Cambrex Corporation Annual Report 2002

Plain-text annual report

---------------------------------------------------------------------------------------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002 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. EMPLOYERINCORPORATION OR ORGANIZATION) IDENTIFICATION NO.) ONE MEADOWLANDS PLAZA, 07073 EAST RUTHERFORD, NEW JERSEY (ZIP CODE) (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (201)-804-3000 SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED ------------------- ----------------------------------------- COMMON STOCK, $.10 PAR VALUE NEW YORK STOCK EXCHANGE (SECURITIES REGISTERED PURSUANT TO SECTION 12 (g) OF THE ACT: NONE) Indicate by check mark whether the registrant (1) has filed all reportsrequired to be filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject to suchfiling requirements for the past 90 days. Yes [X] No Indicate by check mark if disclosure of delinquent filers pursuant to Item405 of Regulation S-K is not contained herein, and will not be contained, to thebest of the registrant's knowledge, in definitive proxy or informationstatements incorporated by reference in Part III of this Form 10-K or anyamendment to this Form 10-K. [ ] Indicate by check mark whether the registrant is an accelerated filer (asdefined in Exchange Act Rule 12b-2). Yes [X] Nodefined in Exchange Act Rule 12b-2). Yes [X] No The aggregate market value of the voting stock held by non-affiliates ofthe registrant was approximately $973,042,420 as of June 30, 2002. APPLICABLE ONLY TO CORPORATE REGISTRANTS As of February 28, 2003, there were 25,859,188 shares outstanding of theregistrant's Common Stock, $.10 par value. DOCUMENTS INCORPORATED BY REFERENCE Portions of the registrant's definitive Proxy Statement for the 2003 AnnualMeeting are incorporated by reference into Part III of this report.---------------------------------------------------------------------------------------------------------------------------------------------------------------- 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 worldwide to the life sciences industry. Cambrex operates in foursegments, Human Health, Biosciences, Rutherford Chemicals and All Other. Each ofthese segments includes various product categories. The Company has continued toevolve into a life science based organization through acquisitions and internalinvestments. The Company's overall strategy for the Human Health and Biosciencessegments is to focus on niche markets that have global opportunities, build onstrong customer relations to enhance its new products pipeline, and supportstate-of-the-art technology, while being a leader in environmental, health andsafety performance. Within each of the segments, the Company uses a consistent businessapproach: 1. Niche market focus: The Company participates in niche markets requiring significant technical expertise. 2. Market leadership: The Company is a leading supplier of essential products and services to accelerate drug discovery, development and manufacturing, for which pricing is not the primary determinant of the buying decision. 3. Continued margin expansion: The Company reviews product and service profitability on a continuing basis to eliminate those not meeting operating profit goals and replaces them with products and services that can generate higher financial returns. The Company has a number of key strategic initiatives: 1. Continue the transition to a pure-play life sciences company. 2. Increase revenue targets generated by new product introductions through continued investment in research and development. 3. The Company will drive growth in strategic business segments through the prudent acquisition of product lines, technologies, and capabilities to increase the Company's position in its niche markets. 4. The Company will maintain its ongoing commitment to continuous improvement and cost reduction to improve productivity and manage costs. 5. The Company will leverage its broad capabilities and reputation across the market segments in which they participate. 6. The Company plans to introduce or acquire new products and services that bring the Company closer to the patient and provide life science testing services. Effective January 1, 2002, the operating units that primarily producespecialty and fine chemicals and animal health and agriculture products werecombined under a new business unit, Rutherford Chemicals, Inc. RutherfordChemicals, Inc. includes CasChem, Inc., Bayonne, New Jersey; Cosan ChemicalCorporation, Carlstadt, New Jersey; Heico Chemicals, Inc., Delaware Water Gap,Pennsylvania; Nepera, Inc., Harriman, New York; Zeeland Chemicals, Inc.,Zeeland, Michigan; and Seal Sands Chemicals Ltd., Middlesbrough, United Kingdom.In the fourth quarter 2002, the Company announced that it had engaged afinancial advisor to assist the Company in investigating strategic alternativesfor the Rutherford Chemicals segment. On October 30, 2001, Cambrex completed the acquisition of the MarathonBiopharmaceuticals ("Marathon") business, located in Hopkinton, Massachusetts,for approximately $26,000 in cash through a ---------------(dollars in thousands, except share data) 1 share purchase of CoPharma Inc. Marathon is a full-service cGMP manufacturer ofbiopharmaceutical ingredients and purified bulk biologics for pre-clinicalevaluation, clinical trials and commercial scale quantities. This acquisitionstrengthens Cambrex's existing capabilities for producing pre-clinical, clinicaland commercial quantities of bulk biologics. Assets acquired and liabilitiesassumed have been recorded at their estimated fair values. Goodwill was recordedat approximately $11,035 and other identifiable intangibles were recorded at$2,153. Subsequent to the acquisition, the acquired subsidiary's formal name waschanged to Cambrex Bio Science Hopkinton, Inc. On June 1, 2001, Cambrex completed its acquisition of the Bio ScienceContract Production Corporation ("Bio Science") biopharmaceutical manufacturingbusiness in Baltimore, Maryland. The business involves the cGMP manufacture ofpurified bulk biologics and pharmaceutical ingredients. The total purchase pricewas approximately $120,000 in cash, which was funded by an existing line ofcredit facility. Additional purchase price payments of up to $25,000 may be madedepending on future business performance over the four years following the dateof purchase. No additional performance-based payments have been made to date.Assets acquired and liabilities assumed have been recorded at their estimatedfair values. Goodwill was recorded at approximately $117,800, includingincremental deal costs. In addition, identifiable intangible assets of $3,382was recorded. Subsequent to the acquisition, the acquired subsidiary's formalname was changed to Cambrex Bio Science Baltimore, Inc. On August 29, 2000, Cambrex Corporation announced that its CasChem, Inc.subsidiary had licensed the castor oil based ester products business fromArizona Chemical, Jacksonville, FL through a perpetual licensing agreement forapproximately $4,500. The agreement provided CasChem with process technologies,customer lists, and supply of raw materials. The ester products are used inpersonal care and coatings applications. The license cost is included inintangible assets. As part of the transaction, CasChem also entered into afive-year supply agreement with Arizona Chemical to manufacture a line of tolloil based products used in the lubricant and lithographic ink markets. On July 24, 2000, the Company completed the acquisition of LumitechLimited, an emerging company based in Nottingham, United Kingdom, which providesproducts and services used in the high throughput screening market for drugdiscovery. The Company paid approximately $4,700 in cash at closing, themajority of which was recorded as patents and other intangibles, with additionalfuture performance-based payments of up to $16,000 due over the next five years.The acquired patents and other intangibles are being amortized over 20 years.Subsequent to the acquisition, the acquired subsidiary's formal name was changedto Cambrex Bio Science Nottingham Limited. On March 2, 2000, the Company completed the acquisition of Conti BC NV, amanufacturer and supplier of pharmaceutical intermediates and activepharmaceutical ingredients, located in Landen, Belgium. The Company paidapproximately $6,200 in cash and assumed debt for the business. At the time ofthe transaction, goodwill was recorded at $451. Subsequent to the acquisition,the acquired subsidiary's formal name was changed to Cambrex Profarmaco LandenNV. ---------------(dollars in thousands, except share data) 2 In 2002, the Company changed the names of their life sciences subsidiariesto leverage capabilities and reputation across the corporation. The newsubsidiary names are listed below: OLD NAME CURRENT NAME-------- ------------ Nordic Synthesis AB......................... Cambrex Karlskoga ABSalsbury Chemicals, Inc..................... Cambrex Charles City, Inc.Chiragene, Inc.............................. Cambrex North Brunswick, Inc.Cambrex Bio Science,Inc..................... Cambrex Bio Science Baltimore, Inc.Cambrex Bio Science MA, Inc................. Cambrex Bio Science Hopkinton, Inc.Conti BC NV................................. Cambrex Profarmaco Landen NVIrotec Laboratories Limited................. Cambrex Profarmaco Cork LimitedProfarmaco S.r.l. .......................... Cambrex Profarmaco Milano S.r.l.BioWhittaker Europe Sprl.................... Cambrex Bio Science Verviers SprlBioWhittaker, Inc........................... Cambrex Bio Science Walkersville, Inc.BioWhittaker UK Limited..................... Cambrex Bio Science Wokingham LimitedLumitech Limited............................ Cambrex Bio Science Nottingham LimitedBioWhittaker Molecular Applications, Inc.... Cambrex Bio Science Rockland, Inc.BioWhittaker Molecular Applications ApS..... Cambrex Bio Science Copenhagen ApS PRODUCTS The Company uses its technical expertise in a wide range of chemical andbiological processes to meet the needs of its customers for high qualityproducts and services for specialized applications. The following table setsforth for the periods indicated information concerning gross sales from theCompany's four segments: YEARS ENDED DECEMBER 31, -------------------------------- 2002 2001(2) 2001(1) -------- -------- -------- Human Health....................................... $209,074 $199,858 $187,420Biosciences........................................ 163,302 124,973 96,232Rutherford Chemicals............................... 129,318 143,903 169,920All Other.......................................... 20,482 30,460 38,972 -------- -------- -------- Gross Sales...................................... $522,176 $499,194 $492,544 ======== ======== ======== ---------------(1) Sales from Conti BC NV (now known as Cambrex Profarmaco Landen NV) acquired in March 2000, Lumitech Limited (now known as Cambrex Bio Science Nottingham Limited) acquired July 2000, and the Arizona Chemical product lines licensed in August 2000, are included from dates of acquisition. (2) Sales from Cambrex Bio Science Baltimore, Inc. acquired in June 2001, and Cambrex Bio Science Hopkinton, Inc. acquired in October 2001, are included from dates of acquisition. Human Health: The Human Health segment is primarily comprised ofpharmaceutical ingredients derived from organic chemistry. Products and servicesare supplied globally to innovative and generic drug companies. Products includeactive pharmaceutical ingredients and advanced pharmaceutical intermediates.Services include development and manufacturing services. The Human Health Segment is classified into four principal product groups:(1) Active Pharmaceutical Ingredients, (2) Pharmaceutical Intermediates, (3)Imaging Chemicals, and (4) Other. These products are sold to a diverse group ofmore than 1,100 customers, with two customers accounting for more than 10% of2002 sales in this segment; one a distributor representing multiple customers,accounting for 15.6%, and a second accounting for 12.7%. Many of these productsare also sold through agents. Also, one active pharmaceutical ingredient makesup 15.6% of 2002 sales in this segment.---------------(dollars in thousands, except share data) 3 This table summarizes the gross sales for this product segment: $ % 2002 2001 CHANGE CHANGE -------- -------- ------ ------ Active Pharmaceutical Ingredients........... $171,794 $165,457 $6,337 3.8%Pharmaceutical Intermediates................ 24,194 25,059 (865) (3.5)Imaging Chemicals........................... 11,689 8,241 3,448 41.8Other....................................... 1,397 1,101 296 N/A -------- -------- ------ Total Human Health................ $209,074 $199,858 $9,216 4.6% ======== ======== ====== === Human Health sales of $209,074 increased $9,216 or 4.6% including thefavorable effects of foreign currency. Human Health sales growth would have been1.8% without the currency impact of the weaker U.S. dollar. Active Pharmaceutical Ingredients ("APIs") are manufactured under Food andDrug Agency current good manufacturing practices (cGMP) for use as the activeingredients in prescription and over-the-counter drugs. APIs include activeingredients used in products for gastro-intestinal, cardiovascular, endocrine,central nervous system, respiratory, diuretics, anti-infective,anti-inflammatory, immunology and various other uses. APIs sales of $171,794were $6,337 or 3.8% above the prior year due primarily to the introduction of anamphetamine product used to treat attention deficit disorders, higher sales ofgastrointestinal APIs used to treat ulcerative colitis to meet increased demand,partly offset by lower sales of cardiovascular actives due to customer inventoryreductions and competitive pricing pressures and a new insomnia product shipmentin 2001 for clinical trials which did not repeat in 2002. Pharmaceutical Intermediates sales of $24,194 were $865 or 3.5% below 2001primarily due to lower sales of an antihistamine product due to falloff incustomer demand and a 2002 shipment of a new anti-infective product for use inclinical trials which was less than the 2001 shipment, partially offset byhigher sales of an intermediate used in a therapeutic drug for treatment ofend-stage kidney disease. Imaging chemicals sales were higher than 2001 by $3,448 or 41.8% due tohigher demand in 2002. Other product category changes from prior year were not significant. Biosciences: This segment consists of cell culture products (includingliving cell cultures, cell culture media, cell culture media supplements, andcell therapy services), endotoxin detection products, electrophoresis andchromatography products, and contract biopharmaceutical manufacturing servicesat clinical and commercial scale for the biotechnology and pharmaceuticalindustries. The Company utilizes both fermentation and mammalian cell culturetechnologies. Services include media optimization, cell banking andpurification. The Company manufactures more than 1,800 products which are soldto more than 14,000 customers worldwide with one customer accounting for 10.7%of 2002 sales in this category. This table summarizes the gross sales for this product segment: $ % 2002 2001 CHANGE CHANGE -------- -------- ------- ------ Cells and Media............................ $ 58,631 $ 54,708 $ 3,923 7.2%Endotoxin Detection........................ 27,156 23,786 3,370 14.2Contract Biopharmaceutical Manufacturing... 55,218 22,461 32,757 145.8Electrophoresis, Chromatography & Other.... 22,297 24,018 (1,721) (7.2) -------- -------- ------- Total Biosciences................ $163,302 $124,973 $38,329 30.7% ======== ======== ======= ===== Gross sales of $163,302 were $38,329 or 30.7% above 2001 due primarily tothe impact of the biopharmaceutical manufacturing acquisitions completed duringthe second half of 2001 (sales growth of 9.1% excluding the effect of theacquisitions), and increased sales of endotoxin protection products reflectingthe ---------------(dollars in thousands, except share data) 4 impact of a more focused sales force and introduction of FDA compliant softwarein mid 2002, higher Media and Serum sales (primarily liquid form) due to marketshare gains in Europe and strong shipments of Normal Human Cells reflectingimproved product supply and quality. These increases were partly offset by theimpact of the sale of the In Vitro Diagnostic cell business during the firstquarter of 2002. Biosciences segment sales growth would have been 29.0% withoutthe currency impact of the weaker U.S. dollar. Rutherford Chemicals: The Rutherford Chemicals segment includes operationsin animal health, agriculture, and specialty and fine chemicals. These productsare used in feed additive, agriculture, photography, pigments, polymers,fuel/oil addition, catalysts, telecommunications, coatings, electronics,specialty plastics and other specialty additives. These products are sold toapproximately 1,300 customers with no one customer accounting for over 10% of2002 sales in this segment. This table summarizes the gross sales for this product segment: $ % 2002 2001 CHANGE CHANGE -------- -------- -------- ------ Vitamin B-3............................... $ 10,324 $ 6,629 $ 3,695 55.7%Agricultural Intermediates................ 22,785 31,535 (8,750) (27.7)Performance Enhancing Chemicals........... 31,199 34,753 (3,554) (10.2)Polymer Systems........................... 21,029 27,871 (6,842) (24.5)Personal Care Ingredients................. 20,356 20,591 (235) (1.1)Personal Care Ingredients................. 20,356 20,591 (235) (1.1)Other..................................... 23,625 22,524 1,101 4.9 -------- -------- -------- Total........................... $129,318 $143,903 $(14,585) (10.1)% ======== ======== ======== ===== Gross sales of $129,318 in 2002 declined $14,585 or 10.1% below 2001,reflecting lower demand and timing of production campaigns for crop protectionproducts, lower demand for certain performance enhancing chemicals, andcontinued weakness in the telecommunications and industrial coatings industries. All Other: This segment includes specialty and fine chemicals and animaland health products not manufactured at the Rutherford Chemicals facilities.These products are sold to approximately 140 customers with one customerrepresenting 43.8% of 2002 sales in this segment. Also, two products account formore than 10% of 2002 sales in this segment. An agriculture/animal healthproduct that accounted for 43.8% and a performance enhancing chemical that makesup 11.0%. $ % 2002 2001 CHANGE CHANGE ------- ------- ------- ------ Agriculture/Animal Health..................... $11,608 $16,694 $(5,086) (30.5)% Performance Enhancing Chemicals............... 8,874 13,766 (4,892) (35.5) ------- ------- ------- Total................................. $20,482 $30,460 $(9,978) (32.8)% ======= ======= ======= ===== Gross sales of $20,482 in 2002 were $9,978 or 32.8% below the prior yearperiod of $30,460, reflecting lower feed additive sales due to customerinventory management, the impact of a customer bringing in-house the manufactureof a performance enhancing polymer product, as well as customer inventoryreductions in another performance enhancing polymer product. MARKETING AND DISTRIBUTION The Company's Human Health segment generally includes high value,low-medium volume products requiring significant technical expertise for theirdevelopment and manufacture. Marketing generally requires significantcooperative effort among a small highly trained sales and marketing staff, atechnical staff who can assess the technical fit and estimate manufacturingeconomics, and the business unit management to determine the strategic andbusiness fit. Such a process may take from two to five years before a commercial ---------------(dollars in thousands, except share data) 5 product is fully established. Sales of established products may be handled byagents in those areas where direct sales efforts are not economical. For the Biosciences segment, the Company markets and sells its products inthe United States and Europe principally through its own direct sales force. Theremaining international markets are served principally through an extensivenetwork of independent distributors. The Company has implemented e-commercesoftware to market and sell these products in the U.S. For the Rutherford Chemicals segment, marketing and distribution is moretypical of specialty chemical companies, with products being sold to customersfrom inventory in volumes ranging from rail cars to five gallon containers.Sales may be handled by Company salespeople, distributors or agents, asappropriate. RAW MATERIALS The Company uses a wide array of raw materials in the conduct of itsbusinesses. The Company's specialty chemical facility in Bayonne, New Jerseyuses significant amounts of castor oil and compounds derived from petroleumfeedstocks in manufacturing a limited number of its products. The Companybelieves it is one of the largest purchasers of castor oil in the United States,and has the ability to take delivery and store a large quantity of castor oil.Castor oil is used primarily in the manufacture of the Company's polymer systemsfor coatings, telecommunication, and electronic applications. 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 generally able to obtain adequate supplies of castor oil at acceptableprices in the past and expects to be able to continue to do so in the future. Pyridine, which accounted for approximately 4%, 5% and 5% of gross revenuesin 2002, 2001 and 2000, respectively, is produced by the Company by a processinvolving the high temperature reaction of acetaldehyde, formaldehyde andammonia. Acetaldehyde is available from a limited number of suppliers in NorthAmerica. The Company uses one primary supplier in the U.S. at competitiveprices. The average price of acetaldehyde decreased approximately 20.6% during2002 after increasing 2.0% in 2001. While formaldehyde is available frommultiple sources, a majority is obtained from a local supplier in the U.S. atcompetitive prices. The average price of formaldehyde in 2002 decreasedapproximately 16.0% from 2001 after increasing 16.0% in 2001 from 2000. Theaverage price of ammonia in 2002 decreased approximately 25.3% from 2001 afterincreasing 23.8% in 2001 from 2000. The Company obtains acetaldehyde,formaldehyde and ammonia pursuant to long-term supply contracts under which theprice for the raw material adjusts to market conditions. For its biosciences 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 Companyalso is dependent on one company for the raw materials used to make Agaroseproducts (used by Cambrex Bio Science Rockland, Inc. and Cambrex Bio ScienceCopenhagen ApS in electrophoresis media products). A long term contract is ineffect for this supply. 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 introduce innovative products, improve manufacturing processes toreduce costs, improve quality and increase capacity, and to identify marketopportunities which warrant a ---------------(dollars in thousands, except share data) 6 significant technical effort, and offer the prospects of a long-term, profitablebusiness relationship. Research and development activities are performed at mostof the Company's manufacturing facilities in both the United States and Europe.Approximately 335 employees are involved directly in research and developmentactivities worldwide. At the end of 2000, the Company completed its initial investment in theCambrex Center of Technical Excellence, a new research and developmentorganization. The 42,000 square foot site is located in The Technology Centre ofNew Jersey in North Brunswick. The new facility helps to place the Company in aunique position to be a full-service resource for pharmaceutical andbiotechnology companies throughout the drug development cycle. The Company spent approximately $17,629, $19,619 and $14,267 in 2002, 2001and 2000, respectively, on research and development efforts. 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 life sciences companies fordeveloping and maintaining its market position. The Company currently owns approximately 120 United States patents whichhave various expiration dates beginning in 2003 through 2019 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. The Company has trademarks registered in the United States and a number ofother countries for use in connection with the Company's products and business.The Company believes that many of its trademarks are generally recognized in itsindustry. Such trademarks include Naturechem(R), Bufferite(R), Poietics(TM),Clonetics(TM), Auto-LAL(TM), SeaPlaque(TM), IsoGel(R), NuSieve(R), Reliant(TM),Long Ranger(R), Singel(R), Latitude(R) and PAGEr(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 segmentand its strategic approach, it is not possible to identify a group of directcompetitors. Where competition exists, it is typically specific to a certainproduct, or is focused early in the process, when an initial market position isbeing established. If the Company perceives significant competitive risk and aneed for large technical or financial commitment, it generally negotiateslong-term contracts or capital guarantees from its targeted customer beforeproceeding. In the Biosciences segment, no one company is known to compete with theCompany in all of its product groups, but in each group competition is offeredby a number of companies, including, in some cases, firms substantially largerand with greater financial resources than the Company. The markets in which theCompany competes are generally concentrated and are highly competitive, withcompetition centering on product specifications and performance, quality, depthof product line, price, technical support, timely product development and speedof delivery. Competition for the Company's Rutherford Chemicals segment is more typicalof chemical markets. Competition exists from other producers of the Company'sproducts and from other products that may offer equivalent properties.Competition in these areas is generally based on product performance, customerservice, product quality and pricing. ---------------(dollars in thousands, except share data) 7 ENVIRONMENTAL AND SAFETY REGULATIONS AND PROCEEDINGS General: Certain products manufactured by the Company involve the use,storage and transportation of toxic and hazardous materials. The Company'soperations are subject to extensive international and domestic federal, stateand local laws and regulations relating to the storage, handling, emission,transportation and discharge of materials into the environment and themaintenance of safe 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 conducts detailed environmental due diligence on allacquisitions. The Company's acquisitions were made with consideration of anyknown environmental conditions. Also, as with other companies engaged in thechemical business, risks of substantial costs and liabilities are inherent incertain plant operations and certain products produced at the Company's plants.Additionally, prevailing legislation tends to hold chemical companies primarilyresponsible for the proper disposal of their chemical wastes even aftertransferal to third party waste disposal facilities. Moreover, other futuredevelopments, such as increasingly strict environmental, safety and health lawsand regulations, and enforcement policies thereunder, could result insubstantial costs and liabilities to the Company and could subject the Company'shandling, manufacture, use, reuse, or disposal of substances or pollutants atits plants to more rigorous scrutiny than at present. Although the Company hasno direct operations and conducts its business through subsidiaries, certainlegal principles that provide the basis for the assertion against a parentcompany of liability for the actions of its subsidiaries may support the directassertion against 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 #24 to the CambrexCorporation and Subsidiaries Consolidated Financial Statements. Present and Future Environmental Expenditures: The Company's policy is tocomply with all legal requirements of applicable environmental, health andsafety laws and regulations. The Company believes it is in general compliancewith such requirements and has adequate professional staff and systems in placeto remain in compliance. In some cases, compliance can only be achieved bycapital expenditures, and the Company made capital expenditures of approximately$4,417 in 2002, $3,900 in 2001, and $5,300 in 2000 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, 2002 the Company had 2,216 employees worldwide (980 of whomwere from international operations) compared with 2,079 employees at December31, 2001 and 1,852 at December 31, 2000. All hourly plant employees at the Bayonne, New Jersey facility arerepresented by Local 2-406 of the Paper, Allied and Chemical WorkersInternational Union under a contract expiring September 17, 2003 and the hourlyplant employees at the Harriman, New York facility are represented by Local 810of the International Brotherhood of Teamsters under a contract expiring June 30,2004. Cambrex Karlskoga AB, Cambrex Profarmaco Landen NV, Cambrex ProfarmacoCork Limited, and Cambrex Profarmaco Milano S.r.l. production, administration,scientific and technical employees are represented by various local and nationalunions. The Company believes its labor relations are satisfactory. ---------------(dollars in thousands, except share data) 8 SEASONALITY Like many other businesses in the life sciences and specialty and finechemicals industries, the Company experiences some seasonality primarily due toplanned plant shutdowns by the Company and certain customers in the thirdquarter. Operating results for any quarter, however, are not necessarilyindicative of results for any future period. In particular, as a result ofvarious factors such as acquisitions and plant shutdowns, the Company believesthat period-to-period comparisons of its operating results should not be reliedupon as an indication of future performance. EXPORT AND INTERNATIONAL SALES The Company exports numerous products to various areas, principally WesternEurope, Asia and Latin America. Export sales from the Company's domesticoperations in 2002, 2001 and 2000 amounted to $50,930, $45,041 and $50,910,respectively. Sales from international operations were $241,113 in 2002,$232,921 in 2001, and $230,476 in 2000. Refer to Note #22 to the CambrexCorporation and Subsidiaries Consolidated Financial Statements. AVAILABLE INFORMATION This annual report on Form 10-K, as well as the Company's reports on Form10-Q, and current reports on Form 8-K, are made available free of charge on theCompany's Internet website www.cambrex.com as soon as reasonably practicableafter such material is electronically filed with or furnished to the Securitiesand Exchange Commission. ---------------(dollars in thousands, except share data) 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, Inc. Personal Care Ingredients; Biomedical Urethanes; Performance Enhancers; Polymer SystemsHarriman, NY 29 acres Nepera, Inc. Personal Care Ingredients; Vitamin B-3; Agricultural Intermediates; Performance Enhancing ChemicalsDelaware Water Gap, PA 12 acres CasChem Performance Enhancing Chemicals; Polymer d/b/a Heico, Inc. SystemsCharles City, IA 57 acres Cambrex Active Pharmaceutical Ingredients; Charles City, Inc. Pharmaceutical Intermediates; Imaging Chemicals; Animal Health Products Performance Enhancing ChemicalsZeeland, MI 14 acres Zeeland,Inc. Personal Care Ingredients; Catalysts; Performance Enhancing ChemicalsMiddlesbrough, England 12 acres Seal Sands Pharmaceutical Intermediates; Personal Care Chemicals Limited Ingredients, Catalysts; Agricultural Intermediates; Performance Enhancing Chemicals; Polymer SystemsKarlskoga, Sweden 42 acres Cambrex Active Pharmaceutical Ingredients; Karlskoga AB Pharmaceutical Intermediates; Imaging Chemicals; Personal Care Ingredients; Catalysts; Agricultural Intermediates; Performance Enhancing ChemicalsPaullo (Milan), Italy 13 acres Cambrex Active Pharmaceutical Ingredients Profarmaco Milano S.r.l.Walkersville, MD 116 acres Cambrex Cells and Media; Endotoxin Detection Bio Science Walkersville, Inc.Verviers, Belgium 9 acres Cambrex Cells and Media Bio Science Verviers SprlCork, Ireland 21 acres Cambrex Active Pharmaceutical Ingredients; Profamraco Pharmaceutical Intermediates Cork LimitedRockland, ME 93 acres Cambrex Electrophoresis and Chromatography Bio Science Rockland, Inc.Copenhagen, Denmark Leased Cambrex Electrophoresis and Chromatography Bio Science Copenhagen ApSLanden, Belgium 40 acres Cambrex Active Pharmaceutical Ingredients Profarmaco Landen NVNottingham, England Leased Cambrex BioAssay Products; Reagent Kits Bio Science Nottingham LimitedBaltimore, MD Leased Cambrex Contract Biopharmaceuticals Bio Science Baltimore, Inc.Hopkinton, MA Leased Cambrex Contract Biopharmaceuticals Bio Science Hopkinton, Inc. ---------------(dollars in thousands, except share data) 10 The Company owns all the above facilities and properties, with theexception of the leased facilities in Nottingham, England, Copenhagen, Denmark,Baltimore, Maryland and Hopkinton, Massachusetts. The Company also leases 42,000square feet in North Brunswick, New Jersey for its Center of TechnicalExcellence, which has a 10 year term ending March 27, 2010. In addition, theCompany owns a four acre site and buildings in North Haven, CT and thirty-oneacres of undeveloped land adjacent to the North Haven facility, one hundred andthree acres of undeveloped land adjacent to the Harriman facility, sixty-sixacres of undeveloped land adjacent to the Zeeland facility, eighty-one acres inWalkersville, Maryland and a three acre site in Carlstadt, New Jersey. TheCompany believes its facilities to be in good condition, well-maintained andadequate 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, with properlead time, to transfer the manufacturing of a particular product to anotherfacility should capacity constraints dictate. However, the Company's pyridineand arsenical feed additive product groups are each manufactured at a singlefacility, and production of such products would not be transferable to anotherexisting Cambrex 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 #24 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 #24. 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. In connection with the restatement disclosed in Note 2 to the accompanyingfinancial statements, the Company voluntarily contacted and made variousdisclosures regarding certain inter-company accounting controls and proceduresto the Securities and Exchange Commission ("SEC"). As a result of the voluntarydisclosures, the SEC began an informal inquiry relating to the inter-companyaccounting matter discussed further in Note 2. The Company is fully cooperatingwith the SEC's inquiry. ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. None ---------------(dollars in thousands, except share data) 11 ITEM 10 EXECUTIVE OFFICERS OF THE REGISTRANT. The following table lists the executive officers of the Company: NAME AGE OFFICE---- --- ------ James A. Mack............................. 65 President, Chairman of the Board, Chief Executive OfficerClaes Glassell(1)......................... 51 President and Chief Operating OfficerSteven M. Klosk........................... 45 Executive Vice President, AdministrationSalvatore J. Guccione..................... 40 Executive Vice President, Corporate Strategy and DevelopmentLuke M. Beshar............................ 44 Senior Vice President and Chief Financial OfficerPeter E. Thauer........................... 63 Senior Vice President, Law & Environment General Counsel & Corporate SecretaryJohn Antonelli, Jr. ...................... 47 Vice President, Tax and TreasurerThomas N. Bird............................ 58 Vice President, Corporate DevelopmentRonnie D. Carroll, PhD.................... 62 Vice President and Chief Technology Officer, Pharmaceutical TechnologiesRobert J. Congiusti....................... 49 Vice President, Information TechnologyDaniel R. Marshak, PhD.................... 45 Vice President and Chief Technology Officer, Biotechnology --------------- (1) Resigned effective January 31, 2003. The Company's executive officers are elected by the Board of Directors andserve at the Board's discretion. Mr. Mack was elected Chairman of the Board of Directors on October 28,1999. Effective January 31, 2003, Mr. Mack was re-appointed President. He alsoretains his position as Chief Executive Officer. Mr. Mack has been ChiefExecutive Officer since Mr. Baldwin's retirement on April 1, 1995. Mr. Mack wasappointed President and Chief Operating Officer and a director of the Company inFebruary 1990. For five years prior thereto he was Vice President in charge ofthe worldwide Performance Chemicals businesses of Olin Corporation, amanufacturer of chemical products, metal products, and ammunition anddefense-related products. Mr. Mack was Executive Vice President of OakiteProducts, Inc. from 1982 to 1984. Prior to joining Oakite, he held variouspositions with The Sherwin-Williams Company, most recently as President andGeneral Manager of the Chemicals Division from 1977 to 1981. Mr. Mack is a pastChairman of the Board of Governors of the Synthetic Organic ChemicalManufacturing Association and is a member of the Board of Trustees of theMichigan Tech Alumni Fund. Mr. Glassell has resigned from his positions at Cambrex effective January31, 2003. Prior to his resignation he was appointed President and ChiefOperating Officer, and elected as a director in July 2001. Previously, he hadbeen Executive Vice President and Chief Operating Officer since July 2000. FromJuly 1998 to July 2000 Mr. Glassell held the position of President,Pharmaceutical Group. Mr. Glassell was appointed President, International inNovember 1997. Mr. Glassell was appointed Vice President of Cambrex in November1994. After extensive management experience at Nordic and Profarmaco, he joinedCambrex as a result of the 1994 acquisition of Nordic and Profarmaco. In 1989,he joined Nordic as President and CEO for Nordic's Chemistry Business. From 1986to 1989, he worked for the agricultural division of Berol Europe Ltd. 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., a ---------------(dollars in thousands, except share data) 12 lighting fixture manufacturer. From 1985 to January 1988, he was Vice President,Administration for Lightolier, Inc., a subsidiary of The Genlyte Group, Inc. Mr. Guccione was appointed Executive Vice President, Corporate Strategy andDevelopment in December 2002. He also served as Senior Vice President and ChiefFinancial Officer from May 2001 through December 2002. Previously, he held theposition of Senior Vice President, Corporate Development since January 2001. Mr.Guccione joined the Company in December 1995 as Vice President, CorporateDevelopment. Prior to joining the Company, from 1993 to 1995, he held theposition of Vice President and General Manager of the International SpecialtyProducts (ISP) Personal Care Division. He also served as Director of CorporateDevelopment for ISP, and had other various positions in Corporate Development atISP from 1987-1993. Mr. Beshar joined the Company on December 5, 2002 as Senior Vice Presidentand Chief Financial Officer. Prior to joining Cambrex, Mr. Beshar was SeniorVice President and Chief Financial Officer for Dendrite International. Prior toDendrite, he was Executive Vice President, Finance and Chief Financial Officerfor Expanets, Inc. from November 1998 through January 2002. Mr. Beshar hasserved as Chief Financial Officer for other businesses in his career and hasbeen the President and Chief Executive Officer of a company privately owned byMerrill Lynch Capital Partners. Mr. Thauer was appointed Senior Vice President, Law & Environment inJanuary 2001. Mr. Thauer was previously appointed Vice President, Law &Environment in December 1992, and General Counsel and Corporate Secretary inAugust 1989. From 1987 until he joined Cambrex, he was Counsel to the businessand finance group of the firm of Crummy, Del Deo, Dolan, Griffinger andVecchione. From 1971 to 1987, Mr. Thauer had held various positions with AvonProducts, Inc., including U.S. Legal Department Head and Corporate AssistantSecretary. Mr. Antonelli was appointed Vice President, Tax and Treasurer in April1999. His prior position was Treasurer and Director of Taxation which he heldsince April 1998. He joined the Company in June 1995 as Director of Taxes. Priorto joining the Company, Mr. Antonelli was Corporate Tax Manager at InterMetroIndustries, a worldwide manufacturer and distributor of storage and shelvingsystems. Mr. Antonelli is a Certified Public Accountant who has worked forPriceWaterhouse, KPMG and Parente Randolph. Mr. Bird was appointed Vice President, Corporate Development in January2002. From January 2001 to January 2002, he held the position of Vice President,Business Development, Life Sciences. Prior to that, Mr. Bird served asPresident, Biosciences Group since July 1998. Mr. Bird joined the Company inJune 1997, as President of Nepera, Inc. He was previously President of theconsulting firm of Bavier, Bulgar and Goodyear since 1994. Prior to that, Mr.Bird maintained various vice presidential positions with Commercial IntertechCorporation in their Fluid Purification Group. Dr. Carroll was appointed Vice President and Chief Technology Officer,Pharmaceutical Technology in January 2002. He joined the Company in September1997 as Vice President, Technology. Mr. Carroll had been with Bristol-MyersSquibb for 14 years, most recently as Vice President, Chemical Development forBristol-Myers Squibb Technical Operations. Prior to working for Bristol-MyersSquibb, Dr. Carroll was with Pfizer, Inc. in Groton, CT. Mr. Congiusti was appointed Vice President, Information Technology inNovember 1998. Mr. Congiusti joined the Company in September 1994 as Director,Information Services. Prior to joining the Company, from 1984 to 1994, he heldvarious senior information systems management positions at InternationalSpecialty Products and American Cyanamid Company. Dr. Marshak was appointed to the position of Vice President and ChiefTechnology Officer, Biotechnology in January 2002. He joined the Company inAugust 2000 as Vice President, Research and Development, BioSciences Group.Prior to joining Cambrex, Dr. Marshak held various Research and Developmentpositions with Osiris Therapeutics, Inc. from 1999 to 2000, most recently asExecutive Scientific Advisor. From 1986 to 1994 he was a Senior StaffInvestigator with Cold Spring Harbor Laboratory.---------------(dollars in thousands, except share data) 13 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 following table sets forth theclosing high and low sales price of the Common Stock as reported on the NYSE: 2002 HIGH LOW---- ------ ------ First Quarter.............................................. $44.30 $38.33Second Quarter............................................. 43.66 37.44Third Quarter.............................................. 39.88 30.95Fourth Quarter............................................. 37.97 24.10 2001 HIGH LOW---- ------ ------ First Quarter.............................................. $48.11 $39.38Second Quarter............................................. 56.99 40.28Third Quarter.............................................. 53.52 33.53Fourth Quarter............................................. 43.60 33.47 As of February 28, 2003, the Company estimates that there wereapproximately 4,400 beneficial holders of the outstanding Common Stock of theCompany. The quarterly dividend on common stock was $0.03 for 2002 and 2001. 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, 2002 are derived fromthe audited financial statements. The consolidated financial statements of theCompany as of December 31, 2002 and December 31, 2001 and for each of the yearsin the three year period ended December 31, 2002 and the report of independentaccountants thereon are included elsewhere in this annual report. The datapresented below should be read in conjunction with the financial statements ofthe Company and the notes thereto and "Management's Discussion and Analysis ofFinancial Condition and Results of Operations" included elsewhere herein. Cambrex Corporation restated its results for the five year period from1997-2001. This restatement resulted from a fourth quarter 2002 managementreview of the inter-company processes and controls which identified certaindiscrepancies in the inter-company accounts. Based upon this review, the Companyhas determined that certain administrative and other charges were not properlyexpensed in these prior periods. The cumulative overstatement of earnings wasapproximately $6.1 million before taxes or $5.1 million, after taxes. Selling,general and administrative expenses were increased in 2001, 2000, 1999 and 1998by $1.7 million, $3.5 million, $0.2 million and $0.8 million, respectively, anddecreased in 1997 by $0.1 million. Net income was overstated by $1.3 million,$2.9 million, $0.2 million and $0.8 million in 2001, 2000, 1999 and 1998,respectively and understated by $0.1 million in 1997. In addition,reclassifications of certain balance sheet accounts were also determined to benecessary. The effects of such items and the specific accounts affected arereflected in Note 2 to the accompanying financial statements. This restatementdid not have any impact on the Company's cash flows nor on 2002 reported resultsfrom operations. ---------------(dollars in thousands, except share data) 14 YEARS ENDED DECEMBER 31, ------------------------------------------------------------ 2002 2001(1) 2000(2) 1999(3) 1998 -------- ---------- ---------- ---------- ---------- (RESTATED) (RESTATED) (RESTATED) (RESTATED) (IN THOUSANDS, EXCEPT PER-SHARE DATA) INCOME DATA:Gross sales................................. $522,176 $499,194 $492,544 $484,560 $441,683Net revenues................................ 526,943 498,855 492,095 488,489 464,143Gross profit................................ 200,176 179,335 177,495 167,163 163,417Selling, general and administrative......... 98,563 91,651 85,714 77,904 77,428Research and development.................... 17,629 19,619 14,267 14,255 13,956Restructuring and other charges............. 14,501 18,649 -- -- --Vitamin B-3 provision....................... 10,000 4,400 -- 6,000 --Operating profit............................ 59,483 45,016 77,514 69,004 72,033Interest expense, net....................... 11,237 10,567 11,487 9,723 10,227Other (income) expense, net................. 64 (277) (329) 555 945Income before taxes......................... 48,182 34,726 66,356 58,726 60,861Net income.................................. 36,233 25,312 46,707 37,903 38,339EARNINGS PER SHARE DATA:Earnings per common share and common share equivalents: Basic..................................... $ 1.40 $ 0.99 $ 1.87 $ 1.54 $ 1.58 Diluted................................... $ 1.37 $ 0.96 $ 1.79 $ 1.48 $ 1.51Weighted average shares outstanding: Basic..................................... 25,954 25,648 25,015 24,572 24,194 Diluted................................... 26,520 26,495 26,157 25,613 25,412DIVIDENDS PER COMMON SHARE.................. $ 0.12 $ 0.12 $ 0.12 $ 0.12 $ 0.11BALANCE SHEET DATA: (AT END OF PERIOD) Working capital........................... $179,990 $159,224 $137,500 $158,950 $152,278 Total assets.............................. 867,528 818,375 681,617 673,396 617,070 Long-term obligations..................... 267,434 312,524 168,591 225,922 191,372 Total stockholders' equity................ 412,682 345,098 330,995 291,150 272,834 ---------------(1) Includes the results of Cambrex Bio Science Baltimore, Inc. from the date of acquisition effective June 2001, the results of Cambrex Bio Science Hopkinton, Inc. from the date of acquisition effective October 2001. (2) Includes the results of Cambrex Profarmaco Landen NV from the date of acquisition effective March 2000, the results of Cambrex Bio Science Wokingham Limited from the date of acquisition effective July 24, 2000 and the results of the Arizona Chemical products from the date of license effective August 2000. (3) Includes the results of Cambrex Profarmaco Cork Limited from the date of acquisition effective March 1999 and the results of Cambrex Bio Science Rockland, Inc. and Cambrex Bio Science Copenhagen ApS from the date of acquisition effective July 1999. ---------------(dollars in thousands, except share data) 15 ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. CRITICAL ACCOUNTING POLICIES Our critical accounting policies are those which we believe require themost subjective or complex judgments; often as a result of the need to makeestimates about the effect of matters that are inherently uncertain. The Companybases its estimates on historical experience and on other various assumptionsthat are deemed reasonable by management under each applicable circumstance. Adiscussion of our critical accounting policies, the underlying judgments anduncertainties affecting their application and the likelihood that materiallydifferent amounts would be reported under different conditions or usingdifferent assumptions, is as follows: Revenue Recognition Revenues are recognized when title to products and risk of loss aretransferred to customers. Additional conditions for recognition of revenue arethat collection of sales proceeds is reasonably assured and the Company has nofurther performance obligations. Sales terms to certain customers include remittance of discounts if certainconditions are met. Additionally, sales are generally made with a limited rightof return under certain conditions. The Company estimates these rebates andestimated returns at the time of sale based on the terms of agreements withcustomers and historical experience and recognizes revenue net of theseestimated costs. The Company continually monitors the adequacy of proceduresused to estimate these reductions by comparison of estimated reductions toactual reductions. Asset Valuations and Review For Potential Impairments Our review of our long-lived assets, principally fixed assets, and otherintangibles requires us to initially estimate the undiscounted future cash flowof these assets, whenever events or changes in circumstances indicate that thecarrying amount of these assets may not be fully recoverable. Our review ofgoodwill is done annually in accordance with SFAS 142 as of December 31utilizing a discounted cash flow analysis. If such analysis indicates that apossible impairment may exist, as described in Note 3 to the accompanyingfinancial statements, we are required to then estimate the fair value of theasset, determined by third party and internal appraisals and valuations, asdeemed appropriate, or estimated discounted future cash flows, which includesmaking estimates of the timing of the future cash flows, discount rates andreflecting varying degrees of perceived risk. The determination of fair valueincludes numerous uncertainties, such as the impact of competition on futuresales and margin, operating, selling and administrative costs, interest anddiscount rates, technological changes, consumer demand and governmentalregulations. We believe that we have made reasonable estimates and judgments indetermining whether our long-lived assets and goodwill have been impaired,however, if there is a material change in the assumptions used in ourdetermination of fair values or if there is a material change in economicconditions or circumstances influencing fair value, we could be required torecognize certain impairment charges in the future. Environmental and Litigation Contingencies We periodically assess the potential liabilities related to any lawsuits orclaims brought against us. See Note 24 in the accompanying financial statementsfor a discussion of our current environmental and litigation matters, reservesrecorded and our position with respect to any related uncertainties. While it istypically very difficult to determine the timing and ultimate outcome of theseactions, we use our best judgment to determine if it is probable that we willincur an expense related to a settlement for such matters and whether areasonable estimation of such probable loss, if any, can be made. Given theinherent uncertainty related to the eventual outcome of litigation andenvironmental matters, it is possible that all or some of these matters may beresolved for amounts materially different from any provisions that we may havemade with respect to their resolution. ---------------(dollars in thousands, except share data) 16 Allowance For Doubtful Accounts and Inventory Obsolescence Reserves The Company maintains allowances for doubtful accounts for estimated lossesresulting from the inability of its customers to make required payments. If thefinancial condition of customers were to deteriorate, this may result in animpairment of their ability to make payments to the Company, and additionalallowances may be required. The Company establishes reserves for its inventories to recognize estimatedobsolescence and unusable items on a continual basis. Market conditionssurrounding products are also considered periodically to determine if there areany net realizable valuation matters which would require a write down of anyrelated inventories. If market or technological conditions change, it may resultin additional inventory reserves and write downs deemed necessary by management. Income Taxes The Company applies an asset and liability approach to accounting forincome taxes. Deferred tax assets and liabilities are recognized for theexpected future tax consequences of temporary differences between the financialstatement and tax bases of assets and liabilities using enacted tax rates ineffect for the year in which the differences are expected to reverse. Therecoverability of deferred tax assets is dependent upon the Company's assessmentthat it is more likely than not that sufficient future taxable income will begenerated in the relevant tax jurisdiction to utilize the deferred tax asset. Inthe event the Company determines that future taxable income will not besufficient to utilize the deferred tax asset, a valuation allowance is recorded.The Company's valuation allowances primarily relate to net operating losscarryforwards in certain state and foreign jurisdictions with little or nohistory of generating taxable income. Research and Development ("R&D"), Including In-Process R&D ("IPR&D") Many of the Company's products are subject to regulation by governmentalauthorities, principally the Food and Drug Administration ("FDA") in the UnitedStates and equivalent authorities in international markets. Research anddevelopment expenses are charged to the consolidated statement of operationswhen incurred, as the Company considers that regulatory and other uncertaintiesinherent in the development of new products preclude it from capitalizingdevelopment costs. With respect to completed acquisitions, acquired products or projects whichhave achieved technical feasibility, signified by FDA or comparable regulatorybody approval, are capitalized as intangible assets because it is probable thatthe costs will give rise to future economic benefits. Estimates of the values ofthese intangible assets are subject to the estimation process described in"Goodwill and Intangible Assets" above. Acquired products or projects which have not achieved technicalfeasibility, (i.e., regulatory approval) are charged to the statement ofoperations on the date of acquisition. In connection with its acquisitions, theCompany generally utilizes independent appraisers in the determination of IPR&Dcharges. The amount of this charge is determined based on a variety of factorsincluding the estimated future cash flows of the product or project, thelikelihood of future benefit from the product or project, and the level of riskassociated with future research and development activities related to theproduct or project. Employee Benefit Plans The Company provides a range of benefits to employees and retiredemployees, including pensions, post-retirement, post employment and health carebenefits. The Company records annual amounts relating to these plans based onthe calculations, which include various actuarial assumptions, includingdiscount rates, assumed rates of return, compensation increases, turnover rates,and health care cost trend rates. The Company reviews its actuarial assumptionson an annual basis and makes modifications to the assumptions based on currentrates and trends when it is deemed appropriate to do so. The effect of themodifications is ---------------(dollars in thousands, except share data) 17 generally recorded and amortized over future periods. The Company believes thatthe assumptions utilized for recording obligations under its plans arereasonably based on input from actuaries. RESTATEMENT OF RESULTS Cambrex Corporation restated its results for the five year period from1997-2001. This restatement resulted from a fourth quarter 2002 managementreview of the inter-company processes and controls which identified certaindiscrepancies in the inter-company accounts. Based upon this review, the Companyhas determined that certain administrative and other charges were not properlyexpensed in these prior periods. The cumulative overstatement of earnings wasapproximately $6.1 million before taxes or $5.1 million, after taxes. Selling,general and administrative expenses were increased in 2001, 2000, 1999 and 1998by $1.7 million, $3.5 million, $0.2 million and $0.8 million, respectively, anddecreased in 1997 by $0.1 million. Net income was overstated by $1.3 million,$2.9 million, $0.2 million and $0.8 million in 2001, 2000, 1999 and 1998,respectively and understated by $0.1 million in 1997. This restatement did nothave any impact on the Company's cash flows nor on 2002 reported results fromoperations. 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, --------------------------------- 2002 2001 2000 ----- ---------- ---------- (RESTATED) (RESTATED) Gross sales.................................... 100.0% 100.0% 100.0%Net revenues................................... 100.9 99.9 99.9Gross profit................................... 38.3 35.9 36.0Selling, general and administrative expenses... 18.9 18.4 17.4Restructuring and special charges.............. 2.8 3.7 --Research and development expenses.............. 3.4 3.9 2.9Vitamin B-3 provision.......................... 1.9 0.9 --Operating profit............................... 11.4 9.0 15.7Interest expense, net.......................... 2.2 2.1 2.3Net income..................................... 6.9 5.1 9.5 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, 2002, 2001 and 2000, as well as the gross profit by productsegment for 2002 and 2001. YEARS ENDED DECEMBER 31, -------------------------------- 2002 2001 2000 -------- -------- -------- GROSS SALES Human Health............................................. $209,074 $199,858 $187,420 Biosciences.............................................. 163,302 124,973 96,232 Rutherford Chemicals..................................... 129,318 143,903 169,920 All Other................................................ 20,482 30,460 38,972 -------- -------- --------Total Gross Sales.......................................... $522,176 $499,194 $492,544 ======== ======== ========Total Net Revenues......................................... $526,943 $498,855 $492,095 ======== ======== ========Total Gross Profit......................................... $200,176 $179,335 $177,495 ======== ======== ======== ---------------(dollars in thousands, except share data) 18 YEARS ENDED DECEMBER 31, -------------------------- 2002 2001 2000 ------ ------ ------ GROSS SALES DISTRIBUTION Human Health.............................................. 40.0% 40.0% 38.1% Biosciences............................................... 31.3 25.0 19.5 Rutherford Chemicals...................................... 24.8 28.9 34.5 All Other................................................. 3.9 6.1 7.9 ----- ----- -----Total Gross Sales Distribution.............................. 100.0% 100.0% 100.0% ===== ===== ===== 2002-2001 GROSS SALES & GROSS PROFIT BY PRODUCT SEGMENT 2002 2001 -------------------------------- -------------------------------- GROSS GROSS GROSS GROSS GROSS GROSS SALES PROFIT PROFIT % SALES PROFIT PROFIT % -------- -------- -------- -------- -------- -------- Human Health................ $209,074 $ 92,671 44.3% $199,858 $ 87,864 44.0%Biosciences................. 163,302 85,346 52.3 124,973 63,193 50.6Rutherford Chemicals........ 129,318 19,434 15.0 143,903 20,852 14.5All Other................... 20,482 2,725 13.3 30,460 7,426 24.4 -------- -------- -------- --------Total....................... $522,176 $200,176 38.3% $499,194 $179,335 35.9% ======== ======== ======== ======== 2002 COMPARED TO 2001 Effective January 1, 2002, the Company adopted Statement of FinancialAccounting Standards No. 142, Goodwill and Other Intangible Assets. The effectof this adoption was to cease amortization of goodwill and certainindefinite-lived intangible assets. On a pro-forma basis to reflect FASB No.142, 2001 net income would have been $34,126 versus the $25,312 reported lastyear. The net income for 2002 was $36,233 versus $25,312 in the same period ayear ago. The 2002 results include special charges, before taxes, of $28,176($19,738 after taxes) consisting of $9,489 for impaired assets and facilityclosure costs in the Rutherford Chemicals business, $3,962 for Rutherfordgoodwill impairment, $10,000 for an accrual for vitamin B-3 settlement andlitigation costs, $3,089 for an investment impairment, $586 for a Rutherfordinventory write off and $1,050 for severance costs. The inventory write off isrecorded in Cost of goods sold, the investment impairment is recorded in Otherexpenses and all other items above have been charged to operating expenses. Inaddition, the 2002 results also include special benefit items, before taxes of$6,380 ($3,980 after taxes) comprised of a $2,620 benefit from the finalinsurance claim settlement related to the previously disclosed reactor outage ata Rutherford Chemicals site, which is recorded against Cost of goods sold and a$3,760 favorable arbitration award within Rutherford Chemicals related to adisputed product line agreement which is recorded in Other income. The awardreimbursed the Company for lost profits for the years 2001 through 2005. Allitems have been charged to operating expenses with the exception of theinventory write off and insurance benefit which are reflected in Cost of goodssold, the investment impairment and favorable arbitration award which arereflected in Other expenses. The net special items above reduced income beforetaxes in 2002 by $21,796 and net income by $15,758. In 2001, the Companyrecorded special charges of $27,475 before taxes ($20,057 after taxes) comprisedof $18,649 for restructuring charges and asset write downs related to theRutherford Chemicals business charged to operating expenses, $4,426 of inventorywrite downs charged to cost of sales, and $4,400 for a Vitamin B-3 litigationprovision. (See Notes 17, 18, 19 and 24 for further discussion of these specialitems). The reported results reflect higher sales in the Human Health andBiosciences Segments, higher margins in the Biosciences segment, the favorablespecial items noted above, and the reduced amortization expense as a result ofthe adoption of FASB No. 142. These items are partly offset by lower sales inRutherford ---------------(dollars in thousands, except share data) 19 Chemicals and All Other segments, higher administrative expenses and higherinterest costs due to funding the 2001 acquisitions. Gross sales for 2002 increased 4.6% to $522,176 from $499,194 in 2001.Sales in the Biosciences and Human Health segments increased compared to 2001more than offsetting the decrease in the Rutherford Chemicals and All Othersegments. The effect of foreign currency exchange rates on gross sales for the yearresulted in an increase in sales of $8,975 or 1.7% compared to 2001. Gross saleswould have been $513,201 using 2001 exchange rates compared to 2001 sales of$499,194. The favorable effects of foreign currencies are attributable primarilyto significant exchange rate fluctuations in the Euro, Swedish Krona and PoundsSterling against the U.S. dollar in 2002. The Human Health Segment gross sales of $209,074 were $9,216 or 4.6% above2001. Gross sales were above the prior year primarily due to sales of a newamphetamine product used to treat attention deficit disorder, higher sales ofgastrointestinal API's to meet increased demand, continued growth of apharmaceutical intermediate used in therapeutic treatment of end-state kidneydisease, higher market share in imaging products worldwide, and higher sales ofcentral nervous system API's due to increased worldwide demand. Partlyoffsetting these increases was lower sales of cardiovascular actives due tocustomer inventory reductions and competitive pressures, lower sales of anantihistamine product due to fall off in customer demand and the effect of asmaller shipment made in 2002 vs. 2001 of an anti-infective product for use inclinical trials. Human Health segment sales growth would have been 1.8% withoutthe currency impact of the weaker U.S. dollar. The Biosciences Segment gross sales of $163,302 increased 30.7% in 2002compared to the prior year period primarily due to the impact of thebiopharmaceutical manufacturing acquisitions completed during the second half of2001 (sales growth of 9.1% excluding the effect of the acquisitions), andincreased sales of endotoxin protection products reflecting the impact of a morefocused sales force and introduction of FDA compliant software in mid 2002,higher Media and Serum sales (primarily liquid form) due to market share gainsin Europe and strong shipments of Normal Human Cells reflecting improved productsupply and quality. These increases were partly offset by the impact of the saleof the IVD cell business during the first quarter of 2002. Bioscience segmentsales growth would have been 29.0% without the currency impact of the weakerU.S. dollar. The Rutherford Chemicals Segment gross sales of $129,318 in 2002 declined$14,585 or 10.1% versus 2001, reflecting lower demand and timing of productioncampaigns for crop protection products, lower demand for certain performanceenhancing chemicals, and continued weakness in the telecommunications andindustrial coatings industries. These decreases were partly offset by increasedsales of feed additive and a polymer product produced overseas due to successfulprice negotiations with customer. The All Other Segment gross sales of $20,482 in 2002 were $9,978 or 32.8%below the prior year period of $30,460, reflecting lower feed additive sales dueto customer inventory management, and the impact of a customer bringing in-housethe manufacture of a performance enhancing polymer product, as well as customerinventory build-ups on another performance enhancing polymer product. Export sales from U.S. businesses of $50,930 in 2002 compared to $45,041 in2001. International sales from European operations totaled $241,113 in 2002compared to $232,921 in 2001. The $522,176 of sales in 2002 consisted of$292,743, $190,620, $27,544 and $11,269 to North America, Europe, Asia and restof world, respectively. Gross profit in 2002 was $200,176 compared to $179,335 in 2001. Grossmargin in 2002 increased to 38.3% from 35.9% in 2001. Included in the 2002 grossmargins is a $2,620 benefit from an insurance settlement recorded against Costof goods sold. This item concerns a Rutherford Chemicals business. Margins alsoinclude a special charge of $586 in the third quarter 2002 for a RutherfordChemicals inventory write-down related to the Rutherford Chemicals assetimpairments. These items increased the overall 2002 gross margin by 0.4%. TheHuman Health gross margins were up slightly compared to the prior year due to a---------------(dollars in thousands, except share data) 20 favorable product mix, which was aided by the Company's hedging strategy andoverall higher production in most European plants. The Bioscience segmentmargins increased slightly due to favorable product mix and higher volumes inthe base business partly offset by under absorption of fixed costs at thebiopharmaceutical contract manufacturing sites. Excluding the favorable itemsdiscussed above, lower Rutherford Chemicals and All Other segment marginsprimarily reflect lower volumes. Selling, general and administrative expenses as a percentage of gross saleswere 18.9% in 2002, compared to 18.4% (15.8% on a pro-forma basis consideringadoption of SFAS No. 142) for the same period in 2001. Higher administrativecosts, excluding the impact of SFAS 142, were due primarily to the impact of thesecond half 2001 biopharmaceutical manufacturing acquisitions, a reduction ofenvironmental accruals in the second quarter 2001, and higher insurance premiumsand employee benefit expenses in 2002. Research and development expenses of $17,629 were 3.4% of gross sales in2002, compared to $19,619 or 3.9% of gross sales in 2001, reflecting staffreductions mainly in Rutherford Chemicals locations. The operating profit in 2002 was $59,483 compared to $45,016 in 2001($57,750 on a pro-forma basis considering adoption of SFAS No. 142). The resultsreflect higher sales in the Human Health and Biosciences segments, highermargins in the Bioscience segment, the favorable insurance settlement notedabove and the reduced amortization expense as a result of the adoption of FASBNo. 142, offset by lower sales in Rutherford Chemicals and All Other segments,and higher administrative expenses. Net interest expense of $11,237 in 2002 increased $670 from 2001 reflectingthe higher average debt balance due to financing of the 2001 acquisitions,partly offset by lower average interest rates. The average interest rate was4.3% for the year 2002 versus 5.2% in 2001. The provision for income taxes in 2002 resulted in an effective rate of24.8% as compared with 27.1% in the same period of 2001. The decrease reflectsthe tax effect of the restructuring and special charges, a change in thegeographic mix of income and the impact of the continuing R&D tax creditprograms. 2001 COMPARED TO 2000 Gross sales in 2001 increased 1.4% to $499,194 from $492,544 in 2000. Salesin Human Health and Biosciences increased 6.6% and 29.9%, respectively comparedto 2000 and more than offset the decreases in Rutherford Chemicals which weredown 15.3% and All Other segments which were down 21.8%. The effect of foreign currency exchange rates on gross sales for the yearhad a negative impact on sales of 1.4% or $7,107 compared to 2000. Gross saleswould have been $506,301 in 2001, using 2000 exchange rates compared to 2000sales of $492,544. The unfavorable effects of foreign currencies areattributable primarily to exchange rate fluctuations in the Italian Lira,Swedish Krona, Pounds Sterling and Irish Punt against the U.S. dollar in 2001. The Human Health Segment gross sales of $199,858 were $12,438 or 6.6% above2000 due primarily to higher sales of generics used in cardiovascular, centralnervous systems and gastrointestinal preparations and new product introductions,including an intermediate used in a product to treat end-stage kidney diseaseand actives used in insomnia and prostate cancer treatment products. Theseincreases were partly offset by the unfavorable impact of foreign currencieswhich reduced sales by 2.5% or $5.0 million, and lower sales of a cardiovascularsupplement, due to a price decrease. This price decrease was offset by lowermanufacturing cost reflecting a change in chemical processing. In addition,lower sales were experienced in a generic used in the treatment of ulcerativecolitis due to competitive pricing pressure and in a gastrointestinal active dueto a customer decision to bring manufacturing in-house. The BioSciences Segment gross sales of $124,973 were $28,741 or 29.9% above2000 primarily due to the acquisition of Cambrex Bio Science Baltimore, Inc. inJune 2001, and Cambrex Bio Science Hopkinton, Inc. in October 2001, as well asincreased shipments of cell culture, including liquid media, flex pack andpowder ---------------(dollars in thousands, except share data) 21 formulations. In addition, endotoxin detection sales increased due to morefocused marketing and production efforts. The Rutherford Chemicals Segment gross sales of $143,903 were $26,017 or15.3% below 2000 due to lower sales in telecommunications, coatings, andperformance enhancing products and weak photographic demand. Reduced sales intelecommunications and coating products have been influenced by a generaleconomic slowdown in those industries. The All Other Segment gross sales of $30,460 were $8,512 or 21.8% below2000 due to lower sales of a polycarbonate additive which a customer decided tomove in-house. Export sales from U.S. businesses of $45,041 in 2001 compared to $50,910 in2000. International sales from European operations totaled $232,921 in 2001compared to $230,476 in 2000. The $499,194 of sales in 2001 consisted of$281,477, $182,541, $23,393 and $11,783 to North America, Europe, Asia and restof world, respectively. Total gross profit of $179,335 was $1,840 above 2000 due to increased grossprofit in the Biosciences segment, due to higher volume in the base businesses,and the impact of two contract biopharmaceutical manufacturing acquisitionscompleted during the year. The Human Health segment also benefited fromincreased volume, as well as favorable product mix. These increases resulteddespite special charges for inventory write-offs recorded in the fourth quarter2001 of $2,000 in the Biosciences segment and $2,426 in the Rutherford Chemicalssegment for discontinued products (See Note 17 for further discussion of thesecharges). The Biosciences segment inventory write-off was related to excess andobsolete inventories. The higher gross profits in the Human Health andBiosciences segments were partly offset by lower gross profits and margins inthe Rutherford Chemicals and All Other segments, both of which were primarilyimpacted by lower volumes. In addition, the Rutherford Chemicals segment wasimpacted by increased raw material and energy costs during the year. The overallgross margin of 35.9%, including the fourth quarter inventory write downs of$4,426, was approximately flat compared to the prior year. Selling, general and administrative expenses as a percentage of gross saleswere 18.4% in 2001 versus 17.4% for 2000. Administration costs increased due tothe added costs and higher amortization expense associated with the June 2001Cambrex Bio Science Baltimore, Inc. acquisition, the full year impact of theAugust 2000 Arizona product line license and October 2001 Cambrex Bio ScienceHopkinton, Inc. acquisition, as well as additional sales and marketing costs inthe Biosciences segment. In addition, the Company experienced higher insurancepremiums during 2001 compared to 2000. In the fourth quarter, as a result of the Company's previously announcedbusiness restructuring which created Rutherford Chemicals, Inc., together withan impairment charge within those businesses, the Company incurred Restructuringand other charges of $18,649, comprised of asset write-downs of $17,243 andseverance costs of $1,406 (See Note 17 for further discussion of these charges). In 2001, the Company increased its provision for potential settlements andlegal costs related to Vitamin B-3 litigation by $4,400. (See Note 24 forfurther discussion of this charge). Research and development expenses of $19,619 were 3.9% of gross sales in2001, and were above 2000 levels by $5,352 or 1.1% of gross sales. This increasewas associated with the strengthening of the R&D group in the Biosciencessegment and costs associated with the expansion of the Cambrex Center ofTechnical Excellence. The operating profit in 2001 was $45,016, compared to $77,514 in 2000. Thisdecrease reflects the special charges discussed above, weakness in the grossmargin and profit in the non-life science businesses, higher Research andDevelopment spending and amortization costs associated with acquisitions. Thisdecrease is partly offset by the higher gross profit in the Human Health andBiosciences businesses. Net interest expense of $10,567 in 2001 reflected a decrease of $920 from2000 reflecting lower average interest rates, partly offset by a higher averagedebt balance due to financing of acquisitions and lower interest---------------(dollars in thousands, except share data) 22 income in 2001 due to a temporary cash buildup in 2000. The average interestrate was 5.2% in 2001 versus 6.7% in 2000. The provision for income taxes in 2001 resulted in an effective rate of27.1% versus 29.6% in 2000. The decrease in the tax rate was due to thefavorable outcome of tax audits and R&D tax credit programs. In addition, theCompany continues to benefit from international tax treaties and foreign incometaxed at a lower overall effective tax rate as compared to the U.S. statutoryrate. The Company's net income in 2001 decreased to $25,312 (which includes$20,057 after-tax impact of restructuring, Vitamin B-3 provision and othercharges) compared with net income of $46,707 in 2000. LIQUIDITY AND CAPITAL RESOURCES Net cash flow from operations was $104,340 for the year ended December 31,2002, up from $55,186 in 2001. The increase in cash flow is due primarily to aninsurance recovery during the year, increases in current and long-termliabilities and lower inventory purchases versus the prior year. In 2002, theCompany received approximately $7,400 in an insurance settlement related tomechanical problems with a reactor at one of its chemicals facilities. Currentliabilities were higher due to an increase in the estimated Vitamin B-3litigation settlement and legal costs, higher current pension liabilities, andthe timing of various payments. Long-term liabilities increased over prior yeardue to higher pension and other post-retirement benefit liabilities. Cash flowsused in investing activities included capital expenditures of $50,303. Cashflows used in financing activities of $49,236 included net repayments of debt of$45,901, payment of dividends of $3,117 and the purchase of treasury stock of$5,549, partially offset by $5,049 in proceeds from the exercise of stockoptions. Capital expenditures were $50,303, $42,948 and $39,456 in 2002, 2001 and2000, respectively, In 2002, part of the funds were used for new productionfacilities at Charles City, Iowa, LAL and Cell Therapy expansions atWalkersville, Maryland, and a Lab upgrade at Karlskoga, Sweden. In November 2001, the Company entered into a $430,000 Revolving CreditAgreement with a group of banks led by JPMorganChase as the lead agency bank.The agreement consisted of a 364-day renewable senior revolving credit facilityfor $161,000, and a 5-year senior revolving credit facility for $269,000. In November 2002, the 364-day senior revolving credit facility matured andwas successfully renewed. The current capacity for the senior revolving creditfacility is $157,500 under the 364-day facility and $268,750 under the five-yearfacility, for a total of $426,250. The five-year agreement expires in November2006. The Revolving Credit Agreement allows the Company to choose among variousinterest rate options and to specify the portion of the borrowing to be coveredby specific interest rates. Under the Revolving Credit Agreement the interestrate options available to the Company are the following: 1) U.S. Prime Rate, 2) LIBOR plus an applicable margin that ranges from .575% to 1.25%, or 3) Money Market rate plus an applicable margin that ranges from .575% to1.25%. The Applicable Rate (margin or credit spread) on outstanding debt is basedupon the ratio of consolidated funded indebtedness to consolidated modifiedEBITDA. The Company also pays a facility fee between .15% to .30% on the entirerevolving credit facility. The 2002 and 2001 average interest rates were 4.31%and 5.23%, respectively. The undrawn borrowing under the Agreement as of December 31, 2002 was$168,900. Of this amount, $152,143 is available to be borrowed due to limitsestablished in the Revolving Credit Agreement. There was $257,350 outstanding asof December 31, 2002. ---------------(dollars in thousands, except share data) 23 At December 31, 2002 our contractual obligations with initial or remainingterms in excess of one year were as follows: TOTAL 2003 2004 2005 2006 2007+ -------- ------ ------ ------ -------- ------- Long Term Debt.......... $269,798 $2,364 $2,387 $1,920 $258,778 $ 4,349Operating Leases........ 26,669 4,561 4,268 3,672 3,494 10,674 -------- ------ ------ ------ -------- -------Contractual Cash Obligations........... $296,467 $6,925 $6,655 $5,592 $262,272 $15,023 ======== ====== ====== ====== ======== ======= See Notes 11 and 23 in the accompanying financial statements for additionalinformation regarding our debt and other commitments. Management believes that existing sources of capital, together with cashflows from operations, will be sufficient to meet foreseeable cash flowrequirements. A key to our access to liquidity is the maintenance of our stronglong-term credit ratings and ability to meet debt covenants to maintain certainlevels of net worth, an interest coverage ratio and leverage ratios. The companymet all bank covenants during 2002 and does not anticipate any covenantcompliance issues in the coming year. Management also believes that the companywill maintain its strong long-term credit ratings. Any events which change thestatus of our ability to meet debt covenants or maintain our credit ratingscould adversely impact our ability to fund operations. Our forecasted cash flow from future operations may be adversely affectedby various factors including, but not limited to, declines in customer demand,increased competition, the deterioration in general economic and businessconditions, as well as other factors. Any change in the current status of thesefactors could adversely impact the Company's ability to fund operating cash flowrequirements. Effective January 1, 2002, the operating units that primarily producespecialty and fine chemicals and animal health and agriculture products werecombined under a new business unit, Rutherford Chemicals, Inc. RutherfordChemicals, Inc. includes CasChem, Inc., Bayonne, New Jersey; Cosan ChemicalCorporation, Carlstadt, New Jersey; Heico Chemicals, Inc., Delaware Water Gap,Pennsylvania; Nepera, Inc., Harriman, New York; Zeeland Chemicals, Inc.,Zeeland, Michigan; and Seal Sands Chemicals, Limited, Middlesbrough, UnitedKingdom. In the fourth quarter 2002, the Company announced that it had engaged afinancial advisor to assist the Company in investigating strategic alternativesfor the Rutherford Chemicals segment. 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 internationaloperations which are primarily denominated in the U.S. Dollar, Euro currency,Swedish Krona and British Pound Sterling. The Company currently uses foreigncurrency exchange forward contracts to mitigate the effect of short-term foreignexchange rate movements on the Company's operating results. The notional amountof these contracts at December 31, 2002 was $29,564 which includes inter-companycontracts of $9,594. The Company estimates the forward contracts to beapproximately 48% of the non-local currency exposure during the period.Unrealized foreign exchange contract losses do not subject the Company's actualresults to risk as gains or losses on these contracts generally offset gains orlosses on the transactions that are hedged. Given a scenario that the operating companies' non-local currencycollections match their forecasts, and all exchange rates move 10% against theirlocal currencies, no more than $3,157 of pre-tax profits for a twelve-monthperiod would be at risk. This is based on unhedged risk of $31,574. Thisresidual risk allows for an over- ---------------(dollars in thousands, except share data) 24 forecasting margin of error and prevents over hedging of actual operating risk.As of December 31, 2002, the non-local forecasted currency exposures were$84,859. Offsetting this exposure are expected $23,720 U.S. Dollar inter-companypayments from the combined European sites. The remaining $61,138 forecastedexposure was partially hedged ($29,564) with major banks and through offsettinginter-company hedge contracts to reduce the non-hedged risk to $31,574. Interest Rate Management Each of the interest rate options in the Revolving Credit Agreementincludes floating rates. This arrangement has the advantage of making lowerinterest rates available in a declining rate market. However, it also exposesthe company to any upward swings in interest rates. For example, based on thecompany's current net debt outstanding, an unexpected annual interest rateincrease of 100 basis points (1%) could increase interest expense and thusdecrease the Company's after-tax profitability by approximately $1,500. To limit the risk of interest rates rising above a tolerable level, theCompany would pay a premium now in order to obtain a fixed interest rate at apredetermined cost in the future. That Swap stabilizes interest costs byconverting floating or variable rates to fixed rates through a contract with afinancial institution. The Company monitors the debt position and market trendsto protect it from any unforeseen shifts in interest rates. The Company has employed a plan to mitigate interest rate risk by enteringinto interest rate swap agreements to convert floating rates to fixed interestrates. As of December 31, 2002, the Company had seventeen interest rate Swaps inplace with an aggregate notional value of $135,000, at an average fixed rate of4.34%, and with varying maturity dates through the year 2006. The Company'sstrategy has been to cover a portion of outstanding bank debt with interest rateprotection. At December 31, 2002, the coverage was approximately 52%. 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 other non-current liabilities, of$1,550 and $1,400 at December 31, 2002 and 2001, respectively, for costsassociated with the study and remediation of Superfund sites and the Company'scurrent and former operating sites for matters that are probable and reasonablyestimable. Based on currently available information and analysis, the Company'saccrual represents management's best estimate of what it believes are thereasonably possible and estimated environmental cleanup related costs of anon-capital nature. During the past three-year period, there were no cashpayments for environmental cleanup related matters. In 2002, a provision of $150was recorded for a chemical site as a result of the development of an initialremediation estimate based on the current conclusions of the ongoinginvestigation of the site. There were no provisions recorded for environmentalcontingencies in 2001. The Company reduced reserves by approximately $900 and$1,100 during 2001 and 2000, respectively, as a result of revised estimatesbased on information obtained from continued investigation and remedial plandevelopment and resolution of proceedings related to Superfund site owners andinsurers. In addition, the Company settled certain environmental claimsinvolving the Cosan Chemical Corporation (a subsidiary) with insurance companiesfor $1,812 in 2000 and $1,150 in 1999. After reviewing information currentlyavailable, management believes any amounts paid in excess of the accruedliabilities will not have a material effect on its financial position or resultsof operations. However, these matters, if resolved in a manner different fromthose assumed in the current estimates, could have a material adverse effect onfinancial condition, operating results and cash flows when resolved in a futurereporting period. ---------------(dollars in thousands, except share data) 25 LITIGATION The Company and its subsidiary Profarmaco S.r.l. (currently known asCambrex Profarmaco Milano S.r.l.) were named as defendants in a proceedinginstituted by the Federal Trade Commission ("FTC") on December 21, 1998, in theUnited States District Court for the District of Columbia. The complaint allegedthat exclusive license agreements which Cambrex Profarmaco Milano S.r.l. enteredinto with Mylan Laboratories, Inc. ("Mylan") covering the drug master files for(and therefore the right to buy and use) two active pharmaceutical ingredients("APIs"), lorazepam and clorazepate, were part of an effort on Mylan's part torestrict competition in the supply of lorazepam and clorazepate and to increasethe price charged for these products when Mylan sold them as genericpharmaceuticals. The complaint further alleged that these agreements violatedthe Federal Trade Commission Act, and that Mylan, Cambrex, Cambrex ProfarmacoMilano S.r.l., and Gyma Laboratories of America, Inc., Cambrex Profarmaco MilanoS.r.l.'s distributor in the United States, engaged in an unlawful restraint oftrade and conspired to monopolize and attempted to monopolize the markets forthe generic pharmaceuticals incorporating the API's. A lawsuit making similarallegations against the Company and Cambrex Profarmaco Milano S.r.l., andseeking injunctive relief and treble damages, was filed by the Attorneys Generalof 31 states in the United States District Court for the District of Columbia onbehalf of those states and persons in those states who were purchasers of thegeneric pharmaceuticals. The Company and Cambrex Profarmaco Milano S.r.l. have also been named inpurported class action complaints brought by private plaintiffs in various statecourts on behalf of purchasers of lorazepam and clorazepate in generic form,making allegations essentially similar to those raised in the FTC's complaintand seeking various forms of relief including treble damages. On February 9, 2001, a federal court in Washington, DC entered an Order andStipulated Permanent Injunction as part of a settlement of the FTC and AttorneysGeneral's suits. Under these settlement documents Mylan agreed to pay over$140,000 on its own behalf and on behalf of most of the other defendantcompanies including Cambrex and Cambrex Profarmaco Milano S.r.l. In the Orderand Injunction, the settling defendants also agreed to monitor certain futureconduct. The private litigation continues. The Company strongly believes that its licensing arrangements with Mylanwere made in accordance with regulatory requirements. However, the Company andMylan terminated the exclusive license to the drug master files 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 its final generic product. Mylan had been fully covering the costs for thedefense and indemnity of Cambrex and Cambrex Profarmaco Milano S.r.l. undercertain obligations set forth in the license agreements. Cambrex agreed to coverseparate legal defense costs incurred for Cambrex and Cambrex Profarmaco MilanoS.r.l. on a going forward basis beginning August 1, 2000. The Company recentlyentered into discussions with Mylan regarding the final resolution of alloutstanding claims. The outcome of these discussions is not currentlydeterminable. 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 anti-trust investigation intovarious business practices in the vitamin industry generally. In the fourthquarter of 1999, the Company reached a settlement with the Government concerningNepera's alleged role in Vitamin B-3 violations from 1992 to 1995. On October13, 2000, the Government settlement was finalized with Nepera entering into avoluntary plea agreement with the Department of Justice. Under this agreement,Nepera entered a plea of guilty to one count of price fixing and marketallocation of Vitamin B-3 from 1992 to 1995 in violation of section one of theSherman Act and has agreed to pay a fine of approximately $4,000. Under the pleaagreement, Nepera was on probation for a one-year period which has ended. Thefine was paid in February 2001. Nepera has been named as a defendant, along withseveral other companies, in a number of private civil actions brought on behalfof alleged purchasers of Vitamin B-3. ---------------(dollars in thousands, except share data) 26 An accrual of $6,000 was recorded in the fourth quarter 1999 to cover theanticipated government settlements, related litigation, and legal expenses.Based on discussions with various plaintiffs counsel, as well as then currentestimates of expenditures for legal fees, an additional accrual of $4,400 wasestablished in the fourth quarter of 2001. The Company believed that the currentreserves would be sufficient to cover resolution of the remaining relatedlitigation matters. However, during 2002, based on ongoing negotiations andother information developed during the year, the Company determined that theremaining litigation matters would be more costly than previously anticipated.Therefore, during the third and fourth quarters of 2002, the Company increasedreserves by $6,000 and $4,000, respectfully. The balance of this accrual as ofDecember 31, 2002 was approximately $9,034. This accrual has been recorded inaccounts payable and accrued liabilities. While it is not possible to predict with certainty the outcome of the abovelitigation matters and various other lawsuits, it is the opinion of managementthat the ultimate resolution of these proceedings should not have a materialadverse effect on the Company's results of operations, cash flows and financialposition. These matters, if resolved in an unfavorable manner, could have amaterial effect on the operating results and cash flows when resolved in afuture reporting period. IMPACT OF RECENT ACCOUNTING PRONOUNCEMENTS In June 2001, the Financial Accounting Standards Board ("FASB") issuedStatement of Financial Accounting Standard No. 143, "Accounting for AssetRetirement Obligations" ("SFAS 143"). The standard requires that legalobligations associated with the retirement of tangible long-lived assets berecorded at fair value when incurred and was adopted by the Company on January1, 2003. Adoption of SFAS 143 did not have a material effect on the Company'sconsolidated financial position or results of operations. In August 2001, the FASB issued Statement of Financial Accounting StandardNo. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS144"). SFAS 144 primarily addresses the financial accounting and reporting forthe impairment or disposal of long-lived assets. SFAS 144 became effective onJanuary 1, 2002. For long-lived assets to be held and used, the new rulescontinue previous guidance to recognize impairment when the undiscounted cashflows will not recover its carrying amount. The impairment to be recognized willcontinue to be measured as the difference between the carrying amount and fairvalue of the asset. The computation of fair value now removes goodwill fromconsideration and incorporates a probability-weighted cash flow estimationapproach. The previous guidance provided in SFAS 121 is to be applied to assetsto be disposed of by sale. Long-lived assets to be disposed by other than salewill now recognize impairment at the date of disposal, but will be consideredassets to be held and used until that time. The Company adopted SFAS 144 as ofJanuary 1, 2002. In May 2002, the FASB issued Statement of Financial Accounting StandardsNo. 145, "Rescission of FAS No. 4, 44 and 64, Amendment of FAS 13, and TechnicalCorrections as of April 2002" ("SFAS 145"). The statement rescinds SFAS 4 (asamended by SFAS 64), which required extraordinary item treatment for gains andlosses on extinguishments of debt, and SFAS 44, which does not affect theCompany. Additionally, the statement amends certain provisions of SFAS 13 andother existing authoritative pronouncements to make various technicalcorrections, clarify meanings, or describe their applicability under changedconditions. The provisions of SFAS 145 related to extinguishments of debt areeffective for the Company beginning January 1, 2003, and all other provisionsare effective for transactions occurring or financial statements issued on orafter May 5, 2002. The Company has determined that the effects on its financialstatements resulting from adoption will not be material. In June 2002, the FASB issued Statement of Financial Accounting StandardNo. 146, "Accounting for Costs Associated with Exit or Disposal Activities"("SFAS 146"). This Statement addresses financial accounting and reporting forcosts associated with exit or disposal activities and nullifies Emerging IssuesTask Force (EITF) Issue No. 94-3, "Liability Recognition for Certain EmployeeTermination Benefits and Other Costs to Exit an Activity (including CertainCosts Incurred in a Restructuring)." This Statement eliminates ---------------(dollars in thousands, except share data) 27 the definition and requirements for recognition of exit costs in Issue 94-3, andrequires that a liability for a cost associated with an exit or disposalactivity be recognized when the liability is incurred. This Statement alsoestablishes that fair value is the objective for initial measurement of theliability. SFAS 146 is effective for exit or disposal activities that areinitiated after December 31, 2002, with early application encouraged. Anycharges associated with future restructuring programs will be recorded inaccordance with SFAS 146. This will spread the recognition of the restructuringexpenses over a number of accounting periods as compared to EITF 94-3. In December 2002, the FASB issued Statement of Financial AccountingStandard No. 148, "Accounting for Stock-Based Compensation -- Transition andDisclosure" ("SFAS 148"). This Statement provides alternative methods oftransition for a voluntary change to the fair value based method of accountingfor stock-based employees compensation from the intrinsic method. SFAS 148 alsoamends the disclosure provisions of SFAS 123 and APB Opinion No. 28, "InterimFinancial Reporting," to require disclosure in the summary of significantaccounting policies of the effects of an entity's accounting policy with respectto stock-based employee compensation on reported net income and earnings pershare in annual and interim financial statements. While the SFAS 148 does notamend SFAS 123 to require companies to account for employee stock options usingthe fair value method, the disclosure provisions of SFAS 148 are applicable toall companies with stock-based employee compensation, regardless of whether theyaccount for that compensation using the fair value method of SFAS 123 or theintrinsic value method of APB 25. SFAS 148's amendment of the transition andannual disclosure requirements of SFAS 123 are effective for fiscal years endingafter December 15, 2002. The Company has adopted the disclosures provision ofSFAS 148 as of December 31, 2002, and will continue to use the intrinsic valuemethod of APB 25. The Company is currently considering the alternatives providedwithin SFAS 148 for future periods. In November 2002, FASB Interpretation No. 45 ("FIN 45"), "Guarantor'sAccounting and Disclosure Requirements for Guarantees, Including IndirectGuarantees of Indebtedness of Others" was issued. FIN 45 elaborates on thedisclosures to be made by a guarantor in its interim and annual financialstatements about its obligations under certain guarantees that it has issued. Italso clarifies that a guarantor is required to recognize, at the inception of aguarantee, a liability for the fair value of the obligation undertaken inissuing the guarantee. The initial recognition and initial measurementprovisions of this Interpretation are applicable on a prospective basis toguarantees issued or modified after December 31, 2002. The required disclosuresare effective for financial statements of interim or annual periods ending afterDecember 15, 2002. The Company is assessing the potential impact on its resultsfrom operations from the adoption of FIN 45. In January 2003, FIN No. 46, "Consolidation of Variable Interest Entities"("FIN 46") was issued. The interpretation provides guidance on consolidatingvariable interest entities and applies immediately to variable interests createdafter January 31, 2003. The guidelines of the interpretation will becomeapplicable for the Company in its third quarter 2003 financial statements forvariable interest entities created before February 1, 2003. The interpretationrequires variable interest entities to be consolidated if the equity investmentat risk is not sufficient to permit an entity to finance its activities withoutsupport from other parties or the equity investors lack certain specifiedcharacteristics. The Company has reviewed FIN 46 to determine its impact, ifany, on future periods, and does not anticipate any material accounting ordisclosure requirement under the provisions of the interpretation. In January 2003, the Emerging Issues Task Force (EITF) released EITF 00-21:"Accounting for Revenue Arrangements with Multiple Deliverables." EITF 00-21clarifies the timing and recognition of revenue from certain transactions thatinclude the delivery and performance of multiple products or services. EITF00-21 is effective for revenue arrangements entered into during fiscal periodsbeginning after June 15, 2003. The Company is currently reviewing the impact ofthis EITF. ---------------(dollars in thousands, except share data) 28 FORWARD-LOOKING STATEMENTS This document may contain "forward-looking statements" for the purposes ofthe Securities and Exchange Commission's "safe harbor" provisions under thePrivate Securities Litigation Reform Act of 1995 and Rule 3B-6 under theExchange Act, without limitation, statements regarding expected performance,especially expectations with respect to sales, research and developmentexpenditures, earnings per share, capital expenditures, acquisitions,divestitures, collaborations, or other expansion opportunities. The forward-looking statements contained herein involve risks anduncertainties that may cause results to differ materially from the Company'sexpectations including but not limited to, global economic trends,pharmaceutical outsourcing trends, competitive pricing or product developments,government legislation and/or regulations (particularly environmental issues),technology, manufacturing and legal issues, unfavorable results from FDAinspections, delays in FDA approval of customers' new products, timing ofshipments, changes in foreign exchange rates, performance of minorityinvestments, uncollectable receivables, loss on disposition of assets,cancellation or delays in renewal of contracts, and lack of suitable rawmaterials or packing materials. 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........................... 30Consolidated Balance Sheets as of December 31, 2002 and 2001...................................................... 31Consolidated Income Statements for the Years Ended December 31, 2002, 2001 and 2000................................... 32Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 2002, 2001 and 2000.............. 33Consolidated Statements of Cash Flows for the Years Ended December 31, 2002, 2001 and 2000.......................... 34Notes to Consolidated Financial Statements.................. 35Consolidated Quarterly Financial Data (unaudited) for the Years Ended December 31, 2002 and 2001.................... 71 The consolidated financial statements and financial statement schedule arefiled pursuant to Item 15 of this report. ---------------(dollars in thousands, except share data) 29 REPORT OF INDEPENDENT ACCOUNTANTS To the Stockholders and Board of Directors of Cambrex Corporation: In our opinion, the accompanying consolidated financial statements listedin the index on page 29 of this Form 10-K present fairly in all materialrespects, the consolidated financial position of Cambrex Corporation andSubsidiaries (the "Company") as of December 31, 2002 and 2001 and theconsolidated results of their operations and their cash flows for each of thethree years in the period ended December 31, 2002, in conformity with accountingprinciples generally accepted in the United States of America. These financialstatements are the responsibility of the Company's management; ourresponsibility is to express an opinion on these financial statements based onour audits. We conducted our audits of these statements in accordance withauditing standards generally accepted in the United States of America whichrequire that we plan and perform the audit to obtain reasonable assurance aboutwhether the financial statements are free of material misstatement. An auditincludes examining, on a test basis, evidence supporting the amounts anddisclosures in the financial statements, assessing the accounting principlesused and significant estimates made by management, and evaluating the overallfinancial statement presentation. We believe that our audits provide areasonable basis for our opinion. As discussed in Note 5 to the consolidated financial statements, theCompany has adopted Statement of Financial Accounting Standards No. 142,"Goodwill and Other Intangible Assets," effective January 1, 2002. As discussed in Note 2, the 2001 and 2000 consolidated financial statementshave been restated. PRICEWATERHOUSECOOPERS LLP Florham Park, New JerseyFebruary 28, 2003 30 CAMBREX CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) DECEMBER 31, ---------------------- 2002 2001 -------- ---------- (RESTATED) ASSETSCurrent assets: Cash and cash equivalents................................. $ 33,296 $ 23,696 Trade receivables, less allowances of $2,258 and $1,270 at respective dates....................................... 79,571 73,789 Inventories, net.......................................... 109,832 107,746 Deferred tax assets....................................... 35,612 19,211 Prepaid expenses and other current assets................. 17,447 19,526 -------- -------- Total current assets.............................. 275,758 243,968Property, plant and equipment, net.......................... 310,501 287,605Goodwill.................................................... 214,354 219,822Other intangible assets, net................................ 53,398 49,189Other assets................................................ 13,517 17,791 -------- -------- Total assets...................................... $867,528 $818,375 ======== ========LIABILITIES AND STOCKHOLDERS' EQUITYCurrent liabilities: Accounts payable and accrued liabilities.................. $ 93,404 $ 81,325 Income taxes payable...................................... -- 852 Short-term debt and current portion of long-term debt..... 2,364 2,567 -------- --------Total current liabilities................................... 95,768 84,744Long-term debt.............................................. 267,434 312,524Deferred tax liabilities.................................... 52,630 48,279Other non-current liabilities............................... 39,014 27,730 -------- -------- Total liabilities................................. $454,846 $473,277Commitments and contingenciesStockholders' equity: Common Stock, $.10 par value; issued 28,323,059 and 28,007,825 shares at respective dates.................. $ 2,832 $ 2,823 Additional paid-in capital................................ 201,883 197,748 Retained earnings......................................... 265,774 232,658 Treasury stock, at cost; 2,487,247 and 2,234,421 shares at respective dates....................................... (19,841) (16,911) Accumulated other comprehensive loss...................... (37,966) (71,220) -------- -------- Total stockholders' equity........................ 412,682 345,098 -------- -------- Total liabilities and stockholders' equity........ $867,528 $818,375 ======== ======== See accompanying notes to consolidated financial statements. 31 CAMBREX CORPORATION AND SUBSIDIARIES CONSOLIDATED INCOME STATEMENTS (IN THOUSANDS, EXCEPT PER-SHARE DATA) YEARS ENDED DECEMBER 31, ------------------------------------ 2002 2001 2000 -------- ---------- ---------- (RESTATED) (RESTATED) Gross sales................................................ $522,176 $499,194 $492,544 Commissions and allowances............................... 5,392 4,259 4,976 -------- -------- --------Net sales.................................................. 516,784 494,935 487,568 Other revenues........................................... 10,159 3,920 4,527 -------- -------- --------Net revenues............................................... 526,943 498,855 492,095 Cost of goods sold....................................... 326,767 319,520 314,600 -------- -------- --------Gross profit............................................... 200,176 179,335 177,495 Selling, general and administrative expenses............. 98,563 91,651 85,714 Research and development expenses........................ 17,629 19,619 14,267 Restructuring and other charges.......................... 14,501 18,649 -- Vitamin B-3 provision.................................... 10,000 4,400 -- -------- -------- --------Operating profit........................................... 59,483 45,016 77,514Other (income) expenses Interest income.......................................... (946) (967) (2,217) Interest expense......................................... 12,183 11,534 13,704 Other -- net............................................. 64 (277) (329) -------- -------- --------Income before income taxes................................. 48,182 34,726 66,356Provision for income taxes................................. 11,949 9,414 19,649 -------- -------- --------Net income................................................. $ 36,233 $ 25,312 $ 46,707 ======== ======== ========Earnings per share of common stock and common stock equivalents: Basic.................................................... $ 1.40 $ 0.99 $ 1.87 Diluted.................................................. $ 1.37 $ 0.96 $ 1.79Weighted average shares outstanding: Basic.................................................... 25,954 25,648 25,015 Diluted.................................................. 26,520 26,495 26,157 See accompanying notes to consolidated financial statements. 32 CAMBREX CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) COMMON STOCK ACCUMULATED ---------------------- ADDITIONAL OTHER SHARES PAR VALUE PAID-IN RETAINED TREASURY COMPREHENSIVE COMPREHENSIVE ISSUED ($.10) CAPITAL EARNINGS STOCK INCOME/(LOSS) INCOME/(LOSS) ---------- --------- ---------- -------- -------- ------------- ------------- BALANCE AT DECEMBER 31, 1999, AS RESTATED............................. 26,719,924 $2,667 $166,288 $166,705 $(10,172) $(34,338) ---------- ------ -------- -------- -------- -------- Comprehensive income/(loss) Net Income......................... 46,707 $ 46,707 Other comprehensive income/loss Foreign currency translation adjustments.................... (16,846) Minimum pension liability adjustment, net of tax of $178........................... 301 -------- Other comprehensive income/(loss).................... (16,545) (16,545) -------- Comprehensive income/(loss).......... $ 30,162 ======== Cash dividends at $0.12 per share............................ (2,991) Exercise of stock options.......... 713,246 102 11,150 (2,838) Tax benefit of stock options exercised........................ 4,260 ---------- ------ -------- -------- -------- --------BALANCE AT DECEMBER 31, 2000, AS RESTATED............................. 27,433,170 $2,769 $181,698 $210,421 $(13,010) $(50,883) Comprehensive income/(loss) Net Income......................... 25,312 $ 25,312 Other comprehensive income/(loss) Foreign currency translation adjustments.................... (17,776) Unrealized losses on hedging Contracts, net of tax benefit of $697........................ (1,770) Minimum pension liability adjustment, net of tax benefit of $469........................ (791) -------- Other comprehensive income/(loss).................... (20,337) (20,337) -------- Comprehensive income................. $ 4,975 ======== Cash dividends at $0.12 per share............................ (3,075) Exercise of stock options.......... 574,655 54 11,016 (3,901) Tax benefit of stock options exercised........................ 5,034 ---------- ------ -------- -------- -------- --------BALANCE AT DECEMBER 31, 2001, AS RESTATED............................. 28,007,825 $2,823 $197,748 $232,658 $(16,911) $(71,220) Comprehensive income/(loss) Net Income......................... 36,233 36,233 Other comprehensive income/(loss) Foreign currency translation adjustments.................... 38,865 Unrealized losses on hedging Contracts, net of tax benefit of $928........................ (1,246) Minimum pension liability adjustment, net of tax benefit of $2,555...................... (4,365) -------- Other comprehensive income/(loss).................... 33,254 33,254 -------- Comprehensive income................. $ 69,487 ======== Cash dividends at $0.12 per share............................ (3,117) Purchase of treasury stock......... (5,549) Retirement of treasury stock....... (65,100) (7) (2,282) 2,289 Exercise of stock options.......... 341,200 16 5,033 Tax benefit of stock options exercised........................ 1,662 Other.............................. 39,134 (278) 330 ---------- ------ -------- -------- -------- --------BALANCE AT DECEMBER 31, 2002........... 28,323,059 $2,832 $201,883 $265,774 $(19,841) $(37,966) ========== ====== ======== ======== ======== ======== TOTAL STOCKHOLDERS' EQUITY ------------- BALANCE AT DECEMBER 31, 1999, AS RESTATED............................. $291,150 -------- Comprehensive income/(loss) Net Income......................... 46,707 Other comprehensive income/loss Foreign currency translation adjustments.................... Minimum pension liability adjustment, net of tax of $178........................... Other comprehensive income/(loss).................... (16,545) Comprehensive income/(loss).......... Cash dividends at $0.12 per share............................ (2,991) Exercise of stock options.......... 8,414 Tax benefit of stock options exercised........................ 4,260 --------BALANCE AT DECEMBER 31, 2000, AS RESTATED............................. $330,995 Comprehensive income/(loss) Net Income......................... 25,312 Other comprehensive income/(loss) Foreign currency translation adjustments.................... Unrealized losses on hedging Contracts, net of tax benefit of $697........................ Minimum pension liability adjustment, net of tax benefit of $469........................ Other comprehensive income/(loss).................... (20,337) Comprehensive income................. Cash dividends at $0.12 per share............................ (3,075) Exercise of stock options.......... 7,169 Tax benefit of stock options exercised........................ 5,034 --------BALANCE AT DECEMBER 31, 2001, AS RESTATED............................. $345,098 Comprehensive income/(loss) Net Income......................... 36,233 Other comprehensive income/(loss) Foreign currency translation adjustments.................... Unrealized losses on hedging Contracts, net of tax benefit of $928........................ Minimum pension liability adjustment, net of tax benefit of $2,555...................... Other comprehensive income/(loss).................... 33,254 Comprehensive income................. Cash dividends at $0.12 per share............................ (3,117) Purchase of treasury stock......... (5,549) Retirement of treasury stock....... -- Exercise of stock options.......... 5,049 Tax benefit of stock options exercised........................ 1,662 Other.............................. 52 --------BALANCE AT DECEMBER 31, 2002........... $412,682 ======== See accompanying notes to consolidated financial statements. 33 33 CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS) YEARS ENDED DECEMBER 31, ----------------------------------- 2002 2001 2000 --------- ---------- ---------- (RESTATED) (RESTATED) Cash flows from operating activities: Net income................................................ $ 36,233 $ 25,312 $ 46,707 Depreciation and amortization............................. 40,678 50,797 42,094 Asset impairments......................................... 15,315 21,670 -- Deferred income tax provision............................. (8,532) (16,817) (6,593) Changes in assets and liabilities (net of assets and liabilities acquired): Trade receivables...................................... (1,801) 1,438 (5,416) Inventories............................................ 3,345 (5,816) (14,664) Prepaid expenses and other current assets.............. 6,315 (6,566) 2,112 Accounts payable and accrued liabilities............... 11,506 (19,217) 17,030 Income taxes payable................................... (2,900) 6,004 13,873 Other non-current assets and liabilities............... 4,181 (1,619) (6,471) --------- --------- --------- Net cash provided from operating activities............ 104,340 55,186 88,672 --------- --------- ---------Cash flows from investing activities: Capital expenditures...................................... (50,303) (42,948) (39,456) Acquisition of businesses (net of cash acquired).......... -- (146,640) (12,488) Other investing activities................................ 1,278 390 111 --------- --------- --------- Net cash used in investing activities.................. (49,025) (189,198) (51,833) --------- --------- ---------Cash flows from financing activities: Dividends................................................. (3,117) (3,075) (2,991) Net (decrease) increase in short-term debt................ (2,737) 1,174 (3,754) Long-term debt activity (including current portion): Borrowings............................................. 60,800 284,232 45,800 Repayments............................................. (103,964) (152,399) (100,947) Proceeds from the stock options exercised................. 5,049 11,016 11,150 Purchase of treasury stock................................ (5,549) (3,901) (2,838) Other..................................................... 282 55 280 --------- --------- --------- Net cash provided by (used in) financing activities.... (49,236) 137,102 (53,300) --------- --------- ---------Effect of exchange rate changes on cash..................... 3,521 (1,115) (1,614) --------- --------- ---------Net increase (decrease) in cash and cash equivalents........ 9,600 1,975 (18,075)Cash and cash equivalents at beginning of year.............. 23,696 21,721 39,796 --------- --------- ---------Cash and cash equivalents at end of year.................... $ 33,296 $ 23,696 $ 21,721 ========= ========= =========Supplemental disclosure: Interest paid............................................. $ 12,946 $ 13,119 $ 14,909 Income taxes paid......................................... $ 18,512 $ 24,919 $ 16,578Non-cash transactions: Additional minimum pension liability eliminated from stockholders' equity................................... $ (6,920) $ (1,260) $ (479) Liabilities assumed in connection with acquisition........ $ -- $ 18,970 $ 10,454 See accompanying notes to consolidated financial statements. 34 CAMBREX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) (1) THE COMPANY Cambrex Corporation and Subsidiaries (the "Company" or "Cambrex") primarilyprovides products and services worldwide to the life sciences industry. TheCompany operates in four segments, Human Health, Biosciences, RutherfordChemicals and All Other. (2) RESTATEMENT OF FINANCIAL RESULTS Cambrex Corporation restated its results for the five year period from1997-2001. This restatement resulted from a fourth quarter 2002 managementreview of the inter-company processes and controls which identified certaindiscrepancies in the inter-company accounts. Based upon this review, the Companyhas determined that certain administrative and other charges were not properlyexpensed in these prior periods. The cumulative overstatement of earnings wasapproximately $6.1 million before taxes or $5.1 million, after taxes. Selling,general and administrative expenses were increased in 2001, 2000, 1999 and 1998by $1.7 million, $3.5 million, $0.2 million and $0.8 million, respectively, anddecreased in 1997 by $0.1 million. Net income was overstated by $1.3 million,$2.9 million, $0.2 million and $0.8 million in 2001, 2000, 1999 and 1998,respectively and understated by $0.1 million in 1997. In addition,reclassifications of certain balance sheet accounts were also determined to benecessary. The effects of such items and the specific accounts affected arereflected in the "Consolidated Balance Sheet" section of the table below. Thisrestatement did not have any impact on the Company's cash flows nor on 2002reported results from operations. A summary of the effects of the restatement on the accompanyingConsolidated Income Statements and Consolidated Balance Sheet follows: Consolidated Income Statements YEAR ENDED DECEMBER 31, 2001 --------------------- AS PREVIOUSLY AS REPORTED RESTATED ---------- -------- Statement of OperationsSG&A expenses.................................... $89,987 $91,651Operating profit................................. 46,680 45,016Provision for income taxes....................... 9,825 9,414Net income....................................... 26,565 25,312Diluted EPS --................................... $ 1.00 $ 0.96 YEAR ENDED DECEMBER 31, 2000 --------------------- AS PREVIOUSLY AS REPORTED RESTATED ---------- -------- Statement of OperationsSG&A expenses.................................... $82,204 $85,714Operating profit................................. 81,024 77,514Provision for income taxes....................... 20,261 19,649Net income....................................... 49,605 46,707Diluted EPS --................................... $ 1.90 $ 1.79 35 CAMBREX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) (2) RESTATEMENT OF FINANCIAL RESULTS -- (CONTINUED) Consolidated Balance Sheet AS OF DECEMBER 31, 2001 ----------------------- AS PREVIOUSLY AS REPORTED RESTATED ----------- --------- Trade receivables............................... $ 74,093 $ 73,789Deferred tax assets............................. 18,599 19,211Current assets.................................. 243,660 243,968Total assets.................................... 818,067 818,375Accounts payable and accrued liabilities........ 66,233 81,325Income taxes payable............................ 1,263 852Current liabilities............................. 70,063 84,744Total liabilities............................... 458,887 473,277Retained earnings............................... 237,759 232,658Accumulated other comprehensive income(a)....... (62,239) (71,220)Shareholders equity............................. $359,180 $345,098 --------------- (a) The reclassifications impacting other comprehensive income reflects currency translation adjustments. (3) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation The consolidated financial statements include the accounts of the Companyand its wholly-owned subsidiaries. All significant inter-company balances andtransactions have been eliminated in consolidation. Cash Equivalents Temporary cash investments with an original maturity of less than threemonths and virtually no risk of loss in value are considered cash equivalents. 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. The Company formally documents all relationships between hedginginstruments and hedged items, as well as its risk management objectives andstrategies for undertaking various hedging relationships. All cash flow hedgesare linked to transactions and the Company assesses effectiveness at inceptionand on a quarterly basis. If it is determined that a derivative instrument isnot highly effective or the transaction is no longer deemed probable ofoccurring, the Company discontinues hedge accounting. 36 CAMBREX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) (3) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED) Inventories Inventories are stated at the lower of cost, determined on a first-in,first-out basis, or market. The determination of market value involvesassessment of numerous factors, including costs to dispose of inventory andestimated selling prices. Reserves are recorded to reduce carrying value forinventory determined to be damaged, obsolete or otherwise unsaleable. Property, Plant and Equipment Property, plant and equipment is stated at cost, net of accumulateddepreciation. Plant and equipment are depreciated on a straight-line basis overthe estimated useful lives for each applicable asset group as follows: Buildings and improvements............................ 15 to 20 yearsMachinery and equipment............................... 5 to 10 yearsFurniture and fixtures................................ 3 to 5 years Expenditures for additions, major renewals or betterments are capitalizedand expenditures for maintenance and repairs are charged to income as incurred. When assets are retired or otherwise disposed of, the cost and relatedaccumulated depreciation are removed from the accounts, and any resulting gainor loss is reflected in Other (income) expenses, 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 2002, 2001 and 2000 amountedto $1,041, $1,482 and $1,307, respectively. Intangible Assets Intangible assets are recorded at cost and amortized on a straight-linebasis as follows: Patents................................. Amortized over the remaining life of individual patents (average 5 years)Goodwill................................ No amortization is being recorded in accordance with SFAS No. 142Product technology...................... 5 to 17 yearsNon-compete agreements.................. 5 yearsTrademarks and other.................... up 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. On January 1, 2002 the Company adoptedStatement of Financial Accounting Standards ("SFAS") 142, "Goodwill and OtherIntangible Assets." SFAS 142 applies to all goodwill and intangibles acquired ina business combination. Under SFAS 142, all goodwill and certain intangiblesdetermined to have indefinite lives, including goodwill and indefinite livedintangibles acquired before initial application of the standard, will not beamortized but will be tested for impairment within six months of adoption of thestatement, and at least annually thereafter. Intangible assets other thangoodwill will be amortized over their useful lives and reviewed for impairmentin accordance with SFAS 144, "Accounting for the Impairment or Disposal ofLong-Lived Assets." 37 CAMBREX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) (3) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED) Impairment of Long-Lived Assets The Company assesses the impairment of its long-lived assets under SFAS144, including intangible assets, and property, plant and equipment, whenevereconomic events or changes in circumstances indicate that the carrying amountsof the assets may not recoverable. Long lived assets are considered to beimpaired when the sum of the undiscounted expected future operating cash flowsis less than the carrying amounts of the related assets. Revenue Recognition Revenues are recognized when products are shipped and title and risk ofloss has passed to the customer. Royalties are recognized as earned inaccordance with royalty agreements. Revenue is recorded net of returns anddiscounts and allowances offered to customers. The Company estimates returns anddiscounts at the time of sale based on the terms of the agreements andhistorical experience. The Company continually evaluates the adequacy of thesemethods used to estimate returns and discounts. Service based revenue isrecognized as work is performed or completed, and payment is assured, inaccordance with individual customer contracts. 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. TheCompany and its eligible subsidiaries file a consolidated U.S. income taxreturn. Certain subsidiaries which are consolidated for financial reporting arenot eligible to be included in the consolidated U.S. income tax return. U.S.income taxes are provided on a repatriation of a portion of accumulated foreignearnings and consider applicable foreign tax credits. The repatriation ofdividends occurred due to an expected tax law change, and there is no plan torepatriate dividends in the future. Cambrex has adopted a policy to indefinitelyreinvest the unremitted earnings of certain non-U.S. subsidiaries, and as such,separate provisions for income taxes have been determined for these entities andU.S. taxes have not been provided on their unremitted earnings. At December 31,2002, 2001 and 2000, the cumulative amount of unremitted earnings of non-U.S.subsidiaries was $0, $23,842 and $0 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, the Company is subject to extensive andchanging federal, state, local and foreign environmental laws and regulations,and has made provisions for the estimated financial impact of environmentalcleanup related costs. The Company's policy is to accrue environmental cleanuprelated costs of a non-capital nature, including estimated litigation costs,when those costs are believed to be probable and can be reasonably estimated.The quantification of environmental exposures requires an assessment of manyfactors, including changing laws and regulations, advancements in environmentaltechnologies, the quality of information available related to specific sites,the assessment stage of each site investigation, preliminary findings and thelength of time involved in remediation or settlement. Such accruals are adjustedas further information develops or circumstances change. For certain matters,the Company expects to share costs with other parties. Costs of futureexpenditures for environmental remediation obligations are not discounted to 38 CAMBREX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) (3) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)their present value. Recoveries of environmental remediation costs from otherparties are recorded as assets when their receipt is deemed certain. Foreign Currency The functional currency of the Company's foreign subsidiaries is theapplicable local currency. The translation of the applicable foreign currenciesinto U.S. dollars is performed for balance sheet accounts using current exchangerates in effect at the balance sheet date and for revenue and expense accountsand cash flows using average rates of exchange prevailing during the year.Adjustments resulting from the translation of foreign currency financialstatements are accumulated in a separate component of stockholders' equity untilthe entity is sold or substantially liquidated. Gains or losses relating totransactions of a long-term investment nature are accumulated in stockholders'equity. Gains or losses resulting from foreign currency transactions areincluded in the results of operations as a component of other revenues in 2002,2001 and 2000. Foreign currency net transaction gain (losses) were $1,019,($2,051) and ($1,157) in 2002, 2001 and 2000, respectively. Earnings Per Common Share All diluted earnings per share are computed on the basis of the weightedaverage shares of common stock outstanding plus common equivalent shares arisingfrom the effect of dilutive stock options, using the treasury stock method. Earnings per share calculations are as follows: FOR THE YEARS ENDED, ----------------------------------- 2002 2001 2000 ------- ---------- ---------- (RESTATED) (RESTATED) Numerator:Income available to common stockholders............... $36,233 $25,312 $46,707Denominator:Basic weighted average shares outstanding............. 25,954 25,648 25,015Effect of dilutive stock options...................... 566 847 1,142 ------- ------- ------- ------- ------- -------Diluted weighted average shares outstanding........... 26,520 26,495 26,157Basic earnings per share.............................. $ 1.40 $ 0.99 $ 1.87Diluted earnings per share............................ $ 1.37 $ 0.96 $ 1.79 For the year ended December 31, 2002, 2001 and 2000, approximately1,223,000, 416,000, and 981,000 shares respectively, were not included in thediluted EPS calculation because the option price was greater than the marketprice. Freight Billing and Costs The Company bills a portion of freight cost incurred on shipments tocustomers. Freight costs are reflected in Cost of goods sold and amounts billedto customers are recorded within Net revenues. These amounts are not material tothe Company's operating results. Stock Based Compensation At December 31, 2003, the Company has seven stock-based employeecompensation plans currently in effect, which are described more fully in Note14. The Company accounts for those plans under the recognition and measurementprinciples of APB Opinion No. 25, Accounting for Stock Issued to Employees, andrelated interpretations. No stock-based employee compensation cost is reflectedin net income, as all options granted under those plans had an exercise priceequal to the market value of the underlying common 39 CAMBREX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) (3) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)stock on the date of grant. The following table illustrates the effect on netincome and earnings per share if the Company had applied the fair valuerecognition provisions of FASB Statement No. 123, Accounting for Stock-BasedCompensation, to stock-based employee compensation. YEARS ENDED DECEMBER 31, ----------------------------------- 2002 2001 2000 ------- ---------- ---------- (RESTATED) (RESTATED) Net income, as reported............................... $36,233 $25,312 $46,707Deduct: stock-based compensation expenses determined using fair value method, net of tax effects......... (1,714) (6,994) (8,869) ------- ------- -------Proforma net income................................... $34,519 $18,318 $37,838Earnings per share: Basic - as reported................................. $ 1.40 $ 0.99 $ 1.87 Basic - proforma.................................... $ 1.33 $ 0.71 $ 1.51 Diluted - as reported............................... $ 1.37 $ 0.96 $ 1.79 Diluted - proforma.................................. $ 1.30 $ 0.69 $ 1.45 The pro forma compensation expense of $1,714, $6,994, and $8,869 for 2002,2001 and 2000, respectively, was calculated based on the fair value of eachoption primarily using the Black-Scholes option-pricing model fornon-performance options and a path dependent model for performance options, withthe following assumptions for 2002, 2001 and 2000, respectively: (i) averagedividend yield of 0.30%, 0.30% and 0.52% (ii) expected volatility of 33.77%,30.28% and 28.8%, (iii) risk-free interest rate ranging from 3.84% to 4.84%,3.86% to 5.13%, and 5.31% to 6.69%, and (iv) expected life of 4-6 years. Comprehensive income SFAS 130, "Reporting Comprehensive Income," requires foreign currencytranslation adjustments and certain other items, which were reported separatelyin stockholders' equity, to be included in other comprehensive income (loss).Included within accumulated other comprehensive income for the Company areforeign currency translation adjustments, changes in the fair value related toderivative instruments classified as cash flow hedges, net of related taxbenefit, and changes in the minimum pension liability, net of related taxbenefit. Total comprehensive income (loss) for the years ended 2002, 2001 and2000 is included in the Statement of Stockholders' Equity. The components of Accumulated Other Comprehensive Income (Loss) inStockholders' Equity are as follows: 2002 2001 2000 -------- ---------- ---------- (RESTATED) (RESTATED) Foreign currency translation......................... $(28,460) $(67,325) $(49,549)Unrealized losses on hedging contracts............... (3,016) (1,770) --Minimum pension liability............................ (6,490) (2,125) (1,334) -------- -------- -------- $(37,966) $(71,220) $(50,883) ======== ======== ======== Software and Development Costs In 2002, 2001 and 2000, the Company capitalized purchased software from athird party vendor and software development costs incurred under the provisionsof SOP 98-1, "Accounting for the Cost of Computer Software Developed or Obtainedfor Internal Use." Capitalized costs include only (1) external direct costs ofmaterials and services incurred in developing or obtaining internal usesoftware, (2) payroll and payroll-related costs for employees who are directlyassociated with and who devote substantial time to the internal-use 40 CAMBREX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) (3) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)software project, and (3) interest costs incurred, while developing internal-usesoftware. Amortization begins when assets are ready for their intended purposeand were placed in service. Research and development costs, business process re-engineering costs,training and computer software maintenance costs are expensed as incurred.Software development costs are being amortized using the straight-line methodover the expected life of the product. Segment Information SFAS 131, "Disclosure about Segments of an Enterprise and RelatedInformation" requires segment information to be prepared using the "management"approach. The management approach is based on the method that managementorganizes the segments within the Company for making operating decisions andassessing performance. SFAS 131 also requires disclosures about products andservices, geographic areas, and major customers. Reclassification Certain reclassifications have been made to prior year disclosures toconform with current year presentation. (4) ACQUISITIONS On October 30, 2001, Cambrex Corporation completed the acquisition ofMarathon Biopharmaceuticals ("Marathon"), located in Hopkinton, Massachusetts,for approximately $26,000 in cash through a share purchase of CoPharma Inc.Marathon is a full-service cGMP manufacturer of biopharmaceutical ingredientsand purified bulk biologics for pre-clinical evaluation, clinical trials andcommercial scale quantities. This acquisition strengthens Cambrex's existingcapabilities for producing pre-clinical, clinical and commercial quantities ofbulk biologics. Assets acquired and liabilities assumed have been recorded attheir fair estimated fair values. Goodwill was recorded at approximately $11,035and other identifiable intangibles were $2,153. Assets acquired include $9,900of fixed assets, $700 in inventories, $5,700 deferred tax assets andapproximately $3,400 in accounts payable and accrued liabilities. The goodwillassociated with this transaction is not deductible for tax purposes. Subsequentto the acquisition, the company's formal name was changed to Cambrex Bio ScienceHopkinton, Inc. On June 1, 2001, Cambrex Corporation completed its acquisition of the BioScience Contract Production Corporation ("Bio Science") biopharmaceuticalmanufacturing business in Baltimore, Maryland. The business involves the cGMPmanufacture of purified bulk biologics and pharmaceutical ingredients. The totalpurchase price was approximately $120,000 in cash, which was funded by anexisting line of credit facility. Additional purchase price payments of up to$25,000 may be made depending on future business performance over the next fouryears. Assets acquired and liabilities assumed have been recorded at theirestimated fair values. Goodwill was recorded at approximately $117,800,including incremental deal costs. In addition, identifiable intangible assets of$3,382 have been recorded. Subsequent to the acquisition, the Company's formalname was changed to Cambrex Bio Science Baltimore, Inc. On March 2, 2000, the Company completed the acquisition of Conti BC NV, amanufacturer and supplier of pharmaceutical intermediates and activepharmaceutical ingredients, located in Landen, Belgium. The Company paidapproximately $6,200 in cash and assumed debt for the business. At the time ofthe transaction, goodwill was recorded at $451. Subsequent to the acquisition,the Company's formal name was changed to Cambrex Profarmaco Landen NV. On July 24, 2000, the Company completed the acquisition of Lumitech,Limited, an emerging company based in Nottingham, United Kingdom, which providesproducts and services used in the high throughput 41 CAMBREX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) (4) ACQUISITIONS -- (CONTINUED)screening market for drug discovery. The Company paid approximately $4,700 incash at closing, the majority of which was recorded as patents and otherintangibles, with additional future performance-based payments of up to $16,000due over the next five years. No additional performance-based payments have beenmade to date. The acquired patents and other intangibles are being amortizedover 20 years. Subsequent to the acquisition, the Company's formal name waschanged to Cambrex Bio Science Nottingham Limited. On August 29, 2000, Cambrex Corporation announced that its CasChem, Inc.subsidiary had licensed the castor oil based ester products business fromArizona Chemical, Jacksonville, FL through a perpetual licensing agreement forapproximately $4,500. The agreement provides CasChem with process technologies,customer lists, and supply of raw materials. The ester products are used inpersonal care and coatings applications. The license cost is included inintangible assets at December 31, 2000 and is being amortized over 10 years. Aspart of the transaction, CasChem entered into a five-year supply agreement withArizona Chemical to manufacture a line of tall oil based products used in thelubricant and lithographic ink markets. The above acquisitions have been accounted for under the purchase method ofaccounting and accordingly the results of operations of the acquisitions areincluded in the accompanying consolidated financial statements from the date ofacquisition. Assets acquired and liabilities assessed have been recorded attheir fair values. (5) IMPACT OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS Goodwill and Intangible Assets: The Company adopted SFAS 142, "Goodwill and Other Intangible Assets" in thefirst quarter of fiscal 2002. The effect of this adoption was to ceaseamortization of goodwill and certain other indefinite-lived intangible assets,which resulted in a decrease in amortization expense for the year ended December31, 2002 of approximately $8,814 million after income taxes. The Company hasestablished reporting units based on its current segment structure for purposesof testing goodwill for impairment. Goodwill has been assigned to the reportingunits to which the value of the goodwill relates. The Company completed thefirst step of the transitional goodwill impairment test and has determined thatno impairment existed at January 1, 2002. The Company will evaluate goodwill andother intangible assets at least on an annual basis and whenever events andchanges in circumstances suggest that the carrying amount may not be recoverablebased on the estimated future cash flows. In the fourth quarter of 2002, the Company performed the required annualtest for impairment. The assessment was made in conjunction with the budgetingprocess and the long range planning by each reporting unit. The assessmentutilized a forecasted cash flow method discounted based on the Company'sweighted average cost of capital plus a risk adjusted factor. The RutherfordChemical reporting unit indicated a possible impairment due to certain externalfactors which indicated increased competition and price declines. The Companyalso began to reevaluate the future plans and related investment into new andexisting products. The re-evaluation indicated declining growth prospects. As aresult, the Company performed an analysis which determined a full impairmentwrite-off of the Rutherford goodwill of approximately $3,962 was necessary. 42 CAMBREX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) (5) IMPACT OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS -- (CONTINUED) The changes in the carrying amount of goodwill for the year ended December31, 2002, are as follows: BIO- HUMAN RUTHERFORD TECHNOLOGY HEALTH CHEMICALS SEGMENT SEGMENT SEGMENT TOTAL ---------- ------- ---------- -------- Balance as of January 1, 2002...... $183,941 $32,032 $ 3,849 $219,822Purchase Accounting Adjustments on Recent Acquisitions.............. (7,071) -- -- (7,071)Impairment Charge.................. -- -- (3,962) (3,962)Cumulative Translation Effect...... 776 4,676 113 5,565 -------- ------- ------- --------Balance as of December 31, 2002.... $177,646 $36,708 $ 0 $214,354 ======== ======= ======= ======== The purchase accounting adjustments relate to the acquisitions occurredduring 2001 and they consist of $5,730 reallocation from goodwill to otherintangible assets, as well as $1,341 reallocation from goodwill to fixed assets.These adjustments are the result of final valuations received on the assets andliabilities acquired. Other intangible assets that are not subject to amortization beginningJanuary 1, 2002, consist of the following: AS OF DECEMBER 31, 2002 AS OF DECEMBER 31, 2001 --------------------------------- --------------------------------- GROSS GROSS CARRYING ACCUMULATED CARRYING ACCUMULATED AMOUNT AMORTIZATION NET AMOUNT AMORTIZATION NET -------- ------------ ------- -------- ------------ ------- Proprietary Process............ $ 4,020 $ (2,345) $ 1,675 $ 4,721 $ (2,345) $ 2,376License Agreements... 3,630 (641) 2,989 4,500 (641) 3,859Trademarks........... 44,038 (9,641) 34,397 44,038 (9,641) 34,397 ------- -------- ------- ------- -------- ------- Total.............. $51,688 $(12,627) $39,061 $53,259 $(12,627) $40,632 ======= ======== ======= ======= ======== ======= Proprietary process intangibles decreased by $701 due to the sale of thein-vitro diagnostic business. License agreements decreased by $870 due to areduction in basis as part of the arbitration award (See Note 19) and the saleof a small portion of the product line initially acquired. Intangible Assets: Other intangible assets, which will continue to be amortized, consist ofthe following: AS OF AS OF DECEMBER 31, 2002 DECEMBER 31, 2001 GROSS CARRYING AMOUNT GROSS CARRYING AMOUNT --------------------- --------------------- Patents................................ $ 2,589 $ 2,469Proprietary Process.................... 5,841 1,091Supply Agreements...................... 2,100 2,100Trademarks............................. 785 --Unpatented Technology.................. 5,490 4,945Other.................................. 1,235 1,480Fully Amortized Assets*................ 12,347 12,347 -------- -------- Total................................ 30,387 24,432 -------- --------Accumulated Amortization............... (16,050) (15,875) -------- --------Net.................................... $ 14,337 $ 8,557 ======== ======== * This category includes certain fully amortized patents, proprietary process and non-compete agreements. 43 CAMBREX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) (5) IMPACT OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS -- (CONTINUED) Amortization expense amounted to $1,554, $14,031 and $10,155, for the yearsended December 31, 2002, 2001 and 2000, respectively. The expected future amortization expense related to current intangibleassets currently recorded in the future is as follows: For the year ended December 31, 2003........................ $1,543For the year ended December 31, 2004........................ $1,333For the year ended December 31, 2005........................ $1,308For the year ended December 31, 2006........................ $1,298For the year ended December 31, 2007........................ $1,287 Pro-forma net income and diluted earnings per share for the year endedDecember 31, 2002, reflecting the adoption of SFAS No. 142, were as follows: FOR THE YEAR ENDED DECEMBER 31, ----------------------------------- 2002 2001 2000 ------- ---------- ---------- (RESTATED) (RESTATED) Net income as reported....................... $36,233 $25,312 $46,707Pro-forma amortization effect, after taxes... -- 8,814 6,463 ------- ------- -------Net income -- pro forma...................... $36,233 $34,126 $53,170Diluted earnings per share as reported....... $ 1.37 $ 0.96 $ 1.79Add back: Goodwill and other indefinite-lived amortization expense.................... N/A 0.33 0.24 ------- ------- -------Diluted earnings per share -- pro forma...... $ 1.37 $ 1.29 $ 2.03 ======= ======= ======= Accounting for Asset Retirement Obligations In June 2001, The Financial Accounting Standards Board ("FASB") issuedStatement of Financial Accounting Standard No. 143, "Accounting for AssetRetirement Obligations" ("SFAS 143"). The standard requires that legalobligations associated with the retirement of tangible long-lived assets berecorded at fair value when incurred and was adopted by the Company on January1, 2003. Adoption of SFAS 143 did not have a material effect on the Company'sconsolidated financial position or results of operations. Accounting for Impairment or Disposal of Long-Lived Assets: In August 2001, the FASB issued Statement of Financial Accounting StandardNo. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS144"). SFAS 144 primarily addresses the financial accounting and reporting forthe impairment or disposal of long-lived assets. SFAS 144 became effective onJanuary 1, 2002. For long-lived assets to be held and used, the new rulescontinue previous guidance to recognize impairment when the undiscounted cashflows will not recover its carrying amount. The impairment to be recognized willcontinue to be measured as the difference between the carrying amount and fairvalue of the asset. The computation of fair value now removes goodwill fromconsideration and incorporates a probability-weighted cash flow estimationapproach. The previous guidance provided in SFAS 121 is to be applied to assetsto be disposed of by sale. Long-lived assets to be disposed by other than salewill now recognize impairment at the date of disposal, but will be consideredwill now recognize impairment at the date of disposal, but will be consideredassets to be held and used until that time. The Company adopted SFAS 144 as ofJanuary 1, 2002. 44 CAMBREX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) (5) IMPACT OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS -- (CONTINUED) Rescission of FAS No. 4, 44 and 64, Amendment of FAS 13, and Technical Corrections as of April 2002 In May 2002, the FASB issued Statement of Financial Accounting StandardsNo. 145, "Rescission of FAS No. 4, 44 and 64, Amendment of FAS 13, and TechnicalCorrections as of April 2002" ("SFAS 145"). The statement rescinds SFAS 4 (asamended by SFAS 64), which required extraordinary item treatment for gains andlosses on extinguishments of debt, and SFAS 44, which does not affect theCompany. Additionally, the statement amends certain provisions of SFAS 13 andother existing authoritative pronouncements to make various technicalcorrections, clarify meanings, or describe their applicability under changedconditions. The provisions of SFAS 145 related to extinguishments of debt areeffective for the Company beginning January 1, 2003, and all other provisionsare effective for transactions occurring or financial statements issued on orafter May 5, 2002. The Company has determined that the effects on its financialstatements resulting from adoption will not be material. Accounting for Costs Associated with Exit or Disposal Activities In June 2002, the FASB issued Statement of Financial Accounting StandardNo. 146, "Accounting for Costs Associated with Exit or Disposal Activities"("SFAS 146"). This Statement addresses financial accounting and reporting forcosts associated with exit or disposal activities and nullifies Emerging IssuesTask Force (EITF) Issue No. 94-3, "Liability Recognition for Certain EmployeeTermination Benefits and Other Costs to Exit an Activity (including CertainCosts Incurred in a Restructuring)." This Statement eliminates the definitionand requirements for recognition of exit costs in Issue 94-3, and requires thata liability for a cost associated with an exit or disposal activity berecognized when the liability is incurred. SFAS 146 also establishes that fairvalue is the objective for initial measurement of the liability. SFAS 146 iseffective for exit or disposal activities that are initiated after December 31,2002, with early application encouraged. Any charges associated with futurerestructuring programs will be recorded in accordance with SFAS 146. This willspread the recognition of the restructuring expenses over a number of accountingperiods as compared to EITF 94-3. Accounting for Stock-Based Compensation -- Transition and Disclosure In December 2002, the FASB issued Statement of Financial AccountingStandard No. 148, "Accounting for Stock-Based Compensation -- Transition andDisclosure" ("SFAS 148"). This Statement provides alternative methods oftransition for a voluntary change to the fair value based method of accountingfor stock-based employees compensation from the intrinsic method. SFAS 148 alsoamends the disclosure provisions of SFAS 123 and APB Opinion No. 28, "InterimFinancial Reporting," to require disclosure in the summary of significantaccounting policies of the effects of an entity's accounting policy with respectto stock-based employee compensation on reported net income and earnings pershare in annual and interim financial statements. While SFAS 148 does not amendSFAS 123 to require companies to account for employee stock options using thefair value method, the disclosure provisions of SFAS 148 are applicable to allcompanies with stock-based employee compensation, regardless of whether theyaccount for that compensation using the fair value method of SFAS 123 or theintrinsic value method of APB 25. SFAS 148's amendment of the transition andannual disclosure requirements of SFAS 123 are effective for fiscal years endingafter December 15, 2002. The Company has adopted the disclosures provision ofSFAS 148 as of December 31, 2002, and will continue to use the intrinsic valuemethod of APB 25. The Company is currently considering the alternatives providedwithin this SFAS 148 for future periods. Guarantor's Accounting and Disclosure Requirements for Guarantees In November 2002, FASB Interpretation No. 45 ("FIN 45"), "Guarantor'sAccounting and Disclosure Requirements for Guarantees, Including IndirectGuarantees of Indebtedness of Others" was issued. FIN 45 45 CAMBREX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) (5) IMPACT OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS -- (CONTINUED)elaborates on the disclosures to be made by a guarantor in its interim andannual financial statements about its obligations under certain guarantees thatit has issued. It also clarifies that a guarantor is required to recognize, atthe inception of a guarantee, a liability for the fair value of the obligationundertaken in issuing the guarantee. The initial recognition and initialmeasurement provisions of this Interpretation are applicable on a prospectivebasis to guarantees issued or modified after December 31, 2002. The requireddisclosures are effective for financial statements of interim or annual periodsending after December 15, 2002. The Company is assessing the potential impact onits results from operations from the adoption of FIN 45. Consolidation of Variable Interest Entities In January 2003, FIN No. 46, "Consolidation of Variable Interest Entities"("FIN 46") was issued. The interpretation provides guidance on consolidatingvariable interest entities and applies immediately to variable interests createdafter January 31, 2003. The guidelines of the interpretation will becomeapplicable for the Company in its third quarter 2003 financial statements forvariable interest entities created before February 1, 2003. The interpretationrequires variable interest entities to be consolidated if the equity investmentat risk is not sufficient to permit an entity to finance its activities withoutsupport from other parties or the equity investors lack certain specifiedcharacteristics. The Company has reviewed FIN 46 to determine its impact, ifany, on future periods, and does not anticipate any material accounting ordisclosure requirement under the provisions of the interpretation. Accounting for Revenue Arrangements with Multiple Deliverables In January 2003, the Emerging Issues Task Force ("EITF") released EITF00-21: "Accounting for Revenue Arrangements with Multiple Deliverables." EITF00-21 clarifies the timing and recognition of revenue from certain transactionsthat include the delivery and performance of multiple products or services. EITF00-21 is effective for revenue arrangements entered into during fiscal periodsbeginning after June 15, 2003. The Company is currently reviewing the impact ofthis EITF. (6) NET INVENTORIES Net inventories consist of the following: DECEMBER 31, -------------------- 2002 2001 -------- -------- Finished goods......................................... $ 55,372 $ 48,184Work in process........................................ 24,997 27,093Raw materials.......................................... 24,638 28,777Supplies............................................... 4,825 3,692 -------- -------- Total........................................ $109,832 $107,746 ======== ======== 46 CAMBREX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) (7) PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment consists of the following: DECEMBER 31, ---------------------- 2002 2001 --------- --------- Land................................................. $ 16,970 $ 19,567Buildings and improvements........................... 127,207 118,205Machinery and equipment.............................. 379,851 341,562Furniture and fixtures............................... 17,940 13,067Construction in progress............................. 38,755 52,747 --------- --------- Total...................................... 580,723 545,148Accumulated depreciation............................. (270,222) (257,543) --------- --------- Net................................................ $ 310,501 $ 287,605 ========= ========= Depreciation expense amounted to $39,124, $36,766 and $31,939 for the yearsended December 31, 2002, 2001 and 2000, respectively. (8) ACCOUNTS PAYABLE AND ACCRUED LIABILITIES The components of accounts payable and accrued liabilities are as follows: YEARS ENDED DECEMBER 31, --------------------- 2002 2001 ------- ---------- (RESTATED) Accounts payable......................................... $44,659 $49,093Salaries, employee benefits payable and other............ 33,219 25,700Unrealized losses on interest rate swaps................. 6,492 2,185Vitamin B-3 reserve...................................... 9,034 4,347 ------- ------- Total........................................ $93,404 $81,325 ======= ======= (9) INCOME TAXES Income (loss) before taxes consisted of the following: YEARS ENDED DECEMBER 31, ----------------------------------- 2002 2001 2000 ------- ---------- ---------- (RESTATED) (RESTATED) Domestic...................................... $(2,890) $(9,063) $10,382International................................. 51,072 43,789 55,974 ------- ------- ------- Total............................... $48,182 $34,726 $66,356 ======= ======= ======= 47 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 consists of the following expenses(benefits): YEARS ENDED DECEMBER 31, ----------------------------------- 2002 2001 2000 ------- ---------- ---------- (RESTATED) (RESTATED) Current: Federal............................................ $(1,004) $ 5,641 $ 8,359 State.............................................. 835 643 336 International...................................... 20,650 19,947 17,547 ------- -------- ------- $20,481 $ 26,231 $26,242 ------- -------- -------Deferred: Federal............................................ $(8,611) (15,471) (7,571) State.............................................. 58 -- -- International...................................... 21 (1,346) 978 ------- -------- ------- $(8,532) $(16,817) $(6,593) ------- -------- ------- Total...................................... $11,949 $ 9,414 $19,649 ======= ======== ======= The provision for income taxes differs from the statutory Federal incometax rate of 35% for 2002, 2001 and 2000 as follows: YEARS ENDED DECEMBER 31, ----------------------------------- 2002 2001 2000 ------- ---------- ---------- (RESTATED) (RESTATED) Income tax at Federal statutory rate.................. $16,864 $12,154 $23,225State and local taxes, net of Federal income tax benefits............................................ 543 419 218Difference between Federal statutory rate and statutory rates non-U.S. income..................... 2,485 424 (1,233)Reversal of valuation allowance for NOL carryforward........................................ (2,455) -- --Research and experimentation credits.................. (1,525) (1,345) (1,458)Research and experimentation credits.................. (1,525) (1,345) (1,458)Non-taxable international income accrual.............. (3,139) (2,692) (2,653)Foreign Tax Credits................................... -- (454) (2,884)Non-deductible provision for Vitamin B-3.............. -- 155 (78)Other................................................. (824) 753 4,512 ------- ------- ------- $11,949 $ 9,414 $19,649 ======= ======= ======= 48 CAMBREX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) (9) INCOME TAXES -- (CONTINUED) The components of deferred tax assets and liabilities as of December 31,2002 and 2001 relate to temporary differences and carryforwards as follows: DECEMBER 31, --------------------- 2002 2001 ------- ---------- (RESTATED) Deferred tax assets: Foreign tax credits.................................... $10,959 $ 612 Environmental.......................................... 582 497 Net operating loss carryforwards....................... 3,309 2,430 Inventory.............................................. 1,762 1,941 Employee benefits...................................... 5,035 4,715 Restructuring.......................................... 8,081 9,885 Receivables............................................ 695 240 Capital Assets......................................... 1,148 -- Legal Reserves......................................... 1,467 -- Alternative minimum tax credits........................ 2,095 2,095 Other.................................................. 3,205 1,681 ------- ------- Net current deferred tax assets........................ 38,338 24,096 Valuation allowances................................... (2,726) (4,885) ------- ------- Total net deferred tax assets.................. $35,612 $19,211 ======= =======Deferred tax liabilities: Depreciation........................................... $27,875 $26,924 Intangibles............................................ 17,433 12,628 Italian Intangibles.................................... -- 1,259 Acquisition Reserve.................................... 3,599 3,727 Other.................................................. 3,723 3,741 ------- ------- Total net non-current deferred tax liabilities.................................. $52,630 $48,279 ======= ======= Included within the change in the cumulative translation adjustment for theyear ended December 31, 2002 is $1,628 related to the translation of deferredtax assets and liabilities of international operations. Under the tax laws of the various countries in which the Company operates,net operating losses (NOLs) may be carried forward, subject to statutorylimitations, to reduce taxable income in future years. The tax effect of suchNOL carryforwards aggregated approximately $3,309 and $2,430 at December 31,2002 and 2001. The change in valuation allowance for the years ended December31, 2002 and 2001 was $2,455 and $(2,196), respectively. A valuation allowance31, 2002 and 2001 was $2,455 and $(2,196), respectively. A valuation allowancehas been established when management believes that it is more likely than notthat the full amount of deferred tax assets will not be realized. As of December 31, 2002 approximately $10,959 of foreign tax credits wereavailable as credit against future U.S. income taxes. Under the U.S. InternalRevenue Code rules, these foreign tax credits will begin to expire in 2005through 2007. The Company believes that it will have sufficient foreign sourceincome to utilize these credits. During 2002, the Company derived U.S. income tax benefits of approximately$495 from an exclusion provided under U.S. income tax laws with respect tocertain extraterritorial income (ETI) attributable to foreign trading grossreceipts. The World Trade Organization (WTO) ruled that this ETI represents aprohibited export subsidy under the WTO Agreement on Subsidies andCountervailing Measures. Since the impact of this matter depends upon theactions of both the European Union and the legislative action of the 49 CAMBREX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) (9) INCOME TAXES -- (CONTINUED)U.S. Congress, it is not possible to predict the impact on future financialresults. If the ETI is repealed and replacement legislation is not enacted,future results could be negatively impacted. As a matter of course, the Company is regularly audited by federal, stateand foreign tax authorities. From time to time, these audits result in proposedassessments. The Company has prevailed in its Swedish tax court case and iscurrently awaiting a decision by the Swedish tax authorities as to whether anappeal will be filed. The Company believes that its positions comply withapplicable law and intends to continue to vigorously defend its positions. TheCompany believes that it has adequately provided for any reasonably foreseeableoutcome related to these matters, and it does not anticipate any materialearnings impact from their resolution. During 1998, the Company made an election which allowed the Italiansubsidiary to deduct for tax purposes previously non-deductible intangibleassets. The result of this election was a charge to 1998 earnings of $3,420 thatresulted in future favorable tax benefits. These benefits were $1,259, $1,326,and $1,928 for 2002, 2001, 2000, respectively. (10) SHORT-TERM DEBT The Company has lines of credit in Italy with local banks (the "Facility").The Facility is short-term and provides three types of financing with thefollowing limits: Overdraft Protection of $2,000, Export Financing of $4,000 andAdvances on Uncleared Deposits of $900. The Overdraft Protection and ExportFinancing facilities bear interest at varying rates when utilized, however,Advances on Uncleared Deposits bear no interest. Short-term debt at December 31, 2002 and 2001 consists of the following: DECEMBER 31, --------------- 2002 2001 ------ ------ Export financing facility................................... $ -- $2,073Other, including current portion of long-term debt.......... 2,364 494 ------ ------ $2,364 $2,567 ====== ====== The 2002 and 2001 average interest rates were 2.2% and 3.9%, respectively. (11) LONG-TERM DEBT Long-term debt consists of the following: DECEMBER 31, ------------------- 2002 2001 -------- -------- Bank credit facilities(a)............................... $257,350 $298,350Capitalized leases(b)................................... 12,448 14,161Notes payable........................................... -- 18 -------- -------- Subtotal...................................... 269,798 312,529Less: current portion................................... (2,364) (5) -------- -------- Total......................................... $267,434 $312,524 ======== ======== (a) In November 2001, the Company entered into a $430,000 Revolving CreditAgreement with a group of banks led by JPMorganChase as the lead agency bank.The agreement consisted of a 364-day renewable senior revolving credit facilityfor $161,000, and a 5-year senior revolving credit facility for $269,000. 50 CAMBREX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) (11) LONG-TERM DEBT -- (CONTINUED) In November 2002, the 364-day senior revolving credit facility matured andwas successfully renewed. The current capacity for the senior revolving creditfacility is $157,500 under the 364-day facility and $268,750 under the five-yearfacility, for a total of $426,250. The five-year agreement expires in November2006. The Revolving Credit Agreement allows the Company to choose among variousinterest rate options and to specify the portion of the borrowing to be coveredby specific interest rates. Under the Revolving Credit Agreement the interestrate options available to the Company are the following: 1) U.S. Prime Rate, 2) LIBOR plus an applicable margin that ranges from .575% to 1.25%, or 3) Money Market rate plus an applicable margin that ranges from .575% to1.25%. The Applicable Rate (margin or credit spread) on outstanding debt is basedupon the ratio of consolidated funded indebtedness to consolidated modifiedEBITDA of Cambrex Corporation. The Company also pays a commitment fee between.15% to .30% on the entire revolving credit facility. The 2002 and 2001 averageinterest rates were 4.3% and 5.2%, respectively. The bank loan is collateralized by dividend and distribution rightsassociated with a pledge of a portion of stock which the Company owns in aforeign holding company. This foreign holding company owns certain of theforeign holding company. This foreign holding company owns certain of theCompany's non-U.S. operating subsidiaries. The credit facilities are primarily used to finance the Company'sacquisition activities. The undrawn borrowing under the agreement as of December31, 2002 was $168,900. Of this amount, $152,143 is available to be borrowed dueto limits established in the Revolving Credit Agreement. The Agreement is subject to financial covenants requiring the Company tomaintain certain levels of net worth, an interest coverage ratio and leverageratios, as well as a limitation on indebtedness. The Company met all of the bankcovenants during 2002. (b) The Company assumed six capital leases as part of the acquisition ofIrotec in 1999 of $5,436. These leases are for various plant and equipmentexpiring in 2006 to be repaid in 28 equal quarterly installments. There is$2,549 outstanding at December 31, 2002. The Company also assumed three capitalleases as part of the acquisition of Bio Science Contract Production Corp. inJune, 2001 of $12,100. The leases are for buildings and improvements and phonesystems. There is $9,897 outstanding at December 31, 2002. All capital leasesare collateralized by their underlying assets. Aggregate maturities of long-term debt are as follows: 2003........................................................ $ 2,3642004........................................................ 2,3872005........................................................ 1,9202006........................................................ 258,7782007........................................................ 1,438Thereafter.................................................. 2,911 -------- Total............................................. $269,798 ======== (12) DERIVATIVES AND FAIR VALUE OF FINANCIAL INSTRUMENTS The Company uses derivative financial instruments to reduce exposures tomarket risks resulting from fluctuations in interest rates and foreign exchangerates. The Company does not enter into financial instruments for trading orspeculative purposes. The Company is exposed to credit loss in the event of non-performance by the other parties to the interest rate swap, forward exchange orput and call contracts. 51 CAMBREX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) (12) DERIVATIVES AND FAIR VALUE OF FINANCIAL INSTRUMENTS -- (CONTINUED)However, the Company does not anticipate non-performance by the counterparties. The Company adopted (SFAS 133) Statement of Financial Accounting StandardNo. 133 "Accounting for Derivative Instruments and Hedging Activities," and itscorresponding amendments under SFAS No. 138, (referred to hereafter as "SFAS133"), which establishes accounting and reporting standards for derivativefinancial instruments. The Company's policy is to enter into forward exchangecontracts and/or currency options to hedge foreign currency transactions. Thishedging strategy mitigates the impact of short-term foreign exchange ratemovements on the Company's operating results primarily in the United Kingdom,Sweden and Italy. The Company's primary market risk relates to exposures toforeign currency exchange rate fluctuations on transactions entered into bythese international operations which are denominated primarily in U.S. dollars,Swedish Krona, Euros, and British pound sterling. As a matter of policy, theCompany does not hedge to protect the translated results of foreign operations.The Company's forward exchange contracts substantially offset gains and losseson the transactions being hedged. The forward exchange contracts have varyingmaturities with none exceeding twelve months. The Company makes net settlementsfor forward exchange contracts at maturity, based upon negotiated rates atinception of the contracts. The Company also enters into interest rate swapagreements to reduce the impact of changes in interest rates on its floatingrate debt. The swap agreements are contracts to exchange floating rate for fixedinterest payments periodically over the life of the agreements without theexchange of the underlying notional debt amounts. All forward and swap contracts outstanding at January 1 and December 31,2002 have been designated as cash flow hedges and accordingly, changes in thefair value of derivatives are recorded each period in Other comprehensiveincome. Changes in the fair value of the derivative instruments reported inOther comprehensive income will be reclassified as earnings in the period inwhich earnings are impacted by the variability of the cash flows of the hedgeditem. The ineffective portion of all hedges are recognized in current-periodearnings and is immaterial to the Company's financial results. Adoption of thisstatement resulted in an after tax reduction of other comprehensive income of$86. The unrealized net loss recorded in comprehensive income at December 31,2002 was $3,017. This amount will be reclassified into earnings as theunderlying forecasted transactions occur. The balance of unrealized lossesincluded in comprehensive income at December 31, 2002 will be recognized inearnings over the next twelve months. The net gain recognized in earningsrelated to foreign currency forward contracts during the twelve months endedDecember 31, 2002 was $2,216. The net loss on interest rate swap contractsrecognized in interest expense was $3,624 for the twelve months ended December31, 2002. 52 CAMBREX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) (12) DERIVATIVES AND FAIR VALUE OF FINANCIAL INSTRUMENTS -- (CONTINUED) Interest Rate Swap Agreements The 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, 2002. WEIGHTED AVG. RATENOTIONAL MATURITY -------------------AMOUNTS DATE PAY RECEIVE-------- -------- ----- -------- $10,000.......................................... 2005 4.76% 1.40%$10,000.......................................... 2005 4.66% 1.41%$10,000.......................................... 2003 5.77% 1.41%$ 5,000.......................................... 2003 2.14% 1.83%$ 5,000.......................................... 2005 3.37% 1.82%$ 5,000.......................................... 2005 3.35% 1.82%$10,000.......................................... 2006 4.72% 1.41%$20,000.......................................... 2005 4.98% 1.42%$10,000.......................................... 2003 6.65% 1.78%$ 5,000.......................................... 2004 3.83% 1.80%$ 5,000.......................................... 2004 2.76% 1.82%$10,000.......................................... 2006 5.05% 1.40%$ 5,000.......................................... 2003 2.08% 1.83%$10,000.......................................... 2005 4.73% 1.41%$ 5,000.......................................... 2004 2.79% 1.83%$ 5,000.......................................... 2003 2.08% 1.82%$ 5,000.......................................... 2003 2.16% 1.83% 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 in a loss position of $6,492 at December 31, 2002. Foreign Exchange Instruments The table below reflects the notional and fair value amounts of foreignexchange contracts at December 31, 2002 and 2001. 2002 2001 ----------------- ---------------- NOTIONAL FAIR NOTIONAL FAIR AMOUNTS VALUE AMOUNTS VALUE -------- ------ -------- ----- Forward exchange contracts....................... $29,564 $1,846 $40,009 $(238) The carrying amount reported in the consolidated balance sheets for cashand cash equivalents, accounts receivable, accounts payable and short-term debtapproximates fair value because of the immediate or short-term maturity of thesefinancial instruments. The carrying amount reported for long-term debtapproximates fair value because approximately 60% of the underlying debt is atvariable rates and reprices quarterly. The remaining amount of long-term debthas fixed rates through interest swap contracts. 53 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 100,000,000 and60,000,000 at December 31, 2002 and 2001 respectively. Authorized shares ofNonvoting Common Stock were 730,746 at December 31, 2002 and 2001. At December 31, 2002 there were 364,662 of authorized shares of CommonStock reserved for issuance for stock option plans. Nonvoting Common Stock with a par value of $.10, has equal rights withCommon Stock, with the exception of voting power. Nonvoting Common Stock isconvertible, share for share, into Common Stock, subject to any legalrequirements applicable to holders restricting the extent to which they may ownvoting stock. As of December 31, 2002 and 2001, no shares of Nonvoting CommonStock were outstanding. The Company held treasury stock of 2,487,247 and 2,234,421 shares atDecember 31, 2002 and 2001, respectively, and are used for issuance to theCambrex Savings Plan. 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, 2002 and 2001, there was nopreferred stock outstanding. (14) STOCK OPTIONS The Company has seven stock-based compensation plans currently in effect.The 1992 Stock Option Plan ("1992 Plan") provides for the granting to keyemployees both non-qualified stock options and incentive stock options. The 1993Senior Executive Stock Option Plan ("1993 Plan") provides for the granting ofnon-qualified and incentive stock options (ISO) intended to qualify asadditional incentives to the Company's Senior Executive Officers. This plan willexpire in April 2003. The 1994 Stock Option Plan ("1994 Plan") provides for thegranting to key employees both non-qualified and ISO stock options, intended toqualify as additional incentives to management and other key employees. The 1994Plan also provides for the granting of non-qualified stock options tonon-employee directors. The 1996 Performance Stock Option Plan ("1996" Plan)provides for the granting of non-qualified and ISO stock options intended toqualify as additional incentives to management and other key employees. The 1996Plan also provides for the granting of non-qualified stock options tonon-employee directors. The 1998 Performance Stock Option Plan ("1998 Plan") provides for thegranting of non-qualified and ISO stock options intended to qualify asadditional incentives to directors and key employees. The 2000 EmployeePerformance Stock Option Plan ("2000 Plan") provides for the granting ofnon-qualified options and ISO stock options intended to qualify as additionalincentives to non-executive employees. On April 26, 2001, The Company'sStockholders approved the 2001 Performance Stock Option Plan ("2001 Plan"),which provides for the granting of options intended to qualify as additionalincentives to directors and key employees. Options granted under the 1996, 1998, 2000 and 2001 Plan shall becomeexercisable six years after the date of grant, subject to acceleration if thepublicly traded price of the Company's Common Stock equals or exceeds levelsdetermined by the Committee within certain time periods or in the event of achange in control. Options shall have a term of no more than ten years from thedate of grant. In addition, stock option awards may be transferred to a memberof the Participant's immediate family or to a trust or similar vehicle for thebenefit of such transferee. 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. The Company has adoptedthe disclosure only provisions available under SFAS 123. Accordingly, nocompensation cost has been recognized for stock option plans under SFAS 123. 54 CAMBREX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) (14) STOCK OPTIONS -- (CONTINUED) 306,200 options were exercised during 2002. Shares of Common Stock subjectto outstanding options under the stock option plans were as follows: OPTIONS OUTSTANDING --------------------------------------------------------------------- OPTIONS EXERCISABLE WEIGHTED AVERAGE -------------------- ---------------------- WEIGHTED OPTION REMAINING AVERAGE AUTHORIZED PRICE PER CONTRACTUAL EXERCISE NUMBER OF EXERCISE FOR ISSUANCE OUTSTANDING SHARE $ LIFE (YRS) PRICE $ SHARES PRICE $ ------------ ----------- --------------- ----------- -------- --------- -------- 1992 Plan............ 300,000 10,500 8.063 1.88 8.06 10,500 8.061993 Plan............ 900,000 65,000 6.625 0.83 6.63 65,000 6.631994 Plan............ 300,000 20,850 6.625 - 7.438 1.15 7.09 20,850 7.09 9,000 11.438 2.33 11.44 9,000 11.44 9,000 11.438 2.33 11.44 9,000 11.441996 Plan............ 3,000,000 593,750 12.375 - 17.500 3.38 13.61 593,750 13.61 181,851 22.063 - 29.375 4.26 26.39 181,850 26.39 536,498 29.900 - 46.850 8.39 41.86 14,000 37.001998 Plan............ 1,180,000 652,688 22.063 - 34.750 6.58 23.28 763,266 26.51 133,200 40.500 - 46.850 8.00 43.62 1,000 40.502000 Plan............ 500,000 451,750 34.750 - 46.850 5.63 42.13 130,167 44.042001 Plan............ 750,000 505,628 29.900 - 46.850 9.10 34.78 -- -- --------- --------- --------- Total Shares... 6,930,000 3,160,715 6.625 - 46.850 29.65 1,789,383 22.45 ========= ========= ========= 2002 Equity Compensation Table COLUMN (A) COLUMN (B) COLUMN (C) ----------------- ----------------- -------------------- NUMBER OF NUMBER OF SECURITIES REMAINING SECURITIES TO BE WEIGHTED FOR FUTURE ISSUANCE ISSUED UPON AVERAGE EXERCISE UNDER EQUITY EXERCISE OF PRICE OF COMPENSATION PLANS OUTSTANDING OUTSTANDING (EXCLUDING OPTIONS, WARRANTS OPTIONS, WARRANTS SECURITIES REFLECTEDPLAN CATEGORY AND RIGHTS AND RIGHTS IN COLUMN (A))------------- ----------------- ----------------- -------------------- Equity compensation plans approved by security holders..................... 2,708,965 $27.5747 319,578Equity compensation plans not approved by security holders..................... 451,750 $42.1275 45,084 --------- -------- -------Total......................... 3,160,715 $29.6547 364,662 ========= ======== ======= 55 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 ------------------------ NUMBER OF EXERCISE FAIR VALUE $ OPTIONS SHARES PRICE $ AT GRANT DATE EXERCISABLE --------- -------- ------------- ----------- Outstanding at December 31, 1999.................... 3,217,049 18.05 1,757,900 Granted........................................... 1,182,182 41.99 16.88 Exercised......................................... (713,246) 15.81 Cancelled......................................... (124,750) 25.42 ---------Outstanding at December 31, 2000.................... 3,561,235 26.18 2,466,080 --------- Granted........................................... 240,144 45.64 17.28 Exercised......................................... (628,577) 18.72 Cancelled......................................... (26,535) 30.62 ---------Outstanding at December 31, 2001.................... 3,146,267 29.10 2,248,352 --------- Granted........................................... 583,932 34.57 14.65 Exercised......................................... (306,200) 20.21 Cancelled......................................... (263,284) 42.65 ---------Outstanding at December 31, 2002.................... 3,160,715 1,789,383 ========= (15) RETIREMENT PLANS Domestic 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 collectivebargaining agreement are based on negotiated benefits and years of service.Effective January 1, 2003, newly hired employees (except those covered bycollective bargaining) will not participate in these plans. The Companycurrently is reviewing alternative means of providing retirement benefits forall employees. The Company's policy is to fund pension costs currently to the full extentrequired by the Internal Revenue Code. Pension plan assets consist primarily ofbalanced fund investments. The net periodic pension expense for both 2002 and 2001 is based on atwelve month period and on valuations of the plans as of January 1. However, thereconciliation of funded status is determined as of the September 30 measurementdate. 56 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 fourth quartercontributions, as of September 30, 2002 and 2001 is as follows: 2002 2001 -------- ------- CHANGE IN BENEFIT OBLIGATIONBenefit obligation at beginning of year..................... $ 31,942 $28,345Service cost................................................ 1,625 1,641Interest cost............................................... 2,339 2,213Amendments.................................................. -- 62Actuarial loss (gain)....................................... 5,995 1,197Benefits paid............................................... (1,575) (1,516) -------- -------Benefit obligation at end of year........................... 40,326 31,942 -------- -------CHANGE IN PLAN ASSETSFair value of plan assets at beginning of year.............. 26,222 29,903Actual return on plan assets................................ (1,566) (3,714)Contributions............................................... 1,540 1,549Benefits paid............................................... (1,575) (1,516) -------- -------Fair value of plan assets at end of year.................... 24,621 26,222 -------- ------- Funded status............................................... (15,705) (5,720)Unrecognized prior service cost............................. 988 1,026Unrecognized net (gain) loss................................ 12,175 2,513Additional minimum liability................................ (9,532) (1,654) -------- -------Prepaid (accrued) benefit at September 30,.................. (12,074) (3,835)4th quarter contributions................................... 357 316 -------- -------Prepaid (accrued) benefit cost at December 31,.............. $(11,717) $(3,519) ======== ======= The components of net periodic pension cost are as follows: 2002 2001 2000 ------- ------- ------- COMPONENTS OF NET PERIODIC BENEFIT COSTService Cost.......................................... $ 1,625 $ 1,641 $ 1,941Interest Cost......................................... 2,339 2,213 2,076Expected return on plan assets........................ (2,190) (2,492) (2,392)Amortization of prior service cost.................... 38 34 34Recognized actuarial (gain) loss...................... 88 (167) (75) ------- ------- -------Net periodic benefit cost............................. $ 1,900 $ 1,229 $ 1,584 ======= ======= =======WEIGHTED-AVERAGE ASSUMPTIONS AS OF DECEMBER 31,Discount rate......................................... 6.75% 7.50% 8.00%Expected return on plan assets........................ 8.50% 8.50% 8.00%Rate of compensation increase......................... 5.00% 5.00% 5.00% The aggregate ABO (Accumulated Benefit Obligation) exceeds plan assets by$12,076 in 2002 for all qualified domestic plans. 57 CAMBREX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) (15) RETIREMENT PLANS -- (CONTINUED) The Company has a Supplemental Executive Retirement Plan (SERP) for keyexecutives. This plan is non-qualified and unfunded. It consists of two plans,the Corporate SERP plan and the BioWhittaker SERP Plan. The benefit obligation for these plans as of September 30, 2002 and 2001 isas follows: 2002 2001 ------- ------- CHANGE IN BENEFIT OBLIGATIONBenefit obligation at beginning of year..................... $ 5,391 $ 5,148Service cost................................................ 226 254Interest cost............................................... 396 403Amendments.................................................. (86) --Actuarial loss (gain)....................................... 432 (191)Benefits paid............................................... (223) (223) ------- -------Benefit obligation at end of year........................... 6,136 5,391 ------- ------- Funded status............................................... (6,136) (5,391)Unrecognized prior service cost............................. 32 133Unrecognized net (gain) loss................................ 1,690 1,370Additional minimum liability................................ (1,386) (1,169) ------- -------Prepaid (accrued) benefit at December 31,................... $(5,800) $(5,057) ======= ======= The components of net periodic benefit cost are as follows: 2002 2001 2000 ---- ---- ---- COMPONENTS OF NET PERIODIC BENEFIT COSTService Cost................................................ $226 $254 $249Interest Cost............................................... 396 403 356Expected return on plan assets.............................. -- -- --Amortization of prior service cost.......................... 15 15 15Recognized actuarial (gain) loss............................ 114 136 136 ---- ---- ----Net periodic benefit cost................................... $751 $808 $756 ==== ==== ====WEIGHTED-AVERAGE ASSUMPTIONS AS OF DECEMBER 31,Discount rate............................................... 6.75% 7.50% 8.00%Expected return on plan assets.............................. N/A N/A N/ARate of compensation increase............................... 5.00% 5.00% 5.00% International Pension Plans Certain foreign subsidiaries of the Company maintain pension plans fortheir employees which conform to the common practice in their respectivecountries. Based on local laws and customs, some of those plans are not funded.For those that are funded, the amount in the trust supporting the plan isdetermined on sound 58 CAMBREX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) (15) RETIREMENT PLANS -- (CONTINUED)actuarial grounds, and where applicable, in compliance with local statutes. Thefunded status of these plans, incorporating fourth quarter contributions, as ofDecember 31, 2002 and 2001 is as follows: 2002 2001 -------- ------- CHANGE IN BENEFIT OBLIGATIONBenefit obligation at beginning of year..................... $ 13,312 $13,098Service cost................................................ 734 755Interest cost............................................... 817 706Plan participants' contribution............................. 65 (118)Prior service cost.......................................... (75) --Actuarial loss (gain)....................................... 1,534 (163)Benefits paid............................................... (168) (55)Foreign exchange............................................ 2,564 (911) -------- -------Benefit obligation at end of year........................... $ 18,783 $13,312 -------- -------CHANGE IN PLAN ASSETSFair value of plan assets at beginning of year.............. 6,547 7,072Actual return on plan assets................................ (1,659) (846)Company contribution........................................ 562 456Plan participant contribution............................... 230 183Benefits paid............................................... (168) (55)Foreign exchange............................................ 795 (263) -------- -------Fair value of plan assets at end of year.................... 6,307 6,547 -------- ------- Funded status............................................... (12,477) (6,765)Unrecognized actuarial loss................................. 5,392 1,698Unrecognized prior service cost............................. (36) 40Unrecognized net gain....................................... (409) (424)Additional minimum liability................................ 71 --Foreign exchange............................................ 507 (18) -------- -------Prepaid (accrued) benefit................................... $ (6,952) $(5,469) ======== ======= The components of the net periodic pension cost is as follows: 2002 2001 2000 ------ ----- ----- COMPONENTS OF NET PERIODIC BENEFIT COSTService Cost.............................................. $ 734 $ 755 $ 643Interest Cost............................................. 817 705 673Expected return on plan assets............................ (588) (584) (557)Amortization of excess plan net........................... (27) (25) (28)Amortization of prior service cost........................ 111 -- (5) ------ ----- -----Net periodic benefit cost................................. $1,047 $ 851 $ 726 ====== ===== ===== 59 CAMBREX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) (15) RETIREMENT PLANS -- (CONTINUED) 2002 2001 2000 ------------ ------------ ------------ WEIGHTED-AVERAGE ASSUMPTIONS AS OF DECEMBER 31,Discount rate............................. 5.50% - 5.60% 5.50% - 6.25% 5.50% - 6.25%Expected return on plan assets............ 6.90% - 7.60% 7.50% - 9.00% 7.50% - 9.00%Rate of compensation increase............. 3.00% - 3.50% 3.00% - 4.25% 3.00% - 4.25% The aggregate ABO for international plans exceeds plan assets by $8,865 in2002. Savings Plan Cambrex makes available to all employees a savings plan as permitted underSections 401(k) and 401(a) of the Internal Revenue Code. Employee contributionsare matched in part by Cambrex. The cost of this plan amounted to $2,426, $1,679and $2,082 in 2002, 2001 and 2000, respectively. Other The Company has a non-qualified Compensation Plan for Key Executives ("theDeferred Plan"). Under the Deferred Plan, officers and key employees may electto defer all or any portion of their pre-tax annual bonus and/or annual basesalary. Included within other liabilities at December 31, 2002 and 2001 there is$1,407 and $1,979, respectively, representing the Company's obligation under theplan. To assist in the funding of this obligation, the Company invests incertain mutual funds and as such, included within other assets at December 31,2002 and 2001 is $1,407 and $1,979 respectively, representing the fair value ofthese funds. During 1995, the Board amended the Deferred Plan to permit officersand key employees to elect to defer receipt of Company stock which wouldotherwise have been issued upon the exercise of Company options. Total sharesheld in trust as of December 31, 2002 and 2001 are 253,378 and 255,235,respectively, and are included as a reduction of equity at cost. The value ofthe shares held in trust and the corresponding liability of $7,654 at December31, 2002 have been recorded in equity. The Deferred Plan is not funded by theCompany, but the Company has established a Deferred Compensation Trust Fundwhich holds the shares issued. In addition, shares are held in trust forrestricted stock grants for certain Officers. The number of shares held atDecember 31, 2002 and 2001 was 85,508 and 91,227, respectively. The fair valueof these shares was $2,640 and $3,810 at 2002 and 2001, respectively. (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. Effective January 1, 2003, the Company made significant changes to thesebenefits affecting current retirees and future retirees, both in reducing levelof benefits and reducing the subsidy the Company provides. Certain subsidiariesand all employees hired after December 31, 2002 (excluding those covered bycollective bargaining) are not eligible for these benefits. The Company elected to amortize the transition obligation of $1,853 overtwenty years. The net effect upon 2002, 2001 and 2000 pretax operating results,including the amortization of the transition obligation, resulted in a cost of$1,100, $308, and $325, respectively. 60 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: DECEMBER 31, ------------------ 2002 2001 ------- ------- CHANGE IN BENEFIT OBLIGATIONAccumulated benefit obligation at beginning of year......... $ 2,135 $ 2,210Service cost................................................ 379 58Interest cost............................................... 465 169Actuarial (gain) loss....................................... 4,513 (117)Benefits paid............................................... (169) (185) ------- -------Accumulated benefit obligation at end of year............... $ 7,323 $ 2,135 ======= =======Unrecognized net (loss) gain................................ $(3,830) $ 519Unrecognized translation obligation......................... (926) (1,018) ------- -------Accrued benefit cost at September 30,....................... $ 2,567 $ 1,6364th Quarter benefits paid................................... (45) -- ------- -------Accrued benefit cost at end of year......................... $ 2,522 $ 1,636 ======= ======= YEARS ENDED DECEMBER 31, ------------------------- 2002 2001 2000 ------- ----- ----- COMPONENTS OF NET PERIODIC BENEFIT COSTService cost of benefits earned............................. $ 379 $ 58 $ 54Interest cost............................................... 465 169 178Amortization of transition obligation....................... 93 93 93Actuarial (gain) loss recognized............................ 163 (12) -- ------ ---- ----Total periodic postretirement benefit cost.................. $1,100 $308 $325 ====== ==== ==== The discount rate used to determine the accumulated postretirement benefitobligation was 6.75% and 7.50% in 2002 and 2001, respectively. The assumedhealth care cost trend rate used to determine the accumulated postretirementbenefit obligation is 6.5% in 2002 and thereafter (7% in 2001). Aone-percentage-point increase in the assumed health care cost trend rate wouldincrease the accumulated postretirement benefit obligation by $525 and wouldincrease the sum of interest and service cost by $63. A one-percentage-pointdecrease would lower the accumulated postretirement benefit obligation by $683and would raise the sum of interest and service cost by $82. (17) RESTRUCTURING, IMPAIRMENTS AND OTHER CHARGES 2001 Actions On November 30, 2001, the Company announced a plan to realign itsbusinesses which included the creation of Rutherford Chemicals, Inc., inrecognition of the Company's strategic emphasis on the growing opportunities inthe Life Sciences Industry. In addition, on November 30, 2001 the Companyannounced its commitment to a restructuring and cost savings program whichincludes impaired assets, severance, and other costs related to the realignmentof the businesses. The restructuring and cost savings program was largelyexecuted in the fourth quarter of 2001, with the remaining actions to becompleted by the end of 2002. 61 CAMBREX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) (17) RESTRUCTURING, IMPAIRMENTS AND OTHER CHARGES -- (CONTINUED) In the fourth quarter, Cambrex recorded special pre-tax charges of $23,075,the majority of which were non-cash items. As a result of the Company'spreviously announced business restructuring which created Rutherford Chemicals,Inc., together with an impairment charge within those businesses, the Companyincurred $18,649 of charges to operating expense, composed of asset write-downsof $17,243 and severance costs of $1,406. The Company also incurred $4,426 ofinventory write-downs charged to cost of sales, consisting of $2,426 associatedwith discontinued products manufactured at Rutherford Chemical facilities and aseparate $2,000 Biosciences inventory charge. The asset write-downs consisted primarily of fixed asset write-offs andimpairments. A $10,000 impairment charge was recorded on certain assets at oneof the Company's domestic chemical sites, based on the estimated fair value ofthe assets determined by discounting the expected future cash flows. A $1,600impairment was also recorded related to an unused chemical facility to recognizeits estimated current fair value. In addition, a $5,644 charge was recorded towrite-off fixed assets related to discontinued product lines at another of theCompany's domestic chemical sites. Severance charges, which apply largely to the Company's various chemicalsites, relate to involuntary terminations of approximately 62 employees. Allaffected employees received notification in the fourth quarter 2001. As ofDecember 31, 2002 all 62 employees have been terminated. The following table displays activity related to the 2001 restructuring andother charges through December 31, 2002 (in millions): DECEMBER 31, DECEMBER 31, 2001 2002 TOTAL NON-CASH CASH RESERVE CASH RESERVE CHARGES WRITE-OFFS PAYMENTS BALANCE PAYMENTS BALANCE ------- ---------- -------- ------------ -------- ------------ Restructuring and other charges:Fixed asset impairments....... $17.2 $(17.2) $ -- $ -- $ -- --Employee severance............ 1.4 -- (.5) .9 (.9) -- ----- ------ ---- ----- ---- ----Total restructuring and other charges..................... 18.6 (17.2) (.5) .9 (.9) --Inventory write-offs.......... 4.5 (4.5) -- -- -- -- ----- ------ ---- ----- ---- ----Total......................... $23.1 $(21.7) $(.5) $ .9 $(.9) -- ===== ====== ==== ===== ==== ==== 2002 Actions In 2002, Cambrex completed its plan to realign its businesses. In 2002, theCompany recorded net special pre-tax charges of $15,087 These charges include:Rutherford Chemicals fixed asset impairments of $7,689, closure costs for asmall manufacturing facility at one of the Rutherford Chemicals sites of $1,800,inventory write-downs of $586 (included in cost of sales), a goodwill impairmentfor Rutherford Chemicals of $3,962, and severance costs of $1,050. The fixed asset impairments related to certain assets at a RutherfordChemicals domestic site, and were based on an assessment completed in the thirdquarter that indicated the return on investment was below management'sexpectations. As a result, an impairment charge was recorded reflecting theasset value associated with the discontinued product line. The closure costsrelate to another domestic Rutherford Chemicals facility and include asset writedowns, disposal, and other related costs. 62 CAMBREX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) (17) RESTRUCTURING, IMPAIRMENTS AND OTHER CHARGES -- (CONTINUED) Severance charges, which apply to a Rutherford Chemicals domestic site andthe Corporate office, relate to the termination of approximately 19 employees.As of January 31, 2003, all these employees have been terminated. The accrual balance related to the 2002 actions for severance and othercosts included above was approximately $2,600 at December 31, 2002. The following table displays the activity related to the 2002restructuring, impairments and other charges through December 31, 2002 (inmillions): DECEMBER 31, 2002 TOTAL NON-CASH CASH RESERVE CHARGES WRITEOFFS PAYMENTS BALANCE ------- --------- -------- ----------------- Restructuring, Impairments and Other Charges:Fixed asset impairments................. $ 7.7 $ (7.7) $ -- $ --Goodwill impairment..................... 4.0 (4.0) -- --Employee severance...................... 1.0 -- $ -- 1.0Facility closure costs.................. 1.8 -- (0.2) 1.6 ----- ------ ----- ----Total restructuring, impairments and other charges......................... 14.5 (11.7) (0.2) 2.6Inventory write-offs.................... 0.6 (0.6) -- -- ----- ------ ----- ----Total................................... $15.1 $(12.3) $(0.2) $2.6 ===== ====== ===== ==== Facility closure costs are expected to be paid within the next year.Severance costs are expected to be paid within the next 2 years. (18) INSURANCE CLAIM The Company experienced mechanical problems with a reactor located in oneof the Company's chemical facilities in both August and December 2000 whichresulted in extended plant downtime and interruption in product supply.Consequently, sales and production of certain products were curtailed throughout2001. Interim inspection and mechanical repairs were made to the reactor and thereactor operated at reduced capacity for most of 2001. A replacement reactor wasinstalled in the fourth quarter 2001. The Company incurred costs associated withthe reactor replacement and plant downtime of approximately $14,000 which wasfully covered by our insurance policies, subject to deductibles. The Company experienced a fire at another one of the chemical facilities inMarch 2001. Beginning in 2001 and completed in 2002, the Company has repairedand rebuilt the affected portions of the facility. The total claim amount whichis primarily to rebuild the plant is $6,600, which we expect to be substantiallycovered by our insurance policies, net of deductibles. As a result, thisincident is not expected to have any negative impact on the Company's operatingresults. (19) ARBITRATION AWARD In April 2002, the Company received a favorable arbitration award relatedto disputes concerning Rutherford Chemicals toll manufacturing and licensedproduct line agreements. The arbitration decision compensated the Company forlost profits for the years 2001 through 2005. The Company originally paid $4,500to acquire the product line rights from Arizona Chemicals Corporation. The totalaward, net of legal 63 CAMBREX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) and other related costs, was $4,300, of which $540 was recorded as a reductionof the intangible asset basis and $3,760 was recorded in Other income in thesecond quarter of 2002. (20) OTHER INCOME AND EXPENSE The Other-net component of Other (income) expense was $64, $(277) and$(329) for 2002, 2001 and 2000, respectively. The 2002 amount consistedprimarily of an investment impairment of $3,089 related to a prior investment inan emerging technology company. The company, in which the investment was held,has experienced significant financial difficulties in recent months. This ledCambrex to evaluate the current market value of the investment. This evaluationindicated that a decline in the market value was other than temporary andaccordingly, an impairment charge was recorded. 2002 also included $312 inwrite-off costs due to a convertible debt arrangement that was abandoned, $194in write-off costs associated with an investment in a joint venture and $330 inlosses on the sales of miscellaneous assets. These items were partially offsetby the favorable arbitration award of $3,760 discussed in Note 19. 2001consisted primarily of gains on a marketable security, classified as trading,royalty and miscellaneous income partly offset by asset write-offs. Included in2000 were gains on foreign exchange and miscellaneous non-recurring labservices. (21) SEGMENT INFORMATION The Company is involved principally in the manufacturing and marketing ofproducts and services which include: Human Health segment, which include ActivePharmaceutical Ingredients and Pharmaceutical Intermediates produced under Foodand Drug Administration cGMP for use in the production of prescription andover-the-counter drug products, and imaging chemicals used in x-ray media;Biosciences segment, consisting of cell culture and endotoxin detectionproducts, electrophoresis and chromatography products and contractbiopharmaceutical manufacturing; Rutherford Chemicals segment consisting ofVitamin B-3 used in feed additives, Agricultural Intermediates used in cropprotection, Performance Enhancing Chemicals used in photography, pigments,specialty polymers, fuel/oil additives, catalysts, and other specialtyadditives, Polymer Systems products used in coatings, telecommunications,electronics and engineering plastics and Personal Care ingredients; All Othersegment, which includes Specialty and Fine Chemicals and Animal and HealthProducts not manufactured at the Rutherford Chemicals facilities. 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. No customer accounts for more than 10% ofconsolidated revenues. The Company announced in late November 2001 a plan to realign itsbusinesses in recognition of the Company's strategic emphasis on the growingopportunities in the life sciences industry. Effective January 1, 2002, theoperating units that primarily produce specialty and fine chemicals, and animalhealth and agriculture products were combined under a new subsidiary, RutherfordChemicals, Inc. The chemical company includes CasChem, Inc., Bayonne, NewJersey; Cosan Chemical Corporation, Carlstadt, New Jersey; Heico Chemicals,Inc., Delaware Water Gap, Pennsylvania; Nepera, Inc., Harriman, New York;Zeeland Chemicals, Inc., Zeeland, Michigan; and Seal Sands Chemicals Ltd.,Middlesbrough, United Kingdom. With this realignment, the Company plans to report four operating segmentsbeginning in 2002: Human Health, Biosciences, Rutherford Chemical and All Other. 64 CAMBREX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) (21) SEGMENT INFORMATION -- (CONTINUED) The following is a summary of business segment information: 2002 2001 2000 -------- -------- -------- GROSS SALESHuman Health......................................... $209,074 $199,858 $187,420Biosciences.......................................... 163,302 124,973 96,232Rutherford Chemicals................................. 129,318 143,903 169,920All Other............................................ 20,482 30,460 38,972 -------- -------- -------- $522,176 $499,194 $492,544 ======== ======== ======== 2002 2001 2000 -------- -------- -------- GROSS PRODUCT SALES DETAIL FOR EACH SEGMENTHuman Health: Active Pharmaceutical Ingredients.................. $171,794 $165,457 $156,290 Pharmaceutical Intermediates....................... 24,194 25,059 21,131 Personal Care Ingredients.......................... 675 416 1,127 Imaging Chemicals.................................. 11,689 8,241 7,465 Catalysts.......................................... 186 248 1,296 Neutraceuticals.................................... 536 437 111 -------- -------- -------- Total Human Health......................... $209,074 $199,858 $187,420 ======== ======== ========Biosciences:Cells and Media...................................... $ 58,631 $ 54,708 $ 50,590Endotoxin Detection.................................. 27,156 23,786 21,391Contract Biopharmaceutical Manufacturing............. 55,218 22,461 --Electrophoresis, Chromatography & Other.............. 22,297 24,018 24,251 -------- -------- -------- Total Biosciences.......................... $163,302 $124,973 $ 96,232 ======== ======== ========Rutherford Chemicals: Vitamin B-3........................................ $ 10,324 $ 6,629 $ 6,910 Agricultural Intermediates......................... 22,785 31,535 32,137 Performance Enhancing Chemicals.................... 31,199 34,753 46,285 Polymer Systems.................................... 21,029 27,871 39,202 Personal Care Ingredients.......................... 20,356 20,591 19,585 Other.............................................. 23,625 22,524 25,801 -------- -------- -------- Total Rutherford Chemicals................. $129,318 $143,903 $169,920 ======== ======== ========All Other: Agriculture/Animal Health.......................... $ 11,608 $ 16,694 $ 17,373 Performance Enhancing Chemicals.................... 8,874 13,766 21,599 -------- -------- -------- Total All Other............................ $ 20,482 $ 30,460 $ 38,972 ======== ======== ======== 65 CAMBREX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) (21) SEGMENT INFORMATION -- (CONTINUED) 2002 2001 2000 -------- -------- -------- GROSS PROFITHuman Health......................................... $ 92,671 $ 87,864 $ 82,873Biosciences.......................................... 85,346 63,193 50,815Rutherford Chemicals................................. 19,434 20,852 33,381All Other............................................ 2,725 7,426 10,426 -------- -------- -------- $200,176 $179,335 $177,495 ======== ======== ======== 2002 2001 2000 -------- ---------- ---------- (RESTATED) (RESTATED) ---------- ---------- OPERATING PROFITHuman Health & All Other............................. $ 69,072 $ 67,060 $ 66,491Biosciences.......................................... 37,760 17,516 14,306Rutherford Chemicals................................. (7,949) (12,625) 16,733Corporate............................................ (39,400) (26,935) (20,016) -------- -------- -------- Total Operating Profit..................... $ 59,483 $ 45,016 $ 77,514 ======== ======== ======== Interest Expense, net................................ $ 11,237 $ 10,567 $ 11,487Other Expense (income), net.......................... 64 (277) (329)Taxes................................................ 11,949 9,414 19,649 -------- -------- -------- Net Income................................. $ 36,233 $ 25,312 $ 46,707 ======== ======== ======== 2002 2001 2000 -------- ---------- ---------- (RESTATED) (RESTATED) TOTAL ASSETSHuman Health & All Other............................. $308,572 $257,335 $273,804Biosciences.......................................... 360,713 356,450 190,770Rutherford Chemicals................................. 139,101 159,859 175,878Corporate............................................ 59,142 44,731 41,165 -------- -------- -------- $867,528 $818,375 $681,617 ======== ======== ======== 2002 2001 2000 -------- -------- -------- CAPITAL SPENDINGHuman Health & All Other............................. $ 28,180 $ 18,970 $ 19,672Biosciences.......................................... 11,295 6,448 4,007Rutherford Chemicals................................. 9,860 13,409 13,901Corporate............................................ 968 4,121 1,876 -------- -------- -------- $ 50,303 $ 42,948 $ 39,456 ======== ======== ======== 66 CAMBREX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) (21) SEGMENT INFORMATION -- (CONTINUED) 2002 2001 2000 -------- -------- -------- DEPRECIATIONHuman Health & All Other............................. $ 20,032 $ 17,657 $ 15,007Biosciences.......................................... 7,081 4,154 3,817Rutherford Chemicals................................. 10,224 12,864 11,053Corporate............................................ 1,787 2,091 2,062 -------- -------- -------- $ 39,124 $ 36,766 $ 31,939 ======== ======== ======== 2002 2001 2000 -------- -------- -------- AMORTIZATIONHuman Health & All Other............................. $ 6 $ 3,350 $ 2,857Biosciences.......................................... 1,548 9,611 6,586Rutherford Chemicals................................. -- 1,070 712 -------- -------- -------- $ 1,554 $ 14,031 $ 10,155 ======== ======== ======== (22) FOREIGN OPERATIONS AND EXPORT SALES Summarized data for the Company's operations for 2002, 2001 and 2000 are asfollows: DOMESTIC EUROPEAN TOTAL -------- -------- -------- 2002Gross sales........................................ $281,063 $241,113 $522,176Long-lived identifiable assets..................... 402,323 175,930 578,2532001Gross sales........................................ $266,273 $232,921 $499,194Long-lived identifiable assets..................... 406,300 150,316 556,6162000Gross sales........................................ $262,068 $230,476 $492,544Long-lived identifiable assets..................... 272,529 164,008 436,537 Export sales, included in domestic gross sales, in 2002, 2001 and 2000amounted to $50,930, $45,041, and $50,910, respectively. No country, in any ofthe given years, represents more than 10% of these export sales. Sales by geographic area consist of the following: 2002 2000 -------- -------- North America............................................... $292,743 $281,477Europe...................................................... 190,620 182,541Asia........................................................ 27,544 23,393Other....................................................... 11,269 11,783 -------- -------- -------- --------Total....................................................... $522,176 $499,194 ======== ======== 67 CAMBREX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) (23) 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, 2002, future minimum commitments under non-cancelable operatinglease arrangements were as follows: Year ended December 31: 2003..................................................... $ 4,561 2004..................................................... 4,268 2005..................................................... 3,672 2006..................................................... 3,494 2007 and thereafter...................................... 10,674 ------- Total commitments........................................ $26,669 ======= Total operating lease expense was $5,017, $3,618 and $2,545 for the yearsended December 31, 2002, 2001 and 2000, respectively. On August 11, 1999, the Company completed a marketing, development andmedia supply agreement with Osiris Therapeutics, Inc. allowing the Company'sCambrex Bio Science Walkersville, Inc. subsidiary to manufacture and marketadult stem cell products for the life science research market through anexclusive worldwide license from Osiris. In addition, Cambrex Bio ScienceWalkersville,Inc. became the exclusive supplier of culture media to Osiris forthe production of human adult stem cells in therapeutic applications. Cambrexalso purchased $5,000 of Osiris Common Stock and has agreed to purchase anadditional $2,000 of Common Stock coincident with an Osiris initial publicoffering. The $5,000 paid for Osiris Common Stock is included in OtherNon-current Assets. (24) 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 other non-current liabilities, of$1,550 and $1,400 at December 31, 2002 and 2001, respectively, for costsassociated with the study and remediation of Superfund sites and the Company'scurrent and former operating sites for matters that are probable and reasonablyestimable. Based on currently available information and analysis, the Company'saccrual represents management's best estimate of what it believes are thereasonably possible and estimated environmental cleanup related costs of anon-capital nature. During the past three-year period, there were no cashpayments for environmental cleanup related matters. In 2002, a provision of $150was recorded for a chemical site as a result of the development of an initialremediation estimate based on the current conclusions of the ongoinginvestigation of the site. There were no provisions for environmentalcontingencies in 2001. The Company reversed reserves by approximately $900, and$1,100 during 2001 and 2000, respectively, as a result of revised estimatesbased on information obtained from continued investigation and remedial plandevelopment and resolution of proceedings related to Superfund site owners andinsurers. In addition, the Company settled certain environmental claimsinvolving the Cosan Chemical Corporation (a subsidiary) with insurance 68 CAMBREX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) (24) CONTINGENCIES -- (CONTINUED)companies for $1,812 in 2000 and $1,150 in 1999, respectively. After reviewinginformation currently available, management believes any amounts paid in excessof the accrued liabilities will not have a material effect on its financialposition or results of operations. However, these matters, if resolved in amanner different from those assumed in the current estimates could have amaterial adverse effect on financial condition, operating results and cash flowswhen resolved in a future reporting period. Litigation The Company and its subsidiary Profarmaco S.r.l. (currently known asCambrex Profarmaco Milano S.r.l.) were named as defendants in a proceedinginstituted by the Federal Trade Commission ("FTC") on December 21, 1998, in theUnited States District Court for the District of Columbia. The complaint allegedthat exclusive license agreements which Cambrex Profarmaco Milano S.r.l. enteredinto with Mylan Laboratories, Inc. ("Mylan") covering the drug master files for(and therefore the right to buy and use) two active pharmaceutical ingredients("APIs"), lorazepam and clorazepate, were part of an effort on Mylan's part torestrict competition in the supply of lorazepam and clorazepate and to increasethe price charged for these products when Mylan sold them as genericpharmaceuticals. The complaint further alleged that these agreements violatedthe Federal Trade Commission Act, and that Mylan, Cambrex, Cambrex ProfarmacoMilano, S.r.l., and Gyma Laboratories of America, Inc., Cambrex ProfarmacoMilano S.r.l's distributor in the United States, engaged in an unlawfulrestraint of trade and conspired to monopolize and attempted to monopolize themarkets for the generic pharmaceuticals incorporating the APIs. A lawsuit makingsimilar allegations against the Company and Cambrex Profarmaco Milano S.r.l.,and seeking injunctive relief and treble damages, was filed by the AttorneysGeneral of 31 states in the United States District Court for the District ofColumbia on behalf of those states and persons in those states who werepurchasers of the generic pharmaceuticals. The Company and Cambrex Profarmaco Milano S.r.l. have also been named inpurported class action complaints brought by private plaintiffs in various statecourts on behalf of purchasers of lorazepam and clorazepate in generic form,making allegations essentially similar to those raised in the FTC's complaintand seeking various forms of relief including treble damages. On February 9, 2001, a federal court in Washington, DC entered an Order andStipulated Permanent Injunction as part of a settlement of the FTC and AttorneysGeneral's suits. Under these settlement documents Mylan agreed to pay over$140,000 on its own behalf and on behalf of most of the other defendantcompanies including Cambrex and Cambrex Profarmaco Milano S.r.l. In the Orderand Injunction, the settling defendants also agreed to monitor certain futureconduct. The private litigation continues. The Company strongly believes that its licensing arrangements with Mylanare in accordance with regulatory requirements. However, the Company and Mylanterminated the exclusive licenses to the drug master files as of December 31,1998. In entering these licensing arrangements, the Company elected not to raisethe price of its products and had no control or influence over the pricing ofits final generic product. Mylan had been fully covering the costs for thedefense and indemnity of Cambrex and Cambrex Profarmaco Milano S.r.l. undercertain obligations set forth in the license agreements. Cambrex agreed to coverseparate legal defense costs incurred for Cambrex and Cambrex Profarmaco MilanoS.r.l. on a going forward basis beginning August 1, 2000. The Company recentlyentered into discussions with Mylan regarding the final resolution of alloutstanding claims. The outcome of these discussions is not currentlydeterminable. 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 was 69 CAMBREX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) (24) CONTINGENCIES -- (CONTINUED)issued as part of the Federal Government's ongoing anti-trust investigation intovarious business practices in the vitamin industry generally. In the fourthquarter of 1999, the Company reached a settlement with the Government concerningNepera's alleged role in Vitamin B-3 violations from 1992 to 1995. On October13, 2000, the Government settlement was finalized with Nepera entering into avoluntary plea agreement with the Department of Justice. Under this agreement,Nepera has entered a plea of guilty to one count of price fixing and marketallocation of Vitamin B-3 from 1992 to 1995 in violation of section one of theSherman Act and has agreed to pay a fine of approximately $4,000. Under the pleaagreement, Nepera was placed on probation for a period of one year which hasended. The fine was paid in February 2001. Nepera has been named as a defendant,along with several other companies, in a number of private civil actions broughton behalf of alleged purchasers of Vitamin B-3. An accrual of $6,000 was recorded in the fourth quarter 1999 to cover theanticipated government settlements, related litigation, and legal expenses.Based on discussions with various plaintiffs counsel, as well as then currentestimates of expenditures for legal fees, an additional accrual of $4,400 wasestablished in the fourth quarter of 2001. The Company believed that the currentreserves would be sufficient to cover resolution of the remaining relatedlitigation matters. However, during 2002, based on information developed duringthe year, the Company determined that the remaining litigation matters would bemore costly than previously anticipated. Therefore, during the third and fourthquarters of 2002, the Company increased reserves by $6,000 and $4,000,respectfully. The balance of this accrual as of December 31, 2002 wasapproximately $9,034. This accrual has been recorded in accounts payable andaccrued liabilities. Other The Company has a $5,000 investment in a privately owned, emergingbiotechnology company that has therapeutic products in various stages ofclinical trials. The investment is monitored on a continual basis to evaluatewhether any changes in value become other than temporary. No impairment has beenrecognized to date. The Company has commitments incident to the ordinary course of businessincluding corporate guarantees of financial assurance obligations under certainenvironmental laws for remediation, closure and/or third party liabilityrequirements of certain of its subsidiaries and a former operating location;contract provisions for indemnification protecting its customers and suppliers,etc. against third party liability for manufacture and sale of Company productsthat fail to meet product warranties and contract provisions for indemnificationprotecting licensees against intellectual property infringement related tolicensed Company technology or processes. The Company is still assessing themateriality threshold of these commitments and potential impact on its resultsfrom operations from the adoption of FIN 45. While it is not possible to predict with certainty the outcome of the abovelitigation matters and various other lawsuits, it is the opinion of managementthat the ultimate resolution of these proceedings should not have a materialadverse effect on the Company's results of operations, cash flows and financialposition. These matters, if resolved in an unfavorable manner, could have amaterial effect on the operating results and cash flows when resolved in afuture reporting period. 70 CAMBREX CORPORATION SELECTED QUARTERLY FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE DATA) 1ST 2ND 3RD 4TH QUARTER QUARTER QUARTER QUARTER YEAR ----------- -------------- -------------- -------------- -------- (UNAUDITED) (UNAUDITED)(2) (UNAUDITED)(3) (UNAUDITED)(4) 2002Gross sales................. $132,455 $134,263 $122,991 $132,467 $522,176Net revenues................ 132,555 134,867 124,975 134,546 526,943Gross profit................ 49,693 53,040 49,860 47,583 200,176Net income.................. 14,990 16,173 2,097 2,973 36,233Earnings per share:(1) Basic..................... $ 0.58 $ 0.62 $ 0.08 $ 0.11 $ 1.40 Diluted................... $ 0.56 $ 0.61 $ 0.08 $ 0.11 $ 1.37Average shares: Basic..................... 25,888 25,991 26,012 25,904 25,954 Diluted................... 26,591 26,644 26,723 26,284 26,520 1ST 2ND 3RD 4TH QUARTER QUARTER QUARTER QUARTER YEAR ----------- ----------- ----------- -------------- ---------- (RESTATED) (RESTATED) (RESTATED) (RESTATED) (RESTATED) (UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)(5) 2001Gross sales...................... $131,185 $122,561 $117,588 $127,860 $499,194Net revenues..................... 131,277 122,038 117,514 128,026 498,855Gross profit..................... 50,316 47,719 40,709 40,591 179,335Net income....................... 13,892 14,453 8,118 (11,151) 25,312Earnings per share:(1) Basic.......................... $ 0.55 $ 0.56 $ 0.32 $ (0.43) $ 0.99 Diluted........................ $ 0.53 $ 0.54 $ 0.31 $ (0.42) $ 0.96Average shares: Basic.......................... 25,411 25,658 25,754 25,774 25,648 Diluted........................ 26,291 26,668 26,613 26,460 26,495 ---------------(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) The second quarter of 2002 includes a special net benefit of $2.7 million ($1.9 million after tax) comprised of $0.4 million expense for fixed asset impairment charged to operating expenses, $2.5 million investment write- down recorded in other expense, $3.8 million arbitration award recorded in other income and $1.8 million benefit related to an insurance settlement recorded in cost of sales.(3) The third quarter 2002 includes special charges of $14.8 million ($10.2 million after tax), comprised of asset impairments, severance and a facility closure of $8.4 million, which are recorded in operating expenses, a related inventory write-down of $0.6 million recorded in cost of sales; an accrual for Vitamin B-3 settlement and litigation costs of $6.0 million recorded in operating expenses, an investment impairment of $0.6 million recorded in other expense; and a $0.8 million benefit related to an insurance settlement recorded in cost of sales.(4) The fourth quarter of 2002 includes special charges of $9.7 million ($7.5 million after tax), comprised of a goodwill impairment at Rutherford sites of $4.0 million; $4.0 million for Vitamin B-3 provision, reserve for facility closure costs of $0.9 million and a severance program of $0.8 million.(5) The fourth quarter 2001 includes special charges of $27.5 million ($20.1 million after tax), comprised of restructuring and asset write-downs of $18.6 million charged to operating expenses, $4.5 million of inventory write-downs charged to cost of sales, and $4.4 million for a Vitamin B-3 provision. Note: Cambrex Corporation restated its results for the five year period from 1997-2001. This restatement resulted from a fourth quarter 2002 management review of the inter-company processes and controls which identified certain discrepancies in the inter-company accounts. Based upon this review, the Company has determined that certain administrative and other charges were not properly expensed in each quarter of 2001. Selling, general and administrative expenses were increased in the first, second and fourth quarter 2001 by $664, $533 and $490, respectively and decreased in the third quarter by $23. Net income was overstated by $500, $401, and $369 in the first, second and fourth quarters 2001, respectively and understated by $17 in the third quarter 2001. This restatement did not have any impact on the Company's cash flows nor on 2002 reported results from operations. 71 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," "Related Party Transactions" and"Executive Compensation" in the registrant's definitive proxy statement for theAnnual Meeting of Stockholders, to be held April 25, 2002, which meetinginvolves the election of directors, which definitive proxy statement is beingfiled with the Securities and Exchange Commission pursuant to Regulation 14A. In addition, information concerning the registrant's executive officers hasbeen included in Part I under the caption "Executive Officers of theRegistrant." ITEM 14 CONTROLS AND PROCEDURES (a) Evaluation of disclosure controls and procedures. The Company's ChiefExecutive Officer and Chief Financial Officer have evaluated the effectivenessof the Company's "disclosure controls and procedures" (as defined in Rules13a-14(c) and under the Securities Exchange Act of 1934 (the "Exchange Act")) asof a date (the "Evaluation Date") within 90 days before the filing date of thisannual report. Based on such evaluation, they have concluded that, as of theEvaluation Date, the Company's disclosure controls and procedures were effectiveto ensure that information required to be disclosed by the Company in thereports that it files or submits under the Exchange Act is recorded, processed,summarized and reported, within the time periods specified in the rules andforms of the Securities and Exchange Commission. (b) Changes in internal controls. As disclosed in Note 2, the Companyrestated its results for prior periods due to certain discrepancies in theinter-company accounts. Effective December 31, 2002, the Company has implementeda revised policy and procedure with respect to inter-company transactions andaccounts to ensure monthly reconciliations are performed. With the exception ofthe changes in inter-company accounting procedures, there were no significantchanges in the Company's internal controls or in other factors that couldsignificantly affect these controls during the period covered by this annualreport. PART IV ITEM 15 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.............................. 30Consolidated Balance Sheets as of December 31, 2002, and 2001...................................................... 31Consolidated Income Statements for the Years Ended December 31, 2002, 2001 and 2000................................... 32Consolidated Statement of Stockholders' Equity for the Years Ended December 31, 2002, 2001 and 2000.................... 33Consolidated Statements of Cash Flows for the Years Ended December 31, 2002, 2001 and 2000.......................... 34Notes to Consolidated Financial Statements.................. 35Consolidated Quarterly Financial Data (unaudited) for the Years Ended December 31, 2002 and 2001.................... 71 (a) 2. (i) The following schedule to the consolidated financial statementsof the Company as filed herein and the Report of Independent Accountants onFinancial Statement Schedule are filed as part of this report. 72 PAGE NUMBER (IN THIS REPORT) ---------------- Report of Independent Accountants on Financial Statement Schedule.................................................. 74Schedule II -- Valuation and Qualifying Accounts............ 75 All other schedules are omitted because they are not applicable or notrequired or because the required information is included in the consolidatedfinancial statements of the Company or the notes thereto. (a) 3 The exhibits filed in this report are listed in the Exhibit Index onpages 80-82 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 did not file any reports on Form 8-K during the last quarterof the year ended December 31, 2002. 73 REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE To the Board of Directors of Cambrex Corporation: Our audits of the consolidated financial statements referred to in ourreport dated February 28, 2003 appearing in the 2002 Annual Report toShareholders of Cambrex Corporation and its subsidiaries on Form 10-K of CambrexCorporation and its subsidiaries also included an audit of the financialstatement schedule listed in Item 15(a) (2) of this Form 10-K. In our opinion,this financial statement schedule presents fairly, in all material respects, theinformation set forth therein when read in conjunction with the relatedconsolidated financial statements. PRICEWATERHOUSECOOPERS LLP Florham Park, New JerseyFebruary 28, 2003 74 SCHEDULE II CAMBREX CORPORATION VALUATION AND QUALIFYING ACCOUNTS FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000 (DOLLARS IN THOUSANDS) COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E --------- ---------- ---------- ---------- -------- ADDITIONS ----------------------- BALANCE CHARGED TO CHARGED TO BEGINNING COST AND OTHER END OFCLASSIFICATION OF YEAR EXPENSES ACCOUNTS DEDUCTIONS YEAR-------------- --------- ---------- ---------- ---------- -------- Year Ended December 31, 2002: Doubtful trade receivables and returns and allowances...................... $ 1,270 $1,185 $ -- $ 197 $ 2,258 Inventory and obsolescence provisions.......................... 19,067 4,986 -- 6,811 17,242Year Ended December 31, 2001: Doubtful trade receivables and returns and allowances...................... $ 1,354 $ 110 $ -- $ 194 $ 1,270 Inventory and obsolescence provisions.......................... 17,393 3,332 -- 1,658 19,067Year Ended December 31, 2000: Doubtful trade receivables and returns and allowances...................... $ 799 $ 805 $ -- $ 250 $ 1,354 Inventory and obsolescence provisions.......................... 18,654 2,599 -- 3,860 17,393 75 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the SecuritiesExchange Act of 1934, the registrant has duly caused this report to be signed onits behalf by the undersigned, thereunto duly authorized. CAMBREX CORPORATION By /s/ JAMES A. MACK ------------------------------------ James A. Mack President, Chairman of the Board of Directors Date: March 18, 2003 Pursuant to the requirements of the Securities Exchange Act of 1934, thisreport has been signed below by the following persons on behalf of theregistrant and in the capacities and on the dates indicated. SIGNATURE TITLE DATE --------- ----- ---- /s/ JAMES A. MACK Chairman of the Board of )------------------------------------------------ Directors James A. Mack President and Chief Executive Officer /s/ LUKE M. BESHAR Senior Vice President )------------------------------------------------ Chief Financial Officer Luke M. Beshar /s/ CYRIL C. BALDWIN, JR. Director )------------------------------------------------ Cyril C. Baldwin, Jr. /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 )------------------------------------------------ Roy W. Haley /s/ KATHRYN RUDIE HARRIGAN, PHD* Director )------------------------------------------------ Kathryn Rudie Harrigan, PhD /s/ LEON J. HENDRIX, JR.* Director ) March 18, 2003------------------------------------------------ Leon J. Hendrix, Jr. /s/ ILAN KAUFTHAL* Director )------------------------------------------------ Ilan Kaufthal /s/ WILLIAM KORB* Director )------------------------------------------------ William Korb 76 SIGNATURE TITLE DATE --------- ----- ---- /s/ ROBERT LEBUHN* Director )------------------------------------------------ Robert LeBuhn /s/ JOHN R. MILLER* Director )------------------------------------------------ John R. Miller /s/ PETER G. TOMBROS* Director )------------------------------------------------ Peter G. Tombros *By /s/ JAMES A. MACK -------------------------- James A. Mack Attorney-in-Fact 77 CAMBREX CORPORATION CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 (18 U.S.C. SECTION 1350) I, James A. Mack, certify that: 1. I have reviewed this annual report on Form 10-K of Cambrex Corporation; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the period presented in this annual report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officer and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. /s/ JAMES A. MACK -------------------------------------- James A. Mack, President Chairman of the Board and Chief Executive Officer Date: March 18, 2003 78 CAMBREX CORPORATION CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 (18 U.S.C. SECTION 1350) I, Luke M. Beshar, certify that: 1. I have reviewed this annual report on Form 10-K of Cambrex Corporation; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the period presented in this annual report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officer and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. /s/ LUKE M. BESHAR -------------------------------------- Luke M. Beshar Senior Vice President and Chief Financial Officer Date: March 18, 2003 79 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). 4.5 -- Loan agreements dated November 28, 2001 by and among the registrant, JPMorganChase Bank as administrative agent, JPMorgan Securities Inc. as advisor, lead arranger and bookrunner and Bank of America N.A., The Bank of New York and Fleet National Bank as co-syndication agents.(R). 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). 10.18 -- 1998 Performance Stock Option Plan.(S). 10.19 -- 2000 Performance Option Plan(S). 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. ---------------See legend on following page. 80 EXHIBIT INDEX EXHIBIT NO. DESCRIPTION------- ----------- 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).10.30.1 Additional Retirement Payment Agreement dated December 15, 1994 between the registrant and Arthur I. Mendolia.(L).10.31 -- Additional Retirement Payment Agreement dated December 15, 1994 between the registrant and Cyril C. Baldwin, Jr.(L).10.32 -- Additional Retirement Payment Agreement between the registrant and James A. Mack.(L).10.40 -- Registration Rights Agreement dated as of June 6, 198510.40 -- 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 PricewaterhouseCoopers LLP to the incorporation by reference of its report herein in Registration Statement Nos. 333-57404, 333-22017, 33-21374, 33-37791, 33-81780 and 33-81782 on Form S-8 of the registrant.(M).24 -- Powers of Attorney to sign this report.(M).99.1 CEO Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.99.2 CFO Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. ---------------See legend on following page. 81 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. 333-22017) 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.(R) Incorporated by reference to the registrant's Current Report on Form 8-K dated December 4, 2001.(S) Incorporated by reference to registrant's Registration Statement on Form S-8 (Registration No. 333-57404) dated March 22, 2001. 82 . . . EXHIBIT 10.21 CAMBREX CORPORATION ANNUAL REPORT ON FORM 10-K REVISED SCHEDULE OF PARTIES NAME TITLE DATE OF AGREEMENT---- ----- ----------------- James A. Mack........................ President, Chairman of the Board, 02/01/90 Chief Executive OfficerClaes Glassell....................... President, and Chief Operating 10/12/94 OfficerSteven M. Klosk...................... Executive Vice President, 10/21/92 AdministrationPeter E. Thauer...................... Senior Vice President, Law and 08/28/89 Environment, General Counsel and Corporate SecretarySalvatore J. Guccione................ Executive Vice President, Corporate 12/14/95 Strategy and DevelopmentThomas N. Bird....................... Vice President, Business Development 07/23/99 Life Sciences . . . EXHIBIT 21 CAMBREX CORPORATION SUBSIDIARIES OF REGISTRANT SUBSIDIARY INCORPORATED IN:---------- ---------------- CasChem, Inc. .............................................. DelawareCosan Chemical Corporation.................................. New JerseyNepera, Inc. ............................................... New YorkCambrex North Brunswick, Inc. .............................. DelawareCambrex Charles City, Inc. ................................. IowaZeeland Chemicals, Inc. .................................... MichiganCambrex Bio Science Walkersville, Inc. ..................... DelawareSeal Sands Chemicals Limited................................ EnglandCambrex Profarmaco Milano S.r.l. ........................... ItalyCambrex Karlskoga AB........................................ SwedenCambrex Bio Science Verviers Sprl........................... BelgiumCambrex Bio Science Rockland, Inc. ......................... DelawareCambrex Bio Science Copenhagen ApS.......................... DenmarkCambrex Profarmaco Cork Limited............................. IrelandCambrex Profarmaco Landen NV................................ BelgiumCambrex Bio Science Nottingham Limited...................... EnglandCambrex Bio Science Baltimore, Inc. ........................ DelawareCambrex Bio Science Hopkinton, Inc. ........................ Delaware EXHIBIT 23 CAMBREX CORPORATION CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the RegistrationStatements on Form S-8 (File Nos. 333-57404, 333-22017, 33-21374, 33-37791,33-81780, and 33-81782) of Cambrex Corporation of our report dated February 28,2003 relating to the financial statements and financial statement schedule,which appear in this Form 10-K. PRICEWATERHOUSECOOPERS LLP Florham Park, New JerseyMarch 18 2003 EXHIBIT 24 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that each officer and director of CambrexCorporation, a Delaware corporation, whose signature appears below constitutesand appoints James A. Mack and Luke M. Beshar, and each of them, his true andlawful attorneys-in-fact and agents, with full power of substitution andresubstitution, for him and in his name, place and stead, in any and allcapacities, to sign any and all Annual Reports on Form 10-K which said CambrexCorporation may be required to file pursuant to Section 13 or 15(d) of theSecurities Exchange Act of 1934 and any and all amendments thereto and to filethe same, with all exhibits thereto, and other documents in connectiontherewith, with the Securities and Exchange Commission, granting unto saidattorneys-in-fact and agents full power and authority to do and perform each andevery act and thing requisite and necessary to be done in and about thepremises, as fully to all intents and purposes as he might or could do inperson, hereby ratifying and confirming all that said attorneys-in-fact andagents or their substitutes may lawfully do or cause to be done by virtuehereof. IN WITNESS WHEREOF each of the undersigned has executed this instrument asof the 18th day of March 2003. /s/ JAMES A. MACK ------------------------------------------------------- James A. Mack President, Chief Executive Officer Chairman of the Board /s/ LUKE M. BESHAR ------------------------------------------------------- Luke M. Beshar Senior Vice President and Chief Financial Officer. (Principal Financial Officer and Accounting Officer) /s/ ROSINA B. DIXON ------------------------------------------------------- Rosina B. Dixon, M.D. Director /s/ GEORGE J.W. GOODMAN ------------------------------------------------------- George J.W. Goodman Director /s/ ROY W. HALEY ------------------------------------------------------- Roy W. Haley Director /s/ KATHRYN RUDIE HARRIGAN, PHD ------------------------------------------------------- Kathryn Rudie Harrigan, PhD Director /s/ LEON J. HENDRIX, JR. ------------------------------------------------------- Leon J. Hendrix, Jr. Director /s/ ILAN KAUFTHAL ------------------------------------------------------- Ilan Kaufthal Director /s/ WILLIAM KORB ------------------------------------------------------- William Korb Director /s/ ROBERT LEBUHN ------------------------------------------------------- Robert LeBuhn Director /s/ JOHN R. MILLER ------------------------------------------------------- John R. Miller Director /s/ CYRIL C. BALDWIN, JR. ------------------------------------------------------- Cyril C. Baldwin Chairman Emeritus /s/ PETER G. TOMBROS ------------------------------------------------------- Peter G. Tombros Director EXHIBIT 99.1 CAMBREX CORPORATION CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 (18 U.S.C. SECTION 1350) Pursuant to the requirements of Section 906 of the Sarbanes-Oxley Act of 2002(18 U.S.C. Sections 1350 (a) and (b)), the undersigned hereby certify asfollows: 1. James A. Mack is the President, Chairman of the Board and Chief Executive Officer of Cambrex Corporation. 2. The Company's Form 10-K for the annual period ended December 31, 2002, accompanying this Certification, in the form filed with the Securities and Exchange Commission (the "Report") fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934 (the "Exchange Act"), and 3. The information in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ JAMES A. MACK -------------------------------------- James A. Mack, President Chairman of the Board and Chief Executive Officer Dated: March 18, 2003 EXHIBIT 99.2 CAMBREX CORPORATION CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 (18 U.S.C. SECTION 1350) Pursuant to the requirements of Section 906 of the Sarbanes-Oxley Act of 2002(18 U.S.C. Sections 1350 (a) and (b)), the undersigned hereby certify asfollows: 1. Luke M. Beshar is Senior Vice President and Chief Financial Officer of Cambrex Corporation. 2. The Company's Form 10-K for the annual period ended December 31, 2002, accompanying this Certification, in the form filed with the Securities and Exchange Commission (the "Report") fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934 (the "Exchange Act") and 3. The information in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ LUKE BESHAR -------------------------------------- Luke M. Beshar Senior Vice President and Chief Financial Officer Dated: March 18, 2003

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