Cambrex Corporation
Annual Report 2003

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---------------------------------------------------------------------------------------------------------------------------------------------------------------- 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, 2003 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] No The aggregate market value of the voting stock held by non-affiliates ofthe registrant was approximately $579,540,125 as of June 30, 2003. APPLICABLE ONLY TO CORPORATE REGISTRANTS As of February 29, 2004, there were 26,093,242 shares outstanding of theregistrant's Common Stock, $.10 par value. DOCUMENTS INCORPORATED BY REFERENCE Portions of the registrant's definitive Proxy Statement for the 2004 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. Cambrex is a life sciences company dedicated toproviding essential products and services to accelerate drug discovery,development and manufacturing processes for human therapeutics. The Companyprimarily supplies its products and services worldwide to pharmaceutical andBiopharmaceutical companies, generic drug companies, biotech companies andresearch organizations. In the fourth quarter, 2003 the Company began reportingresults in three segments: Human Health, (formerly Human Health and All Othersegments), Bioproducts and Biopharma (previously combined as BioSciencessegment). Each of these segments includes various product categories. TheCompany's overall strategy is to focus on niche markets that have globalopportunities, build on strong customer relationships to enhance its newproducts pipeline, and support state-of-the-art technology, while being anindustry leader in regulatory compliance, environmental, health and safetyperformance, and service. The Company uses a consistent business approach in each of its segments: 1. Niche market focus: The Company participates in niche markets requiring significant technical expertise. 2. Market leadership: The Company secures leading market positions through its proprietary technologies and specialized capabilities. 3. 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. Introduce new innovative products to drive organic growth through continued investment in research and new product development. 2. Drive growth in strategic business segments through the prudent acquisition of product lines, technologies, and capabilities to enhance the Company's position in its niche markets. 3. Maintain its commitment to continuous improvement and cost reduction to improve productivity, efficiencies and service levels. 4. Leverage its broad capabilities and reputation across the life sciences market segments in which they participate. 5. Introduce or acquire new products and services that bring the Company closer to the patient and increase revenues from 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. included CasChem, Inc., Bayonne, 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 announcedthat it had engaged a financial advisor to assist the Company in investigatingstrategic alternatives for the Rutherford Chemicals segment. In the thirdquarter 2003, the Company announced that an agreement to sell RutherfordChemicals Business had been signed and on November 10, 2003, the transaction wascompleted, subject to working capital and other adjustments (see Note #14 to theconsolidated financial statements). As a result, the business is being reportedas a discontinued operation for all periods presented. ---------------(dollars in thousands, except share data) 1 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 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 estimated fair values. Goodwill was recorded at approximately $11,035 andother identifiable intangibles were recorded at $2,153. Subsequent to theacquisition, the acquired subsidiary's formal name was changed to Cambrex BioScience 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 $3,382were recorded. Subsequent to the acquisition, the acquired subsidiary's formalname was changed to Cambrex Bio Science Baltimore, Inc. In 2002, the Company changed the names of their life sciences subsidiariesto leverage its 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 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 ---------------(dollars in thousands, except share data) 2 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 three segments: YEARS ENDED DECEMBER 31, -------------------------------- 2003 2002 2001(1) -------- -------- -------- Human Health....................................... $242,165 $231,342 $231,582Bioproducts........................................ 119,298 107,870 102,512Biopharma.......................................... 44,128 55,218 22,461 -------- -------- -------- Gross Sales...................................... $405,591 $394,430 $356,555 ======== ======== ======== ---------------(1) 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 five principal product groups:(1) Active Pharmaceutical Ingredients ("APIs"), (2) PharmaceuticalIntermediates, (3) Imaging Chemicals, (4) Fine Custom Chemicals and (5) Other.These products are sold to a diverse group of more than 1,100 customers, withtwo customers individually accounting for more than 10% of 2003 sales in thissegment; one a distributor representing multiple customers, accounting for13.5%, and a second, a manufacturer of final dosage form pharmaceuticals,accounting for 11.5%. Many of these products are also sold through agents. Also,one active pharmaceutical ingredient makes up 13.8% of 2003 sales in thissegment. This table summarizes the gross sales for this product segment: $ % 2003 2002 CHANGE CHANGE -------- -------- ------- ------ Active Pharmaceutical Ingredients.......... $183,632 172,953 $10,679 6.2%Pharmaceutical Intermediates............... 24,349 24,194 155 0.6Imaging Chemicals.......................... 9,576 11,689 (2,113) (18.1)Fine Custom Chemicals...................... 23,863 21,109 2,754 13.0 Fine Custom Chemicals...................... 23,863 21,109 2,754 13.0Other...................................... 745 1,397 (652) (46.7) -------- -------- ------- Total Human Health............... $242,165 $231,342 $10,823 4.7% ======== ======== ======= === Human Health sales of $242,165 increased $10,823 or 4.7% including thefavorable effects of foreign currency. Human Health sales were favorablyimpacted 9.1% due to exchange rates reflecting the weaker U.S. dollar. APIs sales of $183,632 were $10,679 or 6.2% above the prior year dueprimarily to higher sales of central nervous system and hypertension APIs due tohigher demand, signing of a long-term sales agreement for an API to treatAlzheimer's disease and the favorable currency impact partly offset by lowershipments of a respiratory API due to reduced demand in the U.S., and lowershipments of cardiovascular APIs due primarily to the loss of a U.S. customerand lower prices in Europe. ---------------(dollars in thousands, except share data) 3 Pharmaceutical Intermediates sales of $24,349 were $155 or 0.6% above 2002primarily due to higher sales of an antihistamine product due to increaseddemand and favorable currency effect partly offset by lower custom developmentdemand. Imaging chemicals sales were lower than 2002 by $2,113 or 18.1% due toreduced pricing and market share in 2003. Fine Custom Chemicals sales were higher than 2002 by $2,754 or 13.0% due toincreased sales of crop protection and feed additive products due to higherdemand and successful implementation of higher capacity production lines. Other product category changes from prior year were not significant. Bioproducts: This segment consists of cell culture products (includingliving cell cultures, cell culture media, cell culture media supplements, cellbased assays and cell therapy services), endotoxin detection products andservices, electrophoresis and chromatography products. The Company manufacturesmore than 1,800 products which are sold to more than 14,000 customers worldwidewith no one customer accounting for over 10% of 2003 sales in this segment. This table summarizes the gross sales for this product segment: $ % 2003 2002 CHANGE CHANGE -------- -------- ------- ------ Cells and Media............................ $ 62,161 $ 50,664 $11,497 22.7%Endotoxin Detection........................ 30,474 27,197 3,277 12.0Electrophoresis, Chromatography & Other.... 26,663 30,009 (3,346) (11.1) -------- -------- ------- Total Bioproducts................ $119,298 $107,870 $11,428 10.6% ======== ======== ======= ===== Gross sales of $119,298 were $11,428 or 10.6% above 2002. Bioproducts saleswere favorably impacted 5.2% due to exchange rates reflecting a weaker U.S.dollar. Cells and media sales of $62,161 were $11,497 or 22.7% higher than prioryear due to increased demand for cell therapy services, higher sales of normalhuman cells and media products due to increased demand, pricing and new productlaunches in Europe and the favorable effect of currency exchange. Endotoxin detection sales of $30,474 were $3,277 or 12.0% higher than prior year due to the favorable effect of currency exchange and stronger demand inEurope. Electrophoresis, chromatography and other sales of $26,663 were $3,346 or11.1% lower than prior year primarily due to the sale of the In Vitro diagnosticcell business in the first quarter 2002 partially offset by an increase inassays due to higher demand. Biopharma: The Biopharma segment consists of the Company's contractBiopharmaceutical process development and manufacturing business. Biopharmasales of $44,128 were $11,090 or 20.1% below 2002 reflecting the reduced volumesand suite utilization driven by the previously announced loss of a customerwhose product failed to receive FDA approval, changes in terms of an existingcontract and completion of other 2002 contracts that were only partiallyreplaced in 2003. There are four customers that individually account for morethan 10% of 2003 sales in this segment. They represent 27.4%, 17.2%, 16.2%, and12.1% of 2003 sales in this segment. MARKETING AND DISTRIBUTION The Company's Human Health and Biopharma segments generally include highvalue, low-to-medium volume niche products requiring significant technicalexpertise for their development and manufacture. Marketing generally requiressignificant cooperative effort among a small highly trained sales and marketingstaff, a technical staff that can assess the technical fit and estimatemanufacturing economics, and the business ---------------(dollars in thousands, except share data) 4 unit management to determine the strategic and business fit. The process to takea client's project from the clinical trial stage to a commercial, approvedtherapeutic may take from two to seven years. Agents in those areas where directsales efforts are not economical may handle sales of established product. For the Bioproducts segment, the Company markets and sells its products inthe United States and Europe principally through its own direct sales force. Theremaining international markets are served principally through an extensivenetwork of independent distributors. The Company has also implemented ane-commerce website to market and sell these products in the U.S. and Europe. RAW MATERIALS The Company uses a wide array of raw materials in the conduct of itsbusinesses. For its Human Health products, the Company generally will have a primaryand secondary supplier for its critical raw materials. Long-term contracts arein effect for most of the critical raw materials used. Prices for these rawmaterials are generally stable except for the petroleum based solvents whereprices can vary with market conditions. For its Bioproducts products, the Company buys materials from manysuppliers and is generally not dependent on any one supplier or group ofsuppliers. Although there is a well-established market for raw fetal bovineserum, its price and supply are cyclical and fluctuate. The Company also isdependent on one company for the raw materials used to make electrophorosismedia products incorporating Agarose. A long-term contract is in effect for thissupply. The other key raw materials used by all segments of the Company areadvanced organic intermediates and generally have been in adequate supply frommultiple suppliers. RESEARCH AND DEVELOPMENT The Company's research and development program is designed to increase theCompany's competitiveness 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 that warrant a significant technical expertise, and offer theprospects of a long-term, profitable business relationship. Research anddevelopment activities are performed at most of the Company's manufacturingfacilities in both the United States and Europe. Approximately 125 employees areinvolved directly in research and development activities worldwide. The Cambrex Center of Technical Excellence, a new research and developmentorganization is located in The Technology Center of New Jersey in NorthBrunswick, helps place the Company in a unique position to be a full-serviceresource for pharmaceutical and biotechnology companies throughout the drugdevelopment cycle. The Company spent approximately $17,123, $15,794 and $17,379 in 2003, 2002and 2001, 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 2004 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---------------(dollars in thousands, except share data) 5 other concepts. The Company owns patent and other proprietary rights to theendotoxin detection products which are material to the product lines. The Company has trademarks registered in the United States and a number ofother countries for use in connection with the Company's products and business.The Company believes that many of its trademarks are generally recognized in itsindustry. Such trademarks include Poietics(TM) , Clonetics(R), SeaPlaque(R),NuSieve(R), Reliant(R), Latitude(R), PAGEr(R), MetaPhor(R), Accugene(R) andBioWhittaker(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 Bioproducts segment, no one company is known to compete with theCompany in all of its product groups, but in each group competition is offeredby a number of companies, including, in some cases, firms substantially largerand with greater financial resources than the Company. The markets in which theCompany competes are generally concentrated and are highly competitive, withcompetition centering on product specifications and performance, quality, depth of product line, price, technical support, timely product development and speedof delivery. The Biopharma segment consists of approximately six primary competitorsthat supply contract Biopharmaceutical development and manufacturing services tobiotech companies. Generally, the competition focuses on larger quantities andscale of manufacturing capacity. Cambrex differentiates their services through afocus on smaller scale process development and manufacturing services, anindustry-leading regulatory compliance record, depth of experience producingapproved drugs, a commitment to quality, and world-class early processdevelopment services. 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 ---------------(dollars in thousands, except share data) 6 actions of its subsidiaries may support the direct assertion against the Companyof 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$4,032 in 2003, $3,752 in 2002, and $2,897 in 2001 for environmental projects.As the environmental proceedings in which the Company is involved progress fromthe remedial investigation and feasibility study stage to implementation ofremedial measures, related expenditures will most likely increase. The Companyconsiders costs for environmental compliance to be a normal cost of doingbusiness, and includes such costs in pricing decisions. RISK FACTORS THAT MAY AFFECT FUTURE RESULTS The following risk factors and other information included in this AnnualReport on Form 10-K should be carefully considered. The risks and uncertaintiesdescribed below are not the only ones the Company faces. Additionally, risks anduncertainties not presently known to the Company or that it currently deemsimmaterial also may impair its business operations. If any of the followingrisks occur, the Company's business, financial condition, operating results andcash flows could be materially adversely affected. WE MAY PURSUE TRANSACTIONS THAT MAY CAUSE US TO EXPERIENCE SIGNIFICANT CHARGESTO EARNINGS THAT MAY ADVERSELY AFFECT OUR STOCK PRICE AND FINANCIAL CONDITION. We regularly review potential transactions related to technologies,products or product rights and businesses complementary to our business. Thesetransactions could include mergers, acquisitions, strategic alliances orlicensing agreements. In the future, we may choose to enter into thesetransactions at any time. As a result of acquiring businesses or entering intoother significant transactions, we have previously experienced, and may continueto experience, significant charges to earnings for merger and related expensesthat may include transaction costs, closure costs or costs related to thewrite-off of acquired in-process research and development. These costs may alsoinclude substantial fees for investment bankers, attorneys, accountants andfinancial printing costs and severance and other closure costs associated withthe elimination of duplicate or discontinued products, employees, operations andfacilities. Although we do not expect these charges to have a material adverseeffect upon our overall financial condition, these charges could have a materialadverse effect on our results of operations for particular quarterly or annualperiods and they could possibly have an adverse impact upon the market price ofour common stock. WE MAY MAKE ACQUISITIONS OF BUSINESSES. INHERENT IN THIS PRACTICE IS A RISK THATWE MAY EXPERIENCE DIFFICULTY INTEGRATING THE BUSINESSES OR COMPANIES THAT WEHAVE ACQUIRED INTO OUR OPERATIONS, WHICH WOULD BE DISRUPTIVE TO OUR MANAGEMENTAND OPERATIONS. The merger of two companies involves the integration of two businesses thathave previously operated independently. Difficulties encountered in integratingtwo businesses could have a material adverse effect on the operating results orfinancial condition of the combined company's business. As a result ofuncertainty following a merger and during the integration process, we couldexperience disruption in our business or employee base. There is also a riskthat key employees of a merged company may seek employment elsewhere, includingwith competitors, or that valued employees may be lost upon the elimination ofduplicate functions. If we and our merger partner are not able to successfullyblend our products and technologies to create the advantages the merger wasintended to create, it may affect our results of operations, our ability todevelop and ---------------(dollars in thousands, except share data) 7 introduce new products and the market price of our common stock. Furthermore,there may be overlap between our products, services or customers, and a mergedcompany may create conflicts in relationships or other commitments detrimentalto the integrated businesses. PHARMACEUTICAL, BIOPHARMACEUTICAL AND BIOTECHNOLOGY COMPANIES MAY DISCONTINUE ORDECREASE THEIR USAGE OF OUR SERVICES. We depend on pharmaceutical, biopharmaceutical and biotechnology companiesthat use our services for a large portion of our revenues. Although there hasbeen a trend among these companies to outsource drug production functions, thistrend may not continue. We have experienced increasing pressure on the part ofour customers to reduce spending, including the use of our services, as a resultof negative economic trends generally and in the pharmaceutical industry. Ifthese companies discontinue or decrease their usage of our services, includingas a result of a slowdown in the overall United States or foreign economies, our revenues and earnings could be lower than we expect and our revenues maydecrease or not grow at historical rates. COMPETITION IN THE LIFE SCIENCES RESEARCH MARKET, AND/OR A REDUCTION IN DEMANDFOR OUR PRODUCTS, COULD REDUCE SALES. The markets for our products are competitive and price sensitive. Otherlife science suppliers have significant financial, operational, sales andmarketing resources, and experience in research and development. These and othercompanies may have developed or could in the future develop new technologiesthat compete with our products or even render our products obsolete. If acompetitor develops superior technology or cost-effective alternatives to ourproducts or services, our business, operating results, and financial conditioncould be seriously harmed. In addition, demand for our products may weaken dueto reduction in research and development budgets, loss of distributors or otherfactors, which would have an adverse effect on our financial condition. The markets for certain of our products are also subject to specificcompetitive risks and can be highly price competitive. Our competitors havecompeted in the past by lowering prices on certain products. Our competitors maylower prices on these or other products in the future and we may, in certaincases, respond by lowering our prices. This would reduce revenues and profits.Conversely, failure to anticipate and respond to price competition may hurt ourmarket share. We believe that customers in our markets display loyalty to their initialsupplier of a particular product. Therefore, it may be difficult to generatesales to potential customers who have purchased products from competitors. Tothe extent we are unable to be the first to develop and supply new products, ourcompetitive position may suffer. ---------------(dollars in thousands, except share data) 8 FAILURE TO OBTAIN NEW OR RENEWED CONTRACTS OR CANCELLATION OF EXISTING CONTRACTSMAY ADVERSELY AFFECT OUR BUSINESS AND FINANCIAL RESULTS. Many of the Company's contracts are short-term in duration. As a result,the Company must continually replace its contracts with new contracts to sustainits revenue. The Company's inability to generate new contracts on a timely basiswould have a material adverse effect on its business, financial condition, andresults of operations. In addition, many of the Company's long-term contracts may be cancelled ordelayed by clients for any reason upon notice. Contracts may be terminated for avariety of reasons, including termination of product development, failure ofproducts to satisfy safety requirements, unexpected or undesired results fromuse of the product or the client's decision to forego a particular study. Thefailure to obtain new contracts or the cancellation or delay of existingcontracts could have a material adverse effect on the Company's business andresults of operations. OUR BIOPHARMA BUSINESS SEGMENT MAY EXPERIENCE SIGNIFICANT VOLATILITY INPROFITABILITY AND HAS A LARGE AMOUNT OF GOODWILL RECORDED THAT WILL BE SUBJECTTO IMPAIRMENT IF FORECASTED PROFIT LEVELS ARE NOT OBTAINED. The Company's Biopharma business unit provides process development andmanufacturing services on a contract basis to biopharmaceutical companies. Thisbusiness has a very high fixed cost structure and its customers are oftendependent on the availability of funding and pursuing drugs that are in earlierstages of clinical trials, and thus have high failure rates. Losses of one ormore customers can result in significant swings in profitability from quarter toquarter and year to year. The Company has recorded a substantial amount ofgoodwill related to this business, which may be subject to an impairment chargeif the business unit does not perform at or near projected levels in the future. REVENUE IS DIFFICULT TO PREDICT. The Company's revenue is difficult to predict because it is primarilygenerated on a contract-by-contract or purchase order basis. Many of thecontracts are short-term, and may be canceled at any time. Consequently, theCompany does not have a significant backlog, nor is backlog a meaningfulindicator of future revenue. As a result, much of the Company's revenue is notrecurring from period to period, which contributes to the variability of resultsfrom period to period. OUR OPERATING RESULTS MAY UNEXPECTEDLY FLUCTUATE IN FUTURE PERIODS. The Company's revenue and operating results have fluctuated, and couldcontinue to fluctuate, on a quarterly basis. The operating results for aparticular quarter may be lower than expected as a result of a number offactors, including the timing of contracts; the delay or cancellation of acontract; the mix of services provided; seasonal slowdowns in different parts ofthe world; the timing of start-up expenses for new services and facilities; andchanges in government regulations. Because a high percentage of the Company'scosts are relatively fixed (such as the cost of maintaining facilities andcompensating employees), any one of these factors could have a significantimpact on the Company's quarterly results. In some quarters, the Company'srevenue and operating results may fall below the expectations of securitiesanalysts and investors due to any of the factors described above. In such event,the trading price of the Company's common stock would likely decline, even ifthe decline in revenue did not have any long-term adverse implications for theCompany's business. OUR MARKET SHARE DEPENDS ON NEW PRODUCT INTRODUCTIONS AND ACCEPTANCE. Rapid technological change and frequent new product introductions aretypical for the market for certain of our products and services. Our futuresuccess will depend in part on continuous, timely development and introductionof new products that address evolving market requirements and are attractive tocustomers. We---------------(dollars in thousands, except share data) 9 believe successful new product introductions provide a significant competitiveadvantage because customers make an investment of time in selecting and learningto use a new product, and are reluctant to switch thereafter. We spendsignificant resources on internal research and development, as well as ontechnology development elsewhere to support our effort to develop and introducenew products. To the extent that we fail to introduce new and innovativeproducts, we could fail to obtain an adequate return on these investments andcould lose market share to our competitors, which may be difficult to regain. Aninability, for technological or other reasons, to develop successfully andintroduce new products could reduce our growth rate or otherwise damage ourbusiness. In the past we have experienced, and may experience in the future, delaysin the development and introduction of products. We cannot be assured that wewill keep pace with the rapid change in life sciences research, or that our newproducts will adequately meet the requirements of the marketplace or achievemarket acceptance. Some of the factors affecting market acceptance of ourproducts include: - availability, quality and price as compared to competitive products; - the functionality of new and existing products; - the timing of introduction of our products as compared to competitive products; - scientists' and customers' opinions of the product's utility and our ability to incorporate their feedback into future products; - general trends in life sciences research. The expenses or losses associated with unsuccessful product developmentactivities or lack of market acceptance of our new products could adverselyaffect our business, financial condition and results of operations. FAILURE TO OBTAIN PRODUCTS AND COMPONENTS FROM THIRD-PARTY MANUFACTURERS COULDAFFECT OUR ABILITY TO MANUFACTURE AND DELIVER OUR PRODUCTS. We rely on third-party manufacturers to supply many of our raw materials,product components, and in some case, entire products. In addition, we have asingle source for supplies of some raw materials and components to our products.Manufacturing problems may occur with these and other outside sources. If suchproblems occur, we cannot assure you that we will be able to manufacture ourproducts profitably or on time. ---------------(dollars in thousands, except share data) 10 ANY SIGNIFICANT REDUCTION IN GOVERNMENT REGULATION OF THE DRUG DEVELOPMENTPROCESS, OR VIOLATIONS BY THE COMPANY OF CGMP AND OTHER GOVERNMENT REGULATIONS,COULD HAVE A MATERIAL ADVERSE EFFECT ON THE COMPANY'S BUSINESS AND RESULTS OFOPERATIONS. The design, development, testing, manufacturing and marketing ofbiotechnology and pharmaceutical products are subject to regulation bygovernmental authorities, including the United States Food and DrugAdministration ("FDA") and comparable regulatory authorities in other countries.The Company's business depends in part on strict government regulation of thedrug development process. Legislation may be introduced and enacted from time totime to modify regulations administered by the FDA and governing the drugapproval process. Any significant reduction in the scope of regulatoryrequirements or the introduction of simplified drug approval procedures couldhave a material adverse effect on the Company's business and results ofoperations. All facilities and manufacturing techniques used for manufacturing ofproducts for clinical use or for commercial sale in the Unites States must beoperated in conformity with current Good Manufacturing Practices ("cGMP")regulations. The Company's facilities are subject to scheduled periodicregulatory and customer inspections to ensure compliance with cGMP and otherrequirements. A finding that the Company had materially violated theserequirements could result in regulatory sanctions, the loss of a customercontract, the disqualification of data for client submissions to regulatoryauthorities and/or a mandated closing of the Company's facilities. Any suchmaterial violations would have a material adverse effect on the Company'sbusiness and results of operations. LITIGATION MAY HARM OUR BUSINESS OR OTHERWISE DILUTE OUR MANAGEMENT ANDFINANCIAL RESOURCES. Substantial, complex or extended litigation could cause us to incur largeexpenditures and distract our management. For example, lawsuits by employees,stockholders, collaborators, distributors, customers, or end-users of ourproducts or services could be very costly and substantially disrupt ourbusiness. Disputes from time to time with such companies or individuals are notuncommon, and we cannot assure you that we will always be able to resolve suchdisputes out of court or on terms favorable to us. The Company is involved in a number of lawsuits including a class actionlawsuit filed against Cambrex and five former and current Company officersalleging the failure to disclose in a timely fashion the restatement of resultsfor the 1997 through 2001 time frame as discussed in the SEC investigationsection below, as well as the loss of a significant contract at our Baltimorefacility. If this matter, or any of the Company's other lawsuits, is resolved in an unfavorable manner, they could have a material adverse effect on theoperating results and cash flows in future periods. THE SEC INVESTIGATION INTO THE COMPANY'S INTER-COMPANY ACCOUNTING MATTER COULDHURT OUR BUSINESS. The Securities and Exchange Commission ("SEC") is currently conducting aninvestigation into the Company's inter-company accounting issue. Theinvestigation began during the first half of 2003 after the Company voluntarilydisclosed certain matters related to inter-company accounts for the five-yearperiod ending December 31, 2001 that resulted in the restatement of theCompany's financial statements for those years. The Company is fully cooperatingwith the SEC and does not expect further revisions to its historical financialstatements relating to these issues. This investigation could lead to an adverseoutcome and adversely affect our business, financial condition, results ofoperations and cash flows. LOSS OF KEY PERSONNEL COULD HURT OUR BUSINESS. The Company depends on a number of key executives. The loss of services ofany of the Company's key executives could have a material adverse effect on theCompany's business. The Company also depends on its ability to attract andretain qualified scientific and technical employees. There is a significantshortage of, and intense competition for, qualified scientific and technicalemployees. There can be no assurance the Company will be able to retain itsexisting scientific and technical employees, or to attract and retain additionalqualified---------------(dollars in thousands, except share data) 11 employees. The Company's inability to attract and retain qualified scientificand technical employees would have a material adverse effect on the Company'sbusiness and results of operations. POTENTIAL PRODUCT LIABILITY CLAIMS, ERRORS AND OMISSIONS CLAIMS IN CONNECTIONWITH SERVICES THE COMPANY PERFORMS AND POTENTIAL LIABILITY UNDER INDEMNIFICATIONAGREEMENTS BETWEEN THE COMPANY AND ITS OFFICERS AND DIRECTORS COULD ADVERSELYAFFECT OUR EARNINGS AND FINANCIAL CONDITION. The Company manufactures products intended for use by the public. Inaddition, the Company's services include the manufacture of pharmaceutical andbiologic products to be tested in human clinical trials and for consumption byhumans. These activities could expose the Company to risk of liability forpersonal injury or death to persons using such products, although the Companydoes not presently commercially market or sell the products to end users. TheCompany seeks to reduce its potential liability through measures such ascontractual indemnification provisions with clients (the scope of which may varyfrom client-to-client, and the performances of which are not secured), exclusionof services requiring diagnostic or other medical services, and insurancemaintained by clients. The Company could be materially and adversely affected ifit were required to pay damages or incur defense costs in connection with aclaim that is outside the scope of the indemnification agreements, if theindemnity, although applicable, is not performed in accordance with its terms orif the Company's liability exceeds the amount of applicable insurance orindemnity. In addition, the Company could be held liable for errors andomissions in connection with the services it performs. The Company currentlymaintains product liability and errors and omissions insurance with respect tothese risks. There can be no assurance that the Company's insurance coveragewill be adequate or that insurance coverage will continue to be available onterms acceptable to the Company. The Company also indemnifies its officers and directors for certain eventsor occurrences while the officer or director is, or was serving, at theCompany's request in such capacity. The maximum potential amount of futurepayments the Company could be required to make under these indemnificationagreements is unlimited; however, the Company has a "Director and Officer" insurance policy that covers a portion of any potential exposure. The Companycould be materially and adversely affected if it were required to pay damages orincur legal costs in connection with a claim above its insurance limits. ASSESSMENTS BY VARIOUS TAX AUTHORITIES MAY BE MATERIALLY DIFFERENT THAN WE HAVEPROVIDED FOR. As a matter of course, the Company is regularly audited by federal, state,and foreign tax authorities. From time to time, these audits result in proposedassessments. While the Company believes that it has adequately provided for anysuch assessments, future settlements may be materially different than we haveprovided for and negatively affect our earnings. During 2003, the combination of a loss due to the sale of RutherfordChemicals business, the Mylan settlement, and a geographic shift of forecastedincome resulted in the recording of a valuation allowance against all netdomestic deferred tax assets, except those for which the company has viable taxplanning strategies. Going forward, until such time as the Company's domesticprofitability is restored and considered by management to be sustainable for theforeseeable future, the Company will not record the income tax benefit orexpense for domestic pre-tax losses and income respectively, and as such mayexperience significant volatility in its effective tax rate. Should the Companycontinue to experience domestic losses, certain tax planning strategies may alsobe negatively affected which could result in future increases to our domesticdeferred tax asset valuation allowance. WE HAVE A SIGNIFICANT AMOUNT OF DEBT THAT COULD ADVERSELY AFFECT OUR FINANCIALCONDITION. The Company has a revolving credit facility of approximately $269 millionof which $105 million was outstanding at December 31, 2003 and privately placeddebt of $100 million, which is a significant amount of debt and debt serviceobligations. If we are unable to generate sufficient cash flow or otherwiseobtain funds ---------------(dollars in thousands, except share data) 12 necessary to make required payments on the notes, including from cash and cashequivalents on hand, we will be in default under the terms of the loanagreements, or indentures. Even if we are able to meet our debt service obligations, the amount ofdebt we have could adversely affect us in a number of ways, including by: - limiting our ability to obtain any necessary financing in the future for working capital, capital expenditures, debt service requirements, or other purposes; - limiting our flexibility in planning for, or reacting to, changes in our business; - placing us at a competitive disadvantage relative to our competitors who have lower levels of debt; - making us more vulnerable to a downturn in our business or the economy generally; - requiring us to use a substantial portion of our cash to pay principal and interest on our debt, instead of contributing those funds to other purposes such as working capital and capital expenditures. INTERNATIONAL UNREST OR FOREIGN CURRENCY FLUCTUATIONS COULD ADVERSELY AFFECT OURRESULTS. Our international revenues, which include revenues from our non-U.S. subsidiaries and export sales from the U.S., represented 61% of our productrevenues in 2003 and 59% of our product revenues in 2002. We expect thatinternational revenues will continue to account for a significant percentage ofour revenues for the foreseeable future. There are a number of risks arising from our international business,including: - foreign currencies we receive for sales outside the U.S. could be subject to unfavorable exchange rates with the U.S. Dollar and reduce the amount of revenue that we recognize; - the possibility that unfriendly nations or groups could boycott our products; - general economic and political conditions in the markets in which we operate; - potential increased costs associated with overlapping tax structures; - more limited protection for intellectual property rights in some countries; - unexpected changes in regulatory requirements; - the difficulties of compliance with a wide variety of foreign laws and regulations; - longer accounts receivable cycles in certain foreign countries; and - import and export licensing requirements. A significant portion of our business is conducted in currencies other thanthe U.S. Dollar, which is our reporting currency. We recognize foreign currencygains or losses arising from our operations in the period incurred. As a result,currency fluctuations between the U.S. Dollar and the currencies in which we dobusiness have caused and will continue to cause foreign currency transactiongains and losses. We cannot predict the effects of exchange rage fluctuationsupon our future operating results because of the number of currencies involved,the variability of currency exposures, and the potential volatility of currencyexchange rates. We engage in limited foreign exchange hedging transactions tomanage our foreign currency exposure, but our strategies may not adequatelyprotect our operating results from the full effects of exchange ratefluctuations. ---------------(dollars in thousands, except share data) 13 THE MARKET PRICE OF OUR STOCK COULD BE VOLATILE. The market price of our common stock has been subject to volatility and, inthe future, the market price of our common stock may fluctuate substantially dueto a variety of factors, including: - quarterly fluctuations in our operating income and earnings per share results; - technological innovations or new product introductions by us or our competitors; - economic conditions; - disputes concerning patents or proprietary rights; - changes in earnings estimates and market growth rate projections by market research analysts; - sales of common stock by existing holders; - loss of key personnel; and - securities class actions or other litigation. The market price for our common stock may also be affected by our abilityto meet analysts' expectations. Any failure to meet such expectations, evenslightly, could have an adverse effect on the market price of our common stock.In addition, the stock market is subject to extreme price and volumefluctuations. This volatility has had a significant effect on the market pricesof securities issued by many companies for reasons unrelated to the operatingperformance of these companies. INCIDENTS RELATED TO HAZARDOUS MATERIALS COULD ADVERSELY AFFECT OUR BUSINESS. Portions of our operations require the controlled use of hazardousmaterials. Although we are diligent in designing and implementing safetyprocedures to comply with the standards prescribed by federal, state, and localregulations, the risk of accidental contamination of property or injury toindividuals from these materials cannot be completely eliminated. In the eventof such an incident, we could be liable for any damages that result, which couldadversely affect our business. Additionally, any incident could partially or completely shut down ourresearch and manufacturing facilities and operations. We generate waste that must be transported to approved storage, treatmentand disposal facilities. The transportation and disposal of such waste arerequired to meet applicable state and federal statutes and regulations. Thestorage, treatment and disposal of such waste potentially exposes us toenvironmental liability if, in the future, such transportation and disposal isdeemed to have violated such statues and/or regulations or if the storage,treatment and disposal facilities are inadequate and are proved to have damagedthe environment. The Company is also party to several environmental remediationinvestigations and cleanups and along with other companies, has been named a"potential responsible party" for certain waste disposal sites. The Company hasalso retained the liabilities with respect to certain pre-closing environmentalmatters associated with the sale of the Rutherford Chemicals business. Afterreviewing information currently available, management believes any amount paidin excess of accrued liabilities will not have a material effect on itsfinancial position or results of operations. However, these matters, if resolvedin a manner different from the estimates, could have a material adverse effecton financial condition, operating results and cash flows when resolved in futurereporting periods. ---------------(dollars in thousands, except share data) 14 THE POSSIBILITY THE COMPANY WILL BE UNABLE TO PROTECT OUR TECHNOLOGIES COULDAFFECT OUR ABILITY TO COMPETE. Our success depends to a significant degree upon our ability to developproprietary products and technologies. However, we cannot be assured thatpatents will be granted on any of our patent applications. We also cannot beassured that the scope of any of our issued patents will be sufficiently broadto offer meaningful protection. We only have patents issued in selectedcountries. Therefore, third parties can make, use, and sell products covered byour patents in any country in which we do not have patent protection. Inaddition, our issued patents or patents we license could be successfullychallenged, invalidated or circumvented so that our patent rights would notcreate an effective competitive barrier. We provide our customers the right touse our products under label licenses that are for research purposes only. These licenses could be contested, and we cannot be assured that we would either beaware of an unauthorized use or be able to enforce the restrictions in acost-effective manner. If a third party claimed an intellectual property right to technology weuse, we may need to discontinue an important product or product line, alter ourproducts and processes, defend our right to use such technology in court or paylicense fees. Although we may under these circumstances attempt to obtain alicense to such intellectual property, we may not be able to do so on favorableterms, or at all. Additionally, if our products are found to infringe a thirdparty's intellectual property, we may be required to pay damages for pastinfringement, and lose the ability to sell certain products or receive licensingrevenues. EMPLOYEES At December 31, 2003 the Company had 1,861 employees worldwide (870 of whomwere from international operations) compared with 1,879 employees at December31, 2002 and 1,728 at December 31, 2001. Cambrex Karlskoga AB, Cambrex Profarmaco Landen NV, Cambrex Cork Limited,and Cambrex Profarmaco Milano S.r.l. production, administration, scientific andtechnical employees are represented by various local and national unions. TheCompany believes its labor relations are satisfactory. SEASONALITY The Company experiences some seasonality primarily due to planned plantshutdowns by the Company and certain customers in the third quarter. Operatingresults for any quarter, however, are not necessarily indicative of results forany future period. In particular, as a result of various factors such asacquisitions, plant shutdowns, and the timing of large contract revenue streams,the Company believes that period-to-period comparisons of its operating resultsshould not be relied upon as an indication of future performance. EXPORT AND INTERNATIONAL SALES The Company exports numerous products to various areas, principally WesternEurope, Asia and Latin America. Export sales from the Company's domesticoperations in 2003, 2002 and 2001 amounted to $22,100, $23,684 and $20,934,respectively. Sales from international operations were $223,666 in 2003,$207,082 in 2002, and $199,666 in 2001. 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 ("SEC"). ---------------(dollars in thousands, except share data) 15 Reports filed by the Company with the SEC may be read and copied at theSEC's Public Reference Room at 450 Fifth Street, NW, Washington, DC 20549.Information on the operation of the Public Reference Room may be obtained bycalling the SEC at 1-800-SEC-0330. The SEC also maintains an Internet site atwww.sec.gov that contains reports, proxy and information statements and otherinformation regarding issuers that file electronically with the SEC. The following corporate governance documents are available free of chargeon the Company's website: the charters of our Audit, Compensation and GovernanceCommittees, our Corporate Governance Guidelines and our Code of Business Conductand Ethics. These corporate governance documents are also available in print to any stockholder requesting a copy from our corporate secretary at our principalexecutive offices. Information contained on our website is not part of thisreport. We will also post on our website any amendments to or waivers of ourCode of Business Conduct and Ethics that relate to our Chief Executive Officer,Chief Financial Officer and principal Accounting Officer. ---------------(dollars in thousands, except share data) 16 ITEM 2 PROPERTIES. Set forth below is information relating to the Company's manufacturingfacilities: OPERATINGLOCATION ACREAGE SUBSIDIARY PRODUCT LINES MANUFACTURED-------- ------- ---------- -------------------------- Charles City, IA 57 acres Cambrex Charles Active Pharmaceutical Ingredients; City, Inc. Pharmaceutical Intermediates; Imaging Chemicals; Animal Health Products; Fine Custom ChemicalsKarlskoga, Sweden 42 acres Cambrex Active Pharmaceutical Ingredients; Karlskoga AB Pharmaceutical Intermediates; Imaging Chemicals; Fine Custom 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; Cork Limited Pharmaceutical IntermediatesRockland, 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 Biopharmaceutical Services Bio Science Baltimore, Inc.Hopkinton, MA Leased Cambrex Contract Biopharmaceutical Services Bio Science Hopkinton, Inc. 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, eighty-one acresin Walkersville, 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 ---------------(dollars in thousands, except share data) 17 to regulatory approval. It is generally possible, with proper lead time andcustomer approval, to transfer the manufacturing of a particular product toanother facility should capacity constraints dictate. 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. ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. None ---------------(dollars in thousands, except share data) 18 EXECUTIVE OFFICERS OF THE REGISTRANT The following table lists the executive officers of the Company: NAME AGE OFFICE---- --- ------ James A. Mack............................. 66 President, Chairman of the Board, Chief Executive OfficerLuke M. Beshar............................ 45 Executive Vice President and Chief Financial OfficerRonnie D. Carroll, PhD.................... 63 Vice President and Chief Technology Officer, Pharmaceutical TechnologiesRobert J. Congiusti....................... 50 Vice President, Information TechnologyN. David Eansor........................... 43 President, Bioproducts Business UnitSalvatore J. Guccione..................... 41 Executive Vice President, Corporate Strategy and DevelopmentSteven M. Klosk........................... 46 Executive Vice President, Administration, Chief Operating Officer, Cambrex Pharma and Biopharmaceutical Business UnitDaniel R. Marshak, PhD.................... 46 Vice President and Chief Technology Officer, BiotechnologyGary L. Mossman........................... 63 President and CEO, Cambrex Pharma and Biopharmaceuticals BusinessesPaulo Russolo............................. 59 President, Profarmaco Business UnitPeter E. Thauer........................... 64 Senior Vice President, Law & Environment, General Counsel & Corporate Secretary 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 in February 1990. For six 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. Beshar joined the Company on December 5, 2002 as Senior Vice Presidentand Chief Financial Officer. In January 2004, he was appointed to the positionof Executive Vice President and Chief Financial Officer. Prior to joiningCambrex, Mr. Beshar was Senior Vice President and Chief Financial Officer forDendrite International. Prior to Dendrite, he was Executive Vice President,Finance and Chief Financial Officer for Expanets, Inc. from November 1998through January 2002. Mr. Beshar has served as Chief Financial Officer for otherbusinesses in his career and has been the President and Chief Executive Officerof a company privately owned by Merrill Lynch Capital Partners. Mr. Beshar is amember of the Board of Directors of PNY Technologies, Inc. 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 for ---------------(dollars in thousands, except share data) 19 Bristol-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. Mr. Eansor joined Cambrex in 2000 as Vice President and General Manager,BioTherapeutics Business Unit. In 2002 he was appointed to the position ofPresident, Bioproducts Business Unit. Prior to joining Cambrex, Mr. Eansor waswith R.P. Scherer North America from 1981 until 2000 serving in various rolesincluding Vice President of Pharmaceutical Operations, Vice President ofOperations and General Manager. 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. Klosk was appointed Executive Vice President, Administration in October1996 and was promoted to the position of Executive Vice President,Administration and Chief Operating Officer, Cambrex Pharma and BiopharmaceuticalBusiness Unit in October 2003. Mr. Klosk joined the Company in October 1992 asVice President, Administration. From February 1988 until he joined Cambrex, hewas Vice President, Administration and Corporate Secretary for The GenlyteGroup, Inc., a lighting fixture manufacturer. From 1985 to January 1988, he wasVice President, Administration for Lightolier, Inc., a subsidiary of The GenlyteGroup, Inc. 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. Mr. Mossman joined Cambrex in July 2003 as the President of the CambrexPharma Business Unit. In October 2003, Mr. Mossman's responsibilities wereexpanded and he was appointed to his current position, President and CEO,Cambrex Pharma and Biopharma Business Units. Prior to joining Cambrex, Mr.Mossman was with Dixie Chemical Company, Inc. from 1983 through 2003 and servingin the role of President since 1990. From 1979 through 1980, Mr. Mossman wasGeneral Manager, Thiokol Specialty Chemicals Division, from 1972 through 1979,he was President and Cofounder of Southwest Specialty Chemical Company, Inc.,and from 1964 through 1972, he held various engineering and marketing managementpositions with Salsbury Laboratories. Dr. Russolo, President of the Cambrex Profarmaco Business Unit, joinedCambrex in 1994 with the acquisition of Profarmaco Nobel S.r.l. in Milan Italy,where he served as Managing Director since 1982. Dr. Russolo joined ProfarmacoNobel S.r.l. in 1971. Upon the acquisition of Profarmaco Nobel S.r.l., Dr.Russolo continued serving in the role of Managing Director until 2000, when hewas appointed to his current position. Mr. 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.---------------(dollars in thousands, except share data) 20 PART II ITEM 5 MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. The Company's Common Stock, $.10 par value is listed on the New York StockExchange (NYSE) under the symbol CBM. The following table sets forth the closinghigh and low sales price of the Common Stock as reported on the NYSE: 2003 HIGH LOW---- ------ ------ First Quarter.............................................. $29.84 $21.06Second Quarter............................................. 24.06 15.18Third Quarter.............................................. 25.13 20.06Fourth Quarter............................................. 25.75 21.72 2002 HIGH LOW---- ------ ------ First Quarter.............................................. $44.30 $38.33Second Quarter............................................. 43.66 37.44Third Quarter.............................................. 39.88 30.95 Third Quarter.............................................. 39.88 30.95Fourth Quarter............................................. 37.97 24.10 As of February 29, 2004, the Company estimates that there wereapproximately 4,600 beneficial holders of the outstanding Common Stock of theCompany. The quarterly dividend on common stock was $0.03 for 2003 and 2002. 2003 Equity Compensation Table The following table provides information as of December 31, 2003 withrespect to shares of common stock that may be issued under the Company'sexisting equity compensation plans. COLUMN (A) COLUMN (B) COLUMN (C) -------------------- -------------------- -------------------- NUMBER OF SECURITIES REMAINING FOR FUTURE NUMBER OF SECURITIES ISSUANCE UNDER TO BE ISSUED UPON WEIGHTED AVERAGE EQUITY COMPENSATION EXERCISE OF EXERCISE PRICE OF PLANS (EXCLUDING OUTSTANDING OPTIONS, OUTSTANDING OPTIONS, SECURITIES REFLECTEDPLAN CATEGORY WARRANTS AND RIGHTS WARRANTS AND RIGHTS IN COLUMN (A))------------- -------------------- -------------------- -------------------- Equity compensation plans approved by security holders....................... 3,278,615 $26.90 128,178Equity compensation plans not approved by security holders....................... 422,250 $42.02 73,584 --------- -------Total.................................... 3,700,865 $28.62 201,762 ========= ====== ======= 2000 EMPLOYEE PERFORMANCE STOCK OPTION PLAN The 2000 Employee Performance Stock Option Plan provides for the grant ofstock options (both incentive stock options and "non-qualified" stock options)primarily to key employees of the Company and its subsidiaries who are notexecutive officers. The plan is generally administered by the CompensationCommittee of the Board, which has full authority, subject to the terms of theplan, to determine the provision of awards, including the amount and type of theawards and vesting schedules, as well as to interpret the plan. Individual award agreements set forth the applicable vesting schedule forsuch awards, which are based on the Company's publicly traded share price butwhich may also be based on the passage of time or otherwise. In general,following a "change in control" (as defined in the plan), each stock option willbe canceled in exchange for a cash settlement equal to the excess of the "changein control price," which means ---------------(dollars in thousands, except share data) 21 the highest price per share paid or offered in any bona fide transaction relatedto a change in control (as determined by the Compensation Committee), over theexercise price of the stock option. Stock options are granted with an exercise price of not less than onehundred percent of the fair market value of the underlying Cambrex common stockon the date of grant. Stock options are not exercisable more than ten years fromthe date of grant. 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, 2003 are derived from the audited financial statements. The consolidated financial statements of theCompany as of December 31, 2003 and December 31, 2002 and for each of the yearsin the three year period ended December 31, 2003 and the report of independentauditors thereon are included elsewhere in this annual report. In the thirdquarter 2003, the Company announced that an agreement to sell the RutherfordChemicals business had been signed and on November 10, 2003 the transaction wascompleted, subject to working capital and other adjustments (see Note #14 to theconsolidated financial statements). As a result, the business is being reportedas a discontinued operation for all periods presented. The data presented belowshould be read in conjunction with the financial statements of the Company andthe notes thereto and "Management's Discussion and Analysis of FinancialCondition and Results of Operations" included elsewhere herein. Cambrex Corporation restated its results for the second quarter 2002. Thisrestatement resulted from a reassessment of the carrying value of an equityinvestment in a privately held emerging biotechnology company. The Companyconcluded that $4.3 million of the investment should have been impaired as ofthe second quarter 2002 and the remaining $0.7 million should have beeninitially classified as an intangible asset related to a licensing agreemententered into concurrent with the equity investment. The impairment charge of$4.3 million was recorded in Other expense and a related $1.5 million taxbenefit was recorded in Provision for income taxes and as a deferred tax asset.Net Income and Total Stockholders' Equity decreased by $2.8 million. Thisrestatement did not have an effect on the Company's cash flows. ---------------(dollars in thousands, except share data) 22 YEARS ENDED DECEMBER 31, ------------------------------------------------------ 2003 2002 2001(1) 2000(2) 1999(3) -------- ---------- -------- -------- -------- (RESTATED) (IN THOUSANDS, EXCEPT PER-SHARE DATA) INCOME DATA:Gross sales................................. $405,591 $394,430 $356,555 $326,505 $309,889Net revenues................................ 410,644 399,066 356,830 330,364 317,050Gross profit................................ 162,406 177,718 157,972 144,963 130,820Selling, general and administrative......... 95,117 85,762 80,099 75,643 67,087Research and development.................... 17,123 15,794 17,379 11,802 11,504Restructuring and other charges............. 11,342 4,238 2,022 -- --Operating profit............................ 38,824 71,924 58,472 57,518 52,229Interest expense, net....................... 11,840 11,264 10,602 11,565 9,803Other expense (income), net................. 139 7,890 (323) (213) 627Income from continuing operations before taxes..................................... 26,845 52,770 48,193 46,166 41,799Provision for taxes......................... 26,600 12,815 13,205 13,171 13,066Income from continuing operations........... 245 39,955 34,988 32,995 28,733(Loss)/income from discontinued operations................................ (54,308) (6,546) (9,676) 13,712 9,170Net (loss)/income........................... (54,063) 33,409 25,312 46,707 37,903EARNINGS PER SHARE DATA:Earnings (loss) per common share (basic): Income from continuing operations......... $ 0.01 $ 1.54 $ 1.36 $ 1.32 $ 1.17 (Loss)/income from discontinued operations............................. $ (2.11) $ (0.25) $ (0.37) $ 0.55 $ 0.37 Net (loss) income......................... $ (2.10) $ 1.29 $ 0.99 $ 1.87 $ 1.54Earnings (loss) per common share (diluted): Income from continuing operations......... $ 0.01 $ 1.51 $ 1.32 $ 1.26 $ 1.12 (Loss) income from discontinued operations............................. $ (2.08) $ (0.25) $ (0.36) $ 0.53 $ 0.36 Net (loss)/income......................... $ (2.07) $ 1.26 $ 0.96 $ 1.79 $ 1.48Weighted average common shares outstanding: Basic..................................... 25,775 25,954 25,648 25,015 24,572 Diluted................................... 26,174 26,520 26,495 26,157 25,613DIVIDENDS PER COMMON SHARE.................. $ 0.12 $ 0.12 $ 0.12 $ 0.12 $ 0.12BALANCE SHEET DATA: (AT END OF PERIOD) Working capital........................... $138,458 $154,324 $159,224 $137,500 $158,950 Total assets.............................. 778,503 835,283 818,375 681,617 673,396 Long-term obligations..................... 212,369 267,434 312,524 168,591 225,922 Total stockholders' equity................ 396,630 410,954 345,098 330,995 291,150 ---------------(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. (3) Includes the results of Cambrex 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) 23 ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. EXECUTIVE OVERVIEW During 2003, the Company completed its transformation to a pure lifesciences company with the sale of the Rutherford Chemicals business unit duringthe fourth quarter. Consequently, the Company began reporting three segments in2003 -- Human Health, Bioproducts, and Biopharma. The Human Health segment isprimarily comprised of pharmaceutical ingredients derived from organicchemistry. The Bioproducts segment consists of cell culture products andservices, endotoxin detection products and services, and electrophoresis andchromatography products. The Biopharma segment consists of the Company'sbiopharmaceutical process development and manufacturing business. Members of senior management team regularly review key financial metricsand the status of operating initiatives within our business. These metricsinclude sales growth and gross margin performance by major product category,operating income margins, cash flows from operations, working capital levels,and return on capital employed at both a business unit and consolidated level inaddition to earnings per share at a consolidated level. We review thisinformation on a monthly basis through extensive business unit reviews whichinclude, among other operating issues, detailed discussions related tosignificant sales opportunities, proposed and ongoing investments in newbusinesses or property plant and equipment, cost reduction efforts, and thestatus of new product development. In 2003, the Company continued to see strong growth across many productcategories within its Bioproducts segment, and management sees even moresignificant future growth potential in cell therapy services. The Bioproductssegment is primarily driven by biotechnology research spending levels, theoverall demand for endotoxin detection products and services and the Company'sability to continually provide product upgrades and innovative new products andservices. The loss of a large customer in 2003 whose product did not receive FDAapproval negatively affected our Biopharma segment and the Company continues totake aggressive steps to replace this business. The Company believes itsBiopharma business will experience more volatility than its other businesses dueto the unpredictable nature of the biotechnology drug discovery and theavailability of funding, but believes the overall growth trend predicted for thecontract biopharmaceutical manufacturing market will result in significantlong-term growth for businesses providing these services. In the Human Healthsegment, the company saw net sales growth driven by the impact of a weaker U.S.dollar, with increases in sales of several active pharmaceutical ingredientsoffset by reductions in others, and pricing pressure within certain productcategories. This segment is driven primarily by patent expirations of brandeddrugs, population demographics, pressures to contain health care costs, and thelevel of outsourcing by branded pharmaceutical companies. During 2003, the Company settled its Mylan lawsuit and took a pre-taxcharge for approximately $11,342 as discussed more fully below and in Note #24of the Notes To Consolidated Financial Statements, and recorded valuationallowances against net domestic deferred tax assets totaling $21,487 within theProvision for income taxes for continuing operations, explained more fully belowand in Note #10 in the Notes to Consolidated Financial Statements. The Company'stax rate may experience volatility until such time that domestic operationsachieve sustainable profitability. 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.Actual results or amounts could differ from estimates and the differences couldhave a material impact on the consolidated financial statements. A discussion ofour critical accounting policies, the underlying judgments and uncertainties ---------------(dollars in thousands, except share data) 24 affecting their application and the likelihood that materially different amountswould be reported under different conditions or using different assumptions, isas 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. Service Revenue The Company's contract manufacturing business records revenue as servicesare performed. In 2003 the Company entered into a contract that containsmilestone based payments. Revenue is recorded based on the cost of efforts(since the contract's commencement) up to the reporting date, divided by thetotal expected contractual costs (from the contract's commencement to the end ofthe development arrangement), multiplied by the total expected contractualpayments under the arrangement. However, revenue would be limited to the amountof nonrefundable cash payments received and the subsequent milestone paymentsthat have become due and payable at the reporting date. Asset Valuations and Review For Potential Impairments Under FAS144, our review of our long-lived assets, principally fixedassets, and other amortizable intangibles requires us to initially estimate theundiscounted future cash flow of these assets, whenever events or changes incircumstances indicate that the carrying amount of these assets may not be fullyrecoverable. Our review of goodwill and indefinite lived intangibles are doneannually in accordance with SFAS 142 utilizing a discounted cash flow analysisthat represents fair value. If such analysis indicates that a possibleimpairment may exist, as described in Note #5 to the accompanying financialstatements, we are required to then estimate the fair value of the asset, determined by third party and internal appraisals and valuations, as deemedappropriate, or estimated discounted future cash flows, which includes makingestimates of the timing of the future cash flows, discount rates and reflectingvarying degrees of perceived risk. The determination of fair value includesnumerous uncertainties, such as the impact of competition on future sales andmargin, operating, selling and administrative costs, interest and discountrates, technological changes, consumer demand and governmental regulations. Webelieve that we have made reasonable estimates and judgments in determiningwhether our long-lived assets and goodwill have been impaired, however, if thereis a material change in the assumptions used in our determination of fair valuesor if there is a material change in economic conditions or circumstancesinfluencing fair value, we could be required to recognize certain impairmentcharges 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 ---------------(dollars in thousands, except share data) 25 related to the eventual outcome of litigation and environmental matters, it ispossible that all or some of these matters may be resolved for amountsmaterially different from any provisions that we may have made with respect totheir resolution. 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 that 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, foreign tax credits, and alternative minimum tax credits in theU.S., and net operating loss carryforwards in certain state and foreignjurisdictions with little or no history 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 thathave 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"Asset Valuations and Review for Potential Impairments" above. Acquired products or projects that have not achieved technical feasibility,(i.e., regulatory approval) and no alternative future use are charged to thestatement of operations on the date of acquisition. In connection with itsacquisitions, the Company generally utilizes independent appraisers in thedetermination of IPR&D charges. The amount of this charge is determined based ona variety of factors including the estimated future cash flows of the product orproject, the likelihood of future benefit from the product or project, and thelevel of risk associated with future research and development activities relatedto the product or project. ---------------(dollars in thousands, except share data) 26 Employee Benefit Plans The Company provides a range of benefits to employees and retiredemployees, including pensions, post-retirement, post employment and health carebenefits. The Company records annual amounts relating to these plans based oncalculations, which include various actuarial assumptions, including discountrates, assumed rates of return, compensation increases, turnover rates, andhealth care cost trend rates. The Company reviews its actuarial assumptions onan annual basis and makes modifications to the assumptions based on currentrates and trends when it is deemed appropriate to do so. The effect of themodifications is generally recorded and amortized over future periods. TheCompany believes that the assumptions utilized for recording obligations underits plans are reasonable based on input from actuaries. RESULTS OF OPERATIONS As discussed in Note #14 of the accompanying financial statements, onNovember 10, 2003, the sale of Rutherford Chemicals was completed andaccordingly, the business comprising the Rutherford Chemicals segment is beingreported as a discontinued operation in all periods presented. 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, -------------------------- 2003 2002 2001 ------ ------ ------ Gross sales....................................... 100.0% 100.0% 100.0%Net revenues...................................... 101.2 101.2 100.1Gross profit...................................... 40.0 45.1 44.3 Selling, general and administrative expenses...... 23.4 21.7 22.5Restructuring and special charges................. 2.8 1.1 0.6Research and development expenses................. 4.2 4.1 4.9Operating profit.................................. 9.6 18.2 16.4Interest expense, net............................. 2.9 2.8 3.0Provision for income taxes........................ 6.6 3.2 3.7Income from continuing operations................. 0.1 10.1 9.8Loss on discontinued operations................... (13.4) (1.6) (2.7)Net(loss)/income.................................. (13.3) 8.5 7.1 The following tables show the gross sales of the Company's three segments,in dollars and as a percentage of the Company's total gross sales for the yearsended December 31, 2003, 2002 and 2001, as well as the gross profit by productsegment for 2003 and 2002. YEARS ENDED DECEMBER 31, -------------------------------- 2003 2002 2001 -------- -------- -------- GROSS SALES Human Health............................................. $242,165 $231,342 $231,582 Bioproducts.............................................. 119,298 107,870 102,512 Biopharma................................................ 44,128 55,218 22,461 -------- -------- --------Total Gross Sales.......................................... $405,591 $394,430 $356,555 ======== ======== ========Total Net Revenues......................................... $410,644 $399,066 $356,830 ======== ======== ========Total Gross Profit......................................... $162,406 $177,718 $157,972 ======== ======== ======== ---------------(dollars in thousands, except share data) 27 YEARS ENDED DECEMBER 31, -------------------------- 2003 2002 2001 ------ ------ ------ GROSS SALES DISTRIBUTION Human Health.............................................. 59.7% 58.7% 64.9% Bioproducts............................................... 29.4 27.3 28.8 Biopharma................................................. 10.9 14.0 6.3 ----- ----- -----Total Gross Sales Distribution.............................. 100.0% 100.0% 100.0% ===== ===== ===== 2003-2002 GROSS SALES & GROSS PROFIT BY PRODUCT SEGMENT 2003 2002 -------------------------------- -------------------------------- GROSS GROSS GROSS GROSS GROSS GROSS SALES PROFIT PROFIT % SALES PROFIT PROFIT % -------- -------- -------- -------- -------- -------- Human Health................ $242,165 $ 90,521 37.4% $231,342 $ 94,055 40.7%Bioproducts................. 119,298 60,056 50.3 107,870 56,614 52.5Biopharma................... 44,128 11,829 26.8 55,218 27,049 49.0 -------- -------- -------- --------Total....................... $405,591 $162,406 40.0% $394,430 $177,718 45.1% ======== ======== ======== ======== 2003 COMPARED TO 2002 Cambrex Corporation restated its results for the second quarter 2002. Thisrestatement resulted from a reassessment of the carrying value of an equityinvestment in a privately held emerging biotechnology company. The Companyconcluded that $4.3 million of the investment should have been impaired as ofthe second quarter 2002 and the remaining $0.7 million should have beeninitially classified as an intangible asset related to a licensing agreemententered into concurrent with the equity investment. The impairment charge of$4.3 million was recorded in Other expense and a related $1.5 million taxbenefit was recorded in Provision for income taxes and as a deferred tax asset.Net income and Total stockholders' equity decreased by $2.8 million. Thisrestatement did not have an effect on the Company's cash flows. Gross sales for 2003 increased 2.8% to $405,591 from $394,430 in 2002.Sales in the Human Health and Bioproducts segments increased compared to 2002more than offsetting the decrease in the Biopharma segments. Gross sales werefavorably impacted 7.0% due to the exchange rates reflecting the weakness in theU.S. dollar primarily versus the Euro and Swedish Krona. The Human Health Segment gross sales in 2003 of $242,165 were $10,823 or4.7% above 2002. Human Health sales were favorably impacted 9.1% due to exchangerates reflecting a weaker U.S. dollar. Excluding the currency impact, thedecrease results from the reduced pricing and market share of certain imagingproducts, lower shipments of a respiratory API due to reduced demand in theU.S., lower shipments of cardiovascular APIs due primarily to the loss of a U.S.customer and lower prices in Europe. Partly offsetting these decreases werehigher sales of central nervous system APIs and a hypertension API due toincreased demand, signing of a long-term sales agreement for an API to treatAlzheimer's disease and increased sales of crop protection and feed additiveproducts due to high demand and successful implementation of higher capacityproduction lines. The Bioproducts Segment gross sales in 2003 of $119,298 were $11,428 or10.6% above 2002. Bioproducts sales were favorably impacted 5.2% due to exchangerates reflecting a weaker U.S. dollar. The increased sales before the impact offoreign currency are primarily due to higher cell therapy services due toincreased demand and higher sales of normal human cells and media products dueto increased demand, higher pricing and new product launches in Europe. Theseincreases were partly offset by the impact of the sale of the In Vitrodiagnostic cell business during the first quarter of 2002. ---------------(dollars in thousands, except share data) 28 The Biopharma Segment gross sales in 2003 of $44,128 were $11,090 or 20.1%below 2002. The sales decrease primarily reflects the reduced volumes and suiteutilization in our Biopharmaceutical manufacturing business driven by the lossof a Biopharmaceiutical customer whose product failed to receive FDA approval,changes in terms of an existing contract and completion of other 2002 contractsthat were only partially replaced. Foreign currency had no impact on Biopharmasales. Export sales from the Company's domestic operations were $22,100 in 2003compared to $23,684 in 2002. International sales from European operationstotaled $223,666 in 2003 compared to $207,082 in 2002. The $405,591 of sales in2003 consisted of $206,079, $173,035, $16,401 and $10,076 of sales to NorthAmerica, Europe, Asia and rest of world, respectively. Gross profit in 2003 was $162,406 compared to $177,718 in 2002. Grossmargin in 2003 decreased to 40.0% from 45.1% in 2002, reflecting lower marginsin all segments. The Biopharma segment gross margins were down significantlycompared to the prior year due to lower suite utilization and lower pricing onan existing contract. The Human Health segment margins decreased due to pricingpressures on API's and other fine custom chemicals including a volume-based rebate adjustment and the unfavorable impact of foreign currency partly offsetby favorable product mix. The Bioproducts gross margins decreased primarily dueto additional bad debt reserves in 2003 and certain 2002 favorable inventoryadjustments which did not repeat in 2003, partly offset by favorable productionvolumes, pricing, cost reduction activities and the favorable impact of foreigncurrency. Selling, general and administrative expenses of $95,117 or 23.4% as apercentage of gross sales in 2003 increased from $85,762 or 21.7% in 2002. Salesand marketing expenses increased primarily due to the impact of foreign currencyexchange and an investment in the Company's sales force. Higher administrativecosts reflect the impact of currency translation due to the weaker U.S. dollar,higher pension expenses, the costs incurred for the ongoing SEC investigationinto the restatement of results disclosed in the fourth quarter 2002, thevesting of stock appreciation rights in the fourth quarter 2003 and regulatorycompliance costs associated with the Sarbanes-Oxley Act. Research and development expenses of $17,123 were 4.2% of gross sales in2003, compared to $15,794 or 4.1% of gross sales in 2002. The increase primarilyreflects investments in new product technologies for endotoxin detection andmolecular biology and the impact of foreign currency exchange. The 2003 results include a pre-tax provision of $11,342 (discounted to thepresent value of the five year pay-out) related to an agreement reached withMylan Laboratories under which Cambrex will contribute $12,415 to the settlementof consolidated litigation brought by a class of direct purchasers. Of thisamount, $4,415 has been paid to date with the balance due in equal installmentsover a five-year period. In exchange, Cambrex received from Mylan a release andfull indemnity against future costs or liabilities in related litigation broughtby the purchasers, as well as potential future claims related to this matter.The 2002 results include a pre-tax charge of $4,238 for asset impairment andother charges related to the closure of a small manufacturing facility and otherseverance charges. The operating profit in 2003 was $38,824 compared to $71,924 in 2002. Theresults reflect lower gross margins in all segments, the $11,342 pre-tax chargefor the Mylan settlement discussed above and higher operating expenses. Net interest expense of $11,840 in 2003 increased $576 from 2002 reflectinghigher average interest rates due primarily to the higher fixed interest rate oncertain senior notes issued in 2003, partly offset by the lower average debt dueprimarily to cash flows from operations and the proceeds from the sale of theRutherford Chemicals business. The average interest rate was 4.8% for the year2003 versus 4.3% in 2002. The provision for income taxes in 2003 resulted in an effective rate of99.1% as compared with 24.3% in the same period of 2002. The combination of aloss due to the sale of Rutherford Chemicals, the Mylan settlement, and ageographic shift of forecasted income resulted in $21,487 of domestic deferredtax assets being deemed unlikely to be realized, and as such, a valuationallowance for this amount was recorded against---------------(dollars in thousands, except share data) 29 these assets in the 2003 continuing operations tax provision. The deferred taxassets deemed unlikely to be realized for financial reporting purposes includeforeign tax credit carry-forwards, carrying a five year life from inception, thetax benefit related to domestic net operating losses from continuing operationsand research and experimentation tax credits that can be carried forward 20years, and a credit related to a federal alternative minimum tax that can becarried forward indefinitely. The long carry-forward period for domestic netoperating losses and the alternative minimum credit and expected improvements indomestic continuing operations may result in these tax benefits ultimately beingrealized, however, there is no assurance that such improvements can be achieved. The income from continuing operations in 2003 was $245, or $0.01 per diluted share versus $39,955, or $1.51 per diluted share in 2002. The 2003income from continuing operations includes a charge of approximately $21,487 forthe deferred tax valuation allowance and a $11,342 pretax charge for the Mylansettlement both discussed above. The 2002 results include $4,238 consisting ofan asset impairment and other charges related to the closure of a smallmanufacturing facility and other severance charges and a $7,344 pre-tax chargefor two investment impairments recorded in Other expense. In the third quarter 2003, the Company announced that an agreement to sellthe Rutherford Chemicals business had been signed and on November 10, 2003 thetransaction was completed. As a result, this business is being reported as adiscontinued operation for all periods presented. The terms of sale resulted ina write-down of assets to fair value of approximately $53,098 which is based onthe selling price, including fees associated with the transaction, subject toworking capital and other adjustments. The Company is currently in negotiationswith the buyer regarding the working capital adjustment which is not expected tobe finalized until first quarter 2004. In 2003, loss on discontinued operations,net of tax was $(54,308) compared to $(6,546) in 2002. The 2003 results includethe write-down of assets discussed above. The loss in 2002 includes pre-taxcharges of $10,000 for Vitamin B-3 litigation and $10,849 for asset impairmentand other charges, pretax benefits of $2,620 due to a favorable insurancesettlement and $3,760 for a favorable arbitration settlement. In addition to thespecial items discussed above, the 2003 loss from discontinued operationsincreased due to unfavorable product mix and higher energy and raw materialprices. The net (loss) income in 2003 was $(54,063), or $(2.07) per diluted shareversus $33,409, or $1.26 per diluted share in the same period a year ago. The Company's independent auditors informed the Company that there werematerial weaknesses in the Company's internal controls relating to the adequacyof documentation and level of personnel within the Company's corporate taxdepartment during the fourth quarter of 2003. The Company has and is takingseveral actions to remediate these weaknesses. Please refer to Item 9A for amore detailed description of this matter. 2002 COMPARED TO 2001 Effective January 1, 2002, the Company adopted Statement of FinancialAccounting Standards No. 142, Goodwill and Intangible Assets. The effect of thisadoption was to cease amortization of goodwill and certain indefinite-livedintangible assets. On an as adjusted basis to reflect FASB No. 142, 2001 netincome would have been $33,354 versus the $25,312 reported in 2001. Gross sales in 2002 increased 10.6% to $394,430 from $356,555 in 2001.Sales in Biopharma and Bioproducts increased 145.8% and 5.2%, respectivelycompared to 2001 while the Human Health sales were relatively flat. Gross saleswere favorably impacted 2.2% due to the exchange rates reflecting a weaker U.S.dollar primarily versus the Euro and Swedish Krona. The Human Health Segment gross sales of $231,342 were $240 or 0.1% below2001. Human Health sales were favorably impacted 2.9% due to exchange ratesreflecting a weaker U.S. dollar. Sales decreased due primarily to lower sales ofcardiovascular APIs due to customer inventory reductions and competitivepressures, lower sales of an antihistamine product due to fall off in customerdemand and the effect of a ---------------(dollars in thousands, except share data) 30 smaller shipment of an anti-infective product for use in clinical trials. Also,feed additive sales were lower due to customer inventory management, and theimpact of a customer bringing in-house the manufacture of a performanceenhancing polymer product, as well as customer inventory build-ups of anotherperformance enhancing polymer product. Partly offsetting these decreases wereincreased sales of a new amphetamine product used to treat attention deficit disorder, higher sales of gastrointestinal APIs to meet increased demand,continued growth of a pharmaceutical intermediate used in therapeutic treatmentof end-state kidney disease, higher market share in imaging products worldwide,and higher sales of central nervous system API's due to increased worldwidedemand. The Bioproducts Segment gross sales of $107,870 were $5,358 or 5.2% above2001. Bioproducts sales were favorably impacted 2.0% due to exchange ratesreflecting a weaker U.S. dollar. The increased sales were primarily due tohigher 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 In Vitro diagnostic cell business during the first quarter of 2002. The Biopharma Segment gross sales of $55,218 were $32,757 or 145.8% above2001. The increase in sales is due primarily to the acquisitions of the twocontract Biopharmaceutical process development and manufacturing businesses thatmake up this segment that were completed during the second half of 2001. Foreigncurrency had no impact on Biopharma sales. Export sales from the Company's domestic operations were $23,684 in 2002compared to $20,934 in 2001. International sales from European operationstotaled $207,082 in 2002 compared to $199,666 in 2001. The $394,430 of sales in2002 consisted of $216,591, $150,180, $17,745 and $9,914 of sales to NorthAmerica, Europe, Asia and rest of world, respectively. Gross profit in 2002 was $177,718 compared to $157,972 in 2001. Grossmargin in 2002 increased to 45.1% from 44.3% in 2001. The Bioproducts segmentmargins increased due to favorable product mix and higher volumes. This increasewas partially offset by lower margins in the Biopharma segment due to underabsorption of fixed costs. Overall, Human Health segment margins were downslightly due to lower volumes partially offset by favorable product mix, whichwas aided by the Company's hedging strategy and overall higher production atmost European plants. Selling, general and administrative expenses as a percentage of gross saleswere 21.7% in 2002 versus 22.5% for 2001 (20.2% on an as adjusted basisconsidering the adoption of SFAS No. 142.) Excluding the impact of FAS No. 142,higher administrative costs were due primarily to the impact of the second half2001 Biopharmaceutical manufacturing acquisitions, a reduction of environmentalaccruals in the second quarter 2001, and higher insurance premiums and employeebenefit expenses in 2002. Research and development expenses of $15,794 were 4.1% of gross sales in2002, compared to $17,379 or 4.9% of gross sales in 2001, reflecting staffreductions and lower overall spending. The 2002 results include a pre-tax charge of $4,238 for asset impairmentand other charges related to the closure of a small manufacturing facility andother severance expenses. The 2001 results include a pre-tax charge of $2,022related to the closure of another small manufacturing facility. The operating profit in 2002 was $71,924, compared to $58,472 in 2001. Theresults reflect the increased sales in the Bioproduct and Biopharma segments andthe reduced amortization expense as a result of the adoption of SFAS No. 142,partially offset by higher administration costs. Net interest expense of $11,264 in 2002 increased $662 from 2001 reflectingthe higher average debt balance due to financing the 2001 acquisitions, partlyoffset by a lower average interest rate. The average interest rate was 4.3% in2002 versus 5.2% in 2001. ---------------(dollars in thousands, except share data) 31 The provision for income taxes in 2002 resulted in an effective rate of24.3% versus 27.4% in 2001. The decrease reflects the tax effect of the specialcharges, a change in geographic mix of income and the impact of the continuingR&D tax credit programs. The Company's income from continuing operations in 2002 was $39,955 or$1.51 per diluted share compared with $34,988 or $1.32 per diluted share in2001. In addition to the pre-tax charges discussed above, the 2002 resultsincluded a $7,344 pre-tax charge for investment impairments recorded in Otherexpense. Due to the sale of the Rutherford Chemicals business during 2003, theRutherford Chemicals business is being reported as a discontinued operation forall periods presented. Loss on discontinued operations, net of tax was ($6,546)in 2002 as compared to ($9,676) in 2001. The loss in 2002 includes pre-taxcharges of $10,000 for Vitamin B-3 litigation, $10,849 for asset impairment andother charges, pre-tax benefits of $2,620 due to a favorable insurancesettlement and $3,760 for a favorable arbitration settlement. The loss in 2001includes pre-tax charge of $19,053 for restructuring and asset write-downs and$4,400 pre-tax charge for Vitamin B-3 litigation. Excluding the above items,loss on discontinued operations, net of tax, increased in 2002 primarily due tolower sales volume reflecting lower demand and timing of production campaignsfor crop protection products, lower demand for certain performance enhancingchemicals, and continued weakness in the telecommunications and industrialcoatings industries. The Company's net income in 2002 was $33,409 or $1.26 per diluted sharecompared to $25,312 or $0.96 per diluted share in 2001. LIQUIDITY AND CAPITAL RESOURCES Net cash flow from operations was $73,286 for the year ended December 31,2003, down from $104,340 in 2002. The decrease in cash flow is due primarily tolower net income, net cash payments of $5,198 for settlement and legal costsassociated with Vitamin B-3 litigation, $4,415 cash payment associated with theMylan settlement, and insurance proceeds received in 2002 related to RutherfordChemicals. Cash flows from investing activities in 2003 included proceeds fromthe sale of Rutherford Chemicals, net of expenses, of $50,215 and capitalexpenditures of $37,857. Cash flows from financing activities in 2003 of $60,588included net repayments of debt of $56,253, payment of dividends of $3,100 andthe purchase of treasury stock of $2,420, partially offset by $1,130 in proceedsfrom the exercise of stock options. Capital expenditures were $37,857, $40,443 and $30,161 in 2003, 2002 and2001, respectively. In 2003, part of the funds were used for suite expansion atour Baltimore and Hopkinton sites, endotoxin detection and cell therapymanufacturing capabilities at our Walkersville site; R&D lab upgrades at ourMilano site and new small scale production equipment for generic pharmaceuticalsat our Charles City site. In November 2001, the Company entered into a $430,000 Syndicated RevolvingCredit Agreement led by JPMorganChase as the Administrative Agent. The agreementconsisted of a 364-day renewable senior revolving credit facility for $161,000(the "364-Day Facility"), and a 5-year senior revolving credit facility of$268,750 (the "5-Year Agreement"). In 2003, the Company elected not to renew the 364-Day Facility and thisfacility expired in November 2003. Concurrently, the 5-Year Agreement wasamended with the addition of an "accordion feature" which, if utilized, willallow for the increase of the total commitments of up to $75,000. The 5-Year Agreement allows the Company to choose among various interestrate options and to specify the portion of the borrowing to be covered byspecific interest rates. Under the 5-Year Agreement the interest rate optionsavailable to the Company are the following: 1) U.S. Prime Rate, 2) LIBOR plus an applicable margin that ranges from .575% to 1.20%, or 3) Money Market rate plus an applicable margin that ranges from .575% to1.20%. ---------------(dollars in thousands, except share data) 32 The applicable margin discussed above is based upon the ratio ofconsolidated funded indebtedness to consolidated modified EBITDA. The Companyalso pays a facility fee between .15% to .30% on the entire credit facility. The bank loan is collateralized by dividend and distribution rightsassociated with a pledge of a portion of stock that the Company owns in aforeign holding company. This foreign holding company owns certain of theCompany's non-U.S. operating subsidiaries. As of December 31, 2003, there was $105,200 outstanding and $163,550undrawn under the 5-year Agreement. Of the undrawn amount, $61,000 is availableto be borrowed as of December 31, 2003 due to limits established in the CreditAgreement. The Agreement is subject to financial covenants requiring the Company tomaintain certain levels of net worth, interest coverage ratio, leverage ratiosand limitations on indebtedness. The Company complied with all covenants during2003. In June 2003, the Company borrowed $75,000 in a private offering consistingof 7-year guaranteed senior Notes due in June 2010 with interest payments duesemi-annually at an annual rate of 5.31%. During October 2003, the Companyborrowed an additional $25,000 in a private offering consisting of 10-yearguaranteed senior Notes due in October 2013 with interest payments duesemi-annually at an annual rate of 7.05%. These Notes rank equal with theCompany's other senior indebtedness and are collateralized by the same assets asthe bank loan described above. The funds were used primarily to pay downexisting bank debt and to provide Cambrex with longer term fixed rate debt. The 2003 and 2002 average interest rates were 4.8% and 4.3%, respectively. At December 31, 2003 our contractual obligations with initial or remainingterms in excess of one year were as follows: TOTAL 2004 2005 2006 2007 2008+ -------- ------ ------ -------- ------ -------- Long Term Debt, including capital leases............... $213,745 $1,376 $1,402 $106,617 $1,438 $102,912Operating Leases....... 26,198 3,113 3,657 3,406 3,601 12,421Purchase obligations... 8,095 1,886 1,020 913 913 3,363Mylan Settlement....... 8,000 1,600 1,600 1,600 1,600 1,600 -------- ------ ------ -------- ------ --------Contractual Cash Obligations.......... $256,038 $7,975 $7,679 $112,536 $7,552 $120,296 ======== ====== ====== ======== ====== ======== See Notes #12 and #23 in the accompanying financial statements foradditional information 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 Company levels of net worth, an interest coverage ratio and leverage ratios. The Companymet all bank covenants during 2003 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 that 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 (see Risk Factors section of this documentfor further explanation of factors that may negatively impact our cash flows).Any change in the current status of these factors could adversely impact theCompany's ability to fund operating cash flow requirements. ---------------(dollars in thousands, except share data) 33 FINANCIAL INSTRUMENTS In the normal course of business, the Company uses a variety of techniquesand instruments, including derivatives, as part of its overall risk managementstrategy to lower its exposure to market risks arising from adverse changes ininterest rates and foreign currency exchange rates. Currency Risk Management The Company's primary market risk relates to exposure to foreign currencyexchange rate fluctuations on transactions entered into by internationaloperations which are primarily denominated in the U.S. Dollar, Euro, SwedishKrona and British Pound Sterling currencies. 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, 2003 was $28,036. The Company estimates theforward contracts to be approximately 66% of the non-local currency exposureduring the period. Unrealized foreign exchange contract losses do not subjectthe Company's actual results to risk as gains or losses on these contractsgenerally offset gains or losses 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 $2,100 of pre-tax profits for a twelve-monthperiod would be at risk. This is based on unhedged risk of $21,008. Thisresidual risk allows for an over-forecasting margin of error and prevents overhedging of actual operating risk. As of December 31, 2003, the non-localforecasted currency exposures were $86,766. Offsetting this exposure isforecasted U.S. Dollar inter-company payments from the combined European sitesof $24,217. Of the remaining $62,549 forecasted exposure, $41,541 was partiallyhedged with major banks and through offsetting inter-company hedge contracts,thereby reducing the non-hedged risk to $21,008. 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 $497. 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, 2003, the Company had eleven interest rate swaps inplace with an aggregate notional value of $95,000, at an average fixed rate of4.41%, 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, 2003, the coverage was approximately 90% of ourvariable interest rate debt. 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$4,900 and $4,542 at December 31, 2003 and December 31, 2002, respectively, forcosts associated with the ---------------(dollars in thousands, except share data) 34 study and remediation of Superfund sites and the Company's current and formeroperating sites for matters that are probable and reasonably estimable. Theincrease in the accrual is due to currency fluctuation of $458, partially offsetby $100 in payments. Included in the liabilities mentioned above areenvironmental liabilities discussed in the "Sale of Rutherford Chemicals"section below. Based on currently available information and analysis, theCompany's accrual represents management's best estimate of what it believes arethe probable environmental cleanup related costs of a non-capital nature. Afterreviewing information currently available, management believes any amounts paidin excess of the accrued liabilities will not have a material effect on itsfinancial position or results of operations. However, these matters, if resolvedin a manner different from the estimates could have a material adverse effect onfinancial condition, operating results and cash flows when resolved in a futurereporting period. LITIGATION Mylan Laboratories In late, 1998 the Company and its subsidiary Profarmaco S.r.l. (currentlyknown as Cambrex Profarmaco Milano S.r.l., "Profarmaco") were named asdefendants (along with Mylan Laboratories, Inc. ("Mylan") and Gyma Laboratoriesof America, Inc., Profarmaco's distributor in the United States) in a proceedinginstituted by the Federal Trade Commission ("FTC") in the United States DistrictCourt for the District of Columbia (the "District Court"). The allegations arisefrom exclusive license agreements between Profarmaco and Mylan covering the drugmaster files for lorazepam and clorazepate, two active pharmaceuticalingredients ("APIs"). The FTC alleged violations of the Federal Trade CommissionAct; including unlawful restraint of trade and conspiracy to monopolize marketsfor the APIs. A lawsuit making similar allegations against the same partiesseeking injunctive relief and treble damages, was filed by the Attorneys Generalof 31 states in the District Court on behalf of those states and persons inthose states who were purchasers of the generic pharmaceuticals. The same parties including the Company and Profarmaco have also been namedin purported class action complaints brought by private plaintiffs in variousstate courts on behalf of purchasers of the APIs in generic form, makingallegations similar to those raised in the FTC's complaint and seeking variousforms of relief including treble damages. On February 9, 2001, a federal court in Washington, DC entered an Order and Stipulated 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 Profarmaco. In the Order and Injunction, thesettling defendants also agreed to monitor certain future conduct. Mylan hadbeen fully covering the costs for the defense and indemnity of Cambrex andProfarmaco under certain obligations set forth in the license agreements.Cambrex agreed to cover separate legal defense costs incurred for Cambrex andProfarmaco on a going forward basis beginning August 1, 2000. The privatelitigation continues. On April 7, 2003, Cambrex reached an agreement with Mylan under whichCambrex would contribute $12,415 to the settlement of consolidated litigationbrought by a class of direct purchasers. In exchange, Cambrex and Profarmacoreceived from Mylan a release and full indemnity against future costs orliabilities in related litigation brought by purchasers, as well as potentialfuture claims related to this matter. Approximately $4,415 was paid in April2003 in accordance with the agreement, with the remaining $8,000 to be paid overthe next five years. Cambrex recorded an $11,342 charge (discounted to thepresent value due to the five year pay-out) in the first quarter of 2003 as aresult of this settlement. As of December 31, 2003, the outstanding balance forthis liability was $7,186. Vitamin B-3 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---------------(dollars in thousands, except share data) 35 pricing and possible customer allocation with regard to that product. TheCompany understands that the subpoena was issued as part of the FederalGovernment's ongoing anti-trust investigation into various business practices inthe vitamin industry generally. In the fourth quarter of 1999, the Companyreached a settlement with the Government concerning Nepera's alleged role inVitamin B-3 violations from 1992 to 1995. On October 13, 2000, the Governmentsettlement was finalized with Nepera entering into a voluntary plea agreementwith the Department of Justice. Under this agreement, Nepera entered a plea ofguilty to one count of price fixing and market allocation of Vitamin B-3 from1992 to 1995 in violation of section one of the Sherman Act and agreed to pay afine of $4,000. Under the plea agreement, Nepera was placed on probation for oneyear, which has ended. The fine was paid in February 2001. Nepera has been namedas a defendant, along with several other companies, in a number of private civilactions brought on 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 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 2002, the Companyincreased reserves by $10,000. The balance of this accrual as of December 31,2003 was approximately $3,836. This accrual has been recorded in accruedliabilities. Litigation in the United States under the U.S. antitrust laws was commencedsome years ago by a group of European purchasers. On motion by the Vitamin B-3defendants, the District Court dismissed the litigation, under the long-standingrule that foreign purchasers cannot sue in U.S. courts under U.S. antitruststatutes. Recently, the Federal Circuit Court reversed the District Court'sdecision. The Vitamin B-3 defendants, supported by the U.S. Department ofJustice, appealed to the United States Supreme Court and the hearing is currently scheduled for April 2004. The Company strongly believes that the claimshould be dismissed, however, the Circuit Court's decision is so unusual that wecannot predict the disposition of this matter. Mallinckrodt During February 1999, the Company's Charles City facility ("CCC") soldseveral batches of 5-NIPA, an x-ray contrast media raw material, toMallinckrodt, Inc. In April 1999, Mallinckrodt verbally notified CCC that someof the 5-NIPA batches appeared to be out of specification. CCC requested thatMallinckrodt cease production and return the product for refund or replacement.CCC's quality control tests indicated that the material met the agreedspecification, but CCC was ready to issue a credit to Mallinckrodt upon returnof the questionable material. Nevertheless, it appears that Mallinckrodtcontinued to use the material. In August 1999, Mallinckrodt issued CCC a schedule that summarized thetotal costs allegedly incurred by Mallinckrodt related to the questionable5-NIPA in the amount of approximately $4,800. On July 13, 2000, Mallinckrodtsent CCC a letter claiming that CCC breached its supply agreement by deliveringcontaminated 5-NIPA to Mallinckrodt and claiming damages for its costs. Weresponded that, among other things, CCC delivered in-specification material anddid not breach the supply agreement. On October 2, 2000, Mallinckrodt filed suitin United States District Court in St. Louis, Missouri alleging, among otherthings, that CCC breached the supply agreement and claiming significant damages.On December 27, 2000, we filed our answer, denying Mallinckrodt's claims. Mediation was held in June 2003 but was unsuccessful. A second mediationoccurred on November 12, 2003; we did not reach agreement, but continueddiscussing settlement as we prepared for trial, which had been scheduled forearly January 2004. On December 16, 2003, we reached a settlement withMallinckrodt for $3,200 which has subsequently been paid. The Company has a$1,000 deductible under its insurance policy. The Company exhausted a majorityof the deductible through the costs of defense which had been previouslyreserved. The Company has subsequently been reimbursed approximately $3,000 byits insurance carrier. ---------------(dollars in thousands, except share data) 36 Sale of Rutherford Chemicals The Company entered into an agreement for the sale of its RutherfordChemicals business and completed this transaction on November 10, 2003, subjectto working capital adjustments. Under the agreement, the Company providedstandard representations and warranties concerning the business, operations,liabilities and financial condition of the Rutherford Chemicals Business. Mostof such representations and warranties will survive for a period of thirty daysafter the Buyer's preparation of its audited financial statements for year-end2004. Therefore, claims for breaches of such representations would have to bebrought during that time frame. Certain specified representations andwarranties, such as those relating to employee benefit matters, will survive forlonger periods. Under the agreement, the Company has indemnified the Buyer forbreaches of representations and warranties, such indemnification is subject to adeductible and a cap at a percentage of the purchase price. The Company has retained the liabilities associated with existing generallitigation matters, including Vitamin B-3 as stated above. With respect tocertain pre-closing environmental matters, the Company retains theresponsibility for (i) certain existing matters; including violations andoff-site liabilities and (ii) completing the on-going remediation at the NewYork facility. Further, as a result of the sale of the Bayonne, New Jerseyfacility, the obligation to investigate site conditions and conduct requiredremediation under the provisions of the New Jersey Industrial Site Recovery Actwas triggered; and the Company has retained the responsibility for completion ofany such investigation and remediation. With respect to all other pre-closing environmental liabilities, whether known or unknown, the Buyer is responsiblefor the management of potential future matters; however, the Buyer and theCompany may share the costs of associated remediation with respect to suchpotential future matters, subject to certain limitations defined in theagreement to the sale. Class Action Matter In mid-October, 2003, the Company was notified of a securities class actionlawsuit filed against Cambrex and five former and current Company officers. Todate, five class action suits have been filed with the New Jersey FederalDistrict Court and we have been served with process in several of the cases. Theoriginal and later lawsuits were brought as class actions in the names ofpurchasers of the Company's common stock from October 21, 1998 through July 25,2003. The complaints allege that the Company failed to disclose in timelyfashion the January 2003 accounting restatement and subsequent SECinvestigation, as well as the loss of a significant contract at the Baltimorefacility. Under the rules applicable to class action litigation, the variousplaintiffs appeared in Federal Court on January 12, 2004, and the Courtdesignated the lead plaintiff and selected counsel to represent the class. Theplaintiff has sixty (60) days to amend the complaint. The Company will have afurther forty-five (45) days to file a motion to dismiss. We consider thecomplaints to be substantially without merit and will vigorously defend againstthem. Securities and Exchange Commission The Securities and Exchange Commission ("SEC") is currently conducting aninvestigation into the Company's inter-company accounting issue. Theinvestigation began in the first half of 2003 after the Company voluntarilydisclosed certain matters related to inter-company accounts for the five yearperiod ending December 31, 2001 that resulted in the restatement of theCompany's financial statements for those years. To Cambrex's knowledge, theinvestigation is limited to this inter-company accounting matter, and theCompany does not expect further revisions to its historical financial statementsrelating to these issues. The Company is fully cooperating with the SEC. ---------------(dollars in thousands, except share data) 37 Other The Company enters into standard indemnification agreements in the ordinarycourse of business including contract provisions for indemnification protectingits customers and suppliers against third party liability for manufacture andsale of Company products that fail to meet product specifications and contractprovisions for indemnification protecting licensees against intellectualproperty infringement related to licensed Company technology or processes. Dueto the lack of historical obligations related to these items and the existenceof associated insurance coverage, the Company has no liabilities recorded forthese items as of December 31, 2003. As permitted under Delaware law, the Company has agreements whereby weindemnify our officers and directors for certain events or occurrences while theofficer or director is, or was serving, at our request in such capacity. Theterm of the indemnification period is for the officer's or director's lifetime.The maximum potential amount of future payments we could be required to makeunder these indemnification agreements is unlimited; however, we have a Directorand Officer insurance policy that covers a portion of any potential exposure. The Company believes the estimated fair value of the above indemnificationagreements is minimal, and as such, the Company has no liabilities recorded forthese agreements as of December 31, 2003. While it is not possible to predict with certainty the outcome of the abovelitigation and other matters and various other lawsuits, it is the opinion ofmanagement that the ultimate resolution of these proceedings should not have amaterial adverse effect on the Company's results of operations, cash flows andfinancial position. These matters, if resolved in an unfavorable manner, couldhave a material effect on the operating results and cash flows when resolved ina future reporting period. IMPACT OF RECENT ACCOUNTING PRONOUNCEMENTS 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 any effect on the Company'sconsolidated financial position or results of operations as it has determinedits long-lived assets have indeterminate future lives. Rescission of FAS No. 4, 44 and 64, Amendment of FAS 13, and TechnicalCorrections as of April 2002 In May 2002, the FASB issued Statement of Financial Accounting StandardsNo. 145, "Rescission of SFAS No. 4, 44 and 64, Amendment of SFAS 13, andTechnical Corrections as of April 2002" ("SFAS 145"). The statement rescindsSFAS 4 (as amended by SFAS 64), which required extraordinary item treatment forgains and losses on extinguishments of debt, and SFAS 44, which does not affectthe Company. Additionally, the statement amends certain provisions of SFAS 13and other 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. Adoption of SFAS 145 did not have any effect on the Company'sconsolidated financial position or results of operations. 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---------------(dollars in thousands, except share data) 38 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 of transition 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 disclosure provisions ofSFAS 148 as of December 31, 2002, and will continue to use the intrinsic valuemethod of APB 25. Amendment of Statement 133 on Derivative Instruments and Hedging Activities On April 30, 2003 the FASB issued SFAS 149 "Amendment of Statement 133 onDerivative Instruments and Hedging Activities" which amends SFAS 133. ThisStatement clarifies under what circumstances a contract with an initial netinvestment meets the characteristics of a derivative, it also clarifies when aderivative contains a financing component and amends the definition of anunderling to conform it to language used in FASB Interpretation No. 45. Thisstatement is effective for contracts entered into or modified after June 30,2003, except for those provisions of this Statement that relate to SFAS 133implementation issues that have been effective for fiscal quarters that beganprior to June 15, 2003. Adoption of SFAS 149 did not have any effect on theCompany's consolidated financial position or results of operations. Accounting for Certain Financial Instruments with Characteristics of bothLiabilities and Equity In May 2003, the FASB issued Statement of Financial Accounting Standard No.150, "Accounting for Certain Financial Instruments with Characteristics of bothLiabilities and Equity" ("SFAS 150"). SFAS 150 specifies that instruments withinits scope embody obligations of the issuer and that, therefore, the issuer mustclassify them as liabilities. This statement requires that mandatory redeemablefinancial instruments, obligations to repurchase the issuer's equity shares bytransferring assets, and certain obligations to issue a variable number ofshares be classified as liabilities. SFAS 150 is effective at the beginning ofthe first interim period beginning after June 15, 2003. Adoption of thisStatement did not have any effect on the Company's results. Guarantor's Accounting and Disclosure Requirements for Guarantees In November 2002, FASB Interpretation No. 45, "Guarantor's Accounting andDisclosure Requirements for Guarantees, Including Indirect Guarantees ofIndebtedness of Others" ("FIN 45") was issued. FIN 45---------------(dollars in thousands, except share data) 39 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 adoption of FIN 45 did not have any effecton the Company's consolidated financial position or results of operations. 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 fourth 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 and determined its impact didnot have an effect on the Company's financial position or results of operations. In December 2003, the FASB issued FIN 46R which requires the application ofeither FIN 46 or FIN 46R by public entities created prior to February 1, 2003 atthe end of the first interim or annual reporting period ending after December15, 2003. All entities created after January 31, 2003 by public entities werealready required to be analyzed under FIN 46, and they must continue to do so,unless FIN 46R is adopted early. FIN 46R will be applicable to all non-SPEscreated prior to February 1, 2003 by Public Entities that are not small businessissuers at the end of the first interim or annual reporting period ending afterMarch 15, 2004. Employer's Disclosure about Pensions and Other Postretirement Benefits In December 2003, the FASB published a revision to SFAS No. 132 "Employers'Disclosure about Pensions and Other Postretirement Benefits an amendment of FASBStatements No. 87, 88, and 106." SFAS No. 132R requires additional disclosuresto those in the original SFAS No. 132 about the assets, obligations, cash flows,and net periodic benefit cost of defined benefit pension plans and other definedbenefit postretirement plans. The provisions of SFAS No. 132 remain in effectuntil the provisions of SFAS No. 132R are adopted. SFAS No. 132R is effectivefor financial statements with fiscal years ending after December 15, 2003. TheCompany is in compliance with SFAS No. 132R. On January 12, 2004, the FASB issues Staff Position (FSP) 106-1 whichpermits a sponsor of a postretirement health care plan that provides aprescription drug benefit to make a one-time election to defer accounting forthe effects of the Medicare Prescription Drug, Improvement and Modernization Actof 2003 (the Act). The Company has elected to defer the accounting effects ofthis act. As a result, any measures of the plan APBO or net periodicpostretirement benefit cost in the financial statements or accompanying notes donot reflect the effects of the Act on the plan and specific authoritativeguidance on the accounting for the federal subsidy is pending and that guidance,when issued, could require the Company to change previously reportedinformation. 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"). EITF 00-21 clarifies the timing and recognition of revenue from certaintransactions that include the delivery and performance of multiple products orservices. EITF 00-21 is effective for revenue arrangements entered into duringfiscal periods beginning after June 15, 2003. The Company is in compliance withthis EITF. ---------------(dollars in thousands, except share data) 40 In December 2003, the Securities and Exchange Commission issued StaffAccounting Bulletin No. 104 (SAB 104), Revenue Recognition. SAB 104 supersedesSAB 101, Revenue Recognition in Financial Statements to include the guidancefrom Emerging Issues Task Force EITF 00-21 "Accounting for Revenue Arrangementswith Multiple Deliverables." The adoption of SAB 104 did not have a materialeffect on the Company's consolidated results of operations or financialposition. FORWARD-LOOKING STATEMENTS This document may contain "forward-looking statements" within the meaningof the Private Securities Litigation Reform Act of 1995 and Rule 3B-6 under TheSecurities Exchange Act of 1934, including, without limitation, statementsregarding expected performance, especially expectations with respect to sales,research and development expenditures, earnings per share, capital expenditures,acquisitions, divestitures, collaborations, or other expansion opportunities.These statements may be identified by the fact that they use words such as"expects," "anticipates," "intends," "estimates," "believes" or similarexpressions in connection with any discussion of future financial and operatingperformance. Any forward-looking statements are qualified in their entirety byreference to the factors discussed throughout this Form 10-K. Theforward-looking statements contained herein are based on current plans andexpectations and involve risks and uncertainties that could cause actualoutcomes and results to differ materially from current expectations includingbut not limited to factors that could affect the Company's forward-lookingstatements relating to the resolution of the material weaknesses in internalcontrols discussed in Item 9A of this Annual Report including, among otherthings: the Company's ability to fully resolve the weaknesses during the threeto six month period from the date of filing of this Annual Report; the Company'sability to identify and retain qualified and experienced personnel on both ashort and long term basis in its tax department; the Company's ability to designand maintain policies and procedures which enable the Company to avoid anyreoccurrence of the matters which gave rise to the material weaknesses; theCompany's ability to implement policies and procedures including documentationthat meets the internal control over financial reporting requirements of therules adopted by the Commission pursuant to Section 404 of the Sarbanes-OxleyAct of 2002, the risks and other factors described under the caption "RiskFactors That May Affect Future Results" in this Form 10-K, global economictrends, pharmaceutical outsourcing trends, competitive pricing or productdevelopments, government legislation and/or regulations (particularlyenvironmental issues), tax rate, technology, manufacturing and legal issues,unfavorable results shipments, changes in foreign exchange rates, performance ofminority investments, un-collectable receivables, loss on disposition of assets,cancellation or delays in renewal of contracts, and lack of suitable rawmaterials or packaging materials. Any forward-looking statement speaks only asof the date on which it is made, and the Company undertakes no obligation topublicly update any forward-looking statement, whether as a result of newinformation, future events or otherwise. New factors emerge from time to timeand it is not possible for us to predict which will arise. In addition, wecannot assess the impact of each factor on our business or the extent to whichany factor, or combination of factors, may cause actual results to differmaterially from those contained in any forward-looking statements. ---------------(dollars in thousands, except share data) 41 ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. The following consolidated financial statements and selected quarterlyfinancial data of the Company are filed under this item: PAGE NUMBER (IN THIS REPORT) ---------------- Report of Independent Auditors.............................. 43Consolidated Balance Sheets as of December 31, 2003 and 2002...................................................... 44Consolidated Income Statements for the Years Ended December 31, 2003, 2002 and 2001................................... 45 Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 2003, 2002 and 2001.............. 46Consolidated Statements of Cash Flows for the Years Ended December 31, 2003, 2002 and 2001.......................... 47Notes to Consolidated Financial Statements.................. 48Consolidated Quarterly Financial Data (unaudited) for the Years Ended December 31, 2003 and 2002.................... 88 The consolidated financial statements and financial statement schedule arefiled pursuant to Item 15 of this report. ---------------(dollars in thousands, except share data) 42 REPORT OF INDEPENDENT AUDITORS To the Stockholders and Board of Directors of Cambrex Corporation In our opinion, the consolidated financial statements listed in theaccompanying index on page 42 present fairly, in all material respects, thefinancial position of Cambrex Corporation and Subsidiaries at December 31, 2003and 2002, and the results of their operations and their cash flows for each ofthe three years in the period ended December 31, 2003 in conformity withaccounting principles generally accepted in the United States of America. Inaddition, in our opinion, the financial statement schedule listed in theaccompanying index presents fairly, in all material respects, the informationset forth therein when read in conjunction with the related consolidatedfinancial statements. These financial statements and financial statementschedule are the responsibility of the Company's management; our responsibilityis to express an opinion on these financial statements and financial statementschedule based on our audits. We conducted our audits of these statements inaccordance with auditing standards generally accepted in the United States ofAmerica, which require that we plan and perform the audit to obtain reasonableassurance about whether the financial statements are free of materialmisstatement. An audit includes examining, on a test basis, evidence supportingthe amounts and disclosures in the financial statements, assessing theaccounting principles used and significant estimates made by management, andevaluating the overall financial statement presentation. We believe that ouraudits provide a reasonable basis for our opinion. As discussed in Note 5 to the consolidated financial statements, theCompany adopted Statement of Financial Accounting Standards No. 142, "Goodwilland Other Intangible Assets," effective January 1, 2002. As discussed in Note 2, the 2002 consolidated financial statements havebeen restated. /s/: PRICEWATERHOUSECOOPERS LLP Florham Park, New JerseyFebruary 27, 2004 43 CAMBREX CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) DECEMBER 31, ---------------------- 2003 2002 -------- ---------- (RESTATED) ASSETSCurrent assets: Cash and cash equivalents................................. $ 64,294 $ 33,296 Trade receivables, less allowances of $3,281 and $1,672 at respective dates....................................... 58,324 58,132 Inventories, net.......................................... 82,013 74,430 Deferred tax assets....................................... 8,757 7,712 Assets of discontinued operations -- short term........... -- 57,838 Prepaid expenses and other current assets................. 16,294 16,450 -------- -------- Total current assets.............................. 229,682 247,858Property, plant and equipment, net.......................... 269,147 239,944Goodwill.................................................... 220,742 214,354Other intangible assets, net................................ 51,391 50,570Assets of discontinued operations -- long term.............. -- 74,419Other assets................................................ 7,541 8,138 -------- -------- Total assets...................................... $778,503 $835,283 ======== ========LIABILITIES AND STOCKHOLDERS' EQUITYCurrent liabilities: Accounts payable.......................................... $ 35,326 $ 27,921 Accrued liabilities....................................... 54,522 46,565 Liabilities of discontinued operations.................... -- 16,684 Short-term debt and current portion of long-term debt..... 1,376 2,364 -------- --------Total current liabilities................................... 91,224 93,534Long-term debt.............................................. 212,369 267,434Deferred tax liabilities.................................... 29,196 20,721Other non-current liabilities............................... 49,084 42,640 -------- -------- Total liabilities................................. $381,873 $424,329Commitments and contingencies (see Notes 23 and 24)Stockholders' equity: Common Stock, $.10 par value; issued 28,471,652 and 28,323,059 shares at respective dates.................. $ 2,847 $ 2,832 Additional paid-in capital................................ 206,256 203,444 Retained earnings......................................... 205,787 262,950 Treasury stock, at cost; 2,614,910 and 2,487,247 shares at respective dates....................................... (22,101) (19,841) Deferred compensation..................................... (1,616) (1,561) Accumulated other comprehensive loss...................... 5,457 (36,870) -------- -------- Total stockholders' equity........................ 396,630 410,954 -------- -------- Total liabilities and stockholders' equity........ $778,503 $835,283 ======== ======== See accompanying notes to consolidated financial statements. 44 CAMBREX CORPORATION AND SUBSIDIARIES CONSOLIDATED INCOME STATEMENTS (IN THOUSANDS, EXCEPT PER-SHARE DATA) YEARS ENDED DECEMBER 31, ---------------------------------- 2003 2002 2001 -------- ---------- -------- (RESTATED) Gross sales................................................ $405,591 $394,430 $356,555 Commissions and allowances............................... 3,780 3,194 3,653 -------- -------- --------Net sales.................................................. 401,811 391,236 352,902 Other revenues........................................... 8,833 7,830 3,928 -------- -------- --------Net revenues............................................... 410,644 399,066 356,830 Cost of goods sold....................................... 248,238 221,348 198,858 -------- -------- --------Gross profit............................................... 162,406 177,718 157,972 Selling, general and administrative expenses............. 95,117 85,762 80,099 Research and development expenses........................ 17,123 15,794 17,379 Legal settlement......................................... 11,342 -- -- Asset impairment and other charges....................... -- 4,238 2,022 -------- -------- --------Operating profit........................................... 38,824 71,924 58,472Other (income) expenses Interest income.......................................... (1,164) (946) (967) Interest expense......................................... 13,004 12,210 11,569 Other -- net............................................. 139 7,890 (323) -------- -------- --------Income before income taxes................................. 26,845 52,770 48,193Provision for income taxes................................. 26,600 12,815 13,205 -------- -------- --------Income from continuing operations.......................... $ 245 $ 39,955 $ 34,988Discontinued operations:Loss from discontinued operations.......................... (54,341) (8,933) (13,467)Income tax benefit......................................... (33) (2,387) (3,791) -------- -------- --------Loss from discontinued operations.......................... (54,308) (6,546) (9,676) -------- -------- --------Net (loss)/income.......................................... $(54,063) $ 33,409 $ 25,312 ======== ======== ========Basic earnings (loss) per share Income from continuing operations........................ $ 0.01 $ 1.54 $ 1.36 Loss from discontinued operations........................ $ (2.11) $ (0.25) $ (0.37) -------- -------- -------- Net (loss)/income........................................ $ (2.10) $ 1.29 $ 0.99Diluted earnings (loss) per share Income from continuing operations........................ $ 0.01 $ 1.51 $ 1.32 Loss from discontinued operations........................ $ (2.08) $ (0.25) $ (0.36) -------- -------- -------- Net (loss)/income........................................ $ (2.07) $ 1.26 $ 0.96Weighted average shares outstanding: Basic.................................................... 25,775 25,954 25,648 Diluted.................................................. 26,174 26,520 26,495 See accompanying notes to consolidated financial statements. 45 CAMBREX CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) COMMON STOCK ---------------------- ADDITIONAL SHARES PAR VALUE PAID-IN RETAINED DEFERRED TREASURY COMPREHENSIVE ISSUED ($.10) CAPITAL EARNINGS COMPENSATION STOCK INCOME/(LOSS) ---------- --------- ---------- -------- ------------ -------- -------------- BALANCE AT DECEMBER 31, 2000........ 27,433,170 $2,769 $181,698 $210,421 $ 0 $(13,010) ---------- ------ -------- -------- ------- -------- 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) -------- 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........ 28,007,825 $2,823 $197,748 $232,658 $ 0 $(16,911) Comprehensive income/(loss) Net Income as restated.......... 33,409 33,409 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 $2,891........... (3,269) -------- Other comprehensive income/(loss) as restated..... 34,350 -------- Comprehensive income.............. $ 67,759 ======== 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 1,283 (1,561) 330 ---------- ------ -------- -------- ------- --------BALANCE AT DECEMBER 2002 AS RESTATED.......................... 28,323,059 $2,832 $203,444 $262,950 $(1,561) $(19,841) Comprehensive income/(loss) Net (loss)...................... (54,063) (54,063) Other comprehensive income/(loss) Foreign currency translation adjustments................. 41,340 Unrealized gains on hedging contracts, net of tax expense of $52.............. 2,532 Minimum pension liability adjustment, net of tax expense of $0............... (1,545) -------- Other comprehensive (loss)...... 42,327 -------- Comprehensive income.............. $(11,736) ======== Cash dividends at $0.12 per share........................... (3,100) Purchase of treasury stock........ (2,420) Exercise of stock options......... 122,750 12 1,118 Other............................. 25,843 3 1,694 (55) 160 ---------- ------ -------- -------- ------- --------BALANCE AT DECEMBER 2003............ 28,471,652 $2,847 $206,256 $205,787 $(1,616) $(22,101) ========== ====== ======== ======== ======= ======== ACCUMULATED OTHER TOTAL COMPREHENSIVE STOCKHOLDERS' INCOME/(LOSS) EQUITY -------------- -------------- BALANCE AT DECEMBER 31, 2000........ $(50,883) $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) (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........ $(71,220) $345,098 Comprehensive income/(loss) Net Income as restated.......... 33,409 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 $2,891........... Other comprehensive income/(loss) as restated..... 34,350 34,350 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 2002 AS RESTATED.......................... $(36,870) $410,954 Comprehensive income/(loss) Net (loss)...................... (54,063) Other comprehensive income/(loss) Foreign currency translation adjustments................. Unrealized gains on hedging contracts, net of tax expense of $52.............. Minimum pension liability adjustment, net of tax expense of $0............... Other comprehensive (loss)...... 42,327 42,327 Comprehensive income.............. Cash dividends at $0.12 per share........................... (3,100) Purchase of treasury stock........ (2,420) Exercise of stock options......... 1,130 Other............................. 1,802 -------- --------BALANCE AT DECEMBER 2003............ $ 5,457 $396,630 ======== ======== See accompanying notes to consolidated financial statements. 46 CAMBREX CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS) YEARS ENDED DECEMBER 31, --------------------------------- 2003 2002 2001 --------- --------- --------- (RESTATED) Cash flows from operating activities: Net (loss) income......................................... $ (54,063) $ 33,409 $ 25,312 Depreciation and amortization............................. 35,834 30,838 37,418 Asset impairments......................................... -- 9,033 3,600 Deferred income tax provision............................. 8,005 (7,973) (6,524) Changes in assets and liabilities (net of assets and liabilities acquired): Mylan settlement, net of cash settlements............... 7,186 -- -- Vitamin B-3 provision, net of cash payments............. (5,198) 4,688 (954) Trade receivables....................................... 5,030 (1,614) (4,595) Inventories............................................. 1,017 (952) (5,034) Prepaid expenses and other current assets............... 1,244 (2,311) 2,166 Accounts payable and accrued liabilities................ 10,200 10,483 (12,339) Income taxes payable.................................... (2,741) (4,981) 6,004 Other non-current assets and liabilities................ 1,595 1,635 (1,268)Discontinued operations: Non-cash charges and changes in operating assets and liabilities............................................. 12,079 21,458 (6,670) Writedown of assets held for sale......................... 53,098 -- -- Asset impairments and other charges....................... -- 10,627 18,070 --------- --------- --------- Net cash provided from operating activities............... 73,286 104,340 55,186 --------- --------- ---------Cash flows from investing activities: Capital expenditures...................................... (37,857) (40,443) (30,161) Acquisition of businesses (net of cash acquired).......... -- -- (146,640) Other investing activities................................ (1,548) 1,278 390Discontinued operations: Capital expenditures, net of insurance proceeds........... 671 (9,860) (12,787) Proceeds from sale of Rutherford Chemicals................ 50,215 -- -- --------- --------- --------- Net cash provided from (used in) investing activities..... 11,481 (49,025) (189,198) --------- --------- ---------Cash flows from financing activities: Dividends................................................. (3,100) (3,117) (3,075) Net (decrease) increase in short-term debt................ (1,071) (2,737) 1,174 Long-term debt activity (including current portion): Borrowings.............................................. 359,611 60,800 284,232 Repayments.............................................. (414,793) (103,964) (152,399) Proceeds from the stock options exercised................. 1,130 5,049 11,016 Purchase of treasury stock................................ (2,420) (5,549) (3,901) Other..................................................... 55 282 55 --------- --------- --------- Net cash (used in) provided by financing activities..... (60,588) (49,236) 137,102 --------- --------- ---------Effect of exchange rate changes on cash..................... 6,819 3,521 (1,115) --------- --------- ---------Net increase in cash and cash equivalents................... 30,998 9,600 1,975Cash and cash equivalents at beginning of year.............. 33,296 23,696 21,721 --------- --------- ---------Cash and cash equivalents at end of year.................... $ 64,294 $ 33,296 $ 23,696 ========= ========= =========Supplemental disclosure: Interest paid, net of capitalized interest................ $ 11,725 $ 11,905 $ 11,637 Income taxes paid......................................... $ 18,107 $ 18,512 $ 24,919Non-cash transactions: Additional minimum pension liability eliminated from stockholders' equity.................................... $ (1,224) $ (6,920) $ (1,260) Liabilities assumed in connection with acquisition........ $ -- $ -- $ 18,970 See accompanying notes to consolidated financial statements. 47 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. Asdiscussed in Note #14, on November 10, 2003, the sale of Rutherford Chemicalswas completed and accordingly, the business comprising the Rutherford Chemicalssegment is being reported as a discontinued operation in all periods presented.The Company operates in three segments, Human Health, Bioproducts and Biopharma. (2) RESTATEMENT OF FINANCIAL RESULTS Cambrex Corporation restated its results for the second quarter 2002. Thisrestatement resulted from a reassessment of the carrying value of an equityinvestment in a privately held emerging biotechnology company. The Companyconcluded that $4.3 million of the investment should have been impaired as ofthe second quarter 2002 and the remaining $0.7 million should have beeninitially classified as an intangible asset related to a licensing agreemententered into concurrent with the equity investment. The impairment charge of$4.3 million was recorded in Other expense and a related $1.5 million taxbenefit was recorded in Provision for income taxes and as a deferred tax asset.Net income and total stockholders' equity decreased by $2.8 million. Thisrestatement did not have an effect on the Company's cash flows. A summary of the effects of the restatement on the accompanyingConsolidated Income Statements and Consolidated Balance Sheet follows: Consolidated Income Statement YEAR ENDED DECEMBER 31, 2002 --------------------- AS PREVIOUSLY AS REPORTED* RESTATED ---------- -------- Other expense.................................... $ 3,545 $ 7,890Income before income taxes....................... 57,115 52,770Provision for income taxes....................... 14,336 12,815Income from continuing operations................ 42,779 39,955Net income....................................... 36,233 33,409Basic EPS: Income from continuing operations.............. $ 1.65 $ 1.54 Net income..................................... $ 1.40 $ 1.29Diluted EPS: Income from continuing operations.............. $ 1.61 $ 1.51 Net income..................................... $ 1.37 $ 1.26 48 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, 2002 ----------------------- AS PREVIOUSLY AS REPORTED* RESTATED ----------- --------- Other intangible assets, net.................... $ 49,910 $ 50,570Other assets.................................... 13,143 8,138Total assets.................................... 839,628 835,283Deferred tax liabilities........................ 22,242 20,721Total liabilities............................... 425,850 424,329Retained earnings............................... 265,774 262,950Total stockholders' equity...................... $413,778 $410,954 --------------- * Reflects discontinued operation and other reclassifications (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 transactions are generally recorded inearnings in the same period as they are realized, which is usually the sameperiod as the settlement of the underlying transactions. The Company usesinterest rate derivative instruments only as hedges or as an integral part ofborrowings. As such, the differential to be paid or received in connection withthese instruments is accrued and recognized in income as an adjustment tointerest expense. The Company formally documents all relationships between hedginginstruments and hedged items, as well as its risk management objectives andstrategies for undertaking various hedging relationships. All cash flow hedges are linked to transactions and the Company assesses effectiveness at inceptionand on a quarterly basis. If it is determined that a derivative instrument isnot highly effective or the transaction is no longer deemed probable ofoccurring, the Company discontinues hedge accounting. Inventories Inventories are stated at the lower of 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. 49 CAMBREX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) (3) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED) Property, Plant and Equipment Property, plant and equipment is stated at cost, net of accumulateddepreciation. Plant and equipment are depreciated on a straight-line basis overthe estimated useful lives for each applicable asset group as follows: Buildings and improvements............................ 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 operating expenses. Interest is capitalized inconnection with the construction and acquisition of assets. The capitalizedinterest is recorded as part of the cost of the asset to which it relates and isamortized over the asset's estimated useful life. Total interest capitalized inconnection with ongoing construction activities in 2003, 2002 and 2001 amountedto $53, $1,041 and $1,482, respectively. Goodwill and 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 flows associated 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 determinedto have indefinite lives. Goodwill and indefinite lived intangibles will not beamortized but will be tested for impairment at least annually. Intangible assetsother than goodwill will be amortized over their useful lives and reviewed forimpairment in accordance with SFAS 144, "Accounting for the Impairment orDisposal of Long-Lived Assets." 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 be recoverable. Long lived assets are considered to beimpaired when the sum of the undiscounted expected future operating cash flowsis less than the carrying amounts of the related assets. 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 50 CAMBREX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) (3) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)and discounts and allowances offered to customers. The Company estimates returnsand discounts 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. Service Revenue The Company's contract manufacturing business records revenue as servicesare performed. In 2003 the Company entered into a contract that containsmilestone based payments. Revenue would be based on the cost of efforts (sincethe contract's commencement) up to the reporting date, divided by the totalexpected contractual costs (from the contract's commencement to the end of thedevelopment arrangement), multiplied by the total expected contractual paymentsunder the arrangement. However, revenue would be limited to the amount ofnonrefundable cash payments received and the subsequent milestone payments thathave become due and payable at the reporting date. Income Taxes Deferred income taxes reflect the differences between assets andliabilities recognized for financial reporting purposes and amounts recognizedfor tax purposes. Deferred taxes are based on tax laws currently enacted. The Company and its eligible subsidiaries file a consolidated U.S. incometax return. Certain subsidiaries which are consolidated for financial reportingare not eligible to be included in the consolidated U.S. income tax return. U.S.income taxes are provided on a 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 and U.S. taxes have not been provided on their unremitted earnings. At December 31,2003, the cumulative amount of unremitted earnings of non-U.S. subsidiaries was$47,056. 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 51 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 theConsolidated Income Statement. Foreign currency net transaction gain (losses)were $2,600, $1,083 and ($1,876) in 2003, 2002 and 2001, 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, ------------------------------ 2003 2002 2001 -------- ------- ------- (RESTATED) Numerator:Income from continuing operations available to common stockholders....................................... $ 245 $39,955 $34,988(Loss) income from discontinued operations available to common stockholders............................. (54,308) (6,546) (9,676) -------- ------- -------(Loss)/income available to common stockholders....... $(54,063) $33,409 $25,312 ======== ======= =======Denominator:Basic weighted average shares outstanding............ 25,775 25,954 25,648Effect of dilutive stock options..................... 399 566 847 -------- ------- -------Diluted weighted average shares outstanding.......... 26,174 26,520 26,495(Loss) Earnings per share (basic):Income from continuing operations.................... $ 0.01 $ 1.54 $ 1.36(Loss) income from discontinuing operations.......... $ (2.11) $ (0.25) $ (0.37) -------- ------- -------Net (loss)/income.................................... $ (2.10) $ 1.29 $ 0.99 ======== ======= =======(Loss) Earnings per share (diluted):Income from continuing operations.................... $ 0.01 $ 1.51 $ 1.32(Loss) income from discontinued operations........... $ (2.08) $ (0.25) $ (0.36) -------- ------- -------Net (loss)/income.................................... $ (2.07) $ 1.26 $ 0.96 ======== ======= ======= For the year ended December 31, 2003, 2002 and 2001, approximately2,096,000, 1,223,000, and 416,000 shares respectively, were not included in thediluted EPS calculation because the option price was greater than the marketprice. 52 CAMBREX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) (3) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED) 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 Note#16. The Company accounts for those plans under the recognition and measurementprinciples of APB Opinion No. 25, Accounting for Stock Issued to Employees, andrelated interpretations. No stock-based employee compensation cost related tothe stock option plans is reflected in net income, as all options granted underthose plans had an exercise price equal to the market value of the underlyingcommon stock on the date of grant. The following table illustrates the effect onnet income 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, YEARS ENDED DECEMBER 31, --------------------------------- 2003 2002 2001 -------- ---------- ------- (RESTATED) Net (loss) income, as reported....................... $(54,063) $33,409 $25,312Deduct: stock-based compensation expenses determined using fair value method, net of tax effects in 2002 and 2001........................................... (4,981) (1,714) (6,994) -------- ------- -------Proforma net (loss) income........................... $(59,044) $31,695 $18,318(Loss) earnings per share: Basic - as reported................................ $ (2.10) $ 1.29 $ 0.99 Basic - proforma................................... $ (2.29) $ 1.22 $ 0.71 Diluted - as reported.............................. $ (2.07) $ 1.26 $ 0.96 Diluted - proforma................................. $ (2.26) $ 1.20 $ 0.69 The pro forma compensation expense of $4,981, $1,714, and $6,994 for 2003,2002 and 2001, respectively, was calculated based on the fair value, net of tax,of each option primarily using the Black-Scholes option-pricing model fornon-performance options and a path dependent model for performance options, withthe following assumptions for 2003, 2002 and 2001, respectively: (i) averagedividend yield of 0.57%, 0.30% and 0.30% (ii) expected volatility of 40.81%,33.77% and 30.28%, (iii) risk-free interest rate ranging from 2.75% to 3.95%,3.84% to 4.84%, and 3.86% to 5.13%, and (iv) expected life of 4-7 years. In May 2003, the Chief Executive Officer was granted 150,000 incentivestock appreciation rights. These rights vest if Cambrex stock trades at anaverage price of $25 or higher for 20 consecutive days prior to his retirement.Upon vesting, the employee is entitled to a cash settlement representing thedifference in value between the closing price of Cambrex stock on the day of thegrant, which was $19.30, and the closing price of Cambrex stock on the day therights are exercised. These rights terminate one year after the employee'sretirement. In the fourth quarter of 2003, these rights vested and the Companyrecorded compensation expense of approximately $900. These rights will be markedto market until the rights are exercised or expire with the amount beingrecorded as compensation expense or benefit in the applicable period. 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 (loss) income for the Companyare foreign currency translation adjustments, changes in the fair value relatedto derivative 53 CAMBREX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) (3) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)instruments classified as cash flow hedges, net of related tax benefit, andchanges in the minimum pension liability, net of related tax benefit. Totalcomprehensive income (loss) for the years ended 2003, 2002 and 2001 is includedin the Statement of Stockholders' Equity. The components of Accumulated Other Comprehensive Income (Loss) inStockholders' Equity are as follows: 2003 2002 2001 ------- -------- -------- Foreign currency translation........................ $12,880 $(28,460) $(67,325)Unrealized losses on hedging contracts.............. (484) (3,016) (1,770) Unrealized losses on hedging contracts.............. (484) (3,016) (1,770)Minimum pension liability........................... (6,939) (5,394) (2,125) ------- -------- -------- $ 5,457 $(36,870) $(71,220) ======= ======== ======== Software and Development Costs In 2003, 2002 and 2001, the Company capitalized purchased software from athird party vendor and software development costs incurred under the provisionsof SOP 98-1, "Accounting for the Cost of Computer Software Developed or Obtainedfor Internal Use." Capitalized costs include only (1) external direct costs ofmaterials and services incurred in developing or obtaining internal usesoftware, (2) payroll and payroll-related costs for employees who are directlyassociated with and who devote substantial time to the internal-use softwareproject, and (3) interest costs incurred, while developing internal-usesoftware. Amortization begins when assets are ready for their intended 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 54 CAMBREX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) (4) ACQUISITIONS -- (CONTINUED)deductible for tax purposes. Subsequent to the acquisition, the company's formalname was changed to Cambrex Bio Science Hopkinton, 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 cGMP manufacture 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. 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) 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.The Company has established reporting units based on its current segmentstructure for purposes of testing goodwill for impairment. Goodwill has beenassigned to the reporting units to which the value of the goodwill relates. TheCompany will evaluate goodwill and other intangible assets at least on an annualbasis and whenever events and changes in circumstances suggest that the carryingamount may not be recoverable based on the estimated future cash flows. In the fourth quarter of 2003, 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 discounted cash flow method. The changes in the carrying amount of goodwill for the years ended December31, 2003 and 2002, are as follows: HUMAN BIOPRODUCTS HEALTH BIOPHARMA SEGMENT SEGMENT SEGMENT TOTAL ----------- ------- --------- -------- Balance as of January 1, 2002...... $51,417 $32,032 $132,524 $215,973Purchase accounting adjustment..... 115 -- (7,186) (7,071)Translation Effect................. 776 4,676 -- 5,452 ------- ------- -------- --------Balance as of December 31, 2002.... $52,308 $36,708 $125,338 $214,354Contingent purchase price adjustment....................... 188 -- -- 188Translation Effect................. 1,291 4,909 -- 6,200 ------- ------- -------- --------Balance as of December 31, 2003.... $53,787 $41,617 $125,338 $220,742 ======= ======= ======== ======== 55 CAMBREX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) (5) GOODWILL AND INTANGIBLE ASSETS -- (CONTINUED) Other intangible assets that are not subject to amortization beginningJanuary 1, 2003, consist of the following: AS OF AS OF DECEMBER 31, DECEMBER 31, 2003 2002 ------------ ------------ Proprietary Process................................. $ 1,675 $ 1,675Trademarks.......................................... 33,898 33,898 ------- ------- Total............................................. $35,573 $35,573 ======= ======= Intangible Assets: Other intangible assets, which will continue to be amortized, consist ofthe following: AS OF AS OF DECEMBER 31, 2003 DECEMBER 31, 2002 GROSS CARRYING AMOUNT GROSS CARRYING AMOUNT --------------------- --------------------- (RESTATED) Patents.............................. $ 3,122 $ 2,589Proprietary Process.................. 6,312 5,841Supply Agreements.................... 2,110 2,100Trademarks........................... 785 785Unpatented Technology................ 5,912 5,490Other................................ 2,909 1,895Fully Amortized Assets*.............. 2,883 2,883 ------- ------- Total.............................. 24,033 21,583 ------- -------Accumulated Amortization............. (8,215) (6,586) ------- -------Net.................................. $15,818 $14,997 ======= ======= *This category includes certain fully amortized patents, proprietary process andnon-compete agreements. Amortization expense amounted to $1,626, $1,554 and $12,961 for the yearsended December 31, 2003, 2002 and 2001, respectively. The expected future amortization expense related to current intangibleassets currently recorded in the future is as follows: For the year ended December 31, 2004........................ $1,656For the year ended December 31, 2005........................ $1,631For the year ended December 31, 2006........................ $1,621For the year ended December 31, 2007........................ $1,603For the year ended December 31, 2008........................ $1,495 56 CAMBREX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) (5) GOODWILL AND INTANGIBLE ASSETS -- (CONTINUED) As adjusted net income and diluted earnings per share for the year endedDecember 31, 2003, reflecting the adoption of SFAS No. 142, were as follows: FOR THE YEAR ENDED DECEMBER 31, ------------------------------ 2003 2002 2001 -------- ------- ------- (RESTATED) Net (loss) income as reported................ $(54,063) $33,409 $25,312As adjusted amortization effect, after taxes...................................... -- -- 8,042 -------- ------- -------Net (loss)income -- pro forma................ $(54,063) $33,409 $33,354Diluted (loss) earnings per share as reported................................... $ (2.07) $ 1.26 $ 0.96Add back: Goodwill and other indefinite-lived amortization expense.................... N/A N/A 0.30 -------- ------- -------Diluted (loss) earnings per share -- as adjusted................................... $ (2.07) $ 1.26 $ 1.26 ======== ======= ======= (6) IMPACT OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS 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 any effect on the Company'sconsolidated financial position or results of operations as it has determinedits long-lived assets have indeterminate future lives. 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 SFAS No. 4, 44 and 64, Amendment of SFAS 13, andTechnical Corrections as of April 2002" ("SFAS 145"). The statement rescindsSFAS 4 (as amended by SFAS 64), which required extraordinary item treatment forgains and losses on extinguishments of debt, and SFAS 44, which does not affectthe Company. Additionally, the statement amends certain provisions of SFAS 13and other 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. Adoption of SFAS 145 did not have any effect on the Company'sconsolidated financial position or results of operations. 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 Employee Termination 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 57 CAMBREX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) (6) IMPACT OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS -- (CONTINUED)charges 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. 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. Amendment of Statement 133 on Derivative Instruments and Hedging Activities On April 30, 2003 the Financial Accounting Standards Board issued SFAS 149"Amendment of Statement 133 on Derivative Instruments and Hedging Activities"which amends SFAS 133. This Statement clarifies under what circumstances acontract with an initial net investment meets the characteristics of aderivative, it also clarifies when a derivative contains a financing componentand amends the definition of an underling to conform it to language used in FASBInterpretation No. 45. This statement is effective for contracts entered into ormodified after June 30, 2003, except for those provisions of this Statement thatrelate to SFAS 133 implementation issues that have been effective for fiscalquarters that began prior to June 15, 2003. Adoption of SFAS 149 did not haveany effect on the Company's consolidated financial position or results ofoperations. Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity In May 2003, the Financial Accounting Standards Board ("FASB") issuedStatement of Financial Accounting Standard No. 150, "Accounting for CertainFinancial Instruments with Characteristics of both Liabilities and Equity"("SFAS 150"). SFAS 150 specifies that instruments within its scope embodyobligations of the issuer and that, therefore, the issuer must classify them asliabilities. This statement requires that mandatory redeemable financial instruments, obligations to repurchase the issuer's equity shares bytransferring assets, and certain obligations to issue a variable number ofshares be classified as liabilities. SFAS 150 is effective at the beginning ofthe first interim period beginning after June 15, 2003. Adoption of thisStatement did not have any effect on the Company's results. 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 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 58 CAMBREX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) (6) IMPACT OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS -- (CONTINUED)guarantee. The initial recognition and initial measurement provisions of thisInterpretation are applicable on a prospective basis to guarantees issued ormodified after December 31, 2002. The required disclosures are effective forfinancial statements of interim or annual periods ending after December 15,2002. The adoption of FIN 45 did not have any effect on the Company'sconsolidated financial position or results of operations. 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 fourth 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 and determined its impact didnot have an effect on the Company's consolidated financial position or resultsof operations. In December 2003, the FASB issued FIN 46R which requires the application ofeither FIN 46 or FIN 46R by public entities created prior to February 1, 2003 atthe end of the first interim or annual reporting period ending after December15, 2003. All entities created after January 31, 2003 by public entities werealready required to be analyzed under FIN 46, and they must continue to do so,unless FIN 46R is adopted early. FIN 46R will be applicable to all non-SPEscreated prior to February 1, 2003 by Public Entities that are not small businessissuers at the end of the first interim or annual reporting period ending afterMarch 15, 2004. 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 in compliance with this EITF. In December 2003, the Securities and Exchange Commission issued StaffAccounting Bulletin No. 104 ("SAB 104"), Revenue Recognition. SAB 104 supersedes SAB 101, Revenue Recognition in Financial Statements to include the guidancefrom Emerging Issues Task Force EITF 00-21 "Accounting for Revenue Arrangementswith Multiple Deliverables." The adoption of SAB 104 did not have a materialeffect on the Company's consolidated results of operations or financialposition. Employer's Disclosure about Pension and Other Postretirement Benefits In December 2003, the FASB published a revision to SFAS No. 132 "Employers'Disclosure about Pensions and Other Postretirement Benefits an amendment of FASBStatements No. 87, 88, and 106." SFAS No. 132R requires additional disclosuresto those in the original SFAS No. 132 about the assets, obligations, cash flows,and net periodic benefit cost of defined benefit pension plans and other definedbenefit postretirement plans. The provisions of SFAS No. 132 remain in effectuntil the provisions of SFAS No. 132R are adopted. SFAS No. 132R is effectivefor financial statements with fiscal years ending after December 15, 2003. TheCompany is in compliance with SFAS 132R. On January 12, 2004, the FASB issues Staff Position (FSP) 106-1 whichpermits a sponsor of a postretirement health care plan that provides aprescription drug benefit to make a one-time election to defer accounting forthe effects of the Medicare Prescription Drug, Improvement and Modernization Actof 2003 59 CAMBREX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) (6) IMPACT OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS -- (CONTINUED)(the Act). The Company has elected to defer the accounting effects of this act.As a result, any measures of the plan APBO or net periodic postretirementbenefit cost in the financial statements or accompanying notes do not reflectthe effects of the Act on the plan and specific authoritative guidance on theaccounting for the federal subsidy is pending and that guidance, when issued,could require the Company to change previously reported information. (7) NET INVENTORIES Net inventories consist of the following: DECEMBER 31, ------------------ 2003 2002 ------- ------- Finished goods........................................... $42,045 $38,396Work in process.......................................... 19,105 16,601Raw materials............................................ 16,601 16,026Supplies................................................. 4,262 3,407 ------- ------- Total.......................................... $82,013 $74,430 ======= ======= (8) PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment consists of the following: DECEMBER 31, ---------------------- ---------------------- 2003 2002 --------- --------- Land................................................. $ 11,543 $ 10,762Buildings and improvements........................... 123,727 101,167Machinery and equipment.............................. 302,041 239,874Furniture and fixtures............................... 16,976 12,919Construction in progress............................. 24,285 28,921 --------- --------- Total...................................... 478,572 393,643Accumulated depreciation............................. (209,425) (153,699) --------- --------- Net................................................ $ 269,147 $ 239,944 ========= ========= Depreciation expense was $34,208, $29,284 and $24,457 for the years endedDecember 31, 2003, 2002 and 2001, respectively. (9) ACCRUED LIABILITIES The components of accrued liabilities are as follows: YEARS ENDED DECEMBER 31, ------------------ 2003 2002 ------- ------- Salaries and employee benefits payables.................. $19,115 $14,015Unrealized losses on interest rate swaps................. 4,215 6,492Other accrued liabilities................................ 31,192 26,058 ------- ------- Total.......................................... $54,522 $46,565 ======= ======= 60 CAMBREX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) (10) INCOME TAXES Income (loss) from continuing operations before taxes consisted of thefollowing: YEARS ENDED DECEMBER 31, ------------------------------ 2003 2002 2001 -------- ------- ------- (RESTATED) Domestic............................................. $(20,211) $ 1,615 $(5,054)International........................................ 47,056 51,155 53,247 -------- ------- ------- Total...................................... $ 26,845 $52,770 $48,193 ======== ======= ======= The provision for income taxes consists of the following expenses(benefits): YEARS ENDED DECEMBER 31, ----------------------------- 2003 2002 2001 ------- ------- ------- (RESTATED) Current: Federal............................................. $ 2,060 $ -- $ -- State............................................... 232 777 526 International....................................... 16,303 20,011 19,203 ------- ------- ------- $18,595 $20,788 $19,729 ------- ------- -------Deferred: Federal............................................. 8,980 $(7,973) (5,200) State............................................... 186 -- -- International....................................... (1,161) -- (1,324) ------- ------- ------- $ 8,005 $(7,973) $(6,524) ------- ------- ------- Total....................................... $26,600 $12,815 $13,205 ======= ======= ======= The provision for income taxes differs from the statutory Federal incometax rate of 35% for 2003, 2002 and 2001 as follows: YEARS ENDED DECEMBER 31, ----------------------------- 2003 2002 2001 ------- ------- ------- (RESTATED) Income tax at Federal statutory rate.................. $ 9,396 $18,470 $16,868State and local taxes, net of Federal income tax benefits............................................ 232 505 342Difference between Federal statutory rate and statutory rates on non-U.S. income.................. (3,480) (933) (2,417)Change in valuation allowance......................... 21,487 (2,455) --Research and experimentation credits.................. (1,100) (1,237) (995)Foreign Tax Credits................................... -- -- (454)Other................................................. 65 (1,535) (139) ------- ------- ------- $26,600 $12,815 $13,205 ======= ======= ======= 61 CAMBREX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) (10) INCOME TAXES -- (CONTINUED) The components of deferred tax assets and liabilities as of December 31,2003 and 2002 relate to temporary differences and carryforwards as follows: DECEMBER 31, ---------------------- 2003 2002 -------- ---------- (RESTATED) Current deferred tax assets: Net operating loss carryforwards (foreign)........... $ 2,721 $ 3,309 Inventory............................................ 2,061 1,762 Receivables.......................................... 433 695 Vitamin B-3, legal and related reserves.............. 7,034 1,467 Italian substitute tax benefit....................... 2,000 -- Other................................................ 5,246 3,205 -------- ------- Current deferred tax assets.......................... 19,495 10,438 Valuation allowances................................. (10,738) (2,726) -------- ------- Total current deferred tax assets............ $ 8,757 $ 7,712 ======== =======Non-current deferred tax assets: Foreign tax credits.................................. $ 15,491 $10,959 Environmental........................................ 594 582 Net operating loss carryforwards (domestic).......... 34,766 -- Employee benefits.................................... 4,543 5,035 Restructuring........................................ 157 8,081 Impairment of investment in securities............... 2,764 2,764 Research & experimentation tax credits............... 4,658 3,809 Alternative minimum tax credits...................... 4,155 2,095 -------- ------- Non-current deferred tax assets...................... 67,128 33,325 Valuation allowances................................. (43,031) (95) -------- ------- Total non-current deferred tax assets........ $ 24,097 $33,230 -------- -------Non-current deferred tax liabilities: Depreciation......................................... $ 23,030 $25,723 Intangibles.......................................... 25,071 17,433 Reserves............................................. 2,327 10,042 Other................................................ 2,865 753 -------- ------- Total non-current deferred tax liabilities... $ 53,293 $53,951 -------- ------- Total net non-current deferred tax liabilities................................ $ 29,196 $20,721 ======== ======= SFAS 109, Accounting for Income Taxes, requires the Company to establish avaluation allowance against deferred tax assets when it is more likely than notthat the Company will be unable to realize those deferred tax assets in thefuture. Based on all available evidence -- including the Company's current andpast performance, cumulative losses in recent years resulting from domesticoperations, as well as from the disposition of the Rutherford Chemicalsbusiness, the market environment in which the Company operates, and theutilization of past tax attributes -- the Company has established a valuationallowance of $51,536 against a portion of its domestic deferred tax assets.However, the Company has not recorded a valuation allowance against domestic taxassets which are offset by domestic deferred tax liabilities that are expectedto reverse in the future. In addition, the Company has not recorded a valuationallowance against domestic deferred tax assets that the Company could utilizeupon the implementation of certain tax planning strategies. 62 CAMBREX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) (10) INCOME TAXES -- (CONTINUED) The Company expects to maintain a full valuation allowance against its netdomestic deferred tax assets, subject to the consideration of all prudent andfeasible tax planning strategies, until such time as the Company attains anappropriate level of future domestic profitability and the Company is able toconclude that it is more likely than not that its domestic deferred tax assets are realizable. The change in valuation allowance for the years ended December31, 2003 and 2002 was $50,948 and ($2,455), respectively. Under the tax laws of the various jurisdictions in which the Companyoperates, net operating losses (NOLs) may be carried forward, subject tostatutory limitations, to reduce taxable income in future years. The tax effectof such NOL carryforwards aggregated approximately $37,487 and $3,309 atDecember 31, 2003 and 2002. These NOLs will expire during the period from 2018through 2024. As of December 31, 2003, approximately $15,491 of foreign tax credits wereavailable as credits against future U.S. income taxes. Under the U.S. InternalRevenue Code, these foreign tax credits will expire in 2005 through 2007 and areoffset by a full valuation allowance (see above). During 2003, the Company derived U.S. income tax benefits from continuingoperations of approximately $412 from an exclusion provided under U.S. incometax laws with respect to certain extraterritorial income (ETI) attributable toforeign trading gross receipts. The World Trade Organization (WTO) ruled thatthe ETI exclusion represents a prohibited export subsidy under the WTO Agreementon Subsidies and Countervailing Measures. Based upon this ruling, a WTOarbitration panel has determined that the European Union (EU) may impose up to$4 billion per year in trade sanctions against the U.S., although the EU has yetto impose such sanctions. President George W. Bush has stated that the U.S. willchange its tax laws in order to comply with the WTO ruling. Various legislativeproposals providing for the repeal of the ETI exclusion have introducedbroad-based international tax reforms, but the Bush Administration and Congresshave not yet agreed upon a solution to this issue. Since the impact of thismatter upon the Company depends upon the actions of the EU and the specificprovisions of any tax legislation ultimately enacted by Congress, it is notpossible to predict the impact on future financial results. However, if the ETIexclusion is repealed and legislation that would replace the ETI exclusionbenefit 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 prevailed in a Swedish tax court case relating to aninter-company financing structure and is currently awaiting the outcome of anappeal by the Swedish tax authorities. The Company believes that its positionscomply with applicable law and intends to continue to vigorously defend itspositions. The Company believes that it has adequately provided for any probableoutcome related to these matters, and it does not anticipate any materialearnings impact from their resolution. During 2003, the Company made a substitute tax election that allowed anItalian subsidiary to step-up the tax basis of certain operating assets and torecord a net tax benefit of $2,000 in its 2003 U.S. GAAP financial statements.For U.S. GAAP purposes, the Company expects to record similar tax benefitsrelating to the substitute tax election in 2004 and 2005 and moderate additionaltax benefits for a period of years thereafter. (11) 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 $8,000, Export Financing of $8,000 andAdvances on Uncleared Deposits of $300. The Overdraft Protection and ExportFinancing facilities bear interest at varying rates when utilized, however,Advances on Uncleared Deposits bear no 63 CAMBREX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) (11) SHORT-TERM DEBT -- (CONTINUED) interest. There are no amounts outstanding as of December 31, 2003 and 2002. The2003 and 2002 average interest rates were 1.7% and 2.2%, respectively. Short-term debt at December 31, 2003 and 2002 consists of the following: DECEMBER 31, --------------- 2003 2002 ------ ------ Current portion of long-term debt........................... $1,376 $2,364 ------ ------ $1,376 $2,364 ====== ====== (12) LONG-TERM DEBT Long-term debt consists of the following: DECEMBER 31, ------------------- 2003 2002 -------- -------- Bank credit facilities(a)............................... $105,200 $257,350Senior notes............................................ 100,000 --Capitalized leases(b)................................... 8,545 12,448 -------- -------- Subtotal...................................... 213,745 269,798Less: current portion................................... (1,376) (2,364) -------- -------- Total......................................... $212,369 $267,434 ======== ======== (a) In November 2001, the Company entered into a $430,000 Syndicated RevolvingCredit Agreement led by JPMorganChase as the Administrative Agent. The agreementconsisted of a 364-day renewable senior revolving credit facility for $161,000(the "364-Day Facility"), and a 5-year senior revolving credit facility of$268,750 (the "5-Year Agreement"). In 2003, the Company elected not to renew the 364-Day Facility and thisfacility expired in November 2003. Concurrently, the 5-Year Agreement wasamended with the addition of an "accordion feature" which, if utilized, willallow for the increase of the total commitments of up to $75,000. The 5-Year Agreement allows the Company to choose among various interestrate options and to specify the portion of the borrowing to be covered byspecific interest rates. Under the 5-Year Agreement the interest rate optionsavailable to the Company are the following: 1) U.S. Prime Rate, 2) LIBOR plus an applicable margin that ranges from .575% to 1.20%, or 3) Money Market rate plus an applicable margin that ranges from .575% to1.20%. The applicable margin discussed above is based upon the ratio ofconsolidated funded indebtedness to consolidated modified EBITDA of CambrexCorporation. The Company also pays a commitment fee between .15% to .30% on the Corporation. The Company also pays a commitment fee between .15% to .30% on theentire credit facility. The bank loan is collateralized by dividend and distribution rightsassociated with a pledge of a portion of stock that the Company owns in aforeign holding company. This foreign holding company owns certain of theCompany's non-U.S. operating subsidiaries. As of December 31, 2003, there was $105,200 outstanding and $163,550undrawn under the 5-year Agreement. Of the undrawn amount, $61,000 is availableto be borrowed as of December 31, 2003 due to limits established in the CreditAgreement. 64 CAMBREX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) (12) LONG-TERM DEBT -- (CONTINUED) The Agreement is subject to financial covenants requiring the Company tomaintain certain levels of net worth, interest coverage ratio, leverage ratiosand limitations on indebtedness. The Company complied with all covenants during2003. (b) The Company assumed three capital leases as part of the acquisition ofBio Science Contract Production Corp. in June 2001 of $12,100. The leases arefor buildings, improvements and phone systems. There is $8,545 outstanding atDecember 31, 2003. All capital leases are collateralized by their underlyingassets. In June 2003, the Company borrowed $75,000 in a private offering consistingof 7-year guaranteed senior Notes due in June 2010 with interest payments duesemi-annually at an annual rate of 5.31%. During October 2003, the Companyborrowed an additional $25,000 in a private offering consisting of 10-yearguaranteed senior Notes due in October 2013 with interest payments duesemi-annually at an annual rate of 7.05%. These Notes rank equal with theCompany's other senior indebtedness and are collateralized by the same assets asthe bank loan described above. The funds were used primarily to pay downexisting bank debt and provide Cambrex with longer term fixed rate debt. The 2003 and 2002 average interest rates were 4.8% and 4.3%, respectively. Aggregate maturities of long-term debt are as follows: 2004........................................................ $ 1,3762005........................................................ 1,4022006........................................................ 106,6172007........................................................ 1,4382008........................................................ 1,462Thereafter.................................................. 101,450 -------- Total............................................. $213,745 ======== (13) DERIVATIVES AND FAIR VALUE OF FINANCIAL INSTRUMENTS The Company uses derivative financial instruments to reduce exposures tomarket risks resulting from fluctuations in interest rates and foreign exchangerates. The Company does not enter into financial instruments for trading orspeculative purposes. The Company is exposed to credit loss in the event ofnonperformance by the other parties to the interest rate swap and forwardexchange contracts. 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 Sweden, Belgium, GreatBritain and Italy. The Company's primary market risk relates to exposures toforeign currency exchange rate fluctuations on transactions entered into bythese international operations that are denominated primarily in U.S. Dollars,Swedish Krona, British Pound Sterling and Euros. 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 65 CAMBREX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) (13) DERIVATIVES AND FAIR VALUE OF FINANCIAL INSTRUMENTS -- (CONTINUED)enters into interest rate swap agreements to reduce the impact of changes ininterest rates on its floating rate debt. The swap agreements are contracts toexchange floating rate for fixed interest payments periodically over the life ofthe agreements without the exchange of the underlying notional debt amounts. All forward and swap contracts outstanding at December 31, 2003 have beendesignated as cash flow hedges and, accordingly, changes in the fair value ofderivatives are recorded each period in Other Comprehensive Income. Changes inthe fair value of the derivative instruments reported in Other ComprehensiveIncome will be reclassified as earnings in the period in which earnings areimpacted by the variability of the cash flows of the hedged item. Theineffective portion of all hedges is recognized in current-period earnings andis immaterial to the Company's financial results. Adoption of this statementresulted in an after tax reduction of other comprehensive income of $86. Theunrealized net loss recorded in accumulated comprehensive income at December 31,2003 was $484. This amount will be reclassified into earnings as the underlyingforecasted transactions occur. The net gain recognized in earnings related toforeign currency forward contracts during the twelve months ended December 31,2003 was $3,020. The net loss on interest rate swap contracts recognized ininterest expense was $3,619 for the twelve months ended December 31, 2003. 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, 2003. WEIGHTED AVG. RATENOTIONAL MATURITY -------------------AMOUNTS DATE PAY RECEIVE-------- -------- ----- -------- $10,000.......................................... 2006 4.72% 1.18% $10,000.......................................... 2006 5.05% 1.17%$10,000.......................................... 2005 4.66% 1.17%$10,000.......................................... 2005 4.73% 1.17%$ 5,000.......................................... 2005 3.37% 1.16%$10,000.......................................... 2005 4.75% 1.17%$20,000.......................................... 2005 4.98% 1.18%$ 5,000.......................................... 2005 3.35% 1.16%$ 5,000.......................................... 2004 2.79% 1.16%$ 5,000.......................................... 2004 3.83% 1.16%$ 5,000.......................................... 2004 2.76% 1.16% 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 was based on quotedmarket prices and was in a loss position of $4,146 at December 31, 2003. Foreign Exchange Instruments The table below reflects the notional and fair value amounts of foreignexchange contracts at December 31, 2003 and 2002. 66 CAMBREX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) (13) DERIVATIVES AND FAIR VALUE OF FINANCIAL INSTRUMENTS -- (CONTINUED) 2003 2002 ----------------- ----------------- NOTIONAL FAIR NOTIONAL FAIR AMOUNTS VALUE AMOUNTS VALUE -------- ------ -------- ------ Forward exchange contracts....................... $28,036 $2,089 $29,564 $1,846 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 since approximately 49% of the underlying debt hasvariable rate terms and reprices quarterly. Of this amount, the Company hasinterest rate swaps covering the majority of the outstanding debt. An additional47% of the debt has fixed interest rates, however, these notes have been placedwithin the last six months and as such, approximates fair value as of December31, 2003. (14) DISCONTINUED OPERATIONS -- SALE OF RUTHERFORD CHEMICALS 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; Heico Chemicals,Inc., Delaware Water Gap, Pennsylvania; Nepera, Inc., Harriman, New York;Zeeland Chemicals, Inc., Zeeland, Michigan; and Seal Sands Chemicals, Limited,Middlesbrough, United Kingdom. In the fourth quarter 2002, the Company announcedthat it had engaged a financial advisor to assist the Company in investigatingstrategic alternatives for the Rutherford Chemicals segment. The financialadvisor contacted certain parties regarding the Rutherford Chemicals business.On July 31, 2003 the Company's Board of Directors approved a proposed sale ofthe Rutherford business and on August 7, 2003, the Company announced that anagreement to sell the company had been signed. On October 17, 2003 the Company announced an agreement which amended the terms of the original agreement and onNovember 10, 2003 the sale was completed. The revised agreement specifiesproceeds for the sale of $55,000 in cash at closing, a $2,000 subordinated 12%interest bearing note payable in full in 5 1/2 years from the closing date, andan $8,000 performance-based cash earn-out as certain future operating profittargets are achieved in each of the next 3 years. These terms result in awrite-down of assets to estimated fair value of approximately $53,098 which isbased on the selling price, including fees associated with the transaction,subject to working capital and other adjustments. The Company is currently indiscussions with the buyer regarding the final calculation of the workingcapital adjustment which is expected to be completed in the first half of 2004.The buyer has recently communicated their calculation of the working capitaladjustment, which if correct, would result in an unfavorable adjustment to theloss from discontinued operations. The Company believes it has recorded thisobligation properly, however, any changes resulting in negotiations with thebuyer will be reflected in loss from discontinued operations in future periods.The Company has not included any of the performance based cash earn-out in thecomputation of the $53,098 loss and income for discontinued operations will berecorded in future periods if the Company receives any payments under theearn-out arrangement. This loss has not been tax effected as more fullyexplained in Note #10. Also, the Company retains the liabilities of the Rutherford Chemicalsbusiness associated with existing general litigation matters, including VitaminB-3 reserves, pre-closing environmental liabilities and post retirement benefitsand pension liabilities. See Note #24 for further discussion. As a result of the signing of the agreement on August 7, 2003, and thecompletion of the transaction on November 10, 2003, the business comprising theRutherford Chemicals segment is being reported as a discontinued operation inall periods presented. 67 CAMBREX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) (14) DISCONTINUED OPERATIONS -- SALE OF RUTHERFORD CHEMICALS -- (CONTINUED) The following table shows revenues and loss from the discontinuedoperations: YEARS ENDED DECEMBER 31, ------------------------------ 2003 2002 2001 -------- -------- -------- Revenues............................................. $108,569 $127,746 $142,639 ======== ======== ========Pre-tax loss from operations of discontinued operations......................................... $ (1,243) $ (8,933) $(13,467)Write-down to fair value based on expected selling price.............................................. $(53,098) $ -- $ -- -------- -------- --------Loss from discontinued operations before income taxes.............................................. $(54,341) $ (8,933) $(13,467) ======== ======== ======== The following table shows the carrying amount of the assets and liabilitiesof the segment that was sold as of December 31, 2002: DECEMBER 31, 2002 ------------ Assets:Accounts receivable, net.................................... $ 21,439Inventories, net............................................ 35,402Other current assets........................................ 997Property, plant and equipment, net.......................... 70,557Intangibles, net............................................ 3,488Other assets................................................ 374 --------Total Assets held for sale.................................. 132,257Liabilities:Accounts payable and accrued liabilities.................... 14,532Deferred tax liabilities.................................... 2,152 --------Total Liabilities held for sale............................. 16,684 --------Net assets of discontinued operations....................... $115,573 ======== The Company performed an asset impairment assessment of the long-livedassets in the Rutherford Chemical segments as of June 30, 2003 under a held foruse model. The Company used a probability-weighted undiscounted cash flow modelto test for recoverability. This probability assessment was made as of June 30,2003 and considered all facts and circumstances available at that date, whichincluded the possibility of a sale. The assessment as of June 30, 2003 did notresult in any impairment loss. (15) 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 atDecember 31, 2003 and 2002. Authorized shares of Nonvoting Common Stock were730,746 at December 31, 2003 and 2002. At December 31, 2003 there were 201,762 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, 2003 and 2002, no shares of Nonvoting CommonStock were outstanding. 68 CAMBREX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) (15) STOCKHOLDERS' EQUITY -- (CONTINUED) The Company held treasury stock of 2,614,910 and 2,487,247 shares atDecember 31, 2003 and 2002, respectively, and are used for issuance to theCambrex Savings Plan. In May 2000, the Board of Directors authorized the Companyto purchase an additional 1,000,000 shares of Company Stock in the open marketfrom time to time at a price determined by the Share Repurchase Committee. TheCompany has purchased 419,300 shares under this authorization as of December 31,2003. 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, 2003 and 2002, there was nopreferred stock outstanding. (16) STOCK OPTIONS The Company has seven stock-based compensation plans currently in effect.The 1992 Stock Option Plan ("1992 Plan"), the 1994 Stock Option Plan ("1994Plan"), the 1996 Performance Stock Option Plan ("1996 Plan"), the 1998Performance Stock Option Plan ("1998 Plan"), the 2001 Performance Stock OptionPlan ("2001 Plan") and the 2003 Performance Stock Option Plan ("2003 Plan")provide for the granting of non-qualified and incentive stock options (ISO)intended to qualify as additional incentives to management and other keyemployees. The 1996 Plan, the 1998 Plan, the 2001 Plan and the 2003 Plan alsoprovide for the granting of non-qualified stock options to non-employeedirectors. The 2000 Employee Performance Stock Option Plan ("2000 Plan") provides forthe granting of non-qualified and incentive stock options intended to qualify asadditional incentives to non-executive employees. Certain options granted under the 1996, 1998, 2000, 2001 and 2003 plans maybecome exercisable six years after the date of grant, subject to acceleration ifthe publicly 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 may also become exercisable based on the passage oftime, such that the option becomes fully exercisable in a series of cumulatingportions over a four-year period. Options shall have a term of no more than tenyears from the date of grants. In addition, stock option awards may betransferred to a member of the Participant's immediate family or to a trust orsimilar vehicle for the benefit of such transferee. The Company applies the provisions of APB Opinion No. 25 and relatedInterpretations in accounting for its stock-based compensation plans. 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. 69 CAMBREX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) (16) STOCK OPTIONS -- (CONTINUED) 122,750 options were exercised during 2003. 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 3,500 8.063 0.92 8.06 3,500 8.061994 Plan................ 300,000 14,850 7.438 - 11.438 0.99 9.86 14,850 9.861996 Plan................ 3,000,000 571,500 12.375 - 18.675 2.15 13.70 557,000 13.60 204,851 21.920 - 29.375 5.29 26.01 172,351 26.22 548,932 29.750 - 46.850 6.85 41.96 183,663 42.761998 Plan................ 1,180,000 649,688 22.063 - 34.750 4.30 23.26 649,688 22.69 133,200 40.500 - 46.850 6.52 43.62 43,667 43.632000 Plan................ 500,000 105,500 34.750 - 37.070 6.84 35.39 81,000 44.19 316,750 40.125 - 46.850 7.25 44.23 -- --2001 Plan................ 750,000 483,066 18.675 - 29.750 9.11 26.46 -- -- 245,628 36.950 - 46.850 8.14 39.95 159,612 35.282003 Plan................ 500,000 371,650 18.675 - 19.425 9.35 18.80 -- -- 51,750 25.275 - 25.350 9.91 25.35 -- -- --------- --------- ---------TOTAL SHARES............. 6,530,000 3,700,865 7.438 - 46.850 28.62 1,865,331 24.72 ========= ========= ========= Information regarding the Company's stock option plans is summarized below: WEIGHTED AVERAGE ---------------------- NUMBER OF EXERCISE OPTIONS SHARES PRICE $ EXERCISABLE --------- -------- ----------- Outstanding at December 31, 2000............................ 3,561,235 26.18 2,466,080 Granted................................................... 240,144 45.64 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 Exercised................................................. (306,200) 20.21 Cancelled................................................. (263,284) 42.65 ---------Outstanding at December 31, 2002............................ 3,160,715 1,789,383 --------- Granted................................................... 715,900 20.99 Exercised................................................. (122,750) 8.97 Cancelled................................................. (53,000) 37.71 ---------Outstanding at December 31, 2003............................ 3,700,865 1,865,331 ========= (17) 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 70 CAMBREX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) (17) RETIREMENT PLANS -- (CONTINUED)the Harriman, New York plant, and (2) the Cambrex Pension Plan (the "CambrexPlan") which covers all other eligible employees. Benefits for the salaried and certain hourly employees are based on salaryand years of service, while those for employees covered by a 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 2003 and 2002 is based on atwelve month period and on valuations of the plans as of January 1. However, thereconciliation of funded status is determined as of the September 30 measurementdate. The funded status of these plans, incorporating fourth quartercontributions, as of September 30, 2003 and 2002 is as follows: 2003 2002 ------- ------- CHANGE IN BENEFIT OBLIGATIONBenefit obligation at beginning of year..................... $40,326 $31,942Service cost................................................ 2,598 1,625Interest cost............................................... 2,841 2,339Curtailments................................................ (1,214) --Actuarial loss (gain)....................................... 4,388 5,995Benefits paid............................................... (1,672) (1,575) ------- -------Benefit obligation at end of year........................... $47,267 $40,326 ------- ------- 71 CAMBREX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) (17) RETIREMENT PLANS -- (CONTINUED) Major assumptions used in determining the benefit obligation for theCompany's domestic pension plans are presented in the following table asweighted averages: 2003 2002 -------- -------- WEIGHTED-AVERAGE ASSUMPTIONS AS OF SEPTEMBER 30,Discount rate............................................... 6.00% 6.75%Rate of compensation increase............................... 4.50% 4.50%CHANGE IN PLAN ASSETSFair value of plan assets at beginning of year.............. $ 24,621 $ 26,222Actual return on plan assets................................ 3,920 (1,566)Contributions............................................... 2,082 1,540Benefits paid............................................... (1,672) (1,575) -------- --------Fair value of plan assets at end of year.................... 28,951 24,621 -------- --------Funded status............................................... (18,316) (15,705)Unrecognized prior service cost............................. 567 988Unrecognized net (gain)loss................................. 13,008 12,175Additional minimum liability................................ (9,857) (9,532) -------- --------Prepaid (accrued) benefit at September 30,.................. (14,598) (12,074)4th quarter contributions................................... 481 357 -------- --------Prepaid (accrued) benefit cost at December 31,.............. $(14,117) $(11,717) ======== ======== The components of net periodic pension cost are as follows: 2003 2002 2001 ------- ------- ------- COMPONENTS OF NET PERIODIC BENEFIT COSTService Cost............................................ $ 2,598 $ 1,625 $ 1,641Interest Cost........................................... 2,841 2,339 2,213Expected return on plan assets.......................... (2,098) (2,190) (2,492) Expected return on plan assets.......................... (2,098) (2,190) (2,492)Amortization of prior service cost...................... 68 38 34Recognized actuarial (gain) loss........................ 519 88 (167)Curtailment loss on sale of Rutherford.................. 351 -- -- ------- ------- -------Net periodic benefit cost............................... $ 4,279 $ 1,900 $ 1,229 ======= ======= ======= Major assumptions used in determining the net cost for the Company'sdomestic pension plans are presented in the following table as weightedaverages: 2003 2002 2001 ---- ---- ---- WEIGHTED-AVERAGE ASSUMPTIONS AS OF SEPTEMBER 30,Discount rate............................................... 6.75% 6.75% 7.50%Expected return on plan assets.............................. 8.50% 8.50% 8.50%Rate of compensation increase............................... 4.50% 5.00% 5.00% The aggregate ABO (Accumulated Benefit Obligation) of $43,549 exceeds planassets by $14,598 in 2003 for all qualified domestic plans. 72 CAMBREX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) (17) RETIREMENT PLANS -- (CONTINUED) The Company expects to contribute approximately $4,859 in cash to its twoU.S. defined-benefit pension plans in 2004. The investment objective is to achieve long-term growth of capital, withexposure to risk set at an appropriate level. The objective shall beaccomplished through the utilization of a diversified asset mix consisting ofequities (domestic and international) and taxable fixed income securities. Theaccount is to be managed on a fully discretionary basis to obtain the highesttotal rate of return in keeping with a moderate level of risk. The allocation of pension plan assets is as follows: PERCENTAGE OF PLAN ASSETS TARGET -------------ASSET CATEGORY: ALLOCATION 2003 2002--------------- ---------- ----- ----- U. S. Equities............................................ 30% - 65% 46.3% 48.0%International Equities.................................... 0% - 15% 10.1 13.0U.S. Fixed Income......................................... 30% - 50% 43.6 39.0 ----- ----- 100.0% 100.0% The Company has a Supplemental Executive Retirement Plan (SERP) for keyexecutives. This plan is non-qualified and unfunded. It consists of two plans,the Corporate SERP plan and the BioWhittaker SERP Plan. The benefit obligation for these plans as of September 30, 2003 and 2002 isas follows: 2003 2002 ------- ------- CHANGE IN BENEFIT OBLIGATIONBenefit obligation at beginning of year..................... $ 6,136 $ 5,391Service cost................................................ 251 226Interest cost............................................... 423 396Amendments.................................................. -- (86)Actuarial loss (gain)....................................... 436 432Benefits paid............................................... (225) (223) ------- -------Benefit obligation at end of year........................... 7,021 6,136 ------- ------- Funded status............................................... (7,021) (6,136)Unrecognized prior service cost............................. 28 32Unrecognized net (gain)loss................................. 1,995 1,690Additional minimum liability................................ (1,718) (1,386) ------- -------Prepaid (accrued) benefit at December 31,................... $(6,716) $(5,800) ======= ======= Major assumptions used in determining the benefit obligation for theCompany's SERP Plans are presented in the following table as weighted averages: 2003 2002 ---- ---- WEIGHTED-AVERAGE ASSUMPTIONS AS OF DECEMBER 31,Discount rate............................................... 6.00% 6.75%Rate of compensation increase............................... 5.00% 5.00% 73 CAMBREX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) (17) RETIREMENT PLANS -- (CONTINUED) The components of net periodic benefit cost are as follows: 2003 2002 2001 ---- ---- ---- COMPONENTS OF NET PERIODIC BENEFIT COSTService Cost................................................ $251 $226 $254Interest Cost............................................... 423 396 403Expected return on plan assets.............................. -- -- --Amortization of prior service cost.......................... 4 15 15Recognized actuarial (gain) loss............................ 132 114 136 ---- ---- ----Net periodic benefit cost................................... $810 $751 $808 ==== ==== ==== Major assumptions used in determining the net cost for the Company's SERPplans are presented in the following table as weighted averages: 2003 2002 2001 ---- ---- ---- WEIGHTED-AVERAGE ASSUMPTIONS AS OF DECEMBER 31,Discount rate............................................... 6.75% 7.50% 7.50%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 that conform to the common practice in their respectivecountries. Based on local laws and customs, some of those plans are not funded.For those plans that are funded, the amount in the trust supporting the plan isactuarially determined, and where applicable, in compliance with local statutes.The funded status of these plans, incorporating fourth quarter contributions, asof December 31, 2003 and 2002 is as follows: 2003 2002 ------- ------- CHANGE IN BENEFIT OBLIGATIONBenefit obligation at beginning of year..................... $13,664 $ 9,750Service cost................................................ 633 471Interest cost............................................... 828 598Plan participants' contribution............................. (37) (49)Prior service cost.......................................... -- (75)Actuarial loss (gain)....................................... 1,232 985Benefits paid............................................... (134) (123)Foreign exchange............................................ 3,150 2,107 ------- -------Benefit obligation at end of year........................... $19,336 $13,664 ======= ======= 74 CAMBREX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) (17) RETIREMENT PLANS -- (CONTINUED) Major assumptions used in determining the benefit obligation for theCompany's international pension plans are presented in the following table asweighted averages: 2003 2002 -------------- -------------- WEIGHTED AVERAGE ASSUMPTIONS:Discount rate........................................ 5.20% - 5.50% 5.50% - 6.25%Rate of compensation increase........................ 3.00% - 3.75% 3.00% - 3.50% CHANGE IN PLAN ASSETSFair value of plan assets at beginning of year....... $ 2,490 $ 2,769Actual return on plan assets......................... 343 (971)Company contribution................................. 310 281Plan participant contribution........................ 145 116 Plan participant contribution........................ 145 116Benefits paid........................................ (134) (123)Foreign exchange..................................... 584 418 --------- ---------Fair value of plan assets at end of year............. $ 3,738 $ 2,490 --------- ---------Funded status........................................ $(15,599) $(11,175)Unrecognized actuarial loss.......................... 5,766 4,037Unrecognized prior service cost...................... (85) (75)Unrecognized net gain................................ (442) (409)Additional minimum liability......................... 85 71Foreign exchange..................................... 628 408 --------- ---------Prepaid (accrued) benefit............................ $ (9,647) $ (7,143) --------- --------- --------- --------- The components of the net periodic pension cost is as follows: 2003 2002 2001 ------ ---- ---- COMPONENTS OF NET PERIODIC BENEFIT COSTService Cost................................................ $ 633 $471 $469Interest Cost............................................... 828 598 502Expected return on plan assets.............................. (182) (221) (230)Amortization of excess plan net............................. (32) (27) (25)Amortization of prior service cost.......................... 127 107 6 ------ ---- ----Net periodic benefit cost................................... $1,374 $928 $722 ====== ==== ==== Major assumptions used in determining the net cost for the Company'sinternational pension plans are presented in the following tables as weightedaverages: 2003 2002 2001 ------------- ------------- ------------- WEIGHTED-AVERAGE ASSUMPTIONS AS OF DECEMBER 31,Discount rate........................... 5.20% - 5.50% 5.50% - 5.60% 5.50% - 6.25%Expected return on plan assets.......... 7.34% 6.90% - 7.60% 7.50% - 9.00%Rate of compensation increase........... 3.00% - 3.75% 3.00% - 3.50% 3.00% - 4.25% The aggregate ABO of $14,257 for international plans exceeds plan assets by$10,519 in 2003. 75 CAMBREX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) (17) RETIREMENT PLANS -- (CONTINUED) The Company expects to contribute approximately $562 in cash to itsinternational pension plans. 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 contributions are matched in part by Cambrex. The cost of this plan amounted to $2,113, $1,941and $1,094 in 2003, 2002 and 2001, 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, 2003 and 2002 there is$1,611 and $1,407, 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 31,2003 and 2002 is $1,611 and $1,407, 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, 2003 and 2002 are 248,504 and 253,378,respectively, and are included as a reduction of equity at cost. The value ofthe shares held in trust and the corresponding liability of $6,277 at December31, 2003 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, 2003 and 2002 was 73,783 and 85,508, respectively. The fair valueof these shares was $1,864 and $2,640 at 2003 and 2002, respectively. (18) 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 and future retirees, both in reducing the level ofbenefits and reducing the subsidy the Company provides. Certain subsidiaries andall 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. Due to plan amendments and the curtailment gain on Rutherford,this transition obligation was fully written off. The net effect upon 2003, 2002and 2001 pretax operating results, including the amortization of the transitionobligation in 2002 and 2001, resulted in a (benefit) cost of $(688), $1,100, and$308, respectively. 76 CAMBREX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) (18) OTHER POSTRETIREMENT BENEFITS -- (CONTINUED) The periodic postretirement benefit cost includes the following components: DECEMBER 31, ----------------- 2003 2002 ------- ------- CHANGE IN BENEFIT OBLIGATIONAccumulated benefit obligation at beginning of year......... $ 7,323 $ 2,135Service cost................................................ 124 379Interest cost............................................... 198 465Prior service cost.......................................... (3,446) --Actuarial (gain) loss....................................... (742) 4,513Curtailment................................................. (737) --Benefits paid............................................... (188) (169) ------- -------Accumulated benefit obligation at end of year............... $ 2,532 $ 7,323Unrecognized net (loss) gain................................ $(2,139) $(3,830)Unrecognized transition obligation.......................... -- (926)Unrecognized prior service cost............................. 1,298 -- ------- -------Accrued benefit cost at September 30,....................... $ 1,691 $ 2,5674th Quarter benefits paid................................... (48) (45) ------- -------Accrued benefit cost at end of year......................... $ 1,643 $ 2,522 ======= ======= YEARS ENDED DECEMBER 31, -------------------------- 2003 2002 2001 -------- ------- ----- COMPONENTS OF NET PERIODIC BENEFIT COSTService cost of benefits earned............................. $ 124 $ 379 $ 58Interest cost............................................... 198 465 169Amortization of transition obligation....................... -- 93 93Actuarial (gain) loss recognized............................ 211 163 (12)Amortization of unrecognized prior service cost............. (175) -- --Curtailment gain on Rutherford.............................. (1,046) -- -- ------- ------ ----Total periodic postretirement benefit cost.................. $ (688) $1,100 $308 ======= ====== ==== Major assumptions used in determining the benefit obligation and net costfor the Company's postretirement benefits are presented in the following tableas weighted averages: BENEFIT OBLIGATION NET COST ----------- ------------------ 2003 2002 2003 2002 2001 ---- ---- ---- ---- ---- WEIGHTED-AVERAGE ASSUMPTIONS:Discount rate....................................... 6.00% 6.75% 6.75% 7.50% 8.00%Expected return on plan assets...................... N/A N/A N/A N/A N/A The assumed health care cost trend rate used to determine the accumulatedpostretirement benefit obligation is 11% in 2003 decreasing 1% per year to anultimate rate of 5% (6.5% in 2002). A one-percentage-point increase in theassumed health care cost trend rate would increase the accumulatedpostretirement benefit obligation by $110 and would increase the sum of interestand service cost by $11. A one-percentage- 77 CAMBREX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) (18) OTHER POSTRETIREMENT BENEFITS -- (CONTINUED)point decrease would lower the accumulated postretirement benefit obligation by$128 and would raise the sum of interest and service cost by $13. (19) 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 thatincluded 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. In the fourth quarter 2001, Cambrex recorded special pre-tax charges of$23,075, the majority of which were non-cash items. As a result of the Company'sbusiness restructuring which created Rutherford Chemicals, Inc., together withan impairment charge within those businesses, the Company incurred $18,649(continuing operations consisted of $2,022 and discontinued operations consistedof $16,627) of charges to operating expense, composed of asset write-downs of$17,243 (continuing, $1,600, discontinued, $15,643) and severance costs of$1,406 (continuing, $422, discontinued $984). The Company also incurred $4,426of inventory write-downs charged to cost of sales, consisting of $2,426associated with discontinued products manufactured at Rutherford Chemicalfacilities and a separate $2,000 Bioproducts 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 Rutherford's chemical sites, based on the estimated fair value of the assetsdetermined by discounting the expected future cash flows. A $1,600 impairmentwas also recorded related to an unused chemical facility to recognize itsestimated current fair value. In addition, a $5,643 charge was recorded towrite-off fixed assets related to discontinued product lines at another ofRutherford's 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. 2002 Actions In 2002, Cambrex completed its plan to realign its businesses. In 2002, theCompany recorded special pre-tax charges of $15,087. These charges included:Continuing operations fixed asset impairments of $1,599, closure costs for asmall manufacturing facility of $1,700 and severance costs of $939. Discontinuedoperations consists of fixed asset impairments of $6,079, a goodwill impairmentof $3,962, inventory write-downs of $586 (included in cost of sales),dismantling costs of $100 and severance of $122. The fixed asset impairments related to certain assets at a RutherfordChemicals domestic site, and a domestic site included as parts of continuingoperations, and were based on an assessment completed in the third quarter thatindicated the return on investment was below management's expectations. As aresult, an impairment charge was recorded reflecting the asset value associatedwith the discontinued product line. The closure costs relate to a domesticfacility and include asset write downs, disposal, and other related costs. 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. 78 CAMBREX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) (19) RESTRUCTURING, IMPAIRMENTS AND OTHER CHARGES -- (CONTINUED) The accrual balance related to the 2002 actions for severance and othercosts included above was approximately $1,200 at December 31, 2003. The following table displays the activity related to the 2002restructuring, impairments and other charges through December 31, 2003 (inmillions): DECEMBER 31, DECEMBER 31, TOTAL NON-CASH CASH 2002 RESERVE CASH 2003 RESERVE CHARGES WRITEOFFS PAYMENTS BALANCE PAYMENTS BALANCE ------- ---------- -------- ------------ -------- ------------ Restructuring, Impairments and Other Charges: Fixed asset impairments..... 7.7 (7.7) -- -- -- -- Goodwill impairment......... 4.0 (4.0) -- -- -- -- Employee severance.......... 1.0 -- -- 1.0 (0.8) 0.2 Facility closure costs...... 1.8 -- (0.2) 1.6 (0.6) 1.0 ---- ----- ---- --- ---- --- Total restructuring, impairments and other charges................ 14.5 (11.7) (0.2) 2.6 (1.4) 1.2 Inventory write-offs........ 0.6 (0.6) -- -- -- -- ---- ----- ---- --- ---- --- Total.................... 15.1 (12.3) (0.2) 2.6 (1.4) 1.2 ==== ===== ==== === ==== === Facility closure costs and severance costs are expected to be paid by June30, 2004. (20) OTHER INCOME AND EXPENSE The Other-net component of Other (income) expense is $139, $7,890 and$(323) for 2003, 2002 and 2001, respectively. The 2003 expense consistsprimarily of a number of asset write-offs totaling approximately $900 partiallyoffset by an earn-out received of $(795) on the sale of the In Vitro Diagnosticbusiness that was sold in 2002. The 2002 amount consisted primarily of twoequity investment impairments totaling $7,344 related to investments in emergingtechnology companies. One company, in which an investment was held, hadexperienced significant financial difficulties in 2002. This led Cambrex toevaluate the market value of the investment. This evaluation indicated that adecline in the market value was other than temporary and accordingly, animpairment charge was recorded for $3,089. Cambrex did an assessment in thecarrying value of the other investment and concluded that a $4,255 impairmentwas necessary in the second quarter 2002. See Note #2 for further detail. Alsoincluded in the 2002 expense were $312 in write-off costs due to a convertibledebt arrangement that was abandoned, and $194 in write-off costs associated withan investment in a joint venture. 2001 consisted primarily of gains on amarketable security, classified as trading, royalty and miscellaneous incomepartly offset by asset write-offs. (21) SEGMENT INFORMATION Cambrex is a life sciences company dedicated to providing essentialproducts and services to accelerate drug discover, development and manufacturingprocesses for human therapeutics. The Company primarily supplies its productsand services worldwide to pharmaceutical and Biopharmaceutical companies,generic drug companies, biotech companies and research organizations. In thefourth quarter 2003, the Company began reporting results in three segments:Human Health segment (formerly Human Health and All Other), consisting of ActivePharmaceutical Ingredients and Pharmaceutical Intermediates produced under Foodand Drug Administration cGMP for use in the production of prescription and over-the-counter drug products, 79 CAMBREX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) (21) SEGMENT INFORMATION -- (CONTINUED)imaging chemicals used in x-ray contrast media, and other fine custom chemicalsderived from organic chemistry; Bioproducts segment (previously part ofBiosciences segment), consisting of cell culture, endotoxin detection productsand services, electrophoresis and chromatography products; and Biopharma segment(previously part of BioSciences segment), consisting of contractbiopharmaceutical process development and manufacturing services. The Companyallocates corporate expenses to each of its subsidiaries. The allocation ofcorporate expenses in 2002 and 2001 have been adjusted to be consistent with anew allocation methodology adopted by the Company in 2003. No one customer accounts for more than 10% of the Company's totalconsolidated revenues. The following is a summary of business segment information: 2003 2002 2001 -------- -------- -------- GROSS SALESHuman Health......................................... $242,165 $231,342 $231,582Bioproducts.......................................... 119,298 107,870 102,512Biopharma............................................ 44,128 55,218 22,461 -------- -------- -------- $405,591 $394,430 $356,555 ======== ======== ======== 2003 2002 2001 -------- -------- -------- GROSS PRODUCT SALES DETAIL FOR EACH SEGMENTHuman Health: Active Pharmaceutical Ingredients.................. $183,632 $172,953 $165,991 Pharmaceutical Intermediates....................... 24,349 24,194 25,059 Imaging Chemicals.................................. 9,576 11,689 8,241 Fine Custom Chemicals.............................. 23,863 21,109 30,461 Other.............................................. 745 1,397 1,830 -------- -------- -------- Total Human Health......................... $242,165 $231,342 $231,582 ======== ======== ========Bioproducts:Cells and Media...................................... $ 62,161 $ 50,664 $ 45,260Endotoxin Detection.................................. 30,474 27,197 23,724Electrophoresis, Chromatography & Other.............. 26,663 30,009 33,528 -------- -------- -------- Total BioBioproducts....................... $119,298 $107,870 $102,512 ======== ======== ========Biopharma: Contract Biopharmaceutical Manufacturing........... $ 44,128 $ 55,218 $ 22,461 -------- -------- -------- Total Biopharma............................ $ 44,128 $ 55,218 $ 22,461 ======== ======== ======== 2003 2002 2001 2003 2002 2001 -------- -------- -------- GROSS PROFITHuman Health......................................... $ 90,521 $ 94,055 $ 95,379Bioproducts.......................................... 60,056 56,614 50,440Biopharma............................................ 11,829 27,049 12,153 -------- -------- -------- $162,406 $177,718 $157,972 ======== ======== ======== 80 CAMBREX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) (21) SEGMENT INFORMATION -- (CONTINUED) 2003 2002 2001 -------- ---------- -------- (RESTATED) OPERATING PROFITHuman Health......................................... $ 56,818 $ 59,718 $ 61,056Bioproducts.......................................... 17,205 15,306 8,795Biopharma............................................ 2,256 16,798 5,170Corporate............................................ (37,455) (19,898) (16,549) -------- -------- -------- Total Operating Profit..................... $ 38,824 $ 71,924 $ 58,472 ======== ======== ========Interest Expense, net................................ $ 11,840 $ 11,264 $ 10,602Other Expense (income), net.......................... 139 7,890 (323)Taxes................................................ 26,600 12,815 13,205 -------- -------- -------- Income from continuing operations.......... $ 245 $ 39,955 $ 34,988 ======== ======== ======== 2003 2002 2001 -------- ---------- ---------- (RESTATED) TOTAL ASSETSHuman Health......................................... $358,811 $310,638 $262,842Bioproducts.......................................... 197,689 194,476 186,979Biopharma............................................ 176,467 166,897 169,471Corporate............................................ 45,536 31,015 45,554Assets of discontinued operations.................... -- 132,257 153,529 -------- -------- -------- $778,503 $835,283 $818,375 ======== ======== ======== 2003 2002 2001 -------- ---------- ---------- CAPITAL SPENDINGHuman Health......................................... $ 15,646 $ 28,180 $ 19,592Bioproducts.......................................... 8,477 6,197 2,853Biopharma............................................ 12,319 5,098 3,595Corporate............................................ 1,415 968 4,121 -------- -------- -------- $ 37,857 $ 40,443 $ 30,161 ======== ======== ======== 2003 2002 2001 -------- ---------- ---------- DEPRECIATIONHuman Health......................................... $ 25,072 $ 20,409 $ 18,212Bioproducts.......................................... 5,125 4,966 3,521Biopharma............................................ 2,277 2,122 633Corporate............................................ 1,734 1,787 2,091 -------- -------- -------- $ 34,208 $ 29,284 $ 24,457 ======== ======== ======== 81 CAMBREX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) (21) SEGMENT INFORMATION -- (CONTINUED) 2003 2002 2001 -------- ---------- ---------- AMORTIZATIONHuman Health......................................... $ 7 $ 6 $ 3,350Bioproducts.......................................... 1,206 1,169 6,114Biopharma............................................ 413 379 3,497 -------- -------- -------- $ 1,626 $ 1,554 $ 12,961 ======== ======== ======== (22) FOREIGN OPERATIONS AND EXPORT SALES The following summarized data represents the gross sales and long livedtangible assets for the Company's domestic and foreign entities for 2003, 2002and 2001: DOMESTIC FOREIGN TOTAL -------- -------- -------- 2003Gross sales.......................................... $181,925 $223,666 $405,591Long-lived tangible assets........................... 122,772 146,375 269,1472002Gross sales.......................................... $187,348 $207,082 $394,430Long-lived tangible assets -- as restated............ 111,208 128,736 239,9442001Gross sales.......................................... $156,889 $199,666 $356,555Long-lived tangible assets........................... 105,626 106,351 211,977 Export sales, included in domestic gross sales, in 2003, 2002 and 2001amounted to $22,100, $23,684, and $20,934, respectively. Sales by geographic area consist of the following: 2003 2002 2001 -------- -------- -------- -------- -------- -------- North America........................................ $206,079 $216,591 $189,108Europe............................................... 173,035 150,180 141,826Asia................................................. 16,401 17,745 16,401Other................................................ 10,076 9,914 9,220 -------- -------- --------Total................................................ $405,591 $394,430 $356,555 ======== ======== ======== 82 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, 2003, future minimum commitments under non-cancelable operatinglease arrangements were as follows: Year ended December 31: 2004...................................................... $ 3,113 2005...................................................... 3,657 2006...................................................... 3,406 2007...................................................... 3,601 2008 and thereafter....................................... 12,421 ------- Total commitments......................................... $26,198 ======= Total operating lease expense was $4,205, $5,017 and $3,618 for the yearsended December 31, 2003, 2002 and 2001, respectively. In the first quarter 2003, the Company reached an agreement with MylanLaboratories, Inc. under which the Company would contribute $12,415 to thesettlement of consolidated litigation brought by a class of direct purchasers.Approximately $4,415 was paid in April 2003 in accordance with the agreement,with the remaining $8,000 to be paid over the next five years. At December 31,2003 future commitments under this agreement were as follows: Year ended December 31: 2004...................................................... $1,600 2005...................................................... 1,600 2006...................................................... 1,600 2007...................................................... 1,600 2008...................................................... 1,600 ------ Total Commitments......................................... $8,000 ====== (24) CONTINGENCIES The Company is subject to various investigations, claims and legalproceedings covering a wide range of matters that arise in the ordinary course of its business activities. The Company continually assesses all known facts andcircumstances as they pertain to all legal and environmental matters andevaluates the need for reserves and/or disclosures as deemed necessary based onthese facts and circumstances. 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$4,900 and $4,542 at December 31, 2003 and December 31, 2002, respectively, forcosts associated with the study and remediation of Superfund sites and theCompany's current and former operating sites for matters 83 CAMBREX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) (24) CONTINGENCIES -- (CONTINUED)that are probable and reasonably estimable. The increase in the accrual is dueto currency fluctuation of $458, partially offset by $100 in payments. Includedin the liabilities mentioned above are environmental liabilities discussed inthe "Sale of Rutherford Chemicals" section of this Note. Based on currentlyavailable information and analysis, the Company's accrual representsmanagement's best estimate of what it believes are the probable environmentalcleanup related costs of a non-capital nature. After reviewing informationcurrently available, management believes any amounts paid in excess of theaccrued liabilities will not have a material effect on its financial position orresults of operations. However, these matters, if resolved in a manner differentfrom the estimates could have a material adverse effect on financial condition,operating results and cash flows when resolved in a future reporting period. Litigation Mylan Laboratories In late, 1998 the Company and its subsidiary Profarmaco S.r.l. (currentlyknown as Cambrex Profarmaco Milano S.r.l., "Profarmaco") were named asdefendants (along with Mylan Laboratories, Inc. ("Mylan") and Gyma Laboratoriesof America, Inc., Profarmaco's distributor in the United States) in a proceedinginstituted by the Federal Trade Commission ("FTC") in the United States DistrictCourt for the District of Columbia (the "District Court"). The allegations arisefrom exclusive license agreements between Profarmaco and Mylan covering the drugmaster files for lorazepam and clorazepate, two active pharmaceuticalingredients ("APIs"). The FTC alleged violations of the Federal Trade CommissionAct; including unlawful restraint of trade and conspiracy to monopolize marketsfor the APIs. A lawsuit making similar allegations against the same partiesseeking injunctive relief and treble damages, was filed by the Attorneys Generalof 31 states in the District Court on behalf of those states and persons inthose states who were purchasers of the generic pharmaceuticals. The same parties including the Company and Profarmaco have also been namedin purported class action complaints brought by private plaintiffs in variousstate courts on behalf of purchasers of the APIs in generic form, makingallegations similar to those raised in the FTC's complaint and seeking variousforms of relief including treble damages. 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 Profarmaco. In the Order and Injunction, thesettling defendants also agreed to monitor certain future conduct. Mylan hadbeen fully covering the costs for the defense and indemnity of Cambrex andProfarmaco under certain obligations set forth in the license agreements.Cambrex agreed to cover separate legal defense costs incurred for Cambrex andProfarmaco on a going forward basis beginning August 1, 2000. The privatelitigation continues. On April 7, 2003, Cambrex reached an agreement with Mylan under whichCambrex would contribute $12,415 to the settlement of consolidated litigationbrought by a class of direct purchasers. In exchange, Cambrex and Profarmacoreceived from Mylan a release and full indemnity against future costs orliabilities in related litigation brought by purchasers, as well as potentialfuture claims related to this matter. Approximately $4,415 was paid in April2003 in accordance with the agreement, with the remaining $8,000 to be paid overthe next five years. Cambrex recorded an $11,342 charge (discounted to thepresent value due to the five year pay-out) in the first quarter of 2003 as aresult of this settlement. As of December 31, 2003, the outstanding balance forthis liability was $7,186. 84 CAMBREX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) (24) CONTINGENCIES -- (CONTINUED) Vitamin B-3 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 agreed to pay a fine of $4,000. Under the plea agreement, Neperawas placed on probation for one year, which has ended. The fine was paid inFebruary 2001. Nepera has been named as a defendant, along with several othercompanies, in a number of private civil actions brought on behalf of allegedpurchasers 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 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 2002, the Companyincreased reserves by $10,000. The balance of this accrual as of December 31,2003 was approximately $3,836. This accrual has been recorded in accruedliabilities. Litigation in the United States under the U.S. antitrust laws was commencedsome years ago by a group of European purchasers. On motion by the Vitamin B-3defendants, the District Court dismissed the litigation, under the long-standingrule that foreign purchasers cannot sue in U.S. courts under U.S. antitruststatutes. Recently, the Federal Circuit Court reversed the District Court's decision. The Vitamin B-3 defendants, supported by the U.S. Department ofJustice, appealed to the United States Supreme Court and the hearing iscurrently scheduled for April 2004. The Company strongly believes that the claimshould be dismissed, however, the Circuit Court's decision is so unusual that wecannot predict the disposition of this matter. Mallinckrodt During February 1999, the Company's Charles City facility ("CCC") soldseveral batches of 5-NIPA, an x-ray contrast media raw material, toMallinckrodt, Inc. In April 1999, Mallinckrodt verbally notified CCC that someof the 5-NIPA batches appeared to be out of specification. CCC requested thatMallinckrodt cease production and return the product for refund or replacement.CCC's quality control tests indicated that the material met the agreedspecification, but CCC was ready to issue a credit to Mallinckrodt upon returnof the questionable material. Nevertheless, it appears that Mallinckrodtcontinued to use the material. In August 1999, Mallinckrodt issued CCC a schedule that summarized thetotal costs allegedly incurred by Mallinckrodt related to the questionable5-NIPA in the amount of approximately $4,800. In July 2000, Mallinckrodt sentCCC a letter claiming that CCC breached its supply agreement by deliveringcontaminated 5-NIPA to Mallinckrodt and claiming damages for its costs. TheCompany responded that, among other things, CCC delivered in-specificationmaterial and did not breach the supply agreement. On October 2, 2000,Mallinckrodt filed suit in United States District Court in St. Louis, Missourialleging, among other things, that 85 CAMBREX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) (24) CONTINGENCIES -- (CONTINUED)CCC breached the Supply Agreement and claiming significant damages. On December27, 2000, the Company filed our answer, denying Mallinckrodt's claims. Mediation was held in June, 2003 but was unsuccessful. A second mediationoccurred in November 2003; we did not reach agreement, but continued discussingsettlement as we prepared for trial, which had been scheduled for early January2004. In December 2003, we reached a settlement with Mallinckrodt for $3,200which has subsequently been paid. The Company has a $1,000 deductible under itsinsurance policy. The Company exhausted a majority of the deductible through thecosts of defense which had been previously reserved. The Company hassubsequently been reimbursed approximately $3,000 by its insurance company. Sale of Rutherford Chemicals As previously announced, the Company entered into an agreement for the saleof its Rutherford Chemicals business. The transaction was completed on November10, 2003 subject to working capital adjustments. Under the agreement for thesale the Company provided standard representations and warranties concerning thebusiness, operations, liabilities and financial condition of the RutherfordChemicals Business. Most of such representations and warranties will survive fora period of thirty days after the Buyer's preparation of its audited financialstatements for year-end 2004. Therefore, claims for breaches of suchrepresentations would have to be brought during that time frame. Certainspecified representations and warranties, such as those relating to employeebenefit matters, will survive for longer periods. Under the sale agreement, theCompany has indemnified the Buyer for breaches of representations andwarranties, such indemnification is subject to a deductible and a cap at apercentage of the purchase price. The Company has retained the liabilities associated with existing generallitigation matters, including Vitamin B-3 as stated above. With respect to certain pre-closing environmental matters, the Company retains theresponsibility for (i) certain existing matters; including violations andoff-site liabilities, and (ii) completing the on-going remediation at the NewYork facility. Further, as a result of the sale of the Bayonne, New Jerseyfacility, the obligation to investigate site conditions and conduct requiredremediation under the provisions of the New Jersey Industrial Site Recovery Actwas triggered; and the Company has retained the responsibility for completion ofany such investigation and remediation With respect to all other pre-closingenvironmental liabilities, whether known or unknown, the Buyer is responsiblefor the management of potential future matters; however, the Buyer and theCompany may share the costs of associated remediation with respect to suchpotential future matters, subject to certain limitations defined in theagreement for sale. Class Action Matter In mid-October 2003, the Company was notified of a securities class actionlawsuit filed against Cambrex and five former and current Company officers. Todate, five class action suits have been filed with the New Jersey FederalDistrict Court and we have been served with process in several of the cases. Theoriginal and later lawsuits were brought as class actions in the names ofpurchasers of the Company's common stock from October 21, 1998 through July 25,2003. The complaints allege that the Company failed to disclose in timelyfashion the January 2003 accounting restatement and subsequent SECinvestigation, as well as the loss of a significant contract at the Baltimorefacility. Under the rules applicable to class action litigation, the variousplaintiffs appeared in Federal Court on January 12, 2004, and the Courtdesignated the lead plaintiff and selected counsel to represent the class. Theplaintiff has sixty (60) days to amend the complaint. The Company will have afurther forty-five (45) days to 86 CAMBREX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) (24) CONTINGENCIES -- (CONTINUED)file a motion to dismiss. We consider the complaints to be substantially withoutmerit and will vigorously defend against them. Securities and Exchange Commission The Securities and Exchange Commission ("SEC") is currently conducting aninvestigation into the Company's inter-company accounting issue. Theinvestigation began in the first half of 2003 after the Company voluntarilydisclosed certain matters related to inter-company accounts for the five-yearperiod ending December 31, 2001 that resulted in the restatement of theCompany's financial statements for those years. To Cambrex's knowledge, theinvestigation is limited to this inter-company accounting matter, and theCompany does not expect further revisions to its historical financial statementsrelating to these issues. The Company is fully cooperating with the SEC. Other The Company has commitments incident to the ordinary course of businessincluding corporate guarantees of financial assurance obligations under certainenvironmental laws for remediation, closure and/or third party liabilityrequirements of certain of its subsidiaries and a former operating location;contract provisions for indemnification protecting its customers and 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. As permitted under Delaware law, the Company has agreements whereby weindemnify our officers and directors for certain events or occurrences while theofficer or director is, or was serving, at our request in such capacity. Theterm of the indemnification period is for the officer's or director's lifetime.The maximum potential amount of future payments we could be required to makerunder these indemnification agreements is unlimited; however, we have a Directorand Officer insurance policy that covers a portion of any potential exposure. The Company believes the estimated fair value of the above indemnificationagreements is not significant, and as such the Company has no liabilitiesrecorded for these agreements as of December 31, 2003. 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. 87 CAMBREX CORPORATION SELECTED QUARTERLY FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE DATA) 1ST 2ND 3RD 4TH QUARTER QUARTER QUARTER QUARTER YEAR -------------- ----------- -------------- ----------- -------- (RESTATED) (UNAUDITED)(2) (UNAUDITED) (UNAUDITED)(3) (UNAUDITED) 2003Gross sales................................ $105,231 $103,116 $ 95,179 $102,065 $405,591Net revenues............................... 106,986 104,169 96,379 103,110 410,644Gross profit............................... 45,254 40,209 36,998 39,945 162,406Income/(loss) from continuing operations... 1,564 7,512 (14,901) 6,070 245Income/(loss) on discontinued operations... 795 539 (54,611) (1,031) (54,308)Net income/(loss).......................... 2,359 8,051 (69,512) 5,039 (54,063)Basic earnings per share:(1) Income/(loss) from continuing operations............................. 0.06 0.29 (0.58) 0.24 0.01 Income/(loss) on discontinued operations............................. 0.03 0.02 (2.12) (0.04) (2.11) Net income/(loss)........................ 0.09 0.31 (2.70) 0.20 (2.10)Diluted earnings per share:(1) Income/(loss) from continuing operations............................. 0.06 0.29 (0.58) 0.23 0.01 Income/(loss) on discontinued operations............................. 0.03 0.02 (2.12) (0.04) (2.08) Net income/(loss)........................ 0.09 0.31 (2.70) 0.19 (2.07)Average shares: Basic.................................... 25,853 25,732 25,721 25,796 25,775 Diluted.................................. 26,154 25,973 25,721 26,255 26,174 1ST 2ND 3RD 4TH QUARTER QUARTER QUARTER QUARTER YEAR ----------- ----------------- -------------- -------------- ---------- (RESTATED) (RESTATED) (UNAUDITED) (UNAUDITED)(4)(5) (UNAUDITED)(6) (UNAUDITED)(7) 2002Gross sales............................ $99,618 $102,705 $92,332 $ 99,775 $394,430Net revenues........................... 99,383 103,252 94,191 102,240 399,066Gross profit........................... 43,458 45,918 43,945 44,397 177,718Income from continuing operations...... 13,043 8,183 9,283 9,446 39,955Income/(loss) on discontinued operations........................... 1,947 5,166 (7,186) (6,473) (6,546)Net income............................. 14,990 13,349 2,097 2,973 33,409Basic earnings per share:(1) Income from continuing operations.... 0.50 0.31 0.36 0.36 1.54 Income/(loss) on discontinued operations......................... 0.08 0.20 (0.28) (0.25) (0.25) Net income........................... 0.58 0.51 0.08 0.11 1.29Diluted earnings per share:(1) Income from continuing operations.... 0.49 0.31 0.35 0.36 1.51 Income/(loss) on discontinued operations......................... 0.07 0.19 (0.27) (0.25) (0.25) Net income........................... 0.56 0.50 0.08 0.11 1.26Average shares: Basic................................ 25,888 25,991 26,012 25,904 25,954 Diluted.............................. 26,591 26,644 26,723 26,284 26,520 ---------------(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 first quarter 2003 includes a special pre-tax charge of $11.3 million recorded in operating expenses for the settlement of certain class action lawsuits involving Mylan Laboratories.(3) Cambrex Corporation restated its results for the third quarter 2003. This restatement resulted from the recording of a valuation allowance to the Provision for income taxes of $5.4 million for deferred tax assets arising from unrealized hedge losses and minimum pension liabilities the benefits of which had previously been included in Accumulated other comprehensive income (loss). The Company also is recording an additional valuation allowance of $1.5 million for the 2002 tax benefit related to the investment impairment the Company has recorded in the second quarter 2002 (see Note #2 to the consolidated financial statements). These charges in the third quarter 2003 are consistent with the Company's determination that domestic net deferred tax assets were deemed unlikely to be realized and that a valuation allowance must be recognized (see Note #10 to the consolidated financial statements). The total $6.9 million expense for the two items above is recorded in the third quarter 2003 Provision for income taxes. The Company also recorded a $1.9 million reduction to Loss 88 from discontinued operations due to the reversal of deferred tax liabilities related to the Rutherford Chemicals segment that were not previously taken into consideration in determining such loss from discontinued operations.(4) Cambrex Corporation restated its results for the second quarter 2002. This restatement resulted from an assessment of the carrying value of an equity investment in a privately held emerging biotechnology company. The Company concluded that $4.3 million of the investment should have been impaired as of the second quarter 2002 and the remaining $0.7 million should have been initially classified as an intangible asset related to a licensing agreement entered into concurrent with the equity investment. The impairment charge of $4.3 million was recorded in Other expense and a related $1.5 million tax benefit was recorded in Provision for income taxes and as a deferred tax asset. Net income and total stockholders' equity decreased by $2.8 million. This restatement did not have an effect on the Company's cash flows.(5) The second quarter of 2002 continuing operations also includes additional special charges of $2.9 million comprised of $0.4 million expense for fixed asset impairments charged to operating expenses and a $2.5 million investment write-down recorded in other expense. Discontinued operations include a special benefit of $5.6 million comprised of a $3.8 million arbitration award and a $1.8 million benefit related to an insurance settlement.(6) The third quarter of 2002 continuing operations include special charges of $2.7 million comprised of $2.1 million for severance and a facility closure which are recorded in operating expenses and an investment write-down of $0.6 million recorded in other expense. Discontinued operations include net special charges of $12.1 million comprised of an accrual for Vitamin B-3 settlement and litigation costs of $6.0 million, $6.9 million of asset impairments, inventory write-downs and severance and $0.8 million benefit related to an insurance settlement.(7) The fourth quarter 2002 continuing operations include special charges of $1.7 million comprised of $0.8 million in severance and $0.9 million for facility closure costs recorded in operating expenses. Discontinued operations include special charges of $8.0 million comprised of an accrual for Vitamin B-3 settlement and litigation costs of $4.0 million and a goodwill impairment of $4.0 million. 89 ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING ANDFINANCIAL DISCLOSURE. None. ITEM 9A CONTROLS AND PROCEDURES. With the participation of the Company's Chief Executive Officer and ChiefFinancial Officer, management has evaluated the effectiveness of the Company's'disclosure controls and procedures' (as defined in the Rules 13a-15(e) underthe Securities Exchange Act of 1934 (the 'Exchange Act') as of the end of theperiod covered by this annual report. Disclosure controls and procedures aredesigned to provide reasonable assurance that the Company is able to meet theobjective of filing reports under the Exchange Act that contain disclosure whichis recorded, processed, summarized and reported pursuant to the disclosurerequirements and within the time periods specified in the rules and forms of theCommission. Based on such evaluation, including consideration of the matterdiscussed below, the Chief Executive Officer and Chief Financial Officer haveconcluded that the Company's disclosure controls and procedures were effectiveat the reasonable assurance level at December 31, 2003. Senior management and the Company's Audit Committee were informed by theCompany's independent auditors, PricewaterhouseCoopers LLP, that there werematerial weaknesses (as defined in AU 325, Communication of Internal ControlRelated Matters Noted in an Audit, of the AICPA Professional Standards) in theCompany's internal controls relating to the adequacy of documentation and levelof personnel within the Company's corporate tax department. The insufficientdocumentation and inadequate level of human resources within the tax departmentled to untimely identification and resolution of certain tax accounting mattersthat included matters leading to a restatement of the Company's third quarter2003 results. These matters included: (i) a valuation allowance to the Provisionfor income taxes of $5.4 million for deferred tax assets arising from unrealizedinterest rate swap losses and minimum pension liabilities, the benefits of whichhad previously been included in Accumulated other comprehensive income (loss);and (ii) a $1.9 million reduction to Loss from discontinued operations due tothe reversal of deferred tax liabilities related to the Rutherford Chemicalssegment that were not previously taken into consideration in determining suchloss from discontinued operations. The Company has taken and is taking the following actions to address theseweaknesses in its tax department: - Retained a consultant with significant experience in managing corporate tax functions to review and complete documentation of critical procedures within the corporate tax department, specifically including documentation requirements, in order to strengthen the reliability and timeliness of the Company's tax accounting and to prepare for internal control audits pursuant to Sarbanes-Oxley Section 404; - Initiated searches for the two key recently vacated positions - a Vice President of Tax and a Tax Manager - which are in progress with several candidates for each position having been identified; - Increased the level of involvement of its external tax advisers pertaining to, among other things, the adequacy and design of the Company's tax strategies and entity structure; - Increased the level of review and discussion of significant tax matters and supporting documentation with senior finance management; - Increased the level of discussion and review of tax accounting matters with the Company's independent auditors; - Identifying interim resources both inside and outside the Company to augment the existing personnel on an interim basis until the weaknesses are remediated. While the Company is responding to these weaknesses, management estimatesthat it will take at least three to six months from the date of filing thisannual report to fully resolve them. Management believes these weaknesses do nothave a material effect on the Company's consolidated financial statementsthrough December 31, 2003, other than the third quarter of 2003 which wasrestated as described above. 90 PART III 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. ITEM 14 PRINCIPAL ACCOUNTING FEES AND SERVICES. The information called for by Part III is hereby incorporated by referenceto the information set forth under the captions "Principal Stockholders,""Common Stock Ownership by Directors and Executive Officers," "Board ofDirectors," "Election of Directors," "Section 16(a) Beneficial OwnershipReporting Compliance," "Code of Ethics," "Compensation Committee Interlocks andInsider Participation," "Compensation Committee Report on ExecutiveCompensation," "Executive and Other Compensation," "Executive and OtherCompensation," "Audit Committee Report" and "Principal Accounting Firm Fees" inthe registrant's definitive proxy statement for the Annual Meeting ofStockholders, to be held April 22, 2004, which meeting involves the election ofdirectors, which definitive proxy statement is being filed with the Securitiesand 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." 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 Auditors.............................. 43Consolidated Balance Sheets as of December 31, 2003, and 2002...................................................... 44Consolidated Income Statements for the Years Ended December 31, 2003, 2002 and 2001................................... 45Consolidated Statement of Stockholders' Equity for the Years Ended December 31, 2003, 2002 and 2001.................... 46Consolidated Statements of Cash Flows for the Years Ended December 31, 2003, 2002 and 2001.......................... 47Notes to Consolidated Financial Statements.................. 48Consolidated Quarterly Financial Data (unaudited) for the Years Ended December 31, 2003 and 2002.................... 88 (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. PAGE NUMBER (IN THIS REPORT) ---------------- Schedule II -- Valuation and Qualifying Accounts............ 93 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 95-97 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 91 which has not been filed for the reason that the total amount of securitiesauthorized thereunder does not exceed 10% of the total assets of the registrantand its subsidiaries on a consolidated basis. (b) Reports on Form 8-K The following are the Form 8-Ks filed (or furnished) during the fourthquarter, 2003: October 22, 2003 regarding the press release dated October 17, 2003announcing the amendment to the August 7, 2003 Asset Purchase Agreement forRutherford Chemicals. October 24, 2003 regarding the third quarter 2003 earnings release byCambrex Corporation dated October 23, 2003. November 25, 2003 regarding the completed sale of the Rutherford Chemicalsbusiness. January 23, 2004 regarding the press release dated January 22, 2004announcing the financial results for the fourth quarter and full year of 2003and providing guidance for 2004. 92 SCHEDULE II CAMBREX CORPORATION VALUATION AND QUALIFYING ACCOUNTS FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001 (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, 2003: Doubtful trade receivables and returns and allowances...................... $ 1,672 $ 1,806 $ -- $ 197 $ 3,281 Inventory and obsolescence provisions.......................... 14,412 1,537 -- 490 15,459 Deferred tax valuation allowance....... 2,821 49,502 1,446 -- 53,769Year Ended December 31, 2002: Doubtful trade receivables and returns and allowances...................... $ 1,039 $ 785 $ -- $ 152 $ 1,672 Inventory and obsolescence provisions.......................... 16,246 3,328 -- 5,162 14,412 Deferred tax valuation allowance....... 4,885 (2,064) -- -- 2,821Year Ended December 31, 2001: Doubtful trade receivables and returns and allowances...................... $ 1,061 $ 130 $ -- $ 152 $ 1,039 Inventory and obsolescence provisions.......................... 15,144 2,536 -- 1,434 16,246 Deferred tax valuation allowance....... 2,689 2,455 (259) -- 4,885 93 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 15, 2004 Pursuant to the requirements of the Securities Exchange Act of 1934, thisreport has been signed below by the following persons on behalf of theregistrant and in the capacities and on the dates indicated. SIGNATURE TITLE DATE --------- ----- ---- /s/ JAMES A. MACK Chairman of the Board of Directors )------------------------------------ President and Chief Executive James A. Mack Officer /s/ LUKE M. BESHAR Executive Vice President Chief )------------------------------------ Financial Officer Luke M. Beshar /s/ ROSINA B. DIXON, M.D.* Director )------------------------------------ Rosina B. Dixon, M.D. /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 15, 2004------------------------------------ Leon J. Hendrix, Jr. /s/ ILAN KAUFTHAL* Director )------------------------------------ Ilan Kaufthal /s/ WILLIAM KORB* Director )------------------------------------ William Korb /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 94 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). 10.8 -- Asset purchase agreement dated as of August 7, 2003 between Rutherford Acquisition Corporation and Cambrex Corporation and The Sellers listed in the asset Purchase agreement.(T). 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). ---------------See legend on following page. 95 EXHIBIT INDEX EXHIBIT NO. DESCRIPTION----------- ----------- 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. 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). 10.33 -- 2001 Performance Stock Option Plan.(M). 10.34 -- 2003 Performance Stock Option Plan.(M). 10.40 -- Registration Rights Agreement dated as of June 6, 1985 between the registrant and the purchasers of its Class D Convertible Preferred stock and 9% Convertible Subordinated Notes due 1997.(A) -- Exhibit 10(m). 10.41 -- Administrative Consent Order dated September 16, 1985 of the New Jersey Department of Environmental Protection to Cosan Chemical Corporation.(A) -- Exhibit 10(q). 10.42 -- Registration Rights Agreement dated as of June 5, 1996 between the registrant and American Stock Transfer and Trust Company.(O) -- Exhibit 1. 10.50 -- Manufacturing Agreement dated as of July 1, 1991 between the registrant and A.L. Laboratories, Inc.(G). 21 -- Subsidiaries of registrant.(M). 23 -- Consent of 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). 31.1 -- CEO Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.(M). 31.2 -- CFO Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.(M). 32.1 -- CEO Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.(M). 32.2 -- CFO Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.(M). ---------------See legend on following page. 96 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.(T) Incorporated by reference to the registrant's Current Report on Form 8-K dated November 10, 2003. 97 . . . 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 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 SciencesLuke M. Beshar....................... Executive Vice President and Chief 12/05/02 Financial Officer EXHIBIT 10.33 CAMBREX CORPORATION 2001 PERFORMANCE STOCK OPTION PLAN 1. PURPOSE The Plan is intended to expand and improve the profitability and prosperityof Cambrex Corporation for the benefit of its Stockholders by permitting theCorporation to grant to its directors and key employees Options to purchaseshares of the Corporation's Stock. These awards are intended to provideadditional incentive to such personnel by offering them a greater stake in theCorporation's continued success. The Plan is also intended as a means ofreinforcing the commonality of interest between the Corporation's stockholdersand its directors, officers and other key employees, and as an aid in attractingand retaining directors and key employees of outstanding abilities andspecialized skills. 2. DEFINITIONS For Plan purposes, except where the context otherwise indicates, thefollowing terms shall have the meanings which follow: (a) "Agreement" shall mean a written agreement (including any amendment or supplement thereto) between the Corporation and a Participant which specifies the terms and conditions of an Award granted to such Participant. (b) "Award" shall mean a Stock Option granted to a Participant. (c) "Beneficiary" shall mean the person or persons who shall receive, if the Participant dies, any Option exercise rights. (d) "Board" shall mean the Board of Directors of the Corporation. (e) "Change in Control" shall mean the occurrence of any of the following events: (i) the acquisition (other than from the Corporation) by any person, entity or "group" (within the meaning of Section 13 (d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as amended, (the "Exchange Act") but excluding for this purpose the Corporation or its subsidiaries or any employee benefit plan of the Corporation or its subsidiaries which acquires beneficial ownership of voting securities of the Corporation) of "beneficial ownership" (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of fifteen percent (15%) or more of either the then outstanding shares of Stock or the combined voting power of the Corporation's then outstanding voting securities entitled to vote generally in the election of directors; or (ii) individuals who, as of the date hereof, constitute the Board (the "Incumbent Board") cease for any reason to constitute at least a majority of the Board; provided that any person becoming a member of the Board subsequent to the date hereof whose election or nomination for election by the Corporation's stockholders (other than an election or nomination of an individual whose initial assumption of office is in connection with an actual or threatened election contest relating to the election of the directors of the Corporation, as such terms are used in Rule 14a-11 of Regulation 14A promulgated under the Exchange Act) was approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be, for purposes of this Plan, considered a member of the Incumbent Board; or (iii) approval by the stockholders of the Corporation of either a reorganization, or merger, or consolidation, with respect to which persons who were the stockholders of the Corporation immediately prior to such reorganization, merger or consolidation do not, immediately thereafter, own more than fifty percent (50%) of the combined voting power entitled to vote generally in the election of directors of the reorganized, merged or consolidated entity's then outstanding voting securities, or a liquidation or dissolution of the Corporation, or the sale of all or substantially all of the assets of the Corporation; or (iv) any other event or series of events which is determined by a majority of the Incumbent Board to constitute a Change of Control for the purposes of the Plan. (f) "Change in Control Price" shall mean the highest price per share paid or offered in any bona fide transaction related to a Change in Control, as determined by the Committee, except that, in the case of Incentive Stock Options, such price shall be the Fair Market Value on the date on which the cash out described in Paragraph 10(a) occurs. (g) "Code" shall mean the Internal Revenue Code of 1986, as it may be amended from time to time, and the rules and regulations promulgated thereunder. (h) "Committee" shall mean the Compensation Committee, or such other Committee of the Board, which shall be designated by the Board to administer the Plan. The Committee shall be composed of two or more persons as from time to time are appointed to serve by the Board with respect to awards to employees. Each member of the Committee, while serving as such, shall also be a member of the Board, and shall be both an outside director within the meaning of Section 162(m) of the Code and a "non-employee director" within the meaning of Rule 16b-3 of the Exchange Act . (i) "Common Stock" shall mean the Class A Common Stock of the Corporation having a par value of $0.10 per share. (j) "Corporation" shall mean Cambrex Corporation, a Delaware corporation. (k) "Employee" shall mean any person who is employed on a full time basis by the Corporation or any Subsidiary, including a person who is also a member of the Board, and who is compensated, at least in part, on a regular salary basis. (l) "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended. (m) "Exercise Price" shall mean the price for which a Participant may exercise his Stock Option to purchase a stated number of shares of Common Stock, established pursuant to Paragraph 6 of the Plan. (n) "Fair Market Value" shall mean with respect to any given day, the average of the mean between the highest and lowest reported sales prices on the principal national stock exchange on which the Common Stock is traded, or if such exchange was closed on such day or, if it was open but the Common Stock was not traded on such day, then on the next preceding day that the Common Stock was traded on such exchange, as reported by such responsible reporting service as the Committee may select. (o) "Incentive Stock Option" shall mean a Stock Option which is intended to meet and comply with the terms and conditions for an "incentive stock option" as set forth in Section 422 of the Code. (p) "Non-Employee Director" shall mean a member of the Board who is not an employee of the Corporation or any Subsidiary. (q) "Participant" shall mean a Non-Employee Director or Employee who is granted an Award under the Plan. (r) "Plan" shall mean the Cambrex Corporation 1998 Performance Stock Option Plan as set forth herein and as amended from time to time. (s) "Stock Option" or "Option" shall mean a right, including an Incentive Stock Option and a Nonqualified Stock Option which does not meet the requirements of Section 422 of the Code, to purchase a stated number of shares of Common Stock subject to such terms and conditions as are set forth in an Agreement and the Plan. Also included in this definition are any other forms of tax "qualified" stock options which may be incorporated and defined in the Code as it may from time to time be amended. (t) "Subsidiary Corporation" or "Subsidiary" shall mean any corporation which is a subsidiary corporation of the Corporation as defined in Section 424(f) of the Code. 3. ADMINISTRATION (a) The Committee shall administer the Plan and, accordingly, it shall havefull power to grant Awards, construe and interpret the Plan, establish rules andregulations and perform all other acts it believes reasonable and proper,including the authority to delegate responsibilities to others to assist inadministering the Plan. (b) The determination of those Employees eligible to receive Awards, andthe amount, type and timing of each Award shall rest in the sole discretion ofthe Committee, subject to the provisions of the Plan. (c) Notwithstanding the foregoing, the Plan shall be administered such thatany Non-Employee Director participating in the Plan shall continue to be deemedto be a "disinterested person" under Rule 16b-3 of the Exchange Act, as suchRule is in effect on the effective date of the Plan and as it may besubsequently amended, for purposes of such Director's ability to serve on anycommittee charged with administering any of the Corporation's stock based plansfor executive officers intended to qualify for exemptive relief available underRule 16b-3. 4. COMMON STOCK LIMITS The total number of shares of Common Stock which may be issued on exerciseof Stock Options shall not exceed 750,000 shares, subject to adjustment inaccordance with Paragraph 9 of the Plan. No Participant shall be granted Optionsto purchase more than 100,000 shares of Common Stock in any twelve month period.Shares issued under the Plan may be, in whole or in part, as determined by theCommittee, authorized but unissued or reacquired shares of Common Stock. If anyOption granted under the Plan shall expire or terminate without having beenexercised, the shares subject to such Option shall be available for use underthe Plan. 5. ELIGIBILITY FOR PARTICIPATION (a) Consistent with Plan objectives, eligibility to become a Participant inthe Plan and receive Awards shall be limited to Non-Employee Directors and keyEmployees. (b) No Incentive Stock Option shall be granted to an Employee ineligible atthe time to receive such an Option because of owning more than 10% of the CommonStock in accordance with the provisions of Section 422(b)(6) of the Code, unlessthe Option meets the requirements of Section 422(c)(5) of the Code. 6. STOCK OPTIONS -- TERMS AND CONDITIONS All Stock Options granted under the Plan shall be evidenced by Agreementswhich shall be subject to applicable provisions of the Plan, and such otherprovisions as the Committee may adopt, including the following provisions: (a) Price: The Exercise Price per share shall not be less than 100% of the Fair Market Value of a share of Common Stock on the date of Award provided that without shareholder approval no option shall be repriced or rescinded. (b) Period: Except as provided in Paragraph 6(f) below, the Committee may establish the term of any Option awarded under the Plan, provided, however, that an Option shall expire no later than ten (10) years from the date of Award. (c) Time of Exercise: Subject to the provisions of Paragraph 10 below, the Committee shall establish installment exercise terms in Awards to Employees based on the Company's publicly traded share price, and may establish installment exercise terms based on the passage of time or otherwise, such that the Option becomes fully exercisable in a series of cumulating portions. The Committee may also establish other conditions of exercise as it shall determine and may accelerate the exercisability of any Option granted to an Employee under the Plan. (d) Exercise: An Option, or portion thereof, shall be exercised by delivery of a written notice of exercise to the Corporation and payment of the full price of the shares being exercised. Payment may be made: (i) in United States dollars in cash or by check, bank draft or money order payable to the order of the Corporation, or (ii) through the delivery of shares of Common Stock which have been held by a Participant for at least six months with a value equal to the Option Price, provided that the use by an Employee (but not a Non-Employee Director) of previously acquired shares shall be subject to the approval of the Committee, or (iii) by a combination of both (i) and (ii) above. The Committee shall determine acceptable methods for tendering Common Stock as payment upon exercise of an Option and may impose such limitations and prohibitions on the use of Common Stock to exercise an Option as it deems appropriate. A Participant shall not have any of the rights or privileges of a holder of Common Stock until such time as shares of Common Stock are issued or transferred to the Participant. (e) Special Rules for Incentive Stock Options: Notwithstanding any other provision of the Plan, in the case of any Incentive Stock Option granted under the Plan, the following provisions will apply: (i) The aggregate Fair Market Value (determined at the time the Option is granted) of the shares of stock with respect to which Incentive Stock Options are exercisable for the first time by a Participant under the Plan or any other plan of the Corporation or any Subsidiary or any corporation which is a parent corporation (as defined in Section 424(e) of the Code) of the Corporation, in any calendar year, shall not exceed $100,000 (or such other individual employee maximum as may be in effect from time to time under the Code at the time the Incentive Stock Option is awarded). (ii) Any Participant who disposes of shares of Common Stock acquired on the exercise of an Incentive Stock Option by sale or exchange either (A) within two years after the date of the grant of the Option under which the stock was acquired or (B) within one year after the acquisition of such shares shall notify the Corporation of such disposition and of the amount realized upon such disposition. (f) Special Rules for Grants to Non-Employee Directors: Notwithstandingany other provision of the Plan, grants to Non-Employee Directors shall be madepursuant to the following provisions: (i) On the date of the first meeting of the Board after each Annual Meeting of Stockholders of the Company occurring during the term of this Plan, each Non-Employee Director shall receive an award of Non-qualified Options to purchase 2,000 shares of Common Stock; (ii) All options granted to Non-Employee Directors pursuant to paragraph (i) shall have an exercise price equal to the fair market value of the Common Stock on the date of grant, a term of ten years, and shall become exercisable, subject to the provisions of the Plan, six months after the grant date provided that without shareholder approval no option shall be repriced or rescinded; and (iii) Non-Employee Directors shall not be eligible for any grants under the Plan other than those provided for in paragraph (i) above. (g) Proceeds on Exercise: The proceeds of the sale of the Common Stock subject to Option are to be added to the general funds of the Corporation and used for its corporate purposes. (h) Deferral on Exercise: If the Corporation maintains an appropriate deferred compensation plan available for such purpose, the Committee, in its discretion, may permit a Participant to elect to defer the receipt of Common Stock which would otherwise be issued upon the exercise of Options as provided in such deferred plan. 7. TERMINATION OF EMPLOYMENT (a) In the event a Participant (other than a Non-Employee Director) shallcease to be employed by the Corporation or any Subsidiary while he is holdingone or more Options, each outstanding Option, or any portion thereof, which isexercisable on the date of such termination shall expire at the earlier of theexpiration of its term or the following: (i) one year, in the case of a "non-qualified" Stock Option, and three months, in the case of an Incentive Stock Option, after termination due to normal retirement, late retirement or earlier retirement with Committee consent, under a formal plan or policy of the Corporation; (ii) one year after termination due to disability within the meaning of Section 22(e)(3) of the Code as determined by the Committee; (iii) one year after the Participant's death; or (iv) coincident with the date of termination if due to any other reason, except as and to the extent that the Committee may determine otherwise. In the event of death within the up to three month or one year period set forth in clause (i) above, as appropriate, after normal or early retirement while any portion of the Option remains exercisable, the Committee in its discretion may provide for an extension of the exercise period of up to one year after the Participant's death but not beyond the expiration of the term of the Option. (b) For the purposes of this paragraph 7, it shall not be considered atermination of employment when a Participant is placed by the Corporation or anySubsidiary on a military or sick leave or such other type of leave of absencewhich is considered as continuing intact the employment relationship of theParticipant. In the case of such leave of absence the employment relationshipshall be continued until the later of the date when such leave equals ninety(90) days or the date when the Participant's right to reemployment with theCorporation or such Subsidiary shall no longer be guaranteed either by statuteor contract. Unless otherwise determined by the Committee, any portion of an Option heldby a Participant (other than a Non-Employee Director) that is not exercisable onthe date such Participant's employment terminates shall expire as of suchtermination date. 8. TERMINATION OF SERVICE AS DIRECTOR (a) In the event a Director shall cease to serve as a Director of theCorporation while he or she is holding one or more Options, each outstandingOption which is exercisable as of the date of such termination shall expire atthe earlier of the expiration of its term or the following: (i) one year after termination of service due to retirement under a mandatory retirement policy of the Board as may be in effect on the date of such termination of service; (ii) one year after termination of service due to disability within the meaning of Section 22(e)(3) of the Code; (iii) one year after termination of service due to the Director's death; or (iv) coincident with the date service terminates for any other reason. (b) Any Options which have not become exercisable as of the date a Directorceases to serve as a Director of the Corporation shall terminate as of suchdate. 9. ADJUSTMENTS In the event that a stock dividend, stock split or other subdivision,recapitalization, reorganization, merger, consolidation or change in the sharesof Common Stock, extraordinary cash dividend, spin-off or other similar eventaffects the Common Stock, then if the Committee shall determine in its solediscretion that such change equitably requires an adjustment in the number orkind of shares which may be awarded under the Plan or in the number or kind ofshares covered by any outstanding Options, and/or in such Option's ExercisePrice, such adjustments shall be made by the Committee and shall be conclusiveand binding upon eligible Participants and for all purposes of the Plan. 10. CHANGE IN CONTROL (a) Accelerated Vesting and Payment. Subject to the provisions ofParagraph 10(b) below, in the event of a Change in Control, each Option(including an Option held by a Non-Employee Director) whether or not currentlyexercisable shall promptly be canceled in exchange for a payment in cash of anamount equal to the excess of the Change of Control Price over the ExercisePrice for such Option. (b) Alternative Awards. Notwithstanding Paragraph 10(a), no cancellationand cash settlement shall occur with respect to any Award or class of Awards ifthe Committee reasonably determines in good faith prior to the occurrence of aChange of Control that such Award or class of Awards shall be honored orassumed, or new rights substituted therefor (such honored, assumed orsubstituted award hereinafter called an "Alternative Award") by a Participant's employer (or the parent or a subsidiaryof such employer) immediately following the Change of Control, provided that anysuch Alternative Award must: (i) be based on stock which is traded on an established securities market, or which will be so traded within 60 days following the Change of Control; (ii) provide such Participant (or each Participant in a class of Participants) with rights and entitlements substantially equivalent to or better than the rights and entitlements applicable under such Award; (iii) have substantially equivalent economic value to such Award (determined by the Committee as constituted immediately prior to the Change in Control, in its sole discretion, promptly after a Change in Control); and (iv) have terms and conditions which provide that following a Change of Control, any conditions on a Participant's rights under, or any restrictions or conditions on transfer or exercisability applicable to each such Award, shall be waived or lapse as the case may be. 11. AMENDMENT AND TERMINATION OF PLAN (a) The Board, without further approval of the Stockholders, may at anytime, and from time to time, suspend or terminate the Plan in whole or in partor amend it from time to time in such respects as the Board may deem appropriateand in the best interests of the Corporation; provided, however, that no suchamendment shall be made, without approval of the Stockholders, which would: (i) materially modify the eligibility requirements for Participants; (ii) increase the total number of shares of Common Stock which may be issued pursuant to Stock Options, except as is provided for in accordance with Paragraph 9 under the Plan; (iii) decrease the minimum Exercise Price per share; (iv) extend the period for granting Stock Options; (v) reduce the price or rescind any Option. (b) No amendment may be made to Paragraph 6(f) or any other provision ofthe Plan relating to Options granted to or held by Non-Employee Directors withinsix months of the last date on which any such provision was amended. (c) No amendment, suspension or termination of this Plan shall, without theParticipant's consent, alter or impair any of the rights or obligations underany Award theretofore granted to her or him under the Plan. (d) The Board may amend the Plan, subject to the limitations cited above,in such manner as it deems necessary to permit the granting of Stock Optionsmeeting the requirements of future amendments or issued regulations, if any, tothe Code. 12. GOVERNMENT AND OTHER REGULATIONS The granting of Stock Options under the Plan and the obligation of theCorporation to issue, or transfer and deliver shares for Stock Options exercisedunder the Plan shall be subject to all applicable laws, regulations, rules andorders which shall then be in effect. 13. UNFUNDED PLAN The Plan, insofar as it provides for payments, shall be unfunded and theCorporation shall not be required to segregate any assets which may at any timebe subject to Awards under the Plan. Any liability of the Corporation to anyperson with respect to any Award under this Plan shall be based solely upon anycontractual obligations which may be created by Agreements reflecting grants orAwards under this Plan. 14. MISCELLANEOUS PROVISIONS (a) Rights to Continued Employment: No person shall have any claim orright to be granted an Award under the Plan, and the grant of an Award under thePlan shall not be construed as giving any Participant the right to be retainedin the employ of the Corporation or any Subsidiary corporation of theCorporation and the Corporation expressly reserves the right at any time todismiss a Participant with or without cause, free from any liability, or anyclaim under the Plan, except as provided herein or in an Agreement. (b) Rights to Serve as a Director: This Plan shall not impose anyobligation on the Company to retain any individual as a Non-Employee Directornor shall it impose any obligation on the part of any Non-Employee Director toremain as a director of the Company, provided that each Non-Employee Director byaccepting each award under the Plan shall represent to the Company that it ishis good faith intention to continue to serve as a director of the Company untilits next annual meeting of stockholders and that he agrees to do so unless achange in circumstances arises. (c) No Obligation to Exercise Option: The granting of an Option shallimpose no obligation upon the Participant to exercise such Option. (d) Who Shall Exercise: During a Participant's lifetime, Options may beexercised only by the Participant except as provided by the Plan or as otherwisespecified by the Committee in the case of Options which are not Incentive StockOptions. (e) Non-Transferability: An award may be transferred to a member of theParticipant's immediate family or to a trust or similar vehicle for the benefitof such immediate family members or to a charitable trust (collectively, the"Permitted Transferees"), provided that except as permitted by this section noaward shall be assignable or transferable except by will or the laws of descentand distribution, and except to the extent required by law, no right or interestof any Participant shall be subject to any lien, obligation or liability of theParticipant. All rights with respect to awards granted to a Participant underthe Plan shall be exercisable during his lifetime only by such Participant or,if applicable, the Permitted Transferees. The rights of a Permitted Transfereeshall be limited to the rights conveyed to such Transferee, who shall be subjectto and bound by the terms of the agreement or agreements between the Participantand the Corporation." (f) Withholding Taxes: The Corporation may require a payment to coverapplicable withholding for income and employment taxes in the event of theexercise of a Stock Option. At any time when a Participant is required to pay tothe Corporation an amount required to be withheld under applicable income taxlaws in connection with the exercise of a Stock Option, the Participant maysatisfy this obligation in whole or in part by electing (the "Election") to havethe Corporation withhold shares of Common Stock having a value equal to theamount required to be withheld. The value of the shares to be withheld shall beequal to the Fair Market Value of the Common Stock, as determined on the datethat the amount of tax to be withheld shall be determined (the "Tax Date"). EachElection must be made prior to the Tax Date pursuant to such rules as theCommittee shall establish. The Committee may disapprove of any Election or maysuspend or terminate the right to make Elections. An Election is irrevocable. (g) Plan Expenses: Any expenses of administering this Plan shall be borneby the Corporation. (h) Legal Considerations: The Corporation shall not be required to issueshares of Common Stock under the Plan until all applicable legal, listing orregistration requirements, as determined by legal counsel, have been satisfied,including, if necessary, appropriate written representations from Participants. (i) Other Plans: Nothing contained herein shall prevent the Corporationfrom establishing other incentive and benefit plans in which Participants in thePlan may also participate. (j) No Warranty of Tax Effect: Except as may be contained in anyAgreement, no opinion shall be deemed to be expressed or warranties made as tothe effect for foreign, federal, state or local tax purposes of any Awards. (k) Construction of Plan: The validity, construction, interpretation,administration and effect of the Plan and of its rules and regulations, andrights relating to the Plan, shall be determined in accordance with the laws ofthe State of Delaware. 15. STOCKHOLDER APPROVAL AND EFFECTIVE DATES This Plan shall become operative and in effect on such date as it shall beapproved by the stockholders of the Corporation. No Option shall be grantedhereunder after the expiration of ten years following the date of adoption ofthe Plan by the Board of Directors. EXHIBIT 10.34 CAMBREX CORPORATION 2003 PERFORMANCE STOCK OPTION PLAN 1. PURPOSE The Plan is intended to expand and improve the profitability and prosperityof Cambrex Corporation for the benefit of its stockholders by permitting theCorporation to grant to its officers, directors and key Employees Options topurchase shares of the Corporation's Common Stock. These awards are intended toprovide additional incentive to such personnel by offering them a greater stakein the Corporation's continued success. The Plan is also intended as a means ofreinforcing the commonality of interest between the Corporation's stockholdersand its directors, officers and other key Employees, and as an aid in attractingand retaining directors and key Employees of outstanding abilities andspecialized skills. 2. DEFINITIONS For Plan purposes, except where the context otherwise indicates, thefollowing terms shall have the meanings which follow: (a) "Agreement" shall mean a written agreement (including any amendment or supplement thereto) between the Corporation and a Participant which specifies the terms and conditions of an Award granted to such Participant. (b) "Award" shall mean a Stock Option granted to a Participant. (c) "Beneficiary" shall mean the person or persons who shall receive, if the Participant dies, any Option exercise rights. (d) "Board" shall mean the Board of Directors of the Corporation. (e) "Change in Control" shall mean the occurrence of any of the following events: (i) the acquisition (other than from the Corporation) by any person, entity or "group" (within the meaning of Section 13 (d)(3) or 14(d)(2) of the Exchange Act but excluding for this purpose the Corporation or its Subsidiaries or any employee benefit plan of the Corporation or its Subsidiaries which acquires beneficial ownership of voting securities of the Corporation) of "beneficial ownership" (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of fifteen percent (15%) or more of either the then outstanding shares of Common Stock or the combined voting power of the Corporation's then outstanding voting securities entitled to vote generally in the election of directors; or (ii) individuals who, as of the date that this Plan becomes effective in accordance with Paragraph 16, constitute the Board (the "Incumbent Board") cease for any reason to constitute at least a majority of the Board; provided that any person becoming a member of the Board subsequent to the date that this Plan becomes effective in accordance with Paragraph 16 whose election or nomination for election by the Corporation's stockholders (other than an election or nomination of an individual whose initial assumption of office is in connection with an actual or threatened election contest relating to the election of the directors of the Corporation) was approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be, for purposes of this Plan, considered a member of the Incumbent Board; or (iii) approval by the stockholders of the Corporation of either a reorganization, or merger, or consolidation, with respect to which persons who were the stockholders of the Corporation immediately prior to such reorganization, merger or consolidation do not, immediately thereafter, own more than fifty percent (50%) of the combined voting power entitled to vote generally in the election of directors of the reorganized, merged or consolidated entity's then outstanding voting securities, or a liquidation or dissolution of the Corporation, or the sale of all or substantially all of the assets of the Corporation; or (iv) any other event or series of events which is determined by a majority of the Incumbent Board to constitute a Change in Control for the purposes of the Plan. (f) "Change in Control Price" shall mean the highest price per share paid or offered in any bona fide transaction related to a Change in Control, as determined by the Committee, except that, in the case of Incentive Stock Options, such price shall be the Fair Market Value on the date on which the cash out described in Paragraph 10(a) occurs. (g) "Code" shall mean the Internal Revenue Code of 1986, as it may be amended from time to time, and the rules and regulations promulgated thereunder. (h) "Committee" shall mean the Compensation Committee, or such other Committee of the Board, which shall be designated by the Board to administer the Plan. The Committee shall be composed of two or more persons as from time to time are appointed to serve by the Board with respect to awards to employees. Each member of the Committee, while serving as such, shall also be a member of the Board, and shall be both an outside director within the meaning of Section 162(m) of the Code and a "non-employee director" within the meaning of Rule 16b-3 of the Exchange Act. (i) "Common Stock" shall mean the Class A Common Stock of the Corporation having a par value of $0.10 per share. (j) "Corporation" shall mean Cambrex Corporation, a Delaware corporation. (k) "Employee" shall mean any person who is employed on a full time basis by the Corporation or any Subsidiary, including a person who is also a member of the Board, and who is compensated, at least in part, on a regular salary basis. (l) "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended. (m) "Exercise Price" shall mean the price for which a Participant may exercise his Stock Option to purchase a stated number of shares of Common Stock, established pursuant to Paragraph 6 of the Plan. (n) "Fair Market Value" shall mean with respect to any given day, the average of the highest and lowest reported sales prices on the principal national stock exchange on which the Common Stock is traded, or if such exchange was closed on such day or, if it was open but the Common Stock was not traded on such day, then on the next preceding day that the Common Stock was traded on such exchange, as reported by such responsible reporting service as the Committee may select. (o) "Incentive Stock Option" shall mean a Stock Option which is intended to meet and comply with the terms and conditions for an "incentive stock option" as set forth in Section 422 of the Code. (p) "Non-Employee Director" shall mean a member of the Board who is not an Employee. (q) "Participant" shall mean a Non-Employee Director or Employee who is granted an Award under the Plan. (r) "Plan" shall mean the Cambrex Corporation 2003 Performance Stock Option Plan as set forth herein and as amended from time to time. (s) "Stock Option" or "Option" shall mean a right, including an Incentive Stock Option and a Non-qualified Stock Option which does not meet the requirements of Section 422 of the Code, to purchase a stated number of shares of Common Stock subject to such terms and conditions as are set forth in an Agreement and the Plan. Also included in this definition are any other forms of tax "qualified" stock options which may be incorporated and defined in the Code as it may from time to time be amended. (t) "Subsidiary Corporation" or "Subsidiary" shall mean any corporation which is a subsidiary corporation of the Corporation as defined in Section 424(f) of the Code. E-2 3. ADMINISTRATION (a) The Committee shall administer the Plan and, accordingly, it shall havefull power to grant Awards, construe and interpret the Plan, establish rules andregulations and perform all other acts it believes reasonable and proper,including the authority to delegate responsibilities to others to assist inadministering the Plan. (b) The determination of those Employees eligible to receive Awards, andthe amount, type and timing of each Award shall rest in the sole discretion ofthe Committee, subject to the provisions of the Plan. (c) The Committee's determinations under the Plan need not be uniform andmay be made selectively among Participants, whether or not such Participants aresimilarly situated. Any determination, decision or action of the Committee inconnection with the construction, interpretation, administration, orimplementation of the Plan shall be final, conclusive and binding upon allParticipants and any person(s) claiming under or through any Participant. (d) Notwithstanding the foregoing, the Plan shall be administered such thatany Non-Employee Director participating in the Plan shall continue to be deemedto be a "disinterested person" under Rule 16b-3 of the Exchange Act, as suchRule is in effect on the effective date of the Plan and as it may besubsequently amended, for purposes of such Director's ability to serve on anycommittee charged with administering any of the Corporation's stock based plansfor executive officers intended to qualify for exemptive relief available underRule 16b-3. 4. COMMON STOCK LIMITS The total number of shares of Common Stock which may be issued on exerciseof Stock Options shall not exceed 500,000 shares, subject to adjustment inaccordance with Paragraph 9 of the Plan. No Participant shall be granted Optionsto purchase more than 100,000 shares of Common Stock in any twelve month period.Shares issued under the Plan may be, in whole or in part, as determined by theCommittee, authorized but unissued or reacquired shares of Common Stock. If anyOption granted under the Plan shall expire or terminate without having beenexercised, the shares subject to such Option shall be available for use underthe Plan. 5. ELIGIBILITY FOR PARTICIPATION (a) Consistent with Plan objectives, eligibility to become a Participant inthe Plan and receive Awards shall be limited to Non-Employee Directors and keyEmployees. (b) No Incentive Stock Option shall be granted to an Employee ineligible atthe time to receive such an Option because of owning more than 10% of the CommonStock in accordance with the provisions of Section 422(b)(6) of the Code, unless the Option meets the requirements of Section 422(c)(5) of the Code. 6. STOCK OPTIONS -- TERMS AND CONDITIONS All Stock Options granted under the Plan shall be evidenced by Agreementswhich shall be subject to, and shall be deemed to incorporate, the applicableprovisions of the Plan, and such other provisions as the Committee may adopt,including the following provisions: (a) Price: The Exercise Price per share shall not be less than 100% of the Fair Market Value of a share of Common Stock on the date of Award. (b) Period: Except as provided in Paragraph 6(f) below, the Committee may establish the term of any Option awarded under the Plan, provided, however, that an Option shall expire no later than ten (10) years from the date of Award. (c) Time of Exercise: Subject to the provisions of Paragraph 10 below, the Committee shall establish installment exercise terms in Awards to Employees based on the Company's publicly traded share price, and may establish installment exercise terms based on the passage of time or otherwise, such that the Option becomes fully exercisable in a series of cumulating portions. The Committee may also E-3 establish other conditions of exercise as it shall determine and may accelerate the exercisability of any Option granted to an Employee under the Plan. (d) Exercise: An Option, or portion thereof, shall be exercised by delivery of a written notice of exercise to the Corporation and payment of the full Exercise Price of the shares being purchased. Payment may be made: (i) in United States dollars in cash or by check, bank draft or money order payable to the order of the Corporation, or (ii) through the delivery of shares of Common Stock which have been held by a Participant for at least six months with a Fair Market Value equal to the Exercise Price, provided that the use by an Employee (but not a Non-Employee Director) of previously acquired shares shall be subject to the approval of the Committee, or (iii) by a combination of both (i) and (ii) above. The Committee shall determine acceptable methods for tendering Common Stock as payment upon exercise of an Option and may impose such limitations and prohibitions on the use of Common Stock to exercise an Option as it deems appropriate. A Participant shall not have any of the rights or privileges of a holder of Common Stock until such time as shares of Common Stock are issued or transferred to the Participant. (e) Special Rules for Incentive Stock Options: Notwithstanding any other provision of the Plan, in the case of any Incentive Stock Option granted under the Plan, the following provisions will apply: (i) The aggregate Fair Market Value (determined at the time the Option is granted) of the shares of Common Stock with respect to which Incentive Stock Options are exercisable for the first time by a Participant under the Plan or any other plan of the Corporation or any Subsidiary or any corporation which is a parent corporation (as defined in Section 424(e) of the Code) of the Corporation, in any calendar year, shall not exceed $100,000 (or such other individual employee maximum as may be in effect from time to time under the Code at the time the Incentive Stock Option is awarded). (ii) Any Participant who disposes of shares of Common Stock acquired on the exercise of an Incentive Stock Option by sale or exchange either (A) within two years after the date of the grant of the Option under which the Common Stock was acquired or (B) within one year after the acquisition of such shares shall notify the Corporation of such disposition and of the amount realized upon such disposition. (f) Special Rules for Awards to Non-Employee Directors: Notwithstanding any other provision of the Plan, Awards to Non-Employee Directors shall be made pursuant to the following provisions: (i) On the date of the first meeting of the Board after each Annual Meeting of Stockholders of the Corporation occurring during the term of this Plan, each Non-Employee Director shall receive an Award of Non-qualified Options to purchase 2,000 shares of Common Stock; (ii) All Options awarded to Non-Employee Directors pursuant to paragraph (i) shall have an Exercise Price equal to the Fair Market Value of the Common Stock on the date of grant, shall have a term of ten years, and shall become exercisable, subject to the provisions of the Plan, six months after the grant date; and (iii) Non-Employee Directors shall not be eligible for any Awards under the Plan other than those provided for in paragraph (i) above. (g) Proceeds on Exercise: The proceeds of the sale of the Common Stock subject to Options are to be added to the general funds of the Corporation and used for its corporate purposes. (h) Deferral on Exercise: If the Corporation maintains an appropriate deferred compensation plan available for such purpose, the Committee, in its discretion, may permit a Participant to elect to defer the receipt of Common Stock which would otherwise be issued upon the exercise of Options as provided in such deferred plan. E-4 7. TERMINATION OF EMPLOYMENT (a) In the event a Participant (other than a Non-Employee Director) shallcease to be employed by the Corporation or any Subsidiary while he is holdingone or more Options, each outstanding Option, or any portion thereof, which isexercisable on the date of such termination shall expire unless otherwisedetermined by the Committee at the earlier of the expiration of its term or thefollowing: (i) one year after termination due to normal retirement, late retirement or earlier retirement with Committee consent, under a formal plan or policy of the Corporation; (ii) one year after termination due to permanent and total disability within the meaning of Section 22(e)(3) of the Code as determined by the Committee; (iii) one year after the Participant's death; or (iv) coincident with the date of termination if due to termination for cause or for any other reason not provided for herein, except as and to the extent that the Committee may determine otherwise. In the event of death within the period set forth in clause (i) above, after normal or early retirement while any portion of the Option remains exercisable, the Committee in its discretion may provide for an extension of the exercise period of up to one year after the Participant's death but not beyond the expiration of the term of the Option. (b) For the purposes of this Paragraph 7, it shall not be considered atermination of employment when a Participant is placed by the Corporation or anySubsidiary on a military or sick leave or such other type of leave of absencewhich is considered as continuing intact the employment relationship of theParticipant. In the case of such leave of absence the employment relationshipshall be continued until the later of the date when such leave equals ninety(90) days or the date when the Participant's right to reemployment with theCorporation or such Subsidiary shall no longer be guaranteed either by statute or contract. (c) If the Subsidiary for which a Participant is employed ceases to be aSubsidiary of the Corporation, such event shall be deemed to constitute atermination of employment due to resignation for purposes of the Plan. (d) Unless otherwise determined by the Committee, any portion of an Optionheld by a Participant (other than a Non-Employee Director) that is notexercisable on the date such Participant's employment terminates shall expire asof such termination date. 8. TERMINATION OF SERVICE AS A NON-EMPLOYEE DIRECTOR (a) In the event a Non-Employee Director shall cease to serve as a directorof the Corporation while he or she is holding one or more Options, eachoutstanding Option which is exercisable as of the date of such termination shallexpire at the earlier of the expiration of its term or the following: (i) one year after termination of service due to retirement under a mandatory retirement policy of the Board as may be in effect on the date of such termination of service; (ii) one year after termination of service due to permanent and total disability within the meaning of Section 22(e)(3) of the Code; (iii) one year after termination of service due to the Non-Employee Director's death; or (iv) coincident with the date service terminates for any other reason. (b) Any Options which have not become exercisable as of the date aNon-Employee Director ceases to serve as a director of the Corporation shallterminate as of such date. 9. ADJUSTMENTS In the event that a stock dividend, stock split or other subdivision,recapitalization, reorganization, merger, consolidation or change in the sharesof Common Stock, extraordinary cash dividend, spin-off or other E-5 similar event affects the Common Stock, then if the Committee shall determine inits sole discretion that such change equitably requires an adjustment in thenumber or kind of shares which may be awarded under the Plan or in the number orkind of shares covered by any outstanding Options, and/or in such Option'sExercise Price, such adjustments shall be made by the Committee and shall beconclusive and binding upon all Participants and for all purposes of the Plan. 10. CHANGE IN CONTROL (a) Accelerated Vesting and Payment. Subject to the provisions ofParagraph 10(b) below, in the event of a Change in Control, each Option(including an Option held by a Non-Employee Director) whether or not currentlyexercisable shall promptly be canceled in exchange for a payment in cash of anamount equal to the excess of the Change in Control Price over the ExercisePrice for such Option. (b) Alternative Awards. Notwithstanding Paragraph 10(a), no cancellationand cash settlement shall occur with respect to any Award or class of Awards ifthe Committee reasonably determines in good faith prior to the occurrence of aChange in Control that such Award or class of Awards shall be honored orassumed, or new rights substituted therefor (such honored, assumed orsubstituted award hereinafter called an "Alternative Award") by a Participant'semployer (or the parent or a subsidiary of such employer) immediately followingthe Change in Control, provided that any such Alternative Award must: (i) be based on stock which is traded on an established securities market, or which will be so traded within 60 days following the Change in Control; (ii) provide such Participant (or each Participant in a class of Participants) with rights and entitlements substantially equivalent to or better than the rights and entitlements applicable under such Award; (iii) have substantially equivalent economic value to such Award (determined by the Committee as constituted immediately prior to the Change in Control, in its sole discretion, promptly after a Change in Control); and (iv) have terms and conditions which provide that following a subsequent Change in Control, any conditions on a Participant's rights under, or any restrictions or conditions on transfer or exercisability applicable to each such Award, shall be waived or lapse as the case may be. 11. AMENDMENT AND TERMINATION OF PLAN (a) The Board, without further approval of the stockholders, may at anytime, and from time to time, suspend or terminate the Plan in whole or in partor amend it from time to time in such respects as the Board may deem appropriateand in the best interests of the Corporation; provided, however, that no suchamendment shall be made, without approval of the stockholders, which would: (i) materially modify the eligibility requirements for Participants; (ii) increase the total number of shares of Common Stock which may be issued pursuant to Stock Options, except as is provided for in accordance with Paragraph 9 under the Plan; (iii) decrease the minimum Exercise Price per share; (iv) extend the period for granting Stock Options. (b) No amendment may be made to Paragraph 6(f) or any other provision ofthe Plan relating to Options granted to or held by Non-Employee Directors withinsix months of the last date on which any such provision was amended. (c) No amendment, suspension or termination of this Plan shall, without theParticipant's consent, alter or impair any of the rights or obligations underany Award theretofore granted to him under the Plan. E-6 (d) The Board may amend the Plan, subject to the limitations cited above,in such manner as it deems necessary to permit the granting of Stock Optionsmeeting the requirements of future amendments or issued regulations, if any, tothe Code. 12. GOVERNMENT AND OTHER REGULATIONS The granting of Stock Options under the Plan and the obligation of theCorporation to issue, or transfer and deliver shares for Stock Options exercisedunder the Plan shall be subject to all applicable laws, regulations, rules andorders which shall then be in effect. 13. UNFUNDED PLAN The Plan, insofar as it provides for payments, shall be unfunded and theCorporation shall not be required to segregate any assets which may at any timebe subject to Awards under the Plan. Any liability of the Corporation to anyperson with respect to any Award under this Plan shall be based solely upon anycontractual obligations which may be created by Agreements reflecting grants orAwards under this Plan. 14. MISCELLANEOUS PROVISIONS (a) Rights to Continued Employment: No person shall have any claim orright to be granted an Award under the Plan, and the grant of an Award under thePlan shall not be construed as giving any Participant the right to be retainedin the employ of the Corporation or any Subsidiary of the Corporation and theCorporation expressly reserves the right at any time to dismiss a Participantwith or without cause, free from any liability, or any claim under the Plan,except as provided herein or in an Agreement. (b) Rights to Serve as a Director: This Plan shall not impose anyobligation on the Corporation to retain any individual as a Non-EmployeeDirector nor shall it impose any obligation on the part of any Non-EmployeeDirector to remain as a director of the Corporation, provided that eachNon-Employee Director by accepting each award under the Plan shall represent tothe Corporation that it is his good faith intention to continue to serve as adirector of the Corporation until its next annual meeting of stockholders andthat he agrees to do so unless a change in circumstances arises. (c) No Obligation to Exercise Option: The granting of an Option shallimpose no obligation upon the Participant to exercise such Option. (d) Who Shall Exercise: During a Participant's lifetime, Options may beexercised only by the Participant except as provided by the Plan or as otherwisespecified by the Committee in the case of Options which are not Incentive StockOptions. After the death of a Participant an Option may be exercised only by hisBeneficiary in accordance with the terms of the Plan and the Agreement. (e) Non-Transferability: An Award may be transferred to a member of theParticipant's immediate family or to a trust or similar vehicle for the benefitof such immediate family members or to a charitable trust (collectively, the"Permitted Transferees"), provided that except as permitted by this Section noAward shall be assignable or transferable except by will or the laws of descentand distribution, and except to the extent required by law, no right or interestof any Participant shall be subject to any lien, obligation or liability of theParticipant. All rights with respect to Awards granted to a Participant underthe Plan shall be exercisable during his lifetime only by such Participant or,if applicable, the Permitted Transferees. The rights of a Permitted Transfereeshall be limited to the rights conveyed to such Transferee, who shall be subjectto and bound by the terms of the Agreement between the Participant and theCorporation. (f) Withholding Taxes: The Corporation may require a payment to coverapplicable withholding for income and employment taxes in the event of theexercise of a Stock Option. At any time when a Participant is required to pay tothe Corporation an amount required to be withheld under applicable income taxlaws in connection with the exercise of a Stock Option, the Participant maysatisfy this obligation in whole or in part by electing (the "Election") to havethe Corporation withhold shares of Common Stock having a value equal to theamount required to be withheld. The value of the shares to be withheld shall beequal to the Fair Market Value of the Common Stock, as determined on the datethat the amount of tax to be withheld shall be E-7 determined (the "Tax Date"). Each Election must be made prior to the Tax Datepursuant to such rules as the Committee shall establish. The Committee maydisapprove of any Election or may suspend or terminate the right to makeElections. An Election is irrevocable. (g) Plan Expenses: Any expenses of administering this Plan shall be borneby the Corporation. (h) Legal Considerations: The Corporation shall not be required to issueshares of Common Stock under the Plan until all applicable legal, listing orregistration requirements, as determined by legal counsel, have been satisfied,including, if necessary, appropriate written representations from Participants. (i) Other Plans: Nothing contained herein shall prevent the Corporationfrom establishing other incentive and benefit plans in which Participants in thePlan may also participate. (j) No Warranty of Tax Effect: Except as may be contained in anyAgreement, no opinion shall be deemed to be expressed or warranties made as tothe effect for foreign, federal, state or local tax purposes of any Awards. (k) Construction of Plan: The validity, construction, interpretation,administration and effect of the Plan and of its rules and regulations, andrights relating to the Plan, shall be determined in accordance with the laws ofthe State of Delaware. 15. STOCKHOLDER APPROVAL AND EFFECTIVE DATE This Plan shall become operative and in effect on such date as it shall beapproved by the stockholders of the Corporation. No Option shall be grantedhereunder after the expiration of ten years following the date of adoption ofthe Plan by the Board. E-8 . . . EXHIBIT 21 CAMBREX CORPORATION SUBSIDIARIES OF REGISTRANT SUBSIDIARY INCORPORATED IN:---------- ---------------- Cosan Chemical Corporation.................................. New JerseyCambrex North Brunswick, Inc. .............................. DelawareCambrex Charles City, Inc. ................................. IowaCambrex Bio Science Walkersville, Inc. ..................... DelawareCambrex Profarmaco Milano S.r.l............................. ItalyCambrex Karlskoga AB........................................ SwedenCambrex Bio Science Verviers Sprl........................... BelgiumCambrex Bio Science Rockland, Inc. ......................... DelawareCambrex Bio Science Copenhagen ApS.......................... DenmarkCambrex Cork Limited........................................ IrelandCambrex Profarmaco Landen NV................................ BelgiumCambrex Bio Science Nottingham Limited...................... EnglandCambrex Bio Science Baltimore, Inc. ........................ DelawareCambrex Bio Science Hopkinton, Inc. ........................ 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 reports dated February 27,2004 relating to the financial statements and financial statement schedule,which appear in this Form 10-K. PRICEWATERHOUSECOOPERS LLP Florham Park, New JerseyMarch 15, 2004 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 15th day of March 2004. /s/ JAMES A. MACK ------------------------------------------------------- James A. Mack President, Chief Executive Officer Chairman of the Board /s/ LUKE M. BESHAR ------------------------------------------------------- Luke M. Beshar Executive Vice President and Chief Financial Officer (Principal Financial Officer and Accounting Officer) /s/ ROSINA B. DIXON ------------------------------------------------------- Rosina B. Dixon, M.D. Director /s/ ROY W. HALEY ------------------------------------------------------- Roy W. Haley Director /s/ KATHRYN RUDIE HARRIGAN ------------------------------------------------------- Kathryn Rudie Harrigan, PhD Director /s/ LEON J. HENDRIX, JR. ------------------------------------------------------- Leon J. Hendrix, Jr. Director /s/ 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/ PETER G. TOMBROS ------------------------------------------------------- Peter G. Tombros Director EXHIBIT 31.1 CAMBREX CORPORATION CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 (18 U.S.C. SECTION 1350) I, James A. Mack, certify that: 1. I have reviewed this annual report on Form 10-K of Cambrex Corporation; 2. Based on my knowledge, this 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 periods presented in this annual report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the periods in which this annual report is being prepared; b) [Reserved] c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. /s/ JAMES A. MACK -------------------------------------- James A. Mack, President Chairman of the Board and Chief Executive Officer Date: March 15, 2004 EXHIBIT 31.2 CAMBREX CORPORATION CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 (18 U.S.C. SECTION 1350) I, Luke M. Beshar, certify that: 1. I have reviewed this annual report on Form 10-K of Cambrex Corporation; 2. Based on my knowledge, this 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 periods presented in this annual report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) [Reserved] c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. /s/ LUKE M. BESHAR -------------------------------------- Luke M. Beshar Executive Vice President and Chief Financial Officer Date: March 15, 2004 EXHIBIT 32.1 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 certifies 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, 2003, accompanying this Certification, in the form filed with the Securities and Exchange Commission (the "Report) fully complies with the requirements of Section 13(a) or 15(d) 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 15, 2004 EXHIBIT 32.2 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 certifies asfollows: 1. Luke M. Beshar is Executive Vice President and Chief Financial Officer of Cambrex Corporation. 2. The Company's Form 10-K for the annual period ended December 31, 2003, accompanying this Certification, in the form filed with the Securities and Exchange Commission (the "Report") fully complies with the requirements of Section 13(a) or 15(d) 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 Executive Vice President and Chief Financial Officer Dated: March 15, 2004

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