that encourage the use of genericpharmaceuticals as a more cost effective health care alternative tohigher-priced branded drugs. In the United States and many countries in Europe,governments and prescription benefit management companies provide incentives forgeneric substitution to reduce costs. Cambrex's active pharmaceuticalingredients are used in over 100 niche generic drugs globally. The market for human therapeutics is regulated by the Food and DrugAdministration ("FDA") and other regulatory agencies through the development,manufacturing and commercialization process. The FDA approves human therapeuticsand regulates manufacturing. Excellent regulatory and quality systems areessential to serve the industry. Competition from Asia has increased their capabilities in drug substancemanufacturing and finished dosage form drugs in recent years. Although there hasbeen limited direct impact on the Company's niche products, the presence ofthese competitors in the market has resulted in downward pricing pressure ongeneric active pharmaceutical ingredients. Regulatory compliance and productquality may determine the long term impact of these competitors. STRATEGY As announced earlier this year, the Company has engaged an investmentbanker to examine strategic alternatives including the potential sale of certainassets. Any proceeds from an asset sale may be used to support further growth inthe remaining business, pay down debt, repurchase Cambrex stock or makecomplementary strategic acquisitions as deemed appropriate. The Company expectsto continue to provide innovative life sciences products and services for thebioresearch and therapeutics markets. The Company will use its expertise in drugdiscovery tools, testing reagents, kits and services and the manufacture of drugsubstances to expand its product portfolio. Through internal development andtargeted acquisitions, the Company intends to broaden its current list ofproducts and services. The introduction of complementary offerings will driveorganic growth and expand the Company's footprint in the life sciences markets.New technologies, products, and infrastructure may also come from licensing ortargeted acquisition. ---------------(dollars in thousands, except share data) 3 DEVELOPMENT OF THE BUSINESS The discussion below provides insight to the general development of ourbusiness, including the material acquisitions and disposition of assets over thepast five years. On June 4, 2001, the Company acquired Bio Science Contract Production Corp.in Baltimore, Maryland for approximately $125,000 in cash. Bio Science ContractProduction Corp., now renamed Cambrex Bio Science Baltimore, Inc., manufacturespurified bulk biologics and pharmaceutical ingredients. The acquisition providedthe Company with entry into the contract bioprocessing market. On October 31, 2001, the Company acquired Marathon Biopharmaceuticals Inc.in Hopkinton, Massachusetts for approximately $26,000 in cash through a sharepurchase of CoPharma Inc. Marathon, now renamed Cambrex Bio Science Hopkinton,Inc., is a full-service cGMP manufacturer of biopharmaceutical ingredients andpurified bulk biologics for pre-clinical evaluation, clinical trials andcommercial scale quantities. On January 1, 2002, the Company realigned the organization to focus on lifesciences. The operating units that primarily produced specialty and finechemicals, and animal health and agriculture products were combined to form anew subsidiary, Rutherford Chemicals, Inc. On November 10, 2003, the Company sold its Rutherford Chemicals businessfor a sale price of up to $65,000, consisting of $55,000 in cash paid atclosing, a $2,000 subordinated 12% interest bearing note, and an $8,000performance-based cash earn-out if certain future operating profit targets areachieved. The sale of Rutherford Chemicals represents the completion of thetransformation from a specialty chemical organization into a leading lifesciences company. On October 2, 2004, Cambrex France SARL, one of the Company's subsidiaries,acquired Genolife SA for approximately $6,000 in cash. Genolife, now renamedCambrex Bio Science Clermont Ferrand SAS, located in Saint Beauzire, France,specializes in rapid microbial detection testing for the pharmaceutical,agriculture, food, and cosmetic industries. The acquisition complements theCompany's endotoxin and mycoplasma detection product lines and builds upon itstesting reagent and service franchise. PRODUCTS The Company uses its technical expertise in a wide range of chemical andbiological processes to meet the needs of its customers for high qualityproducts and services for specialized applications. The following table presentsgross sales from the Company's three segments: YEARS ENDED DECEMBER 31 -------------------------------- 2005 2004 2003 -------- -------- ---------- Bioproducts........................................ $149,498 $136,108 $ 119,298Biopharma.......................................... 41,698 43,270 44,128Human Health....................................... 260,790 259,737 242,165 -------- -------- ----------Gross Sales........................................ $451,986 $439,115 $ 405,591 ======== ======== ========== Bioproducts: The Bioproducts segment consists of research products(including cell biology products, cell based assays and molecular biologyproducts) and therapeutic applications (including endotoxin detection products,biotherapeutic media and serum products and cell therapy and related services).The Company manufactures more than 1,800 products which are sold to more than14,000 customers worldwide with no one customer accounting for over 10% of 2005sales in this segment. ---------------(dollars in thousands, except share data) 4 This table summarizes the gross sales by product category for this segment: $ % 2005 2004 CHANGE CHANGE -------- -------- ------- ------ Research products............................. $ 75,810 $ 70,657 $ 5,153 7.3%Therapeutic applications...................... 73,688 65,451 8,237 12.6% -------- -------- ------- Total Bioproducts................... $149,498 $136,108 $13,390 9.8% ======== ======== ======= ==== Gross sales of $149,498 were $13,390 or 9.8% above 2004. Bioproducts saleswere unfavorably impacted 0.1% due to exchange rates reflecting a stronger U.S.dollar. Research products of $75,810 were $5,153 or 7.3% higher than prior year dueprimarily to increased sales in cell biology products resulting from newproducts, market growth and price increases, and higher media/serum productsales as a result of a gain in market share helped by increased raw materialsupply. Therapeutic applications sales of $73,688 were $8,237 or 12.6% higher thanprior year due to higher sales of cell therapy services due to the addition ofnew customers and endotoxin detection products reflecting increased purchasinglevels primarily in North America and continued market growth. Biopharma: The Biopharma segment consists of the Company's contractbiopharmaceutical process development and manufacturing business. Biopharmasales of $41,698 were $1,572 or 3.6% below 2004. The sales decrease primarilyreflects lower suite revenue and process development partially offset by higherreimbursed materials and labor fees. There are two customers that individuallyaccount for more than 10% of 2005 sales in this segment. They represent 30.5%and 13.6% of 2005 sales in this segment. Human Health: The Human Health segment is primarily comprised of thecustom development and manufacture of pharmaceutical ingredients derived fromorganic chemistry. Products and services are supplied globally to innovative andgeneric drug companies. Products include active pharmaceutical ingredients andadvanced pharmaceutical intermediates. Services include development and GMPmanufacturing services. The Human Health segment is classified into three product groups: (1)active pharmaceutical ingredients ("APIs"), (2) pharmaceutical intermediates andcustom development, and (3) other. These products and services are sold to adiverse group of more than 1,100 customers, with two customers individuallyaccounting for more than 10% of 2005 sales in this segment; one, apharmaceutical company with which a long-term sales contract is in effect thatis scheduled to expire at the end of 2008, accounted for 14.4%, and a second, adistributor representing multiple customers, accounted for 14.1%. Many of theseproducts are also sold through agents. One active pharmaceutical ingredientmakes up 16.4% of 2005 sales in this segment. This table summarizes the gross sales for this product segment: $ % 2005 2004 CHANGE CHANGE -------- -------- ------- ------ Active pharmaceutical ingredients............. $199,935 $200,555 $ (620) (0.3)%Pharmaceutical intermediates and custom development................................. 30,578 27,365 3,213 11.7%Other......................................... 30,277 31,817 (1,540) (4.8)% -------- -------- ------- Total Human Health.................. $260,790 $259,737 $ 1,053 0.4% ======== ======== ======= ==== Human Health sales of $260,790 increased $1,053 or 0.4% including a 0.7%unfavorable impact due to exchange rates reflecting the stronger U.S. dollar. Sales of APIs of $199,935 were $620 or 0.3% below the prior year dueprimarily to lower demand for certain central nervous system and cardiovascularAPIs due to increasing competition resulting in lower ---------------(dollars in thousands, except share data) 5 volumes sold and continued pricing pressure, partially offset by higher sales ofa gastrointestinal API and nicotine polacrilex resin (used in smoking cessationproducts) due to stronger demand. Pharmaceutical intermediates and custom development sales of $30,578 were$3,213 or 11.7% above 2004 primarily due to higher sales of custom developmentproducts and an end-stage kidney treatment product due to increased demand. Other sales of $30,277 were $1,540 or 4.8% below the prior year dueprimarily to lower volumes of a crop protection additive and fine chemicals,partially offset by higher sales of feed additive products. MARKETING AND DISTRIBUTION The Company's Human Health and Biopharma segments generally include highervalue, low-to-medium volume niche products requiring significant technicalexpertise to develop and manufacture. Marketing generally requires significantcooperative effort among a highly trained sales and marketing staff, ascientific staff that can assess the technical fit and estimate manufacturingeconomics and the business unit management to determine the strategic andbusiness fit. The process to take a client's project from the clinical trialstage to a commercial, approved therapeutic may take from two to ten years. TheCompany uses sales agents in those areas where direct sales efforts are noteconomical. For the Bioproducts segment, the Company markets and sells its products inthe United States and Europe principally through its own direct sales force. Theremaining international markets are served principally through an extensivenetwork of independent distributors. The Company has also implemented ane-commerce website to market and sell these products in the United States andEurope. RAW MATERIALS The Company uses a wide array of raw materials in the conduct of itsbusinesses. For its Human Health products, the Company generally will have a primaryand secondary supplier for its critical raw materials. Prices for these rawmaterials are generally stable except for the petroleum-based solvents whereprices can vary with market conditions. For its Bioproducts products, the Company buys materials from manysuppliers and is generally not dependent on any one supplier or group ofsuppliers. There is a well-established market for raw fetal bovine serum butprice and supply are cyclical and fluctuate. Bovine spongiform encephalopathy,also known as mad cow disease, can periodically restrict the locations fromwhich the Company can import fetal bovine serum. The Company also has along-term contract with one company to supply agarose, the key raw material usedto make electrophoresis media products. The other key raw materials used by all segments of the Company areadvanced organic intermediates that generally have been in adequate supply frommultiple suppliers. RESEARCH AND DEVELOPMENT The Company's research and development program is designed to increase theCompany's competitiveness by improving its technology and developing processesfor the manufacture of new products to meet customer requirements. The goals areto introduce innovative products; improve manufacturing processes to reducecosts, improve quality and increase capacity; to identify market opportunitiesthat warrant significant technical expertise, and offer the prospects of along-term, profitable business relationship. Research and development activitiesare performed at most of the Company's manufacturing facilities in both theUnited States and Europe. Approximately 150 employees are involved directly inresearch and development activities worldwide. The Cambrex Center of Technical Excellence, a research and developmentorganization located in The Technology Centre of New Jersey in North Brunswick,NJ, helps place the Company in a unique position to---------------(dollars in thousands, except share data) 6 be a full-service resource for pharmaceutical and biotechnology companiesthroughout the drug development cycle. The Company spent $22,331, $19,659 and $17,123 in 2005, 2004 and 2003,respectively, on research and development efforts. PATENTS AND TRADEMARKS The Company has patent protection in many of its product areas. Inaddition, the Company also relies on know-how and trade secrets related to manyof its manufacturing processes and techniques not generally known to other lifesciences companies for developing and maintaining its market position. The Company currently owns approximately 185 worldwide patents which havevarious expiration dates through 2023 and which cover selected items in each ofthe Company's major product areas. The Company also owns foreign equivalents ofmany of its United States patents. In addition, the Company has applied forpatents for various inventions and is in the process of preparing patentapplications for other inventions. The Company owns patent and other proprietaryrights to the endotoxin detection products which are material to the productlines. The Company has trademarks registered in the United States and a number ofother countries for use in connection with the Company's products and business.The Company believes that many of its trademarks are generally recognized in itsindustry. Such trademarks include Poietics(R), Clonetics(R), MYCOAlert(R),NuSieve(R), Reliant(R), Latitude(R), PAGEr(R), MetaPhor(R), AccuGENE(R) andBioWhittaker(R). The Company requires employees to sign confidentiality and ownership ofinventions agreements where appropriate. COMPETITION In the Bioproducts segment, no one company is known to compete with theCompany in all of its product groups, but in each group competition is offeredby a number of companies, including in some cases, firms substantially largerand with greater financial resources than the Company. The markets in which theCompany competes are generally concentrated and are highly competitive, withcompetition centering on product specifications and performance, quality, depthof product line, price, technical support, innovative product development and ontime delivery. In the Biopharma segment, the competitors include therapeutic companies andother companies that supply contract biopharmaceutical development andmanufacturing services to biotech companies. Generally, the competition focuseson larger quantities and scale of manufacturing capacity. Cambrex differentiatesits services by concentrating on small to medium scale process development andmanufacturing services, an excellent regulatory compliance record, experienceproducing vaccines and approved drugs, a commitment to quality, and world-classearly development services. In the Human Health segment, the Company has two primary groups ofcompetitors; those that produce generic active pharmaceutical ingredients andthose that provide development and manufacturing services for branded activepharmaceutical ingredients and intermediates. For generic active pharmaceuticalingredients, there are approximately five primary competitors which are locatedin Europe. For competitors that provide custom development and manufacturingservices for branded active pharmaceutical ingredients, there are approximatelytwenty competitors, six of which are large multinational companies that alsoproduce fine chemicals. More recently, competitors from Asia have entered themarket for larger active pharmaceutical ingredients. While there has beenlimited impact on the specific products the Company produces, it is expectedthat regulatory compliance, product quality and logistics will determine thelong term impact of these competitors in the market. If the Company perceivessignificant competitive risk and a need for technical or financial commitment,it generally negotiates long term contracts or guarantees from its customers.---------------(dollars in thousands, except share data) 7 ENVIRONMENTAL AND SAFETY REGULATIONS AND PROCEEDINGS General: Certain products manufactured by the Company involve the use,storage and transportation of toxic and hazardous materials. The Company'soperations are subject to extensive international and domestic federal, stateand local laws and regulations relating to the storage, handling, emission,transportation and discharge of materials into the environment and themaintenance of safe working conditions. The Company maintains environmental andindustrial safety and health compliance programs at its plants and believes thatits manufacturing operations are in general compliance with all applicablesafety, health and environmental laws. The Company conducts detailed environmental due diligence on allacquisitions. The Company's acquisitions were made with consideration of anyknown environmental conditions. Also, as with other companies engaged in ourindustry, risks of substantial costs and liabilities are inherent in certainplant operations and certain products produced at the Company's plants.Additionally, prevailing legislation tends to hold companies primarilyresponsible for the proper disposal of their wastes even after transferal tothird party waste disposal facilities. Moreover, other future developments, suchas increasingly strict environmental, safety and health laws and regulations,and enforcement policies thereunder, could result in substantial costs andliabilities to the Company and could subject the Company's handling,manufacture, use, reuse, or disposal of substances or pollutants at its plantsto more rigorous scrutiny than at present. Although the Company has no directoperations and conducts its business through subsidiaries, certain legalprinciples that provide the basis for the assertion against a parent company ofliability for the actions of its subsidiaries may support the direct assertionagainst the Company of environmental liabilities of its subsidiaries. Known environmental matters which may result in liabilities to the Companyand the related estimates and accruals are summarized in Note #19 to the CambrexCorporation and Subsidiaries Consolidated Financial Statements. Present and Future Environmental Expenditures: The Company's policy is tocomply with all legal requirements of applicable environmental, health andsafety laws and regulations. The Company believes it is in general compliancewith such requirements and has adequate professional staff and systems in placeto remain in compliance. In some cases, compliance can only be achieved bycapital expenditures and the Company made capital expenditures of $4,371 in2005, $6,725 in 2004, and $4,032 in 2003 for environmental projects. As theenvironmental proceedings in which the Company is involved progress from theremedial investigation and feasibility study stage to implementation of remedialmeasures, related expenditures may increase. The Company considers costs forenvironmental compliance to be a normal cost of doing business and includes suchcosts in pricing decisions. ITEM 1A RISK FACTORS FACTORS THAT MAY AFFECT FUTURE RESULTS The following risk factors and other information included in this AnnualReport on Form 10-K should be carefully considered. If any of the followingrisks occur, the Company's business, financial condition, operating results andcash flows could be materially adversely effected. The risks and uncertaintiesdescribed below are not the only ones the Company faces. Additionally, risks anduncertainties not presently known to the Company or that it currently deemsimmaterial also may impair its business, financial condition, operating resultsand cash flows in the future. THE COMPANY'S ANALYSIS, CONSIDERATION AND IMPLEMENTATION OF STRATEGICALTERNATIVES MAY MATERIALLY ADVERSELY AFFECT OUR BUSINESS, FINANCIAL CONDITIONOR RESULTS OF OPERATIONS. As previously announced, the Company has retained Bear Stearns & Co., Inc.to act as advisors to the Board of Directors in the analysis and considerationof strategic alternatives to maximize shareholder value, including the potentialsale of certain assets. There are several strategic alternatives that may bepursued. ---------------(dollars in thousands, except share data) 8 However, we are presently unable to assess what impact any particular strategicalternative will have on our stock price if accomplished, and our considerationand implementation of strategic alternatives may not be successful.Uncertainties and risks relating to our analysis and consideration of strategicalternatives include but are not limited to: - the analysis and consideration of strategic alternatives may disrupt operations and distract members of management and other employees, which could adversely affect our results of operations; - the process of exploring strategic alternatives may be more time consuming and expensive than currently anticipated; - we may not be able to successfully achieve the benefits of the strategic alternative undertaken; and - perceived uncertainties as to the future direction of the Company may result in the loss of employees, customers, clients or business partners. WE MAY PURSUE TRANSACTIONS THAT MAY CAUSE US TO EXPERIENCE SIGNIFICANT CHARGESTO EARNINGS THAT MAY ADVERSELY AFFECT OUR STOCK PRICE AND FINANCIAL CONDITION. We regularly review potential transactions related to technologies,products, product rights and businesses complementary to our business. Thesetransactions could include mergers, acquisitions, divestitures, strategicalliances or licensing agreements. In the future, we may choose to enter intothese transactions at any time. As a result of acquiring businesses or enteringinto other significant transactions, we have previously experienced, and maycontinue to experience, significant charges to earnings for merger and relatedexpenses that may include transaction costs, closure costs or costs related tothe write-off of acquired in-process research and development. These costs mayalso include substantial fees for investment bankers, attorneys, accountants,financial printing costs, severance and other closure costs associated with theelimination of duplicate or discontinued products, employees, operations andfacilities. Although we do not expect these charges to have a material adverseeffect upon our overall financial condition, these charges could have a materialimpact on our results of operations for particular quarters or years and theycould possibly have an adverse impact upon the market price of our common stock. IF WE MAKE ACQUISITIONS, WE MAY EXPERIENCE DIFFICULTY INTEGRATING THE BUSINESSESWHICH COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS, FINANCIAL CONDITIONAND RESULTS OF OPERATIONS. An important part of our business growth strategy is to acquire products,product lines, technologies and capabilities, including through the acquisitionof businesses and to enhance the Company's position in its niche markets. Wecontinually explore and conduct discussions with many third parties regardingpossible acquisitions. Our ability to continue to achieve our goals may dependupon our ability to effectively integrate such businesses, to achieve costefficiencies and to manage these businesses as part of our company. However, wemay experience difficulty integrating the merged companies which could have amaterial adverse effect on the operating results or financial condition of thecombined company. As a result of uncertainty following an acquisition and duringthe integration process, we could experience disruption in our business oremployee base. There is also a risk that key employees of the combined companymay seek employment elsewhere, including with competitors, or that valuedemployees may be lost upon the elimination of duplicate functions. If we are notable to successfully blend our products and technologies with the acquiredbusiness to create the advantages the acquisition was intended to create, it mayeffect our results of operations, our ability to develop and introduce newproducts and the market price of our common stock. Furthermore, there may beoverlap between our products, services or customers, and the combined companymay create conflicts in relationships or other commitments detrimental to theintegrated businesses. ---------------(dollars in thousands, except share data) 9 IF WE FAIL TO IMPROVE THE OPERATIONS OF FUTURE ACQUIRED BUSINESSES, WE MAY BEUNABLE TO ACHIEVE OUR GROWTH STRATEGY. Some of the businesses we have acquired or will acquire had or may havesignificantly lower operating margins than we do and/or operating losses priorto the time we acquired them. In the past, we have occasionally experiencedtemporary delays in improving the operating margins of these acquiredbusinesses. In the future, if we are unable to improve the operating margins ofacquired businesses or operate them profitably, we may be unable to achieve ourgrowth strategy. PHARMACEUTICAL, BIOPHARMACEUTICAL AND BIOTECHNOLOGY COMPANIES MAY DISCONTINUE ORDECREASE THEIR USAGE OF OUR SERVICES. We depend on pharmaceutical, biopharmaceutical and biotechnology companiesthat use our services for a large portion of our revenues. Although there hasbeen a trend among these companies to outsource therapeutic productionfunctions, this trend may not continue. We have observed increasing pressure onthe part of our customers to reduce spending, including the use of our services,as a result of negative economic trends generally and in the pharmaceuticalindustry. If these companies discontinue or decrease their usage of ourservices, including as a result of an economic slowdown in the overall UnitedStates or foreign economies, our revenues and earnings could be lower than weexpect and our revenues may decrease or not grow at historical rates. COMPETITION IN THE LIFE SCIENCES RESEARCH MARKET, AND/OR A REDUCTION IN DEMANDFOR OUR PRODUCTS, COULD REDUCE SALES. The markets for our products are competitive and price sensitive. Otherlife science suppliers have significant financial, operational, sales andmarketing resources, and experience in research and development. These and othercompanies may have developed or could in the future develop new technologiesthat would compete with our products or render our products obsolete. If acompetitor develops superior technology or cost-effective alternatives to ourproducts or services, our business, operating results, and financial conditioncould be seriously harmed. In addition, demand for our products may weaken dueto reduction in research and development budgets, loss of distributors or otherfactors, which would have an adverse effect on our financial condition. The markets for certain of our products are also subject to specificcompetitive risks and can be highly price competitive. Our competitors havecompeted in the past by lowering prices on certain products. Our competitors maylower prices on these or other products in the future and we may, in certaincases, respond by lowering our prices. This would reduce revenues and profits.Conversely, failure to anticipate and respond to price competition may hurt ourmarket share. We believe that customers in our markets display loyalty to their initialsupplier of a particular product. Therefore, it may be difficult to generatesales to potential customers who have purchased products from competitors. Tothe extent we are unable to be the first to develop and supply new products, ourcompetitive position may suffer. OUR FAILURE TO OBTAIN NEW CONTRACTS OR RENEWED CONTRACTS OR CANCELLATION OFEXISTING CONTRACTS MAY ADVERSELY EFFECT OUR BUSINESS, FINANCIAL CONDITION ANDRESULTS OF OPERATIONS AND MAKE OUR REVENUE DIFFICULT TO PREDICT. Many of our contracts are short-term in duration. As a result, we mustcontinually replace our contracts with new contracts to sustain our revenue. Inaddition, many of our long-term contracts may be cancelled or delayed by clientsfor any reason upon notice. Contracts may be terminated for a variety ofreasons, including termination of product development, failure of products tosatisfy safety requirements, unexpected or undesired results from use of theproduct or the client's decision to forego a particular study. The Companycurrently has a long-term sales contract within the Human Health segment thataccounts for more than 10%---------------(dollars in thousands, except share data) 10 of segment sales that is scheduled to expire at the end of 2008. There is noguarantee that this contract will be renewed. Our failure to obtain newcontracts or renew contracts or the cancellation or delay of existing contractscould have a material adverse effect on our business, financial condition andresults of operations. Furthermore, because our revenue is primarily generated on acontract-by-contract or purchase order basis, our revenue is difficult topredict and contributes to the variability of our financial results from periodto period. In addition, we do not believe that a backlog of contracts is ameaningful indicator of our future revenue because much of our revenue isresulting from short-term contracts or purchase orders and these contracts canoften be terminated for many reasons. THE BIOPHARMA BUSINESS SEGMENT HAS EXPERIENCED AND MAY CONTINUE TO EXPERIENCESIGNIFICANT VOLATILITY IN PROFITABILITY AND THERE ARE NO ASSURANCES THAT IT WILLRETURN TO ITS HISTORIC PROFITABILITY LEVEL. The Company's Biopharma segment provides process development andmanufacturing services on a contract basis to biopharmaceutical companies. Thisbusiness has a very high fixed cost structure and its customers are oftendependent on the availability of funding and pursuing drugs that are in earlierstages of clinical trials, and thus have high failure rates. Losses of one ormore customers can result in significant swings in profitability from quarter toquarter and year to year. Returning to historic profitability levels isdependent on the Company generating significant additional revenues fromexisting and new customers, which can not be assured. THE COMPANY COULD BE SUBJECT TO ADDITIONAL IMPAIRMENT CHARGES IN THE FUTURE. During 2004 and 2005, the Company recorded impairment charges to reducegoodwill and long-lived assets in 2005. The Company may be subject to additionalimpairment charges if the business units do not perform at or near projectedlevels in the future. Should the profit forecast for these businesses be revisedsignificantly downward, the Company may incur additional impairment charges. OUR OPERATING RESULTS MAY UNEXPECTEDLY FLUCTUATE IN FUTURE PERIODS. The Company's revenue and operating results have fluctuated, and couldcontinue to fluctuate, on a quarterly basis. The operating results for aparticular quarter may be lower than expected as a result of a number offactors, including the timing of contracts; the delay or cancellation of acontract; the mix of services provided; seasonal slowdowns in different parts ofthe world; the timing of start-up expenses for new services and facilities; andchanges in government regulations. Because a high percentage of the Company'scosts are relatively fixed in the short term (such as the cost of maintainingfacilities and compensating employees), any one of these factors could have asignificant impact on the Company's quarterly results. In some quarters, theCompany's revenue and operating results may fall below the expectations ofsecurities analysts and investors due to any of the factors described above. Insuch event, the trading price of the Company's common stock would likelydecline, even if the decline in revenue did not have any long-term adverseimplications for the Company's business. OUR MARKET SHARE DEPENDS ON NEW PRODUCT INTRODUCTIONS AND ACCEPTANCE. Rapid technological change and frequent new product introductions aretypical of the market for certain of our products and services. Our futuresuccess will depend in part on continuous, timely development and introductionof new products that address evolving market requirements and are attractive tocustomers. We believe successful new product introductions provide a significantcompetitive advantage because customers make an investment of time in selectingand learning to use a new product, and are reluctant to switch thereafter. Wespend significant resources on internal research and development, as well as ontechnology development elsewhere to support our effort to develop and introducenew products. To the extent that we fail to introduce new and innovativeproducts, we could fail to obtain an adequate return on these investments andcould lose market share to our competitors, which may be difficult to regain. Aninability, for technological or ---------------(dollars in thousands, except share data) 11 other reasons, to develop successfully and introduce new products could reduceour growth rate or otherwise damage our business. In the past, we have experienced, and may experience in the future, delaysin the development and introduction of products. We cannot be assured that wewill keep pace with the rapid change in life sciences research, or that our newproducts will adequately meet the requirements of the marketplace or achievemarket acceptance. Some of the factors effecting market acceptance of ourproducts include: - availability, quality and price as compared to competitive products; - the functionality of new and existing products; - the timing of introduction of our products as compared to competitive products; - scientists' and customers' opinions of the product's utility and our ability to incorporate their feedback into future products; - general trends in life sciences research. The expenses or losses associated with unsuccessful product developmentactivities or lack of market acceptance of our new products could adverselyeffect our business, financial condition and results of operations. FAILURE TO OBTAIN PRODUCTS AND COMPONENTS FROM THIRD-PARTY MANUFACTURERS COULDEFFECT OUR ABILITY TO MANUFACTURE AND DELIVER OUR PRODUCTS. We rely on third-party manufacturers to supply many of our raw materials,product components, and in some cases, entire products. In addition, we have asingle source for supplies of some raw materials and components to our products.Manufacturing problems may occur with these and other outside sources. If suchproblems occur, we cannot ensure that we will be able to manufacture ourproducts profitably or on time. ANY SIGNIFICANT REDUCTION IN GOVERNMENT REGULATION OF THE DRUG DEVELOPMENTPROCESS COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS, FINANCIALCONDITION AND RESULTS OF OPERATIONS. The design, development, testing, manufacturing and marketing ofbiotechnology and pharmaceutical products are subject to extensive regulation bygovernmental authorities, including the FDA and comparable regulatoryauthorities in other countries. The Company's business depends in part on strictgovernment regulation of the drug development process. Legislation may beintroduced and enacted from time to time to modify regulations administered bythe FDA and governing the drug approval process. Any significant reduction inthe scope of regulatory requirements or the introduction of simplified drugapproval procedures could have a material adverse effect on the Company'sbusiness, financial condition and results of operations. VIOLATIONS OF CGMP AND OTHER GOVERNMENT REGULATIONS COULD HAVE A MATERIALADVERSE EFFECT ON OUR BUSINESS, FINANCIAL CONDITION AND RESULTS OF OPERATIONS. All facilities and manufacturing techniques used for manufacturing ofproducts for clinical use or for commercial sale in the United States must beoperated in conformity with current Good Manufacturing Practices ("cGMP")regulations as required by the FDA. The Company's facilities are subject toscheduled periodic regulatory and customer inspections to ensure compliance withcGMP and other requirements applicable to such products. A finding that theCompany had materially violated these requirements could result in regulatorysanctions, the loss of a customer contract, the disqualification of data forclient submissions to regulatory authorities and/or a mandated closing of theCompany's facilities. Any such material violations would have a material adverseeffect on the Company's business, financial condition and results of operations. The Securities and Exchange Commission ("SEC") is currently conducting aninvestigation into the Company's inter-company accounting issue. Theinvestigation began during the first half of 2003 after the ---------------(dollars in thousands, except share data) 12 Company voluntarily disclosed certain matters related to inter-company accountsfor the five-year period ending December 31, 2001 that resulted in therestatement of the Company's financial statements for those years. The Companyis fully cooperating with the SEC and does not expect further revisions to itshistorical financial statements relating to these issues. This investigationcould lead to an adverse outcome and adversely effect our business, financialcondition, results of operations and cash flows. LITIGATION MAY HARM OUR BUSINESS OR OTHERWISE NEGATIVELY IMPACT OUR MANAGEMENTAND FINANCIAL RESOURCES. Substantial, complex or extended litigation could cause the Company toincur large expenditures and distract our management. For example, lawsuits byemployees, stockholders, counterparties to acquisition and divestiturecontracts, collaborators, distributors, customers, or end-users of our productsor services could be very costly and substantially disrupt our business.Disputes from time to time with such companies or individuals are not uncommon,and we cannot assure you that we will always be able to resolve such disputesout of court or on terms favorable to the Company. The Company is involved in a number of lawsuits including a class actionlawsuit filed against Cambrex and certain current Company officers alleging thefailure to disclose in a timely fashion the restatement of results for thefive-year period ending December 31, 2001 as discussed in the risk factor above,as well as the loss of a significant contract at our Baltimore facility. If thismatter, or any of the Company's other lawsuits, is resolved in an unfavorablemanner, they could have a material adverse effect on the operating results andcash flows in future periods. LOSS OF KEY PERSONNEL COULD HURT OUR BUSINESS. The Company depends on a number of key executives. The loss of services ofany of the Company's key executives could have a material adverse effect on theCompany's business. The Company also depends on its ability to attract and retain qualifiedscientific and technical employees. There can be no assurance the Company willbe able to retain its existing scientific and technical employees, or to attractand retain additional qualified employees. The Company's inability to attractand retain qualified scientific and technical employees would have a materialadverse effect on the Company's business, financial condition and results ofoperations. POTENTIAL PRODUCT LIABILITY CLAIMS, ERRORS AND OMISSIONS CLAIMS IN CONNECTIONWITH SERVICES WE PERFORM AND POTENTIAL LIABILITY UNDER INDEMNIFICATIONAGREEMENTS BETWEEN US AND OUR OFFICERS AND DIRECTORS COULD ADVERSELY EFFECT OUREARNINGS AND FINANCIAL CONDITION. The Company manufactures products intended for use by the public. Inaddition, the Company's services include the manufacture of pharmaceutical andbiologic products to be tested in human clinical trials and for consumption byhumans. These activities could expose the Company to risk of liability forpersonal injury or death to persons using such products, although the Companydoes not presently market or sell the products to end users. The Company seeksto reduce its potential liability through measures such as contractualindemnification provisions with clients (the scope of which may vary fromclient-to-client, and the performances of which are not secured), exclusion ofservices requiring diagnostic or other medical services, and insurancemaintained by clients. The Company could be materially and adversely effected ifit were required to pay damages or incur defense costs in connection with aclaim that is outside the scope of the indemnification agreements, if theindemnity, although applicable, is not performed in accordance with its terms orif the Company's liability exceeds the amount of applicable insurance orindemnity. In addition, the Company could be held liable for errors andomissions in connection with the services it performs. The Company currentlymaintains product liability and errors and omissions insurance with respect tothese risks. There can be no assurance, however, that the Company's insurancecoverage will be adequate or that insurance coverage will continue to beavailable on terms acceptable to the Company. ---------------(dollars in thousands, except share data) 13 The Company also indemnifies its officers and directors for certain eventsor occurrences while the officer or director is, or was serving, at theCompany's request in such capacity. The maximum potential amount of futurepayments the Company could be required to make under these indemnificationagreements is unlimited; however, the Company has a "Director and Officer"insurance policy that covers a portion of any potential exposure. The Companycould be materially and adversely effected if it were required to pay damages orincur legal costs in connection with a claim above its insurance limits. ASSESSMENTS BY VARIOUS TAX AUTHORITIES MAY BE MATERIALLY DIFFERENT THAN WE HAVEPROVIDED FOR AND WE MAY EXPERIENCE SIGNIFICANT VOLATILITY IN OUR ANNUAL ANDQUARTERLY 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 proposedassessments. While the Company believes that it has adequately provided for anysuch assessments, future settlements may be materially different than we haveprovided for and negatively effect our earnings. During 2005, the geographic shift of forecasted income resulted in therecording of a valuation allowance against all net domestic deferred tax assets.Going forward, until such time as the Company's domestic profitability isrestored and considered by management to be sustainable for the foreseeablefuture, the Company will not record the income tax benefit or expense fordomestic pre-tax losses and income respectively, and as such may experiencesignificant volatility in its effective tax rate. At December 31, 2005 theCompany has recorded a valuation allowance against domestic indefinite livedintangible deferred tax assets of $16,926, because the Company could no longerpreserve the utilization of certain tax planning strategies. WE HAVE A SIGNIFICANT AMOUNT OF DEBT THAT COULD ADVERSELY EFFECT OUR FINANCIALCONDITION. The Company has a $277,500 revolving credit facility of which $81,943 wasoutstanding at December 31, 2005. In addition, the Company had privately placednotes of $100,000 (repaid in January 2006 by drawing down our existing revolvingcredit facility). If we are unable to generate sufficient cash flow or otherwiseobtain funds necessary to make required payments on the notes, including fromcash and cash equivalents on hand, we will be in default under the terms of theloan agreements and indentures under which we have outstanding debt securities. Even if we are able to meet our debt service obligations, the amount ofdebt we have could adversely effect us in a number of ways, including: - limiting our ability to obtain any necessary financing in the future for working capital, capital expenditures, debt service requirements, or other purposes; - limiting our flexibility in planning for, or reacting to, changes in our business; - placing us at a competitive disadvantage relative to our competitors who have lower levels of debt; - making us more vulnerable to a downturn in our business or the economy generally; - requiring us to use a substantial portion of our cash to pay principal and interest on our debt, instead of contributing those funds to other purposes such as working capital and capital expenditures. INTERNATIONAL UNREST OR FOREIGN CURRENCY FLUCTUATIONS COULD ADVERSELY EFFECT OURRESULTS. Our international revenues, which include revenues from our non-U.S.subsidiaries and export sales from the U.S., represented 62% of our productrevenues in 2005 and 61% of our product revenues in 2004. We ---------------(dollars in thousands, except share data) 14 expect that international revenues will continue to account for a significantpercentage of our revenues for the foreseeable future. There are a number of risks arising from our international business,including: - foreign currencies we receive for sales outside the U.S. could be subject to unfavorable exchange rates with the U.S. dollar and reduce the amount of revenue that we recognize; - the possibility that unfriendly nations or groups could boycott our products; - general economic and political conditions in the markets in which we operate; - potential increased costs associated with overlapping tax structures; - more limited protection for intellectual property rights in some countries; - unexpected changes in regulatory requirements; - the difficulties of compliance with a wide variety of foreign laws and regulations; - longer accounts receivable cycles in certain foreign countries; and - import and export licensing requirements. A significant portion of our business is conducted in currencies other thanthe U.S. dollar, which is our reporting currency. We recognize foreign currencygains or losses arising from our operations in the period incurred. As a result,currency fluctuations between the U.S. dollar and the currencies in which we dobusiness have caused and will continue to cause foreign currency transactiongains and losses. We cannot predict the effects of exchange rate fluctuationsupon our future operating results because of the number of currencies involved,the variability of currency exposures, and the potential volatility of currencyexchange rates. We engage in limited foreign exchange hedging transactions tomanage our foreign currency exposure, but our strategies are short-term innature and may not adequately protect our operating results from the fulleffects of exchange rate fluctuations. THE MARKET PRICE OF OUR STOCK COULD BE VOLATILE. The market price of our common stock has been subject to volatility and, inthe future, the market price of our common stock may fluctuate substantially dueto a variety of factors, including: - quarterly fluctuations in our operating income and earnings per share results; - technological innovations or new product introductions by us or our competitors; - economic conditions; - disputes concerning patents or proprietary rights; - changes in earnings estimates and market growth rate projections by market research analysts; - sales of common stock by existing holders; - loss of key personnel; and - securities class actions or other litigation. The market price for our common stock may also be effected by our abilityto meet analysts' expectations. Any failure to meet such expectations, evenslightly, could have an adverse effect on the market price of our ---------------(dollars in thousands, except share data) 15 common stock. In addition, the stock market is subject to extreme price andvolume fluctuations. This volatility has had a significant effect on the marketprices of securities issued by many companies for reasons unrelated to theoperating performance of these companies. INCIDENTS RELATED TO HAZARDOUS MATERIALS COULD ADVERSELY EFFECT OUR BUSINESS. Portions of our operations require the controlled use of hazardousmaterials. Although we are diligent in designing and implementing safetyprocedures to comply with the standards prescribed by federal, state, and localregulations, the risk of accidental contamination of property or injury toindividuals from these materials cannot be completely eliminated. In the eventof such an incident, we could be liable for any damages that result, which couldadversely effect our business. Additionally, any incident could partially or completely shut down ourresearch and manufacturing facilities and operations. We generate waste that must be transported to approved storage, treatmentand disposal facilities. The transportation and disposal of such waste arerequired to meet applicable state and federal statutes and regulations. Thestorage, treatment and disposal of such waste potentially exposes us toenvironmental liability if, in the future, such transportation and disposal aredeemed to have violated such statues and/or regulations or if the storage,treatment and disposal facilities are inadequate and are proved to have damagedthe environment. The Company is also party to several environmental remediationinvestigations and cleanups and, along with other companies, has been named a"potential responsible party" for certain waste disposal sites. The Company hasalso retained the liabilities with respect to certain pre-closing environmentalmatters associated with the sale of the Rutherford Chemicals business. Afterreviewing information currently available, management believes any amount paidin excess of accrued liabilities will not have a material effect on itsbusiness, financial condition or results of operations. However, these matters,if resolved in a manner different from the estimates, could have a materialadverse effect on the financial condition, operating results and cash flows whenresolved in future reporting periods. THE POSSIBILITY WE WILL BE UNABLE TO PROTECT OUR TECHNOLOGIES COULD EFFECT OURABILITY TO COMPETE. Our success depends to a significant degree upon our ability to developproprietary products and technologies. However, we cannot be assured thatpatents will be granted on any of our patent applications. We also cannot beassured that the scope of any of our issued patents will be sufficiently broadto offer meaningful protection. We only have patents issued in selectedcountries. Therefore, third parties can make, use, and sell products covered byour patents in any country in which we do not have patent protection. Inaddition, our issued patents or patents we license could be successfullychallenged, invalidated or circumvented so that our patent rights would notcreate an effective competitive barrier. We provide our customers the right touse our products under label licenses that are for research purposes only. Theselicenses could be contested, and we cannot be assured that we would either beaware of an unauthorized use or be able to enforce the restrictions in acost-effective manner. If a third party claimed an intellectual property right to technology weuse, we may need to discontinue an important product or product line, alter ourproducts and processes, defend our right to use such technology in court or paylicense fees. Although we may, under these circumstances, attempt to obtain alicense to such intellectual property, we may not be able to do so on favorableterms, or at all. Additionally, if our products are found to infringe on a thirdparty's intellectual property, we may be required to pay damages for pastinfringement, and lose the ability to sell certain products or receive licensingrevenues. ---------------(dollars in thousands, except share data) 16 COMPLIANCE WITH CHANGING REGULATION OF CORPORATE GOVERNANCE AND PUBLICDISCLOSURE MAY RESULT IN ADDITIONAL EXPENSE. Changing laws, regulations and standards relating to corporate governanceand public disclosure, including the Sarbanes-Oxley Act of 2002, are creatinguncertainty for companies. These new or changed laws and standards are subjectto multiple interpretations, in many cases due to their lack of specification.As a result, their application in practice may evolve over time as new guidanceis provided by regulatory and governing bodies which could result in highercosts necessitated by revisions to disclosures and governance practices. We arecommitted to maintaining high standards of corporate governance and publicdisclosure. As a result of the efforts to comply with the evolving laws andregulations increased general and administrative expenses have been experiencedand are likely to continue. In particular, our efforts to comply with Section404 of the Sarbanes-Oxley Act of 2002, and the related assessments have requiredcommitment of significant internal and external financial and operationalresources. EMPLOYEES  At December 31, 2005, the Company had 2,041 employees worldwide (965 ofwhom were from international operations) compared with 1,938 employees atDecember 31, 2004 and 1,861 at December 31, 2003. Cambrex Karlskoga AB, Cambrex Profarmaco Landen NV, Cambrex Cork Limited,and Cambrex Profarmaco Milano S.r.l. production, administration, scientific andtechnical employees are represented by various local and national unions. TheCompany believes its labor relations are satisfactory. SEASONALITY The Company experiences some seasonality primarily due to planned plantshutdowns by the Company and certain customers in the third quarter. Operatingresults for any quarter, however, are not necessarily indicative of results forany future period. In particular, as a result of various factors such asacquisitions, plant shutdowns, and the timing of large contract revenue streams,the Company believes that period-to-period comparisons of its operating resultsshould not be relied upon as an indication of future performance. EXPORT AND INTERNATIONAL SALES The Company exports numerous products to various areas, principally WesternEurope, Asia and Canada. Export sales from the Company's domestic operations in2005, 2004 and 2003 amounted to $47,115, $29,945 and $22,100, respectively.Sales from international operations were $234,199 in 2005, $238,673 in 2004, and$223,666 in 2003. Refer to Note #17 to the Cambrex Corporation and SubsidiariesConsolidated Financial Statements. AVAILABLE INFORMATION This annual report on Form 10-K, the Company's quarterly reports on Form10-Q, the Company's current reports on Form 8-K, and amendments to those reportsfiled or furnished pursuant to Section 13(a) or 15(d) of the Securities ExchangeAct of 1934, are made available free of charge on the Company's Internet websitewww.cambrex.com as soon as reasonably practicable after such material iselectronically filed with or furnished to the SEC. The most recentcertifications by the Company's Chief Executive Officer and Chief FinancialOfficer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 are filed asexhibits to this Annual report on Form 10-K. Last year the Company filed withthe New York Stock Exchange the Annual Chief Executive Officer Certification asrequired by Section 303A.12.(a) of the New York Stock Exchange Listed CompanyManual. ---------------(dollars in thousands, except share data) 17 Reports filed by the Company with the SEC may be read and copied at theSEC's Public Reference Room at 100 F Street, NE, Washington, DC 20549.Information on the operation of the Public Reference Room may be obtained bycalling the SEC at 1-800-SEC-0330. The SEC also maintains an Internet site atwww.sec.gov that contains reports, proxy and information statements and otherinformation regarding issuers that file electronically with the SEC. The following corporate governance documents are available free of chargeon the Company's website: the charters of our Audit, Regulatory Affairs,Compensation and Governance Committees, our Corporate Governance Guidelines andour Code of Business Conduct and Ethics. These corporate governance documentsare also available in print to any stockholder requesting a copy from ourcorporate secretary at our principal executive offices. Information contained onour website is not part of this report. We will also post on our website anyamendments to or waivers of our Code of Business Conduct and Ethics that relateto our Chief Executive Officer, Chief Financial Officer and Principal AccountingOfficer. ITEM 1B UNRESOLVED STAFF COMMENTS  None. ---------------(dollars in thousands, except share data) 18 ITEM 2 PROPERTIES. Set forth below is information relating to the Company's manufacturingfacilities: LOCATION ACREAGE OPERATING SUBSIDIARY PRODUCT LINES MANUFACTURED-------- ------- -------------------- -------------------------- Charles City, IA 57 acres Cambrex Charles Active Pharmaceutical Ingredients, City, Inc. Pharmaceutical Intermediates, Imaging Chemicals, Animal Health Products and Fine Custom ChemicalsKarlskoga, Sweden 42 acres Cambrex Karlskoga AB Active Pharmaceutical Ingredients, Pharmaceutical Intermediates, Imaging Chemicals and Fine Custom ChemicalsPaullo (Milan), Italy 13 acres Cambrex Profarmaco Active Pharmaceutical Ingredients Milano S.r.l.Walkersville, MD 116 acres Cambrex Bio Science Cells and Media and Endotoxin Detection Walkersville, Inc.Verviers, Belgium 9 acres Cambrex Bio Science Cells and Media Verviers SprlCork, Ireland 21 acres Cambrex Cork Limited Active Pharmaceutical Ingredients and Pharmaceutical IntermediatesRockland, ME 93 acres Cambrex Bio Science Electrophoresis and Chromatography Rockland, Inc.Landen, Belgium 40 acres Cambrex Profarmaco Active Pharmaceutical Ingredients Landen NVCopenhagen, Denmark Leased Cambrex Bio Science Electrophoresis and Chromatography Copenhagen ApSBaltimore, MD Leased Cambrex Bio Science Contract Biopharmaceutical Services Baltimore, Inc.Hopkinton, MA Leased Cambrex Bio Science Contract Biopharmaceutical Services Hopkinton, Inc.Saint-Beauzire, France Leased Cambrex Bio Science Microbial and GMO Detection Kits and BioAssay Clermont Ferrand SAS ProductsGaithersburg, MD Leased Cambrex Bio Science Poietics(TM) Walkersville, Inc.Salisbury, MD Leased Cambrex Bio Science Endotoxin Detection Walkersville, Inc. The Company also leases 42,000 square feet in North Brunswick, New Jerseyfor its Center of Technical Excellence, which has a 10 year term ending March27, 2010. In addition, the Company owns a four acre site and buildings in NorthHaven, CT and thirty-one acres of undeveloped land adjacent to the North Havenfacility, eighty-one acres in Walkersville, Maryland and a three acre site inCarlstadt, New Jersey. The Company believes its facilities to be in goodcondition, well-maintained and adequate for its current needs. Most of the Company's products and services are provided from multi-purposefacilities. Each product has a unique requirement for equipment, and occupiessuch equipment for varying amounts of time. It is generally possible, withproper lead time and customer and regulatory approval (if required), to transferthe manufacturing of a particular product to another facility should capacityconstraints dictate. ITEM 3 LEGAL PROCEEDINGS In mid-2004 the USEPA conducted a hazardous waste inspection of theCompany's Charles City facility. Thereafter, the USEPA notified the facility ofseveral alleged violations of the hazardous waste laws related to management ofhazardous waste and requested additional information related to the allegedviolations. The Company responded and provided information which questioned theconclusion that the violations occurred. Nevertheless, the USEPA concluded thatseveral violations existed at the time of the inspection, and on October 3, 2005issued the facility an order and penalty assessment in the amount of $189. OnOctober 31, ---------------(dollars in thousands, except share data) 19 2005 the Company filed a request for a hearing and an informal conference todiscuss settlement. Settlement discussions have been on-going as we prepare forthe hearing. In March 2006, the Company received notice from the United StatesEnvironmental Protection Agency ("USEPA") that two former operating subsidiariesare considered potentially responsible parties ("PRPs") at the Berry's CreekSuperfund Site, Bergen County, New Jersey. Our operating companies are amongmany other PRPs that were listed in the notice. Pursuant to the notice the PRPshave been asked to perform a remedial investigation and feasibility study of theBerry's Creek Site. The Company has met with the other PRPs. Both operatingcompanies joined the groups of PRPs and filed a joint response to the USEPAagreeing to jointly negotiate to conduct or fund along with other PRPs anappropriate remedial investigation and feasibility study of the Berry's CreekSite. At this time it is too early to predict the extent of any liabilities,consequently we have not recorded any reserves for this matter. See "Environmental and Safety Regulations and Proceedings" under Item 1 andNote #19 to the Cambrex Corporation and Subsidiaries Consolidated FinancialStatements with respect to various proceedings involving the Company inconnection with environmental matters. The Company is party to a number of otherproceedings also discussed in Note #19. Management is of the opinion that whilethe ultimate liability resulting from those proceedings, as well asenvironmental matters, may have a material effect upon the results of operationsin any given year, they will not have a material adverse effect upon theCompany's liquidity nor its financial position. ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None ---------------(dollars in thousands, except share data) 20 PART II ITEM 5 MARKET FOR THE REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES The Company's common stock, $.10 par value is listed on the New York StockExchange (NYSE) under the symbol CBM. The following table sets forth the closinghigh and low sales price of the common stock as reported on the NYSE: 2005 HIGH LOW---- ------ ------ First Quarter............................................... $26.22 $20.70Second Quarter.............................................. 21.20 17.51Third Quarter............................................... 20.96 18.46Fourth Quarter.............................................. 19.41 16.88 2004 HIGH LOW---- ------ ------ First Quarter............................................... $28.10 $24.18Second Quarter.............................................. 27.25 21.64Third Quarter............................................... 24.69 20.59Fourth Quarter.............................................. 27.10 21.70 As of April 30, 2006, the Company estimates that there were approximately2,561 beneficial holders of the outstanding common stock of the Company. The quarterly dividend on common stock was $0.03 for 2005 and 2004. 2005 EQUITY COMPENSATION TABLE The following table provides information as of December 31, 2005 withrespect to shares of common stock that may be issued under the Company'sexisting equity compensation plans. COLUMN (A) COLUMN (B) COLUMN (C) -------------------- -------------------- -------------------- NUMBER OF SECURITIES REMAINING FOR FUTURE NUMBER OF SECURITIES ISSUANCE UNDER TO BE ISSUED UPON WEIGHTED AVERAGE EQUITY COMPENSATION EXERCISE OF EXERCISE PRICE OF PLANS (EXCLUDING OUTSTANDING OPTIONS, OUTSTANDING OPTIONS, SECURITIES REFLECTEDPLAN CATEGORY WARRANTS AND RIGHTS WARRANTS AND RIGHTS IN COLUMN (A))------------- -------------------- -------------------- -------------------- Equity compensation plans approved by security holders....................... 3,562,847 $26.08 577,746Equity compensation plans not approved by security holders....................... 458,400 $30.64 37,434 --------- -------Total.................................... 4,021,247 $26.60 615,180 ========= ======= ---------------(dollars in thousands, except share data) 21 ITEM 6 SELECTED FINANCIAL DATA The following selected consolidated financial data of the Company for eachof the years in the five year period ended December 31, 2005 are derived fromthe audited financial statements. The consolidated financial statements of theCompany as of December 31, 2005 and December 31, 2004 and for each of the yearsin the three year period ended December 31, 2005 and the report of independentregistered public accounting firm thereon are included elsewhere in this annualreport. On November 10, 2003, the Company completed the sale of the RutherfordChemicals business. As a result, the businesses comprising the RutherfordChemicals segment are being reported as a discontinued operation for all periodspresented. The data presented below should be read in conjunction with thefinancial statements of the Company and the notes thereto and "Management'sDiscussion and Analysis of Financial Condition and Results of Operations"included elsewhere herein. YEARS ENDED DECEMBER 31, ------------------------------------------------------- 2005(1) 2004(2) 2003(3) 2002(4) 2001(5)(6) --------- -------- -------- -------- ---------- INCOME DATA:Gross sales............................ $ 451,986 $439,115 $405,591 $394,430 $356,555Net revenues........................... 455,097 443,657 410,644 399,066 356,830Gross profit........................... 161,337 170,740 162,406 177,718 157,972Selling, general and administrative.... 107,610 102,769 95,117 85,762 80,099Research and development............... 22,331 19,659 17,123 15,794 17,379Impairment and other charges........... 107,177 48,720 11,342 4,238 2,022Operating (loss)/profit................ (75,781) (408) 38,824 71,924 58,472Interest expense, net.................. 10,815 10,950 11,840 11,264 10,602Other expense/(income), net............ 40 73 139 7,890 (323)(Loss)/income before income taxes...... (86,636) (11,431) 26,845 52,770 48,193Provision for taxes.................... 23,822 14,461 26,600 12,815 13,205(Loss)/income from continuing operations........................... (110,458) (25,892) 245 39,955 34,988Loss from discontinued operations...... -- (978) (54,308) (6,546) (9,676)Net (loss)/income...................... (110,458) (26,870) (54,063) 33,409 25,312EARNINGS PER SHARE DATA:(Loss)/earnings per common share (basic): (Loss)/income from continuing operations........................ $ (4.18) $ (0.99) $ 0.01 $ 1.54 $ 1.36 Loss from discontinued operations.... $ -- $ (0.04) $ (2.11) $ (0.25) $ (0.37) Net (loss)/income.................... $ (4.18) $ (1.03) $ (2.10) $ 1.29 $ 0.99(Loss)/earnings per common share (diluted): (Loss)/income from continuing operations........................ $ (4.18) $ (0.99) $ 0.01 $ 1.51 $ 1.32 Loss from discontinued operations.... $ -- $ (0.04) $ (2.08) $ (0.25) $ (0.36) Net (loss)/income.................... $ (4.18) $ (1.03) $ (2.07) $ 1.26 $ 0.96Weighted average common share outstanding: Basic................................ 26,456 26,094 25,775 25,954 25,648 Diluted.............................. 26,456 26,094 26,174 26,520 26,495 ---------------(dollars in thousands, except share data) 22 YEARS ENDED DECEMBER 31, ------------------------------------------------------- 2005(1) 2004(2) 2003(3) 2002(4) 2001(5)(6) --------- -------- -------- -------- ---------- DIVIDENDS PER COMMON SHARE............. $ 0.12 $ 0.12 $ 0.12 $ 0.12 $ 0.12BALANCE SHEET DATA: (AT END OF PERIOD) Working capital...................... $ 137,380 $182,915 $138,458 $154,324 $159,224 Total assets......................... 612,472 791,985 778,503 835,283 818,375 Long-term obligations................ 186,819 226,187 212,369 267,434 312,524 Total stockholders' equity........... 243,251 391,316 396,630 410,954 345,098 --------------- (1) Results include pre-tax charges for goodwill impairment of $76,385, long-lived asset impairment charge of $30,792 and a tax benefit related to the long-lived asset impairment of $1,673, recorded within the provision for income taxes in the Biopharma and Human Health segments. Results also include pre-tax charges for executive severance of $4,223 and an increase in an environmental reserve of $1,300 recorded in operating expenses and a tax benefit due to a favorable Swedish court decision of $3,329 and an increase in valuation allowances against domestic deferred tax assets totaling $16,926 within the provision for income taxes. (2) Results include a pre-tax charge of $48,720 for goodwill impairment related to the Baltimore reporting unit of the Biopharma segment. (3) Results include a pre-tax charge of $11,342 recorded in operating expenses for the settlement of certain class action lawsuits involving Mylan Laboratories and the establishment of valuation allowances against net domestic deferred tax assets totaling $21,487 within the provision for income taxes. (4) Results include a pre-tax charge of $4,238 for asset impairment and severance related to the closure of a small manufacturing facility and a $7,344 pre-tax charge for investment impairments recorded in other expense. (5) Includes the results of Cambrex Bio Science Baltimore, Inc. from the date of acquisition effective June 2001 and the results of Cambrex Bio Science Hopkinton, Inc. from the date of acquisition effective October 2001. (6) Results include a pre-tax charge of $2,022 related to the closure of a small manufacturing facility and $2,000 for inventory write-offs in the Bioproducts segment. ---------------(dollars in thousands, except share data) 23 ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS EXECUTIVE OVERVIEW The Company's business consists of three segments -- Bioproducts, Biopharmaand Human Health. The Bioproducts segment consists of research products andservices and therapeutic applications. The Biopharma segment consists of theCompany's biopharmaceutical process development and manufacturing business. TheHuman Health segment is primarily comprised of active pharmaceutical ingredientsderived from organic chemistry and pharmaceutical intermediates. During 2005, Cambrex achieved varying levels of success in its businesssegments. The Bioproducts segment attained an important breakthrough with itsthird consecutive year of 10% or greater sales growth. The number of Biopharmadevelopment projects increased 53% in 2005 but this achievement was overshadowedby the continuing challenge to restore profitability to the business and manageproject timing. In the Human Health segment, a record number of new developmentprojects and higher volumes of branded APIs and intermediates were offset bylower volumes and pricing for generic APIs. The following significant events occurred during 2005 which affectedreported results: - A $76,385 goodwill impairment and a $30,792 charge to reduce the carrying value of long-lived assets were recorded in operating expenses and a tax benefit of $1,673 related to the long-lived asset impairment charge was recorded within the provision for income taxes. The goodwill and asset impairments were recorded as the result of lower long-term profitability projections for the Biopharma segment and two small European reporting units in the Human Health segment. - A $16,926 valuation allowance recorded within the income tax provision to write down the carrying value of certain U.S. tax assets that had previously been preserved by tax strategies. The valuation allowance results from the Company's recent history of domestic losses and its short-term projections for continued domestic losses. - A $4,223 charge recorded within administrative expenses primarily due to the severance agreement with the Company's former CEO. - A tax benefit of $3,329 due to a favorable Swedish court decision. - An environmental charge of $1,300 for the expected cost of environmental remediation of a former site. Sales in 2005 increased 2.9% to $451,986, including a 0.4% unfavorableimpact resulting from foreign currency, from $439,115 in 2004 due to highersales in the Bioproducts and Human Health segments partially offset by lowersales in the Biopharma segment. Gross margins in 2005 decreased to 35.7% from 38.9% in 2004 due to lowerBioproducts margins resulting from increased production labor to support currentand future activity levels, lower Biopharma margins caused by higher fixed plantcosts and adverse product mix and lower Human Health margins due to unfavorableabsorption and lower pricing. Foreign currency unfavorably impacted gross marginby 0.1 percentage point in 2005. The Company recorded tax expense of $23,822 in 2005 compared to $14,461 in2004. The tax rate in 2005 was (27.5)% compared to (126.5)% in 2004. The taxrate variations result from valuation allowances recorded in 2005 on the taxbenefit from pre-tax losses in the U.S. and Ireland due to the Company's recenthistory of losses in these jurisdictions. The 2005 tax expense also includes aSwedish tax benefit of $3,329 resulting from a favorable court decision and abenefit from the settlement of interest rate swaps previously deferred inaccumulated other comprehensive income of $2,368. The Company reported a net loss of $110,458, or $4.18 per diluted share in2005, compared to a net loss of $26,870, or $1.03 per diluted share, in 2004. ---------------(dollars in thousands, except share data) 24 CRITICAL ACCOUNTING POLICIES The Company's critical accounting policies are those that require the mostsubjective or complex judgments, often as a result of the need to make estimatesabout the effect of matters that are inherently uncertain. The Company bases itsestimates on historical experience and on other various assumptions that aredeemed reasonable by management under each applicable circumstance. Actualresults or amounts could differ from estimates and the differences could have amaterial impact on the consolidated financial statements. A discussion of theCompany's critical accounting policies, the underlying judgments anduncertainties affecting their application and the likelihood that materiallydifferent amounts would be reported under different conditions or usingdifferent assumptions, is as follows: Revenue Recognition Revenues in the Bioproducts and Human Health segments are generallyrecognized when title to products and risk of loss are transferred to customers.Additional conditions for recognition of revenue are that collection of salesproceeds is reasonably assured and the Company has no further performanceobligations. Sales terms to certain customers include remittance of discounts if certainconditions are met. Additionally, sales are generally made with a limited rightof return under certain conditions. The Company estimates these rebates andestimated returns at the time of sale based on the terms of agreements withcustomers and historical experience and recognizes revenue net of theseestimated costs which are classified as allowances and rebates. Some contracts in the Bioproducts and Biopharma segments are based on timeand materials and revenue for those are recognized as services are performed.For contracts that contain milestone based payments the Company utilizes theEITF-91-6 "Revenue Recognition of Long-term Power Sales Contracts" model forrecording revenue. Under this method, revenue is based on the cost of efforts(since contract commencement) up to the reporting date, divided by the totalestimated contractual cost (from the contract commencement to the end of thedevelopment arrangement), multiplied by the total expected contractual paymentsunder the arrangement. However, revenue is limited to the amount ofnonrefundable cash payments received or contractually receivable at thereporting date. In each of the segments the Company has certain contracts that containmultiple deliverables. These deliverables often include process developmentservices and commercial production. The Company follows the guidance containedin EITF 00-21 "Accounting for Revenue Arrangements with Multiple Deliverables".Revenue for each element is recognized when delivered to the customer based onthe fair value of the element as determined based on sales price when soldseparately. Amounts billed in advance are recorded as deferred revenue within accruedliabilities on the balance sheet. Asset Valuations and Review for Potential Impairments In accordance with FAS 144, our review of long-lived assets, principallyfixed assets and other amortizable intangibles, requires us to estimate theundiscounted future cash flows generated from these assets whenever events orchanges in circumstances indicate that the carrying value may not be fullyrecoverable. If undiscounted cash flows are less than carrying value, thelong-lived assets are written down to fair value. Our review of the carrying value of goodwill and indefinite livedintangibles is done annually or whenever events or changes in circumstancesindicate that the carrying value may not be fully recoverable in accordance withFAS 142 utilizing a two-step process. In the first step, the fair value of thereporting units is determined using a discounted cash flow model and compared tothe carrying value. If such analysis indicates that impairment may exist, wethen estimate the fair value of the other assets and liabilities utilizingappraisals and discounted cash flow analyses to calculate an impairment charge. ---------------(dollars in thousands, except share data) 25 The determination of fair value for both FAS 144 and FAS 142 is judgmentalin nature and involves the use of significant estimates and assumptions,including projected future cash flows primarily based on operating plans,discount rates, determination of appropriate market comparables and perpetualgrowth rates. These estimates and assumptions could have a significant impact onwhether or not an impairment charge is recognized and the magnitude of any suchcharge. Environmental and Litigation Contingencies The Company periodically assesses the potential liabilities related to anylawsuits or claims brought against us. See Note #19 in the accompanyingfinancial statements for a discussion of our current environmental andlitigation matters, reserves recorded and our position with respect to anyrelated uncertainties. While it is typically very difficult to determine thetiming and ultimate outcome of these actions, the Company uses its best judgmentto determine if it is probable that the Company will incur an expense related toa settlement for such matters and whether a reasonable estimation of suchprobable loss, if any, can be made. If probable and estimable, the Companyaccrues for the costs of clean-up, settlements and legal fees. If the aggregateamount of the liability and the timing of the payment is fixed or reasonablydeterminable, the Company discounts the amount to reflect the time value ofmoney. Given the inherent uncertainty related to the eventual outcome oflitigation and environmental matters, it is possible that all or some of thesematters may be resolved for amounts materially different from any provisionsthat the Company may have made with respect to their resolution. Income Taxes The Company applies an asset and liability approach to accounting forincome taxes. Deferred tax assets and liabilities are recognized for theexpected future tax consequences of temporary differences between the financialstatement and tax basis of assets and liabilities using enacted tax rates ineffect for the year in which the differences are expected to reverse. Therecoverability of deferred tax assets is dependent upon the Company's assessmentthat it is more likely than not that sufficient future taxable income will begenerated in the relevant tax jurisdiction to utilize the deferred tax asset. Inthe event the Company determines that future taxable income will not besufficient to utilize the deferred tax asset, a valuation allowance is recorded.The Company's valuation allowances primarily relate to net operating losscarryforwards, foreign tax credits, and alternative minimum tax credits in theU.S., where profitability is uncertain and net operating loss carryforwards incertain state and foreign jurisdictions with little or no history of generatingtaxable income or where future profitability is uncertain. Employee Benefit Plans The Company provides a range of benefits to employees and retiredemployees, including pensions, post-retirement, post employment and health carebenefits. The Company records annual amounts relating to these plans based oncalculations, which include various actuarial assumptions, including discountrates, assumed rates of return, compensation increases, turnover rates, andhealth care cost trend rates. The Company reviews its actuarial assumptions onan annual basis and makes modifications to the assumptions based on currentrates and trends when it is deemed appropriate to do so. The effect of themodifications is generally recorded and amortized over future periods. TheCompany believes that the assumptions utilized for recording obligations underits plans are reasonable. The discount rate used to measure pension liabilities and costs is selectedby projecting cash flows associated with plan obligations which were matched toa yield curve of high quality bonds. The Company then selected the single ratethat produces the same present value as if each cash flow were discounted by thecorresponding spot rate on the yield curve. ---------------(dollars in thousands, except share data) 26 RESULTS OF OPERATIONS The following table sets forth, for the periods indicated, certain itemsfrom the selected consolidated financial information as a percentage of grosssales: YEARS ENDED DECEMBER 31, -------------------------- 2005 2004 2003 ------ ------ ------ Gross sales....................................... 100.0% 100.0% 100.0%Net revenues...................................... 100.7 101.0 101.2Gross profit...................................... 35.7 38.9 40.0Selling, general and administrative expenses...... 23.9 23.4 23.4Research and development expenses................. 4.9 4.5 4.2Impairment and other charges...................... 23.7 11.1 2.8Operating (loss)/profit........................... (16.8) (0.1) 9.6Interest expense, net............................. 2.4 2.5 2.9Provision for income taxes........................ 5.3 3.3 6.6(Loss)/income from continuing operations.......... (24.4) (5.9) 0.1Loss on discontinued operations................... -- (0.2) (13.4)Net loss.......................................... (24.4) (6.1) (13.3) The following tables show the gross sales of the Company's three segments,in dollars and as a percentage of the Company's total gross sales for the yearsended December 31, 2005, 2004 and 2003, as well as the gross profit by productsegment for 2005 and 2004. YEARS ENDED DECEMBER 31, -------------------------------- 2005 2004 2003 -------- -------- -------- GROSS SALES Bioproducts............................................ $149,498 $136,108 $119,298 Bioproducts............................................ $149,498 $136,108 $119,298 Biopharma.............................................. 41,698 43,270 44,128 Human Health........................................... 260,790 259,737 242,165 -------- -------- --------Total Gross Sales........................................ $451,986 $439,115 $405,591 ======== ======== ========Total Net Revenues....................................... $455,097 $443,657 $410,644 ======== ======== ========Total Gross Profit....................................... $161,337 $170,740 $162,406 ======== ======== ========GROSS SALES DISTRIBUTION Bioproducts............................................ 33.1% 31.0% 29.4% Biopharma.............................................. 9.2 9.9 10.9 Human Health........................................... 57.7 59.1 59.7 -------- -------- --------Total Gross Sales Distribution........................... 100.0% 100.0% 100.0% ======== ======== ======== 2005-2004 GROSS SALES & GROSS PROFIT BY PRODUCT SEGMENT 2005 2004 ------------------------------ ------------------------------ GROSS GROSS GROSS GROSS GROSS GROSS SALES PROFIT PROFIT % SALES PROFIT PROFIT % -------- -------- -------- -------- -------- -------- Bioproducts...................... $149,498 $ 77,908 52.1% $136,108 $ 74,930 55.1%Biopharma........................ 41,698 (3,811) (9.1) 43,270 4,880 11.3Human Health..................... 260,790 87,240 33.5 259,737 90,930 35.0 -------- -------- -------- --------Total............................ $451,986 $161,337 35.7% $439,115 $170,740 38.9% ======== ======== ======== ======== ---------------(dollars in thousands, except share data) 27 2005 COMPARED TO 2004 Gross sales for 2005 increased 2.9% to $451,986 from $439,115 in 2004.Sales in the Bioproducts and Human Health segments increased compared to 2004,more than offsetting the decrease in the Biopharma segment. Gross sales wereunfavorably impacted 0.4% due to exchange rates reflecting strength in the U.S.dollar primarily versus the Euro and Swedish krona. Gross profit in 2005 was $161,337 compared to $170,740 in 2004. Grossmargin in 2005 decreased to 35.7% from 38.9% in 2004, reflecting lower marginsin all segments. The following table shows gross sales by geographic area for the yearsended December 31, 2005 and 2004: 2005 2004 -------- -------- North America............................................... $204,421 $213,668Europe...................................................... 219,728 198,540Asia........................................................ 18,927 17,723Other....................................................... 8,910 9,184 -------- --------Total....................................................... $451,986 $439,115 ======== ======== The Bioproducts Segment gross sales in 2005 of $149,498 were $13,390 or9.8% above 2004. Bioproducts sales were unfavorably impacted 0.1% due toexchange rates reflecting a stronger U.S. dollar. The increased sales, beforethe impact of foreign currency, are primarily due to higher sales in both theresearch products and therapeutics applications categories including cellbiology, cell therapy, rapid microbial detection, testing services, serum, mediaand assays due to stronger demand, higher pricing and the addition of newcustomers. Bioproducts gross margins decreased to 52.1% in 2005 from 55.1% in 2004 dueprimarily to increased production labor to support current and future activitylevels and higher utilities partially offset by higher sales volume andincreased pricing in most product categories. The Biopharma Segment gross sales in 2005 of $41,698 were $1,572 or 3.6%below 2004 reflecting lower suite and process development revenues partiallyoffset by higher reimbursed materials and labor fees. Foreign currency had noimpact on Biopharma sales. Biopharma gross margins decreased to (9.1%) in 2005 from 11.3% in 2004 dueprimarily to a higher percentage of revenues from reimbursed materials whichhave virtually no profit margin, lower revenues and higher production costs. The Human Health Segment gross sales in 2005 of $260,790 increased $1,053or 0.4% above 2004. Human Health sales were unfavorably impacted 0.7% due toexchange rates reflecting a stronger U.S. dollar. The increase in sales is duemainly to stronger demand of a gastrointestinal API, nicotine polacrilex resin(used in smoking cessation products), a pharmaceutical intermediate used forend-stage kidney treatment and higher sales of a diuretic API. These sales werepartially offset by lower sales of certain central nervous system andcardiovascular APIs due to increasing competition resulting in lower volumessold and lower sales of a gastrointestinal API and crop additive. Human Health gross margins decreased to 33.5% in 2005 from 35.0% in 2004due primarily to higher production costs, lower pricing on certain APIs, andunfavorable impact of foreign currency partially offset by favorable product mixand increased sales volume. Selling, general and administrative expenses of $107,610 or 23.9% of grosssales in 2005 increased from $102,769 or 23.4% in 2004. Sales and marketingexpenses increased primarily due to additional sales and marketing personnelwithin the Bioproducts segment. Higher administrative costs are primarily due toexecutive severance, increased personnel and higher environmental costs relatedto a former site, partially offset by lower valuation of stock appreciationrights and legal expenses. ---------------(dollars in thousands, except share data) 28 Research and development expenses of $22,331 were 4.9% of gross sales in2005, compared to $19,659 or 4.5% of gross sales in 2004. The increase primarilyreflects investments in new product technologies for pathogen testing and highercustom development costs. During the fourth quarter of 2005 the Company performed an impairmentassessment of long-lived assets, which includes amortizable intangible assets aswell as property, plant and equipment. As a result of lower long-termprofitability projections, the Company determined that the sum of theundiscounted expected future operating cash flows were less than the carryingvalue of the related assets. The Company recorded an impairment charge forlong-lived assets in the fourth quarter of $14,433 in the Biopharma segment and$16,359 in the Human Health segment to write-down these assets to their fairvalue as determined primarily based on appraisals. During the performance of theannual goodwill impairment test in the fourth quarter of 2005, the Companydetermined that the goodwill of four reporting units was impaired utilizing thesteps as outlined in Critical Accounting Policies, "Asset Valuation and Reviewfor Potential Impairment." The goodwill impairment charge recorded in the fourthquarter of 2005 was $67,950 in the Biopharma segment and $8,435 in the HumanHealth segment. The goodwill impairment charge is primarily due to lower longterm profitability projections due to current market factors. In the thirdquarter of 2004, the Company recorded an impairment charge of $48,720 to reducethe carrying value of goodwill in the Biopharma segment. Operating loss in 2005 was $75,781 compared to $408 in 2004. The resultsreflect lower gross margins in all segments and higher operating expenses. Inaddition to the impairment charges, 2005 results include a charge for executiveseverance of $4,223 and a $1,300 charge for an environmental remediation reserveat a former site. The 2004 results include the $48,720 charge for the goodwillimpairment discussed above, $2,863 of income due to early termination of aBioproducts customer contract and an unrelated $1,000 charge associated with thereorganization and related workforce reduction at a European facility. Net interest expense of $10,815 in 2005 decreased $135 from 2004. Averagedebt balance, year over year, was slightly lower in 2005, while the averageinterest rate was 5.5% in 2005 and 2004. The Company recorded tax expense of $23,822 in 2005 compared to $14,461 in2004. The tax expense for 2005 includes a $16,926 valuation allowance to writedown the carrying value of certain U.S. tax assets that had been previouslypreserved by tax strategies. This valuation allowance results from the Company'srecent history of domestic losses and its short-term projections for continueddomestic losses. Since 2003, the Company has maintained a full valuationallowance on the tax benefits arising from domestic pre-tax losses. The Companyhas recorded a valuation allowance of $120,022 on certain foreign and domesticnet deferred tax assets as of December 31, 2005. The majority of the 2004 taxexpense represents taxes on international profits. The Company will continue to record a full valuation allowance on itsdomestic net deferred tax assets and indefinite lived intangibles until anappropriate level of domestic profitability is sustained or tax strategies canbe developed that would enable the Company to conclude that it is more likelythan 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, incometax benefits associated with those losses will not be recognized and, therefore,those losses would not be reduced by such income tax benefits. The carryforwardperiods for foreign tax credits, research and experimentation tax credits, netoperating losses, and the federal alternative minimum tax credits are 10 years,20 years, 20 years and an indefinite period, respectively. As such, improvementsin domestic pre-tax income in the future may result in these tax benefitsultimately being realized. However, there is no assurance that such improvementswill be achieved. Loss from continuing operations in 2005 was $110,458, or $4.18 per dilutedshare, versus $25,892, or $0.99 per diluted share in 2004. 2004 COMPARED TO 2003 Gross sales for 2004 increased 8.3% to $439,115 from $405,591 in 2003.Sales in the Bioproducts and Human Health segments increased compared to 2003more than offsetting the decrease in the Biopharma ---------------(dollars in thousands, except share data) 29 segment. Gross sales were favorably impacted 4.5% due to the exchange ratesreflecting the weakness in the U.S. dollar primarily versus the Euro and Swedishkrona. Gross profit in 2004 was $170,740 compared to $162,406 in 2003. Grossmargin in 2004 decreased to 38.9% from 40.0% in 2003, reflecting lower marginsin the Biopharma and Human Health segments partially offset by higher margins inthe Bioproducts segment. The following table shows gross sales by geographic area for the yearsended December 31, 2004 and 2003: 2004 2003 -------- -------- North America............................................... $213,668 $206,079Europe...................................................... 198,540 173,035Asia........................................................ 17,723 16,401Other....................................................... 9,184 10,076 -------- --------Total....................................................... $439,115 $405,591 ======== ======== The Bioproducts Segment gross sales in 2004 of $136,108 were $16,810 or14.1% above 2003. Bioproducts sales were favorably impacted 4.0% due to exchangerates reflecting a weaker U.S. dollar. The increased sales before the impact offoreign currency are primarily due to higher sales across most productcategories including research products, endotoxin detection products,bioservices sales and process development products due to stronger demand,higher pricing, new products and customers and investments in sales andmarketing. These higher sales were partially offset by lower sales inbiotherapeutic serum mainly due to timing of shipments and stronger sales in2003. The Bioproducts segment gross margins increased primarily due to highersales volume, increased pricing in most product categories, lower bad debtreserves due to favorable collections and favorable impact of foreign currencypartly offset by higher costs for raw materials. The Biopharma Segment gross sales in 2004 of $43,270 were $858 or 1.9%below 2003. The sales decrease primarily reflects reduced billings in ourbiopharmaceutical manufacturing business driven by the completion or timing ofprojects and a change in contract terms from time and material to milestonepayments. This decrease was partially offset by higher reimbursable materialsrevenue due to timing of current projects. Foreign currency had no impact onBiopharma sales. The Biopharma segment gross margins were down significantly compared to theprior year due to higher production costs, increased fixed costs associated withthe addition of the 2800 liter fermentation suite (a new suite which willincrease the production capabilities in the facility) and higher reimbursablematerials revenue which has very low margins. The Human Health Segment gross sales in 2004 of $259,737 were $17,572 or7.3% above 2003. Human Health sales were favorably impacted 5.6% due to exchangerates reflecting a weaker U.S. dollar. Excluding the currency impact, theincrease in sales is due mainly to higher sales of custom development products,a pharmaceutical intermediate used for end-stage kidney treatment, higher salesof cardiovascular, gastrointestinal and Alzheimer treatment APIs, and highersales of amphetamines due to higher volumes. These sales were partially offsetby lower sales of central nervous system APIs due to increasing competitionresulting in lower volumes sold. The Human Health segment gross margins decreased due to pricing pressureson APIs and other fine custom chemicals, unfavorable impact of foreign currencyand higher production costs partially offset by increased sales volume andfavorable product mix. Selling, general and administrative expenses of $102,769 or 23.4% as apercentage of gross sales in 2004 increased from $95,117 or 23.4% in 2003. Salesand marketing expenses increased primarily due to additional ---------------(dollars in thousands, except share data) 30 sales and marketing personnel in our Human Health and Bioproducts segments andthe impact of foreign currency exchange. Higher administrative costs areprimarily due to the impact of currency translation due to the weaker U.S.dollar, regulatory compliance costs associated with the Sarbanes-Oxley Act andhigher information technology, legal and environmental costs, partially offsetby lower medical claims, the vesting of stock appreciation rights in the fourthquarter 2003 and lower pension expense. Research and development expenses of $19,659 were 4.5% of gross sales in2004, compared to $17,123 or 4.2% of gross sales in 2003. The increase primarilyreflects investments in new product technologies for pathogen testing, highercustom development costs and the impact of foreign currency exchange partiallyoffset by decreased spending for endotoxin detection technologies. The 2004 results include the $48,720 charge for the goodwill impairmentdiscussed above, $2,863 of income due to early termination of a Bioproductscustomer contract and an unrelated $1,000 charge associated with thereorganization and related workforce reduction at a European facility. The 2003 results include a charge of $11,342 (discounted to the presentvalue of the five year pay-out) related to an agreement reached with MylanLaboratories under which Cambrex will contribute $12,415 to the settlement ofconsolidated litigation brought by a class of direct purchasers. In exchange,Cambrex received from Mylan a release and full indemnity against future costs orliabilities in related litigation brought by the purchasers, as well aspotential future claims related to this matter. The operating loss in 2004 was $408 compared to income of $38,824 in 2003.The results reflect lower gross margins in the Biopharma and Human Healthsegments partially offset by higher margins in the Bioproducts segment, the$48,720 charge for the goodwill impairment discussed above and higher operatingexpenses. The 2003 operating profit includes the $11,342 charge for the Mylansettlement discussed above. Net interest expense of $10,950 in 2004 decreased $890 from 2003. The 2004net interest expense was reduced by interest income accrued on an income taxrefund, while in 2003 interest expense also included a write off of deferredcharges in 2003 associated with the 364-day renewable senior revolving creditfacility that was not renewed. Average debt balance, year over year, wasvirtually unchanged, while the average interest rate, net of the items discussedabove, was 5.5% in 2004 versus 4.8% in 2003. The higher average rate in 2004 wasdue to the full year impact of $100 million of privately placed long-term debt,which carries a fixed rate that is currently higher than the Company's revolvingcredit facility and the impact of slightly higher variable interest rates on therevolver. The Company recorded tax expense of $14,461 in 2004 compared to $26,600 in2003. During 2003, the Company concluded that $21,487 of domestic deferred taxassets were deemed unlikely to be realized, and as such, valuation allowancesfor this amount were recorded against these assets. Since that time, the Companyhas maintained a full valuation allowance on any domestic net deferred taxassets created since 2003 and as such no tax benefit has been recognized fordomestic pre-tax losses. Accordingly, for the year ended December 31, 2004 avaluation allowance of $24,047 was recorded against the Company's domestic netdeferred tax assets, including amounts related to the goodwill impairmentcharge. The majority of the 2004 tax expense represents taxes on internationalprofits. The loss from continuing operations in 2004 was $25,892, or $0.99 perdiluted share versus income of $245, or $0.01 per diluted share in 2003. The2004 loss from continuing operations includes a goodwill impairment charge of$48,720 discussed above. The 2003 income from continuing operations includes acharge of approximately $21,487 for the deferred tax valuation allowance and an$11,342 charge for the Mylan settlement both discussed above. LIQUIDITY AND CAPITAL RESOURCES During 2005 cash and cash equivalents on hand decreased $45,600 to $45,932.The stronger U.S. dollar negatively impacted the translated cash balances by$9,861. During 2005, the Company generated cash flows from operations totaling$42,435, a decrease of $6,298 versus the same period a year ago. The decrease incash---------------(dollars in thousands, except share data) 31 flows generated from operations in 2005 versus 2004 is due primarily to adecrease in net income, excluding the impairment and tax valuation allowancecharges recorded against certain deferred tax assets, an increase in inventoriesresulting from increased production based on forecasted requirements and anincrease in accounts receivable due to higher sales volume in the fourth quarterof 2005 versus the fourth quarter of 2004. These decreases were partially offsetby the timing of foreign tax payments and of payments made to RutherfordChemicals in 2004. Capital expenditures from continuing operations were $40,307 in 2005 ascompared to $39,480 in 2004. Part of the funds in 2005 were used for capitalimprovements to existing facilities, a new warehouse and purification lab at aHuman Health facility, cell therapy manufacturing capabilities at a Bioproductsfacility and suite improvements at Biopharma manufacturing plants. In 2004, thefunds were primarily used for suite improvements at a Biopharma manufacturingplant, cell therapy manufacturing capabilities, upgrades to powder mediafacilities and a large scale media preparation suite at our Bioproductsfacilities and new research and development labs at a Human Health facility. During 2005, the Company repatriated approximately $92,000 as a dividendfrom its foreign subsidiaries pursuant to the American Jobs Creation Act of2004, approximately $36,000 of which was from proceeds of a European-based loan,and the balance from foreign subsidiary cash on hand. The Company used therepatriated cash primarily to pay down domestic debt. Cash flows used in financing activities in 2005 of $38,535 include a netreduction of debt of $39,210 and dividends paid of $3,176 partially offset byproceeds from stock options exercised of $3,906. In 2004 the Company increasedborrowings by $13,510, generated proceeds from the exercise of stock options of$6,284 and paid dividends of $3,113. In October 2005, the Company entered into a $277,500 five-year SyndicatedSenior Revolving Credit Facility ("5-Year Agreement"), which expires in October2010. The 5-Year Agreement allows the Company to choose among various interestrate options and to specify the portion of the borrowing to be covered byspecific interest rates. Under the 5-Year Agreement the interest rate optionsavailable to the Company are the following: (i) LIBOR plus an applicable marginthat ranges from .475% to .85%, (ii) higher of U.S. Prime Rate or Federal FundsRate plus .5% or (iii) Money Market rate as quoted by the Administrative Agentof the Agreement. The applicable margin is based upon the ratio of consolidatedfunded indebtedness to consolidated earnings before interest, taxes,depreciation and amortization ("EBITDA") (as defined in the 5-Year Agreement,"Leverage Rates"). The Company also pays a facility fee between .15% to .275% onthe entire credit facility which is based upon the leverage ratio. The 5-YearAgreement is subject to financial covenants requiring the Company to maintaincertain levels of interest coverage ratio, leverage ratios and limitations onindebtedness. The Company complied with all covenants in this 5-Year Agreementduring 2005. The Company is required to provide audited financial statements toits lenders under the 5-Year Agreement within 100 days after its fiscalyear-end. The Company has received a waiver from its lenders through June 9,2006 relating to this requirement for the year ended December 31, 2005. The 5-Year Agreement is collateralized by dividend and distribution rightsassociated 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 theCompany's non-U.S. operating subsidiaries. As of December 31, 2005, there was $81,943 outstanding and $195,557 undrawnunder the 5-Year Agreement. Of the undrawn amount, $106,358 was available to beborrowed as of December 31, 2005 due to limits established in the 5-YearAgreement. As of December 31, 2005, the Company had outstanding two Senior notes, a$75,000 7-year note due in June 2010 with a rate of 5.31%, and a $25,000 10-yearnote due in October 2013 with an annual rate of 7.05%. These Senior notes rankedequal with the Company's 5-Year Agreement. On January 27, 2006, the Companyelected to prepay these Senior notes with funds provided by borrowing under the5-Year Agreement. An expense of $5,272 will be recorded during the first quarterof 2006 related to a make whole payment of $4,809---------------(dollars in thousands, except share data) 32 paid to the Senior note holders concurrent with the January 27, 2006 payment,and the related acceleration of $463 of unamortized origination fees. Theundrawn amount under the 5-Year Agreement was $95,643 as of January 27, 2006, ofwhich the entire amount was available to be borrowed at that time. The 2005 and 2004 weighted average interest rate for long-term bank debtwas 5.5%. CONTRACTUAL OBLIGATIONS At December 31, 2005, our contractual obligations with initial or remainingterms in excess of one year were as follows: TOTAL 2006 2007 2008 2009 2010+ -------- ------- ------- ------- ------- -------- Long Term Debt, including Capital Leases............. $188,290 $ 1,471 $ 1,731 $ 1,502 $ 1,595 $181,991Interest on Debt*.... 49,581 10,630 10,519 10,519 10,472 7,441Operating Leases..... 23,072 4,607 4,418 3,917 3,630 6,500Purchase Obligations........ 13,417 7,590 1,857 1,015 985 1,970Mylan Settlement..... 4,800 1,600 1,600 1,600 -- -- -------- ------- ------- ------- ------- --------Contractual Cash Obligations........ $279,160 $25,898 $20,125 $18,553 $16,682 $197,902 ======== ======= ======= ======= ======= ======== --------------- * Amounts include fixed interest under Senior Notes which was refinanced in January 2006 under the 5-Year Agreement at a variable rate. See Notes #9, #10 and #18 for additional information regarding our debt andother commitments. Management believes that existing sources of capital, together with cashflows from operations, will be sufficient to meet foreseeable cash flowrequirements. A key to our access to liquidity is the maintenance of ourlong-term credit ratings and ability to meet debt covenants to maintain certainlevels of an interest coverage ratio and leverage ratio. The Company met allcovenants related to the 5-Year Agreement during 2005. Any events that changethe status of our ability to meet debt covenants or maintain our credit ratingscould adversely impact our ability to fund operations. Our forecasted cash flow from future operations may be adversely affectedby various factors including, but not limited to, declines in customer demand,increased competition, the deterioration in general economic and businessconditions, as well as other factors. See the Risk Factors section of thisdocument for further explanation of factors that may negatively impact our cashflows. Any change in the current status of these factors could adversely impactthe Company's ability to fund operating cash flow requirements. MARKET RISKS In the normal course of business, the Company uses a variety of techniquesand instruments, including derivatives, as part of its overall risk managementstrategy to lower its exposure to market risks arising from adverse changes ininterest rates and foreign currency exchange rates. Currency Risk Management The Company's primary market risk relates to exposure to foreign currencyexchange rate fluctuations on transactions entered into by internationaloperations which are primarily denominated in the U.S. dollar, Euro, Swedishkrona and British pound sterling. The Company currently uses foreign currencyexchange forward contracts to mitigate the effect of short-term foreign exchangerate movements on the Company's operating results. The notional amount of thesecontracts as of December 31, 2005 was $16,741. Unrealized foreign exchangecontract losses do not subject the Company's actual results to risk as gains orlosses on these contracts are undertaken to offset gains or losses on thetransactions that are hedged.---------------(dollars in thousands, except share data) 33 With respect to the contracts outstanding at December 31, 2005, a 10%fluctuation of the local currency over a one-year period would cause $1,690pre-tax earnings to be at risk. This is based on the notional amount of thecontracts, adjusted for unrealized gains and losses, of $16,906. Thesecalculations do not include the impact of exchange gains or losses on theunderlying positions that would offset the gains and losses of the derivativeinstruments. Interest Rate Management As of December 31, 2005, the Company had $100,000 in fixed interestborrowings (privately placed Notes) and the rest of its borrowings of $81,943were based on short-term variable interest rates in the new 5-Year Agreement. With the repayment of the privately placed Notes in January 2006, theCompany's entire bank debt is based on short-term interest rates in the 5-YearAgreement. CONTINGENCIES The Company is subject to various investigations, claims and legalproceedings covering a wide range of matters that arise in the ordinary courseof its business activities. The Company continually assesses all known facts andcircumstances as they pertain to all legal and environmental matters andevaluates the need for reserves and disclosures as deemed necessary based onthese facts and circumstances and as such facts and circumstances develop. Environmental In connection with laws and regulations pertaining to the protection of theenvironment, the Company and/or its subsidiaries is a party to severalenvironmental proceedings and remediation investigations and cleanups and, alongwith other companies, has been named a potentially responsible party for certainwaste disposal sites ("Superfund sites"). Additionally, as discussed in the"Sale of Rutherford Chemicals" section of this Note, the Company has retainedthe liability for certain environmental proceedings, associated with theRutherford Chemicals business. Each of these matters is subject to variousuncertainties, and it is possible that some of these matters will be decidedunfavorably against the Company. The resolution of such matters often spansseveral years and frequently involves regulatory oversight or adjudication.Additionally, many remediation requirements are not fixed and are likely to beaffected 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 itsliability, the Company has accrued for the estimated costs associated with thestudy and remediation of Superfund sites not owned by the Company and theCompany's current and former operating sites. These accruals were $6,413 and$6,247 at December 31, 2005 and December 31, 2004, respectively. The increase inthe accrual is primarily due to estimated remediation costs at the Clifton site(see below) based on information developed during the third quarter of 2005 of$1,300 offset by a decrease in a reserve at an international site of $207,currency fluctuation of $581 and payments of $413. Based upon currentlyavailable information and analysis, the Company's current accrual representsmanagement's best estimate of what it believes are the probable and estimablecosts associated with environmental proceedings including amounts for legal andinvestigation fees where remediation costs may not be estimable at the reportingdate. As a result of the sale of the Bayonne, New Jersey facility (see "Sale ofRutherford Chemicals" section of this Note), an obligation to investigate siteconditions and conduct required remediation under the New Jersey Industrial SiteRecovery Act was triggered and the Company has retained the responsibility forsuch obligation. The Company completed a Preliminary Assessment of the site andsubmitted the preliminary assessment to the New Jersey Department ofEnvironmental Protection ("NJDEP"). The preliminary assessment identifiedpotential areas of concern based on historical operations and sampling of suchareas---------------(dollars in thousands, except share data) 34 commenced. The Company has completed a second phase of sampling and determinedthat a third phase of sampling is necessary to determine the extent ofcontamination and any necessary remediation. The results of the completed andproposed sampling, and any additional sampling deemed necessary, will be used todevelop an estimate of the Company's future liability for remediation costs, ifrequired. The Company submitted its plan for the third phase of sampling to theNJDEP during the fourth quarter. The sampling will commence in the next fewmonths. In March 2000, the Company completed the acquisition of the CambrexProfarmaco Landen facility in Belgium. At the time of acquisition, Cambrex wasaware of certain site contamination and recorded a reserve for the estimatedcosts of remediation. This property has been the subject of an extensiveon-going environmental investigation. The investigation has been completed andthe Company concluded that no change to the reserve was necessary based on theinformation developed through the investigation. The health risk assessmentrelated to the site contamination is on-going, and is expected to be completedin the near future, and the results of such assessment may affect the reserves. The Company's Cosan subsidiary conducted manufacturing operations inClifton, New Jersey from 1968 until 1979. Prior to the acquisition by theCompany, the operations were moved to another location and thereafter Cambrexpurchased the business. In 1997, Cosan entered into an Administrative ConsentOrder with the NJDEP. Under the Administrative Consent Order, Cosan is requiredto complete an investigation of the extent of the contamination related to theClifton site and conduct remediation as may be necessary. During the thirdquarter 2005, the Company completed the investigation related to the Cliftonsite, which extends to adjacent properties. The results of the investigationcaused the Company to increase its related reserves by $1,300. The Companysubmitted the results of the investigation and proposed remedial action plan tothe NJDEP. The increase in the reserves is based on the proposed remedial actionplan. In February 2005, the New Jersey Federal District Court ruled that alawsuit claiming property damages against Cosan by the owners of contaminatedproperty adjacent to the Clifton location could be placed on the activecalendar. Discovery in this matter is ongoing. The outcome of this matter couldalso affect the reserves. In mid-2004 the USEPA conducted a hazardous waste inspection of theCompany's Charles City facility. Thereafter, the USEPA notified the facility ofseveral alleged violations of the hazardous waste laws related to management ofhazardous waste and requested additional information related to the allegedviolations. The Company responded and provided information which questioned theconclusion that the violations occurred. Nevertheless, the USEPA concluded thatseveral violations existed at the time of the inspection, and on October 3, 2005issued the facility an order and penalty assessment in the amount of $189. OnOctober 31, 2005 the Company filed a request for a hearing and an informalconference to discuss settlement. Settlement discussions have been on-going aswe prepare for the hearing. In March 2006, the Company received notice from the United StatesEnvironmental Protection Agency ("USEPA") that two former operating subsidiariesare considered potentially responsible parties ("PRPs") at the Berry's CreekSuperfund Site, Bergen County, New Jersey. Our operating companies are amongmany other PRPs that were listed in the notice. Pursuant to the notice the PRPshave been asked to perform a remedial investigation and feasibility study of theBerry's Creek Site. The Company has met with the other PRPs. Both operatingcompanies joined the groups of PRPs and filed a joint response to the USEPAagreeing to jointly negotiate to conduct or fund along with other PRPs anappropriate remedial investigation and feasibility study of the Berry's CreekSite. At this time it is too early to predict the extent of any liabilities,consequently we have not recorded any reserves for this matter. The Company is involved in other matters where the range of liability isnot reasonably estimable at this time and it is not determinable wheninformation will become available to provide a basis for recording an accrual,should an accrual be required. If any of the Company's environmental matters areresolved in a more unfavorable manner than presently estimated, these matterseither individually or in the aggregate, could have a material adverse effect onthe Company's financial condition, operating results and cash flows whenresolved in a future reporting period. ---------------(dollars in thousands, except share data) 35 LITIGATION AND OTHER MATTERS Mylan Laboratories In 1998 the Company and its subsidiary Profarmaco S.r.l. (currently knownas Cambrex Profarmaco Milano S.r.l.") ("Profarmaco") were named as defendants(along with Mylan Laboratories, Inc. ("Mylan") and Gyma Laboratories of America,Inc., Profarmaco's distributor in the United States) in a proceeding institutedby the Federal Trade Commission ("FTC") in the United States District Court forthe District of Columbia (the "District Court"). Suits were also commenced byseveral State Attorneys General. The suits alleged violations of the FederalTrade Commission Act arising from exclusive license agreements betweenProfarmaco and Mylan covering two APIs. The FTC and Attorneys' General suitswere settled in February 2001, with Mylan (on its own behalf and on behalf ofProfarmaco and Cambrex) agreeing to pay over $140,000 and with Mylan, Profarmacoand Cambrex agreeing to monitor certain future conduct. The same parties including the Company and Profarmaco have also been namedin purported class action complaints brought by private plaintiffs in variousstate courts on behalf of purchasers of the APIs in generic form, makingallegations similar to those raised in the FTC's complaint and seeking variousforms of relief including treble damages.  In April 2003, Cambrex reached an agreement with Mylan under which Cambrexwould contribute $12,415 to the settlement of litigation brought by a class ofdirect purchasers. In exchange, Cambrex and Profarmaco received from Mylan arelease and full indemnity against future costs or liabilities in relatedlitigation brought by purchasers, as well as potential future claims related tothis matter. In accordance with the agreement $7,615 has been paid throughDecember 31, 2005, with the remaining $4,800 to be paid over the next threeyears. Cambrex recorded an $11,342 charge (discounted to the present value dueto the five year pay-out) in the first quarter of 2003 as a result of thissettlement. As of December 31, 2005 the outstanding balance for this liabilitywas $4,520. Vitamin B-3 In May 1998, the Company's subsidiary, Nepera, which formerly operated theHarriman facility and manufactured and sold niacinamide (Vitamin B-3), receiveda Federal Grand Jury subpoena for the production of documents relating to thepricing and possible customer allocation with regard to that product. In 2000,Nepera reached agreement with the Government as to its alleged role in VitaminB-3 violations from 1992 to 1995. The Canadian government claimed similarviolations. All government suits in the U.S. and Canada have now been concluded. Nepera has been named as a defendant, along with several other companies,in a number of private civil actions brought on behalf of alleged purchasers ofVitamin B-3. The actions seek injunctive relief and unspecified but substantialdamages. All cases have been settled within established reserve amounts.Settlement documents will be finalized and payments will be made during the nextseveral months. The balance of the reserves recorded within accrued liabilitiesrelated to this matter was $1,627 as of December 31, 2005. Litigation in the United States under the U.S. antitrust laws was commencedsome years ago by a group of European purchasers. On motion by the Vitamin B-3defendants, the District Court dismissed the litigation under the long-standingrule that foreign purchasers cannot sue in U.S. courts under U.S. antitruststatutes. Thereafter, the Federal Circuit Court for the District of Columbiareversed the District Court's decision. The Vitamin B-3 defendants, supported bythe U.S. Department of Justice, appealed to the United States Supreme Court andoral arguments were heard on April 29, 2004. In June 2004, the United StatesSupreme Court ruled that foreign purchasers could not sue in U.S. courts underU.S. antitrust statutes if the conduct at issue resulted in purely foreign harm.However, the Court left open potential claims where foreign injuries suffered byforeign plaintiffs were dependent upon domestic harm resulting from conduct thatviolates the U.S. antitrust laws and remanded the matter to the Circuit Courtfor further proceedings. In June 2005, the ---------------(dollars in thousands, except share data) 36 District Court's finding against the plaintiffs was affirmed and the matterdismissed. During the fourth quarter 2005, the United States Supreme Courtdismissed plaintiff's final appeal. This matter can be considered concluded. Sale of Rutherford Chemicals The Company completed the sale of its Rutherford Chemicals business inNovember 2003. Under the agreement for the sale ("Purchase Agreement"), theCompany provided standard representations and warranties and included variouscovenants concerning the business, operations, liabilities and financialcondition of the Rutherford Chemicals business ("Rutherford Business"). Most ofsuch representations and warranties survived for a period of thirty days afterthe preparation of the audited financial statements for year-end 2004 by thepurchasers of the Rutherford Business ("Buyers"). Therefore, claims for breachesof such representations would have to be brought during that time frame. Certainspecified representations, warranties and covenants, such as those relating toemployee benefit matters and certain environmental matters, survive for longerperiods and claims under such representations, warranties and covenants could bebrought during such longer periods. Under the Purchase Agreement, the Companyhas indemnified the Buyer for breaches of representations, warranties andcovenants. Indemnifications for certain but not all representations andwarranties are subject to a deductible of $750 and a cap at 25 percent of thepurchase price. Under the Purchase Agreement, the Company has retained the liabilitiesassociated with existing general litigation matters related to RutherfordChemicals, including the Vitamin B-3 matter as stated above. With respect tocertain pre-closing environmental matters, the Company retains theresponsibility for: (i) certain existing matters including violations,environmental testing for the New York facility incinerator and off-siteliabilities; and (ii) completing the on-going remediation at the New Yorkfacility. Further, as a result of the sale of the Bayonne, New Jersey facilitywithin Rutherford Chemicals, and as discussed in the Environmental Sectionabove, the obligation to investigate site conditions and conduct requiredremediation under the provisions of the New Jersey Industrial Site Recovery Actwas triggered; and the Company has retained the responsibility for completion ofany such investigation and remediation. With respect to all other pre-closingenvironmental liabilities, whether known or unknown, the Buyer is responsiblefor the management of potential future matters; however, the Buyer and theCompany may share the costs of associated remediation with respect to suchpotential future matters, subject to certain limitations defined in theagreement for sale. The Company has accrued for exposures which are deemedprobable and estimable. In March 2005, the Company received a claim from the Buyers claiming breachof certain representations, warranties and covenants contained in the PurchaseAgreement. In April 2005 the Company responded rejecting the claim. Thereafter,the Buyers submitted an amended claim. The amended claim alleges breaches ofrepresentations, warranties and covenants covering each of the five operatingsites sold pursuant to the Purchase Agreement and are related primarily tofacility structures, utilities and equipment and alleges damages of $26,407. Tothe extent the alleged damages arise from breaches of representations andwarranties, the claim would be subject to a cap of between approximately $14,000and $16,250, depending on whether certain contingent payments are made, and issubject to the deductible of $750 which is the responsibility of the Buyers. InMay 2005, the Company responded to the Buyers and rejected the claim entirely.Management currently believes that the foregoing claims are without merit andwill vigorously defend against the claim. As such, the Company has no reservesrelated to this matter. In September 2005, the Company received a request for indemnity ("SeptemberNotice") from the Buyers related to an arbitration claim filed by a RutherfordBusiness customer ("Customer"). The arbitration claim arises from a claimedbreach of a supply agreement that was assigned to and assumed by the Buyerspursuant to the Purchase Agreement. Thereafter, the Company was also served withan arbitration claim by the Customer related to the same matter. In thearbitration claim, the Customer claims $30,000 in damages arising from Buyers'breach of the supply agreement. The Buyers claim that the September Noticeamends the earlier claims that they filed in March and April 2005, as discussedabove, and that the Customer's claimed breach of the supply agreement should betreated as part of a breach of a representation, warranty or---------------(dollars in thousands, except share data) 37 covenant set forth in the earlier notices. The supply agreement was assigned toand assumed by the Buyers, and the Company has now been dismissed from theCustomer's arbitration claim. In October 2005, the Company rejected the Buyers'claim for indemnity under the September Notice in its entirety. In October 2005, the Company received a notice from the Buyers ("OctoberNotice") that summarized the claims previously received in March and April 2005,and included the Buyers' response to the Company's April and May rejection ofthe earlier notices. The October Notice also set forth additional claims forenvironmental matters related to the Rutherford Business that relate toenvironmental matters at each of the five operating sites sold pursuant to thePurchase Agreement. In December 2005 the Buyers added two additionalenvironmental claims related to the former operating sites ("December Notices").The Company has now responded to the October and December Notices disputing theenvironmental claims on various grounds, including that the Company believesmost claims relate to Buyers' obligations under the Purchase Agreement. TheCompany also requested additional information because some environmental claimsmay be covered by sections of the Purchase Agreement where the parties shareliability concerning environmental matters (see above). Management continues itsevaluation of the Buyers' information and is in discussions concerningresolution of the claims. In April 2006, the Company and its Seller subsidiaries received a summonsand complaint (the Complaint) from the Buyers, which was filed in the SupremeCourt of the State of New York, County of New York. The Complaint seeksindemnification, declaratory and injunctive relief for alleged (i) breaches ofpresentations, warranties and covenants covering each of the former operatingsites related to facility structures, utilities and equipment included in theMarch, April and October Notices mentioned above and the allegedly relatedbreach of the Customer Supply Agreement arising from a breach of warranty at theHarriman facility included in September Notice mentioned above (collectivelyEquipment Matters); and (ii) claims related to environmental matters at each ofthe five operating locations, most of which related to the former Harrimanlocation included in the October Notice and December Notices mentioned above(collectively Environmental Matters). The Company continues its evaluation of Buyers' allegations and intends todefend itself against these claims vigorously. The Company continues to believethat the Equipment Matters are without merit. Further, the Company continues tobelieve that based on current information the majority of the claims are eitherBuyers' responsibility or without merit and the remaining are otherwise notreasonably estimable at this time. As such the Company has recorded no reservesfor this matter. Class Action Matter In October 2003, the Company was notified of a securities class actionlawsuit filed against Cambrex and five former and current Company officers. Fiveclass action suits were filed with the New Jersey Federal District Court ("theCourt"). In January 2004, the Court consolidated the cases, designated the leadplaintiff and selected counsel to represent the class. An amended complaint wasfiled in March 2004. The lawsuit has been brought as a class action in the namesof purchasers of the Company's common stock from October 21, 1998 through July25, 2003. The complaint alleges that the Company failed to disclose in timelyfashion the January 2003 accounting restatement and subsequent SECinvestigation, as well as the loss of a significant contract at the Baltimorefacility. The Company filed a Motion to Dismiss in May 2004. Thereafter the plaintifffiled a reply brief. In October 2005, the Court denied the Company's Motion toDismiss against the Company and two current Company officers. The Company hasreached its deductible under its insurance policy and further costs, expensesand any settlement is expected to be paid by the Company's insurers. The Companycontinues to believe that the complaints are without merit and will vigorouslydefend against them. As such, the Company has recorded no reserves related tothis matter. ---------------(dollars in thousands, except share data) 38 Securities and Exchange Commission The SEC is currently conducting an investigation into the Company'sinter-company accounting procedures from the period 1997 through 2001. Theinvestigation began in the first half of 2003 after the Company voluntarilydisclosed certain matters related to inter-company accounts for the five-yearperiod ending December 31, 2001 that resulted in the restatement of theCompany's financial statements for those years. To the Company's knowledge, theinvestigation is limited to this inter-company accounting matter, and theCompany does not expect further revisions to its historical financial statementsrelating to these issues. The Company is fully cooperating with the SEC. Baltimore Litigation In 2001, the Company acquired the biopharmaceutical manufacturing businessin Baltimore. The sellers filed suit against the Company alleging that theCompany made false representations during the negotiations on which the sellersrelied in deciding to sell the business and that the Company breached itsobligation to pay additional consideration as provided in the purchase agreementwhich was contingent on the performance of the purchased business. Managementbelieves the matter to be without merit and has been vigorously defending thesuit. Other The Company has commitments incident to the ordinary course of businessincluding corporate guarantees of financial assurance obligations under certainenvironmental laws for remediation, closure and/or third party liabilityrequirements of certain of its subsidiaries and a former operating location;contract provisions for indemnification protecting its customers and suppliersagainst third party liability for manufacture and sale of Company products thatfail to meet product warranties and contract provisions for indemnificationprotecting licensees against intellectual property infringement related tolicensed Company technology or processes. Additionally, as permitted under Delaware law, the Company has agreementswhereby we indemnify our officers and directors for certain events oroccurrences while the officer or director is, or was serving, at our request insuch capacity. The term of the indemnification period is for the officer's ordirector's lifetime. The maximum potential amount of future payments we could berequired to make under these indemnification agreements is unlimited; however,we have a Director and Officer insurance policy that covers a portion of anypotential exposure. The Company currently believes the estimated fair value of itsindemnification agreements is not significant based on currently availableinformation, and as such, the Company has no liabilities recorded for theseagreements as of December 31, 2005. In addition to the matters identified above, Cambrex's subsidiaries areparty to a number of other proceedings. While it is not possible to predict withcertainty the outcome of the Company's litigation matters and various otherlawsuits and contingencies, it is the opinion of management based on informationcurrently available that the ultimate resolution of these matters should nothave a material adverse effect on the Company's results of operations, cashflows and financial position. These matters, if resolved in an unfavorablemanner, could have a material effect on the operating results and cash flowswhen resolved in a future reporting period. IMPACT OF RECENT ACCOUNTING PRONOUNCEMENTS Inventory Costs In November 2004, the Financial Accounting Standards Board ("FASB")published FAS 151 "Inventory Costs -- an amendment of ARB No. 43, Chapter 4".FAS 151 amends the guidance in ARB No. 43, Chapter 4, "Inventory Pricing" toclarify the accounting for abnormal amounts of idle facility expense, freight,---------------(dollars in thousands, except share data) 39 handling costs, and wasted material (spoilage). This Statement requires thatthose items be recognized as current-period charges regardless of whether theymeet the criteria of "so abnormal". In addition, this Statement requires thatallocation of fixed production overheads to the cost of conversion be based onthe normal capacity of the production facility. This Statement will be effectivefor inventory costs incurred during fiscal years beginning after June 15, 2005.The Company has reviewed FAS 151 and determined its impact will not have amaterial effect on the Company's financial position or results of operations. Share-Based Payment In December 2004, the FASB published FAS 123(R) (revised 2004) "Share-BasedPayment". FAS 123(R) supersedes APB Opinion No. 25 "Accounting for Stock Issuedto Employees" and its related implementation guidance. This Statement eliminatesthe alternative to use APB Opinion No. 25's intrinsic value method of accountingthat was provided in FAS 123 as originally issued. This Statement requiresentities to recognize the cost of employee services received in exchange forawards of equity instruments based on the grant-date fair value of those awards(with limited exceptions). This Statement applies to all awards granted afterthe required effective date and to awards modified, repurchased, or cancelledafter that date. During 2005 all unvested options outstanding as well as alloptions granted during 2005 were fully vested by the Compensation Committee ofthe Board of Directors. This represents approximately 2,650,000 options whichresulted in the acceleration of pro forma compensation expense of $12,711. Thepurpose of the accelerated vesting was to eliminate compensation expense in theincome statement that the Company would otherwise have recorded with respect tothese accelerated options subsequent to the January 1, 2006 effective date ofFAS 123(R). The Company adopted FAS 123(R) on January 1, 2006 and as a result ofthe accelerated vesting of options as discussed in Note #2, the impact was notmaterial. Conditional Asset Retirement Obligations In March 2005, the FASB issued Interpretation No. 47, "Accounting forConditional Asset Retirement Obligations" ("FIN 47"). This Statement clarifiesthe meaning of the term "conditional asset retirement" as used in FAS 143,"Accounting for Asset Retirement Obligations" and clarifies when an entity hassufficient information to reasonably estimate the fair value of an assetretirement obligation. FIN 47 requires the accelerated recognition of certainasset retirement obligations when the fair value of such obligation can beestimated. FIN 47 became effective for the Company in the fourth quarter of2005. The adoption of FIN 47 did not have a material effect on the Company'sfinancial position or results of operations. FORWARD-LOOKING STATEMENTS This document may contain "forward-looking statements" within the meaningof the Private Securities Litigation Reform Act of 1995 and Rule 3b-6 under TheSecurities Exchange Act of 1934, including, without limitation, statementsregarding 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 similarexpressions in connection with any discussion of future financial and operatingperformance. Any forward-looking statements are qualified in their entirety byreference to the factors discussed throughout this Form 10-K. Theforward-looking statements contained herein are based on current plans andexpectations and involve risks and uncertainties that could cause actualoutcomes 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/orregulations (particularly environmental issues), tax rate, interest rate,technology, manufacturing and legal issues, changes in foreign exchange rates,performance of minority investments, uncollectable receivables, loss ondisposition of assets, cancellation or delays in renewal of contracts, lack ofsuitable raw materials or packaging materials, the possibility that the value ofthe acquisition of PermaDerm cultured skin may not be realized or that our plansto obtain a Humanitarian Device ---------------(dollars in thousands, except share data) 40 Exemption, completion of clinical trials and commercialization of PermaDermcultured skin in the United States may not be successful, and the Company'sability to receive regulatory approvals for its products, and the risks andother factors described under the caption "Risk Factors That May Affect FutureResults" in this Form 10-K. Any forward-looking statement speaks only as of thedate on which it is made, and the Company undertakes no obligation to publiclyupdate 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 notpossible for us to predict which will arise. In addition, we cannot assess theimpact of each factor on our business or the extent to which any factor, orcombination of factors, may cause actual results to differ materially from thosecontained in any forward-looking statements. ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The information required in this section can be found in the "Market Risks"section of Item 7 on page 33 of this Form 10-K. ---------------(dollars in thousands, except share data) 41 ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The following consolidated financial statements and selected quarterlyfinancial data of the Company are filed under this item: PAGE NUMBER (IN THIS REPORT) ---------------- Report of Independent Registered Public Accounting Firm..... 43Consolidated Balance Sheets as of December 31, 2005 and 2004...................................................... 45Consolidated Income Statements for the Years Ended December 31, 2005, 2004 and 2003................................... 46Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 2005, 2004 and 2003.............. 47Consolidated Statements of Cash Flows for the Years Ended December 31, 2005, 2004 and 2003.......................... 48Notes to Consolidated Financial Statements.................. 49 The consolidated financial statements and financial statement schedule arefiled pursuant to Item 15 of this report. ---------------(dollars in thousands, except share data) 42 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Shareholders ofCambrex Corporation We have completed integrated audits of Cambrex Corporation's 2005 and 2004and consolidated financial statements and of its internal control over financialreporting as of December 31, 2005, and an audit of its 2003 consolidatedfinancial statements in accordance with the standards of the Public CompanyAccounting Oversight Board (United States). Our opinions, based on our audits,are presented below. Consolidated financial statements and financial statement schedule In our opinion, the consolidated financial statements listed in the indexappearing under Item 15 (a) (1) present fairly, in all material respects, thefinancial position of Cambrex Corporation and its subsidiaries at December 31,2005 and 2004, and the results of their operations and their cash flows for eachof the three years in the period ended December 31, 2005 in conformity withaccounting principles generally accepted in the United States of America. Inaddition, in our opinion, the financial statement schedule listed in the indexappearing under Item 15 (a) (2) presents fairly, in all material respects, theinformation set forth therein when read in conjunction with the relatedconsolidated financial statements. These financial statements and financialstatement schedule are the responsibility of the Company's management. Ourresponsibility is to express an opinion on these financial statements andfinancial statement schedule based on our audits. We conducted our audits ofthese statements in accordance with the standards of the Public CompanyAccounting Oversight Board (United States). Those standards require that we planand perform the audit to obtain reasonable assurance about whether the financialstatements are free of material misstatement. An audit of financial statementsincludes examining, on a test basis, evidence supporting the amounts anddisclosures in the financial statements, assessing the accounting principlesused and significant estimates made by management, and evaluating the overallfinancial statement presentation. We believe that our audits provide areasonable basis for our opinion. Internal control over financial reporting Also, we have audited management's assessment, included in Management'sReport on Internal Control Over Financial Reporting appearing under Item 9A,that Cambrex Corporation did not maintain effective internal control overfinancial reporting as of December 31, 2005, because the Company did notmaintain effective controls over the accounting for income taxes based oncriteria established in Internal Control -- Integrated Framework issued by theCommittee of Sponsoring Organizations of the Treadway Commission (COSO). TheCompany's management is responsible for maintaining effective internal controlover financial reporting and for its assessment of the effectiveness of internalcontrol over financial reporting. Our responsibility is to express opinions onmanagement's assessment and on the effectiveness of the Company's internalcontrol over financial reporting based on our audit. We conducted our audit of internal control over financial reporting inaccordance with the standards of the Public Company Accounting Oversight Board(United States). Those standards require that we plan and perform the audit toobtain reasonable assurance about whether effective internal control overfinancial reporting was maintained in all material respects. An audit ofinternal control over financial reporting includes obtaining an understanding ofinternal control over financial reporting, evaluating management's assessment,testing and evaluating the design and operating effectiveness of internalcontrol, and performing such other procedures as we consider necessary in thecircumstances. We believe that our audit provides a reasonable basis for ouropinions. A company's internal control over financial reporting is a process designedto provide reasonable assurance regarding the reliability of financial reportingand the preparation of financial statements for external purposes in accordancewith generally accepted accounting principles. A company's internal control overfinancial reporting includes those policies and procedures that (i) pertain tothe maintenance of records that, in reasonable detail, accurately and fairlyreflect the transactions and dispositions of the assets of the company; (ii)provide reasonable assurance that transactions are recorded as necessary topermit preparation of financial 43 statements in accordance with generally accepted accounting principles, and thatreceipts and expenditures of the company are being made only in accordance withauthorizations of management and directors of the company; and (iii) providereasonable assurance regarding prevention or timely detection of unauthorizedacquisition, use, or disposition of the company's assets that could have amaterial effect on the financial statements. Because of its inherent limitations, internal control over financialreporting may not prevent or detect misstatements. Also, projections of anyevaluation of effectiveness to future periods are subject to the risk thatcontrols may become inadequate because of changes in conditions, or that thedegree of compliance with the policies or procedures may deteriorate. A material weakness is a control deficiency, or combination of controldeficiencies, that results in more than a remote likelihood that a materialmisstatement of the annual or interim financial statements will not be preventedor detected. The following material weakness has been identified and included inmanagement's assessment. As of December 31, 2005, the Company did not maintaineffective controls over the accounting for income taxes. Specifically, theCompany did not have a sufficient level of experienced personnel to enable theCompany to properly consider and apply generally accepted accounting principlesto the accounting for income taxes. Additionally, the Company did not maintaineffective controls to determine the completeness and accuracy of the componentsof the income tax provision calculations and the related deferred income taxesand income taxes payable, including the monitoring of the differences betweenthe tax basis and the financial reporting basis of assets and liabilities toeffectively reconcile the deferred tax balances. This control deficiencyresulted in audit adjustments to the 2005 consolidated financial statements.Additionally, this control deficiency could result in a misstatement of othercomprehensive income, income taxes payable, deferred income taxes assets andliabilities and the related income tax provision that would result in a materialmisstatement to annual or interim consolidated financial statements that wouldnot be prevented or detected. Accordingly, management has determined that thiscontrol deficiency constitutes a material weakness. This material weakness was considered in determining the nature, timing,and extent of audit tests applied in our audit of the 2005 consolidatedfinancial statements, and our opinion regarding the effectiveness of theCompany's internal control over financial reporting does not affect our opinionon those consolidated financial statements. In our opinion, management's assessment that Cambrex Corporation did notmaintain effective internal control over financial reporting as of December 31,2005, is fairly stated, in all material respects, based on criteria establishedin Internal Control -- Integrated Framework issued by the COSO. Also, in ouropinion, because of the effect of the material weakness described above on theachievement of the objectives of the control criteria, Cambrex Corporation hasnot maintained effective internal control over financial reporting as ofDecember 31, 2005, based on criteria established in InternalControl -- Integrated Framework issued by the COSO. /s/ PRICEWATERHOUSECOOPERS LLP Florham Park, New JerseyMay 26, 2006 44 CAMBREX CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)  DECEMBER 31, ------------------- 2005 2004 -------- -------- ASSETSCurrent assets: Cash and cash equivalents................................. $ 45,932 $ 91,532 Trade receivables, less allowances of $2,767 and $2,304 at respective dates....................................... 74,425 68,370 Inventories, net.......................................... 93,617 91,039 Prepaid expenses and other current assets................. 15,552 23,430 -------- -------- Total current assets.............................. 229,526 274,371Property, plant and equipment, net.......................... 229,410 280,790Goodwill.................................................... 96,368 176,275Other intangible assets, net................................ 51,183 54,381Other assets................................................ 5,985 6,168 -------- -------- Total assets...................................... $612,472 $791,985 ======== ========LIABILITIES AND STOCKHOLDERS' EQUITYCurrent liabilities: Accounts payable.......................................... $ 38,813 $ 38,552 Accrued expense and other current liabilities............. 51,819 51,504 Short-term debt and current portion of long-term debt..... 1,514 1,400 -------- -------- Total current liabilities......................... 92,146 91,456Long-term debt.............................................. 186,819 226,187Deferred tax liabilities.................................... 28,543 21,686Other non-current liabilities............................... 61,713 61,340 -------- -------- Total liabilities................................. 369,221 400,669Commitments and contingencies (see Notes 18 and 19)Stockholders' equity: Common Stock, $.10 par value; issued 29,118,141 and 28,825,603 shares at respective dates.................. 2,912 2,883 Additional paid-in capital................................ 219,236 213,120 Retained earnings......................................... 62,170 175,804 Treasury stock, at cost, 2,443,313 and 2,593,129 shares at respective dates....................................... (20,768) (21,991) Deferred compensation..................................... (2,131) (1,982) Accumulated other comprehensive (loss)/income............. (18,168) 23,482 -------- -------- Total stockholders' equity........................ 243,251 391,316 -------- -------- Total liabilities and stockholders' equity........ $612,472 $791,985 ======== ======== See accompanying notes to consolidated financial statements. 45 CAMBREX CORPORATION AND SUBSIDIARIES CONSOLIDATED INCOME STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) YEARS ENDED DECEMBER 31, ------------------------------- 2005 2004 2003 --------- -------- -------- Gross Sales................................................. $ 451,986 $439,115 $405,591 Allowances and rebates.................................... 3,437 2,258 3,780 Allowances and rebates.................................... 3,437 2,258 3,780 --------- -------- --------Net sales................................................... 448,549 436,857 401,811 Other revenues............................................ 6,548 6,800 8,833 --------- -------- --------Net revenues................................................ 455,097 443,657 410,644 Cost of goods sold........................................ 293,760 272,917 248,238 --------- -------- --------Gross profit................................................ 161,337 170,740 162,406 Selling, general and administrative expenses.............. 107,610 102,769 95,117 Research and development expenses......................... 22,331 19,659 17,123 Asset impairments......................................... 107,177 48,720 -- Legal settlement.......................................... -- -- 11,342 --------- -------- --------Operating (loss)/profit..................................... (75,781) (408) 38,824Other (income)/expenses Interest income........................................... (942) (1,103) (1,164) Interest expense.......................................... 11,757 12,053 13,004 Other -- net.............................................. 40 73 139 --------- -------- --------(Loss)/income before income taxes........................... (86,636) (11,431) 26,845Provision for income taxes.................................. 23,822 14,461 26,600 --------- -------- --------(Loss)/income from continuing operations.................... $(110,458) $(25,892) $ 245Discontinued operations:Loss from discontinued operations, net of tax............... -- (978) (54,308) --------- -------- --------Net loss.................................................... $(110,458) $(26,870) $(54,063) ========= ======== ========Basic (loss)/earnings per share (Loss)/income from continuing operations.................. $ (4.18) $ (0.99) $ 0.01 Loss from discontinued operations......................... $ -- $ (0.04) $ (2.11) --------- -------- -------- Net loss.................................................. $ (4.18) $ (1.03) $ (2.10)Diluted (loss)/earnings per share (Loss)/income from continuing operations.................. $ (4.18) $ (0.99) $ 0.01 Loss from discontinued operations......................... $ -- $ (0.04) $ (2.08) --------- -------- -------- Net loss.................................................. $ (4.18) $ (1.03) $ (2.07)Weighted average shares outstanding: Basic..................................................... 26,456 26,094 25,775 Diluted................................................... 26,456 26,094 26,174 See accompanying notes to consolidated financial statements. 46 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 COMPREHENSIVE ISSUED ($.10) CAPITAL EARNINGS COMPENSATION STOCK LOSS ---------- --------- ---------- --------- ------------ -------- ------------- BALANCE AT DECEMBER 31, 2002......... 28,323,059 $2,832 $203,444 $ 262,950 $(1,561) $(19,841) Comprehensive income/(loss) Net loss.......................... (54,063) (54,063) Other comprehensive income/(loss) Foreign currency translation adjustments................... 41,340 Unrealized gains on hedging contracts, net of tax of $52........................... 2,532 Minimum pension liability adjustment, net of tax of $0............................ (1,545) --------- Other comprehensive income........ 42,327 ---------Total Comprehensive loss............. $ (11,736) =========Cash dividends at $0.12 per share.... (3,100)Purchase of treasury stock........... (2,420)Exercise of stock options............ 122,750 12 1,118Restricted Stock..................... 865Other................................ 25,843 3 829 (55) 160 ---------- ------ -------- --------- ------- --------BALANCE AT DECEMBER 31, 2003......... 28,471,652 $2,847 $206,256 $ 205,787 $(1,616) $(22,101) Comprehensive income/(loss) Net loss.......................... (26,870) (26,870) Other comprehensive income/(loss) Foreign currency translation adjustments................... 20,224 Unrealized gains on hedging contracts, net of tax of $716.......................... 1,276 Minimum pension liability adjustment, net of tax of $513.......................... (3,488) Unrealized gains on available for sale marketable securities, net of tax expense of$7.......................... 13 --------- Other comprehensive income........ 18,025 ---------Total Comprehensive loss............. $ (8,845) =========Cash dividends at $0.12 per share.... (3,113)Purchase of treasury stock........... (219)Exercise of stock options............ 353,951 36 6,248Restricted Stock..................... 372 (366) 205Other................................ 244 -- 124 ---------- ------ -------- --------- ------- --------BALANCE AT DECEMBER 31, 2004......... 28,825,603 $2,883 $213,120 $ 175,804 $(1,982) $(21,991) Comprehensive income/(loss) Net loss.......................... (110,458) (110,458) Other comprehensive income/(loss) Foreign currency translation adjustments................... (40,188) Unrealized losses on hedging contracts, net of tax of $883.......................... (984) Minimum pension liability adjustment, net of tax of $217.......................... (117) Unrealized losses on available for sale marketable securities, net of tax expense of $0......................... (361) --------- Other comprehensive loss.......... (41,650) ---------Total Comprehensive loss............. $(152,108) =========Cash dividends at $0.12 per share.... (3,176)Purchase of treasury stock........... (75)Exercise of stock options............ 292,538 29 3,877Restricted Stock..................... 2,239 (149) 1,298 ---------- ------ -------- --------- ------- --------BALANCE AT DECEMBER 31, 2005......... 29,118,141 $2,912 $219,236 $ 62,170 $(2,131) $(20,768) ========== ====== ======== ========= ======= ======== ACCUMULATED OTHER TOTAL COMPREHENSIVE STOCKHOLDERS' INCOME/(LOSS) EQUITY ------------- ------------- BALANCE AT DECEMBER 31, 2002......... $(36,870) $ 410,954 Comprehensive income/(loss) Net loss.......................... (54,063) Other comprehensive income/(loss) Foreign currency translation adjustments................... Unrealized gains on hedging contracts, net of tax of $52........................... Minimum pension liability adjustment, net of tax of $0............................ Other comprehensive income........ 42,327 42,327Total Comprehensive loss.............Cash dividends at $0.12 per share.... (3,100)Purchase of treasury stock........... (2,420)Exercise of stock options............ 1,130Restricted Stock..................... 865Other................................ 937 -------- ---------BALANCE AT DECEMBER 31, 2003......... $ 5,457 $ 396,630 Comprehensive income/(loss) Net loss.......................... (26,870) Other comprehensive income/(loss) Foreign currency translation adjustments................... Unrealized gains on hedging contracts, net of tax of $716.......................... Minimum pension liability adjustment, net of tax of $513.......................... Unrealized gains on available for sale marketable securities, net of tax expense of$7.......................... Other comprehensive income........ 18,025 18,025Total Comprehensive loss.............Cash dividends at $0.12 per share.... (3,113)Purchase of treasury stock........... (219)Exercise of stock options............ 6,284Restricted Stock..................... 211Other................................ 368 -------- ---------BALANCE AT DECEMBER 31, 2004......... $ 23,482 $ 391,316 Comprehensive income/(loss) Net loss.......................... (110,458) Other comprehensive income/(loss) Foreign currency translation adjustments................... Unrealized losses on hedging contracts, net of tax of $883.......................... Minimum pension liability adjustment, net of tax of $217.......................... Unrealized losses on available for sale marketable securities, net of tax expense of $0......................... Other comprehensive loss.......... (41,650) (41,650)Total Comprehensive loss.............Cash dividends at $0.12 per share.... (3,176)Purchase of treasury stock........... (75)Exercise of stock options............ 3,906Restricted Stock..................... 3,388 -------- ---------BALANCE AT DECEMBER 31, 2005......... $(18,168) $ 243,251 ======== ========= See accompanying notes to consolidated financial statements. 47 CAMBREX CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS) YEARS ENDED DECEMBER 31, ------------------------------- 2005 2004 2003 --------- -------- -------- Cash flows from operating activities: Net loss.................................................. $(110,458) $(26,870) $(54,063) Asset impairment charges.................................. 107,177 48,720 -- Depreciation and amortization............................. 38,900 40,858 35,834 Stock based compensation included in net income........... 1,936 1,228 1,589 Deferred income tax provision............................. 11,727 466 8,005 Allowance for doubtful accounts........................... 877 (369) 1,584 Inventory reserve......................................... 4,536 3,390 163 Loss on sale of assets.................................... 1,126 -- --Changes in assets and liabilities: Trade receivables......................................... (12,709) (6,362) 3,446 Inventories............................................... (16,551) (7,942) 854 Prepaid expenses and other current assets................. 8,151 826 (1,497) Accounts payable and other current liabilities............ 9,248 4,330 10,599 Other non-current assets and liabilities.................. (1,525) (8,469) 1,595Discontinued operations: Non-cash charges and changes in operating assets and liabilities............................................. -- (1,073) 12,079 Writedown of assets held for sale......................... -- -- 53,098 --------- -------- -------- Net cash provided from operating activities............... 42,435 48,733 73,286 --------- -------- --------Cash flows from investing activities: Capital expenditures...................................... (40,307) (39,480) (37,857) Acquisition of businesses (net of cash acquired).......... (814) (5,256) -- Other investing activities................................ 1,482 223 (1,548)Discontinued operations: Capital expenditures, net of insurance proceeds........... -- -- 671 Proceeds from sale of Rutherford Chemicals................ -- -- 50,215 --------- -------- -------- Net cash (used in)/ provided from investing activities.... (39,639) (44,513) 11,481 --------- -------- --------Cash flows from financing activities: Dividends................................................. (3,176) (3,113) (3,100) Net increase/(decrease) in short-term debt................ 45 -- (1,071) Long-term debt activity (including current portion): Borrowings.............................................. 212,074 86,218 359,611 Repayments.............................................. (251,329) (72,708) (414,793) Proceeds from the stock options exercised................. 3,906 6,284 1,130 Purchase of treasury stock................................ (75) (219) (2,420) Other..................................................... 20 212 55 --------- -------- -------- Net cash (used in)/provided by financing activities..... (38,535) 16,674 (60,588) --------- -------- --------Effect of exchange rate changes on cash..................... (9,861) 6,344 6,819 --------- -------- --------Net (decrease)/increase in cash and cash equivalents........ (45,600) 27,238 30,998Cash and cash equivalents at beginning of year.............. 91,532 64,294 33,296 --------- -------- --------Cash and cash equivalents at end of year.................... $ 45,932 $ 91,532 $ 64,294 ========= ======== ========Supplemental disclosure: Interest paid, net of capitalized interest................ $ 11,185 $ 11,848 $ 11,725 Income taxes paid......................................... $ 12,181 $ 20,182 $ 18,107 See accompanying notes to consolidated financial statements. 48 CAMBREX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) (1) THE COMPANY Cambrex Corporation and Subsidiaries (the "Company" or "Cambrex") primarilyprovides products and services worldwide to pharmaceutical and biopharmaceuticalcompanies, generic drug companies, biotech companies and research organizations.The Company is dedicated to providing essential products and services toaccelerate drug discovery, development and manufacturing processes for humantherapeutics. The Company reports results in three segments: Bioproducts,consisting of research products and therapeutic application products; Biopharmasegment, consisting of contract biopharmaceutical process development andmanufacturing services; and Human Health segment, consisting of activepharmaceutical ingredients and pharmaceutical intermediates produced under Foodand Drug Administration cGMP for use in the production of prescription andover-the-counter drug products and other fine custom chemicals derived fromorganic chemistry. (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation The consolidated financial statements include the accounts of the Companyand its wholly-owned subsidiaries. All significant inter-company balances andtransactions have been eliminated in consolidation. Cash Equivalents Temporary cash investments with an original maturity of less than threemonths are considered cash equivalents. The carrying amounts approximate fairvalue. Derivative Instruments Derivative financial instruments are used by the Company primarily forhedging purposes to mitigate a variety of working capital, investment andborrowing risks. The use and mix of hedging instruments can vary depending onbusiness and economic conditions and management's risk assessments. The Companyuses a variety of strategies, including foreign currency forward contracts andtransaction hedging, to minimize or eliminate foreign currency exchange raterisk associated with foreign currency transactions. Gains and losses on thesehedging transactions are generally recorded in earnings in the same period asthey are realized, which is usually the same period as the settlement of theunderlying transactions. The Company uses interest rate derivative instrumentsonly as hedges or as an integral part of borrowings. As such, the differentialto be paid or received in connection with these instruments is accrued andrecognized in income as an adjustment to interest expense. The Company formally documents all relationships between hedginginstruments and hedged items, as well as its risk management objectives andstrategies for undertaking various hedging relationships. All cash flow hedgesare linked to transactions and the Company assesses effectiveness at inceptionand on a quarterly basis. If it is determined that a derivative instrument isnot highly effective or the transaction is no longer deemed probable ofoccurring, the Company discontinues hedge accounting. Inventories Inventories are stated at the lower of standard cost, which approximates afirst-in, first-out basis, or market. The determination of market value involvesassessment of numerous factors, including costs to dispose of inventory andestimated selling prices. Reserves are recorded to reduce carrying value forinventory determined to be damaged, obsolete or otherwise unsaleable. 49 CAMBREX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) -- (CONTINUED) (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED) Property, Plant and Equipment Property, plant and equipment is stated at cost, net of accumulateddepreciation. Plant and equipment are depreciated on a straight-line basis overthe estimated useful lives for each applicable asset group as follows: Buildings and improvements....... 20 to 30 years, or term of lease if applicableMachinery and equipment.......... 7 to 15 yearsFurniture and fixtures........... 5 to 7 yearsComputer hardware and software... 3 to 7 years Expenditures for additions, major renewals or betterments are capitalizedand expenditures for maintenance and repairs are charged to income as incurred. When assets are retired or otherwise disposed of, the cost and relatedaccumulated depreciation are removed from the accounts, and any resulting gainor loss is reflected in operating expenses. Interest is capitalized inconnection with the construction and acquisition of assets. The capitalizedinterest is recorded as part of the cost of the asset to which it relates and isamortized over the asset's estimated useful life. Total interest capitalized inconnection with ongoing construction activities in 2005, 2004 and 2003 amountedto $786, $400 and $339, respectively. Intangible Assets Intangible assets are recorded at cost and amortized on a straight-linebasis as follows: Patents................................. Amortized over the remaining life of individual patentsProduct technology...................... 5 to 18 yearsNon-compete agreements.................. 5 yearsTrademarks and other.................... up to 40 years Impairment of Goodwill The Company reviews the carrying value of acquired intangible assets,including goodwill, to determine whether impairment may exist on an annual basisor whenever it has reason to believe goodwill may not be recoverable. The annualimpairment test of goodwill is performed during the fourth quarter of eachfiscal year. Goodwill impairment is determined using a two-step process. The first stepof the goodwill impairment test is used to identify potential impairment bycomparing the fair value of each reporting unit, determined using variousvaluation techniques, with the primary technique being a discounted cash flowanalysis, to its carrying value. A discounted cash flow analysis requires one tomake various judgmental assumptions including assumptions about cash flows,growth rates and discount rates. The assumptions about future cash flows andgrowth rates are based on the Company's budget and long-term plans. Discountrate assumptions are based on market participant comparables. If the fair valueof a reporting unit exceeds its carrying amount, goodwill of the reporting unitis considered not impaired and the second step of the impairment test isunnecessary. If the carrying amount of a reporting unit exceeds its fair value,the second step of the goodwill impairment test is performed to measure theamount of impairment loss, if any. The second step of the goodwill impairmenttest compares the implied fair value of the reporting unit's goodwill with thecarrying amount of that goodwill. If the carrying amount of the reporting unit'sgoodwill exceeds the implied fair value 50 CAMBREX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) -- (CONTINUED) (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)of that goodwill, an impairment loss is recognized in an amount equal to thatexcess. The implied fair value of goodwill is determined in the same manner asthe amount of goodwill recognized in a business combination. That is, the fairvalue of the reporting unit is allocated to all of the assets and liabilities ofthat unit as if the reporting unit had been acquired in a business combinationand the fair value of the reporting unit was the purchase price paid to acquirethe reporting unit. The impairment test for other intangible assets not subject to amortizationconsists of a comparison of the fair value of the intangible asset with itscarrying value. If the carrying value of the intangible asset exceeds its fairvalue, an impairment loss is recognized in an amount equal to that excess. Impairment of Long-Lived Assets The Company assesses the impairment of its long-lived assets, includingamortizable intangible assets, and property, plant and equipment, whenevereconomic events or changes in circumstances indicate that the carrying amountsof the assets may not be recoverable. Long lived assets are considered to beimpaired when the sum of the undiscounted expected future operating cash flowsis less than the carrying amounts of the related assets. If impaired, the assetsare written down to fair market value. Revenue Recognition Revenues in the Bioproducts and Human Health segments are generallyrecognized when title to products and risk of loss are transferred to customers.Additional conditions for recognition of revenue are that collection of salesproceeds is reasonably assured and the Company has no further performanceobligations. Sales terms to certain customers include remittance of discounts if certainconditions are met. Additionally, sales are generally made with a limited rightof return under certain conditions. The Company estimates these rebates andestimated returns at the time of sale based on the terms of agreements withcustomers and historical experience and recognizes revenue net of theseestimated costs which are classified as allowances and rebates. Some contracts in the Bioproducts and Biopharma segments are based on timeand materials and revenue for those contracts is recognized as services areperformed. For contracts that contain milestone based payments the Companyutilizes the EITF-91-6 "Revenue Recognition of Long-term Power Sales Contracts"model for recording revenue. Under this method, revenue is based on the cost ofefforts (since the contract's commencement) up to the reporting date, divided bythe total estimated contractual costs (from the contract's commencement to theend of the development arrangement), multiplied by the total expectedcontractual payments under the arrangement. However, revenue is limited to theamount of nonrefundable cash payments received or contractually receivable atthe reporting date. In each of the segments the Company has certain contracts that containmultiple deliverables. These deliverables often include process developmentservices and commercial production. The Company follows the guidance containedin EITF 00-21 "Accounting for Revenue Arrangements with Multiple Deliverables".Revenue for each element is recognized when that element is delivered to thecustomer based on the fair value for each element as determined based on salesprice when sold separately. Amounts billed in advance are recorded as deferred revenue on the balancesheet. Income Taxes The Company and its eligible subsidiaries file a consolidated U.S. incometax return. Certain subsidiaries which are consolidated for financial reportingare not eligible to be included in the consolidated U.S. income 51 CAMBREX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) -- (CONTINUED) (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)tax return. Cambrex has adopted a policy to indefinitely reinvest theun-remitted earnings of certain non-U.S. subsidiaries, and as such, U.S. taxeshave not been provided on their un-remitted earnings. The earnings are intendedto support business expansion, either through acquisition of new businesses orinvestments in the existing businesses. At December 31, 2005, the cumulativeamount of un-remitted earnings of non-U.S. subsidiaries was approximately$5,000. The Company repatriated approximately $92,000 during 2005 pursuant toSection 965 of the Internal Revenue Code (introduced by the American JobsCreation Act of 2004) which provided a one time benefit in 2005 of exemptingfrom U.S. tax 85% of qualified repatriated foreign earnings. Use of Estimates The preparation of financial statements in conformity with generallyaccepted accounting principles requires management to make estimates andassumptions that affect the reported amounts of assets and liabilities anddisclosure of contingent assets and liabilities at the date of the financialstatements and the reported amounts of revenues and expenses during thereporting period. Actual results could differ from those estimates. Environmental Costs In the ordinary course of business, the Company is subject to extensive andchanging federal, state, local and foreign environmental laws and regulations,and has made provisions for the estimated financial impact of environmentalcleanup related costs. The Company's policy is to accrue environmental cleanuprelated 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 manyfactors, including changing laws and regulations, advancements in environmentaltechnologies, the quality of information available related to specific sites,the assessment stage of each site investigation, preliminary findings and thelength of time involved in remediation or settlement. Such accruals are adjustedas further information develops or circumstances change. For certain matters,the Company expects to share costs with other parties. Costs of futureexpenditures for environmental remediation obligations are not discounted totheir present value unless the aggregate amount of the liability and the timingof cash payments are fixed or reasonably determinable. Recoveries ofenvironmental remediation costs from other parties are recorded as assets whentheir receipt is deemed certain. Foreign Currency The functional currency of the Company's foreign subsidiaries is theapplicable local currency. The translation of the applicable foreign currenciesinto U.S. dollars is performed for balance sheet accounts using current exchangerates in effect at the balance sheet date and for revenue and expense accountsand cash flows using average rates of exchange prevailing during the year.Adjustments resulting from the translation of foreign currency financialstatements are accumulated in a separate component of stockholders' equity untilthe entity is sold or substantially liquidated. Gains or losses relating totransactions of a long-term investment nature are accumulated in stockholders'equity. Gains or losses resulting from foreign currency transactions areincluded in the results of operations as a component of other revenues in theconsolidated income statement. Foreign currency net transaction gains were$1,105, $1,161 and $2,600 in 2005, 2004 and 2003, respectively. 52 CAMBREX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) -- (CONTINUED) (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED) Earnings Per Common Share All diluted earnings per share are computed on the basis of the weightedaverage shares of common stock outstanding plus common equivalent shares arisingfrom the effect of dilutive stock options, using the treasury stock method. Earnings per share calculations are as follows: FOR THE YEARS ENDED, ------------------------------- 2005 2004 2003 --------- -------- -------- Net (loss)/income:(Loss)/income from continuing operations............ $(110,458) $(25,892) $ 245Loss from discontinued operations................... -- (978) (54,308) --------- -------- --------Net loss............................................ $(110,458) $(26,870) $(54,063) ========= ======== ========Weighted average shares outstanding:Basic weighted average shares outstanding........... 26,456 26,094 25,775Effect of dilutive stock options *.................. -- -- 399 --------- -------- --------Diluted weighted average shares outstanding......... 26,456 26,094 26,174(Loss)/Earnings per share (basic):(Loss)/income from continuing operations............ $ (4.18) $ (0.99) $ 0.01Loss from discontinuing operations.................. $ -- $ (0.04) $ (2.11) --------- -------- --------Net loss............................................ $ (4.18) $ (1.03) $ (2.10) ========= ======== ========(Loss)/Earnings per share (diluted):(Loss)/income from continuing operations............ $ (4.18) $ (0.99) $ 0.01Loss from discontinued operations................... $ -- $ (0.04) $ (2.08) --------- -------- --------Net loss............................................ $ (4.18) $ (1.03) $ (2.07) ========= ======== ======== * For 2005 and 2004, the effect of stock options would be anti-dilutive and is therefore excluded. For the year ended December 31, 2005, 2004 and 2003, 3,317,847, 2,083,716,and 2,095,939 shares respectively, were not included in the calculation ofdiluted shares outstanding because the option price was greater than the averagemarket price for the year. Freight Billing and Costs The Company bills a portion of freight cost incurred on shipments tocustomers. Freight costs are reflected in cost of goods sold and amounts billedto customers are recorded within net revenues. These amounts are not material tothe Company's operating results. Stock Based Compensation At December 31, 2005, the Company has seven active stock-based employeecompensation plans currently in effect, which are described more fully in Note#13. The Company accounts for those plans under the recognition and measurementprinciples of APB Opinion No. 25, Accounting for Stock Issued to Employees, andrelated interpretations. No stock-based employee compensation cost related tothe stock 53 CAMBREX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) -- (CONTINUED) (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)option plans is reflected in net income, as all options granted under thoseplans had an exercise price equal to the market value of the underlying commonstock on the date of grant. The following table illustrates the effect on netincome and earnings per share if the Company had applied the fair valuerecognition provisions of FAS 123 as amended by FAS 148, Accounting forStock-Based Compensation, to stock-based employee compensation. YEARS ENDED DECEMBER 31, ------------------------------- 2005 2004 2003 --------- -------- -------- Net loss, as reported............................... $(110,458) $(26,870) $(54,063)Add: stock based compensation expense included in reported net loss................................. 1,936 1,228 1,589Deduct: stock-based compensation expenses determined using fair value method........................... 21,504 5,969 6,570 --------- -------- --------Pro forma net loss.................................. $(130,026) $(31,611) $(59,044)Loss per share: Basic -- as reported.............................. $ (4.18) $ (1.03) $ (2.10) Basic -- pro forma................................ $ (4.91) $ (1.21) $ (2.29) Diluted -- as reported............................ $ (4.18) $ (1.03) $ (2.07) Diluted -- pro forma.............................. $ (4.91) $ (1.21) $ (2.26) The pro-forma compensation expense pertaining to stock options was $19,568,$4,741, and $4,981 for 2005, 2004 and 2003, respectively. During 2005 all unvested options outstanding as well as all options grantedduring 2005 were fully vested by the Compensation Committee of the Board ofDirectors. This represents approximately 2,650,000 options which resulted in theacceleration of pro forma compensation expense of $12,711 in 2005. The Companyhas imposed a holding period that will require all optionees to refrain fromselling shares acquired upon the exercise of these options until certain futuredates. The purpose of the accelerated vesting was to eliminate compensationexpense in the income statement that the Company would otherwise have recordedwith respect to these accelerated options subsequent to the January 1, 2006effective date of FAS 123(R). Due to this acceleration of stock options, the proforma disclosures are not likely to be representative of the effects on reportednet income for future periods. The pro forma compensation expense for 2005, 2004 and 2003 were calculatedbased on recognizing ratably over the vesting period the fair value of eachoption determined using the Black-Scholes option-pricing model fornon-performance options and a path dependent model for performance options. The following assumptions were used in the Black-Scholes model to determinefair value on grant date of grants issued in 2005, 2004 and 2003, respectively:(i) average dividend yield of 0.57%, 0.55% and 0.57% (ii) expected volatility of41.20%, 41.75% and 40.81%, (iii) risk-free interest rate ranging from 2.75% to4.47% , 2.75% to 3.95%, and 2.75% to 3.95%, and (iv) expected life of 6-7 years. Comprehensive Income FAS 130, "Reporting Comprehensive Income," requires foreign currencytranslation adjustments and certain other items, which were reported separatelyin stockholders' equity, to be included in other comprehensive income. Includedwithin accumulated other comprehensive income for the Company are foreigncurrency translation adjustments, changes in the fair value related toderivative instruments classified 54 CAMBREX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) -- (CONTINUED) (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)as cash flow hedges, net of related tax benefit, unrealized gain on availablefor sales securities and changes in the minimum pension liability, net ofrelated tax benefit. Total comprehensive income for the years ended 2005 and2004 is included in the Statement of Stockholders' Equity. The components of Accumulated Other Comprehensive Income in Stockholders'Equity are as follows: 2005 2004 -------- -------- Foreign currency translation................................ $ (7,084) $ 33,104Unrealized (loss)/gain on hedging contracts, net of tax..... (192) 792Unrealized (loss)/gain on available for sale securities..... (348) 13Minimum pension liability, net of tax....................... (10,544) (10,427) -------- -------- Total..................................................... $(18,168) $ 23,482 ======== ======== Software and Development Costs In 2005, 2004 and 2003, the Company capitalized purchased software from athird party vendor and software development costs incurred under the provisionsof SOP 98-1, "Accounting for the Cost of Computer Software Developed or Obtainedfor Internal Use." Capitalized costs include only (1) external direct costs ofmaterials and services incurred in developing or obtaining internal usesoftware, (2) payroll and payroll-related costs for employees who are directlyassociated with and who devote substantial time to the internal-use softwareproject, and (3) interest costs incurred, while developing internal-usesoftware. Amortization begins when assets are ready for their intended purposeand are placed in service. Capitalized software and development costs were$2,178, $1,725 and $2,113 for 2005, 2004 and 2003, respectively. Software anddevelopment costs are being amortized using the straight-line method over theexpected life of the product, which ranges from 3 to 7 years. Research and development costs, business process re-engineering costs,training and computer software maintenance costs are expensed as incurred. (3) IMPACT OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS Inventory Costs In November 2004, the FASB published FAS 151 "Inventory Costs -- anamendment of ARB No. 43, Chapter 4". FAS 151 amends the guidance in ARB No. 43,Chapter 4, "Inventory Pricing" to clarify the accounting for abnormal amounts ofidle facility expense, freight, handling costs, and wasted material (spoilage).This Statement requires that those items be recognized as current-period chargesregardless of whether they meet the criteria of "so abnormal". In addition, thisStatement requires that allocation of fixed production overheads to the cost ofconversion be based on the normal capacity of the production facility. ThisStatement will be effective for inventory costs incurred during fiscal yearsbeginning after June 15, 2005. The Company has reviewed FAS 151 and determinedits impact will not have a material effect on the Company's financial positionor results of operations. Share-Based Payment In December 2004, the FASB published FAS 123(R) (revised 2004) "Share-BasedPayment." FAS 123(R) supersedes APB Opinion No. 25 "Accounting for Stock Issuedto Employees" and its related implementation guidance. This Statement eliminatesthe alternative to use APB Opinion No. 25's intrinsic value method of accountingthat was provided in FAS 123 as originally issued. This Statement requires 55 CAMBREX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) -- (CONTINUED) (3) IMPACT OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS -- (CONTINUED)entities to recognize the cost of employee services received in exchange forawards of equity instruments based on the grant-date fair value of those awards(with limited exceptions). This Statement applies to all awards granted afterthe required effective date and to awards modified, repurchased, or cancelledafter that date. During 2005 all unvested options outstanding as well as alloptions granted during 2005 were fully vested by the Compensation Committee ofthe Board of Directors. This represents approximately 2,650,000 options whichresulted in the acceleration of pro forma compensation expense of $12,711. Thepurpose of the accelerated vesting was to eliminate compensation expense in theincome statement that the Company would otherwise have recorded with respect tothese accelerated options subsequent to the January 1, 2006 effective date ofFAS 123(R). The Company adopted FAS 123(R) on January 1, 2006 and as a result ofthe accelerated vesting of options as discussed in Note #2, the impact was notmaterial. Conditional Asset Retirement Obligations In March 2005, the FASB issued Interpretation No. 47, "Accounting forConditional Asset Retirement Obligations" ("FIN 47"). This Statement clarifiesthe meaning of the term "conditional asset retirement" as used in FAS 143,"Accounting for Asset Retirement Obligations" and clarifies when an entity hassufficient information to reasonably estimate the fair value of an assetretirement obligation. FIN 47 requires the accelerated recognition of certainasset retirement obligations when the fair value of such obligation can beestimated. FIN 47 became effective for the Company in the fourth quarter of2005. The adoption of FIN 47 did not have a material effect on the Company'sfinancial position or results of operations. (4) GOODWILL AND INTANGIBLE ASSETS In accordance with FAS 142, "Goodwill and Other Intangible Assets" theCompany has established reporting units based on its current segment structurefor purposes of testing goodwill for impairment. Goodwill has been assigned tothe reporting units to which the value of the goodwill relates. The Companyevaluates goodwill and other intangible assets not subject to amortization atleast on an annual basis and whenever events and changes in circumstancessuggest that the carrying amount may not be recoverable based on the estimatedfuture cash flows. During the performance of the annual goodwill impairment test in the fourthquarter of 2005, the Company determined that the goodwill of three reportingunits was impaired. The Company tested for impairment and determined that thecarrying value exceeded its fair value by using a discounted cash flow model.Management then computed the fair value of its tangible and intangible assetsfor purposes of determining the implied fair value of goodwill. The goodwillimpairment charge recorded in the fourth quarter of 2005 was $67,950 for tworeporting units in the Biopharma segment and $8,435 for one reporting unit inthe Human Health segment. The goodwill impairment charge is primarily due tolower long term profitability projections due to current market factors. TheCompany also recorded a write-down of certain amortizable intangible assets asfollows: product technology of $662 in the Biopharma segment, patents of $385 inthe Biopharma and Human Health segments and license agreements of $55 in theBiopharma segment, due to the lower future cash flow projections. Additionally,in the third quarter of 2004, the Company recorded an impairment charge of$48,720 to reduce the carrying value of goodwill in the Biopharma segment. 56 CAMBREX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) -- (CONTINUED) (4) GOODWILL AND INTANGIBLE ASSETS -- (CONTINUED) The changes in the carrying amount of goodwill for the years ended December31, 2005 and 2004, are as follows: HUMAN BIOPRODUCTS BIOPHARMA HEALTH SEGMENT SEGMENT SEGMENT TOTAL ----------- --------- ------- -------- Balance as of January 1, 2004...... $53,787 $125,338 $41,617 $220,742Acquisitions....................... 2,063 -- -- 2,063Other, including purchase price adjustment....................... (865) -- -- (865)Translation effect................. 321 -- 2,734 3,055Goodwill impairment................ -- (48,720) -- (48,720) ------- -------- ------- --------Balance as of December 31, 2004.... $55,306 $ 76,618 $44,351 $176,275 ======= ======== ======= ========Other, including purchase price adjustment....................... 2,319 195 -- 2,514Translation effect................. (983) -- (5,053) (6,036)Goodwill impairment................ -- (67,950) (8,435) (76,385) ------- -------- ------- --------Balance at December 31, 2005....... $56,642 $ 8,863 $30,863 $ 96,368 ======= ======== ======= ========  Other intangible assets that are not subject to amortization consist of thefollowing: AS OF AS OF DECEMBER 31, DECEMBER 31, 2005 2004 --------------- --------------- Trademarks.......................................... $33,898 $33,898Proprietary Process................................. 2,052 1,675 ------- ------- Total............................................. $35,950 $35,573 ======= ======= Intangible Assets: Other intangible assets, which will continue to be amortized, consist ofthe following: AS OF DECEMBER 31, 2005 -------------------------------------------- GROSS CARRYING ACCUMULATED NET CARRYING AMOUNT AMORTIZATION AMOUNT -------------- ------------ ------------ Product Technology..................... $12,326 $(4,257) $ 8,069Patents................................ 5,685 (2,097) 3,588Supply Agreements...................... 2,110 (1,152) 958License Agreement...................... 2,005 (401) 1,604Other.................................. 1,974 (960) 1,014 ------- ------- ------- Total................................ $24,100 $(8,867) $15,233 ======= ======= ======= 57 CAMBREX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) -- (CONTINUED) (4) GOODWILL AND INTANGIBLE ASSETS -- (CONTINUED) AS OF DECEMBER 31, 2004 -------------------------------------------- GROSS CARRYING ACCUMULATED NET CARRYING AMOUNT AMORTIZATION AMOUNT -------------- ------------ ------------ Product Technology..................... $13,230 $(2,574) $10,656Patents................................ 5,433 (1,199) 4,234Supply Agreements...................... 2,110 (936) 1,174License Agreement...................... 836 (65) 771Trademarks............................. 785 (236) 549Other.................................. 2,057 (633) 1,424 ------- ------- ------- Total................................ $24,451 $(5,643) $18,808 ======= ======= ======= Amortization expense amounted to $2,282, $1,921 and $1,626 for the yearsended December 31, 2005, 2004 and 2003, respectively.  The expected future amortization expense related to current intangibleassets is as follows: For the year ended December 31, 2006........................ $1,915For the year ended December 31, 2007........................ $1,884For the year ended December 31, 2008........................ $1,636For the year ended December 31, 2009........................ $1,496For the year ended December 31, 2010........................ $1,304 (5) NET INVENTORIES Net inventories consist of the following: DECEMBER 31, ----------------- 2005 2004 ------- ------- Finished goods............................................ $46,134 $45,002Work in process........................................... 24,615 23,658Raw materials............................................. 18,159 17,222Supplies.................................................. 4,709 5,157 ------- ------- Total........................................... $93,617 $91,039 ======= ======= (6) PROPERTY, PLANT AND EQUIPMENT During the fourth quarter of 2005 the Company performed an impairmentassessment of long-lived assets, which includes amortizable intangible assets aswell property, plant and equipment. As a result of lower long term profitabilityprojections, the Company determined that the sum of the undiscounted expectedfuture operating cash flows were less than the carrying value of certainlong-lived assets within the Biopharma and Human Health segments. The Companyrecorded an impairment charge for long-lived assets in the fourth quarter of$13,581 in the Biopharma segment and $16,109 in the Human Health segment towrite down these assets to their fair value as determined primarily based onappraisals. 58 CAMBREX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) -- (CONTINUED) (6) PROPERTY, PLANT AND EQUIPMENT -- (CONTINUED) Property, plant and equipment consist of the following: DECEMBER 31, --------------------- 2005 2004 --------- --------- Land.................................................. $ 11,147 $ 12,022Buildings and improvements............................ 137,670 132,091Machinery and equipment............................... 318,941 334,367Furniture and fixtures................................ 20,020 19,345Construction in progress.............................. 32,954 43,113 --------- --------- Total....................................... 520,732 540,938Accumulated depreciation.............................. (291,322) (260,148) --------- --------- Net................................................. $ 229,410 $ 280,790 ========= ========= Depreciation expense was $36,618, $38,937 and $34,208 for the years endedDecember 31, 2005, 2004 and 2003, respectively. (7) ACCRUED EXPENSE AND OTHER CURRENT LIABILITIES The components of accrued expenses and other current liabilities are asfollows: YEARS ENDED DECEMBER 31, ----------------- 2005 2004 ------- ------- Salaries and employee benefits payable.................... $20,669 $23,344Deferred revenue.......................................... 8,978 2,733Advances from suppliers................................... 4,293 5,737Other..................................................... 17,879 19,690 ------- ------- Total........................................... $51,819 $51,504 ======= ======= (8) INCOME TAXES (Loss)/income from continuing operations before income taxes consisted ofthe following: YEARS ENDED DECEMBER 31, ------------------------------ 2005 2004 2003 -------- -------- -------- Domestic............................................. $(98,203) $(60,058) $(20,211)International........................................ 11,567 48,627 47,056 -------- -------- -------- Total...................................... $(86,636) $(11,431) $ 26,845 ======== ======== ======== 59 CAMBREX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) -- (CONTINUED) (8) INCOME TAXES -- (CONTINUED) The provision for income taxes for continuing operations consists of thefollowing provision/(benefits):  YEARS ENDED DECEMBER 31, --------------------------- 2005 2004 2003 ------- ------- ------- Current: Federal............................................... $(2,424) $ -- $ 2,060 State................................................. 659 347 232 International......................................... 13,860 13,648 16,303 ------- ------- ------- 12,095 $13,995 $18,595 ======= ======= =======Deferred: Federal............................................... $17,238 $ -- $ 8,980 State................................................. (5) (17) 186 International......................................... (5,506) 483 (1,161) ------- ------- ------- $11,727 $ 466 $ 8,005 ------- ------- ------- Total......................................... $23,822 $14,461 $26,600 ======= ======= ======= The provision for income taxes for continuing operations differs from thestatutory federal income tax rate of 35% for 2005, 2004 and 2003 as follows: YEARS ENDED DECEMBER 31, ---------------------------- 2005 2004 2003 -------- ------- ------- Income tax (benefit)/provision at federal statutory rate................................................. $(30,322) $(4,001) $ 9,396State and local taxes, net of federal income tax benefits............................................. 423 208 232Difference between federal statutory rate and statutory rates on non-U.S. income............................. 380 (2,888) (3,480)Goodwill impairment.................................... 2,952 -- --Net change in valuation allowance...................... 40,126 21,142 21,487Interest rate swaps.................................... (2,368) -- --Indefinite-lived intangibles........................... 16,926 -- --Research and experimentation credits................... -- -- (1,100)Change in tax reserve.................................. (2,960) -- --Other.................................................. (1,335) -- 65 -------- ------- ------- Total........................................ $ 23,822 $14,461 $26,600 ======== ======= ======= 60 CAMBREX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) -- (CONTINUED) (8) INCOME TAXES -- (CONTINUED) The components of deferred tax assets and liabilities as of December 31,2005 and 2004 relate to temporary differences and carryforwards as follows: DECEMBER 31, -------------------- 2005 2004 --------- -------- Current deferred tax assets: Inventory............................................ $ 1,349 $ 1,273 Receivables.......................................... 493 254 Vitamin B-3, legal and related reserves.............. 5,213 5,104 Other................................................ 3,169 3,275 --------- -------- Current deferred tax assets.......................... 10,224 9,906 Valuation allowances................................. (10,039) (7,301) --------- -------- Total current deferred tax assets............ $ 185 $ 2,605 ========= ========Non-current deferred tax assets: Foreign tax credits.................................. $ 31,698 $ 15,712 Environmental........................................ 1,166 745 Net operating loss carryforwards (domestic).......... 33,223 42,248 Net operating loss carryforwards (foreign)........... 6,023 3,996 Employee benefits.................................... 5,860 5,765 Restructuring........................................ -- 74 Impairment of investment in securities............... 2,764 2,764 Research & experimentation tax credits............... 5,629 5,697 Alternative minimum tax credits...................... 4,155 4,155 Italian substitute tax benefit....................... 3,720 1,922 Depreciation......................................... 2,775 -- Intangibles.......................................... 16,755 -- Other -- non-current assets.......................... 3,438 3,752 --------- -------- Non-current deferred tax assets...................... 117,206 86,830 Valuation allowances................................. (109,983) (71,711) --------- -------- Total non-current deferred tax assets*....... $ 7,223 $ 15,119 --------- --------Non-current deferred tax liabilities: Depreciation......................................... $ 10,460 $ 22,621 Intangibles.......................................... 6,986 11,954 Indefinite-lived intangible.......................... 16,926 -- Other................................................ 1,394 2,230 --------- -------- Total non-current deferred tax liabilities... $ 35,766 $ 36,805 ========= ======== Total net non-current deferred tax liabilities................................ $ 28,543 $ 21,686 ========= ======== * Does not include deferred tax asset and corresponding valuation allowance of $342 for 2004 discontinued operations. FAS 109, Accounting for Income Taxes, requires the Company to establish avaluation allowance against deferred tax assets when it is more likely than notthat the Company will be unable to realize those deferred 61 CAMBREX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) -- (CONTINUED) (8) INCOME TAXES -- (CONTINUED)tax assets in the future. Based on the Company's current and past performance,cumulative losses in recent years resulting from domestic operations, the marketenvironment in which the Company operates, and the utilization of past taxattributes, the Company has established a valuation allowance of $115,612against a portion of its domestic deferred tax assets. However, the Company hasnot recorded a valuation allowance against domestic tax assets which are offsetby domestic deferred tax liabilities that are expected to reverse in the future.In addition, the Company has recorded a valuation allowance against deferred taxassets relating to domestic indefinite lived intangible assets of $16,926 atDecember 31, 2005 that had been previously preserved by tax strategies. Thisvaluation allowance results from the Company's recent history of domestic lossesand increased uncertainty regarding the timing and extent of a return todomestic profitability. With respect to the Company's foreign deferred taxassets, the Company has recorded a valuation allowance of $4,410 as of December31, 2005. The Company expects to maintain a full valuation allowance against its netdomestic deferred tax assets, subject to the consideration of all prudent andfeasible tax planning strategies, until such time as the Company attains anappropriate level of future domestic profitability and the Company is able toconclude that it is more likely than not that its domestic deferred tax assetsare realizable. The change in the domestic valuation allowance for the yearsended December 31, 2005 and 2004 was $39,934 and $24,047, respectively. Thechange in the foreign valuation allowance for the years ended December 31, 2005and 2004 was $1,076 and $1,196, respectively. Under the tax laws of the various jurisdictions in which the Companyoperates, net operating losses ("NOLs") may be carried forward, subject tostatutory limitations, to reduce taxable income in future years. The domesticNOLs total approximately $93,541 and the foreign NOLs total approximately$19,611. The domestic NOLs will expire during the period from 2019 through 2025.NOLs in foreign jurisdictions will carryforward indefinitely. As of December 31, 2005, approximately $31,698 of foreign tax credits,$5,629 of Research and Experimental Research credits and $4,155 of AlternativeMinimum Tax Credits were available as credits against future U.S. income taxes.Under the U.S. Internal Revenue Code, these will expire respectively as follows2006 through 2015, and 2020 through 2025. The alternative minimum tax creditcarryforwards have no expiration date. All domestic credits are offset by a fullvaluation allowance. On October 22, 2004, the President signed the American Jobs Creation Act of2004 which created Section 965 of the Internal Revenue Code ("Section 965"). OnJune 2, 2005, the Company adopted a Domestic Reinvestment Plan ("DRP") asdescribed under Section 965 of the Internal Revenue Code introduced by theAmerican Jobs Creation Act of 2004. The DRP states that the Company mayrepatriate up to $209,000 and invest in permitted investments. The Companyrepatriated approximately $92,000 and recorded the corresponding additional taxexpense of $368. By virtue of the dividend, the Company reduced its domesticdeferred tax asset related to net operating loss carryforwards by $14,280, withcorresponding adjustments to the full valuation allowances previously recordedagainst this asset. The Company also utilized $3,192 of currently generatedForeign Tax Credits as allowed under Section 965. As a matter of course, the Company is regularly audited by federal, stateand foreign tax authorities. From time to time, these audits result in proposedassessments. The Company believes that its positions comply with applicable lawand intends to continue to defend its positions. The Company believes that ithas adequately provided for the estimated outcome related to these matters. 62 CAMBREX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) -- (CONTINUED) (9) SHORT-TERM DEBT The Company has lines of credit in Italy with local banks that providethree types of financing with the following limits: Overdraft protection ofapproximately $8,000, export financing of approximately $7,700 and advances onuncleared deposits of approximately $300. The overdraft protection and exportfinancing facilities bear interest at varying rates when utilized, however,advances on uncleared deposits bear no interest. There was $43 outstanding as ofDecember 31, 2005 and no amount outstanding as of December 31, 2004. The 2005and 2004 weighted average interest rates were 2.0% and 1.6%, respectively. Also included in short-term debt at December 31, 2005 and 2004 was thecurrent portion of long-term debt of $1,471 and $1,400, respectively. (10) LONG-TERM DEBT Long-term debt consists of the following: DECEMBER 31, ------------------- 2005 2004 -------- -------- Bank credit facilities.................................. $ 81,943 $120,000Senior notes............................................ 100,000 100,000Capitalized leases...................................... 6,056 7,280Notes payable........................................... 291 307 -------- -------- Subtotal...................................... 188,290 227,587Less: current portion................................... 1,471 1,400 -------- -------- Total......................................... $186,819 $226,187 ======== ======== In October 2005, the Company entered into a $277,500 five-year SyndicatedSenior Revolving Credit Facility ("5-Year Agreement"), which expires in October2010. The 5-Year Agreement allows the Company to choose among various interestrate options and to specify the portion of the borrowing to be covered byspecific interest rates. Under the 5-Year Agreement the interest rate optionsavailable to the Company are the following: (i) LIBOR plus an applicable marginthat ranges from .475% to .85%, (ii) higher of U.S. Prime Rate or Federal FundsRate plus .5% or (iii) Money Market rate as quoted by the Administrative Agentof the Agreement. The applicable margin is based upon the ratio of consolidatedfunded indebtedness to consolidated EBITDA (as defined in the 5-Year Agreement,"Leverage Rate"). The Company also pays a facility fee between .15% to .275% onthe entire credit facility which is based upon the leverage ratio. The 5-YearAgreement is subject to financial covenants requiring the Company to maintaincertain levels of interest coverage ratio, leverage ratios and limitations onindebtedness. The Company complied with all covenants in this 5-Year Agreementduring 2005. The Company is required to provide audited financial statements toits lenders under the 5-Year Agreement within 100 days after its fiscalyear-end. The Company has received a waiver from its lenders through June 9,2006 relating to this requirement for the year ended December 31, 2005. The 5-Year Agreement is collateralized by dividend and distribution rightsassociated with a pledge of a portion of stock that the Company owns in aforeign holding company. This foreign holding company owns a majority of theCompany's non-U.S. operating subsidiaries. As of December 31, 2005, there was$81,943 outstanding and $195,557 undrawn under the 5-Year Agreement. Of theundrawn amount, $106,358 was available to be borrowed as of December 31, 2005due to limits established in the 5-Year Agreement. 63 CAMBREX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) -- (CONTINUED) (10) LONG-TERM DEBT -- (CONTINUED) As of December 31, 2005, the Company had outstanding two Senior notes, a$75,000 7-year note due in June 2010 with a rate of 5.31%, and a $25,000 10-yearnote due in October 2013 with an annual rate of 7.05%. These Senior notes rankedequal with the Company's 5-Year Agreement. On January 27, 2006, the Companyelected to prepay these Senior notes with funds provided by borrowing under the5-Year Agreement. An expense of approximately $5,272 will be recorded during thefirst quarter of 2006 related to a make whole payment of $4,809 paid to theSenior note holders concurrent with the January 27, 2006 payment, and therelated acceleration of $463 of unamortized origination fees. The outstandingamount under the 5-Year Agreement was $95,643 as of January 27, 2006, of whichthe entire amount was available to be borrowed at that time. The Company assumed three capital leases as part of the acquisition ofCambrex Bio Science Baltimore, Inc. in June 2001 of $12,100. The leases are forbuildings and improvements. There is $6,056 outstanding at December 31, 2005.All capital leases are collateralized by their underlying assets. The 2005 and 2004 weighted average interest rate for long-term bank debtwas 5.5%. Aggregate maturities of long-term debt are as follows: 2006........................................................ $ 1,4712007........................................................ 1,7312008........................................................ 1,5022009........................................................ 1,5952010........................................................ 156,991Thereafter.................................................. 25,000 -------- Total............................................. $188,290 ======== (11) DERIVATIVES AND FAIR VALUE OF FINANCIAL INSTRUMENTS The Company uses derivative financial instruments to reduce exposures tomarket risks resulting from fluctuations in interest rates and foreign exchangerates. The Company does not enter into financial instruments for trading orspeculative purposes. The Company is exposed to credit loss in the event ofnonperformance by the counter parties to the contracts. However, the Companydoes not anticipate non-performance by the counterparties. The Company adopted FAS 133 "Accounting for Derivative Instruments andHedging Activities" ("FAS 133"), and its corresponding amendments, whichestablishes accounting and reporting standards for derivative financialinstruments. The Company's policy is to enter into forward exchange contracts orcurrency options to hedge foreign currency transactions. This hedging strategymitigates the impact of short-term foreign exchange rate movements on theCompany's operating results primarily in Sweden, Belgium, and Italy. TheCompany's primary market risk relates to exposures to foreign currency exchangerate fluctuations on transactions entered into by these international operationsthat are denominated primarily in U.S. dollars, Swedish krona, British poundsterling and Euros. As a matter of policy, the Company does not hedge to protectthe translated results of foreign operations. The Company's forward exchange contracts substantially offset gains andlosses on the transactions being hedged. The forward exchange contracts havevarying maturities with none exceeding twelve months. The Company makes netsettlements for forward exchange contracts at maturity, based upon negotiatedrates at inception of the contracts. The Company has also utilized interest rateswap agreements to reduce the impact 64 CAMBREX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) -- (CONTINUED) (11) DERIVATIVES AND FAIR VALUE OF FINANCIAL INSTRUMENTS -- (CONTINUED)of changes in interest rates on its floating rate debt. The swap agreements arecontracts to exchange floating rates for fixed interest payments periodicallyover the life of the agreements without the exchange of the underlying notionaldebt amounts. As of December 31, 2005, the Company did not have any interestrate swap arrangements in place. All forward contracts outstanding at December 31, 2005 have been designatedas cash flow hedges and, accordingly, changes in the fair value of derivativesare recorded each period in accumulated other comprehensive income. Changes inthe fair value of the derivative instruments reported in accumulated othercomprehensive income will be reclassified into earnings in the period in whichearnings are impacted by the variability of the cash flows of the hedged item.The ineffective portion of all hedges is recognized in current-period earningsand is immaterial to the Company's financial results. The unrealized net lossrecorded in accumulated other comprehensive income at December 31, 2005 was$192. This amount will be reclassified into earnings as the underlyingforecasted transactions occur. The net gain recognized in earnings related toforeign currency forward contracts during the twelve months ended December 31,2005 was $72. The net loss on interest rate swap contracts recognized ininterest expense was $1,003 for the twelve months ended December 31, 2005. The table below reflects the notional and fair value amounts of foreignexchange contracts at December 31, 2005 and 2004. 2005 2004 ---------------- ----------------- NOTIONAL FAIR NOTIONAL FAIR AMOUNTS VALUE AMOUNTS VALUE -------- ----- -------- ------ Forward exchange contracts....................... $16,741 $(166) $16,692 $1,189 The carrying amount reported in the consolidated balance sheets for cashand cash equivalents, accounts receivable, and accounts payable approximatesfair value because of the immediate or short-term maturity of these financialinstruments. The carrying amount for short-term debt approximates fair valuebecause all of this underlying debt is at variable rates. The fair value of theSenior Notes was approximately $101,000 at December 31, 2005. (12) STOCKHOLDERS' EQUITY The Company has two classes of common shares which are Common Stock andNonvoting Common Stock. Authorized shares of Common Stock were 100,000,000 atDecember 31, 2005 and 2004. Authorized shares of Nonvoting Common Stock were730,746 at December 31, 2005 and 2004. At December 31, 2005 there were 615,180 of authorized shares of CommonStock reserved for issuance for stock option plans. Nonvoting Common Stock with a par value of $.10, has equal rights withCommon Stock, with the exception of voting power. Nonvoting Common Stock isconvertible, share for share, into Common Stock, subject to any legalrequirements applicable to holders restricting the extent to which they may ownvoting stock. As of December 31, 2005 and 2004, no shares of Nonvoting CommonStock were outstanding. The Company held treasury stock of 2,443,313 and 2,593,129 shares atDecember 31, 2005 and 2004, respectively, which are used for issuance toemployee benefit plans. The Company has authorized 5,000,000 shares of Series Preferred Stock, parvalue $.10, issuable in series and with rights, powers and preferences as may befixed by the Board of Directors. At December 31, 2005 and 2004, there was nofixed by the Board of Directors. At December 31, 2005 and 2004, there was nopreferred stock outstanding. 65 CAMBREX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) -- (CONTINUED) (13) STOCK BASED COMPENSATION The Company has seven stock-based compensation plans currently in effect.The 1994 Stock Option Plan ("1994 Plan"), the 1996 Performance Stock Option Plan("1996 Plan"), the 1998 Performance Stock Option Plan ("1998 Plan"), the 2001Performance Stock Option Plan ("2001 Plan"), the 2003 Performance Stock OptionPlan ("2003 Plan"), and the 2004 Omnibus Incentive Plan ("2004 Plan") providefor the granting of non-qualified and incentive stock options (ISOs), restrictedstock and other equity based vehicles intended to qualify as additionalincentives to management and other key employees. The 2000 Employee PerformanceStock Option Plan ("2000 Plan") provides for the granting of non-qualified stockoptions and ISOs intended to qualify as additional incentives to non-executiveemployees. The 1996 Plan, the 1998 Plan, the 2001 Plan, the 2003 Plan and the2004 Plan also provide for the granting of non-qualified stock options tonon-employee directors. Certain options under the 1996 Plan, the 1998 Plan, the 2000 Plan, the 2001Plan, and the 2003 Plan may become exercisable six years after the date ofgrant, subject to acceleration if the publicly traded share price of theCompany's Common Stock equals or exceeds levels determined by the CompensationCommittee of the Board of Directors within certain time periods or in the eventof a change in control. Options may also become exercisable based on the passageof time, such that the option becomes fully exercisable in a series ofcumulating portions over a four-year period. Options have a term of no more thanten years from the date of grant. In addition, stock option awards may betransferred to a member of the Participant's immediate family or to a trust orsimilar vehicle for the benefit of such transferee. The Company applies the provisions of APB Opinion No. 25 and relatedInterpretations in accounting for its stock-based compensation plans. FAS 123establishes financial accounting and reporting standards for stock-basedemployee compensation plans. The Company has adopted the disclosure onlyprovisions available under FAS 123. Accordingly, no compensation cost has beenrecognized for stock option plans under FAS 123. Shares of Common Stock subject to outstanding options under the stockoption plans were as follows: OPTIONS OUTSTANDING OPTIONS EXERCISABLE -------------------------------------------------- -------------------- WEIGHTED AVERAGE ---------------------- WEIGHTED REMAINING AVERAGE AUTHORIZED NUMBER OF OPTION PRICE CONTRACTUAL EXERCISE NUMBER OF EXERCISE FOR ISSUANCE SHARES PER SHARE $ LIFE (YRS) PRICE $ SHARES PRICE $ ------------ --------- ------------- ----------- -------- --------- -------- 1994 Plan.................. 300,000 14,000 26.67 5.31 26.67 14,000 26.671996 Plan.................. 3,000,000 231,950 14.25 - 20.72 3.61 17.28 231,950 17.28 267,100 21.90 - 29.75 3.98 24.58 267,100 24.58 381,182 34.75 - 43.63 4.26 41.88 381,182 41.881998 Plan.................. 1,180,000 478,249 18.75 - 27.56 2.00 22.50 478,249 22.50 137,839 34.75 - 43.63 4.55 41.50 137,839 41.502000 Plan.................. 500,000 251,900 18.30 - 20.72 6.62 20.34 251,900 20.34 206,500 34.75 - 46.85 4.40 43.20 206,500 43.202001 Plan.................. 750,000 291,000 18.30 - 25.88 5.96 22.60 291,000 22.60 439,612 29.75 - 42.87 5.01 33.85 439,612 33.85 8,582 46.85 5.57 46.85 8,582 46.852003 Plan.................. 500,000 446,683 18.68 - 25.56 4.24 20.11 446,683 20.112004 Plan.................. 1,500,000 866,650 18.15 - 21.90 5.75 21.56 866,650 21.56 --------- --------- --------- 7,730,000 4,021,247 14.25 - 46.85 26.60 4,021,247 26.60 ========= ========= ========= 66 CAMBREX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) -- (CONTINUED) (13) STOCK BASED COMPENSATION -- (CONTINUED) Information regarding the Company's stock option plans is summarized below: WEIGHTED AVERAGE ------------------------------ NUMBER OF EXERCISE PRICE OPTIONS SHARES $ EXERCISABLE --------- ---------------- ----------- Outstanding at December 31, 2002........................ 3,162,715 29.65 1,791,383 --------- Granted............................................... 715,900 20.99 Exercised............................................. (122,750) 8.97 Cancelled............................................. (53,000) 37.71Outstanding at December 31, 2003........................ 3,702,865 28.62 1,867,331 --------- Granted............................................... 1,029,350 22.08 Exercised............................................. (353,951) 17.48 Cancelled............................................. (425,907) 35.76Outstanding at December 31, 2004........................ 3,952,357 27.07 1,790,467 --------- Granted............................................... 653,033 20.07 Exercised............................................. (292,538) 13.32 Cancelled............................................. (291,605) 31.45 ---------Outstanding at December 31, 2005........................ 4,021,247 26.60 4,021,247 ========= The weighted-average grant-date fair value of options granted during 2005,2004 and 2003 was $8.56, $9.68 and $9.09 per share, respectively. Cambrex senior executives participate in a long-term incentive plan whichrewards achievement of long-term strategic goals with restricted stock units.Awards are made annually to key executives and vest in one-third increments onthe first, second and third anniversaries of the grant. On the third anniversaryof the grant, restrictions on sale or transfer are removed and shares are issuedto executives. In the event of termination of employment or retirement, theparticipant is entitled to the vested portion of the restricted stock units andforfeits the remaining amount; the three-year sale and transfer restrictionremains in place. In the event of death or permanent disability, all shares vestand the deferred sales restriction lapses. For the years ended December 31,2005, 2004 and 2003 the Company recorded $892, $725 and $695 respectively, incompensation expense for this plan. In addition, the Company recorded $2,214,$227 and $0 in compensation expense in 2005, 2004 and 2003, respectively, forrestricted stock in accordance with the CEO's sign-on agreement. Shares are heldin trust for the restricted stock unit grants. The number of shares held atDecember 31, 2005 and 2004 was 213,465 and 87,314, respectively. The fair valueof these shares was $4,007 and $2,366 as of December 31, 2005 and 2004,respectively. At December 31, 2005, the Company has outstanding 150,000 incentive stockappreciation rights fully-vested at a price of $19.30 issued to the current CEO.These rights will be marked to market until the rights are exercised or expirewith the amount being recorded as compensation expense or benefit in theapplicable period. For the years ended December 31, 2005, 2004 and 2003 theCompany recorded ($1,170), $276 and $894, respectively, in compensation(benefit)/expense. 67 CAMBREX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) -- (CONTINUED) (14) RETIREMENT PLANS Domestic Pension Plans The Company maintains two U.S. defined-benefit pension plans: the NeperaHourly Pension Plan which covers the union employees at the formerly-ownedHarriman, New York plant, and the Cambrex Pension Plan which covers all othereligible employees. Generally, all employees hired after December 31, 2002 arenot eligible for these benefits. Benefits for the salaried and certain hourly employees are based on salaryand years of service, while those for employees covered by a collectivebargaining agreement are based on negotiated benefits and years of service. The Company's policy is to fund pension costs currently to the full extentrequired by the Internal Revenue Code. Pension plan assets consist primarily ofbalanced fund investments. The net periodic pension expense for both 2005 and 2004 is based on atwelve month period and on valuations of the plans as of January 1. However, thereconciliation of funded status is determined as of the September 30 measurementdate. The funded status of these plans, incorporating fourth quartercontributions, as of September 30, 2005 and 2004 is as follows: 2005 2004 ------- ------- CHANGE IN BENEFIT OBLIGATION Benefit obligation at October 1........................... $53,253 $47,267 Service cost.............................................. 2,751 2,395 Interest cost............................................. 3,166 3,010 Actuarial loss............................................ 1,393 2,494 Benefits paid............................................. (2,112) (1,913) ------- ------- Benefit obligation at September 30........................ $58,451 $53,253 ======= ======= 2005 2004 -------- -------- CHANGE IN PLAN ASSETS Fair value of plan assets at October 1.................... $ 34,887 $ 28,951 Actual return on plan assets.............................. 3,861 3,411 Contributions............................................. 1,801 4,438 Benefits paid............................................. (2,112) (1,913) -------- -------- Fair value of plan assets at September 30................. $ 38,437 $ 34,887 -------- -------- Funded status............................................. (20,014) (18,366) Unrecognized prior service cost........................... 476 522 Unrecognized net loss..................................... 14,272 14,266 Additional minimum liability.............................. (9,442) (9,601) -------- -------- Accrued benefit cost at September 30,..................... (14,708) (13,179) Fourth quarter contributions.............................. -- 901 -------- -------- Accrued benefit cost at December 31,...................... $(14,708) $(12,278) ======== ======== 68 CAMBREX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) -- (CONTINUED) (14) RETIREMENT PLANS -- (CONTINUED) Major assumptions used in determining the benefit obligation as ofSeptember 30 for the Company's domestic pension plans are presented in thefollowing table: 2005 2004 ---- ---- Discount rate............................................... 5.75% 5.75%Rate of compensation increase............................... 5.00% 5.00% The components of net periodic pension cost are as follows: 2005 2004 2003 ------ ------ ------ COMPONENTS OF NET PERIODIC PENSION COST Service cost............................................. $2,751 $2,395 $2,598 Interest cost............................................ 3,166 3,010 2,841 Expected return on plan assets........................... (2,939) (2,768) (2,098) Amortization of prior service cost....................... 46 46 68 Recognized actuarial loss................................ 466 592 519 Curtailment loss on sale of Rutherford................... -- -- 351 ------ ------ ------ Net periodic benefit cost................................ $3,490 $3,275 $4,279 ====== ====== ====== Major assumptions used in determining the net cost for the Company'sdomestic pension plans are presented in the following table: 2005 2004 2003 ---- ---- ---- Discount rate............................................... 5.75% 6.00% 6.75%Expected return on plan assets.............................. 8.50% 8.50% 8.50%Rate of compensation increase............................... 5.00% 4.50% 4.50% In making its assumption for the long-term rate of return, the Company hasutilized historical rates earned on securities allocated consistently with itsinvestments. The aggregate Accumulated Benefit Obligation (ABO) of $53,145 exceeds planassets by $14,708 as of September 30, 2005 for all domestic plans. The Company expects to contribute approximately $4,250 in cash to its twoU.S. defined-benefit pension plans in 2006. 69 CAMBREX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) -- (CONTINUED) (14) RETIREMENT PLANS -- (CONTINUED) Estimated Future Benefit Payments The following benefit payments, which reflect expected future service, asappropriate, are expected to be paid: PENSION BENEFITS -------- 2006........................................................ $ 2,1542007........................................................ $ 2,2562008........................................................ $ 2,3592009........................................................ $ 2,4892010........................................................ $ 2,6072011-2015................................................... $16,531 The investment objective for plan assets is to achieve long-term growth ofcapital with exposure to risk set at an appropriate level. The objective shallbe accomplished through the utilization of a diversified asset mix consisting ofequities (domestic and international) and taxable fixed income securities. Theaccount is to be managed on a fully discretionary basis to obtain the highesttotal 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 2005 2004--------------- ---------- -------- -------- U.S. equities........................................... 30%-70% 49.9% 50.2%International equities.................................. 0%-20% 11.2% 10.4%U.S. fixed income....................................... 20%-60% 36.9% 37.6%Cash.................................................... N/A 2.0% 1.8% ------ ------ 100.0% 100.0% ====== ====== The Company has a Supplemental Executive Retirement Plan ("SERP") for keyexecutives. This plan is non-qualified and unfunded. It consists of two plans,the Corporate SERP plan and the BioWhittaker SERP Plan. 70 CAMBREX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) -- (CONTINUED) (14) RETIREMENT PLANS -- (CONTINUED) The benefit obligation for these plans as of December 31, 2005 and 2004 isas follows:  2005 2004 ------- ------- CHANGE IN BENEFIT OBLIGATIONBenefit obligation at beginning of year..................... $ 7,422 $ 7,021Service cost................................................ 224 215Interest cost............................................... 434 440Actuarial loss/(gain)....................................... 280 (29)Benefits paid............................................... (330) (225) ------- -------Benefits obligation at end of year.......................... 8,030 7,422 ======= =======Funded status............................................... $(8,030) $(7,422)Unrecognized prior service cost............................. 20 24Unrecognized net transition obligation...................... 199 300Unrecognized net loss....................................... 1,747 1,507Additional minimum liability................................ (1,649) (1,536) ------- -------Accrued benefit at December 31,............................. $(7,713) $(7,127) ======= ======= Major assumptions used in determining the benefit obligation as of December31 for the Company's SERP Plans are presented in the following table: 2005 2004 ----- ----- Discount rate............................................... 5.75% 5.75%Rate of compensation increase............................... 5.00% 5.00% The components of net periodic benefit cost are as follows: 2005 2004 2003 ---- ---- ---- COMPONENTS OF NET PERIODIC BENEFIT COSTService cost................................................ $224 $215 $251Interest cost............................................... 434 440 423Amortization of prior service cost.......................... 4 4 4Recognized actuarial loss................................... 140 159 132 ---- ---- ----Net periodic benefit cost................................... $802 $818 $810 ==== ==== ==== Major assumptions used in determining the net cost for the Company's SERPplans are presented in the following table: 2005 2004 2003 ----- ----- ----- Discount rate............................................... 5.75% 6.00% 6.75%Rate of compensation increase............................... 5.00% 5.00% 5.00% 71 CAMBREX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) -- (CONTINUED) (14) RETIREMENT PLANS -- (CONTINUED) Estimated Future Benefit Payments The following benefit payments, which reflect expected future service, asappropriate, are expected to be paid: SERP BENEFITS -------- 2006........................................................ $ 3442007........................................................ $ 4272008........................................................ $ 5842009........................................................ $ 5792010........................................................ $ 5822011-2015................................................... $2,766 International Pension Plans Certain foreign subsidiaries of the Company maintain pension plans fortheir employees that conform to the common practice in their respectivecountries. Based on local laws and customs, some of those plans are not funded.For those plans that are funded, the amount in the trust, supporting the plan,is actuarially determined, and where applicable, in compliance with localstatutes. 72 CAMBREX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) -- (CONTINUED) (14) RETIREMENT PLANS -- (CONTINUED) The funded status of these plans, as of December 31, 2005 and 2004 is asfollows: 2005 2004 -------- -------- CHANGE IN BENEFIT OBLIGATION Benefit obligation at beginning of year................... $ 25,698 $ 20,146 Service cost.............................................. 1,274 882 Interest cost............................................. 1,088 990 Plan participants' contributions.......................... 136 169 Actuarial loss............................................ 1,032 1,777 Benefits paid............................................. (586) (219) Foreign exchange.......................................... (4,049) 1,953 -------- -------- Benefit obligation at end of year......................... $ 24,593 $ 25,698 ======== ========CHANGE IN PLAN ASSETS Fair value of plan assets at beginning of year............ $ 5,678 $ 4,226 Actual return on plan assets.............................. 1,001 354 Company contributions..................................... 605 551 Plan participants' contributions.......................... 179 169 Benefits paid............................................. (345) (17) Foreign exchange.......................................... (836) 395 -------- -------- Fair value of plan assets at end of year.................. $ 6,282 $ 5,678 -------- -------- Funded status............................................. $(18,311) $(20,020) Unrecognized actuarial loss............................... 8,190 7,952 Unrecognized prior service cost........................... (80) (87) Unrecognized net gain..................................... (381) (433) Additional minimum liability.............................. (4,171) (3,919) Foreign exchange.......................................... (195) 352 -------- -------- Accrued benefit........................................... $(14,948) $(16,155) ======== ======== Major assumptions used in determining the benefit obligation as of December31, for the Company's international pension plans are presented in the followingtable: 2005 2004 ------------- ------------- Discount rate.......................................... 4.25% - 5.00% 4.50% - 5.26%Rate of compensation increase.......................... 3.00% - 3.50% 3.00% - 3.50% 73 CAMBREX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) -- (CONTINUED) (14) RETIREMENT PLANS -- (CONTINUED) The components of the net periodic pension cost are as follows: 2005 2004 2003 ------ ------ ------ COMPONENTS OF NET PERIODIC PENSION COSTService cost............................................... $1,274 $ 882 $ 633Interest cost.............................................. 1,088 990 828Expected return on plan assets............................. (416) (288) (182)Amortization of unrecognized net obligation................ (35) (35) (32)Amortization of prior service cost......................... 197 166 127 ------ ------ ------Net periodic benefit cost.................................. $2,108 $1,715 $1,374 ====== ====== ====== Major assumptions used in determining the net cost for the Company'sinternational pension plans are presented in the following table: 2005 2004 2003 ------------- ------------- ------------- Discount rate........................... 4.25% - 5.00% 4.50% - 5.26% 5.20% - 5.50%Expected return on plan assets.......... 4.50% - 6.26% 6.89% 7.34%Rate of compensation increase........... 3.00% - 3.50% 3.00% - 3.50% 3.00% - 3.75% The aggregate ABO of $21,016 for international plans exceeds plan assets by$14,734 in 2005. The Company expects to contribute approximately $548 in cash to itsinternational pension plans in 2006. Estimated Future Benefit Payments The following benefit payments, which reflect expected future service, asappropriate, are expected to be paid: PENSION BENEFITS -------- 2006........................................................ $ 2662007........................................................ $ 3092008........................................................ $ 3832009........................................................ $ 4392010........................................................ $ 5102011-2015................................................... $3,318 The allocation of pension plan assets is as follows: PERCENTAGE OF PLAN ASSETS -------------ASSET CATEGORY: 2005 2004--------------- ----- ----- Equities.................................................... 83.5% 92.2%Fixed income................................................ 13.2% 3.6%Property.................................................... 1.6% 1.4%Cash........................................................ 1.7% 2.8% ----- ----- 100.0% 100.0% ===== ===== 74 CAMBREX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) -- (CONTINUED) (14) RETIREMENT PLANS -- (CONTINUED) Savings Plan Cambrex makes available to all employees a savings plan as permitted underSections 401(k) and 401(a) of the Internal Revenue Code. Employee contributionsare matched in part by Cambrex. The cost of this plan amounted to $2,095, $2,092and $2,113 in 2005, 2004 and 2003, respectively. Other The Company has a non-qualified Compensation Plan for Key Executives ("theDeferred Plan"). Under the Deferred Plan, officers and key employees may electto defer all or any portion of their pre-tax annual bonus and/or annual basesalary. Included within other liabilities at December 31, 2005 and 2004 there is$2,472 and $2,050, respectively, representing the Company's obligation under theplan. To assist in the funding of this obligation, the Company invests incertain mutual funds and as such, included within other assets at December 31,2005 and 2004 is $2,472 and $2,050, respectively, representing the fair value ofthese funds. During 1995, the Board amended the Deferred Plan to permit officersand key employees to elect to defer receipt of the Company's stock which wouldotherwise have been issued upon the exercise of the Company's options. Totalshares held in trust as of December 31, 2005 and 2004 are 224,075 and 228,677,respectively, and are included as a reduction of equity at cost. The value ofthe shares held in trust and the corresponding liability of $4,206 at December31, 2005 has been recorded in equity. The Deferred Plan is not funded by theCompany, but the Company has established a Deferred Compensation Trust Fundwhich holds the shares issued. (15) OTHER POSTRETIREMENT BENEFITS Cambrex provides postretirement health and life insurance benefits("postretirement benefits") to all eligible retired employees. Employees whoretire at or after age 55 with ten years of service are eligible to participatein the postretirement benefit plans. The Company's responsibility for suchpremiums for each plan participant is based upon years of service subject to anannual maximum of one thousand dollars. Such plans are self-insured and are notfunded. Certain subsidiaries and all employees hired after December 31, 2002(excluding those covered by collective bargaining) are not eligible for thesebenefits. Effective January 1, 2006, the Cambrex Retiree Medical Plan will nolonger provide prescription coverage to retirees or dependents age 65 or over. 75 CAMBREX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) -- (CONTINUED) (15) OTHER POSTRETIREMENT BENEFITS -- (CONTINUED) The benefit obligation of the plan as of September 30, 2005 and 2004,incorporating fourth quarter payments, is as follows: 2005 2004 ------- ------- CHANGE IN BENEFIT OBLIGATIONAccumulated benefit obligation at October 1................. $ 2,655 $ 2,532Service cost................................................ 60 53Interest cost............................................... 154 154Actuarial (gain)/loss....................................... (766) 207Plan amendments............................................. (51) --Benefits paid............................................... (180) (291) ------- -------Accumulated benefit obligation at September 30.............. $ 1,872 $ 2,655Unrecognized net loss....................................... (1,343) (2,227)Unrecognized prior service cost............................. 1,046 1,146 ------- -------Accrued benefit cost at September 30,....................... $ 1,575 $ 1,574Fourth quarter benefits paid................................ (29) (36) ------- -------Accrued benefit obligation at December 31................... $ 1,546 $ 1,538 ======= ======= The periodic postretirement benefit cost includes the following components:  YEARS ENDED DECEMBER 31, -------------------------- 2005 2004 2003 ------ ------ -------- COMPONENTS OF NET PERIODIC BENEFIT COSTService cost............................................... $ 60 $ 53 $ 124Interest cost.............................................. 154 154 198Actuarial loss recognized.................................. 118 119 211Amortization of unrecognized prior service cost............ (152) (151) (175)Curtailment gain on Rutherford............................. -- -- (1,046) ----- ----- -------Total periodic postretirement benefit cost................. $ 180 $ 175 $ (688) ===== ===== ======= Major assumptions used in determining the benefit obligation and net costfor the Company's postretirement benefits are presented in the following tableas weighted averages: BENEFIT OBLIGATION NET COST ----------- ------------------ 2005 2004 2005 2004 2003 ---- ---- ---- ---- ---- WEIGHTED-AVERAGE ASSUMPTIONS:Discount rate....................................... 5.75% 5.75% 5.75% 6.00% 6.75% 76 CAMBREX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) -- (CONTINUED) (15) OTHER POSTRETIREMENT BENEFITS -- (CONTINUED) Estimated Future Benefit Payments The following benefit payments, which reflect expected future service, asappropriate, are expected to be paid: OPEB BENEFITS -------- 2006........................................................ $ 732007........................................................ $ 782008........................................................ $ 832009........................................................ $ 882010........................................................ $ 93 ----2011-2015................................................... $545 ==== The assumed health care cost trend rate used to determine the accumulatedpostretirement benefit obligation is 9% in 2005 decreasing 1% per year to anultimate rate of 5% in 2009 (10% in 2004). A one-percentage-point increase inthe assumed health care cost trend rate would increase the accumulatedpostretirement benefit obligation by $29 and would increase the sum of interestand service cost by $3. A one-percentage-point decrease would lower theaccumulated postretirement benefit obligation by $22 and would decrease the sumof interest and service cost by $2. (16) SEGMENT INFORMATION The Company classifies its business units into three reportable segments:Bioproducts, consisting of research products and other therapeutic applicationproducts, Biopharma, consisting of contract biopharmaceutical processdevelopment and manufacturing services and Human Health, consisting of activepharmaceutical ingredients and pharmaceutical intermediates produced under FDAcGMP for use in the production of prescription and over-the-counter drugproducts and other fine custom chemicals derived from organic chemistry. Information as to the operations of the Company in each of its businesssegments is set forth below based on the nature of the products and servicesoffered. Cambrex evaluates performance based on gross profit and operatingprofit. Intersegment sales are not material. The Company allocates certaincorporate expenses to each of the segments. In 2005 no single customer accounted for more than 10% of totalconsolidated gross sales. In 2004 one customer, a distributor which representsmultiple customers, accounted for 10.1% of consolidated gross sales. Thiscustomer is in the Human Health segment. The Company currently has a long-term sales contract within the HumanHealth segment that accounts for more than 10% of segment sales that isscheduled to expire at the end of 2008. There is no guarantee that this contractwill be renewed. 77 CAMBREX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) -- (CONTINUED) (16) SEGMENT INFORMATION -- (CONTINUED) The following is a summary of business segment information: 2005 2004 2003 -------- -------- -------- GROSS SALESBioproducts.......................................... $149,498 $136,108 $119,298Biopharma............................................ 41,698 43,270 44,128Human Health......................................... 260,790 259,737 242,165 -------- -------- -------- $451,986 $439,115 $405,591 ======== ======== ======== GROSS PRODUCT SALES DETAIL FOR EACH SEGMENT 2005 2004 2003 -------- -------- -------- BIOPRODUCTS: Research products.................................. $ 75,810 $ 70,657 $ 62,650 Therapeutic application............................ 73,688 65,451 56,648 -------- -------- -------- Total Bioproducts.......................... $149,498 $136,108 $119,298 ======== ======== ========BIOPHARMA: Contract biopharmaceutical manufacturing........... $ 41,698 $ 43,270 $ 44,128 -------- -------- -------- Total Biopharma............................ $ 41,698 $ 43,270 $ 44,128 ======== ======== ========HUMAN HEALTH:HUMAN HEALTH: Active pharmaceutical ingredients.................. $199,935 $200,555 $183,632 Pharmaceutical intermediates and custom development..................................... 30,578 27,365 24,349 Other.............................................. 30,277 31,817 34,184 -------- -------- -------- Total Human Health......................... $260,790 $259,737 $242,165 ======== ======== ======== 2005 2004 2003 -------- -------- -------- GROSS PROFITBioproducts.......................................... $ 77,908 $ 74,930 $ 60,056Biopharma............................................ (3,811) 4,880 11,829Human Health......................................... 87,240 90,930 90,521 -------- -------- -------- $161,337 $170,740 $162,406 ======== ======== ======== 2005 2004 2003 -------- -------- -------- OPERATING (LOSS)/PROFITBioproducts.......................................... $ 25,670 $ 26,386 $ 17,205Biopharma............................................ (97,245) (53,813) 2,256Human Health......................................... 20,711 50,651 56,818Corporate............................................ (24,917) (23,632) (37,455) -------- -------- -------- Total operating (loss)/profit...................... $(75,781) $ (408) $ 38,824 ======== ======== ======== 78 CAMBREX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) -- (CONTINUED) (16) SEGMENT INFORMATION -- (CONTINUED) 2005 2004 -------- ---------- TOTAL ASSETSBioproducts.......................................... $231,965 $220,791Biopharma............................................ 58,652 134,591Human Health......................................... 301,771 399,538Corporate............................................ 20,084 37,065 -------- -------- $612,472 $791,985 ======== ======== 2005 2004 2003 -------- ---------- -------- CAPITAL EXPENDITURESBioproducts.......................................... $ 12,392 $ 10,601 $ 8,477Biopharma............................................ 5,536 9,167 12,319Biopharma............................................ 5,536 9,167 12,319Human Health......................................... 21,223 18,593 15,646Corporate............................................ 1,156 1,119 1,415 -------- -------- -------- $ 40,307 $ 39,480 $ 37,857 ======== ======== ======== 2005 2004 2003 -------- ---------- -------- DEPRECIATIONBioproducts.......................................... $ 6,066 $ 5,514 $ 5,125Biopharma............................................ 4,840 4,239 2,277Human Health......................................... 24,533 27,950 25,072Corporate............................................ 1,179 1,234 1,734 -------- -------- -------- $ 36,618 $ 38,937 $ 34,208 ======== ======== ======== 2005 2004 2003 -------- ---------- -------- AMORTIZATIONBioproducts.......................................... $ 1,295 $ 1,455 $ 1,206Biopharma............................................ 903 431 413Human Health......................................... 84 35 7 -------- -------- -------- $ 2,282 $ 1,921 $ 1,626 ======== ======== ======== 79 CAMBREX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) -- (CONTINUED) (17) FOREIGN OPERATIONS AND EXPORT SALES The following summarized data represents the gross sales and long livedtangible assets for the Company's domestic and foreign entities for 2005, 2004and 2003: DOMESTIC FOREIGN TOTAL -------- -------- -------- 2005Gross sales.......................................... $217,787 $234,199 $451,986Long-lived tangible assets........................... 112,500 116,910 229,4102004Gross sales.......................................... $200,442 $238,673 $439,115Long-lived tangible assets........................... 124,595 156,195 280,7902003Gross sales.......................................... $181,925 $223,666 $405,591Long-lived tangible assets........................... 118,509 150,638 269,147 Export sales, included in domestic gross sales, in 2005, 2004 and 2003amounted to $47,115, $29,945, and $22,100, respectively. Sales by geographic area consist of the following:  2005 2004 2003 -------- -------- -------- North America........................................ $204,421 $213,668 $206,079Europe............................................... 219,728 198,540 173,035Asia................................................. 18,927 17,723 16,401Other................................................ 8,910 9,184 10,076 -------- -------- -------- Total.............................................. $451,986 $439,115 $405,591 ======== ======== ======== (18) COMMITMENTS The Company has operating leases expiring on various dates through the year2013. The leases are primarily for the rental of office space, office andlaboratory equipment and vehicles. At December 31, 2005, future minimumcommitments under non-cancelable operating lease arrangements were as follows: Year ended December 31: 2006...................................................... $ 4,607 2007...................................................... 4,418 2008...................................................... 3,917 2009...................................................... 3,630 2010 and thereafter....................................... 6,500 ------- Total commitments......................................... $23,072 ======= Total operating lease expense was $4,826, $4,815 and $4,205 for the yearsended December 31, 2005, 2004 and 2003, respectively. The Company is party to several unconditional purchase obligationsresulting from contracts that contain legally binding provisions with respect toquantities, pricing and timing of purchases. The Company's purchase obligationsinclude commitments to purchase raw materials and equipment and for theconstruction of a new 80 CAMBREX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) -- (CONTINUED) (18) COMMITMENTS -- (CONTINUED)warehouse and R&D laboratory. At December 31, 2005 future commitments underthese obligations were as follows: Year ended December 31: 2006...................................................... $ 7,590 2007...................................................... 1,857 2008...................................................... 1,015 2009...................................................... 985 2010 and thereafter....................................... 1,970 ------- Total commitments......................................... $13,417 ======= In the first quarter 2003, the Company reached an agreement with MylanLaboratories, Inc. under which the Company would contribute $12,415 to thesettlement of consolidated litigation brought by a class of direct purchasers.As of December 31, 2005, $7,615 was paid in accordance with the agreement, withthe remaining $4,800 to be paid over the next three years. At December 31, 2005future commitments under this agreement were as follows: Year ended December 31: 2006...................................................... $1,600 2007...................................................... 1,600 2008...................................................... 1,600 ------ Total Commitments......................................... $4,800 ====== (19) CONTINGENCIES The Company is subject to various investigations, claims and legalproceedings covering a wide range of matters that arise in the ordinary courseof its business activities. The Company continually assesses all known facts andcircumstances as they pertain to all legal and environmental matters andevaluates the need for reserves and disclosures as deemed necessary based onthese facts and circumstances and as such facts and circumstances develop. Environmental In connection with laws and regulations pertaining to the protection of theenvironment, the Company and/or its subsidiaries is a party to severalenvironmental proceedings and remediation investigations and cleanups and, alongwith other companies, has been named a potentially responsible party for certainwaste disposal sites ("Superfund sites"). Additionally, as discussed in the"Sale of Rutherford Chemicals" section of this Note, the Company has retainedthe liability for certain environmental proceedings, associated with theRutherford Chemicals business. Each of these matters is subject to variousuncertainties, and it is possible that some of these matters will be decidedunfavorably against the Company. The resolution of such matters often spansseveral years and frequently involves regulatory oversight or adjudication.Additionally, many remediation requirements are not fixed and are likely to beaffected 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 itsliability, the Company has accrued for the estimated costs associated with thestudy and remediation of Superfund sites not owned by the 81 CAMBREX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) -- (CONTINUED) (19) CONTINGENCIES -- (CONTINUED)Company and the Company's current and former operating sites. These accrualswere $6,413 and $6,247 at December 31, 2005 and December 31, 2004, respectively.The increase in the accrual is primarily due to estimated remediation costs atthe Clifton site (see below) based on information developed during the thirdquarter of 2005 of $1,300 offset by a decrease in a reserve at an internationalsite of $207, currency fluctuation of $581 and payments of $413. Based uponcurrently available information and analysis, the Company's current accrualrepresents management's best estimate of what it believes are the probable andestimable costs associated with environmental proceedings including amounts forlegal and investigation fees where remediation costs may not be estimable at thereporting date. As a result of the sale of the Bayonne, New Jersey facility (see "Sale ofRutherford Chemicals" section of this Note), an obligation to investigate siteconditions and conduct required remediation under the New Jersey Industrial SiteRecovery Act was triggered and the Company has retained the responsibility forsuch obligation. The Company completed a Preliminary Assessment of the site andsubmitted the preliminary assessment to the New Jersey Department ofEnvironmental Protection ("NJDEP"). The preliminary assessment identifiedpotential areas of concern based on historical operations and sampling of suchareas commenced. The Company has completed a second phase of sampling anddetermined that a third phase of sampling is necessary to determine the extentof contamination and any necessary remediation. The results of the completed andproposed sampling, and any additional sampling deemed necessary, will be used todevelop an estimate of the Company's future liability for remediation costs, ifrequired. The Company submitted its plan for the third phase of sampling to theNJDEP during the fourth quarter. The sampling will commence in the next fewmonths. In March 2000, the Company completed the acquisition of the CambrexProfarmaco Landen facility in Belgium. At the time of acquisition, Cambrex wasaware of certain site contamination and recorded a reserve for the estimatedcosts of remediation. This property has been the subject of an extensiveon-going environmental investigation. The investigation has been completed andthe Company concluded that no change to the reserve was necessary based on theinformation developed through the investigation. The health risk assessmentrelated to the site contamination is on-going, and is expected to be completedin the near future, and the results of such assessment may affect the reserves. The Company's Cosan subsidiary conducted manufacturing operations inClifton, New Jersey from 1968 until 1979. Prior to the acquisition by theCompany, the operations were moved to another location and thereafter Cambrexpurchased the business. In 1997, Cosan entered into an Administrative ConsentOrder with the NJDEP. Under the Administrative Consent Order, Cosan is requiredto complete an investigation of the extent of the contamination related to theClifton site and conduct remediation as may be necessary. During the thirdquarter 2005, the Company completed the investigation related to the Cliftonsite, which extends to adjacent properties. The results of the investigationcaused the Company to increase its related reserves by $1,300. The Companysubmitted the results of the investigation and proposed remedial action plan tothe NJDEP. The increase in the reserves is based on the proposed remedial actionplan. In February 2005, the New Jersey Federal District Court ruled that alawsuit claiming property damages against Cosan by the owners of contaminatedproperty adjacent to the Clifton location could be placed on the activecalendar. Discovery in this matter is ongoing. The outcome of this matter couldalso affect the reserves. In mid-2004 the USEPA conducted a hazardous waste inspection of theCompany's Charles city facility. Thereafter, the USEPA notified the facility ofseveral alleged violations of the hazardous waste laws related to management ofhazardous waste and requested additional information related to the allegedviolations. The Company responded and provided information which questioned theconclusion that the violations occurred. Nevertheless, the USEPA concluded thatseveral violations existed at the time of the inspection, and on October 3, 2005issued the facility an order and penalty assessment in the amount of $189. OnOctober 31, 82 CAMBREX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) -- (CONTINUED) (19) CONTINGENCIES -- (CONTINUED)2005 the Company filed a request for a hearing and an informal conference todiscuss settlement. Settlement discussions have been on-going as we prepare forthe hearing.  In March 2006, the Company received notice from the United StatesEnvironmental Protection Agency ("USEPA") that two former operating subsidiariesare considered potentially responsible parties ("PRPs") at the Berry's CreekSuperfund Site, Bergen County, New Jersey. Our operating companies are amongmany other PRPs that were listed in the notice. Pursuant to the notice the PRPshave been asked to perform a remedial investigation and feasibility study of theBerry's Creek Site. The Company has met with the other PRPs. Both operatingcompanies joined the groups of PRPs and filed a joint response to the USEPAagreeing to jointly negotiate to conduct or fund along with other PRPs anappropriate remedial investigation and feasibility study of the Berry's CreekSite. At this time it is too early to predict the extent of any liabilities,consequently we have not recorded any reserves for this matter. The Company is involved in other matters where the range of liability isnot reasonably estimable at this time and it is not determinable wheninformation will become available to provide a basis for recording an accrual,should an accrual be required. If any of the Company's environmental matters areresolved in a more unfavorable manner than presently estimated, these matterseither individually or in the aggregate, could have a material adverse effect onthe Company's financial condition, operating results and cash flows whenresolved in a future reporting period. Litigation and Other Matters Mylan Laboratories In 1998 the Company and its subsidiary Profarmaco S.r.l. (currently knownas Cambrex Profarmaco Milano S.r.l.") ("Profarmaco") were named as defendants(along with Mylan Laboratories, Inc. ("Mylan") and Gyma Laboratories of America,Inc., Profarmaco's distributor in the United States) in a proceeding institutedby the Federal Trade Commission ("FTC") in the United States District Court forthe District of Columbia (the "District Court"). Suits were also commenced byseveral State Attorneys General. The suits alleged violations of the FederalTrade Commission Act arising from exclusive license agreements betweenProfarmaco and Mylan covering two APIs. The FTC and Attorneys' General suitswere settled in February 2001, with Mylan (on its own behalf and on behalf ofProfarmaco and Cambrex) agreeing to pay over $140,000 and with Mylan, Profarmacoand Cambrex agreeing to monitor certain future conduct. The same parties including the Company and Profarmaco have also been namedin purported class action complaints brought by private plaintiffs in variousstate courts on behalf of purchasers of the APIs in generic form, makingallegations similar to those raised in the FTC's complaint and seeking variousforms of relief including treble damages. In April 2003, Cambrex reached an agreement with Mylan under which Cambrexwould contribute $12,415 to the settlement of litigation brought by a class ofdirect purchasers. In exchange, Cambrex and Profarmaco received from Mylan arelease and full indemnity against future costs or liabilities in relatedlitigation brought by purchasers, as well as potential future claims related tothis matter. In accordance with the agreement $7,615 has been paid throughDecember 31, 2005, with the remaining $4,800 to be paid over the next threeyears. Cambrex recorded an $11,342 charge (discounted to the present value dueto the five year pay-out) in the first quarter of 2003 as a result of thissettlement. As of December 31, 2005 the outstanding balance for this liabilitywas $4,520. 83 CAMBREX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) -- (CONTINUED) (19) CONTINGENCIES -- (CONTINUED) Vitamin B-3  In May 1998, the Company's subsidiary, Nepera, which formerly operated theHarriman facility and manufactured and sold niacinamide (Vitamin B-3), receiveda Federal Grand Jury subpoena for the production of documents relating to thepricing and possible customer allocation with regard to that product. In 2000,Nepera reached agreement with the Government as to its alleged role in VitaminB-3 violations from 1992 to 1995. The Canadian government claimed similarviolations. All government suits in the U.S. and Canada have now been concluded. Nepera has been named as a defendant, along with several other companies,in a number of private civil actions brought on behalf of alleged purchasers ofVitamin B-3. The actions seek injunctive relief and unspecified but substantialdamages. All cases have been settled within established reserve amounts.Settlement documents will be finalized and payments will be made during the nextseveral months. The balance of the reserves recorded within accrued liabilitiesrelated to this matter was $1,627 as of December 31, 2005. Litigation in the United States under the U.S. antitrust laws was commencedsome years ago by a group of European purchasers. On motion by the Vitamin B-3defendants, the District Court dismissed the litigation under the long-standingrule that foreign purchasers cannot sue in U.S. courts under U.S. antitruststatutes. Thereafter, the Federal Circuit Court for the District of Columbiareversed the District Court's decision. The Vitamin B-3 defendants, supported bythe U.S. Department of Justice, appealed to the United States Supreme Court andoral arguments were heard on April 29, 2004. In June 2004, the United StatesSupreme Court ruled that foreign purchasers could not sue in U.S. courts underU.S. antitrust statutes if the conduct at issue resulted in purely foreign harm.However, the Court left open potential claims where foreign injuries suffered byforeign plaintiffs were dependent upon domestic harm resulting from conduct thatviolates the U.S. antitrust laws and remanded the matter to the Circuit Courtfor further proceedings. In June 2005, the District Court's finding against theplaintiffs was affirmed and the matter dismissed. During the fourth quarter2005, the United States Supreme Court dismissed plaintiff's final appeal. Thismatter can be considered concluded. Sale of Rutherford Chemicals The Company completed the sale of its Rutherford Chemicals business inNovember 2003. Under the agreement for the sale ("Purchase Agreement"), theCompany provided standard representations and warranties and included variouscovenants concerning the business, operations, liabilities and financialcondition of the Rutherford Chemicals business ("Rutherford Business"). Most ofsuch representations and warranties survived for a period of thirty days afterthe preparation of the audited financial statements for year-end 2004 by thepurchasers of the Rutherford Business ("Buyers"). Therefore, claims for breachesof such representations would have to be brought during that time frame. Certainspecified representations, warranties and covenants, such as those relating toemployee benefit matters and certain environmental matters, survive for longerperiods and claims under such representations, warranties and covenants could bebrought during such longer periods. Under the Purchase Agreement, the Companyhas indemnified the Buyers for breaches of representations, warranties andcovenants. Indemnifications for certain but not all representations andwarranties are subject to a deductible of $750 and a cap at 25 percent of thepurchase price. Under the Purchase Agreement, the Company has retained the liabilitiesassociated with existing general litigation matters related to RutherfordChemicals, including the Vitamin B-3 matter as stated above. With respect tocertain pre-closing environmental matters, the Company retains theresponsibility for: (i) certain existing matters including violations,environmental testing for the New York facility incinerator and off-site 84 CAMBREX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) -- (CONTINUED) (19) CONTINGENCIES -- (CONTINUED)liabilities; and (ii) completing the on-going remediation at the New Yorkfacility. Further, as a result of the sale of the Bayonne, New Jersey facilitywithin Rutherford Chemicals, and as discussed in the Environmental Sectionabove, the obligation to investigate site conditions and conduct requiredremediation under the provisions of the New Jersey Industrial Site Recovery Actwas triggered; and the Company has retained the responsibility for completion ofany such investigation and remediation. With respect to all other pre-closingenvironmental liabilities, whether known or unknown, the Buyer is responsiblefor the management of potential future matters; however, the Buyer and theCompany may share the costs of associated remediation with respect to suchpotential future matters, subject to certain limitations defined in theagreement for sale. The Company has accrued for exposures which are deemedprobable and estimable. In March 2005, the Company received a claim from the Buyers claiming breachof certain representations, warranties and covenants contained in the PurchaseAgreement. In April 2005 the Company responded rejecting the claim. Thereafter,the Buyers submitted an amended claim. The amended claim alleges breaches ofrepresentations, warranties and covenants covering each of the five operatingsites sold pursuant to the Purchase Agreement and are related primarily tofacility structures, utilities and equipment and alleges damages of $26,407. Tothe extent the alleged damages arise from breaches of representations andwarranties, the claim would be subject to a cap of between approximately $14,000and $16,250, depending on whether certain contingent payments are made, and issubject to the deductible of $750 which is the responsibility of the Buyers. InMay 2005, the Company responded to the Buyers and rejected the claim entirely.Management currently believes that the foregoing claims are without merit andwill vigorously defend against the claim. As such, the Company has no reservesrelated to this matter. In September 2005, the Company received a request for indemnity ("SeptemberNotice") from the Buyers related to an arbitration claim filed by a RutherfordBusiness customer ("Customer"). The arbitration claim arises from a claimedbreach of a supply agreement that was assigned to and assumed by the Buyerspursuant to the Purchase Agreement. Thereafter, the Company was also served withan arbitration claim by the Customer related to the same matter. In thearbitration claim, the Customer claims $30,000 in damages arising from Buyers'breach of the supply agreement. The Buyers claim that the September Noticeamends the earlier claims that they filed in March and April 2005, as discussedabove, and that the Customer's claimed breach of the supply agreement should betreated as part of a breach of a representation, warranty or covenant set forthin the earlier notices. The supply agreement was assigned to and assumed by theBuyers, and the Company has now been dismissed from the Customer's arbitrationclaim. In October 2005, the Company rejected the Buyers' claim for indemnityunder the September Notice in its entirety. In October 2005, the Company received a notice from the Buyers ("OctoberNotice") which summarized the claims previously received in March and April2005, along with the Buyer's response to the Company's April and May rejectionof the earlier notices. The October Notice also set forth additional claims forenvironmental matters related to the Rutherford Business that relate toenvironmental matters at each of the five operating sites sold pursuant to thePurchase Agreement. In December 2005 Buyers added two additional environmentalclaims related to the former operating sites ("December Notices"). The Companyhas now responded to the October and December Notices disputing theenvironmental claims on various grounds, including that the Company believesmost claims relate to Buyers' obligations under the Purchase Agreement. TheCompany also requested additional information because some environmental claimsmay be covered by sections of the Purchase Agreement where the parties shareliability concerning environmental matters (see above). Management continues itsevaluation of the Buyers' information and is in discussions concerningresolution of the claims. In April 2006, the Company and its Seller subsidiaries received a summonsand complaint (the Complaint) from the Buyers, which was filed in the SupremeCourt of the State of New York, County of 85 CAMBREX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) -- (CONTINUED) (19) CONTINGENCIES -- (CONTINUED)New York. The Complaint seeks indemnification, declaratory and injunctive relieffor alleged (i) breaches of presentations, warranties and covenants coveringeach of the former operating sites related to facility structures, utilities andequipment included in the March, April and October Notices mentioned above andthe allegedly related breach of the Customer Supply Agreement arising from abreach of warranty at the Harriman facility included in September Noticementioned above (collectively Equipment Matters); and (ii) claims related toenvironmental matters at each of the five operating locations, most of whichrelated to the former Harriman location included in the October Notice andDecember Notices mentioned above (collectively Environmental Matters). The Company continues its evaluation of Buyers' allegations and intends todefend itself against these claims vigorously. The Company continues to believethat the Equipment Matters are without merit. Further, the Company continues tobelieve that based on current information the majority of the claims are eitherBuyers' responsibility or without merit and the remaining are otherwise notreasonably estimable at this time. As such the Company has recorded no reservesfor this matter. Class Action Matter In October 2003, the Company was notified of a securities class actionlawsuit filed against Cambrex and five former and current Company officers. Fiveclass action suits were filed with the New Jersey Federal District Court ("theCourt"). In January 2004, the Court consolidated the cases, designated the leadplaintiff and selected counsel to represent the class. An amended complaint wasfiled in March 2004. The lawsuit has been brought as a class action in the namesof purchasers of the Company's common stock from October 21, 1998 through July25, 2003. The complaint alleges that the Company failed to disclose in timelyfashion the January 2003 accounting restatement and subsequent SECinvestigation, as well as the loss of a significant contract at the Baltimorefacility. The Company filed a Motion to Dismiss in May 2004. Thereafter the plaintifffiled a reply brief. In October 2005, the Court denied the Company's Motion toDismiss against the Company and two current Company officers. The Company hasreached its deductible under its insurance policy and further costs, expensesand any settlement is expected to be paid by the Company's insurers. The Companycontinues to believe that the complaints are without merit and will vigorouslydefend against them. As such, the Company has recorded no reserves related tothis matter. Securities and Exchange Commission The SEC is currently conducting an investigation into the Company'sinter-company accounting procedures from the period 1997 through 2001. Theinvestigation began in the first half of 2003 after the Company voluntarilydisclosed certain matters related to inter-company accounts for the five-yearperiod ending December 31, 2001 that resulted in the restatement of theCompany's financial statements for those years. To the Company's knowledge, theinvestigation is limited to this inter-company accounting matter, and theCompany does not expect further revisions to its historical financial statementsrelating to these issues. The Company is fully cooperating with the SEC. Baltimore Litigation In 2001, the Company acquired the biopharmaceutical manufacturing businessin Baltimore. The sellers filed suit against the Company alleging that theCompany made false representations during the negotiations on which the sellersrelied in deciding to sell the business and that the Company breached itsobligation to pay additional consideration as provided in the purchase agreementwhich was contingent on the performance of 86 CAMBREX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) -- (CONTINUED) (19) CONTINGENCIES -- (CONTINUED)the purchased business. Management believes the matter to be without merit andhas been vigorously defending the suit. Other The Company has commitments incident to the ordinary course of businessincluding corporate guarantees of financial assurance obligations under certainenvironmental laws for remediation, closure and/or third party liabilityrequirements of certain of its subsidiaries and a former operating location;contract provisions for indemnification protecting its customers and suppliersagainst third party liability for manufacture and sale of Company products thatfail to meet product warranties and contract provisions for indemnificationprotecting licensees against intellectual property infringement related tolicensed Company technology or processes. Additionally, as permitted under Delaware law, the Company has agreementswhereby we indemnify our officers and directors for certain events oroccurrences while the officer or director is, or was serving, at our request insuch capacity. The term of the indemnification period is for the officer's ordirector's lifetime. The maximum potential amount of future payments we could berequired to make under these indemnification agreements is unlimited; however,we have a Director and Officer insurance policy that covers a portion of anypotential exposure. The Company currently believes the estimated fair value of itsindemnification agreements is not significant based on currently availableinformation, and as such, the Company has no liabilities recorded for theseagreements as of December 31, 2005. In addition to the matters identified above, Cambrex's subsidiaries areparty to a number of other proceedings. While it is not possible to predict withcertainty the outcome of the Company's litigation matters and various otherlawsuits and contingencies, it is the opinion of management based on informationcurrently available that the ultimate resolution of these matters should nothave a material adverse effect on the Company's results of operations, cashflows and financial position. These matters, if resolved in an unfavorablemanner, could have a material effect on the operating results and cash flowswhen resolved in a future reporting period. 87 CAMBREX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) -- (CONTINUED) (20) CONSOLIDATED SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED) 1ST 2ND 3RD 4TH QUARTER QUARTER QUARTER QUARTER YEAR(1) ---------- ---------- ------------- --------- --------- 2005Gross sales.................................... $110,462 $116,171 $104,500 $ 120,853 $ 451,986 Net revenues................................. 111,933 116,746 104,585 121,833 455,097Gross profit................................... 43,262 40,270 36,822 40,983 161,337 Net income/(loss)............................ 4,090 7,080 (48) (121,580) (110,458)Basic earnings per share:(4) Net income/(loss)............................ 0.16 0.27 (0.00) (4.56) (4.18)Diluted earnings per share:(4) Net income/(loss)............................ 0.15 0.27 (0.00) (4.56) (4.18)Average shares: Basic........................................ 26,346 26,402 26,418 26,654 26,456 Diluted...................................... 26,630 26,510 26,418 26,654 26,456 1ST 2ND 3RD 4TH QUARTER(2) QUARTER(2) QUARTER(2)(3) QUARTER YEAR ---------- ---------- ------------- ---------- -------- 2004Gross sales..................................... $113,549 $108,951 $ 99,250 $117,365 $439,115Net revenues.................................... 115,632 110,049 100,336 117,640 443,657Gross profit.................................... 45,471 42,006 39,194 44,069 170,740Income/(loss) from continuing operations........ 7,759 6,339 (44,861) 4,871 (25,892)Loss on discontinued operations................. (742) -- (236) -- (978)Net income/(loss)............................... 7,017 6,339 (45,097) 4,871 (26,870)Basic earnings per share:(4) Income/(loss) from continuing operations...... 0.30 0.24 (1.72) 0.19 (0.99) Loss on discontinued operations............... (0.03) -- (0.01) -- (0.04) Net income/(loss)............................. 0.27 0.24 (1.73) 0.19 (1.03)Diluted earnings per share:(4) Income/(loss) from continuing operations...... 0.29 0.24 (1.72) 0.18 (0.99) Loss on discontinued operations............... (0.03) -- (0.01) -- (0.04) Net income/(loss)............................. 0.26 0.24 (1.73) 0.18 (1.03)Average shares: Basic......................................... 26,001 26,112 26,109 26,154 26,094 Diluted....................................... 26,605 26,383 26,109 26,540 26,094 (1) Results for 2005 include pre-tax charges for goodwill impairment of $76,385, long-lived asset impairment of $30,792 and a tax benefit related to the long-lived asset impairment of $1,673, recorded within the provision for income taxes in the Biopharma and Human Health segments (fourth quarter). The 2005 results also include pre-tax charges for executive severance of $4,223 (fourth quarter) and an increase in an environmental reserve of $1,300 recorded in operating expenses (third quarter) and a tax benefit due to a favorable Swedish court decision of $3,329 (second quarter) and an increase in valuation allowances against domestic deferred tax assets totaling $16,926 (fourth quarter) within the provision for income taxes. The Company also recorded a net decrease to the tax provision of $524 relating to prior period adjustments (fourth quarter). (2) During the 2004 year-end financial reporting process, the Company identified certain accounting adjustments principally related to amortization of leasehold improvements, employee benefit accruals, inventory and taxes that impacted prior years and prior quarters within 2004. The aggregate impact of the prior years' adjustments was a reduction to net income of $475 and is not considered material to any prior period. The impact on net income for the first, second and third quarters of 2004 was an increase of $36, an increase of $229 or $0.01 per fully diluted share and a decrease of $666 or $0.03 per fully diluted share, respectively. The Company has restated the results of the first three quarters of 2004 to reflect these adjustments. The prior years' adjustment of $475 has been reflected in the restated first quarter results, netting to a $439 reduction to net income or $0.02 per fully diluted share. (3) The third quarter 2004 includes a goodwill impairment charge related to the Baltimore reporting unit of the Biopharma segment of $48,720. (4) Earnings per share calculations for each of the quarters are based on the weighted average number of shares outstanding for each period, as such, the sum of the quarters may not necessarily equal the earnings per share amount for the year. 88 ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. ITEM 9A CONTROLS AND PROCEDURES CONCLUSION REGARDING THE EFFECTIVENESS OF DISCLOSURE CONTROLS AND PROCEDURES The Company maintains disclosure controls and procedures as defined inRules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, asamended (the "Exchange Act") that are designed to ensure that informationrequired to be disclosed in its reports filed or submitted under the ExchangeAct is processed, recorded, summarized and reported within the time periodsspecified in the SEC's rules and forms, and that such information is accumulatedand communicated to the Company's management, including the Company's ChiefExecutive Officer and Chief Financial Officer, as appropriate, to allow fortimely decisions regarding required disclosure. In designing and evaluating thedisclosure controls and procedures, management recognizes that any controls andprocedures, no matter how well designed and operated, can provide onlyreasonable assurance of achieving the desired control objectives, and managementis required to apply its judgment in evaluating the cost-benefit relationship ofpossible 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 theCompany's Chief Executive Officer and Chief Financial Officer, of theeffectiveness of the design and operation of the Company's disclosure controlsand procedures as of the end of the period covered by this Annual Report. Basedon this evaluation, our Chief Executive Officer and Chief Financial Officerconcluded that the Company's disclosure controls and procedures were noteffective as of December 31, 2005, at the reasonable assurance level, because ofthe material weakness described in Management's Report on Internal Control overFinancial Reporting. Notwithstanding the existence of the material weakness described below,management has concluded that the consolidated financial statements in this Form10-K fairly present, in all material respects, the Company's financial position,results of operations and cash flows for the periods presented. MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING Our management is responsible for establishing and maintaining adequateinternal control over financial reporting, as defined in Exchange Act Rule13a-15(f). Internal control over financial reporting is a process designed toprovide reasonable assurance regarding the reliability of financial reportingand the preparation of financial statements for external purposes in accordancewith accounting principles generally accepted in the United States, and includethose 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 financialreporting may not prevent or detect misstatements. Also, projections of anyevaluation of effectiveness to future periods are subject to the risk thatcontrols may become inadequate because of changes in conditions, or that thedegree 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, wecarried out an evaluation of the effectiveness of our internal control overfinancial reporting as of December 31, 2005 based on the InternalControl -- Integrated Framework issued by the Committee of SponsoringOrganizations of the Treadway Commission ("COSO"). 89 A material weakness is a control deficiency, or combination of controldeficiencies, that results in more than a remote likelihood that a materialmisstatement of the annual or interim financial statements will not be preventedor detected. As of December 31, 2005, the Company did not maintain effectivecontrols over the accounting for income taxes. Specifically, the Company did nothave a sufficient level of experienced personnel to enable the Company toproperly consider and apply generally accepted accounting principles to theaccounting for income taxes. Additionally, the Company did not maintaineffective controls to determine the completeness and accuracy of the componentsof the income tax provision calculations and the related deferred income taxesand income taxes payable, including the monitoring of the differences betweenthe tax basis and the financial reporting basis of assets and liabilities toeffectively reconcile the deferred taxes balances. This control deficiencyresulted in audit adjustments to the 2005 consolidated financial statements.Additionally, this control deficiency could result in a misstatement of othercomprehensive income, income taxes payable, deferred income tax assets andliabilities and the related income tax provision that would result in a materialmisstatement to the annual or interim consolidated financial statements thatwould not be prevented or detected. Accordingly, management has determined thatthis control deficiency constitutes a material weakness. As a result of the material weakness described above, the Company'smanagement has concluded that, as of December 31, 2005, the Company's internalcontrol over financial reporting was not effective based on the criteria inInternal Control -- Integrated Framework issued by the COSO. Management's assessment of the effectiveness of the Company's internalcontrol over financial reporting as of December 31, 2005 has been audited byPricewaterhouseCoopers LLP, an independent registered public accounting firm, asstated in their report, which is included herein under Item 8. REMEDIATION OF MATERIAL WEAKNESS The Company has taken and is taking the following actions to address thismaterial weakness in its accounting for income taxes: - Strengthened procedures whereby the current income tax payable account and deferred income tax asset and liability accounts will be reconciled on a regular and timely basis. - Reorganized the corporate tax department; the Vice President of Tax has elected to leave the Company, created and filled a new position- Senior Tax Director, and aligned the corporate tax department to report to the Vice President of Finance. - Increased level of review and discussion of significant tax matters and supporting documentation with senior finance management. - Hired a Tax Director in January of 2006 to fill a vacancy within the corporate tax department. - Identifying interim personnel to augment existing corporate tax staff to ensure there are adequate resources to reconcile all tax-related accounts for each reporting period. CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING Our management carried out an evaluation, with the participation of ourprincipal executive officer and principal financial officer, of changes in ourinternal control over financial reporting, as defined in Exchange Act Rule 13a-15(f). Based on this evaluation, our management determined that no change inour internal control over financial reporting occurred during the fourth quarterof fiscal 2005 that has materially affected, or is reasonably likely tomaterially affect, our internal control over financial reporting. ITEM 9B OTHER INFORMATION The Company has updated the December 31, 2005 financial informationincluded in its February 22, 2006 Form 8-K and the related exhibit. Revisionswere made to the Consolidated Income Statement and Segment Information for assetimpairment charges, and provision for income taxes for the year ended December31, 2005 as well as the December 31, 2005 Consolidated Balance Sheet primarilyfor goodwill and property plant and equipment. The Financial Statements andSupplementary Data are included in Item 8 of this Form 10-K. 90 PART III ITEM 10 DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The following table lists the officers of the Company: NAME AGE OFFICE---- --- ------ James A. Mack*............................ 68 Chairman of the Board of Directors, President and Chief Executive OfficerGary L. Mossman*.......................... 65 Executive Vice President and Chief Operating OfficerLuke M. Beshar*........................... 47 Executive Vice President and Chief Financial OfficerThomas N. Bird*........................... 61 Vice President, Corporate DevelopmentRonnie D. Carroll, PhD*................... 65 Vice President and Chief Technology Officer, Pharmaceutical TechnologiesShawn P. Cavanagh*........................ 40 Senior Vice President and General Manager, Bioproducts Business UnitRobert J. Congiusti*...................... 52 Vice President, Information TechnologyMary E. Fletcher.......................... 44 Assistant General Counsel and Assistant Corporate SecretaryAnup Gupta................................ 41 Vice President, Financial Planning and TreasurerSteven M. Klosk*.......................... 48 Executive Vice President and Chief Operating Officer, Biopharma Business UnitMelissa M. Lesko.......................... 43 Vice President, Human ResourcesGary P. Morrison.......................... 51 Vice President, TaxPaolo Russolo*............................ 61 President, Cambrex Profarmaco Business UnitGregory P. Sargen*........................ 40 Vice President, FinanceCharles W. Silvey......................... 47 Vice President, Internal AuditPeter E. Thauer*.......................... 66 Senior Vice President, Law and Environment, General Counsel and Corporate Secretary * Executive Officer The Company's executive officers are elected by the Board of Directors andserve at the Board's discretion. Mr. Mack joined Cambrex in February 1990 and was reappointed President andChief Executive Officer of Cambrex in February 2006. Mr. Mack had retired asPresident and Chief Executive Officer in August 2004. He joined the Company asPresident and Chief Operating Officer and was appointed to the position ofPresident and Chief Executive Officer in April 1995. Mr. Mack has been adirector of the Cambrex Board of Directors since joining the Company in 1990 andwas appointed Chairman of the Board of Directors in October 1999. Prior tojoining Cambrex, Mr. Mack was Vice President in charge of the worldwidePerformance Chemicals business of Olin Corporation. Mr. Mack was Executive VicePresident of Oakite Products, Inc. from 1982 to 1984. Prior to joining Oakite,he held various positions with The Sherwin-Williams Company, most recently asPresident and General Manager of the Chemicals Division from 1977 to 1981. Mr.Mack is a past Chairman of the Board of Governors of the Synthetic OrganicChemical Manufacturing Association and is a member of the Board of Trustees ofthe Michigan Tech Alumni Fund. Mr. Mossman joined Cambrex in February 2003 and currently serves in therole of Executive Vice President and Chief Operating Officer. He joined theCompany as President of the Pharmaceuticals Business Unit and was appointed tothe position of President and Chief Executive Officer of the Cambrex 91 Pharmaceutical and Biopharmaceutical Business Units in October 2003. In August2004, he was appointed to his current position of Executive Vice President andChief Operating Officer. Prior to joining Cambrex, Mr. Mossman was with DixieChemical Company, Inc. from 1983 through 2003 and served in the role ofPresident since 1990. From 1979 through 1980, Mr. Mossman was General Manager,Thiokol Specialty Chemicals Division and from 1972 through 1979, he wasPresident and Cofounder of Southwest Specialty Chemical Company, Inc. Mr. Beshar joined Cambrex in December 2002 and currently serves in the roleof Executive Vice President and Chief Financial Officer. He joined the Companyas Senior Vice President and Chief Financial Officer and in February 2004 wasappointed to his current position. Prior to joining Cambrex, Mr. Beshar wasSenior Vice President and Chief Financial Officer with Dendrite International.Prior to Dendrite, he was Executive Vice President, Finance and Chief FinancialOfficer for Exp@nets, Inc. from 1998 through 2002. Mr. Beshar has served asChief Financial Officer for other businesses in his career and has been thePresident and Chief Financial Officer of a company privately owned by MerrillLynch Capital Partners. Mr. Beshar is a member of the Board of Directors of PNYTechnologies, Inc. Mr. Bird joined Cambrex in 1997 and currently serves in the role of VicePresident, Corporate Development. He joined the Company as President and ChiefOperating Officer -- Nepera Inc. and was appointed to the position of President,Biotechnology Group in July 1998. In December 2000, he was appointed to theposition of Vice President Business Development -- Life Sciences. In December2002, he was appointed to his current position of Vice President, CorporateDevelopment. Prior to joining Cambrex, Mr. Bird was President of Bavier, Bulger& Goodyear, a management consulting firm, from 1994 to 1997. From 1989 to 1994,he was with Commercial Intertech Corporation, serving in various managementroles, most recently as Group Vice President, Fluid Purification Group. From1984 to 1989, he served as Founder and President of W.M.A Incorporated. Mr. Birdalso served in various general management roles with Sherwin Williams Companyfrom 1979 to 1984. Dr. Carroll joined Cambrex in September 1997 and currently serves in therole of Vice President and Chief Technology Officer, PharmaceuticalTechnologies. He joined the Company as Vice President Technology and wasappointed to his current position in January 2002. Prior to joining Cambrex, Dr.Carroll had been with Bristol-Myers Squibb from 1983 to 1997, most recently inthe role of Vice President, Chemical Development for Bristol-Myers SquibbTechnical Operations. Dr. Carroll was with Pfizer, Inc. from 1966 to 1983 invarious research and development roles. Mr. Cavanagh joined Cambrex in October 1999 and currently serves in therole of Senior Vice President and General Manager, Bioproducts Business Unit.Mr. Cavanagh joined Cambrex with the acquisition of FMC BioProducts where heserved as Site Director. In October 2000, he was appointed Global Director,Endotoxin Detection and in February 2004, to the position of Vice President,Bioproducts. He was appointed to his current position in September 2005. Priorto joining Cambrex, Mr. Cavanagh held various management and engineeringpositions with FMC. Mr. Congiusti joined Cambrex in September 1994 and currently serves in therole of Vice President, Information Technology. He joined the Company asDirector, Information Services and was appointed to his current position inNovember 1998. Prior to joining the Company, he held various senior informationsystems management positions from 1984 to 1994 at International SpecialtyProducts and American Cyanamid Company. Ms. Fletcher joined Cambrex in September 1992 and currently serves in therole of Assistant General Counsel and Assistant Corporate Secretary. She joinedthe Company as Associate Counsel. Ms. Fletcher was appointed Senior Counsel inJanuary 1997 and Assistant General Counsel in May 2000. She was appointed to hercurrent role in November 2005. Prior to joining Cambrex, Ms. Fletcher was withthe New Jersey Department of Environmental Protection from 1985 to 1989, servingin various environmental compliance and enforcement roles. Mr. Gupta joined Cambrex in October 2003 and currently serves as VicePresident, Financial Planning and Treasurer. He joined the Company as Director,Financial Planning and Analysis and was appointed 92 Director, Finance in September 2005. In February 2006, he was promoted to hiscurrent position. Prior to joining Cambrex, Mr. Gupta was with Satyam ComputerServices as Vice President, Automotive Vertical Business Unit from 2002 to 2003.From 1987 to 2002, he worked in various capacities at Planet One, Scient,Trilogy, The Boston Consulting Group and Andersen Consulting (now known asAccenture). Mr. Klosk joined Cambrex in October 1992 and currently serves in the roleof Executive Vice President and Chief Operating Officer, Biopharma BusinessUnit. Mr. Klosk joined the Company as Vice President, Administration. He wasappointed Executive Vice President, Administration in October 1996 and waspromoted to the position of Executive Vice President, Administration and ChiefOperating Officer for the Cambrex Pharma and Biopharmaceutical Business Unit inOctober 2003. In January 2005, Mr. Klosk assumed direct responsibility for theleadership of the Biopharmaceutical Business Unit as Chief Operating Officer.From 1988 until he joined Cambrex, Mr. Klosk was Vice President, Administrationand Corporate Secretary for The Genlyte Group, Inc. From 1985 to 1988, he wasVice President, Administration for Lightolier, Inc., a subsidiary of The GenlyteGroup, Inc. Ms. Lesko joined Cambrex in August 1995 and currently serves in the role ofVice President, Human Resources. She joined Cambrex as Manager, Human Resourcesand was promoted to the position of Director, Compensation, Staffing andDevelopment in October 2001. In October 2004, she was promoted to her currentposition. Prior to joining Cambrex, Ms. Lesko held various human resourcesmanagement positions at The Genlyte Group, Inc. and RCA Records. Mr. Morrison joined Cambrex in July 2004 as Vice President, Tax. From 2000until 2004, he held the position of Vice President, Corporate Taxation withMovado Group, Inc. From 1998 to 2000, he was with Calvin Klein, Inc., as TaxDirector and Ernst & Young as Senior Tax Manager, U.S. Corporate Tax from 1996to 1998. Prior experience includes BCE Telecom Corporation from 1988 to 1995 andPirelli Cable Corporation from 1986 to 1988, serving in various management rolesin corporate taxation. Dr. Russolo is President, Cambrex Profarmaco Business Unit and joined theCompany 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 ProfarmacoNobel 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 hewas appointed to his current position. Mr. Sargen joined Cambrex in February 2003 as Vice President, Finance.Previously, he was with Exp@nets, Inc. from 1999 through 2002, serving in theroles of Executive Vice President, Finance/Chief Financial Officer and VicePresident/Corporate Controller. From 1996 to 1998, he was with FischerScientific International's Chemical Manufacturing Division, serving in the rolesof Vice President, Finance and Controller. Mr. Sargen has also held variouspositions in finance, accounting and audit with Merck & Company, Inc., Heat andControl, Inc., and Deloitte & Touche. Mr. Silvey joined Cambrex in August 2004 as Vice President, Internal Audit.Prior to joining the Company, he was with Automatic Data Processing (ADP) from2002 to 2004 as Vice President, Financial and Operational Audit. From 1998 to2002, he was with Lucent Technologies, most recently in the role of ChiefFinancial Officer, Americas' -- Lucent Worldwide Services. From 1995 to 1998, hewas with CR Bard, Inc., serving in various finance and audit roles. From 1990 to1995, he was with KPMG Peat Marwick LLP as Audit Manager. Mr. Thauer joined Cambrex in August 1989 and currently serves in the roleof Senior Vice President, Law and Environment, General Counsel, and CorporateSecretary. He joined the Company as General Counsel and Corporate Secretary andwas appointed Vice President, Law and Environment in December 93 1992. He was appointed to his current position in January 2001. From 1987 until1989, he was Counsel to the business and finance group of the firm of Crummy,Del Deo, Dolan, Griffinger and Vecchione. From 1971 to 1987, Mr. Thauer heldvarious positions with Avon Products, Inc., including U.S. Legal Department Headand Corporate Assistant Secretary. BOARD OF DIRECTORS The Board of Directors is responsible for directing the management of thebusiness and affairs of the Company. The Board holds regular meetings five timeseach year and holds additional special meetings as required. During 2005 theBoard held ten meetings. Non-management directors have regularly scheduled executive sessions inwhich they meet without the presence of members of management. These executivesessions occur before or after each regularly scheduled meeting of our Board andmay also occur in conjunction with special meetings. The Lead Director of theseexecutive sessions is John R. Miller. Our Board has affirmatively determined, after considering all of therelevant facts and circumstances, that all of the directors, other than James A.Mack and Ilan Kaufthal, are independent from our management under the standardsset forth in the Company's Independence Standards for Directors, which wasadopted by the Board in January 2004 and is attached to this proxy statement asExhibit 1. This means that none of the independent directors have any direct orindirect material relationship with the Company, either directly or as apartner, stockholder or officer of an organization that has a relationship withus. As a result, the Company has a majority of independent directors on ourBoard as required by the listing standards of the New York Stock Exchange. The Board has established four standing committees: the Audit Committee,the Compensation Committee, the Governance Committee and the Regulatory AffairsCommittee. The Charters of such Committees as well as the Corporate GovernanceGuidelines and Code of Business Conduct & Ethics are available on our website(www.cambrex.com), under the "Investors-Governance" captions. The Company will also provide any of the foregoing information in printwithout charge upon written request to the Corporate Secretary, CambrexCorporation, One Meadowlands Plaza, 15(th) Floor, East Rutherford, New Jersey07073. The Audit Committee, comprised of four independent directors, appoints(subject to stockholder ratification) the accounting firm to act as theindependent accountants for the Company, consults with the accounting firmconcerning the scope of the audit, reviews the audit results and reviews theCompany's internal financial controls and procedures with the independentaccountants and with members of management. The Charter of the Audit Committeehas been adopted by the Committee and approved by the Board. All of the membersof the Audit Committee are independent within the meaning of SEC regulations,the listing standards of the New York Stock Exchange and the Company'sIndependence Standards for Directors. The Audit Committee held eleven meetingsin 2005.  The Compensation Committee, comprised of four independent directors,oversees the Company's executive compensation programs and policies andadministers the Company's Equity and Incentive Plans. The Charter of theCompensation Committee has been adopted by the Committee and approved by theBoard. All of the members of the Compensation Committee are independent withinthe meaning of the listing standards of the New York Stock Exchange and theCompany's Independence Standards for Directors. The Compensation Committee heldseven meetings in 2005. The Governance Committee, comprised of four independent directors, isresponsible for reporting to the Board of Directors concerning its evaluation ofthe performance of the Chief Executive Officer, individual directors and theBoard as a whole. The Governance Committee makes recommendations to the Board ofDirectors concerning nominees for election to the Board at Annual StockholderMeetings and candidates for newly created directorships and vacancies on theBoard. The Charter of the Governance Committee has been adopted by the Committeeand approved by the Board. All of the members of the Governance Committee are 94 independent within the meaning of the listing standards of the New York StockExchange and the Company's Independence Standards for Directors. The GovernanceCommittee held three meetings in 2005. The Regulatory Affairs Committee, comprised of three non-managementdirectors, oversees the Company's compliance with Food and Drug Regulations andenvironmental and safety affairs. The Regulatory Affairs Committee held fourmeetings during 2005. Under the retirement policy for non-employee directors established by theBoard of Directors in 1989, a non-employee director (other than incumbentdirectors when the policy was adopted) must not have attained age 72 at the timeof election and may not serve as a director beyond the Annual Meeting nextfollowing such person's 72nd birthday. CONSIDERATION OF DIRECTOR NOMINEES STOCKHOLDER NOMINEES The Governance Committee will consider nominees recommended bystockholders. Such recommendations for the 2007 Annual Meeting should be sent tothe Corporate Secretary of the Company not later than January 24, 2007, andshould include such information as specified in the Company's By-Laws. DIRECTOR QUALIFICATIONS The Company's Corporate Governance Guidelines set forth Board membershipcriteria. Under these criteria, members of the Board should possess the highestpersonal and professional ethics, integrity and values, and be committed torepresenting the long-term interests of the stockholders. Their skills andbackgrounds should include, among other things, experience in making decisions,a track record of competent judgment, the ability to function rationally andobjectively, and experience in different businesses and professions. Directorsmust be willing to devote sufficient time to carrying out their duties andresponsibilities effectively, and should be committed to serve on the Board foran extended period of time. Directors should not serve on more than four otherboards of public companies in addition to the Cambrex Board. Current positionsin excess of these limits may be maintained unless the Board determines thatdoing so would impair the director's service on the Cambrex Board. IDENTIFYING AND EVALUATING NOMINEES FOR DIRECTORS The Governance Committee utilizes a variety of methods for identifying andevaluating nominees for director. The Governance Committee regularly assessesthe appropriate size of the Board, and whether any vacancies on the Board areexpected due to retirement or otherwise. In the event that vacancies areanticipated, or otherwise arise, the Governance Committee considers variouscandidates for director. Candidates may come to the attention of the GovernanceCommittee through current Board members, professional search firms, stockholdersor other persons. These candidates are evaluated at regular or special meetingsof the Governance Committee, and may be considered at any point during the year.As described above, the Governance Committee considers properly submittedstockholder nominations for candidates for the Board. In addition to thestandards and qualifications set out in the Company's Corporate GovernanceGuidelines, the Governance Committee also considers such other relevant factorsas it deems appropriate, including the current composition of the Board, thebalance of management and independent directors, the need for Audit Committeeexpertise and the evaluations of other prospective nominees. There are nodifferences in the manner in which the Governance Committee evaluates nomineesfor director based on whether or not the nominee is recommended by astockholder. COMPENSATION OF DIRECTORS From January until July 1, 2005, the Company paid each non-employeedirector of the Company an annual fee of $23,000, as well as $1,000 for eachBoard, Committee and Stockholders' Meeting attended, except that the Chairpersonof the Compensation, Audit, Regulatory Affairs and Governance Committees 95 received $1,500 for each Committee meeting chaired. On June 2, 2005, the Boardof Directors approved a new Directors' Compensation Program, effective July 1,2005. Under the new Directors' Compensation Program, effective July 1, 2005, theannual fee was increased to $26,000 and was prorated for 2005 service. Theadditional Annual Retainer fee of $5,000 for the Chairman of the Audit Committeewhich was approved by the Board in January 2004 remains effective. Further,under the new Directors' Compensation Program, effective January 1, 2005, (i)each non-employee director of the Company (i) will receive $1,000 for eachtelephonic Board and Committee meeting, except that the Chairperson of theCompensation, Audit, Regulatory Affairs and Governance Committees will eachreceive $1,500 for each telephonic Committee meeting chaired; (ii) will receive$1,500 for each in-person Board and Committee meeting attended, except that theChairperson of the Compensation, Audit, Regulatory Affairs and GovernanceCommittees will each receive $2,000 for each in-person Committee meeting chairedand the lead director shall receive $2,000 for each Board meeting attended.Under the new Director's Compensation Program all retainer and meeting fees for2005 were paid in cash. Directors also receive reimbursement for expensesincurred in connection with meeting attendance. Employees of the Company who arealso directors will not receive any separate fees for acting as directors. In 1995 the Board adopted a policy that each director, within three yearsafter joining the Board, shall have acquired an amount of Company Common Stockequal in value to the annual Board retainer. This policy remains effective. In1995, the Board adopted a Non-Employee Directors' Deferred Compensation Planpermitting non-employee Directors to defer receipt of Board fees includingCompany Common Stock otherwise issuable in payment of Board fees beginning withfees payable after January 1, 1996. Pursuant to the terms of the Non-Employee Director Program of the 1996,1998, 2001, 2003 and 2004 Plans (the "Plans"), each new non-employee directorshall be awarded an option to purchase 2,000 shares of the Company's CommonStock upon election as a director. The Plans further provide that eachnon-employee director will receive a grant of options to purchase 2,000 sharesof Common Stock at the first meeting of the Board of Directors following eachAnnual Meeting of Stockholders of the Company. Each such option will have a pershare exercise price equal to the fair market value of the Company's CommonStock on the date of grant. Options granted to non-employee directors shall benon-qualified options with a seven-year term. Each option will becomeexercisable six months after the date of grant, subject to acceleration upon achange in control. In April 2005 the Board of Directors granted options topurchase 2,000 shares of Common Stock under the Plans to Rosina B. Dixon, Roy W.Haley, Kathryn Rudie Harrigan, Leon J. Hendrix, Jr., Ilan Kaufthal, William B.Korb, James A. Mack, John R. Miller and Peter G. Tombros.  ELECTION OF DIRECTORS The Board of Directors of the Company is divided into three classes. Theterm of office of the directors in Class I expires at this Annual Meeting withthe terms of office of the directors in Class II and Class III ending atsuccessive Annual Meetings. At this Annual Meeting two directors in Class I willbe elected to hold office until the 2009 Annual Meeting and until theirsuccessors shall be elected and qualified. Each of the nominees has consented toserve as a director if elected. To be elected, each nominee for directorrequires a plurality of the votes cast. Abstentions and broker non-votes willnot be counted in connection with the election of directors. A properly executedproxy marked "Withhold" with respect to the election of one or more directorswill not be voted with respect to the director or directors indicated. Thefollowing sets forth with respect to the two persons who have been nominated bythe Board of Directors for election at this Annual Meeting and the otherdirectors of the Company certain information concerning their positions with theCompany (including its predecessor and now wholly-owned subsidiary CasChem,Inc.) and principal outside occupations and other directorships held. Except asotherwise disclosed herein, none of the corporations or organizations listedbelow is a parent, subsidiary or other affiliate of the Company. NOMINEES FOR ELECTION TO SERVE AS DIRECTORS UNTIL 2009 ANNUAL MEETING (CLASS I) David R. Bethune (age 65). Director since June 2005. Member of theCompensation and Governance Committees of the Board of Directors. RetiredChairman and Chief Executive Officer of Atrix Laboratories, a 96 drug delivery and product development company, where he has been a director ofthe company for the past ten years. Prior to Atrix Laboratories, he wasPresident and Chief Operating Officer of IVAX Corporation, a pharmaceuticalcompany. Before joining IVAX, began a start-up pharmaceutical company ventureformed by Mayo Medical Ventures, a business unit of Mayo Clinics of Rochester.He previously served as group Vice President of American Cyanamid Company and amember of the Executive Committee where he had executive authority for humanbiologicals, consumer health products, pharmaceuticals and ophthalmics as wellas global medical research. He was also President of the Lederle LaboratoriesDivision of American Cyanamid Company and President of GD Searle's NorthAmerican operations in the 1980's. He currently serves on the Boards of ZilaIncorporated and Female Health Company. Kathryn Rudie Harrigan (age 55). Director since 1994. Member of the AuditCommittee of the Board of Directors. Since 1981, Professor, Management ofOrganizations Division of the Columbia University Business School, and, since1993, the Henry R. Kravis Professor of Business Leadership at ColumbiaUniversity Business School. Member of the Board of Active International. DIRECTORS SERVING UNTIL 2007 ANNUAL MEETING (CLASS II) Rosina B. Dixon, M.D. (age 63). Director since 1995 and Chairperson of theCompensation Committee and member of the Regulatory Affairs Committee of theBoard of Directors. Dr. Dixon has been a consultant to the pharmaceuticalindustry since May 1986. Prior to that time, she was Vice President andSecretary of Medical Market Specialties Incorporated, as well as a member of itsBoard of Directors. Dr. Dixon previously served as Medical Director, ScheringLaboratories, Schering-Plough Corporation. Prior to that, she was ExecutiveDirector Biodevelopment, Pharmaceuticals Division, CIBA-GEIGY Corporation. Sheis a member of the Board of Directors of Church & Dwight Co., Inc. Roy W. Haley (age 59). Director since 1998. Chairman of the AuditCommittee of the Board of Directors. Chairman, President and Chief ExecutiveOfficer of WESCO International, Inc. (NYSE), an electrical products distributioncompany. Prior to joining WESCO in 1994, served as President and Chief OperatingOfficer of American General Corporation, one of the nation's largest consumerfinancial services organizations. Began his career in 1969 with the managementconsulting division of Arthur Andersen & Co. and served as a partner from 1980until 1988. Director of United Stationers, Inc. (NASDAQ), Pittsburgh Branch ofthe Federal Reserve Bank of Cleveland and civic organizations generally based inWestern Pennsylvania. Leon J. Hendrix, Jr. (age 64). Director since 1995 and Chairman of theGovernance Committee and member of the Compensation Committee of the Board ofDirectors. Chairman of Remington Arms Co. since December 1997 and from December1997 until April 1999 was also Chief Executive Officer. From 1993 to 2000, Mr.Hendrix was a Principal of Clayton, Dubilier & Rice, Inc., a private investmentfirm. Prior thereto, Mr. Hendrix was with Reliance Electric Company, amanufacturer and seller of industrial and telecommunications equipment andservices, since 1973, where he held a series of executive level positions, mostrecently Chief Operating Officer and a member of the Board of Directors since1992. Mr. Hendrix is a member of the Boards of Directors of KeithleyInstruments, Inc., and NACCO Industries, Inc. He is also Chairman of the ClemsonUniversity Board of Trustees. Ilan Kaufthal (age 58). Director since the Company commenced business in1981. Member of the Regulatory Affairs Committee of the Board of Directors. ViceChairman of Investment Banking at Bear, Stearns & Co., Inc. since joining thatfirm in May 2000. Until joining Bear, Stearns & Co., Inc., he was with Schroder& Co. Incorporated as Vice Chairman and head of mergers and acquisitions forthirteen years. Prior thereto, he was with NL Industries, Inc., a firm in thechemicals and petroleum services businesses, as its Senior Vice President andChief Financial Officer. Director of United Retail Group, Inc. and Russ Berrie &Company, Inc. DIRECTORS SERVING UNTIL 2008 ANNUAL MEETING (CLASS III) William B. Korb (age 65). Director since 1999 and member of the Audit andChairman of the Regulatory Affairs Committees of the Board of Directors.Director, President and Chief Executive Officer 97 since 1987 of Marconi Commerce Systems, Inc., formerly Gilbarco Inc., prior tohis retirement on March 1, 2001. Prior to joining Gilbarco, the world's leadinggasoline pump and dispenser manufacturing company, was an Operating VicePresident of Reliance Electric Company, a position he held from 1979 to 1987.Currently serves on the Board of Premier Farnell plc. James A. Mack (age 68). Director since 1990, President and Chief OperatingOfficer of the Company since joining the Company in February 1990 and ChiefExecutive Officer since 1995. Appointed Chairman of the Board of Directors inOctober 1999. In August 2004 he retired as President and Chief Executive Officerand became Executive Chairman of the Board of Directors. In December 2005 he wasnamed Acting President and Chief Executive Officer and on February 1, 2006 hewas elected as President and Chief Executive Officer. Prior thereto was withOlin Corporation, a manufacturer of chemical and other products, since 1984 asVice President, Specialty Chemicals and, more recently, Vice President,Performance Chemicals. Executive Vice President of Oakite Products, Inc. from1982 to 1984. Prior to joining Oakite held various positions with TheSherwin-Williams Company, most recently as President and General Manager of theChemicals Division from 1977 to 1981. Past Chairman of the Board of Governors ofthe Synthetic Organic Chemical Manufacturing Association. Member of the Board ofTrustees of the Michigan Tech Alumni Fund and serves on the Board of Directorsof Research Corporation Technologies Inc. John R. Miller (age 68). Director since 1998. Lead Director, member of theCompensation and Governance Committees of the Board of Directors. Mr. Millercurrently serves as non-executive Chairman of the Board of SIRVA, Inc., aprovider of relocation and moving services to consumers, corporations andgovernments, and is also a Director of Eaton Corporation, a diversifiedindustrial manufacturing company and Graphic Packaging Corporation, a providerof paperboard packaging solutions. Past Director and Chairman of the FederalReserve Bank of Cleveland. Mr. Miller served with The Standard Oil Company as aDirector, President and Chief Operating Officer from 1980 until 1986. From 2000to 2003, he was Chairman and Chief Executive Officer of Petroleum Partners,Inc., a provider of outsourcing services to the petroleum industry. Peter Tombros (age 63). Director since 2002. Member of the Audit andGovernance Committees of the Board of Directors. Professor, DistinguishedExecutive in residence, Eberly College of Science, Pennsylvania StateUniversity. Former Chairman of the Board and Chief Executive Officer ofVivoQuest, a private biopharmaceutical company from 2001 until 2005. Served asPresident and Chief Executive Officer from 1994 to 2001 of Enzon Pharma. Beforejoining Enzon, spent 25 years with Pfizer, Inc. as Vice President of Marketing,Senior Vice President and General Manager and as Executive Vice President ofPfizer Pharmaceuticals, Inc. He also served as Vice President CorporateStrategic Planning. He also serves as Director of Alpharma, Inc., NPSPharmaceuticals, Dendrite International and Protalex. During 2005, each incumbent director attended more than 90% of theaggregate of the meetings of the Board and Committees of the Board of which suchdirector was a member. Eight directors attended the Company's annual meeting ofstockholders in April of 2005. COMMUNICATIONS WITH OUR BOARD The Company is committed to providing stockholders and other interestedpersons with an open line of communication for bringing issues of concern to theCompany's non-management directors. In January 2004, the Board approved thefollowing process by which such communications may be made and for handling anysuch communications received by the Company: Any stockholder or interested person may communicate with the Company's non-management directors as a group by sending a communication to the Board of Directors, c/o Corporate Secretary, Cambrex Corporation, One Meadowlands Plaza, 15(th) Floor, East Rutherford, New Jersey 07073. All communications will be reviewed by the Company's Corporate Secretary who will send such communications to the non-management directors unless the Corporate Secretary determines that the communication does not relate to the business or affairs of the Company, or the function of the Board or its Committees, or relates to insignificant matters that do not warrant the non-management directors' attention or is not otherwise appropriate for delivery to the non-management directors. 98 The non-management directors who receive such communication will have discretion to determine the handling of such communication, and if appropriate, respond to the person sending the communication, and disclosure, which shall be consistent with the Company's policies and procedures and applicable law regarding the disclosure of information. SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE Section 16(a) of the Securities Exchange Act of 1934 requires the Company'sdirectors and executive officers, and persons who own more than ten percent of aregistered class of the Company's securities, to file reports of ownership andtransactions in the Company's securities with the Securities and ExchangeCommission and the New York Stock Exchange. Such directors, executive officersand ten percent stockholders are also required to furnish the Company withcopies of all Section 16(a) forms they file. Based solely on a review of the copies of such forms received by it, and onwritten representation from certain of the Company's directors and executiveofficers that no other reports were required, the Company believes that during2005 all Section 16(a) filing requirements applicable to its directors,executive officers and ten percent stockholders were complied with during the2005 fiscal year except that Robert J. Congiusti, Vice President of InformationTechnology, and Gregory P. Sargen, Vice President of Finance, each filed oneForm 4 late reporting a transaction in Company stock. CODE OF ETHICS The Company has a Code of Business Conduct and Ethics, which is applicableto all directors, officers and employees of the Company, including the ChiefExecutive Officer, the Chief Financial Officer and the principal accountingofficer. AUDIT COMMITTEE REPORT The following Report of the Audit Committee of the Board of Directors ofCambrex Corporation does not constitute soliciting material and should not bedeemed filed or incorporated by reference into any other Company filing underthe Securities Act of 1933 or the Securities Exchange Act of 1934, except to theextent the Company specifically incorporates this Report by reference. The Audit Committee consists of four directors, who were appointed by theBoard. The Board has determined that each member of the Audit Committee (i) isindependent as currently defined by Cambrex policy, the Securities and ExchangeCommission Rules and the New York Stock Exchange listing standards; and (ii)satisfies the financial literacy requirements of the NYSE listing standards.Further, the Board has determined that at least one member of the AuditCommittee satisfies the financial expertise requirements of the NYSE listingstandards. The Board has also determined that Mr. Roy Haley, Audit CommitteeChairperson is an Audit Committee Financial Expert, as that term is defined bycurrent SEC rules. The Audit Committee acts under a written charter adopted by the Committeeand approved by the Board. The role of the Audit Committee is to assist the Board in fulfilling itsresponsibility to oversee (i) the integrity of the Company's financial reportingprocess; (ii) the Company's systems of internal accounting and financialcontrols; (iii) the annual independent audit of the Company's financialstatements; (iv) the independent auditors' qualifications and independence; and(v) the Company's compliance with legal and regulatory requirements. The AuditCommittee's role is one of oversight and it recognizes that the Company'sManagement is responsible for preparing the Company's financial statements andthat the Company's independent auditors are responsible for auditing thosefinancial statements. The Audit Committee's specific responsibilities are setforth in the Audit Committee Charter. In fiscal year 2003, the Audit Committee established a policy (the"Policy") for pre-approval of all audit and permissible non-audit servicesperformed by the independent auditors. Under the Policy, the Audit Committeewill approve the following Audit and Audit-Related Services prior to eachengagement, along with 99 a fee amount: (i) domestic quarterly reviews and the annual financial statementaudit; (ii) statutory or financial audits for international subsidiaries oraffiliates of the Company; (iii) the attestation engagement for the independentauditor's report on Management's assertion on internal controls for financialreporting; (iv) financial audits of employee benefit plans; and (v) duediligence services pertaining to potential business acquisitions anddispositions. On an annual basis, the Audit Committee will pre-approve a blanketamount to authorize the following Audit and Audit-Related Services: (i)consultations related to accounting, financial reporting or disclosure matters;(ii) assistance with understanding and implementing new accounting and financialreporting guidance; and (iii) assistance with internal control reportingrequirements and also Permissible Non-Audit Services, including tax services.Management will provide a quarterly update to the Committee detailing actualspending by quarter and year-to-date for any services rendered under such pre-approval. Under the Policy, the Audit Committee has delegated pre-approvalauthority to the Committee Chairperson for permissible services and fees up to amaximum of $25,000. The Committee Chairperson will report to the entire AuditCommittee any services and fees approved pursuant to such delegation ofauthority.  The Audit Committee met eleven (11) times in 2005. The Audit Committee metindividually with Management, with PricewaterhouseCoopers LLP ("PwC"), theCompany's independent public accountants, and with the Company's internalauditors, as appropriate. The Audit Committee also reviewed and had discussionswith Company Management and PwC regarding the audited financial statements,including a discussion of accounting principles, the reasonableness ofsignificant judgments, and the clarity of disclosures in the financialstatements. Further, the Audit Committee has been updated quarterly onmanagement's process to assess the adequacy of the Company's system of internalcontrol over financial reporting, the framework used to make the assessment, andmanagement's conclusions on the effectiveness of the Company's internal controlover financial reporting. The Audit Committee has also discussed with theindependent auditor the Company's internal control assessment process,management's assessment with respect thereto and the independent auditor'sevaluation of the Company's system of internal control over financial reporting. Additionally, the Audit Committee reviewed and had discussions with PwCregarding the matters required to be discussed by Statement of AuditingStandards No. 61. Further, the Audit Committee received the letter from PwCrequired by Independence Standards Board Standard No. 1 (IndependenceDiscussions with Audit Committees) and has discussed with representatives of PwCtheir independence. The Committee also received PwC's Report dated May 26, 2006 concerning theCompany's financial statements and PwC's assessment of the Company's internalcontrols (the "PwC Opinion"), which is included in the Company's Annual Reporton Form 10-K for fiscal year ended December 31, 2005. Based on the reviews anddiscussions with PwC and Management, and the PwC Opinion, and subject to thelimitations on the role and responsibilities of the Audit Committee as set forthin the Audit Committee Charter, the Audit Committee recommended to the Board,and the Board approved, that the audited financial statements for the fiscalyear ended December 31, 2005 be included in Cambrex's 2005 Annual Report on Form10-K. AUDIT COMMITTEE Roy W. Haley, Chairperson Kathryn Rudie Harrigan William B. Korb Peter G. Tombros ITEM 11 EXECUTIVE COMPENSATION The Company's executive compensation program involves several components.Annual compensation is in the form of base salary plus an incentive award whichconsists of cash and restricted stock units with a multi-year vesting period andwhich is awarded to executives based on the achievement of individual andcorporate goals. In addition to the restricted stock unit grants, long-termcompensation consists of stock options, which are intended to reward executiveswhen improvements in performance increase the market value of the Company forits stockholders. 100 The attainment of results measured against the executives' goals andobjectives is reviewed by the Compensation Committee subsequent to review andrecommendation from the Office of the Chairman. Executives are rewarded foraccomplishments that contribute to desired results, e.g., sales, net income,earnings per share, return on capital employed and other assigned goalsincluding but not limited to: service and quality improvement, product andmarketing development, technology development, and personnel development. TheCompany uses independent salary surveys of its Peer Group, as well as nationalcompensation surveys, to assist in determining appropriate levels ofcompensation for each executive position. The Company targets annual executivesalaries at the median levels in companies surveyed. The Company's annual executive incentive compensation program is designedto provide a better than average individual award when the Company's financialperformance is improved and its long-range prospects are enhanced. This programcurrently includes individual measurements against agreed upon annual operatingand financial goals and longer-term strategic growth objectives. Under thisprogram two-thirds of the award pool is based on annual operating and financialgoals and is generally paid in cash, while the remaining one-third is based onstrategic, longer-term growth objectives and is generally awarded in the form ofrestricted stock units having a three-year holding period. The Committee may inits discretion apportion the aggregate award pool between cash and stock and mayincrease or reduce individual awards. For 2005, despite the fact that theCompany's financial performance was disappointing, management continued to makeprogress with regard to the strategic positioning of the Company's corebusinesses within the life sciences industry. In addition to the restricted stock unit grants, long-term compensation forexecutives includes Company stock option grants, which are awarded based on anindividual's position in the Company, the individual's performance, and thenumber of outstanding stock option awards held by the individual. Optionsgranted to the Company's key employees in 2005, including those individualsnamed in the Summary Compensation Table (below), are typically exercisable basedon the passage of time. During 2005, all unvested stock options, including thosegranted in 2005, were fully vested by the Compensation Committee of the Board ofDirectors as of December 31, 2005, resulting in an acceleration of proformacompensation expense. The Company has imposed holding periods that will requireexecutives to refrain from selling shares acquired upon the exercise of theseoptions. CHIEF EXECUTIVE OFFICERS' COMPENSATION On January 4, 2006, the Company announced that its Board of Directorsdecided to discontinue the Company's acquisition program aimed at transformingCambrex into a specialty therapeutics enterprise. As a result of this change instrategy, effective December 31, 2005, Mr. James A. Mack rejoined the Companywhen he was appointed by the Board of Directors of Cambrex to the positions ofActing President and Chief Executive Officer of Cambrex. Mr. Mack had retired asPresident and Chief Executive Officer, a position he held since April 1995, andbecame Executive Chairman of the Cambrex Board of Directors in August 2004 untilApril 2005 when he retired as Executive Chairman. During 2005 Mr. Mack received$108,333 in annual salary which was determined based on the same factors used indetermining other executive salaries. After retiring as Executive Chairman, Mr.Mack provided consulting services to the Company, for which he received $67,583in consulting fees pursuant to his consulting agreement discussed below in theManagement Contracts and Programs section. Effective February 1, 2006, Mr. Mackwas elected by the Board as President and Chief Executive Officer of Cambrex andthe Board of Directors approved (i) an annual salary for Mr. Mack of $500,000,(ii) a car allowance and driving service; (iii) the extension of the exerciseperiod of Mr. Mack's Stock Appreciation Rights until December 31, 2006(described below), and (iv)an incentive payment for Mr. Mack of up to four timeshis annual salary upon the achievement of certain strategic objectives inconnection with the Board of Directors' decision announced on January 4, 2006 tochange the Company's strategic focus and to consider all available strategicalternatives. Payments to Mr. Mack under the Company's qualified andnon-qualified pension plans and under a consulting agreement, aggregatingapproximately $360,000 per year, are also being surrendered or deferred. At its July 27(th), 2000 meeting and based on the Compensation Committee'srecommendation, the Board adopted the 2000 Succession Planning Incentive Programto ensure effective succession planning and transition. Under the Program Mr.Mack was awarded 175,000 Incentive Appreciation Units at the traded 101 closing price of the Company's common stock on the date of the award. With thedeparture of the Company's Chief Operating Officer early in 2003, Mr. Mackagreed to remain with the Company for an additional two year period. At its May21(st), 2003 meeting and considering Mr. Mack's commitment to continue for a twoyear period, and based on the Compensation Committee's recommendation, the Boardadopted a new Incentive Appreciation Unit Plan for Mr. Mack replacing the Planadopted in 2000. Under the new plan, 150,000 appreciation units were awarded toMr. Mack valued initially at the closing price of the Company's traded shareprice on the date of the award which was $19.30. Upon a finding by the Boardthat a successful management transition has occurred, the vested award would beexercisable on and after December 31, 2004, if the Company's common stock tradesat or above an average price of $25 per share for twenty consecutive days priorto December 31, 2004, representing an increase of more than 29% over the grantprice. During 2004 the stock traded above $25 per share for more the twentyconsecutive days and the award vested. At a meeting held on January 27, 2005 theCompany's Board of Directors, based on the hiring of John R. Leone as Presidentand Chief Executive Officer and his performance during his first five monthswith the Company, determined that a successful management transition hadoccurred. Thereafter, Mr. Mack was entitled to exercise the award in whole or inpart and receive in cash from the Company the difference between the grant priceand the traded share price on the date of exercise times the number of unitsexercised. The award was due to expire on the earlier of (i) December 31, 2007,or (ii) a date one year after Mr. Mack's retirement from active service on April27, 2005. On February 1, 2006, the Board of Directors extended the expirationdate of Mr. Mack's award to December 31, 2006, due to his election as Presidentand Chief Executive Officer. In connection with the Board of Directors' decision to change the Company'sstrategic focus it was mutually agreed that John R. Leone, President and ChiefExecutive Officer would leave the Company and the Company entered into aSeparation and General Release Agreement with Mr. Leone which is filed as anExhibit to the Company's Current Report on Form 8-K dated January 4, 2006. Mr.Leone joined Cambrex in August 2004 for the purpose of leading the Company'sentry into the specialty therapeutics market. During 2005, Mr. Leone received$575,000 in annual salary which was determined based on the same factors used indetermining other executive salaries. Mr. Leone's incentive award for 2005consisted of a cash award of $86,250 and a restricted stock unit award of 2,732shares of Company stock valued at $59,297, both of which were paid in 2006. POLICY REGARDING SECTION 162(M) The Company's policy on the tax deductibility of compensation is tomaximize deductibility to the extent possible without negating all of itsdiscretionary power. To this end the Company has submitted complying plans forstockholder approval. Nevertheless, the Committee has occasionally taken actionsthat result in non-deductible compensation and it may do so again in the futurewhen the Committee determines that such actions are in the Company's bestinterests. COMPENSATION COMMITTEE Rosina B. Dixon, M.D., Chairman David R. Bethune Leon J. Hendrix, Jr. John R. Miller Compensation Committee Interlocks and Insider Participation The members of the Compensation Committee during 2005 were Rosina B. Dixon,David R. Bethune, Leon J. Hendrix, Jr. and John R. Miller, each of whom arenon-employee directors. 102 EXECUTIVE AND OTHER COMPENSATION The following table summarizes the compensation earned by the current andformer Chief Executive Officer during 2005 and each of the four other mosthighly compensated executive officers (collectively, the "Named ExecutiveOfficers") for services in such capacities to the Company and its subsidiariesduring the previous three fiscal years. SUMMARY COMPENSATION TABLE  ANNUAL COMPENSATION LONG TERM COMPENSATION ------------------------------------- --------------------------------------- OTHER RESTRICTED SECURITIES ANNUAL STOCK UNDERLYING PAYOUTS- ALL OTHER COMPENSATION AWARD(S) OPTIONS/SARS LTIP COMPENSATIONNAME AND PRINCIPAL POSITION YEAR SALARY ($) BONUS ($) ($)(1) ($)(2) (#) PAYOUTS ($) ($)(10)--------------------------- ---- ---------- --------- ------------ ---------- ------------ ----------- ------------ James A. Mack............ 2005 108,333 -0 - -0 - -0 -(3) -0 - -0 - 4,875 Chairman, President 2004 650,000 182,813 -0 - 414,375 -0 - -0 - 9,225 and Chief Executive 2003 650,000 100,000 -0 - 200,000 -0 - -0 - 9,000 Officer(2)John R. Leone............ 2005 575,000 86,250 -0 - 59,297(4) 33,333 -0 - 9,450 President, Chief 2004 207,147 350,000 -0 - 2,441,227 400,000 -0 - 5,794 Executive OfficerGary L. Mossman.......... 2005 417,000 137,610 -0 - 213,435(5) -0 - -0 - 9,450 Executive Vice 2004 337,983 142,864 -0 - 133,857 117,000 -0 - 9,225 President, Chief 2003 217,949 125,000 -0 - 50,000 162,500 -0 - 9,000 Operating OfficerLuke Beshar.............. 2005 363,333 44,400 -0 - 183,150(6) 17,000 -0 - 9,450 Executive Vice 2004 347,917 78,750 -0 - 178,500 17,000 -0 - 7,225 President, Chief 2003 325,000 90,000 -0 - 90,000 62,500 -0 - 6,147 Financial OfficerSteven M. Klosk.......... 2005 338,333 16,560 -0 - 145,418(7) 17,000 -0 - 9,450 Executive Vice 2004 322,917 81,331 -0 - 93,313 17,000 -0 - 9,225 President, 2003 300,000 80,000 -0 - 80,000 12,500 -0 - 9,000 Administration & Chief Operating Officer, Pharma & Biopharma Business UnitsPaolo Russolo............ 2005 307,063 8,173 64,666(8) 163,453(9) 17,000 -0 - -0 - President, Cambrex 2004 299,374 136,703 66,527(8) 102,910 17,000 -0 - -0 - Profarmaco Business 2003 259,807 113,000 61,278(8) 60,000 12,500 -0 - -0 - Unit --------------- (1) The rules require disclosure of perquisites and other personal benefits only when the aggregate value of these items exceeds the lesser of $50,000 or 10% of salary and bonus. (2) Mr. Mack retired on April 27, 2005. After his retirement, he provided consulting services to Cambrex, for which he was paid $67,583 in consulting fees. (3) As of 12/31/2005, Mr. Mack held 7,318 shares of restricted stock units and 25,101 unvested shares of restricted stock units, with a combined value of $608,505. (4) As of 12/31/2005, Mr. Leone held 31,066 vested shares of restricted stock units and 80,395 unvested shares of restricted stock units, with a combined value of $2,092,123. (5) As of 12/31/2005, Mr. Mossman held 652 vested shares of restricted stock units and 6,967 unvested shares of restricted stock units, with a combined value of $143,009. (6) As of 12/31/2005, Mr. Beshar held 1,173 vested shares of restricted stock units and 9,899 unvested shares of restricted stock units, with a combined value of $207,821. (7) As of 12/31/2005, Mr. Klosk held 3,128 vested shares of restricted stock units and 7,289 unvested shares of restricted stock units, with a combined value of $195,527. 103 (8) Paid pursuant to an employment arrangement assumed by the Company as part of its acquisition of Cambrex Profarmaco Milano S.r.l. (9) As of 12/31/05, Dr. Russolo held 1,534 vested shares of restricted stock units and 6,295 unvested shares of restricted stock units, with a combined vlue of $146,950. (10) Amounts indicated are attributable to Company contributions under the Company's Savings Plan. OPTION GRANTS IN FISCAL 2005  INDIVIDUAL GRANTS POTENTIAL REALIZABLE VALUE AT ASSUMED ANNUAL RATES OF % OF TOTAL RETURN OF STOCK OPTIONS PRICE APPRECIATION GRANTED TO EXERCISE OR FOR OPTION TERM(2) OPTIONS EMPLOYEES IN BASE PRICE EXPIRATION ---------------------NAME GRANTED (#)(1) FISCAL YEAR ($/SHARE) DATE 5% ($) 10% ($)---- -------------- ------------- ----------- ---------- --------- --------- James A. Mack........ -0 - 0.0% N/A N/A N/A N/AJohn R. Leone........ 33,333(3) 5.0% 20.72 1/30/2006 281,168 655,241Gary L. Mossman...... -0 - 0.0% N/A N/A N/A N/ALuke M. Beshar....... 17,000 2.5% 20.72 7/25/2012 143,397 334,176Steven M. Klosk...... 17,000 2.5% 20.72 7/25/2012 143,397 334,176Paolo Russolo........ 17,000 2.5% 20.72 7/25/2012 143,397 334,176 --------------- (1) Options granted on 07/25/05 became fully exercisable on 12/31/05 but are subject to holding periods, such that shares became 25% saleable on 12/31/05 and the remaining shares will be saleable in 25% increments on 12/31/06, 12/31/07, and 12/31/08. The vesting in 2005 eliminated future compensation expense the Company would otherwise recognize in its consolidated statement of operations with respect to these options when the Statement of Financial Accounting Standards No. 123(R) "Share-Based Payment", issued by the Financial Accounting Standards Board, was implemented for reporting periods beginning January 1, 2006. Options were granted at fair market value and have a term of seven years, subject to earlier forfeiture in the event of termination of employment. (2) Realizable value is presented net of option exercise price, but before taxes associated with exercise. These amounts represent assumed compounded rates of appreciation and exercise of the options immediately prior to the expiration of their term. Actual gains are dependent on the future performance of Cambrex Stock, overall stock market conditions, and continued employment through the exercise period. (3) Mr. Leone terminated his employment in January 2006. Options granted to him on 07/25/05 were cancelled thirty days after his termination of employment. 104 The following table sets forth information for each Named Executive Officerwith regard to the aggregate options exercised during 2005 and the aggregatestock options held as of December 31, 2005. AGGREGATE OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION/SAR VALUES(1) VALUE OF UNEXERCISED NUMBER OF SECURITIES IN-THE-MONEY UNDERLYING UNEXERCISED OPTIONS/SARS AT FY-END SHARES OPTIONS/SARS AT ($) ACQUIRED ON VALUE REALIZED FY-END (#) ----------------------------NAME EXERCISE (#) ($)(1) EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE(2)---- ------------ --------------- ------------------------- ---------------------------- James A. Mack............ -0 - -0 - 456,482/0 $ 100/$0John R. Leone............ -0 - -0 - 433,333/0 $ 0/$0Gary L. Mossman.......... -0 - -0 - 279,500/0 $ 1,187/$0Luke M. Beshar........... -0 - -0 - 326,500/0 $ 1,187/$0Steven M. Klosk.......... 125,000 682,188 176,500/0 $ 1,187/$0Paolo Russolo............ -0 - -0 - 156,500/0 $181,988/$0 (1) Based upon the market value of underlying securities at exercise less the exercise price. (2) Based upon the closing price on December 31, 2005 of $18.77. With respect to shares of Common Stock that may be issued under theCompany's existing equity compensation plans, see Item 5 of this 2005 Form 10K. 2000 EMPLOYEE PERFORMANCE STOCK OPTION PLAN The 2000 Employee Performance Stock Option Plan provides for the grant ofstock options (both incentive stock options and non-qualified stock options)primarily to key employees of the Company and its subsidiaries who are notexecutive officers. The plan is generally administered by the CompensationCommittee of the Board, which has full authority, subject to the terms of theplan, to determine the provision of awards, including the amount and type of theawards and vesting schedules, and to interpret the plan. Individual award agreements set forth the applicable vesting schedule forsuch awards, which are based on the Company's publicly traded share price butwhich may also be based on the passage of time or otherwise. In general,following a "change in control" (as defined in the plan), each stock option willbe canceled in exchange for a cash settlement equal to the excess of the "changein control price," which means the highest price per share paid or offered inany bona fide transaction related to a change in control (as determined by theCompensation Committee), over the exercise price of the stock option. Stock options are granted with an exercise price of not less than onehundred percent of the fair market value of the underlying Cambrex common stockon the date of grant. Stock options are not exercisable more than ten years fromthe date of grant. RETIREMENT PLANS Retirement benefits are based on an employee's years of service andcompensation for such years. "Compensation" for the purposes of the computationof benefits, includes regular compensation, bonuses and overtime, but excludesincome attributable to fringe benefits and perquisites. The retirement benefitearned for a given year of service is calculated by multiplying theparticipant's compensation for the year by 1% and adding to that amount 0.6% ofsuch compensation in excess of the participant's social security coveredcompensation. Similar amounts are calculated for each year of service and areaggregated to obtain the annual retirement benefit, subject to the limitationsimposed by the Employee Retirement Income Security Act of 1974 and relatedregulations ("ERISA"). For this purpose social security covered compensation isthe 35-year average of the social security wage bases ending with the wage basefor the year in which the participant reaches age 65. Although compensation includes the items mentioned above, the Company'squalified non-contributory pension plan (the "Qualified Plan") limits themaximum amount of compensation which may be taken into 105 account for the purposes of calculating benefits to the ERISA limit, which was$210,000 during 2005. Therefore, any compensation received by any of the NamedExecutive Officers which exceeds this amount will not be taken into account inthe calculation of their benefits under this Plan. A Supplemental Non-QualifiedPension Plan, which became effective on January 1, 1994, provides benefits basedon compensation levels above the ERISA maximum compensation level. Employeeshired after December 31, 2002 are not eligible to participate in the RetirementPlan. The following table shows the estimated aggregate annual retirementbenefits payable under the Company's Qualified and Supplemental pension plans toemployees listed, assuming they retire at normal retirement age (65), withbenefits payable in the form of a life annuity and that pensionable compensationfor all years after 2005 will be the same as 2005 pensionable compensation.  PENSION PLAN TABLE PROJECTED ANNUAL BENEFITS AT THE LATER 2005 PENSIONABLE OF AGE 65 ORNAME COMPENSATION ($) JANUARY 1, 2005 ($)---- ---------------- ---------------------- James A. Mack(1)................................... $487,746.92 $235,964.40John R. Leone...................................... $ -0 - $ -0 -(2)Gary L. Mossman.................................... $ -0 - $ -0 -(2)Luke M. Beshar..................................... $444,374.97 $128,599.32Steven M. Klosk.................................... $482,588.91 $205,773.24Paolo Russolo...................................... $ -0 - $ -0 -(3) (1) Mr. Mack was rehired at February 1, 2006 and is currently over age 65. Therefore, the annual benefit shown is his single life annuity as of February 1, 2006. (2) Mr. Leone and Mr. Mossman were employed by the Company after December 31, 2002 which therefore makes them ineligible for benefits under the Company's pension plan. (3) Mr. Russolo does not receive pensionable compensation from the Company but does receive a retirement benefit from the government of Italy. DEFERRED COMPENSATION PLAN The Company has established a Non-qualified Deferred Compensation Plan forKey Executives (the "Deferred Plan"). Under the Deferred Plan, officers and keyemployees may elect to defer all or any portion of their pre-tax annual bonusand/or annual base salary (other than the minimum required Social Securitycontributions and $10,000). The deferred amount is invested in Fidelity MutualFunds available under the Cambrex Savings Plan, except for the Cambrex StockFund. The Deferred Plan is not funded by the Company, but the Company hasestablished a Deferred Compensation Trust Fund to protect the account balance inthe case of a change of control of the Company. The Plan is administered incompliance with the new rules and guidance under IRC Section 409A. CHANGE IN CONTROL ARRANGEMENTS The Company has entered into agreements with a number of key employees,including certain Named Executive Officers, with the objective of preservingmanagement stability in the event of a threatened or actual change of control ofthe Company. Under each agreement, in the event of a change of control of theCompany (defined in the agreement to include certain events involving changes inownership of the Company's stock or the composition of the Company's Board ofDirectors or other structural changes, but, in any case, with the Board havingdiscretion to find other events to constitute a change of control) the employeeis awarded a three-year contract of employment in substantially the sameposition he had prior to the start of the employment contract term. The contractof employment is at a monthly salary not less than the highest monthly salaryearned by the employee during the 12 months preceding the start of theemployment contract 106 term and provides for an annual bonus and benefits comparable to thosepertaining to the employee prior to the start of the employment contract term.In addition, in the event of a change of control, performance options willbecome immediately exercisable regardless of the publicly traded share price. In the event that at any time during the employment contract term, theemployee's employment is terminated (i) by the Company (other than by reason ofdisability or for cause), or (ii) by the employee by reason of the Company'sviolation of the terms of the employment contract, or (iii) by the employeeduring the thirteenth month of the employment contract term, with or withoutreason, the employee will be entitled to a lump sum payment in an amount equalto the sum of (a) a ratable portion of the amount of the highest annual bonuspaid to the employee during the three years prior to the year of termination,based upon the elapsed time in the year of termination, (b) up to three timesthe annual salary under the contract and three times such highest annual bonus,which amount declines ratably over a 36 month term for each month the employeeremains employed by the Company following the first anniversary of the start ofthe employment contract term, and (c) the present value of the pension benefitlost by the employee by reason of the early termination of employment. In theevent of such termination the employee will also be entitled to the employmentbenefits, such as health insurance and life insurance, to which he would havebeen entitled had his employment not been terminated, and to the immediate rightto exercise any employee stock options notwithstanding their statedexercisability in installments. Additionally, the employment contracts providefor an additional payment to the employee to cover any excise tax payable by theemployee on so-called excess golden parachute payments under Section 4999 of theInternal Revenue Code of 1986, as amended. Effective February 1, 2006, the Board of Directors of the Company approvedchanges to the Company's executive employment agreements (for certainexecutives), such that a sale of thirty five percent or more of the Company,calculated on an enterprise value basis (market capitalization plus debt minuscash) will constitute a change of control of the Company. The agreement also nowcontains a one-year non-competition provision, a provision under which allequity awards will vest upon a change of control, and a provision for thedeferral of certain payments for six months in the event of termination ofemployment, to avoid imposition of a tax penalty under Section 490A of the TaxCode. The amended agreement and schedule of parties thereto was filed as anExhibit with the Company's Annual Report on Form 10-K for fiscal year endingDecember 31, 2005. 107 ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS The following sets forth information with respect to the only persons ofwhich the Company is aware as of February 15, 2006, who may be deemed tobeneficially own more than 5% of the outstanding Common Stock of the Company: NUMBER OF SHARES PERCENT OFNAME AND ADDRESS BENEFICIALLY OWNED(1) CLASS(2)---------------- --------------------- ----------- Transamerica Investment................................ 2,214,804(3) 8.30% Management, LLC 1150 South Olive Street, Suite 2700 Los Angeles, CA 90015Dimensional Fund Advisors Inc. ........................ 2,192,782(4) 8.22% 1299 Ocean Avenue, 11(th) Floor Santa Monica, CA 90401Snyder Capital Management, L.P. ....................... 1,808,400(5) 6.78% Snyder Capital Management, Inc. One Market Plaza Steuart Tower, Suite 1200 San Francisco, CA 94105Cramer Rosenthal McGlynn, LLC.......................... 1,437,436(6) 5.39% 520 Madison Avenue New York, NY 10022Wentworth, Hauser & Violich, Inc. ..................... 1,408,443(7) 5.30% 353 Sacramento Street, Suite 600 San Francisco, CA 94111 (1) Unless otherwise indicated (a) share ownership is based upon information furnished as of February 15, 2006, by the beneficial owner, and (b) each beneficial owner has sole voting and investment power with respect to the shares shown. (2) For the purpose of this table, the percent of issued and outstanding shares of Common Stock of the Company held by each beneficial owner has been calculated on the basis of (i) 26,696,151 shares of Common Stock issued and outstanding (excluding treasury shares) on February 15, 2006, and (ii) 23,922 shares still to be issued in connection with the 1993 conversion of the Company's 9% Convertible Subordinated Notes. (3) In a Schedule 13G under the Securities Exchange Act of 1934 dated January 10, 2006 and filed by Transamerica Investment Management, LLC ("Transamerica"), Transamerica reported that it has sole dispositive power over 2,214,804 shares and sole voting power over 2,088,456 shares. The shares reported on Transamerica's Schedule 13G are reported beneficially owned as a result of acting as an investment adviser. (4) In a Schedule 13G under the Securities Exchange Act of 1934 dated February 1, 2006 and filed by Dimensional Fund Advisors Inc. ("Dimensional"), Dimensional reported that it has sole dispositive power and sole voting power over 2,192,782 shares. The shares reported on Dimensional's 13G are reported beneficially owned as a result of acting as investment advisor to four investment companies registered under the Investment Company act of 1940 and as investment manager to certain other commingled group trusts and separate accounts known as the "Funds". Dimensional may be deemed to be the beneficial owner of the shares held by the Funds and all securities reported in Dimensional's 13G are owned by the Funds. Dimensional disclaims beneficial ownership of such securities. (5) In a Schedule 13G under the Securities Exchange Act of 1934 dated February 15, 2006 and filed by Snyder Capital Management, L.P. ("SCMLP") and Snyder Capital Management, Inc. ("SCMI"), SCMLP and SCMI reported that it has shared voting power over 1,571,300 shares and shared dispositive power over 1,808,400 shares. SCMLP and SCMI have reported the shares as beneficially owned as a result of acting as an investment advisor. SCMI and its direct parent company, IXIS Asset Management 108 North America, L.P. (formerly known as CDC IXIS Asset Management North America, L.P.) operate under an understanding that all investment and voting decisions regarding managed accounts are to be made by SCMI and SCMLP and not by IXIS Asset Management North America or any entity controlling it. Accordingly, SCMI and SCMLP do not consider IXIS Asset Management North America or any entity controlling it to have any direct or indirect control over the securities held in managed accounts. (6) In a Schedule 13G under the Securities Exchange Act of 1934 dated January 31, 2006 and filed by Cramer Rosenthal McGlynn, LLC ("Cramer"), Cramer reported that it has solve voting power over 1,024,400 shares, sole dispositive power of 1,067,300 shares, shared voting power over 365,536 shares and shared dispositive power over 370,136 shares. Cramer is deemed to be the beneficial owner of 1,437,436 shares as a result of acting as an Investment Adviser registered under section 203 of the Investment Advisers Act of 1940. (7) In a Schedule 13G under the Securities Exchange Act of 1934 dated February 7, 2006 and filed by Wentworth, Hauser & Violich, Inc. ("Wentworth"), Wentworth reported that it has shared voting and shared dispositive power over 1,408,443 shares. Wentworth is deemed to be the beneficial owner of the 1,408,443 shares pursuant to separate arrangements whereby Wentworth acts as investment adviser to certain persons. COMMON STOCK OWNERSHIP BY DIRECTORS AND EXECUTIVE OFFICERS The following table gives information concerning the beneficial ownershipof the Company's Common Stock on February 15, 2006, by (i) each director andnominee for election as a director, (ii) each of the executive officers named inthe Summary Compensation Table (below) and (iii) all directors and executiveofficers of the Company as a group. SHARES BENEFICIALLYBENEFICIAL OWNERS OWNED(1) PERCENT OF CLASS(2)----------------- ------------------- -------------------- David R. Bethune..................................... 2,000(3) *Rosina B. Dixon, M.D................................. 32,346(4) *Roy W. Haley......................................... 26,576(5) *Kathryn Rudie Harrigan............................... 31,885(4) *Leon J. Hendrix, Jr. ................................ 36,802(6) *Ilan Kaufthal........................................ 47,108(7) *William B. Korb...................................... 26,075(8) *John R. Leone........................................ 520,047(9) 1.95%James A. Mack........................................ 996,452(10) 3.73%John R. Miller....................................... 22,273(11) *Peter Tombros........................................ 17,206(12) *Luke M. Beshar....................................... 347,090(13) 1.30%Steven M. Klosk...................................... 273,287(14) 1.02%Gary L. Mossman...................................... 316,213(15) 1.18%Paolo Russolo........................................ 180,736(16) *All Directors and Executive Officers as a group (23 Persons)........................................... 3,566,558(17) 13.36% * Beneficial Ownership is less than 1% of the Common Stock outstanding (1) Except as otherwise noted, reported share ownership is as of February 15, 2006. Unless otherwise stated, each person has sole voting and investment power with respect to the shares of Common Stock he or she beneficially owns. (2) For the purpose of this table, the percent of issued and outstanding shares of Common Stock of the Company held by each beneficial owner has been calculated on the basis of (i) 26,696,151 shares of 109 Common Stock issued and outstanding (excluding treasury shares) on February 15, 2006, (ii) all shares of Common Stock subject to stock options which are held by such beneficial owner and are exercisable within 60 days of February 15, 2006, and (iii) 23,922 shares still to be issued in connection with the 1993 conversion of the Company's 9% Convertible Subordinated Notes. (3) The number of shares reported is 2,000 shares issuable upon exercise of an option granted under the Company's 2004 Incentive Plan. (4) The number of shares reported includes 19,000 shares issuable upon exercise of options granted under the Company's 1994, 1996, 2001 and 2004 stock option Plans. (5) The number of shares reported includes 16,000 shares issuable upon exercise of options granted under the Company's 1994, 1996, 2001 and 2004 stock option Plans and 10,576 share equivalents held at February 15, 2006 in the Company's Directors' Deferred Compensation Plan. (6) The number of shares reported includes 19,000 shares issuable upon exercise of options granted under the Company's 1994, 1996, 2001 and 2004 stock option Plans and 13,302 share equivalents held at February 15, 2006 in the Company's Directors' Deferred Compensation Plan. (7) The number of shares reported includes 17,500 shares issuable upon exercise of options granted under the Company's 1994, 1996, 2001 and 2004 stock option Plans. (8) The number of shares reported includes 16,000 shares issuable upon exercise of options granted under the Company's 1994, 1996, 2001 and 2004 stock option Plans, 1,000 shares held by a family member for which beneficial ownership of such shares is disclaimed, and 9,075 share equivalents held at February 15, 2006 in the Company's Directors' Deferred Compensation Plan. (9) The number of shares reported includes 400,000 shares issuable upon exercise of an option granted under the Company's Stock Option Plans and 119,655 restricted stock units and 392 shares held at December 31, 2005 in the Company's Savings Plan. (10) The number of shares reported includes 456,483 shares issuable upon exercise of options granted under the Company's Stock Option Plans, 25,354 restricted stock units, 94,364 share equivalents held at February 15, 2006 in the Company's Deferred Compensation Plan, and 150,000 Stock Appreciation Rights (see Management Contracts and Programs). (11) The number of shares reported includes 16,000 shares issuable upon exercise of options granted under the Company's 1996, 1998, 2001 and 2004 stock option Plans. (12) The number of shares reported includes 10,000 shares issuable upon exercise of options granted under the Company's 1996, 2001 and 2004 stock option Plans and 6,206 share equivalents held at February 15, 2006 in the Company's Directors' Deferred Compensation Plan. (13) The number of shares reported includes 326,500 shares issuable upon exercise of options granted under the Company's Stock Option Plans, 19,509 restricted stock units and 1,081 shares held at December 31, 2005 in the Company's Savings Plan. (14) The number of shares reported includes 176,500 shares issuable upon exercise of options granted under the Company's Stock Option Plans, 13,988 restricted stock units, 8,386 shares held at December 31, 2005 in the Company's Savings Plan, and 48,785 share equivalents held at February 15, 2006 in the Company's Deferred Compensation Plan. (15) The number of shares reported includes 279,500 shares issuable upon exercise of options granted under the Company's Stock Option Plans, 18,280 restricted stock units and 1,254 shares held at December 31, 2005 in the Company's Savings Plan. (16) The number of shares reported includes 156,500 shares issuable upon exercise of options granted under the Company's Stock Option Plans and 14,230 restricted stock units. (17) The number of shares reported includes 2,554,315 shares issuable upon exercise of options that are currently exercisable or will become exercisable within 60 days, 236,230 restricted stock units, 27,955 shares held at December 31, 2005 in the Company's Savings Plan, 39,159 share equivalents held at February 15, 2006 in the Director's Deferred Compensation Plan and 224,075 share equivalents held 110 at February 15, 2006 in the Company's Deferred Compensation Plan. Shares held by immediate family members are not included and beneficial ownership of such shares is disclaimed. ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS MANAGEMENT CONTRACTS AND PROGRAMS At a meeting held on January 26, 1995, the Board of Directors authorized anagreement with Mr. Mack pursuant to which he might, at his election, enter intoa consulting arrangement with the Company upon his resignation as an employee atan annual rate of $100,000. The Company later restated this arrangement underwhich Mr. Mack entered into two agreements at the prior rate, the firstproviding for consulting services while he is able to provide such services andthe second providing an additional retirement benefit for the remainder of hislifetime. At its July 27(th), 2000 meeting and based on the Compensation Committee'srecommendation, the Board adopted the 2000 Succession Planning Incentive Programto ensure effective succession planning and transition. Under the Program Mr.Mack was awarded 175,000 Incentive Appreciation Units at the traded closingprice of the Company's common stock on the date of the award. With the departureof the Company's Chief Operating Officer early in 2003, Mr. Mack agreed toremain with the Company for an additional two year period. At its May 21(st),2003 meeting and considering Mr. Mack's commitment to continue for a two yearperiod, and based on the Compensation Committee's recommendation, the Boardadopted a new Incentive Appreciation Unit Plan for Mr. Mack replacing the Planadopted in 2000. Under the new plan, 150,000 appreciation units were awarded toMr. Mack valued initially at the closing price of the Company's traded shareprice on the date of the award which was $19.30. Upon a finding by the Boardthat a successful management transition has occurred, the vested award would beexercisable on and after December 31, 2004, if the Company's common stock tradesat or above an average price of $25 per share for twenty consecutive days priorto December 31, 2004, representing an increase of more than 29% over the grantprice. During 2004 the stock traded above $25 per share for more than twentyconsecutive days and the award vested. At a meeting held on January 27, 2005 theCompany's Board of Director, based on the hiring of John R. Leone as Presidentand Chief Executive Officer and his performance during his first five monthswith the Company, determined that a successful management transition hadoccurred. Thereafter, Mr. Mack was entitled to exercise the award in whole or inpart and receive in cash from the Company the difference between the grant priceand the traded share price on the date of exercise times the number of unitsexercised. The award was due to expire on the earlier of (i) December 31, 2007,or (ii) a date one year after Mr. Mack's retirement from active service on April27, 2005. On February 1, 2006, the Board of Directors extended the expirationdate of Mr. Mack's award to December 31, 2006, due to his election as Presidentand Chief Executive Officer. As previously disclosed, the Board of Directors' decided to change theCompany's strategic focus and to consider all available strategic alternatives.In connection with such decision in February 2006, the Board of Directorsapproved a number of measures designed to enhance the retention of employees,including the retention of certain Executive Officers. This retention programwas previously disclosed in the Company's February 7, 2006 Current Report onForm 8-K. With respect to the Executive Officers, the Board approved a specialretention pool, in the total amount of up to $2.5 million, to retain theservices of Gary L. Mossman, Steven M. Klosk, Paolo Russolo and Luke Beshar,each a Named Executive Officer herein and certain other Executive Officers.Payment under such retention pool is to be apportioned in the President andChief Executive Officer's discretion and dependent on the achievement of certainstrategic objectives. 111 ITEM 14 PRINCIPAL ACCOUNTING FEES AND SERVICES The following table sets forth the aggregate fees billed to Cambrex foreach of the fiscal years ended December 31, 2005 and December 31, 2004, by theCompany's independent public accounting firm, PricewaterhouseCoopers LLP forAudit, Audit-Related, Tax and All Other Fees: DECEMBER 31, DECEMBER 31, 2005 2004 --------------- --------------- Audit Fees.................................................. $2,915,670 $2,886,000Audit-Related Fees.......................................... $ 60,000 $ 278,000Tax Fees.................................................... $ 0 $ 0All Other................................................... $ 0 $ 0 ---------- ---------- ---------- ----------Totals...................................................... $2,975,670 $3,164,000 ========== ========== AUDIT FEES Aggregate Audit fees billed for professional services rendered byPricewaterhouseCoopers, LLP in connection with its audit of the Company'sfinancial statements were $2,915,670 for fiscal year-ended 2005. Aggregate Auditfees for fiscal year ended 2004 were $2,886,000. Such fees also include PwC'sinternal control review and attestation now required pursuant to theSarbanes-Oxley Act and the securities regulations. AUDIT-RELATED FEES Aggregate Audit-Related fees billed for professional services rendered byPricewaterhouseCoopers, LLP in connection with assurance and related servicesreasonably related to the audit and review of the Company's financial statementswere $60,000 and $278,000 for fiscal years-ended 2005 and 2004, respectively.Such services include the financial audits of the Company's employee benefitplans; due diligence services pertaining to an acquisition and other commercialtransactions; and general accounting, financial reporting and disclosurematters; and assistance with understanding and implementing new accounting andfinancial reporting guidance and internal control requirements. TAX FEES There were no Tax fees billed for professional tax services rendered byPricewaterhouseCoopers, LLP for fiscal years ended 2005 and 2004. ALL OTHER FEES PricewaterhouseCoopers, LLP did not perform any services classified asOther Services during fiscal years-ended 2005 and 2004, and as such, there wereno billings for such services. As discussed above in the Audit Committee Report, in May of 2003 the AuditCommittee established a policy (the "Policy") for pre-approval of all audit andpermissible non-audit services performed by the independent auditors. Duringfiscal year 2005, all services rendered were approved pursuant to the Policy.Further during fiscal years 2005 and 2004, there were no services performed orfees incurred by PricewaterhouseCoopers, LLP where pre-approval was waivedpursuant to the statutory de minimis exception. The Audit Committee has reviewed the billings by PricewaterhouseCoopers LLPand has determined that they do not affect the auditor's independence. 112 PART IV ITEM 15 EXHIBITS, FINANCIAL STATEMENT SCHEDULES (a) 1. The following consolidated financial statements of the Company arefiled as part of this report: PAGE NUMBER (IN THIS REPORT) ---------------- Report of Independent Registered Public Accounting Firm..... 43Consolidated Balance Sheets as of December 31, 2005, and 2004...................................................... 45Consolidated Income Statements for the Years Ended December 31, 2005, 2004 and 2003................................... 46Consolidated Statement of Stockholders' Equity for the Years Ended December 31, 2005, 2004 and 2003.................... 47Consolidated Statements of Cash Flows for the Years Ended December 31, 2005, 2004 and 2003.......................... 48Notes to Consolidated Financial Statements.................. 49 (a) 2. (i) The following schedule to the consolidated financial statementsof the Company as filed herein and the Report of Independent Registered PublicAccounting Firm are filed as part of this report. PAGE NUMBER (IN THIS REPORT) ---------------- Schedule II -- Valuation and Qualifying Accounts............ 114 All other schedules are omitted because they are not applicable or notrequired or because the required information is included in the consolidatedfinancial statements of the Company or the notes thereto. (a) 3. The exhibits filed in this report are listed in the Exhibit Index onpages 117-119. 113 SCHEDULE II CAMBREX CORPORATION VALUATION AND QUALIFYING ACCOUNTS FOR THE YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003 (DOLLARS IN THOUSANDS) COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E --------- ---------- ---------- ---------- -------- ADDITIONS ----------------------- BALANCE CHARGED TO CHARGED TO BEGINNING COST AND OTHER END OFCLASSIFICATION OF YEAR EXPENSES ACCOUNTS DEDUCTIONS YEAR-------------- --------- ---------- ---------- ---------- -------- Year Ended December 31, 2005: Doubtful trade receivables and returns and allowances..................... $ 2,304 $ 877 $ (47) $367 $ 2,767 Deferred tax valuation allowance...... 79,012 40,126 884 -- 120,022Year Ended December 31, 2004: Doubtful trade receivables and returns and allowances..................... $ 3,281 $ (369) $ 91 $699 $ 2,304 Deferred tax valuation allowance...... 53,769 24,550 693 -- 79,012Year Ended December 31, 2003: Doubtful trade receivables and returns and allowances..................... $ 1,672 $ 1,584 $ 222 $197 $ 3,281 Deferred tax valuation allowance...... 2,821 49,502 1,446 -- 53,769 114 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the SecuritiesExchange Act of 1934, the registrant has duly caused this report to be signed onits behalf by the undersigned, thereunto duly authorized. CAMBREX CORPORATION By /s/ JAMES A. MACK ------------------------------------ James A. Mack Chairman of the Board of Directors President and Chief Executive Officer Date: May 26, 2006 Pursuant to the requirements of the Securities Exchange Act of 1934, thisreport has been signed below by the following persons on behalf of theregistrant and in the capacities and on the dates indicated. SIGNATURE TITLE DATE --------- ----- ---- /s/ JAMES A. MACK Chairman of the Board of ) ------------------------------------------------ Directors President and Chief James A. Mack Executive Officer /s/ LUKE M. BESHAR Executive Vice President and ) ------------------------------------------------ Chief Financial Officer Luke M. Beshar (Principal Financial Officer and Accounting Officer) /s/ DAVID R. BETHUNE Director ) ------------------------------------------------ David R. Bethune /s/ ROSINA B. DIXON* Director ) ------------------------------------------------ Rosina B. Dixon, M.D. /s/ ROY W. HALEY* Director ) ------------------------------------------------ Roy W. Haley /s/ KATHRYN RUDIE HARRIGAN* Director ) ------------------------------------------------ Kathryn Rudie Harrigan PhD /s/ LEON J. HENDRIX, JR.* Director ) May 26, 2006 ------------------------------------------------ Leon J. Hendrix, Jr. /s/ ILAN KAUFTHAL* Director ) ------------------------------------------------ Ilan Kaufthal /s/ WILLIAM KORB* Director ) ------------------------------------------------ William Korb /s/ JOHN R. MILLER* Director ) ------------------------------------------------ John R. Miller 115 SIGNATURE TITLE DATE --------- ----- ---- /s/ PETER G. TOMBROS* Director ) ------------------------------------------------ Peter G. Tombros *By /s/ JAMES A. MACK ) ------------------------------------------ James A. Mack Attorney-in-Fact 116 EXHIBIT INDEX EXHIBIT NO. DESCRIPTION----------- ----------- 3.1 -- Restated Certificate of Incorporation of registrant, as amended.(W). 3.2 -- By Laws of registrant.(X). 4.1 -- Form of Certificate for shares of Common Stock of registrant.(A) -- Exhibit 4(a). 10.1 -- Purchase Agreement dated July 11, 1986, as amended, between the registrant and ASAG, Inc.(A) -- Exhibit 10(r). 10.2 -- Asset Purchase Agreement dated as of June 5, 1989 between Whittaker Corporation and the registrant.(B) -- Exhibit 10(a). 10.3 -- Asset Purchase Agreement dated as of July 1, 1991 between Solvay Animal Health, Inc. and the registrant.(C). 10.4 -- Asset Purchase Agreement dated as of March 31, 1992 between Hexcel Corporation and the registrant.(E). 10.5 -- Stock Purchase Agreement dated as of September 15, 1994 between Akzo Nobel AB, Akzo Nobel NV and the registrant, for the purchase of Nobel Chemicals AB.(H). 10.6 -- Stock Purchase Agreement dated as of September 15, 1994 between Akzo Nobel AB, Akzo Nobel and the registrant, for the purchase of Profarmaco Nobel, S.r.l.(H). 10.7 -- Stock purchase agreement dated as of October 3, 1997 between BioWhittaker and the registrant.(M). 10.8 -- Asset purchase agreement dated as of August 7, 2003 between Rutherford Acquisition Corporation and Cambrex Corporation and The Sellers listed in the asset Purchase agreement.(O). 10.9 -- Credit Agreement dated as of October 7, 2005 between Cambrex Corporation, the subsidiary borrowers party hereto, the subsidiary guarantors party hereto, the lenders party hereto and JP Morgan Chase Bank, N.A., as Administrative Agent.(T). 10.14 -- Retention and Enhanced Severance Program.(Y). 10.15 -- James A. Mack Compensation Agreement.(Y). 10.16 -- 1994 Stock Option Plan.(G). 10.17 -- 1996 Performance Stock Option Plan.(L). 10.18 -- 1998 Performance Stock Option Plan.(N). 10.19 -- 2000 Employee Performance Stock Option Plan.(N). 10.20 -- Form of Employment Agreement (amended and restated) between the registrant and its executive officers named in the Revised Schedule of Parties thereto.(J). 10.21 -- Revised Schedule of Parties to Employment Agreement (Exhibit 10.20 hereto).(J). 10.22 -- Cambrex Corporation Savings Plan.(F). 10.23 -- Cambrex Corporation Supplemental Retirement Plan.(I). 10.24 -- Deferred Compensation Plan of Cambrex Corporation (as amended and restated as of March 1, 2001).(J). 10.27 -- Consulting Agreement dated December 15, 1994 between the registrant and Arthur I. Mendolia.(I). 10.28 -- Consulting Agreement dated December 15, 1995 between the registrant and Cyril C. Baldwin, Jr.(I). 10.29 -- Consulting Agreement between the registrant and James A. Mack.(I). 10.30.1 -- Additional Retirement Payment Agreement dated December 15, 1994 between the registrant and Arthur I. Mendolia.(I). ---------------See legend on following page 117 EXHIBIT INDEX EXHIBIT NO. DESCRIPTION----------- ----------- 10.31 -- Additional Retirement Payment Agreement dated December 15, 1994 between the registrant and Cyril C. Baldwin, Jr.(I). 10.32 -- Additional Retirement Payment Agreement between the registrant and James A. Mack.(I). 10.33 -- 2001 Performance Stock Option Plan.(P). 10.34 -- 2003 Performance Stock Option Plan.(P). 10.35 -- 2004 Performance Incentive Plan.(Q). 10.36 -- Directors' Common Stock Fee Payment Plan.(Q). 10.37 -- Directors' Compensation Arrangements.(S). 10.38 -- 2004 Incentive Plan.(U). 10.39 -- Separation and General Release Agreement.(V). 10.40 -- Registration Rights Agreement dated as of June 6, 1985 between the registrant and the purchasers of its Class D Convertible Preferred stock and 9% Convertible Subordinated Notes due 1997.(A) -- Exhibit 10(m). 10.41 -- Administrative Consent Order dated September 16, 1985 of the New Jersey Department of Environmental Protection to Cosan Chemical Corporation.(A) -- Exhibit 10(q) 10.42 -- Registration Rights Agreement dated as of June 5, 2006 between the registrant and American Stock Transfer and Trust Company.(K). 10.50 -- Manufacturing Agreement dated as of July 1, 1991 between the registrant and A.L. Laboratories, Inc.(D). 21 -- Subsidiaries of registrant.(J). 23 -- Consent of PricewaterhouseCoopers LLP to the incorporation by reference of its report herein in Registration Statement Nos. 333-57404, 333-22017, 33-21374, 33-37791, 33-81780, 33-81782, 333-113612, 333-113613 and 333-129473 on Form S-8 of the registrant.(J). 24 -- Powers of Attorney to sign this report.(J) 31.1 -- CEO Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.(J). 31.2 -- CFO Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.(J). 32.1 -- CEO Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.(R). 32.2 -- CFO Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.(R). ---------------See legend on following page 118 EXHIBIT INDEX (A) Incorporated by reference to the indicated Exhibit to registrant's Registration Statement on Form S-1 (Registration No. 33-16419). (B) Incorporated by reference to registrant's Annual Report on Form 8-K dated June 5, 1989. (C) Incorporated by reference to registrant's Current Report on Form 8-K dated July 1, 1991. (D) Incorporated by reference to the registrant's Annual Report on Form 10-K for 1991. (E) Incorporated by reference to the registrant's Current Report on Form 8-K dated April 10, 1992 and Amendment No. 1 to its Current Report. (F) Incorporated by reference to registrant's Registration Statement on Form S-8 (Registration No. 33-81780) dated July 20, 1994. (G) Incorporated by reference to registrant's Registration Statement on Form S-8 (Registration No. 33-81782) dated July 20, 1994. (H) Incorporated by reference to registrant's Current Report on Form 8-K dated October 26, 1994. (I) Incorporated by reference to the registrant's Annual Report on Form 10-K for 1994. (J) Filed herewith. (K) Incorporated by reference to the registrant's Current Report on Form 8-A dated May 25, 2006. (L) Incorporated by reference to registrant's Registration Statement on Form S-8 (Registration No. 333-22017) dated February 19, 1997. (M) Incorporated by reference to the registrant's Current Report on Form 8-K dated October 8, 1997. (N) Incorporated by reference to registrant's Registration Statement on Form S-8 (Registration No. 333-57404) dated March 22, 2001. (O) Incorporated by reference to the registrant's Current Report on Form 8-K dated November 10, 2003. (P) Incorporated by reference to registrant's Registration Statement on Form S-8 (Registration No. 333-113612) dated March 15, 2004. (Q) Incorporated by reference to registrant's Registration Statement on Form S-8 (Registration No. 333-113613) dated March 15, 2004. (R) Furnished herewith. (S) Incorporated by reference to the registrant's Current Report on Form 8-K dated June 6, 2005. (T) Incorporated by reference to the registrant's Quarterly Report on Form 10-Q dated August 4, 2005. (U) Incorporated by reference to registrant's Registration Statement on Form S-8 (Registration No. 333-129473) dated November 4, 2005. (V) Incorporated by reference to the registrant's Current Report on Form 8-K dated January 4, 2006. (W) Incorporated by reference to registrant's Annual Report on Form 10-K dated March 31, 2005. (X) Incorporated by reference to registrant's Current Report on Form 8-K dated August 3, 2005. (Y) Incorporated by reference to registrant's Current Report on Form 8-K dated February 7, 2006. 119 EXHIBIT 10.20 EMPLOYMENT AGREEMENT THIS AGREEMENT made by and between CAMBREX CORPORATION, a Delawarecorporation (the "Company"), and _________________, residing at_________________________ (the "Employee"), as of the 6th day of February, 2006. WHEREAS, the Employee presently is a key management employee of theCompany, namely its __________________________________; and WHEREAS, the Board of Directors of the Company (the "Board"), on theadvice of its Compensation Committee, has determined that it is in the bestinterests of the Company and its stockholders to assure that the Company willhave the continued dedication of the Employee, notwithstanding the possibility,threat, or occurrence of a Change of Control (as defined below) of the Company.The Board believes it is imperative to diminish the inevitable distraction ofthe Employee by virtue of the personal uncertainties and risks created by apending or threatened Change of Control, to encourage the Employee's fullattention and dedication to the Company currently and in the event of anythreatened or pending Change of Control which provides the Employee withindividual financial security and which are competitive with those of othercorporations. In order to accomplish these objectives, the Board has caused theCompany to enter into this Agreement. NOW, THEREFORE, IT IS HEREBY AGREED AS FOLLOWS: 1. Certain Definitions. (a) The "Effective Date" shall be the first date during the "Change ofControl Period" (as defined in Section 1(b)) on which a Change of Controloccurs. Anything in this Agreement to the contrary notwithstanding, if theEmployee's employment with the Company is terminated prior to the date on whicha Change of Control occurs, and it is reasonably demonstrated that suchtermination (1) was at the request of a third party who has taken stepsreasonably calculated to effect a Change of Control or (2) otherwise arose inconnection with or anticipation of a Change of Control, then for all purposes ofthis Agreement the "Effective Date" shall mean the date immediately prior to thedate of such termination. (b) The "Change of Control Period" is the period commencing on thedate hereof and ending on the third anniversary of such date; provided, however,that commencing on the date one year after the date hereof, and on eachsuccessive anniversary thereof (each such anniversary being hereinafter referredto as a "Renewal Date"), the Change of Control Period shall be automaticallyextended so as to end on the third anniversary of such Renewal Date unless atleast sixty (60) days prior to such Renewal date the Company shall give noticethat the Change of Control Period shall not be so extended, in which event thethen current Change of Control Period shall not be extended and shall end on thethen applicable ending date. 2. Change of Control. For the purpose of this Agreement, a "Change ofControl" shall mean: (a) the acquisition (other than from the Company) by any person,entity or "group" (within the meaning of Section 13 (d)(3) or 14(d)(2) of theSecurities Exchange Act of 1934 (the "Exchange Act") but excluding for thispurpose the Company or its subsidiaries or any employee benefit plan of theCompany or its subsidiaries which acquires beneficial ownership of votingsecurities of the Company) of "beneficial ownership" (within the meaning of Rule13d-3 promulgated under the Exchange Act) of fifteen percent (15%) or more ofeither the then outstanding shares of common stock or the combined voting powerof the Company's then outstanding voting securities entitled to vote generally in the election of directors; or -2- (b) individuals who, as of the date hereof, constitute the Board (asof the date hereof the "Incumbent Board") cease for any reason to constitute atleast a majority of the Board; provided that any person becoming a member of theBoard subsequent to the date hereof whose election or nomination for election bythe Company's stockholders (other than an election or nomination of anindividual whose initial assumption of office is in connection with an actual orthreatened election contest relating to the election of the directors of theCompany, as such terms are used in Rule 14a-11 of Regulation 14A promulgatedunder the Exchange Act) was approved by a vote of at least a majority of thedirectors then comprising the Incumbent Board shall be, for purposes of thisAgreement, considered a member of the Incumbent Board; or (c) approval by the stockholders of the Company of either areorganization, or merger, or consolidation, with respect to which persons whowere the stockholders of the Company immediately prior to such reorganization,merger or consolidation do not, immediately thereafter, own more than fiftypercent (50%) of the combined voting power entitled to vote generally in theelection of directors of the reorganized, merged or consolidated entity's thenoutstanding voting securities, or a liquidation or dissolution of the Company,or the sale of all or substantially all of the assets of the Company; or (d) the sale or disposition by the Company of all or substantially allof the assets of the Company; or (e) any other event or series of events or which, notwithstanding anyof the foregoing provisions of this Section 2 to the contrary, is determined bya majority of the Incumbent Board to constitute a Change of Control for thepurposes of this Agreement.The term "the sale or disposition by the Company of all or substantially all ofthe assets of the Company" shall mean a sale or other disposition transaction orseries of related transactions involving assets of the Company or of any director indirect subsidiary of the Company (including the stock of any direct orindirect subsidiary of the Company) in which the value of the assets or stockbeing sold or otherwise disposed of (as measured by the purchase price beingpaid therefor or by such other method as the Board determines is appropriate ina case where there is no readily ascertainable purchase price) constitutes 35%or more of the enterprise value of the Company (as hereinafter defined). The"enterprise value of the Company" shall be the aggregate market value of thethen Outstanding Company Common Stock (on a fully diluted basis) plus aggregatedebt minus cash. The aggregate market value of the shares of Outstanding CompanyCommon Stock shall be determined by multiplying the number of shares ofOutstanding Company Common Stock (on a fully diluted basis) outstanding on thedate of the execution and delivery of a definitive agreement with respect to thetransaction or series of related transactions (the "Transaction Date") by theaverage closing price of the shares of Outstanding Company Common Stock for theten trading days immediately preceding the Transaction Date. Debt and cash shallbe measured by the actual debt and cash on hand as of the end of the monthpreceding the Transaction Date. -3- 3. Employment Period. The Company hereby agrees to employ the Employee, andthe Employee hereby agrees to remain in the employ of the Company, for theperiod (the "Employment Period") commencing on the Effective Date and ending onthe third anniversary of such date; provided, however, that if a Change ofControl actually occurs but the Employee's employment is terminated by theCompany other than for Cause (as defined in Section 5(b) hereof) prior to theoccurrence of such Change of Control but within twelve (12) months after (a) the commencement of a tender offer for at least 15% of the Company's common stock by any person (other than the Company, one of its subsidiaries or any employee benefit plan sponsored or maintained by the Company or one of its subsidiaries) that has not been withdrawn on or before the date of such termination; (b) the commencement of a proxy contest intended to remove control of the Company's business from the Incumbent Board that has not been abandoned on or before the date of such termination; or (c) the execution of a definitive agreement to merge or otherwise consolidate the Company with or into another corporation or to sell a substantial portion of the Company's assets (in each case, other than a transaction involving only the Company and one or more corporations or other entities directly or indirectly owned and controlled by the Company) that is still binding on the parties thereto at the date of such termination;the Effective Date of this Agreement shall be deemed to be the day immediatelyprior to the date of such termination and the date of such termination shall bedeemed to be the Employee's Date of Termination (as defined in Section 5(e)hereof) for the purposes of this Agreement. 4. Terms of Employment. (a) Position and Duties. (i) During the Employment Period, (A) the Employee's positionshall be at least commensurate in all substantial respects with the Employee'sposition with the Company and its subsidiaries during the ninety-day periodimmediately preceding the Effective Date and (B) the Employee's services shallbe performed at the location where the Employee was employed immediatelypreceding the Effective Date or any office or location less than thirty-five(35) miles from such location. (ii) During the Employment Period, the Employee agrees to devotereasonable attention and time during normal business hours to the business andaffairs of the Company and, to the extent necessary to discharge theresponsibilities assigned to the Employee hereunder, to use the Employee'sreasonable best efforts to perform faithfully and efficiently suchresponsibilities. It is expressly understood and agreed that to the extent thatany outside activities have been conducted by the Employee prior to theEffective Date, the continued conduct of such activities subsequent to theEffective Date shall not thereafter be deemed to interfere with the performanceof the Employee's responsibilities to the Company. -4- (b) Compensation. (i) Base Salary. During the Employment Period, the Employee shallreceive a base salary ("Base Salary") at a monthly rate at least equal to thehighest monthly base salary paid or payable to the Employee by the Company andits subsidiaries during the twelve-month period immediately preceding the monthin which the Effective Date occurs. During the Employment Period, the BaseSalary shall be reviewed at least annually and shall be increased at any timeand from time to time as shall be substantially consistent with increases inbase salary awarded in the ordinary course of business to other key employees ofthe Company and its subsidiaries. Any increase in Base Salary shall not serve tolimit or reduce any other obligation to the Employee under this Agreement. (ii) Annual Bonus. In addition to Base Salary, the Employee shallbe eligible (but not entitled) to receive, for each fiscal year during theEmployment Period, an annual bonus (an "Annual Bonus") (either pursuant to anyincentive bonus plan maintained by the Company or otherwise) in cash on the samebasis as with respect to the fiscal year immediately preceding the fiscal yearin which the Effective Date occurs. 5. Termination. (a) Death or Disability. This Agreement shall terminate automaticallyupon the Employee's death. If the Company determines in good faith that theDisability of the Employee has occurred (pursuant to the definition of"Disability" set forth below), it may give to the Employee written notice of itsintention to terminate the Employee's employment. In such event, the Employee'semployment with the Company shall terminate effective on the thirtieth (30th)day after receipt of such notice by the Employee (the "Disability EffectiveDate"), provided that, within the thirty (30) days after such receipt, theEmployee shall not have returned to full-time performance of the Employee'sduties. For purposes of this Agreement, "Disability" means disability which, atleast twenty-six (26) weeks after its commencement, is determined to be totaland permanent by a physician selected by the Company or its insurers andacceptable to the Employee or the Employee's legal representative (suchagreement as to acceptability not to be withheld unreasonably). (b) Cause. The Company may terminate the Employee's employment for"Cause". For purposes of this Agreement, "Cause" shall constitute either (i)personal dishonesty or breach of fiduciary duty involving personal profit; (ii)the commission of a criminal act related to the performance of duties, or thefurnishing of proprietary confidential information about the Company to acompetitor, or potential competitor or third party whose interests are adverseto those of the Company; (iii) habitual intoxication by alcohol or drugs duringwork hours; or (iv) conviction of a felony. -5- (c) Good Reason. The Employee's employment may be terminated by theEmployee for Good Reason. For purposes of this Agreement, "Good Reason" means: (i) relocation of the principal place at which the Employee'sduties are to be performed to a location more than thirty-five (35) miles fromthe principal place where the Employee's duties were performed during theninety-day period immediately preceding the Effective Date; (ii) a substantial reduction in the Base Salary, or in thebenefits or perquisites provided the Employee from those which pertained duringthe 90-day period immediately preceding the Effective Date; (iii) a substantial reduction in the Employee's,responsibilities, authorities or functions from those which pertained during the90-day period immediately preceding the Effective Date; (iv) a substantial adverse change in the Employee's workconditions from those which pertained during the 90-day period immediatelypreceding the Effective Date; and (v) any failure by the Company to comply with and satisfy SectionII(c) of this Agreement. For purposes of this Section 5(c), any good faith determination of"Good Reason" made by the Employee shall be conclusive. Notwithstanding anythingin this Agreement to the contrary, a termination by the Employee for any reasonduring the 30-day period immediately following the first anniversary of theEffective Date shall be deemed to be a termination for Good Reason for allpurposes of this Agreement. (d) Notice of Termination. Any termination by the Company for Cause orby the Employee for Good Reason shall be communicated by Notice of Terminationto the other party hereto given in accordance with Section 12(b) of thisAgreement. For purposes of this Agreement, a "Notice of Termination" means awritten notice which (i) indicates the specific termination provision in thisAgreement relied upon (ii) sets forth in reasonable detail the facts andcircumstances claimed to provide a basis for termination of the Employee'semployment under the provision so indicated and (iii) if the Date of Termination(as defined below) is other than the date of receipt of such notice, specifiesthe termination date (which date shall be not more than fifteen (15) days afterthe giving of such notice). The failure by the Employee to set forth in theNotice of Termination any fact or circumstance which contributes to a showing ofGood Reason shall not waive any right of the Employee hereunder or preclude theEmployee from asserting such fact or circumstance in enforcing his rightshereunder. (e) Date of Termination. "Date of Termination" means the date ofreceipt of the Notice of Termination or any later date specified therein, as thecase may be; provided, however, that (i) if the Employee's employment isterminated by the Company other than Cause or Disability, the Date ofTermination shall be the date on which the Company notifies the Employee of suchtermination and (ii) if the Employee's employment is terminated by reason of -6-death or Disability, the Date of Termination shall be the date of death of theEmployee or the Disability Effective Date, as the case may be. 6. Obligation of the Company upon Termination. (a) Death. If the Employee's employment is terminated by reason of theEmployee's death, this Agreement shall terminate without further obligations tothe Employee's legal representatives under this Agreement, other than thoseobligations accrued or earned and vested (if applicable) by the Employee as ofthe Date of Termination, including, for this purpose (i) the Employee's fullBase Salary through the Date of Termination at the rate in effect on the Date ofTermination or, if higher, at the highest rate in effect at any time from theninety-day period preceding the Effective Date through the Date of Termination(the "Highest Base Salary"), (ii) the product of the Annual Bonus paid to theEmployee for the last full fiscal year and a fraction, the numerator of which isthe number of days in the current fiscal year through the Date of Termination,and the denominator of which is three hundred sixty-five (365) and (iii) anycompensation previously deferred by the Employee (together with accrued interestthereon, if any) and not yet paid by the Company and any accrued vacation paynot yet paid by the Company (such amounts specified in clauses (i), (ii) and(iii) are hereinafter referred to as "Accrued Obligations"). All such AccruedObligations shall be paid to the Employee's estate or beneficiary, asapplicable, in a lump sum in cash within thirty (30) days of the Date ofTermination. Anything in this Agreement to the contrary notwithstanding, theEmployee's family shall be entitled to receive benefits at least equal to themost favorable benefits provided by the Company and any of its subsidiariesunder such plans, programs, practices and policies relating to family deathbenefits, if any, in accordance with the most favorable plans, programs,practices and policies of the company and its subsidiaries in effect at any timeduring the ninety-day period immediately preceding the Effective Date or, ifmore favorable to the Employee and/or the Employee's family, as in effect on thedate of the Employee's death with respect to other key employees of the Companyand its subsidiaries and their families. (b) Disability. If the Employee's employment is terminated by reasonof the Employee's Disability, this Agreement shall terminate without furtherobligations to the Employee; other than those obligations accrued or earned andvested (if applicable) by the Employee as of the Date of Termination, includingfor this purpose, all Accrued Obligations. All such Accrued Obligations shall bepaid to the Employee in a lump sum in cash within thirty (30) days of the Dateof Termination. Anything in this Agreement to the contrary notwithstanding, theEmployee shall be entitled after the Disability Effective Date to receivedisability and other benefits at least equal to the most favorable of thoseprovided by the Company and its subsidiaries to disabled employees and/or theirfamilies in accordance with such plans, programs, practices and policies of theCompany and its subsidiaries in effect at any time during the ninety-day periodimmediately preceding the Effective Date or, if more favorable to the Employeeand/or the Employee's family, as in effect at any time thereafter with respectto other key employees of the Company and its subsidiaries and their families. (c) Cause; Other than for Good Reason. If the Employee's employmentshall be terminated for Cause, this Agreement shall terminate without furtherobligations to the Employee other than the obligation to pay to the Employee theHighest Base Salary through the Date of Termination plus the amount of anycompensation previously deferred by the Employee (together with accrued interestthereon, if any). -7-If the Employee terminates employment other than for Good Reason, this Agreementshall terminate without further obligations to the Employee, other than thoseobligations accrued or earned and vested (if applicable) by the Employee throughthe Date of Termination, including for this purpose, all Accrued Obligations.All such Accrued Obligations shall be paid to the Employee in a lump sum in cashwithin thirty (30) days of the Date of Termination. (d) Good Reason; Other than for Cause or Disability. If, during theEmployment Period, the Company shall terminate the Employee's employment otherthan for Cause, Disability, or death or if the Employee shall terminate hisemployment for Good Reason: (i) the Company shall pay to the Employee in a lump sum in cashwithin thirty (30) days after the Date of Termination the aggregate of thefollowing amounts: A. to the extent not theretofore paid, the Employee'sHighest Base Salary through the Date of Termination; and B. the product of (x) the highest Annual Bonus paid to theEmployee during the three fiscal years immediately preceding the Date ofTermination and (y) a fraction, the numerator of which is the number of days inthe current fiscal year through the Date of Termination and the denominator ofwhich is three hundred sixty-five (365); and C. the product of (x) a fraction, the numerator of which isthirty-six (36) minus the number of whole months the Employee has been employedby the Company following the first anniversary of the Effective Date and thedenominator of which is twelve (12) and (y) the annualized Highest Base Salary;and D. the product of (x) fraction, the numerator of which isthirty-six (36) minus the number of whole months the Employee has been employedby the Company following the first anniversary of the Effective Date and thedenominator of which is twelve (12) and (y) the highest Annual Bonus paid to theEmployee during three fiscal years immediately preceding the Date ofTermination, provided that Employee's Annual Bonus under this Section shall behis Target Bonus until an Annual Bonus has actually been paid; and E. in the case of compensation previously deferred by theEmployee, all amounts previously deferred (together with accrued interestthereon, if any) and not yet paid by the Company, and any accrued vacation paynot yet paid by the Company; and F. a lump-sum payment equal to the excess of (a) theactuarial equivalent of the benefit under the retirement plan of the Company ora subsidiary of the Company in which the Employee is a participant at the datehereof or any successor retirement plan (the "Retirement Plan") (and thesupplemental and/or excess retirement plan, if any) the Employee would receiveif he remained employed by the Company at the compensation level provided for inSection 6(d)(i) of this Agreement through the end of the Employment Period,assuming Employee was fully vested under such plan(s), over (b) the actuarialequivalent of the actual benefit, if any, the Employee is to receive under theRetirement Plan (and the supplemental and/or excess retirement plan), utilizing,in each case, the payment option available under the Retirement Plan (and thesupplemental and/or excess retirement plan) which will produce the greatestlump-sum benefit to the Employee; and -8- (ii) for the remainder of the Employment Period, or such longerperiod as any plan, program, practice or policy may provide, the Company shallcontinue benefits to the Employee and/or the Employee's family at least equal tothose which would have been provided to them as if the Employee's employment hadnot been terminated, in accordance with the most favorable employee welfarebenefit plans (as such term is defined in Section 3(1) of the EmployeeRetirement Income Security Act of 1974, as amended) of the Company and itssubsidiaries (including health insurance and life insurance) during theninety-day period immediately preceding the Effective Date or, if more favorableto the Employee, as in effect at any time thereafter with respect to other keyemployees and their families, and for purposes of eligibility for retireebenefits pursuant to such employee welfare benefit plans, the Employee shall beconsidered to have remained employed until the end of the Employment Period andto have retired on the last day of such period; and (iii) all outstanding equity awards shall immediately vest and,as applicable, become exercisable; and (iv) the Date of Termination shall be considered the Vesting Dateunder the Company's 1987 Long Term Incentive Plan. 7. Non-exclusivity of Rights. Nothing in this Agreement shall prevent orlimit the Employee's continuing or future participation in any benefit, bonus,incentive or other plans, programs, policies or practices, provided by theCompany or any of its subsidiaries and for which the Employee may qualify, norshall anything herein limit or otherwise affect such rights as the Employee mayhave under any stock option or other agreements with the Company or any of itssubsidiaries. Amounts which are vested benefits or which the Employee isotherwise entitled to receive under any plan, policy, practice or program of theCompany or any of its subsidiaries at or subsequent to the Date of Terminationshall be payable in accordance with such plan, policy, practice or programprovided, however, that in the event the terms of any such plan, policy,practice or program concerning the payment of benefits thereunder shall conflictwith any provision of this Agreement, the terms of this Agreement shall takeprecedence but only if and to the extent the payment would not adversely affectthe tax exempt status (if applicable) of any such plan, policy, practice orprogram and only if the Employee agrees in writing that such payment shall be inlieu of any corresponding payment from such plan, policy, practice or program. 8. Full Settlement. The Company's obligation to make the payments providedfor in this Agreement and otherwise to perform its obligations hereunder shallnot be affected by any set-off, counterclaim, recoupment, defense or otherclaim, right or action which the Company may have against the Employee orothers. In no event shall the Employee be obligated to seek other employment ortake any other action by way of mitigation of the amounts payable to theEmployee under any of the provisions of this Agreement. The Company agrees topay, to the full extent permitted by law, all legal fees and expenses which theEmployee may reasonably incur as a result of any contest (regardless of theoutcome thereof) by the Company or others of the validity or enforceability of,or liability under, any provision of this Agreement or any guarantee ofperformance thereof (including as a result of any contest by the Employee aboutthe amount of any payment pursuant to Section 9 of this Agreement), plus in eachcase interest at the applicable Federal rate provided for in Section 7872(f)(2)of the Internal Revenue Code of 1986, as amended (the "Code"). -9- 9. Certain Additional Payments by the Company. (a) Anything in this Agreement to the contrary notwithstanding, in theevent it shall be determined that any payment or distribution by the Company toor for the benefit of the Employee, whether paid or payable or distributed ordistributable pursuant to the terms of this Agreement or otherwise (a"payment"), would be subject to the excise tax imposed by Section 4999 of theCode or any interest or penalties with respect to such excise tax (such excisetax, together with any such interest and penalties, are hereinafter collectivelyreferred to as the "Excise Tax"), then the Employee shall be entitled to receivean additional payment (a "Gross-Up Payment") in the amount such that afterpayment by the Employee of all taxes (including any interest or penaltiesimposed with respect to such taxes), including any Excise Tax, imposed upon theGross-Up Payment, the Employee retains an amount of the Gross-Up Payment equalto the Excise Tax imposed upon the Payments. (b) Subject to the provisions of Section 9(c), all determinationsrequired to be made under this Section 9, including whether a Gross-Up Paymentis required and the amount of such Gross-Up Payment, shall be made by theCompany's regular outside independent public accounting firm (the "AccountingFirm") which shall provide detailed supporting calculations both to the Companyand the Employee within fifteen (15) business days of the Date of Termination,if applicable, or such earlier time as is requested by the Company. The initialGross-Up Payment, if any, as determined pursuant to this Section 9(b), shall bepaid to the Employee within five (5) days of the receipt of the AccountingFirm's determination. If the Accounting Firm determines that no Excise Tax ispayable by the Employee, it shall furnish the Employee with an opinion that hehas substantial authority under Section 6661 of the Code not to report anyExcise Tax on his federal income tax return. Any determination by the AccountingFirm shall be binding upon the Company and the Employee. As a result of theuncertainty in the application of Section 4999 of the Code at the time of theinitial determination by the Accounting Firm hereunder, it is possible thatGross-Up Payments which will not have been made by the Company should have beenmade ("Underpayment"), consistent with the calculations required to be madehereunder. In the event that the Company exhausts its remedies pursuant toSection 9(c) and the Employee thereafter is required to make a payment of anyExcise Tax, the Accounting Firm shall determine the amount of the Underpaymentthat has occurred and any such Underpayment shall be promptly paid by theCompany to or for the benefit of the Employee. (c) The Employee shall notify the Company in writing of any claim bythe Internal Revenue Service that, if successful, would require the payment bythe Company of the Gross-Up Payment. Such notification shall be given as soon aspracticable but no later than ten (10) business days after the later of either(i) the date the Employee has actual knowledge of such claim, or (ii) ten (10)days after the Internal Revenue Service issues to the Employee either a writtenreport proposing imposition of the Excise Tax or a statutory Notice ofDeficiency with respect thereto, and shall apprise the Company of the nature ofsuch claim and the date on which such claim is requested to be paid. TheEmployee shall not pay such claim prior to the expiration of the thirty-dayperiod following the date on which it gives such notice to the Company -10-(or such shorter period ending on the date that any payment of taxes withrespect to such claim is due). If the Company notifies the Employee in writingprior to the expiration of such period that it desires to contest such claim,the Employee shall: (i) give the Company any information reasonably requested by theCompany relating to such claim, (ii) take such action in connection with contesting such claim asthe Company shall reasonably request in writing from time to time, including,without limitation, accepting legal representation with respect to such claim byan attorney reasonably selected by the Company, (iii) cooperate with the Company in good faith in ordereffectively to contest such claim, (iv) permit the Company to participate in any proceedingsrelating to such claim; provided, however, that the Company shall bear and paydirectly all costs and expenses (including additional interest and penalties)incurred in connection with such contest and shall indemnify and hold theEmployee harmless, on an after-tax basis, for any Excise Tax or income tax,including interest and penalties with respect thereto, imposed as a result ofsuch representation and payment of costs and expenses. Without limitation of theforegoing provisions of this Section 9(c), the Company shall control allproceedings taken in connection with such contest and, at its sole option, maypursue or forego any and all administrative appeals, proceedings, hearings andconferences with the taxing authority in respect of such claim and may, at itssole option, either direct the Employee to request or accede to a request for anextension of the statute of limitations with respect only to the tax claimed, orpay the tax claimed and sue for a refund or contest the claim in any permissiblemanner, and the Employee agrees to prosecute such contest to a determinationbefore any administrative tribunal, in a court of initial jurisdiction and inone or more appellate courts, as the Company shall determine; provided, however,that if the Company directs the Employee to pay such claim and sue for a refund,the Company shall advance the amount of such payment to the Employee, on aninterest-free basis and shall indemnify and hold the Employee harmless, on anafter-tax basis, from any Excise Tax or income tax, including interest orpenalties with respect hereto, imposed with respect to such advance or withrespect to any imputed income with respect to such advance; and further providedthat any extension of the statue of limitations requested or acceded to by theEmployee at the Company's request and relating to payment of taxes for thetaxable year of the Employee with respect to which such contested amount isclaimed to be due is limited solely to such contested amount. Furthermore, theCompany's control of the contest shall be limited to issues with respect towhich a Gross-Up Payment would be payable hereunder and the Employee shall beentitled to settle or contest, as the case may be, any other issue raised by theInternal Revenue Service or any other taxing authority. (d) If, after the receipt by the Employee of an amount advanced by theCompany pursuant to Section 9(c), the Employee becomes entitled to receive anyrefund with respect to such claim, the Employee shall (subject to the Company'scomplying with the requirements of Section 9(c)) promptly pay to the Company theamount of such refund (together with any interest paid or credited thereon aftertaxes applicable thereto). If, after the receipt by the outstanding shares ofcommon stock or the combined voting power of the Company's then outstandingvoting securities entitled to vote generally in the election of directors; orEmployee of an amount -11-advanced by the Company pursuant to Section 9(c), a determination is made thatthe Employee shall not be entitled to any refund with respect to such claim andthe Company does not notify the Employee in writing of its intent to contestsuch denial of refund prior to the expiration of thirty (30) days after suchdetermination, then such advance shall be forgiven and shall not be required tobe repaid and the amount of such advance shall offset, to the extent thereof,the amount of Gross-Up Payment required to be paid. (e) In the event that any state or municipality or subdivision thereofshall subject any Payment to any special tax which shall be in addition to thegenerally applicable income tax imposed by such state, municipality, orsubdivision with respect to receipt of such Payment, the foregoing provisions ofthis Section 9 shall apply, mutatis mutandis, with respect to such special tax. 10. Non-competition. As a condition to receiving any benefits pursuant tothis Agreement, the Employee agrees that during his period of employment andthrough the first anniversary of his Date of Termination, the Employee shall notengage in or become associated with any Competitive Activity. For purposes ofthis Section 10, a "Competitive Activity" shall mean any business or otherendeavor that engages in any country in which the Company or its Affiliates havebusiness operations in a business that directly or indirectly competes with allor any substantial part of any of the business in which the Company or itsAffiliates is engaged at the time of the Employee's Date of Termination. TheEmployee shall be considered to have become "engaged" or "associated" with aCompetitive Activity if he becomes involved as an owner, employee, officer,director, independent contractor, agent, partner, advisor, lender, or in anyother capacity calling for the rendition of the Employee's personal services,either alone or with any individual, partnership, corporation or otherorganization that is engaged in a Competitive Activity and his involvementrelates in any respect to the Competitive Activity of such entity; provided,however, that the Employee shall not be prohibited from owning less than twopercent of any publicly traded corporation, whether or not such corporation isin competition with the Company. If, at any time, the provisions of this Section10 shall be determined to be invalid or unenforceable, by reason of being vagueor unreasonable as to area, duration or scope of activity, this Section _ shallbe considered divisible and shall become and be immediately amended to only sucharea, duration and scope of activity as shall be determined to be reasonable andenforceable by the court or other body having jurisdiction over the matter; andthe Employee agrees that this Section 10 as so amended shall be valid andbinding as though any invalid or unenforceable provision had not been includedherein. 11. Confidential Information. The Employee shall hold in a fiduciarycapacity for the benefit of the Company all secret or confidential information,knowledge or data relating to the Company or any of its subsidiaries, and theirrespective businesses, which shall have been obtained by the Employee during theEmployee's employment by the Company or any of its subsidiaries and which shallnot be or become public knowledge (other than by acts by the Employee or hisrepresentatives in violation of this Agreement). After termination of theEmployee's employment with the Company, the Employee shall not, without theprior written consent of the Company, communicate or divulge any suchinformation, -12-knowledge or data to anyone other than the Company and those designated by it.In no event shall an asserted violation of the provisions of this Section 10constitute a basis for deferring or withholding any amounts otherwise payable tothe Employee under this Agreement. 12. Successors. (a) This Agreement is personal to the Employee and without the priorwritten consent of the Company shall not be assignable by the Employee otherwisethan by will or the laws of descent and distribution. This Agreement shall inureto the benefit of and be enforceable by the Employee's legal representatives. (b) This Agreement shall inure to the benefit of and be binding uponthe Company and its successors and assigns. (c) The Company shall require any successor (whether direct orindirect, by purchase, merger, consolidation or otherwise) to all orsubstantially all of the business and/or assets of the Company to assumeexpressly and agree to perform this Agreement in the same manner and to the sameextent that the Company would be required to perform it if no such successionhad taken place. As used in this Agreement, "Company" shall mean the Company ashereinbefore defined and any successor to its business and/or assets asaforesaid which assumes and agrees to perform this Agreement by operation oflaw, or otherwise. 13. Miscellaneous. (a) This Agreement shall be governed by and construed in accordancewith the laws of the State of Delaware, without reference to principles ofconflict of laws. The captions of this Agreement are not part of the provisionshereof an shall have no force or effect. (b) All notices and other communications hereunder shall be in writingand shall be given by hand delivery to the other party or by registered orcertified mail, return receipt requested, postage prepaid, addressed as follows: If to the Employee: If to the Company: Cambrex Corporation One Meadowlands Plaza East Rutherford, N.J. 07073 Attention: General Counsel -13-or to such other address as either party shall have furnished to the other inwriting in accordance herewith. Notice and communications shall be effectivewhen actually received by the addressee. (c) The invalidity or unenforceability of any provision of thisAgreement shall not affect the validity or enforceability of any other provisionof this Agreement. (d) The Company may withhold from any amounts payable under thisAgreement such Federal, state or local taxes as shall be required to be withheldpursuant to any applicable law or regulation. (e) The Employee's failure to insist upon strict compliance with anyprovision hereof shall not be deemed to be a waiver of such provision or anyother provision thereof. (f) This Agreement contains the entire understanding of the Companyand the Employee with respect to the subject matter hereof. This agreement maynot be amended or modified otherwise than by a written agreement executed by theparties hereto or their respective successors and legal representatives. (g) The Employee and the Company acknowledge that the employment ofthe Employee by the Company or any of its subsidiaries prior to the EffectiveDate is "at will", and, prior to the Effective Date, may be terminated by eitherthe Employee or the employer at any time. Upon a termination of the Employee'semployment or upon the Employee's ceasing to be an officer of the Company, ineach case, prior to the Effective Date, there shall be no further rights underthis Agreement. 14. Section 409A. Notwithstanding anything in this Agreement to thecontrary, to the extent the Employee would otherwise be entitled to a paymentduring the six months beginning on the Date of Termination that would be subjectto the additional tax imposed under Section 409A of the Code, (i) the paymentwill not be made to the Employee and instead will be made, at the election ofthe Company, either to a trust in compliance with Rev. Proc. 92-64 or an escrowaccount established to fund such payments (provided that such funds shall be atall times subject to the creditors of the Company and its affiliates) and (ii)the payment, together with interest thereon at the rate of "prime" plus 1%, willbe paid to the Employee on the earlier of the six-month anniversary of Date ofTermination or the Employee's death or disability (within the meaning of Section409A of the Code). Similarly, to the extent the Employee would otherwise beentitled to any benefit (other than a cash payment) during the six monthsbeginning on the Date of Termination that would be subject to the additional taxunder Section 409A of the Code, the benefit will be delayed and will begin beingprovided (together, if applicable, with an adjustment to compensate the Employeefor the delay, with such adjustment to be determined in the Company's reasonablegood faith discretion) on the earlier of the six-month anniversary of the Dateof Termination or the Employee's death or disability (within the meaning ofSection 409A of the Code). The Company will establish the trust or escrowaccount, as applicable, no later than ten days following the Employee's Date ofTermination. It is the intention of the parties that the payments and benefitsto which the Employee could become entitled in connection with termination ofemployment under this Agreement comply with Section 409A of the Code. -14-In the event that the parties determine that any such benefit or right does notso comply, they will negotiate reasonably and in good faith to amend the termsof this Agreement such that it complies (in a manner that attempts to minimizethe economic impact of such amendment on the Employee and the Company). IN WITNESS WHEREOF, pursuant to the authorization from its Board ofDirectors, the Company has caused these presents to be executed in its name onits behalf, and the Employee has hereunto set his hand, all as of the day andyear first above written. CAMBREX CORPORATION By: ------------------------------------ James A. Mack, Chairman, President & Chief Executive Officer . . . EXHIBIT 10.21 CAMBREX CORPORATION ANNUAL REPORT ON FORM 10-K REVISED SCHEDULE OF PARTIES NAME TITLE DATE OF AGREEMENT---- ----- ----------------- Peter E. Thauer...................... Senior Vice President, Law and 02/06/06 Environment, General Counsel and Corporate Secretary Steven M. Klosk...................... Executive Vice President and Chief 02/06/06 Operating Officer, Biopharma Business Unit Thomas N. Bird....................... Vice President, Corporate Development 02/06/06Luke M. Beshar....................... Executive Vice President and Chief 02/06/06 Financial Officer Gary L. Mossman...................... Executive Vice President and Chief 02/06/06 Operating Officer Shawn P. Cavanagh.................... Senior Vice President and General 02/06/06 Manager, Bioproducts Business Unit EXHIBIT 10.24 DEFERRED COMPENSATION PLAN OF CAMBREX CORPORATION (AS AMENDED AND RESTATED AS OF MARCH 1, 2001) 1. ELIGIBILITY Each officer or other key employee (a "Key Employee") shall be eligible toparticipate in the Deferred Compensation Plan of Cambrex Corporation (the"Plan"), provided that, notwithstanding any other provision of the Plan to thecontrary, the Vice President of Administration may impose such terms, conditionsor limitations on the participation of any Key Employee or any class of KeyEmployees that he deems necessary or appropriate for the proper administrationof the Plan. The Vice President of Administration shall provide a copy of thePlan to each Key Employee together with a form of letter which may be used bythe Key Employee to notify Cambrex Corporation (the "Corporation") of hiselection to participate in the Plan. 2. PARTICIPATION a. Bonus Deferral Election. On or before December 31st of any calendaryear, a Key Employee may elect to defer receipt of all or any part of any annualbonus payable in United States currency for services performed during such yearwhich, but for such election, is expected to be paid to him in the nextfollowing calendar year. b. Salary Deferral Election. On or before December 31st of any calendaryear, a Key Employee may elect to defer receipt of all or any part of thatportion of his annual base salary payable in United States currency in thefollowing calendar year which exceeds the sum of (i) the Social Security wagebase with respect to old age, survivor and disability income taxes in effect forsuch following calendar year and (ii) $10,000. Notwithstanding the foregoing, aKey Employee who (x) receives an annual base salary in United States currency inexcess of the sum of (i) and (ii) above and (v) is not subject to withholdingfor old age survivor and disability employment taxes under U.S. law may elect todefer receipt of all or a portion of his annual base salary in excess of TenThousand Dollars ($10,000) for the following calendar year which is payable inUnited States currency. c. Stock Option Deferral Election. With the approval of the Vice Presidentof Administration, a Key Employee may elect, on or before December 31st of anycalendar year, to defer receipt of all or a portion of the Corporation's commonstock ("Common Stock") which would otherwise be issued upon exercise in thefollowing calendar year of a stock option under a Corporate stock option plan,provided that in each case such election must be made (i) within 30 days of theeffective date of this subsection, or (ii) more than six months prior to thedate on which the Common Stock is to be issued. d. Form and Duration of Deferral Election. An election to defer bonus,salary or Common Stock issued upon an option exercise shall be made by writtennotice filed on a designated form with the Vice President of Administration. Theminimum dollar amount that each Key Employee may defer under the Plan for eachyear shall be (i) with respect to annual bonuses, Ten Thousand Dollars($10,000); (ii) with respect to base salary, Ten Thousand Dollars ($10,000); and(iii) with respect Common Stock, One Hundred Thousand Dollars ($100,000) atclosing market price on the date of deferral, provided that in each case theVice President of Administration may determine a greater or lesser minimumdeferral amount. Except with respect to elections to defer receipt of CommonStock, any such election shall continue in effect with respect to cashcompensation payable for subsequent calendar years unless and until the KeyEmployee revokes or modifies such election by written notice on a designatedform filed with the Vice President of Administration. Any such revocation ormodification of a deferral election shall become effective only with respect tocompensation payable in the calendar year following receipt of such revocationor modification by the Vice President of Administration. e. Renewal. A Key Employee who has revoked an election to participate inthe Plan may file a new election to defer compensation payable in the calendaryear following the year in which such election is filed. 3. KEY EMPLOYEE'S ACCOUNT a. Establishment of Account. The Corporation shall maintain a separatememorandum account (the "Account") for each Key Employee who has elected toparticipate in the Plan, and shall make additions to and subtractions from suchAccount as provided in this Section 3. b. Additions to Account. Compensation allocated to a Key Employee'sAccount pursuant to this Section 3 shall be credited to such Account as of thedate such compensation would otherwise have been paid to the Key Employee. A KeyEmployee electing to defer the receipt of Common Stock pursuant to Section 2(c),will be deemed to have invested in a stock unit fund (the "Stock Unit Fund") andsuch Key Employee's Account will be credited, as of the date of exercise of thestock option, with a hypothetical number of units ("Stock Units") equal to thenumber of shares of Common Stock which would otherwise have been issued uponexercise of the stock option if such deferral election had not been made. c. Designation of Phantom Investment Funds. The Benefits AdministrationCommittee shall select one or more mutual funds or other investment vehicles inaddition to the Stock Unit Fund, (the "Phantom Funds") which shall be used todetermine the hypothetical investment experience of each Key Employee's Accountunder the Plan; provided, however, that unless the Benefits AdministrationCommittee otherwise determines the Phantom Funds shall be the investment fundsavailable to employees as investment options from time to time under theCompany's qualified savings plan (the "Savings Plan"). d. Investment Election. Each Key Employee shall from time to timedesignate on a form approved by the Vice President of Administration the PhantomFund or Funds that shall determine the investment experience with respect tosuch Key Employee's Account; provided, however, that the Vice President ofAdministration may require that the Key Employee's Account be credited ordebited as though such Account were invested in the same Phantom Funds, and inthe same percentages, as such Key Employee's account balance is invested fromtime to time under the Savings Plan. The Vice President of Administration may,in his discretion, (i) establish minimum amounts (in terms of dollar amounts ora percentage of a Key Employee's Account), which may be allocated to any PhantomFund, (ii) preclude any Key Employee who is an executive officer of the Companyfrom designating any Phantom Fund which invests primarily in securities issuedby the Company, (iii) establish rules regarding the time at which any suchelection (or any change in such election permitted under Section 3(e) shallbecome effective, and (iv) permit different designations with respect to a KeyEmployee's existing Account balance and amounts to be credited to such Accountunder Section 3(e) after the date the election form is filed with the VicePresident of Administration. If a Key Employee fails to make a valid electionwith respect to any portion of his Account (or if any such election ceases to beeffective for any reason), such Key Employee shall be deemed to have elected tohave his entire Account deemed invested in the Phantom Fund which the VicePresident of Administration determines generally to have the least risk of lossof principal. e. Change in Designation of Phantom Fund. Effective as of the firstbusiness day of the calendar quarter commencing more than ten (10) business daysafter the proper form is filed with the Vice President of Administration (orsuch other time as the Vice President of Administration shall permit), a KeyEmployee may change the Phantom Funds designated with respect to all or anyportion of his Account. Any such change shall comply with all rules applicablewith respect to any initial designation of such Phantom Funds. Notwithstandingthe foregoing, unless otherwise approved by the Vice President ofAdministration, a Key Employee will be permitted only four (4) transfers fromhis or her Stock Unit Fund to another Phantom Fund in any calendar year, and theminimum value of such transfer shall be One Hundred Thousand Dollars ($100,000),provided that after September 30, 1998, no transfer from the Stock Unit Fund toanother Phantom Fund shall be permitted. f. Crediting of Phantom Investment Experience. (i) As of the last day ofeach calendar quarter (or such other time as the Vice President ofAdministration shall establish from time to time), each Key Employee's Accountshall be credited or debited, as the case may be, with an amount equal to thenet investment gain or loss which such Key Employee would have realized had heactually invested in each Phantom Fund an amount equal to the portion of hisAccount designated as deemed invested in such Phantom 2 Fund during that calendar quarter (or such other period as may have beenestablished by the Vice President of Administration). (ii) Whenever a dividend is declared with respect to the Common Stock, aKey Employee's Account shall also be credited as of the payment date with anumber of additional Stock Units computed as follows: (x) the number of StockUnits in the Key Employee's Account multiplied by any dividend payable in cashor property other than Common Stock declared by the Corporation on a share ofCommon Stock, divided by the closing market price of the Common Stock on therelated dividend record date and/or (y) the number of Stock Units in the KeyEmployee's Account multiplied by any stock dividend declared by the Corporationon a share of Common Stock, provided that the Vice President of Administrationmay determine another method of crediting dividends to a Key Employee's Account. (iii) In the event of any change in the Common Stock by reason of anymerger, consolidation, reorganization, recapitalization, stock split,combination or exchange of shares, or any other similar change affecting theCommon Stock, other than a stock dividend as provided above, the number of StockUnits credited to a Key Employee's Account shall be appropriately adjusted insuch manner as determined by the Vice President of Administration. g. Valuation of Stock Units on Transfer. In the event a Key Employeeelects to transfer all or a portion of his or her Stock Unit Fund to anotherPhantom Fund prior to September 30, 1998 as provided in Section 3(e), the amounttransferred shall be determined by multiplying the number of Stock Units subjectto the election by the fair market value of the Common Stock as determined inaccordance with procedures established by the Vice President of Administrationreduced by any expenses directly related to the transfer. h. No Actual Investment. Notwithstanding anything else in this Section 3to the contrary, no amount standing to the credit of any Key Employee's Accountshall be set aside or invested in any actual fund on behalf of such KeyEmployee; provided, however, that nothing in this Section 3(h) shall be deemedto preclude the company from making investments for its own account in anyPhantom Funds (whether directly or through a grantor trust) to assist it inmeeting its obligations to the Key Employees hereunder. 4. DISTRIBUTION FROM ACCOUNT a. Distribution Election. Each Key Employee shall file with the VicePresident of Administration a written election (a "Distribution Election") withrespect to the timing and manner of distribution of the aggregate cash amount,if any, as well as any Stock Units credited to his Account at any time. A KeyEmployee may elect to receive a distribution from his Account in one lump-sumpayment, or in such number of annual installments (not to exceed ten) as the KeyEmployee may designate. Subject to such limitations as the Vice President ofAdministration shall impose, a Key Employee may, while he is an employee, alsoelect to receive all or a portion of the aggregate amount credited to hisAccount, payment to be made in accordance with Section 4(b) during the month ofJanuary, or, if payment cannot be made during the month of January, paymentshall be made as soon as administratively possible thereafter. If a distributionelection is not made during active employment or if such election does not applyto the entire balance in such Account, the balance in the Key Employee's Accountshall be distributed in a single lump-sum payment during the month of January oras soon as administratively possible thereafter, during the calendar yearimmediately following the year of separation from employment. In the case of anydistribution being made in annual installments, each installment after the firstinstallment shall be paid during the month of January or as soon asadministratively possible thereafter during the calendar year following the yearin which such first installment is paid until the entire amount subject suchinstallment Distribution Election shall have been paid. b. Amendment of Distribution Election. A Key Employee may, at any timeduring active employment, elect to change the time at which distributions fromhis Account will commence; provided, however, that unless the Vice President ofAdministration shall otherwise determine, no such election shall be effectiveunless at least one full calendar year elapses between (i) the date as of whichsuch election is filed and (ii) (A) the date as of which a distribution wouldotherwise have commenced and (B) the date as which such distribution willcommence under such election. If a Key Employee receives any distribution fromhis Account while still eligible to make deferrals hereunder, the Vice Presidentof Administration may suspend 3 the Key Employee's right to defer additional amounts Account during suchcalendar year in accordance with Section 2. c. Amount of Installment Payments. Where the Key Employee receives thebalance of his Account in annual installments, the amount of each installmentshall be approximately equal to the product of (i) the cash balance and/or thenumber of Stock Units credited to such Account on the date of such payment and(ii) a fraction, the numerator of which is one (1) and the denominator of whichis the total number of installments remaining to be paid at that time, providedthat if the Key Employee elects to receive installments, and the value of theany installment remaining at the time of distribution of any installment is OneHundred Thousand Dollars ($100,000) or less, a minimum of $100,000 or balanceshall be distributed as such installment. d. Form of Distribution. Distribution of any amount credited to a KeyEmployee's Account on a cash basis shall be made in cash. Distributions of StockUnits in such Key Employee's Account shall be made in whole shares of CommonStock; fractional shares shall be paid in an amount equal to the number offractional shares multiplied by the fair market value of the Common Stock asdetermined in accordance with procedures established by the Vice President ofAdministration reduced by the amount of any expense directly related to suchdistribution. e. Change of Control. Notwithstanding the foregoing, upon a Change ofControl (as defined below), a Key Employee's Account shall immediately bedistributed to a Key Employee in a lump sum distribution within ten (10) daysfollowing the occurrence of such Change of Control (as defined below) unless allthe Trustees then serving unanimously determine that such acceleration ofdistributions should not occur. A "Change of Control" for purposes of this Planshall mean: (i) the acquisition (other than from the Corporation) by any person, entity or "group" (within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934 (the "Exchange Act") but excluding for this purpose the Corporation or its subsidiaries or any employee benefit plan of the Corporation or its subsidiaries which acquires beneficial ownership of voting securities of the Corporation) of "beneficial ownership" (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of Twenty Percent (20%) of more of the then outstanding shares of common stock or the combined voting power of the Corporation's then outstanding voting securities entitled to vote generally in the election of directors; or (ii) individuals who, as of the date hereof, constitute the Board (as of the date hereof the "Incumbent Board") cease for any reason to constitute at least a majority of the Board; provided that any person becoming a member of the Board subsequent to the date hereof whose election or nomination for election by the Corporation's stockholders (other than an election or nomination of an individual whose initial assumption of office is in connection with an actual or threatened election contest relating to the election of the directors of the Corporation, as such terms are used in Rule 14a-11 of Regulation 14A promulgated under the Exchange Act) was approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be, for purposes of this provision, considered a member of the Incumbent Board; or (iii) approval by the stockholders of the Corporation of either a reorganization, or merger, or consolidation, with respect to which persons who were the shareholders of the Corporation immediately prior to such reorganization, merger or consolidation do not, immediately thereafter, own more than fifty percent (50%) of the combined voting power entitled to vote generally in the election of directors of the reorganized, merged or consolidated entity's then outstanding voting securities, or a liquidation or dissolution of the Corporation, or the sale of all or substantially all of the assets of the Corporation; or (iv) any other event or series of events which, notwithstanding any of the foregoing provisions of this Section 4(e) to the contrary, is determined by a majority of the Incumbent Board to constitute a Change of Control for the purposes of this Plan. 4 5. DISTRIBUTION ON DEATH If a Key Employee shall die before payment of all amounts credited to theKey Employee's Account has been completed, the total unpaid balance thencredited to such Key Employee's Account shall be paid to the Key Employee'sdesignated beneficiaries or estate in a single lump-sum payment as of the firstbusiness day of the first calendar month commencing after the date of the KeyEmployee's death or as soon, thereafter, or administratively possible. 6. DESIGNATION OF A BENEFICIARY A Key Employee may designate a beneficiary or beneficiaries (which may bean entity other than a natural person) to receive any payments to be made uponthe Key Employee's death pursuant to Section 5 hereof. At any time, and fromtime to time, any such designation may be changed or canceled by the KeyEmployee without the consent of any beneficiary. Any such designation, change orcancellation must be made by written notice filed with the Vice President ofAdministration. If a Key Employee designates more than one beneficiary, anypayments to such beneficiaries made pursuant to Section 5 shall be made in equalshares unless the Key Employee has designated otherwise, in which case thepayments shall be made in the shares designated by the Key Employee. If nobeneficiary has been named by a Key Employee, payment shall be made to the KeyEmployee's spouse or, if the Key Employee has no spouse at the time of hisdeath, to the Key Employee's estate. 7. AMENDMENT AND TERMINATION. The Benefits Administration Committee may, at any time, amend or terminatethe Plan; provided no such amendment or termination shall impair the rights of aKey Employee with respect to amounts then credited to his Account under thePlan. 8. MISCELLANEOUS a. Unfunded Plan. The Corporation shall not be obligated to fund itsliabilities under the Plan, the Account established for each Key Employeeelecting deferment shall not constitute trusts, and a Key Employee shall have noclaim against the corporation or its assets other than as an unsecured generalcreditor. Without limiting the generality of the foregoing, the Key Employee'sclaim at any time shall be for the amount credited to such Key Employee'sAccount at such time. Notwithstanding the foregoing, the Corporation mayestablish a grantor trust or purchase securities to assist it in meeting itsobligations hereunder; provided, however, that in no event shall any KeyEmployee have any interest in such trust or property other than as an unsecuredgeneral creditor. b. Non-alienation. The right of a Key Employee to receive a distributionof the value of such Key Employee's Account payable pursuant to the Plan shallnot be subject to assignment or alienation. c. No Right to Continued Employment. Nothing in this Plan shall beconstrued to give any Key Employee the right to continue in the employ of theCorporation or any of its subsidiaries. d. Legal Fees. In the event that any Key Employee (or the beneficiary orlegal representative of such Key Employee) shall make demand for payment ofbenefits due under the terms of the plan and prevail as to any material aspectof such claim, the Corporation shall pay all of the Key Employee's expenses inconjunction with pursuing such claim (including, without limitation, legal fees)and interest on the amount due from the date of such demand in an amount equalto the greater of (i) the amount of earnings credited to the Key Employee'sAccount hereunder or (ii) 10% per annum compounded semi-annually. 5 . . . EXHIBIT 21 CAMBREX CORPORATION SUBSIDIARIES OF REGISTRANT SUBSIDIARY INCORPORATED IN:---------- ---------------- Cambrex North Brunswick, Inc. .............................. DelawareCambrex Charles City, Inc. ................................. IowaCambrex Bio Science Walkersville, Inc. ..................... DelawareCambrex Profarmaco Milano S.r.l............................. ItalyCambrex Karlskoga AB........................................ SwedenCambrex Bio Science Verviers Sprl........................... BelgiumCambrex Bio Science Rockland, Inc. ......................... DelawareCambrex Bio Science Copenhagen ApS.......................... DenmarkCambrex Cork Limited........................................ IrelandCambrex Profarmaco Landen NV................................ BelgiumCambrex Bio Science Nottingham Limited...................... EnglandCambrex Bio Science Baltimore, Inc. ........................ DelawareCambrex Bio Science Hopkinton, Inc. ........................ DelawareCambrex Bio Science Clermont Ferrand SAS.................... France CAMBREX CORPORATION EXHIBIT 23 CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM We hereby consent to the incorporation by reference in the RegistrationStatements on Form S-8 (File Nos. 333-57404, 333-22017, 33-21374, 33-37791,33-81780, 33-81782, 333-113612, 333-113613 and 333-129473) of CambrexCorporation of our report dated May 26, 2006 relating to the financialstatements, financial statement schedule, management's assessment of theeffectiveness of internal control over financial reporting and the effectivenessof internal control over financial reporting, which appears in this Form 10-K. PRICEWATERHOUSECOOPERS LLP Florham Park, New JerseyMay 26, 2006 EXHIBIT 24 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that each officer and director of CambrexCorporation, a Delaware corporation, whose signature appears below constitutesand appoints James A. Mack and Luke M. Beshar, and each of them, his true andlawful attorneys-in-fact and agents, with full power of substitution andresubstitution, for him and in his name, place and stead, in any and allcapacities, to sign any and all Annual Reports on Form 10-K which said CambrexCorporation may be required to file pursuant to Section 13 or 15(d) of theSecurities Exchange Act of 1934 and any and all amendments thereto and to filethe same, with all exhibits thereto, and other documents in connectiontherewith, with the Securities and Exchange Commission, granting unto saidattorneys-in-fact and agents full power and authority to do and perform each andevery act and thing requisite and necessary to be done in and about thepremises, as fully to all intents and purposes as he might or could do inperson, hereby ratifying and confirming all that said attorneys-in-fact andagents or their substitutes may lawfully do or cause to be done by virtuehereof. IN WITNESS WHEREOF each of the undersigned has executed this instrument asof the 26(th) day of May 2006. /s/ JAMES A. MACK------------------------------------------------------- James A. Mack Chairman of the Board of Directors, President and Chief Executive Officer /s/ DAVID R. BETHUNE------------------------------------------------------- David R. Bethune Director /s/ ROSINA B. DIXON------------------------------------------------------- Rosina B. Dixon, M.D. Director /s/ ROY W. HALEY------------------------------------------------------- Roy W. Haley Director /s/ KATHRYN RUDIE HARRIGAN------------------------------------------------------- Kathryn Rudie Harrigan, PhD Director /s/ LEON J. HENDRIX, JR.------------------------------------------------------- Leon J. Hendrix, Jr. Director /s/ LUKE M. BESHAR------------------------------------------------------- Luke M. Beshar Executive Vice President and Chief Financial Officer (Principal Financial Officer and Accounting Officer) /s/ ILAN KAUFTHAL------------------------------------------------------- Ilan Kaufthal Director /s/ WILLIAM KORB------------------------------------------------------- William Korb Director /s/ JOHN R. MILLER------------------------------------------------------- John R. Miller Director /s/ PETER G. TOMBROS ------------------------------------------------------- Peter G. Tombros Director EXHIBIT 31.1 CAMBREX CORPORATION CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 (18 U.S.C. SECTION 1350) I, James A. Mack, certify that: 1. I have reviewed this annual report on Form 10-K of Cambrex Corporation; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a -- 15(f) and 15d-15(f)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the periods in which this annual report is being prepared; b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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; c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. /s/ JAMES A. MACK -------------------------------------- James A. Mack Chairman of the Board of Directors, President and Chief Executive Officer Date: May 26, 2006 EXHIBIT 31.2 CAMBREX CORPORATION CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 (18 U.S.C. SECTION 1350) I, Luke M. Beshar, certify that: 1. I have reviewed this annual report on Form 10-K of Cambrex Corporation; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a -- 15(f) and 15d-15(f))for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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; c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. /s/ LUKE M. BESHAR -------------------------------------- Luke M. Beshar Executive Vice President and Chief Financial Officer Date: May 26, 2006 EXHIBIT 32.1 CAMBREX CORPORATION CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 (18 U.S.C. SECTION 1350) In connection with the Annual Report of Cambrex Corporation (the "Company") onForm 10-K for the period ending December 31, 2005, as filed with the Securitiesand Exchange Commission on the date hereof (the "Report"), I, James A. Mack,President and Chief Executive Officer of the Company, certify, pursuant toSection 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350), that: 1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 ; and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ JAMES. A. MACK -------------------------------------- James. A. Mack Chairman of the Board of Directors, President and Chief Executive Officer Dated: May 26, 2006 EXHIBIT 32.2 CAMBREX CORPORATION CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 (18 U.S.C. SECTION 1350) In connection with the Annual Report of Cambrex Corporation (the "Company") onForm 10-K for the period ending December 31, 2005, as filed with the Securitiesand Exchange Commission on the date hereof (the "Report"), I, Luke M. Beshar,Executive Vice President and Chief Financial Officer of the Company, certify,pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section1350), that: 1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ LUKE M. BESHAR -------------------------------------- Luke M. Beshar Executive Vice President and Chief Financial Officer Dated: May 26, 2006

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