Cambrex Corporation Annual Report 1998

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, 1998 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 IDENTIFICATION NO.) INCORPORATION OR ORGANIZATION) 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 NEW YORK 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 $532,685,089 as of February 28, 1999. APPLICABLE ONLY TO CORPORATE REGISTRANTS As of February 28, 1999, there were 24,536,085 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. The Company primarily provides products andservices to the life sciences industries and operates in four segments: HumanHealth, Biotechnology, Animal Health/Agriculture and Specialty Business. Each ofthese segments include various product categories. The Human Health,Biotechnology and Animal Health/Agriculture segments facilitate all the ongoinganalysis of the business in the area of life sciences. Currently, the Company'soverall strategy for these segments is to focus on niche markets that haveglobal opportunities, build on strong customer relations to enhance our newproducts pipeline, and support state-of-the-art technology, while being a leaderin environmental, health and safety performance. Within each of the segments, the Company uses a consistent businessapproach: 1. Focus on niche products requiring significant technical expertise. 2. Be a leading supplier of core products, for which price competition is not the primary market determinant. 3. Review products on a continuing basis and eliminate those not meeting operating profit goals and replace those products with ones generating higher returns. Important objectives of the Company are to expand its operations throughinternal growth and to make strategic acquisitions of product lines, technologyand companies that increase its position 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 inWalkersville, 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. OnMay 12, 1998, Cambrex purchased the assets of the biopharmaceuticalmanufacturing and distribution business of Boehringer Ingelheim BioproductPartnership. The assets acquired include a state-of-the-art cell culture andmedia manufacturing facility in Verviers, Belgium, and inventory for certaincell culture, endotoxin detection and molecular biology products. On January 5, 1998, the Company completed the acquisition of the chiralintermediates business of Celgene Corporation for $7,500 plus future royaltiesof up to $7,500 based upon sales. The product line, which has been re-namedChiragene, will produce optically active, complex, organic compounds that arecritical to the production of modern active pharmaceutical ingredients. On January 4, 1999, the Company acquired Poietic Technologies, Inc., theleading supplier of normal human cells of hemotopoietic origin. Terms of thetransaction are $2.5 million cash and future consideration based on theperformance of the business. On March 12, 1999, the Company announced the purchase of IrotecLaboratories, Ltd., a manufacturer of active pharmaceutical ingredients locatedin Cork, Ireland. Cambrex paid approximately $40,000 for the business, whichincludes a new $15,000 cGMP pharmaceutical manufacturing plant, that should comeon line in the second quarter of 1999. In connection with the purchase, theCompany signed a long-term agreement with Hexal AG, Germany's second largestgeneric pharmaceutical producer. The agreement covers the supply of an expected$50,000 to $75,000 of Active Pharmaceutical Ingredients (API) over the next fiveyears. - ---------------(dollars in thousands, except share data) 1 3 PRODUCTS The Company uses its technical expertise in a wide range of chemical andbiological processes to meet the needs of its customers for high qualityproducts for specialized applications. The following table sets forth for theperiods indicated information concerning gross sales from the Company's foursegments: YEAR ENDED DECEMBER 31, -------------------------------- 1998 1997(1) 1996 -------- -------- -------- Human Health....................................... $194,766 $182,818 $174,398Biotechnology...................................... 65,968 13,577 --Animal Health/Agriculture.......................... 56,285 59,804 61,560Specialty Business................................. 124,664 123,884 133,521 -------- -------- -------- Gross Sales...................................... $441,683 $380,083 $369,479 ======== ======== ======== - ---------------(1) Sales from BioWhittaker, acquired in October 1997, are included from the date of acquisition. Human Health: The Human Health Segment is classified into eight principalproduct groups: (1) Active Pharmaceutical Ingredients, (2) PharmaceuticalIntermediates, (3) Imaging Chemicals, (4) Personal Care Ingredients, (5)Biomedicals, (6) Catalysts, (7) Chiral Technology and (8) Nutraceuticals. Theseproducts are sold to a diverse group of more than 1,000 customers, with twocustomers accounting for 11% and 9% of 1998 sales in this segment. Many of theseproducts are also sold through agents. This table summarizes the gross sales for this product segment. % 1998 1997 CHANGE CHANGE -------- -------- ------- ------ Active Pharmaceutical Ingredients.......... $120,459 $110,461 $ 9,998 9%Pharmaceutical Intermediates............... 24,844 23,430 1,414 6Imaging Chemicals.......................... 14,179 17,617 (3,438) (20)Personal Care Ingredients.................. 16,777 16,453 324 2Biomedicals................................ 3,977 4,286 (309) (7)Catalysts.................................. 8,281 6,554 1,727 26Chiral Technology.......................... 5,548 3,733 1,815 49Nutraceuticals............................. 701 284 417 147 -------- -------- ------- --- -------- -------- ------- --- Total Human Health............... $194,766 $182,818 $11,948 7% ======== ======== ======= === The Active Pharmaceutical Ingredients are manufactured under FDA regulation(cGMP -- current Good Manufacturing Practices) for use as the active ingredientsin prescription and over-the-counter drugs. Active Pharmaceutical Ingredientsales of $120,459 were $9,998 (9%) above the prior year due to strong demand forour gastro-intestinal products used for treating ulcerative colitis, and alsodue to shipments of a new anti-asthma drug and other new products. ActivePharmaceutical Ingredients include active ingredients used in products forgastro-intestinal, cardiovascular, endocrine, central nervous system,respiratory, diuretics, anti-infective, anti-inflammatory, immunology andvarious other uses. Pharmaceutical Intermediate sales of $24,844 were $1,414 (6%) above 1997due to new products used in migraine medicine and central nervous systemapplications. These increases were partially offset by lower sales ofaminodioxepin (AOA), a drug intermediate used in the production of a proteaseinhibitor for the treatment of AIDS, due to the demand for the end-use drugleveling off primarily from the filling of the distribution pipeline. Chiral Technology product sales of $5,548 were $1,815 (49%) above 1997 dueto the sales from the acquisition of the chiral intermediates business(Chiragene) from Celgene Corporation in January 1998. - ---------------(dollars in thousands, except share data) 2 4 Imaging Chemical (X-Ray Media) sales of $14,179 were $3,438 (20%) below theprior year due to a customer reducing inventories, and another customer decidingto manufacture on a captive basis. A third customer established a backupsupplier, as was permitted under a 5-year supply agreement, which furtherreduced sales. Other product category changes from prior year were not significant. Biotechnology: This segment 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 customeraccounting for more than 10% of sales in this category. This table summarizes the gross sales for this product segment: 1998 1997 ------- ------- Cell Culture............................................. $43,795 $ 9,126Endotoxin Detection...................................... 18,852 3,539Other.................................................... 3,321 912 ------- ------- Total Biotechnology............................ $65,968 $13,577 ======= ======= Animal Health/Agriculture: This segment consists of three product groups:(1) Vitamin B3 used in feed additives and for veterinary products, (2) AnimalHealth Products used in disease prevention and (3) Agricultural Intermediatesused in crop protection. These products are sold to approximately 200 customers.Three customers accounted for 31%, 20% and 13% of 1998 sales in this segment. This table summarizes the gross sales for this product segment: % 1998 1997 CHANGE CHANGE ------- ------- ------- ------ Vitamin B3................................... $12,814 $12,163 $ 651 5%Animal Health................................ 17,614 17,471 143 1Agricultural Intermediates................... 25,857 30,170 (4,313) (14) ------- ------- ------- --- Total Animal Health/Agriculture.... $56,285 $59,804 $(3,519) (6)% ======= ======= ======= === Vitamin B3 sales of $12,814 were $651 (5%) above 1997 due to priceincreases put in place in late 1997 and volume increases to customers. Animal Health sales of $17,614, were roughly flat with 1997. Sales oforgano-aresnical feed additives, the largest product in animal health remainedat 1997 levels. Agricultural Intermediate sales of $25,857 were down $4,313 (14%) due toreduced demand for crop protection products directly related to the economicconditions in Asia. Specialty Business: This segment consists of two product groups: (1)Performance Enhancing Chemicals and (2) Polymer Systems. Performance EnhancingChemicals are complex chemicals designed to impart special properties when smallquantities are included in the formulation of specific products. Thesechemicals, which include over 100 products, are used in photography, pigments,polymers, fuel/oil additives, catalysts and other specialty additives. PolymerSystems are monomers or two component polymer systems for use in small volume,high performance applications. These polymers include applications used incoatings, telecommunications, electronics and engineering plastics. Theseproducts are sold to approximately 1,100 customers with no one customeraccounting for over 10% of 1998 sales. - ---------------(dollars in thousands, except share data) 3 5 This table summarizes the gross sales for this product category: % 1998 1997 CHANGE CHANGE -------- -------- ------ ------ Performance Enhancing Chemicals............. $ 81,853 $ 81,640 $213 0%Polymer Systems............................. 42,811 42,244 567 1 -------- -------- ---- -- Total Specialty Business.......... $124,664 $123,884 $780 1% ======== ======== ==== == Key sales increases in Performance Enhancing Chemicals resulted fromincreases in THPE, a polycarbonate additive, growth in export markets, and incastor oil based products, and were offset by decreases in photographicproducts. Polymer System sales of $42,811 were $567 (1%) above 1997, due to increaseddemand for a monomer used in high performance plastics offset by decreases incoating products. MARKETING AND DISTRIBUTION The Company's Human Health segment generally includes high value, lowvolume products requiring significant technical expertise for their developmentand manufacture. Marketing generally requires significant cooperative effortamong a small highly trained marketing staff, a technical staff who can assessthe technical fit and estimate manufacturing economics, and the businessmanagement to determine the strategic and business fit. Such a process may takefrom two to five years before a commercial product is fully established. Becauseof this long lead time and the complexity of the technical efforts there areusually long-term relationships with major corporations who become significantcustomers. Sales of established products may be handled by agents in those areaswhere direct sales efforts are uneconomic. For the biotechnology segment, the Company markets and sells its productsin the United States and Europe principally through its own direct sales force.The Company directly serves the European markets through its wholly ownedsubsidiaries, BioWhittaker UK LTD, located outside London, and BioWhittakerEurope located in Belgium. The remaining international markets are servedprincipally through an extensive network of independent distributors. For the Specialty Business segment and some Animal Health/Agriculturesegment products, marketing and distribution is more typical of specialtychemical companies, with products being sold to customers from inventory involumes ranging from rail cars to five gallon containers. Sales may be handledby Company 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 oilin the 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, telecommunication, and electronicapplications. Under advantageous market conditions, the Company sells thiscommodity in bulk quantities as simple castor oil derivatives. Castor oil, whichis not produced in the United States, is an agricultural product, the marketprice of which is affected by natural factors relating to the castor bean cropfrom which the oil is produced. Castor oil is produced commercially in a fewforeign countries, with India currently being the largest exporter. The Companyhas been able to obtain adequate supplies of castor oil generally at acceptableprices in the past and expects to be able to continue to do so in the future. Pyridine, which accounted for 6%, 7% and 8% of gross revenues in 1998, 1997and 1996, respectively, is produced by the Company by a process involving thehigh temperature reaction of acetaldehyde, formalin and ammonia. Acetaldehyde isavailable from one supplier in North America. The price of acetaldehydedecreased - ---------------(dollars in thousands, except share data) 4 6 approximately 12% during 1998 after increasing 13% in 1997. Formalin's feedstockis methanol, which experienced decreased prices in 1998 compared to 1997 due tohigher natural gas inventories caused by warmer weather (methanol is made fromnatural gas). The Company obtains acetaldehyde and formalin pursuant tolong-term supply contracts under which the price for the raw material adjusts tomarket conditions, with a time lag. 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 rawfetal bovine serum, its price and supply are cyclical and fluctuate. 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. Approximately 130 employees areinvolved directly in research and development activities worldwide. In February, 1997, the Company signed a cooperative agreement with AlbanyMolecular Research, Inc. of Albany, New York. The Company has and will continueto provide Albany Molecular Research financial support to develop processesspecifically designed to fit into the Company's cGMP manufacturing facilities.In May, 1997, the Company formed an alliance with Fine Tech Ltd., of TechniconCity, Israel, in which the Company has and will continue to 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. There have been three products brought to market as a result ofthese alliances and agreements, and the Company is evaluating several otherproducts for possible commercialization. The estimated commitments for theresearch and development agreements over the next three years is approximately$1,300. The Company spent approximately $14,000, $10,600 and $9,200 in 1998, 1997and 1996, respectively, on research and development efforts. The Company alsoincurred 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. The Company currently owns approximately 135 United States patents whichhave various expiration dates beginning in 1999 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. - ---------------(dollars in thousands, except share data) 5 7 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),Vitride(R), Clonetics(R), Auto-LAL(TM) and ELVIS(TM). The Company requires employees to sign confidentiality and non-competeagreements where appropriate. COMPETITION Because of the nature of the Company's products in its Human Health andAnimal Health/Agriculture segments and its strategic approach, it is notpossible to identify a group of direct competitors. Where competition exists, itis typically specific to a certain product, or is focused early in the process,when an initial market position is being established. If the Company perceivessignificant competitive risk and a need for large technical or financialcommitment, it generally negotiates long-term contracts or capital guaranteesfrom its targeted customer before proceeding. In the Biotechnology segment, no one company is known to compete with theCompany in all of its product groups, but in each group competition is offeredby a number of companies, including, in some cases, firms substantially largerand with greater financial resources than the Company. The markets in which theCompany competes are generally concentrated and are highly competitive, withcompetition centering on product specifications, quality, depth of product line,price, technical support, timely product development and speed of delivery. Competition for the Company's Specialty Business segment is more typical ofchemical markets. Competition exists from other producers of the Company'sproducts and from other products that may offer equivalent properties.Competition in these areas are generally based on customer service, productquality and pricing. ENVIRONMENTAL AND SAFETY REGULATIONS AND PROCEEDINGS General: Production of certain of the Company's products involves the use,storage and transportation of toxic and hazardous materials. The Company'soperations are subject to extensive international and domestic federal, stateand local laws and regulations relating to the storage, handling, emission,transportation and discharge of materials into the environment and themaintenance of safe 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, as with other companies engaged in the chemical business,risks of substantial costs and liabilities are inherent in certain plantoperations and certain products produced at the Company's plants. Additionally,prevailing legislation tends to hold chemical companies primarily responsiblefor the proper disposal of their chemical wastes even after transferal to thirdparty waste disposal facilities. Moreover, other future developments, such asincreasingly strict environmental, safety and health laws and regulations, andenforcement policies thereunder, could result in substantial costs andliabilities to the Company and could subject the Company's handling,manufacture, use, reuse, or disposal of substances or pollutants at its plantsto more rigorous scrutiny than at present. Although the Company has no directoperations and conducts its business through subsidiaries, certain legalprinciples that provide the basis for the assertion against a parent company ofliability for the actions of its subsidiaries may support the direct assertionagainst the Company of environmental liabilities of its subsidiaries. Known environmental matters which may result in liabilities to the Companyand the related estimates and accruals are summarized in Note #22 to the CambrexCorporation and Subsidiaries Consolidated Financial Statements. - ---------------(dollars in thousands, except share data) 6 8 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$2,900 in 1998, $2,800 in 1997, and $4,800 in 1996 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, 1998 the Company had 1,750 employees worldwide (600 of whomwere from international operations) compared with 1,790 employees at December31, 1997 and 1,292 at December 31, 1996. 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, 2001. 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, 1999. The Company believes its labor relations aresatisfactory, and will begin negotiations for the renewal of contracts expiringin 1999. SEASONALITY Like many other businesses in the life sciences and specialty chemicalsindustry, the Company experiences some seasonality. Operating results for anyquarter, however, are not necessarily indicative of results for any futureperiod. In particular, as a result of various factors such as acquisitions andplant shutdowns, the Company believes that period-to-period comparisons of itsoperating results should not be relied upon as an indication of futureperformance. EXPORT AND INTERNATIONAL SALES The Company exports numerous products to various areas, principally WesternEurope, Asia and Latin America. Export sales from the Company's domesticoperations in 1998, 1997 and 1996 amounted to $64,174, $48,852, and $50,243,respectively. Sales from international operations were $156,844 in 1998,$152,079 in 1997, and $151,466 in 1996. Refer to Note #20 to the CambrexCorporation and Subsidiaries Consolidated Financial Statements. - ---------------(dollars in thousands, except share data) 7 9 ITEM 2 PROPERTIES. Set forth below is information relating to the Company's manufacturingfacilities: OPERATINGLOCATION ACREAGE SUBSIDIARY PRODUCT LINES MANUFACTURED- -------- --------- ------------- --------------------------------- Bayonne, NJ...................... 8 acres CasChem Personal Care Ingredients; Biomedicals; Performance Enhancers; Polymer SystemsCarlstadt, NJ.................... 3 acres Cosan Performance Enhancers; Polymer SystemsHarriman, NY..................... 29 acres Nepera Active Pharmaceutical Ingredients Personal Care Ingredients; Vitamin B3; Agriculture Ingredients; Performance EnhancersDelaware Water Gap, PA........... 12 acres Heico Active Pharmaceutical Ingredients; Chiral Technology; Performance Enhancers; Polymer SystemsNorth Haven, CT.................. 4 acres Humphrey Performance EnhancersCharles City, IA................. 57 acres Salsbury Active Pharmaceutical Ingredients; Pharmaceutical Intermediates; Imaging Chemicals; Animal Health Products Performance EnhancersZeeland, MI...................... 14 acres Zeeland Pharmaceutical Intermediates; Catalysts; Chiral Technology; Performance EnhancersWalkersville, MD................. 116 acres BioWhittaker BiotechnologyVerviers, Belgium................ 9 acres BioWhittaker Biotechnology EuropeMiddlesbrough, England........... 12 acres Seal Sands Pharmaceutical Intermediates; Personal Care Ingredients; Catalysts; Agriculture Intermediates; Performance Enhancers; Polymer SystemsKarlskoga, Sweden................ 42 acres Nordic Active Pharmaceutical Ingredients; Pharmaceutical Intermediates; Imaging Chemicals; Personal Care Ingredients; Catalysts; Agriculture 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. TheCompany also leases 18,000 square feet in Warren, NJ for its Chiragene facility.In addition, the Company owns thirty-one acres of undeveloped land adjacent tothe North Haven facility, one hundred and three acres of undeveloped landadjacent to the Harriman facility, sixty-six acres of undeveloped land adjacentto the Zeeland facility and eighty-one acres used as grazing fields for theCompany's animals in Walkersville, Maryland. The Company believes its facilitiesto be in good 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 additive - ---------------(dollars in thousands, except share data) 8 10 product 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 1 andNote #22 to the Cambrex Corporation and Subsidiaries Consolidated FinancialStatements with respect to various proceedings involving the Company inconnection with environmental matters. The Company is party to a number of otherproceedings also discussed in Note #22. Management is of the opinion that whilethe ultimate liability resulting from those proceedings, as well asenvironmental matters, may have a material effect upon the results of operationsin any given year, they will not have a material adverse effect upon theCompany's liquidity nor its financial position. ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. None ITEM 10 EXECUTIVE OFFICERS OF THE REGISTRANT. The following table lists the executive officers of the Company and thegroup executives of the Company's operating subsidiaries: NAME AGE OFFICE(1)- ---- --- ------------------------------------------------------ James A. Mack.......................... 61 President and Chief Executive OfficerDouglas H. MacMillan................... 52 Vice President and Chief Financial OfficerPeter E. Thauer........................ 59 Vice President, Law & Environment General Counsel & Corporate SecretarySteven M. Klosk........................ 41 Executive Vice President, AdministrationClaes Glassell......................... 47 Vice President, Cambrex President, Pharmaceutical and Fine Chemicals GroupSalvatore J. Guccione.................. 36 Vice President, Corporate DevelopmentRonnie D. Carroll...................... 58 Vice President, TechnologyThomas N. Bird......................... 54 Vice President, Cambrex President, Biotechnology GroupJohn V. Van Hulle...................... 41 Vice President, Cambrex President, Specialty Chemicals GroupCyril C. Baldwin, Jr................... 71 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 - ---------------(dollars in thousands, except share data) 9 11 Governors of the Synthetic Organic Chemical Manufacturing Association and is amember of the Board of Trustees of the Michigan Tech Alumni Fund. 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 December1992, and General Counsel and Corporate Secretary in August 1989. From 1987until he joined Cambrex, he was Counsel to the business and finance group of thefirm of Crummy, Del Deo, Dolan, Griffinger and Vecchione. From 1971 to 1987, Mr.Thauer had 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 assumed the position of President, Pharmaceutical and FineChemicals Group in July 1998. Mr. Glassell was appointed President,International in November 1997. Mr. Glassell was appointed Vice President ofCambrex in November 1994. 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 Vice President,Corporate Development. Prior to joining the Company, from 1993 to 1995, he heldthe position of Vice President and General Manager of the InternationalSpecialty Products (ISP) Personal Care Division. He also served as Director ofCorporate Development for ISP. Dr. Carroll joined the Company in September 1997 as Vice President,Technology. Mr. Carroll had been with Bristol-Myers Squibb for 14 years, mostrecently as Vice President, Chemical Development for Bristol-Myers SquibbTechnical Operations. Prior to working for Bristol-Myers Squibb, Dr. Carroll waswith Pfizer, Inc. in Groton, CT. Mr. Bird was appointed President, Biotechnology Group in July 1998. Mr.Bird joined the Company in June 1997, as President of Nepera, Inc. He waspreviously President of the consulting firm of Bavier, Bulgar and Goodyear since1994. Prior to that, Mr. Bird maintained various vice presidential positionswith Commercial Intertech Corporation in their Fluid Purification Group. Mr. Van Hulle assumed the position President, Specialty Chemicals Groupeffective July 1998. Mr. Van Hulle was appointed President of the SpecialtyChemicals Group in November 1997. Mr. Van Hulle was appointed President ofCasChem, Inc. and Cosan Chemical Corporation in December 1994. He joined CasChemin July 1994 as Executive Vice President. For more than five years prior theretohe was General Manager of the Fine Chemicals Group for General ChemicalCorporation, and had extensive experience with Air Products & Chemicals, Inc. 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 - ---------------(dollars in thousands, except share data) 10 12 Environmental and Governance Committees of the Company's Board of Directors, andhe is a director of Church & Dwight Co., Inc. and Congoleum Corporation. PART II ITEM 5 MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. Effective March 5, 1998 the Company's Common Stock, $.10 par value, waslisted on the New York Stock Exchange (NYSE), continuing under the symbol CBM.From November 15, 1990 to March 5, 1998, the Company's Common Stock had beentraded on the American Stock Exchange (AMEX). The Common Stock previously hadbeen quoted on the National Association of Securities Dealers AutomatedQuotation (NASDAQ) National Market System. The following table sets forth theclosing high and low sales prices of the Common Stock as reported on NYSE: 1998 HIGH LOW- ---- ---- --- First Quarter............................................... $25 1/4 $21Second Quarter.............................................. 29 7/16 25 3/8Third Quarter............................................... 28 3/16 22 13/16Fourth Quarter.............................................. 29 19 5/8 1997 HIGH LOW- ---- ---- --- First Quarter............................................... $19 1/16 $16Second Quarter.............................................. 19 7/8 16 7/16Third Quarter............................................... 26 3/16 19 13/16Fourth Quarter.............................................. 24 7/8 21 13/16 As of March 13, 1999, the Company estimates that there were approximately4,372 beneficial holders of the outstanding Common Stock of the Company. The quarterly dividend on common stock was $0.03 and $.025 per share for1998 and 1997. 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, 1998 are derived fromthe audited financial statements. The consolidated financial statements of theCompany as of December 31, 1998 and December 31, 1997 and for each of the yearsin the three year period ended December 31, 1998 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. - ---------------(dollars in thousands, except share data) 11 13 YEARS ENDED DECEMBER 31, ---------------------------------------------------------- 1998(1) 1997(2)(3) 1996 1995 1994(4) -------- ---------- -------- -------- -------- (IN THOUSANDS, EXCEPT PER-SHARE DATA) INCOME DATA:Gross sales......................... $441,683 $380,083 $369,479 $368,070 $249,683Net revenues........................ 457,241 374,215 359,385 357,176 241,634Gross profit........................ 163,417 113,962 101,336 99,780 57,881Selling, general and administrative.................... 76,594 52,688 45,879 47,751 31,216Research and development............ 13,956 10,600 9,183 7,526 5,689Non-recurring in-process R&D charge............................ -- 14,000 -- -- --Operating profit.................... 72,867 36,674 46,274 44,503 20,976Interest expense, net............... 10,227 5,330 5,799 10,508 4,581Other (income) expense, net......... 945 (1,263) (194) 2,779 (497)Income before taxes................. 61,695 32,607 40,669 31,216 16,892Net income.......................... 39,102 17,776 28,225 19,670 11,126EARNINGS PER SHARE DATA:Earnings per common share and common share equivalents: Basic............................. $ 1.62 $ 0.75 $ 1.22 $ 1.03 $ 0.71 Diluted........................... $ 1.54 $ 0.73 $ 1.19 $ 0.98 $ 0.66Weighted average shares outstanding: Basic............................. 24,194 23,627 23,214 19,078 15,750 Diluted........................... 25,412 24,419 23,792 20,106 17,022DIVIDENDS PER COMMON SHARE............................. $ 0.11 $ 0.10 $ 0.09 $ 0.07 $ 0.07BALANCE SHEET DATA: (at end of period) Working capital................... $156,297 $116,743 $ 62,912 $ 69,865 $ 19,925 Total assets...................... 617,054 552,426 404,444 402,553 360,477 Long-term obligations............. 191,372 194,325 60,152 99,643 115,975 Total stockholders' equity........ 276,853 225,954 229,045 189,484 101,966 - ---------------(1) Includes royalty income of $19,298 in net revenues related to a technology license agreement with Mylan Laboratories for the use of intellectual property. (2) Includes the results of BioWhittaker, Inc. from the date of acquisition effective October, 1997. (3) Includes the non-recurring charge for in-process research and development associated with the acquisition of BioWhittaker. (4) Includes the results of Seal Sands, Nordic and Profarmaco from their respective dates of acquisition, January 31, 1994 and October 12, 1994 and October 12, 1994, through December 31, 1994. - ---------------(dollars in thousands, except share data) 12 14 ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTSOF 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, ------------------------------- 1998 1997 1996 ----- ----- ----- Gross sales......................................... 100.0% 100.0% 100.0%Net revenues........................................ 103.5* 98.5 97.3Gross profit........................................ 37.0 30.0 27.4Selling, general and administrative................. 17.3 13.9 12.4Research and development............................ 3.2 2.8 2.5Non-recurring in-process R&D charge................. -- 3.6 --Operating profit.................................... 16.5 9.6 12.5Interest expense.................................... 2.3 1.4 1.6Other (income) expense, net......................... 0.2 (0.3) (0.1)Net income.......................................... 8.9 4.7 7.6 - ---------------* Includes royalty income of $19,298. 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 gross sales of the Company's four segments,in dollars and as a percentage of the Company's total gross sales for the yearsended December 31, 1998, 1997 and 1996, as well as the gross profit by productcategory for 1998 and 1997. YEARS ENDED DECEMBER 31, -------------------------------- 1998 1997 1996 -------- -------- -------- GROSS SALES Human Health..................................... $194,766 $182,818 $174,398 Biotechnology.................................... 65,968 13,577 -- Animal Health/Agriculture........................ 56,285 59,804 61,560 Specialty Business............................... 124,664 123,884 133,521 -------- -------- --------Total Gross Sales.................................. $441,683 $380,083 $369,479 ======== ======== ========Total Net Revenues................................. $457,241* $374,215 $359,385 ======== ======== ========Total Gross Profit................................. $163,417 $113,962 $101,336 ======== ======== ======== - ---------------* Includes royalty income of $19,298. YEARS ENDED DECEMBER 31, ------------------------------- 1998 1997 1996 ----- ----- ----- GROSS SALES DISTRIBUTION Human Health...................................... 44.1% 48.1% 47.2% Biotechnology..................................... 14.9% 3.6% 0.0% Animal Health/Agriculture......................... 12.8% 15.7% 16.7% Specialty Business................................ 28.2% 32.6% 36.1% ----- ----- -----Total Gross Sales Distribution...................... 100.0% 100.0% 100.0% ===== ===== ===== - ---------------(dollars in thousands, except share data) 13 15 1998-1997 GROSS SALES & GROSS PROFIT BY PRODUCT CATEGORY 1998 GROSS GROSS SALES PROFIT $ PROFIT % -------- -------- -------- Human Health................................................ $194,766 $ 92,441* 47.5%Biotechnology............................................... 65,968 32,321 49.0%Animal Health/Agriculture................................... 56,285 11,557 20.5%Specialty Business.......................................... 124,664 27,098 21.7% -------- -------- Total............................................. $441,683 $163,417 37.0% ======== ======== - --------------- *Includes royalty income of $19,298. 1997 GROSS GROSS GROSS SALES PROFIT $ PROFIT % -------- -------- -------- Human Health................................................ $182,818 $ 67,779 37.1%Biotechnology............................................... 13,577 6,696 49.3%Animal Health/Agriculture................................... 59,804 10,621 17.8%Specialty Business.......................................... 123,884 28,866 23.3% -------- -------- Total............................................. $380,083 $113,962 30.0% ======== ======== 1998 Compared to 1997 Gross sales in 1998 were $61,600 (16%) above 1997. Increases occurred inHuman Health and Biotechnology. Animal Health/Agriculture products decreasedcompared to 1997, and the Specialty Business was at the same level as the prioryear. The effect of foreign currency exchange rates on gross sales for the yearresulted in a negative impact on sales of $2,026 compared to 1997. Gross salesfor 1998 would have been $443,709 using 1997 exchange rates compared to 1997sales of $380,083. The Human Health Segment gross sales of $194,766 were $11,948 (7%) above1997. This segment's increases were in Active Pharmaceutical Ingredients, whichwere up $9,998 (9%), Pharmaceutical Intermediates, up $1,414 (6%) and ChiralTechnology, up $1,815 (49%). Imaging Chemicals (X-Ray Media) were down $3,438(20%) from 1997. Active Pharmaceutical Ingredient sales of $120,459 were $9,998 (9%) abovethe prior year due to strong demand for our gastro-intestinal products used fortreating ulcerative colitis, and also due to shipments of a new anti-asthma drugand other new products. Active Pharmaceutical Ingredients include activeingredients used in products for gastro-intestinal, cardiovascular, endocrine,central nervous system, respiratory, diuretics, anti-infective,anti-inflammatory, immunology and various other uses. PharmaceuticalIntermediate sales of $24,844 were $1,414 (6%) above 1997 due to new productsused in migraine medicine and central nervous system applications. Theseincreases were partially offset by lower sales of aminodioxepin (AOA), a drugintermediate used in the production of a protease inhibitor for the treatment ofAIDS, due to the demand for the end-use drug leveling off primarily from thefilling of the distribution pipeline. Chiral Technology product sales of $5,548were $1,815 (49%) above 1997 due to the sales from the acquisition of the chiralintermediates business (Chiragene) from Celgene Corporation in January 1998.Imaging Chemical (X-Ray Media) sales of $14,179 were $3,438 (20%) below theprior year due to a customer reducing inventories, and another customer decidingto manufacture on a captive basis. A third customer established a backupsupplier as was permitted under a 5-year supply agreement, which further reducedsales. Other product category changes from prior years were not significant. - ---------------(dollars in thousands, except share data) 14 16 The Biotechnology Segment gross sales of $65,968 are from the Company'sBioWhittaker subsidiary which was acquired in the fourth quarter of 1997, andinclude their first full year sales as a Cambrex subsidiary. This segmentconsists principally of cell culture products, including living cell cultures,cell culture media and cell culture media supplements, as well as endotoxindetection products. Sales for 1998 from cell culture products were $43,795 and sales fromendotoxin detection products were $18,852. The Animal Health/Agriculture Segment gross sales of $56,285 were $3,519(6%) below the 1997 level with decreases in Agricultural Intermediates of $4,313(down 14%). Vitamin B(3) was $651 (up 5%) above 1997 and Animal Health productswere at the same level as 1997. Vitamin B(3) sales of $12,814 were $651 (5%) above 1997 due to priceincreases put in place in late 1997 and volume increases to customers. AnimalHealth sales of $17,614 was at the same level as 1997. Sales of organo-arsenicalfeed additives, the largest product in Animal Health, remained at 1997 levels.Agricultural Intermediate sales of $25,857 were down $4,313 (14%) due to reduceddemand for crop protection products directly related to the economic conditionsin Asia. The Specialty Business Segment gross sales of $124,664 increased $780 (1%)above 1997. Sales of Performance Enhancing Chemicals of $81,853 were at 1997levels and Polymer System sales of $42,811 were $567 (1%) above 1997. Performance Enhancing Chemical sales include over 100 products used inphotography, pigments, specialty polymers, fuel/or additives, catalysts, andother specialty additives. Key sales increases resulted from increases in THPE,a polycarbonate additive, with growth in export markets, and in castor oil basedproducts and were offset by decreases in photographic products. Polymer Systemsales of $42,811 were $567 (1%) above 1997, due to increased demand for amonomer used in high performance plastics offset by decreases in coatingproducts. Export sales from U.S. businesses of $64,174 in 1998 compared to$48,852 in 1997. Export sales from U.S. businesses were at $64,174 compared with $48,852 in1997. International sales, comprised of all sites from our operations in Europe,totaled $156,844 as compared with $152,079 in 1997. Total gross profit of $163,417 was $49,455 above 1997 due mainly to theinclusion of the Biotechnology Segment for a full year, and the effect ofroyalty income of $19,298. (The 1997 gross profit included $1,000 in royaltyincome). The gross margin for all product segments excluding the royalty incomewas 32.6% up from 29.7% in 1997. The reduced gross margin in the SpecialtyBusiness segment was due to higher sales of low margin commodity castor oil. Thegross margin for the Human Health Segment (excluding the royalty income) was$73,143 (37.6%) in 1998 versus $66,779 (36.5%) in 1997 due to the general mix ofsales. The royalty income discussed above relates to a technology licenseagreement signed in late 1997 with Mylan Laboratories for the use ofintellectual property related to three pharmaceutical ingredients. The companyhas been advised that Mylan will no longer enforce its exclusive access to thetechnology. The royalty arrangements under the agreements have also concluded.As previously reported, the company's exclusive license agreement is the subjectof various lawsuits. The company has begun to sell these products on anon-exclusive basis in first quarter 1999. The Company anticipates that it willbe able to replace a substantial portion of royalty revenues through sales withadditional customers and price increases. Selling, general and administrative expenses as a percentage of gross saleswas 17.3% in 1998, up from 13.9% in 1997. The increase is mainly due to theinclusion for the full year 1998 of the Biotechnology Segment acquired in thefourth quarter 1997, Chiragene acquired in January 1998 and the third quarter1998 restructuring charge of $1,400. Excluding the effect of the BiotechnologySegment for the first nine months of 1998, the restructuring charge taken in thethird quarter 1998, and the Chiragene expenses, SG&A expenses were $59,144(13.4% of gross sales) versus $52,688 (13.7% of gross sales) in 1997. TheCompany incurred a restructuring charge of $1,400 which includes thenon-recurring costs resulting from the consolidation of administrative andmanagement functions and resulted in the reduction of 44 employees. These costsare - ---------------(dollars in thousands, except share data) 15 17 primarily related to severance paid to terminated employees. In addition,certain actions were taken in the third quarter of 1998 for the acquisitionreorganization plan at our BioWhittaker facility of approximately $1,400 for thetermination of 28 employees. This plan was part of the final purchase accountingadjustments made in the third quarter 1998. In addition, BioWhittaker favorablyconcluded a patent infringement dispute and has received a cash payment ofapproximately $5,400 in 1998. This settlement, as well as the settlement ofother acquisition contingencies of approximately $1,600, are part of the finalpurchase accounting adjustments in the third quarter 1998. As a result offinalizing the purchase accounting, the net impact on goodwill, including thetax effect, was a reduction of approximately $900. The Company conducts periodicreviews of its environmental and litigation matters, prepares estimates of therange of potential future costs of each matter wherever possible, and adjuststhe accruals for environmental contingencies as circumstances warrant. In 1998,the Company incurred an additional $1,799 in environmental costs and reversed$800 from the reserve, thereby decreasing the total reserve by $2,599. Research and Development expenses of $13,956 were 3.2% of gross sales in1998, and represented a 32% increase from 1997. This increase was mainly due tothe inclusion of BioWhittaker for a full year, the acquisition of Chiragene inJanuary 1998, and increased corporate commitment to underwrite spending onoutside contract research. The operating profit in 1998 was $72,867 versus $50,674 in 1997 (excludingthe effect of the non-recurring charge for in-process research and developmentof $14,000 in 1997). Net interest expense of $10,227 in 1998 reflected an increase of $4,897from 1997. This increase was due to the financing of the acquisition ofBioWhittaker and Chiragene. The average interest rate was 6.5% in 1998 versus6.8% in 1997. Other expense of $945 for 1998 was $2,208 higher than the $1,263 of otherincome in 1997. The year 1997 included a one-time gain of $954 on a foreigncurrency denominated loan. Also included in other expense for 1998 were assetwrite-offs at our Zeeland, Michigan facility of $522. The year 1998 included a one-time charge of $3,420 in income taxes for theItalian Substitute Tax election, which was made in the second quarter of 1998.This election allows previously non-deductible goodwill of Cambrex's Italiansubsidiary, Profarmaco, S.r.l., to be deducted. This one-time charge will have atotal future tax benefit in the years 1999 to 2004 of approximately $8,000. The provision for income taxes for 1998 resulted in an effective rate of31% (excluding the Italian Substitute Tax) versus 32% in 1997 (excluding theeffect of the non-recurring charge for in-process research and development of$14,000 in 1997). The Company's net income for 1998 increased to $39,102 compared with a netincome of $31,776 in 1997 (excluding the effect of the non-recurring charge forin-process research and development of $14,000 in 1997). 1997 Compared to 1996 Gross sales in 1997 were $10,604 above 1996. Increases in Human Health wereoffset by lower sales in our Animal Health/Agriculture and Specialty Businesscategories. Biotechnology sales (from the acquisition of BioWhittaker in thefourth 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. The Human Health Segment gross sales of $182,818 were $8,420 (5%) above1996. Increases in Active Pharmaceutical Ingredients of $6,652, PharmaceuticalIntermediates of $7,119, and Personal Care of $2,150, more than offset lowerImaging Chemicals (X-Ray Media) of $5,407. - ---------------(dollars in thousands, except share data) 16 18 Active Pharmaceutical Ingredient sales of $110,461 were $6,652 (6%) above1996 due mainly to the introduction of a new generic product in the Japanesemarket used as an anti-ulcerative, which resulted in new product sales of $6,264in 1997. This increase was also attributable to sales ofIsosorbide-5-mononitrate, used as a vasodilator in cardiovascular pretreatments,which had strong volume growth in 1997. Pharmaceutical Intermediate sales of$23,430 were $7,119 (44%) above 1996 due to the effect of sales of an advancedintermediate of a new protease inhibitor for AIDS treatment, and the manufactureof Aminopyridine, used in a variety of pharmaceutical products. Personal CareIngredient sales of $16,453 were $2,150 (15%) above 1996, due to higher sales ofseveral smaller products manufactured and sold to the European market. The Biotechnology Segment gross sales of $13,577 are from BioWhittakersince the date of acquisition. Their products include cell culture and endotoxindetection products. The Animal Health/Agriculture Segment gross sales of $59,804 were $1,756(3%) below 1996. Animal Health sales decreased $678, Agricultural Intermediatesales decreased $1,501, but Vitamin B(3) sales increased $423. Vitamin B(3) sales of $12,163 increased 4% as compared to 1996 with volumeincreases in Europe partially offset by decreased pricing due to competitivepressure. Animal Health Product sales were $17,471, down 4% from 1996, mainlydue to a decision to exit a low margin poultry additive. AgriculturalIntermediate sales of $30,170 decreased $1,501 (5%) from 1996. The decrease wasdue to the unusual amount of a pyridine derivative used in the manufacture ofherbicides shipped in 1996 under a renegotiated contract. The shipments in 1997returned to normal levels. Pyridine, which is the largest agriculture product ,was at 1996 levels. The Specialty Business Segment gross sales of was $123,884, decreased$9,637 (7%) from 1996. Performance Enhancing Chemical sales of $81,640 were down7% compared to 1996 and Polymer System sales of $42,244 were down 8% from 1996. Performance Enhancing Chemical sales decreased $5,755 (7%). Pyridinederivatives returned to pre-1996 sales as the result of decreased demand in theAsian market. Photographic product sales decreased due to the expected reductionin volume by one-half of normal levels from a key customer. Polymer System salesof $42,244 decreased $3,881 (8%) as compared to 1996. Sales of engineeringplastics decreased $2,000 (24%) from 1996 due to a major customer losing to acompetitor their largest market of a product used in producing high performanceplastics mainly used in the electronics industry. Coatings decreased $1,217 (6%)from 1996 due to reduced sales of low margin castor based products as a resultof management's decision to focus on higher margin products, andTelecommunications product sales decreased $665 (4%) from 1996 primarily as aresult of a major customer's decision to change their specification of anencapsulant product, but it took some time for customers to reduce existinginventories. 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. 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 active pharmaceutical ingredients and new pharmaceutical intermediates,production efficiencies, and increased plant throughput, in line withmanagement's continued focus on higher performing, more profitable productlines. Excluding the BioWhittaker acquisition, the gross margin would have been29.3%. Selling, general and administrative expenses as a percentage of gross saleswere 13.9% 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 environmentaland litigation matters, prepares estimates of the range of potential futurecosts of - ---------------(dollars in thousands, except share data) 17 19 each matter 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 acharge of $14,000 in the fourth quarter 1997 for the value of in-processresearch and development at the time of the acquisition of BioWhittaker, Inc.which was completed 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 6.8%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 a foreign denominated loan.Additionally, 1997 other income included the final resolution and receipt of thesettlement proceeds due from the 1996 premature termination of a contract by thecustomer of $766, offset by a charge of $507 for the settlement of a legalmatter 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. 1996 compared to 1995 Gross sales in 1996 were at the same level as 1995. Increases in the HumanHealth and Specialty Business Segment were offset by lower sales in our AnimalHealth/Agriculture Segment. The Human Health Segment gross sales of $174,398 was $4,136 (2%) above1995. Increased Imaging Chemicals (X-Ray Media) of $3,648, and Chiral Technologyof $2,829, offset Pharmaceuticals Intermediates which decreased $3,459. Active Pharmaceutical Ingredient sales were $103,809, the same level as1995. The key products in this segment included gastrointestinal activesSulfasalazine/mesalamin, used in the treatment of ulcerative colitis;cardiovasculars Diltiazem HcL and Sotalil Hcl; the endocrine preparationGlipizide; and respiratory Cromoglycate Sodium. Imaging Chemical sales (X-Raymedia product), which include 5 NIPA compounds, of $23,024 increased $3,648(19%) with the largest increase from one of our U.S. facilities, due to a shiftin production by a major customer in 1996 from Europe to the U.S. ChiralTechnology product sales of $5,537 increased $2,829 over 1995 due to theintroduction of various new products. Pharmaceutical Intermediate sales of$16,311, decreased $3,459 (18%) due to the effect of the loss a significantcustomer contract and - ---------------(dollars in thousands, except share data) 18 20 reduced demand for dextromethorphan intermediates (used in over-the-countercough suppressants), partially offset by the initial sales of an advancedintermediate of a new protease inhibitor for AIDS treatment. The Animal Health/Agriculture Segment gross sales of $61,560 was down$6,588 (10%) from 1995. This segment includes Vitamin B(3), Animal HealthProducts, and Agricultural Intermediates. Vitamin B(3) sales of $11,740 decreased $6,774 (37%) due to reduced pricingand increased competition. Animal Health Product sales were $18,149, a decreaseof 4% from 1995. Sales of organo-arsenical feed additives, the largest productin feed additives, was down 7% from 1995 due to escalated grain prices andincreased price competition to end-users. Agricultural Intermediate sales of$31,671 increased $1,217 (4%) from 1995. The increase was due to therenegotiation of a contract for a pyridine derivative used in the manufacture ofherbicides in the first quarter 1996. However, Pyridine, which is the largestproduct in crop protection, was down from 1995, due to a major customerpurchasing at 1993 levels after two years (1994 and 1995) at above contractlevels. The Specialty Business Segment was $133,521 an increase of $3,859 (3%) from1995. This segment includes Performance Enhancing Chemical sales of $87,395 up$7,111 (9%) from 1995 and Polymer System sales of $46,216 down $3,252 (7%) from1995. Performance Enhancing Chemical sales increased $7,111 over 1995. The keyincreases were pyridine derivatives shipments to world markets and customers notpreviously served, and gain in market share of PNBA, a pigment used in dyes andUV protection agents. Polymer System sales of $46,126 were down $3,252 from1995. Telecommunications products decreased $4,901 from 1995 primarily as aresult of the Company's strategic decision to no longer providing product toAT&T. 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, a contract with our U.S. facility in Zeeland, Michigan wasterminated prematurely by the customer. A settlement had been agreed upon thatentitles the Company to payments in 1996 and for the next three years.Accordingly, the Company recognized income, net of related costs, ofapproximately $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. The Companyconducts periodic reviews of its environmental and litigation matters, preparesestimates of the range of potential future costs of each matter whereverpossible, and adjusts the accruals for environmental contingencies ascircumstances warrant. In 1996, this accrual was reduced by $1,000 to reflectthe Company's 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. - ---------------(dollars in thousands, except share data) 19 21 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. LIQUIDITY AND CAPITAL RESOURCES Net cash flow from operations was $80,686 for the year ended December 31,1998 compared with $52,579 in 1997. The increase in cash flow is primarily dueto increased revenues, as well as increased current liabilities and income taxespayable. Cash flows used in investing activities included capital expendituresof $43,007, the acquisition of the Chiragene facility and the acquisition ofBoehringer Ingelheim Bioproduct Partnership (BIBP). Cash flows from financingactivities included $10,325 in proceeds from the issuance of common stock due tothe exercise of stock options offset by the payment of $2,658 in dividends andnet repayment of debt of $4,836. Capital expenditures were $43,007 in 1998, $35,935 in 1997 and $32,396 in1996. The largest expenditures in 1998 were for new business projects and plantupgrades. The Company completed two new business projects to construct pilotplants at Salsbury and Zeeland which incorporate cGMP facilities. New businessprojects also included additional batch still capabilities and the start ofconstruction of a new Niacinamide (Vitamin B(3)) plant at Nepera, as well as anew plant for a polymer product starting up in the second quarter 1999 atCasChem. Plant upgrades included an office relocation and expansion at Nordicwhich allowed several locations to be combined and the purchase of additionalland adjacent to Profarmaco. 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. Under this agreement, the Company has pledged 66% of the common stock ofthe Company's foreign subsidiaries as collateral. The Agreement permits theCompany to choose between various interest rate options. Under the Agreement,the interest rate options available to the Company are: (a) U.S. Prime rate or(b) LIBOR plus the applicable margin (ranging from .225% to .5%) or (c)Competitive Bid at a LIBOR Rate Borrowing or a Fixed Rate Borrowing to bedetermined by auction. The applicable margin is adjusted based upon the FundedIndebtedness to Cash Flow Ratio of the Company. Additionally, the Company pays acommitment fee of between .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 31,1998 and 1997 was $210,000 and $207,400 respectively. There is $190,000outstanding as of December 31, 1998. Management is - ---------------(dollars in thousands, except share data) 20 22 of the opinion that these amounts, together with cash flows from operations, areadequate for meeting the company's operating, financing and capitalrequirements. Effective May 28, 1998, the Company's Board of Directors approved atwo-for-one split of the Company's Common Stock, $0.10 par value, in the form ofone additional share of Common Stock for each share held. Management believes that existing sources of capital, together with cashflows from operations, will be sufficient to meet foreseeable cash flowrequirements. FINANCIAL INSTRUMENTS The company is exposed to market risks arising from adverse changes ininterest rates and foreign currency exchange rates. In the normal course ofbusiness, the company uses a variety of techniques and instruments, includingderivatives, as part of its overall risk management strategy. Currency Risk Management The Company's primary market risk relates to exposure to foreign currencyexchange rate fluctuations on transactions entered into by our internationaloperations which are primarily denominated in the U.S. dollar, Deutsche mark andBritish pound sterling. The Company currently uses foreign currency forwardexchange contracts and has used put and call options contracts in the past tomitigate the effect of short-term foreign exchange rate movements on theCompany's operating results. The net notional amount of these contracts is$24,371 which the Company estimates to be approximately 56% of the foreigncurrency exposure during the period covered resulting in an unrealized currencyloss of $66 at December 31, 1998. Given the unlikely scenario that the collections match the forecast, andthat all the collections move 10% against their local currencies, no more than$3,329 of pre-tax profits for a twelve month period would be at risk. This isbased on a non-hedged risk of $33,290. This residual risk allows for anover-forecasting margin of error and prevents over hedging of actual operatingrisk. As of December 31, 1998, the combined non-local currency forecasted netcollections amounted to $76,120. Offsetting this exposure are the expected$18,393 U.S. dollar intercompany payments from the combined European sites. Theremaining $57,727 forecasted exposure was partially hedged ($24,437) with majorbanks through interest rate swaps to reduce the non-hedged risk to $33,290. Interest Rate Management The company's debt outstanding, and the interest paid to support the debt,has been relatively flat over the past year. Each of the interest rate optionscontained in the Revolving Credit Agreement includes floating rates. Thisarrangement has the advantage of making lower interest rates available in adeclining market, however it also exposes the company to any upward swings ininterest rates. For example, based on the Company's current level of debtoutstanding, an interest rate increase of 100 basis points would increaseinterest expense and thus decrease the company's after-tax profitability by$1,235. The Company has employed a plan to control interest rate risk. The planallows the Company to pay a premium now in order to obtain a fixed interest rateat predetermined cost in the future. In effect, the premium, or swap, stabilizesinterest costs by converting unpredictable variable interest rates to fixedrates. The swap market is currently offering fixed rates for the next two tofive years at a small premium, between .10% and .25%, over the current LIBORrate. As of December 31, 1998, the Company has seven interest rate swaps in placethat total $80,000 at an average rate of 5.79%, with maturities through the year2003. The Company's strategy is to cover approximately 40% of outstanding bankdebt with interest rate protection. - ---------------(dollars in thousands, except share data) 21 23 Impact of the Euro The advent of the Euro may have a slight impact on the transactions of theCompany's Italian subsidiary, Profarmaco. The Euro has mitigated any exposure onthe transactions among the Company's subsidiaries in Germany and France. Theactivities of Nordic and Seal Sands will not be impacted since the England andSweden are not part of the European Monetary Union at present. Overall, the Euroshould not have a material impact on the consolidated financial statements ofthe company. ENVIRONMENTAL In connection with laws and regulations pertaining to the protection of theenvironment, the Company is a party to several environmental remediationinvestigations and cleanups and, along with other companies, has been named a"potentially responsible party" for certain waste disposal sites (Superfundsites). Each of these matters is subject to various uncertainties, and it ispossible that some of these matters will be decided unfavorably against theCompany. The Company had accruals, included in current accrued liabilities andother noncurrent liabilities, of $4,800 and $7,400 at December 31, 1998 and1997, respectively, for costs associated with the study and remediation ofSuperfund sites and the Company's current and former operating sites for mattersthat are probable and reasonably estimable. Based on currently availableinformation and analysis, the Company's accrual represents 73% of what itbelieves are the reasonably possible environmental cleanup related costs of anon-capital nature. The estimate of reasonably possible costs is less certainthan the probable estimate on which the accrual is based. During the pastthree-year period, cash payments for environmental cleanup related matters were$1,800, $400 and $600 for 1998, 1997 and 1996, respectively. There were noprovisions for environmental contingencies during the past three-year period.The Company reduced reserves of approximately $800 and $1,000 in 1998 and 1996,respectively, as a result of revised estimates. After reviewing informationcurrently available, management believes any amounts paid in excess of theaccrued liabilities will not have a material effect on its financial position orresults of operations. However, these matters, if resolved in a manner differentfrom the estimates could have a material adverse effect on financial condition,operating results and cash flows when resolved in a future reporting period. LITIGATION The Company and its subsidiary Profarmaco S.r.l. ("Profarmaco") were namedas defendants in a proceeding instituted by the Federal Trade Commission ("FTC")on December 21, 1998, in the United States District Court for the District ofColumbia. The complaint alleges that exclusive license agreements whichProfarmaco entered into with Mylan Laboratories, Inc. ("Mylan") covering thedrug master files for (and therefore the right to buy and use) two activepharmaceutical ingredients ("APIs"), lorazepam and clorazepate, were part of aneffort on Mylan's part to restrict competition in the supply of lorazepam andclorazepate and to increase the price charged for these products when Mylan soldthem as generic pharmaceuticals. The complaint further alleges that theseagreements violate the Federal Trade Commission Act, and that Mylan, Cambrex,Profarmaco, and Gyma Laboratories of America, Inc., Profarmaco's distributor inthe United States, engaged in an unlawful restraint of trade and conspired tomonopolize and attempted to monopolize the markets for the genericpharmaceuticals incorporating the APIs. The FTC seeks a permanent injunction andother relief, including disgorgement of the profits generated through thelicensing arrangements, which the FTC alleges to be in excess of $120,000 forall defendants. In accordance with the license agreement, the Company receivedroyalties of approximately $19,300 and $1,000 for the years ended December 31,1998 and 1997, respectively. A lawsuit making similar allegations against the Company and Profarmaco,and seeking injunctive relief and treble damages, has been filed by theAttorneys General of 31 states and the District of Columbia in the United StatesDistrict Court for the District of Columbia on behalf of those states andpersons in those states who were purchasers of the generic pharmaceuticals. TheCompany and Profarmaco have also been named in purported class action complaintsbrought by private plaintiffs in various state courts on behalf of purchasers of - ---------------(dollars in thousands, except share data) 22 24 lorazepam and clorazepate in generic form, making allegations essentiallysimilar to those raised in the FTC's complaint and seeking various forms ofrelief including treble damages. The Company believes that its licensing arrangements with Mylan are inaccordance with regulatory requirements and will vigorously defend the FTC'sactions and various other lawsuits and class actions. However, the Company andMylan have terminated the exclusive licenses to the drug master files. Thefuture royalty arrangements under the agreements have concluded as of December31, 1998. In entering these licensing arrangements, the Company elected not toraise the price of its products and had no control or influence over the pricingof the final generic product forms by Mylan. On May 14, 1998, the Company's Nepera subsidiary, a manufacturer and sellerof niacinamide (Vitamin B(3)), received a Federal Grand Jury subpoena for theproduction of documents relating to the pricing and possible customer allocationwith regard to that product. The Company understands that the subpoena wasissued as part of the Federal Government's ongoing antitrust investigation intovarious business practices in the vitamin industry generally. The Company andNepera have been cooperating fully with the Government's investigation. While it is not possible to predict with certainty the outcome of the FTCaction and various other lawsuits and class actions, it is the opinion ofmanagement that the ultimate resolution of these proceedings should not have amaterial adverse affect on the Company's results of operations, cash flows andfinancial position. These matters if resolved in an unfavorable manner couldhave a material adverse affect on the operating results or cash flows whenresolved in a future reporting period. IMPACT OF RECENT ACCOUNTING PRONOUNCEMENTS The Company adopted Statement of Financial Accounting Standards No. 131"Disclosures about Segments of an Enterprise and Related Information" (SFAS 131)in the fourth quarter of 1998. This Statement establishes standards for the wayin which public business enterprises report information about operating segmentsin annual financial statements and requires that those enterprises reportselected information about those operating segments in interim reports. It alsoestablishes standards for related disclosures about products and services,geographic areas and major customers. The adoption of SFAS 131 did not have aneffect on the financial position or results of operations of the Company. The Company adopted Statement of Financial Accounting Standards No. 132"Employers' Disclosures about Pensions and Other Postretirement Benefits" (SFAS132) in the fourth quarter of 1998. This statement revises employers'disclosures about pension and other postretirement benefit plans. It does notchange the measurement or recognition of those plans. The adoption of SFAS 132did not have an effect on the financial position or results of operations of theCompany. In June 1998, the Financial Accounting Standards Board issued Statement ofFinancial Accounting Standards No. 133 "Accounting for Derivative Instrumentsand Hedging Activities" (SFAS 133). SFAS 133 is effective for all fiscalquarters of all fiscal years beginning after June 15, 1999. SFAS requires thatall derivative instruments be recorded on the balance sheet at their fair value.Changes in the fair value of derivatives are recorded each period in currentearnings or other comprehensive income, depending on whether a derivative isdesignated as part of a hedge transaction and, if it is, the type of hedgetransaction. The fair value hedge transactions in which the Company is hedgingchanges in an asset's, liability's or firm commitment's fair value; changes inthe fair value of the derivative instrument that are reported in othercomprehensive income will be reclassified as earnings in the period in whichearnings are impacted by the variability of the cash flows of the hedged item.The ineffective portion of all hedges will be recognized in current-periodearnings. The Company is evaluating the impact that the adoption of SFAS 133will have on its earnings, comprehensive income or statement of financialposition. - ---------------(dollars in thousands, except share data) 23 25 YEAR 2000 UPDATE The ability of computers, software or any equipment utilizingmicro-processors to properly recognize and process data information at the turnof the century is commonly referred to as a Year 2000 ("Y2K") compliance issue.To minimize the risk of unplanned interruptions, the Company is using amulti-step approach in conducting its year 2000 project. These steps areinventory, assessment, remediation, testing for compliance, and contingencyplanning. The Company approaches its Y2K compliance issue by categorizing itsdependencies into two sections: Internal systems (Information Technology ("IT")systems and Non-IT systems), and External systems of suppliers and customers.Generally, internal systems identified as non-Y2K compliant are being replacedor modified. Many of the internal non-compliant systems were targeted forreplacement for reasons other than Y2K issues as the benefits of newertechnology had already created an economic business case for action. Replacementsolution costs will be capitalized as permitted by applicable accountingstandards whereas the cost of modification solutions will generally be expensedas repairs. External systems are being monitored with the cooperation of oursuppliers and customers. Internal Systems a) IT systems -- These systems include internal applications software suchas finance, manufacturing (purchasing, product costing, production reporting,maintenance, and planning and scheduling), logistics (distribution planning andcustomer order entry), human resources, and communications. All internal ITsystems have been inventoried, assessed, and remediated where necessary for Y2Kcompliance and are now being tested. The Company anticipates its internal ITwill be Y2K compliant by the end of 1999. b) Non-IT systems -- These systems are used for process monitoring andcontrol, laboratory measurement and analysis, waste treatment control, and inother plant operations. These systems include embedded chip technology such asprogrammable logic controllers and related hardware/software, and personalcomputers and related software. All internal non-IT systems have beeninventoried and assessed for Y2K compliance and those which require modificationare being remediated. This remediation, or where necessary replacement, will becompleted by mid-1999. Testing will be completed on all systems by the end ofthe third quarter 1999. External systems External systems include systems of customers and suppliers. The Company isin the process of understanding the extent to which it is vulnerable to the Y2Kissues of its customers and suppliers. The Company has identified and contactedthird parties whose systems would have a significant negative impact onoperations if not Y2K compliant, and is in the process of assessing the systemsof these third parties. The Company expects to complete its assessment and tohave developed requisite action plans with respect to these findings bymid-1999. The Company will also develop contingency plans during the third and fourthquarters of 1999 for all critical systems and key suppliers in the event aninternal or external system, that is believed to be compliant, fails. The dates on which the Company plans to complete any necessary Y2Kmodifications are based on management's best estimates, which were derivedutilizing numerous assumptions of future events, including the continuedavailability of certain resources, third-party modification plans and otherfactors. The Company believes its most reasonably likely worst case scenario inthe event of the failure to correct a material Y2K compliance problem, internalor external, could result in an interruption in, or a failure of, certain normalbusiness activities or operations. While management is not aware of suchproblems, such failures, if they occur, could have a material adverse impact onthe operations of the Company. The Company believes that - ---------------(dollars in thousands, except share data) 24 26 with the implementation of new business systems and completion of the Y2Kproject as scheduled, the possibility of significant interruptions of normaloperations will be reduced. The estimated total cost of implementing Y2K solutions, which includes thecost of the replacement systems discussed above, is approximately $8,500. Theapproximate amount expended through December 1997 was $6,000 with an additionalspending of approximately $1,900 occurring in 1998. With regard to the $7,900expended through 1998, approximately $700 has been expensed and $7,200capitalized in accordance with applicable accounting standards. The remainingY2K expenditures, which will be expensed, are estimated to be $600 and areanticipated to be incurred by the end of 1999. FORWARD-LOOKING STATEMENTS This document contains forward-looking statements. Investors should beaware of factors that could cause Cambrex actual results to vary materially fromthose projected in the forward-looking statements. These factors include, butare not limited to, global economic trends; competitive pricing or productdevelopment activities; markets, alliances, and geographic expansions developingdifferently than anticipated; government legislation and/or regulation(particularly on environmental issues); and technology, manufacturing and legalissues; and the factors disclosed in the Year 2000 Update. 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........................... 26Consolidated Balance Sheets as of December 31, 1998 and 1997...................................................... 27Consolidated Income Statements for the Years Ended December 31, 1998, 1997 and 1996................................... 28Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 1998, 1997 and 1996.............. 29Consolidated Statements of Cash Flows for the Years Ended December 31, 1998, 1997 and 1996.......................... 30Notes to Consolidated Financial Statements.................. 31Consolidated Quarterly Financial Data (unaudited) for the Years Ended December 31, 1998 and 1997.................... 56 The consolidated financial statements and financial statement schedule arefiled pursuant to Item 14 of this report. - ---------------- ---------------(dollars in thousands, except share data) 25 27 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholders of Cambrex Corporation: In our opinion, the accompanying consolidated balance sheets and the relatedconsolidated statements of income and retained earnings and cash flows presentfairly, in all material respects, the financial position of Cambrex Corporationand its subsidiaries at December 31, 1998 and 1997, and the results of theiroperations and their cash flows for each of the three years in the period endedDecember 31, 1998, in conformity with generally accepted accounting principles.These financial statements are the responsibility of the Company's management;our responsibility is to express an opinion on these financial statements basedon our audits. We conducted our audits of these financial statements inaccordance with generally accepted auditing standards which require that we planand perform the audit to obtain reasonable assurance about whether the financialstatements are free of material misstatement. An audit includes examining, on atest basis, evidence supporting the amounts and disclosures in the financialstatements, assessing the accounting principles used and significant estimatesmade by management, and evaluating the overall financial statement presentation.We believe that our audits provide a reasonable basis for the opinion expressedabove. PRICEWATERHOUSECOOPERS LLP Florham Park, New JerseyJanuary 22, 1999, exceptfor Note 23, as to which thedate is March 12, 1999 26 28 CAMBREX CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) DECEMBER 31, -------------------- 1998 1997 -------- -------- ASSETSCurrent assets: Cash and cash equivalents................................. $ 48,527 $ 21,469 Trade receivables, less allowances of $1,550 and $1,705 at respective dates....................................... 56,964 55,733 Other receivables......................................... 7,689 6,150 Inventories, net.......................................... 100,245 91,733 Deferred tax assets....................................... 11,759 5,947 Prepaid expenses and other current assets................. 6,342 3,622 -------- -------- Total current assets.............................. 231,526 184,654Property, plant and equipment, net.......................... 255,016 237,342Intangible assets, net...................................... 126,995 127,003Other assets................................................ 3,517 3,427 -------- -------- Total assets...................................... $617,054 $552,426 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITYCurrent liabilities: Accounts payable and accrued liabilities.................. $ 63,467 $ 58,471 Income taxes payable...................................... 8,733 4,857 Short-term debt........................................... 2,451 3,597 Current portion of long-term debt......................... 578 986 -------- -------- Total current liabilities......................... 75,229 67,911Long-term debt.............................................. 191,372 194,325Deferred tax liabilities.................................... 52,183 43,436Other noncurrent liabilities................................ 21,417 20,800 -------- -------- Total liabilities................................. 340,201 326,472Commitments and contingenciesStockholders' equity: Common Stock, $.10 par value; issued 26,573,324 and 25,934,574 shares at respective dates.................. 2,655 1,295 Additional paid-in capital................................ 163,525 154,406 Retained earnings......................................... 132,471 96,027 Treasury stock, at cost; 2,081,099 and 2,081,122 shares at respective dates....................................... (9,841) (9,458) Shares held in trust, at cost; 381,749 and 360,554 shares at respective dates.................................... (407) (1,275) Accumulated other comprehensive income/(loss)............. (11,550) (15,041) -------- -------- Total stockholders' equity........................ 276,853 225,954 -------- -------- Total liabilities and stockholders' equity........ $617,054 $552,426 ======== ======== See accompanying notes to consolidated financial statements. 27 29 CAMBREX CORPORATION AND SUBSIDIARIES CONSOLIDATED INCOME STATEMENTS (IN THOUSANDS, EXCEPT PER-SHARE DATA) YEARS ENDED DECEMBER 31, -------------------------------- 1998 1997 1996 -------- -------- -------- Gross sales................................................ $441,683 $380,083 $369,479Net revenues............................................... 457,241 374,215 359,385 Cost of goods sold....................................... 293,824 260,253 258,049 -------- -------- --------Gross profit............................................... 163,417 113,962 101,336 Selling, general and administrative...................... 76,594 52,688 45,879 Research and development................................. 13,956 10,600 9,183 Non-recurring in-process R&D charge...................... -- 14,000 -- -------- -------- --------Operating profit........................................... 72,867 36,674 46,274Other (income) expenses Interest income.......................................... (249) (238) (353) Interest expense......................................... 10,476 5,568 6,152 Other -- net............................................. 945 (1,263) (194) -------- -------- --------Income before income taxes................................. 61,695 32,607 40,669Provision for income taxes................................. 22,593 14,831 12,444 -------- -------- --------Net income................................................. $ 39,102 $ 17,776 $ 28,225 ======== ======== ========Earnings per share of common stock and common stock equivalents: Basic.................................................... $ 1.62 $ 0.75 $ 1.22 Basic.................................................... $ 1.62 $ 0.75 $ 1.22 Diluted.................................................. $ 1.54 $ 0.73 $ 1.19Weighted average shares outstanding: Basic.................................................... 24,194 23,627 23,214 Diluted.................................................. 25,412 24,419 23,792 See accompanying notes to consolidated financial statements. 28 30 CAMBREX CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) COMMON STOCK ---------------------- ADDITIONAL SHARES SHARES PAR VALUE PAID-IN RETAINED TREASURY HELD IN COMPREHENSIVE ISSUED ($.10) CAPITAL EARNINGS STOCK TRUST INCOME/(LOSS) ---------- --------- ---------- -------- -------- ------- ------------- BALANCE AT DECEMBER 31, 1995.............. 8,195,831 $ 818 $142,453 $ 54,316 $(9,160) $ -- Comprehensive income/(loss) Net Income............................ 28,225 $ 28,225 -------- Other comprehensive income/(loss) Foreign currency translation adjustments...................... 6,884 Minimum pension liability adjustment....................... 197 -------- Other comprehensive income/(loss)..... 7,081 -------- Comprehensive income.................... $ 35,306 ======== Cash dividends at $0.09 per share....... (1,933) Exercise of stock options............... 334,650 33 4,677 (856) (718) Tax benefit of stock options exercised............................. 1,406 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) ---------- ------ -------- -------- ------- -------BALANCE AT DECEMBER 31, 1996.............. 12,769,175 $1,275 $149,191 $ 80,608 $(9,449) $ (718) Comprehensive income/(loss) Net Income............................ 17,776 $ 17,776 -------- Other comprehensive income/(loss) Foreign currency translation adjustments...................... (23,732) Minimum pension liability adjustment....................... 553 -------- Other comprehensive income/(loss)..... (23,179) -------- Comprehensive income.................... $ (5,403) ======== Cash dividends at $0.10 per share....... (2,357) Exercise of stock options............... 198,112 20 3,555 (201) (557) Tax benefit of stock options exercised............................. 718 Shares issued to Board of Directors..... 134 54 Shares issued under savings plan........ 808 138 ---------- ------ -------- -------- ------- -------BALANCE AT DECEMBER 31, 1997.............. 12,967,287 $1,295 $154,406 $ 96,027 $(9,458) $(1,275) Comprehensive income/(loss) Net Income............................ 39,102 $ 39,102 -------- Other comprehensive income/(loss) Foreign currency translation adjustments...................... 5,522 Minimum pension liability adjustment....................... (2,031) -------- Other comprehensive income/(loss)..... 3,491 -------- Comprehensive income.................... $ 42,593 ======== Cash dividends at $0.11 per share....... (2,658) Exercise of stock options............... 472,575 47 7,148 (462) 868 Tax benefit of stock options exercised............................. 2,977 Shares issued to Board of Directors..... 104 Shares issued under savings plan........ 203 79 Two-for-one stock split................. 13,133,462 1,313 (1,313) ---------- ------ -------- -------- ------- -------BALANCE AT DECEMBER 31, 1998.............. 26,573,324 $2,655 $163,525 $132,471 $(9,841) $ (407) ========== ====== ======== ======== ======= ======= ACCUMULATED OTHER TOTAL COMPREHENSIVE STOCKHOLDERS' INCOME/(LOSS) EQUITY ------------- ------------- BALANCE AT DECEMBER 31, 1995.............. $ 1,057 $189,484 Comprehensive income/(loss) Net Income............................ 28,225 Other comprehensive income/(loss) Foreign currency translation adjustments...................... Minimum pension liability adjustment....................... Other comprehensive income/(loss)..... 7,081 7,081 Comprehensive income.................... Cash dividends at $0.09 per share....... (1,933) Exercise of stock options............... 3,136 Tax benefit of stock options exercised............................. 1,406 Shares issued to Board of Directors..... 149 Shares issued under savings plan........ 1,497 Three-for-two stock split............... -- -------- --------BALANCE AT DECEMBER 31, 1996.............. $ 8,138 $229,045 Comprehensive income/(loss) Net Income............................ 17,776 Other comprehensive income/(loss) Foreign currency translation adjustments...................... Minimum pension liability adjustment....................... Other comprehensive income/(loss)..... (23,179) (23,179) Comprehensive income.................... Cash dividends at $0.10 per share....... (2,357) Exercise of stock options............... 2,817 Tax benefit of stock options exercised............................. 718 Shares issued to Board of Directors..... 188 Shares issued under savings plan........ 946 -------- --------BALANCE AT DECEMBER 31, 1997.............. $(15,041) $225,954 Comprehensive income/(loss) Net Income............................ 39,102 Other comprehensive income/(loss) Foreign currency translation adjustments...................... Minimum pension liability adjustment....................... Other comprehensive income/(loss)..... 3,491 3,491 Comprehensive income.................... Cash dividends at $0.11 per share....... (2,658) Exercise of stock options............... 7,601 Tax benefit of stock options exercised............................. 2,977 Shares issued to Board of Directors..... 104 Shares issued under savings plan........ 282 Two-for-one stock split................. -- -------- --------BALANCE AT DECEMBER 31, 1998.............. $(11,550) $276,853 ======== ======== See accompanying notes to consolidated financial statements. 29 31 CAMBREX CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS) YEARS ENDED DECEMBER 31, --------------------------------- 1998 1997 1996 -------- --------- -------- Cash flows from operations: Net income.............................................. $ 39,102 $ 17,776 $ 28,225 Depreciation and amortization........................... 40,132 31,122 28,493 Non-recurring in-process R&D charge..................... -- 14,000 -- Recognition of reimbursement for past environmental costs................................................ -- (2,400) -- Gain realized on settlement of foreign denominated loan................................................. -- (954) -- Provision for inventories............................... 6,046 2,489 1,099 Reversal of tax contingencies........................... -- -- (1,500) Reversal of environmental contingencies................. (800) -- (1,000) Deferred income tax provision........................... 2,189 4,236 1,721 Changes in assets and liabilities (net of assets and liabilities acquired): Receivables.......................................... (2,274) 2,321 1,205 Inventories.......................................... (10,867) (8,815) 6,284 Prepaid expenses and other current assets............ (2,711) 323 1,663 Accounts payable and accrued liabilities............. 3,383 (5,418) (6,199) Income taxes payable................................. 4,407 (2,792) 6,620 Other noncurrent assets and liabilities.............. 2,079 691 174 -------- --------- -------- Net cash provided from operations.................. 80,686 52,579 66,785 -------- --------- --------Cash flows from investing activities: Capital expenditures.................................... (43,007) (35,935) (32,396) Acquisition of businesses (net of cash acquired)........ (15,199) (128,916) -- Acquisition of businesses (net of cash acquired)........ (15,199) (128,916) -- Other investing activities.............................. 1,948 -- (1,345) -------- --------- -------- Net cash (used in) investing activities............ (56,258) (164,851) (33,741) -------- --------- --------Cash flows from financing activities: Dividends............................................... (2,658) (2,357) (1,933) Net increase (decrease) in short-term debt.............. (1,406) 370 (1,025) Long-term debt activity (including current portion): Borrowings........................................... 37,000 235,900 44,000 Repayments........................................... (40,430) (109,649) (80,599) Proceeds from the issuance of common stock.............. 10,325 3,575 6,116 (Purchase of)Proceeds from the sale of treasury stock... (229) 933 790 Other................................................... (2,031) -- -- -------- --------- -------- Net cash provided from (used in) financing activities...................................... 571 128,772 (32,651) -------- --------- --------Effect of exchange rate changes on cash................... 2,059 (2,384) 2,119 -------- --------- --------Net increase in cash and cash equivalents................. 27,058 14,116 2,512Cash and cash equivalents at beginning of year............ 21,469 7,353 4,841 -------- --------- --------Cash and cash equivalents at end of year.................. $ 48,527 $ 21,469 $ 7,353 ======== ========= ========Supplemental disclosure: Interest paid (net of capitalized interest)............. $ 13,660 $ 5,275 $ 6,859 Income taxes paid....................................... $ 16,767 $ 13,344 $ 3,695Noncash transactions: Additional minimum pension liability (eliminated from) charged to stockholders' equity...................... $ 2,031 $ (553) $ (197) Liabilities established under deferred compensation plan................................................. $ (868) $ 557 $ 718 Tax benefit on stock options exercised.................. $ 2,977 $ 718 $ 1,406 Liabilities assumed in connection with acquisition...... $ -- $ 1,253 $ -- See accompanying notes to consolidated financial statements. 30 32 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 specialty and fine chemicals, as wellas products and services to the biotechnology industry. The Company operates infour segments: Human Health, Biotechnology, Animal Health/Agriculture andSpecialty Business. (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 and have virtually no risk of loss in value are considered cashequivalents. Derivative Instruments Derivative financial instruments are used by the Company primarily forhedging purposes to mitigate a variety of working capital, investment andborrowing risks. The use and mix of hedging instruments can vary depending onbusiness and economic conditions and management's risk assessments. The Companyuses a variety of strategies, including foreign currency forward contracts andtransaction hedging, to minimize or eliminate foreign currency exchange raterisk associated with substantially all of its foreign currency transactions.Gains and losses on these hedging transaction are generally recorded in earningsin the same period as they are realized, which is usually the same period as thesettlement of the underlying transactions. The Company uses interest ratederivative instruments only as hedges or as an integral part of borrowings. Assuch, the differential to be paid or received in connection with theseinstruments is accrued and recognized in income as an adjustment to interestexpense. 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 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 1998, 1997 and 1996 amountedto $533, $1,045, and $677, respectively. 31 33 CAMBREX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED) 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 The Company continually evaluates the reasonableness of its amortization ofintangibles. If it becomes probable that expected future undiscounted cash flowsassociated with intangible assets are less than their carrying value, the assetsare written down to their fair value. Revenue Recognition Revenues are generally recognized when products are shipped or title haspassed to customer. Royalties are recognized as earned in accordance withroyalty agreements. Income Taxes Deferred income taxes reflect the differences between assets andliabilities recognized for financial reporting purposes and amounts recognizedfor tax purposes. Deferred taxes are based on tax laws currently enacted. 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 a planned repatriation of a portion of non U.S.earnings 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, 1998, 1997 and1996, the cumulative amount of unremitted earnings of non-U.S. subsidiaries was$28,850, $16,140, and $3,605, 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 Costs In the ordinary course of business, like most other industrial companies,the Company is subject to extensive and changing federal, state, local andforeign environmental laws and regulations, and has made provisions for theestimated financial impact of environmental cleanup related costs. The Company'spolicy is to accrue environmental cleanup related costs of a noncapital naturewhen those costs are believed to be probable and can be reasonably estimated.The quantification of environmental exposures requires an 32 34 CAMBREX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)assessment of many factors, including changing laws and regulations,advancements in environmental technologies, the quality of information availablerelated to specific sites, the assessment stage of each site investigation,preliminary findings and the length of time involved in remediation orsettlement. For certain matters, the Company expects to share costs with otherparties. The Company does not include anticipated recoveries from insurancecarriers or other third parties in its accruals for environmental liabilities. Foreign Currency The functional currency of the Company's foreign subsidiaries is theapplicable local currency. The translation of the applicable foreign currenciesinto U.S. dollars is performed for balance sheet accounts using current exchangerates in effect at the balance sheet date and for revenue and expense accountsand cash flows using average rates of exchange prevailing during the year.Adjustments resulting from the translation of foreign currency financialstatements are accumulated in a separate component of stockholders' equity untilthe entity is sold or substantially liquidated. Gains or losses relating totransactions of a long-term investment nature are accumulated in stockholders'equity. Gains or losses resulting from foreign currency transactions areincluded in the results of operations as a component of other revenues in 1998and 1997 and as a component of other income in 1996. Foreign currency nettransaction gains (losses) were $2,019, $2,668, and $194 in 1998, 1997 and 1996,respectively. Stock Option Plans The Company adopted Statement of Financial Accounting Standards No. 123"Accounting for Stock-Based Compensation" ("SFAS 123") in 1997. In conjunctionwith the adoption, the Company will continue to apply the intrinsic value basedmethod of accounting prescribed by Accounting Principles Board Opinion No. 25"Accounting for Stock Issued to Employees" with pro-forma disclosure of netincome and earnings per share as if the fair value based method prescribed bySFAS 123 had been applied. In general, no compensation cost related to theseplans is recognized in the consolidated statements of earnings. Earnings Per Common Share Earnings per share of Common Stock for 1998, 1997 and 1996 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. Earnings per share calculations are as follows: FOR THE YEARS ENDED, ----------------------------- 1998 1997 1996 ------- ------- ------- Numerator:Income available to common stockholders............... $39,102 $17,776 $28,225Denominator:Basic weighted average shares outstanding............. 24,194 23,627 23,214Effect of dilutive stock options...................... 1,218 792 578 ------- ------- -------Diluted weighted average shares outstanding........... 25,412 24,419 23,792Basic earnings per share.............................. $ 1.62 $ 0.75 $ 1.22Diluted earnings per share............................ $ 1.54 $ 0.73 $ 1.19 33 35 CAMBREX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) (3) ACQUISITIONS AND DIVESTITURES On January 9, 1998, Chiragene, a newly formed subsidiary of CambrexCorporation, acquired substantially all of the assets of the chiral intermediatebusiness of Celgene Corporation for approximately $11,328. The purchaseagreement includes an upfront payment of $7,500 paid at closing plus futureroyalties based upon sales. While the present value of the potential futureroyalties is $7,500 based upon a formula disclosed in the purchase agreement,the amount included in the initial purchase allocation is $3,750 which are theminimum guaranteed royalty payouts. The acquisition has been accounted for underthe purchase method and as such, the purchase price has been allocated to thefair value of assets acquired. Purchase price in excess of the fair value of thenet assets was approximately $5,000 and was recorded as goodwill and will beamortized over 15 years. On January 9, 1998, the Company borrowed $8,200 fromthe existing Credit Agreement with Chase Manhattan Bank, of which $7,500 wasused to finance the acquisition of Chiragene. On May 12, 1998, Cambrex completed the acquisition of certain assets of thebiopharmaceutical manufacturing and distribution business of BoerhingerIngelheim Bioproduct Partnership (BIBP). The assets acquired include astate-of-the-art cell culture and media manufacturing facility in Verviers,Belgium, and inventory for certain cell culture, endotoxin detection andmolecular biology products. The acquisition has been accounted for as a purchasetransaction in which the purchase price has been allocated to the fair value ofassets and liabilities acquired. The majority of the acquisition was fundedthrough cash reserves. The proforma information for the above acquisitions has not been includedin these financial statements, as it was deemed to be immaterial, bothindividually and collectively. Certain actions were taken in the third quarter of 1998 for the acquisitionreorganization plan at our BioWhittaker facility of approximately $1,400 for thetermination of 28 employees. This plan was part of the final purchase accountingadjustments made in the third quarter 1998. In addition, BioWhittaker favorablyconcluded a patent infringement dispute and has received a cash payment ofapproximately $5,400 in 1998. This settlement, as well as the settlement ofother acquisition contingencies of approximately $1,600, are part of the finalpurchase accounting adjustments in the third quarter 1998. As a result offinalizing the purchase accounting, the net impact on goodwill, including thetax effect, was a reduction of approximately $900. 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 and was financed by the Company's Credit Agreement. Theacquisition was accounted for as a purchase transaction and as such, thepurchase price was allocated to the fair value of assets and liabilitiesacquired. The excess of the purchase price over the fair value of the net assetsacquired was approximately $48,000 and was recorded as goodwill and will beamortized over 20 years. The allocation to in-process research and developmentof $14,000 represents the value of BioWhittaker's research and developmentefforts which had not reached commercial viability with no alternative futureuse and were, therefore, immediately expensed. Unaudited proforma 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. 34 36 CAMBREX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) (3) ACQUISITIONS AND DIVESTITURES -- (CONTINUED) YEARS ENDED DECEMBER 31, ------------------------ 1997 1996 ---------- ---------- Net revenues................................................ $416,871 $410,844Net income.................................................. $ 17,146 $ 21,564Earnings per share Basic..................................................... $ 1.45 $ 1.86 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. 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 In June 1998, the Financial Accounting Standards Board issued Statement ofFinancial Accounting Standards No. 133 "Accounting for Derivative Instrumentsand Hedging Activities" (SFAS 133). SFAS 133 is effective for all fiscalquarters of all fiscal years beginning after June 15, 1999. SFAS requires thatall derivative instruments be recorded on the balance sheet at their fair value.Changes in the fair value of derivatives are recorded each period in currentearnings or other comprehensive income, depending on whether a derivative isdesignated as part of a hedge transaction and, if it is, the type of hedgetransaction. The fair value hedge transactions in which the Company is hedgingchanges in an asset's, liability's or firm commitment's fair value; changes inthe fair value of the derivative instrument that are reported in othercomprehensive income will be reclassified as earnings in the period in whichearnings are impacted by the variability of the cash flows of the hedged item.The ineffective portion of all hedges will be recognized in current-periodearnings. The Company is evaluating the impact that the adoption of SFAS 133will have on its earnings, comprehensive income or statement of financialposition. 35 37 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, ------------------- 1998 1997 -------- ------- Finished goods.......................................... $ 54,264 $42,974Work in process......................................... 20,177 25,217Raw materials........................................... 20,105 18,254Supplies................................................ 5,699 5,288 -------- ------- Total......................................... $100,245 $91,733 ======== ======= (6) PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment consists of the following: DECEMBER 31, ---------------------- 1998 1997 --------- --------- Land................................................. $ 11,009 $ 10,555Buildings and improvements........................... 76,949 76,476Machinery and equipment.............................. 289,577 256,689Furniture and fixtures............................... 9,033 6,555Construction in progress............................. 30,657 19,194 --------- --------- Total...................................... 417,225 369,469Accumulated depreciation............................. (162,209) (132,127) --------- --------- Net................................................ $ 255,016 $ 237,342 ========= ========= Depreciation expense amounted to $30,547, $24,666, and $22,788 for theyears ended December 31, 1998, 1997 and 1996, respectively. (7) INTANGIBLE ASSETS Intangible assets consist of the following: DECEMBER 31, -------------------- 1998 1997 -------- -------- Goodwill............................................... $110,117 $100,229Other.................................................. 56,330 55,977 -------- -------- Total........................................ 166,447 156,206Accumulated amortization............................... (39,452) (29,203) -------- -------- Net.................................................. $126,995 $127,003 ======== ======== Amortization expense amounted to $9,585, $6,456 and $5,705 for the yearsended December 31, 1998, 1997 and 1996 respectively. 36 38 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, ------------------ 1998 1997 ------- ------- Accounts payable......................................... $30,761 $28,174Salaries, wages and employee benefits payable............ 20,475 15,208Other accrued liabilities................................ 12,231 15,089 ------- ------- Total.......................................... $63,467 $58,471 ======= ======= (9) INCOME TAXES Income before taxes consisted of the following: YEARS ENDED DECEMBER 31, ----------------------------- 1998 1997 1996 ------- ------- ------- Domestic.............................................. $31,324 $13,195 $31,611Foreign............................................... $30,371 19,412 9,058 ------- ------- ------- Total....................................... $61,695 $32,607 $40,669 ======= ======= ======= The provision for income taxes consists of the following expenses(benefits): YEARS ENDED DECEMBER 31, ----------------------------- 1998 1997 1996 ------- ------- ------- Current: Federal............................................. 14,377 $ 2,670 $ 3,783 State............................................... 696 427 598 Foreign............................................. 5,331 7,498 6,342 ------- ------- ------- 20,404 10,595 10,723 ------- ------- -------Deferred: Federal............................................. (2,481) 2,272 922 State............................................... (167) 143 (527) Foreign............................................. 4,837 1,821 1,326 ------- ------- ------- 2,189 4,236 1,721 ------- ------- ------- Total....................................... $22,593 $14,831 $12,444 ======= ======= ======= 37 39 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 1998, 1997 and 1996 as follows: YEARS ENDED DECEMBER 31, ----------------------------- 1998 1997 1996 ------- ------- ------- Income tax at Federal statutory rate.................. $21,594 $11,412 $14,234State and local taxes (benefits), net of Federal income tax benefits................................. 522 605 (239)Difference between Federal statutory rate and statutory rates on foreign income................... (945) (1,666) 1,771Reversal of tax contingency for IRS audit settlement.......................................... -- (728) (1,500)Return to provision adjustment........................ -- -- (1,066)Research and experimentation credits.................. (150) (399) (484)Write off of acquired in-process research and development......................................... -- 4,900 --Foreign Tax Credits................................... (311) -- --Other................................................. 1,883 707 (272) ------- ------- ------- $22,593 $14,831 $12,444 ======= ======= ======= The components of deferred tax assets and liabilities as of December 31,1998 and 1997 relate to temporary differences and carryforwards as follows: DECEMBER 31, ------------------ 1998 1997 ------- ------- Deferred tax assets: Acquisition reserves................................... $ 781 $ 732 Environmental.......................................... 1,574 -- Net operating loss carryforwards....................... 3,643 3,896 Inventory.............................................. 2,535 1,235 Employee benefits...................................... 3,297 2,365 Receivables............................................ 195 136 Other.................................................. 2,148 -- ------- ------- Net current deferred tax assets........................ 14,173 8,364 Valuation allowances................................... (2,414) (2,417) ------- ------- Total net deferred tax assets.................. $11,759 $ 5,947 ======= =======Deferred tax liabilities: Depreciation........................................... $29,591 $29,937 Environmental reserves................................. -- (1,261) Intangibles............................................ 14,839 14,659 Italian Intangibles.................................... 6,086 -- Other.................................................. 1,667 101 ------- ------- Total net non-current deferred tax liabilities.................................. $52,183 $43,436 ======= ======= Included within the change in the cumulative translation adjustment for theyear ended December 31, 1998 is $(413) which relates to the translation ofdeferred tax assets and liabilities. 38 40 CAMBREX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) (9) INCOME TAXES -- (CONTINUED) 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 is approximately $3,643 and $3,896 at December31, 1998 and 1997, the majority of which are available on an indefinitecarryforward basis. However, valuation reserves have been established againstcertain NOLs to reflect uncertainties associated with the realizability of suchfuture benefits. During 1998, the Company made an election which allows its Italiansubsidiary to deduct for tax purposes intangible assets that were previouslynondeductible. The result of this election was a charge to 1998 earnings of$3,420 that will result in net favorable future tax benefits. During 1997, the Company concluded some of the ongoing matters with theInternal Revenue Service related to audits for the years 1988 through 1993. (10) SHORT-TERM DEBT The Company 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, 1998 and 1997 consists of the following: DECEMBER 31, -------------------- 1998 1997 -------- -------- Export financing facility.............................. $ 2,451 $ 3,597 (11) LONG-TERM DEBT Long-term debt consists of the following: DECEMBER 31, -------------------- 1998 1997 -------- -------- Bank credit facilities(a).............................. $190,000 $192,600Capitalized leases..................................... 49 --Notes payable(b)....................................... 1,901 2,711 -------- -------- Subtotal..................................... 191,950 195,311Less: current portion(c)............................... 578 986 -------- -------- Total........................................ $191,372 $194,325 ======== ======== (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. Under this agreement, the Company has pledged 66% of the common stock ofthe Company's foreign subsidiaries as collateral. The Agreement permits theCompany to choose between various interest rate 39 41 CAMBREX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) (11) LONG-TERM DEBT -- (CONTINUED)options and to specify the portion of the borrowing to be covered by specificinterest rate options. Under the Agreement, the interest rate options availableto the Company are: (a) U.S. Prime rate or (b) LIBOR plus the applicable margin(ranging from .225% to .5%) or (c) Competitive Bid at a LIBOR Rate Borrowing ora Fixed Rate Borrowing to be determined by auction. The applicable margin isadjusted based upon the Funded Indebtedness to Cash Flow Ratio of the Company.Additionally, the Company pays a commitment fee of between .15% to .25% on theentire portion of the Agreement. The 1998 and 1997 average interest rates were6.4% and 6.8%. 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, 1998 was $210,000. 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 for1998. (b) The Company has a loan agreement with the Italian government 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 $891 and $931 outstanding as of December 31, 1998 and 1997,respectively. The Company 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 $845 outstanding as ofDecember 31, 1998. (c) Aggregate maturities of long-term debt are as follows: 1999.............................................. $ 5782000.............................................. 4332001.............................................. 4282002.............................................. 190,1602003.............................................. 168Thereafter........................................ 183 -------- Total................................... $191,950 ======== (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. 40 42 CAMBREX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) (12) DERIVATIVE FINANCIAL INSTRUMENTS -- (CONTINUED) 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 outstanding, maturity dates, andthe weighted average receive and pay rates of interest rate swap agreements asof December 31, 1998. WEIGHTED AVG. RATENOTIONAL MATURITY -------------------AMOUNTS DATE RECEIVE PAY- -------- -------- -------- ----- $10,000 2002 5.25% 5.85%$10,000 2003 5.23% 5.77%$10,000 2002 5.21% 5.77%$10,000 2001 5.25% 5.81%$10,000 2000 5.23% 6.09%$20,000 2001 5.23% 5.93%$10,000 2002 5.23% 5.15% 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 $78,640 at December 31, 1998. 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. 1998 -------------------------------------- UNREALIZED NOTIONAL FAIR --------------- AMOUNTS VALUE GAINS LOSSES -------- ------- ----- ------ Forward exchange contracts...................... $24,371 $24,437 $481 $547 1997 -------------------------------------- UNREALIZED NOTIONAL FAIR --------------- AMOUNTS VALUE GAINS LOSSES -------- ------- ----- ------ Forward exchange contracts...................... $22,173 $22,295 $ 85 $207 41 43 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 60,000,000 atDecember 31, 1998 and 20,000,000 at December 31, 1997. Authorized shares ofNonvoting Common Stock were 730,746 at December 31, 1998 and 1997. At December 31, 1998, authorized shares of Common Stock were reserved forissuance as follows: Stock option plans................................ 4,070,450Cambrex savings plan.............................. 169,544 --------- Total shares............................ 4,239,994 ========= On May 28, 1998, the Company's Board of Directors approved a two-for-onestock split of the Company's Common Stock, $.10 par value, effected by thedistribution to stockholders of record as of the close of business on June 10,1998 of one additional share of Common Stock for each share held. All share andper share date, including stock option plan information, have been adjusted toreflect the impact of the two-for-one stock split. The effect of the split waspresented within stockholders' equity at December 31, 1998 by transferring thepar value for the additional shares issued from additional paid-in capital tocommon stock. On July 24, 1996, the Company's Board of Directors approved a three-for-twostock split of the Company's Common Stock, $.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 presentedretroactively 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. Nonvoting Common Stock with a par value of $.10, has equal rights withCommon Stock, with the exception of voting power. Nonvoting Common Stock isconvertible, share for share, into Common Stock, subject to any legalrequirements applicable to holders restricting the extent to which they may ownvoting stock. As of December 31, 1998 and 1997, no shares of Nonvoting CommonStock were outstanding. The Company held treasury stock of 2,081,099 and 2,081,122 shares atDecember 31, 1998 and 1997, respectively, and are used for issuance to theCambrex Savings Plan. 42 44 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 $.10, issuable in series and with rights, powers and preferences as may befixed by the Board of Directors. At December 31, 1998 and 1997, there was nopreferred stock outstanding. (14) STOCK OPTIONS The Company has eight 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 forthe 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. On April 23, 1998, the Company's stockholders approved The 1998 PerformanceStock Option Plan (the "1998 Plan"), which provides for the granting of optionsintended to qualify as additional incentives to directors and key employees.Options granted under the 1998 Plan shall vest and become exercisable nine yearsafter the date of grant, subject to acceleration if the publicly traded price ofthe Company's Common Stock equals or exceeds levels determined by the Committeewithin certain time periods or in the event of a change in control. Optionsshall have a term of no more than ten years from the date of grant. The Company applies the provisions of APB Opinion No. 25 and relatedInterpretations in accounting for its stock-based compensation plans. Statementof Financial Accounting Standards No. 123 "Accounting for Stock-BasedCompensation" (SFAS 123) establishes financial accounting and reportingstandards for stock-based employee compensation plans. During 1996, the Companyadopted the disclosure only provisions available under SFAS 123. Accordingly, nocompensation cost has been recognized for stock option plans under SFAS 123. 43 45 CAMBREX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) (14) STOCK OPTIONS -- (CONTINUED) Had compensation cost for the Company's 1998, 1997 and 1996 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 1998, 1997 and 1996 wouldapproximate the pro forma amounts below: 1998 1997 1996 ------- ------- ------- Net income -- as reported............................. $39,102 $17,776 $28,225Net income -- as reported............................. $39,102 $17,776 $28,225 ======= ======= =======Net income -- pro forma............................... $35,951 $16,079 $26,946 ======= ======= =======Diluted earnings per share -- as reported............. $ 1.54 $ 0.73 $ 1.19 ======= ======= =======Diluted earnings per share -- pro forma............... $ 1.41 $ 0.66 $ 1.14 ======= ======= ======= The pro forma compensation expense of $3,151, $1,697, and $1,279 for 1998and 1997 and 1996, respectively, was calculated based on the fair value of eachoption primarily using the Black-Scholes option-pricing model with the followingassumptions for 1998, 1997 and 1996, respectively: (i) average dividend yield of0.58% and 1.33% (ii) expected volatility of 24.5% and 25.5%, (iii) risk-freeinterest rate ranging from 5.50% to 5.54% and from 6.03% to 6.85% and (iv)expected life of 4-5 years. The 1998 and 1997 grants have been valued using apath dependent model due to the cliff vesting with performance accelerationprovisions set forth in the 1996 Plan. As of December 31, 1998, 4,056,050 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............ 648,000 -- -- -- -- -- --1987 Plan............ 600,000 -- -- -- -- -- --1989 Plan............ 1,200,000 -- -- -- -- -- --1992 Plan............ 300,000 52,200 6.938 - 12.375 4.3 7.66 52,200 7.661993 Plan............ 900,000 287,200 6.625 - 8.063 4.8 6.85 287,200 6.851994 Plan............ 300,000 88,350 6.625 - 13.688 5.6 8.45 88,350 8.451996 Plan............ 3,000,000 1,718,850 12.375 - 27.500 7.5 15.90 1,714,050 15.881998 Plan............ 1,180,000 1,108,250 22.063 - 27.563 9.2 23.34 -- n/a --------- --------- --------- Total shares.... 8,128,000 3,254,850 6.625 - 27.563 17.30 2,141,800 ========= ========= ========= 44 46 CAMBREX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) (14) STOCK OPTIONS -- (CONTINUED) 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, 1995.................. 1,864,650 7.69 1,789,650 Granted......................................... 1,775,752 13.88 4.97 Exercised....................................... (950,926) 6.69 Cancelled....................................... (16,500) 10.88 ---------Outstanding at December 31, 1996.................. 2,672,976 11.52 912,226 Granted......................................... 466,800 21.09 6.92 Exercised....................................... (396,226) 10.54 Cancelled....................................... (30,000) 14.39 ---------Outstanding at December 31, 1997.................. 2,713,550 13.28 2,472,050 Granted......................................... 1,237,050 23.35 9.59 Exercised....................................... (638,750) 11.19 Exercised....................................... (638,750) 11.19 Cancelled....................................... (57,000) 21.84 ---------Outstanding at December 31, 1998.................. 3,254,850 17.30 2,141,800 ========= (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 the Harriman, New York plant,and (2) the Cambrex Pension Plan (the "Cambrex Plan") which covers all othereligible 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 Company also has a Supplemental Executive Retirement Plan for certainkey executives. The net periodic pension expense for both 1998 and 1997 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. 45 47 CAMBREX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) (15) RETIREMENT PLANS -- (CONTINUED) The funded status of these plans, incorporating these fourth quartercontributions, as of September 30, 1998 and 1997 is as follows: 1998 1997 ------- ------- CHANGE IN BENEFIT OBLIGATIONBenefit obligation at beginning of year..................... $29,350 $24,007Service cost................................................ 1,587 1,310Interest cost............................................... 2,108 1,886Amendments.................................................. 81 1,087Actuarial loss (gain)....................................... 1,968 2,268Benefits paid............................................... (1,238) (1,208) ------- -------Benefit obligation at end of year........................... 33,856 29,350 ------- -------CHANGE IN PLAN ASSETSFair value of plan assets at beginning of year.............. 26,321 21,898Actual return on plan assets................................ 334 4,814Acquisitions................................................ 375 789Benefits paid............................................... (1,210) (1,180) ------- -------Fair value of plan assets at end of year.................... 25,820 26,321 ------- -------Funded status............................................... (8,036) (3,029)Unrecognized prior service cost............................. 1,115 2,082Unrecognized net (gain) loss................................ 5,121 (181)Additional minimum liability................................ (1,281) -- ------- -------Prepaid (accrued) benefit at September 30, ................. (3,081) (1,128)4th quarter contributions................................... 232 18 ------- -------Prepaid (accrued) benefit cost at December 31, ............. $(2,849) $(1,110) ======= ======= The components of net periodic pension cost is as follows: 1998 1997 1996 ------- ------- ------- COMPONENTS OF NET PERIODIC BENEFIT COSTService Cost.......................................... $ 1,587 $ 1,310 $ 1,171Interest Cost......................................... 2,108 1,887 1,535Expected return on plan assets........................ (2,201) (1,827) (1,665)Amortization of prior service cost.................... 36 (23) (32)Recognized actuarial loss............................. 195 92 (26) ------- ------- -------Net periodic benefit cost............................. $ 1,725 $ 1,439 $ 983 ======= ======= =======WEIGHTED-AVERAGE ASSUMPTIONSDiscount rate......................................... 6.75% 7.25% 7.50%Expected return on plan assets........................ 8.50% 8.50% 8.50%Rate of compensation increase......................... 5.00% 5.00% 5.00% 46 48 CAMBREX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) (15) RETIREMENT PLANS -- (CONTINUED) Certain foreign subsidiaries of the Company maintain pension plans fortheir employees which conform to the common practice in their respectivecountries The funded status of these plans, as of December 31, 1998 and 1997, isas follows: 1998 1997 ------- ------- CHANGE IN BENEFIT OBLIGATIONBenefit obligation at beginning of year..................... $ 8,094 $ 7,892Service cost................................................ 532 472Interest cost............................................... 533 544Plan participants' contribution............................. (64) (62)Actuarial loss (gain)....................................... (264) 126Benefits paid............................................... (68) (5)Foreign exchange............................................ (95) (1,180) ------- -------Benefit obligation at end of year........................... 8,668 8,094 ------- -------CHANGE IN PLAN ASSETSFair value of plan assets at beginning of year.............. 2,205 1,617Actual return on plan assets................................ 249 369Company contribution........................................ 280 231Plan participant contribution............................... 88 74Benefits paid............................................... (99) (25)Foreign exchange............................................ 26 (61) ------- -------Fair value of plan assets at end of year.................... 2,749 2,205 ------- -------Funded status............................................... (6,043) (6,746)Unrecognized actuarial loss................................. 53 279Unrecognized prior service cost............................. 53 56Unrecognized net (gain) loss................................ (467) (478)Foreign exchange............................................ 127 858 ------- -------Prepaid (accrued) benefit................................... $(6,277) $(6,032) ======= ======= 47 49 CAMBREX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) (15) RETIREMENT PLANS -- (CONTINUED) The components of the net periodic pension cost is as follows: 1998 1997 1996 ------- ------- ------- COMPONENTS OF NET PERIODIC BENEFIT COSTService Cost.............................. $ 532 $ 472 $ 387Interest Cost............................. 533 544 462Expected return on plan assets............ (236) (167) (906)Amortization of excess plan net........... (33) (34) (139)Amortization of prior service cost........ 3 3 2Recognized actuarial loss................. -- -- 865 ------- ------- ------- Net periodic benefit cost............... $ 799 $ 818 $ 671 ------- ------- ------- ------- ------- ------- WEIGHTED-AVERAGE ASSUMPTIONSDiscount rate............................ 5.50%-6.00% 5.50%-7.00% 5.00%Expected return on plan assets........... 9.00% 10.00% 10.00%Rate of compensation increase............ 2.50%-3.50% 3.50%-5.00% 4.00%-4.50% The aggregate ABO for those plans with ABO's in excess of plan assets is$5,120 in 1998, which were not funded. The Company's net pension costs included in operating results amounted to$2,524, $2,257, and $1,654 in 1998, 1997 and 1996, respectively. The pensionexpense for foreign pension plans of $799, $818, and $672 is included in the1998, 1997 and 1996 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 amounted to $546 in 1998 and from the date ofacquisition amounted to $126 in 1997. Savings Plan Cambrex makes available to all employees a savings plan as permitted underSections 401(k) and 401(a) of the Internal Revenue Code. Effective August 1998,this plan became available to all BioWhittaker employees. Employee contributionsare matched in part by Cambrex. The cost of this plan amounted to $1,523,$1,387, and $1,534, in 1998, 1997 and 1996, respectively. BioWhittaker had available to all eligible employees a contributory 401(k)plan which was terminated in August 1998. Employee contributions had beenmatched in part by BioWhittaker. The cost of this plan amounted to $262 in 1998and from the date of acquisition amounted to $115 in 1997. Other The Company has a non-qualified Compensation Plan for Key Executives ("theDeferred Plan"). Under the Deferred Plan, officers and key employees may electto defer all or any portion of their pre-tax annual bonus and/or annual basesalary. Included within other liabilities at December 31, 1998 and 1997 there is$3,005, and $2,764, respectively, representing the Company's obligation underthe plan. To assist in the funding of this obligation, the Company invests incertain mutual funds and as such, included within other 48 50 CAMBREX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) (15) RETIREMENT PLANS -- (CONTINUED)assets at December 31, 1998 and 1997 is $3,005 and $2,764, respectively,representing the fair value of these funds. During 1995, the Board amended theDeferred Plan to permit officers and key employees to elect to defer receipt ofCompany stock which would otherwise have been issued upon the exercise ofCompany options. Total shares held in trust as of December 31, 1998 and 1997 are364,811 and 360,544, respectively; and are included as a reduction of equity atcost. The value of the shares held in trust and the corresponding liability of$1,375 at December 31, 1998 have been recorded in equity. The Deferred Plan isnot funded by the Company, but the Company has established a DeferredCompensation Trust Fund which 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 elected to amortize the transition obligation of $1,853 overtwenty years. The net effect upon 1998, 1997 and 1996 pretax operating results,including the amortization of the transition obligation, resulted in a cost of$321, $285, and $316, respectively. Disclosure is presented in accordance withStatement of Financial Accounting Standards No. 132 "Employers' DisclosuresAbout Pensions and Other Post Retirement Benefits" (SFAS 132). DECEMBER 31, ------------------ 1998 1997 ------- ------- CHANGE IN BENEFIT OBLIGATIONBenefit obligation at beginning of year..................... $ 2,157 $ 2,141Service cost................................................ 63 51Interest cost............................................... 165 150Actuarial loss (gain)....................................... 154 (185) ------- -------Benefit obligation at end of year........................... 2,539 2,157 ------- -------Unrecognized net (gain) loss................................ (49) 241Unrecognized translation obligation......................... (1,297) (1,390) ------- -------Benefit obligation at end of year........................... $ 1,193 $ 1,008 ======= =======Account recognized in the Statement of Financial Position:Accrued benefit liability................................... $ 1,193 $ 1,008 ------- -------Net amount recognized....................................... $ 1,193 $ 1,008 ======= ======= 49 51 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, ------------------------ 1998 1997 1996 ---- ---- ---- COMPONENTS OF NET PERIODIC BENEFIT COSTService cost of benefits earned........................... $ 63 $ 51 $ 67Interest cost............................................. 165 150 156Amortization of unrecognized prior service cost........... -- (9) --Amortization of transition obligation..................... 93 93 93 ---- ---- ----Total periodic postretirement benefit cost................ $321 $285 $316 ==== ==== ==== The discount rate used to determine the accumulated postretirement benefitobligation was 6.75% and 7.25% in 1998 and 1997, respectively. The assumedhealth care cost trend rate used to determine the accumulated postretirementbenefit obligation is 10.0%, 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. (17) RESTRUCTURING During the third quarter of 1998, the Company incurred a restructuringcharge of $1,400 which includes the non-recurring costs resulting from theconsolidation of administrative and management functions and resulted in thereduction of 44 employees. These costs are related to severance paid toterminated employees. The majority of these costs were incurred and paid priorto December 31, 1998. (18) OTHER INCOME AND EXPENSE Other expense (income) was $945, $(1,263) and $(194) for 1998, 1997 and1996, respectively. Included in 1998 other expense were asset write-offs at theZeeland facility of $522. Other income in 1997 included a 'gain of $954 on theZeeland facility of $522. Other income in 1997 included a 'gain of $954 on thesettlement of a foreign denominated loan. Additionally, 1997 other incomeincluded the final resolution and receipt of the settlement proceeds due fromthe 1996 premature termination of a contract by a customer for $766, offset by acharge of $507 for the settlement of a legal matter reached during the year.Other income in 1996 of $194 is related to foreign currency transaction gains. (19) SEGMENT INFORMATION The Company is involved principally in the manufacturing and marketing ofproducts which include: Human Health, which include Active PharmaceuticalIngredients produced under Food and Drug Administration (FDA) regulation for usein prescription drug products, Pharmaceutical Intermediates produced in currentGood Manufacturing Practices (cGMP) facilities for use in the production ofpharmaceuticals and over-the-counter drug products, Imaging Chemicals used inx-ray media, Personal Care Products used in cosmetics and for the pharmaceuticalactives market, and Nutraceuticals used in health products; Biotechnology,consisting of cell culture and endotoxin detection products; AnimalHealth/Agriculture products including Vitamin B(3) used in feed additives,Agricultural Intermediates used in crop protection, and Animal Health productsused as feed additives; and the Specialty Business segment which includesPerformance Enhancing Chemicals used in photography, pigments, specialtypolymers, fuel/oil additives, catalysts, and other specialty additives, andPolymer Systems products used in coatings, telecommunications, electronics andengineering plastics. Most of the Company's subsidiaries operate in more thanone of these segments. The 50 52 CAMBREX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) (19) SEGMENT INFORMATION -- (CONTINUED)exception is BioWhittaker which solely comprises the Biotechnology segment. TheCompany has provided financial information in order to show Gross Sales andGross Profit by segment. All other financial information is available only forthe Biotechnology Segment and for all other segments combined. The Companyallocates Corporate expenses and interest to each of its subsidiaries. Theinterest allocation is based on 12% of subsidiary working capital and 9% of netproperty plant and equipment. The following is a summary of business segment information: GROSS SALES: 1998 1997 1996 ------------ -------- -------- -------- Human Health............................................... $194,766 $182,818 $174,398Biotechnology.............................................. 65,968 13,577 --Animal Health/Agriculture.................................. 56,285 59,804 61,560Specialty Business......................................... 124,664 123,884 133,521 -------- -------- -------- $441,683 $380,083 $369,479 ======== ======== ======== GROSS PRODUCT SALES DETAIL FOR EACH SEGMENT 1998 1997 1996 ------------------------------------------- -------- -------- -------- Human Health: Active Pharmaceutical Ingredients........................ $120,459 $110,461 $103,809 Pharmaceutical Intermediates............................. 24,844 23,430 16,311 Imaging Chemicals........................................ 14,179 17,617 23,024 Personal Care Ingredients................................ 16,777 16,453 14,303 Biomedicals.............................................. 3,977 4,286 5,888 Biomedicals.............................................. 3,977 4,286 5,888 Catalysts................................................ 8,281 6,554 5,537 Chiral Tehnology......................................... 5,548 3,733 5,520 Neutraceuticals.......................................... 701 284 6 -------- -------- -------- Total Human Health............................... $194,766 $182,818 $174,398 ======== ======== ======== Biotechnology: Cell Culture............................................. $ 43,795 $ 9,126 $ -- Endotoxin Detection...................................... 18,852 3,539 -- Other.................................................... 3,321 912 -- -------- -------- -------- Total Biotechnology.............................. $ 65,968 $ 13,577 $ -- ======== ======== ======== Animal Health/Agriculture: Vitamin B(3)............................................. $ 12,814 $ 12,163 $ 11,740 Animal Health............................................ 17,614 17,471 18,149 Agricultural Intermediates............................... 25,857 30,170 31,671 -------- -------- -------- Total Animal Health/Agriculture.................. $ 56,285 $ 59,804 $ 61,560 ======== ======== ======== Specialty Business: Performance Enhancing Chemicals.......................... $ 81,853 $ 81,640 $ 87,395 Polymer Systems.......................................... 42,811 42,244 46,126 -------- -------- -------- Total Specialty Business......................... $124,664 $123,884 $133,521 ======== ======== ======== 51 53 CAMBREX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) (19) SEGMENT INFORMATION -- (CONTINUED) GROSS PROFIT: 1998 1997 1996 ------------- -------- -------- -------- Human Health............................................... $ 92,441* $ 67,779 $ 54,633Biotechnology.............................................. 32,321 6,696 --Animal Health/Agriculture.................................. 11,557 10,621 12,784Specialty Business......................................... 27,098 28,866 33,919 -------- -------- -------- $163,417 $113,962 $101,336 ======== ======== ======== NET INCOME: 1998 1997 1996 ----------- -------- -------- -------- Biotechnology.............................................. $ 1,953 $(13,921)** $ --Human Health, Animal Health/Agriculture & Specialty Business................................................. 37,149 31,697 28,225 -------- -------- -------- $ 39,102 $ 17,776 $ 28,225 ======== ======== ======== IDENTIFIABLE ASSETS 1998 1997 1996- ------------------- -------- -------- -------- Biotechnology.............................................. $ 27,799 $ 24,647 $ --Human Health, Animal Health/Agriculture & Specialty Business................................................. 227,217 212,695 216,481 -------- -------- -------- $255,016 $237,342 $216,481 ======== ======== ======== CAPITAL SPENDING 1998 1997 1996- ---------------- -------- -------- -------- Biotechnology.............................................. $ 4,215 $ 886 $ --Human Health, Animal Health/Agriculture & Specialty Business................................................. 38,792 35,049 32,396 -------- -------- -------- $ 43,007 $ 35,935 $ 32,396 ======== ======== ======== DEPRECIATION 1998 1997 1996- ------------ -------- -------- -------- Biotechnology.............................................. $ 1,997 $ 428 $ --Human Health, Animal Health/Agriculture & Specialty Business................................................. 28,550 24,238 22,788 -------- -------- -------- $ 30,547 $ 24,666 $ 22,788 ======== ======== ======== AMORTIZATION 1998 1997 1996- ------------ -------- -------- -------- Biotechnology.............................................. $ 4,358 $ 1,122 $ --Human Health, Animal Health/Agriculture & Specialty Business................................................. 5,227 5,334 5,705 -------- -------- -------- $ 9,585 $ 6,456 $ 5,705 ======== ======== ======== - --------------- * Includes royalty income of $19,298. ** 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. 52 54 CAMBREX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) (20) FOREIGN OPERATIONS AND EXPORT SALES Summarized data for the Company's operations for 1998, 1997 and 1996 are asfollows: DOMESTIC EUROPEAN TOTAL -------- -------- -------- 1998Gross sales........................................ $284,839 $156,844 $441,683Operating profit................................... 38,414 34,453 72,867Net income......................................... 26,392 12,710 39,102Net income......................................... 26,392 12,710 39,102Identifiable assets................................ 414,742 202,312 617,054 1997Gross sales........................................ $228,004 $152,079 $380,083Operating profit................................... 4,656 32,018 36,674Net income......................................... 4,787 12,989 17,776Identifiable assets................................ 335,637 216,789 552,426 1996Gross sales........................................ $218,013 $151,466 $369,479Operating profit................................... 22,296 23,978 46,274Net income......................................... 22,094 6,131 28,225Identifiable assets................................ 179,164 225,280 404,444 Export sales, included in domestic gross sales, in 1998, 1997 and 1996amounted to $64,174, $48,852, and $50,243 respectively. No country, in any ofthe given years, represents more than 10% of these export sales. (21) 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, 1998, future minimum commitments under non-cancelable operatinglease arrangements were as follows: Year ended December 31: 1999............................................. $ 1,367 2000............................................. 903 2001............................................. 507 2002............................................. 417 2003 and thereafter.............................. 11,047 ------- Net commitments.................................. $14,241 ======= Total operating lease expense was $2,412, $1,939, and $2,175 for the yearsended December 31, 1998, 1997 and 1996, respectively. 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 May, 1997, theCompany formed an alliance with Fine Tech Ltd., of Technicon City, Israel, inwhich the Company will provide Fine Tech funding over the next three years forprocess improvement on existing and newly-developed generic drugs to bemanufactured in the Company's cGMP facilities. The estimated commitments for theResearch & Development agreements over the next three years is approximately$1,300. 53 55 CAMBREX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) (22) CONTINGENCIES The Company is subject to various investigations, claims and legalproceedings covering a wide range of matters that arise in the ordinary courseof its business activities. Environmental In connection with laws and regulations pertaining to the protection of theenvironment, the Company is a party to several environmental remediationinvestigations and cleanups and, along with other companies, has been named a"potentially responsible party" for certain waste disposal sites (Superfundsites). Each of these matters is subject to various uncertainties, and it ispossible that some of these matters will be decided unfavorably against theCompany. The Company had accruals, included in current accrued liabilities andother noncurrent liabilities, of $4,800 and $7,400 at December 31, 1998 and1997, respectively, for costs associated with the study and remediation ofSuperfund sites and the Company's current and former operating sites for mattersthat are probable and reasonably estimable. Based on currently availableinformation and analysis, the company's accrual represents 73% of what itbelieves are the reasonably possible environmental cleanup related costs of anon-capital nature. The estimate of reasonably possible costs is less certainthan the probable estimate on which the accrual is based. During the pastthree-year period, cash payments for environmental cleanup related matters were$1,800, $400 and $600 for 1998, 1997 and 1996, respectively. There were noprovisions for environmental contingencies during the past three-year period.The Company reversed reserves of approximately $800 and $1,000 in 1998 and 1996,respectively, as a result of revised estimates. After reviewing informationcurrently available, management believes any amounts paid in excess of theaccrued liabilities will not have a material effect on its financial position orresults of operations. However, these matters, if resolved in a manner differentfrom the estimates could have a material adverse effect on financial condition,operating results and cash flows when resolved in a future reporting period. Litigation The Company and its subsidiary Profarmaco S.r.l. ("Profarmaco") were namedas defendants in a proceeding instituted by the Federal Trade Commission ("FTC")on December 21, 1998, in the United States District Court for the District ofColumbia. The complaint alleges that exclusive license agreements whichProfarmaco entered into with Mylan Laboratories, Inc. ("Mylan") covering thedrug master files for (and therefore the right to buy and use) two activepharmaceutical ingredients ("APIs"), lorazepam and clorazepate, were part of aneffort on Mylan's part to restrict competition in the supply of lorazepam andclorazepate and to increase the price charged for these products when Mylan soldthem as generic pharmaceuticals. The complaint further alleges that theseagreements violate the Federal Trade Commission Act, and that Mylan, Cambrex,Profarmaco, and Gyma Laboratories of America, Inc., Profarmaco's distributor inthe United States, engaged in an unlawful restraint of trade and conspired tomonopolize and attempted to monopolize the markets for the genericpharmaceuticals incorporating the APIs. The FTC seeks a permanent injunction andother relief, including disgorgement of the profits generated through thelicensing arrangements, which the FTC alleges to be in excess of $120,000 forall defendants. In accordance with the license agreement, the Company receivedroyalties of approximately $19,300 and $1,000 for the years ended December 31,1998 and 1997, respectively. A lawsuit making similar allegations against the Company and Profarmaco,and seeking injunctive relief and treble damages, has been filed by theAttorneys General of 31 states and the District of Columbia in the United StatesDistrict Court for the District of Columbia on behalf of those states andpersons in those states who were purchasers of the generic pharmaceuticals. TheCompany and Profarmaco have also been named in purported class action complaintsbrought by private plaintiffs in various state courts on behalf of purchasers of 54 56 CAMBREX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) (22) CONTINGENCIES -- (CONTINUED)lorazepam and clorazepate in generic form, making allegations essentiallysimilar to those raised in the FTC's complaint and seeking various forms ofrelief including treble damages. The Company believes that its licensing arrangements with Mylan are inaccordance with regulatory requirements and will vigorously defend the FTC'sactions and various other lawsuits and class actions. However, the Company andMylan have terminated the exclusive licenses to the drug master files. Thefuture royalty arrangements under the agreements have concluded as of December31, 1998. In entering these licensing arrangements, the Company elected not toraise the price of its products and had no control or influence over the pricingof the final generic product forms by Mylan. On May 14, 1998, the Company's Nepera subsidiary, a manufacturer and sellerof niacinamide (Vitamin B(3)), received a Federal Grand Jury subpoena for theproduction of documents relating to the pricing and possible customer allocationwith regard to that product. The Company understands that the subpoena wasissued as part of the Federal Government's ongoing antitrust investigation intovarious business practices in the vitamin industry generally. The Company andNepera have been cooperating fully with the government's investigation. While it is not possible to predict with certainty the outcome of the FTCaction and various other lawsuits and class actions, it is the opinion ofmanagement that the ultimate resolution of these proceedings should not have amaterial adverse affect on the Company's results of operations, cash flows andfinancial position. These matters if resolved in an unfavorable manner couldhave a material adverse affect on the operating results or cash flows whenresolved in a future reporting period. (23) SUBSEQUENT EVENT On March 12, 1999, the Company announced the purchase of IrotecLaboratories, Ltd., a manufacturer of active pharmaceutical ingredients locatedin Cork, Ireland. Cambrex paid approximately $40,000 for the business, whichincludes a new $15,000 cGMP pharmaceutical manufacturing plant which is expectedto be on line in the second quarter of 1999. In connection with the purchase,the Company signed a long-term agreement with Hexal AG, Germany's second largestgeneric pharmaceutical producer. The agreement covers the supply of an expected$50,000 to $75,000 of Active Pharmaceutical Ingredients (API) over the next fiveyears. 55 57 CAMBREX CORPORATION SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE DATA) 1ST 2ND 3RD 4TH QUARTER QUARTER QUARTER QUARTER(2) YEAR(3) -------- -------- -------- ---------- -------- 1998Gross sales......................... $113,770 $116,173 $104,423 $107,317 $441,683Net revenues........................ 113,602 123,504 107,950 112,185 457,241Gross profit........................ 38,950 47,821 38,839 37,807 163,417Net income.......................... 9,143 10,886 8,851 10,222 39,102Earnings per share*:(1) Basic............................. $ 0.38 $ 0.45 $ 0.36 $ 0.42 $ 1.62 Diluted........................... $ 0.36 $ 0.43 $ 0.35 $ 0.40 $ 1.54Average shares*: Basic............................. 23,910 24,154 24,288 24,417 24,194 Diluted........................... 25,052 25,548 25,483 25,534 25,4121997Gross 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............................. $ 0.32 $ 0.38 $ 0.32 $ (0.26) $ 0.75 Diluted........................... $ 0.31 $ 0.38 $ 0.30 $ (0.26) $ 0.73Average shares*: Basic............................. 23,476 23,504 23,658 23,830 23,627 Diluted........................... 23,988 24,034 24,810 25,004 24,419 - ---------------(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) Includes non-recurring charge for in-process research and development related to the acquisition of BioWhittaker in the fourth quarter of 1997. 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 the settlement with a prior owner of one of the Company's operating facilities. (3) Includes royalty income of $19,298 in net revenues related to a technology license agreement with Mylan Laboratories for use of intellectual property in 1998. * Share and per share data reflect adjustments for a two-for-one stock split in the form of a dividend of one new share for each share held, paid on June 25, 1998. 56 58 PART III ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING ANDFINANCIAL 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 22, 1999, 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." 57 59 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 Accounts.............................. 26Consolidated Balance Sheets as of December 31, 1998 and 1997...................................................... 27Consolidated Income Statements for the Years Ended December 31, 1998, 1997 and 1996................................... 28Consolidated Statement of Stockholder's Equity for the Years Ended December 31, 1998, 1997 and 1996.................... 29Consolidated Statements of Cash Flows for the Years Ended December 31, 1998, 1997 and 1996.......................... 30Notes to Consolidated Financial Statements.................. 31Consolidated Quarterly Financial Data (unaudited) for the Years Ended December 31, 1998 and 1997.................... 56 (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............................. 59Schedule II -- Valuation and Qualifying Accounts............ 60 All other schedules are omitted because they are not applicable or notrequired or because the required information is included in the consolidatedfinancial statements of the Company or the notes thereto. (a) 3. The exhibits filed in this report are listed in 63 the Exhibit Index on page............................. 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 no reports on Form 8-K during the last quarter of theyear ended December 31, 1998. 58 60 REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE To the Boards of Directorsof Cambrex Corporation: Our audits of the consolidated financial statements referred to in our reportdated January 22, 1999 (except for Note 23, as to which the date is March 12,1999) of the 1998 Annual Report on Form 10-K of Cambrex Corporation and itssubsidiaries also included an audit of the financial statement schedule listedin Item 14(a)(2) of this Form 10-K. In our opinion, this financial statementschedule presents fairly, in all material respects, the information set forththerein when read in conjunction with the related consolidated financialstatements. PRICEWATERHOUSECOOPERS LLP Florham Park, New JerseyJanuary 22, 1999 59 61 SCHEDULE II CAMBREX CORPORATION VALUATION AND QUALIFYING ACCOUNTS FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 (DOLLARS IN THOUSANDS) COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E --------- ---------- ---------- ---------- -------- ADDITIONS ----------------------- BALANCE CHARGED TO CHARGED TO BEGINNING COST AND OTHER END OF CLASSIFICATION OF YEAR EXPENSES ACCOUNTS DEDUCTIONS YEAR -------------- --------- ---------- ---------- ---------- -------- YEAR ENDED DECEMBER 31, 1998: Doubtful trade receivables and returns and allowances...................... 1,705 257 -- 412 1,550 Inventory and obsolescence provisions.......................... 15,943 6,046 -- (4,833) 17,156YEAR 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 6,467 - ---------------(1) Reserve of BioWhittaker acquired during 1997. 60 62 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 22, 1999 Pursuant to the requirements of the Securities Exchange Act of 1934, thisreport has been signed below by the following persons on behalf of theregistrant and in the capacities and on the dates indicated. SIGNATURE TITLE DATE- --------- ----- ---- /s/ 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/ GEORGE J. W. GOODMAN* Director- ------------------------------------------------ George J. W. Goodman /s/ ROY W. HALEY* Director- ------------------------------------------------ March 22, 1999 Roy W. Haley /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/ WILLIAM B. KORB* Director- ------------------------------------------------ William B. Korb /s/ ROBERT LEBUHN* Director- ------------------------------------------------ Robert LeBuhn /s/ JAMES A. MACK* Director- ------------------------------------------------ James A. Mack 61 63 SIGNATURE TITLE DATE- --------- ----- ---- /s/ JOHN R. MILLER Director- ------------------------------------------------ John R. Miller March 22, 1999 /s/ DEAN P. PHYPERS* Director- ------------------------------------------------ Dean P. Phypers *By /s/ CYRIL C. BALDWIN, JR. ------------------------------------------- Cyril C. Baldwin, Jr. Attorney-in-Fact 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.l. (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).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). 63 65 EXHIBIT NO. DESCRIPTION- ------- ----------- 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). - ---------------See legend on following page 64 66 EXHIBIT INDEX (A) Incorporated by reference to the indicated Exhibit to registrant's Registration Statement on Form S-1 (Registration No. 33-16419).(B) Incorporated by reference to registrant's 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.(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 CAMBREX CORPORATION ANNUAL REPORT ON FORM 10-K EXHIBIT 10.21 REVISED SCHEDULE OF PARTIES NAME TITLE DATE OF AGREEMENT- ---- ----- ----------------- James A. Mack....................... President and Chief Executive Officer 02/01/90Claes Glassell...................... Vice President, Cambrex and President, 10/12/94 Pharmaceutical and Fine Chemicals GroupSteven M. Klosk..................... Executive Vice President, Administration 10/21/92Peter E. Thauer..................... Vice President, Law and Environment, 08/28/89 General Counsel and Corporate SecretarySalvatore J. Guccione............... Vice President, Corporate Development 12/14/95Douglas H. MacMillan................ Vice President and Chief Financial Officer 04/14/97 1 CAMBREX CORPORATION EXHIBIT 21 SUBSIDIARIES OF REGISTRANT SUBSIDIARY INCORPORATED IN:- ---------- ---------------- CasChem, Inc. .............................................. DelawareCosan Chemical Corp. ....................................... New JerseyNepera, Inc. ............................................... New YorkThe Humphrey Chemical Co., Inc. ............................ DelawareChiragene, Inc. ............................................ DelawareSalsbury Chemicals, Inc. ................................... IowaZeeland Chemicals, Inc. .................................... MichiganBioWhittaker, Inc. ......................................... DelawareSeal Sands Chemicals Limited................................ EnglandProfarmaco S.r.l. .......................................... ItalyNordic Synthesis AB......................................... SwedenBioWhittaker Europe s.p.r.l. ............................... Belgium 1 EXHIBIT 23 ACCOUNTANTS' CONSENT Cambrex Corporation: We consent to the incorporation by reference in the registration statements ofCambrex Corporation and its subsidiaries on Forms S-8 (File Nos. 33-22017,33-21374, 33-7791, 33-81780, and 33-81782) of our report dated January 22, 1999(except for Note 23, as to which the date is March 12, 1999), on our audits ofthe consolidated financial statements and financial statement schedule ofCambrex Corporation as of December 31, 1998 and 1997, and for each of the threeyears in the period ended December 31, 1998 which report is included in thisAnnual Report on Form 10-K. PRICEWATERHOUSECOOPERS LLP Florham Park, New JerseyMarch 22, 1999 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 28th day of January 1999. /s/ CYRIL C. BALDWIN /s/ LEON J. HENDRIX, JR.- --------------------------------------------------- ---------------------------------------------------Cyril C. Baldwin, Jr. Leon J. Hendrix, Jr.Chairman of the Board of Directors Director /s/ DOUGLAS H. MACMILLAN /s/ ILAN KAUFTHAL- --------------------------------------------------- ---------------------------------------------------Douglas H. MacMillan Ilan KaufthalVice President DirectorChief Financial Officer /s/ ROSINA B. DIXON /s/ WILLIAM B. KORB- --------------------------------------------------- ---------------------------------------------------Rosina B. Dixon M.D. William B. KorbDirector Director /s/ GEORGE J.W. GOODMAN /s/ ROBERT LEBUHN- --------------------------------------------------- ---------------------------------------------------George J.W. Goodman Robert LeBuhnDirector Director /s/ ROY W. HALEY /s/ JOHN R. MILLER- --------------------------------------------------- ---------------------------------------------------Roy W. Haley John R. MillerDirector Director /s/ KATHRYN RUDIE HARRIGAN, PHD /s/ DEAN P. PHYPERS- --------------------------------------------------- ---------------------------------------------------Kathryn Rudie Harrigan, PhD Dean P. PhypersDirector Director /s/ JAMES A. MACK- ---------------------------------------------------James A. MackPresident, Chief Executive OfficerDirector

5 YEAR DEC-31-1998 DEC-31-1998 48,527 0 58,514 1,550 100,245 231,526 417,225 162,209 617,054 75,229 191,372 2,655 0 0 274,198 617,054 434,302 457,241 293,824 90,550 0 0 10,227 61,695 22,593 39,102 0 0 0 39,102 1.62 1.54

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Cambrex Corporation Annual Report 1998

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Cambrex Corporation
Annual Report 1998