Cambrex Corporation
Annual Report 1997

Plain-text annual report

1 ================================================================================ 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, 1997 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, EAST RUTHERFORD, NEW JERSEY 07073 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (201)-804-3000 SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NAME OF EACH EXCHANGE TITLE OF EACH CLASS ON WHICH REGISTERED ------------------- --------------------- Common Stock,$.10 par value American Stock Exchange SECURITIES REGISTERED PURSUANT TO SECTION 12 (g) OF THE ACT: NONE 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. [ ]  The aggregate market value of the voting stock held by non-affiliates ofthe registrant was approximately $551,406,933 as of February 28, 1998. APPLICABLE ONLY TO CORPORATE REGISTRANTS As of February 28, 1998, there were 11,947,239 shares outstanding of theregistrant's Common Stock, $.10 par value. DOCUMENTS INCORPORATED BY REFERENCE Portions of the registrant's definitive Proxy Statement for the 1998 AnnualMeeting are incorporated by reference into Part III of this report. ================================================================================ 2 PART I ITEM 1 -- BUSINESS. GENERAL Cambrex Corporation (the "Company" or "Cambrex"), a Delaware corporation,began business in December 1981 through its predecessor, and now wholly-ownedsubsidiary, CasChem, Inc. The Company manufactures and markets a broad line of specialty and finechemicals, as well as products and services to the biotechnology industry. TheCompany operates in two segments, biotechnology and pharmaceutical specialty andfine chemicals. The pharmaceutical specialty and fine chemicals segment includesfive product categories: active pharmaceutical ingredients, pharmaceuticalintermediates, organic intermediates, performance enhancers and polymer systems.Currently the Company's overall strategy for these categories is to focus onniche markets that have global opportunities, build on strong customer relationsto fill our new products' pipeline, and support the capital and state-of-the-arttechnology, while being leaders in environmental, health and safety performance. Within each of the product categories, the Company uses a consistentbusiness approach: 1. Focus on niche products requiring high technical expertise. 2. Be a leading supplier of core products, for which price competition is not the primary market determinant. 3. Review products and product lines continually and eliminate those not meeting operating profit goals and replace with new products with higher returns. In order to manage a business with a large number of products and a dynamicbusiness mix, the Company runs a decentralized organization. The business isconducted by nine subsidiary organizations headed by an experienced businessmanager. Each subsidiary controls all the resources required for the success ofits business and is responsible for its financial performance. Cambrex providesoversight of the subsidiaries and, where performance is consideredunsatisfactory, becomes directly involved to help correct any deficiencies. Italso provides support services that are not directly related to getting theproducts to market; such services include finances, risk management, and pensionand benefits management. Important objectives of the Company are to expand its operations throughinternal growth and to make strategic acquisitions of product lines, technologyand companies that have substantial positions in niche markets. On October 3, 1997, the Company completed the acquisition of all of theoutstanding common stock of BioWhittaker, Inc. ("BioWhittaker") forapproximately $133,500. BioWhittaker, which is located on 116 acres inWalkersville, Maryland, develops, produces and sells cell culture and endotoxindetection products to the biotechnology and pharmaceutical industries forresearch and for the commercial manufacture of biopharmaceutical products. On January 5, 1998, the Company completed the acquisition of all of theassets of the chiral intermediates business of Celgene Corporation for $7,500plus future royalties of up to $7,500 based upon sales. The product line, whichhas been re-named Chiragene, will produce optically active, complex, organiccompounds that are critical to the production of modern active pharmaceuticalingredients. - - --------------- (dollars in thousands, except share data) 1 3 PRODUCTS The following table sets forth for the periods indicated informationconcerning gross sales from the Company's six product categories: YEARS ENDED DECEMBER 31, -------------------------------- 1997(1) 1996 1995 -------- -------- -------- Biotechnology.............................. $ 13,577 $ -- $ --Active Pharmaceutical Ingredients.......... 103,962 97,582 96,827Pharmaceutical Intermediates............... 74,694 71,202 69,097Organic Intermediates...................... 70,771 73,049 77,792Performance Enhancers...................... 70,549 75,632 69,973Polymer Systems............................ 46,530 52,014 54,381 -------- -------- --------Gross Sales................................ $380,083 $369,479 $368,070 ======== ======== ======== - - --------------- (1) Sales from BioWhittaker, acquired in October 1997, are included from the date of acquisition. The Company uses its technical expertise in a wide range of chemical andbiological processes to meet the needs of its customers for high qualityproducts for specialized applications. These applications include:biotechnology, consisting of cell culture and endotoxin detection products;active pharmaceutical ingredients produced under Food and Drug Administration(FDA) regulation for use in prescription and over-the-counter drug products;pharmaceutical intermediates produced in current Good Manufacturing Practices(cGMP) facilities for use in the production of pharmaceuticals, cosmetics, foodadditives and other healthcare products; organic intermediates used in theproduction of herbicides, insecticides, feed additives, pigments, and othercomplex organic molecules; performance enhancers which are complex chemicalsdesigned to impart special properties when small quantities are included in theformulation of specific products; and polymer systems which are monomers or twocomponent polymer systems for use in small volume, high performanceapplications. Biotechnology: This category consists of cell culture products, includingliving cell cultures, cell culture media and cell culture media supplements, andendotoxin detection products supplied to the biotechnology and pharmaceuticalindustries. The Company manufactures more than 1,100 products which are sold tomore than approximately 12,000 customers worldwide with no one customeraccounting for more than 10% of sales in this category. This table summarizes the gross sales for this product category from thedate of acquisition: 1997 ------- Cell culture................................................ $ 9,126Endotoxin detection......................................... 3,539Other....................................................... 912 ------- $13,577 ======= Active Pharmaceutical Ingredients: Pharmaceutical products are classifiedinto nine therapeutic product groups. Cambrex sells products in six of theseprincipal product groups: (1) gastrointestinal preparations, (2) cardiovascular,(3) central nervous system, (4) endocrine products, (5) respiratory products,and (6) other actives, including anti-infective, anti-inflammatory products,immunology, diuretics and other preparations. These products are sold to adiverse group of more than 400 customers with two customers accounting for 32%of 1997 sales in this category. Many of these products are also sold throughagents. Products in this category are manufactured under FDA regulation for use asthe active ingredients in prescription and over-the-counter drugs. - - --------------- (dollars in thousands, except share data) 2 4 This table summarizes the gross sales for this product category: % 1997 1996 CHANGE CHANGE -------- ------- ------- ------ Gastrointestinal.................... $ 34,732 $31,503 $ 3,229 10%Cardiovascular...................... 23,791 21,806 1,985 9Central Nervous System.............. 10,634 8,809 1,825 21Endocrine........................... 10,014 7,438 2,576 35Respiratory......................... 7,661 9,409 (1,748) (19)Other Actives....................... 17,130 18,617 (1,487) (8) -------- ------- ------- --- $103,962 $97,582 $ 6,380 7% ======== ======= ======= === Gastrointestinal products increased 10% mostly due to the introduction of anew generic product used in the Japanese market as an anti-ulcerative.Cardiovascular active ingredients increased mainly due to growth in currentmarkets, and sales of central nervous system products were up 21% due toincreases in several of the products in this category. Endocrine activeingredients increased 35% as the result of a favorable mix of products andcustomers. Respiratory active ingredients decreased by 19% due to one productwhich decreased after very high 1996 levels. Other actives were affected bylower sales of anti-inflammatory active ingredients.  Pharmaceutical Intermediates: This category consists of four productgroups: (1) intermediates used in the manufacture of vitamins and other healthcare products, (2) x-ray contrast media intermediates, (3) intermediates for thecosmetic industry, and (4) other pharmaceutical intermediates. These productsare sold to approximately 650 customers, with one customer accounting for 13% of1997 sales in this category. These products are mainly produced in cGMPfacilities. This table summarizes the gross sales for this product category: % 1997 1996 CHANGE CHANGE ------- ------- ------- ------ Health............................... $20,814 $19,548 $ 1,266 6%X-Ray Media.......................... 16,876 21,552 (4,676) (22)Cosmetics............................ 8,816 6,609 2,207 33Other Pharmaceutical Intermediates... 28,188 23,493 4,695 20 ------- ------- ------- --- $74,694 $71,202 $ 3,492 5% ======= ======= ======= === Other pharmaceutical intermediates were positively impacted by the sales ofan advanced intermediate of a new protease inhibitor for AIDS treatment, and themanufacture of aminopyridine used in a variety of pharmaceutical products.Health products increased 6% mainly due to increased sales of a modifier forfood starch and another intermediate for a new molecular compound in cooperationwith a major ethical pharmaceutical company. X-ray media products were adverselyaffected due to a major customer changing their formulation and, thus, reducinginventory. The customer has switched to another x-ray media product that theCompany also manufactures. Cosmetic products increased 33% due to higher salesof several smaller products manufactured in and sold to the European market. Organic Intermediates: This category consists of three product groups: (1)intermediates used for crop protection chemicals, (2) feed additives and (3)pigment intermediates. These products are sold to approximately 200 customers.Two customers accounted for 25% and 18% of 1997 sales in this category. - - --------------- (dollars in thousands, except share data) 3 5 This table summarizes the gross sales for this product category: % 1997 1996 CHANGE CHANGE ------- ------- ------- ------ Crop Protection...................... $30,170 $31,671 $(1,501) (5)%Feed Additives....................... 29,634 29,889 (255) (1)Pigment Intermediates................ 10,967 11,489 (522) (5) ------- ------- ------- --- $70,771 $73,049 $(2,278) (3)% ======= ======= ======= === Crop protection was affected by the unusual amount of a pyridine derivativeused in the manufacture of herbicides shipped in 1996 under a renegotiatedcontract. Shipments in 1997 have returned to normal levels. Pyridine, thelargest product in crop protection, was at 1996 levels. Feed additives saw aminor decrease in Niacinamide Feed Grade B3 due to reduced pricing in thebeginning of 1997, although the prices increased during the second half of theyear. Pigment intermediates were down 5% due to the loss of its major customerfor this product in the Far East. Performance Enhancers: These products are complex chemicals designed toimpart special properties, such as flame retardancy or rapid curing, when smallquantities are included in the formulation of specific products. This categoryconsists of five product groups: (1) specialty additives, (2) polymers, (3)catalysts (4) photographic chemicals, and (5) additives for the fuel/oilindustry. These products are sold to approximately 750 customers with no onecustomer accounting for over 10% of 1997 sales in this category. This table summarizes the gross sales for this product category: % 1997 1996 CHANGE CHANGE ------- ------- ------- ------ Specialty Additives.................. $18,158 $22,870 $(4,712) (21)%Polymers............................. 16,664 16,084 580 4Catalysts............................ 15,990 15,833 157 1Photographic......................... 10,164 12,326 (2,162) (18)Fuel/Oil............................. 9,573 8,519 1,054 12 ------- ------- ------- --- $70,549 $75,632 $(5,083) (7)% ======= ======= ======= === Specialty additives decreased 21% due to lower pyridine derivatives, whichreturned to pre-1996 volume levels. Photographic products decreased 18% due to amajor customer reducing volume by one-half of normal levels. Fuel/oil productswere up 12% from 1996 because of increases in castor based products used invarious lubricating applications and increases of a product used as a hardenerfor epoxy resins and an additive to lubricating oils. Polymer Systems: The products in this category are monomers or twocomponent polymer systems for use in small volume, high performanceapplications. This category consists of four product groups: (1)telecommunications and electronics industries, (2) coatings, (3) highperformance engineering plastics, and (4) biomedical. Polymer systems are soldto an estimated 400 customers with no one customer accounting for over 10% of1997 sales in this category. This table summarizes the gross sales for this product category: % 1997 1996 CHANGE CHANGE ------- ------- ------- ------ Telecommunications................... $18,144 $18,809 $ (665) (4)%Coatings............................. 17,921 19,138 (1,217) (6)Engineering Plastics................. 6,179 8,179 (2,000) (24)Biomedical........................... 4,286 5,888 (1,602) (27) ------- ------- ------- --- $46,530 $52,014 $(5,484) (11)% ======= ======= ======= === - - --------------- (dollars in thousands, except share data)(dollars in thousands, except share data) 4 6 Polymers were all at lower levels than 1996. Telecommunication productswere down slightly due to a major customer changing its specification of anencapsulant product, however, the new product is also made by the Company.Engineering plastics decreased 24% due to a major customer losing to acompetitor their largest business in producing high performance plastics mainlyfor the electronics industry. Biomedicals decreased 27% due to management'sdecision to eliminate products not meeting gross margin goals. MARKETING AND DISTRIBUTION The Company's active pharmaceutical ingredients and pharmaceuticalintermediates are generally high value, low volume products requiringsignificant technical expertise for their development and manufacture. Marketinggenerally requires significant cooperative effort between a small highly trainedmarketing staff, a technical staff who can assess the technical fit and estimatemanufacturing economics, and the business management to determine the strategicand business fit. Such a process may take from two to five years before acommercial product is fully established. Because of this long lead time and thecomplexity of the technical efforts there are usually long-term relationshipswith major corporations who become significant customers. Sales of establishedproducts may be handled by agents in those areas where direct sales efforts areuneconomic. For the biotechnology category, the Company markets and sells its productsin the United States, principally through its own direct sales force, andinternationally, principally through an extensive network of independentdistributors. The Company directly serves the British and Irish markets througha wholly owned subsidiary, BioWhittaker UK LTD, located outside London. For other product categories, marketing and distribution is more typical ofchemical companies, with products being sold to customers from inventory involumes ranging from rail cars to five gallon pails. Sales may be handled byCompany sales people, distributors or agents as appropriate. RAW MATERIALS The Company uses a wide array of raw materials in the conduct of itsbusinesses. The Company uses significant amounts of castor oil and compoundsderived from petroleum feedstocks in manufacturing a limited number of itsproducts. The Company believes it is one of the largest purchasers of castor oil inthe United States, and has the ability to take delivery and store a largequantity of castor oil on site. Castor oil is used primarily in the manufactureof the Company's polymer systems for coatings and telecommunicationapplications. Under advantageous market conditions, the Company sells thiscommodity in bulk quantities as simple castor oil derivatives. Castor oil, which is not produced in the United States, is an agriculturalproduct, the market price of which is affected by natural factors relating tothe castor bean crop from which the oil is produced. Castor oil is producedcommercially in a few foreign countries, with India currently being the largestexporter. The Company has been able to obtain adequate supplies of castor oilgenerally at acceptable prices in the past and expects to be able to continue todo so in the future. Pyridine, which accounted for 7%, 8% and 8% of gross revenues in 1997, 1996and 1995, respectively, is produced by the Company by a process involving thehigh temperature reaction of acetaldehyde, formalin and ammonia. Acetaldehyde isavailable from two suppliers in North America. The price of acetaldehydeincreased approximately 13% during 1997 after decreasing 11% in 1996. Formalin'sfeedstock is methanol, which experienced increased prices in 1997 over 1996 duein part to market growth for methanol and its derivatives. The continuedunscheduled global methanol plant outages also helped feed the price growth in1997. Ammonia is widely available, and the cost of ammonia decreased by 15% in1997. - - --------------- (dollars in thousands, except share data) 5 7 The Company obtains acetaldehyde and formalin pursuant to long-term supplycontracts under which the price for the raw material adjusts to marketconditions, with a time lag. The Company sometimes has difficulty passing onprice increases to its customers, particularly if the increases are precipitousrather than general. For the biotechnology products, the Company buys materials from manysuppliers and is generally not dependent on any one supplier or group ofsuppliers. Nonetheless, although there is a well-established market for certaincell culture products, its price is unstable and supplies, at times, could belimited since the availability of these raw materials tend to be cyclical. TheCompany's supply of these raw materials is generally adequate to meet currentdemand. The other key raw materials used by the Company are advanced organicintermediates and generally have been in adequate supply from multiplesuppliers. RESEARCH AND DEVELOPMENT The Company's research and development program is designed to increase theCompany's competitiveness through improving its technology and developingprocesses for the manufacture of new products to meet customer requirements. Thegoals are to improve the Company's manufacturing processes so as to reducecosts, improve quality and increase capacity; and to identify marketopportunities which warrant a significant technical effort, and offer theprospects of a long-term, profitable business relationship. Research anddevelopment activities are performed at most of the Company's manufacturingfacilities in both the United States and Europe. Nearly 110 employees areinvolved directly in research and development activities worldwide. In November, 1995, the Company formed a strategic alliance with OxfordAsymmetry, Ltd. (located near Oxford in the United Kingdom). The Company willcommercialize technologies and products developed by Oxford Asymmetry, andprovides financial support for their research and development group. The Companywill be required to pay royalties to Oxford Asymmetry for any technologylicensed. The Company entered into several research and development agreements in1997. In February, 1997, the Company signed a cooperative agreement with AlbanyMolecular Research, Inc. of Albany, New York. The Company will provide AlbanyMolecular Research financial support to develop processes specifically designedto fit into the Company's cGMP manufacturing facilities. In April, 1997, theCompany formed two separate agreements with the Science ApplicationsInternational Corporation (a.k.a. Zelinsky Institute) to secure the specialknowledge and talents of Russian scientists. In May, 1997, the Company formed analliance with Fine Tech Ltd., of Technicon City, Israel, in which the Companywill provide Fine Tech funding over the next three years for process improvementon existing and newly-developed generic drugs to be manufactured in theCompany's cGMP facilities. Although there have been no products brought to market as a result of thesealliances and agreements, the company is evaluating several products forpossible commercialization. The estimated commitments for the research &development agreements over the next three years is approximately $3,000. The Company spent approximately $10,600, $9,200 and $7,500 in 1997, 1996and 1995, respectively, on research and development efforts. The Company alsoincurred a one-time non-cash expense of $14,000 in 1997 related to the value ofin-process research and development efforts underway at the time of theacquisition of BioWhittaker. PATENTS AND TRADEMARKS The Company has patent protection in some of its product areas. However,the Company relies primarily on know-how in many of its manufacturing processesand techniques not generally known to other chemical companies, for developingand maintaining its market position. - - --------------- (dollars in thousands, except share data) 6 8 The Company currently owns approximately 105 United States patents whichhave various expiration dates beginning in 1998 through 2015 and which coverselected items in each of the Company's major product areas. The Company alsoowns the foreign equivalent of many of its United States patents. In addition,the Company has applied for patents for various concepts and is in the processof preparing patent applications for other concepts. In conjunction with theacquisition of BioWhittaker, the Company acquired patent and other proprietaryrights, which are material to the endotoxin detection products, allergy testskits and the ELVIS(TM) cell culture products. The Company has trademarks registered in the United States and a number offoreign countries for use in connection with the Company's products andbusiness. The Company believes that many of its trademarks are generallyrecognized in its industry. Such trademarks include Naturechem(R), Bufferite(R)and Vitride(R). The Company requires employees to sign confidentiality and non-competeagreements where appropriate. COMPETITION In Biotechnology, no one company is known to compete with the Company inall of its product groups, but in each group competition is offered by a numberof companies, including, in some cases, firms substantially larger and withgreater financial resources than the Company. The markets in which the Companycompetes are generally concentrated and are highly competitive, with competitioncentering on product specifications, quality, depth of product line, price,technical support, timely product development and speed of delivery. Because of the nature of the Company's products in its activepharmaceutical ingredients and pharmaceutical intermediates categories and itsstrategic approach, it is not possible to identify a group of directcompetitors. Where competition exists, it is typically specific to a certainproduct, or is focused early in the process, when an initial market position isbeing established. If the Company perceives significant competitive risk and aneed for large technical or financial commitment, it generally negotiateslong-term contracts or capital guarantees from its targeted customer beforeproceeding. Competition for the Company's products other than active pharmaceuticalingredients and pharmaceutical intermediates is more typical of chemicalmarkets. Competition exists from other producers of the Company's products andfrom other products that may offer equivalent properties. Competition in theseareas are generally based on customer service, product quality and pricing. ENVIRONMENTAL AND SAFETY REGULATIONS AND PROCEEDINGS General: Production of certain of the Company's chemicals involves the use,storage and transportation of toxic and hazardous materials. The Company'soperations are subject to extensive international and domestic federal, stateand local laws and regulations relating to the storage, handling, emission,transportation and discharge of materials into the environment and themaintenance of safe conditions in the work place. The Company maintainsenvironmental and industrial safety and health compliance programs at itsplants, and believes that its manufacturing operations are in general compliancewith all applicable safety, health and environmental laws. The Company's acquisitions were made subject to known environmentalconditions. Also, risks of substantial costs and liabilities are inherent incertain plant operations and certain products produced at the Company's plantsbecause as with other companies engaged in the chemical business, there can beno assurance that significant costs and liabilities will not be incurred.Additionally, prevailing legislation tends to hold chemical companies primarilyresponsible for the proper disposal of their chemical wastes even aftertransferal to third party waste disposal facilities. Moreover, other futuredevelopments, such as increasingly strict environmental, safety and health lawsand regulations, and enforcement policies thereunder, could result insubstantial costs and liabilities to the Company and could subject the Company'shandling, manufacture, use, reuse, or disposal of substances or pollutants atits plants to more rigorous scrutiny than at present. - - --------------- (dollars in thousands, except share data) 7 9 Although the Company has no direct operations and conducts its business throughsubsidiaries, certain legal principles that provide the basis for the assertionagainst a parent company of liability for the actions of its subsidiaries maysupport the direct assertion against the Company of environmental liabilities ofits subsidiaries. During January 1997, an opinion was rendered against Cosan ChemicalCorporation (a subsidiary of Cambrex) by the United States District Court of NewJersey in a matter that has been pending since 1991. The opinion addressedCosan's liability for contamination at a site in Clifton, New Jersey which waspreviously owned and operated by Cosan. In the opinion, Cosan was found liablefor past remediation costs in the amount of approximately $800 plus prejudgmentinterest on such costs. Additionally, Cosan was found primarily responsible forthe future remediation costs for the site. The judge also awarded treble damageson the past costs, prejudgment interest and future costs. To avoid trebledamages for future costs, Cosan entered into an Administrative Consent Orderwith the State to perform a major portion of the future remediation at the site.During 1997, the judge reversed the decision regarding prejudgment interest.Also, during 1997, both Cosan and the plaintiffs appealed various aspects of thedecision. In January 1998, the appeals were heard before the United States Courtof Appeals for the Third Circuit. A decision has not been rendered. Theestimated range of costs for this case have been considered in the Company'sreserve assessment. During November 1997, a settlement was reached between Nepera, Inc. (asubsidiary of the Company), a former owner of the Nepera facility and theoriginal owner of the facility pertaining to past and future costs ofremediating two sites. Under the terms of the settlement, the original siteowner has placed in escrow approximately $13,000 to provide for past and futureremediation costs at the two sites in exchange for a release from therequirement to clean up the two sites. After certain administrative proceedings,the funds will be placed in a Trust for the benefit of remediating the two siteson behalf of Nepera and the other former site owner. As permitted under theterms of the agreement, Nepera is eligible to recover and has sought to recover$2,400 of past costs from this settlement which was recognized in the results ofoperations and a receivable for this amount in the 1997 financial statements.The remaining funds available from this settlement should be sufficient toprovide for the future remediation costs for these two sites based upon currentestimates of such costs.  Known environmental matters which may result in liabilities to the Companyand the related estimates and accruals are summarized in Note #21 to the CambrexCorporation and Subsidiaries Consolidated Financial Statements. Present and Future Environmental Expenditures: The Company's policy is tocomply with all legal requirements of applicable environmental, health andsafety laws and regulations. The Company believes it is in general compliancewith such requirements and has adequate professional staff and systems in placeto remain in compliance. In some cases, compliance can only be achieved bycapital expenditures, and the Company made capital expenditures of approximately$2,800 in 1997, $4,800 in 1996, and $4,000 in 1995 for environmental projects.The Company anticipates that capital requirements will increase in subsequentyears as a result of the Clean Air Act Amendments and other pendingenvironmental laws. Additionally, as the environmental proceedings in which theCompany is involved progress from the remedial investigation and feasibilitystudy stage to implementation of remedial measures, related expenditures willmost likely increase. The Company considers costs for environmental complianceto be a normal cost of doing business, and includes such costs in pricingdecisions. EMPLOYEES At December 31, 1997 the Company had 1,790 employees worldwide (567 of whomwere from our international operations) compared with 1,292 employees atDecember 31, 1996 and 1,336 at December 31, 1995. - - --------------- (dollars in thousands, except share data) 8 10 All hourly plant employees at the Bayonne, New Jersey facility arerepresented by Local 8-406 of the Oil, Chemical and Atomic Workers InternationalUnion under a contract expiring September 17, 2001; the hourly plant employeesat the Carlstadt, New Jersey plant are represented by the Amalgamated IndustrialUnion of East Orange, New Jersey under a contract expiring November 30, 2000;and the hourly plant employees at the Harriman, New York facility arerepresented by Local 810 of the International Brotherhood of Teamsters under acontract expiring June 30, 1998. Nordic and Profarmaco production,administration, scientific and technical employees are represented by variouslocal and national unions. The contracts with these unions expire at varioustimes through December 31, 1998. The Company believes its labor relations aresatisfactory, and will begin negotiations for the renewal of contracts expiringin 1998. SEASONALITY Like many other businesses in the specialty chemicals industry, the Companyexperiences some seasonality. Operating results for any quarter, however, arenot necessarily indicative of results for any future period. In particular, as aresult of various factors such as acquisitions and plant shutdowns, the Companybelieves that period-to-period comparisons of its operating results should notbe relied upon as an indication of future performance. EXPORT AND INTERNATIONAL SALES The Company exports numerous products to various areas, principally WesternEurope, Asia and Latin America. Export sales from the Company's domesticoperations in 1997, 1996 and 1995 amounted to $48,852, $50,243, and $50,608,respectively. Sales from international operations were $152,079 in 1997,$151,466 in 1996 and $144,883 in 1995. Refer to Note #19 to the CambrexCorporation and Subsidiaries Consolidated Financial Statements. - - --------------- (dollars in thousands, except share data) 9 11 ITEM 2 -- PROPERTIES. Set forth below is information relating to the Company's manufacturingfacilities: OPERATING LOCATION ACREAGE SUBSIDIARY PRODUCT LINES MANUFACTURED -------- --------- ------------ -------------------------- Bayonne, NJ 8 acres CasChem Pharmaceutical intermediates; Performance enhancers; Polymer systemsCarlstadt, NJ 3 acres Cosan Performance enhancers; Polymer systemsHarriman, NY 29 acres Nepera Pharmaceutical intermediates; Organic intermediates; Performance enhancersDelaware Water Gap, PA 12 acres Heico Active pharmaceutical ingredients; Pharmaceutical intermediates; Performance enhancers; Polymer systemsNorth Haven, CT 4 acres Humphrey Pharmaceutical intermediates; Performance enhancersCharles City, IA 57 acres Salsbury Active pharmaceutical ingredients; Pharmaceutical intermediates; Organic intermediates; Performance enhancersZeeland, MI 14 acres Zeeland Pharmaceutical intermediates; Performance enhancersWalkersville, MD 116 acres BioWhittaker BiotechnologyMiddlesbrough, England 12 acres Seal Sands Pharmaceutical intermediates; Organic intermediates; Performance enhancers; Polymer systemsKarlskoga, Sweden 42 acres Nordic Active pharmaceutical ingredients; Pharmaceutical intermediates; Organic intermediates; Performance enhancersPaullo (Milan), Italy 13 acres Profarmaco Active pharmaceutical ingredients The Company owns all the above facilities and properties, with theexception of the twelve acre tract it leases in Middlesbrough, England. Inaddition, the Company owns thirty-one acres of undeveloped land adjacent to theNorth Haven facility, one hundred and three acres of undeveloped land adjacentto the Harriman facility, sixty-six acres of undeveloped land adjacent to theZeeland facility and eighty-one acres used as grazing fields for the Company'sanimals in Walkersville, Maryland. The Company believes its facilities to be ingood condition, well maintained and adequate for its current needs. Most of the Company's products are manufactured in multi-purposefacilities. Each product has a unique requirement for equipment, and occupiessuch equipment for varying amounts of time. This, combined with the variationsin demand for individual products, makes it difficult to estimate actual overallcapacity subject to regulatory approval. It is generally possible to transferthe manufacturing of a particular product to another facility should capacityconstraints dictate. However, the Company's pyridine and arsenical feed additiveproduct groups are each manufactured at a single facility, and production ofsuch products would not be transferable to another site. The Company plans to continue to expand capacity to meet growing needs byprocess improvements and construction of new facilities where needed. ITEM 3 -- LEGAL PROCEEDINGS. See "Environmental and Safety Regulations and Proceedings" under Item 1hereof with respect to various proceedings involving the Company in connectionwith environmental matters. The Company is party to a number of otherproceedings. Management is of the opinion that while the ultimate liabilityresulting from those proceedings, as well as environmental matters, may have amaterial effect upon the results of operations - - ---------------- - --------------- (dollars in thousands, except share data) 10 12 in any given year, they will not have a material adverse effect upon theCompany's liquidity nor its financial position. ITEM 4 -- SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. None ITEM 10 -- EXECUTIVE OFFICERS OF THE REGISTRANT. The following table lists the executive officers of the Company and thechief operating officers of the Company's operating subsidiaries: NAME AGE OFFICE(1) ---- --- --------- James A. Mack........................ 60 President and Chief Executive OfficerPeter Tracey......................... 56 Executive Vice President-Corporate DevelopmentDouglas H. MacMillan................. 51 Vice President, Chief Financial OfficerPeter E. Thauer...................... 58 Vice President-Law & Environment, General Counsel & Corporate SecretarySteven M. Klosk...................... 40 Executive Vice President-AdministrationClaes Glassell....................... 46 Vice President-Cambrex, President, InternationalSalvatore J. Guccione................ 35 Vice President-Corporate DevelopmentRonnie D. Carroll.................... 57 Vice President-TechnologyRudi E. Moerck....................... 51 President of Salsbury Chemicals, Inc., President of Fine Chemicals GroupJohn J. Stanulonis................... 51 Vice President and General Manager of Heico Chemicals, Inc. and The Humphrey Chemical Company, Inc.Thomas N. Bird....................... 53 President of Nepera, Inc.Robert M. Parlman.................... 47 Vice President and General Manager of Zeeland Chemicals, Inc.John V. Van Hulle.................... 40 President of CasChem, Inc. and Cosan Chemical Corporation, President of the Specialty Chemicals GroupNoel L. Buterbaugh................... 65 President of BioWhittaker, Inc.Cyril C. Baldwin, Jr................. 70 Chairman of the Board - - --------------- (1) Unless otherwise indicated, positions shown are with the Company. The Company's executive officers are elected by the Board of Directors andserve at the Board's discretion. Mr. Mack has been Chief Executive Officer since Mr. Baldwin's retirement onApril 1, 1995. Mr. Mack was appointed President and Chief Operating Officer anda director of the Company in February 1990. For five years prior thereto he wasVice President in charge of the worldwide Performance Chemicals businesses ofOlin Corporation, a manufacturer of chemical products, metal products, andammunition and defense-related products. Mr. Mack was Executive Vice Presidentof Oakite Products, Inc. from 1982 to 1984. Prior to joining Oakite, he heldvarious positions with The Sherwin-Williams Company, most recently as Presidentand General Manager of the Chemicals Division from 1977 to 1981. Mr. Mack is apast Chairman of the Board of Governors of the Synthetic Organic ChemicalManufacturing Association and is a member of the Board of Trustees of theMichigan Tech Alumni Fund. - - --------------- (dollars in thousands, except share data) 11 13 Mr. Tracey announced his retirement effective December 31, 1997, and nowserves as an advisor to the CEO. Mr. Tracey was appointed Executive VicePresident-Corporate Development in April 1997. Mr. Tracey was appointedExecutive Vice President and Chief Financial Officer in November 1994. Mr.Tracey joined the Company in November 1990 as Vice President and Chief FinancialOfficer. For three years prior to joining Cambrex, he was Vice President-Financeand Chief Financial Officer for Joyce International Inc., a manufacturer ofoffice products. From 1986 to 1987, he was Vice President-Finance and ChiefFinancial Officer for Robotic Vision Systems, Inc., a manufacturer of industrialautomation systems. Prior to 1986, Mr. Tracey was a principal in the firm ofSirius Management Consultants. Mr. MacMillan was appointed Vice President and Chief Financial Officer inApril 1997. He was most recently Vice President, Chief Financial Officer forMorgan Products, Ltd., a manufacturer and distributor of building productstraded on the New York Stock Exchange. Prior to his work with Morgan Products,he was Chief Financial Officer of Varlen Corporation, a manufacturer ofpetroleum analysis and automotive and scientific instruments. Mr. Thauer was appointed Vice President-Law & Environment in December 1992,and General Counsel and Corporate Secretary in August 1989. From 1987 until hejoined Cambrex, he was Counsel to the business and finance group of the firm ofCrummy, Del Deo, Dolan, Griffinger and Vecchione. From 1971 to 1987, Mr. Thauerhad held various positions with Avon Products, Inc., including U. S. LegalDepartment Head and Corporate Assistant Secretary. Mr. Klosk was appointed Executive Vice President-Administration in October1996. Mr. Klosk joined the Company in October 1992 as Vice President,Administration. From February 1988 until he joined Cambrex, he was VicePresident, Administration and Corporate Secretary for The Genlyte Group, Inc., alighting fixture manufacturer. From 1985 to January 1988, he was Vice President,Administration for Lightolier, Inc., a subsidiary of The Genlyte Group, Inc. Mr. Glassell was appointed President, International in November 1997. Mr.Glassell was appointed Vice President of Cambrex in November 1994. As ManagingDirector and President of Cambrex Limited, he is responsible for Cambrex'sEuropean operations. After extensive management experience at Nordic andProfarmaco, he joined Cambrex as a result of the 1994 acquisition of Nordic andProfarmaco. In 1989, he joined Nordic as President and CEO for Nordic'sChemistry Business. From 1986 to 1989, he worked for the agricultural divisionof Berol Europe Ltd. Mr. Guccione joined the Company in December 1995 as VicePresident-Corporate Development. Prior to joining the Company, from 1993 to1995, he held the position of Vice President and General Manager of theInternational Specialty Products (ISP) Personal Care Division. He also served asDirector of Corporate Development for ISP. Dr. Carroll joined the Company in September 1997 as VicePresident-Technology. Mr. Carroll had been with Bristol-Myers Squibb for 14years, most recently as Vice President, Chemical Development for Bristol-MyersSquibb Technical Operations. Prior to working for Bristol-Myers Squibb, Dr.Carroll was with Pfizer, Inc. in Groton, CT. Dr. Moerck was appointed President of the Fine Chemicals Group in November1997. Mr. Moerck joined the Company in September 1996 as President of SalsburyChemicals, Inc. From 1994 to 1996 he held executive positions with HarrisSpecialty Chemicals. From 1990 to 1994 he was Vice President, Marketing, Salesand Applied Research with Troy Corporation. From 1979 to 1990 he held variousmanagerial positions with Degussa Corporation. Dr. Stanulonis joined the Company in April 1996 as Vice President andGeneral Manager of Heico Chemicals, Inc. and The Humphrey Chemical Company. From1995 until he joined Cambrex, he was Vice President, Marketing for NovanInternational, Inc. From 1988 to 1994 he was General Manager of CWM - - --------------- (dollars in thousands, except share data) 12 14 Chemicals Services, Inc., and from 1980 to 1987 he held various managementpositions with Harshaw/Filtrol Partnership. Mr. Bird joined the Company in June 1997, as President of Nepera, Inc. Mr.Bird was previously President of the consulting firm of Bavier, Bulgar andGoodyear since 1994. Prior to that, Mr. Bird maintained various vicepresidential positions with Commercial Intertech Corporation in their FluidPurification Group. Dr. Parlman joined the Company as Vice President and General Manager ofZeeland Chemicals, Inc. in March 1994. Prior to such time, he was Vice Presidentand General Manager of the Tretolite Division of Petrolite. Dr. Parlman hasextensive experience in market development and research and development. Mr. Van Hulle was appointed President of the Specialty Chemicals Group inNovember 1997. Mr. Van Hulle was appointed President of CasChem, Inc. and CosanChemical Corporation in December 1994. He joined CasChem in July 1994 asExecutive Vice President. For more than five years prior thereto he was GeneralManager of the Fine Chemicals Group for General Chemical Corporation, and hadextensive experience with Air Products & Chemicals, Inc. Mr. Buterbaugh has been with the Company since October 1997 and has beenPresident of BioWhittaker since 1979 and CEO since 1992. Mr. Buterbaugh has hadextensive experience in the biotechnology industry, as well as managing at a NewYork Stock Exchange company and overseeing several acquisitions anddivestitures. Mr. Baldwin has been Chairman of the Board since July 1991, and a directorof the Company since it began business in December 1981. On January 26, 1995,Mr. Baldwin announced his retirement, effective April 1, 1995, as ChiefExecutive Officer of the Company, a position he also held since December 1981.Mr. Baldwin retired as an employee of the Company effective April 30, 1995. Heis a member of the Environmental and Governance Committees of the Company'sBoard of Directors, and he is a director of Church & Dwight Co., Inc. andCongoleum Corporation. PART II ITEM 5 -- MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. Since November 15, 1990, the Company's Common Stock, $.10 par value, hasbeen traded on the American Stock Exchange (AMEX) under the symbol CBM. TheCommon Stock previously had been quoted on the National Association ofSecurities Dealers Automated Quotation (NASDAQ) National Market System.Effective March 5, 1998 the Company will be listed on the New York StockExchange (NYSE), continuing under the symbol CBM. The following table sets forththe closing high and low sales prices of the Common Stock as reported on AMEX: HIGH LOW ---- ---- 1997First Quarter............................................ $38 1/8 $32Second Quarter........................................... 39 3/4 32 7/8Third Quarter............................................ 52 7/16 39 5/8Fourth Quarter........................................... 49 3/4 43 5/8 - - --------------- (dollars in thousands, except share data) 13 15 HIGH LOW ---- ---- 1996*First Quarter............................................ $31 3/4 $25 7/8Second Quarter........................................... 34 1/8 28 1/4Third Quarter............................................ 34 1/8 29 7/8Fourth Quarter........................................... 34 1/2 29 3/4 - - --------------- * Share and per share data reflect adjustments for a three-for-two stock split in the form of a 50% stock dividend paid in July, 1996. As of March 13, 1998, the Company estimates that there were approximately2,410 beneficial holders of the outstanding Common Stock of the Company. The quarterly dividend on common stock was $.05 per share for 1997 and1996. ITEM 6 -- SELECTED FINANCIAL DATA. The following selected consolidated financial data of the Company for eachof the years in the five year period ended December 31, 1997 are derived fromthe audited financial statements. The consolidated financial statements of theCompany as of December 31, 1997 and December 31, 1996 and for each of the yearsin the three year period ended December 31, 1997 and the accountants' reportsthereon are included elsewhere in this annual report. The data presented belowshould be read in conjunction with the financial statements of the Company andthe notes thereto and "Management's Discussion and Analysis of FinancialCondition and Results of Operations" included elsewhere herein. YEARS ENDED DECEMBER 31, ---------------------------------------------------------- 1997(1)(2) 1996 1995 1994(3) 1993(4) ---------- -------- -------- -------- -------- (IN THOUSANDS, EXCEPT PER-SHARE DATA) INCOME DATA: Gross sales....................... $380,083 $369,479 $368,070 $249,683 $203,308 Net revenues...................... 374,215 359,385 357,176 241,634 197,203 Gross profit...................... 113,962 101,336 99,780 57,881 51,778 Selling, general and administrative................. 52,688 45,879 47,751 31,216 29,286 Research and development.......... 10,600 9,183 7,526 5,689 5,843 Non-recurring in-process R&D charge......................... 14,000 -- -- -- -- Operating profit.................. 36,674 46,274 44,503 20,976 16,649 Interest expense, net............. 5,330 5,799 10,508 4,581 2,771 Other (income) expense, net....... (1,263) (194) 2,779 (497) 446 Income before taxes............... 32,607 40,669 31,216 16,892 13,412 Net income........................ 17,776 28,225 19,670 11,126 8,641EARNINGS PER SHARE DATA*: Earnings per common share and common share equivalents: Basic.......................... $ 1.50 $ 2.43 $ 2.06 $ 1.41 $ 1.16 Diluted........................ $ 1.46 $ 2.37 $ 1.96 $ 1.31 $ 1.11 Weighted average shares outstanding: Basic.......................... 11,814 11,608 9,539 7,875 7,442 Diluted........................ 12,210 11,896 10,053 8,511 7,923DIVIDENDS PER COMMON SHARE*......... $ 0.20 $ 0.17 $ 0.13 $ 0.13 $ 0.13 - - --------------- (dollars in thousands, except share data) 14 16 YEARS ENDED DECEMBER 31, ---------------------------------------------------------- 1997(1)(2) 1996 1995 1994(3) 1993(4) ---------- -------- -------- -------- -------- (IN THOUSANDS, EXCEPT PER-SHARE DATA) BALANCE SHEET DATA: (at end of period) Working capital................... $116,743 $ 62,912 $ 69,865 $ 19,925 $ 38,497 Total assets...................... 552,426 404,444 402,553 360,477 166,845 Long-term obligations............. 194,325 60,152 99,643 115,975 36,261 Total stockholders' equity........ 225,954 229,045 189,484 101,966 87,569 - - --------------- (1) Includes the results of BioWhittaker, Inc. from the date of acquisition effective October, 1997. (2) Includes the non-recurring charge for in-process research and development associated with the acquisition of BioWhittaker. (3) Includes the results of Seal Sands, Nordic and Profarmaco from their respective dates of acquisition, January 31, 1994 and October 12, 1994, through December 31, 1994. (4) Includes the results of Viscosity Oil's fiber optic gel business from March 12, 1993, the date of acquisition, through December 31, 1993. * Share and per share data reflect adjustments for a three-for-two stock split in the form of a 50% stock dividend paid in July, 1996. All earnings per share calculations reflect the adoption of SFAS No. 128, "Earnings per Share." ITEM 7 -- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. RESULTS OF OPERATIONS The following table sets forth, for the periods indicated, certain itemsfrom the selected consolidated financial information as a percentage of grosssales. YEARS ENDED DECEMBER 31, -------------------------------- 1997 1996 1995 -------- -------- -------- Gross sales................................ 100.0% 100.0% 100.0%Net revenues............................... 98.5 97.3 97.0Gross profit............................... 30.0 27.4 27.1Selling, general and administrative........ 13.9 12.4 13.0Research and development................... 2.8 2.5 2.0Non-recurring in-process R&D charge........ 3.6 -- --Operating profit........................... 9.6 12.5 12.1Interest expense........................... 1.4 1.6 2.9Other (income) expense, net................ (0.3) (0.1) 0.8Net income................................. 4.7 7.6 5.3 The Company's product mix has changed over the periods indicated,principally due to the BioWhittaker acquisition and management's continued focuson higher value pharmaceutical products. The following tables show the grosssales of the Company's six product categories, in dollars and as a percentage ofthe Company's total gross sales for the years ended December 31, 1997, 1996 and1995, as well as the gross profit by product category for 1997, 1996 and 1995. - - --------------- (dollars in thousands, except share data) 15 17 YEARS ENDED DECEMBER 31, -------------------------------- 1997 1996 1995 -------- -------- -------- GROSS SALESBiotechnology.............................. $ 13,577 $ -- $ --Active Pharmaceutical Ingredients.......... 103,962 97,582 96,827Pharmaceutical Intermediates............... 74,694 71,202 69,097Organic Intermediates...................... 70,771 73,049 77,792Performance Enhancers...................... 70,549 75,632 69,973Polymer Systems............................ 46,530 52,014 54,381 -------- -------- -------- Total Gross Sales........................ $380,083 $369,479 $368,070 ======== ======== ======== Total Net Revenues....................... $374,215 $359,385 $357,176 ======== ======== ======== Total Gross Profit....................... $113,962 $101,336 $ 99,780 ======== ======== ======== YEARS ENDED DECEMBER 31, ----------------------------- 1997 1996 1995 ----- ----- ----- GROSS SALES DISTRIBUTIONBiotechnology.............................. 3.5% --% --%Active Pharmaceutical Ingredients.......... 27.3 26.4 26.3Pharmaceutical Intermediates............... 19.7 19.3 18.8Organic Intermediates...................... 18.6 19.8 21.1Performance Enhancers...................... 18.7 20.5 19.0Polymer Systems............................ 12.2 14.0 14.8 ----- ----- ----- 100.0% 100.0% 100.0% ===== ===== ===== 1997-1996 GROSS SALES & GROSS PROFIT BY PRODUCT CATEGORY  1997 -------------------------------- GROSS GROSS GROSS SALES PROFIT $ PROFIT % -------- -------- -------- Biotechnology................................ $ 13,577 $ 6,696 49.3%Active Pharmaceutical Ingredients............ 103,962 42,794 41.2%Pharmaceutical Intermediates................. 74,694 18,761 25.1%Organic Intermediates........................ 70,771 10,362 14.6%Performance Enhancers........................ 70,549 20,238 28.7%Polymer Systems.............................. 46,530 15,111 32.5% -------- -------- ---- $380,083 $113,962 30.0% ======== ======== ==== 1996 -------------------------------- GROSS GROSS GROSS SALES PROFIT $ PROFIT % -------- -------- -------- Biotechnology................................ $ -- $ -- --%Active Pharmaceutical Ingredients............ 97,582 32,063 32.9%Pharmaceutical Intermediates................. 71,202 15,824 22.2%Organic Intermediates........................ 73,049 15,046 20.6%Performance Enhancers........................ 75,632 24,066 31.8%Polymer Systems.............................. 52,014 14,337 27.6% -------- -------- ---- $369,479 $101,336 27.4% ======== ======== ==== - - --------------- (dollars in thousands, except share data) 16 18 1997 COMPARED TO 1996 Gross sales in 1997 were $10,604 above 1996. Increases in activepharmaceutical ingredients and pharmaceutical intermediates were offset by lowersales in our organic intermediates, performance enhancers, and polymer systemsproduct categories. Biotechnology sales (from the acquisition of BioWhittaker inthe fourth quarter 1997) were $13,577. The effect of foreign currency exchange rates on gross sales for the yearresulted in a reduction in sales of $8,551 compared to 1996. Gross sales for1997 would have been $388,634 using 1996 exchange rates compared to 1996 salesof $369,479. BIOTECHNOLOGY sales of $13,577 are from BioWhittaker since the date ofacquisition. Their products include cell culture and endotoxin detectionproducts. ACTIVE PHARMACEUTICAL INGREDIENTS of $103,962 were $6,380 (7%) above 1996.Increases in the gastrointestinal products of $3,229, endocrine of $2,576,cardiovascular product group of $1,985 and central nervous system of $1,825 morethan offset decreases in respiratory of $1,748 and the other active ingredientsof $1,487. Gastrointestinal active ingredients were $34,732, an increase of $3,229(10%) from 1996. This increase is mainly attributable to the introduction of a(10%) from 1996. This increase is mainly attributable to the introduction of anew generic product in the Japanese market used as an anti-ulcerative, whichresulted in new product sales of $6,264 in 1997. Cardiovascular active ingredients were $23,791, an increase of $1,985 (9%)from 1996. The key products in this total included Diltiazem Hcl, AmiodaroneHcl, Isosorbide-5-mononitrate, Sotalol Hcl and Acebutolol Hcl. The increase ismainly due to the sales of Isosorbide-5-mononitrate, used as a vasodilator inpretreatments, which had strong volume growth in 1997. Respiratory actives were $7,661, a decrease of $1,748 (19%) from 1996. Thekey product in this category is Cromoglycate sodium, which, after very high 1996levels, decreased to historical sales levels. Central nervous system active ingredients of $10,634 were $1,825 (21%)above 1996. Increases occurred in several of the 23 products making up thisgroup. Endocrine actives were $10,014, a $2,576 (35%) increase from 1996, as aresult of a favorable mix of products and customers. Other active ingredients were $17,130, a decrease of $1,487 (8%) from 1996,and included items for anti-inflammatory, diuretics, anti-infective, immunologyand various other uses. Sales of ketoprofen (a generic anti-inflammatory)decreased $1,058 due to lower volume development as the result of pricepressure. PHARMACEUTICAL INTERMEDIATES of $74,694 were $3,492 above 1996 (5%). Otherpharmaceutical intermediates increased $4,695, cosmetic products increased$2,207, and health products increased $1,266, offsetting the decreases in X-RayMedia of $4,676. Health products of $20,814 increased by $1,266 (6%) from 1996 in variousproducts, including a modifier for food starch and another intermediate for anew molecular compound in cooperation with a major ethical pharmaceuticalcompany. X-ray Media products, which include 5 NIPA compounds, of $16,876 decreased$4,676 (22%) due to a major customer changing their formulation and thus reduceddemand in 1997. The customer has switched to another x-ray media product thatthe Company also manufactures. Cosmetic products of $8,816 were $2,207 (33%) above 1996 due to highersales of several smaller products manufactured and sold to the European market. - - --------------- (dollars in thousands, except share data) 17 19 Other Pharmaceutical Intermediates of $28,188 increased $4,695 (20%) due tothe effect of sales of an advanced intermediate of a new protease inhibitor forAIDS treatment, and the manufacture of Amino-pyridine used in a variety ofpharmaceutical products. ORGANIC INTERMEDIATES of $70,771 were $2,278 below 1996 (3%). The CropProtection category decreased $1,501 and pigments decreased $522. Feed Additiveswas at the same level as 1996. Feed additives of $29,634 were consistent with 1996 levels. The decision toexit a low margin poultry feed additive was offset by increased feed gradeVitamin B3 sales. Crop protection intermediates of $30,170 decreased $1,501 (5%) from 1996.The decrease was due to the unusual amount of a pyridine derivative used in themanufacture of herbicides shipped in 1996 under a renegotiated contract. Theshipments in 1997 returned to normal levels. Pyridine, which is the largestproduct in crop protection, was at 1996 levels. Pigments intermediates of $10,967 decreased $522 (5%) from 1996. Continuedgain in market share of PNBA, a pigment used in dyes and UV protection agents,was offset by reduced demand for 4,3-CNBA, used in dyestuffs and pigments forpharmaceuticals, whose main customer for this product changed supplier and isnow sourcing from the Far East. PERFORMANCE ENHANCERS of $70,549 were $5,083 below 1996 (7%). Specialtyadditives decreased $4,712 and photographic products decreased $2,162. Polymerproducts increased $580 from 1996, Catalysts increased $157 and fuel/oilproducts increased $1,054. Specialty additives of $18,158 decreased $4,712 (21%) from 1996. The keydecrease was due to pyridine derivatives returning to pre-1996 sales as theresult of decreased demand in the Asian market. Polymer products of $16,664 increased $580 (4%) over 1996. The increase wasdue to a wider usage of a crosslinking agent to improve the performance ofpolycarbonate resins by a major customer, as well as to increases inantioxidants with continued growth in the U.S. markets. Photographic products of $10,164 decreased $2,162 (18%) from 1996 due tothe expected reduction in volume by one-half of normal levels from a customer. Fuel/oil products of $9,572 increased $1,053 (12%) from 1996. The increasewas in castor based products used in various lubricating applications andincreased sales of K-12, used as a hardener for epoxy resins and an additive tolubricating oils. POLYMER SYSTEMS of $46,530 were $5,484 below 1996 (11%). All productcategories decreased with telecommunications $665, coatings $1,217, engineeringplastics $2,000, and biomedicals down $1,602. Telecommunications of $18,144 decreased $665 (4%) from 1996 primarily as aresult of a major customer's decision to change their specification of anencapsulant product. The Company also makes the new product, but it took sometime for customers to reduce existing inventories. Coatings of $17,921 decreased $1,217 (6%) from 1996 due to reduced sales oflow margin castor based products as a result of management's decision to focuson higher margin products. Biomedicals of $4,286 decreased $1,602 (27%) from 1996 due to a managementdecision to eliminate products not meeting gross margin goals. Engineering plastics of $6,179 decreased $2,000 (24%) from 1996 due to amajor customer losing to a competitor their largest market of a product used inproducing high performance plastics mainly used in the electronics industry. Export sales from U.S. businesses were at $48,852 compared with $50,243 in1996. International sales, comprised of all sales from our operations in Europe,totaled $152,079 as compared with $151,466 in 1996. - - --------------- (dollars in thousands, except share data) 18 20 Total gross profit in 1997 increased to $113,962, resulting in a highergross margin percentage of 30.0% of gross sales compared with 27.4% in 1996. Thegross margin increase was due to an improved product mix of sales to includehigher pharmaceutical actives and intermediates, production efficiencies, andincreased plant throughput, in line with management's continued focus on higherperforming, more profitable product lines. Excluding the BioWhittakeracquisition, the gross margin would have been 29.3%. Selling, general and administrative expenses as a percentage of gross saleswere 13.8% in 1997, up from 12.4% in 1996. The 1997 expense of $52,688 was$6,809 (15%) above 1996 primarily due to addition of BioWhittaker in the fourthquarter 1997 and incremental expenses associated with tax planning strategies.Expenses were reduced by a $2,400 recovery of previously incurred environmentalcosts as a result of a settlement with a prior owner of one of the Company'soperating facilities. The Company conducts periodic reviews of its environmental and litigationmatters, prepares estimates of the range of potential future costs of eachmatter wherever possible, and adjusts the accruals for environmentalcontingencies as circumstances warrant. No adjustments were made to this reservein 1997. Research and development expenses of $10,600 were 2.8% of gross sales in1997, and represented a 15% increase from 1996. A portion of this increase wasdue to costs associated with the Albany Molecular contract and the addition ofBioWhittaker. As previously announced in November 1997, Cambrex recorded a charge of$14,000 in the fourth quarter 1997 for the value of in-process research anddevelopment at the time of the acquisition of BioWhittaker, Inc. which wascompleted on October 3, 1997. This charge, which is consistent withpharmaceutical industry practice, reflects the recognition of the value of thecontinuing efforts to develop new products in the biotechnology marketplace.These research and development projects were not commercially viable and had noalternative future use at the date of acquisition. Management intends tocontinue funding these projects, which will permit BioWhittaker to maintain itsmarket leadership position. The operating profit in 1997 was $36,674, including the non-recurringcharge for in-process research and development of $14,000, versus $46,274 in1996. Excluding the charge, operating profit would have been $50,674. Net interest expense of $5,330 in 1997 reflected a decrease of $469 (8%)from 1996. The decrease was due to an average interest rate in 1997 of 6.84%compared to 7.4% in 1996 offset by the additional borrowings used to finance theBioWhittaker acquisition combined with an increase in the average outstandingdebt. Other income in 1997 was $1,263 compared with $194 in 1996. Other incomeincluded a gain of $954 on the settlement of an intercompany foreign denominatedloan. Additionally, 1997 other income included the final resolution and receiptof the settlement proceeds due from the 1996 premature termination of a contractby the customer of $766, offset by a charge of $507 for the settlement of alegal matter reached during the year. The provision for income taxes for 1997 resulted in an effective rate of45.5%, which includes the $14,000 non-recurring charge for in-process researchand development, versus 30.6% in 1996. The effective tax rate in 1997 would havebeen 31.8% excluding the $14,000 charge, which is not deductible for taxpurposes. The 1997 effective tax rate is the result of continued tax planningefforts to minimize the impact of foreign taxes. In 1996, the Company recorded a$1,500 reversal of tax reserves as a result of a settlement with the InternalRevenue Service related to audits for the years 1988 through 1991. The Company's net income in 1997 was $17,776, including $14,000 for thenon-recurring charge for in-process research and development, compared to$28,225 in 1996. Excluding this charge, net income in 1997 would have been$31,776. - - --------------- (dollars in thousands, except share data) 19 21 1996 COMPARED TO 1995 Gross sales in 1996 were at the same level as 1995. Increases inperformance enhancers and pharmaceutical intermediates were offset by lowersales in our organic intermediates and polymer systems product categories.Active pharmaceutical ingredients were at the same level as 1995. ACTIVE PHARMACEUTICAL INGREDIENTS of $97,582 were at the same level as1995. Increases in the cardiovascular product group of $1,577 and respiratorybulk actives of $2,458 offset decreases in gesture-intestinal of $425,anti-inflammatory bulk actives of $377 and the other bulk actives of $2,384. Gastro-intestinal active ingredients were $31,503, a decrease of $425 (1%)from 1995. This decrease is mainly attributable to Sulfasalazine/Mesalamine,used to treat ulcerative colitis, as a major customer had high inventories inthe last quarter of 1995 and did not reorder until the second quarter 1996. Cardiovascular active ingredients were $21,806, an increase of $1,577 (8%)from 1995. The key products in this total included Diltiazem Hcl, AmiodaroneHcl, Isosorbide-5-mononitrate, Sotalol Hcl and Acebutolol Hcl. The increase ismainly due to the sales of Amiodarone Hcl, used as an anti-arithmic, in newcountries as well as to new customers in 1996. Respiratory actives were $9,409, an increase of $2,458 (35%) from 1995. Thekey product in this category is Cromoglycate sodium which had increased 66% dueto increased demand in U.S. markets. Central nervous system active ingredients of $8,809 were at the same levelas 1995, and included Bromazepan, Alprazolam and Lorazepam among 19 products. Anti-inflammatory active ingredients were $7,966, a $377 (5%) decrease from1995. Included among 12 products are Ketoprofen, Magnesium Salicyliate (forbackache formulas) and Naproxen sodium. Other active ingredients were $18,089, a decrease of $2,384 (12%) from1995, and included items for endocrine, diuretics, anti-infective, immunologyand various other uses. One product decreased $1,132 due to a lack ofavailability of raw materials for production in 1996, but is expected to returnto 1995 levels in 1997. PHARMACEUTICAL INTERMEDIATES of $71,202 were $2,105 above 1995 (3%).Cosmetic products increased $198 and X-Ray Media products increased $3,180,offsetting the decreases in Other Pharmaceutical Intermediates of $818 andHealth products of $455. Health products of $19,548 decreased by $455 (2%) from 1995 in variousproducts, including Niacinamide USP and Pyridine. X-Ray Media products, which include 5 NIPA compounds, of $21,552 increased$3,180 (17%) with the largest increase ($2,067) from one of our U.S. facilities,due to a shift in production by a major customer in 1996 from Europe to the U.S. Cosmetic products of $6,609 were $198 (3%) above 1995 due to higher salesof our proprietary Naturechem product line. Other Pharmaceutical Intermediates of $23,493 decreased $818 (3%) due tothe effect of the loss of the PMPA contract and reduced demand fordextromethorphan intermediates (used in over-the-counter cough suppressants),offset by the initial sales of an advanced intermediate of a new proteaseinhibitor for AIDS treatment. ORGANIC INTERMEDIATES of $73,049 were $4,743 below 1995 (6%). The feedadditives category decreased $7,498 and offset the increases in crop protectionof $1,217 and pigments of $1,538. Feed additives of $29,889 decreased $7,498 (20%) due to reduced pricing andincreased competition in the feed grade Vitamin B3 markets. Sales oforgano-arsenical feed additives, the largest product in feed additives, was down7% from 1995 due to escalated grain prices and increased price competition toend-users. - - --------------- (dollars in thousands, except share data) 20 22 Crop protection intermediates of $31,671 increased $1,217 (4%) from 1995.The increase was due to the renegotiation of a contract for a pyridinederivative used in the manufacture of herbicides in the first quarter 1996.However, Pyridine, which is the largest product in crop protection, was downfrom 1995, due to a major customer purchasing at 1993 levels after two years(1994 and 1995) at above contract levels. Pigments intermediates of $11,489 increased $1,538 (15%) from 1995, due tothe gain in market share of PNBA, a pigment used in dyes and UV protectionagents. PERFORMANCE ENHANCERS of $75,632 were $5,659 above 1995 (8%). Specialtyadditives increased $6,660, photographic products increased $129 and polymerproducts increased $362 from 1995. Catalysts decreased $1,152 and fuel/oilproducts decreased $340. Specialty additives of $22,870 increased $6,660 (41%) from 1995. The keyincrease was the sales of pyridine derivatives to world markets and customersnot previously served. Catalysts products of $15,833 decreased $1,152 (7%) from 1995. Thisdecrease is primarily attributable to lower demand for various catalysts sold byone of our U.S. facilities in the dextromethorphan markets. Polymer products of $16,084 increased $362 (2%) over 1995. The increase wasa crosslinking agent to improve the performance of polycarbonate resins, due towider usage of the product by a major customer. Photographic products of $12,326 increased $129 (1%) from 1995 due to acustomer requiring additional inventory of a polymer used in instant film in thefirst quarter 1996. Fuel/oil products of $8,519 decreased $340 (4%) from 1995. The decrease wasin castor based products used in grease applications. POLYMER SYSTEMS of $52,014 were $2,367 below 1995 (4%), Telecommunicationsdecreased $4,901 and was partially offset by coatings which increased $1,564,and biomedicals of $884. Engineering plastics were at the same level as 1995. Telecommunications of $18,809 decreased $4,901 (21%) from 1995 primarily asa result of the Company's strategic decision to no longer provide product toAT&T. Coatings of $19,138 increased $1,564 (9%) from 1995 due to the sales ofcastor based products to a major coatings manufacturer. Biomedicals of $5,888 increased $884 from 1995 due to both increased demandof end-use products and increased pricing. Export sales from U.S. businesses were at $50,243 compared with $50,608 in1995. International sales, comprised of all sales from our operations in Europe,totaled $151,466 as compared with $144,883 in 1995. During 1996, the PMPA contract with our U.S. facility in Zeeland, Michiganwas terminated prematurely by the customer. A settlement had been agreed uponthat entitles the Company to payments in 1996 and for the next three years.Accordingly, the Company recognized income, net of related costs, ofapproximately $1,100 during 1996. Total gross profit in 1996 increased to $101,336, resulting in a highergross margin percentage of 27.4% of gross sales compared with 27.1% in 1995. Thegross margin increase was due to an improved product mix of sales, productionefficiencies, and increased plant throughput, in line with management'scontinued focus on higher performing, more profitable product lines. Selling, general and administrative expenses as a percentage of gross saleswere 12.4% in 1996, down from 13.0% in 1995. The 1996 expense of $45,879 was$1,872 (4%) below 1995 primarily due to lower legal and environment costs. Suchreductions are the result of recoveries from third parties and reserve reversalsthat exceeded our outlays related to remediation programs in 1996. - - --------------- (dollars in thousands, except share data) 21 23 The Company conducts periodic reviews of its environmental and litigationmatters, prepares estimates of the range of potential future costs of eachmatter wherever possible, and adjusts the accruals for environmentalcontingencies as circumstances warrant. In 1996, this accrual was reduced by$1,000 to reflect our remaining estimated exposure. Research and development expenses of $9,183 were 2.5% of gross sales in1996, and represented a 22% increase from 1995. A portion of this increase wasdue to costs associated with the Oxford Asymmetry contract of $1,000. The operating profit in 1996 increased to $46,274 from $44,503 in 1995 dueto the improved gross margins and the aforementioned reductions in selling,general and administrative expenses. Net interest expense of $5,799 in 1996 reflected a decrease of $4,709 (45%)from 1995. The decrease was due to strong cash flow and to the decreasedoutstanding debt as a result of the equity offering in mid-1995. The interestrate in 1996 was 7.4% compared to 7.7% in 1995. Other income in 1996 was $194 compared with other expense of $2,779 in1995. The difference included 1996 foreign currency transaction gains versuscurrency losses in 1995. The provision for income taxes for 1996 resulted in an effective rate of30.6% versus 37.0% in 1995. The Company recorded a $1,500 reversal of taxreserves as a result of a settlement with the Internal Revenue Service relatedto audits for the years 1988 through 1991. During January 1997, the Companyimplemented tax strategies which, based upon projected domestic andinternational taxable income, should have a favorable impact on the effectivetax rate for 1997 and beyond. However, actual results could differ in the eventof changes in tax regulations or deviations in projections. The Company's net income increased 43.5% to $28,225 compared with a netincome of $19,670 in 1995 primarily due to increased margins and reducedselling, general and administrative expenses and interest. 1995 COMPARED TO 1994 Gross sales in 1995 increased $118,387 (48%) over 1994. Increases occurredin all phases of the business with key increases in active pharmaceuticalingredients which added $73,053 and pharmaceutical intermediates $20,236. ACTIVE PHARMACEUTICAL INGREDIENTS of $96,827 were $73,053 above 1994.Nordic/Profarmaco increased $72,869. The sales of Magnesium Salicyliate (theactive ingredient in backache formulas) accounted for the rest of the increase$416.  Gastro-intestinal active ingredients were $31,928. This category is mainlySulfasalazine/Mesalamine, made in bulk in the U.S. and at Nordic, which are usedto treat ulcerative colitis. Cardiovascular active ingredients were $20,229. The key products in thistotal included Diltiazem Hcl, Isosorbide-5-mononitrate, Sotalol Hcl andAcebutolol Hcl. Endocrine active ingredients were $8,919 and included two keyitems -- Glipizide and Clormadinone. Central nervous system active ingredients were $8,903 and includedBromazepam and Lorazepam among 20 products. Anti-inflammatory active ingredients were $8,343 and include among 15products, Ketoprofen, Magensium Salicyliate (for backache formulas) andPranoprofen. Other active ingredients were $18,505 and included items for respiratorysystem, diuretics, anti-infective, immunology and various other uses. All hadhigher sales than 1994 due to the Nordic/Profarmaco acquisition. - - --------------- (dollars in thousands, except share data) 22 24 PHARMACEUTICAL INTERMEDIATES of $69,097 were $20,236 above 1994 (41%).Nordic/Profarmaco increased $17,270 and excluding the Nordic/Profarmacoincrease: Health decreased $1,661; Cosmetic decreased $2,967; X-Ray Mediaincreased $1,339; and Other Pharmaceutical Intermediates increased $6,255. Health products of $20,003 increased $172 with Nordic increasing $1,833 andall Other Business decreasing $1,661 due to two discontinued product lines(Citrates $913 and Hydrogels $1,922) partially offset by higher Pyridine salesof $939. X-Ray Media products, which include 5 NIPA compounds of $18,372, increased$13,038 with Nordic increasing $11,699 and all other businesses increasing$1,339. Cosmetic products of $6,411 decreased $2,967 from 1994 due to sale of theWickhen product line in 1994 ($2,700 in reduced sales). Other Pharmaceutical Intermediates of $24,311 increased $9,993 with Nordicincreasing $3,738 and all the other businesses increasing $6,255. This increasewas due to sales of the two intermediates used in the formulation ofdextromethorphan, an over-the-counter cough suppressant ($4,951 increase), andMandelic Acid ($1,702 increase). ORGANIC INTERMEDIATES of $77,792 were $13,320 above 1994 (21%). Nordicincreased $9,515 in this category. Excluding the effect of Nordic, cropprotection intermediates increased $3,104 and feed additives increased $701. Thepigment intermediates were all Nordic business. Feed additives of $37,387 increased $632 due in part to improved pricing offeed grade Vitamin B3. Sales of organo-arsenical feed additives, the largestproduct in feed additives, remained at 1994 levels. Crop protection intermediates of $30,454 increased $5,169 from 1994. Theincrease was due to greater off-take of pyridine derivatives used in themanufacture of herbicides. Pyridine, which is the largest product in cropprotection, was at the 1994 level. Pigments intermediates of $9,951 increased $7,519 from 1994 due to the fullyear effect of the Nordic acquisition. These intermediates are used in variousindustrial products including inks, dyes and color additives. PERFORMANCE ENHANCERS of $69,973 were $10,763 above 1994 (18%). Nordicincreased $4,579. Excluding the Nordic increase: photographic products decreased$127 from 1994 levels; catalysts increased $965; specialty additives increased$1,618; fuel/oil products increased $996; and polymer products increased $2,732. Specialty additives of $18,241 increased $3,978 from 1994. This includesNordic's sales increase of $2,360. Other increases include castor oil basedproducts. Catalysts products of $16,985 increased $3,128 from 1994. This increaseincludes Nordic's added sales of $2,163 and increases in various other catalystsof $965. Polymer products of $15,722 increased $2,788 over 1994. The key increaseswere products used as a crosslinking agent to improve the performance ofpolycarbonate resins, as a dye receptor in acrylic fibers for textiles, and ananti-oxidant used in plastics. Photographic products of $10,166 decreased $127 from 1994 mainly due toreduced sales of a polymer used in instant film, due to a customer continuing toreduce inventory levels in 1995. (Refer to the 1994 Form 10-K). Fuel/oil products of $8,859 increased $996 over 1994. Key increase was invarious alkenyl succinic anhydrides (ASA's) used in rust inhibitors, and fueland oil detergents. POLYMER SYSTEMS of $54,381 were $1,013 above 1994. Engineering plasticsincreased $2,970 from 1994 and helped to offset reductions in coatings of $657and telecommunications of $1,320. Biomedicals of $5,004 were at the same levelas 1994. - - --------------- (dollars in thousands, except share data) 23 25 Telecommunications of $23,710 decreased $1,320 from 1994 due to reducedencapsulant sales. This reduction was the result of good weather, and decliningapplications, as domestic customers replace cable lines with fiber optics. Coatings of $17,574 decreased $657 from 1994 due to reduced sales to paintmanufacturers. Engineering plastics of $8,093 increased $2,970 from 1994. This increasewas due to the growing demand for a product used in high performance polysulfoneengineering plastics in electronic and industrial applications, such as computerand television screens, and automobile parts. Export sales from U.S. businesses increased to $50,608 from $44,135 in1994. International sales, comprised of all sales from our acquired operationsin Europe, totaled $144,883 as compared with $34,803 in 1994. Total gross profit of $99,780 increased by $41,899, or 72.4%, from 1994.This was due to the increased sales and higher gross margin percentage whichincreased to 27.1% of gross sales from 23.2% in 1994. The gross margin increasewas due to an improved product mix of sales, reduced cost for major rawmaterials which affected the 1994 margin, and price increases gained in 1995. Selling, general and administrative expenses as a percentage of gross saleswas 13.0% in 1995, up from 12.5% in 1994. The 1995 expense of $47,751 was$16,535 (53.0%) above 1994. The increased operating expenses of acquisitionsmade in 1994 accounted for most of the increase. Other increases included bonusaccruals of $1,400.  Periodically, the Company conducts a comprehensive review of itsenvironmental and litigation issues, prepares estimates of the range ofpotential costs of each issue wherever possible, and adjusts the accruals forenvironmental contingencies as circumstances warrant. There were no provisionsmade in 1995 or 1994. A discussion of such matters is included in the footnotesto the financial statements. Research and development expenses were 2.0% of gross sales in 1995, andrepresented a 0.3% decrease from 1994. Research and development spendingincreased to $7,526 from $5,689 in 1994. The 1994 acquisitions accounted for allof this increase. The operating profit in 1995 increased 112% to $44,503 from $20,976 in1994. The increased operating profits were due to the full year effect of 1994acquisitions and to increased gross margins. Net interest expense of $10,508 in 1995 reflected an increase of $5,927from 1994. The increase was due to $138,000 in financing activities necessaryfor the acquisitions of Seal Sands and Nordic/Profarmaco. Additionally, theinterest rate in 1995 was 7.7% compared to 6.2% in 1994. The provision for income taxes for 1995 resulted in an effective rate of37.0% versus 34.1% in 1994. The rate increased due to the mix of income betweeninternational and domestic subsidiaries. Other expense in 1995 was $2,779 compared with other income of $497 in1994. The difference included 1995 currency losses at Nordic and Profarmaco, aswell as the writedowns of the carrying value of equipment no longer in use. The Company's net income increased 76.8% to $19,670 compared with a netincome of $11,126 in 1994. LIQUIDITY AND CAPITAL RESOURCES Net cash flow from operations was $52,579 for the year ended December 31,1997 compared with $66,785 in 1996. The decrease in cash flow is primarily dueto increased inventories, as well as decreased income taxes payable due to thetiming of foreign tax payments, and payments made during 1997 for the favorablesettlement reached with the Internal Revenue Service at the end of 1996. - - --------------- (dollars in thousands, except share data) 24 26 Capital expenditures were $35,935 in 1997, $32,396 in 1996, and $46,398 in1995. The largest expenditures in 1997 were for new business projects includingthe construction of pilot plants at Salsbury Chemicals and Zeeland Chemicalswhich incorporate cGMP capabilities. These facilities have begun actualproduction in the fourth quarter of 1997. Other expenditures were mostly forplant upgrades, including additional batch still capabilities at our Harrimanfacility. On September 16, 1997, the Company entered into a new five year CreditAgreement (the "Agreement") with a bank group headed by The Chase Manhattan Bankas Administrative Agent and The First National Bank of Chicago as DocumentationAgent. The bank group has a total of 13 domestic banks and 7 internationalbanks. The Agreement provides the Company with a $400,000 borrowing facility.The new Agreement replaces the previously existing Revolving Credit Agreementwith NBD Bank, N.A. The Company has pledged 66% of the common stock of the Company's foreignsubsidiaries as collateral. The Agreement permits the Company to choose betweenvarious interest rate options. Under the Agreement, the interest rate optionsavailable to the Company are: (a) U.S. Prime rate or (b) LIBOR plus theapplicable margin (ranging from .225% of 1% to .5% of 1%) or (c) Competitive Bidat a LIBOR Rate Borrowing or a Fixed Rate Borrowing to be determined by auction.The applicable margin is adjusted based upon the Funded Indebtedness to CashFlow Ratio of the Company. Additionally, the Company pays a commitment fee ofbetween .15% to .25% on the entire portion of the Agreement. On September 18, 1997, the Company utilized $60,000 of the Agreement inorder to repay the then outstanding balance under the previously existingRevolving Credit Agreement. On September 30, 1997, the Company borrowed $126,000to finance the acquisition of the outstanding common stock of BioWhittaker. Ofthis amount, $116,000 was utilized on September 30, 1997 to acquire the 93% ofBioWhittaker shares which had been tendered at that date. The Companysubsequently utilized the remaining portion to finance the acquisition of theremaining 7% of BioWhittaker on October 3, 1997. The undrawn borrowing availability under the Agreement as of December 31,1997 was $207,400. There is $192,600 outstanding as of December 31, 1997.Management is of the opinion that these amounts, together with cash flows fromoperations, are adequate for meeting the company's operating, financing andcapital requirements. On July 24, 1995, the Company raised $62,572 in a public offering, whichwas used to pay down outstanding debt ($50,000 short-term bridge loan, $12,572long-term) under the old credit agreement. Effective July 24, 1996, the Board of Directors approved a three-for-twosplit of the Company's Common Stock, $.10 par value, in the form of a 50% stockdividend for holders of record on July 8, 1996. After giving effect to a three-for-two stock split approved by theCompany's Board of Directors on July 24, 1996, the Company paid cash dividendsof $0.17 per share in 1996. A regular cash dividend has been declared by theBoard of Directors on the Company's Common Stock since the fourth quarter, 1989. The Company buys materials and sells products in a variety of currencies invarious parts of the world. Its results are therefore impacted by changes in therelative value of currencies in which it deals. Prior to the acquisition ofNordic and Profarmaco in October, 1994, this risk was not considered to besignificant and the Company had no program to mitigate foreign currency risk. The Company's primary market risk relates to exposure to foreign currencyexchange rate fluctuations on transactions entered into by our foreignoperations which are primarily denominated in the U.S. dollar, Deutsche mark andBritish pound sterling. The Company currently uses foreign currency forwardexchange and has used put and call option contracts in the past to mitigate theeffect of short-term foreign exchange rate movements on the Company's operatingresults. The notional amount of these contracts is $42,829 which the Companyestimates to be approximately 56% of the foreign currency exposure during theperiod covered resulting in a deferred currency loss of $122 at December 31,1997. An additional $3,597 of the foreign currency exposure is protected throughexport financing. - - --------------- (dollars in thousands, except share data) 25 27 ENVIRONMENTAL The Company maintains environmental and industrial safety and healthcompliance programs at its plants, and believes that its manufacturingoperations are in general compliance with all applicable safety, health andenvironmental laws. Through the activities of its predecessors and third parties in connectionwith the handling and disposal of hazardous and other wastes, the Company maybecome liable, irrespective of fault, for certain site remediation costs underfederal and state environmental statutes. Descriptions of such environmentallyrelated contingencies are presented in Note #21 to the consolidated financialstatements and incorporated herein by reference. During January 1997, an opinion was rendered against Cosan ChemicalCorporation (a subsidiary of Cambrex) by the United States District Court of NewJersey in a matter that has been pending since 1991. The opinion addressedCosan's liability for contamination at a site in Clifton, New Jersey which waspreviously owned and operated by Cosan. In the opinion, Cosan was found liablefor past remediation costs in the amount of approximately $800 plus prejudgmentinterest on such costs. Additionally, Cosan was found primarily responsible forthe future remediation costs for the site. The judge also awarded treble damageson the past costs, prejudgment interest and future costs. To avoid trebledamages for future costs, Cosan entered into an Administrative Consent Orderwith the State to perform a major portion of the future remediation at the site.During 1997, the judge reversed the decision regarding prejudgment interest.Also, during 1997, both Cosan and the plaintiffs appealed various aspects of thedecision. In January 1998, the appeals were heard before the United States Courtof Appeals for the Third Circuit. A decision has not been rendered. Theestimated range of costs for this case have been considered in the Company'sreserve assessment. During November 1997, a settlement was reached between Nepera, Inc. (asubsidiary of the Company), a former owner of the Nepera facility and theoriginal owner of the facility pertaining to past and future costs ofremediating two sites. Under the terms of the settlement, the original siteowner has placed in escrow approximately $13,000 to provide for past and futureremediation costs at the two sites in exchange for a release from therequirement to clean up the two sites. After certain administrative proceedings,the funds will be placed in a Trust for the benefit of remediating the two siteson behalf of Nepera and the other former site owner. As permitted under theterms of the agreement, Nepera is eligible to recover and has sought to recover$2,400 of past costs from this settlement which was recognized in the results ofoperations and a receivable for this amount in the 1997 financial statements.The remaining funds available from this settlement should be sufficient toprovide for the future remediation costs for these two sites based upon currentestimates of such costs. The resolution of such matters often spans several years and frequentlyinvolves regulatory oversight and/or adjudication. Additionally, manyremediation requirements 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 ofrelated cash disbursements cannot be determined with certainty. However,management is of the opinion that while the ultimate liability resulting fromthese matters may have a material effect upon the results of operations in anygiven year, they will not have a material adverse effect upon the Company'sliquidity nor its financial position. IMPACT OF RECENT ACCOUNTING PRONOUNCEMENTS Statement of Financial Accounting Standards No. 130 "ReportingComprehensive Income" requires that comprehensive income and its components bereported in the financial statements. The Company is required to adopt thisstandard in 1998 and is currently evaluating this standard. Statement of Financial Accounting Standards No. 131 "Disclosures AboutSegments of an Enterprise and Related Information" requires that publicly tradedcompanies report financial and descriptive information about its reportableoperating segments. The Company is required to adopt this standard in 1998 andis currently evaluating the impact of this standard. - - --------------- (dollars in thousands, except share data) 26 28 Statement of Financial Accounting Standards No. 132 "Employers' DisclosuresAbout Pensions and Other Postretirement Benefits" changes current financialstatement disclosure requirements from those that were required under FinancialAccounting Standard No. 87, "Employers' Accounting for Pensions," FinancialAccounting Standard No. 88, "Employers' Accounting for Settlement andCurtailments of Defined Benefit Pension Plans and for Termination Benefits," andFinancial Accounting Standard No. 106, "Employers' Accounting for PostretirementBenefit Other Pensions." The Company is required to adopt this standard in 1998and is currently evaluating this standard. The Company is in the process of implementing new information andtransaction systems which are year 2000 compliant. The implementation at allcurrent Company sites is anticipated to be completed by the end of 1998. ITEM 8 -- FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. The following consolidated financial statements and selected quarterlyfinancial data of the Company are filed under this item: PAGE NUMBER (IN THIS REPORT) ----------------- Report of Independent Accountants........................... 28Consolidated Balance Sheets as of December 31, 1997 and 1996...................................................... 29Consolidated Income Statements for the Years Ended December 31, 1997, 1996 and 1995.......................................... 36Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 1997, 1996 and 1995.............. 31Consolidated Statements of Cash Flows for the Years Ended December 31, 1997, 1996 and 1995.......................... 32Notes to Consolidated Financial Statements.................. 33Consolidated Quarterly Financial Data (unaudited) for the Years Ended December 31, 1997 and 1996.................... 58 The consolidated financial statements and financial statement schedule arefiled pursuant to Item 14 of this report. - - --------------- (dollars in thousands, except share data) 27 29 REPORT OF INDEPENDENT ACCOUNTANTS To the Stockholders and Board of Directors of Cambrex Corporation: We have audited the accompanying consolidated balance sheets of CambrexCorporation and Subsidiaries (the "Company") as of December 31, 1997 and 1996,and the related consolidated statements of income, stockholders' equity and cashflows and the consolidated financial statement schedule for each of the threeyears in the period ended December 31, 1997, as listed in Item 14(a) of thisForm 10-K. These consolidated financial statements and financial statementschedule are the responsibility of the Company's management. Our responsibilityis to express an opinion on these consolidated financial statements andfinancial statement schedule based on our audits.  We conducted our audits in accordance with generally accepted auditingstandards. Those standards require that we plan and perform the audits to obtainreasonable assurance about whether the financial statements are free of materialmisstatement. An audit includes examining, on a test basis, evidence supportingthe amounts and disclosures in the financial statements. An audit also includesassessing the accounting principles used and significant estimates made bymanagement, as well as evaluating the overall financial statement presentation.We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to abovepresent fairly, in all material respects, the consolidated financial position ofCambrex Corporation and Subsidiaries as of December 31, 1997 and 1996, and theconsolidated results of their operations and their cash flows for each of thethree years in the period ended December 31, 1997, in conformity with generallyaccepted accounting principles. In addition, in our opinion, the consolidatedfinancial statement schedule referred to above, when considered in relation tothe basic consolidated financial statements taken as a whole, presents fairly,in all material respects, the information required to be included therein. COOPERS & LYBRAND L.L.P. Parsippany, New JerseyJanuary 16, 1998 28 30 CAMBREX CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) ASSETS DECEMBER 31, -------------------- 1997 1996 -------- -------- Current assets: Cash and cash equivalents................................. $ 21,469 $ 7,353 Receivables: Trade accounts, less allowance for doubtful accounts of $1,705 and $1,453 at respective dates................. 55,733 52,910 Other.................................................. 6,150 3,840 -------- -------- 61,883 56,750 Inventories, net.......................................... 91,733 64,209 Deferred tax assets....................................... 5,947 5,009 Prepaid expenses and other current assets................. 3,622 3,541 -------- -------- Total current assets.............................. 184,654 136,862Property, plant and equipment, net.......................... 237,342 216,481Intangible assets, net...................................... 127,003 49,573Other assets................................................ 3,427 1,528 -------- -------- Total assets...................................... $552,426 $404,444 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITYCurrent liabilities: Accounts payable and accrued liabilities.................. $ 58,471 $ 54,754 Income taxes payable...................................... 4,857 8,085 Short-term debt........................................... 3,597 3,880 Current portion of long-term debt......................... 986 7,231 -------- -------- Total current liabilities......................... 67,911 73,950Long-term debt.............................................. 194,325 60,152Deferred tax liabilities.................................... 43,436 21,587Other noncurrent liabilities................................ 20,800 19,710 -------- -------- Total liabilities................................. 326,472 175,399 Commitments and contingenciesStockholders' equity: Common Stock, $.10 par value; issued 12,967,287 and 12,769,175 shares at respective dates.................. 1,295 1,275 Additional paid-in capital................................ 154,406 149,191 Retained earnings......................................... 96,027 80,608 Additional minimum pension liability...................... -- (553) Treasury stock, at cost; 1,040,561 and 1,049,895 shares at respective dates....................................... (9,458) (9,449) Shares held in trust, at cost; 180,277 and 132,126 shares at respective dates.................................... (1,275) (718) Cumulative translation adjustment......................... (15,041) 8,691 -------- -------- Total stockholders' equity........................ 225,954 229,045 -------- -------- Total liabilities and stockholders' equity........ $552,426 $404,444 ======== ======== See accompanying notes to consolidated financial statements. 29 31 CAMBREX CORPORATION AND SUBSIDIARIES CONSOLIDATED INCOME STATEMENTS (IN THOUSANDS, EXCEPT PER-SHARE DATA) YEARS ENDED DECEMBER 31, -------------------------------- 1997 1996 1995 -------- -------- -------- Gross sales................................................ $380,083 $369,479 $368,070Net revenues............................................... 374,215 359,385 357,176 Cost of goods sold....................................... 260,253 258,049 257,396 -------- -------- --------Gross profit............................................... 113,962 101,336 99,780 Selling, general and administrative...................... 52,688 45,879 47,751 Research and development................................. 10,600 9,183 7,526 Non-recurring in-process R&D charge...................... 14,000 -- -- -------- -------- --------Operating profit........................................... 36,674 46,274 44,503Other (income) expenses Interest income.......................................... (238) (353) (638) Interest expense......................................... 5,568 6,152 11,146 Other -- net............................................. (1,263) (194) 2,779 -------- -------- --------Income before income taxes................................. 32,607 40,669 31,216Provision for income taxes................................. 14,831 12,444 11,546 -------- -------- --------Net income................................................. $ 17,776 $ 28,225 $ 19,670 ======== ======== ======== Earnings per share of common stock and common stock equivalents*: Basic.................................................... $ 1.50 $ 2.43 $ 2.06 Diluted.................................................. $ 1.46 $ 2.37 $ 1.96 Weighted average shares outstanding*:Weighted average shares outstanding*: Basic.................................................... 11,814 11,608 9,539 Diluted.................................................. 12,210 11,896 10,053 - - --------------- * Share and per share data reflect adjustments for a three-for-two stock split in the form of a 50% stock dividend paid in July, 1996. All earnings per share calculations reflect the adoption of SFAS No, 128, "Earnings per Share." See accompanying notes to consolidated financial statements. 30 32 CAMBREX CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) COMMON STOCK NONVOTING ADDITIONAL ---------------------- COMMON ADDITIONAL MINIMUM SHARES PAR VALUE STOCK PAID-IN RETAINED PENSION TREASURY ISSUED ($.10) (PAR $.10) CAPITAL EARNINGS LIABILITY STOCK ---------- --------- ---------- ---------- -------- ---------- -------- Balance at December 31, 1994.............. 6,078,781 $ 607 $ -- $ 73,673 $35,935 $ -- $(9,690) Net income.............................. 19,670 Cash dividends at $0.13 per share....... (1,289) Exercise of stock options............... 392,050 39 2,755 Tax benefit of stock options exercised............................. 2,721 Shares issued in public offering........ 1,725,000 172 62,400 Additional minimum pension liability.... (750) Shares issued under savings plan........ 904 530 Adjustment for foreign currency translation........................... ---------- ------ ---- -------- ------- ----- -------Balance at December 31, 1995.............. 8,195,831 $ 818 $ -- $142,453 $54,316 $(750) $(9,160) Net income.............................. 28,225 Cash dividends at $0.17 per share....... (1,933) Exercise of stock options............... 334,650 33 4,677 (856) Tax benefit of stock options exercised............................. 1,406 Reduction of additional minimum pension liability............................. 197 Shares issued to Board of Directors..... 87 62 Shares issued under savings plan........ 992 505 Three-for-two stock split............... 4,238,694 424 (424) Adjustment for foreign currency translation........................... ---------- ------ ---- -------- ------- ----- -------Balance at December 31, 1996.............. 12,769,175 $1,275 $ -- $149,191 $80,608 $(553) $(9,449) Net income.............................. 17,776 Cash dividends at $0.20 per share....... (2,357) Exercise of stock options............... 198,112 20 3,555 (201) Tax benefit of stock options exercised............................. 718 Reduction of additional minimum pension liability............................. 553 Shares issued to Board of Directors..... 134 54 Shares issued under savings plan........ 808 138 Adjustment for foreign currency translation........................... ---------- ------ ---- -------- ------- ----- -------Balance at December 31, 1997.............. 12,967,287 $1,295 $ -- $154,406 $96,027 $ -- $(9,458) ========== ====== ==== ======== ======= ===== ======= SHARES CUMULATIVE TOTAL HELD IN TRANSLATION STOCKHOLDERS' TRUST ADJUSTMENT EQUITY ------- ----------- ------------- Balance at December 31, 1994.............. $ -- $ 1,441 $101,966 Net income.............................. 19,670 Cash dividends at $0.13 per share....... (1,289) Exercise of stock options............... 2,794 Tax benefit of stock options exercised............................. 2,721 Shares issued in public offering........ 62,572 Additional minimum pension liability.... (750) Shares issued under savings plan........ 1,434 Adjustment for foreign currency translation........................... 366 366 ------- -------- --------Balance at December 31, 1995.............. $ -- $ 1,807 $189,484 Net income.............................. 28,225 Cash dividends at $0.17 per share....... (1,933) Exercise of stock options............... (718) 3,136 Tax benefit of stock options exercised............................. 1,406 Reduction of additional minimum pension liability............................. 197 Shares issued to Board of Directors..... 149 Shares issued under savings plan........ 1,497 Three-for-two stock split............... Adjustment for foreign currency translation........................... 6,884 6,884 ------- -------- --------Balance at December 31, 1996.............. $ (718) $ 8,691 $229,045 Net income.............................. 17,776 Cash dividends at $0.20 per share....... (2,357) Exercise of stock options............... (557) 2,817 Tax benefit of stock options exercised............................. 718 Reduction of additional minimum pension liability............................. 553 Shares issued to Board of Directors..... 188 Shares issued under savings plan........ 946 Adjustment for foreign currency translation........................... (23,732) (23,732) ------- -------- --------Balance at December 31, 1997.............. $(1,275) $(15,041) $225,954 ======= ======== ======== See accompanying notes to consolidated financial statements. 31 33 CAMBREX CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS) YEARS ENDED DECEMBER 31, ------------------------------- 1997 1996 1995 --------- -------- -------- Cash flows from operations: Net income................................................ $ 17,776 $ 28,225 $ 19,670 Depreciation and amortization............................. 31,122 28,493 24,961 Non-recurring in-process R&D charge....................... 14,000 -- -- Recognition of reimbursement for past environmental costs.................................................. (2,400) -- -- Gain realized on settlement of intercompany foreign denominated loan....................................... (954) -- -- Provision for inventories................................. 2,489 1,099 3,052 Reversal of tax contingencies............................. -- (1,500) -- Reversal of environmental contingencies................... -- (1,000) -- Deferred income taxes..................................... 4,236 1,721 751 Loss on disposal of property, plant and equipment......... -- -- 1,562 Changes in assets and liabilities (net of assets and liabilities acquired): Receivables, net....................................... 2,321 1,205 (4,296) Inventories............................................ (8,815) 6,284 (9,952) Prepaid expenses and other current assets.............. 323 1,663 (1,409) Accounts payable and accrued liabilities............... (5,418) (6,199) 8,013 Income taxes payable................................... (2,792) 6,620 958 Other noncurrent assets and liabilities................ 691 174 1,254 --------- -------- -------- Net cash provided from operations................. 52,579 66,785 44,564 --------- -------- --------Cash flows from investing activities: Capital expenditures...................................... (35,935) (32,396) (46,398) Acquisition of businesses (net of cash acquired).......... (128,916) -- -- Other investing activities................................ -- (1,345) (2,038) --------- -------- -------- Net cash (used in) investing activities........... (164,851) (33,741) (48,436) --------- -------- --------Cash flows from financing activities: Dividends................................................. (2,357) (1,933) (1,289) Net increase (decrease) in short-term debt................ 370 (1,025) (47,663) Long-term debt activity (including current portion): Borrowings............................................. 235,900 44,000 73,884 Repayments............................................. (109,649) (80,599) (90,257) Proceeds from the issuance of common stock................ 3,575 6,116 65,367 Proceeds from the sale of treasury stock.................. 933 790 1,434 --------- -------- -------- Net cash provided from (used in) financing activities...................................... 128,772 (32,651) 1,476 --------- -------- --------Effect of exchange rate changes on cash..................... (2,384) 2,119 (1,850) --------- -------- --------Net increase (decrease) in cash and cash equivalents........ 14,116 2,512 (4,246)Cash and cash equivalents at beginning of year.............. 7,353 4,841 9,087 --------- -------- --------Cash and cash equivalents at end of year.................... $ 21,469 $ 7,353 $ 4,841Cash and cash equivalents at end of year.................... $ 21,469 $ 7,353 $ 4,841 ========= ======== ========Supplemental disclosure: Interest paid (net of capitalized interest)............ $ 5,275 $ 6,859 $ 12,254 Income taxes paid...................................... $ 13,344 $ 3,695 $ 5,321Noncash transactions: Additional minimum pension liability (eliminated from) charged to stockholders' equity...................... $ (553) $ (197) $ 750 Liabilities established under deferred compensation plan................................................. $ 557 $ 718 $ -- Tax benefit on stock options exercised................. $ 718 $ 1,406 $ 2,721 Liabilities assumed in connection with acquisition..... $ 1,253 $ -- $ -- See accompanying notes to consolidated financial statements. 32 34 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")manufactures and markets a broad line of pharmaceutical related products,specialty chemicals, fine chemicals and commodity chemical intermediates to adiverse customer base for use in a wide variety of applications. The Companyoperates in two segments, biotechnology and pharmaceutical specialty and finechemicals. The pharmaceutical specialty and fine chemicals segment includes fiveproduct categories: active pharmaceutical ingredients, pharmaceuticalintermediates, organic intermediates, performance enhancers and polymer systems. (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 intercompany balances andtransactions have been eliminated in consolidation. Cash Equivalents Temporary cash investments with an original maturity of less than threemonths are considered cash equivalents. Financial Instruments The financial instruments of the Company consist of cash and cashequivalents, trade receivables, short-term debt, and long-term debt. At December31, 1997, the carrying amount of these financial instruments approximate theirfair value. The carrying amounts for cash and cash equivalents, tradereceivables, and short-term debt approximate fair value because of the shortmaturity of these instruments. The carrying amount for long-term debtapproximates fair value due to the variable nature of the interest rate. The Company places its cash equivalents with financial institutions andlimits the amount of credit exposure to any one financial institution.Concentrations of credit risk with respect to trade receivables are limited dueto the large numbers of customers comprising the Company's customer base, andtheir dispersion across different business and geographic areas. No one customerrepresents more than 10% of sales or receivables. Gains and losses on foreign currency forward exchange contracts pertainingto existing assets or liabilities, or hedges of firm commitments are deferredand are recognized in income as part of the related transactions. Although thepurpose for using put and call option contracts is to mitigate currency risk,these particular instruments do not qualify for hedge accounting under generallyaccepted accounting principles and accordingly, must be adjusted to market valueat the end of each accounting period. Inventories Inventories are stated at the lower of cost, determined on a first-in,first-out basis, or market. 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............................ 15 to 20 yearsMachinery and equipment............................... 5 to 10 yearsFurniture and fixtures................................ 3 to 5 years 33 35 CAMBREX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)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 other (income) expense, net. Interest is capitalized inconnection with the construction and acquisition of assets. The capitalizedinterest is recorded as part of the cost of the asset to which it relates and isamortized over the asset's estimated useful life. Total interest capitalized inconnection with ongoing construction activities in 1997, 1996 and 1995 amountedto $1,045, $677 and $749, respectively. Software Development Costs The Company capitalizes development costs of computer software usedinternally; which include consulting for modifications and implementation, andcosts for employees dedicated solely to the project. Total capitalized softwaredevelopment costs amounted to $2,487 and $2,806 in 1997 and 1996. The cost of capitalized software is amortized over five years using thestraight line method. Amortization expense related to software development costswas $467, $27 and $0 for the years ended December 31, 1997, 1996 and 1995,respectively. Intangible Assets Intangible assets are recorded at cost and amortized on a straight-linebasis as follows: Patents................................. Amortized over the remaining life of individual patents (average 5 years)Goodwill................................ 4 to 20 yearsProduct technology...................... 5 to 17 yearsNon-compete agreements.................. 5 yearsTrademarks and other.................... 1 to 40 years At each balance sheet date, the Company evaluates the recoverability ofintangibles based upon expectations of non-discounted cash flows and operatingincome for each subsidiary having material intangible assets. Impairment of Long-Lived Assets Statement of Financial Accounting Standards No. 121 "Accounting for theImpairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of"requires that long-lived assets and certain identifiable intangibles held and tobe used by an entity be reviewed for impairment whenever events or changes incircumstances indicate that the carrying amount of an asset may not berecoverable. The Company adopted this standard in 1996 with no material impacton its results of operations. Revenue Recognition Revenues are generally recognized when products are shipped. Income Taxes The provision for income taxes is based upon income recognized forfinancial statement purposes and includes the effect of deferred taxes. Thesedeferred taxes are the result of transactions which are recognized in differentperiods for financial and income tax reporting. 34 36 CAMBREX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED) 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. U.S.income taxes are provided on planned repatriation of a portion of foreignearnings and consider applicable foreign tax credits. Cambrex also intends toindefinitely reinvest the unremitted earnings of certain non-U.S. subsidiaries,and as such, separate provisions for income taxes have been determined for theseentities and U.S. taxes have not been provided. At December 31, 1997, 1996 and1995, the cumulative amount of unremitted earnings of non-U.S. subsidiaries was$16,140, $3,605 and $2,742, respectively. 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 Remediation Costs The Company accrues for losses associated with environmental remediationobligations when such losses are probable and reasonably estimable, as well asan estimate of legal costs associated with specific environmental matters.Accruals for estimated losses from environmental remediation obligationsgenerally are recognized no later than completion of the remedial feasibilitystudy. Such accruals are adjusted as further information develops orcircumstances change. Costs of future expenditures for environmental remediationobligations are not discounted to their present value. Foreign Currency The functional currency of the Company's foreign subsidiaries is theapplicable local currency. The translation of the applicable foreign currenciesinto 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 resulting fromforeign currency transactions are included in the results of operations as acomponent of other revenues in 1997 and as a component of other income in 1996and 1995. Gains or losses relating to intercompany transactions of a long-terminvestment nature are accumulated in stockholders' equity. Foreign currency nettransaction gains (losses) were $2,668, $194, and ($1,400) in 1997, 1996 and1995, respectively. Earnings Per Common Share Earnings per share of Common Stock for 1997, 1996 and 1995 reflect theadoption of SFAS No. 128, "Earnings per Share." All diluted earnings per shareare computed on the basis of the weighted average shares of common stockoutstanding plus common equivalent shares arising from the effect of dilutivestock options, using the treasury stock method. 35 37 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, ----------------------------- 1997 1996 1995 ------- ------- ------- NUMERATOR:Income available to common stockholders....... $17,776 $28,225 $19,670DENOMINATOR:Basic weighted average shares outstanding*.... 11,814 11,608 9,539Effect of dilutive stock options.............. 396 288 514 ------- ------- -------Diluted weighted average shares outstanding... 12,210 11,896 10,053Basic earnings per share...................... $ 1.50 $ 2.43 $ 2.06Diluted earnings per share.................... $ 1.46 $ 2.37 $ 1.96 - - ---------------* Share and per share date reflect adjustments for a three-for-two split in the form of a 50% stock dividend paid in July, 1996. All earnings per share calculations reflect the adoption of SFAS No. 128, "Earnings per Share." (3) ACQUISITIONS AND DIVESTITURES On September 30, 1997, the Company acquired approximately 93% of theoutstanding common stock of BioWhittaker for approximately $116,000. Theremaining 7% of the outstanding common stock was subsequently acquired onOctober 3, 1997 for an additional $10,000. The acquisition price wasapproximately $133,500 (including acquisition costs of $7,500) which wasfinanced by the Company's new Credit Agreement. The acquisition has beenaccounted for as a purchase transaction and as such, the purchase price has beenallocated to the fair value of assets and liabilities acquired. The excess ofthe purchase price over the fair value of the net assets acquired wasapproximately $48,000 and has been recorded as goodwill and will be amortizedover 20 years. The allocation to in-process research and development of $14,000represents the value of BioWhittaker's research and development efforts whichhad not reached commercial viability with no alternative future use and were,therefore, immediately expensed as required by generally accepted accountingprinciples. Unaudited pro forma results of operations of the Company and BioWhittakerfor the years ended December 31, 1997 and 1996, as if it had occurred on January1, 1996 are listed below. YEAR ENDED DECEMBER 31, ------------------------ 1997 1996 ---------- ---------- Net revenues........................................... $416,871 $410,844Net income............................................. 17,146 21,564Earnings per share Basic............................................. $ 1.45 $ 1.86 Diluted........................................... $ 1.40 $ 1.81 The unaudited pro forma adjustments give effect to the depreciation ofproperty, plant and equipment, amortization of the goodwill, interest on thedebt assumed to finance the acquisition, and the tax effects of each of theseitems. The unaudited pro forma information is not necessarily indicative of theresults of operations that would have occurred had the combination been ineffect at January 1, 1996, nor of future results of operations of the combinedcompanies. 36 38 CAMBREX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) (3) ACQUISITIONS AND DIVESTITURES -- (CONTINUED) The fair value of assets acquired and liabilities assumed are as follows(giving effect to the total purchase price): Cash...................................................... $ 4,557Receivables............................................... 6,795Inventories............................................... 25,389Deferred tax asset........................................ 770Other current assets...................................... 556Property, plant and equipment............................. 24,190In-process research and development....................... 14,000Other identified intangibles.............................. 41,590Goodwill.................................................. 47,859Other assets.............................................. 89Accounts payable and accrued liabilities.................. (10,458)Income taxes payable...................................... (1,073)Long term debt............................................ (1,755)Deferred tax liabilities.................................. (19,036) -------- $133,473 ======== (4) FUTURE IMPACT OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS  Statement of Financial Accounting Standards No. 130 "ReportingComprehensive Income" requires that comprehensive income and its components bereported in the financial statements. The Company is required to adopt thisstandard in 1998 and is currently evaluating this standard. Statement of Financial Accounting Standards No. 131 "Disclosures AboutSegments of an Enterprise and Related Information" requires that publicly tradedcompanies report financial and descriptive information about its reportableoperating segments. The Company is required to adopt this standard in 1998 andis currently evaluating the impact of this standard. Statement of Financial Accounting Standards No. 132 "Employers' DisclosuresAbout Pensions and Other Postretirement Benefits" changes current financialstatement disclosure requirements from those that were required under FinancialAccounting Standard No. 87, "Employers' Accounting for Pensions," FinancialAccounting Standard No. 88, "Employers' Accounting for Settlement andCurtailments of Defined Benefit Pension Plans and for Termination Benefits," andFinancial Accounting Standard No. 106, "Employers' Accounting for PostretirementBenefit Other Pensions." The Company is required to adopt this standard in 1998and is currently evaluating this standard. 37 39 CAMBREX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) (5) INVENTORIES Inventories consist of the following: DECEMBER 31, ------------------ 1997 1996 ------- ------- Finished goods........................................... $42,974 $29,443Work in process.......................................... 25,217 15,463Raw materials............................................ 18,254 13,179Supplies................................................. 5,288 6,124 ------- ------- Total............................................... $91,733 $64,209 ======= ======= (6) PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment consists of the following: DECEMBER 31, ---------------------- 1997 1996 --------- --------- Land................................................. $ 10,555 $ 8,132Buildings and improvements........................... 76,476 55,120Machinery and equipment.............................. 256,689 229,358Furniture and fixtures............................... 6,555 7,603Construction in progress............................. 19,194 26,845 --------- --------- Total........................................... 369,469 327,058Accumulated depreciation............................. (132,127) (110,577) --------- --------- Net............................................. $ 237,342 $ 216,481 ========= ========= Depreciation expense amounted to $24,666, $22,788, and $19,493 for theyears ended December 31, 1997, 1996 and 1995, respectively. (7) INTANGIBLE ASSETS Components of intangible assets are as follows: DECEMBER 31, -------------------- 1997 1996 -------- -------- Goodwill............................................... $100,229 $ 59,024Other.................................................. 55,977 14,563 -------- -------- Total............................................. 156,206 73,587Accumulated amortization............................... (29,203) (24,014) -------- -------- Net............................................... $127,003 $ 49,573 ======== ======== Amortization expense amounted to $6,456, $5,705 and $5,468 for the yearsended December 31, 1997, 1996 and 1995 respectively. 38 40 CAMBREX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) (8) ACCOUNTS PAYABLE AND ACCRUED LIABILITIES The components of accounts payable and accrued liabilities are as follows: DECEMBER 31, ------------------ 1997 1996 ------- ------- Accounts payable......................................... $28,174 $30,205Salaries, wages and employee benefits payable............ 15,208 13,596Other accrued liabilities................................ 15,089 10,953 ------- ------- Total............................................... $58,471 $54,754 ======= ======= (9) INCOME TAXES Income before taxes consisted of the following:  YEARS ENDED DECEMBER 31, ----------------------------- 1997 1996 1995 ------- ------- ------- Domestic...................................... $13,195 $31,611 $22,543Foreign....................................... 19,412 9,058 8,673 ------- ------- ------- Total.................................... $32,607 $40,669 $31,216 ======= ======= ======= The provision for income taxes consists of the following expenses(benefits): YEARS ENDED DECEMBER 31, ----------------------------- 1997 1996 1995 ------- ------- ------- Current: Federal.................................. $ 2,670 $ 3,783 $ 5,951 State.................................... 427 598 460 Foreign.................................. 7,498 6,342 4,384 ------- ------- ------- 10,595 10,723 10,795 ------- ------- -------Deferred: Federal.................................. 2,272 922 1,008 State.................................... 143 (527) (22) Foreign.................................. 1,821 1,326 (235) ------- ------- ------- 4,236 1,721 751 ------- ------- ------- Total............................... $14,831 $12,444 $11,546 ======= ======= ======= 39 41 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 1997, 1996 and 1995 as follows: YEARS ENDED DECEMBER 31, ----------------------------- 1997 1996 1995 ------- ------- ------- Income tax at Federal statutory rate.......... $11,412 $14,234 $10,926State and local taxes (benefits), net of Federal income tax benefits................. 605 (239) 285Difference between Federal statutory rate and statutory rates on foreign income........... (1,666) 1,771 656Reversal of tax contingency for IRS audit settlement.................................. (728) (1,500) --Return to provision adjustment................ -- (1,066) --Research and experimentation credits.......... (399) (484) --Write off of acquired in-process research and development................................. 4,900 -- --Other......................................... 707 (272) (321) ------- ------- ------- $14,831 $12,444 $11,546 ======= ======= ======= The components of deferred tax assets and liabilities as of December 31,1997 and 1996 relate to temporary differences and carryforwards as follows: DECEMBER 31, ------------------ 1997 1996 ------- ------- Deferred tax assets: Acquisition reserves................................... $ 732 $ 732 Net operating loss carryforwards....................... 3,896 3,703 Inventory.............................................. 1,235 1,677 Employee benefits...................................... 2,365 883 Receivables............................................ 136 238 ------- ------- Net current deferred tax assets........................ 8,364 7,233 Valuation allowances................................... (2,417) (2,224) ------- ------- Total net deferred tax assets.................. $ 5,947 $ 5,009 ======= =======Deferred tax liabilities: Depreciation........................................... $29,937 $25,366 Environmental reserves................................. (1,261) (2,341) Intangibles............................................ 14,659 (1,585) Other.................................................. 101 147 ------- ------- Total net non-current deferred tax liabilities.................................. $43,436 $21,587 ======= ======= Included within the change in the cumulative translation adjustment for theyear ended December 31, 1997 is $1,608 related to the translation of deferredtax assets and liabilities. Under the tax laws of various foreign countries in which the Companyoperates, net operating losses (NOLs) may be carried forward, subject tostatutory limitations, to reduce taxable income in future years. The tax effectof such foreign NOLs aggregated approximately $3,896 and $3,703 at December 31,1997 and 1996, the majority of which are available on an indefinite carryforwardbasis. However, valuation reserves have 40 42 CAMBREX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) (9) INCOME TAXES -- (CONTINUED)been established against certain NOLs to reflect uncertainties associated withthe realizability of such future benefits. During 1997, the Company concluded some of the ongoing matters with theInternal Revenue Service related to audits for the years 1988 through 1993.  During December 1996, the Company reached a settlement agreement with theInternal Revenue Service related to audits for the years 1998 through 1991.Reversal of reserves no longer needed for this matter increased income by$1,500. (10) SHORT-TERM DEBT Profarmaco has lines of credit in Italy with five local banks (the"Facility"). The Facility is short-term and provides three types of financingwith the following limits: Overdraft Protection of $2,300 (Lire 4.0 billion),Export Financing of $4,500 (Lire 8.0 billion) and Advances on Uncleared Depositsof $1,700 (Lire 3.0 billion). The Overdraft Protection and Export Financingfacilities bear interest at varying rates when utilized, however, Advances onUncleared Deposits (Ricevute Bancarie) bear no interest. Short-term debt at December 31, 1997 and 1996 consists of the following: DECEMBER 31, ------------------- 1997 1996 -------- ------- Export financing facility............................... $ 3,597 $ 2,760Overdraft protection.................................... -- 1,120 -------- ------- Total......................................... $ 3,597 $ 3,880 ======== ======= (11) LONG-TERM DEBT Long-term debt consists of the following: DECEMBER 31, ------------------- 1997 1996 -------- ------- Bank credit facilities(a)............................... $192,600 $66,000Capitalized leases...................................... -- 13Notes payable(b)........................................ 2,711 1,370 -------- ------- Subtotal........................................... 195,311 67,383Less: current portion(c)................................ 986 7,231 -------- -------Total................................................... $194,325 $60,152 ======== ======= (a) On September 16, 1997, the Company entered into a new five year CreditAgreement (the "Agreement") with a bank group headed by The Chase Manhattan Bankas Administrative Agent and The First National Bank of Chicago as DocumentationAgent. The bank group has a total of 13 domestic banks and 7 internationalbanks. The Agreement provides the Company with a $400,000 borrowing facility.The new Agreement replaces the previously existing Revolving Credit Agreementwith NBD Bank, N.A. The Company has pledged 66% of the common stock of the Company's foreignsubsidiaries as collateral. The Agreement permits the Company to choose betweenvarious interest rate options and to specify the portion of the borrowing to becovered by specific interest rate options. Under the Agreement, the interestrate options available to the Company are: (a) U.S. Prime rate or (b) LIBOR plusthe applicable margin (ranging from .225% of 1% to .5% of 1%) or (c) CompetitiveBid at a LIBOR Rate Borrowing or a Fixed Rate 41 43 CAMBREX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) (11) LONG-TERM DEBT -- (CONTINUED)Borrowing to be determined by auction. The applicable margin is adjusted basedupon the Funded Indebtedness to Cash Flow Ratio of the Company. Additionally,the Company pays a commitment fee of between .15% to .25% on the entire portionof the Agreement. The 1997 and 1996 average interest rates were 6.8% and 7.4%. On September 18, 1997, the Company utilized $60,000 of the Agreement inorder to repay the then outstanding balance under the previously existingRevolving Credit Agreement. On September 30, 1997, the company borrowed $126,000to finance the acquisition of the outstanding common stock of BioWhittaker. Ofthis amount, approximately $116,000 was utilized on September 30, 1997. OnOctober 3, 1997, an additional $12,000 was utilized to acquire the remaining 7%of BioWhittaker's common stock. The undrawn borrowing availability under theAgreement as of December 31, 1997 was $207,400. The Agreement is subject to financial covenants requiring the Company tomaintain certain levels of net worth and an interest coverage ratio, as well asa limitation on indebtedness. The Company met all of the bank covenants for1997. (b) As part of the October 12, 1994 acquisition of Nordic and Profarmaco,the Company assumed a government loan made to Profarmaco to financetechnological innovations. The loan of $1,291 bearing interest at 9.21%, isamortized over ten annual payments starting July 26, 1995 and ending July 26,2004. There is $931 and $1,200 outstanding as of December 31, 1997 and 1996,respectively. The Company also assumed a note payable as part of the acquisition ofBioWhittaker in 1997 of $1,253. The note, bearing interest at 8%, is payable inannual installments of $340 and expires in 2001. There is $1,016 outstanding asof December 31, 1997. (c) Aggregate maturities of long-term debt are as follows: 1998...................................... $ 9861999...................................... 4082000...................................... 4252001...................................... 4172002...................................... 192,750Thereafter................................ 325 -------- Total................................ $195,311 ======== (12) DERIVATIVE FINANCIAL INSTRUMENTS The Company uses derivative financial instruments to reduce exposures tomarket risks resulting from fluctuations in interest rates and foreign exchangerates. The Company does not enter into financial instruments for trading orspeculative purposes. The Company is exposed to credit loss in the event ofnonperformance by the other parties to the interest rate swap, forward exchangeand put and call contracts. However, the Company does not anticipatenon-performance by the counterparties. Interest Rate Swap Agreements The Company enters into interest rate swap agreements to reduce the impactof changes in interest rates on its floating rate debt. The swap agreements arecontracts to exchange floating rate for fixed interest payments periodicallyover the life of the agreements without the exchange of the underlying notionalamounts. Notional amounts provide an indication of the extent of the Company'sinvolvement in such agreements but do not represent its exposure to market risk.The following table shows the notional amounts 42 44 CAMBREX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) (12) DERIVATIVE FINANCIAL INSTRUMENTS -- (CONTINUED)outstanding, maturity dates, and the weighted average receive and pay rates ofinterest rate swap agreements as of December 31, 1997. AS OF DECEMBER 31, 1997 -------------------------------------- WEIGHTED AVG. RATE NOTIONAL MATURITY -------------- AMOUNTS DATE RECEIVE PAY -------- -------- ------- --- Interest rate swaps....................... $10,000 1998 5.8% 6.1%Interest rate swaps....................... $10,000 1998 5.9% 5.9%Interest rate swaps....................... $10,000 2000 5.9% 6.1%Interest rate swaps....................... $20,000 2000 5.9% 5.9% Interest expense under these agreements, and the respective debtinstruments that they hedge, are recorded at the net effective interest rate ofthe hedged transactions. The fair value of these agreements were based on quotedmarket prices and was $49,939 at December 31, 1997. Foreign Exchange Instruments The Company's policy is to enter into forward exchange contracts and/orcurrency options to hedge foreign currency transactions. This hedging mitigatesthe impact of short-term foreign exchange rate movements on the Company'soperating results primarily in the United Kingdom, Sweden and Italy. TheCompany's primary market risk relates to exposure to foreign currency exchangerate fluctuations on transactions entered into by these foreign operations whichare denominated primarily in U.S. dollars, Deutsche marks and British poundsterling. As a matter of policy, the Company does not hedge to protect thetranslated results of foreign operations. The Company's forward exchangecontracts do not subject the Company's results of operations to risk due toexchange rate movements because gains and losses on these contracts generallyoffset gains and losses on the transactions being hedged. The forward exchangecontracts have varying maturities with none exceeding twelve months. The Companymakes net settlements for forward exchange contracts at maturity, based uponnegotiated rates at inception of the contracts. At December 31, 1996, the Company's foreign currency options were comprisedof cap and floor options under which a foreign currency option is purchased atone exchange rate and another foreign currency option for equal notional valueis sold at a higher exchange rate. The foreign currency options purchased andsold mature over the same period with premiums paid equal to premiums receivedresulting in zero net cost. The Company believes the use of these optionsreduces its foreign exchange risk by mitigating the range of exposure ofcurrency fluctuation between the put and call exchange rates. All foreigncurrency options outstanding as of December 31, 1996 matured during the firstsix months of 1997. 1997 -------------------------------------- UNREALIZED NOTIONAL FAIR --------------- AMOUNTS VALUE GAINS LOSSES -------- ------- ----- ------ Forward exchange contracts... $22,173 $22,295 $ 85 $207 1996 --------------------------------------------------- UNREALIZED PREMIUMS NOTIONAL FAIR --------------- RECEIVED/ AMOUNTS VALUE GAINS LOSSES (PAID) -------- ------- ----- ------ --------- Forward exchange contracts... $32,823 $32,903 $595 $516 $ --Foreign currency options purchased.................. 7,300 7,300 -- -- (86)Foreign currency options sold....................... 7,300 7,300 -- -- 86 43 45 CAMBREX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) (13) STOCKHOLDERS' EQUITY The Company has two classes of common shares designated Common Stock andNonvoting Common Stock. Authorized shares of Common Stock were 20,000,000 atDecember 31, 1997 and 1996. Authorized shares of Nonvoting Common Stock were730,746 at December 31, 1997 and 1996. At December 31, 1997, authorized shares of Common Stock were reserved forissuance as follows: Stock option plans.......................................... 1,765,350Cambrex savings plan........................................ 91,028 --------- Total shares........................................... 1,856,378 ========= On July 24, 1996, the Company's Board of Directors approved a three-for-twostock split of the Company's Common Stock, $0.10 par value, effected in the formof a 50% stock dividend to holders of record on July 8, 1996. All share and pershare data, including stock option plan information were adjusted to reflect theimpact of the three-for-two stock split. The effect of the split is presentedretroactively within stockholders' equity at December 31, 1996 by transferringthe par value for the additional shares issued from additional paid-in capitalto common stock. On May 23, 1996, the Board of Directors of the Company declared a dividendof one Right for each outstanding share of Common Stock, $.10 par value pershare, payable on June 10, 1996 to the stockholders of record on that date.Under certain circumstances, each Right entitles the registered holder topurchase from the Company, one one-hundredth of a share of Series E JuniorParticipating Cumulative Preferred Stock ("Preferred Stock"), or in certaincircumstances, shares of Common Stock of the Company or common stock of anacquiring company at one-half the market price of such Common Stock or commonstock, as the case may be. The Rights are designed to make it more likely thatall stockholders of the Company receive fair and equal treatment in the event ofany proposed takeover of the Company and to guard against the use of partialtender offers or other coercive tactics to gain control of the Company. A Rightwill be granted for each share of Common Stock issued after such date and priorto the expiration date or redemption of that Right. The Rights will become exercisable only in the event that any person orgroup of affiliated persons becomes a holder, or commences a tender or exchangeoffer, that if consummated, would result in that person or group of affiliatedpersons owning at least 15% of the outstanding Common Stock of the Company. Onceexercisable, each Right entitles the registered holder to purchase from theCompany one one-hundredth of a share of Preferred Stock, at a price of $174 pershare, subject to adjustment. The Rights may be redeemed at a price of $.01 perRight at any time prior to the expiration date of June 5, 2006. On July 24, 1995, the Company completed a public offering of 2,587,500shares of newly issued common stock at a price of $25.30 per share. The totalproceeds to the Company, net of underwriting discounts, commissions, and otherrelated fees, amounted to $62,572. Proceeds were used to reduce outstanding debtunder the Company's then existing Revolving Credit Agreement. Nonvoting Common Stock has equal rights with Common Stock, with theexception of voting power. Nonvoting Common Stock is convertible, share forshare, into Common Stock, subject to any legal requirements applicable toholders restricting the extent to which they may own voting stock. As ofDecember 31, 1997 and 1996, no shares of Nonvoting Common Stock wereoutstanding. The Company held treasury stock of 1,040,561 and 1,049,895 shares atDecember 31, 1997 and 1996, respectively, and are used for issuance to theCambrex Savings Plan. In 1997 and 1996, shares were also issued to the Board ofDirectors as compensation. 44 46 CAMBREX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) (13) STOCKHOLDERS' EQUITY -- (CONTINUED) The Company has authorized 5,000,000 shares of Series Preferred Stock, parvalue $0.10, issuable in series and with rights, powers and preferences as maybe fixed by the Board of Directors. At December 31, 1997 and 1996, there was nopreferred stock outstanding. (14) STOCK OPTIONS The Company has seven stock-based compensation plans currently in effect.The 1983 Incentive Stock Option Plan ("1983 Plan") provides for the grant ofoptions intended to qualify as incentive stock options to management and otherkey employees. The 1987 Stock Option Plan ("1987 Plan") provides for thegranting to key employees both non-qualified stock options and incentive stockoptions. The 1989 Senior Executive Stock Option Plan ("1989 Plan") provides forthe grant of options intended to qualify as additional incentives to theCompany's Senior Executive Officers. The 1992 Stock Option Plan ("1992 Plan")provides for the granting to key employees both non-qualified stock options andincentive stock options. The 1993 Senior Executive Stock Option Plan ("1993Plan") provides for the grant of options intended to qualify as additionalincentives to the Company's Senior Executive Officers. The 1994 Stock OptionPlan ("1994 Plan") provides for the granting to key employees both non-qualifiedand incentive stock options. The 1994 Plan also provides for the granting ofnon-qualified stock options to non-employee directors. On April 25, 1996, the Company's stockholders approved the 1996 PerformanceStock Option Plan ("1996 Plan"), which provides for the granting of optionsintended to qualify as additional incentives to management and other keyemployees. The 1996 Plan also provides for the granting of non-qualified stockoptions to non-employee directors. Options granted under the 1996 Plan vest nineyears after the date of grant, subject to acceleration if the publicly tradedprice of the Company's Common Stock equals or exceeds certain levels.Substantially all options available under the various plans prior to the 1996Plan have been granted. These Plans contain various vesting provisions alsobased upon time and achievement of certain stock price levels. All option awardsgranted under each plan expire no more than ten years from the grant date. The Company applies the provisions of APB Opinion No. 25 and relatedInterpretations in accounting for its stock-based compensation plans. Under APB25, the Company recognized compensation expense of $360, $240, and $0 for 1997,1996, and 1995, respectively. Statement of Financial Accounting Standards No.123 "Accounting for Stock-Based Compensation" (SFAS 123) establishes financialaccounting and reporting standards for stock-based employee compensation plans.During 1996, the Company adopted the disclosure only provisions available underSFAS 123. Accordingly, no compensation cost has been recognized for stock optionplans under SFAS 123. Had compensation cost for the Company's 1997, 1996 and 1995 grants forstock-based compensation plans been determined based on the fair value at thegrant dates for awards under these plans consistent with SFAS 123, the Company'snet income, and net income per common share for 1997, 1996 and 1995 wouldapproximate the pro forma amounts below: 1997 1996 1995 ------- -------- ------- Net income -- as reported.................... $17,776 $ 28,225 $19,670 ======= ======== =======Net income -- pro forma...................... $16,079 $ 26,946 $19,617 ======= ======== =======Diluted earnings per share -- as reported.... $ 1.46 $ 2.37 $ 1.96 ======= ======== =======Diluted earnings per share -- pro forma...... $ 1.32 $ 2.27 $ 1.95 ======= ======== ======= The pro forma compensation expense of $1,697, $1,279 and $53 for 1997 and1996 and 1995, respectively, was calculated based on the fair value of eachoption primarily using the Black-Scholes option-pricing model 45 47 CAMBREX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) (14) STOCK OPTIONS -- (CONTINUED)with the following assumptions for 1997 and 1996, respectively: (i) averagedividend yield of 1.33% and 1.45%, (ii) expected volatility of 25.5% and 23%,(iii) risk-free interest rate ranging from 6.03% to 6.85% and from 5.44% to7.74% and (iv) expected life of 4-5 years. The 1997 and 1996 grants have beenvalued using a path dependent model due to the cliff vesting with performanceacceleration provisions set forth in the 1996 Plan. As of December 31, 1997, 1,708,650 options had been exercised. Shares ofCommon Stock subject to outstanding options under the stock option plans were asfollows: OPTIONS OUTSTANDING OPTIONS EXERCISABLE ------------------------------------------------------ -------------------- WEIGHTED AVERAGE ---------------------- WEIGHTED OPTION REMAINING AVERAGE AUTHORIZED PRICE PER CONTRACTUAL EXERCISE NUMBER EXERCISE FOR ISSUANCE OUTSTANDING SHARE $ LIFE (YRS.) PRICE $ OF SHARES PRICE $ ------------ ----------- --------------- ----------- -------- --------- -------- 1983 Plan............ 324,000 25 11.875 0.1 11.88 25 11.881987 Plan............ 300,000 -- -- -- -- -- --1989 Plan............ 600,000 -- -- -- -- -- --1992 Plan............ 150,000 38,525 11.875 - 24.75 6.8 14.74 38,525 14.741993 Plan............ 450,000 252,500 13.25 - 25.50 5.8 14.28 252,500 14.281994 Plan............ 150,000 50,175 13.25 - 27.375 6.5 16.66 50,175 16.661996 Plan............ 1,500,000 1,016,050 24.75 - 48.625 8.2 30.54 895,300 8.34 --------- --------- --------- Total shares..... 3,474,000 1,356,775 11.875 - 48.625 26.56 1,236,025 ========= ========= ========= Information regarding the Company's stock option plans is summarized below: WEIGHTED AVERAGE ------------------- FAIR VALUE $ NUMBER OF EXERCISE AT GRANT OPTIONS SHARES PRICE $ DATE EXERCISABLE --------- -------- -------- ----------- Outstanding at December 31, 1994......................... 1,461,525 9.75 Granted............................................. 60,375 22.75 5.86 Exercised........................................... (588,075) 9.125 Cancelled........................................... (1,500) 15.00 ---------Outstanding at December 31, 1995......................... 932,325 15.375 894,825 Granted............................................. 887,876 27.75 9.95 Exercised........................................... (475,463) 13.375 Cancelled........................................... (8,250) 21.75 ---------Outstanding at December 31, 1996......................... 1,336,488 23.03 456,113 Granted............................................. 233,400 42.18 13.85 Exercised........................................... (198,113) 21.08 Cancelled........................................... (15,000) 28.78 ---------Outstanding at December 31, 1997......................... 1,356,775 26.56 1,236,025 ========= (15) RETIREMENT PLANS Pension Plans The Company maintains two U.S. defined-benefit pension plans which coversubstantially all eligible employees: (1) the Nepera Hourly Pension Plan (the"Nepera Plan") which covers the union employees at 46 48 CAMBREX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) (15) RETIREMENT PLANS -- (CONTINUED)the Harriman, New York plant, and (2) the Cambrex Pension Plan (the "CambrexPlan") which covers all other eligible employees. Benefits for the salaried and certain hourly employees are based on salaryand years of service, while those for employees covered by a collectivebargained agreement are based on negotiated benefits and years of service. TheCompany's policy is to fund pension costs currently to the extent deductible forincome tax purposes. Pension plan assets consist primarily of balanced mutualfund investments. The net periodic pension expense for both 1997 and 1996 are based on atwelve month period and on valuations of the plans as of January 1. However, thereconciliation of funded status is determined as of the September 30 measurementdate. The funded status of these plans, incorporating these fourth quartercontributions, as of September 30, 1997 and 1996 is as follows: SEPTEMBER 30, 1997 SEPTEMBER 30, 1996 ------------------ ------------------ OVERFUNDED OVERFUNDED ------------------ ------------------ Actuarial present value of benefit obligations: Vested benefits........................................ $(22,917) $(18,908) Non-vested benefits.................................... (1,421) (1,202) -------- -------- Accumulated benefit obligation......................... (24,338) (20,110) Additional benefits based on estimated future salary levels.............................................. (1,484) (1,406) -------- --------Projected benefit obligation for service rendered through September 30, 1997 and 1996............................ (25,822) (21,516)Plan assets at fair market value......................... 26,320 21,898 -------- --------Plan assets in excess of PBO............................. 498 382Unrecognized net transition (asset)...................... -- (98)Unrecognized prior service benefit (cost)................ 878 (152)Other -- unrecognized net gain (loss) on past experience............................................. (650) 650Additional minimum liability............................. -- (553) -------- --------Prepaid (accrued) pension cost as of September 30, 1997 and 1996............................................... 726 2294th quarter contributions................................ 18 84 -------- --------Prepaid (accrued) pension cost as of December 31, 1997 and 1996............................................... $ 744 $ 313 ======== ======== Assumptions used to develop the U.S. 1997 and 1996 net periodic pensionexpense and the September 30, 1997 and 1996 actuarial present value of projectedbenefit obligations: JANUARY 1, 1997 JANUARY 1, 1996 --------------- --------------- OVERFUNDED OVERFUNDED --------------- --------------- PENSION EXPENSE Weighted-average discount rate............................ 7.75% 7.5% Expected long-term rate of return on assets............... 8.5% 8.5% Rate of increase in future compensation levels (non-collective bargained employees)................... 5.0% 5.0% 47 49 CAMBREX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) (15) RETIREMENT PLANS -- (CONTINUED) SEPTEMBER 30, 1997 SEPTEMBER 30, 1996 ------------------ ------------------ OVERFUNDED OVERFUNDED ------------------ ------------------ ACTUARIAL PRESENT VALUE OF PROJECTED BENEFIT OBLIGATIONS Weighted-average discount rate........................... 7.25% 7.75% Expected long-term rate of return on assets.............. 8.5% 8.5% Rate of increase in future compensation levels (non-collective bargained employees).................. 5.0% 5.0% Certain foreign subsidiaries of the Company maintain pension plans fortheir employees which conform to the common practice in their respectivecountries. The funded status of the Company's international pension plans as ofDecember 31, 1997 and 1996 is as follows: DECEMBER 31, 1997 DECEMBER 31, 1996 ----------------- ----------------- UNDERFUNDED UNDERFUNDED ----------------- ----------------- Actuarial present value of benefit obligations: Vested benefits.......................................... $(7,299) $(6,733) ------- ------- Accumulated benefit obligation........................... (7,299) (6,733) Additional benefits based on estimated future salary levels................................................ (1,004) (1,162) ------- -------Projected benefit obligation for service rendered through December 31, 1997 and 1996............................... (8,302) (7,895)Plan assets at fair market value........................... 2,196 1,573 ------- -------Funded status.............................................. (6,107) (6,322)Unrecognized net transition (asset)........................ (308) (382)Unrecognized prior service cost............................ 56 60Other unrecognized net loss (gain) on past experience...... 109 189 ------- -------Accrued pension liability.................................. $(6,250) $(6,455) ======= ======= Assumptions used to develop the 1997 and 1996 actuarial present value ofprojected benefit obligations for the Company's foreign pension plans: DECEMBER 31, 1997 DECEMBER 31, 1996 ----------------- ----------------- ACTUARIAL PRESENT VALUE OF PROJECTED BENEFIT OBLIGATIONS Weighted-average discount rate........................... 6.5% to 7.0% 7.5% to 8.0% Expected long-term rate of return on assets.............. 10% 10% Rate of increase in future compensation levels........... 3.5% to 5.0% 4.5% to 6.0% 48 50 CAMBREX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) (15) RETIREMENT PLANS -- (CONTINUED) The Company's net pension costs included in operating results amounted to$1,662, $1,508 and $1,209 in 1997, 1996 and 1995, respectively, and werecomprised of the following: YEARS ENDED DECEMBER 31, ----------------------------- 1997 1996 1995 ------- ------- ------- Service cost.................................. $ 1,603 $ 1,491 $ 1,106Interest cost on projected benefit obligation.................................. 2,183 1,949 1,898Return on plan assets......................... (5,180) (2,571) (2,887)Amortization of excess plan net assets at adoption of SFAS 87......................... (135) (139) (137)Amortization of unrecognized prior service cost........................................ (28) (38) (40)Amortization of unrecognized net (gain) loss........................................ -- (14) (9)Other items -- deferred investment gain (loss)...................................... 3,219 830 1,278 ------- ------- -------Net pension cost.............................. $ 1,662 $ 1,508 $ 1,209 ======= ======= ======= Included in the net periodic pension cost is the amortization of priorservice cost over a period of twelve to nineteen years and the amortization ofthe SFAS 87 transition obligation over a period of ten to seventeen years. Thepension expense for foreign pension plans of $818, $672 and $575 is included inthe 1997, 1996 and 1995 net periodic pension expense, respectively. BioWhittaker has established a noncontributory defined contribution targetplan for its eligible employees. Under BioWhittaker's target plan, all domesticemployees over 21 years of age who have completed one year of service with theCompany participate. The target plan is 100% Company-funded, with annualcontributions by the Company based on the employee's targeted benefit,determined by such factors as salary and expected years of service to age 65.Total target plan expenses recorded from the date of acquisition amounted to$126 in 1997. Savings Plan Cambrex makes available to all employees, excluding BioWhittaker, a savingsplan as permitted under Sections 401(k) and 401(a) of the Internal Revenue Code.Employee contributions are matched in part by Cambrex. The cost of this planamounted to $1,387, $1,534, and $1,452 in 1997, 1996 and 1995, respectively. BioWhittaker makes available to all eligible employees a contributory401(k) plan as well. Employee contributions are matched in part by BioWhittaker.The cost of this plan from the date of acquisition amounted to $115 in 1997. Other In addition to the above plans, Cambrex also established a SupplementalExecutive Retirement Plan in 1994 for certain key executives. This non-qualifiedplan provides supplemental pension payments in excess of qualified plan limitsimposed by Federal tax law and serves to restore the combined pension amount tooriginal benefit levels. For measurement purposes, a discount rate of 7.25% wasused together with an average wage increase of 5.0%. The net periodic pensioncost for 1997, 1996 and 1995 amounted to $213, $122 and $104, respectively. BioWhittaker also maintains a nonqualified Supplemental ExecutiveRetirement Program ("SERP") covering certain key employees. The SERP providesfor supplemental defined pension benefits based on compensation and years ofservice. The SERP also includes a defined contribution component. For 49 51 CAMBREX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) (15) RETIREMENT PLANS -- (CONTINUED)measurement purposes, a discount rate of 7.25% was used together with an averagewage increase of 5.0%. The net periodic pension cost for 1997, from the date ofacquisition, was $95. The Company also has contracts with certain current and former executivesto provide consulting services to the Company after retirement as an employeeand additional retirement benefits for the remainder of the respectiveexecutive's life. The annual expense pertaining to these contracts was $240,$240 and $227 for 1997, 1996 and 1995, respectively. The Company has a non-qualified Compensation Plan for Key Executives ("theDeferred Plan"). Under the Deferred Plan, officers and key employees may electto defer all or any portion of their pre-tax annual bonus and/or annual basesalary. Included within other liabilities at December 31, 1997 and 1996 there is$2,764 and $1,028, respectively, representing the Company's obligation under theplan. To assist in the funding of this obligation, the Company invests incertain mutual funds and as such, included within other assets at December 31,1997 and 1996 is $2,764 and $1,028, respectively, representing the fair value ofthese funds. During 1995, the Board amended the Deferred Plan to permit officersand key employees to elect to defer receipt of Company stock which wouldotherwise have been issued upon the exercise of Company options. Total sharesheld in trust as of December 31, 1997 and 1996 are 180,277 and 132,126,respectively; and are included as a reduction of equity at cost. The Company hasestablished a corresponding liability to the Deferred Plan participants in theamount of $1,275 and $718 which is included in other non-current liabilities atDecember 31, 1997 and 1996, respectively. The Deferred Plan is not funded by theCompany, but the Company has established a Deferred Compensation Trust Fundwhich holds the shares issued. (16) OTHER POSTRETIREMENT BENEFITS Cambrex provides postretirement health and life insurance benefits("postretirement benefits") to all eligible retired employees. Employees whoretire at or after age 55 with ten years of service are eligible to participatein the postretirement benefit plans. The Company's responsibility for suchpremiums for each plan participant is based upon years of service subject to anannual maximum of one thousand dollars. Such plans are self-insured and are notfunded. The Company accounts for the postretirement benefits in accordance withStatement of Financial Accounting Standards No. 106 "Employers' Accounting forPostretirement Benefits Other than Pensions" (SFAS 106). SFAS 106 requires suchbenefits to be accounted for on an accrual basis. In connection with theadoption of SFAS 106, the Company elected to amortize the transition obligationof $1,853 over twenty years. The net effect upon 1997, 1996 and 1995 pretaxoperating results, including the amortization of the transition obligation,resulted in a cost of $285, $316, and $306, respectively. 50 52 CAMBREX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) (16) OTHER POSTRETIREMENT BENEFITS -- (CONTINUED) The periodic postretirement benefit cost includes the following components: YEARS ENDED DECEMBER 31, -------------------------- 1997 1996 1995 ------ ------ ------ Service cost of benefits earned........................... $ 51 $ 67 $ 57 Interest cost on accumulated postretirement benefit obligation............................................. 150 156 159 Amortization of unrecognized Prior service cost........................................ (9) -- -- Amortization of transition obligation..................... 93 93 90 ---- ---- ---- Total periodic postretirement benefit cost................ $285 $316 $306 ==== ==== ==== Accumulated postretirement benefit obligation: 1997 1996 ------ ------ Retirees.................................................... $ 1,095 $ 852Fully eligible plan participants............................ 579 673Other active plan participants.............................. 484 616 ------- -------Accumulated postretirement benefit obligation............... 2,158 2,141Unrecognized net loss....................................... 240 181Unrecognized transition obligation.......................... (1,390) (1,482) ------- -------Accrued postretirement benefit cost recognized at the end of the period................................................ $ 1,008 $ 840 ======= ======= The discount rate used to determine the accumulated postretirement benefitobligation was 7.25% and 7.75% in 1997 and 1996, respectively. The assumedhealth care cost trend rate used to determine the accumulated postretirementbenefit obligation is 11.0%, declining ratably to 6.5% in 2002 and thereafter. Aone-percentage-point increase in the assumed health care cost trend rate wouldnot have a material effect on either the accumulated postretirement benefitobligation or the service and interest cost component of the net periodicpost-retirement benefit cost. The cost of all health and life insurance benefits is recognized asincurred and was approximately $4,286, $4,362 and $3,825 in 1997, 1996 and 1995,respectively. The cost of providing these benefits for the 224, 207 and 190retirees in 1997, 1996 and 1995, respectively, is not separable from the cost ofproviding benefits for the 718, 725, and 738 active U.S. employees. (17) OTHER INCOME AND EXPENSE Other income in 1997 was $1,263 compared with $194 in 1996. Other incomeincluded a gain of $954 on the settlement of an intercompany foreign denominatedloan. Additionally, 1997 other income included the final resolution and receiptof the settlement proceeds due from the 1996 premature termination of a contractby a customer for $766, offset by a charge of $507 for the settlement of a legalmatter reached during the year. Other income in 1996 of $194 is related to foreign currency transactiongains. Other expense in 1995 was $2,779 including $1,400 in foreign currencytransaction losses, and $865 for the write-off of equipment used for a specificproduct, which is no longer manufactured. 51 53 CAMBREX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) (18) SEGMENT INFORMATION The Company has been involved principally in the manufacturing andmarketing of specialty and fine chemicals which include products used inprescription and over-the-counter drugs, cosmetics, and other health careproducts, as well as other complex molecules and chemicals for various multipleend-use markets. In October 1997, the Company entered into the biotechnologysegment pursuant to the acquisition of BioWhittaker, Inc. The biotechnologysegment consists of cell culture products, including living cell cultures, cellculture media and cell culture media supplements, and endotoxin detectionproducts supplied to the biotechnology and pharmaceutical industries. Thepharmaceutical specialty and fine chemicals segment includes five productcategories: active pharmaceutical ingredients, pharmaceutical intermediates,organic intermediates, performance enhancers and polymer systems. Following is a summary of business segment information: 1997 -------- GROSS SALESBiotechnology............................................... $ 13,577Pharmaceutical specialty and fine chemicals................. 366,506 -------- $380,083 ========OPERATING PROFITBiotechnology............................................... $(13,096)*Pharmaceutical specialty and fine chemicals................. 49,770 -------- $ 36,674 ========NET INCOMEBiotechnology............................................... $(13,921)*Pharmaceutical specialty and fine chemicals................. 31,697 -------- $ 17,776 ========INDENTIFIABLE ASSETSBiotechnology............................................... $145,306Pharmaceutical specialty and fine chemicals................. 385,756Corporate................................................... 21,364 -------- $552,426 ======== - - ---------------* Includes effect of non-recurring charge for $14,000 related to the value of in-process research and development efforts underway at the time of the acquisition of BioWhittaker, Inc., which was completed on October 3, 1997. Depreciation for biotechnology and for pharmaceutical specialty and finechemicals, respectively, was $428 and $23,401. Capital expenditures for the twosegments were $886 and $32,368, respectively. (19) FOREIGN OPERATIONS AND EXPORT SALES European sales are comprised of all sales from Nordic, Profarmaco and SealSands. 52 54 CAMBREX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) (19) FOREIGN OPERATIONS AND EXPORT SALES -- (CONTINUED) Summarized data for the Company's operations for 1997, 1996 and 1995 are asfollows: DOMESTIC EUROPEAN TOTAL -------- -------- -------- 1997Gross sales.................................... $228,004 $152,079 $380,083Operating profit............................... 4,656 32,018 36,674Net income..................................... 4,787 12,989 17,776Identifiable assets............................ 335,637 216,789 552,4261996Gross sales.................................... $218,013 $151,466 $369,479Operating profit............................... 22,296 23,978 46,274Net income..................................... 22,094 6,131 28,225Identifiable assets............................ 179,164 225,280 404,4441995Gross sales.................................... $223,187 $144,883 $368,070Operating profit............................... 19,763 24,740 44,503Net income..................................... 17,324 2,346 19,670Identifiable assets............................ 176,839 225,714 402,553 Export sales, included in domestic gross sales, in 1997, 1996 and 1995amounted to $48,852, $50,243 and $50,608 respectively. No country, in any of thegiven years, represents more than 10% of these export sales. (20) COMMITMENTS The Company has operating leases expiring on various dates through the year2012. The leases are primarily for office and laboratory equipment and vehicles.At December 31, 1997, future minimum commitments under noncancelable operatinglease arrangements were as follows: YEAR ENDED DECEMBER 31: ----------------------- 1997................................ $ 1,407 1998................................ 890 1999................................ 524 2000................................ 379 2001 and thereafter................. 11,160 -------Net commitments............................ $14,360 ======= Total operating lease expense was $1,939, $2,175 and $2,284 for the yearsended December 31, 1997, 1996 and 1995, respectively. In November 1995, the Company formed a strategic alliance with OxfordAsymmetry, Ltd. (located near Oxford in the United Kingdom). The Company willcommercialize technologies and products developed by Oxford Asymmetry, andprovides financial support for their research and development group. The Companywill be required to pay royalties to Oxford Asymmetry for any technologylicensed. The Company also entered into several research and development agreementsin 1997. In February, 1997, the Company signed a cooperative agreement withAlbany Molecular Research, Inc. of Albany, New York. The Company will provideAlbany Molecular Research financial support to develop processes specificallydesigned to fit into the Company's cGMP manufacturing facilities. In April,1997, the Company formed two 53 55 CAMBREX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) (20) COMMITMENTS -- (CONTINUED)separate agreements with the Science Applications International Corporation(a.k.a. Zelinsky Institute) to secure the special knowledge and talents ofRussian scientists. In May, 1997, the Company formed an alliance with Fine TechLtd., of Technicon City, Israel, in which the Company will provide Fine Techfunding over the next three years for process improvement on existing andnewly-developed generic drugs to be manufactured in the Company's cGMPfacilities. The estimated commitments for the Research & Development agreementsover the next three years is approximately $3,000. (21) CONTINGENCIES Contingencies exist for certain subsidiaries of Cambrex because of legaland administrative proceedings arising out of the normal course of business.Such contingencies include environmental proceedings directly and indirectlyagainst the subsidiaries, as well as matters internally identified. Theresolution of such matters often spans several years and frequently involvesregulatory oversight and/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. However, management isof the opinion that while the ultimate liability resulting from these mattersmay have a material effect upon the results of operations in any given year,they will not have a material adverse effect upon the Company's liquidity norits financial position. The following table exclusively addresses matters wherein the relatedliabilities are considered estimable. It summarizes the estimated range of theCompany's share of costs associated with such matters, the related accruals, andthe activity associated with those accruals. The changes in the estimated rangesbetween the current and prior year reflect revisions to estimates, the additionof matters that were quantified for the first time during the current year, andthe satisfaction of others. The related accruals represent management'sassessment of the aggregate liability associated with estimable matters. DECEMBER 31, ----------------- 1997 1996 ------ ------- Estimated range of the Company's share of costs associated with estimable matters: Minimum................................................... $4,501 $4,544 ====== ======= Maximum................................................... $9,908 $16,039 ====== =======Accrual and related activity: Balance, beginning of year................................ $7,800 $9,400 Additions................................................. -- -- Reserve reversal.......................................... -- (1,000) Expenditures.............................................. (355) (600) ------ ------- Balance, end of year...................................... $7,445 $7,800 ====== =======Classification of year end accrual: Current................................................... $35 $617 Non-current............................................... 7,410 7,183 ------ ------- $7,445 $7,800 ====== ======= During 1995, there were no income statement charges for additions to theaccrual for environmental contingencies. 54 56 CAMBREX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) (21) CONTINGENCIES -- (CONTINUED) Significant matters wherein the related liability or range of liability isestimable, are summarized as follows: a) Nepera, Inc. (Nepera) was named in 1987 as a Potentially ResponsibleParty (PRP) along with certain prior owners of the Maybrook Site inHamptonburgh, New York by the United States Environmental Protection Agency(EPA) in connection with the disposition, under appropriate permits, ofwastewater at that site prior to Cambrex's acquisition of Nepera in 1986. TheHamptonburgh site is on the EPA's National Priorities List for remedial work andclean-up. However, to date the EPA has entrusted the management of theremediation effort to the New York State Department of EnvironmentalConservation (DEC). Although the periods of ownership of the site and the extentof its use for wastewater disposal are well established, the PRP's have not beenable to agree upon an allocation method for future remediation costs. However, aprior owner has participated with Nepera in the performance of the activitiesdescribed in the following paragraphs. During 1992, Nepera prepared a draft Remedial Investigation/FeasibilityStudy (RI/FS) report which enumerated several remediation alternatives andsubmitted the Remedial Investigation portion to the DEC for review.Consequently, although this RI/FS had not been approved by the DEC, Neperautilized it to revise the estimated liability for this matter previouslyincluded in the accrual for environmental contingencies. This estimateconsidered the probability of cost sharing with prior owners of the site. During 1993, the DEC requested the performance of additional siteinvestigation prior to reviewing the Feasibility Study portion of the report.Nepera prepared a plan for such additional site investigation and submitted itfor review. During 1994, the DEC requested the performance of additional siteinvestigation beyond the 1993 proposed plan and requested the Feasibility Studyportion of the report. Nepera updated the RI/FS, prepared a revised plan foradditional site investigation, submitted them for review and utilized them toupdate the estimated liability for this matter. Additionally, a DECadministrative law judge issued a decision ordering one of the former owners toremediate the site. However, that former owner appealed the decision andsettlement discussions commenced. During 1995, the draft RI/FS was finalized and filed with the DEC. Whilesimilar to the 1994 draft, this final RI/FS delineated eight remediationalternatives which Nepera utilized to update the estimated liability for thismatter. During 1996, the DEC requested the performance of an additional pilot studybeyond the 1995 RI/FS to determine the viability of another remediationalternative. Nepera utilized this study to update the estimated liability whichresulted in a reduction in the estimated reserve for this matter. During 1997, the RI/FS was updated for the additional remediationalternative requested by the DEC. This final draft RI/FS also included anadditional alternative suggested by the Company. This final report was used tofurther refine the estimate liability for this matter. Additionally, during November 1997, a settlement was reached betweenNepera, Inc., a former owner of the site and the original owner of the sitepertaining to past and future costs of remediating this site and the Harrimansite (see b below). Under the terms of the settlement, the original site ownerhas placed in escrow approximately $13,000 to provide for past and futureremediation costs at the two sites in exchange for a release from therequirement to clean up the two sites. After certain administrative proceedings,the funds will be placed in a Trust for the benefit of remediating the two siteson behalf of Nepera and the other former site owner. 55 57 CAMBREX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) (21) CONTINGENCIES -- (CONTINUED) As permitted under the terms of the agreement, Nepera is eligible torecover and has sought to recover $2,400 of past costs from this settlementwhich was recognized in the results of operations and as a receivable for thisamount in the 1997 financial statements. Nepera estimates that the remainingfunds available from this settlement should be sufficient to provide for thefuture remediation costs for these two sites based upon current estimates.Accordingly, the estimated range of liability for this site have been set offagainst these settlement funds and are not included in the minimum and maximumestimates for 1997. The 1996 minimum and maximum estimates did include certainamounts for this site. b) Nepera was named in 1987 as a responsible party along with certain priorowners of Nepera's Harriman, New York production facility by the DEC inconnection with contamination at that site. During 1997, a final Record ofDecision (ROD) was issued which describes the remediation plan for the site.Nepera utilized the ROD to update the estimated costs of remediating this site.As noted above, during 1997, a settlement was reached with the original owner ofthe site which provides for funds to be placed in escrow for the future clean-upcosts of the site. Nepera estimates that the remaining funds available from thissettlement should be sufficient to provide for the future remediation costs forthese two sites based upon current estimates. Accordingly, the estimated rangeof liability for this site have been set off against these settlement funds andare not included in the minimum and maximum estimates for 1997. The 1996 minimumand maximum estimates did include certain amounts for this site. c) Cosan, Inc. (Cosan) entered into an Administrative Consent Order in 1985with the New Jersey Department of Environmental Protection (NJDEP) under NewJersey's Industrial Site Recovery Act (ISRA) in order to consummate the sale ofthe controlling interest in Cosan to the Company. Through that action, Cosanbecame required to determine whether its facility located in Carlstadt, NewJersey was contaminated by hazardous materials and, if appropriate, effect acleanup. During 1992, based upon the results of an evaluation of the site, Cosanproposed the installation of a groundwater recovery system to removecontaminates from the soil. During 1996, the NJDEP approved the Remedial ActionWorkplan for groundwater treatment and also approved the further RI workplan forsoils. There were no significant developments at this site during 1997. d) Cosan was named in 1991 as a defendant in a suit filed by the owners ofa manufacturing site in Clifton, New Jersey that had been owned and operated byCosan from about 1968 to 1979. The plaintiffs alleged Cosan contributed to thecontamination at the site and seek to compel Cosan to contribute toward presentand future costs of remediation of the site under ISRA. During January 1997, ajudge's opinion was rendered against Cosan under which Cosan was liable for amajority of past environmental investigation and remediation costs ofapproximately $800 plus prejudgment interest on such costs and was foundresponsible for future remediation costs at the site. In addition, the opinionassessed treble damages against Cosan under the New Jersey Spill Act. Cosanbelieves such damages are unprecedented and has contested such award on appeal.The plaintiffs also appealed certain aspects of the decision. During 1997, the judge reversed the decision regarding prejudgmentinterest. Also, during 1997 both Cosan and the plaintiffs appealed variousaspects of the decision. In January 1998, the appeals were heard before theUnited States Court of Appeals for the Third Circuit. A decision has not beenrendered. The estimated range of costs for this case have been considered in theCompany's year-end reserve assessment. e) Nepera was named in the early 1980's as a PRP along with approximately130 other companies by the EPA in connection with the SCP Corporation (SCP) sitein Carlstadt, New Jersey. The site is on the EPA's National Priorities List forremedial work and cleanup. SCP disposed of process wastewater and minor amountsof other material for Nepera during the 1970's. 56 58 CAMBREX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) (21) CONTINGENCIES -- (CONTINUED) The EPA has directed an Interim Remedial Measure for this site consistingof the construction of slurry walls and a pump and treat facility. Presently, aproportionate allocation of responsibility has not been established. However,Nepera's responsibility may be relatively large in relation to other parties.Nepera is contesting the proposed basis for the allocation of responsibility forthis site, and believes it has grounds to, and will, oppose any efforts tocharge it with excessive responsibility. During 1994, the cost of capping the site was estimated by the PRP group torange from $5,000 to $8,000. Although such a remediation alternative has notbeen approved by the EPA, Nepera has assumed it to be the minimum effort whichwill be required at the site. Consequently, Nepera utilized such information todevelop a range of estimated liabilities for this matter and considered suchestimates when determining the accrual for environmental contingencies. Additionally, during 1994, Nepera reached a settlement agreement withcertain insurers who agreed to pay a certain portion of future expendituresassociated with the site and incurred by Nepera. Under the terms of thesettlement, $2,450 was made available through a trust arrangement forremediation and administrative expenditures in connection with a number ofrelatively small sites. Through 1997, Nepera has recovered approximately thefull amount of this settlement for costs incurred including a recovery ofapproximately $400 in 1997. There is minimal remaining balance from theserecoveries. During 1995, the PRP group commenced a Focused Feasibility Study (FFS) ofsoil contamination of a portion of the site as requested by the EPA. During 1996, the PRP group commenced an off property investigation todetermine if any contamination has moved off-site. There were no significantdevelopments during 1997 with this site. f) In 1992, Cambrex acquired substantially all of the assets of the finechemicals business of Hexcel Fine Chemicals, now known as Zeeland Chemicals,Inc. In connection with that transaction, an accrual was recorded for estimatedfuture costs for environmental conditions existing as of the date of theacquisition. To date, based upon the inactivity of required action at this site,the Company has reduced the estimate of the maximum exposure associated withthis site by $1,000. There have been no significant developments in connectionwith environmental conditions at that site. g) In connection with the acquisition of Nordic and Profarmaco in 1994, anaccrual of $1,510 was established for environmental conditions existing as ofthe date of the acquisition. Approximately $100 and $500 was spent during 1997and 1996, respectively, for environmental permit compliance matters. h) In addition to the matters identified above, Cambrex's subsidiaries areparty to a number of other proceedings. Management is of the opinion that theultimate liability resulting from those proceedings will not have a materialadverse effect upon Cambrex's results of operations nor its financial position. (22) SUBSEQUENT EVENTS On January 5, 1998, the Company acquired all of the assets of the chiralintermediates business of Celgene Corporation for $7,500 plus future royaltiesof up to $7,500 based upon sales. The acquisition has been accounted for as apurchase and was financed with the Company's Credit Agreement. The preliminaryallocation of the purchase price results in goodwill of approximately $5,000which will be amortized over 15 years. 57 59 CAMBREX CORPORATION SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE DATA) 1ST 2ND 3RD 4TH QUARTER QUARTER QUARTER QUARTER(4) YEAR ------- -------- ------- ---------- -------- 1997- - -----Gross sales........................... $93,141 $100,773 $82,638 $103,531 $380,083Net revenues.......................... 91,894 98,719 81,365 102,237 374,215Gross profit.......................... 27,739 30,070 24,558 31,595 113,962Net income............................ 7,448 8,852 7,531 (6,055) 17,776Earnings per share*:(1) Basic............................ $ 0.63 $ 0.75 $ 0.64 $ (0.51) $ 1.50 Diluted.......................... $ 0.62 $ 0.74 $ 0.61 $ (0.51) $ 1.46Average shares*: Basic............................ 11,738 11,752 11,829 11,915 11,814 Diluted.......................... 11,994 12,017 12,405 12,502 12,2101996- - -----Gross sales........................... $96,717 $ 92,969 $88,318 $ 91,475 $369,479Net revenues.......................... 93,925 90,269 86,046 89,145 359,385Gross profit.......................... 26,466 25,986 25,002 23,882 101,336Net income............................ 6,197 7,528(2) 6,101 8,399(3) 28,225Earnings per share*:(1) Basic............................ $ 0.54 $ 0.65 $ 0.52 $ 0.72 $ 2.43 Diluted.......................... $ 0.52 $ 0.63 $ 0.51 $ 0.70 $ 2.37Average shares*: Basic............................ 11,480 11,595 11,646 11,695 11,608 Diluted.......................... 11,810 11,859 11,907 11,949 11,896 - - ---------------(1) 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.(2) Net income for the three months ended June 30, 1996 reflect the reversal of certain reserves amounting to $1,400. Additionally, a recovery of $1,085 for legal expenses was recognized in results of operations for the three months ended June 30, 1996.(3) Net income for the three months ended December 31, 1996 reflect income, net of related costs, of approximately $1,100 recognized from the settlement with a customer related to the premature termination of a five year supply contract for the sale of PMPA. Additionally, a $1,000 reversal of the Company's environmental accrual is reflected in net income for the three months ended December 31, 1996.(4) Includes non-recurring charge for in-process research and development related to the acquisition of BioWhittaker. Additionally, the Company recognized $2,400 as a reduction of legal expenses in the fourth quarter of 1997 related to the recovery of past environmental costs associated with a settlement with a prior owner of one of the Company's operating facilities. * Share and per share date reflect adjustments for a three-for-two stock split in the form of a 50% stock dividend. All earnings per share calculations reflect the adoption of SFAS No. 128, "Earnings per Share." 58 60 PART III ITEM 9 -- CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. ITEM 10 -- DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. ITEM 11 -- EXECUTIVE COMPENSATION. ITEM 12 -- SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. ITEM 13 -- CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. The information called for by Part III is hereby incorporated by referenceto the information set forth under the captions "Principal Stockholders," "Boardof Directors," "Election of Directors," and "Executive Compensation" in theregistrant's definitive proxy statement for the Annual Meeting of Stockholders,to be held April 23, 1998, which meeting involves the election of directors,which definitive proxy statement is being filed with the Securities and ExchangeCommission pursuant to Regulation 14A. In addition, information concerning the registrant's executive officers hasbeen included in Part I above under the caption "Executive Officers of theRegistrant." 59 61 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K. (a) 1. The following consolidated financial statements of the Company arefiled as part of this report: PAGE NUMBER (IN THIS REPORT) ---------------- Report of Independent Accountants........................... 28Consolidated Balance Sheets as of December 31, 1997 and 1996...................................................... 29Consolidated Income Statements for the Years Ended December 31, 1997, 1996 and 1995................................... 30Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 1997, 1996 and 1995.............. 31Consolidated Statements of Cash Flows for the Years Ended December 31, 1997, 1996 and 1995.......................... 32Notes to Consolidated Financial Statements.................. 33Consolidated Quarterly Financial Data (unaudited) for the Years Ended December 31, 1996 and 1995.................... 58 (a) 2. (i) The following schedule to the consolidated financial statementsof the Company as filed herein and the Report of Independent Certified PublicAccountants on Schedule are filed as part of this report. PAGE NUMBER (IN THIS REPORT) ---------------- Independent Accountants' Report (included in the accountants' reports on the registrant's consolidated financial statements)..................................... 28Schedule II -- Valuation and Qualifying Accounts............ 61 All other schedules are omitted because they are not applicable or not requiredor because the required information is included in the consolidated financialstatements of the Company or the notes thereto. (a) 3. The exhibits filed in this report are listed in the Exhibit Index onpage . The registrant agrees, upon request of the Securities and ExchangeCommission, to file as an exhibit each instrument defining the rights of holdersof long-term debt of the registrant and its consolidated subsidiaries which hasnot been filed for the reason that the total amount of securities authorizedthereunder does not exceed 10% of the total assets of the registrant and itssubsidiaries on a consolidated basis. (b) Reports on Form 8-K The registrant filed the following reports on Form 8-K during the lastquarter of the year ended December 31, 1997. DATE OF REPORT ITEMS REPORTED -------------- -------------- October 8, 1997 Acquisition of BioWhittaker, Inc.October 8, 1997 New Loan AgreementNovember 26, 1997 Amendment to Form 8-K filed on October 8, 1997 related to the acquisition of BioWhittaker 60 62 CAMBREX CORPORATION SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 (DOLLARS IN THOUSANDS) COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E --------- -------- -------- ---------- -------- ADDITIONS ------------------- CHARGED CHARGED BALANCE TO COST TO BEGINNING AND OTHER END OF CLASSIFICATION OF YEAR EXPENSES ACCOUNTS DEDUCTIONS YEAR -------------- --------- -------- -------- ---------- -------- Year Ended December 31, 1997: Doubtful trade receivables and returns and allowances...................... $1,453 $ 818 $ 57(1) $ 623 $ 1,705 Inventory and obsolescence provisions.......................... 6,467 2,489 8,225(1) 1,238 15,943Year Ended December 31, 1996: Doubtful trade receivables and returns and allowances...................... 1,261 609 -- 417 1,453 Inventory and obsolescence provisions.......................... 8,364 1,099 -- 2,996 6,467Year Ended December 31, 1995: Doubtful trade receivables and returns and allowances...................... 1,288 547 -- 574 1,261 Inventory and obsolescence provisions.......................... 5,578 3,052 -- 266 8,364 - - --------------- (1) Reserve of BioWhittaker acquired during 1997. 61 63 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/ CYRIL C. BALDWIN, JR. ------------------------------------ Cyril C. Baldwin, Jr. Chairman of the Board of Directors Date: March 20, 1998 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.  NAME TITLE DATE ---- ----- ---- /s/ CYRIL C. BALDWIN, JR. Chairman of the Board of- - ----------------------------------------------------- Directors Cyril C. Baldwin, Jr. /s/ DOUGLAS MACMILLAN Vice President -- Chief- - ----------------------------------------------------- Financial Officer Douglas MacMillan /s/ ROSINA B. DIXON, M.D.* Director- - ----------------------------------------------------- Rosina B. Dixon, M.D /s/ FRANCIS X. DWYER* Director- - ----------------------------------------------------- Francis X. Dwyer /s/ GEORGE J. W. GOODMAN* Director- - ----------------------------------------------------- George J. W. Goodman /s/ KATHRYN RUDIE HARRIGAN, PHD* Director- - ----------------------------------------------------- Kathryn Rudie Harrigan, PhD /s/ LEON J. HENDRIX, JR.* Director- - ----------------------------------------------------- Leon J. Hendrix, Jr. /s/ ILAN KAUFTHAL* Director- - ----------------------------------------------------- Ilan Kaufthal /s/ ROBERT LEBUHN* Director- - ----------------------------------------------------- Robert LeBuhn /s/ JAMES A. MACK* Director- - ----------------------------------------------------- James A. Mack /s/ DEAN P. PHYPERS* Director- - ----------------------------------------------------- Dean P. Phypers *By /s/ CYRIL C. BALDWIN, JR. ------------------------------------------------- Cyril C. Baldwin, Jr. -- Attorney-in-Fact March 20, 1998 62 64 EXHIBIT INDEX EXHIBIT NO. DESCRIPTION- - ----------- ----------- 3.1 Restated Certificate of Incorporation of registrant(A) -- Exhibit 3(a). 3.2 By Laws of registrant.(E) -- Exhibit 4.2. 4.1 Form of Certificate for shares of Common Stock of registrant.(A) -- Exhibit 4(a). 4.2 Article Fourth of the Restated Certificate of Incorporation.(A) -- Exhibit 4(b). 4.3 Loan Agreement dated September 21, 1994 by and among the registrant, NBD Bank, N.A., United Jersey Bank, National Westminster Bank NJ, Wachovia Bank of Georgia, N.A., BHF-Bank, The First National Bank of Boston, Chemical Bank New Jersey, N.A., and National City Bank.(K). 4.4 Loan Agreement dated September 16, 1997 by and among the registrant, Chase Manhattan Bank as Administrative Agent and The First National Bank of Chicago as Documentation Agent. The bank group includes 13 domestic banks and 7 international banks.(Q) 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.(C) -- Exhibit 10(a). 10.3 Asset Purchase Agreement dated as of July 1, 1991 between Solvay Animal Health, Inc. and the registrant.(F). 10.4 Asset Purchase Agreement dated as of March 31, 1992 between Hexcel Corporation and the registrant.(H). 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.(K). 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.1.(K). 10.7 Stock purchase agreement dated as of October 3, 1997 between BioWhittaker and the registrant.(Q) 10.10 1983 Incentive Stock Option Plan, as amended.(B). 10.11 1987 Long-term Incentive Plan.(A) -- Exhibit (g). 10.12 1987 Stock Option Plan.(B). 10.13 1989 Senior Executive Stock Option Plan.(J). 10.14 1992 Stock Option Plan.(J). 10.15 1993 Senior Executive Stock Option Plan.(J). 10.16 1994 Stock Option Plan.(J). 10.17 1996 Performance Stock Option Plan.(N). 10.20 Form of Employment Agreement between the registrant and its executive officers named in the Revised Schedule of Parties thereto.(D) -- Exhibit 10.A. 10.21 Revised Schedule of Parties to Employment Agreement (exhibit 10.20 hereto).(M). 10.22 Cambrex Corporation Savings Plan.(I). 10.23 Cambrex Corporation Supplemental Retirement Plan.(L). 10.24 Deferred Compensation Plan of Cambrex Corporation.(L). 10.25 Amendment to Deferred Compensation Plan of Cambrex Corporation (Exhibit 10.24 hereto).(P). - - ---------------See legend on following page. 63 65 EXHIBIT NO. DESCRIPTION- - ----------- ----------- 10.26 Cambrex Earnings Improvement Plan.(L). 10.27 Consulting Agreement dated December 15, 1994 between the registrant and Arthur I. Mendolia.(L). 10.28 Consulting Agreement dated December 15, 1995 between the registrant and Cyril C. Baldwin, Jr.(L). 10.29 Consulting Agreement between the registrant and James A. Mack.(L). 10.30 Additional Retirement Payment Agreement dated December 15, 1994 between the registrant and Arthur I. Mendolia.(L). 10.31 Additional Retirement Payment Agreement dated December 15, 1994 between the registrant and Cyril C. Baldwin, Jr.(L). 10.32 Additional Retirement Payment Agreement between the registrant and James A. Mack.(L). 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, 1996 between the registrant and American Stock Transfer and Trust Company.(O) -- Exhibit 1. 10.50 Manufacturing Agreement dated as of July 1, 1991 between the registrant and A.L. Laboratories, Inc.(G). 21 Subsidiaries of registrant.(M). 23 Consent of Coopers & Lybrand L.L.P. to the incorporation by reference of its report herein in Registration Statement Nos. 33-22017, 33-21374, 33-37791, 33-81780 and 33-81782 on Form S-8 of the registrant.(M). 24 Powers of Attorney to sign this report.(M). 27 Financial Data Schedule.(M). - - --------------- (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 Registration Statement on Form S-8 (Registration No. 33-21374) and Amendment No. 1. (C) Incorporated by reference to registrant's Annual Report on Form 10-K dated June 5, 1989. (D) Incorporated by reference to the indicated Exhibit to registrant's Annual Report on Form 10-K for 1989. (E) Incorporated by reference to the indicated Exhibit to registrant's Registration Statement on Form S-8 (Registration No. 33-37791). (F) Incorporated by reference to registrant's Current Report on Form 8-K dated July 1, 1991. (G) Incorporated by reference to the registrant's Annual Report on Form 10-K for 1991. (H) 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. (I) Incorporated by reference to registrant's Registration Statement on Form S-8 (Registration No. 33-81780) dated July 20, 1994. (J) Incorporated by reference to registrant's Registration Statement on Form S-8 (Registration No. 33-81782) dated July 20, 1994. (K) Incorporated by reference to registrant's Current Report on Form 8-K dated October 26, 1994. (L) Incorporated by reference to the registrant's Annual Report on Form 10-K for 1994. 64 66 (M) Filed herewith. (N) Incorporated by reference to registrant's Registration Statement on Form S-8 (Registration No. 33-22017) dated February 19, 1997. (O) Incorporated by reference to the registrant's Current Report on Form 8-A dated June 12, 1996. (P) Incorporated by reference to the registrant's Annual Report on Form 10-K for 1995. (Q) Incorporated by reference to the registrant's Current Report on Form 8-K dated October 8, 1997. 65 1 EXHIBIT 10.21 CAMBREX CORPORATION ANNUAL REPORT ON FORM 10-K REVISED SCHEDULE OF PARTIES NAME TITLE DATE OF AGREEMENT ---- ----- ----------------- James A. Mack President and Chief 02/01/90 Executive OfficerPeter Tracey Executive Vice President -- 11/05/90 Corporate DevelopmentClaes Glassell Vice President -- Cambrex 10/12/94 President, InternationalSteven M. Klosk Executive Vice President -- 10/21/92 AdministrationPeter E. Thauer Vice President -- Law and Environment, 08/28/89 General Counsel and Corporate SecretarySalvatore J. Guccione Vice President -- 12/14/95 Corporate DevelopmentDouglas H. MacMillan Vice President, 04/14/97 Chief Financial Officer 1 EXHIBIT 21 CAMBREX CORPORATION SUBSIDIARIES OF REGISTRANT SUBSIDIARY INCORPORATED IN: ---------- ---------------- CasChem, Inc........................................... DelawareCosan Chemical Corp.................................... New JerseyNepera, Inc............................................ New YorkThe Humphrey Chemical Co., Inc......................... DelawareSalsbury Chemicals, Inc................................ IowaZeeland Chemicals, Inc................................. MichiganBioWhittaker, Inc...................................... DelawareSeal Sands Chemicals Limited........................... EnglandProfarmaco S.r.1....................................... ItalyNordic Synthesis AB.................................... Sweden 1 EXHIBIT 23 CAMBREX CORPORATION ACCOUNTANTS' CONSENT Cambrex Corporation: We consent to the incorporation by reference in the registration statementsof Cambrex Corporation on Forms S-8 (File Nos. 33-22017, 33-21374, 33-37791,33-81780, and 33-81782) of our report dated January 16, 1998, on our audits ofthe consolidated financial statements and financial statement schedule ofCambrex Corporation as of December 31, 1997 and 1996, and for each of the threeyears in the period ended December 31, 1997, which report is included in thisAnnual Report on Form 10-K. COOPERS & LYBRAND L.L.P. Parsippany, New JerseyMarch 17, 1998 1 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 Cyril C. Baldwin, Jr., James A. Mack, and Douglas H. MacMillan, andeach of them, his true and lawful attorneys-in-fact and agents, with full powerof substitution and resubstitution, for him and in his name, place and stead, inany and all capacities, to sign any and all Annual Reports on Form 10-K whichsaid Cambrex Corporation may be required to file pursuant to Section 13 or 15(d)of the Securities Exchange Act of 1934 and any and all amendments thereto and tofile the 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 23rd day of January 1997. /s/ CYRIL C. BALDWIN, JR. /s/ JAMES A. MACK- - -------------------------------------------- -------------------------------------------- Cyril C. Baldwin, Jr. James A. Mack Chairman of the Board of Directors President, Chief Executive Officer Director /s/ DOUGLAS H. MACMILLAN /s/ LEON J. HENDRIX, JR.- - -------------------------------------------- -------------------------------------------- Douglas H. MacMillan Leon J. Hendrix, Jr. Vice President Director Chief Financial Officer /s/ ROSINA B. DIXON /s/ ILAN KAUFTHAL- - -------------------------------------------- -------------------------------------------- Rosina B. Dixon, M.D. Ilan Kaufthal Director Director /s/ FRANCIS X. DWYER /s/ ROBERT LEBUHN- - -------------------------------------------- -------------------------------------------- Francis X. Dwyer Robert LeBuhn Director Director /s/ GEORGE J. W. GOODMAN /s/ DEAN P. PHYPERS- - -------------------------------------------- -------------------------------------------- George J. W. Goodman Dean P. Phypers Director Director /s/ KATHRYN RUDIE HARRIGAN, PHD- - -------------------------------------------- Kathryn Rudie Harrigan, PhD Director