Cambrex Corporation
Annual Report 2008

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, 2008 OR[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO Commission file number 1-10638 CAMBREX CORPORATION (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 22-2476135 (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.) ONE MEADOWLANDS PLAZA, 07073 EAST RUTHERFORD, NEW JERSEY (ZIP CODE) (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (201) 804-3000 SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NAME OF EACH EXCHANGE ON WHICH TITLE OF EACH CLASS REGISTERED ------------------- ------------------------------ COMMON STOCK, $.10 PAR VALUE NEW YORK STOCK EXCHANGE SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: (NONE) Indicate by check mark whether the Registrant is a well-known seasonedissuer, as defined in Rule 405 of the Securities Act. Yes [ ]. No [X]. Indicate by check mark if the Registrant is not required to file 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 of1934 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, a non-accelerated filer, or a smaller reporting company.See the definitions of "large accelerated filer," "accelerated filer" and"smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one): Large accelerated filer [ ] Accelerated filer [X] Non-accelerated filer [ ] (Do not check if a smaller reporting company)Large accelerated filer [ ] Smaller reporting company [ ] Indicate by check mark whether the Registrant is a shell company (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 $168,064,886 as of June 30, 2008. APPLICABLE ONLY TO CORPORATE REGISTRANTS As of January 31, 2009, there were 29,207,831 shares outstanding of theregistrant's Common Stock, $.10 par value. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Registrant's definitive Proxy Statement for the 2009 AnnualMeeting are incorporated by reference into Part III of this Report.---------------------------------------------------------------------------------------------------------------------------------------------------------------- CAMBREX CORPORATION AND SUBSIDIARIES INDEX TO ANNUAL REPORT ON FORM 10-K FILED WITH THE SECURITIES AND EXCHANGE COMMISSION FOR THE YEAR ENDED DECEMBER 31, 2008ITEM PAGENO. NO.---- ----  PART I 1 Business.......................................... 2 1A Risk Factors...................................... 6 1B Unresolved Staff Comments......................... 13 2 Properties........................................ 13 3 Legal Proceedings................................. 14 4 Submission of Matters to a Vote of Security Holders........................................... 14 PART II 5 Market for the Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities........................................ 14 6 Selected Financial Data........................... 17 7 Management's Discussion and Analysis of Financial Condition and Results of Operations............... 19 7A Quantitative and Qualitative Disclosures about Market Risk....................................... 34 8 Financial Statements and Supplementary Data....... 35 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure............... 80 9A Controls and Procedures........................... 80 9B Other Information................................. 81 PART III10 Directors, Executive Officers and Corporate Governance........................................ 8211 Executive Compensation............................ 8312 Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.... 8313 Certain Relationships and Related Transactions and Director Independence............................. 8314 Principal Accountant Fees and Services............ 83 PART IV15 Exhibits and Financial Statement Schedules........ 84 1 PART IITEM 1 BUSINESSGENERAL Cambrex Corporation (the "Company" or "Cambrex"), a Delaware corporation,began business in December 1981. Cambrex is a life sciences company dedicated togrowing its portfolio of commercial small molecule therapeutics and providingproducts and services that accelerate and improve the discovery andcommercialization of new therapeutics. The Company primarily supplies itsproducts and services worldwide to pharmaceutical and generic drug companies.Cambrex has three operating segments, which are manufacturing facilities thathave been aggregated as one reportable segment. The Company's overall strategyis to: grow its portfolio of custom development projects, especially those inthe later stages of the clinical trial process, secure long-term supplyagreements for newly approved drug products utilizing the Company's activepharmaceutical ingredients ("APIs") and advanced intermediates; expand sales ofproducts and projects based on its proprietary technologies; and partner withgeneric drug companies to grow the Company's extensive portfolio of genericAPIs. The Company also seeks to demonstrate excellence in regulatory compliance,environmental, health and safety performance, and customer service. As part ofthe process of evaluating strategic alternatives to enhance shareholder value,the sale of two businesses within the former Human Health segment was completedin October 2006 and the sale of the businesses that comprised the Bioproductsand Biopharma segments was completed in February 2007, and accordingly, thesebusinesses are being reported as discontinued operations in all periodspresented. The Company uses a consistent business approach: - Niche Market Focus: The Company participates in niche markets where significant technical expertise provides a competitive advantage and market differentiation. - Market Leadership: The Company secures leading market positions through excellent customer service, proprietary technologies, specialized capabilities and an outstanding regulatory record and leverages these capabilities across the market segments in which it participates. - New Products and Services: The Company continues to invest in research and product development in order to introduce innovative products and services to accelerate revenue growth, provide a competitive advantage and maintain its leading market positions. - Operational Excellence: The Company maintains its commitment to continually improve productivity and customer service levels and maintains excellent quality and regulatory compliance systems. - Acquisition and Licensing: The Company may drive growth in strategic business segments through the prudent acquisition of products, product lines, technologies and capabilities to enhance the Company's position in its niche markets.MARKET OVERVIEW AND GROWTH DRIVERS The Company participates in markets that serve the healthcare industry.Customers include companies and institutions that discover and commercializehuman therapeutics using organic chemistry and generic drug companies. 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. Demand for Cambrex products and services is increased by its customers'continuing access to financial resources to advance their research anddevelopment ("R&D") projects for therapeutic candidates from the laboratory tothe clinic, and eventually, to the patient. Healthcare investment comes from avariety of sources. Large--------(dollars in thousands, except share data) 2pharmaceutical and biotechnology companies spend billions on drug discovery anddevelopment. Research institutions may be funded by the government, business orprivate sectors. Macro-economic conditions can have an impact on theavailability of funding for the Company's customers, especially those customersdependent upon venture capital and other private sources of funding. Once a drug is identified, companies need to develop a robust process forthe manufacture of clinical and commercial quantities. Product testing,analytical methods and quality processes need to be integrated into themanufacturing process. This is a critical step to getting a commercially viabledrug to market. Cambrex excels in the manufacture and testing of APIs and drugsubstances 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. Many emerging pharmaceutical andgeneric drug companies outsource all process development and manufacturing.Cambrex is particularly well positioned to assist drug companies with these muchneeded services for traditional APIs. 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 to higher-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 manufactures nearly 70 genericAPIs, typically in relatively small quantities for use in niche therapeutics. The market for human therapeutics is regulated by the Food and DrugAdministration ("FDA") in the United States and other regulatory agenciesthroughout the world. These agencies oversee and regulate the development,manufacturing and commercialization process for APIs and regulatedintermediates. Excellent regulatory and quality systems are essential to servethe industry. Asian competitors have increased their capabilities in drug substancemanufacturing and finished dosage form drugs in recent years. There has been agrowing impact on the volumes sold of the Company's niche products and thepresence of these competitors in the market has resulted in downward pricingpressure on generic APIs and certain development services for clinical phaseproducts. Regulatory compliance and product quality may determine the long termimpact of these competitors.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. In October 2006, the Company sold two businesses within the former HumanHealth segment for nominal consideration. As a result of this transaction, thesebusinesses are being reported as discontinued operations in all periodspresented. In February 2007, the Company completed the sale of the businesses thatcomprised the Bioproducts and Biopharma segments (excluding certain liabilities)to Lonza for total cash consideration of $463,914, including working capitaladjustments. As a result of this transaction, these businesses are beingreported as discontinued operations in all periods presented. In January 2008, the Company acquired AS ProSyntest, a privately held APIresearch and development company located in Tallinn, Estonia. ProSyntest,renamed Cambrex Tallinn, has strengths in cost effective chemical routeselection and sample generation, rapid scale up of products at kilo lab scale,as well as chiral and organometallic chemistries.--------(dollars in thousands, except share data) 3PRODUCTS The Company uses its technical expertise in a wide range of chemicalprocesses to meet the needs of its customers for high quality products andservices for specialized applications. The Company's business is primarily comprised of the custom development andmanufacture of pharmaceutical ingredients derived from organic chemistry.Products and services are supplied globally to innovative and generic drugcompanies. Products include APIs and advanced pharmaceutical intermediates.Services include custom development and current Good Manufacturing Practices("cGMP") manufacturing services. Products and services are sold to a diverse group of more than 500customers, with two customers individually accounting for more than 10% of 2008sales. One, a pharmaceutical company with which a long-term sales contract is ineffect, accounted for 10.0%. A second customer, a distributor representingmultiple customers, accounted for 11.8%. The Company's products are sold througha combination of direct sales and independent agents. One API accounted for13.6% of 2008 sales, the majority of which is sold under a long-term salescontract. This table summarizes gross sales by product groups: 2008 2007 2006 -------- -------- -------- APIs and pharmaceutical intermediates.......... $220,722 $220,386 $206,193Other.......................................... 28,896 32,188 30,466 -------- -------- -------- Total................................ $249,618 $252,574 $236,659 ======== ======== ======== Sales in 2008 of $249,618 decreased $2,956 or 1.2% including a 2.5%favorable impact due to exchange rates reflecting a weaker U.S. dollar whencompared to 2007. Sales of APIs and pharmaceutical intermediates in 2008 of $220,722 were$336 or 0.2% above the prior year. Excluding the favorable impact due to foreignexchange rates, sales were down 2.4%. Lower sales were driven by lower volumesof a diuretic API, lower demand for custom development and drug deliveryproducts as well as lower pricing of a gastro-intestinal API due to therenegotiation of a long-term contract. These decreases were partially offset byhigher sales of controlled substances and higher demand for a central nervoussystem API. Other sales in 2008 of $28,896 were $3,292 or 10.2% below the prior year.Excluding the favorable impact due to foreign exchange, these sales were down12.1%. The decrease in sales is due primarily to lower sales of a feed additiveproduct line that the Company exited in the third quarter of 2008 and lowersales of polymer products.MARKETING AND DISTRIBUTION The Company's products generally include higher value, low-to-medium volumeniche products requiring significant technical expertise to develop andmanufacture. Marketing generally requires significant cooperative effort among ahighly trained sales and marketing staff, a scientific staff that can assess thetechnical fit and estimate manufacturing economics and business unit managementto determine the strategic and operational fit. The process to take a client'sproject from the clinical trial stage to a commercial, approved therapeutic maytake from two to ten years. The Company uses sales agents and independentdistributors in those areas where they are deemed to be more effective oreconomical than direct sales efforts.RAW MATERIALS The Company uses a wide array of raw materials in its businesses. For its products, the Company generally will attempt to have a primary andsecondary 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.--------(dollars in thousands, except share data) 4RESEARCH AND DEVELOPMENT The Company's R&D program is designed to increase the Company'scompetitiveness by improving its technology and developing processes for themanufacture of new products to meet customer requirements. The goals are tointroduce innovative and proprietary products, improve manufacturing processesto reduce costs, improve quality and increase capacity, to identify marketopportunities that warrant significant technical expertise, and offer theprospects of a long-term, profitable business relationship. R&D activities areperformed at all of the Company's manufacturing facilities in both the UnitedStates and Europe. Approximately 98 employees are at least partially involved inR&D activities worldwide. In December 2007 the Company consolidated its United States R&D activitiesand small scale API production into its facility in Charles City, Iowa. As aresult of the consolidation, the Company's Center of Technical Excellence inNorth Brunswick, New Jersey ("New Jersey R&D facility") was closed as ofDecember 31, 2008. The Company spent $7,590, $12,157 and $10,813 in 2008, 2007 and 2006,respectively, on R&D efforts.PATENTS AND TRADEMARKS The Company has patent protection covering certain products, processes andservices. In addition, the Company also relies on know-how and trade secrets(related to many of its manufacturing processes and techniques not generallyknown to other companies) for developing and maintaining its market position. Worldwide, the Company currently owns approximately 15 granted/in-forcepatents which have various expiration dates, the latest of which is in 2025. Inaddition, the Company currently has several pending patent applications and, asdecisions are made to patent new inventions, prepares new patent applications. The Company has registered trademark rights in the United States and selectforeign countries for use in connection with the Company's products andservices. The Company also holds common law trademark rights for certain othermarks. The Company requires employees to sign confidentiality and ownership ofinventions agreements where appropriate.COMPETITION The Company has at least 25 primary API and advanced intermediatecompetitors throughout Western Europe and the U.S. and many more competitorswithin various segments of the markets the Company serves, including a growingnumber of competitors in Asia, Eastern Europe and other low-cost areas. TheCompany believes that low cost providers have had the impact of driving pricesdown for many products and services for which the Company competes to provide,and the Company anticipates that it will face increased competition from theseproviders in the future. It is expected that regulatory compliance, productquality and logistics will determine the extent of the long term impact of thesecompetitors in the primary markets that the Company serves. If the Companyperceives significant competitive risk and a need for technical or financialcommitment, it generally attempts to negotiate long term contracts or guaranteesfrom its customers.ENVIRONMENTAL AND SAFETY REGULATIONS AND PROCEEDINGS General: Certain products manufactured by the Company involve the use,storage and transportation of toxic and hazardous materials. The Company'soperations are subject to extensive laws and regulations relating to thestorage, handling, emission, transportation and discharge of materials into theenvironment and the maintenance of safe working conditions. The Companymaintains environmental and industrial safety, health compliance programs andtraining at its plants and believes that its manufacturing operations are incompliance with all applicable safety, health and environmental laws. Prevailing legislation tends to hold companies primarily responsible forthe proper disposal of their wastes even after transfer to third party wastedisposal facilities. Moreover, other future developments, such as increasingly--------(dollars in thousands, except share data) 5strict environmental, safety and health laws and regulations, and enforcementpolicies there under, could result in substantial costs and liabilities to theCompany and could subject the Company's handling, manufacture, use, reuse, ordisposal of substances or pollutants at its plants to more rigorous scrutinythan at present. Known environmental matters which may result in liabilities to the Companyand the related estimates and accruals are summarized in Note 18 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 compliance with suchrequirements and has adequate professional staff and systems in place to remainin compliance. In some cases, compliance can only be achieved by capitalexpenditures and the Company made capital expenditures of $1,760 in 2008, $2,060in 2007, and $2,784 in 2006 for environmental projects. As the environmentalproceedings in which the Company is involved progress from the remedialinvestigation 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.EMPLOYEES At December 31, 2008, the Company had 856 employees worldwide (609 of whomwere from international operations) compared with 844 employees at December 31,2007 and 858 at December 31, 2006. Non-U.S. production, administration, scientific and technical employees arerepresented by various local and national unions. The Company believes its laborrelations 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 including, butnot limited to, acquisitions, plant shutdowns, and the timing of large contractrevenue streams, the Company believes that period-to-period comparisons of itsoperating results should not be relied upon as an indication of futureperformance.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 in2008, 2007 and 2006 amounted to $24,602, $28,821 and $28,825, respectively.Sales from international operations were $167,911 in 2008, $171,145 in 2007, and$154,197 in 2006. Refer to Note 16.ITEM 1A RISK FACTORSFACTORS 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 affected. 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.--------(dollars in thousands, except share data) 6THE COMPANY MAY PURSUE TRANSACTIONS THAT MAY CAUSE IT TO EXPERIENCE SIGNIFICANTCHARGES TO EARNINGS THAT MAY ADVERSELY AFFECT ITS STOCK PRICE AND FINANCIALCONDITION. The Company regularly reviews potential transactions related totechnologies, products, product rights and businesses complementary to itsbusiness. These transactions could include mergers, acquisitions, divestitures,strategic alliances or licensing agreements. In the future, the Company maychoose to enter into these transactions at any time. As a result of acquiringbusinesses or entering into other significant transactions, the Company haspreviously experienced, and may continue to experience, significant charges toearnings for merger and related expenses that may include transaction costs,closure costs or costs related to the write-off of acquired in-process researchand development. These costs may also include substantial fees for investmentbankers, attorneys, accountants, financial printing costs, severance and otherclosure costs associated with the elimination of duplicate or discontinuedproducts, employees, operations and facilities.IF THE COMPANY MAKES ACQUISITIONS, IT MAY EXPERIENCE DIFFICULTY INTEGRATING THEBUSINESSES. The Company continually explores and conducts discussions with many thirdparties regarding possible acquisitions. The Company's ability to continue toachieve its goals may depend upon its ability to effectively integrate suchbusinesses, to achieve cost efficiencies and to manage these businesses as partof Cambrex. However, the Company may experience difficulty integrating themerged companies. As a result of uncertainty following an acquisition and duringthe integration process, the Company could experience disruption in its businessor employee base. If the Company is not able to successfully blend its productsand technologies with the acquired business to create the advantages theacquisition was intended to create, it may affect the Company's results ofoperations, its ability to develop and introduce new products and the marketprice of its common stock. Furthermore, there may be overlap between theCompany's products, services or customers, and the combined company may createconflicts in relationships or other commitments detrimental to the integratedbusinesses.IF THE COMPANY FAILS TO IMPROVE THE OPERATIONS OF FUTURE ACQUIRED BUSINESSES, ITMAY BE UNABLE TO ACHIEVE OUR GROWTH STRATEGY. Some of the businesses the Company may acquire could have significantlylower operating margins than the Company does prior to the time of acquisition.In the past, the Company has occasionally experienced temporary delays inimproving the operating margins of these acquired businesses. In the future, ifthe Company is unable to improve the operating margins of acquired businesses oroperate them profitably, it may be unable to achieve its growth strategy.COMPANIES MAY DISCONTINUE OR DECREASE THEIR USAGE OF CAMBREX'S SERVICES. The Company has observed increasing pressure on the part of its customersto reduce spending, including the use of its services and products, as a resultof negative macro-economic trends and various market dynamics specificallyaffecting the pharmaceutical industry. These customers could discontinue ordecrease their usage of Cambrex's services and products, including as a resultof an economic slowdown in the overall United States or foreign economies.COMPETITION OR A REDUCTION IN DEMAND FOR CAMBREX'S PRODUCTS COULD REDUCE SALES. The markets for the Company's products are competitive and price sensitive.Other suppliers have significant financial, operational, sales and marketingresources, and experience in R&D. These and other companies may have developedor could in the future develop new technologies that would compete with theCompany's products or render its products obsolete. Several of Cambrex'scustomers, especially those that buy its generic APIs, have recently verticallyintegrated and now have internal capabilities similar to Cambrex's. In addition,demand for the Company's products may weaken due to a reduction in research anddevelopment budgets, loss of distributors or other factors.--------(dollars in thousands, except share data) 7 The markets for certain Cambrex products are also subject to specificcompetitive risks and can be highly price competitive. The Company's competitorshave competed in the past by lowering prices on certain products. The Company'scompetitors may lower prices on these or other products in the future and theCompany may, in certain cases, respond by lowering its prices. Conversely,failure to anticipate and respond to price competition may hurt Cambrex's marketshare. The Company believes that customers in its markets display loyalty to theirinitial supplier of a particular product. Therefore, it may be difficult togenerate sales to potential customers who have purchased products fromcompetitors. To the extent the Company is unable to be the first to develop andsupply new products, our competitive position may suffer.THE COMPANY'S FAILURE TO OBTAIN NEW CONTRACTS OR RENEW EXISTING CONTRACTS MAYADVERSELY AFFECT ITS BUSINESS. Many of Cambrex's contracts are short-term in duration. As a result, theCompany must continually replace its contracts with new contracts to sustain itsrevenue. In addition, certain of the Company's long-term contracts may becancelled or delayed by clients for any reason upon notice. The Companycurrently has a long-term sales contract that accounts for 10% of sales that isscheduled to expire at the end of 2013. There is no guarantee that this contractwill be renewed. The Company also has a contract for certain drug deliveryproducts that accounts for nearly 4% of sales that expires in September of 2009.While the Company currently believes it will renew the contract, and that it hasintellectual property that increases the likelihood of renewal, there is noguarantee that this contract will be renewed and that if it is renewed, that theprofitability will not be negatively impacted going forward.CAMBREX'S OPERATING RESULTS MAY UNEXPECTEDLY FLUCTUATE IN FUTURE PERIODS. The Company's revenue and operating results have fluctuated, and 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, but not limited to, the timing of contracts; the delay orcancellation of a contract; the mix of services provided; seasonal slowdowns indifferent parts of the world; the timing of start-up expenses for new servicesand facilities; changes in government regulations; and unfavorable exchangerates with the U.S. dollar. Because a high percentage of the Company's costs arerelatively fixed in the short term, such as the cost of maintaining facilitiesand compensating employees, any one of these factors could have a significantimpact on the Company's quarterly results. In some quarters, the Company'srevenue and operating results may fall below the expectations of securitiesanalysts and investors due to any of the factors described above. In such event,the trading price of the Company's common stock would likely decline, even ifthe decline in revenue did not have any long-term adverse implications for theCompany's business.FAILURE TO OBTAIN PRODUCTS AND RAW MATERIALS FROM THIRD-PARTY MANUFACTURERSCOULD AFFECT CAMBREX'S ABILITY TO MANUFACTURE AND DELIVER ITS PRODUCTS. The Company relies on third-party manufacturers to supply many of its rawmaterials, and in some cases, entire products. In addition, the Company has asingle source for supplies of some raw materials to our products. Manufacturingproblems may occur with these and other outside sources. If such problems occur,the Company cannot ensure that it will be able to manufacture its productsprofitably or on time.ANY SIGNIFICANT CHANGE IN GOVERNMENT REGULATION OF THE DRUG DEVELOPMENT PROCESSCOULD HAVE A MATERIAL ADVERSE EFFECT ON THE COMPANY. The manufacturing of pharmaceutical products is subject to extensiveregulation by governmental authorities, including the FDA and comparableregulatory authorities in other countries. The Company's business depends inpart on strict government regulation of the drug development process.Legislation may be introduced and enacted from time to time to modifyregulations administered by the FDA and governing the drug approval process. Anysignificant reduction in the scope of regulatory requirements or theintroduction of simplified drug approval procedures could have a materialadverse effect on the Company's business.--------(dollars in thousands, except share data) 8VIOLATIONS OF CGMP AND OTHER GOVERNMENT REGULATIONS COULD HAVE A MATERIALADVERSE EFFECT ON THE COMPANY. All facilities and manufacturing techniques used for manufacturing productsfor clinical use or for commercial sale in the United States must be operated inconformity with cGMP regulations as required by the FDA and for certainproducts, the Drug Enforcement Agency. 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 regulatorysanctions, the loss of a customer contract, the disqualification of data forclient submissions to regulatory authorities and a mandated closing of theCompany's facilities. Any such violations would have a material adverse effecton the Company's business. Cambrex's customers are typically subject to thesame, or similar, regulations and any such violations or other actions byregulatory agencies, including, but not limited to, plant shutdowns or productrecalls, that eliminate or reduce the Company's sale of it's products orservices could negatively impact the Company's business.LITIGATION MAY HARM THE COMPANY OR OTHERWISE NEGATIVELY IMPACT ITS MANAGEMENTAND FINANCIAL RESOURCES. Complex or extended litigation could cause the Company to incur largeexpenditures and distract our management. For example, lawsuits by employees,stockholders, counterparties to acquisition and divestiture contracts,collaborators, distributors, customers, or end-users of our products or servicescould be very costly and substantially disrupt our business. Disputes from timeto time with such companies or individuals are not uncommon, and the Companycannot be assured that it will always be able to resolve such disputes out ofcourt or on terms favorable to the Company. Refer to Note 18 for a discussion of the Company's environmental and legalmatters.LOSS OF KEY PERSONNEL COULD HURT THE COMPANY. 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.POTENTIAL PRODUCT LIABILITY CLAIMS, ERRORS AND OMISSIONS CLAIMS IN CONNECTIONWITH SERVICES THE COMPANY PERFORMS AND POTENTIAL LIABILITY UNDER INDEMNIFICATIONAGREEMENTS BETWEEN THE COMPANY AND ITS OFFICERS AND DIRECTORS COULD ADVERSELYAFFECT THE COMPANY. The Company manufactures products intended for use by the public. Theseactivities could expose the Company to risk of liability for personal injury ordeath to persons using such products, although the Company does not presentlymarket or sell the products to end users. The Company seeks to reduce itspotential liability through measures such as contractual indemnificationprovisions with clients (the scope of which may vary from client-to-client, andthe performances of which are not secured), exclusion of services requiringdiagnostic or other medical services, and insurance maintained by clients. TheCompany could be materially and adversely affected if it were required to paydamages or incur defense costs in connection with a claim that is outside thescope of the indemnification agreements, if the indemnity, although applicable,is not performed in accordance with its terms or if the Company's liabilityexceeds the amount of applicable insurance or indemnity. In addition, theCompany could be held liable for errors and omissions in connection with theservices it performs. The Company currently maintains product liability anderrors and omissions insurance with respect to these risks. There can be noassurance, however, that the Company's insurance coverage will be adequate orthat insurance coverage will continue to be available on terms acceptable to theCompany.--------(dollars in thousands, except share data) 9 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 affected 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 THECOMPANY HAS PROVIDED FOR AND IT MAY EXPERIENCE SIGNIFICANT VOLATILITY IN ITSANNUAL AND QUARTERLY EFFECTIVE TAX RATE. As a matter of course, the Company is regularly audited by federal, state,and foreign tax authorities. From time to time, these audits result in proposedassessments. In recent years, the Company utilized significant tax attributes inthe form of foreign tax credits and U.S. net operating loss ("NOLs")carryforwards to reduce or eliminate potential tax expense related to therepatriation of funds into the U.S. resulting from the 2005 Jobs Creation Actand from a large divestiture of its biotechnology-related businesses in 2007.While the Company believes that it has adequately provided for any taxes relatedto these items, and taxes related to all other aspects of its business, any suchassessments or future settlements may be materially different than it hasprovided. In recent years, as described more fully in Note 9, the Company hasrecorded a valuation allowance against all net domestic and certain foreigndeferred tax assets. Until such time as the Company's domestic and certainforeign profitability is restored and considered by management to be sustainablefor the foreseeable future, the Company will not record the income tax benefitor expense for domestic pre-tax losses and income respectively, and as such willlikely experience significant volatility in its effective tax rate.THE COMPANY HAS A SIGNIFICANT AMOUNT OF DEBT. The Company has a $200,000 revolving credit facility of which $123,800 wasoutstanding at December 31, 2008. This facility expires in April of 2012. If theCompany is unable to generate sufficient cash flow or otherwise obtain fundsnecessary to make required payments on the credit facility, it will be indefault. Even if the Company is able to meet its debt service obligations, theamount of debt it has could adversely affect the Company in a number of ways,including: - limiting its ability to obtain any necessary financing in the future for working capital, capital expenditures, debt service requirements, or other purposes; - limiting its flexibility in planning for, or reacting to, changes in the Company; - placing it at a disadvantage relative to its competitors who have lower levels of debt; - making it more vulnerable to a downturn in its business or the economy generally; and - requiring it to use a substantial portion of its cash to pay principal and interest on its debt, instead of investing those funds in the business.VOLATILE FINANCIAL MARKETS COULD AFFECT THE COMPANY'S CASH FLOWS The Company believes that cash flows from operations along with fundsavailable from a revolving line of credit will be adequate to meet theoperational and debt servicing needs of the Company, but no assurances can begiven that this will continue to be the case. Given the current state of theworldwide credit markets, there is a risk that the funds available to be drawnunder the Company's revolving line of credit may not be available in the eventof the failure of one or more participant banks. The Company's cash flow from future operations may be adversely affected byvarious factors including, but not limited to, declines in customer demand,increased competition, the deterioration in general economic and businessconditions, returns on assets within the Company's domestic pension plans thatare significantly below expected performance, as well as other factors.--------(dollars in thousands, except share data) 10INTERNATIONAL UNREST OR FOREIGN CURRENCY FLUCTUATIONS COULD ADVERSELY AFFECT THECOMPANY'S RESULTS. The Company's international revenues, which include revenues from its non-U.S. subsidiaries and export sales from the U.S., represented 77% and 79% of itsproduct revenues in 2008 and 2007, respectively. There are a number of risks arising from the Company's internationalbusiness, including: - foreign currencies it receives for sales outside the U.S. could be subject to unfavorable exchange rates with the U.S. dollar and reduce the amount of revenue that the Company recognizes; - the possibility that unfriendly nations or groups could boycott its products; - general economic and political conditions in the markets in which it operate; - potential increased costs associated with overlapping tax structures; - more limited protection for intellectual property rights in some countries; - unexpected changes in regulatory requirements; - the difficulties of compliance with a wide variety of foreign laws and regulations; - longer accounts receivable cycles in certain foreign countries; and - import and export licensing requirements. A significant portion of the Company's business is conducted in currenciesother than the U.S. dollar, which is its reporting currency. The Companyrecognizes foreign currency gains or losses arising from its operations in theperiod incurred. As a result, currency fluctuations between the U.S. dollar andthe currencies in which the Company does business have caused, and will continueto cause, foreign currency transaction gains and losses. The Company cannotpredict the effects of exchange rate fluctuations upon our future operatingresults because of the number of currencies involved, the variability ofcurrency exposures, and the potential volatility of currency exchange rates. TheCompany engages in limited foreign exchange hedging transactions to mitigate theimpact of this volatility on its operations, but its strategies are short-termin nature and may not adequately protect its operating results from the fulleffects of exchange rate fluctuations.THE MARKET PRICE OF CAMBREX'S STOCK COULD BE VOLATILE. The market price of the Company's common stock fluctuates substantially dueto a variety of factors, including: - quarterly fluctuations in its operating income and earnings per share results; - technological innovations or new product introductions by the Company or competitors; - economic conditions; - disputes concerning patents or proprietary rights; - changes in earnings estimates and market growth rate projections by market research analysts; - sales of common stock by existing holders; - loss of key personnel; and - securities class actions or other litigation. The market price for the Company's common stock may also be affected by theCompany's ability to meet any guidance that it may, from time to time, publiclyannounce related to our expected sales growth, profitability and other financialand operational metrics, and its ability to meet analysts' expectations. Inaddition, the stock market is subject to extreme price and volume fluctuations.This volatility has had a significant effect on the market prices of securitiesissued by many companies for reasons unrelated to the operating performance ofthese companies.--------(dollars in thousands, except share data) 11INCIDENTS RELATED TO HAZARDOUS MATERIALS COULD ADVERSELY AFFECT THE COMPANY. Portions of the Company's operations require the controlled use ofhazardous materials. Although the Company is diligent in designing andimplementing safety procedures to comply with the standards prescribed byfederal, state, and local regulations, the risk of accidental contamination ofproperty or injury to individuals from these materials cannot be completelyeliminated. In the event of such an incident, the Company could be liable forany damages that result, which could adversely affect its business. Additionally, any incident could partially or completely shut down theCompany's research and manufacturing facilities and operations. The Company generates waste that must be transported to approved storage,treatment and disposal facilities. The transportation and disposal of such wasteare required to meet applicable state and federal statutes and regulations. Thestorage, treatment and disposal of such waste potentially exposes the Company toenvironmental liability if, in the future, such transportation and disposal aredeemed to have violated such statues or regulations or if the storage, treatmentand disposal facilities are inadequate and are proved to have damaged theenvironment. 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. Refer toNote 18 for a discussion of the Company's environmental matters.THE POSSIBILITY THE COMPANY WILL BE UNABLE TO PROTECT ITS TECHNOLOGIES COULDAFFECT ITS ABILITY TO COMPETE. The Company's success depends to a significant degree upon its ability todevelop proprietary products and technologies. However, the Company cannot beassured that patents will be granted on any of its patent applications. TheCompany also cannot be assured that the scope of any of its issued patents willbe sufficiently broad to offer meaningful protection. The Company has patentsissued in selected countries, therefore, third parties can make, use, and sellproducts covered by its patents in any country in which the Company does nothave patent protection. In addition, issued patents or patents the Companylicenses could be successfully challenged, invalidated or circumvented so thatits patent rights would not create an effective competitive barrier. The Companyprovides its customers the right to use its products under label licenses thatare for research purposes only. These licenses could be contested, and theCompany cannot be assured that it would either be aware of an unauthorized useor be able to enforce the restrictions in a cost-effective manner. If a third party claimed an intellectual property right to technology theCompany uses, it may need to discontinue an important product or product line,alter its products and processes, defend its right to use such technology incourt or pay license fees. Although the Company may, under these circumstances,attempt to obtain a license to such intellectual property, it may not be able todo so on favorable terms, or at all. Additionally, if Cambrex's products arefound to infringe on a third party's intellectual property, the Company may berequired to pay damages for past infringement, and lose the ability to sellcertain products or receive licensing revenues.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, are creating uncertainty for companies. These new orchanged laws and standards are subject to multiple interpretations, in manycases due to their lack of specification. As a result, their application inpractice may evolve over time as new guidance is provided by regulatory andgoverning bodies which could result in higher costs necessitated by revisions todisclosures and governance practices. The Company is committed to maintaininghigh standards of corporate governance and public disclosure. As a result of theefforts to comply with the evolving laws and regulations increased general andadministrative expenses have been experienced and are likely to continue.--------(dollars in thousands, except share data) 12AVAILABLE 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. Reports filed by the Company with the SEC may be read and copied at theSEC's Public Reference Room at 100 F Street, NE, Washington, DC 20549.Information on the operation of the Public Reference Room may be obtained 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.ITEM 2 PROPERTIES. Set forth below is information relating to the Company's manufacturingfacilities as of December 31, 2008: OPERATINGLOCATION ACREAGE SUBSIDIARY PRODUCT LINES MANUFACTURED-------- -------- ---------- -------------------------- Charles City, IA 57 acres Cambrex APIs, Pharmaceutical Intermediates, Charles City, Imaging Chemicals, Animal Health Inc. Products and Fine Custom ChemicalsKarlskoga, Sweden 42 acres Cambrex APIs, Pharmaceutical Intermediates, Karlskoga AB Imaging Chemicals and Fine Custom ChemicalsPaullo (Milan), Italy 13 acres Cambrex APIs and Pharmaceutical Intermediates Profarmaco Milano S.r.l. The Company leases 10,000 square feet in Tallinn, Estonia which has a leaseterm ending May 2014. In addition, the Company owns a six acre site andbuildings in North Haven, CT, and a three acre site in Carlstadt, New Jersey.The Company believes its facilities to be in good condition, well-maintained andadequate for its current needs. In December 2007 the Company consolidated its United States R&D activitiesand small scale API production into its facility in Charles City, Iowa. As aresult of the consolidation, the Company's New Jersey R&D facility was closed asof December 31, 2008. The lease will continue through December 2010. 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.--------(dollars in thousands, except share data) 13ITEM 3 LEGAL PROCEEDINGS See "Environmental and Safety Regulations and Proceedings" under Item 1 andNote 18 with respect to various proceedings involving the Company in connectionwith environmental matters. The Company is party to a number of otherproceedings also discussed in Note 18.ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None PART IIITEM 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 theclosing high and low sales price of the common stock as reported on the NYSE:2008 HIGH LOW---- ------ ------ First Quarter............................................. $10.96 $6.93Second Quarter............................................ 7.28 5.51Third Quarter............................................. 7.97 5.45Fourth Quarter............................................ 6.14 2.452007 HIGH LOW---- ------ ------ First Quarter............................................. $25.04 $21.46Second Quarter............................................ 25.89 11.67Third Quarter............................................. 14.35 10.15Fourth Quarter............................................ 11.69 7.44 As of February 9, 2009, the Company estimates that there were approximately3,967 beneficial holders of the outstanding common stock of the Company. During May 2007, the Company paid a special dividend of $14.00 per share ofcommon stock. The quarterly dividend on common stock was $0.03 for the firstquarter of 2007 and discontinued thereafter. 2008 EQUITY COMPENSATION TABLE The following table provides information as of December 31, 2008 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 WEIGHTED AVERAGE ISSUANCE UNDER EQUITY TO BE ISSUED UPON EXERCISE PRICE OF COMPENSATION PLANS EXERCISE OF OUTSTANDING (EXCLUDING SECURITIES OUTSTANDING OPTIONS, OPTIONS, WARRANTS REFLECTED IN COLUMNPLAN CATEGORY WARRANTS AND RIGHTS AND RIGHTS (A))------------- -------------------- ----------------- --------------------- Equity compensation plans approved by security holders..................... 1,313,595 $13.45 47,046Equity compensation plans not approved by security holders.................. 277,274 $17.05 5,546 --------- ------Total.................................. 1,590,869 $14.07 52,592 ========= ======--------(dollars in thousands, except share data) 14 The material features of the equity compensation plan under which equitysecurities are authorized for issuance that was adopted without stockholderapproval are described below: 2000 EMPLOYEE PERFORMANCE STOCK OPTION PLAN The 2000 Employee Stock Option Plan (the "2000 Plan") is used to fundawards for Non-Executive Employees of the Company. The 2000 Plan is administeredby the Compensation Committee of the Board of Directors, and that Committee maydelegate responsibilities to others to assist in administering the 2000 Plan.The total number of shares of Common Stock which may be issued on exercise ofstock options shall not exceed 500,000 shares, subject to adjustment inaccordance with the Plan. No participant shall be granted options to purchasemore than 100,000 shares of common stock in any twelve month period. The optionsshall be priced at fair market value on the date of grant and shall expire 10years after the date of grant. If the employment of a participant terminates,other than as a result of death, disability or retirement, all unexercisedawards shall be cancelled immediately. In the event of death, disability orretirement, the options will expire one year from the date of the event.--------(dollars in thousands, except share data) 15 COMPARISON OF FIVE-YEAR CUMULATIVE TOTAL RETURNS The following graph compares the Company's cumulative total stockholderreturn for a five-year period, with a performance indicator of the overall stockmarket, the S&P 500 Index and the S&P 1500 Pharmaceuticals Index which theCompany believes more closely reflects the industry within which the Companyoperates. Prices are as of December 31 of the year indicated. COMPARISON OF CUMULATIVE FIVE YEAR TOTAL RETURN (PERFORMANCE GRAPH) The Company's commercial activities are focused on manufacturing andmarketing to customers concentrated in the Life Sciences Industry (includingpharmaceutical chemicals and intermediates). Although the Company's products arediverse, making it difficult to select a comparative peer group, the Companybelieves that the S&P 1500 Pharmaceuticals Index is a reasonable, publiclyavailable comparison group for the commercial activities on which it currentlyfocuses. The S&P 1500 Pharmaceuticals Index is comprised of 22 pharmaceuticalcompanies within the S&P 1500 Composite Index as of December 31, 2008.--------(dollars in thousands, except share data) 16ITEM 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, 2008 are derived fromthe audited financial statements for 2008, 2007 and 2006 and the books andrecords of the Company for 2005 and 2004, respectively, each including alladjustments necessary for discontinued operations presentation. The consolidatedfinancial statements of the Company as of December 31, 2008 and 2007 and foreach of the years in the three year period ended December 31, 2008 and thereports of independent registered public accounting firms thereon are includedelsewhere in this annual report. In October 2006, the Company sold twobusinesses within the former Human Health segment and in February 2007 theCompany completed the sale of the businesses that comprised the Bioproducts andBiopharma segments (excluding certain liabilities). See Note 19. As a result,these businesses are being reported as discontinued operations 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, ------------------------------------------------- 2008(1) 2007(2) 2006(3) 2005(4) 2004(5) -------- -------- -------- --------- -------- INCOME DATA:Gross sales................................ $249,618 $252,574 $236,659 $ 223,565 $216,528Net revenues............................... 249,228 252,505 235,073 224,213 217,065Gross profit............................... 73,743 91,232 83,858 86,911 84,857Selling, general and administrative expenses................................. 40,521 48,858 58,279 56,109 53,312Research and development expenses.......... 7,590 12,157 10,813 11,946 10,434Restructuring expenses..................... 4,695 6,073 -- -- --Strategic alternative costs................ 1,515 31,127 2,958 -- --Operating profit/(loss).................... 19,422 (6,983) 11,808 18,856 21,111Interest expense/(income), net............. 3,668 (485) 5,478 3,089 3,134Other expense/(income), net................ 754 725 (17) 201 336Income/(loss) before income taxes.......... 15,000 (7,223) 6,347 15,566 17,641Provision for income taxes................. 7,071 6,288 14,513 25,322 11,050Income/(loss) from continuing operations... 7,929 (13,511) (8,166) (9,756) 6,591Income/(loss) from discontinued operations, including gains/(losses) from dispositions, net of tax................. -- 222,759 (21,706) (100,702) (33,461)Income/(loss) before cumulative effect of a change in accounting principle........... 7,929 209,248 (29,872) (110,458) (26,870)Cumulative effect of a change in accounting principle................................ -- -- (228) -- --Net income/(loss).......................... 7,929 209,248 (30,100) (110,458) (26,870)EARNINGS PER SHARE DATA:Earnings/(loss) per common share (basic): Income/(loss) from continuing operations............................ $ 0.27 $ (0.47) $ (0.30) $ (0.37) $ 0.25 Income/(loss) from discontinued operations, including gains/(losses) from dispositions, net of tax......... $ -- $ 7.77 $ (0.81) $ (3.81) $ (1.28) Cumulative effect of a change in accounting principle.................. $ -- $ -- $ (0.01) $ -- $ -- -------- -------- -------- --------- -------- Net income/(loss)........................ $ 0.27 $ 7.30 $ (1.12) $ (4.18) $ (1.03)--------(dollars in thousands, except share data) 17 YEARS ENDED DECEMBER 31, ------------------------------------------------- 2008(1) 2007(2) 2006(3) 2005(4) 2004(5) -------- -------- -------- --------- -------- Earnings/(loss) per common share (diluted): Income/(loss) from continuing operations............................ $ 0.27 $ (0.47) $ (0.30) $ (0.37) $ 0.25 Income/(loss) from discontinued operations, including gains/(losses) from dispositions, net of tax......... $ -- $ 7.77 $ (0.81) $ (3.81) $ (1.27) Cumulative effect of a change in accounting principle.................. $ -- $ -- $ (0.01) $ -- $ -- -------- -------- -------- --------- -------- Net income/(loss)........................ $ 0.27 $ 7.30 $ (1.12) $ (4.18) $ (1.02)Weighted average shares outstanding: Basic.................................... 29,116 28,683 26,816 26,456 26,094 Diluted.................................. 29,161 28,683 26,816 26,456 26,462DIVIDENDS PER COMMON SHARE................. $ -- $ 14.03 $ 0.12 $ 0.12 $ 0.12BALANCE SHEET DATA: (AT END OF PERIOD) Working capital.......................... $ 74,376 $ 69,148 $117,616 $ 139,207 $182,915 Total assets............................. 341,072 373,462 606,376 612,472 791,985 Long-term debt........................... 123,800 101,600 158,600 182,060 219,999 Total stockholders' equity............... 74,786 102,057 246,646 243,251 391,316-------- (1) Income from continuing operations include pre-tax charges of $1,515 within operating expenses for the costs related to strategic alternatives, $4,695 within operating expenses for restructuring costs and $1,040 within operating expenses related to a former CEO's retirement. (2) Loss from continuing operations include pre-tax charges of $31,127 within operating expenses for the costs related to strategic alternatives, $6,073 within operating expenses for restructuring costs and $841 within interest expense for the write-off of unamortized debt costs. Income from discontinued operations include the gain on sale of the businesses that comprised the Bioproducts and Biopharma business segments of $235,489, expense of $4,636 for the Rutherford litigation settlement and expense of $1,000 for an adjustment to an environmental reserve at a Rutherford Business site. (3) Loss from continuing operations include pre-tax charges of $2,958 within operating expenses for external advisor costs related to divestitures, $5,272 within interest expense due to the pre-payment of a portion of the Company's long-term debt and tax expense of $1,696 related to prior years returns included in the provision for income taxes. Loss from discontinued operations include the loss on the sale of two businesses within the former Human Health segment of $23,244, expense of $200 for an adjustment to an environmental reserve at a Rutherford Business site, $2,092 for a goodwill impairment charge, $1,791 due to the acquisition of Cutanogen and $1,475 for the write-down of an investment in equity securities. (4) Loss from continuing operations include pre-tax charges for executive severance of $4,223 and an increase in an environmental reserve of $1,300 recorded in operating expenses, a tax benefit due to a favorable Swedish court decision of $3,329 and an increase in valuation allowances against domestic deferred tax assets totaling $16,926 within the provision for income taxes. Loss from discontinued operations include pre-tax charges for goodwill impairment of $76,385, long-lived asset impairment charge of $30,792 and a tax benefit related to the long-lived asset impairment of $1,673. (5) Loss from discontinued operations includes a pre-tax charge of $48,720 for goodwill impairment. As a result of the adjustments for discontinued operations, the calculation of diluted weighted average shares outstanding includes common equivalent shares previously excluded as anti-dilutive.--------(dollars in thousands, except share data) 18ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSEXECUTIVE OVERVIEW The Company's business consists of three manufacturing facilities. Thesefacilities primarily manufacture APIs, ingredients derived from organicchemistry and pharmaceutical intermediates. The following significant events, which are explained in detail on thefollowing pages, occurred during 2008 which affected results from continuingoperations: - A charge of $4,695 recorded within operating expenses for restructuring expenses. - A charge of $1,515 recorded within operating expenses for strategic alternatives costs. - A benefit of $726 recorded within cost of goods sold for an insurance settlement related to business interruption. Sales in 2008 decreased 1.2% to $249,618 from $252,574 in 2007. Sales in2008 were favorably impacted 2.5% as a result of foreign currency exchange. The Company experienced lower demand for custom development products during2008 due to macro-economic conditions and certain project delays. The Companyalso experienced lower generic API sales due to competitive pricing pressuresand a lack of new generic API products due to prior European legislation. Thislegislation was recently overturned and the Company expects to generate sales ofnew generic products in 2010 and beyond. Sales of controlled substances showedstrong growth in 2008. The Company also continues to develop several newproducts utilizing its proprietary polymeric drug delivery technology. The Company maintained a robust custom development pipeline during 2008 andits portfolio currently includes 14 products in phase III clinical trials. Witha broad portfolio of products and services in the API market, the Companyremains profitable and has a solid platform for future growth. Gross margins in 2008 decreased to 29.5% from 36.1% in 2007. The decreaseis due primarily to lower pricing and higher production costs partially offsetby proceeds from an insurance settlement related to business interruption. Theinsurance settlement contributed 0.3% to gross margins. The impact of foreigncurrency exchange was negligible. Two customers accounted for 10% or more of 2008 gross sales. A distributorrepresenting multiple customers, accounted for 11.8% and a pharmaceuticalcompany, with which a long-term sales contract is in effect, accounted for10.0%. Many of the Company's contracts are short-term in duration. As a result,the Company must continually replace its contracts with new contracts to sustainits revenue. In addition, certain of the Company's long-term contracts may becancelled or delayed by clients for any reason upon notice. The Companycurrently has a long-term sales contract that accounts for 10% of sales that isscheduled to expire at the end of 2013. There is no guarantee that this contractwill be renewed. The Company also has a contract for certain drug deliveryproducts that accounts for nearly 4% of sales that expires in September of 2009.While the Company currently believes it will renew the contract, and that it hasintellectual property that increases the likelihood of renewal, there is noguarantee that this contract will be renewed and that if it is renewed, that theprofitability will not be negatively impacted going forward. The Company recorded tax expense of $7,071 in 2008 compared to $6,288 in2007. Tax expense in 2007 includes $7,915 of benefit related to the recognitionof certain tax attributes as a result of the sale of the businesses thatcomprised the Bioproducts and Biopharma segments. The tax provisions in 2008 and2007 are primarily affected by the non-recognition of tax benefits in the U.S.where losses are incurred and the Company records valuation allowances againstthe benefits. The 2008 provision also includes benefits due to the expiration ofstatutes of limitations on certain tax positions, benefits for tax losscarrybacks and credits, and incremental benefits of the project to streamlinethe Company's legal structure.--------(dollars in thousands, except share data) 19 The Company reported income from continuing operations of $7,929, or $0.27per diluted share in 2008, compared to a loss of $13,511, or $0.47 per dilutedshare, in 2007.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 assumptions that are deemedreasonable by management under each applicable circumstance. Actual results oramounts could differ from estimates and the differences could have a materialimpact on the consolidated financial statements. A discussion of the Company'scritical accounting policies, the underlying judgments and uncertaintiesaffecting their application and the likelihood that materially different amountswould be reported under different conditions or using different assumptions, isas follows: Revenue Recognition Revenues are generally recognized when title to products and risk of lossare transferred to customers. Additional conditions for recognition of revenueare that collection of sales proceeds is reasonably assured and the Company hasno further performance obligations. The Company has certain contracts that contain multiple deliverables. Thesedeliverables often include process development services and commercialproduction and are divided into separate units of accounting if certain criteriaare met, including whether the delivered element has stand-alone value to thecustomer and whether there is objective and reliable evidence of the fair valueof the undelivered items. The consideration the Company receives is allocatedamong the separate units based on their respective fair values, and theapplicable revenue recognition criteria are applied to each of the separateunits. For contracts that contain milestone-based payments, the Company recognizesrevenue using the proportional performance method based on the percentage ofcosts incurred relative to the total costs estimated to be incurred to completethe contract. Revenue recognition computed under this methodology is compared tothe amount of non-refundable cash payments received or contractually receivableat the reporting date and the lesser of the two amounts is recognized as revenueat each reporting date. The proportional performance methodology applied by theCompany for revenue recognition, utilizes an input based measure, specificallylabor costs, because the Company believes the use of an input measure is abetter surrogate of proportional performance than an output based measure, suchas milestones. Amounts billed in advance are recorded as deferred revenue on the balancesheet. Since payments received are typically non-refundable, the termination ofa contract by a customer prior to its completion could result in an immediaterecognition of deferred revenue relating to payments already received notpreviously recognized as revenue. Sales terms to certain customers include rebates if certain conditions aremet. Additionally, sales are generally made with a limited right of return undercertain conditions. The Company estimates these rebates and returns at the timeof sale based on the terms of agreements with customers and historicalexperience and recognizes revenue net of these estimated costs which areclassified as allowances and rebates. The Company bills a portion of freight cost incurred on shipments tocustomers. Freight costs are reflected in cost of goods sold. Amounts billed tocustomers are recorded within net revenues. Asset Valuations and Review for Potential Impairments The review of long-lived assets, principally fixed assets and otheramortizable intangibles, requires the Company to estimate the undiscountedfuture cash flows generated from these assets whenever events or changes incircumstances indicate that the carrying value may not be fully recoverable. Ifundiscounted cash flows are less than carrying value, the long-lived assets arewritten down to fair value.--------(dollars in thousands, except share data) 20 The 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 utilizing a two-step process. In the first step, the fair value of the reporting units isdetermined using a discounted cash flow model and compared to the carryingvalue. If such analysis indicates that impairment may exist, the Company thenestimates the fair value of the other assets and liabilities utilizingappraisals and discounted cash flow analyses to calculate an impairment charge. The determination of fair value is judgmental and involves the use ofsignificant estimates and assumptions, including projected future cash flowsprimarily based on operating plans, discount rates, determination of appropriatemarket comparables and perpetual growth rates. These estimates and assumptionscould have a significant impact on whether or not an impairment charge isrecognized and the magnitude of any such charge. Environmental and Litigation Contingencies The Company periodically assesses the potential liabilities related to anylawsuits or claims brought against us. See Note 18 for a discussion of theCompany's current environmental and litigation matters, reserves recorded andour position with respect to any related uncertainties. While it is typicallyvery difficult to determine the timing and ultimate outcome of these actions,the Company uses its best judgment to determine if it is probable that theCompany will incur an expense related to a settlement for such matters andwhether a reasonable estimation of such probable loss, if any, can be made. Ifprobable and estimable, the Company accrues for the costs of clean-up,settlements and legal fees. If the aggregate amount of the liability and thetiming of the payment is fixed or reasonably determinable, the Company discountsthe amount to reflect the time value of money. Given the inherent uncertaintyrelated to the eventual outcome of litigation and environmental matters, it ispossible that all or some of these matters may be resolved for amountsmaterially different from any provisions that the Company may have made withrespect 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 generatingtaxable income or where future profitability is uncertain. Employee Benefit Plans The Company provides a range of benefits to certain 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, turnover rates, and health care cost trendrates. The Company reviews its actuarial assumptions on an annual basis andmakes modifications to the assumptions based on current rates and trends when itis deemed appropriate to do so. The effect of the modifications is generallyrecorded and amortized over future periods. The Company believes that theassumptions utilized for recording obligations under its 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) 21RESULTS OF OPERATIONS 2008 COMPARED TO 2007 Gross sales for 2008 decreased 1.2% to $249,618 from $252,574 in 2007.Gross sales were favorably impacted in 2008 by 2.5% due to the weakness in theU.S. dollar primarily versus the Euro and Swedish krona. The following table shows gross sales to geographic area for the yearsended December 31, 2008 and 2007: 2008 2007 -------- -------- North America.......................................... $ 86,631 $ 85,644Europe................................................. 143,542 150,692Asia................................................... 11,440 9,125Other.................................................. 8,005 7,113 -------- --------Total.................................................. $249,618 $252,574 ======== ======== Sales of APIs and pharmaceutical intermediates of $220,722 were comparableto the prior year. Excluding the favorable impact due to foreign exchange rates,sales were down 2.4%. Lower sales were driven by lower volumes of a diureticAPI, lower demand for custom development and drug delivery products as well aslower pricing of a gastro-intestinal API due to the renegotiation of a long-termcontract. These decreases were partially offset by strong sales of controlledsubstances and higher demand for a central nervous system API. Other sales of $28,896 were $3,292 or 10.2% below the prior year. Excludingthe favorable impact due to foreign exchange, these sales were down 12.1%. Thedecrease in sales is due primarily to lower sales of a feed additive productline that the Company exited in the third quarter of 2008 and lower sales ofpolymer products. Gross profit in 2008 was $73,743 compared to $91,232 in 2007. Gross marginsin 2008 decreased to 29.5% from 36.1% in 2007. The lower margins are dueprimarily to lower pricing and higher production costs partially offset byproceeds from an insurance settlement related to business interruption. Theinsurance settlement contributed 0.3% to gross margins. The impact of foreigncurrency exchange was negligible. Selling, general and administrative ("SG&A") expenses of $40,521 or 16.2%of gross sales in 2008 decreased from $48,858 or 19.3% in 2007. Administrativeexpenses decreased primarily due to lower personnel costs resulting from reducedstaffing at corporate headquarters (approximately $3,200), lower bonus expense(approximately $2,500) and lower legal fees (approximately $2,500) partiallyoffset by an unfavorable impact from foreign currency (approximately $1,100). Total restructuring expenses for 2008 and 2007 were $4,695 and $6,073,respectively. Restructuring expenses include the reduction of employee positionsat the corporate office and the consolidation of the Company's R&D activitiesand small scale API production with its facility in Iowa. During 2007, the Company announced plans to eliminate certain employeepositions at the corporate office upon completion of the sale of the businessesthat comprised the Bioproducts and Biopharma segments. This plan includedcertain one-time benefits for terminated employees. Costs related to these plansare recorded as restructuring expenses in the income statement. The Companyrecognized expense of $805 and $4,014 in 2008 and 2007, respectively, related tothis plan. In December of 2007, the Company consolidated its United States R&Dactivities and small scale API production with its facility in Charles City,Iowa. The Company recognized restructuring expenses in 2007 of $2,059 related tothis consolidation. This charge included the present value of the remaininglease payments under the Company's current operating lease at the New Jersey R&Dfacility (reduced by estimated sublease rentals) of $998. The operating leaseexpires in December 2010. In accordance with accounting guidance, the fair valueof the liability recorded at the cease-use date factored in the remaining leaserentals, reduced by estimated sublease rentals that could be reasonably obtainedfor the property. The Company consulted with local real estate brokers at thattime to determine what reasonable sublease rentals could be obtained. During thepast year, the Company has not been--------(dollars in thousands, except share data) 22able to sublease the property and interest dramatically decreased during thefourth quarter of 2008. Due to the lack of interest, the Company consulted withits real estate broker and determined that the possibility of obtaining asublease was extremely low. As a result, during the fourth quarter of 2008, theCompany increased the reserve related to the remaining lease payments by $2,388.This amount assumes the Company will not obtain a sublease for the facility. Inaddition to increasing the reserve, the Company incurred costs of $1,502 relatedto lease payments, utilities and severance during 2008. Costs related to thisconsolidation are recorded as restructuring expenses on the income statement. Total strategic alternative costs for 2008 and 2007 were $1,515 and$31,127, respectively. Strategic alternative costs include expenses that theCompany has incurred related to the decision to sell the businesses thatcomprised the Bioproducts and Biopharma segments in February 2007, costsassociated with a project to streamline the Company's legal structure and costsassociated with the exit of a feed additives product line. These costs are notconsidered part of the restructuring program or a part of discontinuedoperations under current accounting guidance. Strategic alternative costs for 2008 include $1,385 related to the projectto streamline the Company's legal structure, costs associated with themodification of employee stock options due to the payment of the specialdividend in connection with the divestiture of $102 and change of controlexpense of $28. Costs for 2007 include change of control expenses totaling$20,025 related to the 2007 divestiture of the businesses that comprised theBioproducts and Biopharma segments, retention bonuses of $6,780, costsassociated with the stock option modification of $2,854 and external advisorcosts of $456. During the fourth quarter of 2007 the Company committed to a plan to exit afeed additive product line. The equipment used in producing this product will bedismantled and disposed subsequent to the completion of production. Productioncontinued through the third quarter of 2008. In accordance with FASBInterpretation No. 47, Accounting for Conditional Asset Retirement Obligations("FIN 47"), the Company recorded $1,012 for the asset retirement obligation in2007. This charge is recorded as strategic alternative costs in the incomestatement. Research and development expenses of $7,590 were 3.0% of gross sales in2008, compared to $12,157 or 4.8% of gross sales in 2007. The decrease isprimarily due to the Company's decision in 2007 to consolidate its New JerseyR&D facility with its R&D operations in Iowa to create increased operatingefficiencies. The Company also utilized certain R&D personnel on customdevelopment projects resulting in these costs being classified as cost of goodssold. The impact of foreign currency was negligible. Operating profit was $19,422 in 2008 compared to an operating loss of$6,983 in 2007. The increase is due to lower strategic alternative andrestructuring costs and lower corporate spending partially offset by lower grossmargins. The 2008 results include strategic alternative and restructuring costsof $1,515 and $4,695, respectively. The 2007 results include strategicalternative and restructuring costs of $31,127 and $6,073, respectively. Net interest expense was $3,668 in 2008 compared to net interest income of$485 in 2007 primarily reflecting interest income in 2007 due to interest earnedon the proceeds from the sale of the businesses that comprised the Bioproductsand Biopharma segments. Higher average debt partially offset by lower interestrates contributed to higher interest expense. Additionally, 2007 includes theacceleration of unamortized origination fees related to the repayment of a priorcredit facility of $841. The average interest rate was 4.9% and 6.9% in 2008 and2007, respectively. The Company recorded tax expense of $7,071 in 2008 compared to $6,288 in2007. The tax expense for 2008 includes a $5,537 valuation allowance to offsetbenefits generated from U.S. tax credits and losses in certain non-U.S.jurisdictions. These valuation allowances result from the Company's recenthistory of domestic and certain foreign losses and its short-term projectionsfor losses from continuing operations in the relative jurisdictions. Since 2003,the Company has maintained a full valuation allowance on the tax benefitsarising from domestic pre-tax losses. The Company will continue to record a full valuation allowance, primarilyon its domestic net deferred tax assets and indefinite lived intangibles, untilan appropriate level of domestic profitability is sustained or tax strategiescan be developed that would enable the Company to conclude that it is morelikely than not that a portion--------(dollars in thousands, except share data) 23of the domestic net deferred assets would be realized. If the Company continuesto report pre-tax losses in the United States and certain foreign jurisdictions,income tax benefits associated with those losses will not be recognized and,therefore, those losses would not be reduced by such income tax benefits. Thecarryforward periods for foreign tax credits, research and experimentation taxcredits and the federal alternative minimum tax credits are 10 years, 20 yearsand an indefinite period, respectively. As such, improvements in domestic pre-tax income in the future may result in these tax benefits ultimately beingrealized. However, there is no assurance that such improvements will beachieved. In connection with the sale of the businesses that comprised theBioproducts and Biopharma businesses in 2007, the Company utilized domesticfederal NOLs and foreign tax credits for which a full valuation allowance wasprovided for at December 31, 2007, to eliminate the U.S. tax on thistransaction. U.S. income tax related to distributions from non-U.S. entitiesrepatriated in 2008 has been offset by foreign tax credits. Income from continuing operations in 2008 was $7,929, or $0.27 per dilutedshare, versus a loss of $13,511, or $0.47 per diluted share in 2007. 2007 COMPARED TO 2006 Gross sales for 2007 increased 6.7% to $252,574 from $236,659 in 2006.Gross sales were favorably impacted 4.7% due to the impact of foreign currencyreflecting weakness in the U.S. dollar primarily versus the Euro and Swedishkrona. The following table shows gross sales to geographic area for the yearsended December 31, 2007 and 2006: 2007 2006 -------- -------- North America.......................................... $ 85,644 $ 85,944Europe................................................. 150,692 136,545Asia................................................... 9,125 8,041Other.................................................. 7,113 6,129 -------- --------Total.................................................. $252,574 $236,659 ======== ======== Sales of APIs and pharmaceutical intermediates of $220,386 were $14,193 or6.9% above the prior year due primarily to higher demand for a diuretic API,nicotine polacrilex resin (used in smoking cessation products), amphetamines,and a neurological API. The increase in 2007 sales was partially offset by lowersales of three custom development products. Other sales of $32,188 were $1,722 or 5.7% above the prior year dueprimarily to higher volumes of a crop protection product and x-ray media,partially offset by lower sales of feed additive products. Gross profit in 2007 was $91,232 compared to $83,858 in 2006. Gross marginsin 2007 increased to 36.1% from 35.4% in 2006. On a performance basis (excludingforeign currency impact), gross margins were 35.5% in 2007. The marginalincrease is due primarily to favorable mix mostly offset by lower pricing. SG&A expenses of $48,858 or 19.3% of gross sales in 2007 decreased from$58,279 or 24.6% in 2006. Administrative expenses decreased primarily due tolower personnel costs resulting from reduced staffing at corporate headquarters(approximately $3,000) and lower audit (approximately $2,200), insurance(approximately $1,900) and legal fees (approximately $1,500) partially offset byan unfavorable impact from foreign currency (approximately $1,500). The Company announced plans to eliminate certain employee positions at thecorporate office upon completion of the sale of the businesses that comprisedthe Bioproducts and Biopharma segments. This plan included certain one-timebenefits for employees terminated and is substantially completed as of December31, 2007. Costs related to these plans are recorded as restructuring expenses inthe income statement. The Company recognized expense of $4,014 during 2007.--------(dollars in thousands, except share data) 24 The Company also consolidated its United States R&D activities and smallscale API production with its facility in Charles City, Iowa. As a result of theconsolidation, the Company's New Jersey R&D facility was substantially closed asof December 31, 2007. The Company recognized restructuring expenses in 2007 of$2,059, of which approximately $1,354 will be in cash. The charge of $2,059consists of the present value of the remaining lease payments under theCompany's current operating lease at the New Jersey R&D facility (reduced byestimated sublease rentals) of $998, leasehold improvement write-offs of $705and employee retention and severance of $356. Costs related to this plan arerecorded as restructuring expenses on the income statement. The operating leaseexpires in December 2010. In accordance with accounting guidance, the severanceand retention charges are being recognized ratably over the remaining serviceperiod. Lease payments are approximately $1,400 per year. Strategic alternative costs include costs that the Company has incurredrelated to the decision to sell the businesses that comprised the Bioproductsand Biopharma segments in February 2007 and costs associated with the exit of aproduct line that manufactures a feed additive. These costs are not consideredpart of the restructuring program or a part of discontinued operations undercurrent accounting guidance. As a result of the sale of the businesses that comprise the Bioproducts andBiopharma segments, certain benefits became payable under change of controlagreements between the Company and four of its current or former executives.These costs totaled $20,025 in 2007. Also included in strategic alternativecosts are retention bonuses of $6,780; this includes amounts paid to certaincurrent employees for continued employment, generally through September 30, 2007and December 31, 2007, costs associated with the modification of employee stockoptions due to the payment of the special dividend in connection with thedivestiture of $2,854 and external advisor costs of $456. Substantially all ofthese charges have been paid in cash. During the fourth quarter of 2007 the Company committed to a plan to exit afeed additive product line. The equipment used in producing this product will bedismantled and disposed subsequent to the completion of production. Productioncontinued through the third quarter of 2008. In accordance with FIN 47, theCompany now has the information needed to estimate a range of potentialsettlement dates and the potential methods of settlement for the dismantling anddisposal of this equipment. Upon adopting FIN 47 in the fourth quarter of 2005,the Company did not have the information needed to estimate the fair marketvalue of the asset retirement obligation and as such did not record a liability.During the fourth quarter of 2007, the Company recorded $1,012 for the assetretirement obligation. This charge is recorded as strategic alternative costs inthe income statement. Total strategic alternative costs for 2007 were $31,127. Strategicalternative costs for 2006 totaled $2,958 consisting of external advisor costsrelated to divestitures. Research and development expenses of $12,157 were 4.8% of gross sales in2007, compared to $10,813 or 4.6% of gross sales in 2006. The increase inexpense primarily reflects higher personnel costs to invest in the growth anddevelopment of proprietary technology platforms ($400), higher costs at the NewJersey R&D facility due to lower billings of fixed costs to customers resultingfrom fewer projects ($400) and depreciation expense associated with the new R&Dfacility in Milano ($100). The impact of foreign currency also contributed tohigher expense ($500). The Company incurred an operating loss in 2007 of $6,983 compared tooperating income of $11,808 in 2006 due to higher strategic alternative andrestructuring costs, partially offset by lower corporate spending and highergross margins. The 2007 results include strategic alternative and restructuringcosts of $31,127 and $6,073, respectively. The 2006 results include strategicalternative costs of $2,958. Net interest income was $485 in 2007 compared to net interest expense of$5,478 in 2006 primarily reflecting higher interest income in 2007 compared to2006 due to interest earned on the proceeds from the sale of the businesses thatcomprised the Bioproducts and Biopharma segments. Lower average debt partiallyoffset by higher interest rates contributed to lower interest expense.Additionally, 2007 includes the acceleration of unamortized origination feesrelated to the repayment of a prior credit facility of $841. Included in 2006 isapproximately $5,272 related to the make whole payment of $4,809 and the relatedacceleration of $463 of unamortized origination fees--------(dollars in thousands, except share data) 25due to the prepayment of the Senior Notes partially offset by the allocation ofinterest expense to discontinued operations. The average interest rate was 6.9%and 5.8% in 2007 and 2006, respectively. The Company recorded tax expense of $6,288 in 2007 compared to $14,513 in2006. Tax expense in 2007 includes $7,915 of benefit related to the recognitionof certain tax attributes as a result of the sale of the businesses thatcomprised the Bioproducts and Biopharma segments. The tax expense for 2007 alsoincludes a $7,816 valuation allowance to offset benefits generated from U.S. taxlosses and tax credits and losses in certain non-U.S. jurisdictions. Thesevaluation allowances result from the Company's recent history of domestic andcertain foreign losses and its short-term projections for losses from continuingoperations in the relative jurisdictions. Since 2003, the Company has maintaineda full valuation allowance on the tax benefits arising from domestic pre-taxlosses. The Company will continue to record a full valuation allowance, primarilyon its domestic net deferred tax assets and indefinite lived intangibles, untilan appropriate level of domestic profitability is sustained or tax strategiescan be developed that would enable the Company to conclude that it is morelikely than not that a portion of the domestic net deferred assets would berealized. If the Company continues to report pre-tax losses in the United Statesand certain foreign jurisdictions, income tax benefits associated with thoselosses will not be recognized and, therefore, those losses would not be reducedby such income tax benefits. The carryforward periods for foreign tax credits,research and experimentation tax credits, NOLs, and the federal alternativeminimum tax credits are 10 years, 20 years, 20 years and an indefinite period,respectively. As such, improvements in domestic pre-tax income in the future mayresult in these tax benefits ultimately being realized. However, there is noassurance that such improvements will be achieved. In connection with the sale of the businesses that comprised theBioproducts and Biopharma businesses, the Company utilized domestic NOLs andforeign tax credits for which a full valuation allowance was provided for atDecember 31, 2006. The NOLs and foreign tax credits were utilized to reduce allthe domestic tax on this transaction. Loss from continuing operations in 2007 was $13,511 or $0.47 per dilutedshare, versus $8,166 or $0.30 per diluted share in 2006.LIQUIDITY AND CAPITAL RESOURCES During 2008 cash and cash equivalents on hand decreased $5,948 to $32,540.The year over year decline in the Euro and Swedish krona unfavorably impactedthe translated cash balances by $2,410. During 2008, cash flows from operationsprovided $4,989, compared to using $793 in the same period a year ago. Thechange in cash flows from operations in 2008 versus 2007 is due primarily tohigher income from continuing operations and improved accounts receivablecollections partially offset by the pay down of several year end 2007 accruals. Cash flows used in investing activities in 2008 of $30,637 primarilyreflect cash payments related to capital expenditures of $29,378 compared to$25,927 in 2007. Capital expenditures in 2008 primarily consisted of a new mid-scale Pharma manufacturing facility in Karlskoga, Sweden, an API purificationfacility in Milan, Italy and capital improvements to existing facilities. For2009, capital expenditures are expected to be approximately $13,000 to $16,000. Cash flows provided by financing activities in 2008 of $22,110 mainlyreflect a net increase in bank debt of $22,142. In 2007 the Company had a netreduction of debt of $57,255 and paid dividends of $402,389 which was partiallyoffset by proceeds from stock options exercised of $21,898. In April 2007, the Company entered into a $200,000 five-year SyndicatedSenior Revolving Credit Facility which expires in April 2012. The Company paysinterest on this credit facility at LIBOR plus 1.25% -- 2.00% based upon certainmeasurements of the Company's financial performance. The credit facility alsoincludes financial covenants regarding interest coverage and leverage ratios.The Company was in compliance with all financial covenants at December 31, 2008.The 5-Year Agreement is collateralized by dividend and distribution rightsassociated with a pledge of a portion of stock that the Company owns in aforeign holding company. This--------(dollars in thousands, except share data) 26foreign holding company owns a majority of the Company's non-U.S. operatingsubsidiaries. As of December 31, 2008, there was $123,800 outstanding under thefive-year Syndicated Senior Revolving Credit Facility. The Company has employed a plan to mitigate interest rate risk by enteringinto interest rate swap agreements to convert floating rates to fixed interestrates. As of December 31, 2008, the Company had three interest rate swaps inplace with an aggregate notional value of $60,000, at an average fixed rate of4.48%, and with maturity dates of October 2010. The Company's strategy has beento cover a portion of outstanding bank debt with interest rate protection. AtDecember 31, 2008, the coverage was approximately 48% of our variable interestrate debt. The Company used the proceeds from the sale of the businesses thatcomprised the Bioproducts and Biopharma segments, which closed during the firstquarter of 2007, to repay outstanding debt and in May 2007, paid a specialdividend of $14.00 per share, totaling $401,970. Approximately $94,000 wasborrowed from the Company's 5-Year Agreement to pay the dividend. The Companyalso discontinued its quarterly dividend payment. The Company did not pay a quarterly dividend during 2008. During 2007, theCompany paid its quarterly dividend on common stock of $0.03 only for the firstquarter. The 2008 and 2007 weighted average interest rate for long-term bank debtwas 4.9% and 6.9%, respectively.CONTRACTUAL OBLIGATIONS At December 31, 2008, the Company's contractual obligations with initial orremaining terms in excess of one year were as follows: TOTAL 2009 2010 2011 2012 2013+ -------- ------- ------- ------ -------- ----- Long term debt................... $123,800 $ -- $ -- $ -- $123,800 $ --Interest on debt................. 14,054 4,775 4,568 3,533 1,178 --Operating leases................. 6,132 2,265 2,164 707 672 324Purchase obligations............. 14,136 6,819 3,410 2,425 1,482 --Strategic alternatives/restructuring..... 5,628 5,628 -- -- -- --Vitamin B-3 settlement........... 1,577 1,577 -- -- -- -- -------- ------- ------- ------ -------- ----Contractual cash obligations..... $165,327 $21,064 $10,142 $6,665 $127,132 $324 ======== ======= ======= ====== ======== ==== In addition to the contractual obligations listed above, the Companyexpects to contribute approximately $1,205 in cash to its two U.S. defined-benefit pension plans in 2009. Also not included in the table above is $1,697 ofuncertain tax positions due to uncertainties surrounding the timing of theobligation. See Note 9. See Notes 10, 12, 15, 17 and 18 for additional information regarding ourpension plans, debt and other commitments. The Company's forecasted cash flow from future operations may be adverselyaffected by various factors including, but not limited to, declines in customerdemand, increased competition, the deterioration in general economic andbusiness conditions, returns on assets within the Company's domestic pensionplans that are significantly below expected performance, as well as otherfactors. See the Risk Factors section of this document for further explanationof factors that may negatively impact the Company's cash flows. Any change inthe current status of these factors could adversely impact the Company's abilityto fund operating cash flow requirements.MARKET RISKS 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 and Swedishkrona. The Company currently uses foreign currency exchange forward contracts tomitigate the effect of--------(dollars in thousands, except share data) 27short-term foreign exchange rate movements on the Company's local operatingresults. As a matter of policy, the Company does not hedge to protect thetranslated results of foreign operations. The notional amount of these contractsas of December 31, 2008 was $20,568. Unrealized foreign exchange contract lossesdo not subject the Company's actual results to risk as gains or losses on thesecontracts are undertaken to offset gains or losses on the transactions that arehedged. The foreign exchange contracts have varying maturities with noneexceeding twelve months. With respect to the contracts outstanding at December 31, 2008, a 10%fluctuation of the local currency over a one-year period would cause $2,113 pre-tax earnings to be at risk. This is based on the notional amount of thecontracts, adjusted for unrealized gains and losses, of $21,131. 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 The Company has employed a plan to mitigate interest rate risk by enteringinto interest rate swap agreements to convert floating rates to fixed interestrates. As of December 31, 2008, the Company had three interest rate swaps inplace with an aggregate notional value of $60,000, at an average fixed rate of4.48%, and with maturity dates of October 2010. The Company's strategy has beento cover a portion of outstanding bank debt with interest rate protection. AtDecember 31, 2008, the coverage was approximately 48% of our variable interestrate debt. At December 31, 2008 the Company had variable debt of $123,800, ofwhich $60,000 is fixed by an interest rate swap. Holding all other variablesconstant, if the LIBOR portion of the weighted average interest rates in thevariable rate debt increased by 100 basis points, the effect on our earnings andcash flows would have been higher interest expense of $638.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. Thesematters, either individually or in the aggregate, could have a material adverseeffect on the Company's financial condition, operating results and cash flows ina future reporting period. Environmental In connection with laws and regulations pertaining to the protection of theenvironment, the Company and its subsidiaries are a party to severalenvironmental proceedings and remediation investigations and cleanups and, alongwith other companies, have been named potentially responsible parties ("PRP")for certain waste disposal sites ("Superfund sites"). Additionally, the Companyhas retained the liability for certain environmental proceedings, associatedwith the sale of the Rutherford Chemicals business. Each of these matters is subject to various uncertainties, and it ispossible that some of these matters will be decided unfavorably against theCompany. The resolution of such matters often spans several years and frequentlyinvolves regulatory oversight or adjudication. Additionally, many remediationrequirements are not fixed and are likely to be affected by futuretechnological, site, and regulatory developments. Consequently, the ultimateextent of liabilities with respect to such matters, as well as the timing ofcash 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 $6,226 and$6,905 at December 31, 2008 and December 31, 2007, respectively. The decrease inthe accrual includes payments of $633 and the impact of currency of $303partially offset by adjustments to reserves of $257. Based upon availableinformation and analysis, the--------(dollars in thousands, except share data) 28Company's current accrual represents management's best estimate of the probableand estimable costs associated with environmental proceedings including amountsfor investigation fees where remediation costs may not be estimable at thereporting date. CasChem ISRA As a result of the sale of the Bayonne, New Jersey facility, the Companybecame obligated to investigate site conditions and conduct required remediationunder the New Jersey Industrial Site Recovery Act ("ISRA"). The Companycompleted a preliminary assessment of the site and submitted the preliminaryassessment to the New Jersey Department of Environmental Protection ("NJDEP").The preliminary assessment identified potential areas of concern based onhistorical operations and sampling of such areas commenced. The Company hascompleted a second phase of sampling and determined that a third phase ofsampling is necessary to determine the extent of contamination and any necessaryremediation. The results of the completed and proposed sampling, and anyadditional sampling deemed necessary, will be used to develop an estimate of theCompany's future liability for remediation costs, if any. The Company submittedits plan for the third phase of sampling to the NJDEP during the fourth quarterof 2005. The sampling will commence upon approval of the sampling plan. Cosan The Company's Cosan subsidiary conducted manufacturing operations inClifton, New Jersey from 1968 until 1979. Prior to the acquisition of Cosan bythe Company, the operations were moved to another location and thereafterCambrex purchased the business. In 1997, Cosan entered into an AdministrativeConsent Order with the NJDEP. Under the Administrative Consent Order, Cosan wasrequired to complete an investigation of the extent of the contamination relatedto the Clifton site and conduct remediation as may be necessary. During thethird quarter of 2005, the Company completed the investigation related to theClifton site, which extends to adjacent properties. The results of theinvestigation caused the Company to increase its related reserves by $1,300 in2005 based on the proposed remedial action plan. The Company submitted theresults of the investigation and proposed remedial action plan to the NJDEP. Inlate 2006, the NJDEP requested that an additional investigation be conducted atthe site. The Company estimated that the additional work will cost approximately$240, and as such, increased the related reserve in the first quarter of 2007.The Company submitted its plan for additional work to the NJDEP in April 2007.In August 2007 the NJDEP approved the Company's work plan and the additionalinvestigation has been partially completed. The Company has submitted an interimreport to NJDEP and is proceeding to complete the investigation. As of December31, 2008, the reserve was $1,260. The results of the additional investigationmay impact the remediation plan and costs. Additionally, there is a reserve of $929 as of December 31, 2008 for theCosan Carlstadt, N.J. site related to an Administrative Consent Order with theNJDEP entered into in 1985 in connection with the acquisition of Cosan. InSeptember 2004, the reserve was increased based on the investigations completedto date and the proposed Remedial Action Work Plan ("RAW") submitted to theNJDEP for their approval. The NJDEP subsequently rejected the RAW and requiredthe Company to perform additional investigative work prior to approval of a newRAW. The Company's reserves were increased to cover the additional investigativework. The results of this additional investigative work may impact the RAW andcosts. Berry's Creek In March 2006, the Company received notice from the United StatesEnvironmental Protection Agency ("USEPA") that two former operating subsidiariesare considered PRPs at the Berry's Creek Superfund Site, Bergen County, NewJersey. The operating companies are among many other PRPs that were listed inthe notice. Pursuant to the notice, the PRPs have been asked to perform aremedial investigation and feasibility study of the Berry's Creek Site. TheCompany has met with the other PRPs. Both operating companies joined the groupof PRPs and filed a joint response to the USEPA agreeing to jointly negotiate toconduct or fund (along with other PRPs) an appropriate remedial investigationand feasibility study of the Berry's Creek Site. The PRPs have engaged technicaland allocation consultants to evaluate investigation and remedial alternativesand develop a method to allocate related--------(dollars in thousands, except share data) 29costs among the PRPs. In December 2007 the PRPs reached a tentative agreement onthe allocation of the site investigation costs and at December 31, 2008 theCompany's reserve was $498. The investigation is expected to take several yearsand at this time it is too early to predict the extent of any additionalliabilities. Nepera, Inc. -- Maybrook and Harriman Sites In 1987, Nepera, Inc. ("Nepera") was named a PRP along with certain priorowners of the Maybrook Site in Hamptonburgh, New York by the USEPA in connectionwith the disposition, under appropriate permits, of wastewater at that siteprior to Cambrex's acquisition of Nepera in 1986. The Maybrook Site is on theUSEPA's National Priorities List for remedial work. A prior owner of the Neperafacility has participated with Nepera in the performance of a remedialinvestigation and feasibility study for the Maybrook Site. In September 2007,the USEPA issued the Record of Decision ("ROD") which describes the remedialplan for the Maybrook Site. The USEPA also issued the Company and the priorowner a Notice of Potential Liability and the recipients have signed a ConsentDecree to complete the ROD and pay the USEPA certain past oversight costs andhave provided the USEPA with appropriate financial assurance, including a letterof credit to guarantee the recipient's obligation under the Consent Decree. In 1987, Nepera was also named as a responsible party along with certainprior owners of the Harriman, New York production facility by the New York StateDepartment of Environmental Conservation in connection with contamination at theHarriman Site. A prior owner of the Nepera facility has participated with Neperain the performance of the remedial investigation and feasibility study for theHarriman Site. In 1997, a final ROD was issued which describes the remediationplan for the site. Nepera and the prior owner have been implementing the RODsince 1997. Until 1997, reserves were assessed and established based on the informationavailable. In November 1997, a settlement was reached between Nepera, Inc., theformer owner mentioned above, and the original owner of the Harriman operations,pertaining to past and future costs of remediating the Maybrook and HarrimanSites ("the Sites"). Under the terms of the settlement, the original site ownerpaid approximately $13,000 to provide for past and future remediation costs atthe two sites in exchange for a release from the requirement to clean up the twosites, and the settlement funds were placed in a trust for the benefit ofremediating the two sites on behalf of Nepera and the other former site owner.Nepera and the prior owner were reimbursed their past costs from the trust.Nepera had believed that the remaining funds available in the trust would besufficient to provide for the future remediation costs for the Sites.Accordingly, the estimated range of liability for the Sites was offset againstthe settlement funds. Based on available information, Nepera believed that the current trustbalance would not cover the remaining work to be completed at Harriman and underthe final Maybrook ROD issued in September 2007. As such the Company increasedits reserve by $1,000 during 2007, which was recorded in discontinuedoperations. As of December 31, 2008, the reserve recorded on the books was$1,200. Solvent Recoveries Superfund Site In 1992, the USEPA notified Humphrey Chemical Co., Inc. ("Humphrey") of itspossible involvement as one of approximately 1,300 PRPs at a Superfund site("the site") in Southington, Connecticut, once operated by Solvent Recoveries,Inc. Humphrey joined the PRP group, which has agreed with the USEPA to perform aRemedial Investigation/Feasibility Study ("RIFS"). The RIFS has been completedand the USEPA has proposed remediation of the Site. In September 2008, Humphreyagreed to enter into a consent decree and settlement with the other PRPs and theUSEPA whereby Humphrey agreed to pay a settlement amount of $353 with an initialpayment of $106 and the remaining $247 to be paid in installments over time asthe remediation proceeds. The Company has reserved for the unpaid portion of thesettlement and has entered into a letter of credit to guarantee the paymentobligation under the settlement. 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 adjusting or recordingan accrual, should an accrual ultimately be required.--------(dollars in thousands, except share data) 30 Newark Bay Complex Litigation CasChem and Cosan have been named as two of several hundred third-partydefendants in a third-party complaint filed in February 2009, by Maxus EnergyCorporation ("Maxus") and Tierra Solutions, Inc. ("Tierra"). The originalplaintiffs include the NJDEP, the Commissioner of the NJDEP and theAdministrator of the NJ Spill Compensation Fund, which originally filed suit in2005 against Maxus, Tierra and other defendants seeking recovery of cleanup andremoval costs for alleged discharges of dioxin and other hazardous substancesinto the Passaic River, Newark Bay, Hackensack River, Arthur Kill, Kill Van Kulland adjacent waters (the "Newark Bay Complex"). Maxus and Tierra are now seekingcontribution from third-party defendants for any cleanup and removal costs forwhich each may be held liable in the lawsuit. Maxus and Tierra also seekrecovery for cleanup and removal costs, that each has incurred or will incurrelating to the Newark Bay Complex. The Company expects to vigorously defendagainst the lawsuit. At this time it is too early to predict whether the Companywill have any liability in this matter.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., ("Gyma") Profarmaco's distributor in the United States) in a proceedinginstituted by the Federal Trade Commission ("FTC") in the United States DistrictCourt for the District of Columbia (the "District Court"). Suits were alsocommenced by several State Attorneys' General. The suits alleged violations ofthe Federal Trade Commission Act arising from exclusive license agreementsbetween Profarmaco and Mylan covering two APIs. The FTC and Attorneys' Generalsuits were settled in February 2001, with Mylan (on its own behalf and on behalfof Profarmaco and Cambrex) agreeing to pay over $140,000 and with Mylan,Profarmaco and Cambrex agreeing to monitor certain future conduct. The same parties including the Company and Profarmaco have also been 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. All of these cases have been resolvedexcept for one brought by three health care insurers known as In Re Lorazepam &Clorazepate Antitrust Litigation. In April 2003, Cambrex reached an agreement with Mylan under which Cambrexwould contribute $12,415 to the settlement of litigation brought by a class ofdirect purchasers which has been fully paid as of December 31, 2008. Inexchange, Cambrex and Profarmaco received from Mylan a release and fullindemnity against future costs or liabilities in related litigation brought bypurchasers, as well as potential future claims related to this matter. In February 2008 the District Court, in the In Re Lorazepam & ClorazepateAntitrust Litigation, entered judgment after trial against Mylan, Gyma andCambrex in the amount of $8,355, payable jointly and severally, and also apunitive damage award against each of Mylan, Gyma and Cambrex in the amount of$16,709. In addition, in October 2008, the District Court ruled that Mylan, Gymaand Cambrex were also subject to a total of approximately $7,000 in prejudgmentinterest. The parties will appeal the awards. Cambrex expects any payment of thejudgment against it to be made by Mylan under the indemnity described above. Vitamin B-3 In May 1998, Nepera, which manufactured and sold niacinamide ("Vitamin B-3"), received a Federal Grand Jury subpoena for the production of documentsrelating to the pricing and possible customer allocation with regard to thatproduct. In 2000, Nepera reached an agreement with the government as to itsalleged role in Vitamin B-3 violations from 1992 to 1995. The Canadiangovernment claimed similar violations. All government suits in the U.S. andCanada have been concluded.--------(dollars in thousands, except share data) 31 Nepera was named as a defendant, along with several other companies, in anumber 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. The balance of the reserves recorded within accrued liabilities related tothis matter is $1,577 as of December 31, 2008 and is sufficient to cover thesettlement. Baltimore Litigation In 2001, the Company acquired a biopharmaceutical manufacturing business inBaltimore (the "Baltimore Business"). The sellers of the Baltimore Businessfiled suit against the Company alleging that the Company made falserepresentations during the negotiations on which the sellers relied in decidingto sell the business and that the Company breached its obligation to payadditional consideration as provided in the purchase agreement which wascontingent on the performance of the Baltimore Business. In August 2007 the United States District Court, Southern District of NewYork, granted the Company's pending Motion for Summary Judgment in the BaltimoreLitigation. The Sellers have filed a notice of appeal and oral arguments on theappeal are scheduled for March 2009. Management continues to believe the matterto be without merit and continues its defense of this matter. Other The Company has commitments incident to the ordinary course of businessincluding corporate guarantees of certain subsidiary obligations to theCompany's lenders related to financial assurance obligations under certainenvironmental laws for remediation, closure and 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 indemnifies itsofficers and directors for certain events or occurrences while the officer ordirector is, or was, serving at the Company's request in such capacity. The termof the indemnification period is for the officer's or director's lifetime. Themaximum potential amount of future payments the Company could be required tomake under these indemnification agreements is unlimited; however, the Companyhas a Director and Officer insurance policy that covers a portion of anypotential exposure. The Company currently believes the estimated fair value ofits indemnification agreements is not significant based on currently availableinformation, and as such, the Company has no liabilities recorded for theseagreements as of December 31, 2008. In addition to the matters identified above, Cambrex's subsidiaries areparty to a number of other proceedings that are not considered material at thistime.IMPACT OF RECENT ACCOUNTING PRONOUNCEMENTS Fair Value Measurements In September 2006, the FASB issued Statement No. 157 "Fair ValueMeasurements" ("FAS 157"). This statement defines fair value, establishes aframework for measuring fair value in GAAP, and expands disclosures about fairvalue measurements. This statement will apply whenever another standard requires(or permits) assets or liabilities to be measured at fair value. The standarddoes not expand the use of fair value to any new circumstances. FAS 157 iseffective for financial statements issued for fiscal years beginning afterNovember 15, 2007, and interim periods within those fiscal years. Relative toFAS 157, the FASB issued FASB Staff Positions ("FSP") 157-2, which defers theeffective date of FAS 157 for all nonfinancial assets and nonfinancialliabilities, except those that are recognized or disclosed at fair value in thefinancial statements on a recurring basis, until fiscal years beginning afterNovember 15, 2008, and interim periods within those fiscal years. The effect ofadopting this pronouncement--------(dollars in thousands, except share data) 32(related to financial assets and financial liabilities) did not have a materialimpact on the Company's financial position or results of operations. The Companyis currently evaluating the potential impact of this pronouncement (related tononfinancial assets and nonfinincial liabilities). Employers' Accounting for Defined Benefit Pension and Other PostretirementPlans The Company adopted FASB Statement No. 158 "Employers' Accounting forDefined Benefit Pension and Other Postretirement Plans, an amendment of FASBStatements No. 87, 88, 106 and 132(R)" ("FAS 158") for the year ended December31, 2006. FAS 158 requires an employer to recognize the overfunded orunderfunded status of a defined benefit postretirement plan as an asset orliability in the balance sheet and to recognize changes in that funded status inthe year in which the changes occur through comprehensive income. This statementdoes not impact the amounts recognized in the income statement. FAS 158 also requires an employer to measure the funded status of a plan asof the date of the fiscal year end balance sheet. The Company's fiscal year endis December 31 and its pension plans and postretirement benefits plan previouslyhad a September 30 measurement date. The Company adopted this measurementrequirement as of December 31, 2008. The effect of adopting this pronouncementdid not have a material impact on the Company's financial position or results ofoperations. Fair Value Option for Financial Assets and Financial Liabilities The Company adopted FASB Statement No. 159 "The Fair Value Option forFinancial Assets and Financial Liabilities -- Including an amendment of FASBStatement No. 115" ("FAS 159") effective January 1, 2008. This Statement permitsentities to choose to measure many financial instruments and certain other itemsat fair value. Unrealized gains and losses on items for which the fair valueoption has been elected should be reported in earnings at each subsequentreporting date. The effect of adopting this pronouncement did not have amaterial impact on the Company's financial position or results of operations. Amendment of FAS 141 In December 2007, the FASB issued Statement No. 141 (Revised 2007),"Business Combinations" ("FAS 141R") which requires an acquirer to recognize theassets acquired, the liabilities assumed and any non-controlling interest in theacquiree at the acquisition date, measured at their fair values as of that date,with limited exceptions. This Statement also requires the acquirer in a businesscombination, achieved in stages, to recognize the identifiable assets andliabilities, as well as the non-controlling interest in the acquiree, at thefull amounts of their fair values. FAS 141R makes various other amendments toauthoritative literature intended to provide additional guidance or to confirmthe guidance in that literature to that provided in this Statement. FAS 141Rapplies prospectively to business combinations for which the acquisition date ison or after the beginning of the first annual reporting period beginning on orafter December 15, 2008. Earlier adoption is prohibited. Accordingly, theCompany adopted this statement on January 1, 2009. Amendment of FAS 133 In March 2008, the FASB issued Statement No. 161 "Disclosures aboutDerivative Instruments and Hedging Activities -- an amendment of FASB StatementNo. 133" ("FAS 161"). This statement requires enhanced disclosures aboutderivative and hedging activities and thereby improves the transparency offinancial reporting. FAS 161 encourages, but does not require, comparativedisclosures for earlier periods at initial adoption. This statement is effectivefor fiscal years beginning after November 15, 2008. The effect of adopting thispronouncement will not have an impact on the Company's financial position orresults of operations. Employers' Disclosures about Postretirement Benefit Plan Assets In December 2008, the FASB issued FSP 132(R)-1 "Employers' Disclosuresabout Postretirement Benefit Plan Assets" ("FSP 132(R)-1"). This statementprovides guidance on additional disclosures about plan assets of a definedbenefit pension or other postretirement plan. This statement is effective forfiscal years ending after--------(dollars in thousands, except share data) 33December 15, 2009. Upon initial application, the provisions of FSP 132(R)-1 arenot required for earlier periods that are presented for comparative purposes.The effect of adopting this pronouncement will not have an impact on theCompany's financial 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, as amended, including, without limitation,statements regarding expected performance, especially expectations with respectto sales, research and development expenditures, earnings per share, capitalexpenditures, acquisitions, divestitures, collaborations, or other expansionopportunities. These statements may be identified by the fact that they usewords such as "expects," "anticipates," "intends," "estimates," "believes" orsimilar expressions in connection with any discussion of future financial andoperating performance. Any forward-looking statements are qualified in theirentirety by reference to the factors discussed throughout this Form 10-K. Anyforward-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 andregulations (particularly environmental issues), tax rate, interest rate,technology, manufacturing and legal issues, including the outcome of outstandinglitigation disclosed in the Company's public filings, changes in foreignexchange rates, uncollectable receivables, loss on disposition of assets,cancellation or delays in renewal of contracts, lack of suitable raw materialsor packaging materials, the Company's ability to receive regulatory approvalsfor its products and other factors described under the caption "Risk FactorsThat May Affect Future Results" in this Form 10-K. Any forward-looking statementspeaks only as of the date on which it is made, and the Company undertakes noobligation to publicly update any forward-looking statement, whether as a resultof new information, future events or otherwise. New factors emerge from time totime and it is not possible for the Company to predict which will arise. Inaddition, the Company cannot assess the impact of each factor on the Company'sbusiness or the extent to which any factor, or combination of factors, may causeactual results to differ materially from those contained in any forward-lookingstatements.ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The information required in this section can be found in the "Market Risks"section of Item 7 on page 27 of this Form 10-K.--------(dollars in thousands, except share data) 34ITEM 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) ---------------- Reports of Independent Registered Public Accounting Firms......... 36Consolidated Balance Sheets as of December 31, 2008 and 2007...... 39Consolidated Statements of Operations for the Years Ended December 31, 2008, 2007 and 2006......................................... 40Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 2008, 2007 and 2006.......................... 41Consolidated Statements of Cash Flows for the Years Ended December 31, 2008, 2007 and 2006......................................... 42Notes to Consolidated Financial Statements........................ 43Selected Quarterly Financial and Supplementary Data (unaudited)... 78 The consolidated financial statements and financial statement schedule arefiled pursuant to Item 15 of this report.--------(dollars in thousands, except share data) 35 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMTo the Board of Directors and Shareholders ofCambrex Corporation We have audited the accompanying consolidated balance sheets of CambrexCorporation as of December 31, 2008 and 2007 and the related consolidatedstatements of operations, stockholders' equity, and cash flows for the yearsthen ended. In connection with our audits of the financial statements, we havealso audited the financial statement schedule. The financial statements andschedule are the responsibility of the Company's management. Our responsibilityis to express an opinion on these financial statements and schedule based on ouraudits. We conducted our audits in accordance with the standards of the PublicCompany Accounting Oversight Board (United States). Those standards require thatwe plan and perform the audit to obtain reasonable assurance about whether thefinancial statements are free of material misstatement. An audit also includesexamining, on a test basis, evidence supporting the amounts and disclosures inthe financial statements and schedule, assessing the accounting principles usedand significant estimates made by management, as well as evaluating the overallpresentation of the financial statements and schedule. We believe that ouraudits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to abovepresent fairly, in all material respects, the financial position of CambrexCorporation at December 31, 2008 and 2007, and the results of its operations andits cash flows for the years then ended, in conformity with accountingprinciples generally accepted in the United States of America. Also, in our opinion, the financial statement schedule, when considered inrelation to the basic consolidated financial statements taken as a whole,present fairly, in all material respects, the information set forth therein forthe years ended December 31, 2008 and 2007. As described in Note 3, in 2007 the Company adopted Financial AccountingStandards Board Interpretation No. 48, Accounting for Uncertainty in IncomeTaxes -- an interpretation of FASB Statement No. 109. We also have audited, in accordance with the standards of the PublicCompany Accounting Oversight Board (United States), Cambrex Corporation'sinternal control over financial reporting as of December 31, 2008, based oncriteria established in Internal Control -- Integrated Framework issued by theCommittee of Sponsoring Organizations of the Treadway Commission (COSO) and ourreport dated February 19, 2009 expressed an unqualified opinion thereon./s/ BDO Seidman, LLPWoodbridge, NJFebruary 19, 2009 36 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMTo the Board of Directors and Shareholders ofCambrex Corporation We have audited Cambrex Corporation's internal control over financialreporting as of December 31, 2008, based on criteria established in InternalControl -- Integrated Framework issued by the Committee of SponsoringOrganizations of the Treadway Commission (the COSO criteria). CambrexCorporation's management is responsible for maintaining effective internalcontrol over financial reporting and for its assessment of the effectiveness ofinternal control over financial reporting, included in the accompanying "Item9A, Management's Report on Internal Control Over Financial Reporting". Ourresponsibility is to express an opinion on the Company's internal control overfinancial reporting based on our audit. We conducted our audit in accordance with the standards of the PublicCompany Accounting Oversight Board (United States). Those standards require thatwe plan and perform the audit to obtain reasonable assurance about whethereffective internal control over financial reporting was maintained in allmaterial respects. Our audit included obtaining an understanding of internalcontrol over financial reporting, assessing the risk that a material weaknessexists, and testing and evaluating the design and operating effectiveness ofinternal control based on the assessed risk. Our audit also included performingsuch other procedures as we considered necessary in the circumstances. Webelieve that our audit provides a reasonable basis for our opinion. 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 (1) pertain tothe maintenance of records that, in reasonable detail, accurately and fairlyreflect the transactions and dispositions of the assets of the company; (2)provide reasonable assurance that transactions are recorded as necessary topermit preparation of financial statements in accordance with generally acceptedaccounting principles, and that receipts and expenditures of the company arebeing made only in accordance with authorizations of management and directors ofthe company; and (3) provide reasonable assurance regarding prevention or timelydetection of unauthorized acquisition, use, or disposition of the company'sassets 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 thatcontrols may become inadequate because of changes in conditions, or that thedegree of compliance with the policies or procedures may deteriorate. In our opinion, Cambrex Corporation maintained, in all material respects,effective internal control over financial reporting as of December 31, 2008,based on the COSO criteria. We also have audited, in accordance with the standards of the PublicCompany Accounting Oversight Board (United States), the accompanyingconsolidated balance sheets of Cambrex Corporation as of December 31, 2008 and2007 and the related consolidated statements of operations, stockholders'equity, and cash flows for the years then ended and our report dated February19, 2009 expressed an unqualified opinion thereon./s/ BDO Seidman, LLPWoodbridge, NJFebruary 19, 2009 37 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMTo the Board of Directors and Shareholders ofCambrex Corporation In our opinion, the consolidated financial statements listed in the indexappearing under Item 15(a) (1) present fairly, in all material respects, theresults of their operations and their cash flows of Cambrex Corporation and itssubsidiaries for the year ended December 31, 2006, in conformity with accountingprinciples generally accepted in the United States of America. In addition, inour opinion, the information with respect to 2006 included in the financialstatement schedule listed in the accompanying index appearing under Item15(a)(2) presents fairly, in all material respects, the information set forththerein when read in conjunction with the related consolidated financialstatements. These financial statements and financial statement schedule are theresponsibility of the Company's management. Our responsibility is to express anopinion on these financial statements and financial statement schedule based onour audits. We conducted our audits of these statements in accordance with thestandards of the Public Company Accounting Oversight Board (United States).Those standards require that we plan and perform the audit to obtain reasonableassurance about whether the financial statements are free of materialmisstatement. An audit of financial statements includes examining, on a testbasis, evidence supporting the amounts and disclosures in the financialstatements, assessing the accounting principles used and significant estimatesmade by management, and evaluating the overall financial statement presentation.We believe that our audits provide a reasonable basis for our opinion. As discussed in Notes 3 and 14 to the consolidated financial statements, in2006 the Company changed the manner in which it accounts for pension and otherpostretirement benefit plans and the manner in which it accounts for share-basedcompensation./s/ PRICEWATERHOUSECOOPERS LLPFlorham Park, NJMarch 15, 2007, except for the effects of thediscontinued operations with respect to 2006described in Note 19, as to which the dateis February 27, 2008 38 CAMBREX CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) DECEMBER 31, ------------------- 2008 2007 -------- -------- ASSETSCurrent assets: Cash and cash equivalents.................................. $ 32,540 $ 38,488 Trade receivables, less allowances of $1,150 and $560 at respective dates........................................ 36,685 45,003 Inventories, net........................................... 61,133 61,440 Prepaid expenses and other current assets.................. 8,798 20,104 -------- -------- Total current assets............................... 139,156 165,035Property, plant and equipment, net........................... 161,500 165,657Goodwill..................................................... 35,374 35,552Other non-current assets..................................... 5,042 7,218 -------- -------- Total assets....................................... $341,072 $373,462 ======== ========LIABILITIES AND STOCKHOLDERS' EQUITYCurrent liabilities: Accounts payable........................................... $ 19,700 $ 26,185 Accrued expense and other current liabilities.............. 45,080 69,702 -------- -------- Total current liabilities.......................... 64,780 95,887Long-term debt............................................... 123,800 101,600Deferred income tax.......................................... 16,138 19,086Accrued pension and postretirement benefits.................. 44,165 32,104Other non-current liabilities................................ 17,403 22,728 -------- -------- Total liabilities.................................. 266,286 271,405Commitments and contingencies (see Notes 17 and 18) Stockholders' equity: Common Stock, $.10 par value; authorized 100,000,000 issued 31,406,778 and 31,399,700 shares at respective dates.... 3,140 3,140 Additional paid-in capital................................. 99,881 98,793 Retained earnings.......................................... 11,960 4,031 Treasury stock, at cost, 2,224,613 and 2,385,066 shares at respective dates........................................ (19,014) (20,386) Accumulated other comprehensive (loss)/income.............. (21,181) 16,479 -------- -------- Total stockholders' equity......................... 74,786 102,057 -------- -------- Total liabilities and stockholders' equity......... $341,072 $373,462 ======== ======== See accompanying notes to consolidated financial statements. 39 CAMBREX CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) YEARS ENDED DECEMBER 31, ------------------------------ 2008 2007 2006 -------- -------- -------- Gross Sales.......................................... $249,618 $252,574 $236,659 Allowances and rebates............................. 2,099 1,368 1,026 -------- -------- --------Net sales............................................ 247,519 251,206 235,633 Other revenues..................................... 1,709 1,299 (560) -------- -------- --------Net revenues......................................... 249,228 252,505 235,073 Cost of goods sold................................. 175,485 161,273 151,215 -------- -------- --------Gross profit......................................... 73,743 91,232 83,858 Selling, general and administrative expenses....... 40,521 48,858 58,279 Research and development expenses.................. 7,590 12,157 10,813 Restructuring expenses............................. 4,695 6,073 -- Strategic alternative costs........................ 1,515 31,127 2,958 -------- -------- --------Operating profit/(loss).............................. 19,422 (6,983) 11,808Other (income)/expenses Interest income.................................... (802) (5,199) (514) Interest expense................................... 4,470 4,714 5,992 Other expenses/(income), net....................... 754 725 (17) -------- -------- --------Income/(loss) before income taxes.................... 15,000 (7,223) 6,347Provision for income taxes........................... 7,071 6,288 14,513 -------- -------- --------Income/(loss) from continuing operations............. $ 7,929 $(13,511) $ (8,166)Income/(loss) from discontinued operations, including gains/(losses) from dispositions, net of tax....... -- 222,759 (21,706) -------- -------- --------Income/(loss) before cumulative effect of a change in accounting principle............................... 7,929 209,248 (29,872)Cumulative effect of a change in accounting principle.......................................... -- -- (228) -------- -------- --------Net income/(loss).................................... $ 7,929 $209,248 $(30,100) ======== ======== ========Basic earnings/(loss) per share Income/(loss) from continuing operations........... $ 0.27 $ (0.47) $ (0.30) Income/(loss) from discontinued operations, including gains/(losses) from dispositions, net of tax.......................................... $ -- $ 7.77 $ (0.81) Cumulative effect of a change in accounting principle....................................... $ -- $ -- $ (0.01) -------- -------- -------- Net income/(loss).................................. $ 0.27 $ 7.30 $ (1.12)Diluted earnings/(loss) per share Income/(loss) from continuing operations........... $ 0.27 $ (0.47) $ (0.30) Income/(loss) from discontinued operations, including gains/(losses) from dispositions, net of tax.......................................... $ -- $ 7.77 $ (0.81) Cumulative effect of a change in accounting principle....................................... $ -- $ -- $ (0.01) -------- -------- -------- Net income/(loss).................................. $ 0.27 $ 7.30 $ (1.12)Weighted average shares outstanding: Basic.............................................. 29,116 28,683 26,816 Diluted............................................ 29,161 28,683 26,816 See accompanying notes to consolidated financial statements. 40 CAMBREX CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) COMMON STOCK --------------------- ADDITIONAL SHARES PAR VALUE PAID-IN RETAINED DEFERRED TREASURY ISSUED ($.10) CAPITAL EARNINGS COMPENSATION STOCK ---------- --------- ---------- --------- ------------ -------- BALANCE AT DECEMBER 31, 2005....... 29,118,141 $2,912 $ 219,236 $ 62,170 $(2,131) $(20,768) Comprehensive loss Net loss...................... (30,100) Other comprehensive income/(loss) Foreign currency translation adjustment............... Unrealized losses on hedging contracts, net of tax of $177..................... Pensions, net of tax of $(20).................... Unrealized losses on available for sale marketable securities, net of tax of $0 ........ Reclass adjustment for loss on marketable securities included in net earnings, net of tax of $0......... Other comprehensive income.......Total comprehensive loss...........Adjustment to initially apply FASB StatementNo. 158, net of tax of $376........Disposition of business -- pension..............Cash dividends at $0.12 per share.. (3,210)Purchase of treasury stock......... (113)Exercise of stock options.......... 1,069,876 103 20,977 230Deferred compensation.............. 222 159Vested restricted stock............ (563) 2,131 (340)Stock option expense............... 448Restricted stock expense........... 1,040 ---------- ------ --------- --------- ------- --------BALANCE AT DECEMBER 31, 2006....... 30,188,017 $3,015 $ 241,360 $ 28,860 $ -- $(20,832) Comprehensive income Net income.................... 209,248 Other comprehensive income/(loss) Foreign currency translation adjustment............... Unrealized losses on hedging contracts, net of tax of $107..................... Pensions, net of tax of $346..................... Reclass adjustment for gain on marketable securities included in net earnings, net of tax of $0....................... Other comprehensive income.......Total comprehensive income.........Disposition of business -- pension..............Cash dividends and return of capital at $14.03 per share...... (169,782) (234,077)Purchase of treasury stock......... (59)Exercise of stock options.......... 1,175,101 121 21,777Deferred compensation.............. 8,771 1 207 62Vested restricted stock............ 27,811 3 (446) 443Stock option modification.......... 2,535Stock option expense............... 711Restricted stock expense........... 2,431 ---------- ------ --------- --------- ------- --------BALANCE AT DECEMBER 31, 2007....... 31,399,700 $3,140 $ 98,793 $ 4,031 $ -- $(20,386) Comprehensive loss Net income.................... 7,929 Other comprehensive loss Foreign currency translation adjustment.................. Unrealized losses on hedging contracts, net of tax of $322..................... Pensions, net of tax of $145..................... Other comprehensive loss.........Total comprehensive loss...........Purchase of treasury stock......... (50)Exercise of stock options.......... 2,301 -- 18Deferred compensation.............. 4,777 -- 59 170Vested restricted stock............ (1,252) 1,252Stock option modification.......... 102Stock option expense............... 582Restricted stock expense........... 1,545Performance stock expense.......... 34 ---------- ------ --------- --------- ------- --------BALANCE AT DECEMBER 31, 2008....... 31,406,778 $3,140 $ 99,881 $ 11,960 $ -- $(19,014) ========== ====== ========= ========= ======= ======== ACCUMULATED OTHER TOTAL COMPREHENSIVE COMPREHENSIVE STOCKHOLDERS' (LOSS)/GAIN (LOSS)/INCOME EQUITY ------------- ------------- ------------- BALANCE AT DECEMBER 31, 2005....... $(18,168) $ 243,251 Comprehensive loss Net loss...................... (30,100) (30,100) Other comprehensive income/(loss) Foreign currency translation adjustment............... 14,443 Unrealized losses on hedging contracts, net of tax of $177..................... 280 Pensions, net of tax of $(20).................... 839 Unrealized losses on available for sale marketable securities, net of tax of $0 ........ (10) Reclass adjustment for loss on marketable securities included in net earnings, net of tax of $0......... 1,475 -------- Other comprehensive income....... 17,027 17,027 17,027 --------Total comprehensive loss........... $(13,073) ========Adjustment to initially apply FASB StatementNo. 158, net of tax of $376........ (7,088) (7,088)Disposition of business -- pension.............. 2,472 2,472Cash dividends at $0.12 per share.. (3,210)Purchase of treasury stock......... (113)Exercise of stock options.......... 21,310Deferred compensation.............. 381Vested restricted stock............ 1,228Stock option expense............... 448Restricted stock expense........... 1,040 -------- ---------BALANCE AT DECEMBER 31, 2006....... $ (5,757) $ 246,646 Comprehensive income Net income.................... 209,248 209,248 Other comprehensive income/(loss) Foreign currency translation adjustment............... 15,684 Unrealized losses on hedging contracts, net of tax of $107..................... (1,385) Pensions, net of tax of $346..................... 7,734 Reclass adjustment for gain on marketable securities included in net earnings, net of tax of $0....................... (1,117) -------- Other comprehensive income....... 20,916 20,916 20,916 --------Total comprehensive income......... $230,164 ========Disposition of business -- pension.............. 1,320 1,320Cash dividends and return of capital at $14.03 per share...... (403,859)Purchase of treasury stock......... (59)Exercise of stock options.......... 21,898Deferred compensation.............. 270Vested restricted stock............ --Stock option modification.......... 2,535Stock option expense............... 711Restricted stock expense........... 2,431 -------- ---------BALANCE AT DECEMBER 31, 2007....... $ 16,479 $ 102,057 Comprehensive loss Net income.................... 7,929 7,929 Other comprehensive loss Foreign currency translation adjustment.................. (16,830) Unrealized losses on hedging contracts, net of tax of $322..................... (2,962) Pensions, net of tax of $145..................... (17,868) -------- Other comprehensive loss......... (37,660) (37,660) (37,660) --------Total comprehensive loss........... $(29,731) ========Purchase of treasury stock......... (50)Exercise of stock options.......... 18Deferred compensation.............. 229Vested restricted stock............ --Stock option modification.......... 102Stock option expense............... 582Restricted stock expense........... 1,545Performance stock expense.......... 34 -------- ---------BALANCE AT DECEMBER 31, 2008....... $(21,181) $ 74,786 ======== ========= See accompanying notes to consolidated financial statements. 41 CAMBREX CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS) YEARS ENDED DECEMBER 31, -------------------------------- 2008 2007 2006 -------- --------- --------- Cash flows from operating activities: Net income/(loss)...................................... $ 7,929 $ 209,248 $ (30,100) Adjustments to reconcile net income/(loss) to cash flows: Depreciation and amortization.......................... 21,055 19,878 19,028 Inventory reserve...................................... 2,916 2,709 2,548 Stock based compensation included in net income/(loss)....................................... 1,967 3,142 1,281 Deferred income tax provision.......................... (23) 4,209 1,486 Strategic alternative and restructuring charges........ 2,987 17,693 -- Strategic alternative and restructuring charges........ 2,987 17,693 -- Write-off of debt origination fees..................... -- 841 463 Stock option modification.............................. 102 2,535 -- Other.................................................. 1,884 447 494Changes in assets and liabilities: Trade receivables...................................... 5,547 (4,542) (2,399) Inventories............................................ (8,612) (6,329) (10,117) Prepaid expenses and other current assets.............. 7,264 1,131 (6,452) Accounts payable and other current liabilities......... (36,509) (17,919) 16,831 Other non-current assets and liabilities............... (1,518) 550 (2,433)Discontinued operations: (Gain)/loss on sale of businesses...................... -- (235,489) 23,244 Rutherford settlement, net of tax...................... -- 4,172 -- Changes in operating assets and liabilities............ -- (5,428) (5,398) Other non-cash charges................................. -- 2,359 24,152 Writedown of assets.................................... -- -- 2,092 -------- --------- --------- Net cash provided by/(used) in operating activities.... 4,989 (793) 34,720 -------- --------- ---------Cash flows from investing activities: Capital expenditures................................... (29,378) (25,927) (23,183) Acquisition of business, net of cash................... (1,271) -- -- Other investing activities............................. 12 887 233Discontinued operations: Capital expenditures................................... -- (530) (15,975) Proceeds from sale of business......................... -- 466,277 -- Acquired in-process research and development........... -- -- (1,392) Divestiture of business, net of cash................... -- -- (636) Other investing activities............................. -- 11 (301) -------- --------- --------- Net cash (used) in/provided by in investing activities.......................................... (30,637) 440,718 (41,254) -------- --------- ---------Cash flows from financing activities: Dividends and return of capital........................ -- (402,389) (3,210) Long-term debt activity (including current portion): Borrowings.......................................... 61,600 151,500 225,069 Repayments.......................................... (39,458) (208,755) (250,555) Proceeds from stock options exercised.................. 18 21,898 21,310 Other financing activities............................. (50) (59) (113)Discontinued operations: Long-term debt activity (including current portion): Borrowings.......................................... -- -- 258 Repayments.......................................... -- (254) (1,450) -------- --------- --------- Net cash provided by/(used) in financing activities........................................ 22,110 (438,059) (8,691) -------- --------- ---------Effect of exchange rate changes on cash and cash equivalents............................................ (2,410) 2,876 3,629 -------- --------- ---------Net (decrease)/increase in cash and cash equivalents..... (5,948) 4,742 (11,596)Cash and cash equivalents at beginning of year........... 38,488 33,746 45,342 -------- --------- ---------Cash and cash equivalents at end of year................. $ 32,540 $ 38,488 $ 33,746 ======== ========= =========Supplemental disclosure: Interest paid, net of capitalized interest............. $ 4,126 $ 5,003 $ 13,613 Income taxes paid...................................... $ 10,342 $ 17,869 $ 16,690 See accompanying notes to consolidated financial statements. 42 CAMBREX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)(1) THE COMPANY Cambrex Corporation and Subsidiaries (the "Company" or "Cambrex") primarily Cambrex Corporation and Subsidiaries (the "Company" or "Cambrex") primarilyprovides products and services worldwide to pharmaceutical companies and genericdrug companies. The Company is dedicated to providing essential products andservices to accelerate drug discovery, development and manufacturing processesfor human therapeutics. The Company's products consist of active pharmaceuticalingredients ("APIs") and pharmaceutical intermediates produced under Food andDrug Administration current Good Manufacturing Practices for use in theproduction of prescription and over-the-counter drug products and other finecustom chemicals derived from organic chemistry. Cambrex has three operatingsegments, which are manufacturing facilities, that have been aggregated as onereportable segment. In October 2006 the Company sold two businesses within the former HumanHealth segment for nominal consideration. As a result of this transaction, theCompany reported a non-cash charge of $23,244 in the fourth quarter of 2006, andthe results of these businesses are presented as discontinued operations. In February 2007, the Company completed the sale of the businesses thatcomprised the Bioproducts and Biopharma segments (excluding certain liabilities)for total cash consideration of $463,914, including working capital adjustments.As a result of this transaction, the Company reported a gain of $235,489 in 2007and all periods presented reflect the results of these businesses asdiscontinued operations. Refer to Note 19 for a complete discussion ofdiscontinued operations. Interest expense is allocated to discontinued operations based upon netassets consistent with EITF 87-24 "Allocations of Interest on DiscontinuedOperations."(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 Company primarily uses foreign currency forward contractsto minimize foreign currency exchange rate risk associated with foreign currencytransactions. Gains and losses on these hedging transactions are generallyrecorded in earnings in the same period as they are realized, which is usuallythe same period as the settlement of the underlying transactions. The Companyuses interest rate swap instruments only as hedges or as an integral part ofborrowing. As such, the differential to be paid or received in connection withthese instruments is accrued and recognized in income as an adjustment tointerest 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 and recognizes theineffective portion in current period earnings. 43 CAMBREX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED) Inventories Inventories are stated at the lower of cost, determined on a first-in,first-out basis, or market. The determination of market value involvesassessment 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. 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 that are capitalizedover longer periods of time for larger amounts. The capitalized interest isrecorded as part of the cost of the asset to which it relates and is amortizedover the asset's estimated useful life. Total interest capitalized in connectionwith ongoing construction activities in 2008, 2007 and 2006 amounted to $2,032,$1,123 and $443, respectively. Impairment of Goodwill The Company reviews the carrying value of goodwill to determine whetherimpairment may exist on an annual basis or whenever it has reason to believegoodwill may not be recoverable. The annual impairment test of goodwill isperformed during the fourth quarter of each fiscal 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 flowanalysis, to its carrying value. If the fair value of a reporting unit exceedsits carrying amount, goodwill of the reporting unit is considered not impairedand the second step of the impairment test is unnecessary. If the carryingamount of a reporting unit exceeds its fair value, the second step of thegoodwill impairment test is performed to measure the amount of impairment loss,if any. The second step of the goodwill impairment test compares the impliedfair value of the reporting unit's goodwill with the carrying amount of thatgoodwill. If the carrying amount of the reporting unit's goodwill exceeds theimplied fair value of that goodwill, an impairment loss is recognized in anamount equal to that excess. The impairment test for other intangible assets not subject to 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. 44 CAMBREX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED) Impairment of Long-Lived Assets The Company assesses the impairment of its long-lived assets, 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 are generally recognized when title to products and risk of lossare transferred to customers. Additional conditions for recognition of revenueare that collection of sales proceeds is reasonably assured and the Company hasno further performance obligations. The Company has certain contracts that contain multiple deliverables. Thesedeliverables often include process development services and commercialproduction and are divided into separate units of accounting if certain criteriaare met, including whether the delivered element has stand-alone value to thecustomer and whether there is objective and reliable evidence of the fair valueof the undelivered items. The consideration the Company receives is allocatedamong the separate units based on their respective fair values, and theapplicable revenue recognition criteria are applied to each of the separateunits. For contracts that contain milestone-based payments, the Company recognizesrevenue using the proportional performance method based on the percentage ofcosts incurred relative to the total costs estimated to be incurred to completethe contract. Revenue recognition computed under this methodology is compared tothe amount of non-refundable cash payments received or contractually receivableat the reporting date and the lesser of the two amounts is recognized as revenueat each reporting date. The proportional performance methodology applied by theCompany for revenue recognition, utilizes an input based measure, specificallylabor costs, because the Company believes the use of an input measure is abetter surrogate of proportional performance than an output based measure, suchas milestones. Amounts billed in advance are recorded as deferred revenue on the balancesheet. Since payments received are typically non-refundable, the termination ofa contract by a customer prior to its completion could result in an immediaterecognition of deferred revenue relating to payments already received notpreviously recognized as revenue. Sales terms to certain customers include rebates if certain conditions aremet. Additionally, sales are generally made with a limited right of return undercertain conditions. The Company estimates these rebates and returns at the timeof sale based on the terms of agreements with customers and historicalexperience and recognizes revenue net of these estimated costs which areclassified as allowances and rebates. The Company bills a portion of freight cost incurred on shipments tocustomers. Freight costs are reflected in cost of goods sold. Amounts billed tocustomers are recorded within net revenues. 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 tax return.Cambrex has not provided U.S. federal income and withholding taxes on itsundistributed earnings from non-U.S. operations as of December 31, 2008 becauseit intends to reinvest such earnings indefinitely outside of the United States.If Cambrex were to distribute these earnings, it is anticipated that foreign taxcredits would be 45 CAMBREX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)available under current law to significantly reduce the resulting U.S. incometax liability. Determination of the amount of unrecognized deferred tax relatedto these earnings is not practical. 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 The Company is subject to extensive and changing federal, state, local andforeign environmental laws and regulations, and has made provisions for theestimated financial impact of environmental cleanup related costs. The Company'spolicy is to accrue environmental cleanup related costs of a non-capital nature,including estimated litigation costs, when those costs are believed to beprobable and can be reasonably estimated. The quantification of environmentalexposures requires an assessment of many factors, including changing laws andregulations, advancements in environmental technologies, the quality ofinformation available related to specific sites, the assessment stage of eachsite investigation, preliminary findings and the length of time involved inremediation or settlement. Such accruals are adjusted as further informationdevelops or circumstances change. For certain matters, the Company expects toshare costs with other parties. Costs of future expenditures for environmentalremediation obligations are not discounted to their present value unless theaggregate amount of the liability and the timing of cash payments are fixed orreasonably determinable. Recoveries of environmental remediation costs fromother parties are recorded as assets when their 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/(losses)were $1,183, $260 and ($1,042) in 2008, 2007 and 2006, respectively. Earnings per Common Share All diluted earnings per share are computed on the basis of the weightedaverage shares of common stock outstanding plus common equivalent shares arisingfrom the effect of dilutive stock options, using the treasury stock method. 46 CAMBREX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED) Earnings per share calculations are as follows: FOR THE YEARS ENDED, ----------------------------- 2008 2007 2006 ------- -------- -------- Net income/(loss):Income/(loss) from continuing operations........ $ 7,929 $(13,511) $ (8,166)Income/(loss) from discontinued operations, including gains/(losses) from dispositions, net of tax.................................... -- 222,759 (21,706)Cumulative effect of a change in accounting principle..................................... -- -- (228) ------- -------- --------Net income/(loss)............................... $ 7,929 $209,248 $(30,100) ======= ======== ========Weighted average shares outstanding:Basic weighted average shares outstanding....... 29,116 28,683 26,816Effect of dilutive stock options and restricted stock*........................................ 45 -- -- ------- -------- --------Diluted weighted average shares outstanding..... 29,161 28,683 26,816Income/(loss) per share (basic):Income/(loss) from continuing operations........ $ 0.27 $ (0.47) $ (0.30)Income/(loss) from discontinued operations, including gains/(losses) from dispositions, net of tax.................................... $ -- $ 7.77 $ (0.81)Cumulative effect of a change in accounting principle..................................... $ -- $ -- $ (0.01) ------- -------- --------Net income/(loss)............................... $ 0.27 $ 7.30 $ (1.12) ======= ======== ========Income/(loss) per share (diluted):Income/(loss) from continuing operations........ $ 0.27 $ (0.47) $ (0.30)Income/(loss) from discontinued operations, including gains/(losses) from dispositions, net of tax.................................... $ -- $ 7.77 $ (0.81)Cumulative effect of a change in accounting principle..................................... $ -- $ -- $ (0.01) ------- -------- --------Net income/(loss)............................... $ 0.27 $ 7.30 $ (1.12) ======= ======== ========* For 2007 and 2006, the effect of stock options and restricted stock would be anti-dilutive and is therefore excluded. For the years ended December 31, 2008, 2007 and 2006, shares of 1,648,193,1,171,895, and 2,157,470, respectively, were not included in the calculation ofdiluted shares outstanding because the effect would be anti-dilutive. Marketable Securities The Company determines the appropriate classification of all marketablesecurities as held-to-maturity, available-for-sale or trading at the time ofpurchase, and re-evaluates such classification as of each balance sheet date.Unrealized gains and losses are reflected as a net amount under the caption ofaccumulated other comprehensive (loss)/income in stockholders' equity. Realizedgains and losses are recorded in other expenses. For purposes of computing gainsor losses, cost is identified on a specific identification basis. As of December31, 2008 and 2007 the Company did not hold any marketable securities. Comprehensive (Loss)/Income Included within accumulated other comprehensive (loss)/income for theCompany are foreign currency translation adjustments, changes in the fair valuerelated to derivative instruments classified as cash flow hedges, net 47 CAMBREX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)of related tax benefit and changes in the pensions, net of tax. Totalcomprehensive (loss)/income for the years ended December 31, 2008 and 2007 areincluded in the Statements of Stockholders' Equity. The components of accumulated other comprehensive (loss)/income instockholders' equity are as follows: 2008 2007 -------- ------- Foreign currency translation............................ $ 6,210 $23,040Unrealized loss on hedging contracts, net of tax........ (4,256) (1,294)Pensions, net of tax.................................... (23,135) (5,267) -------- ------- Total................................................. $(21,181) $16,479 ======== =======(3) IMPACT OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS Fair Value Measurements In September 2006, the FASB issued Statement No. 157 "Fair ValueMeasurements" ("FAS 157"). This statement defines fair value, establishes aframework for measuring fair value in GAAP, and expands disclosures about fairvalue measurements. This statement will apply whenever another standard requires(or permits) assets or liabilities to be measured at fair value. The standarddoes not expand the use of fair value to any new circumstances. FAS 157 iseffective for financial statements issued for fiscal years beginning afterNovember 15, 2007, and interim periods within those fiscal years. Relative toFAS 157, the FASB issued FASB Staff Positions ("FSP") 157-2, which defers theeffective date of FAS 157 for all nonfinancial assets and nonfinancialliabilities, except those that are recognized or disclosed at fair value in thefinancial statements on a recurring basis, until fiscal years beginning afterNovember 15, 2008, and interim periods within those fiscal years. The effect ofadopting this pronouncement (related to financial assets and financialliabilities) did not have a material impact on the Company's financial positionor results of operations. The Company is currently evaluating the potentialimpact of this statement (related to nonfinancial assets and nonfinancialliabilities). Employers' Accounting for Defined Benefit Pension and Other Postretirement Plans The Company adopted FASB Statement No. 158 "Employers' Accounting forDefined Benefit Pension and Other Postretirement Plans, an amendment of FASBStatements No. 87, 88, 106 and 132(R)" ("FAS 158") for the year ended December31, 2006. FAS 158 requires an employer to recognize the overfunded orunderfunded status of a defined benefit postretirement plan as an asset orliability in the balance sheet and to recognize changes in that funded status inthe year in which the changes occur through comprehensive income. This statementdoes not impact the amounts recognized in the income statement. FAS 158 requires an employer to measure the funded status of a plan as ofthe date of the fiscal year end balance sheet. The Company's fiscal year end isDecember 31 and its pension plans and postretirement benefits plan previouslyhad a September 30 measurement date. The Company adopted this measurementrequirement as of December 31, 2008. The effect of adopting this pronouncementdid not have a material impact on the Company's financial position or results ofoperations. Fair Value Option for Financial Assets and Financial Liabilities The Company adopted FASB Statement No. 159 "The Fair Value Option forFinancial Assets and Financial Liabilities -- Including an amendment of FASBStatement No. 115" ("FAS 159") effective January 1, 2008. This Statement permitsentities to choose to measure many financial instruments and certain other itemsat fair value. Unrealized gains and losses on items for which the fair valueoption has been elected should be reported in earnings 48 CAMBREX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)(3) IMPACT OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS -- (CONTINUED)at each subsequent reporting date. The effect of adopting this pronouncement didnot have a material impact on the Company's financial position or results ofoperations. Amendment of FAS 141 In December 2007, the FASB issued Statement No. 141 (Revised 2007),"Business Combinations" ("FAS 141R") which requires an acquirer to recognize theassets acquired, the liabilities assumed and any non-controlling interest in theacquiree at the acquisition date, measured at their fair values as of that date,with limited exceptions. This Statement also requires the acquirer in a businesscombination, achieved in stages, to recognize the identifiable assets andliabilities, as well as the non-controlling interest in the acquiree, at thefull amounts of their fair values. FAS 141R makes various other amendments toauthoritative literature intended to provide additional guidance or to confirmthe guidance in that literature to that provided in this Statement. FAS 141Rapplies prospectively to business combinations for which the acquisition date ison or after the beginning of the first annual reporting period beginning on orafter December 15, 2008. Earlier adoption is prohibited. Accordingly, theCompany adopted this statement on January 1, 2009. Amendment of FAS 133 In March 2008, the FASB issued Statement No. 161 "Disclosures aboutDerivative Instruments and Hedging Activities -- an amendment of FASB StatementNo. 133" ("FAS 161"). This statement requires enhanced disclosures aboutderivative and hedging activities and thereby improves the transparency offinancial reporting. FAS 161 encourages, but does not require, comparativedisclosures for earlier periods at initial adoption. This statement is effectivefor fiscal years beginning after November 15, 2008. The effect of adopting thispronouncement will not have an impact on the Company's financial position orresults of operations. Employers' Disclosures about Postretirement Benefit Plan Assets In December 2008, the FASB issued FSP 132(R)-1 "Employers' Disclosuresabout Postretirement Benefit Plan Assets" ("FSP 132(R)-1"). This statementprovides guidance on additional disclosures about plan assets of a definedbenefit pension or other postretirement plan. This statement is effective forfiscal years ending after December 15, 2009. Upon initial application, theprovisions of FSP 132(R)-1 are not required for earlier periods that arepresented for comparative purposes. The effect of adopting this pronouncementwill not have an impact on the Company's financial position or results ofoperations.(4) ACQUISITIONS In January 2008, Cambrex completed the acquisition of AS ProSyntest,located in Tallinn, Estonia for approximately $1,271, net of cash. ProSyntest isan active pharmaceutical ingredient ("API") research and development company andhas strengths in cost effective chemical route selections and sample generation,rapid scale up of products at kilo lab scale, as well as chiral andorganometallic chemistries. The purchase price was allocated to the acquired assets and liabilities onthe basis of their respective fair values. As a result the Company recognizedgoodwill of $1,489. Acquisitions are included in the accompanying consolidated financialstatements from the date of acquisition. The acquisition would not have had amaterial impact on the results of operations had the acquisition occurred at thebeginning of 2008 and as such no proforma results have been presented. 49 CAMBREX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)(5) GOODWILL The changes in the carrying amount of goodwill for the years ended December31, 2008 and 2007 are as follows: Balance as of January 1, 2007............................. $32,573Translation effect........................................ 2,979 -------Balance as of December 31, 2007........................... 35,552 -------Acquisition of business................................... 1,489Translation effect........................................ (1,667) -------Balance as of December 31, 2008........................... $35,374 =======(6) NET INVENTORIES Inventories are stated at the lower of cost, determined on a first-in,first-out basis, or market. Net inventories consist of the following: DECEMBER 31, ----------------- 2008 2007 ------- ------- Finished goods..................................... $24,657 $25,646Work in process.................................... 22,372 21,301Raw materials...................................... 10,688 11,058Supplies........................................... 3,416 3,435 ------- ------- Total............................................ $61,133 $61,440 ======= =======(7) PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment consist of the following: DECEMBER 31, --------------------- 2008 2007 --------- --------- Land............................................ $ 4,127 $ 3,451Buildings and improvements...................... 83,939 77,459Machinery and equipment......................... 282,119 287,602Furniture and fixtures.......................... 1,954 1,729Construction in progress........................ 31,451 45,129 --------- --------- Total...................................... 403,590 415,370Accumulated depreciation........................ (242,090) (249,713) --------- --------- Net........................................... $ 161,500 $ 165,657 ========= ========= Depreciation expense was $21,051, $19,799 and $18,989 for the years endedDecember 31, 2008, 2007 and 2006, respectively. The Company made major capitalimprovements to two facilities in 2008. Total capital expenditures in 2008 were$32,722, which includes $3,344 that was not paid as of December 31, 2008. 50 CAMBREX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)(8) ACCRUED EXPENSE AND OTHER CURRENT LIABILITIES The components of accrued expenses and other current liabilities are asfollows: DECEMBER 31, ----------------- 2008 2007 ------- ------- Salaries and employee benefits payable............. $12,369 $18,035Legal services..................................... 660 4,741Deferred revenue................................... 4,426 5,190Restructuring and strategic alternatives........... 8,131 18,414Rutherford settlement.............................. -- 4,421Deferred tax liabilities........................... 116 4,971Taxes payable...................................... 1,948 3,444Hedges payable..................................... 5,027 1,435Commissions........................................ 3,759 492Other.............................................. 8,644 8,559 ------- ------- Total............................................ $45,080 $69,702 ======= =======(9) INCOME TAXES Income/(loss) before income taxes consist of the following: DECEMBER 31, ------------------------------ 2008 2007 2006 -------- -------- -------- Domestic.................................. $(15,756) $(48,634) $(32,954)International............................. 30,756 41,411 39,301 -------- -------- -------- Total................................... $ 15,000 $ (7,223) $ 6,347 ======== ======== ======== The provision for income taxes consist of the followingprovisions/(benefits): DECEMBER 31, -------------------------- 2008 2007 2006 ------ ------- ------- Current: Federal................................... $ (897) $(8,317) $ 680 State..................................... 120 380 (614) International............................. 7,871 10,016 12,961 ------ ------- ------- 7,094 2,079 13,027 ------ ------- -------Deferred: Federal................................... $ 204 $ 172 $ 337 International............................. (227) 4,037 1,149 ------ ------- ------- (23) 4,209 1,486 ------ ------- ------- Total.................................. $7,071 $ 6,288 $14,513 ====== ======= ======= 51 CAMBREX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)(9) INCOME TAXES -- (CONTINUED) The provision for income taxes differs from the statutory federal incometax rate of 35% for 2008, 2007 and 2006 as follows: DECEMBER 31, --------------------------- 2008 2007 2006 ------- ------- ------- Income tax provision/(benefit) at U.S federal statutory rate.................... $ 5,250 $(2,528) $ 2,220State and local taxes, net of federal income tax benefits.............................. 33 73 7Effect of foreign income taxed at rates other than the U.S. federal statutory rate...................................... (2,744) (27) (1,082)Permanent items (primarily compensation).... -- 9,225 --Tax credits................................. (788) -- --Net change in valuation allowance........... 5,537 7,816 11,804GAAP benefit in continuing operations....... -- (7,915) --Indefinite-lived intangibles................ 204 172 337Adjustments for prior years' taxes.......... (562) (536) 1,393Other....................................... 141 8 (166) ------- ------- ------- Total..................................... $ 7,071 $ 6,288 $14,513 ======= ======= ======= The components of deferred tax assets and liabilities as of December 31,2008 and 2007 relate to temporary differences and carryforwards as follows: DECEMBER 31, ----------------- 2008 2007 ------- ------- Current deferred tax assets: Inventory........................................ $ 1,266 $ 507 Receivables...................................... 106 145 Legal and related reserves....................... 1,737 4,959 Disposition reserve.............................. -- 1,860 Other............................................ 955 3,755 ------- ------- Current deferred tax assets...................... 4,064 11,226 Valuation allowances............................. (3,616) (6,026) ------- ------- Total current deferred tax assets............. $ 448 $ 5,200 ======= =======Current deferred tax liabilities: Unremitted foreign earnings...................... $ -- $ 4,618 Other............................................ 116 353 ------- ------- Total current deferred tax liabilities........ $ 116 $ 4,971 ======= ======= 52 CAMBREX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)(9) INCOME TAXES -- (CONTINUED) DECEMBER 31, ------------------- 2008 2007 -------- -------- Non-current deferred tax assets: Foreign tax credits carryforwards............... $ 50,523 $ 44,270 Environmental................................... 1,689 1,921 Net operating loss carryforwards (state)........ 2,661 -- Net operating loss carryforwards (foreign)...... 227 1,858 Employee benefits............................... 14,143 7,412 Restructuring................................... 1,172 -- Research & experimentation tax credits carryforwards................................ 1,309 1,237 Alternative minimum tax credits carryforwards... 3,266 4,054 Property, plant and equipment................... 1,187 1,088 Intangibles..................................... -- 16 Other........................................... 4,714 1,163 -------- -------- Non-current deferred tax assets................. 80,891 63,019 Valuation allowances*........................... (75,614) (58,816) -------- -------- Total non-current deferred tax assets........ 5,277 4,203Non-current deferred tax liabilities: Property, plant and equipment................... 6,750 6,978 Intangibles..................................... 7,488 6,348 Indefinite-lived intangibles.................... 1,736 1,531 Foreign tax allocation reserve.................. 5,441 8,061 Other........................................... -- 371 -------- -------- Total non-current deferred tax liabilities... $ 21,415 $ 23,289 -------- -------- Total net non-current deferred tax liabilities................................ $ 16,138 $ 19,086 ======== ========* In addition to the effect of the domestic and foreign valuation allowances reflected in the current effective tax rate, the valuation allowance has changed due to currency translation adjustments. The Company establishes a valuation allowance against deferred tax assetswhen it is more likely than not that the Company will be unable to realize thosedeferred tax assets in the future. Based on the Company's current and pastperformance, cumulative losses in recent years resulting from domesticoperations, the market environment in which the Company operates, and theutilization of past tax attributes, the Company has established a valuationallowance of $78,989 against a portion of its domestic deferred tax assets.However, the Company has not recorded a valuation allowance against domestic taxassets which are offset by domestic deferred tax liabilities that are expectedto reverse in the future. With respect to the Company's foreign deferred taxassets, the Company has recorded a valuation allowance of $241 as of December31, 2008. The Company expects to maintain a full valuation allowance against its netdomestic deferred tax assets (primarily foreign tax credits), subject to theconsideration of all prudent and feasible tax planning strategies, until suchtime as the Company attains an appropriate level of future domesticprofitability and the Company is able to conclude that it is more likely thannot that its domestic deferred tax assets are realizable. The change in thedomestic valuation allowance for the years ended December 31, 2008 and 2007 was$15,095 and $26,506 53 CAMBREX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)(9) INCOME TAXES -- (CONTINUED)respectively. The change in the foreign valuation allowance for the years endedDecember 31, 2008 and 2007 was ($707) and $55, respectively. Under the tax laws of the various jurisdictions in which the Companyoperates, net operating losses ("NOLs") may be carried forward or back, subjectto statutory limitations, to reduce taxable income in future or prior years. Thedomestic federal NOLs were fully utilized in 2007 as a result of the sale of thebusinesses that comprised the Bioproducts and Biopharma segments. The domesticstate NOLs were approximately $28,430, and will expire in 2015. The foreign NOLswere approximately $791. NOLs in foreign jurisdictions will carryforwardindefinitely. As of December 31, 2008, $50,523 of foreign tax credits, $1,309 of research& experimentation tax credits and $3,266 of alternative minimum tax credits wereavailable as credits against future U.S. income taxes. Under the U.S. InternalRevenue Code, these will expire in 2015 through 2018, and 2020 through 2027,respectively. The alternative minimum tax credit carryforwards have noexpiration date. All domestic credits are offset by a full valuation allowance. The Company has not provided U.S. federal income and withholding taxes onits undistributed earnings from non-U.S. operations as of December 31, 2008because it intends to reinvest such earnings indefinitely outside of the UnitedStates. Determination of the amount of unrecognized deferred tax related tothese earnings is not practical. However, in 2008, the Company did repatriate$16,263 of cash resulting from the sale of its non-U.S. businesses thatcomprised the Bioproducts segments and the sale of two non-U.S. businesseswithin the former Human Health segment. The Company provided for the tax effectof this in its 2007 tax provision. The Company also settled several intercompanyloans in 2008 as part of its project to streamline the Company's legalstructure, and provided for the tax effects in its 2008 tax provision. The Company adopted the provisions of FASB Interpretation No. 48"Accounting for Uncertainty in Income Taxes -- an interpretation of FASBStatement No. 109" as of January 1, 2007. As of December 31, 2007 the Companyhad approximately $5,116 of unrecognized tax benefits. During 2008, the Companyincreased its unrecognized tax benefits by $96 for current year positions whichis offset by a decrease in unrecognized tax benefits of $3,515, due to amendedreturn filings, settlement of positions with state and foreign taxingauthorities, the expiration of statute of limitation periods and foreigncurrency translation. Of the $3,515, the current year's provision includes$1,332 of benefit. Of the total balance of unrecognized benefits at December 31,2008 $967, if recognized, would affect the effective tax rate. In the next twelve months the Company may decrease its reserve forunrecognized tax benefits for intercompany transactions by approximately $250mainly due to the expiration of a statute of limitation period. This item couldimpact the income tax provision. The following table summarizes the activity related to the Company'sunrecognized tax benefits as of December 31, 2008 and 2007: 2008 2007 ------- ------ Balance at January 1..................................... $ 5,116 5,522Gross increases related to current period tax positions.. 96 128Gross decreases related to prior period tax positions.... (2,896) (109)Expiration for statute of limitations for the assessment of taxes............................................... (401) (377)Foreign currency translation............................. (218) (48) ------- ------Balance at December 31................................... $ 1,697 $5,116 ======= ====== 54 CAMBREX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)(9) INCOME TAXES -- (CONTINUED) Gross interest and penalties for 2008 and 2007 of $333 and $420,respectively, related to the above unrecognized tax benefits are not reflectedin the table above. In 2008 and 2007, the Company accrued $79 and $142,respectively, of interest and penalties in the income statement. Consistent withprior periods, the Company recognizes interest and penalties within its incometax provision. In 2007, the Company finalized an IRS examination for the periods 2001-2003. In September 2008, the Company was selected for a random IRS examinationfor tax year 2006. Tax years 2005 and 2007 remain open to examination within theU.S. The Company is also subject to exams in its significant non-U.S.jurisdictions for 2004 and 2006 forward. The Company is also subject to audit in numerous states for various yearsin which it has filed income tax returns. In February 2009, the Company wasnotified that New Jersey would, in the near future, begin an examination of itsopen tax years. Recently finalized state audits resulted in immaterialadjustments. Open years for the majority of states where the Company files arefor 2005 and forward.(10) LONG-TERM DEBT In February 2007, proceeds from the sale of the businesses that comprisedthe Bioproducts and Biopharma segments, as discussed in Note 19, were used torepay all outstanding debt under a prior credit facility. In April 2007, theCompany entered into a $200,000 five-year Syndicated Senior Revolving CreditFacility which expires in April 2012. The Company pays interest on this creditfacility at LIBOR plus 1.25% -- 2.00% based upon certain financial measurements.The credit facility also includes financial covenants regarding interestcoverage and leverage ratios. The Company was in compliance with all financialcovenants at December 31, 2008. The 5-Year Agreement is collateralized bydividend and distribution rights associated with a pledge of a portion of stockthat the Company owns in a foreign holding company. This foreign holding companyowns a majority of the Company's non-U.S. operating subsidiaries. As of December31, 2008 there was $123,800 outstanding. The 2008 and 2007 weighted averageinterest rate for long-term bank debt was 4.9% and 6.9%, respectively.(11) DERIVATIVES AND FAIR VALUE OF FINANCIAL INSTRUMENTS The Company uses derivative financial instruments to reduce exposures tomarket risks resulting from fluctuations in interest rates and foreign exchangerates. The Company is exposed to credit losses in the event of nonperformance bythe counter parties to the contracts. However, the Company does not anticipatenon-performance by the counterparties. 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 and Italy. The Company's primarymarket risk relates to exposures to foreign currency exchange rate fluctuationson transactions entered into by these international operations that aredenominated primarily in U.S. dollars, Swedish krona, and Euros. As a matter ofpolicy, the Company does not hedge to protect the translated results of foreignoperations. 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 also enters into interest rateswap agreements to reduce the impact of changes in interest rates on itsfloating rate debt. The swap agreements are contracts to exchange floating ratefor fixed interest payments periodically over the life of the agreements withoutthe exchange of the underlying notional debt amounts. 55 CAMBREX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)(11) DERIVATIVES AND FAIR VALUE OF FINANCIAL INSTRUMENTS -- (CONTINUED) All forward and swap contracts outstanding at December 31, 2008 have beendesignated as cash flow hedges and, accordingly, changes in the fair value ofderivatives are recorded each period in accumulated other comprehensive(loss)/income. Changes in the fair value of the derivative instruments reportedin accumulated other comprehensive income will be reclassified into earnings inthe period in which earnings are impacted by the variability of the cash flowsof the hedged item. The ineffective portion of all hedges is recognized incurrent-period earnings and is immaterial to the Company's financial results.The unrealized net loss recorded in accumulated other comprehensive loss atDecember 31, 2008 was $715 and $3,541 for forwards and swaps, respectively.These amounts will be reclassified into earnings as the underlying forecastedtransactions occur. The net loss recognized in earnings related to foreigncurrency forward contracts during the twelve months ended December 31, 2008 was$1,275. Interest Rate Swap Agreements The Company has employed a plan to mitigate interest rate risk by enteringinto interest rate swap agreements to convert floating rates to fixed interestrates. As of December 31, 2008, the Company had three interest rate swaps inplace with an aggregate notional value of $60,000, at an average fixed rate of4.48%, and with maturity dates of October 2010. The Company's strategy has beento cover a portion of outstanding bank debt with interest rate protection. AtDecember 31, 2008, the coverage was approximately 48% of our variable interestrate debt. At December 31, 2008 the Company had variable debt of $123,800, ofwhich $60,000 is fixed by an interest rate swap. Holding all other variablesconstant, if the LIBOR portion of the weighted average interest rates in thevariable rate debt increased by 100 basis points, the effect on our earnings andcash flows would have been higher interest expense of $638. Interest expenseunder these agreements, and the respective debt instruments that they hedge, arerecorded at the net effective interest rate of the hedged transactions. The fairvalue of these agreements was based on quoted market prices and was in a lossposition of $3,541 at December 31, 2008. Foreign Exchange Instruments The table below reflects the notional and fair value amounts of foreignexchange contracts at December 31, 2008 and 2007: 2008 2007 ---------------- ---------------- NOTIONAL FAIR NOTIONAL FAIR AMOUNTS VALUE AMOUNTS VALUE -------- ----- -------- ----- Forward exchange contracts.................... $20,568 $(678) $22,078 $(74) The carrying amount reported in the consolidated balance sheets for 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 long-term debt approximates fair valuebecause all of this underlying debt is at variable rates. 56 CAMBREX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)(12) STRATEGIC ALTERNATIVE AND RESTRUCTURING CHARGES Strategic Alternative Costs Strategic alternative costs include expenses that the Company has incurredrelated to the decision to sell the businesses that comprised the Bioproductsand Biopharma segments in February 2007, costs associated with a project tostreamline the Company's legal structure and costs associated with the exit of afeed additives product line. These costs are not considered part of therestructuring program or a part of discontinued operations under currentaccounting guidance. Strategic alternative costs for 2008 include $1,385 related to the projectto streamline the Company's legal structure, costs associated with themodification of employee stock options due to the payment of the specialdividend in connection with the divestiture of $102 and change of controlexpense of $28. Costs for 2007 include change of control expense totaling$20,025 related to the 2007 divestiture of the businesses that comprised theBioproducts and Biopharma segments, retention bonuses of $6,780, costsassociated with the stock option modification of $2,854 and external advisorcosts of $456. During the fourth quarter of 2007 the Company committed to a plan to exit afeed additive product line. The equipment used in producing this product will bedismantled and disposed of upon completion of production. Production continuedthrough the third quarter of 2008. In accordance with FASB Interpretation No.47, Accounting for Conditional Asset Retirement Obligations, the Companyrecorded $1,012 for the asset retirement obligation in 2007. This charge isrecorded as a strategic alternative cost in the income statement. Total strategic alternative costs for 2008, 2007 and 2006 were $1,515,$31,127 and $2,958, respectively. Strategic alternative costs for 2006 consistedof external advisor costs related to divestitures. Corporate Office Restructuring During 2007, The Company announced plans to eliminate certain employeepositions at the corporate office upon completion of the sale of the businessesthat comprised the Bioproducts and Biopharma segments. This plan includedcertain one-time benefits for terminated employees. Costs related to these plansare recorded as restructuring expenses in the income statement. The Companyrecognized expense of $805 and $4,014 in 2008 and 2007, respectively, related tothis plan. The following table reflects the activity related to the severance reservethrough December 31, 2008: JANUARY 1, 2007 ACTIVITY DECEMBER 31, 2008 ACTIVITY DECEMBER 31, 2007 ------------------ 2007 ------------------ 2008 RESERVE CASH RESERVE CASH RESERVE BALANCE EXPENSE PAYMENTS BALANCE EXPENSE PAYMENTS BALANCE ---------- ------- -------- ------------ ------- -------- ------------ Employee termination costs.. $-- $3,787 $(2,975) $812 $734 $(1,084) $462 === ====== ======= ==== ==== ======= ==== This reserve is expected to be paid in full during 2009. Consolidation of Domestic Research and Development Activities In December of 2007, the Company consolidated its United States researchand development ("R&D") activities and small scale API production with itsfacility in Charles City, Iowa. The Company recognized restructuring expenses in2007 of $2,059 related to this consolidation. This charge included the presentvalue of the remaining lease payments under the Company's current operatinglease at the New Jersey R&D facility of $998. The operating lease expires inDecember 2010. In accordance with accounting guidance, the fair value of theliability recorded at the cease-use date factored in the remaining leaserentals, reduced by estimated sublease rentals that could be reasonably obtainedfor the property. The Company consulted with local real estate brokers at thattime to determine what reasonable sublease rentals could be obtained. During thepast year, the Company has not been 57 CAMBREX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)(12) STRATEGIC ALTERNATIVE AND RESTRUCTURING CHARGES -- (CONTINUED)able to sublease the property and interest dramatically decreased during thefourth quarter of 2008. Due to the lack of interest, the Company consulted withits real estate broker and determined that the possibility of obtaining asublease was extremely low. As a result, during the fourth quarter of 2008, theCompany increased the reserve related to the remaining lease payments by $2,388.This amount assumes the Company will not obtain a sublease for the facility. Inaddition to increasing the reserve, the Company incurred costs of $1,502 relatedto lease payments, utilities and severance during 2008. Costs related to thisconsolidation are recorded as restructuring expenses on the income statement. The following table reflects the activity related to the restructuringreserve through December 31, 2008: JANUARY 1, 2007 ACTIVITY DECEMBER 31, 2008 ACTIVITY DECEMBER 31, 2007 ------------------ 2007 ------------------ 2008 RESERVE CASH RESERVE CASH RESERVE BALANCE EXPENSE PAYMENTS BALANCE EXPENSE PAYMENTS BALANCE ---------- ------- -------- ------------ ------- -------- ------------ Employee termination costs...... $-- $ 356 $-- $ 356 $ 115 $(471) $ --Present value of lease payments...................... -- 998 -- 998 2,396 (373) 3,021 --- ------ --- ------ ------ ----- ------ $-- $1,354 $-- $1,354 $2,511 $(844) $3,021 === ====== === ====== ====== ===== ====== This reserve will be paid in full by December 31, 2010. Total restructuringexpenses for 2008 and 2007 were $4,695 and $6,073, respectively.(13) STOCKHOLDERS' EQUITY The Company has two classes of common shares which are Common Stock andNonvoting Common Stock. Authorized shares of Common Stock were 100,000,000 atDecember 31, 2008 and 2007. Authorized shares of Nonvoting Common Stock were730,746 at December 31, 2008 and 2007. Nonvoting Common Stock with a par valueof $.10 has equal rights with Common Stock, with the exception of voting power.Nonvoting Common Stock is convertible, share for share, into Common Stock,subject to any legal requirements applicable to holders restricting the extentto which they may own voting stock. As of December 31, 2008 and 2007, no sharesof Nonvoting Common Stock were outstanding. The Company has authorized 5,000,000shares of Series Preferred Stock, par value $.10, issuable in series and withrights, powers and preferences as may be fixed by the Board of Directors. AtDecember 31, 2008 and 2007, there was no preferred stock outstanding. On May 3, 2007, the Company paid a special dividend of $14.00 per share toits shareholders resulting in a reduction in stockholders' equity of $403,026.The effect on stockholders' equity was a reduction to retained earnings of$233,244, representing total accumulated earnings as of the date of declaration,with the remainder representing a return of capital of $169,782. As of December31, 2008, cash disbursements were $401,970 and $1,056 was accrued related todividends on unvested restricted stock. The Company no longer pays a quarterlydividend. The Company held treasury stock of 2,224,613 and 2,385,066 shares atDecember 31, 2008 and 2007, respectively, which are primarily used for issuanceto employee compensation plans. At December 31, 2008 there were 52,592 authorized shares of Common Stockreserved for issuance through stock option plans.(14) STOCK BASED COMPENSATION Beginning January 1, 2006, the Company began recognizing compensation costsfor stock option awards to employees based on their grant-date fair value. Thevalue of each stock option is estimated on the date of grant using the Black-Scholes option-pricing 58 CAMBREX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)(14) STOCK BASED COMPENSATION -- (CONTINUED)model. The weighted-average fair value per share for the stock options grantedto employees for the years ended December 31, 2008, 2007 and 2006 were $1.72,$5.44 and $8.00, respectively. The following assumptions were used in determining the fair value of stockoptions for grants issued in 2008, 2007 and 2006: 2008 2007 2006 --------------- ----------------- ----------------- Expected volatility............. 33.30% - 38.78% 34.38% - 36.90% 36.49% - 38.28%Average dividend yield.......... 0.00% 0.00% 0.55% - 0.56%Expected term................... 4.75 years 3.75 - 4.75 years 3.75 - 4.75 yearsRisk-free interst rate.......... 2.77% - 3.08% 4.30% - 4.85% 4.42% - 4.96% The Company does not have any publicly traded stock options; therefore,expected volatilities are based on historical volatility of the Company's stock.The risk-free interest rate is based on the yield of a zero-coupon U.S. Treasurybond whose maturity period approximates the option's expected term. The expectedterm was utilized based on the "simplified" method for determining the expectedterm of stock options in Staff Accounting Bulletin ("SAB") No. 107, "Share-BasedPayment." The Company also considered SAB No. 110 when determining the expectedterm of stock options. FASB Statement No. 123(R) "Share-Based Payment" ("FAS 123(R)") requirescompanies to estimate the expected forfeitures for all unvested awards andrecord compensation costs only for those awards that are expected to vest. As ofDecember 31, 2008, the total compensation cost related to unvested stock optionawards granted to employees but not yet recognized was $1,606. The cost will beamortized on a straight-line basis over the remaining weighted-average vestingperiod of 3.5 years. For 2008, 2007 and 2006, the Company recorded $555, $379 and $383,respectively, in selling, general and administrative expenses for stock options.In addition the Company recorded $27 in restructuring expenses in 2008 and $282and $50 in strategic alternative costs and restructuring expenses, respectively,in 2007 for stock options related to the change in control agreements and thereduction in workforce in 2007 and 2008. In addition, for 2008 and 2007 the Company recorded $102 and $2,535,respectively, in strategic alternative costs for expenses associated with astock option modification due to the special dividend paid on May 3, 2007. Themodification reduced the exercise price of all stock options outstanding as ofthe dividend payment date by $14.00 per share, the amount of the specialdividend. As of December 31, 2008, the total compensation cost related tounvested stock option awards that were modified but not yet recognized was $153.The cost will be amortized on a straight-line basis over the remaining weighted-average vesting period of 1.6 years. Cambrex senior executives participate in an executive incentive plan whichrewards achievement with restricted stock units. Awards are made annually ifcertain targets are met and vest in one-third increments on the first, secondand third anniversaries of the grant. On the third anniversary of the grant,restrictions on sale or transfer are removed and shares are issued toexecutives. 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. For certain employees with employment contracts, all sharesvest upon certain events, including a change in control. In the event of deathor permanent disability, all shares vest and the deferred sales restrictionor permanent disability, all shares vest and the deferred sales restrictionlapses. These awards are classified as equity awards as defined in FAS 123(R).Historically, only senior executives participated in this plan. As of January 1,2006, certain other employees are eligible to receive restricted stock as partof a redesigned stock-based compensation plan. These awards cliff vest on thethird anniversary of the grant date. 59 CAMBREX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)(14) STOCK BASED COMPENSATION -- (CONTINUED) For 2008, 2007, and 2006, the Company recorded $1,327, $705, and $898,respectively, in selling, general and administrative expenses for restrictedstock. In addition, the Company recorded $24 in restructuring expenses in 2008and $1,554 and $172 in strategic alternative costs and restructuring expenses,respectively, in 2007 for restricted stock. As of December 31, 2008 the totalcompensation cost related to unvested restricted stock granted but not yetrecognized was $897. The cost will be amortized on a straight-line basis overthe remaining weighted-average vesting period of 1.4 years. In May 2008 the Company granted a target award of 43,000 performanceshares, with a potential award of up to 86,000 shares to the current CEO. Theseperformance shares are dependent upon the Company's performance measured againstcertain financial metrics over a three year period beginning July 1, 2008, ascompared to an external peer group. Any payment of the performance shares willbe made in three years. In accordance with FAS 123(R) the Company is currentlyrecognizing expense related to 43,000 shares over the vesting period, whichassumes that the CEO will be compensated at target. The Company will assessperformance at each reporting period and adjust accordingly. For 2008 theCompany recorded $34 in selling, general and administrative expense related tothese performance shares. The following table is a summary of the Company's stock option activityissued to employees and related information: WEIGHTED AVERAGE ---------------------- NUMBER OF EXERCISE OPTIONS SHARES PRICE EXERCISABLE ---------- -------- ----------- Outstanding at December 31, 2005............... 4,013,647 $26.60 4,013,647 ---------- Granted...................................... 249,367 21.39 Exercised.................................... (1,069,876) 19.91 Forfeited or expired......................... (438,245) 28.11 ----------Outstanding at December 31, 2006............... 2,754,893 28.48 2,517,941 ---------- Granted...................................... 152,675 14.99 Exercised.................................... (1,202,752) 18.21 Forfeited or expired......................... (233,059) 22.52 ----------Outstanding at December 31, 2007............... 1,471,757 20.15 1,293,108 ---------- Granted...................................... 744,000 4.82 Exercised.................................... (2,301) 7.47 Forfeited or expired......................... (622,587) 19.17 ----------Outstanding at December 31, 2008............... 1,590,869 14.07 ==========Exercisable at December 31, 2008............... $22.01 757,050 On May 3, 2007, the Company paid a special dividend of $14.00 per share. Asa result, the market price of the stock declined by approximately $14.00 pershare from the prior day's close and therefore, all outstanding options weremodified to reduce the exercise price by $14.00 per share. The aggregate intrinsic value for all stock options exercised for the yearsended December 31, 2008, 2007 and 2006 were $4, $2,866 and $2,684, respectively.The aggregate intrinsic value for all stock options outstanding as of December31, 2008 was $109. The aggregate intrinsic value for all stock optionsexercisable as of December 31, 2008 was $1. 60 CAMBREX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)(14) STOCK BASED COMPENSATION -- (CONTINUED) A summary of the Company's nonvested stock options and restricted stock asof December 31, 2008 and changes during the years ended December 31, 2008 and2007 are presented below: NONVESTED RESTRICTED NONVESTED STOCK OPTIONS STOCK ----------------------- ------------------------ WEIGHTED- WEIGHTED- AVERAGE AVERAGE NUMBER OF GRANT-DATE NUMBER OF GRANT-DATE SHARES FAIR VALUE SHARES FAIR VALUE --------- ---------- --------- ---------- Nonvested at January 1, 2007............... 236,952 $21.39 165,868 $22.02Granted.................................... 152,675 $14.99 125,489 $17.09Vested during period....................... (137,145) $16.57 (123,494) $21.55Forfeited.................................. (73,833) $19.79 (33,962) $20.91 -------- --------Nonvested at December 31, 2007............. 178,649 $11.34 133,901 $18.11 -------- --------Granted.................................... 744,000 $ 4.82 122,872 $ 8.74Vested during period....................... (69,963) $10.95 (102,858) $12.52Forfeited.................................. (18,867) $11.50 (10,588) $16.52 -------- --------Nonvested at December 31, 2008............. 833,819 $ 5.55 143,327 $13.38 ======== ========(15) RETIREMENT PLANS AND OTHER POSTRETIREMENT BENEFITS Domestic Pension Plans The Company maintains two U.S. defined-benefit pension plans. Benefits forthe salaried and certain hourly employees are based on salary and years ofservice, while those for employees covered by a collective bargaining agreementare based on negotiated benefits and years of service. The Company's policy isto fund pension costs currently to the full extent required by the InternalRevenue Code. Pension plan assets consist primarily of balanced fundinvestments. The net periodic pension expense for 2008, 2007 and 2006 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 a December 31 measurementdate for 2008 and a September 30 measurement date for 2007. FAS 158 eliminatedthe Company's option to measure the pension and other postretirement benefitsplans' benefit obligations, assets and net periodic cost at a date prior toDecember 31. Therefore, the pension and postretirement benefits plans, whichwere measured as of September 30 in 2007, have been measured as of December 31,2008. The Company elected to use the 15-month alternative to determine 2008pension cost. The portion of expense attributed to the remaining three months of2007 was charged directly to retained earnings, with accumulated othercomprehensive (loss)/income adjusted to reflect the amortization amounts. Thechange in measurement date did not have a material impact on the Company'sfinancial position or results of operations. 61 CAMBREX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)(15) RETIREMENT PLANS AND OTHER POSTRETIREMENT BENEFITS -- (CONTINUED) The funded status of these plans, incorporating fourth quartercontributions, as of December 31, 2008 and September 30, 2007 is as follows: 2008 2007 ------- ------- CHANGE IN BENEFIT OBLIGATION Benefit obligation, beginning of period............... $57,451 $61,517 Service cost.......................................... -- 1,000 Interest cost......................................... 3,513 3,597 Actuarial gain........................................ 1,234 (2,203) Benefits paid......................................... (3,431) (2,433) Plan amendments....................................... -- 2,102 Curtailments.......................................... -- (6,129) Effect of eliminating early measurement date.......... (238) -- ------- ------- Benefit obligation, end of period..................... $58,529 $57,451 ======= ======= 2008 2007 -------- ------- CHANGE IN PLAN ASSETS Fair value of plan assets, beginning of period........ $ 49,985 $42,761 Actual return on plan assets.......................... (12,342) 4,966 Actual return on plan assets.......................... (12,342) 4,966 Contributions......................................... 3,194 4,691 Benefits paid......................................... (3,431) (2,433) Effect of eliminating early measurement date.......... (95) -- -------- ------- Fair value of plan assets at end of period............ $ 37,311 $49,985 -------- ------- Funded status......................................... (21,218) (7,466) -------- ------- Accrued benefit cost, end of period................... $(21,218) $(7,466) ======== ======= The amounts recognized in accumulated other comprehensive (loss)/income asof December 31, 2008 and 2007 consist of the following: 2008 2007 ------- ------ Actuarial loss........................................... $20,690 $3,148Prior service cost....................................... 1,368 1,912 ------- ------ $22,058 $5,060 ======= ====== 62 CAMBREX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)(15) RETIREMENT PLANS AND OTHER POSTRETIREMENT BENEFITS -- (CONTINUED) The components of net periodic pension cost are as follows: 2008 2007 2006 ------- ------- ------- COMPONENTS OF NET PERIODIC PENSION COST Service cost.................................... $ -- $ 1,000 $ 2,571 Interest cost................................... 3,513 3,597 3,448 Expected return on plan assets.................. (4,086) (3,733) (3,041) Amortization of prior service cost.............. 532 206 46 Recognized actuarial loss....................... -- 209 448 Curtailments.................................... -- 414 -- ------- ------- ------- Net periodic benefit cost....................... $ (41) $ 1,693 $ 3,472 ======= ======= ======= The sale of the businesses that comprised the Bioproducts and Biopharmasegments in February 2007 required the Company to recognize a curtailment chargeof $337 for the pension plans in 2007 which is recorded in discontinuedoperations. In April 2007, the Board of Directors of the Company approved thesuspension of the domestic pension plans effective August 31, 2007. As a result,the Company was required to recognize a curtailment charge of $77 for thepension plan in 2007. The estimated amounts that will be amortized from accumulated othercomprehensive loss into net periodic cost in 2009 are as follows: PENSION BENEFITS -------- Actuarial loss.................................................. $544Prior service cost.............................................. 436 ---- Total......................................................... $980 ==== Major assumptions used in determining the benefit obligation and net costfor the Company's domestic pension plans are presented in the following table: BENEFIT NET COST OBLIGATION ------------------ 2008 2007 2008 2007 2006 ---- ---- ---- ---- ---- Discount rate................................. 6.00% 6.25% 6.25% 6.00% 5.75%Expected return on plan assets................ N/A N/A 8.00% 8.00% 8.00%Rate of compensation increase................. N/A 5.00% N/A 5.00% 5.00% In making its assumption for the long-term rate of return on plan assets,the Company has utilized historical rates earned on securities allocatedconsistently with its investments. The discount rate was selected by projectingcash flows associated with plan obligations, which were matched to a yield curveof high quality corporate bonds. The Company then selected the single rate thatproduced the same present value as if each cash flow were discounted by thecorresponding spot rate on the yield curve. The aggregate Accumulated Benefit Obligation ("ABO") of $58,529 exceedsplan assets by $21,218 as of December 31, 2008 for all domestic plans. The Company expects to contribute approximately $1,205 in cash to its twoU.S. defined-benefit pension plans in 2009. 63 CAMBREX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)(15) RETIREMENT PLANS AND OTHER POSTRETIREMENT BENEFITS -- (CONTINUED) The following benefit payments, which reflect expected future service, asappropriate, are expected to be paid: PENSION BENEFITS ---------------- 2009........................................................ $ 2,8732010........................................................ $ 2,9332011........................................................ $ 3,0552012........................................................ $ 3,2632013........................................................ $ 3,2472014-2018................................................... $17,700 The investment objective for plan assets is to achieve long-term growthwith exposure to risk at an appropriate level. The Company invests in adiversified asset mix consisting of equities (domestic and international) andtaxable fixed income securities. Assets are managed to obtain the highest totalrate of return in keeping with a moderate level of risk. The allocation of pension plan assets is as follows: PERCENTAGE OF PLAN ASSETS TARGET ---------------ASSET CATEGORY: ALLOCATION 2008 2007--------------- ---------- ------ ------ U.S. equities.................................................... 30%-70% 44.9% 42.2%International equities........................................... 0%-20% 13.0% 15.4%U.S. fixed income................................................ 20%-60% 41.7% 34.5%Cash............................................................. N/A 0.4% 7.9% ------ ------ 100.0% 100.0% ====== ====== The Company has a Supplemental Executive Retirement Plan ("SERP") for keyexecutives. This plan is non-qualified and unfunded. The benefit obligation for this plan as of December 31, 2008 and 2007 is asfollows: 2008 2007 ------- ------- CHANGE IN BENEFIT OBLIGATION Benefit obligation, beginning of period........ $ 5,207 $ 5,225 Service cost................................... -- 53 Interest cost.................................. 303 300 Actuarial (gain)/loss.......................... (135) 112 Benefits paid.................................. (107) (96) Plan amendments................................ 516 -- Curtailments................................... -- (387) ------- ------- Benefits obligation, end of period............. 5,784 5,207 ======= ======= Funded status.................................. $(5,784) $(5,207) ======= ======= In July 2008, the Board of Directors of the Company amended the SERP planto allow for lump sum payments effective January 1, 2009. If the lump sum valueas of January 1, 2009 was greater than $10, it will be paid in 10 equalactuarial equivalent installments; all others will be paid as a lump sum.Retirees as of January 1, 2009 were 64 CAMBREX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)(15) RETIREMENT PLANS AND OTHER POSTRETIREMENT BENEFITS -- (CONTINUED)allowed a one-time election in 2008 to continue under their current form ofpayment or switch to the 10 year installment option. All retirees chose the 10year installment option. The amounts recognized in accumulated other comprehensive (loss)/income asof December 31, 2008 and 2007 consist of the following: 2008 2007 ------ ---- Actuarial loss............................................. $ 540 $680Prior service cost......................................... 516 -- ------ ---- $1,056 $680 ====== ==== The components of net periodic benefit cost are as follows: 2008 2007 2006 ---- ---- ---- COMPONENTS OF NET PERIODIC BENEFIT COST Service cost......................................... $ -- $ 53 $193 Interest cost........................................ 303 300 254 Amortization of prior service cost................... -- 1 4 Recognized actuarial loss............................ 5 17 -- Curtailments......................................... -- 15 -- ---- ---- ---- Net periodic benefit cost............................ $308 $386 $451 ==== ==== ==== The sale of the businesses that comprised the Bioproducts and Biopharmasegments in February 2007 required the Company to recognize a curtailment chargeof $11 for the SERP plan in 2007 which is recorded in discontinued operations.In April 2007, the Board of Directors of the Company approved the suspension ofthe SERP plan effective August 31, 2007. As a result, the Company was requiredto recognize a curtailment charge of $4 in 2007. The estimated amounts that will be amortized from accumulated othercomprehensive loss into net periodic cost in 2009 is $57 related to priorservice cost. Major assumptions used in determining the benefit obligation and net costfor the Company's SERP plan are presented in the following table: BENEFIT OBLIGATION NET COST ----------- ------------------ 2008 2007 2008 2007 2006 ---- ---- ---- ---- ---- Discount rate................................. 5.60% 6.00% 6.00% 6.00% 5.75%Rate of compensation increase................. N/A 5.00% N/A 5.00% 5.00% 65 CAMBREX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)(15) RETIREMENT PLANS AND OTHER POSTRETIREMENT BENEFITS -- (CONTINUED) Estimated Future Benefit Payments The following benefit payments, which reflect expected future service, asappropriate, are expected to be paid: SERP BENEFITS ------------- 2009......................................................... $ 8002010......................................................... $ 7202011......................................................... $ 7202012......................................................... $ 7202013......................................................... $ 7202014-2018.................................................... $3,600 International Pension Plans A foreign subsidiary of the Company maintains a pension plan for theiremployees that conforms to the common practice in their respective country.Based on local laws and customs, this plan is not funded. The funded status of this plan, as of December 31, 2008 and 2007 is asfollows: 2008 2007 -------- -------- CHANGE IN BENEFIT OBLIGATION Benefit obligation, beginning of period.............. $ 18,563 $ 15,375 Service cost......................................... 520 462 Interest cost........................................ 831 665 Actuarial loss....................................... 757 1,237 Benefits paid........................................ (460) (364) Foreign exchange..................................... (3,577) 1,188 -------- -------- Benefit obligation, end of period.................... $ 16,634 $ 18,563 ======== ======== Funded status........................................ $(16,634) $(18,563) ======== ======== The amounts recognized in accumulated other comprehensive (loss)/income asof December 31, 2008 and 2007 consist of the following: 2008 2007 ------ ------ Actuarial loss............................................ $4,591 $4,079Prior service credit...................................... (58) (67) ------ ------ $4,533 $4,012 ====== ====== 66 CAMBREX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)(15) RETIREMENT PLANS AND OTHER POSTRETIREMENT BENEFITS -- (CONTINUED) The components of the net periodic pension cost are as follows: 2008 2007 2006 ------ ------ ------ COMPONENTS OF NET PERIODIC PENSION COST Service cost...................................... $ 520 $ 462 $ 539 Interest cost..................................... 831 665 539 Amortization of unrecognized net obligation....... -- -- (35) Amortization of prior service credit.............. (7) (7) (6) Recognized actuarial loss......................... 125 75 73 ------ ------ ------ Net periodic benefit cost......................... $1,469 $1,195 $1,110 ====== ====== ====== The estimated amounts that will be amortized from accumulated othercomprehensive loss into net periodic cost in 2009 are as follows: PENSION BENEFITS -------- Actuarial loss.................................................. $(127)Prior service credit............................................ 6 ----- Total......................................................... $(121) ===== Major assumptions used in determining the benefit obligation and net costfor the Company's international pension plan are presented in the followingtable: BENEFIT OBLIGATION NET COST ----------- ------------------ 2008 2007 2008 2007 2006 ---- ---- ---- ---- ---- Discount rate................................. 4.40% 4.25% 4.40% 4.25% 4.00%Rate of compensation increase................. 3.00% 3.00% 3.00% 3.00% 2.70% The aggregate ABO is $15,860 for the international plan as of December 31,2008. The international pension plan is unfunded. The Company does not expect to contribute cash to its international pensionplan in 2009. The following benefit payments, which reflect expected future service, asappropriate, are expected to be paid: PENSION BENEFITS ---------------- 2009........................................................ $ 4402010........................................................ $ 4882011........................................................ $ 5212012........................................................ $ 5342013........................................................ $ 6102014-2018................................................... $3,564 Savings Plan Cambrex makes available to all domestic employees a savings plan aspermitted under Sections 401(k) and 401(a) of the Internal Revenue Code.Employee contributions are matched in part by Cambrex. The cost of this planamounted to $592, $608 and $606 in 2008, 2007 and 2006, respectively. 67 CAMBREX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)(15) RETIREMENT PLANS AND OTHER POSTRETIREMENT BENEFITS -- (CONTINUED) Other Postretirement Benefits Cambrex provides post-retirement health and life insurance benefits("postretirement benefits") to all eligible retired employees. Employees whoretire at or after age 55 with fifteen years of service are eligible toparticipate in the postretirement benefit plans. Certain subsidiaries and allemployees hired after December 31, 2002 (excluding those covered by collectivebargaining) are not eligible for these benefits. The Company's responsibilityfor such premiums for each plan participant is based upon years of service. Suchplans are self-insured and are not funded. Effective January 1, 2006, theCambrex Retiree Medical Plan will no longer provide prescription coverage toretirees or dependents age 65 or over. The benefit obligation of the plan as of December 31, 2008 and September30, 2007, incorporating fourth quarter payments, is as follows: 2008 2007 ------ ------ CHANGE IN BENEFIT OBLIGATION Accumulated benefit obligation, beginning of period..... $1,757 $1,795 Service cost............................................ 25 21 Interest cost........................................... 109 107 Plan participants' contributions........................ 20 31 Actuarial gain.......................................... (4) (112) Benefits paid........................................... (65) (85) Effect of elimination early measurement date............ 16 -- ------ ------ Accumulated benefit obligation, end of period........... $1,858 $1,757 ====== ====== Amounts recognized in accumulated other comprehensive (loss)/income as ofDecember 31, 2008 and 2007 consist of the following: 2008 2007 ----- ----- Actuarial loss............................................. $ 824 $ 899Prior service credit....................................... (541) (735)Prior service credit....................................... (541) (735) ----- ----- $ 283 $ 164 ===== ===== The components of net periodic postretirement benefit cost are as follows: 2008 2007 2006 ----- ----- ----- COMPONENTS OF NET PERIODIC POSTRETIREMENT BENEFIT COST Service cost....................................... $ 25 $ 21 $ 60 Interest cost...................................... 109 107 109 Actuarial loss recognized.......................... 56 65 85 Amortization of unrecognized prior service cost.... (155) (156) (155) ----- ----- ----- Total periodic postretirement benefit cost......... $ 35 $ 37 $ 99 ===== ===== ===== 68 CAMBREX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)(15) RETIREMENT PLANS AND OTHER POSTRETIREMENT BENEFITS -- (CONTINUED) The estimated amounts that will be amortized from accumulated othercomprehensive loss into net periodic pension cost in 2009 are as follows: OTHER POSTRETIREMENT BENEFITS -------------- Actuarial loss............................................... $ 52Prior service credit......................................... (155) -----Total........................................................ $(103) ===== 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 ----------- ------------------ 2008 2007 2008 2007 2006 ---- ---- ---- ---- ---- WEIGHTED-AVERAGE ASSUMPTIONS:Discount rate.................................. 6.0% 6.25% 6.25% 6.00% 5.75% The following benefit payments, which reflect expected future service, asappropriate, are expected to be paid: OTHER POSTRETIREMENT BENEFITS -------------- 2009......................................................... $ 862010......................................................... $ 862011......................................................... $ 912012......................................................... $ 962013......................................................... $1022014-2018.................................................... $593 The assumed health care cost trend rate used to determine the accumulatedpostretirement benefit obligation is 8.5% in 2008 (9% in 2007) decreasingannually to an ultimate rate of 5% in 2013. A 1% increase in the assumed healthcare cost trend rate would increase the accumulated postretirement benefitobligation by $40 and would increase the sum of interest and service cost by $4.A 1% decrease would lower the accumulated postretirement benefit obligation by$47 and would decrease the sum of interest and service cost by $5. Other The Company has a non-qualified Compensation Plan for Key Executives ("theDeferred Plan"). Under the Deferred Plan, officers and key employees may electto defer all or any portion of their pre-tax earnings or to elect to deferreceipt of the Company's stock which would otherwise have been issued upon theexercise of the Company's options. Included within other liabilities at December31, 2008 and 2007 there is $3,012 and $4,614, respectively, representing theCompany's obligation under the plan. The Company invests in certain mutual fundsand as such, included within other assets at December 31, 2008 and 2007 is$3,012 and $4,614, respectively, representing the fair value of these funds.Total shares held in trust as of December 31, 2008 and 2007 are 195,851 and areincluded as a reduction of equity at cost. The value of the shares held in trustand the corresponding liability of $905 at December 31, 2008 has been recordedin equity. The Deferred Plan is not funded by the Company, but the Company hasestablished a Deferred Compensation Trust Fund which holds the shares issued. 69 CAMBREX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)(16) FOREIGN OPERATIONS AND SALES The following summarized data represents the gross sales and long livedtangible assets for the Company's domestic and foreign entities for 2008, 2007and 2006: DOMESTIC FOREIGN TOTAL -------- -------- -------- 2008Gross sales..................................... $81,707 $167,911 $249,618Long-lived assets............................... 42,621 154,257 196,8782007Gross sales..................................... $81,429 $171,145 $252,574Long-lived assets............................... 42,103 159,106 201,2092006Gross sales..................................... $82,462 $154,197 $236,659Long-lived assets............................... 42,830 131,606 174,436 Export sales, included in domestic gross sales, in 2008, 2007 and 2006amounted to $24,602, $28,821, and $28,825, respectively. Sales to geographic area consist of the following: 2008 2007 2006 -------- -------- -------- North America.................................. $ 86,631 $ 85,644 $ 85,944Europe......................................... 143,542 150,692 136,545Asia........................................... 11,440 9,125 8,041Other.......................................... 8,005 7,113 6,129 -------- -------- -------- Total........................................ $249,618 $252,574 $236,659 ======== ======== ======== This table summarizes gross sales by product groups: 2008 2007 2006 -------- -------- -------- APIs and pharmaceutical intermediates.......... $220,722 $220,386 $206,193Other.......................................... 28,896 32,188 30,466 -------- -------- -------- Total........................................ $249,618 $252,574 $236,659 ======== ======== ======== Two customers each account for 10% of consolidated gross sales for theyears ended December 31, 2008, 2007 and 2006. One customer is a pharmaceuticalcompany with which a long-term sales contract is in effect, account for 10.0%,11.2% and 12.3% for 2008, 2007 and 2006, respectively. The second customer is adistributor representing multiple customers, accounted for 11.8%, 12.5% and14.5% for 2008, 2007 and 2006, respectively. 70 CAMBREX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)(17) COMMITMENTS The Company has operating leases expiring on various dates through the year2014. The leases are primarily for the rental of office space, office andlaboratory equipment and vehicles. At December 31, 2008, future minimumcommitments under non-cancelable operating lease arrangements were as follows: Year Ended December 31:2009............................................................ $2,2652010............................................................ 2,1642011............................................................ 7072012............................................................ 6722013............................................................ 2972014 and thereafter............................................. 27 ------Total commitments............................................... $6,132 ====== Total operating lease expense was $2,270, $2,270 and $2,363 for the yearsended December 31, 2008, 2007 and 2006, 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 obligationsmainly include commitments to purchase raw materials and for the construction ofa new manufacturing facility. At December 31, 2008 future commitments underthese obligations were as follows: Year Ended December 31:2009........................................................... $ 6,8192010........................................................... 3,4102011........................................................... 2,4252012........................................................... 1,4822013........................................................... -- -------Total commitments.............................................. $14,136 =======(18) 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. Thesematters, either individually or in the aggregate, could have a material adverseeffect on the Company's financial condition, operating results and cash flows ina future reporting period. Environmental In connection with laws and regulations pertaining to the protection of theenvironment, the Company and its subsidiaries are a party to severalenvironmental proceedings and remediation investigations and cleanups and, alongwith other companies, have been named potentially responsible parties ("PRP")for certain waste disposal sites ("Superfund sites"). Additionally, the Companyhas retained the liability for certain environmental proceedings, associatedwith the sale of the Rutherford Chemicals business. 71 CAMBREX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)(18) CONTINGENCIES -- (CONTINUED) Each of these matters is subject to various uncertainties, and it ispossible that some of these matters will be decided unfavorably against theCompany. The resolution of such matters often spans several years and frequentlyinvolves regulatory oversight or adjudication. Additionally, many remediationrequirements are not fixed and are likely to be affected by futuretechnological, site, and regulatory developments. Consequently, the ultimateextent of liabilities with respect to such matters, as well as the timing ofcash 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 $6,226 and$6,905 at December 31, 2008 and December 31, 2007, respectively. The decrease inthe accrual includes payments of $633 and the impact of currency of $303partially offset by adjustments to reserves of $257. Based upon availableinformation and analysis, the Company's current accrual represents management'sbest estimate of the probable and estimable costs associated with environmentalproceedings including amounts for investigation fees where remediation costs maynot be estimable at the reporting date. CasChem ISRA As a result of the sale of the Bayonne, New Jersey facility, the Companybecame obligated to investigate site conditions and conduct required remediationunder the New Jersey Industrial Site Recovery Act ("ISRA"). The Companycompleted a preliminary assessment of the site and submitted the preliminaryassessment to the New Jersey Department of Environmental Protection ("NJDEP").The preliminary assessment identified potential areas of concern based onhistorical operations and sampling of such areas commenced. The Company hascompleted a second phase of sampling and determined that a third phase ofsampling is necessary to determine the extent of contamination and any necessaryremediation. The results of the completed and proposed sampling, and anyadditional sampling deemed necessary, will be used to develop an estimate of theCompany's future liability for remediation costs, if any. The Company submittedits plan for the third phase of sampling to the NJDEP during the fourth quarterof 2005. The sampling will commence upon approval of the sampling plan. Cosan The Company's Cosan subsidiary conducted manufacturing operations inClifton, New Jersey from 1968 until 1979. Prior to the acquisition of Cosan bythe Company, the operations were moved to another location and thereafterCambrex purchased the business. In 1997, Cosan entered into an AdministrativeConsent Order with the NJDEP. Under the Administrative Consent Order, Cosan wasrequired to complete an investigation of the extent of the contamination relatedto the Clifton site and conduct remediation as may be necessary. During thethird quarter of 2005, the Company completed the investigation related to theClifton site, which extends to adjacent properties. The results of theinvestigation caused the Company to increase its related reserves by $1,300 in2005 based on the proposed remedial action plan. The Company submitted theresults of the investigation and proposed remedial action plan to the NJDEP. Inlate 2006, the NJDEP requested that an additional investigation be conducted atthe site. The Company estimated that the additional work will cost approximately$240, and as such, increased the related reserve in the first quarter of 2007.The Company submitted its plan for additional work to the NJDEP in April 2007.In August 2007 the NJDEP approved the Company's work plan and the additionalinvestigation has been partially completed. The Company has submitted an interimreport to NJDEP and is proceeding to complete the investigation. As of December31, 2008, the reserve was $1,260. The results of the additional investigationmay impact the remediation plan and costs. Additionally, there is a reserve of $929 as of December 31, 2008 for theCosan Carlstadt, N.J. site related to an Administrative Consent Order with theNJDEP entered into in 1985 in connection with the acquisition of Cosan. In 72 CAMBREX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)(18) CONTINGENCIES -- (CONTINUED)September 2004, the reserve was increased based on the investigations completedto date and the proposed Remedial Action Work Plan ("RAW") submitted to theNJDEP for their approval. The NJDEP subsequently rejected the RAW and requiredthe Company to perform additional investigative work prior to approval of a newRAW. The Company's reserves were increased to cover the additional investigativework. The results of this additional investigative work may impact the RAW andcosts. Berry's Creek In March 2006, the Company received notice from the United StatesEnvironmental Protection Agency ("USEPA") that two former operating subsidiariesare considered PRPs at the Berry's Creek Superfund Site, Bergen County, NewJersey. The operating companies are among many other PRPs that were listed inthe notice. Pursuant to the notice, the PRPs have been asked to perform aremedial investigation and feasibility study of the Berry's Creek Site. TheCompany has met with the other PRPs. Both operating companies joined the groupof PRPs and filed a joint response to the USEPA agreeing to jointly negotiate toconduct or fund (along with other PRPs) an appropriate remedial investigationand feasibility study of the Berry's Creek Site. The PRPs have engaged technicaland allocation consultants to evaluate investigation and remedial alternativesand develop a method to allocate related costs among the PRPs. In December 2007the PRPs reached a tentative agreement on the allocation of the siteinvestigation costs and at December 31, 2008 the Company's reserve was $498. Theinvestigation is expected to take several years and at this time it is too earlyto predict the extent of any additional liabilities. Nepera, Inc. -- Maybrook and Harriman Sites In 1987, Nepera, Inc. ("Nepera") was named a PRP along with certain priorowners of the Maybrook Site in Hamptonburgh, New York by the USEPA in connectionwith the disposition, under appropriate permits, of wastewater at that siteprior to Cambrex's acquisition of Nepera in 1986. The Maybrook Site is on theUSEPA's National Priorities List for remedial work. A prior owner of the Neperafacility has participated with Nepera in the performance of a remedialinvestigation and feasibility study for the Maybrook Site. In September 2007,the USEPA issued the Record of Decision ("ROD") which describes the remedialplan for the Maybrook Site. The USEPA also issued the Company and the priorowner a Notice of Potential Liability and the recipients have signed a ConsentDecree to complete the ROD and pay the USEPA certain past oversight costs andhave provided the USEPA with appropriate financial assurance, including a letterof credit to guarantee the recipient's obligation under the Consent Decree. In 1987, Nepera was also named as a responsible party along with certainprior owners of the Harriman, New York production facility by the New York StateDepartment of Environmental Conservation in connection with contamination at theHarriman Site. A prior owner of the Nepera facility has participated with Neperain the performance of the remedial investigation and feasibility study for theHarriman Site. In 1997, a final ROD was issued which describes the remediationplan for the site. Nepera and the prior owner have been implementing the RODsince 1997. Until 1997, reserves were assessed and established based on the informationavailable. In November 1997, a settlement was reached between Nepera, Inc., theformer owner mentioned above, and the original owner of the Harriman operations,pertaining to past and future costs of remediating the Maybrook and HarrimanSites ("the Sites"). Under the terms of the settlement, the original site ownerpaid approximately $13,000 to provide for past and future remediation costs atthe two sites in exchange for a release from the requirement to clean up the twosites, and the settlement funds were placed in a trust for the benefit ofremediating the two sites on behalf of Nepera and the other former site owner.Nepera and the prior owner were reimbursed their past costs from the trust.Nepera had believed that the remaining funds available in the trust would besufficient to provide for the future remediation costs for the Sites.Accordingly, the estimated range of liability for the Sites was offset againstthe settlement funds. 73 CAMBREX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)(18) CONTINGENCIES -- (CONTINUED) Based on available information, Nepera believed that the current trustbalance would not cover the remaining work to be completed at Harriman and underthe final Maybrook ROD issued in September 2007. As such the Company increasedits reserve by $1,000 during 2007, which was recorded in discontinuedoperations. As of December 31, 2008, the reserve recorded on the books was$1,200. The foregoing matters were retained by Cambrex under the 2003 PurchaseAgreement as well as the settlement reached in the Rutherford matter. Solvent Recoveries Superfund Site In 1992, the USEPA notified Humphrey Chemical Co., Inc. ("Humphrey") of itspossible involvement as one of approximately 1,300 PRPs at a Superfund site("the site") in Southington, Connecticut, once operated by Solvent Recoveries,Inc. Humphrey joined the PRP group, which has agreed with the USEPA to perform aRemedial Investigation/Feasibility Study ("RIFS"). The RIFS has been completedand the USEPA has proposed remediation of the Site. In September 2008, Humphreyagreed to enter into a consent decree and settlement with the other PRPs and theUSEPA whereby Humphrey agreed to pay a settlement amount of $353 with an initialpayment of $106 and the remaining $247 to be paid in installments over time asthe remediation proceeds. The Company has reserved for the unpaid portion of thesettlement and has entered into a letter of credit to guarantee the paymentobligation under the settlement. 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 adjusting or recordingan accrual, should an accrual ultimately be required. Newark Bay Complex Litigation CasChem and Cosan have been named as two of several hundred third-partydefendants in a third-party complaint filed in February 2009, by Maxus EnergyCorporation ("Maxus") and Tierra Solutions, Inc. ("Tierra"). The originalplaintiffs include the NJDEP, the Commissioner of the NJDEP and theAdministrator of the NJ Spill Compensation Fund, which originally filed suit in2005 against Maxus, Tierra and other defendants seeking recovery of cleanup andremoval costs for alleged discharges of dioxin and other hazardous substancesinto the Passaic River, Newark Bay, Hackensack River, Arthur Kill, Kill Van Kulland adjacent waters (the "Newark Bay Complex"). Maxus and Tierra are now seekingcontribution from third-party defendants for any cleanup and removal costs forwhich each may be held liable in the lawsuit. Maxus and Tierra also seekrecovery for cleanup and removal costs, that each has incurred or will incurrelating to the Newark Bay Complex. The Company expects to vigorously defendagainst the lawsuit. At this time it is too early to predict whether the Companywill have any liability in this matter. 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., ("Gyma") Profarmaco's distributor in the United States) in a proceedinginstituted by the Federal Trade Commission ("FTC") in the United States DistrictCourt for the District of Columbia (the "District Court"). Suits were alsocommenced by several State Attorneys' General. The suits alleged violations ofthe Federal Trade Commission Act arising from exclusive license agreementsbetween Profarmaco and Mylan covering two APIs. The FTC and Attorneys' Generalsuits were settled in February 2001, with Mylan (on its own behalf and on behalfof Profarmaco and Cambrex) agreeing to pay over $140,000 and with Mylan,Profarmaco and Cambrex agreeing to monitor certain future conduct. 74 CAMBREX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)(18) CONTINGENCIES -- (CONTINUED) The same parties including the Company and Profarmaco have also been 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. All of these cases have been resolvedexcept for one brought by three health care insurers known as In Re Lorazepam &Clorazepate Antitrust Litigation. In April 2003, Cambrex reached an agreement with Mylan under which Cambrexwould contribute $12,415 to the settlement of litigation brought by a class ofdirect purchasers which has been fully paid as of December 31, 2008. Inexchange, Cambrex and Profarmaco received from Mylan a release and fullindemnity against future costs or liabilities in related litigation brought bypurchasers, as well as potential future claims related to this matter. In February 2008 the District Court, in the In Re Lorazepam & ClorazepateAntitrust Litigation, entered judgment after trial against Mylan, Gyma andCambrex in the amount of $8,355, payable jointly and severally, and also apunitive damage award against each of Mylan, Gyma and Cambrex in the amount of$16,709. In addition, in October 2008, the District Court ruled that Mylan, Gymaand Cambrex were also subject to a total of approximately $7,000 in prejudgmentinterest. The parties will appeal the awards. Cambrex expects any payment of thejudgment against it to be made by Mylan under the indemnity described above. Vitamin B-3 In May 1998, Nepera, which manufactured and sold niacinamide ("Vitamin B-3"), received a Federal Grand Jury subpoena for the production of documentsrelating to the pricing and possible customer allocation with regard to thatproduct. In 2000, Nepera reached an agreement with the government as to itsalleged role in Vitamin B-3 violations from 1992 to 1995. The Canadiangovernment claimed similar violations. All government suits in the U.S. andCanada have been concluded. Nepera was named as a defendant, along with several other companies, in anumber 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. The balance of the reserves recorded within accrued liabilities related tothis matter is $1,577 as of December 31, 2008 and is sufficient to cover thesettlement. Baltimore Litigation In 2001, the Company acquired a biopharmaceutical manufacturing business inBaltimore (the "Baltimore Business"). The sellers of the Baltimore Businessfiled suit against the Company alleging that the Company made falserepresentations during the negotiations on which the sellers relied in decidingto sell the business and that the Company breached its obligation to payadditional consideration as provided in the purchase agreement which wascontingent on the performance of the Baltimore Business. In August 2007 the United States District Court, Southern District of NewYork, granted the Company's pending Motion for Summary Judgment in the BaltimoreLitigation. The Sellers have filed a notice of appeal and oral arguments on theappeal are scheduled for March 2009. Management continues to believe the matterto be without merit and continues its defense of this matter. Other The Company has commitments incident to the ordinary course of businessincluding corporate guarantees of certain subsidiary obligations to theCompany's lenders related to financial assurance obligations under certainenvironmental laws for remediation, closure and third party liabilityrequirements of certain of its subsidiaries and a 75 CAMBREX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)(18) CONTINGENCIES -- (CONTINUED)former operating location; contract provisions for indemnification protectingits customers and suppliers against third party liability for manufacture andsale of Company products that fail to meet product warranties and contractprovisions for indemnification protecting licensees against intellectualproperty infringement related to licensed Company technology or processes. Additionally, as permitted under Delaware law, the Company indemnifies itsofficers and directors for certain events or occurrences while the officer ordirector is, or was, serving at the Company's request in such capacity. The termof the indemnification period is for the officer's or director's lifetime. Themaximum potential amount of future payments the Company could be required tomake under these indemnification agreements is unlimited; however, the Companyhas a Director and Officer insurance policy that covers a portion of anypotential exposure. The Company currently believes the estimated fair value ofits indemnification agreements is not significant based on currently availableinformation, and as such, the Company has no liabilities recorded for theseagreements as of December 31, 2008. In addition to the matters identified above, Cambrex's subsidiaries areparty to a number of other proceedings that are not considered material at thistime.(19) DISCONTINUED OPERATIONS In October 2006, the Company sold two businesses within the former HumanHealth segment for nominal consideration. As a result of the transaction, theCompany reported a non-cash charge of $23,244 in the fourth quarter of 2006 andthe results of these businesses are presented as discontinued operations. In February 2007, the Company completed the sale of the businesses thatcomprised the Bioproducts and Biopharma segments (excluding certain liabilities)to Lonza for total cash consideration of $463,914, including working capitaladjustments. As a result of this transaction, the Company reported a gain of$235,489 in 2007 and all periods presented reflect the results of thesebusinesses as discontinued operations. In July 2007 the Company entered into a Settlement Agreement and a relatedEscrow Agreement settling litigation which had been commenced by the purchasersof the Rutherford Business by the filing of the Complaint in April 2006. As aresult of this settlement, the Company's 2007 results include a charge of$4,041, net of tax of $595, recorded in discontinued operations. In addition,during 2007 the Company recorded expense of $1,000 for an adjustment to anenvironmental reserve at a Rutherford Business site. Refer to Note 18 for acomplete discussion on these matters. The 2006 pre-tax income of discontinuedoperations includes $2,092 for an asset impairment charge, $1,791 due to theacquisition of Cutanogen and $1,475 for the write-down of an investment inequity securities. 76 CAMBREX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)(19) DISCONTINUED OPERATIONS -- (CONTINUED) The following table shows revenues and income/(loss) from the discontinuedoperations: 2007 2006 -------- -------- Revenues............................................... $ 20,335 $246,538 ======== ========Pre-tax income of discontinued operations.............. $ 545 $ 5,945Gain on sale of Bioproducts and Biopharma segments..... 235,489 --Rutherford litigation settlement....................... (4,636) --Rutherford environmental reserve adjustment............ (1,000) (200)Loss on sale of Cork and Landen........................ -- (23,244) -------- --------Income/(loss) from discontinued operations before income taxes......................................... $230,398 $(17,499)Provision for income taxes............................. 7,639 4,207 -------- --------Income/(loss) from discontinued operations, including gains/(losses) from dispositions, net of tax......... $222,759 $(21,706) ======== ======== 77 CAMBREX CORPORATION AND SUBSIDIARIES SELECTED QUARTERLY FINANCIAL AND SUPPLEMENTARY DATA -- UNAUDITED (IN THOUSANDS, EXCEPT PER SHARE DATA) 1ST 2ND 3RD 4TH QUARTER(1) QUARTER(2) QUARTER(3) QUARTER(4) ---------- ---------- ---------- ---------- 2008Gross sales............................. $61,706 $66,226 $56,508 $65,178Net revenues............................ 60,990 65,813 58,292 64,133Gross profit............................ 21,929 19,811 16,235 15,768Income/(loss) from continuing operations............................ 4,246 1,836 2,797 (950)Net income/(loss)....................... 4,246 1,836 2,797 (950)Basic earnings per share:(9) Income/(loss) from continuing operations......................... 0.15 0.06 0.10 (0.03) Net income/(loss)..................... 0.15 0.06 0.10 (0.03)Diluted earnings per share:(9) Income/(loss) from continuing operations......................... 0.15 0.06 0.10 (0.03) Net income/(loss)..................... 0.15 0.06 0.10 (0.03)Average shares: Basic................................. 29,035 29,090 29,163 29,175 Diluted............................... 29,093 29,101 29,178 29,175 1ST 2ND 3RD 4TH QUARTER(5) QUARTER(6) QUARTER(7) QUARTER(8) ---------- ---------- ---------- ---------- 20072007Gross sales............................. $ 64,997 $63,081 $54,742 $69,754Net revenues............................ 65,214 62,855 54,614 69,822Gross profit............................ 24,395 23,938 18,521 24,378(Loss)/income from continuing operations............................ (14,443) 2,455 (2,736) 1,213Net income.............................. 205,216 2,274 1,493 265Basic earnings per share:(9)(Loss)/income from continuing operations............................ (0.51) 0.09 (0.09) 0.04 Net income............................ 7.31 0.08 0.05 0.01Diluted earnings per share:(9) (Loss)/income from continuing operations......................... (0.51) 0.08 (0.09) 0.04 Net income............................ 7.31 0.08 0.05 0.01Average shares: Basic................................. 28,071 28,711 28,934 29,002 Diluted............................... 28,071 28,949 28,934 29,040 The sale of the businesses that comprised the Bioproducts and Biopharmasegments was completed in February 2007, and accordingly, these businesses arebeing reported as discontinued operations in all periods presented.(1) Income from continuing operations include pre-tax charges of $177 within operating expenses for the costs related to strategic alternatives and $634 within operating expenses for restructuring costs.(2) Income from continuing operations include pre-tax charges of $398 within operating expenses for the costs related to strategic alternatives, $514 within operating expenses for restructuring costs and $597 within operating expenses for the acceleration of equity awards related to the former CEO's retirement. 78(3) Income from continuing operations include pre-tax charges of $833 within operating expenses for the costs related to strategic alternatives, $321 within operating expenses for restructuring costs and $35 within operating expenses for the modification of equity awards related to the former CEO's retirement.(4) Loss from continuing operations include pre-tax charges of $107 within operating expenses for the costs related to strategic alternatives, $3,226 within operating expenses for restructuring costs and $408 within operating expenses related to the former CEO's retirement.(5) Loss from continuing operations include pre-tax charges of $23,130 within operating expenses for the costs related to strategic alternatives, $1,682 within operating expenses for restructuring costs and $841 within interest expense for the write-off of unamortized debt costs. Discontinued operations include the gain on sale of the businesses that comprised the Bioproducts and Biopharma segments of $232,116.(6) Income from continuing operations include pre-tax charges of $4,564 within operating expenses for the costs related to strategic alternatives and $1,901 within operating expenses for restructuring costs. Discontinued operations include an adjustment to the gain on sale of the businesses that comprised the Bioproducts and Biopharma segments of $3,491 (primarily for the working capital adjustment) and expense of $4,602 for the Rutherford litigation settlement.(7) Loss from continuing operations include pre-tax charges of $866 within operating expenses for the costs related to strategic alternatives and $451 within operating expenses for restructuring costs. Discontinued operations include a charge of $69 to the gain on sale of the businesses that comprised the Bioproducts and Biopharma segments businesses and expense of $400 for an adjustment to a reserve at a Rutherford Business site.(8) Income from continuing operations include pre-tax charges of $2,567 within operating expenses for the costs related to strategic alternatives and $2,039 within operating expenses for restructuring costs. Discontinued operations include a charge of $49 to the gain on sale of the businesses that comprised the Bioproducts and Biopharma segments, expense of $600 for an adjustment to a reserve at a Rutherford Business site and expense of $34 for an adjustment to the Rutherford litigation settlement.(9) Earnings per share calculations for each of the quarters are based on the weighted average number of shares outstanding for each period, as such, the sum of the quarters may not necessarily equal the earnings per share amount for the year. 79ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None.ITEM 9A CONTROLS AND PROCEDURESCONCLUSION 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 as of December 31, 2008 our disclosure controls and procedureswere effective to provide reasonable assurance that information required to bedisclosed by us in the reports that we file or submit under the SecuritiesExchange Act of 1934 is recorded, processed, summarized, reported, accumulatedand communicated to management, including the Company's Chief Executive Officerand Chief Financial Officer within the time periods specified in the Securitiesand Exchange Commission's rules and forms.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 Rule 13a-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 overfinancial reporting as of December 31, 2008 based on the InternalControl -- Integrated Framework issued by the Committee of SponsoringOrganizations of the Treadway Commission ("COSO"). Our management concluded thatbased on its assessment, our internal control over financial reporting waseffective as of December 31, 2008. Effectiveness of 80our internal control over financial reporting as of December 31, 2008 has beenaudited by BDO Seidman, LLP, an independent registered public accounting firm,as stated in their report which appears elsewhere herein.CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING There were no changes in our internal control over financial reportingidentified in connection with the evaluation required by paragraph (d) ofExchange Act Rules 13a-15 or 15d-15 that occurred during our last fiscal quarterthat have materially affected, or are reasonably likely to materially affect,our internal control over financial reporting.ITEM 9B OTHER INFORMATION None. 81 PART IIIITEM 10 DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE. EXECUTIVE OFFICERS OF THE REGISTRANT The following table lists the officers of the Company:NAME AGE OFFICE---- --- ------ Steven M. Klosk*................. 51 President, Chief Executive OfficerJames G. Farrell................. 42 Vice President and Corporate ControllerPaolo Russolo*................... 64 President, Profarmaco MilanoGregory P. Sargen*............... 43 Vice President & Chief Financial OfficerF. Michael Zachara*.............. 45 Vice President, 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. Klosk joined Cambrex in October 1992 and has served as President &Chief Executive Officer since May 2008. He also became a member of the Board ofDirectors in May 2008. Mr. Klosk joined the Company as Vice President,Administration. He was appointed Executive Vice President, Administration inOctober 1996 and was promoted to the position of Executive Vice President,Administration and Chief Operating Officer for the Cambrex Pharma andBiopharmaceutical Business Unit in October 2003. In January 2005, Mr. Kloskassumed direct responsibility for the leadership of the BiopharmaceuticalBusiness Unit as Chief Operating Officer. In August 2006, Mr. Klosk assumed theresponsibility of the Pharma business as Executive Vice President and ChiefOperating Officer -- Biopharma & Pharma and in February 2007 was appointed toExecutive Vice President, Chief Operating Officer & President, PharmaceuticalProducts and Services. From 1988 until he joined Cambrex, Mr. Klosk was VicePresident, Administration and Corporate Secretary for The Genlyte Group, Inc.From 1985 to 1988, he was Vice President, Administration for Lightolier, Inc., asubsidiary of The Genlyte Group, Inc. Mr. Farrell joined Cambrex in September 2005 and has served as VicePresident and Corporate Controller since July 2007. Mr. Farrell previously heldthe position of Corporate Controller. Mr. Farrell was briefly employed during apart of 2008 by PDI, Inc. as Vice President and Corporate Controller/InterimChief Financial Officer. Mr. Farrell returned to Cambrex in late 2008. From 1994until 2005, he was with Ingersoll-Rand Company, most recently as Director,Accounting Policy, Procedures and External Reporting. Mr. Farrell was with Ernst& Young from 1988 to 1994, most recently as Audit Manager. Dr. Russolo is President, Profarmaco Milano and joined the Company in 1994with the acquisition of Profarmaco Nobel S.r.l. in Milan Italy, where he servedas Managing Director since 1982. Dr. Russolo joined Profarmaco Nobel S.r.l. in1971. Upon the acquisition of Profarmaco Nobel S.r.l., Dr. Russolo continuedserving in the role of Managing Director until 2000, when he was appointed toPresident, Cambrex Profarmaco Business Unit. Upon the completion of the sale ofthe Landen facility Dr. Russolo assumed his current position. Mr. Sargen joined Cambrex in February 2003 and has served as Vice Presidentand Chief Financial Officer since February 2007. Mr. Sargen previously held theposition of Vice President, Finance. Previously, he was with Exp@nets, Inc. from1999 through 2002, serving in the roles of Executive Vice President,Finance/Chief Financial Officer and Vice President/Corporate Controller. From1996 to 1998, he was with Fisher Scientific International's ChemicalManufacturing Division, serving in the roles of Vice President, Finance andController. Mr. Sargen has also held various positions in finance, accountingand audit with Merck & Company, Inc., Heat and Control, Inc., and Deloitte &Touche. Mr. Zachara joined Cambrex in June 2008 and has served as Vice President,General Counsel and Corporate Secretary since February 2009. Mr. Zacharaformerly held the position of Assistant General Counsel and Assistant CorporateSecretary. Previously, he was with Sun Chemical Corporation from 1997 to 2008 asSenior Corporate Attorney, Assistant Secretary and Director of Real Estate. From1994 to 1997, he was with Brown & Wood LLP, a 82New York firm as Associate, Real Estate/Environmental Department. Mr. Zacharahas also held positions with Shanley & Fisher, P.C. and James C. AndersonAssociates.ITEM 11 EXECUTIVE COMPENSATION.ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE.ITEM 14 PRINCIPAL ACCOUNTANT FEES AND SERVICES. The remaining information called for by Part III is hereby incorporated byreference to the information set forth under the captions "PrincipalStockholders," "Common Stock Ownership by Directors and Executive Officers,""Board of Directors," "Election of Directors," "Section 16(a) BeneficialOwnership Reporting Compliance," "Code of Ethics," "Compensation CommitteeInterlocks and Insider Participation," "Compensation Committee Report onExecutive Compensation," "Executive and Other Compensation," "Executive andOther Compensation," "Audit Committee Report" and "Principal Accounting FirmFees" in the registrant's definitive proxy statement for the Annual Meeting ofStockholders, to be held April 23, 2009, which meeting involves the election ofdirectors, which definitive proxy statement is being filed with the Securitiesand Exchange Commission pursuant to Regulation 14A. 83 PART IVITEM 15 EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (a) 1. The following consolidated financial statements of the Company arefiled as part of this report: PAGE NUMBER (IN THIS REPORT) ---------------- Financial Statements: Reports of Independent Registered Public Accounting Firms......... 36 Consolidated Balance Sheets as of December 31, 2008 and 2007................. 39 Consolidated Statements of Operations for the Years Ended December 31, 2008, 2007 and 2006............ 40 Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 2008, 2007 and 2006.. 41 Consolidated Statements of Cash Flows for the Years Ended December 31, 2008, 2007 and 2006............ 42 Notes to Consolidated Financial Statements..... 43 Selected Quarterly Financial and Supplementary Data (unaudited).............. 78 (a) 2. (i) The following schedule to the consolidated financial statementsof the Company as filed herein and the Report of Independent Registered PublicAccounting Firms are filed as part of this report. PAGE NUMBER (IN THIS REPORT) ---------------- Schedule II -- Valuation and Qualifying Accounts......... 85 All other schedules are omitted because they are not applicable or 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 88 - 91. 84 SCHEDULE II CAMBREX CORPORATION VALUATION AND QUALIFYING ACCOUNTS FOR THE YEARS ENDED DECEMBER 31, 2008, 2007 AND 2006 (DOLLARS IN THOUSANDS) COLUMN C ----------------------------- ADDITIONS COLUMN B ----------------------------- COLUMN E --------- CHARGED/ CHARGED/ -------- COLUMN A BALANCE (CREDITED) TO (CREDITED) TO COLUMN D BALANCE -------- BEGINNING COST AND OTHER ---------- END OFDESCRIPTION OF YEAR EXPENSES ACCOUNTS DEDUCTIONS YEAR----------- --------- ------------- ------------- ---------- -------- Year ended December 31, 2008: Doubtful trade receivables and returns and allowances......... $ 560 $ 600 $ (41) $ 14 $ 1,105 Deferred tax valuation allowance.. 64,842 3,762 10,626 -- 79,230Year ended December 31, 2007: Doubtful trade receivables and returns and allowances......... $ 571 $ 55 $ 35 $101 $ 560 Deferred tax valuation allowance.. 91,403 (21,241)* (5,320) -- 64,842Year ended December 31, 2006: Doubtful trade receivables and returns and allowances......... $ 508 $ 53 $ 62 $ 52 $ 571 Deferred tax valuation allowance.. 82,953 11,804 (3,354) -- 91,403* Includes $(31,584) related to discontinued operations. 85 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the 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/ GREGORY P. SARGEN ------------------------------------- Gregory P. Sargen Vice President and Chief Financial Officer Date: February 19, 2009 Pursuant to the requirements of the Securities Exchange Act of 1934, 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/ STEVEN M. KLOSK President and Chief Executive ) Officer------------------------------------- Steven M. Klosk/s/ GREGORY P. SARGEN Vice President and Chief ) Financial Officer (Principal------------------------------------- Financial Officer and Accounting Gregory P. Sargen Officer)/s/ JOHN R. MILLER* Chairman of the Board of ) Directors------------------------------------- John R. Miller/s/ DAVID R. BETHUNE* Director )------------------------------------- David R. Bethune/s/ ROSINA B. DIXON,* Director )------------------------------------- Rosina B. Dixon, M.D./s/ ROY W. HALEY* Director )------------------------------------- Roy W. Haley/s/ KATHRYN RUDIE HARRIGAN,* Director )------------------------------------- Kathryn Rudie Harrigan, PhD/s/ LEON J. HENDRIX, JR.* Director ) February 19, 2009------------------------------------- Leon J. Hendrix, Jr./s/ ILAN KAUFTHAL* Director )------------------------------------- Ilan Kaufthal 86 SIGNATURE TITLE DATE --------- ----- ---- /s/ WILLIAM KORB* Director )------------------------------------- William Korb/s/ PETER G. TOMBROS* Director )------------------------------------- Peter G. Tombros*By /s/ STEVEN M. KLOSK* -------------------------------- Steven M. Klosk Attorney-in-Fact 87 EXHIBIT INDEX EXHIBIT NO. DESCRIPTION ----------- ----------- 3.1 -- Restated Certificate of Incorporation of registrant, as amended.(W).3.2 -- By Laws of registrant, as amended.(W).4.1 -- Form of Certificate for shares of Common Stock of registrant.(A -- Exhibit 4(a)).10.1 -- Purchase Agreement dated July 11, 1986, as amended, between the registrant and ASAG, Inc. (A -- Exhibit 10(r)).10.2 -- Asset Purchase Agreement dated as of June 5, 1989 between Whittaker Corporation and the registrant.(B -- Exhibit 10(a)).10.3 -- Asset Purchase Agreement dated as of July 1, 1991 between Solvay Animal Health, Inc. and the registrant.(C).10.4 -- Asset Purchase Agreement dated as of March 31, 1992 between Hexcel Corporation and the registrant.(E).10.5 -- Stock Purchase Agreement dated as of September 15, 1994 between Akzo Nobel AB, Akzo Nobel NV and the registrant, for the purchase of Nobel Chemicals AB.(H).10.6 -- Stock Purchase Agreement dated as of September 15, 1994 between Akzo Nobel AB, Akzo Nobel and the registrant, for the purchase of Profarmaco Nobel, S.r.l.(H).10.7 -- Stock purchase agreement dated as of October 3, 1997 between BioWhittaker and the registrant.(M).10.8 -- Asset purchase agreement dated as of August 7, 2003 between Rutherford Acquisition Corporation and Cambrex Corporation and The Sellers listed in the asset Purchase agreement.(O).10.9 -- Credit Agreement dated as of April 6, 2007 between Cambrex Corporation, the subsidiary borrowers party hereto, the subsidiary guarantors party hereto, the lenders party hereto and JP Morgan Chase Bank, N.A., as Administrative Agent.(JJ). Chase Bank, N.A., as Administrative Agent.(JJ).10.10 -- Settlement Agreement and Release and Environmental Escrow Agreement dated July 30, 2007 between Rutherford Chemicals LLC, Vertellus Specialties Holdings UK Ltd. (formerly Rutherford Chemicals UK Ltd.), Vertellus Specialties UK Ltd. (formerly Seal Sands Chemicals Ltd.), and Vertellus Specialties Holdings Corp. (formerly Rutherford Chemicals Holdings Corp.), and Cambrex Corporation, Nepera, Inc., CasChem Inc., Zeeland Chemicals, Inc., Nepcam, Inc., and Cambrex Ltd.(X).10.11 -- Peter E. Thauer Letter Agreement dated December 21, 2007.(LL).10.12 -- Supplemental Executive Retirement Plan Change of Control Amendment.(MM).10.13 -- Retention and Enhanced Severance Program.(Y).10.14 -- 2007 Retention Program.(AA).10.15 -- James A. Mack Compensation Agreement, as amended.(Y)(Z).10.16 -- 1994 Stock Option Plan.(G).10.17 -- 1996 Performance Stock Option Plan.(L).10.18 -- 1998 Performance Stock Option Plan.(N).10.19 -- 2000 Employee Performance Stock Option Plan.(N).10.20 -- Form of Employment Agreement (amended and restated) between the registrant and its executive officers named in the Revised Schedule of Parties thereto.(BB -- Exhibit 10.20) (as amended (CC) Exhibit 10.20.1).10.21 -- Revised Schedule of Parties (Exhibit 10.20 hereto).(J).10.22 -- Cambrex Corporation Savings Plan.(F).10.23 -- Cambrex Corporation Supplemental Retirement Plan.(I).10.24 -- Deferred Compensation Plan of Cambrex Corporation (as amended and restated as of March 1, 2001).(BB).10.25 -- Employment Agreement dated February 6, 2007 between the registrant and Gregory P. Sargen.(KK).10.26 -- Consulting Agreement dated December 15, 1994 between the registrant and Arthur I. Mendolia.(I).10.27 -- Consulting Agreement dated December 15, 1994 between the registrant and Cyril C. Baldwin, Jr.(I).10.28 -- Consulting Agreement dated January 26, 1995 between the registrant and James A. Mack.(I).--------See legend on following page 88 EXHIBIT INDEX EXHIBIT NO. DESCRIPTION ----------- ----------- 10.29 -- Additional Retirement Payment Agreement dated December 15, 1994 between the registrant and Arthur I. Mendolia.(I).10.30 -- Additional Retirement Payment Agreement dated December 15, 1994 between the registrant and Cyril C. Baldwin, Jr.(I).10.31 -- Additional Retirement Payment Agreement between the registrant and James A. Mack.(I).10.32 -- Employment Agreement dated February 6, 2007 between the registrant and Paolo Russolo.(KK).10.33 -- 2001 Performance Stock Option Plan.(P).10.34 -- 2003 Performance Stock Option Plan.(P).10.35 -- 2004 Performance Incentive Plan.(Q).10.36 -- Directors' Common Stock Fee Payment Plan.(Q).10.37 -- Directors' Compensation Arrangements.(S).10.38 -- 2004 Incentive Plan.(U).10.39 -- Separation and General Release Agreement.(V).10.40 -- Registration Rights Agreement dated as of June 6, 1985 between the registrant and the purchasers of its Class D Convertible Preferred stock and 9% Convertible Subordinated Notes due 1997.(A -- Exhibit 10(m)).10.41 -- Administrative Consent Order dated September 16, 1985 of the New Jersey Department of Environmental Protection to Cosan Chemical Corporation.(A - Exhibit 10(q)).10.42 -- Registration Rights Agreement dated as of June 5, 2006 between the registrant and American Stock Transfer and Trust Company.(K).10.43 -- Share Purchase Agreement between Cambrex AB and International10.43 -- Share Purchase Agreement between Cambrex AB and International Chemical Investors II S.A.(CC).10.44 -- Consulting Agreement dated November 10, 2006 between registrant and Gary L. Mossman.(DD).10.45 -- Mr. Thomas Bird Bonus Arrangement.(HH).10.46 -- Stock Purchase Agreement dated October 23, 2006 between Lonza America Inc., Lonza Bioproducts AG, Lonza Sales AG, Lonza Group Limited and Cambrex Corporation and Subsidiaries.(GG -- Exhibit 10.1).10.47 -- Agreement to Lift Sales Restrictions on Certain Vested Options.(EE).10.48 -- Agreement to Accelerate Vesting of Certain Options.(FF).10.49 -- Directors' Equity Program.(MM).10.50 -- Manufacturing Agreement dated as of July 1, 1991 between the registrant and A.L. Laboratories, Inc.(D).16.1 -- PricewaterhouseCoopers LLP Letter.(II).21 -- Subsidiaries of registrant.(J).23.1 -- Consent of BDO Seidman LLP to the incorporation by reference of its report herein in Registration Statement Nos. 333-57404, 333- 22017, 33-37791, 33-81780, 33-81782, 333-113612, 333-113613, 333- 129473 and 333-136529 on Form S-8 of the registrant.(J).23.2 -- Consent of PricewaterhouseCoopers LLP to the incorporation by reference of its report herein in Registration Statement Nos. 333- 57404, 333-22017, 33-37791, 33-81780, 33-81782, 333-113612, 333- 113613, 333-129473 and 333-136529 on Form S-8 of the registrant.(J).24 -- Powers of Attorney to sign this report.(J).31.1 -- CEO Certification pursuant to Rule 13a -- 14(a) and Rule 15d -- 14(a) of the Securities Exchange Act, as amended.(J).31.2 -- CFO Certification pursuant to Rule 13a -- 14(a) and Rule 15d -- 14(a) of the Securities Exchange Act, as amended.(J).32.1 -- CEO Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.(R).32.2 -- CFO Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.(R).--------See legend on following page 89 EXHIBIT INDEX (A) Incorporated by reference to the indicated Exhibit to registrant's Registration Statement on Form S-1 (Registration No. 33-16419).(B) Incorporated by reference to registrant's Annual Report on Form 8-K dated June 5, 1989.(C) Incorporated by reference to registrant's Current Report on Form 8-K dated July 1, 1991.(D) Incorporated by reference to the registrant's Annual Report on Form 10-K for 1991.(E) Incorporated by reference to the registrant's Current Report on Form 8-K dated April 10, 1992 and Amendment No. 1 to its Current Report.(F) Incorporated by reference to registrant's Registration Statement on Form S-8 (Registration No. 33-81780) dated July 20, 1994.(G) Incorporated by reference to registrant's Registration Statement on Form S-8 (Registration No. 33-81782) dated July 20, 1994.(H) Incorporated by reference to registrant's Registration Statement on Form 8-K dated October 27, 1994.(I) Incorporated by reference to the registrant's Annual Report on Form 10-K for 1994.(J) Filed herewith.(K) Incorporated by reference to the registrant's Registration Statement on Form 8-A dated May 25, 2006.(L) Incorporated by reference to registrant's Registration Statement on Form S-8 (Registration No. 333-22017) dated February 19, 1997.(M) Incorporated by reference to the registrant's Current Report on Form 8-K dated October 8, 1997.(N) Incorporated by reference to registrant's Registration Statement on Form S-8 (Registration No. 333-57404) dated March 22, 2001.(O) Incorporated by reference to the registrant's Current Report on Form 8-K dated November 10, 2003.(P) Incorporated by reference to registrant's Registration Statement on Form S-8 (Registration No. 333-113612) dated March 15, 2004.(Q) Incorporated by reference to registrant's Registration Statement on Form S-8 (Registration No. 333-113613) dated March 15, 2004.(R) Furnished herewith.(S) Incorporated by reference to the registrant's Current Report on Form 8-K dated June 6, 2005.(T) Incorporated by reference to the registrant's Current Report on Form 8-K filed October 13, 2005.(U) Incorporated by reference to registrant's Registration Statement on Form S-8 (Registration No. 333-129473) dated November 4, 2005.(V) Incorporated by reference to the registrant's Current Report on Form 8-K dated January 4, 2006.(W) Incorporated by reference to registrant's Quarterly Report on Form 10- Q for the period ending March 31, 2007.(X) Incorporated by reference to registrant's Quarterly Report on Form 10- Q for the period ending September 30, 2007.(Y) Incorporated by reference to Item 1.01 registrant's Current Report on Form 8-K dated February 7, 2006.(Z) Incorporated by reference to Item 5.02(e)(1) to registrant's Current Report on Form 8-K dated February 9, 2007.(AA) Incorporated by reference to Item 5.02(e) to registrant's Current Report on Form 8-K dated December 22, 2006.(BB) Incorporated by reference to registrant's Annual Report on Form 10-K for year end 2005 filed May 26, 2006.(CC) Incorporated by reference to registrant's Quarterly Report on Form 10- Q for the period ending September 30, 2006.(DD) Incorporated by reference to registrant's Current Report on Form 8-K dated November 15, 2006.(EE) Incorporated by reference to registrant's Current Report on Form 8-K dated November 7, 2006.(FF) Incorporated by reference to registrant's Current Report on Form 8-K dated June 7, 2005. 90 EXHIBIT INDEX (GG) Incorporated by reference to registrant's Current Report on Form 8-K filed October 24, 2006.(HH) Incorporated by reference to registrant's Current Report on Form 8-K filed November 1, 2006.(II) Incorporated by reference to registrant's Current Report on Form 8-K filed March 21, 2007.(JJ) Incorporated by reference to registrant's Current Report on Form 8-K filed April 11, 2007.(KK) Incorporated by reference to registrant's Annual Report on Form 10-K for year end 2006 filed on March 15, 2007.(LL) Incorporated by reference to registrant's Annual Report on Form 10-K for year end 2007 filed February 27, 2008.(MM) Incorporated by reference to registrant's Quarterly Report on Form 10- Q for the period ending June 30, 2008. 91 . . . CAMBREX CORPORATION ANNUAL REPORT ON FORM 10-K EXHIBIT 10.21 REVISED SCHEDULE OF PARTIESNAME TITLE DATE OF AGREEMENT---- ----- ----------------- Steven M. Klosk....................... President & Chief Executive Officer 02/06/06Paolo Russolo......................... President, Profarmaco Milano 02/06/07Gregory P. Sargen..................... Vice President & Chief Financial Officer 02/06/07 . . . CAMBREX CORPORATION EXHIBIT 21 SUBSIDIARIES OF REGISTRANTSUBSIDIARY INCORPORATED IN:---------- ---------------- Cambrex Charles City, Inc. ....................................... IowaCambrex Profarmaco Milano S.r.l. ................................. ItalyCambrex Karlskoga AB.............................................. SwedenAS Cambrex Tallinn................................................ Estonia CAMBREX CORPORATION EXHIBIT 23.1 CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM We hereby consent to the incorporation by reference in the RegistrationStatements on Form S-8 (No. 333-57404, 333-22017, 33-21374, 33-37791, 33-81780,33-81782, 333-113612, 333-113613, 333-129473 and 333-136529) of CambrexCorporation of our reports dated February 19, 2009, relating to the consolidatedfinancial statements and schedule, and the effectiveness of CambrexCorporation's internal control over financial reporting, which appear in thisAnnual Report on Form 10-K./s/ BDO Seidman, LLP----------------------------------------Woodbridge, New JerseyFebruary 19, 2009 CAMBREX CORPORATION EXHIBIT 23.2 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, 33-37791, 33-81780, 33-81782, 333-113612, 333-113613, 333-129473 and 333-136529) of Cambrex Corporationof our report dated March 15, 2007, except for the effects of the discontinuedoperations with respect to 2006 described in Note 19, as to which the date isFebruary 27, 2008 relating to the financial statements for the year endedDecember 31, 2006 and financial statement schedule for the year ended December31, 2006, which appear in this Form 10-K./s/ PricewaterhouseCoopers LLP----------------------------------------Florham Park, New JerseyFebruary 19, 2009 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 Steven M. Klosk and Gregory P. Sargen, and each of them, his trueand lawful 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 19th day of February 2009. /s/ Steven M. Klosk /s/ Gregory P. Sargen---------------------------------------- ----------------------------------------Steven M. Klosk Gregory P. SargenPresident, Chief Executive Officer and Vice President and Chief FinancialDirector Officer (Principal Financial Officer and Accounting Officer)/s/ John R. Miller /s/ Leon J. Hendrix, Jr.---------------------------------------- ----------------------------------------John R. Miller Leon J. Hendrix, Jr.Chairman of the Board of Directors Director/s/ David R. Bethune /s/ Ilan Kaufthal---------------------------------------- ----------------------------------------David R. Bethune Ilan KaufthalDirector Director/s/ Rosina B. Dixon /s/ William Korb---------------------------------------- ----------------------------------------Rosina B. Dixon, M.D. William KorbDirector Director/s/ Roy W. Haley /s/ Peter G. Tombros---------------------------------------- ----------------------------------------Roy W. Haley Peter G. TombrosDirector Director/s/ Kathryn Rudie Harrigan----------------------------------------Kathryn Rudie Harrigan, PhDDirector EXHIBIT 31.1 CAMBREX CORPORATION CERTIFICATION PURSUANT TO RULE 13A -- 14(A) AND RULE 15D -- 14(A) OF THE SECURITIES EXCHANGE ACT, AS AMENDEDI, Steven M. Klosk, 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 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 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/ Steven M. Klosk ---------------------------------------- Steven M. Klosk President and Chief Executive OfficerDate: February 19, 2009 EXHIBIT 31.2 CAMBREX CORPORATION CERTIFICATION PURSUANT TO RULE 13A -- 14(A) AND RULE 15D -- 14(A) OF THE SECURITIES EXCHANGE ACT, AS AMENDEDI, Gregory P. Sargen, 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 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 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/ Gregory P. Sargen ---------------------------------------- Gregory P. Sargen Vice President and Chief Financial OfficerDate: February 19, 2009 EXHIBIT 32.1 CAMBREX CORPORATION CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report of Cambrex Corporation (the "Company")on Form 10-K for the period ending December 31, 2008, as filed with theSecurities and Exchange Commission on the date hereof (the "Report"), I, StevenM. Klosk, President and Chief Executive 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/ Steven M. Klosk ---------------------------------------- Steven M. Klosk President and Chief Executive OfficerDated: February 19, 2009 EXHIBIT 32.2 CAMBREX CORPORATION CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report of Cambrex Corporation (the "Company")on Form 10-K for the period ending December 31, 2008, as filed with theSecurities and Exchange Commission on the date hereof (the "Report"), I, GregoryP. Sargen, 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/ Gregory P. Sargen ---------------------------------------- Gregory P. Sargen Vice President and Chief Financial OfficerDated: February 19, 2009

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