Cambrex Corporation
Annual Report 2004

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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, 2004 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 defined 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 $641,852,184 as of June 30, 2004. APPLICABLE ONLY TO CORPORATE REGISTRANTS As of February 28, 2005, there were 26,391,752 shares outstanding of theregistrant's Common Stock, $.10 par value. DOCUMENTS INCORPORATED BY REFERENCE Portions of the registrant's definitive Proxy Statement for the 2005 AnnualMeeting are incorporated by reference into Part III of this report.---------------------------------------------------------------------------------------------------------------------------------------------------------------- CAMBREX CORPORATION INDEX TO ANNUAL REPORT ON FORM 10-K FILED WITH THE SECURITIES AND EXCHANGE COMMISSION FOR THE YEAR ENDED DECEMBER 31, 2004 ITEM PAGENO. NO.---- ---- PART I 1 Business.................................................... 2 2 Properties.................................................. 19 3 Legal Proceedings........................................... 20 4 Submission of Matters to a Vote of Security Holders......... 20 Executive Officers of the Registrant........................ 21 PART II 5 Market for the Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases to Equity Securities.................................................. 24 6 Selected Financial Data..................................... 25 7 Management's Discussion and Analysis of Financial Condition and Results of Operations................................... 27 7A Quantitative and Qualitative Disclosures about Market Risk........................................................ 43 8 Financial Statements and Supplementary Data................. 44 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.................................... 96 9A Controls and Procedures..................................... 96 9B Other Information........................................... 97 PART III10 Directors and Executive Officers of the Registrant.......... 9711 Executive Compensation...................................... 9712 Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.................. 9713 Certain Relationships and Related Transactions.............. 9714 Principal Accounting Fees and Services...................... 97 PART IV15 Exhibits, Financial Statement Schedules..................... 97 1 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 products and services that accelerate and improve the discovery andcommercialization of human therapeutics. The Company primarily supplies itsproducts and services worldwide to pharmaceutical and biopharmaceuticalcompanies, generic drug companies, biotechnology companies and researchorganizations. The Company reports results in three segments: Bioproducts,Biopharma and Human Health. Each of these segments includes multiple productcategories. The Company's overall strategy is to focus on niche markets thathave global opportunities, build on strong customer relationships to enhance itsnew products pipeline, and support state-of-the-art technology, while being anindustry leader in regulatory compliance, environmental, health and safetyperformance, and customer service. The Company uses a consistent business approach in each of its segments: - Market Leadership: The Company secures leading market positions through its proprietary technologies and specialized capabilities. The Company leverages its broad capabilities and reputation across the life sciences market segments in which it participates. - Niche Market Focus: The Company participates in niche markets that require significant technical expertise that provides market differentiation. - Acquisition and Licensing: The Company drives growth in strategic business segments through the prudent acquisition of products, product lines, technologies, and capabilities to enhance the Company's position in its niche markets and move the Company closer to the patient. - New Product Programs: The Company introduces innovative products to drive organic growth and continues to invest in research and product development. - Margin Expansion: The Company reviews the growth and profitability of its businesses on an ongoing basis to ensure resources are appropriately allocated. The Company will de-emphasize or eliminate offerings not meeting operating profit goals. - Operational Excellence: The Company maintains its commitment to improve productivity and customer service levels and reduce costs. The Company works in a highly regulated industry and maintains its commitment to excellent quality and regulatory compliance systems. MARKET OVERVIEW AND GROWTH DRIVERS The Company participates in markets that serve the healthcare industry.Customers include companies and institutions that discover and commercializetherapeutics including traditional drugs made using organic chemistry, or, morerecently, products made using biotechnology and cells. The aging population, continued investment in healthcare research and drugdevelopment and the necessity to develop life saving therapeutics to addressunmet needs drives business growth in life sciences companies serving thehealthcare market. Aging "baby boomers" in the United States, Europe and Japanare entering retirement which may provide an enormous healthcare opportunity.This group typically has more education, a higher socio-economic level, andhigher demands for healthcare services than previous generations. Their use ofthe internet may offer new sales and marketing opportunities to the healthcaremarket. Healthcare investment comes from a variety of segments. Largepharmaceutical and biotechnology companies invest billions in new drug discoveryand development. Research institutions may be funded by the ---------------(dollars in thousands, except share data) 2 government, business or private sectors. The U.S. government's funding ofBioShield, which went into effect in 2004, provides new incentives to companiesto develop vaccines and drugs to counter bioterrorism. Investments in emergingdrug companies from venture capital and initial public offerings were also up in2004 versus prior year. Healthcare investment increases the demand for Cambrexproducts and services by providing customers the financial resources to movetheir research and development projects from the laboratory to the clinic, andeventually, to the patient. It is estimated that getting a new drug to market may take up to sixteenyears. With the need to get new drugs to market faster, pharmaceutical companiesmake huge investments in drug discovery. There is the need for a continuingstream of innovative research tools that accelerate the drug discovery process.More and more cellular models are being used to understand the mechanism ofdisease and the efficacy and toxicity of drug candidates. Demand for rapid,accurate tests to assess drug candidates is growing greater than 20% annually.Cambrex is a leading provider of testing products used in the drug discoveryprocess. Once a drug is identified, companies need to develop a robust process forthe manufacture of clinical and commercial quantities. Product testing andquality processes need to be integrated into the manufacturing process. This isa critical step to getting a commercially viable drug to market. Cambrexmanufactures active pharmaceutical ingredients at laboratory, clinical andcommercial scale at facilities around the world and maintains an industryleading quality record. Large pharmaceutical and biotechnology companies may outsource thedevelopment and manufacturing of a drug substance to manage multiple internalpriorities, access new technologies or additional capacity, preserve neededcapital or ensure multiple sources of supply. Emerging pharmaceutical,biotechnology and generic drug companies typically outsource all processdevelopment and manufacturing. New drugs are typically patented. When the patent expires, the drug may bemanufactured and marketed in a generic form. Growth in the generic drug marketis driven by the continuing stream of drug patents that will expire in thefuture and favorable market forces that encourage the use of genericpharmaceuticals as a more cost effective health care alternative to higherpriced branded drugs. In the United States and many countries in Europe,governments and prescription benefit management companies provide incentives forgeneric substitution to reduce costs. Cambrex's active pharmaceuticalingredients are used in over 100 niche generic drugs globally. The market for human therapeutics is highly regulated by the Food and DrugAdministration (FDA) and other regulatory agencies through the development,manufacturing and commercialization process. The FDA approves human therapeuticsand regulates manufacturing. Excellent regulatory and quality systems areessential to serve the industry. In 2004, the FDA modified its manufacturingregulations to encourage companies to improve and optimize manufacturingprocesses, which presents manufacturers, like Cambrex, new opportunities toreduce product costs and cycle times for their clients. The healthcare market continues to evolve. - In recent years, there have been fewer FDA drug approvals and weaker drug development pipelines in large pharmaceutical companies. To bolster the number of drugs in development, large pharmaceutical companies have entered into partnerships and alliances with emerging pharmaceutical companies. Emerging companies continue to drive innovation with over two thirds of the products in phase I clinical trials. - Competition from Asia has increased their capabilities in drug substance manufacturing and finished dosage form drugs. Although there has been limited direct impact on niche products, the presence of these competitors has resulted in downward pricing pressure on active pharmaceutical ingredients. Regulatory compliance and long-term quality may determine the long term impact of these competitors. ---------------(dollars in thousands, except share data) 3 - Weaker pharmaceutical pipelines have resulted in reduced demand and excess capacity for branded drug substance manufacturing made by organic chemistry, resulting in the retirement of facilities by several U.S. and European competitors in 2004. - The Medicare Modernization Act (MMA) may negatively impact future pharmaceutical company profits by limiting price increases and effecting changes in supply chain management. In contrast, it may also offer improved commercial opportunities to companies with more efficient and cost effective supply chains via broader access to patients and a larger number of prescriptions. - The regulatory environment supporting generic drugs remains favorable and will probably extend to generic biopharmaceuticals in the future. - Recent regulatory mis-steps and related negative publicity may cause pharmaceutical companies to focus additional resources on reputation management and community relations. STRATEGY The Company expects to continue to provide innovative life sciencesproducts and services for the bioresearch and therapeutics markets. The Companywill use its expertise in drug discovery tools, testing reagents, kits andservices and the manufacture of drug substances to expand its product portfolio.Through internal developments and targeted acquisitions, the Company alsointends to broaden its current list of products and services. The introductionof complementary offerings will drive organic growth and expand the Company'sfootprint in the life sciences markets. New technologies, products, andinfrastructure may also come from licensing or acquisition. Long term, theCompany also expects to market and sell therapeutics, whether developed by ourcustomers or the Company, to certain specialty markets. DEVELOPMENT OF THE BUSINESS The discussion below provides insight to the general development of ourbusiness, including the material acquisitions and disposition of assets, overthe past five years. On March 2, 2000, the Company acquired Conti BPC NV in Landen, Belgium forapproximately $5 million in cash and assumed debt. Conti BPC NV, now renamedCambrex Profarmaco Landen NV, is a manufacturer and supplier of pharmaceuticalintermediates and active pharmaceutical ingredients. On July 24, 2000, the Company acquired LumiTech, Limited in Nottingham,England for $4.3 million in cash. LumiTech, Limited, now renamed Cambrex BioScience Nottingham Limited, provides products and services used in the highthroughput screening market for drug discovery. On June 4, 2001, the Company acquired Bio Science Contract Production Corp.in Baltimore, Maryland for approximately $125 million in cash. Bio ScienceContract Production Corp., now renamed Cambrex Bio Science Baltimore, Inc.,manufactures purified bulk biologics and pharmaceutical ingredients. The acquisition provided the Company with entry into the contract bioprocessingmarket. On October 31, 2001, the Company acquired Marathon Biopharmaceuticals Inc.in Hopkinton, Massachusetts for approximately $26 million in cash through ashare purchase of CoPharma Inc. Marathon, now renamed Cambrex Bio ScienceHopkinton, Inc., is a full-service cGMP manufacturer of biopharmaceuticalingredients and purified bulk biologics for pre-clinical evaluation, clinicaltrials and commercial scale quantities. On January 1, 2002, the Company realigned the organization to focus on lifesciences. The operating units that primarily produced specialty and finechemicals, and animal health and agriculture products were combined under a newsubsidiary, Rutherford Chemicals, Inc. On November 10, 2003, the Company sold its Rutherford Chemicals businessfor a sale price of up to $65 million, consisting of $55 million in cash paid atclosing, a $2 million subordinated 12% interest bearing ---------------(dollars in thousands, except share data) 4 note, and an $8 million performance-based cash earn-out if certain futureoperating profit targets are achieved. The sale of Rutherford Chemicalsrepresents the completion of the transformation from a specialty chemicalorganization into a leading life sciences company. On October 2, 2004, Cambrex France SARL, one of the Company's subsidiaries,acquired Genolife SA for approximately $6 million in cash. Genolife, located inSaint Beauzire, France, specializes in rapid microbial detection testing for thepharmaceutical, agriculture, food, and cosmetic industries. The acquisitioncomplements the endotoxin and mycoplasma detection product lines and builds uponthe Company's testing reagent and service franchise. 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 presentsgross sales from the Company's three segments: YEARS ENDED DECEMBER 31 -------------------------------- 2004 2003 2002 -------- -------- -------- Bioproducts........................................ $136,108 $119,298 $107,870Biopharma.......................................... 43,270 44,128 55,218Human Health....................................... 259,737 242,165 231,342 -------- -------- -------- Gross Sales...................................... $439,115 $405,591 $394,430 ======== ======== ======== Bioproducts: The Bioproducts segment consists of research products(including cell biology products, cell based assays and molecular biologyproducts) and therapeutic applications (including endotoxin detection products,biotherapeutic media and serum products and cell therapy products). The Companymanufactures more than 1,800 products which are sold to more than 14,000customers worldwide with no one customer accounting for over 10% of 2004 salesin this segment. This table summarizes the gross sales for this product segment: $ % 2004 2003 CHANGE CHANGE -------- -------- ------- ------ Research Products.......................... $ 70,657 $ 62,650 $ 8,007 12.8%Therapeutic Applications................... 65,451 56,648 8,803 15.5% -------- -------- ------- Total Bioproducts................ $136,108 $119,298 $16,810 14.1% ======== ======== ======= ==== Gross sales of $136,108 were $16,810 or 14.1% above 2003. Bioproducts saleswere favorably impacted 4.0% due to exchange rates reflecting a weaker U.S.dollar. Research products of $70,657 were $8,007 or 12.8% higher than prior yeardue to increased sales in cell biology products due to strong market demand inthe U.S. and Europe, higher media and serum products sales due to increasedsupply and increased demand in North America, Europe and Asia and higher salesof assays due to increased market demand in North America. The favorable effectof foreign currency exchange also contributed to the higher sales. Therapeutic applications sales of $65,451 were $8,803 or 15.5% higher thanprior year due to higher sales of endotoxin detection products reflectingincreased purchasing levels in the U.S. and rest of world and timing ofshipments and increased sales of cell therapy products due to the addition ofnew customers. Biopharma: The Biopharma segment consists of the Company's contractbiopharmaceutical process development and manufacturing business. Biopharmasales of $43,270 were $858 or 1.9% below 2003. The sales decrease primarilyreflects reduced billings in our biopharmaceutical manufacturing business drivenby the completion or timing of projects and a change in contract terms from timeand material to milestone ---------------(dollars in thousands, except share data) 5 payments offset by higher reimbursable materials revenue due to timing ofcurrent projects. There are three customers that individually account for morethan 10% of 2004 sales in this segment. They represent 23.0%, 22.7%, and 22.2%of 2004 sales in this segment. Human Health: The Human Health segment is primarily comprised of thecustom development and manufacture of pharmaceutical ingredients derived fromorganic chemistry. Products and services are supplied globally to innovative andgeneric drug companies. Products include active pharmaceutical ingredients andadvanced pharmaceutical intermediates. Services include development andmanufacturing services. The Human Health segment is classified into three product groups: (1)active pharmaceutical ingredients (APIs), (2) pharmaceutical intermediates, and(3) other. These products are sold to a diverse group of more than 1,100customers, with two customers individually accounting for more than 10% of 2004sales in this segment; one, a distributor representing multiple customers,accounting for 17.1%, and a second pharmaceutical company, accounting for 10.6%.Many of these products are also sold through agents. One active pharmaceuticalingredient makes up 13.3% of 2004 sales in this segment. This table summarizes the gross sales for this product segment: $ % 2004 2003 CHANGE CHANGE -------- -------- ------- ------ -------- -------- ------- ------ Active Pharmaceutical Ingredients.......... $200,555 $183,632 $16,923 9.2%Pharmaceutical Intermediates............... 27,365 24,349 3,016 12.4%Other...................................... 31,817 34,184 (2,367) (6.9)% -------- -------- ------- Total Human Health............... $259,737 $242,165 $17,572 7.3% ======== ======== ======= ==== Human Health sales of $259,737 increased $17,572 or 7.3% including a 5.6%favorable impact due to exchange rates reflecting the weaker U.S. dollar. APIs sales of $200,555 were $16,923 or 9.2% above the prior year dueprimarily to higher demand for cardiovascular and gastrointestinal APIs due tohigher demand and a favorable currency impact. Pharmaceutical intermediatessales of $27,365 were $3,016 or 12.4% above 2003 primarily due to higher salesof custom development products, an end-stage kidney treatment product due toincreased demand and favorable currency effect. Other sales of $31,817 were $2,367 or 6.9% below the prior year as pricingpressure from offshore competition negatively impacted sales of feed additiveproducts. MARKETING AND DISTRIBUTION The Company's Human Health and Biopharma segments generally include highervalue, low-to-medium volume niche products requiring significant technicalexpertise to develop and manufacture. Marketing generally requires significantcooperative effort among a highly trained sales and marketing staff, ascientific staff that can assess the technical fit and estimate manufacturingeconomics, and the business unit management to determine the strategic andbusiness fit. The process to take a client's project from the clinical trialstage to a commercial, approved therapeutic may take from two to seven years.The process to take generic active pharmaceutical ingredients from benchdevelopment to amended new drug application (ANDA) approval may take five toseven years. The Company has agents in those areas where direct sales effortsare not economical. 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. ---------------(dollars in thousands, except share data) 6 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. Bovine spongiform encephalopathy, also known as mad cow disease, hasimpacted where the Company can import fetal bovine serum from. Although there isa well-established market for raw fetal bovine serum, its price and supply arecyclical and fluctuate. The Company also is dependent on one company for the rawmaterials used to make electrophoresis media products incorporating Agarose. Along-term contract is in effect for this supply. 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 137 employees areinvolved directly in research and development activities worldwide. The Cambrex Center of Technical Excellence, a research and developmentorganization located in The Technology Centre of New Jersey in North Brunswick,NJ, helps place the Company in a unique position to be a full-service resourcefor pharmaceutical and biotechnology companies throughout the drug developmentcycle. The Company spent $19,659, $17,123 and $15,794 in 2004, 2003 and 2002,respectively, on research and development efforts. PATENTS AND TRADEMARKS The Company has patent protection in most of its product areas. Inaddition, the Company also relies on know-how and trade secrets related to manyof its manufacturing processes and techniques not generally known to other lifesciences companies for developing and maintaining its market position. The Company currently owns approximately 180 United States patents whichhave various expiration dates through 2023 and which cover selected items ineach of the Company's major product areas. The Company also owns foreignequivalents of many of its United States patents. In addition, the Company hasapplied for patents for various inventions and is in the process of preparingpatent applications for other inventions. The Company owns patent and otherproprietary rights to the endotoxin detection products which are material to theproduct 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(R), Clonetics(R), MYCOAlert(R),NuSieve(R), Reliant(R), Latitude(R), PAGEr(R), MetaPhor(R), AccuGENE(R) andBioWhittaker(TM.) ---------------(dollars in thousands, except share data) 7 The Company requires employees to sign confidentiality, ownership ofinventions and non-compete agreements where appropriate. COMPETITION 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, depthof product line, price, technical support, innovative product development and ontime delivery. In the Biopharma segment, the competitors include therapeutic companies andother companies that supply contract biopharmaceutical development andmanufacturing services to biotech companies. Generally, the competition focuseson larger quantities and scale of manufacturing capacity. Cambrex differentiatesits services by concentrating on small to medium scale process development andmanufacturing services, an excellent regulatory compliance record, experienceproducing vaccines and approved drugs, a commitment to quality, and world-classearly development services. In the Human Health segment, the Company has two primary groups ofcompetitors; those that produce generic active pharmaceutical ingredients andthose that produce branded active pharmaceutical ingredients and intermediates.For generic active pharmaceutical ingredients, there are approximately fiveprimary competitors which are located in Europe. For competitors that providecustom development and manufacturing services for branded active pharmaceuticalingredients, there are approximately twenty competitors, six of which are largemultinational companies that also produce fine chemicals. More recently,competitors from Asia have entered the market for larger active pharmaceuticalingredients. While there has been limited or no impact on the products theCompany produces, it is expected that their regulatory compliance and productquality will determine the long term impact of these competitors in the market.If the Company perceives significant competitive risk and a need for largetechnical or financial commitment, it generally negotiates long term contractsor guarantees from its customers. ENVIRONMENTAL AND SAFETY REGULATIONS AND PROCEEDINGS General: Certain products manufactured by the Company involve the use,storage and transportation of toxic and hazardous materials. The Company'soperations are subject to extensive 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) 8 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 #23 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 and safety 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$6,725 in 2004, $4,032 in 2003, and $3,752 in 2002 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 may increase. The Company considerscosts for environmental compliance to be a normal cost of doing business, andincludes 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. If any of the followingrisks occur, the Company's business, financial condition, operating results andcash flows could be materially adversely affected. The risks and uncertaintiesdescribed below are not the only ones the Company faces. Additionally, risks anduncertainties not presently known to the Company or that it currently deemsimmaterial also may impair its business, financial condition, operating resultsand cash flows. 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 quarters or years andthey could possibly have an adverse impact upon the market price of our commonstock. IF WE MAKE ACQUISITIONS, WE MAY EXPERIENCE DIFFICULTY INTEGRATING THE BUSINESSESWHICH COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS, FINANCIAL CONDITIONAND RESULTS OF OPERATIONS. An important part of our business growth strategy is to acquire products,product lines, technologies and capabilities, including through the acquisitionof businesses, to enhance the Company's position in its niche markets and movethe Company closer to the patient. We continually explore and conductdiscussions with many third parties regarding possible acquisitions. Our abilityto continue to achieve our goals may depend upon our ability to effectivelyintegrate such businesses, to achieve cost efficiencies and to manage thesebusinesses as part of our company. However, we may experience difficultyintegrating the merged companies which could have a material adverse effect onthe operating results or financial condition of the combined company. As aresult of uncertainty following an acquisition and during the integrationprocess, we could ---------------(dollars in thousands, except share data) 9 experience disruption in our business or employee base. There is also a riskthat key employees of the combined company may seek employment elsewhere,including with competitors, or that valued employees may be lost upon the elimination of duplicate functions. If we are not able to successfully blend ourproducts and technologies with the acquired business to create the advantagesthe acquisition was intended to create, it may affect our results of operations,our ability to develop and introduce new products and the market price of ourcommon stock. Furthermore, there may be overlap between our products, servicesor customers, and the combined company may create conflicts in relationships orother commitments detrimental to the integrated businesses. IF WE FAIL TO IMPROVE THE OPERATIONS OF FUTURE ACQUIRED BUSINESSES, WE MAY BEUNABLE TO ACHIEVE OUR GROWTH STRATEGY. Some of the businesses we have acquired or will acquire had or may havesignificantly lower operating margins than we do and/or operating losses priorto the time we acquired them. In the past, we have occasionally experiencedtemporary delays in improving the operating margins of these acquiredbusinesses. In the future, if we are unable to improve the operating margins ofacquired businesses or operate them profitably, we may be unable to achieve ourgrowth strategy. 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, ourrevenues 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 would 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) 10 OUR FAILURE TO OBTAIN NEW CONTRACTS OR RENEWED CONTRACTS OR CANCELLATION OFEXISTING CONTRACTS MAY ADVERSELY AFFECT OUR BUSINESS, FINANCIAL CONDITION AND RESULTS OF OPERATIONS, AND MAKE OUR REVENUE DIFFICULT TO PREDICT. Many of our contracts are short-term in duration. As a result, we mustcontinually replace our contracts with new contracts to sustain our revenue. Inaddition, many of our long-term contracts may be cancelled or delayed by clientsfor any reason upon notice. Contracts may be terminated for a variety ofreasons, including termination of product development, failure of products tosatisfy safety requirements, unexpected or undesired results from use of theproduct or the client's decision to forego a particular study. Our failure toobtain new contracts or renew contracts or the cancellation or delay of existingcontracts could have a material adverse effect on our business, financialcondition and results of operations. Furthermore, because our revenue is primarily generated on acontract-by-contract or purchase order basis, our revenue is difficult topredict and contributes to the variability of our financial results from periodto period. In addition, we do not believe that a backlog of contracts is ameaningful indicator of our future revenue because of the possibility that thecontracts may be terminated. THE BIOPHARMA BUSINESS SEGMENT HAS EXPERIENCED AND MAY CONTINUE TO EXPERIENCESIGNIFICANT VOLATILITY IN PROFITABILITY AND THERE ARE NO ASSURANCES THAT IT WILLRETURN TO ITS HISTORIC PROFITABILITY LEVEL. 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. Returning to historic profitability levels isdependent on the Company generating significant additional revenues fromexisting and new customers, which can not be absolutely assured. THE COMPANY COULD BE SUBJECT TO ADDITIONAL GOODWILL IMPAIRMENT CHARGES IN THEFUTURE. During the third quarter 2004, the Company recorded an impairment charge of$48,720 to reduce the goodwill recorded in the acquisition of the Baltimoresite. The Company still has a substantial amount of goodwill related to thisbusiness and others, which may be subject to additional impairment charges ifthe business units do not perform at or near projected levels in the future.Certain other facilities do not have enterprise values that are significantlyhigher than the carrying value of goodwill. Should the profit forecast for these businesses be revised significantlydownward the Company may incur additional goodwill impairment charges. 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 in the short term (such as the cost of maintainingfacilities and compensating employees), any one of these factors could have asignificant impact on the Company's quarterly results. In some quarters, theCompany's revenue and operating results may fall below the expectations ofsecurities analysts and investors due to any of the factors described above. Insuch event, the trading price of the Company's common stock would likelydecline, even if the decline in revenue did not have any long-term adverseimplications for the Company's business. ---------------(dollars in thousands, except share data) 11 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 believe successful new product introductions provide a significantcompetitive advantage because customers make an investment of time in selectingand learning to use a new product, and are reluctant to switch thereafter. Wespend significant 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 ensure that we will be able to manufacture ourproducts profitably or on time. ANY SIGNIFICANT REDUCTION IN GOVERNMENT REGULATION OF THE DRUG DEVELOPMENTPROCESS COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS, FINANCIALCONDITION AND RESULTS OF OPERATIONS. The design, development, testing, manufacturing and marketing ofbiotechnology and pharmaceutical products are subject to extensive regulation bygovernmental authorities, including the FDA and comparable regulatoryauthorities in other countries. The Company's business depends in part on strictgovernment regulation of the drug development process. Legislation may beintroduced and enacted from time to time to modify regulations administered bythe FDA and governing the drug approval process. Any significant reduction inthe scope of regulatory requirements or the introduction of simplified drugapproval procedures could have a material adverse effect on the Company'sbusiness, financial condition and results of operations. ---------------(dollars in thousands, except share data) 12 VIOLATIONS OF CGMP AND OTHER GOVERNMENT REGULATIONS COULD HAVE A MATERIALADVERSE AFFECT ON OUR BUSINESS, FINANCIAL CONDITION AND RESULTS OF OPERATIONS. All facilities and manufacturing techniques used for manufacturing ofproducts for clinical use or for commercial sale in the United States must beoperated in conformity with current Good Manufacturing Practices ("cGMP")regulations as required by the FDA. The Company's facilities are subject toscheduled periodic regulatory and customer inspections to ensure compliance withcGMP and other requirements applicable to such products. A finding that theCompany had materially violated these requirements could result in regulatorysanctions, the loss of a customer contract, the disqualification of data forclient submissions to regulatory authorities and/or a mandated closing of theCompany's facilities. Any such material violations would have a material adverseeffect on the Company's business, financial condition and results of operations. LITIGATION MAY HARM OUR BUSINESS OR OTHERWISE NEGATIVELY IMPACT OUR MANAGEMENTAND FINANCIAL RESOURCES. Substantial, complex or extended litigation could cause the Company toincur large expenditures and distract our management. For example, lawsuits byemployees, stockholders, collaborators, distributors, customers, or end-users ofour products 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 the Company. The Company is involved in a number of lawsuits including a class actionlawsuit filed against Cambrex and certain former and current Company officersalleging the failure to disclose in a timely fashion the restatement of resultsfor the five-year period ending December 31, 2001 as discussed in the riskfactor immediately below, as well as the loss of a significant contract at ourBaltimore facility. If this matter, or any of the Company's other lawsuits, isresolved in an unfavorable manner, they could have a material adverse effect onthe operating results and cash flows in future periods. THE SEC INVESTIGATION INTO OUR INTER-COMPANY ACCOUNTING MATTER COULD HURT OURBUSINESS. 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 and retain qualifiedscientific and technical employees. There is a significant shortage of, andintense competition for, qualified scientific and technical employees. There canbe no assurance the Company will be able to retain its existing scientific andtechnical employees, or to attract and retain additional qualified employees.The Company's inability to attract and retain qualified scientific and technicalemployees would have a material adverse effect on the Company's business, financial condition and results of operations. ---------------(dollars in thousands, except share data) 13 POTENTIAL PRODUCT LIABILITY CLAIMS, ERRORS AND OMISSIONS CLAIMS IN CONNECTIONWITH SERVICES WE PERFORM AND POTENTIAL LIABILITY UNDER INDEMNIFICATIONAGREEMENTS BETWEEN US AND OUR OFFICERS AND DIRECTORS COULD ADVERSELY AFFECT OUREARNINGS 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 market or sell the products to end users. The Company seeksto reduce its potential liability through measures such as contractualindemnification provisions with clients (the scope of which may vary fromclient-to-client, and the performances of which are not secured), exclusion ofservices 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, however, that the Company's insurancecoverage will be adequate or that insurance coverage will continue to beavailable on terms 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 AND WE MAY EXPERIENCE SIGNIFICANT VOLATILITY IN OUR ANNUAL ANDQUARTERLY EFFECTIVE TAX RATE. As a matter of course, the Company is regularly audited by federal, state,and foreign tax authorities. From time to time, these audits result in proposedassessments. 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 2004, the geographic shift of forecasted income resulted in therecording of a valuation allowance against all net domestic deferred tax assets,except those for which the company has viable tax planning strategies. Goingforward, until such time as the Company's domestic profitability is restored andconsidered by management to be sustainable for the foreseeable future, theCompany will not record the income tax benefit or expense for domestic pre-taxlosses and income respectively, and as such may experience significantvolatility in its effective tax rate. As of December 31, 2004 the Company hadidentified tax planning strategies that preserved approximately $13 million ofnet tax attributes. Should the Company continue to experience domestic losses,these tax planning strategies may also be negatively affected which could resultin future increases to our domestic deferred 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 $120 million was outstanding at December 31, 2004, and privately placeddebt of $100 million. This is a significant amount of debt. If we are unable togenerate sufficient cash flow or otherwise obtain funds necessary to makerequired payments on the notes, including from cash and cash equivalents onhand, we will be in default under the terms of the loan agreements, andindentures under which we have outstanding debt securities. ---------------(dollars in thousands, except share data) 14 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: - 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 2004 and 61% of our product revenues in 2003. 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 rate 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 are short-term innature and may not adequately protect our operating results from the fulleffects of exchange rate fluctuations. 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;---------------(dollars in thousands, except share data) 15 - 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. The storage, 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 itsbusiness, financial condition or results of operations. However, these matters,if resolved in a manner different from the estimates, could have a materialadverse effect on financial condition, operating results and cash flows whenresolved in future reporting periods. THE POSSIBILITY WE WILL BE UNABLE TO PROTECT OUR TECHNOLOGIES COULD AFFECT OURABILITY 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. Theselicenses could be ---------------(dollars in thousands, except share data) 16 contested, and we cannot be assured that we would either be aware of anunauthorized use or be able to enforce the restrictions in a cost-effectivemanner. 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. COMPLIANCE WITH CHANGING REGULATION OF CORPORATE GOVERNANCE AND PUBLICDISCLOSURE MAY RESULT IN ADDITIONAL EXPENSE. Changing laws, regulations and standards relating to corporate governanceand public disclosure including the Sarbanes-Oxley Act of 2002 are creatinguncertainty for companies. These new or changed laws and standards are subjectto multiple interpretations, in many cases due to their lack of specification.As a result, their application in practice may evolve over time as new guidanceis provided by regulatory and governing bodies which could result in highercosts necessitated by revisions to disclosures and governance practices. We arecommitted to maintaining high standards of corporate governance and publicdisclosure. As a result of the efforts to comply with the evolving laws andregulations increased general and administrative expenses have been experiencedand are likely to continue. In particular, our efforts to comply with Section404 of the Sarbanes-Oxley Act of 2002, and the related assessments have required commitment of significant internal and external financial and operationalresources. EMPLOYEES At December 31, 2004, the Company had 1,938 employees worldwide (885 ofwhom were from international operations) compared with 1,861 employees atDecember 31, 2003 and 1,879 at December 31, 2002. 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 2004, 2003 and 2002 amounted to $29,945, $22,100 and $23,684,respectively. Sales from international operations were $238,673 in 2004,$223,666 in 2003, and $207,082 in 2002. Refer to Note #21 to the CambrexCorporation and Subsidiaries Consolidated Financial Statements. AVAILABLE INFORMATION This annual report on Form 10-K, the Company's quarterly reports on Form10-Q, the Company's current reports on Form 8-K, and amendments to those reportsfiled or furnished pursuant to Section 13(a) or ---------------(dollars in thousands, except share data) 17 15(d) of the Securities Exchange Act of 1934, are made available free of chargeon the Company's Internet website www.cambrex.com as soon as reasonablypracticable after such material is electronically filed with or furnished to theSecurities and Exchange Commission ("SEC"). The most recent certifications bythe Company's Chief Executive Officer and Chief Financial Officer pursuant toSection 302 of the Sarbanes-Oxley Act of 2002 are filed as exhibits to thisannual report on Form 10-K. Last year, the Company filed with the New York StockExchange the Annual Chief Executive Officer Certification as required by Section303A.12.(a) of the New York Stock Exchange Listed Company Manual. 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 toany 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 our Code 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) 18 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 Active Pharmaceutical Ingredients; Charles 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) 19 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 #23 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 #23. 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) 20 EXECUTIVE OFFICERS OF THE REGISTRANT The following table lists the executive officers of the Company: NAME AGE OFFICE---- --- ------ James A. Mack............................. 67 Executive Chairman of the BoardJohn R. Leone............................. 57 President and Chief Executive OfficerGary L. Mossman........................... 64 Executive Vice President and Chief Operating OfficerLuke M. Beshar............................ 46 Executive Vice President and Chief Financial OfficerRonnie D. Carroll, PhD.................... 64 Vice President and Chief Technology Officer, Pharmaceutical TechnologiesRobert J. Congiusti....................... 51 Vice President, Information TechnologyN. David Eansor........................... 44 President, Bioproducts Business UnitSteven M. Klosk........................... 47 Executive Vice President, Administration, Chief Operating Officer, Cambrex Biopharmaceutical Business UnitDaniel R. Marshak, PhD.................... 47 Vice President and Chief Technology Officer, BiotechnologyGary P. Morrison.......................... 50 Vice President, TaxPaulo Russolo............................. 60 President, Cambrex Profarmaco Business UnitGregory P. Sargen......................... 39 Vice President, FinanceCharles W. Silvey......................... 46 Vice President, Internal AuditPeter E. Thauer........................... 65 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 joined Cambrex in February 1990 and currently serves in the roleof Executive Chairman of the Board of Directors. In August 2004, Mr. Leone wasappointed President and Chief Executive Officer, to replace Mr. Mack, who wasappointed Executive Chairman of the Board. Mr. Mack was appointed President andChief Operating Officer and a director of Cambrex when he joined the Company inFebruary 1990. In April 1995, he was named Chief Executive Officer with theretirement of the former Chief Executive Officer, Mr. Cyril Baldwin. In January 2003, Mr. Mack was reappointed to the position of President, while alsoretaining his position of Chief Executive Officer. In October 1999, Mr. Mack waselected Chairman of the Board of Directors. Prior to joining Cambrex, Mr. Mackwas Vice President in charge of the worldwide Performance Chemicals business ofOlin Corporation. Mr. Mack was Executive Vice President of Oakite Products, Inc.from 1982 to 1984. Prior to joining Oakite, he held various positions with TheSherwin-Williams Company, most recently as President and General Manager of theChemicals Division from 1977 to 1981. Mr. Mack is a past Chairman of the Boardof Governors of the Synthetic Organic Chemical Manufacturing Association and isa member of the Board of Trustees of the Michigan Tech Alumni Fund. Mr. Leone was appointed President and Chief Executive Officer of Cambrexand a member of the Board of Directors in August 2004. Previously, Mr. Leone wasPresident of the Global Dermatology Division of Aventis Pharmaceuticals, Inc.and Senior Vice President of Aventis Pharmaceuticals, Inc. from 2003 to 2004.From 1996 to 2003, he was with Aventis Pharmaceuticals, Inc., most recently inthe role of Senior Vice President and Chief Operating Officer of U.S. CommercialOperations. From 1998 to 1999, he was Senior Vice President and General Managerof Rhone-Poulenc Rorer Pharmaceuticals and from 1996 to 1997, he was Presidentand General Manager of Rhone-Poulenc Rorer Pharmaceuticals. From 1984 to 1996,Mr. Leone was with American Home Products Corporation, serving in variousgeneral management, marketing and business development roles, most recentlyholding the position of Vice President and General ---------------(dollars in thousands, except share data) 21 Manager of Wyeth-Lederle Vaccines and Pediatrics. From 1974 to 1984, Mr. Leonewas with Pfizer, Inc., serving in various marketing and operations roles. Mr. Mossman joined Cambrex in February 2003 and currently serves in therole of Executive Vice President and Chief Operating Officer. He joined theCompany as President of the Pharmaceuticals Business Unit and was appointed tothe position of President and Chief Executive Officer of the CambrexPharmaceutical and Biopharmaceutical Business Units in October 2003. In August2004, he was appointed to his current position of Executive Vice President andChief Operating Officer. Prior to joining Cambrex, Mr. Mossman was with DixieChemical Company, Inc. from 1983 through 2003 and served in the role ofPresident since 1990. From 1979 through 1980, Mr. Mossman was General Manager,Thiokol Specialty Chemicals Division and from 1972 through 1979, he wasPresident and Cofounder of Southwest Specialty Chemical Company, Inc. Mr. Beshar serves in the role of Executive Vice President and ChiefFinancial Officer, having joined Cambrex in December 2002. Upon his initialappointment to Cambrex, he was named Senior Vice President and Chief FinancialOfficer and in January 2004 was appointed Executive Vice President and ChiefFinancial Officer. Prior to joining Cambrex, Mr. Beshar was Senior VicePresident and Chief Financial Officer with Dendrite International. Prior toDendrite, he was Executive Vice President, Finance and Chief Financial Officerfor Exp@nets, Inc. from 1998 through 2002. Mr. Beshar has served as ChiefFinancial Officer for other businesses in his career and has been the Presidentand Chief Financial Officer of a company privately owned by Merrill LynchCapital Partners. Mr. Beshar is a member of the Board of Directors of PNYTechnologies, Inc. Dr. Carroll joined Cambrex in September 1997 as Vice President Technologyand has served in the role of Vice President and Chief Technology Officer,Pharmaceutical Technologies since January 2002. Prior to joining Cambrex, Dr.Carroll had been with Bristol-Myers Squibb from 1983 to 1997, most recently inthe role of Vice President, Chemical Development for Bristol-Myers SquibbTechnical Operations. Dr. Carroll was with Pfizer, Inc. from 1966 to 1983 invarious research and development roles. Mr. Congiusti joined Cambrex in September 1994 and has served in the roleof Vice President, Information Technology since November 1998. Upon joiningCambrex, he was Director, Information Services. Prior to joining the Company, he held various senior information systems management positions from 1984 to 1994at International Specialty Products and American Cyanamid Company. Mr. Eansor joined Cambrex in October 2000 as Vice President and GeneralManager, BioTherapeutics Business Unit and currently serves in the role ofPresident, Bioproducts Business Unit to which he was appointed in July 2002.Prior to joining Cambrex, Mr. Eansor was with R. P. Scherer North America from1981 until 2000, serving in various roles, including Vice President ofPharmaceutical Operations, Vice President Operations, and General Manager. Mr. Klosk joined Cambrex in October 1992 and currently serves in the roleof Chief Operating Officer, Cambrex Biopharmaceutical Business Unit andExecutive Vice President, Administration of Cambrex Corporation. Mr. Kloskjoined the Company as Vice President, Administration. He was appointed ExecutiveVice President, Administration in October 1996 and was promoted to the positionof Executive Vice President, Administration and Chief Operating Officer for theCambrex Pharma and Biopharmaceutical Business Unit in October 2003. In January2005, Mr. Klosk assumed direct responsibility for the leadership of theBiopharmaceutical Business Unit as Chief Operating Officer and continues toserve as a corporate officer as Executive Vice President, Administration. FromFebruary 1988 until he joined Cambrex, Mr. Klosk was Vice President,Administration and Corporate Secretary for The Genlyte Group, Inc. From 1985 to1988, he was Vice President, Administration for Lightolier, Inc., a subsidiaryof The Genlyte Group, Inc. Dr. Marshak joined Cambrex in August 2000 as Vice President -- Research andDevelopment, BioSciences Group and has served in the role of Vice President andChief Technology Officer, Biotechnology, since January 2002. Prior to joiningCambrex, Dr. Marshak held various Research and Development positions ---------------(dollars in thousands, except share data) 22 with Osiris Therapeutics, Inc. from 1999 to 2000, most recently as ExecutiveScientific Advisor. From 1986 to 1994, he was a Senior Staff Investigator withCold Spring Harbor Laboratory. Mr. Morrison joined Cambrex in July 2004 as Vice President, Tax. From 2002until 2004, he held the position of Vice President, Corporate Taxation withMovado Group, Inc. From 1998 to 2000, he was with Calvin Klein, Inc., as TaxDirector and Ernst & Young as Senior Tax Manager, US Corporate Tax from 1996 to1998. Prior experience includes BCE Telecom Corporation from 1988 to 1995 andPirelli Cable Corporation from 1986 to 1988, serving in various management rolesin corporate taxation. Dr. Russolo is President of the Cambrex Profarmaco Business Unit and joinedthe Company in 1994 with the acquisition of Profarmaco Nobel S.r.l. in MilanItaly, where he served as Managing Director since 1982. Dr. Russolo joinedProfarmaco Nobel S.r.l. in 1971. Upon the acquisition of Profarmaco NobelS.r.l., Dr. Russolo continued serving in the role of Managing Director until2000, when he was appointed to his current position. Mr. Sargen joined Cambrex as Vice President, Finance in February 2003.Previously, he was with Exp@nets, Inc. from 1999 through 2002, serving in theroles of Executive Vice President, Finance/Chief Financial Officer and VicePresident/Corporate Controller. From 1996 to 1998, he was with FischerScientific International's Chemical Manufacturing Division, serving in the rolesof Vice President, Finance and Controller. Mr. Sargen has also held variouspositions in finance, accounting and audit with Merck & Company, Inc., Heat andControl, Inc., and Deloitte & Touche. Mr. Silvey joined Cambrex in August 2004 as Vice President, Internal Audit.Prior to joining the Company, he was with Automatic Data Processing (ADP) from2002 to 2004 as Vice President, Financial and Operational Audit. From 1998 to2002, he was with Lucent Technologies, most recently in the role of ChiefFinancial Officer, Americas' -- Lucent Worldwide Services. From 1995 to 1998, he was with CR Bard, Inc., serving in various finance and audit roles. From 1990 to1995, he was with KPMG Peat Marwick LLP as Audit Manager. Mr. Thauer joined the Company in August 1989 and has served in the role ofSenior Vice President, Law and Environment, General Counsel, and CorporateSecretary since January 2001. Upon joining the Company, he was appointed to theposition of General Counsel and Corporate Secretary and was appointed VicePresident, Law and Environment in December 1992. From 1987 until 1989, he wasCounsel to the business and finance group of the firm of Crummy, Del Deo, Dolan,Griffinger and Vecchione. From 1971 to 1987, Mr. Thauer held various positionswith Avon Products, Inc., including U.S. Legal Department Head and CorporateAssistant Secretary. ---------------(dollars in thousands, except share data) 23 PART II ITEM 5 MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES. The Company's Common Stock, $.10 par value is listed on the New York StockExchange (NYSE) under the symbol CBM. The following table sets forth the closinghigh and low sales price of the Common Stock as reported on the NYSE: 2004 HIGH LOW---- ------ ------ First Quarter.............................................. $28.10 $24.18Second Quarter............................................. 27.25 21.64Third Quarter.............................................. 24.69 20.59Fourth Quarter............................................. 27.10 21.70 2003 HIGH LOW---- ------ ------ First Quarter.............................................. $29.84 $21.06Second Quarter............................................. 24.06 15.18Third Quarter.............................................. 25.13 20.06Fourth Quarter............................................. 25.75 21.72 As of February 28, 2005, the Company estimates that there wereapproximately 2,512 beneficial holders of the outstanding Common Stock of theCompany. The quarterly dividend on common stock was $0.03 for 2004 and 2003. 2004 Equity Compensation Table The following table provides information as of December 31, 2004 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....................... 3,606,357 $25.72 838,235Equity compensation plans not approved by security holders....................... 330,000 $41.88 165,834 --------- ---------Total.................................... 3,936,357 $27.07 1,004,069 ========= ====== ========= 2000 EMPLOYEE PERFORMANCE STOCK OPTION PLAN (NOT APPROVED BY SECURITY HOLDERS) 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) 24 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, 2004 are derived fromthe audited financial statements. The consolidated financial statements of theCompany as of December 31, 2004 and December 31, 2003 and for each of the yearsin the three year period ended December 31, 2004 and the report of independentregistered public accounting firm thereon are included elsewhere in this annualreport. On November 10, 2003, the Company completed the sale of the RutherfordChemicals business (See Note #13 consolidated financial statements). As aresult, the businesses comprising the Rutherford Chemicals segment are beingreported as a discontinued operation for all periods presented. The datapresented below should be read in conjunction with the financial statements ofthe Company and the notes thereto and "Management's Discussion and Analysis ofFinancial Condition and Results of Operations" included elsewhere herein. YEARS ENDED DECEMBER 31, ------------------------------------------------------ 2004(1) 2003(2) 2002(3) 2001(4)(5) 2000(6) -------- -------- -------- ---------- -------- INCOME DATA:Gross sales................................. $439,115 $405,591 $394,430 $356,555 $326,505 Net revenues................................ 443,657 410,644 399,066 356,830 330,364Gross profit................................ 170,740 162,406 177,718 157,972 144,963Selling, general and administrative......... 102,769 95,117 85,762 80,099 75,643Research and development.................... 19,659 17,123 15,794 17,379 11,802Impairment and other charges................ 48,720 11,342 4,238 2,022 --Operating profit............................ (408) 38,824 71,924 58,472 57,518Interest expense, net....................... 10,950 11,840 11,264 10,602 11,565Other expense (income), net................. 73 139 7,890 (323) (213)(Loss)/income from continuing operations before taxes.............................. (11,431) 26,845 52,770 48,193 46,166Provision for taxes......................... 14,461 26,600 12,815 13,205 13,171(Loss)/income from continuing operations.... (25,892) 245 39,955 34,988 32,995(Loss)/income from discontinued operations................................ (978) (54,308) (6,546) (9,676) 13,712Net (loss)/income........................... (26,870) (54,063) 33,409 25,312 46,707EARNINGS PER SHARE DATA:(Loss)/earnings per common share (basic): (Loss)/income from continuing operations............................. $ (0.99) $ 0.01 $ 1.54 $ 1.36 $ 1.32 (Loss)/income from discontinued operations............................. $ (0.04) $ (2.11) $ (0.25) $ (0.37) $ 0.55 Net (loss)/income......................... $ (1.03) $ (2.10) $ 1.29 $ 0.99 $ 1.87(Loss)/earnings per common share (diluted): (Loss)/income from continuing operations............................. $ (0.99) $ 0.01 $ 1.51 $ 1.32 $ 1.26 (Loss)/income from discontinued operations............................. $ (0.04) $ (2.08) $ (0.25) $ (0.36) $ 0.53 Net (loss)/income......................... $ (1.03) $ (2.07) $ 1.26 $ 0.96 $ 1.79Weighted average common share outstanding: Basic..................................... 26,094 25,775 25,954 25,648 25,015 Diluted................................... 26,094 26,174 26,520 26,495 26,157DIVIDENDS PER COMMON SHARE.................. $ 0.12 $ 0.12 $ 0.12 $ 0.12 $ 0.12 ---------------(dollars in thousands, except share data) 25 YEARS ENDED DECEMBER 31, ------------------------------------------------------ 2004(1) 2003(2) 2002(3) 2001(4)(5) 2000(6) -------- -------- -------- ---------- -------- BALANCE SHEET DATA: (AT END OF PERIOD) Working capital........................... $182,238 $138,458 $154,324 $159,224 $137,500 Total assets.............................. 791,985 778,503 835,283 818,375 681,617 Long-term obligations..................... 226,187 212,369 267,434 312,524 168,591 Total stockholders' equity................ 391,316 396,630 410,954 345,098 330,995 ---------------(1) 2004 results include a goodwill impairment charge related to the Baltimore reporting unit of the Biopharma segment of $48,720. (2) 2003 results include a pre-tax charge of $11,342 recorded in operating expenses for the settlement of certain class action lawsuits involving Mylan Laboratories and the establishment of valuation allowances against net domestic deferred tax assets totaling $21,487 within the provision for income taxes. (3) 2002 results include a pre-tax charge of $4,238 for asset impairment and severance related to the closure of a small manufacturing facility and a $7,344 pre-tax charge for investment impairments recorded in other expense. (4) Includes the results of Cambrex Bio Science Baltimore, Inc. from the date of acquisition effective June 2001 and the results of Cambrex Bio Science Hopkinton, Inc. from the date of acquisition effective October 2001. (5) 2001 results include a pre-tax charge of $2,022 related to the closure of a small manufacturing facility and $2,000 for inventory write-offs in the Bioproducts segment. (6) Includes the results of Cambrex Profarmaco Landen NV from the date of acquisition effective March 2000 and the results of Cambrex Bio Science Wokingham Limited from the date of acquisition effective July 2000. ---------------(dollars in thousands, except share data) 26 ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. EXECUTIVE OVERVIEW The Company's business consists of three segments: Bioproducts, Biopharmaand Human Health. The Bioproducts segment consists of research products andtherapeutic applications. The Biopharma segment consists of the Company'scontract biopharmaceutical process development and manufacturing business. TheHuman Health segment is primarily comprised of active pharmaceutical ingredientsderived from organic chemistry and pharmaceutical intermediates. Members of the senior management team regularly review key financialmetrics and the status and strategy of operating initiatives within ourbusiness. These metrics include sales growth, gross margin performance,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. Management reviews 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 2004, the Company continued to see strong growth across many productcategories within its Bioproducts segment. The Bioproducts segment is primarilydriven by biotechnology research spending levels, the overall demand forendotoxin detection products and services and the Company's ability tocontinually provide product upgrades and innovative new products and services. 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 businessesuntil such time that it is able to secure more long-term commercial contracts,but believes the overall growth trend predicted for the contractbiopharmaceutical manufacturing market will result in significant long-termgrowth for businesses providing these services. In the Human Health segment, the Company saw net sales growth primarilydriven by the impact of a weaker U.S. dollar, with increases in sales of severalactive pharmaceutical ingredients offset by reductions in others, and pricingpressure within certain product categories. This segment is driven primarily bypatent expirations of branded drugs, population demographics, pressures tocontain health care costs, the level of capacity available for outsourcing andthe level of outsourcing by branded pharmaceutical companies. During 2004, the Company evaluated the carrying value of the goodwillrelated to its Baltimore site, which is reported in the Biopharma segment, anddetermined that it may not be recoverable due to the lowering of Baltimore'srevenue and operating income forecasts for 2004 and beyond versus priorprojections. The Company tested for impairment and determined that the carryingvalue exceeded its fair value, as determined by using a discounted cash flowmodel. Management utilized appraisals to determine the value of its tangible andidentifiable intangible assets for purposes of determining the implied fairvalue of goodwill. Upon completion of the assessment, the Company recorded anon-cash impairment charge of $48,720 to reduce the carrying value of goodwillin the Baltimore reporting unit to its estimated fair value of $65,584. Refer toNote #5 for further details. During 2003, the Company completed its transformation to a pure life sciences company with the sale of the Rutherford Chemicals business unit duringthe fourth quarter. 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 #23,and recorded valuation allowances against net domestic deferred tax assetstotaling $21,487 within the Provision for income taxes, explained more fullybelow and in Note #9. The Company's tax rate may experience volatility from themix of domestic and foreign earnings until such time that domestic operationsachieve sustainable profitability. ---------------(dollars in thousands, except share data) 27 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 uncertaintiesaffecting their application and the likelihood that materially different amountswould be reported under different conditions or using different assumptions, isas follows: Revenue Recognition Revenues in our Bioproducts and Human Health segments are generallyrecognized when title to products and risk of loss are transferred to customers.Additional conditions for recognition of revenue are that collection of salesproceeds is reasonably assured and the Company has no further performanceobligations. 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 which are classified as allowances and rebates. Some contracts in our Bioproducts and Biopharma segments are based on timeand materials and revenue for those are recognized as services are performed.The Biopharma segment also utilizes contracts that contain milestone basedpayments. The Company utilizes the EITF-91-6 "Revenue Recognition of Long-termPower Sales Contracts" model for recording revenue from these contracts. Underthis method, revenue is based on the cost of efforts (since contractcommencement) up to the reporting date, divided by the total estimatedcontractual cost (from the contract commencement to the end of the developmentarrangement), multiplied by the total expected contractual payments under thearrangement. However, revenue is limited to the amount of nonrefundable cashpayments received or contractually receivable at the reporting date. In each of our segments we have certain contracts that contain multipledeliverables. These deliverables often include process development services andcommercial production. The Company follows the guidance contained in EITF 00-21"Accounting for Revenue Arrangements with Multiple Deliverables". Revenue foreach element is recognized when delivered to the customer based on the fairvalue of the element as determined based on sales price when sold separately. Amounts billed in advance are recorded as deferred revenue on the balancesheet. Asset Valuations and Review for Potential Impairments In accordance with FAS 144, our review of long-lived assets, principallyfixed assets and other amortizable intangibles requires us to estimate theundiscounted future cash flows generated from these assets, whenever events orchanges in circumstances indicate that the carrying value may not be fullyrecoverable. If undiscounted cash flows are less than carrying value, thelong-lived assets are written down to fair value which equals the discountedcash flows. Our review of the carrying value of goodwill and indefinite livedintangibles is done annually or whenever events or changes in circumstancesindicate that the carrying value may not be fully recoverable in accordance withFAS 142 utilizing a two-step process. In the first step, the fair value of thereporting units is determined using a discounted cash flow model and compared tothe carrying value. If such analysis indicates that impairment may exist, wethen estimate the fair value of the other assets and liabilities utilizingappraisals and discounted cash flow analyses to calculate an impairment charge. ---------------(dollars in thousands, except share data) 28 The determination of fair value for both FAS 144 and FAS 142 is judgmentalin nature and involves the use of significant estimates and assumptions,including projected future cash flows, discount rates, determination ofappropriate market comparables and perpetual growth rates. These estimates andassumptions could have a significant impact on whether or not an impairmentcharge is recognized and the magnitude of any such charge. As noted previously and in Note #5, in the third quarter of 2004, theCompany recorded a goodwill impairment loss of $48,720 related to its Baltimorereporting unit. The Company's annual review for goodwill impairment, which wasperformed during the fourth quarter, did not result in any additional chargesfor 2004. Environmental and Litigation Contingencies The Company periodically assesses the potential liabilities related to anylawsuits or claims brought against us. See Note #23 in the accompanyingfinancial statements for a discussion of our current environmental andlitigation matters, reserves recorded and our position with respect to anyrelated uncertainties. While it is typically very difficult to determine thetiming and ultimate outcome of these actions, the Company uses its best judgmentto determine if it is probable that the Company will incur an expense related toa settlement for such matters and whether a reasonable estimation of suchprobable loss, if any, can be made. If probable and estimable, the Companyaccrues for the costs of clean-up, settlements and legal fees. If the aggregateamount of the liability and the timing of the payment is fixed or reasonablydeterminable, the Company discounts the amount to reflect the time value ofmoney. Given the inherent uncertainty related to the eventual outcome oflitigation and environmental matters, it is possible that all or some of thesematters may be resolved for amounts materially different from any provisionsthat the Company may have made with respect to their resolution. Income Taxes The Company applies an asset and liability approach to accounting forincome taxes. Deferred tax assets and liabilities are recognized for theexpected future tax consequences of temporary differences between the financialstatement and tax basis of assets and liabilities using enacted tax rates ineffect for the year in which the differences are expected to reverse. Therecoverability of deferred tax assets is dependent upon the Company's assessmentthat it is more likely than not that sufficient future taxable income will begenerated in the relevant tax jurisdiction to utilize the deferred tax asset. Inthe event the Company determines that future taxable income will not besufficient to utilize the deferred tax asset, a valuation allowance is recorded.When assessing the valuation allowance, the Company takes into account certain tax planning strategies. The Company's valuation allowances primarily relate tonet operating loss carryforwards, foreign tax credits, and alternative minimumtax credits in the U.S., where profitability is uncertain and net operating losscarryforwards in certain state and foreign jurisdictions with little or nohistory of generating taxable income. 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. ---------------(dollars in thousands, except share data) 29 RESULTS OF OPERATIONS As discussed in Note #13 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, -------------------------- 2004 2003 2002 ------ ------ ------ Gross sales....................................... 100.0% 100.0% 100.0%Net revenues...................................... 101.0 101.2 101.2Gross profit...................................... 38.9 40.0 45.1Selling, general and administrative expenses...... 23.4 23.4 21.7Research and development expenses................. 4.5 4.2 4.1Impairment and other charges...................... 11.1 2.8 1.1Operating (loss)/profit........................... (0.1) 9.6 18.2Interest expense, net............................. 2.5 2.9 2.8Provision for income taxes........................ 3.3 6.6 3.2(Loss)/income from continuing operations.......... (5.9) 0.1 10.1Loss on discontinued operations................... (0.2) (13.4) (1.6)Net (loss)/income................................. (6.1) (13.3) 8.5 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, 2004, 2003 and 2002, as well as the gross profit by productsegment for 2004 and 2003: YEARS ENDED DECEMBER 31, -------------------------------- 2004 2003 2002 2004 2003 2002 -------- -------- -------- GROSS SALES Bioproducts............................................ $136,108 $119,298 $107,870 Biopharma.............................................. 43,270 44,128 55,218 Human Health........................................... 259,737 242,165 231,342 -------- -------- --------Total Gross Sales........................................ $439,115 $405,591 $394,430 ======== ======== ========Total Net Revenues....................................... $443,657 $410,644 $399,066 ======== ======== ========Total Gross Profit....................................... $170,740 $162,406 $177,718 ======== ======== ========GROSS SALES DISTRIBUTION Bioproducts............................................ 31.0% 29.4% 27.3% Biopharma.............................................. 9.9 10.9 14.0 Human Health........................................... 59.1 59.7 58.7 -------- -------- --------Total Gross Sales Distribution........................... 100.0% 100.0% 100.0% ======== ======== ======== ---------------(dollars in thousands, except share data) 30 2004-2003 GROSS SALES & GROSS PROFIT BY PRODUCT SEGMENT 2004 2003 -------------------------------- -------------------------------- GROSS GROSS GROSS GROSS GROSS GROSS SALES PROFIT PROFIT % SALES PROFIT PROFIT % -------- -------- -------- -------- -------- -------- Bioproducts................. $136,108 $ 74,930 55.1% $119,298 $ 60,056 50.3%Biopharma................... 43,270 4,880 11.3 44,128 11,829 26.8Human Health................ 259,737 90,930 35.0 242,165 90,521 37.4 -------- -------- -------- --------Total....................... $439,115 $170,740 38.9% $405,591 $162,406 40.0% ======== ======== ======== ======== 2004 COMPARED TO 2003 Gross sales for 2004 increased 8.3% to $439,115 from $405,591 in 2003.Sales in the Bioproducts and Human Health segments increased compared to 2003more than offsetting the decrease in the Biopharma segment. Gross sales werefavorably impacted 4.5% due to the exchange rates reflecting the weakness in theU.S. dollar primarily versus the Euro and Swedish Krona. Gross profit in 2004 was $170,740 compared to $162,406 in 2003. Grossmargin in 2004 decreased to 38.9% from 40.0% in 2003, reflecting lower marginsin the Biopharma and Human Health segments partially offset by higher margins inthe Bioproducts segment. The following table shows gross sales by geographic area for the yearsended December 31, 2004 and 2003: 2004 2003 -------- -------- North America............................................... $213,668 $206,079Europe...................................................... 198,540 173,035Asia........................................................ 17,723 16,401Other....................................................... 9,184 10,076 -------- --------Total....................................................... $439,115 $405,591 ======== ======== ======== ======== The Bioproducts Segment gross sales in 2004 of $136,108 were $16,810 or14.1% above 2003. Bioproducts sales were favorably impacted 4.0% due to exchangerates reflecting a weaker U.S. dollar. The increased sales before the impact offoreign currency are primarily due to higher sales across most productcategories including research products, endotoxin detection products,bioservices sales and process development products due to stronger demand,higher pricing, new products and customers and investments in sales andmarketing. These higher sales were partially offset by lower sales inbiotherapeutic serum mainly due to timing of shipments and stronger sales in2003. The Bioproducts segment gross margins increased primarily due to highersales volume, increased pricing in most product categories, lower bad debtreserves due to favorable collections and favorable impact of foreign currencypartly offset by higher costs for raw materials. The Biopharma Segment gross sales in 2004 of $43,270 were $858 or 1.9%below 2003. The sales decrease primarily reflects reduced billings in ourbiopharmaceutical manufacturing business driven by the completion or timing ofprojects and a change in contract terms from time and material to milestonepayments. This decrease was partially offset by higher reimbursable materialsrevenue due to timing of current projects. Foreign currency had no impact onBiopharma sales. The Biopharma segment gross margins were down significantly compared to theprior year due to higher production costs, increased fixed costs associated withthe addition of the 2800 liter fermentation suite (a new suite which willincrease the production capabilities in the facility) and higher reimbursablematerials revenue which has very low margins. ---------------(dollars in thousands, except share data) 31 The Human Health Segment gross sales in 2004 of $259,737 were $17,572 or7.3% above 2003. Human Health sales were favorably impacted 5.6% due to exchangerates reflecting a weaker U.S. dollar. Excluding the currency impact, theincrease in sales is due mainly to higher sales of custom development products,a pharmaceutical intermediate used for end-stage kidney treatment, higher salesof cardiovascular, gastrointestinal and Alzheimer treatment APIs, and highersales of amphetamines due to higher volumes. These sales were partially offsetby lower sales of central nervous system APIs due to increasing competitionresulting in lower volumes sold. The Human Health segment gross margins decreased due to pricing pressureson APIs and other fine custom chemicals, unfavorable impact of foreign currencyand higher production costs partially offset by increased sales volume andfavorable product mix. Selling, general and administrative expenses of $102,769 or 23.4% as apercentage of gross sales in 2004 increased from $95,117 or 23.4% in 2003. Salesand marketing expenses increased primarily due to additional sales and marketingpersonnel in our Human Health and Bioproducts segments and the impact of foreigncurrency exchange. Higher administrative costs are primarily due to the impactof currency translation due to the weaker U.S. dollar, regulatory compliancecosts associated with the Sarbanes-Oxley Act and higher information technology,legal and environmental costs, partially offset by lower medical claims, thevesting of stock appreciation rights in the fourth quarter 2003 and lowerpension expense. Research and development expenses of $19,659 were 4.5% of gross sales in2004, compared to $17,123 or 4.2% of gross sales in 2003. The increase primarilyreflects investments in new product technologies for pathogen testing, highercustom development costs and the impact of foreign currency exchange partiallyoffset by decreased spending for endotoxin detection technologies. The 2004 results include a pre-tax impairment charge of $48,720. During thethird quarter of 2004, the Company evaluated whether the carrying value of thegoodwill related to its Baltimore reporting unit, which is a component of theBiopharma segment, was recoverable due to the lowering of Baltimore's revenueand operating income forecasts for 2004 and beyond versus prior projections. TheCompany tested for impairment and determined that the carrying value exceededits fair value, as determined by using a discounted cash flow model. Managementutilized appraisals to value its tangible and identifiable intangible assets forpurposes of determining the implied fair value of goodwill. Upon completion ofthe assessment, the Company recorded a non-cash impairment charge of $48,720 toreduce the carrying value of goodwill in the Baltimore reporting unit to itsestimated fair value of $65,584. The Company still has a substantial amount ofgoodwill related to this business and others, which may be subject to additionalimpairment charges if the business units do not perform at or near projectedlevels in the future. Certain other facilities do not have enterprise valuesthat are significantly higher than the carrying value of goodwill. Refer to Note#5 for further details. 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, $6,015 has been paid as of December 31, 2004 with the balance due inequal installments over the next four years. In exchange, Cambrex received fromMylan a release and full indemnity against future costs or liabilities inrelated litigation brought by the purchasers, as well as potential future claimsrelated to this matter. The operating loss in 2004 was $408 compared to income of $38,824 in 2003.The results reflect lower gross margins in the Biopharma and Human Healthsegments partially offset by higher margins in the Bioproducts segment, the$48,720 pre-tax charge for the goodwill impairment discussed above and higheroperating expenses. 2003 operating profit includes the $11,342 pre-tax chargefor the Mylan settlement discussed above. Net interest expense of $10,950 in 2004 decreased $890 from 2003. 2004 netinterest expense was reduced by interest income accrued on an income tax refund,while in 2003 interest expense also included a ---------------(dollars in thousands, except share data) 32 write off of deferred charges in 2003 associated with the 364-day renewablesenior revolving credit facility that was not renewed. Average debt balance,year over year, was virtually unchanged, while the average interest rate, net ofthe items discussed above, was 5.5% in 2004 versus 4.8% in 2003. The higheraverage rate in 2004 was due to the full year impact of $100 million ofprivately placed long-term debt, which carries a fixed rate that is currentlyhigher than the Company's revolving credit facility and the impact of slightlyhigher variable interest rates on the revolver. The Company recorded tax expense of $14,461 in 2004 compared to $26,600 in2003. During 2003, the Company concluded that $21,487 of domestic deferred taxassets were deemed unlikely to be realized, and as such, valuation allowancesfor this amount were recorded against these assets. Since that time, the Companyhas maintained a full valuation allowance on its domestic net deferred taxassets and no tax benefit has been recognized for domestic pre-tax losses.Accordingly, for the year ended December 31, 2004 a valuation allowance of$24,047 on the Company's domestic net deferred tax assets, including amountsrelated to the goodwill impairment charge, was recorded. The majority of the2004 tax expense represents taxes on international profits. The Company will continue to record a full valuation allowance on itsdomestic net deferred tax assets until an appropriate level of domesticprofitability is sustained or tax strategies can be developed that would enable the Company to conclude that it is more likely than not that a portion of thedomestic net deferred assets would be realized. If the Company continues toreport pre-tax losses in the United States, income tax benefits associated withthose losses will not be recognized and, therefore, those losses would not bereduced by such income tax benefits. Additionally, should domestic lossescontinue, it is possible that certain tax planning strategies preserving certaindomestic tax assets could be deemed inadequate, resulting in additionalvaluation allowances in the future. The carryforward periods for foreign taxcredits, research and experimentation tax credits, net operating losses, and thefederal alternative minimum tax credits are 10 years, 20 years, 20 years and anindefinite period, respectively. As such, improvements in domestic pre-taxincome in the future may result in these tax benefits ultimately being realized.However, there is no assurance that such improvements will be achieved. During the 2004 year-end financial reporting process, the Companyidentified certain accounting adjustments principally related to amortization ofleasehold improvements, employee benefit accruals, inventory and taxes thatimpacted prior years and prior quarters within 2004. The cumulative impact ofthe prior years' adjustments was a reduction to net income of $475 and is notconsidered material to any prior period. The prior years' adjustment of $475 hasbeen reflected in the restated first quarter 2004 results. The impact on netincome for the first, second and third quarters of 2004 was a decrease of $439or $0.02 per fully diluted share, an increase of $229 or $0.01 per fully dilutedshare and a decrease of $666 or $0.03 per fully diluted share, respectively. TheCompany has restated the results of the first three quarters of 2004 to reflectthese adjustments. The loss from continuing operations in 2004 was $25,892, or $0.99 perdiluted share versus income of $245, or $0.01 per diluted share in 2003. The2004 loss from continuing operations includes a goodwill impairment charge of$48,720 discussed above. The 2003 income from continuing operations includes acharge of approximately $21,487 for the deferred tax valuation allowance and an$11,342 pretax charge for the Mylan settlement both discussed above. 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 recorded in thethird quarter of 2003 which was based on the selling price, including feesassociated with the transaction. In 2003, loss on discontinued operations, netof tax was $54,308 including the write-down of assets. In 2004, the Companyrecorded an additional $978 loss from discontinued operations primarilyresulting from a working capital adjustment made in the first quarter of 2004. ---------------(dollars in thousands, except share data) 33 The net loss in 2004 was $26,870, or $1.03 per diluted share versus a netloss of $54,063, or $2.07 per diluted share in the same period a year ago. 2003 COMPARED TO 2002 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. 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 following table shows sales by geographic area for the years endedDecember 31, 2003 and 2002: 2003 2002 -------- -------- North America............................................... $206,079 $216,591Europe...................................................... 173,035 150,180Asia........................................................ 16,401 17,745Other....................................................... 10,076 9,914 -------- --------Total....................................................... $405,591 $394,430 ======== ======== 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. The Bioproducts segment gross margins decreased primarily due to additionalbad debt reserves in 2003 and certain 2002 favorable inventory adjustments whichdid not repeat in 2003, partly offset by favorable production volumes, pricing,cost reduction activities and the favorable impact of foreign currency. 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 biopharmaceutical 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. The Biopharma segment gross margins were down significantly compared to theprior year due to lower suite utilization and lower pricing on an existingcontract. 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 Human Health segment gross margins decreased due to pricing pressureson APIs and other fine custom chemicals including a volume-based rebateadjustment and the unfavorable impact of foreign currency partly offset byfavorable product mix.---------------(dollars in thousands, except share data) 34 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 higher pension expenses, regulatory compliance costs associatedwith the Sarbanes-Oxley Act, the costs incurred for the ongoing SEC investigation into the restatement of results disclosed in the fourth quarter2002, the vesting of stock appreciation rights in the fourth quarter 2003 andthe impact of currency translation due to the weaker U.S. dollar. 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. As ofDecember 31, 2004, $6,015 has been paid with the balance due in equalinstallments over the next four years. In exchange, Cambrex received from Mylana release and full indemnity against future costs or liabilities in relatedlitigation brought by the purchasers, as well as potential future claims relatedto this matter. The 2002 results include a pre-tax charge of $4,238 for assetimpairment and other charges related to the closure of a small manufacturingfacility and other severance 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 these assets in 2003. Thedeferred tax assets deemed unlikely to be realized for financial reportingpurposes include foreign tax credit carry-forwards, carrying a ten year lifefrom inception, the tax benefit related to domestic net operating losses fromcontinuing operations and research and experimentation tax credits that can becarried forward 20 years, and a credit related to a federal alternative minimumtax that can be carried forward indefinitely. The long carry-forward period fordomestic net operating losses and the alternative minimum credit and expectedimprovements in domestic continuing operations may result in these tax benefitsultimately being realized, however, there is no assurance that such improvementscan be achieved. The income from continuing operations in 2003 was $245, or $0.01 perdiluted 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 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 was based onthe selling price, including fees associated with the transaction. In 2003, losson discontinued operations, net of tax was $54,308 compared to ---------------(dollars in thousands, except share data) 35 $6,546 in 2002. The 2003 results include the write-down of assets discussedabove. The loss in 2002 includes pre-tax charges of $10,000 for Vitamin B-3litigation and $10,849 for asset impairment and other charges, pretax benefitsof $2,620 due to a favorable insurance settlement and $3,760 for a favorablearbitration settlement. In addition to the special items discussed above, the2003 loss from discontinued operations included unfavorable product mix andhigher energy and raw material prices. The net loss in 2003 was $54,063, or $2.07 per diluted share versus netincome of $33,409, or $1.26 per diluted share in 2002. LIQUIDITY AND CAPITAL RESOURCES During 2004 cash and cash equivalents on hand increased $27,238 to $91,532.Net cash flow from operations was $48,733 for the year ended for December 31,2004, down from $73,286 in 2003. The decrease in cash flow is due primarily toloss of operating cash flows from Rutherford Chemicals, an increase in accountsreceivable due to higher shipments in the fourth quarter 2004 compared to 2003,and an increase in inventories due to timing of receipts partially offset bylower payments in 2004 for Vitamin B-3 litigation and the Mylan legalsettlement. Cash flows used in investing activities of $44,513 in 2004 includedcapital expenditures of $39,480 and the acquisition of Genolife SA forapproximately $5,256 compared to capital expenditures of $37,857 in 2003. Cashflows from financing activities in 2004 of $16,674 included net borrowings ofdebt of $13,510, proceeds from the exercise of stock options of $6,284,partially offset by payment of dividends of $3,113. Cash flows used in financingactivities in 2003 were $60,588 including net repayments of debt of $56,253,$2,420 to repurchase treasury stock and $3,100 to pay dividends offset byproceeds from the exercise of stock options of $1,130. Capital expenditures were $39,480, $37,857 and $40,443 in 2004, 2003 and2002, respectively. In 2004, part of the funds were used for suite expansion atour Biopharma sites; cell therapy manufacturing capabilities, upgrades to powdermedia facilities and a large scale media preparation suite at our Bioproductssites; and warehouse upgrades and new small scale production equipment forgeneric pharmaceuticals at our Human Health sites. In November 2003, the Company amended its five-year Syndicated SeniorRevolving Credit Facility ("The 5-Year Agreement") of $268,750, which originatedin November 2001 and expires in November 2006. The 5-Year Agreement is led byJPMorganChase as the Administrative Agent. The 5-Year Agreement was amended toinclude an "accordion feature" which, if utilized, will allow for the increaseof the total commitments of up to $75,000 with bank approval. 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 EBITDA. The Company also pays afacility fee between .175% 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 a majority of theCompany's non-U.S. operating subsidiaries. ---------------(dollars in thousands, except share data) 36 As of December 31, 2004, there was $120,000 outstanding and $148,750undrawn under the 5-year Agreement. Of the undrawn amount, $63,057 is availableto be borrowed as of December 31, 2004 due to limits established in the CreditAgreement. The 5-Year Agreement is subject to financial covenants requiring theCompany to maintain certain levels of net worth, interest coverage ratio,leverage ratios and limitations on indebtedness. The Company complied with allcovenants during 2004. 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 equally with theCompany's other senior indebtedness. The funds were used primarily to pay downexisting bank debt and to provide Cambrex with longer term fixed rate debt. The 2004 and 2003 average interest rates were 5.5% and 4.8%, respectively. CONTRACTUAL OBLIGATIONS At December 31, 2004, our contractual obligations with initial or remainingterms in excess of one year were as follows: TOTAL 2005 2006 2007 2008 2009+ -------- ------- -------- ------- ------- -------- Long Term Debt, including Capital Leases..... $227,587 $ 1,400 $121,721 $ 1,436 $ 1,460 $101,570Interest on Debt, including Swaps.... 50,360 12,576 11,254 5,922 5,846 14,762Operating Leases..... 25,853 4,223 4,063 4,163 3,606 9,798Purchase Obligations........ 15,162 8,065 2,459 986 928 2,724Mylan Settlement..... 6,400 1,600 1,600 1,600 1,600 -- -------- ------- -------- ------- ------- --------Contractual Cash Obligations........ $325,362 $27,864 $141,097 $14,107 $13,440 $128,854 ======== ======= ======== ======= ======= ======== See Notes #10, #11, #12 and #22 for additional information regarding ourdebt and other commitments. Management believes that existing sources of capital, together with cashflows from operations, will be sufficient to meet foreseeable cash flowrequirements. A key to our access to liquidity is the maintenance of our stronglong-term credit ratings and ability to meet debt covenants to maintain certainlevels of net worth, an interest coverage ratio and leverage ratios. The Companymet all bank covenants during 2004 and does not anticipate any covenantcompliance issues in the coming year. Any events that change the status of ourability to meet debt covenants or maintain our credit ratings could adverselyimpact 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 the Risk Factors section of thisdocument for further explanation of factors that may negatively impact our cashflows. Any change in the current status of these factors could adversely impact the Company's ability to fund operating cash flow requirements. MARKET RISKS 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. The Company currently uses foreign currencyexchange forward---------------(dollars in thousands, except share data) 37 contracts to mitigate the effect of short-term foreign exchange rate movementson the Company's operating results. The notional amount of these contracts atDecember 31, 2004 was $16,692. The Company estimates the forward contracts to beapproximately 44% of the non-local currency exposure during the period.Unrealized foreign exchange contract losses do not subject the Company's actualresults to risk as gains or losses on these contracts generally offset gains orlosses on the transactions that are hedged. Given a scenario that the operating companies' non-local currencycollections match their forecasts, and all exchange rates move 10% against theirlocal currencies, no more than $2,147 of pre-tax profits for a twelve-monthperiod would be at risk. This is based on unhedged risk of $21,471. As ofDecember 31, 2004, the non-local forecasted currency exposures were $38,084. Ofthis forecasted exposure, $16,613 was hedged with major banks and throughoffsetting inter-company hedge contracts, thereby reducing the non-hedged riskto $21,471. 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. 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, 2004, the Company had eight interest rate swaps inplace with an aggregate notional value of $80,000, at an average fixed rate of4.65%, 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, 2004, the coverage was approximately 67% of ourvariable interest rate debt. The swap stabilizes interest costs by converting floating or variable ratesto fixed rates through a contract with a financial institution. The Companymonitors the debt position and market trends to protect it from unforeseenshifts in interest rates. For example, at December 31, 2004 the company had variable debt of$120,000, of which $80,000 is fixed by an interest rate swap. Holding all othervariables constant, if the LIBOR portion of the weighted average interest ratesin the variable rate debt increased by 100 basis points the effect on ourearnings and cash flows would have been higher interest expense of $400. CONTINGENCIES The Company is subject to various investigations, claims and legal proceedings covering a wide range of matters that arise in the ordinary courseof its business activities. The Company continually assesses all known facts andcircumstances as they pertain to all legal and environmental matters andevaluates the need for reserves and/or disclosures as deemed necessary based onthese facts and circumstances and as such facts and circumstances develop. Environmental In connection with laws and regulations pertaining to the protection of theenvironment, the Company and/or its subsidiaries is a party to severalenvironmental proceedings and remediation investigations and cleanups and, alongwith other companies, has been named a "potentially responsible party" forcertain waste disposal sites ("Superfund sites"). Additionally, as discussed inthe "Sale of Rutherford Chemicals" section of Note #23, the Company has retainedthe liability for certain environmental proceedings associated with theRutherford Chemicals business. Each of these matters is subject to variousuncertainties and it is possible that some of these matters will be decidedunfavorably against the Company. The resolution of such matters often spansseveral years and frequently involves regulatory oversight and/or adjudication.Additionally, many remediation requirements are not fixed and are likely to beaffected by future technological, site, and regulatory developments.Consequently, the ultimate extent of liabilities with respect to such matters,as well as the timing of cash disbursements cannot be determined with certainty. In matters where the Company has been able to reasonably estimate itsliability, the Company has accrued for the estimated costs associated with thestudy and remediation of Superfund sites not owned by the Company and theCompany's current and former operating sites. These accruals were $5,570 and$5,100 at ---------------(dollars in thousands, except share data) 38 December 31, 2004 and 2003, respectively. The increase in the accrual is due tocurrency fluctuation of $252, payments of $332 and an increase to the reserve of$550. A portion of this increase relates to an increase in an existing reserveassociated with the on-going investigation and remediation at the Company'sCarlstadt, New Jersey location. An assessment of remedial costs based oninformation currently known resulted in the increase. Based upon currentlyavailable information and analysis, the Company's current accrual representsmanagement's best estimate of what it believes are the probable and estimablecosts associated with environmental proceedings, including amounts for legal andinvestigation fees where a range of remediation costs may not be estimatable atthe reporting date. The Company expects to receive information in the near future on threematters, as described below that could impact the Company's current assessmentof its probable and estimable costs and as such may require an adjustment to thereserves. As a result of the sale of the Bayonne, New Jersey facility (see "Sale ofRutherford Chemicals" section of this Note), an obligation to investigate siteconditions and conduct required remediation under the New Jersey Industrial SiteRecovery Act was triggered and the Company has retained the responsibility forsuch obligation. The Company completed a Preliminary Assessment (PA) of the Siteand submitted the PA to the New Jersey Department of Environmental Protection.The PA identified potential areas of concern based on historical operations andproposed certain sampling at the Site. The Company has reserved for the costs ofthe sampling. The results of the sampling will be used to develop an estimate ofthe Company's future liability for remediation costs, if required. In March 2000, the Company completed the acquisition of the CambrexProfarmaco Landen facility in Belgium. At the time of acquisition, Cambrex wasaware of certain site contamination and recorded a reserve for the estimatedcosts of remediation. This property has been the subject of an extensiveon-going environmental investigation, which has been completed with no change to the reserve warranted based on such information. The health risk assessmentrelated to the site contamination is on-going. The Company's Cosan subsidiary conducted manufacturing operations inClifton, New Jersey from 1968 until 1979. In 1997, Cosan entered into anAdministrative Consent Order with the State of New Jersey Department ofEnvironmental Protection. Under the Administrative Consent Order, Cosan isrequired to complete an investigation of the Clifton site conditions and conductremediation as may be necessary. The investigation of site conditions continuesand is expected to be completed in mid-2005. The results of the investigationwill enable the Company to estimate its liability, if any. In February 2005, theNew Jersey Federal District Court ruled that a lawsuit against Cosan by theowners of property adjacent to the Clifton location could be placed on theactive calendar. The outcome of this matter could also affect the reserves. The Company is involved in other matters where the range of liability isnot reasonably estimable at this time and it is not determinable wheninformation will become available to provide a basis for recording an accrual,should an accrual be required. If any of the Company's environmental matters are resolved in a moreunfavorable manner than presently estimated, these matters, either individuallyor in the aggregate, could have a material adverse effect on the Company'sfinancial condition, operating results and cash flows when resolved in a futurereporting period. LITIGATION AND OTHER MATTERS Mylan Laboratories In 1998 the Company and its subsidiary Profarmaco S.r.l. (currently knownas Cambrex Profarmaco Milano S.r.l.") ("Profarmaco") were named as defendants(along with Mylan Laboratories, Inc. ("Mylan") and Gyma Laboratories of America,Inc., Profarmaco's distributor in the United States) in a proceeding institutedby the Federal Trade Commission ("FTC") in the United States District Court forthe District of Columbia (the "District Court"). The allegations arose fromexclusive license agreements between Profarmaco and Mylan covering two activepharmaceutical ingredients ("APIs"). The FTC alleged violations of the FederalTrade Commission Act; including unlawful restraint of trade and conspiracy tomonopolize markets for the APIs. A lawsuit making similar allegations againstthe same parties seeking injunctive relief and treble damages was filed by theAttorneys General of 31 states in the District Court on behalf of those ---------------(dollars in thousands, except share data) 39 states and persons in those states who were purchasers of the genericpharmaceuticals. The FTC and Attorneys General's suits were settled in February2001, with Mylan (on its own behalf and on behalf of Profarmaco and Cambrex)agreeing to pay over $140,000 and with Mylan, Profarmaco and Cambrex agreeing tomonitor certain future conduct. The same parties including the Company and Profarmaco have also been namedin purported class action complaints brought by private plaintiffs in variousstate courts on behalf of purchasers of the APIs in generic form, makingallegations similar to those raised in the FTC's complaint and seeking variousforms of relief including treble damages. 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. In accordance with the agreementapproximately $6,015 has been paid through 2004, with the remaining $6,400 to bepaid over the next four years. Cambrex recorded an $11,342 charge (discounted to the present value due to the five year pay-out) in the first quarter of 2003 asa result of this settlement. As of December 31, 2004 the outstanding balance forthis liability was $5,885. Vitamin B-3 On May 14, 1998, the Company's subsidiary, Nepera, which formerly operatedthe Harriman facility and manufactured and sold niacinamide (Vitamin B-3),received a Federal Grand Jury subpoena for the production of documents relatingto the pricing and possible customer allocation with regard to that product. In2000, Nepera reached agreement with the Government as to its alleged role inVitamin B-3 violations from 1992 to 1995. The Canadian government claimedsimilar violations. All government suits in the U.S. and Canada have now beenconcluded. Nepera has been named as a defendant, along with several other companies,in a number of private civil actions brought on behalf of alleged purchasers ofVitamin B-3. The actions seek injunctive relief and unspecified but substantialdamages. An accrual of $6,000 was recorded in the fourth quarter 1999 to coverthe anticipated government settlements, related litigation, and legal expenses.During 2002 based on information developed during 2002 this accrual wasincreased to $10,000. Several actions have been concluded during 2003 and 2004.All settlement amounts are fully reserved. Additional settlements are beingdiscussed in several more indirect purchaser cases and we believe that currentreserves are sufficient to complete the settlements. 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. Thereafter, the Federal Circuit Court for the District of Columbiareversed the District Court's decision. The Vitamin B-3 defendants, supported bythe U.S. Department of Justice, appealed to the United States Supreme Court andoral arguments were heard on April 29, 2004. In June 2004, the United StatesSupreme Court ruled that foreign purchasers could not sue in U.S. courts underU.S. antitrust statutes if the conduct at issue resulted in purely foreign harm.However, the Court left open potential claims where foreign injuries suffered byforeign plaintiffs were dependent upon domestic harm resulting from conduct thatviolates the U.S. antitrust laws. The Supreme Court remanded the matter to theCircuit Court for briefing on the issue of whether Plaintiffs preserved such aclaim in the underlying proceedings, in which case a hearing on the claim wouldproceed in District Court. At December 31, 2004, the Company had an accrual ofapproximately $3,043 for this matter. This accrual has been recorded in accruedliabilities. Any adjustments to this liability will be recorded as part ofdiscontinued operations. Sale of Rutherford Chemicals The Company completed the sale of its Rutherford Chemicals business onNovember 10, 2003. Under the agreement for the sale, the Company providedstandard representations and warranties and included various covenantsconcerning the business, operations, liabilities and financial condition of theRutherford Chemicals business. Most of such representations and warranties willsurvive for a period of thirty days after ---------------(dollars in thousands, except share data) 40 the Buyer's preparation of its audited financial statements for year-end 2004.Therefore, claims for breaches of such representations would have to be broughtduring that time frame. Certain specified representations and warranties andcovenants, such as those relating to employee benefit matters and certainenvironmental matters, will survive for longer periods and claims under suchrepresentations, warranties and covenants could be brought during such longerperiods. Under the sale agreement, the Company has indemnified the Buyer forbreaches of representations, warranties and covenants. Indemnifications for certain but not all representations and warranties are subject to a deductibleof $750 and a cap at 25 percent of the purchase price. On March 31, 2005, theCompany received a claim by the purchasers of the Rutherford Chemicals businessclaiming breach of representations and warranties contained in the October 2003Purchase Agreement. The Company is in the process of evaluating the claim andcannot determine at this time if it has any merit. Under the agreement for sale, the Company has retained the liabilitiesassociated with existing general litigation matters related to RutherfordChemicals, including Vitamin B-3 as stated above. With respect to certainpre-closing environmental matters, the Company retains the responsibility for:(i) certain existing matters including violations, environmental testing for theNew York facility incinerator and off-site liabilities; and (ii) completing theon-going remediation at the New York facility. Further, as a result of the saleof the Bayonne, New Jersey facility, the obligation to investigate siteconditions and conduct required remediation under the provisions of the NewJersey Industrial Site Recovery Act was triggered; and the Company has retainedthe responsibility for completion of any such investigation and remediation.With respect to all other pre-closing environmental liabilities, whether knownor unknown, the Buyer is responsible for the management of potential futurematters; however, the Buyer and the Company may share the costs of associatedremediation with respect to such potential future matters, subject to certainlimitations defined in the agreement for sale. The Company has accrued forexpenses which are deemed probable and estimable. Class Action Matter In October 2003, the Company was notified of a securities class actionlawsuit filed against Cambrex and five former and current Company officers. Fiveclass action suits were filed with the New Jersey Federal District Court. Underthe rules applicable to class action litigation, the various plaintiffs appearedin Federal Court on January 12, 2004, and the Court designated the leadplaintiff and selected counsel to represent the class. The cases were alsoconsolidated and an amended complaint was filed on March 30, 2004. The lawsuithas been brought as a class action in the names of purchasers of the Company'scommon stock from October 21, 1998 through July 25, 2003. The complaint allegesthat the Company failed to disclose in timely fashion the January 2003accounting restatement and subsequent SEC investigation, as well as the loss ofa significant contract at the Baltimore facility. The Company filed a motion to dismiss in May 2004. Thereafter the plaintifffiled a reply brief. The Company responded and is awaiting a decision from theCourt. The Company considers the complaints to be without merit and willvigorously defend against them. As such, the Company has recorded no reservesrelated to this matter. Securities and Exchange Commission The Securities and Exchange Commission is currently conducting aninvestigation into the Company's inter-company accounting procedures from theperiod 1997-2001. The investigation began in the first half of 2003 after theCompany voluntarily disclosed certain matters related to inter-company accountsfor the five-year period ending December 31, 2001 that resulted in therestatement of the Company's financial statements for those years. To Cambrex'sknowledge, the investigation is limited to this inter-company accounting matter,and the Company does not expect further revisions to its historical financialstatements relating to these issues. The Company is fully cooperating with theSEC. 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 ---------------(dollars in thousands, except share data) 41 manufacture and sale of Company products that fail to meet product warrantiesand contract provisions for indemnification protecting licensees againstintellectual property infringement related to licensed Company technology orprocesses. Additionally, as permitted under Delaware law, the Company has agreementswhereby we indemnify our officers and directors for certain events oroccurrences while the officer or director is, or was serving, at our request insuch capacity. The term of the indemnification period is for the officer's ordirector's lifetime. The maximum potential amount of future payments we could berequired to make under these indemnification agreements is unlimited; however,we have a Director and Officer insurance policy that covers a portion of anypotential exposure. The Company currently believes the estimated fair value of itsindemnification agreements is not significant based on currently availableinformation, and as such, the Company has no liabilities recorded for theseagreements as of December 31, 2004. In addition to the matters identified above, Cambrex's subsidiaries areparty to a number of other proceedings. While it is not possible to predict withcertainty the outcome of the Company's litigation matters and various otherlawsuits and contingencies, it is the opinion of management based on informationcurrently available that the ultimate resolution of these matters should nothave a material adverse effect on the Company's results of operations, cashflows and financial position. These matters, if resolved in an unfavorablemanner, could have a material effect on the operating results and cash flowswhen resolved in a future reporting period. IMPACT OF RECENT ACCOUNTING PRONOUNCEMENTS Share-Based Payment In December 2004, the Financial Accounting Standards Board ("FASB")published SFAS No. 123 (revised 2004) "Share-Based Payment". SFAS No. 123Rsupersedes APB Opinion No. 25 "Accounting for Stock Issued to Employees", andits related implementation guidance. This Statement eliminates the alternativeto use Opinion No. 25's intrinsic value method of accounting that was providedin Statement 123 as originally issued. This Statement requires entities torecognize the cost of employee services received in exchange for awards ofequity instruments based on the grant-date fair value of those awards (withlimited exceptions). This Statement shall be effective as of the beginning ofthe first interim or annual period that begins after June 15, 2005. ThisStatement applies to all awards granted after the required effective date and toawards modified, repurchased, or cancelled after that date. The cumulativeeffect of initially applying this Statement, if any, is recognized as of therequired effective date. The Company is in the process of reviewing the SFAS No.123 implementation and determining its transition methodology and impact on thesecond half of 2005. Consolidation of Variable Interest Entities In January 2003, FASB issued FASB Interpretation No. 46, "Consolidation ofVariable Interest Entities" ("FIN 46"). The interpretation provides guidance onconsolidating variable interest entities and applies immediately to variableinterests created after January 31, 2003. The guidelines of the interpretationbecame applicable for the Company in its fourth quarter 2003 financialstatements for variable interest entities created before February 1, 2003. Theinterpretation requires variable interest entities to be consolidated if theequity investment at risk is not sufficient to permit an entity to finance itsactivities without support from other parties or the equity investors lackcertain specified characteristics. 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 was adopted early. FIN 46R is applicable to all non-specialpurpose entities created prior to February 1, 2003 by Public Entities that arenot small business issuers at the end of the first interim or annual reportingperiod ending after March 15, 2004. The Company has reviewed FIN 46 and FIN 46Rand determined their impact did not have an effect on the Company's consolidatedfinancial position or results in operations. ---------------(dollars in thousands, except share data) 42 Employer's Disclosure about Pensions and Other Postretirement Benefits In May 2004, the FASB issued FASB Staff Position (FSP) No. 106-2"Accounting and Disclosure Requirements Related to the Medicare PrescriptionDrug Improvement and Modernization Act ("the Act") of 2003", which supersedesFASB issued Staff Position 106-1 of the same title. The Act allows for thefederal government to make subsidy payments (beginning in 2006) to employersthat sponsor postretirement benefit plans under which retirees receiveprescription drug benefits that are "actuarially equivalent" to the prescriptiondrug benefit provided under Medicare. The Staff Position clarifies theaccounting for the benefits attributable to the Act. The Company has determinedthat the benefits provided under the Company's plan are not actuariallyequivalent to the Medicare Part D benefit under the Act. As a result, FSP No.106-2 will not have any effect on the Company's consolidated financial positionor results of operations. Inventory Costs In November 2004, the FASB published SFAS No. 151 "Inventory Costs -- anamendment of ARB No. 43, Chapter 4". SFAS No. 151 amends the guidance in ARB No.43, Chapter 4, "Inventory Pricing" to clarify the accounting for abnormalamounts of idle facility expense, freight, handling costs, and wasted material(spoilage). This Statement requires that those items be recognized ascurrent-period charges regardless of whether they meet the criteria of "soabnormal". In addition, this Statement requires that allocation of fixedproduction overheads to the cost of conversion be based on the normal capacityof the production facility. This Statement shall be effective for inventorycosts incurred during fiscal years beginning after June 15, 2005 or earlierapplication is permitted for inventory costs incurred during fiscal yearsbeginning after the date this Statement is issued. The Company is reviewing SFASNo. 151 to determine its impact on the Company's financial position or resultsof operations. FORWARD-LOOKING STATEMENTS This document may contain "forward-looking statements" within the meaningof the Private Securities Litigation Reform Act of 1995 and Rule 3B-6 under TheSecurities Exchange Act of 1934, 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 the risks and other factors described under the caption "RiskFactors That May Affect Future Results" in this Form 10-K, global economic trends, pharmaceutical outsourcing trends, competitive pricing or productdevelopments, government legislation and/or regulations (particularlyenvironmental issues), tax rate, technology, manufacturing and legal issues,changes in foreign exchange rates, performance of minority investments,un-collectable receivables, loss on disposition of assets, cancellation ordelays in renewal of contracts, and lack of suitable raw materials or packagingmaterials. Any forward-looking statement speaks only as of the date on which itis made, and the Company undertakes no obligation to publicly update anyforward-looking statement, whether as a result of new information, future eventsor otherwise. New factors emerge from time to time and it is not possible for usto predict which will arise. In addition, we cannot assess the impact of eachfactor on our business or the extent to which any factor, or combination offactors, may cause actual results to differ materially from those contained inany forward-looking statements. ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The information required in this section can be found in the "Market Risk"section of Item 7 on pages 37-38 of this Form 10-K. ---------------(dollars in thousands, except share data) 43 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 Registered Public Accounting Firm..... 45Consolidated Balance Sheets as of December 31, 2004 and 47 2003......................................................Consolidated Income Statements for the Years Ended December 48 31, 2004, 2003 and 2002...................................Consolidated Statements of Stockholders' Equity for the 49 Years Ended December 31, 2004, 2003 and 2002..............Consolidated Statements of Cash Flows for the Years Ended 50 December 31, 2004, 2003 and 2002..........................Notes to Consolidated Financial Statements.................. 51 The consolidated financial statements and financial statement schedule arefiled pursuant to Item 15 of this report. ---------------(dollars in thousands, except share data) 44 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Stockholders and Board of Directors of Cambrex Corporation: We have completed an integrated audit of Cambrex Corporation's 2004consolidated financial statements and of its internal control over financialreporting as of December 31, 2004 and audits of its 2003 and 2002 consolidatedfinancial statements in accordance with the standards of the Public CompanyAccounting Oversight Board (United States). Our opinions, based on our audits, are presented below. Consolidated financial statements and financial statement schedule In our opinion, the consolidated financial statements listed in theaccompanying index present fairly, in all material respects, the financialposition of Cambrex Corporation and its subsidiaries (the "Company") at December31, 2004 and 2003, and the results of their operations and their cash flows foreach of the three years in the period ended December 31, 2004 in conformity withaccounting principles generally accepted in the United States of America. Inaddition, in our opinion, the financial statement schedule listed in the indexappearing under Item 15(a)(2) presents fairly, in all material respects, theinformation set forth therein when read in conjunction with the relatedconsolidated financial statements. The financial statements and the financialstatement schedule are the responsibility of the Company's management. Ourresponsibility is to express an opinion on these financial statements andfinancial statement schedule based on our audits. We conducted our audits ofthese statements in accordance with the standards of the Public CompanyAccounting Oversight Board (United States). Those standards require that we planand perform the audit to obtain reasonable assurance about whether the financialstatements are free of material misstatement. An audit of financial statementsincludes examining, on a test basis, evidence supporting the amounts anddisclosures in the financial statements, assessing the accounting principlesused and significant estimates made by management, and evaluating the overallfinancial statement presentation. We believe that our audits provide areasonable basis for our opinion. Internal control over financial reporting Also, in our opinion, management's assessment, included in Management'sReport on Internal Control Over Financial Reporting appearing under Item 9A,that the Company maintained effective internal control over financial reportingas of December 31, 2004 based on criteria established in Internal Control --Integrated Framework issued by the Committee of Sponsoring Organizations of theTreadway Commission (COSO), is fairly stated, in all material respects, based onthose criteria. Furthermore, in our opinion, the Company maintained, in allmaterial respects, effective internal control over financial reporting as ofDecember 31, 2004, based on criteria established in InternalControl -- Integrated Framework issued by COSO. The Company's management isresponsible for maintaining effective internal control over financial reportingand for its assessment of the effectiveness of internal control over financialreporting. Our responsibility is to express opinions on management's assessmentand on the effectiveness of the Company's internal control over financialreporting based on our audit. We conducted our audit of internal control overfinancial reporting in accordance with the standards of the Public CompanyAccounting Oversight Board (United States). Those standards require that we planand perform the audit to obtain reasonable assurance about whether effectiveinternal control over financial reporting was maintained in all materialrespects. An audit of internal control over financial reporting includesobtaining an understanding of internal control over financial reporting,evaluating management's assessment, testing and evaluating the design andoperating effectiveness of internal control, and performing such otherprocedures as we consider necessary in the circumstances. We believe that ouraudit provides a reasonable basis for our opinions. A company's internal control over financial reporting is a process designedto provide reasonable assurance regarding the reliability of financial reportingand the preparation of financial statements for external purposes in accordancewith generally accepted accounting principles. A company's internal control overfinancial reporting includes those policies and procedures that (i) pertain tothe maintenance of records that, in reasonable detail, accurately and fairlyreflect the transactions and dispositions of the assets of the company; (ii)provide reasonable assurance that transactions are recorded as necessary topermit preparation of financial statements in accordance with generally acceptedaccounting principles and that receipts and expenditures of the company arebeing made only in accordance with authorizations of management and directors ofthe 45 company; and (iii) provide reasonable assurance regarding prevention or timelydetection of unauthorized acquisition, use, or disposition of the company'sassets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financialreporting may not prevent or detect misstatements. Also, projections of anyevaluation of effectiveness to future periods are subject to the risk thatcontrols may become inadequate because of changes in conditions, or that thedegree of compliance with the policies or procedures may deteriorate. /s/ PRICEWATERHOUSECOOPERS LLP Florham Park, New JerseyMarch 31, 2005 46 CAMBREX CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) DECEMBER 31, -------------------- 2004 2003 -------- -------- ASSETSCurrent assets: Cash and cash equivalents................................. $ 91,532 $ 64,294 Trade receivables, less allowances of $2,304 and $3,281 at respective dates....................................... 68,370 58,324 Inventories, net.......................................... 91,039 82,013 Deferred tax assets....................................... 2,605 8,757 Prepaid expenses and other current assets................. 20,825 16,294 -------- -------- Total current assets.............................. 274,371 229,682Property, plant and equipment, net.......................... 280,790 269,147Goodwill.................................................... 176,275 220,742Other intangible assets, net................................ 54,381 51,391Other assets................................................ 6,168 7,541 -------- -------- Total assets...................................... $791,985 $778,503 ======== ========LIABILITIES AND STOCKHOLDERS' EQUITYCurrent liabilities: Accounts payable.......................................... $ 38,552 $ 35,326 Accrued liabilities....................................... 52,181 54,522 Short-term debt and current portion of long-term debt..... 1,400 1,376 -------- -------- Total current liabilities......................... 92,133 91,224Long-term debt.............................................. 226,187 212,369Deferred tax liabilities.................................... 21,686 29,196Other non-current liabilities............................... 60,663 49,084 -------- -------- Total liabilities................................. $400,669 $381,873Commitments and contingencies (see Notes 22 and 23)Stockholders' equity: Common Stock, $.10 par value; issued 28,825,603 and 28,471,652 shares at respective dates.................. $ 2,883 $ 2,847 Additional paid-in capital................................ 213,120 206,256 Retained earnings......................................... 175,804 205,787 Treasury stock, at cost, 2,593,129 and 2,614,910 shares at respective dates....................................... (21,991) (22,101) Deferred compensation..................................... (1,982) (1,616) Accumulated other comprehensive income.................... 23,482 5,457 -------- -------- Total stockholders' equity........................ 391,316 396,630 -------- -------- Total liabilities and stockholders' equity........ $791,985 $778,503 ======== ======== See accompanying notes to consolidated financial statements. 47 CAMBREX CORPORATION AND SUBSIDIARIES CONSOLIDATED INCOME STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) YEARS ENDED DECEMBER 31, -------------------------------- 2004 2003 2002 -------- -------- -------- Gross Sales................................................ $439,115 $405,591 $394,430 Allowances and rebates................................... 2,258 3,780 3,194 -------- -------- --------Net sales.................................................. 436,857 401,811 391,236 Other revenues........................................... 6,800 8,833 7,830 -------- -------- --------Net revenues............................................... 443,657 410,644 399,066 Cost of goods sold....................................... 272,917 248,238 221,348 -------- -------- --------Gross profit............................................... 170,740 162,406 177,718 Selling, general and administrative expenses............. 102,769 95,117 85,762 Research and development expenses........................ 19,659 17,123 15,794 Goodwill impairment...................................... 48,720 -- -- Legal settlement......................................... -- 11,342 -- Asset impairment and other charges....................... -- -- 4,238 -------- -------- --------Operating (loss)/profit.................................... (408) 38,824 71,924Other (income)/expenses Interest income.......................................... (1,103) (1,164) (946) Interest expense......................................... 12,053 13,004 12,210 Other -- net............................................. 73 139 7,890 -------- -------- --------(Loss)/income before income taxes.......................... (11,431) 26,845 52,770Provision for income taxes................................. 14,461 26,600 12,815 -------- -------- --------(Loss)/income from continuing operations................... $(25,892) $ 245 $ 39,955Discontinued operations:Loss from discontinued operations.......................... (978) (54,341) (8,933)Income tax benefit......................................... -- (33) (2,387) -------- -------- --------Loss from discontinued operations.......................... (978) (54,308) (6,546) -------- -------- --------Net (loss)/income.......................................... $(26,870) $(54,063) $ 33,409 ======== ======== ========Basic earnings/(loss) per share (Loss)/income from continuing operations................. $ (0.99) $ 0.01 $ 1.54 Loss from discontinued operations........................ $ (0.04) $ (2.11) $ (0.25) -------- -------- -------- Net (loss)/income........................................ $ (1.03) $ (2.10) $ 1.29Diluted earnings/(loss) per share (Loss)/income from continuing operations................. $ (0.99) $ 0.01 $ 1.51 Loss from discontinued operations........................ $ (0.04) $ (2.08) $ (0.25) -------- -------- -------- Net (loss)/income........................................ $ (1.03) $ (2.07) $ 1.26Weighted average shares outstanding: Basic.................................................... 26,094 25,775 25,954 Diluted.................................................. 26,094 26,174 26,520 See accompanying notes to consolidated financial statements. 48 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, 2001.... 28,007,825 $2,823 $197,748 $232,658 $ -- $(16,911) ---------- ------ -------- -------- ------- -------- Comprehensive Income Net Income................... 33,409 33,409 Other comprehensive income Foreign currency translation adjustments.............. 38,865 Unrealized losses on hedging contracts, net of tax of $928.............. (1,246) Minimum pension liability adjustment, net of tax of $2,891................... (3,269) -------- Other comprehensive income... 34,350 --------Total 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) 2,289Exercise of stock options....... 341,200 16 5,033Tax benefit of stock options exercised...................... 1,662Other........................... 39,134 1,283 (1,561) 330 ---------- ------ -------- -------- ------- --------BALANCE AT DECEMBER 31, 2002.... 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 of $52...................... 2,532 Minimum pension liability adjustment, net of tax of $0....................... (1,545) -------- Other comprehensive income... 42,327 --------Total Comprehensive loss........ $(11,736) ========Cash dividends at $0.12 per share.......................... (3,100)Purchase of treasury stock...... (2,420)Exercise of stock options....... 122,750 12 1,118Other........................... 25,843 3 1,694 (55) 160 ---------- ------ -------- -------- ------- --------BALANCE AT DECEMBER 31, 2003.... 28,471,652 $2,847 $206,256 $205,787 $(1,616) $(22,101) Comprehensive income/(loss) Net loss..................... (26,870) (26,870) Other comprehensive income/(loss) Foreign currency translation adjustments.............. 20,224 Unrealized gains on hedging contracts, net of tax of $716..................... 1,276 Minimum pension liability adjustment, net of tax of $513..................... (3,488) Unrealized gains on available for sale marketable securities, net of tax expense of $7....................... 13 -------- Other comprehensive income... 18,025 --------Total Comprehensive loss........ $ (8,845) ========Cash dividends at $0.12 per share.......................... (3,113)Purchase of treasury stock...... (219)Exercise of stock options....... 353,951 36 6,248Other........................... 616 (366) 329 ---------- ------ -------- -------- ------- --------BALANCE AT DECEMBER 31, 2004.... 28,825,603 $2,883 $213,120 $175,804 $(1,982) $(21,991) ========== ====== ======== ======== ======= ======== ACCUMULATED OTHER TOTAL COMPREHENSIVE STOCKHOLDERS' INCOME/(LOSS) EQUITY ------------- ------------- BALANCE AT DECEMBER 31, 2001.... $(71,220) $345,098 -------- -------- Comprehensive Income Net Income................... 33,409 Other comprehensive income Foreign currency translation adjustments.............. Unrealized losses on hedging contracts, net of tax of $928.............. Minimum pension liability adjustment, net of tax of $2,891................... Other comprehensive income... 34,350 34,350Total 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....... 5,049Tax benefit of stock options exercised...................... 1,662Other........................... 52 -------- --------BALANCE AT DECEMBER 31, 2002.... $(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 of $52...................... Minimum pension liability adjustment, net of tax of $0....................... Other comprehensive income... 42,327 42,327Total Comprehensive loss........Cash dividends at $0.12 per share.......................... (3,100)Purchase of treasury stock...... (2,420)Exercise of stock options....... 1,130Other........................... 1,802 -------- --------BALANCE AT DECEMBER 31, 2003.... $ 5,457 $396,630 Comprehensive income/(loss) Net loss..................... (26,870) Other comprehensive income/(loss) Foreign currency translation adjustments.............. Unrealized gains on hedging contracts, net of tax of $716..................... Minimum pension liability adjustment, net of tax of $513..................... Unrealized gains on available for sale marketable securities, net of tax expense of $7....................... Other comprehensive income... 18,025 18,025Total Comprehensive loss........Cash dividends at $0.12 per share.......................... (3,113)Purchase of treasury stock...... (219)Exercise of stock options....... 6,284Other........................... 579 -------- --------BALANCE AT DECEMBER 31, 2004.... $ 23,482 $391,316 ======== ======== See accompanying notes to consolidated financial statements. 49 CAMBREX CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS) YEARS ENDED DECEMBER 31, -------------------------------- 2004 2003 2002 -------- --------- --------- Cash flows from operating activities: Net (loss) income........................................ $(26,870) $ (54,063) $ 33,409 Depreciation and amortization............................ 40,858 35,834 30,838 Asset impairments........................................ 48,720 -- 9,033 Deferred income tax provision............................ 466 8,005 (7,973) Mylan settlement, net of cash payments................... (1,600) 7,186 -- Vitamin B-3 provision, net of cash payments.............. (793) (5,198) 4,688Changes in assets and liabilities: Trade receivables........................................ (6,731) 5,030 (1,614) Inventories.............................................. (4,552) 1,017 (952) Prepaid expenses and other current assets................ 8,600 1,244 (2,311) Accounts payable and accrued liabilities................. 7,951 10,200 10,483 Income taxes payable..................................... (7,774) (2,741) (4,981) Other non-current assets and liabilities................. (8,469) 1,595 1,635Discontinued operations: Non-cash charges and changes in operating assets and liabilities........................................... (1,073) 12,079 21,458 Writedown of assets held for sale........................ -- 53,098 -- Asset impairments and other charges...................... -- -- 10,627 -------- --------- --------- Net cash provided from operating activities.............. 48,733 73,286 104,340 -------- --------- ---------Cash flows from investing activities: Capital expenditures..................................... (39,480) (37,857) (40,443) Acquisition of businesses (net of cash acquired)......... (5,256) -- -- Other investing activities............................... 223 (1,548) 1,278Discontinued operations: Capital expenditures, net of insurance proceeds.......... -- 671 (9,860) Proceeds from sale of Rutherford Chemicals............... -- 50,215 -- -------- --------- --------- Net cash (used in) provided from investing activities.... (44,513) 11,481 (49,025) -------- --------- ---------Cash flows from financing activities: Dividends................................................ (3,113) (3,100) (3,117) Net (decrease) increase in short-term debt............... -- (1,071) (2,737) Long-term debt activity (including current portion): Borrowings............................................ 86,218 359,611 60,800 Repayments............................................ (72,708) (414,793) (103,964) Proceeds from the stock options exercised................ 6,284 1,130 5,049 Purchase of treasury stock............................... (219) (2,420) (5,549) Other.................................................... 212 55 282 -------- --------- --------- Net cash provided by (used in) financing activities... 16,674 (60,588) (49,236) -------- --------- ---------Effect of exchange rate changes on cash.................... 6,344 6,819 3,521 -------- --------- ---------Net increase in cash and cash equivalents.................. 27,238 30,998 9,600Cash and cash equivalents at beginning of year............. 64,294 33,296 23,696 -------- --------- ---------Cash and cash equivalents at end of year................... $ 91,532 $ 64,294 $ 33,296 ======== ========= =========Supplemental disclosure: Interest paid, net of capitalized interest............... $ 11,848 $ 11,725 $ 11,905 Income taxes paid........................................ $ 20,182 $ 18,107 $ 18,512Non-cash transactions: Liabilities assumed in connection with acquisition....... $ 642 $ -- $ -- See accompanying notes to consolidated financial statements. 50 CAMBREX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) (1) THE COMPANY Cambrex Corporation and Subsidiaries (the "Company" or "Cambrex") primarily provides products and services worldwide to pharmaceutical and biopharmaceuticalcompanies, generic drug companies, biotech companies and research organizations.The Company is dedicated to providing essential products and services toaccelerate drug discovery, development and manufacturing processes for humantherapeutics. The Company reports results in three segments: Bioproducts,consisting of research products and therapeutic application products; Biopharmasegment, consisting of contract biopharmaceutical process development andmanufacturing services; and Human Health segment, consisting of activepharmaceutical ingredients and pharmaceutical intermediates produced under Foodand Drug Administration cGMP for use in the production of prescription andover-the-counter drug products and other fine custom chemicals derived fromorganic chemistry. In 2004 one customer, a distributor which represents multiple customers,accounted for 10.1% of the Company's total consolidated gross sales. In 2003 and2002 no single customer accounted for more than 10% of total consolidated grosssales. As discussed in Note #13, on November 10, 2003, the sale of RutherfordChemicals was completed and accordingly, the business comprising the RutherfordChemicals segment is being reported as a discontinued operation in all periodspresented. (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation The consolidated financial statements include the accounts of the Companyand its wholly-owned subsidiaries. All significant inter-company balances andtransactions have been eliminated in consolidation. Cash Equivalents Temporary cash investments with an original maturity of less than threemonths 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 foreign currency transactions. Gains and losses on thesehedging transactions are generally recorded in earnings in the same period asthey are realized, which is usually the same period as the settlement of theunderlying transactions. The Company uses interest rate derivative instrumentsonly as hedges or as an integral part of borrowings. As such, the differentialto be paid or received in connection with these instruments is accrued andrecognized in income as an adjustment to interest expense. The Company formally documents all relationships between hedginginstruments and hedged items, as well as its risk management objectives andstrategies for undertaking various hedging relationships. All cash flow hedgesare linked to transactions and the Company assesses effectiveness at inceptionand on a quarterly basis. If it is determined that a derivative instrument isnot highly effective or the transaction is no longer deemed probable ofoccurring, the Company discontinues hedge accounting. 51 CAMBREX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED) Inventories Inventories are stated at the lower of standard cost, which approximates afirst-in, first-out basis, or market. The determination of market value involvesassessment of numerous factors, including costs to dispose of inventory andestimated selling prices. Reserves are recorded to reduce carrying value forinventory determined to be damaged, obsolete or otherwise unsaleable. Property, Plant and Equipment Property, plant and equipment is stated at cost, net of accumulateddepreciation. Plant and equipment are depreciated on a straight-line basis overthe estimated useful lives for each applicable asset group as follows: Buildings and improvements......................... 20 to 30 years, or term of lease if applicableMachinery and equipment............................ 7 to 15 yearsFurniture and fixtures............................. 5 to 7 yearsComputer hardware and software..................... 3 to 7 years Expenditures for additions, major renewals or betterments are capitalizedand expenditures for maintenance and repairs are charged to income as incurred. When assets are retired or otherwise disposed of, the cost and relatedaccumulated depreciation are removed from the accounts, and any resulting gainor loss is reflected in operating expenses. Interest is capitalized inconnection with the construction and acquisition of assets. 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 2004, 2003 and 2002 amountedto $400, $339 and $1,041, respectively. Intangible Assets Intangible assets are recorded at cost and amortized on a straight-linebasis as follows: Patents................................. Amortized over the remaining life of individual patentsProduct technology...................... 5 to 18 yearsNon-compete agreements.................. 5 yearsTrademarks and other.................... up to 40 years Impairment of Goodwill In January 2002, the Company adopted FASB Statement of Financial AccountingStandards No. 142, "Goodwill and Other Intangible Assets" ("FAS 142"), whichrequired that goodwill, and indefinite-lived other intangible assets deemed tohave an indefinite useful life, cease amortizing. The new rules also requiredthat goodwill and certain intangible assets be assessed for impairment usingfair value measurement techniques. The Company reviews the carrying value ofacquired intangible assets, including goodwill, to determine whether impairmentmay exist on an annual basis or whenever it has reason to believe goodwill maynot be recoverable. Goodwill impairment is determined using a two-step process. The first stepof the goodwill impairment test is used to identify potential impairment bycomparing the fair value of a reporting unit, generally the 52 CAMBREX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)Company's operating segments, determined using various valuation techniques,with the primary technique being a discounted cash flow analysis. A discountedcash flow analysis requires one to make various judgmental assumptions includingassumptions about cash flows, growth rates and discount rates. The assumptionsabout future cash flows and growth rates are based on the Company's budget andlong-term plans. Discount rate assumptions are based on market participantcomparables. If the fair value of a reporting unit exceeds its carrying amount,goodwill of the reporting unit is considered not impaired and the second step ofthe impairment test is unnecessary. If the carrying amount of a reporting unitexceeds its fair value, the second step of the goodwill impairment test isperformed to measure the amount of impairment loss, if any. The second step ofthe goodwill impairment test compares the implied fair value of the reportingunit's goodwill with the carrying amount of that goodwill. If the carryingamount of the reporting unit's goodwill exceeds the implied fair value of thatgoodwill, an impairment loss is recognized in an amount equal to that excess.The implied fair value of goodwill is determined in the same manner as theamount of goodwill recognized in a business combination. That is, the fair valueof the reporting unit is allocated to all of the assets and liabilities of thatunit as if the reporting unit had been acquired in a business combination andthe fair value of the reporting unit was the purchase price paid to acquire thereporting unit. The impairment test for other intangible assets not subject to amortizationconsists of a comparison of the fair value of the intangible asset with itscarrying value. If the carrying value of the intangible asset exceeds its fairvalue, an impairment loss is recognized in an amount equal to that excess. Impairment of Long-Lived Assets The Company assesses the impairment of its long-lived assets under FAS 144,including amortizable intangible assets, and property, plant and equipment,whenever economic events or changes in circumstances indicate that the carryingamounts of the assets may not be recoverable. Long lived assets are consideredto be impaired when the sum of the undiscounted expected future operating cashflows is less than the carrying amounts of the related assets. If impaired, theassets are written down to fair market value which equals discounted cash flow. Revenue Recognition Revenues in the Bioproducts and Human Health segments are generallyrecognized when title to products and risk of loss are transferred to customers.Additional conditions for recognition of revenue are that collection of salesproceeds is reasonably assured and the Company has no further performanceobligations. 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 which are classified as allowances and rebates. Some contracts in the Bioproducts and Biopharma segments are based on timeand materials and revenue for those contracts is recognized as services areperformed. For contracts that contain milestone based payments the Companyutilizes the EITF-91-6 "Revenue Recognition of Long-term Power Sales Contracts"model for recording revenue. Under this method, revenue is based on the cost ofefforts (since the contract's commencement) up to the reporting date, divided bythe total estimated contractual costs (from the contract's commencement to theend of the development arrangement), multiplied by the total expectedcontractual payments under the arrangement. However, revenue is limited to the amount of nonrefundable cash payments received or contractually receivable atthe reporting date. 53 CAMBREX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED) In each of the segments the Company has certain contracts that containmultiple deliverables. These deliverables often include process developmentservices and commercial production. The Company follows the guidance containedin EITF 00-21 "Accounting for Revenue Arrangements with Multiple Deliverables".Revenue for each element is recognized when that element is delivered to thecustomer based on the fair value for each element as determined based on salesprice when sold separately. Amounts billed in advance are recorded as deferred revenue on the balancesheet. 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.Cambrex has adopted a policy to indefinitely reinvest the un-remitted earningsof certain non-U.S. subsidiaries, and as such, U.S. taxes have not been providedon their un-remitted earnings. At December 31, 2004, the cumulative amount ofun-remitted earnings of non-U.S. subsidiaries was approximately $71 million. On October 22, 2004, the President signed the American Jobs Creation Act of2004 (the "Act"). The Act creates a temporary incentive for U.S. corporations torepatriate accumulated earnings by providing an 85% dividends received deductionfor certain dividends from controlled foreign corporations. The Company isevaluating whether, and to what extent, it may repatriate foreign earnings thathave not yet been remitted to the U.S. 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 future expenditures for environmental remediation obligations are not discounted totheir present value, unless the aggregate amount of the liability and the timingof cash payments are fixed or reasonably determinable. Recoveries ofenvironmental remediation costs from other parties are recorded as assets whentheir receipt is deemed certain. 54 CAMBREX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED) Foreign Currency The functional currency of the Company's foreign subsidiaries is theapplicable local currency. The translation of the applicable foreign currenciesinto U.S. dollars is performed for balance sheet accounts using current exchangerates in effect at the balance sheet date and for revenue and expense accountsand cash flows using average rates of exchange prevailing during the year.Adjustments resulting from the translation of foreign currency financialstatements are accumulated in a separate Component of stockholders' equity untilthe entity is sold or substantially liquidated. Gains or losses relating totransactions of a long-term investment nature are accumulated in stockholders'equity. Gains or losses resulting from foreign currency transactions areincluded in the results of operations as a component of other revenues in theConsolidated Income Statement. Foreign currency net transaction gains were$1,161, $2,600 and $1,083 in 2004, 2003 and 2002, 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, ------------------------------- 2004 2003 2002 -------- -------- ------- Numerator:(Loss)/income from continuing operations available to common stockholders............................ $(25,892) $ 245 $39,955Loss from discontinued operations available to common stockholders............................... (978) (54,308) (6,546) -------- -------- -------Net (loss)/income available to common stockholders...................................... $(26,870) $(54,063) $33,409 ======== ======== =======Denominator:Basic weighted average shares outstanding........... 26,094 25,775 25,954Effect of dilutive stock options *.................. -- 399 566 -------- -------- -------Diluted weighted average shares outstanding......... 26,094 26,174 26,520(Loss)/Earnings per share (basic):(Loss)/income from continuing operations............ $ (0.99) $ 0.01 $ 1.54Loss from discontinuing operations.................. $ (0.04) $ (2.11) $ (0.25) -------- -------- -------Net (loss)/income................................... $ (1.03) $ (2.10) $ 1.29 ======== ======== =======(Loss)/Earnings per share (diluted): *(Loss)/income from continuing operations............ $ (0.99) $ 0.01 $ 1.51Loss from discontinued operations................... $ (0.04) $ (2.08) $ (0.25) -------- -------- -------Net (loss)/income................................... $ (1.03) $ (2.07) $ 1.26 ======== ======== ======= --------------- * For 2004, the effect of stock options would be anti-dilutive and is therefore excluded. 55 CAMBREX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED) For the year ended December 31, 2004, 2003 and 2002, 2,083,716, 2,095,939,and 1,223,150 shares respectively, were not included in the calculation ofdiluted shares outstanding because the option price was greater than the marketprice. Freight Billing and Costs The Company bills a portion of freight cost incurred on shipments tocustomers. Freight costs are reflected in Cost of goods sold and amounts billedto customers are recorded within Net revenues. These amounts are not material tothe Company's operating results. Stock Based Compensation At December 31, 2004, the Company has seven active stock-based employeecompensation plans currently in effect, which are described more fully in Note#15. 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 as amended by FASB No. 148,Accounting for Stock-Based Compensation, to stock-based employee compensation. YEARS ENDED DECEMBER 31, ------------------------------- 2004 2003 2002 -------- -------- ------- Net (loss)/income, as reported...................... $(26,870) $(54,063) $33,409Add: stock based compensation expense included in reported net income............................... 1,228 1,589 419Deduct: stock-based compensation expenses determined using fair value method, net of tax effects in 2002.............................................. (5,969) (6,570) (2,133) -------- -------- -------Proforma net (loss)/income.......................... $(31,611) $(59,044) $31,695(Loss)/earnings per share: Basic - as reported............................... $ (1.03) $ (2.10) $ 1.29 Basic - proforma.................................. $ (1.21) $ (2.29) $ 1.22 Diluted - as reported............................. $ (1.03) $ (2.07) $ 1.26 Diluted - proforma................................ $ (1.21) $ (2.26) $ 1.20 The pro-forma compensation expense pertaining to stock options of $4,741,$4,981, and $1,714 for 2004, 2003 and 2002, respectively, was calculated basedon recognizing ratably over the vesting period the fair value of each optiondetermined using the Black-Scholes option-pricing model for non-performanceoptions and a path dependent model for performance options. The followingassumptions were used in the Black-Scholes model to determine fair value ongrant date of grants issued in 2004, 2003 and 2002, respectively: (i) average dividend yield of 0.55%, 0.57% and 0.30% (ii) expected volatility of 41.75%,40.81% and 33.77%, (iii) risk-free interest rate ranging from 2.75% to 3.95% ,2.75% to 3.95%, and 3.84% to 4.84%, and (iv) expected life of 6-7 years. Comprehensive Income SFAS 130, "Reporting Comprehensive Income," requires foreign currencytranslation adjustments and certain other items, which were reported separatelyin stockholders' equity, to be included in other 56 CAMBREX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)comprehensive income. Included within accumulated other comprehensive income forthe Company are foreign currency translation adjustments, changes in the fairvalue related to derivative instruments classified as cash flow hedges, net ofrelated tax benefit, unrealized gain on available for sales securities andchanges in the minimum pension liability, net of related tax benefit. Totalcomprehensive income for the years ended 2004 and 2003 is included in theStatement of Stockholders' Equity. The components of Accumulated Other Comprehensive Income in Stockholders'Equity are as follows: 2004 2003 -------- ------- Foreign currency translation................................ $ 33,104 $12,880Unrealized gain (loss) on hedging contracts................. 792 (484)Unrealized gain on available for sale securities............ 13 --Minimum pension liability................................... (10,427) (6,939) -------- ------- Total..................................................... $ 23,482 $ 5,457 ======== ======= Software and Development Costs In 2004, 2003 and 2002, 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 are placed in service. Capitalized software and development costs were$1,039, $817 and $2,823 for 2004, 2003 and 2002, respectively. Software anddevelopment costs are being amortized using the straight-line method over theexpected life of the product, which ranges from 3 to 7 years. Research and development costs, business process re-engineering costs,training and computer software maintenance costs are expensed as incurred. (3) IMPACT OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS Consolidation of Variable Interest Entities In January 2003, the Financial Accounting Standards Board ("FASB") issued FASB interpretation No. 46 "Consolidation of Variable Interest Entities" ("FIN46"). The interpretation provides guidance on consolidating variable interestentities and applies immediately to variable interests created after January 31,2003. The guidelines of the interpretation became applicable for the Company inits fourth quarter 2003 financial statements for variable interest entitiescreated before February 1, 2003. The interpretation requires variable interestentities to be consolidated if the equity investment at risk is not sufficientto permit an entity to finance its activities without support from other partiesor the equity investors lack certain specified characteristics 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 57 CAMBREX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) (3) IMPACT OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS -- (CONTINUED)not small business issuers at the end of the first interim or annual reportingperiod ending after March 15, 2004. The Company has reviewed FIN 46 and FIN 46Rand determined their impact did not have an effect on the Company's consolidatedfinancial position or results of operations. Employer's Disclosure about Pension and Other Post-Retirement Benefits In May 2004, the FASB issued FASB Staff Position (FSP) No. 106-2"Accounting and Disclosure Requirements Related to the Medicare PrescriptionDrug Improvement and Modernization Act ("the Act") of 2003", which supersedesFASB issued Staff Position 106-1 of the same title. The Act allows for thefederal government to make subsidy payments (beginning in 2006) to employersthat sponsor postretirement benefit plans under which retirees receiveprescription drug benefits that are "actuarially equivalent" to the prescriptiondrug benefit provided under Medicare. The Staff Position clarifies theaccounting for the benefits attributable to the Act. The Company has determinedthat the benefits provided under the Company's plan are not actuariallyequivalent to the Medicare Part D benefit under the Act. As a result, FSP No.106-2 will not have any effect on the Company's consolidated financial positionor results of operations. Inventory Costs In November 2004, the FASB published SFAS No. 151 "Inventory Costs -- anamendment of ARB No. 43, Chapter 4". SFAS No. 151 amends the guidance in ARB No.43, Chapter 4, "Inventory Pricing" to clarify the accounting for abnormalamounts of idle facility expense, freight, handling costs, and wasted material(spoilage). This Statement requires that those items be recognized ascurrent-period charges regardless of whether they meet the criteria of "soabnormal". In addition, this Statement requires that allocation of fixedproduction overheads to the cost of conversion be based on the normal capacityof the production facility. This Statement shall be effective for inventorycosts incurred during fiscal years beginning after June 15, 2005 or earlierapplication is permitted for inventory costs incurred during fiscal yearsbeginning after the date this Statement is issued. The Company is reviewing SFASNo. 151 to determine its impact on the Company's financial position or resultsof operations. Share-Based Payment In December 2004, the FASB published SFAS No. 123 (revised 2004) "Share-Based Payment". SFAS No. 123R supersedes APB Opinion No. 25 "Accountingfor Stock Issued to Employees", and its related implementation guidance. ThisStatement eliminates the alternative to use Opinion No. 25's intrinsic valuemethod of accounting that was provided in Statement No. 123 as originallyissued. This Statement requires entities to recognize the cost of employeeservices received in exchange for awards of equity instruments based on thegrant-date fair value of those awards (with limited exceptions). This Statementshall be effective as of the beginning of the first interim or annual periodthat begins after June 15, 2005. This Statement applies to all awards grantedafter the required effective date and to awards modified, repurchased, orcancelled after that date. The cumulative effect of initially applying thisStatement, if any, is recognized as of the required effective date. The Companyis in the process of reviewing the SFAS No. 123 implementation and determiningits transition methodology and impact on the second half of 2005. (4) ACQUISITIONS In October 2004, Cambrex completed the acquisition of Genolife SA., locatedin Saint Beauzire, France, for approximately $6,000 in cash. Genolife is aninnovative biotechnology company specializing in rapid microbial detectiontesting for the pharmaceutical, agriculture, food and cosmetic industries. Theacquisition will expand the project offerings in the Bioproducts segment. 58 CAMBREX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) (4) ACQUISITIONS -- (CONTINUED) The acquisition was accounted for under the purchase method of accounting.The purchase price was allocated to the acquired assets and liabilities on thebasis of their respective fair values. As a result, the Company recognizedgoodwill and intangible assets of $2,063 and $2,857, respectively. The goodwillwas assigned to the Bioproducts segment. Of the $2,857 of acquired intangibleassets, $2,028 was assigned to patents with a useful life of 18 years, and $829was assigned to developed technology with useful lifes ranging from 9 to 18years. Acquisitions are accounted for under the purchase method of accounting andaccordingly the results of operations of acquisitions are included in theaccompanying consolidated financial statements from the date of acquisition. Theacquisition would not have had a material impact on the results of operationshad the acquisition occurred at the beginning of 2004 and as such no proformaresults have been presented. (5) GOODWILL AND INTANGIBLE ASSETS In accordance with SFAS 142, "Goodwill and Other Intangible Assets" theCompany has established units based on its current segment structure forpurposes of testing goodwill for impairment. Goodwill has been assigned to thereporting units to which the value of the goodwill relates. The Companyevaluates goodwill and other intangible assets not subject to amortization atleast on an annual basis and whenever events and changes in circumstancessuggest that the carrying amount may not be recoverable based on the estimatedfuture cash flows. In the third quarter of 2004, the Company evaluated whether the carryingvalue of the goodwill related to its Baltimore reporting unit, which is acomponent of the Biopharma segment, was recoverable due to the lowering ofBaltimore's revenue and operating income forecast for the remainder of 2004 andbeyond versus prior projections. The Company tested for impairment anddetermined that the carrying value exceeded its fair value, as determined byusing a discounted cash flow model. Management then valued its tangible andidentifiable intangible assets for purposes of determining the implied fairvalue of goodwill. Upon completion of the assessment, the Company recorded anon-cash impairment charge of $48,720 to reduce the carrying value of goodwill in the Baltimore reporting unit to its estimated fair value of $65,584. The changes in the carrying amount of goodwill for the years ended December31, 2004 and 2003, are as follows: HUMAN BIOPRODUCTS BIOPHARMA HEALTH SEGMENT SEGMENT SEGMENT TOTAL ----------- --------- ------- -------- Balance as of January 1, 2003...... $52,308 $125,338 $36,708 $214,354Other, including contingent purchase price adjustment........ 188 -- -- 188Translation effect................. 1,291 -- 4,909 6,200 ------- -------- ------- --------Balance as of December 31, 2003.... 53,787 125,338 41,617 220,742Goodwill impairment................ -- (48,720) -- (48,720)Genolife acquisition............... 2,063 -- -- 2,063Other, including contingent purchase price adjustment........ (865) -- -- (865)Translation effect................. 321 -- 2,734 3,055 ------- -------- ------- --------Balance as of December 31, 2004.... $55,306 $ 76,618 $44,351 $176,275 ======= ======== ======= ======== 59 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, 2004 2003 ------------ ------------ 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, 2004 DECEMBER 31, 2003 GROSS CARRYING AMOUNT GROSS CARRYING AMOUNT --------------------- --------------------- Patents.............................. $ 5,792 $ 3,122 Patents.............................. $ 5,792 $ 3,122Proprietary Process.................. 8,189 6,972Supply Agreements.................... 2,110 2,110Trademarks........................... 1,384 785Unpatented Technology................ 5,912 5,912Other................................ 2,674 2,249Fully Amortized Assets*.............. 2,883 2,883 -------- ------- Total.............................. 28,944 24,033 -------- -------Accumulated Amortization............. (10,136) (8,215) -------- -------Net.................................. $ 18,808 $15,818 ======== ======= *This category includes certain fully amortized patents, proprietary process andnon-compete agreements. Amortization expense amounted to $1,921, $1,626 and $1,554 for the yearsended December 31, 2004, 2003 and 2002, respectively. The expected future amortization expense related to current intangibleassets currently recorded in the future is as follows: For the year ended December 31, 2005........................ $2,134For the year ended December 31, 2006........................ $2,117For the year ended December 31, 2007........................ $2,040For the year ended December 31, 2008........................ $1,740For the year ended December 31, 2009........................ $1,636 60 CAMBREX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) (6) NET INVENTORIES Net inventories consist of the following: DECEMBER 31, ------------------ 2004 2003 ------- ------- Finished goods........................................... $45,002 $42,045Work in process.......................................... 23,658 19,105Raw materials............................................ 17,222 16,601Supplies................................................. 5,157 4,262 ------- ------- Total.......................................... $91,039 $82,013 ======= ======= (7) PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment consists of the following: DECEMBER 31, ---------------------- 2004 2003 --------- --------- Land................................................. $ 12,022 $ 11,543Buildings and improvements........................... 132,091 123,727Machinery and equipment.............................. 334,367 302,041Furniture and fixtures............................... 19,345 16,976Construction in progress............................. 43,113 24,285 --------- --------- Total...................................... 540,938 478,572Accumulated depreciation............................. (260,148) (209,425) --------- --------- Net................................................ $ 280,790 $ 269,147 ========= ========= Depreciation expense was $38,937, $34,208 and $29,284 for the years endedDecember 31, 2004, 2003 and 2002, respectively. (8) ACCRUED LIABILITIES The components of accrued liabilities are as follows: YEARS ENDED DECEMBER 31, ------------------ 2004 2003 ------- ------- Salaries and employee benefits payable................... $14,917 $19,115Unrealized losses on interest rate swaps................. 1,277 4,215Other accrued liabilities................................ 35,987 31,192 ------- ------- Total.......................................... $52,181 $54,522 ======= ======= 61 CAMBREX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) (9) INCOME TAXES (Loss)/income from continuing operations before income taxes consisted ofthe following: YEARS ENDED DECEMBER 31, ------------------------------- 2004 2003 2002 -------- -------- ------- Domestic............................................ $(60,058) $(20,211) $ 1,615International....................................... 48,627 47,056 51,155 -------- -------- ------- Total..................................... $(11,431) $ 26,845 $52,770 ======== ======== ======= The provision for income taxes for continuing operations consists of thefollowing expenses (benefits): YEARS ENDED DECEMBER 31, ----------------------------- 2004 2003 2002 ------- ------- ------- Current: Federal............................................. $ -- $ 2,060 $ -- State............................................... 347 232 777 International....................................... 13,648 16,303 20,011 ------- ------- ------- $13,995 $18,595 $20,788 ======= ======= =======Deferred: Federal............................................. $ -- $ 8,980 $(7,973) State............................................... (17) 186 -- International....................................... 483 (1,161) -- ------- ------- ------- $ 466 $ 8,005 $(7,973) ------- ------- ------- Total....................................... $14,461 $26,600 $12,815 ======= ======= ======= The provision for income taxes for continuing operations differs from thestatutory federal income tax rate of 35% for 2004, 2003 and 2002 as follows: YEARS ENDED DECEMBER 31, ----------------------------- 2004 2003 2002 ------- ------- ------- Income tax at Federal statutory rate.................. $(4,001) $ 9,396 $18,470State and local taxes, net of Federal income tax benefits............................................ 208 232 505Difference between Federal statutory rate and statutory rates on non-US income.................... (2,888) (3,480) (933)Net change in valuation allowance..................... 21,142 21,487 (2,455)Research and experimentation credits.................. -- (1,100) (1,237)Other................................................. -- 65 (1,535) ------- ------- ------- Total....................................... $14,461 $26,600 $12,815 ======= ======= ======= 62 CAMBREX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) (9) INCOME TAXES -- (CONTINUED) The components of deferred tax assets and liabilities as of December 31,2004 and 2003 relate to temporary differences and carryforwards as follows: DECEMBER 31, ------------------- 2004 2003 -------- -------- Current deferred tax assets: Net operating loss carryforwards (foreign)............ $ -- $ 2,721 Inventory............................................. 1,273 2,061 Receivables........................................... 254 433 Vitamin B-3, legal and related reserves............... 5,104 7,034 Italian substitute tax benefit........................ -- 2,000 Other................................................. 3,275 5,246 -------- -------- Current deferred tax assets........................... 9,906 19,495 Valuation allowances.................................. (7,301) (10,738) -------- -------- Total current deferred tax assets............. $ 2,605 $ 8,757 ======== ========Non-current deferred tax assets: Foreign tax credits................................... $ 15,712 $ 15,491 Environmental......................................... 745 594 Net operating loss carryforwards (domestic)........... 42,248 34,766 Net operating loss carryforwards (foreign)............ 3,996 -- Employee benefits..................................... 5,765 4,543 Restructuring......................................... 74 157 Impairment of investment in securities................ 2,764 2,764 Research & experimentation tax credits................ 5,697 4,658 Alternative minimum tax credits....................... 4,155 4,155 Italian substitute tax benefit........................ 1,922 -- Other -- non-current Assets........................... 3,752 -- -------- -------- Non-current deferred tax assets....................... 86,830 67,128 Valuation allowances.................................. (71,711) (43,031) -------- -------- Total non-current deferred tax assets......... $ 15,119 $ 24,097 -------- --------Non-current deferred tax liabilities: Depreciation.......................................... $ 22,621 $ 23,030 Intangibles........................................... 11,954 25,071 Other................................................. 2,230 5,192 -------- -------- Total non-current deferred tax liabilities.... $ 36,805 $ 53,293 ======== ======== Total net non-current deferred tax liabilities................................. $ 21,686 $ 29,196 ======== ======== 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 the Company's current and past performance, cumulative lossesin recent years resulting from domestic operations, the market environment inwhich the Company operates, and the utilization of past tax attributes, theCompany has established a valuation allowance of $75,678 against a 63 CAMBREX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) (9) INCOME TAXES -- (CONTINUED)portion of its domestic deferred tax assets. However, the Company has notrecorded a valuation allowance against domestic tax assets which are offset bydomestic deferred tax liabilities that are expected to reverse in the future. Inaddition, the Company has not recorded a valuation allowance against domesticdeferred tax assets of approximately $13 million at December 31, 2004, that theCompany could utilize upon the implementation of certain tax planningstrategies. Should the Company continue to experience losses, these tax planningstrategies may be negatively affected which could result in future increases tothe domestic deferred tax asset valuation allowance. With respect to theCompany's foreign deferred tax assets, the Company has recorded a valuationallowance of $3,334. The Company expects to maintain a full valuation allowance against its netdomestic deferred tax assets, subject to the consideration of all prudent and feasible 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 assetsare realizable. The change in the domestic valuation allowance for the yearsended December 31, 2004 and 2003 was $24,047 and $51,536, respectively. Thechange in the foreign valuation allowance for the years ended December 31, 2004and 2003 was $1,196 and ($588), 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 $46,244 and $37,487 atDecember 31, 2004 and 2003, respectively. These NOLs will expire during theperiod from 2018 through 2024. As of December 31, 2004, approximately $15,712 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 2010 through 2014 and areoffset by a full valuation allowance, as discussed above. Certain adjustments to 2003 deferred tax balances and cumulativetranslation adjustments have been recorded in 2004. The amounts are notconsidered material to prior periods. On October 22, 2004, the President signed the American Jobs Creation Act of2004 (the "Act"). The Act creates a temporary incentive for U.S. corporations torepatriate accumulated income earned abroad by providing an 85% dividendsreceived deduction for certain dividends from controlled foreign corporations.The deduction is subject to a number of limitations and uncertainty remains asto how to interpret numerous provisions in the Act. The Company is evaluatingwhether, and to what extent, it may repatriate foreign earnings that have notyet been remitted to the U.S. 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 believes that its positions comply with applicable lawand intends to continue to defend its positions. The Company believes that ithas adequately provided for the estimated outcome related to these matters. (10) SHORT-TERM DEBT The Company has lines of credit in Italy with local banks (the "Facility").The Facility is short-term and provides three types of financing with thefollowing limits: Overdraft protection of approximately $9,000, export financingof approximately $9,000 and advances on uncleared deposits of approximately$300. The overdraft protection and export financing facilities bear interest atvarying rates when utilized, however, advances on uncleared deposits bear nointerest. There are no amounts outstanding as of December 31, 2004 and 2003. The2004 and 2003 average interest rates were 1.6% and 1.7%, respectively. 64 CAMBREX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) (10) SHORT-TERM DEBT -- (CONTINUED) Short-term debt at December 31, 2004 and 2003 consists of the following: DECEMBER 31, --------------- 2004 2003 ------ ------ Current portion of long-term debt........................... $1,400 $1,376 ====== ====== (11) LONG-TERM DEBT Long-term debt consists of the following: DECEMBER 31, ------------------- 2004 2003 -------- -------- Bank credit facilities(a)............................... $120,000 $105,200Senior notes(b)......................................... 100,000 100,000Capitalized leases(c)................................... 7,280 8,545Notes payable........................................... 307 -- -------- -------- Subtotal...................................... 227,587 213,745Less: current portion................................... (1,400) (1,376) -------- -------- Total......................................... $226,187 $212,369 ======== ======== (a) In November 2003, the Company amended its five-year Syndicated SeniorRevolving Credit Facility ("The 5-Year Agreement") of $268,750, which originatedin November 2001 and expires in November 2006, led by JPMorganChase as theAdministrative Agent. The 5-Year Agreement was amended to include an "accordionfeature" which, if utilized, will allow for the increase of the totalcommitments of up to $75,000 with bank approval. 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 EBITDA of Cambrex Corporation.The Company also pays a facility fee between .175% to .30% on the entire creditfacility. 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, 2004, there was $120,000 outstanding and $148,750undrawn under the 5-year Agreement. Of the undrawn amount, $63,057 is availableto be borrowed as of December 31, 2004 due to limits established in the CreditAgreement. The 5-Year Agreement is subject to financial covenants requiring theCompany to maintain certain levels of net worth, interest coverage ratio,leverage ratios and limitations on indebtedness. The Company complied with allcovenants during 2004. 65 CAMBREX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) (11) LONG-TERM DEBT -- (CONTINUED) (b) In June 2003, the Company borrowed $75,000 in a private offeringconsisting of 7-year guaranteed senior Notes due in June 2010 with interestpayments due semi-annually at an annual rate of 5.31%. During October 2003, theCompany borrowed an additional $25,000 in a private offering consisting of10-year guaranteed 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. The funds were used primarily to pay downexisting bank debt and provide Cambrex with longer term fixed rate debt. (c) The Company assumed three capital leases as part of the acquisition ofCambrex BioScience Baltimore, Inc. in June 2001 of $12,100. The leases are forbuildings and improvements. There is $7,280 outstanding at December 31, 2004.All capital leases are collateralized by their underlying assets. The 2004 and 2003 average interest rates were 5.5% and 4.8% respectively. Aggregate maturities of long-term debt are as follows: 2005........................................................ $ 1,4002006........................................................ 121,7212007........................................................ 1,4362008........................................................ 1,4602009........................................................ 1,570Thereafter.................................................. 100,000 -------- Total............................................. $227,587 ======== (12) DERIVATIVES AND FAIR VALUE OF FINANCIAL INSTRUMENTS The Company uses derivative financial instruments to reduce exposures tomarket risks resulting from fluctuations in interest rates and foreign exchangerates. The Company does not enter into financial instruments for trading orspeculative purposes. The Company is exposed to credit loss in the event ofnonperformance by the other parties to the interest rate swap and forwardexchange contracts. However, the Company does not anticipate non-performance bythe 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,England 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 at inception of the contracts. The Company also enters into interest rate swapagreements to reduce the impact of changes in interest rates on its floatingrate debt. The swap agreements are contracts to exchange floating rate for fixedinterest payments periodically over the life of the agreements without theexchange of the underlying notional debt amounts. 66 CAMBREX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) (12) DERIVATIVES AND FAIR VALUE OF FINANCIAL INSTRUMENTS -- (CONTINUED) All forward and swap contracts outstanding at December 31, 2004 have beendesignated as cash flow hedges and, accordingly, changes in the fair value ofderivatives are recorded each period in Accumulated other comprehensive income.Changes in the fair value of the derivative instruments reported in Accumulatedother comprehensive income will be reclassified as earnings in the period inwhich earnings are impacted by the variability of the cash flows of the hedgeditem. The ineffective portion of all hedges is recognized in current-periodearnings and is immaterial to the Company's financial results. The unrealizednet gain recorded in Accumulated other comprehensive income at December 31, 2004was $792. 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 31,2004 was $1,161. The net loss on interest rate swap contracts recognized ininterest expense was $2,797 for the twelve months ended December 31, 2004. 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, 2004. WEIGHTED AVG. RATENOTIONAL MATURITY -------------------AMOUNTS DATE PAY RECEIVE-------- -------- ----- -------- $10,000.......................................... 2006 4.72% 2.30%$10,000.......................................... 2006 5.05% 2.55%$10,000.......................................... 2005 4.66% 2.47%$10,000.......................................... 2005 4.73% 2.47%$ 5,000.......................................... 2005 3.37% 2.13%$10,000.......................................... 2005 4.75% 2.55%$20,000.......................................... 2005 4.98% 2.44%$ 5,000.......................................... 2005 3.35% 2.13% 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, based on quotedmarket prices, was in a loss position of $1,255 at December 31, 2004. Foreign Exchange Instruments The table below reflects the notional and fair value amounts of foreignexchange contracts at December 31, 2004 and 2003. 2004 2003 ----------------- ----------------- NOTIONAL FAIR NOTIONAL FAIR AMOUNTS VALUE AMOUNTS VALUE -------- ------ -------- ------ Forward exchange contracts....................... $16,692 $1,189 $28,036 $2,089 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 53% of the underlying debt hasvariable rate terms and reprices quarterly. Of this amount, the Company hasinterest rate swaps covering 67% of the outstanding debt at December 31, 67 CAMBREX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) (12) DERIVATIVES AND FAIR VALUE OF FINANCIAL INSTRUMENTS -- (CONTINUED)2004. The remaining 47% of the debt has fixed interest rates, however, atcurrent market interest rates, the carrying amount and fair market values arenot notionally different as of December 31, 2004. The balance of unrealizedgains included in comprehensive income at December 31, 2004 will be recognizedin earnings over the next 12 months. (13) DISCONTINUED OPERATIONS -- SALE OF RUTHERFORD CHEMICALS On November 10, 2003, the Company completed the sale of RutherfordChemicals. As a result of the completion of the transaction, the businesscomprising the Rutherford Chemicals segment is being reported as a discontinuedoperation in all periods presented. The agreement specified proceeds for thesale of $55,000 in cash at closing, a $2,000 subordinated 12% interest bearingnote payable in full in 5 1/2 years from the closing date, and an $8,000performance-based cash earn-out if certain future operating profit targets areachieved in each of the next 3 years. These terms resulted in a write-down ofassets to estimated fair value of approximately $53,098 which is based on theselling price, including fees associated with the transaction. The Company hasnot included any of the performance based cash earn-out in the computation ofthe $53,098 loss and income for discontinued operations will be recorded infuture periods if the Company receives any payments under the earn-outarrangement. In the first quarter of 2004, the Company finalized the postclosing working capital adjustment. This adjustment, along with legal and othercharges associated with the sale, resulted in an additional $742 charge todiscontinued operations in the first quarter 2004. In the third quarter of 2004,the Company incurred an additional $236 primarily for revised estimates ofenvironmental liabilities associated with Rutherford Chemicals. These losseshave not been tax effected, the reasons for which are more fully explained inNote #9. In accordance with the sale agreement, the Company has retained certainliabilities of the Rutherford Chemicals business including existing generallitigation matters, including the Vitamin B-3 matter, pre-closing environmentalliabilities and post retirement benefits and pension liabilities. See Note #23. The following table shows revenues and loss from the discontinuedoperations: YEARS ENDED DECEMBER 31, --------------------------- 2004 2003 2002 2004 2003 2002 ----- -------- -------- Revenues................................................ $ -- $108,569 $127,746 ===== ======== ========Pre-tax loss from operations of discontinued operations............................................ (978) (1,243) (8,933)Write-down to fair value................................ -- (53,098) -- ----- -------- --------Loss from discontinued operations before taxes.......... $(978) $(54,341) $ (8,933) ===== ======== ======== (14) 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, 2004 and 2003. Authorized shares of Nonvoting Common Stock were730,746 at December 31, 2004 and 2003. At December 31, 2004 there were 1,004,069 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, 68 CAMBREX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) (14) STOCKHOLDERS' EQUITY -- (CONTINUED)subject to any legal requirements applicable to holders restricting the extentto which they may own voting stock. As of December 31, 2004 and 2003, no sharesof Nonvoting Common Stock were outstanding. The Company held treasury stock of 2,593,129 and 2,614,910 shares atDecember 31, 2004 and 2003, 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 31,2004. 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, 2004 and 2003, there was nopreferred stock outstanding. (15) STOCK BASED COMPENSATION The Company has seven stock-based compensation plans currently in effect.The 1994 Stock Option Plan ("1994 Plan"), the 1996 Performance Stock Option Plan("1996 Plan"), the 1998 Stock Option Plan ("1998 Plan"), the 2001 PerformanceStock Option Plan ("2001 Plan"), the 2003 Performance Stock Option Plan ("2003Plan"), and the 2004 Omnibus Incentive Plan ("2004 Plan") provide for thegranting of non-qualified and incentive stock options (ISOs) intended to qualifyas additional incentives to management and other key employees. The 2000Non-Executive Stock Option Plan ("2000 Plan") provides for the granting ofnon-qualified stock options and ISOs intended to qualify as additionalincentives to non-executive employees. The 1996 Plan, the 1998 Plan, the 2001Plan, the 2003 Plan and the 2004 Plan also provide for the granting ofnon-qualified stock options to non-employee directors. Certain options under the 1996 Plan, the 1998 Plan, the 2000 Plan, the 2001Plan, and the 2003 Plan may become exercisable six years after the date ofgrant, subject to acceleration if the publicly traded share price of the Company's Common Stock equals or exceeds levels determined by the CompensationCommittee of the Board of Directors within certain time periods or in the eventof a change in control. Options may also become exercisable based on the passageof time, such that the option becomes fully exercisable in a series ofcumulating portions over a four-year period. Options have a term of no more thanten years from the date of grant. 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) amended by FAS 148 establishes financial accounting andreporting standards for stock-based employee compensation plans. The Company hasadopted the 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) (15) STOCK BASED COMPENSATION -- (CONTINUED) Shares of Common Stock subject to outstanding options under the stockoption plans were as follows: OPTIONS OUTSTANDING OPTIONS EXERCISABLE ---------------------------------------------------- -------------------- WEIGHTED AVERAGE ---------------------------------------- WEIGHTED REMAINING AVERAGE AUTHORIZED NUMBER OPTION PRICE CONTRACTUAL EXERCISE NUMBER OF EXERCISE FOR ISSUANCE OF SHARES PER SHARE $ LIFE (YRS) PRICE $ SHARES PRICE $ ------------ --------- --------------- ----------- -------- --------- -------- 1994 Plan............ 300,000 9,000 11.438 0.32 11.438 9,000 11.44 14,000 26.667 6.31 26.667 14,000 26.671996 Plan............ 3,000,000 391,000 12.375 - 17.500 1.00 13.698 391,000 13.70 201,700 18.675 - 27.500 5.86 23.693 93,177 24.74 206,582 27.562 - 41.290 5.97 35.735 111,209 33.54 258,667 43.625 - 46.850 5.05 43.637 97,001 43.631998 Plan............ 1,180,000 451,849 21.903 - 27.563 3.41 22.615 424,599 22.66 139,039 34.750 - 46.850 5.56 41.549 66,172 39.392000 Plan............ 500,000 88,500 34.750 - 37.070 6.22 35.332 -- -- 241,500 40.125 - 46.850 5.85 44.285 53,828 44.192001 Plan............ 750,000 503,000 18.675 - 29.750 8.00 26.522 204,250 27.03 198,194 36.950 - 46.850 7.08 39.940 85,194 42.822003 Plan............ 500,000 396,476 18.675 - 25.560 5.42 19.900 96,491 19.722004 Plan............ 1,500,000 836,850 21.903 6.64 21.903 142,546 21.90 --------- --------- ---------TOTAL SHARES......... 7,730,000 3,936,357 11.438 - 46.850 27.07 1,788,467 25.11 ========= ========= ========= Information regarding the Company's stock option plans is summarized below: WEIGHTED AVERAGE ---------------------- NUMBER OF EXERCISE OPTIONS SHARES PRICE $ EXERCISABLE --------- -------- ----------- 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 --------- Granted................................................... 1,015,350 22.08 Exercised................................................. (353,951) 17.48 Cancelled................................................. (425,907) 35.76 ---------Outstanding at December 31, 2004............................ 3,936,357 1,788,467 ========= 70 CAMBREX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) (15) STOCK BASED COMPENSATION -- (CONTINUED)The weighted-average grant-date fair value of options granted during 2004, 2003and 2002 was $9.68, $9.09 and $14.51, respectively, per share. Cambrex senior executives participate in a long-term incentive plan whichrewards achievement of long-term strategic goals with restricted stock units.Awards are made annually to key executives and vest in one-third increments onthe first, second and third anniversaries of the grant. On the third anniversaryof the grant, restrictions on sale or transfer are removed and shares are issuedto executives. In the event of termination of employment, the participant isentitled to the vested portion of the restricted stock units and forfeits theremaining amount; the three-year restriction remains in place. In the event ofdeath, retirement, or permanent disability, all shares vest and the deferredsales restriction lapses. For the years ended December 31, 2004, 2003 and 2002the Company recorded $952, $695 and $419 respectively, in compensation expensefor this plan. Shares are held in trust for the restricted stock grants. Thenumber of shares held at December 31, 2004 and 2003 was 87,314 and 73,783,respectively. The fair value of these shares was $2,366 and $1,864 at 2004 and2003, respectively. In May 2003, the former Chief Executive Officer and current ExecutiveChairman of the Board was granted 150,000 incentive stock appreciation rights.In the fourth quarter 2003 these rights vested and, as such, the Chairman of theBoard is entitled to a cash settlement representing the difference in valuebetween the closing price of Cambrex stock on the day of the grant, which was$19.30, and the closing price of Cambrex stock on the day the rights areexercised. These rights terminate one year after his retirement as an employeeof the Company. These rights will be marked to market until the rights areexercised or expire with the amount being recorded as compensation expense orbenefit in the applicable period. For the years ended December 31, 2004 and 2003the Company recorded $276 and $894, respectively, in compensation expense. (16) RETIREMENT PLANS Domestic Pension Plans The Company maintains two U.S. defined-benefit pension plans: (1) theNepera Hourly Pension Plan (the "Nepera Plan") which covers the union employeesat the Harriman, New York plant, which the Company sold on November 10, 2003,and (2) the Cambrex Pension Plan (the "Cambrex Plan") which covers all othereligible employees. Benefits for the salaried and certain hourly employees are based on salaryand years of service, while those for employees covered by a collectivebargaining agreement are based on negotiated benefits and years of service.Effective January 1, 2003, newly hired employees (except those covered bycollective bargaining) will not participate in these plans. The 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 2004 and 2003 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. 71 CAMBREX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) (16) RETIREMENT PLANS -- (CONTINUED) The funded status of these plans, incorporating fourth quartercontributions, as of September 30, 2004 and 2003 is as follows: 2004 2003 ------- ------- CHANGE IN BENEFIT OBLIGATIONBenefit obligation at October 1............................. $47,267 $40,326Service cost................................................ 2,395 2,598Interest cost............................................... 3,010 2,841Curtailments................................................ -- (1,214)Actuarial loss.............................................. 2,494 4,388Benefits paid............................................... (1,913) (1,672) ------- -------Benefit obligation at September 30.......................... $53,253 $47,267 ------- ------- 2004 2003 -------- -------- CHANGE IN PLAN ASSETSFair value of plan assets at October 1...................... $ 28,951 $ 24,621Actual return on plan assets................................ 3,411 3,920Contributions............................................... 4,438 2,082Benefits paid............................................... (1,913) (1,672) -------- --------Fair value of plan assets at September 30................... $ 34,887 $ 28,951 -------- --------Funded status............................................... (18,366) (18,316)Unrecognized prior service cost............................. 522 567Unrecognized net loss....................................... 14,266 13,008Additional minimum liability................................ (9,601) (9,857) -------- --------Accrued benefit cost at September 30,....................... (13,179) (14,598)Fourth quarter contributions................................ 901 481 -------- --------Accrued benefit cost at December 31,........................ $(12,278) $(14,117) ======== ======== Major assumptions used in determining the benefit obligation as ofSeptember 30 for the Company's domestic pension plans are presented in thefollowing table: 2004 2003 ----- ----- Discount rate............................................... 5.75% 6.00%Rate of compensation increase............................... 4.50% 4.50% 72 CAMBREX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) (16) RETIREMENT PLANS -- (CONTINUED) The components of net periodic pension cost are as follows: 2004 2003 2002 ------- ------- ------- COMPONENTS OF NET PERIODIC BENEFIT COSTService Cost............................................ $ 2,395 $ 2,598 $ 1,625Interest Cost........................................... 3,010 2,841 2,339Expected return on plan assets.......................... (2,768) (2,098) (2,190)Amortization of prior service cost...................... 46 68 38Recognized actuarial loss............................... 592 519 88Curtailment loss on sale of Rutherford.................. -- 351 -- ------- ------- -------Net periodic benefit cost............................... $ 3,275 $ 4,279 $ 1,900 ======= ======= ======= Major assumptions used in determining the net cost for the Company'sdomestic pension plans are presented in the following table: 2004 2003 2002 ----- ----- ----- Discount rate............................................... 6.00% 6.75% 6.75%Expected return on plan assets.............................. 8.50% 8.50% 8.50%Rate of compensation increase............................... 4.50% 4.50% 5.00% In making its assumption for the long-term rate of return, the Company hasutilized historical rates earned on securities allocated consistently with itsinvestments. The aggregate Accumulated Benefit Obligation (ABO) as of September 30, 2004of $48,066 exceeds plan assets by $13,179 in 2004 for all domestic plans. The Company expects to contribute approximately $500 in cash to its twoU.S. defined-benefit pension plans in 2005. Estimated Future Benefit Payments The following benefit payments, which reflect expected future service, asappropriate, are expected to be paid: PENSION BENEFITS -------- 2005........................................................ $ 1,8222006........................................................ 1,8962007........................................................ 2,0552008........................................................ 2,1742009........................................................ 2,3512010-2014................................................... 14,858 The investment objective for plan assets is to achieve long-term growth ofcapital with exposure to risk set at an appropriate level. The objective shallbe accomplished 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. 73 CAMBREX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) (16) RETIREMENT PLANS -- (CONTINUED) The allocation of pension plan assets is as follows: PERCENTAGE OF PLAN ASSETS TARGET -------------ASSET CATEGORY: ALLOCATION 2004 2003--------------- ---------- ----- ----- U.S. Equities.............................................. 30%-65% 50.2% 46.3%International Equities..................................... 0%-15% 10.4% 10.1%U.S. Fixed Income.......................................... 30%-50% 37.6% 43.6%Cash....................................................... N/A 1.8% -- ----- ----- 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 December 31, 2004 and 2003 isas follows: 2004 2003 ------- ------- CHANGE IN BENEFIT OBLIGATIONBenefit obligation at beginning of year..................... $ 7,021 $ 6,136Service cost................................................ 215 251Interest cost............................................... 440 423Actuarial (gain)/loss....................................... (29) 436Benefits paid............................................... (225) (225) ------- -------Benefits obligation at end of year.......................... 7,422 7,021 ======= =======Funded status............................................... (7,422) (7,021)Unrecognized prior service cost............................. 24 28Unrecognized net loss....................................... 1,807 1,995Additional minimum liability................................ (1,536) (1,718) ------- -------Accrued benefit at December 31,............................. $(7,127) $(6,716) ======= ======= Major assumptions used in determining the benefit obligation as of December31 for the Company's SERP Plans are presented in the following table: 2004 2003 ----- ----- Discount rate............................................... 5.75% 6.00%Rate of compensation increase............................... 5.00% 5.00% 74 CAMBREX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) (16) RETIREMENT PLANS -- (CONTINUED) The components of net periodic benefit cost are as follows: 2004 2003 2002 ---- ---- ---- COMPONENTS OF NET PERIODIC BENEFIT COSTService Cost................................................ $215 $251 $226Interest Cost............................................... 440 423 396Amortization of prior service cost.......................... 4 4 15Recognized actuarial loss................................... 159 132 114 ---- ---- ----Net periodic benefit cost................................... $818 $810 $751 ==== ==== ==== Major assumptions used in determining the net cost for the Company's SERPplans are presented in the following table: 2004 2003 2002 ----- ----- ----- Discount rate............................................... 6.00% 6.75% 7.50%Rate of compensation increase............................... 5.00% 5.00% 5.00% Estimated Future Benefit Payments The following benefit payments, which reflect expected future service, asappropriate, are expected to be paid: SERP ----- 2005........................................................ $ 3362006........................................................ 359 2007........................................................ 4612008........................................................ 5692009........................................................ 5632010-2014................................................... 2,761 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 75 CAMBREX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) (16) RETIREMENT PLANS -- (CONTINUED)determined, and where applicable, in compliance with local statutes. The fundedstatus of these plans, as of December 31, 2004 and 2003 is as follows: 2004 2003 -------- -------- CHANGE IN BENEFIT OBLIGATIONBenefit obligation at beginning of year..................... $ 19,336 $ 13,664Service cost................................................ 882 633Interest cost............................................... 990 828Plan participants' contribution............................. (33) (37)Actuarial loss.............................................. 1,777 1,232Benefits paid............................................... (17) (134)Foreign exchange............................................ 1,953 3,150 -------- --------Benefit obligation at end of year........................... $ 24,888 $ 19,336 ======== ========CHANGE IN PLAN ASSETSFair value of plan assets at beginning of year.............. $ 3,738 $ 2,490Actual return on plan assets................................ 354 343Company contributions....................................... 551 310Plan participant contribution............................... 169 145Benefits paid............................................... (17) (134)Foreign exchange............................................ 393 583 -------- --------Fair value of plan assets at end of year.................... $ 5,188 $ 3,737 -------- --------Funded status............................................... $(19,700) $(15,599)Unrecognized actuarial loss................................. 7,952 5,851Unrecognized prior service cost............................. (87) (85)Unrecognized net gain....................................... (433) (442)Additional minimum liability................................ (3,919) --Foreign exchange............................................ 352 628 -------- --------Accrued benefit............................................. $(15,835) $ (9,647) ======== ======== Certain adjustments were made in 2004 for the 2003 additional minimumpension liability. The adjustments were not considered material to priorperiods. Major assumptions used in determining the benefit obligation as of December Major assumptions used in determining the benefit obligation as of December31, for the Company's International pension plans are presented in the followingtable: 2004 2003 ------------- ------------- Discount rate.......................................... 4.50% - 5.26% 5.20% - 5.50%Rate of compensation increase.......................... 3.00% - 3.50% 3.00% - 3.75% 76 CAMBREX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) (16) RETIREMENT PLANS -- (CONTINUED) The components of the net periodic pension cost is as follows: 2004 2003 2002 ------ ------ ----- COMPONENTS OF NET PERIODIC BENEFIT COSTService Cost................................................ $ 882 $ 633 $ 471Interest Cost............................................... 990 828 598Expected return on plan assets.............................. (288) (182) (221)Amortization of excess plan net............................. (35) (32) (27)Amortization of prior service cost.......................... 166 127 107 ------ ------ -----Net periodic benefit cost................................... $1,715 $1,374 $ 928 ====== ====== ===== Major assumptions used in determining the net cost for the Company'sinternational pension plans are presented in the following table: 2004 2003 2002 ------------- ------------- ------------- Discount rate........................... 4.50% - 5.26% 5.20% - 5.50% 5.50% - 5.60%Expected return on plan assets.......... 6.89% 7.34% 6.90% - 7.60%Rate of compensation increase........... 3.00% - 3.50% 3.00% - 3.75% 3.00% - 3.50% The aggregate ABO of $21,023 for international plans exceeds plan assets by$15,835 in 2004. The Company expects to contribute approximately $669 in cash to itsinternational pension plans in 2005. Estimated Future Benefit Payments The following benefit payments, which reflect expected future service, asappropriate, are expected to be paid: PENSION BENEFITS -------- 2005........................................................ $ 2972006........................................................ 3402007........................................................ 3842008........................................................ 4642009........................................................ 5382010-2014................................................... 3,654 The allocation of pension plan assets is as follows: PERCENTAGE OF PLAN ASSETS -------------ASSET CATEGORY: 2004 2003--------------- ----- ----- Equities.................................................... 92.2% 95.8%Fixed Income................................................ 3.6% 1.7%Property.................................................... 1.4% 0.6%Cash........................................................ 2.8% 1.9% ----- ----- 100.0% 100.0% 77 CAMBREX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) (16) RETIREMENT PLANS -- (CONTINUED) Savings Plan Cambrex makes available to all employees a savings plan as permitted underSections 401(k) and 401(a) of the Internal Revenue Code. Employee contributionsare matched in part by Cambrex. The cost of this plan amounted to $2,092, $2,113and $1,941 in 2004, 2003 and 2002, 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, 2004 and 2003 there is$1,270 and $1,611, 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 31,2004 and 2003 is $1,270 and $1,611, 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, 2004 and 2003 are 228,677 and 248,504,respectively, and are included as a reduction of equity at cost. The value ofthe shares held in trust and the corresponding liability of $6,197 at December31, 2004 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. (17) 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 such in 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 and all employees hired after December 31, 2002(excluding those covered by collective bargaining) are not eligible for thesebenefits. 78 CAMBREX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) (17) OTHER POSTRETIREMENT BENEFITS -- (CONTINUED) The benefit obligation of the plan as of September 30, 2004 and 2003,incorporating fourth quarter payments, is as follows: 2004 2003 ------- ------- CHANGE IN BENEFIT OBLIGATIONAccumulated benefit obligation at beginning of year......... $ 2,532 $ 7,323Service cost................................................ 53 124Interest cost............................................... 154 198Prior service cost.......................................... -- (3,446)Actuarial loss/(gain)....................................... 207 (742)Curtailment................................................. -- (737)Benefits paid............................................... (291) (188) ------- -------Accumulated benefit obligation at end of year............... $ 2,655 $ 2,532Unrecognized net loss....................................... (2,227) (2,139)Unrecognized prior service cost............................. 1,146 1,298 ------- -------Accrued benefit cost at September 30,....................... $ 1,574 $ 1,691Fourth quarter benefits paid................................ (36) (48) ------- -------Accrued benefit obligation at end of year................... $ 1,538 $ 1,643 ======= ======= The periodic postretirement benefit cost includes the following components: YEARS ENDED DECEMBER 31, ------------------------ 2004 2003 2002 ----- ------- ------ COMPONENTS OF NET PERIODIC BENEFIT COSTService cost of benefits earned............................ $ 53 $ 124 $ 379Interest cost.............................................. 154 198 465Amortization of transition obligation...................... -- -- 93Actuarial loss recognized.................................. 119 211 163Amortization of unrecognized prior service cost............ (151) (175) --Curtailment gain on Rutherford............................. -- (1,046) -- ----- ------- ------Total periodic postretirement benefit cost................. $ 175 $ (688) $1,100 ===== ======= ====== 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 ----------- ------------------ 2004 2003 2004 2003 2002 ---- ---- ---- ---- ---- WEIGHTED-AVERAGE ASSUMPTIONS:Discount rate....................................... 5.75% 6.00% 6.00% 6.75% 7.50% 79 CAMBREX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) (17) OTHER POSTRETIREMENT BENEFITS -- (CONTINUED) Estimated Future Benefit Payments The following benefit payments, which reflect expected future service, asappropriate, are expected to be paid: OPEB BENEFITS -------- 2005........................................................ $1012006........................................................ 1102007........................................................ 1242008........................................................ 1392009........................................................ 1502010-2014................................................... 871 The assumed health care cost trend rate used to determine the accumulatedpostretirement benefit obligation is 10% in 2004 decreasing 1% per year to anultimate rate of 5% in 2009 (11% in 2003). A one-percentage-point increase inthe assumed health care cost trend rate would increase the accumulatedpostretirement benefit obligation by $86 and would increase the sum of interestand service cost by $7. A one-percentage-point decrease would lower theaccumulated postretirement benefit obligation by $100 and would decrease the sumof interest and service cost by $9. (18) RESTRUCTURING, IMPAIRMENTS AND OTHER CHARGES 2004 Actions In the first quarter of 2004, management communicated to employees that aworkforce reduction would occur at one of the Company's European facilitieswithin the Human Health segment. The Company recorded a $1,000 charge in Other,net operating expenses to accrue for the termination benefits related to theworkforce reduction of 13 employees. As of December 31, 2004 approximately $900has been paid. The following table displays the activity related to the 2004 reduction inworkforce reserve through December 31, 2004 (in millions): 2004 ACTIVITY ---------------------------- DECEMBER 31, 2004 2004 EXPENSE CASH PAYMENTS RESERVE BALANCE ------------ ------------- ----------------- Workforce reduction........................ $1.0 $(0.9) $0.1 ==== ===== ==== 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 part 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. 80 CAMBREX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) (18) RESTRUCTURING, IMPAIRMENTS AND OTHER CHARGES -- (CONTINUED) Severance charges, which apply to a Rutherford Chemicals domestic site andthe Corporate office, relate to the termination of approximately 19 employees.As of January 31, 2003, all these employees have been terminated. The accrual balance related to the 2002 actions for severance and othercosts included above was approximately $200 at December 31, 2004. The following table displays the activity related to the 2002restructuring, impairments and other charges through December 31, 2004 (inmillions): DECEMBER 31, DECEMBER 31, DECEMBER 31, TOTAL NON-CASH CASH 2002 RESERVE CASH 2003 RESERVE CASH 2004 RESERVE CHARGES WRITEOFFS PAYMENTS BALANCE 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 (0.2) -- Facility closure costs............... 1.8 -- (0.2) 1.6 (0.6) 1.0 (0.8) 0.2 ---- ----- ---- --- ---- --- ---- --- Total restructuring, impairments and other charges..... 14.5 (11.7) (0.2) 2.6 (1.4) 1.2 (1.0) 0.2 Inventory write-offs.......... 0.6 (0.6) -- -- -- -- -- -- ---- ----- ---- --- ---- --- ---- --- Total............... 15.1 (12.3) (0.2) 2.6 (1.4) 1.2 (1.0) 0.2 ==== ===== ==== === ==== === ==== === (19) OTHER INCOME AND EXPENSE -- NET The Other-net component of Other (income) expense is $73, $139 and $7,890for 2004, 2003 and 2002 respectively. 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 performed an assessment inthe carrying value of the other investment and concluded that a $4,255impairment was necessary in the second quarter 2002. Also included in the 2002expense were $312 of costs due to a convertible debt arrangement that wasabandoned, and $194 of costs associated with an investment in a joint venture. (20) SEGMENT INFORMATION The Company classifies its business units into three reportable segments:Bioproducts, consisting of research products and other therapeutic applicationproducts, Biopharma, consisting of contract biopharmaceutical processdevelopment and manufacturing services and Human Health, consisting of activepharmaceutical ingredients and pharmaceutical intermediates produced under Foodand Drug Administration cGMP for use in the production of prescription andover-the-counter drug products and other fine custom chemicals derived fromorganic chemistry. Information as to the operations of the Company in each of its businesssegments is set forth below based on the nature of the products and servicesoffered. Cambrex evaluates performance based gross profit and operating profit.Operating profit is most similar to income from continuing operations and areconciliation is 81 CAMBREX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) (20) SEGMENT INFORMATION -- (CONTINUED)included below. Intersegment sales are not material. The Company allocatescertain corporate expenses to each of the segments. The following is a summary of business segment information: 2004 2003 2002 -------- -------- -------- GROSS SALESBioproducts.......................................... $136,108 $119,298 $107,870Biopharma............................................ 43,270 44,128 55,218Human Health......................................... 259,737 242,165 231,342 -------- -------- -------- $439,115 $405,591 $394,430 ======== ======== ======== 2004 2003 2002 -------- -------- -------- GROSS PRODUCT SALES DETAIL FOR EACH SEGMENTBioproducts: Research Products.................................. $ 70,657 $ 62,650 $ 58,308 Therapeutic Application............................ 65,451 56,648 49,562 -------- -------- -------- Total Bioproducts.......................... $136,108 $119,298 $107,870 ======== ======== ======== ======== ======== ========Biopharma: Contract Biopharmaceutical Manufacturing........... $ 43,270 $ 44,128 $ 55,218 -------- -------- -------- Total Biopharma............................ $ 43,270 $ 44,128 $ 55,218 ======== ======== ========Human Health: Active Pharmaceutical Ingredients.................. $200,555 $183,632 $172,953 Pharmaceutical Intermediates....................... 27,365 24,349 24,194 Other.............................................. 31,817 34,184 34,195 -------- -------- -------- Total Human Health......................... $259,737 $242,165 $231,342 ======== ======== ======== 2004 2003 2002 -------- -------- -------- GROSS PROFITBioproducts.......................................... $ 74,930 $ 60,056 $ 56,614Biopharma............................................ 4,880 11,829 27,049Human Health......................................... 90,930 90,521 94,055 -------- -------- -------- $170,740 $162,406 $177,718 ======== ======== ======== 82 CAMBREX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) (20) SEGMENT INFORMATION -- (CONTINUED) 2004 2003 2002 -------- ---------- -------- OPERATING (LOSS)/PROFITBioproducts.......................................... $ 26,386 $ 17,205 $ 15,306Biopharma............................................ (53,813) 2,256 16,798Human Health......................................... 50,651 56,818 59,718Corporate............................................ (23,632) (37,455) (19,898) -------- -------- -------- Total Operating (Loss)/profit.............. $ (408) $ 38,824 $ 71,924 ======== ======== ========Interest expense, net................................ $ 10,950 $ 11,840 $ 11,264Other, net........................................... 73 139 7,890Taxes................................................ 14,461 26,600 12,815 -------- -------- -------- (Loss)/income from continuing operations... $(25,892) $ 245 $ 39,955 ======== ======== ======== 2004 2003 -------- ---------- TOTAL ASSETSBioproducts.......................................... $220,791 $197,689Biopharma............................................ 134,591 176,467Human Health......................................... 399,538 358,811Corporate............................................ 37,065 45,536 -------- -------- $791,985 $778,503 ======== ======== 2004 2003 2002 -------- ---------- -------- CAPITAL SPENDINGBioproducts.......................................... $ 10,601 $ 8,477 $ 6,197Biopharma............................................ 9,167 12,319 5,098Human Health......................................... 18,593 15,646 28,180Corporate............................................ 1,119 1,415 968 -------- -------- -------- $ 39,480 $ 37,857 $ 40,443 ======== ======== ======== 2004 2003 2002 -------- ---------- -------- DEPRECIATIONBioproducts.......................................... $ 5,514 $ 5,125 $ 4,966Biopharma............................................ 4,239 2,277 2,122Human Health......................................... 27,950 25,072 20,409Corporate............................................ 1,234 1,734 1,787 -------- -------- -------- $ 38,937 $ 34,208 $ 29,284 ======== ======== ======== 83 CAMBREX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) (20) SEGMENT INFORMATION -- (CONTINUED) 2004 2003 2002 -------- ---------- -------- AMORTIZATIONBioproducts.......................................... $ 1,455 $ 1,206 $ 1,169Biopharma............................................ 431 413 379Human Health......................................... 35 7 6 -------- -------- -------- $ 1,921 $ 1,626 $ 1,554 ======== ======== ======== (21) 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 2004, 2003and 2002: DOMESTIC FOREIGN TOTAL -------- -------- -------- 2004Gross Sales.......................................... $200,442 $238,673 $439,115Long-lived tangible assets........................... 124,595 156,195 280,7902003Gross Sales.......................................... $181,925 $223,666 $405,591Long-lived tangible assets........................... 118,509 150,638 269,147 Long-lived tangible assets........................... 118,509 150,638 269,1472002Gross Sales.......................................... $187,348 $207,082 $394,430Long-lived tangible assets........................... 111,208 128,736 239,944 Export sales, included in domestic gross sales, in 2004, 2003 and 2002amounted to $29,945, $22,100, and $23,684, respectively. Sales by geographic area consist of the following: 2004 2003 2002 -------- -------- -------- North America........................................ $213,668 $206,079 $216,591Europe............................................... 198,540 173,035 150,180Asia................................................. 17,723 16,401 17,745Other................................................ 9,184 10,076 9,914 -------- -------- --------Total................................................ $439,115 $405,591 $394,430 ======== ======== ======== 84 CAMBREX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) (22) COMMITMENTS The Company has operating leases expiring on various dates through the year2013. The leases are primarily for office and laboratory equipment and vehicles.At December 31, 2004, future minimum commitments under non-cancelable operatinglease arrangements were as follows: Year ended December 31: 2005...................................................... $ 4,223 2006...................................................... 4,063 2007...................................................... 4,163 2008...................................................... 3,606 2009 and thereafter....................................... 9,798 ------- Total commitments......................................... $25,853 ======= Total operating lease expense was $4,815, $4,205 and $5,017 for the yearsended December 31, 2004, 2003 and 2002, respectively. The Company is party to several unconditional purchase obligationsresulting from contracts that contain legally binding provisions with respect toquantities, pricing and timing of purchases. The Company's purchase obligationsinclude commitments to purchase raw materials and equipment and for theconstruction of a new warehouse. At December 31, 2004 future commitments underthese obligations were as follows: Year ended December 31: 2005...................................................... $ 8,065 2006...................................................... 2,459 2007...................................................... 986 2008...................................................... 928 2009 and thereafter....................................... 2,724 ------- Total Commitments......................................... $15,162 ======= 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 $6,015 was paid as of December 31, 2004 in accordance with theagreement, with the remaining $6,400 to be paid over the next four years. AtDecember 31, 2004 future commitments under this agreement were as follows: Year ended December 31: 2005...................................................... $1,600 2006...................................................... 1,600 2007...................................................... 1,600 2008...................................................... 1,600 ------ Total Commitments......................................... $6,400 ====== 85 CAMBREX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) (23) CONTINGENCIES The Company is subject to various investigations, claims and legalproceedings covering a wide range of matters that arise in the ordinary courseof its business activities. The Company continually assesses all known facts andcircumstances as they pertain to all legal and environmental matters andevaluates the need for reserves and/or disclosures as deemed necessary based onthese facts and circumstances and as such facts and circumstances develop. Environmental In connection with laws and regulations pertaining to the protection of theenvironment, the Company and/or its subsidiaries is a party to severalenvironmental proceedings and remediation investigations and cleanups and, alongwith other companies, has been named a "potentially responsible party" forcertain waste disposal sites ("Superfund sites"). Additionally, as discussed inthe "Sale of Rutherford Chemicals" section of this Note, the Company hasretained the liability for certain environmental proceedings, associated withthe Rutherford Chemicals business. Each of these matters is subject to variousuncertainties, and it is possible that some of these matters will be decidedunfavorably against the Company. The resolution of such matters often spansseveral years and frequently involves regulatory oversight and/or adjudication.Additionally, many remediation requirements are not fixed and are likely to beaffected by future technological, site, and regulatory developments.Consequently, the ultimate extent of liabilities with respect to such matters,as well as the timing of cash disbursements cannot be determined with certainty. In matters where the Company has been able to reasonably estimate itsliability, the Company has accrued for the estimated costs associated with thestudy and remediation of Superfund sites not owned by the Company and the study and remediation of Superfund sites not owned by the Company and theCompany's current and former operating sites. These accruals were $5,570 and$5,100 at December 31, 2004 and 2003, respectively. The increase in the accrualis due to currency fluctuation of $252, payments of $332 and an increase to thereserve of $550. A portion of this increase relates to an increase in anexisting reserve associated with the on-going investigation and remediation atthe Company's Carlstadt, New Jersey location. An assessment of remedial costsbased on information currently known resulted in the increase. Based uponcurrently available information and analysis, the Company's current accrualrepresents management's best estimate of what it believes are the probable andestimable costs associated with environmental proceedings including amounts forlegal and investigation fees where remediation costs may not be estimable at thereporting date. The Company expects to receive information in the near future on threematters, as described below that could impact the Company's current assessmentof its probable and estimable costs and as such may require an adjustment to thereserves. As a result of the sale of the Bayonne, New Jersey facility (see "Sale ofRutherford Chemicals" section of this Note), an obligation to investigate siteconditions and conduct required remediation under the New Jersey Industrial SiteRecovery Act was triggered and the Company has retained the responsibility forsuch obligation. The Company completed a Preliminary Assessment (PA) of the Siteand submitted the PA to the New Jersey Department of Environmental Protection.The PA identified potential areas of concern based on historical operations andproposed certain sampling at the Site. The Company has reserved for the costs ofthe sampling. The results of the sampling will be used to develop an estimate ofthe Company's future liability for remediation costs, if required. In March 2000, the Company completed the acquisition of the CambrexProfarmaco Landen facility in Belgium. At the time of acquisition, Cambrex wasaware of certain site contamination and recorded a reserve for the estimatedcosts of remediation. This property has been the subject of an extensiveon-going 86 CAMBREX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) (23) CONTINGENCIES -- (CONTINUED)environmental investigation, which has been completed with no change to thereserve warranted based on such information. The health risk assessment relatedto the site contamination is on-going. The Company's Cosan subsidiary conducted manufacturing operations inClifton, New Jersey from 1968 until 1979. In 1997, Cosan entered into anAdministrative Consent Order with the State of New Jersey Department ofEnvironmental Protection. Under the Administrative Consent Order, Cosan isrequired to complete an investigation of the Clifton site conditions and conductremediation as may be necessary. The investigation of site conditions continuesand is expected to be completed in mid-2005. The results of the investigationwill enable the Company to estimate its liability, if any. In February 2005, theNew Jersey Federal District Court ruled that a lawsuit against Cosan by theowners of property adjacent to the Clifton location could be placed on theactive calendar. The outcome of this matter could also affect the reserves. The Company is involved in other matters where the range of liability isnot reasonably estimable at this time and it is not determinable wheninformation will become available to provide a basis for recording an accrual,should an accrual be required. If any of the Company's environmental matters are resolved in a moreunfavorable manner than presently estimated, these matters, either individuallyor in the aggregate, could have a material adverse effect on the Company's financial condition, operating results and cash flows when resolved in a futurereporting period. Litigation and Other Matters Mylan Laboratories In 1998 the Company and its subsidiary Profarmaco S.r.l. (currently knownas Cambrex Profarmaco Milano S.r.l.") ("Profarmaco") were named as defendants(along with Mylan Laboratories, Inc. ("Mylan") and Gyma Laboratories of America,Inc., Profarmaco's distributor in the United States) in a proceeding institutedby the Federal Trade Commission ("FTC") in the United States District Court forthe District of Columbia (the "District Court"). The allegations arose fromexclusive license agreements between Profarmaco and Mylan covering two activepharmaceutical ingredients ("APIs"). The FTC alleged violations of the FederalTrade Commission Act; including unlawful restraint of trade and conspiracy tomonopolize markets for the APIs. A lawsuit making similar allegations againstthe same parties seeking injunctive relief and treble damages was filed by theAttorneys General of 31 states in the District Court on behalf of those statesand persons in those states who were purchasers of the generic pharmaceuticals.The FTC and Attorneys General's suits were settled in February 2001, with Mylan(on its own behalf and on behalf of Profarmaco and Cambrex) agreeing to pay over$140,000 and with Mylan, Profarmaco and Cambrex agreeing to monitor certainfuture conduct. The same parties including the Company and Profarmaco have also been namedin purported class action complaints brought by private plaintiffs in variousstate courts on behalf of purchasers of the APIs in generic form, makingallegations similar to those raised in the FTC's complaint and seeking variousforms of relief including treble damages. 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. In accordance with the agreementapproximately $6,015 has been paid through 2004, with the remaining $6,400 to bepaid over the next four years. Cambrex recorded an $11,342 charge (discounted tothe present value due to the five 87 CAMBREX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) (23) CONTINGENCIES -- (CONTINUED)year pay-out) in the first quarter of 2003 as a result of this settlement. As ofDecember 31, 2004 the outstanding balance for this liability was $5,885. Vitamin B-3 On May 14, 1998, the Company's subsidiary, Nepera, which formerly operatedthe Harriman facility and manufactured and sold niacinamide (Vitamin B-3),received a Federal Grand Jury subpoena for the production of documents relatingto the pricing and possible customer allocation with regard to that product. In2000, Nepera reached agreement with the Government as to its alleged role inVitamin B-3 violations from 1992 to 1995. The Canadian government claimedsimilar violations. All government suits in the U.S. and Canada have now beenconcluded. Nepera has been named as a defendant, along with several other companies,in a number of private civil actions brought on behalf of alleged purchasers ofVitamin B-3. The actions seek injunctive relief and unspecified but substantialdamages. An accrual of $6,000 was recorded in the fourth quarter 1999 to cover the anticipated government settlements, related litigation, and legal expenses.During 2002 based on information developed during 2002 this accrual wasincreased to $10,000. Several actions have been concluded during 2003 and 2004.All settlement amounts are fully reserved. Additional settlements are beingdiscussed in several more indirect purchaser cases and we believe that currentreserves are sufficient to complete the settlements. 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. Thereafter, the Federal Circuit Court for the District of Columbiareversed the District Court's decision. The Vitamin B-3 defendants, supported bythe U.S. Department of Justice, appealed to the United States Supreme Court andoral arguments were heard on April 29, 2004. In June 2004, the United StatesSupreme Court ruled that foreign purchasers could not sue in U.S. courts underU.S. antitrust statutes if the conduct at issue resulted in purely foreign harm.However, the Court left open potential claims where foreign injuries suffered byforeign plaintiffs were dependent upon domestic harm resulting from conduct thatviolates the U.S. antitrust laws. The Supreme Court remanded the matter to theCircuit Court for briefing on the issue of whether Plaintiffs preserved such aclaim in the underlying proceedings, in which case a hearing on the claim wouldproceed in District Court. The balance of this accrual as of December 31, 2004was approximately $3,043. This accrual has been recorded in accrued liabilities.Any adjustments to this liability will be recorded as part of discontinuedoperations. Sale of Rutherford Chemicals The Company completed the sale of its Rutherford Chemicals business onNovember 10, 2003. Under the agreement for the sale, the Company providedstandard representations and warranties and included various covenantsconcerning the business, operations, liabilities and financial condition of theRutherford Chemicals business. Most of such representations and warranties willsurvive for a period of thirty days after the Buyer's preparation of its auditedfinancial statements for year-end 2004. Therefore, claims for breaches of suchrepresentations would have to be brought during that time frame. Certainspecified representations and warranties and covenants, such as those relatingto employee benefit matters and certain environmental matters, will survive forlonger periods and claims under such representations, warranties and covenantscould be brought during such longer periods. Under the sale agreement, theCompany has indemnified the Buyer for breaches of representations, warrantiesand covenants. Indemnifications for certain but not all representations andwarranties are subject to a deductible of $750 and a cap at 25 percent of thepurchase price. On March 31, 2005, the Company received a claim by thepurchasers of the Rutherford Chemicals business claiming breach 88 CAMBREX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) (23) CONTINGENCIES -- (CONTINUED)of representations and warranties contained in the October 2003 PurchaseAgreement. The Company is in the process of evaluating the claim and cannotdetermine at this time if it has any merit. Under the agreement for sale, the Company has retained the liabilitiesassociated with existing general litigation matters related to RutherfordChemicals, including Vitamin B-3 as stated above. With respect to certainpre-closing environmental matters, the Company retains the responsibility for:(i) certain existing matters including violations, environmental testing for theNew York facility incinerator and off-site liabilities; and (ii) completing theon-going remediation at the New York facility. Further, as a result of the saleof the Bayonne, New Jersey facility, the obligation to investigate siteconditions and conduct required remediation under the provisions of the New Jersey Industrial Site Recovery Act was triggered; and the Company has retainedthe responsibility for completion of any such investigation and remediation.With respect to all other pre-closing environmental liabilities, whether knownor unknown, the Buyer is responsible for the management of potential futurematters; however, the Buyer and the Company may share the costs of associatedremediation with respect to such potential future matters, subject to certainlimitations defined in the agreement for sale. The Company has accrued forexposures which are deemed probable and estimable. Class Action Matter In October 2003, the Company was notified of a securities class actionlawsuit filed against Cambrex and five former and current Company officers. Fiveclass action suits were filed with the New Jersey Federal District Court. Underthe rules applicable to class action litigation, the various plaintiffs appearedin Federal Court on January 12, 2004, and the Court designated the leadplaintiff and selected counsel to represent the class. The cases were alsoconsolidated and an amended complaint was filed on March 30, 2004. The lawsuithas been brought as a class action in the names of purchasers of the Company'scommon stock from October 21, 1998 through July 25, 2003. The complaint allegesthat the Company failed to disclose in timely fashion the January 2003accounting restatement and subsequent SEC investigation, as well as the loss ofa significant contract at the Baltimore facility. The Company filed a motion to dismiss in May 2004. Thereafter the plaintifffiled a reply brief. The Company responded and is awaiting a decision from theCourt. The Company considers the complaints to be substantially without meritand will vigorously defend against them. As such, the Company has recorded noreserves related to this matter. Securities and Exchange Commission The Securities and Exchange Commission ("SEC") is currently conducting aninvestigation into the Company's inter-company accounting procedures from theperiod 1997-2001. The investigation began in the first half of 2003 after theCompany voluntarily disclosed certain matters related to inter-company accountsfor the five-year period ending December 31, 2001 that resulted in therestatement of the Company's financial statements for those years. To Cambrex'sknowledge, the investigation is limited to this inter-company accounting matter,and the Company does not expect further revisions to its historical financialstatements relating to these issues. The Company is fully cooperating with theSEC. 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 89 CAMBREX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) (23) CONTINGENCIES -- (CONTINUED)manufacture and sale of Company products that fail to meet product warrantiesand contract provisions for indemnification protecting licensees againstintellectual property infringement related to licensed Company technology orprocesses. Additionally, as permitted under Delaware law, the Company has agreementswhereby we indemnify our officers and directors for certain events or occurrences while the officer or director is, or was serving, at our request insuch capacity. The term of the indemnification period is for the officer's ordirector's lifetime. The maximum potential amount of future payments we could berequired to make under these indemnification agreements is unlimited; however,we have a Director and Officer insurance policy that covers a portion of anypotential exposure. The Company currently believes the estimated fair value of itsindemnification agreements is not significant based on currently availableinformation, and as such, the Company has no liabilities recorded for theseagreements as of December 31, 2004. In addition to the matters identified above, Cambrex's subsidiaries areparty to a number of other proceedings. While it is not possible to predict withcertainty the outcome of the Company's litigation matters and various otherlawsuits and contingencies, it is the opinion of management based on informationcurrently available that the ultimate resolution of these matters should nothave a material adverse effect on the Company's results of operations, cashflows and financial position. These matters, if resolved in an unfavorablemanner, could have a material effect on the operating results and cash flowswhen resolved in a future reporting period. 90 CAMBREX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) (24) CONSOLIDATED SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED) 1ST 2ND 3RD 4TH QUARTER(1) QUARTER(1) QUARTER(1)(4) QUARTER YEAR ---------- ---------- ------------- -------- -------- (RESTATED) (RESTATED) (RESTATED) 2004Gross sales...................................... $113,549 $108,951 $99,250 $117,365 $439,115Net revenues..................................... 115,632 110,049 100,336 117,640 443,657Gross profit..................................... 45,471 42,006 39,194 44,069 170,740Income/(loss) from continuing operations......... 7,759 6,339 (44,861) 4,871 (25,892)Loss on discontinued operations.................. (742) -- (236) -- (978)Net income/(loss)................................ 7,017 6,339 (45,097) 4,871 (26,870)Basic earnings per share:(2) Income/(loss) from continuing operations....... 0.30 0.24 (1.72) 0.19 (0.99) Loss on discontinued operations................ (0.03) -- (0.01) -- (0.04) Net income/(loss).............................. 0.27 0.24 (1.73) 0.19 (1.03)Diluted earnings per share:(2) Income/(loss) from continuing operations....... 0.29 0.24 (1.72) 0.18 (0.99) Loss on discontinued operations................ (0.03) -- (0.01) -- (0.04) Net income/(loss).............................. 0.26 0.24 (1.73) 0.18 (1.03)Average shares: Basic.......................................... 26,001 26,112 26,109 26,154 26,094 Diluted........................................ 26,605 26,383 26,109 26,540 26,094 1ST 2ND 3RD 4TH QUARTER(3) QUARTER QUARTER QUARTER YEAR ---------- -------- ------- -------- -------- 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:(2) 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:(2) 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 ---------------(1) During the 2004 year-end financial reporting process, the Company identified certain accounting adjustments principally related to amortization of leasehold improvements, employee benefit accruals, inventory and taxes that impacted prior years and prior quarters within 2004. The aggregate impact of the prior years' adjustments was a reduction to net income of $475 and is not considered material to any prior period. The impact on net income for the first, second and third quarters of 2004 was an increase of $36, an increase of $229 or $0.01 per fully diluted share and a decrease of $666 or $0.03 per fully diluted share, respectively. The Company has restated the results of the first three quarters of 2004 to reflect these adjustments. The prior years' adjustment of $475 has been reflected in the restated first quarter results, netting to a $439 reduction to net income or $0.02 per fully diluted share. See Note #25.(2) 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.(3) 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. 91 CAMBREX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) (24) CONSOLIDATED SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED) -- (CONTINUED)(4) The third quarter 2004 includes a goodwill impairment charge related to the Baltimore reporting unit of the Biopharma segment of $48,720. (25) RESTATEMENT OF 2004 QUARTERLY RESULTS -- UNAUDITED During the 2004 year-end financial reporting process, the Companyidentified certain accounting adjustments principally related to amortization ofleasehold improvements, employee benefit accruals, inventory and taxes thatimpacted prior years and prior quarters within 2004. The cumulative impact ofthe prior years' adjustments was a reduction to net income of $475 and is notconsidered material to any prior period. The prior years' adjustment of $475 hasbeen reflected in the restated first quarter 2004 results. The impact on netincome for the first, second and third quarters of 2004 was a decrease of $439or $0.02 per fully diluted share, an increase of $229 or $0.01 per fully dilutedshare and a decrease of $666 or $0.03 per fully diluted share, respectively. TheCompany has restated the results of the first three quarters of 2004 to reflectthese adjustments. The Company also identified certain adjustments to the December 31, 2003foreign deferred tax balances, minimum pension liability and other comprehensiveincome which have been reflected as of March 31, 2004. These adjustments werenot considered material to 2003. The restatement did not have any impact on the Company's cash flows. Asummary of the effects of the restatement on the accompanying ConsolidatedIncome Statements and Consolidated Balance Sheets is as follows: CONSOLIDATED INCOME STATEMENTS QUARTER ENDED MARCH 31, 2004 ------------------------- AS PREVIOUSLY AS REPORTED RESTATED REPORTED RESTATED ----------- ----------- (UNAUDITED) (UNAUDITED) Gross sales................................................. $113,592 $113,549Cost of goods sold.......................................... 70,517 70,161Gross profit................................................ 45,158 45,471SG&A expenses............................................... 27,479 27,437R&D expenses................................................ 4,722 4,743Operating profit............................................ 14,820 15,154Provision for income taxes.................................. 3,566 4,339Income from continuing operations........................... 8,198 7,759Net income.................................................. 7,456 7,017Diluted EPS, Continuing operations.......................... $ 0.31 $ 0.29Diluted EPS, Net income..................................... $ 0.28 $ 0.26 92 CAMBREX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) (25) RESTATEMENT OF 2004 QUARTERLY RESULTS -- UNAUDITED -- (CONTINUED) QUARTER ENDED JUNE 30, 2004 ------------------------- AS PREVIOUSLY AS REPORTED RESTATED ----------- ----------- (UNAUDITED) (UNAUDITED) Gross sales................................................. $108,951 $108,951Cost of goods sold.......................................... 67,969 68,043Gross profit................................................ 42,080 42,006SG&A expenses............................................... 24,739 24,425R&D expenses................................................ 4,665 4,673Operating profit............................................ 12,676 12,908Provision for income taxes.................................. 3,857 3,860Income from continuing operations........................... 6,110 6,339Net income.................................................. 6,110 6,339Diluted EPS, Continuing operations.......................... $ 0.23 $ 0.24Diluted EPS, Net income..................................... $ 0.23 $ 0.24 CONSOLIDATED INCOME STATEMENTS QUARTER ENDED SEPTEMBER 30, 2004 ------------------------- AS PREVIOUSLY REPORTED AS RESTATED ----------- ----------- (UNAUDITED) (UNAUDITED) Gross sales................................................. $ 99,250 $ 99,250Cost of good sold........................................... 60,454 61,142Gross profit................................................ 39,882 39,194SG&A expenses............................................... 25,645 25,668R&D expenses................................................ 4,512 4,520Operating loss.............................................. (38,995) (39,714)Provision for income taxes.................................. 2,555 2,502Loss from continuing operations............................. (44,195) (44,861)Net loss.................................................... (44,431) (45,097)Diluted EPS, Continuing operations.......................... $ (1.69) $ (1.72)Diluted EPS, Net loss....................................... $ (1.70) $ (1.73) 93 CAMBREX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) (25) RESTATEMENT OF 2004 QUARTERLY RESULTS -- UNAUDITED -- (CONTINUED) CONSOLIDATED BALANCE SHEETS AS OF MARCH 31, 2004 --------------------------- AS PREVIOUSLY REPORTED AS RESTATED ------------- ----------- (UNAUDITED) (UNAUDITED) Trade receivables, net...................................... $ 56,263 $ 56,220Inventories, net............................................ 84,324 85,259Deferred tax assets......................................... 8,757 6,174Prepaid expenses and other current assets................... 11,164 10,863Total current assets........................................ 234,190 232,198Property, plant and equipment, net.......................... 261,173 260,465Goodwill.................................................... 219,668 218,574Total assets................................................ 773,236 769,442Accrued Liabilities......................................... 58,626 58,316Deferred tax liabilities.................................... 28,998 29,021Other non-current liabilities............................... 48,592 50,515Total liabilities........................................... 374,898 376,534Retained earnings........................................... 212,457 212,018Accumulated other comprehensive loss........................ (4,081) (9,072)Shareholders' equity........................................ $398,338 $392,908 CONSOLIDATED BALANCE SHEETS AS OF JUNE 30, 2004 --------------------------- AS PREVIOUSLY REPORTED AS RESTATED ------------- ----------- (UNAUDITED) (UNAUDITED) Trade receivables, net...................................... $ 57,167 $ 57,124Inventories, net............................................ 84,519 85,486Deferred tax assets......................................... 8,757 6,174Prepaid expenses and other current assets................... 21,653 21,347Total current assets........................................ 248,233 246,268Property, plant and equipment, net.......................... 262,100 261,209Goodwill.................................................... 219,424 218,330Total assets................................................ 787,339 783,389Accrued Liabilities......................................... 56,658 56,062Deferred tax liabilities.................................... 28,998 28,895Other non-current liabilities............................... 46,993 48,840Total liabilities........................................... 383,299 384,447Retained earnings........................................... 217,805 217,595Accumulated other comprehensive loss........................ (3,743) (8,631)Shareholders' equity........................................ $404,040 $398,942 94 CAMBREX CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) (25) RESTATEMENT OF 2004 QUARTERLY RESULTS -- UNAUDITED -- (CONTINUED) AS OF SEPTEMBER 30, 2004 --------------------------- AS PREVIOUSLY REPORTED AS RESTATED ------------- ----------- (UNAUDITED) (UNAUDITED) Trade receivables, net...................................... $ 56,276 $ 56,233Inventories, net............................................ 88,222 89,060Deferred tax assets......................................... 8,757 6,174Prepaid expenses and other current assets................... 21,184 20,929Total current assets........................................ 258,200 256,157Property, plant and equipment, net.......................... 265,261 264,187Goodwill.................................................... 171,514 170,420Total assets................................................ 752,519 748,308Accrued Liabilities......................................... 59,176 59,085Deferred tax liabilities.................................... 28,998 29,351Other non-current liabilities............................... 45,410 47,181Total liabilities........................................... 386,856 388,889Retained earnings........................................... 172,592 171,716Accumulated other comprehensive income/(loss)............... 3,346 (2,022)Shareholders' equity........................................ $365,663 $359,419 95 ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. ITEM 9A CONTROLS AND PROCEDURES CONCLUSION REGARDING THE EFFECTIVENESS OF DISCLOSURE CONTROLS AND PROCEDURES We carried out an evaluation, with the participation of our principalexecutive officer and principal financial officer, of the effectiveness of ourdisclosure controls and procedures as of December 31, 2004. Based on thisevaluation, our principal executive officer and principal financial officerconcluded that, as of December 31, 2004, our disclosure controls and procedures,as defined in Rule 13a-15(e), were effective to ensure that information requiredto be disclosed by the issuer in the reports that it files or submits under theSecurities Exchange Act of 1934 (the "Exchange Act") are recorded, processed,summarized and reported within the time periods specified in the Securities andExchange Commission's rules and forms. MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING Our management is responsible for establishing and maintaining adequateinternal control over financial reporting, as defined in Exchange Act Rule13a-15(f). Under the supervision and with the participation of our management,including our principal executive officer and principal financial officer, wecarried out an evaluation of the effectiveness of our internal control overfinancial reporting as of December 31, 2004 based on the InternalControl -- Integrated Framework issued by the Committee of SponsoringOrganizations of the Treadway Commission ("COSO"). Based on this evaluation, ourmanagement concluded that our internal control over financial reporting waseffective as of December 31, 2004. PricewaterhouseCoopers LLP, the independent registered public accountingfirm that audited our financial statements included in this Annual Report onForm 10-K, has also audited our management's assessment of the effectiveness ofour internal control over financial reporting and the effectiveness of internalcontrol over financial reporting as of December 31, 2004 as stated in theirreport which is included herein under Item 8. MANAGEMENT'S CONSIDERATION OF THE 2004 INTERIM PERIOD RESTATEMENT In coming to the conclusion that our internal control over financialreporting was effective as of December 31, 2004, our management considered,among other things, a significant control deficiency related to periodicreassessment of the application of generally accepted accounting principles inprior periods, which resulted in the need to restate our previously issuedinterim financial statements as disclosed in "Note 25" to the accompanyingconsolidated financial statements included in this Form 10-K. After reviewingand analyzing the Securities and Exchange Commission's Staff Accounting Bulletin("SAB") No. 99, "Materiality," Accounting Principles Board Opinion No. 28,"Interim Financial Reporting," paragraph 29 and SAB Topic 5 F, "AccountingChanges Not Retroactively Applied Due to Immateriality," and taking intoconsideration (i) that the restatement adjustments did not have a materialimpact on the financial statements of interim or annual periods, taken as awhole; (ii) that the cumulative impact of the restatement adjustments onstockholders' equity was not material to the financial statements of priorinterim or annual periods; and (iii) that we decided to restate our 2004quarterly financial statements because the cumulative impact of the error, ifrecorded in the fourth quarter of 2004, would have been material to thequarter's reported net income, our management concluded that the restatement ofthe prior period financial statements was not the result of a material weaknessin internal control over financial reporting as of December 31, 2004. CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING Our management carried out an evaluation, with the participation of ourprincipal executive officer and principal financial officer, of changes in ourinternal control over financial reporting, as defined in Exchange Act Rule13a-15(f). Based on this evaluation, our management determined that no change inour internal 96 control over financial reporting occurred during the fourth quarter of fiscal2004 that has materially affected, or is reasonably likely to materially affect,our internal control over financial reporting. ITEM 9B OTHER INFORMATION None 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 AND RELATED STOCKHOLDER MATTERS. 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 28, 2005, 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 the Registrant"in this Annual Report on Form 10-K. PART IV ITEM 15 EXHIBITS, FINANCIAL STATEMENT SCHEDULES. (a) 1. The following consolidated financial statements of the Company arefiled as part of this report: PAGE NUMBER (IN THIS REPORT) ---------------- Report of Independent Registered Public Accounting Firm..... 45Consolidated Balance Sheets as of December 31, 2004, and 2003...................................................... 47Consolidated Income Statements for the Years Ended December 31, 2004, 2003 and 2002................................... 48Consolidated Statement of Stockholders' Equity for the Years Ended December 31, 2004, 2003 and 2002.................... 49Consolidated Statements of Cash Flows for the Years Ended December 31, 2004, 2003 and 2002.......................... 50Notes to Consolidated Financial Statements.................. 51 (a) 2. (i) The following schedule to the consolidated financial statementsof the Company as filed herein and the Report of Independent Registered PublicAccounting Firm on Financial Statement Schedule are filed as part of thisreport. 97 PAGE NUMBER (IN THIS REPORT) ---------------- Schedule II -- Valuation and Qualifying Accounts............ 99 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 102-104 The registrant agrees, upon request of the Securities and ExchangeCommission, to file as an exhibit each instrument defining the rights of holdersof long-term debt of the registrant and its consolidated subsidiaries which hasnot been filed for the reason that the total amount of securities authorizedthereunder does not exceed 10% of the total assets of the registrant and itssubsidiaries on a consolidated basis. (b) Reports on Form 8-K The following are the Form 8-Ks filed (or furnished) during the fourthquarter, 2004: October 21, 2004 regarding the press release dated October 18, 2004 announcing an agreement between Cambrex and Ortec International, Inc. October 21, 2004 regarding the press release dated October 20, 2004announcing that Cambrex's wholly-owned subsidiary, Cambrex France SARL, acquiredGenolife SA. October 29, 2004 regarding the press release dated October 28, 2004announcing the financial results for the third quarter of 2004. 98 SCHEDULE II CAMBREX CORPORATION VALUATION AND QUALIFYING ACCOUNTS FOR THE YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002 (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, 2004: Doubtful trade receivables and returns and allowances...................... $ 3,281 $ (369) $ 91 $ 699 $ 2,304 Inventory and obsolescence provisions.......................... 15,459 3,390 424 4,905 14,368 Deferred tax valuation allowance....... 53,769 24,550 693 -- 79,012Year Ended December 31, 2003: Doubtful trade receivables and returns and allowances...................... $ 1,672 $ 1,584 $ 222 $ 197 $ 3,281 Inventory and obsolescence provisions.......................... 14,412 163 1,374 490 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 (2,360) 296 -- 2,821 99 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/ JOHN R. LEONE ------------------------------------ John R. Leone President and Chief Executive Officer Date: March 31, 2005 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/ JOHN R. LEONE President and Chief Executive )------------------------------------ Officer John R. Leone /s/ JAMES A. MACK Executive Chairman of the Board of )------------------------------------ Directors James A. Mack /s/ LUKE M. BESHAR Executive Vice President and Chief )------------------------------------ Financial Officer Luke M. Beshar /s/ GREGORY P. SAGEN Vice President, Finance and )------------------------------------ Principal Accounting Officer Gregory P. Sagen /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 31, 2005------------------------------------ Leon J. Hendrix, Jr. /s/ ILAN KAUFTHAL* Director )------------------------------------ Ilan Kaufthal /s/ WILLIAM KORB* Director )------------------------------------ William Korb /s/ ROBERT LEBUHN* Director )------------------------------------ Robert Lebuhn 100 SIGNATURE TITLE DATE --------- ----- ---- /s/ JOHN R. MILLER* Director )------------------------------------ John R. Miller /s/ PETER G. TOMBROS* Director )------------------------------------ Peter G. Tombros *By /s/ JOHN R. LEONE------------------------------------ John R. Leone Attorney-in-Fact 101 EXHIBIT INDEX EXHIBIT NO. DESCRIPTION----------- ----------- 3.1 -- Restated Certificate of Incorporation of registrant, as amended (M) 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 -- 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) 4.3 -- 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) 4.4 -- 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) 10.19 -- 2000 Performance Option Plan.(S) ---------------See legend on following page 102 EXHIBIT INDEX EXHIBIT NO. DESCRIPTION----------- ----------- 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.(U) 10.34 -- 2003 Performance Stock Option Plan.(U) 10.35 -- 2004 Performance Incentive Plan.(V) 10.36 -- Directors' Common Stock Fee Payment Plan Agreement for N. David Eansor.(V) 10.40 -- Registration Rights Agreement dated as of June 6, 1985 between the registrant and the purchasers of its Class D Convertible Preferred stock and 9% Convertible Subordinated Notes due 1997.(A) -- Exhibit 10(m) 10.41 -- Administrative Consent Order dated September 16, 1985 of the New Jersey Department of Environmental Protection to Cosan Chemical Corporation.(A) -- Exhibit 10(q) 10.42 -- Registration Rights Agreement dated as of June 5, 1996 between the registrant and American Stock Transfer and Trust Company.(O) 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.(W) 32.2 -- CFO Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.(W) ---------------See legend on following page 103 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.(U) Incorporated by reference to registrant's Registration Statement on Form S-8 (Registration No. 333-113612) dated March 15, 2004. (V) Incorporated by reference to registrant's Registration Statement on Form S-8 (Registration No. 333-113613) dated March 15, 2004.(W) Furnished herewith. 104 EXHIBIT 3.1 STATE OF DELAWARE SECRETARY OF STATE DIVISION OF CORPORATIONS FILED 03:30 PM 06/07/2001 010275168 - 2018808 CERTIFICATE OF AMENDMENT OF CERTIFICATE OF INCORPORATION OF CAMBREX CORPORATION PURSUANT TO SECTION 242 OF THE GENERAL CORPORATION LAW OF THE STATE OF DELAWARE CAMBREX CORPORATION (the "Corporation"), a corporation organized andexisting under the General Corporation Law of the State of Delaware (the"General Corporation Law"), hereby certifies as follows: FIRST: That the Board of Directors of the Corporation, at a meeting of itsmembers, duly adopted a resolution setting forth the following proposedamendment to the Certificate of Incorporation of the Corporation and declaringsuch amendment to be advisable: 1. The Certificate of Incorporation of the Corporation is hereby amendedby the amendment of the first paragraph of ARTICLE FOURTH thereof to read in itsentirety as follows: FOURTH: The total number of shares or all classes of stock which the Corporation shall have the authority to issue is 106,263,835 shares, consisting of 400,000 shares of Class A 8.25% Cumulative Preferred Stock, par value $.10 per share (the "Class A Preferred"), 40,597 shares of Class B 8.25% Cumulative Convertible Preferred Stock, par value $.10 per share (the "Class B Preferred), 19,403 shares of Class C Convertible Preferred Stock, par value $.10 per share (the "Class C Preferred"), 73,089 shares of Class D 8% Convertible Preferred Stock, par value $.10 per share (the "Class D Preferred"), 5,000,000 shares of Series Preferred Stock, par value $.10 per share (the "Series Preferred Stock"), 730,746 shares of Nonvoting Common Stock, par value $.10 per share (the "Nonvoting Common"), and 100,000,000 shares of Common Stock, par value $.10 per share (the "Voting Common"). The Class B Preferred and the Class C Preferred are referred to herein collectively as the "1981 Convertible Preferred Stock"; the 1981 Convertible Preferred Stock and the Class A Preferred are referred to herein collectively as the "1981 Preferred Stock"); the 1981 Preferred Stock and the Class D Preferred are referred to herein collectively as the "Preferred Stock"; and the Voting Common and the Nonvoting Common are referred to herein collectively as the "Common Stock". A share of Preferred Stock will be referred to herein as a "Share". The Voting Common is also referred to herein as the "Class A Common" and the Non-voting Common is also referred to herein as the "Class B Common". Unless otherwise provided, other capitalized terms used in Section A of this Article FOURTH are defined in subdivision VI thereof, other capitalized terms used in Section C of this Article FOURTH are defined in subdivision VIII thereof and definitions set forth in any Section of this Article FOURTH apply only to capitalized terms used in such Section. All cross-references in each Section of this Article FOURTH refer to other parts, paragraphs and subdivisions in such Section unless otherwise indicated; and further SECOND: That at a special meeting and vote of the stockholders of theCorporation called and held in accordance with Section 222 of the GeneralCorporation Law on April 26, 2001, a majority of the outstanding stock entitledto vote thereon has voted in favor of the foregoing amendment. THIRD: The Amendment to the Certificate of Incorporation of theCorporation set forth in paragraph FIRST above was duly adopted in accordancewith the provisions of Section 242 of the General Corporation Law. IN WITNESS WHEREOF, I, the undersigned Steven M. Klosk, being theExecutive Vice President-Administration, for the purpose of amending theCertificate of Incorporation of the Corporation pursuant to Section 242 of theGeneral Corporation Law of the State of Delaware, do make and file thisCertification, hereby declaring and certifying that the facts herein stated aretrue, and accordingly have hereunto set my hand, this 7th day of June, 2001.[Corporate Seal] -s- Steven M. Klosk ---------------------------------------- Steven M. Klosk Executive Vice President-AdministrationATTEST:-s- Peter E. Thauer-------------------------Peter E. ThauerSecretary 8772730903686C FILED SEP 30 1987 1PM [ILLEGIBLE] [ILLEGIBLE] Restated Certificate of Incorporation of Cambrex Corporation Cambrex Corporation, a corporation organized and existing under the lawsof the State of Delaware (the "Corporation"), hereby certifies as follows: 1. The name of the Corporation is Cambrex Corporation. TheCorporation was originally incorporated under the name "CasChem Group, Inc.".The date of filing its original Certificate of Incorporation with the Secretaryof State is October 11, 1983. 2. This Restated Certificate of Incorporation restates andintegrates and further amends the Certificate of Incorporation of theCorporation by amending ARTICLES SIXTH and EIGHTH thereof. 3. The text of the Certificate of Incorporation of theCorporation, as amended, or supplemented heretofore is further amended hereby toread as herein set forth in full: FIRST: The name of the Corporation is: Cambrex Corporation SECOND: The address of its registered office in the State ofDelaware is No. 1209 Orange Street, in the City of Wilmington, County of NewCastle. The name of its registered agent at such address is The CorporationTrust Company. THIRD: The purpose of the Corporation is to engage in any lawful actor activity for which corporations3686Cmay be organized under the General Corporation Law of Delaware. FOURTH: The total number of shares of all classes of stock which theCorporation shall have authority to issue is 26,263,835 shares, consisting of400,000 shares of Class A 8.25% Cumulative Preferred StocK, par value $.10 pershare (the "Class A Preferred"), 40,597 shares of Class B 8.25% CumulativeConvertible Preferred Stock, par value $.10 per share (the "Class B Preferred"),19,403 shares of Class C Convertible Preferred Stock, par value $.10 per share(the "Class C Preferred"), 73,089 shares of Class D 8% Convertible PreferredStock, par value $.10 per share (the "Class D Preferred"), 5,000,000 shares ofSeries Preferred Stock, par value $.10 per share (the "Series Preferred Stock"),730,746 shares of Nonvoting Common Stock, par value $.10 per share (the"Nonvoting Common"), and 20,000,000 shares of Common Stock, par value $.10 pershare (the "Voting Common"). The Class B Preferred and the Class C Preferred arereferred to herein collectively as the "1981 Convertible Preferred Stock"; the1981 Convertible Preferred Stock and the Class A Preferred are referred toherein collectively as the "1981 Preferred Stock"; the 1981 Preferred Stock andthe Class D Preferred are referred to herein collectively as the "PreferredStock"; and the Voting Common and the Nonvoting Common are referred to hereincollectively as the "Common Stock". A share of Preferred Stock will be referredto herein as a "share". The Voting Common is also referred to herein as the"Class A Common" and the Non-voting Common is also referred to herein as the"Class B Common". Unless otherwise provided, other capitalized terms used inSection A of this Article FOURTH are defined in subdivision VI thereof, othercapitalized terms used in Section C of this Article FOURTH are defined insubdivision VIII thereof and definitions set forth in any Section of thisArticle FOURTH apply only to capitalized terms used in such Section. Allcross-references in each Section of this Article FOURTH refer to other parts, paragraphs and subdivisions in such Section unless otherwise indicated. The following is a statement of the designations, and the powers,preferences and rights, and the qualifications, limitations or restrictionsthereof, in respect of each class of stock of the Corporation: -2- SECTION A. 1981 PREFERRED STOCKI. Terms Applicable Only to Class A Preferred and Class B Preferred. 1. Dividends. 1A. General Obligation. When and as declared by the board ofdirectors of the Corporation and to the extent permitted under applicable law, the Corporation will pay preferential dividends to the holders of the Class APreferred and the Class B Preferred as provided in this part 1. Except asotherwise provided herein, dividends on each Share of Class A Preferred willaccrue cumulatively on a daily basis at the rate of 8.25% per annum of theLiquidation Value thereof from and including the first day after the end of thecalendar quarter next preceding the date of issuance of such Share to andincluding the date on which the Redemption Price of such Share is paid.Dividends on each Share of Class B Preferred will accrue cumulatively on a dailybasis at the rate of 8.25% per annum of the Purchase Price thereof from andincluding the first day after the end of the calendar quarter next preceding thedate of issuance of such Share to and including the date on which the RedemptionPrice of such Share is paid or the date on which such Share is converted.Dividends on the Class A Preferred and the Class B Preferred will accrue whetheror not they have been declared and whether or not there are profits, surplus orother funds of the Corporation legally available for the payments of dividends.The date on which the Corporation initially issues any Share will be deemed tobe its "date of issuance" regardless of the number of times transfer of suchShare is made on the stock records maintained by or for the Corporation andregardless of the number of certificates which may be issued to evidence suchShare. Notwithstanding the foregoing, the payment of any dividend accrued onthe Class A Preferred or the Class B Preferred shall be subject to theprovisions of Section C, subdivision VII. 2C. hereof. 1B. Dividend Reference Dates. To the extent not paid on each March31, June 30, September 30 and December 31, beginning December 31, 1983 (the"Dividend Reference Dates"), all dividends which have accrued on each Share ofClass A Preferred outstanding during the three-month period (or other period inthe case of the initial Dividend Reference Date) ending upon any such DividendReference Date will be added to the Liquidation Value of such Share and willremain a part thereof until such dividends are paid. All dividends which haveaccrued on each Share of Class B Preferred outstanding during the three-monthperiod (or other period in the case of -3-the initial Dividend Reference Date) ending upon any Dividend Reference Datewill become payable on such Dividend Reference Date to the extent declared bythe Corporation's board of directors. 1C. Distribution of Partial Dividend Payments. If at any time theCorporation pays less than the total amount of dividends then accrued withrespect to the Class A Preferred or the Class B Preferred, such payment will bedistributed among the holders of such class so that an equal amount will be paidwith respect to each outstanding Share. 2. Redemptions. 2A. Class A Scheduled Redemptions. The Corporation will redeem200,000 Shares of Class A Preferred (or such lesser number then outstanding) onDecember 31 of each year, commencing in 1989 and ending in 1990 (the "Class AScheduled Redemption Dates"), at a price per Share equal to the Redemption Pricethereof. 2B. Class A Optional Redemptions. The Corporation may at any timeredeem all or any portion of the Class A Preferred then outstanding at a priceper Share equal to the Redemption Price. No redemption of Class A Preferredpursuant to this subdivision may be made for less than 50,000 Shares (or suchlesser number of Shares then outstanding), and redemptions made pursuant to thissubdivision will not relieve the Corporation of its obligation to redeem Shareson the Class A Scheduled Redemption Dates. 2C. Class B Scheduled Redemptions. The Corporation will redeem20,299 Shares of Class B Preferred (or such lesser number then outstanding) onDecember 31 of each year, commencing in 1991 and ending in 1992 (the "Class BScheduled Redemption Dates"), at a price per Share equal to the Redemption Pricethereof; provided that the Shares of Class B Preferred to be redeemed pursuant to this subdivision will be subject to the right of offset set forth insubdivision 1B of subdivision IV and, to the extent the right of offset isexercised, the Corporation's redemption obligation will be reduced. 2D. No Redemption During Certain Class D Preferred Events ofNoncompliance. Anything herein contained to the contrary notwithstanding, themaking by the Corporation of any payment in respect of redemption of any Sharesof 1981 Preferred Stock shall be subject to the provisions of Section C,subdivision VII. 2C. hereof. -4- 3. Voting Rights. Except as provided herein or as otherwiseprovided by law, the Class A Preferred and the Class B Preferred will have novoting rights.II. Terms Applicable to All Classes of 1981 Preferred Stock. 1. Liquidation. Upon any liquidation, dissolution or winding upof the Corporation, each holder of 1981 Preferred Stock will be entitled to bepaid, before any distribution or payment is made upon any Junior Securities ofthe Corporation, an amount in cash equal to the aggregate Liquidation Value ofall Shares held by such holder, and the holders of 1981 Preferred Stock will notbe entitled to any further payment; provided, however, except at provided inSection C, subdivision V.2., no payment upon any liquidation, dissolution orwinding up of the Corporation may be made with respect to any 1981 PreferredStock unless each holder of Class D Preferred shall have received payment incash of an amount equal to the aggregate Liquidation Value of the shares ofClass D Preferred held by such holder. The Corporation will mail written noticeof such liquidation, dissolution or winding up, not less than 60 days prior tothe payment date stated therein, to each record holder of 1981 Preferred Stock.Neither the consolidation or merger of the Corporation into or with any othercorporation or corporations, nor the sale or transfer by the Corporation of allor any part of its assets, nor the reduction of the capital stock of theCorporation, will be deemed to be a liquidation, dissolution or winding up ofthe Corporation within the meaning of this part 1. 2. General Terms of Redemptions. 2A. Redemption Price. For each Share of 1981 Preferred Stock whichis to be redeemed, the Corporation will be obligated on the Redemption Date topay to the holder thereof (upon surrender by such holder at the Corporation'sprincipal office of the certificate representing such Share) an amount in cashequal to the respective Liquidation Value of such Share (the "RedemptionPrice"). If the funds of the Corporation legally available for redemption ofShares of any class of 1981 Preferred Stock on any Redemption Date areinsufficient to redeem the total number of Shares of such class to be redeemedon such date, those funds which are legally available will be used to redeem themaximum possible number of Shares pro rata among the holders of the Shares to beredeemed based upon the aggregate Liquidation Value of the Shares to beredeemed. At any time thereafter when additional funds of the Corporation arelegally available for the redemption of Shares of such class, such funds will -5-immediately be used to redeem the balance of the Shares which the Corporationhas become obligated to redeem on any Redemption Date but which it has notredeemed. 2B. Notice of Redemption. The Corporation will mail written noticeof each redemption of any class or classes of 1981 Preferred Stock to eachrecord holder of such class or classes, not more than 60 nor less than 30 daysprior to the date on which such redemption is to be made. Upon mailing anynotice of redemption which relates to a redemption at the Corporation's option, the Corporation will become obligated to redeem the total number of Sharesspecified in such notice at the time of redemption specified therein. In casefewer than the total number of Shares represented by any certificate areredeemed, a new certificate representing the number of unredeemed Shares will beissued to the holder thereof without cost to such holder promptly uponsurrender of the certificate representing the redeemed Shares. 2C. Determination of the Number of Each Holder's Shares to beRedeemed. Except as otherwise provided in subdivision IV, the number of Sharesof a particular class of 1981 Preferred Stock to be redeemed from each holderthereof in redemptions hereunder will be the number of whole Shares determined,as nearly as practicable to the nearest Share, by multiplying the total numberof Shares of such class to be redeemed times a fraction, the numerator of whichwill be the total number of Shares of such class then held by such holder andthe denominator of which will be the total number of Shares of such class thenoutstanding. 2D. Dividends After Redemption Date. No Share of 1981 PreferredStock is entitled to any dividends accruing after its Redemption Date. On suchRedemption Date all rights of the holder of such Share will cease, and suchShare will not be deemed to be outstanding. 2E. Redeemed or Otherwise Acquired Shares. Any Shares of 1981Preferred Stock which are redeemed or otherwise acquired by the Corporation willbe cancelled and will not be reissued, sold or transferred. 2F. Other Redemptions or Acquisitions. Neither the Corporation norany Subsidiary will redeem or otherwise acquire any 1981 Preferred Stock, exceptas expressly authorized herein or pursuant to a purchase offer made to allholders of the Class A Preferred or the 1981 Convertible Preferred Stock, as thecase may be, pro rata based upon the -6-aggregate Liquidation Value of the Shares of such class or classes of 1981Preferred Stock held by each such holder. 2G. Accrued Dividends Must be Paid Prior to Any Redemption. TheCorporation may not redeem any Shares of a particular class of 1981 PreferredStock, unless all dividends accrued on the outstanding Shares of such class of1981 Preferred Stock through the immediately preceding Dividend Reference Datehave been paid in full. 3. Events of Noncompliance. 3A. Definition. An Event of Noncompliance will be deemed to haveoccurred if: (i) the Corporation fails to pay on any Dividend Reference Date the full amount of dividends then accrued on the Class A Preferred or the Class B Preferred, whether or not such payment is legally permissible; (ii) the Corporation fails to make any redemption payment with respect to the 1981 Preferred Stock which it is obligated to make, whether or not such payment is legally permissible; (iii) the Corporation breaches or otherwise fails to perform or observe any other covenant or agreement with respect to the 1981 Preferred Stock set forth in this Article FOURTH or in the Exchange Agreement; (iv) any material representation or warranty contained in the Exchange Agreement or required to be furnished to any transferor of 1981 Preferred Stock pursuant to the Exchange Agreement on or before the date of issuance of the 1981 Preferred Stock is false or misleading in any material respect on the date made or furnished; (v) any written information furnished by the Corporation or any Subsidiary to any holder of 1981 Preferred Stock pursuant to the Exchange Agreement after the date of issuance of the 1981 Preferred Stock is, to the Corporation's or such Subsidiary's knowledge after due inquiry, false or misleading in any material respect on the date made or furnished; (vi) the Corporation or any Material Subsidiary makes an assignment for the benefit of credi- -7- tors or admits in writing its inability to pay its debts generally as they become due; or an order, judgment or decree is entered adjudicating the Corporation or any Material Subsidiary bankrupt or insolvent under the Bankruptcy Code or the Corporation or any Material Subsidiary is a debtor-in-possession under the Bankruptcy Code; or any order for relief with respect to the Corporation or any Material Subsidiary is entered under the Bankruptcy Code; or the Corporation or any Material Subsidiary petitions or applies to any tribunal for the appointment of a custodian, trustee, receiver or liquidator of the Corporation or any Material Subsidiary or of any substantial part of the assets of the Corporation or any Material Subsidiary, or commences any proceeding (other than a proceeding for the voluntary liquidation and dissolution of a Material Subsidiary) relating to the Corporation or any Material Subsidiary under any bankruptcy, reorganization, arrangement, insolvency, readjustment of debt, dissolution or liquidation law of any jurisdiction; or any such petition or application is filed, or any such proceeding is commenced, against the Corporation or any Material Subsidiary and either (a) the Corporation or any such Material Subsidiary by any act indicates its approval thereof, consent thereto or acquiesence therein or (b) such petition, application or proceeding is not dismissed within 60 days; (vii) a judgment in excess of $500,000 is rendered against the Corporation or any Material Subsidiary and, within 60 days after entry thereof, such judgment is not discharged or execution thereof stayed pending appeal, or within 60 days after the expiration of any such stay, such judgment is not discharged; or (viii) the Corporation or any Material Subsidiary defaults in the performance of any obligation, if the effect of such default is to cause an amount exceeding $500,000 to become due prior to its stated maturity, or to permit the holder or holders of such obligation to cause an amount exceeding $500,000 to become due prior to its stated maturity.An Event of Noncompliance will not be deemed to have occurred with respect tothe matters described in subparagraph 3A(iii) or 3A(iv) if the Corporationestablishes that (a) in the case -8-of subparagraph 3A(iii), the particular Event of Noncompliance has not beencaused by knowing or purposeful conduct by the Corporation or any Subsidiary andthe Corporation has exercised, and continues to exercise, best effortsexpeditiously to cure the Event of Noncompliance (if cure is possible), (b) inthe case of subparagraph 3A(iv), the particular Event of Noncompliance has notbeen caused by a knowing or willful misstatement or misrepresentation on thepart of the Corporation, (c) in the case of both such subparagraphs, the Eventof Noncompliance is not material to the Corporation's financial condition,operations, assets or business prospects, and (d) in the case of both suchsubparagraphs, the Event of Noncompliance is not material to any holder'sinvestment in the 1981 Preferred Stock. 3B. Consequences of Certain Events of Noncompliance. (i) If an Event of Noncompliance of the type described in subparagraph 3A(iii) has occurred and continued for a period of 30 days or any other Event of Noncompliance has occurred, the dividend rate on the Class A Preferred will increase immediately by an increment of 1/2 percentage point. Thereafter, until such time as no Event of Noncompliance exists, the dividend rate on the Class A Preferred will increase automatically at the end of each succeeding 90-day period by an additional increment of 1/2 percentage point (but in no event will the dividend rate exceed 10.25%). Any increase of the dividend rate resulting from the operation of this subdivision will terminate as of the close of business on the date on which no Event of Noncompliance exists, subject to subsequent increases pursuant to this subdivision. (ii) If Events of Noncompliance exist for an aggregate of 365 days (whether or not such days are successive), the Conversion Price of the 1981 Convertible Preferred Stock will be reduced immediately by 10% of the Conversion Price in effect immediately prior to such adjustment. Notwithstanding the foregoing, if no Events of Noncompliance exist for a period of 365 successive days, previous days in which Events of Noncompliance existed will not be counted in determining such adjustment. In no event will the Conversion Price adjustment be rescinded, and in no event will there be more than one Conversion Price adjustment pursuant to this subdivision. -9- (iii) If an Event of Noncompliance exists, each holder of 1981 Preferred Stock will also have any other rights which such holder may have been afforded under any contract or agreement at any time and any other rights which such holder may have pursuant to applicable law.III. Priority of 1981 Preferred Stock. 1. Class A Preferred Priority in Liquidation. Upon anyliquidation, dissolution or winding up of the Corporation, if the assets of theCorporation to be distributed among the holders of 1981 Preferred Stock areinsufficient to permit payment to such holders of the aggregate amount whichthey are entitled to be paid, then the assets of the Corporation to bedistributed to such holders will be distributed (i) first to the holders ofClass D Preferred pursuant to Section C, subdivision V.1., (ii) second, to theholders of Class A Preferred, until such holders are paid the aggregate amountwhich they are entitled to be paid, or, if the assets to be distributed areinsufficient for such purpose, the entire assets to be distributed will bedistributed ratably among such holders based upon the aggregate LiquidationValue of Class A Preferred held by each such holder, and (iii) third, thebalance (if any) will be distributed ratably among the holders of 1981Convertible Preferred Stock based upon the aggregate Liquidation Value of the1981 Convertible Preferred Stock held by each such holder; provided, however,the priority established by clauses (i) and (ii) shall be subject to Section C,subdivision V.2. 2. Class A Preferred Priority on Dividends, Redemptions, etc. Solong as any Class A Preferred remains outstanding, neither the Corporation norany Subsidiary will redeem, purchase or otherwise acquire any 1981 ConvertiblePreferred Stock or any Junior Securities (except in connection with conversionsthereof), nor will the Corporation declare or pay any dividend or make anydistribution upon any 1981 Convertible Preferred Stock or any Junior Securitiesof the Corporation, if immediately after such redemption, purchase, acquisition,dividend or distribution any Event of Noncompliance of the type described insubdivision 3A(i) or 3A(ii) of subdivision II would exist with respect to theClass A Preferred. 3. Class B Preferred Priority on Dividends, Redemptions, etc. Solong as any Class B Preferred remains outstanding, neither the Corporation norany Subsidiary will redeem, purchase or otherwise acquire any Class C Preferredor any Junior Securities (except in connection with conver- -10-sions thereof), nor will the Corporation declare or pay any dividend or make anyother distribution upon any Class C Preferred or any Junior Securities of theCorporation, if immediately after such redemption, purchase, acquisition,dividend or distribution any Event of Noncompliance of the type described insubdivision 3A(i) or 3A(ii) of subdivision II would exist with respect to theClass B Preferred.IV. Terms Applicable Only to 1981 Convertible Preferred Stock. 1A. Optional Redemptions. The Corporation may redeem all or anyportion of the 1981 Convertible Preferred Stock after the earlier of (i) thedate of closing with the underwriters of the first firm commitment underwritingof Common Stock, whether for the account of the Corporation or for others,having a gross price per share equal to at least 150% of the Conversion Price ineffect on such date and an aggregate price to the public for the Common Stockwhich, when added to the aggregate price to the public of any similar priorregistered offerings with gross purchase prices per share of Common Stock equalto at least 150% of the respective Conversion Prices in effect on the respectivedates of such sales, shall equal at least $5,000,000, or (ii) the date on whichthe Corporation shall have received gross proceeds from the sale of Common Stockfor its account for a gross purchase price per share equal to at least 200% ofthe Conversion Price in effect on the date of such sale, which proceeds, whenadded to the proceeds of any other such sale or sales of Common Stock for grosspurchase prices per share equal to at least 200% of the respective ConversionPrices at the respective dates of sale, shall equal at least $5,000,000;provided that no more than one redemption pursuant to clause (i) or (ii) may bemade in any twelve-month period and no 1981 Convertible Preferred Stock may beredeemed pursuant to clause (ii) prior to December 31, 1986. All redemptions of1981 Convertible Preferred Stock pursuant to this subdivision will be made prorata among the Class B Preferred and the Class C Preferred based upon the theaggregate Liquidation Value of the Shares then outstanding. For the purposes ofthe foregoing clause (ii), the sale by the Corporation of any stock orsecurities convertible into or exchangeable for Common Stock (such convertibleor exchangeable stock or securities being called "Convertible Securities" inthis subdivision) shall be deemed to be the sale of Common Stock on the dateupon which such Convertible Securities are converted into or exchanged forCommon Stock, and the gross proceeds received by the Corporation upon the saleof such Convertible Securities plus the amount of any additional considerationpaid to the Corporation upon the -11-conversion or exchange thereof shall be deemed to be gross proceeds receivedfrom such sale of Common Stock. No redemptions of 1981 Convertible PreferredStock pursuant to this subdivision may be made for less than 5,000 Shares (orsuch lesser number of Shares then outstanding), and redemptions made pursuant tothis subdivision will not relieve the Corporation of its obligation to redeemShares on the Class B Scheduled Redemption Dates pursuant to subdivision 2C ofsubdivision I. 1B. Right of Offset. Upon the receipt of any notice of redemptionunder this part 1 or under subdivision 2C of subdivision I, any holder of 1981Convertible Preferred Stock or Class B Preferred, as the case may be, will havethe right (exercisable by notifying the Corporation at least two days prior tothe date specified for redemption in the redemption notice) to reduce the numberof Shares of the particular class to be redeemed from such holder at such timeby a number of Shares not exceeding the sum of the number of Offset Shares ofsuch class of 1981 Convertible Preferred Stock held by such holder at the timeof such redemption; provided that in the case of the final Class B ScheduledRedemption or a redemption at the Corporation's option in which all outstanding1981 Convertible Preferred Stock will be redeemed, a holder of 1981 Convertible Preferred Stock or Class B Preferred, as the case may be, may apply OffsetShares to reduce the number of Shares to be redeemed from such holder in suchredemption only to the extent such holder converts or has converted the Shareswhich are to be redeemed at such time. Each holder of 1981 Convertible PreferredStock or Class B Preferred, as the case may be, will be deemed to so apply anumber of Offset Shares equal to the excess (if any) of the number of Shares ofthe particular class of 1981 Convertible Preferred Stock to be redeemed fromsuch holder in any redemption over the number of Shares of such class held bysuch holder as of the time of such redemption. 1C. Determination of the Number of Each Holder's Shares to beRedeemed. The number of Shares of a particular class of 1981 ConvertiblePreferred Stock to be redeemed from each holder thereof in redemptions by theCorporation under this part 1 and subdivision 2C of subdivision I will be thenumber of whole Shares, as nearly as practicable to the nearest Share,determined by multiplying the total number of Shares of the particular class of1981 Convertible Preferred Stock to be redeemed times a fraction, the numeratorof which will be the total number of Shares and Offset Shares of such class thenheld by such holder and the denominator of which will be the total number ofShares and Offset Shares of such -12-class then outstanding; provided that the number of Shares so determined to beredeemed from any holder will be reduced by the number of Offset Shares suchholder applies to such redemption. 2. Conversions. 2A. Conversion Procedure. (i) At any time up to two days prior to the Redemption Date of any Share, any holder of 1981 Convertible Preferred Stock may convert all or any portion of such holder's Shares of 1981 Convertible Preferred Stock into a number of shares of the Conversion Stock computed by multiplying the number of Shares to be converted by $83.75 and dividing the result by the Conversion Price then in effect. For purposes of this subdivision, "Conversion Stock" means the Non-Voting Common in the case of Class B Preferred and the Voting Common in the case of Class C Preferred. (ii) Each conversion of 1981 Convertible Preferred Stock will be deemed to have been effected as of the close of business on the date on which the certificate or certificates representing the 1981 Convertible Preferred Stock to be converted have been surrendered at the principal office of the Corporation. At such time as such conversion has been effected, the rights of the holder of such 1981 Convertible Preferred Stock as such holder will cease and the Person or Persons in whose name or names any certificate or certificates for shares of Conversion Stock are to be issued upon such conversion will be deemed to have become the holder or holders of record of the shares of Conversion Stock represented thereby. (iii) As soon as possible after the conversion has been effected, the Corporation will deliver to the converting holder: (a) a certificate or certificates representing the number of shares of Conversion Stock issuable by reason of such conversion in such name or names and such denomination or denominations as the converting holder has specified; (b) payment in an amount equal to all accrued dividends with respect to each Share of Class B Preferred converted, which have not been paid prior thereto, plus the amount payable under -13- subparagraph (v) below with respect to such conversion; and (c) a certificate representing any Shares of 1981 Convertible Preferred Stock which were represented by the certificate or certificates delivered to the Corporation in connection with such conversion but which were not converted. (iv) If for any reason the Corporation is unable to pay any accrued dividends on the Class B Preferred being converted, the Corporation will pay such dividends to the converting holder as soon thereafter as funds of the Corporation are legally available for such payment. At the request of any such converting holder, the Corporation will provide such holder with written evidence of its obligation to such holder. (v) If any fractional interest in a share of Conversion Stock would, except for the provisions of this subparagraph (v), be deliverable upon any conversion, the Corporation, in lieu of delivering the fractional share therefor, will pay an amount equal to the Market Price of such fractional interest as of the date of conversion; provided that if for any reason the Corporation is unable to pay the Market Price of any such fractional interest, the Corporation will issue such fractional share upon the conversion. (vi) The issuance of certificates for shares of Conversion Stock upon conversion of 1981 Convertible Preferred Stock will be made without charge to the holders of such 1981 Convertible Preferred Stock for any issuance tax in respect thereof or other cost incurred by the Corporation in connection with such conversion and the related issuance of shares of Conversion Stock. (vii) The Corporation will not close its books against the transfer of 1981 Convertible Preferred Stock or of Conversion Stock issued or issuable upon conversion of 1981 Convertible Preferred Stock in any manner which interferes with the timely conversion of 1981 Convertible Preferred Stock. (viii) If the shares of Non-Voting Common issuable by reason of such conversion of Class B Preferred are convertible into or exchangeable for any other stock or securities of the Corporation (including, without limitation, Class A Common), the Corporation will, at the converting holder's option, upon surrender of the -14- shares to be converted by such holder as provided above together with any notice or payment required to effect such conversion or exchange of Non-Voting Common, deliver to such holder, or as otherwise specified by such holder, a certificate or certificates representing the stock or securities into which the shares of Non-Voting Common issuable by reason of such conversion are so convertible or exchangeable, registered in such name or names and in such denomination or denominations as such holder has specified. 2B. Conversion Price. (i) The initial Conversion Price for the 1981 Convertible Preferred Stock will be $83.75. In order to prevent dilution of the conversion rights granted under this subdivision, the Conversion Price will be subject to adjustment from time to time pursuant to this part 2. (ii) If and whenever the Corporation issues or sells, or in accordance with subdivision 2C is deemed to have issued or sold, any shares of its Common Stock for a consideration per share less than the Conversion Price in effect immediately prior to the time of such issue or sale, then forthwith upon such issue or sale, the Conversion Price will be reduced to the Conversion Price determined by dividing (A) an amount equal to the sum of (x) the product derived by multiplying the Conversion Price immediately prior to such issue or sale times the number of shares of Common Stock Deemed Outstanding immediately prior to such issue or sale, plus (y) the consideration, if any, received by the Corporation upon such issue or sale, by (B) the number of shares of Common Stock Deemed Outstanding immediately after such issue or sale; provided that no such adjustment in the Conversion Price will be made in connection with the issuance of (including the issuance of rights and options to purchase) up to an aggregate of 8,000 shares of Class A Common to key employees of the Corporation and its Subsidiaries. 2C. Effect on Conversion Price of Certain Events. For purposes ofdetermining the adjusted Conversion Price under subdivision 2B, the followingwill be applicable: (i) Issuance of Rights or Options. If the Corporation in any manner grants any rights or options to subscribe for or to purchase Common Stock or any stock or other securities convertible into or exchangeable for Common Stock (such rights or -15- options being herein called "Options" and such convertible or exchangeable stock or securities being herein called "Convertible Securities") and the price per share for which Common Stock is issuable upon exercise of such Options or upon conversion or exchange of such Convertible Securities is less than the Conversion Price in effect immediately prior to the time of the granting of such Options, then the total maximum number of shares of Common Stock issuable upon the exercise of such Options or upon conversion or exchange of the total maximum amount of such Convertible Securities issuable upon the exercise of such Options will be deemed to be outstanding and to have been issued and sold by the Corporation for such price per share. For purposes of this subdivision, the "price per share for which Common Stock is issuable" will be determined by dividing (A) the total amount, if any, received or receivable by the Corporation as consideration for the granting of such Options, plus the minimum aggregate amount of additional consideration payable to the Corporation upon the exercise of all such Options, plus in the case of such Options which relate to Convertible Securities, the minimum aggregate amount of additional consideration, if any, payable to the Corporation upon the issuance or sale of such Convertible Securities and the conversion or exchange thereof, by (B) the total maximum number of shares of Common Stock issuable upon the exercise of such Options or upon the conversion or exchange of all such Convertible Securities issuable upon the exercise of such Options. Except as otherwise provided in subdivision 2C(iii), no adjustment of the Conversion Price will be made when Convertible Securities are actually issued upon the exercise of such Options or when Common Stock is actually issued upon the exercise of such Options or the conversion or exchange of such Convertible Securities. (ii) Issuance of Convertible Securities. If the Corporation in any manner issues or sells any Convertible Securities and the price per share for which Common Stock is issuable upon such conversion or exchange is less than the Conversion Price in effect immediately prior to the time of such issue or sale, then the maximum number of shares of Common Stock issuable upon conversion or exchange of all such Convertible Securities will be deemed -16- to be outstanding and to have been, issued and sold by the Corporation for such price per share. For the purposes of this subdivision, the "price per share for which Common Stock is issuable" will be determined by dividing (A) the total amount received or receivable by the Corporation as consideration for the issue or sale of such Convertible Securities, plus the minimum aggregate amount of additional consideration, if any, payable to the Corporation upon the conversion or exchange thereof, by (B) the total maximum number of shares of Common Stock issuable upon the conversion or exchange of all such Convertible Securities. Except as otherwise provided in subdivision 2C(iii), no further adjustment of the Conversion Price will be made when Common Stock is actually issued upon the conversion or exchange of such Convertible Securities, and if any such issue or sale of such Convertible Securities is made upon exercise of any Options for which adjustments of the Conversion Price had been or are to be made pursuant to other provisions of this part 2, no further adjustment of the Conversion Price will be made by reason of such issue or sale. (iii) Change in Option Price or Conversion Rate. If the purchase price provided for in any Options, the additional consideration, if any, payable upon the conversion or exchange of any Convertible Securities, or the rate at which any Convertible Securities are convertible into or exchangeable for Common Stock change at any time (other than under or by reason of provisions designed to protect against dilution of the type set forth in this part 2 and which have no more favorable effect on the holders of such Options or Convertible Securities than this part 2 would have if this part 2 were included in such Options or Convertible Securities), the Conversion Price in effect at the time of such change will be readjusted to the Conversion Price which would have been in effect at such time had such Options or Convertible Securities still outstanding provided for such changed purchase price, additional consideration or changed conversion rate, as the case may be, at the time initially granted, issued or sold. If the purchase price provided for in any Options, the additional consideration, if any, payable upon the conversion or exchange of any Convertible Securities, or the rate at which any -17-Convertible Securities are convertible into or exchangeable for Common Stock, isreduced at any time under or by reason of provisions with respect theretodesigned to protect against dilution of the type set forth herein and which haveno more favorable effect on the holders of such Options or ConvertibleSecurities than the provisions hereof would have if the provisions hereof wereincluded in such Options or Convertible Securities, then in the case of thedelivery of Common Stock upon the exercise of any such Options or otherconversion or exchange of any such Convertible Securities, the Conversion Pricethen in effect hereunder will forthwith be adjusted to such respective amount aswould have been obtained had such Option or Convertible Security never beenissued as to such Common Stock and had adjustments been made upon the issuanceof the shares of Common Stock delivered, but only if as a result of suchadjustment the Conversion Price then in effect hereunder would be reduced. (iv) Treatment of Expired Options and Unexercised ConvertibleSecurities. Upon the expiration of any Option or the termination of any right toconvert or exchange any Convertible Securities without the exercise of suchOption or right, the Conversion Price then in effect hereunder will be adjustedto the Conversion Price which would have been in effect at the time of suchexpiration or termination had such Option or Convertible Securities, to theextent outstanding immediately prior to such expiration or termination, neverbeen issued. (v) Calculation of Consideration Received. If any Common Stock,Options or Convertible Securities are issued or sold or deemed to have beenissued or sold for cash, the consideration received therefor will be deemed tobe the net amount received by the Corporation therefor. In case any CommonStock, Options or Convertible Securities are issued or sold for a considerationother than cash, the amount of the consideration other than cash received by theCorporation will be the fair value of such consideration, except where suchconsideration consists of securities, in which case the amount of considerationreceived by the Corporation will be the Market Price thereof as of the date ofreceipt. In case any Common Stock, -18-Options or Convertible Securities are issued in connection with any merger inwhich the Corporation is the surviving corporation, the amount of considerationtherefor will be deemed to be the fair value of such portion of the net assetsand business of the non-surviving corporation as is attributable to such CommonStock, Options or Convertible Securities, as the case may be. The fair value ofany consideration other than cash and securities will be determined jointly bythe Corporation and the holders of a majority of the outstanding 1981Convertible Preferred Stock (based upon the aggregate Liquidation Valuethereof). If such parties are unable to reach agreement, the fair value of suchconsideration will be determined by appraisers jointly selected by theCorporation and the holders of a majority of the outstanding 1981 ConvertiblePreferred Stock (based upon the aggregate Liquidation Value thereof). (vi) Integrated Transactions. In case any Option is issued in connectionwith the issue or sale of other securities of the Corporation, togethercomprising one integrated transaction in which no specific consideration isallocated to such Option by the parties thereto, the Option will be deemed tohave been issued without consideration. (vii) Treasury Shares. The number of shares of Common Stock outstanding atany given time does not include shares owned or held by or for the account ofthe Corporation or any Subsidiary, and the disposition of any shares so owned orheld will be considered an issue or sale of Common Stock. (viii) Record Date. If the Corporation takes a record of the holders ofCommon Stock for the purpose of entitling them (a) to receive a dividend orother distribution payable in Common Stock, Options or in Convertible Securitiesor (b) to subscribe for or purchase Common Stock, Options or ConvertibleSecurities, then such record date will be deemed to be the date of the issue orsale of the shares of Common Stock deemed to have been issued or sold upon thedeclaration of such dividend or upon the making of such other distribution orthe date of the granting of such right of subscription or purchase, as the casemay be. -19- 2D. Subdivision or Combination of Common Stock. If the Corporationat any time subdivides (by any stock split, stock dividend or otherwise) one ormore classes of its outstanding shares of Common Stock into a greater number ofshares, the Conversion Price in effect immediately prior to such subdivisionwill be proportionately reduced, and if the Corporation at any time combines (byreverse stock split or otherwise) one or more classes of its outstanding sharesof Common Stock into a smaller number of shares, the Conversion Price in effectimmediately prior to such combination will be proportionately increased. 2E. Reorganization, Reclassification, Consolidation, Merger orSale. If any capital reorganization, reclassification, consolidation, merger orany sale of all or substantially all of the Corporation's assets to anotherPerson (collectively any "Organic Change") is effected in such a way thatholders of Common Stock are entitled to receive (either directly or uponsubsequent liquidation) stock, securities or assets with respect to or inexchange for Common Stock, then, as a condition to such Organic Change, lawfuland adequate provision (in form and substance satisfactory to the holders of amajority of the 1981 Convertible Preferred Stock then outstanding, based uponthe aggregate Liquidation Value thereof) will be made whereby each of theholders of 1981 Convertible Preferred Stock will thereafter have the right toacquire and receive in lieu of shares of Conversion Stock immediatelytheretofore acquirable and receivable upon the conversion of such holder's 1981Convertible Preferred Stock, such shares of stock, securities or assets as maybe issuable or payable with respect to or in exchange for the number of shares of Conversion Stock immediately theretofore acquirable and receivable uponconversion of the 1981 Convertible Preferred Stock had such Organic Change nottaken place. In any such case, appropriate provision will be made with respectto such holder's rights and interests to the end that the provisions of thispart 2 and parts 3 and 4 will thereafter be applicable in relation to any sharesof stock, securities or assets thereafter deliverable upon the conversion of1981 Convertible Preferred Stock (including, in the case of any suchconsolidation, merger or sale in which the successor corporation or purchasingcorporation is other than the Corporation, an immediate adjustment of theConversion Price to the value for the Common Stock reflected by the terms ofsuch consolidation, merger or sale if the value so reflected is less than theConversion Price in effect immediately prior to such consolidation, merger orsale). The Corporation will not effect any such consolidation, merger or sale,unless prior to the consummation thereof, the successor corporation (if other -20-than the Corporation) resulting from consolidation or merger or the corporationpurchasing such assets assumes by written instrument (in form reasonablysatisfactory to the holders of a majority of the 1981 Convertible PreferredStock then outstanding, based upon the aggregate Liquidation Value thereof), theobligation to deliver to each such holder such shares of stock, securities orassets as, in accordance with the foregoing provisions, such holder may beentitled to acquire. 2F. Certain Events. If any event occurs of the type contemplatedby the provisions of this part 2 but not expressly provided for by suchprovisions, then the board of directors of the Corporation will make anappropriate adjustment in the Conversion Price so as to protect the rights ofthe holders of 1981 Convertible Preferred Stock; provided that no suchadjustment will increase the Conversion Price as otherwise determined pursuantto this part 2 or decrease the number of shares of Conversion Stock issuableupon conversion of each share of 1981 Convertible Preferred Stock. 2G. Notices. (i) Immediately upon any adjustment of the Conversion Price, the Corporation will send written notice thereof to all holders of 1981 Convertible Preferred Stock. (ii) The Corporation will send written notice to all holders of 1981 Convertible Preferred Stock at least 20 days prior to the date on which the Corporation closes its books or takes a record (a) with respect to any dividend or distribution upon Common Stock, (b) with respect to any pro rata subscription offer to holders of Common Stock or (c) for determining rights to vote with respect to any Organic Change, dissolution or liquidation. (iii) The Corporation will also give to the holders of 1981 Convertible Preferred Stock at least 20 days prior written notice of the date on which any Organic Change, dissolution or liquidation will take place. 2H. Mandatory Conversions of Class C Preferred. Notwithstandinganything to the contrary contained in this Article FOURTH, at such time as thereis no longer any Class B Preferred outstanding, or at such time as theoutstanding Class D Preferred shall be converted pursuant to subdivision VIII.13of Section C hereof, all outstanding Shares of Class C Preferred (if any) will,without any action on the part of -21-the Corporation or the holders thereof, be immediately converted into shares ofVoting Common in accordance with the terms of this part 2, and thereafter no Shares of Class C Preferred will be deemed outstanding and any holder of acertificate of Shares of Class C Preferred will be deemed to be the holder ofthe number of shares of Voting Common into which the Shares of Class C Preferredrepresented by such certificate were converted pursuant to this subdivision 2H. 2I. Mandatory Conversions of Class B Preferred. Notwithstandinganything to the contrary contained in this Article FOURTH, at such time as theoutstanding Class D Preferred shall be converted pursuant to subdivision VIII.13of Section C hereof, all outstanding Shares of Class B Preferred (if any) will,without any action on the part of the Corporation or the holders thereof, beimmediately converted into shares of Non-Voting Common in accordance with theterms of this part 2, and thereafter no Shares of Class B Preferred will bedeemed outstanding and any holder of a certificate of Shares of Class BPreferred will be deemed to be the holder of the number of shares of Non-VotingCommon into which the Shares of Class B Preferred represented by suchcertificate were converted pursuant to this subdivision 2I. 3. Liquidating Dividends. If the Corporation declares a dividendupon the Common Stock payable other than in shares of Common Stock or other thanout of earnings or earned surplus (determined in accordance with generallyaccepted accounting principles, consistently applied) (a "LiquidatingDividend"), then the Corporation will pay to the holders of 1981 ConvertiblePreferred Stock at the time of payment of a Liquidating Dividend an amount equalto the aggregate value of all Liquidating Dividends which would have been paidon the Conversion Stock had such 1981 Convertible Preferred Stock been convertedimmediately prior to the date on which a record is taken for such LiquidatingDividend, or, if no record is taken, the date as of which the record holders ofCommon Stock entitled to such dividends are to be determined. For purposes ofthis part 3, a dividend other than in cash will not be considered payable out ofearnings or earned surplus regardless of whether or not earnings or earnedsurplus are charged an amount equal to the fair value of such dividend. 4. Purchase Rights. If at any time the Corporation grants,issues or sells any Options, Convertible Securities or rights to purchasestock, warrants, securities or other property pro rata to the record holders ofany class of Common Stock (the "Purchase Rights"), then each holder of -22-1981 Convertible Preferred Stock will be entitled to acquire, upon the termsapplicable to such Purchase Rights, the aggregate Purchase Rights which suchholder could have acquired if such holder had held the number of shares ofConversion Stock acquirable upon conversion of such holder's 1981 ConvertiblePreferred Stock immediately before the date on which a record is taken for thegrant, issuance or sale of such Purchase Rights, or, if no such record is taken,the date as of which the record holders of Common Stock are to be determined forthe grant, issue or sale of such Purchase Rights; provided that if the PurchaseRights involve voting securities, the Corporation will make available to eachholder of Class B Preferred, at such holder's request, Purchase Rightsinvolving non-voting securities which are otherwise identical to the PurchaseRights involving voting securities and which non-voting securities areconvertible into such voting securities on the same terms as Class B Common isconvertible into Class A Common.V. Terms Applicable Only to Class C Preferred. 1. Dividends. When and as any dividend or distribution isdeclared or paid by the Corporation on Cammon Stock, whether payable in cash,property, securities or rights to acquire securities (except for dividendspayable in shares of Common Stock or securities convertible into, or rights toacquire, shares of Common Stock and except for Purchase Rights which the holdersof Class C Preferred are entitled to acquire pursuant to part 4 of subdivisionIV), the holders of Class C Preferred will be entitled to participate with theholders of Common Stock in such dividend or distribution as set forth in thispart 1; provided, however, that the Corporation may pay no dividend and make nodistribution on the Class C Preferred (except for the Purchase Rights which the holders of Class C Preferred are entitled to acquire pursuant to part 4,subdivision IV) unless it first shall have paid all dividends and made alldistributions then due on the Class D Preferred; provided further, that thepayment of any dividend on the Class C Preferred shall be subject to Section C,subdivision VII.2C. hereof. At the time such dividend or distribution is payableto the holders of Common Stock, the Corporation will pay to each holder of ClassC Preferred such holder's share of such dividend or distribution equal to theamount of the dividend or distribution per share of Common Stock payable at suchtime multiplied by the number of shares of Voting Common obtainable uponconversion of such holder's Class C Preferred. -23- 2. Voting Rights. Except as otherwise provided by law, the ClassC Preferred will be entitled to vote with the Class A Common and Class DPreferred, voting together as a single class, on all matters to be voted on bythe Corporation's stockholders, with each Share of Class C Preferred entitledto the number of votes equal to the number of shares of Voting Common obtainableupon conversion of such Share of Class C Preferred. Under no circumstances,however, shall holders of the Class C Preferred, in their capacity as such, havethe right to participate in the class vote of any other class of securities,including but not limited to the vote of the holders of Class D Preferred toelect directors pursuant to Section C, subdivision IV.VI. Miscellaneous. 1. Registration of Transfer. The Corporation will keep at itsprincipal office a register for the registration of 1981 Preferred Stock. Uponthe surrender of any certificate representing 1981 Preferred Stock at suchplace, the Corporation will, at the request of the record holder of suchcertificate, execute and deliver (at the Corporation's expense) a newcertificate or certificates in exchange therefor, representing in the aggregatethe number of shares represented by the surrendered certificate. Each such newcertificate will be registered in such name and will represent such number ofshares as is requested by the holder of the surrendered certificate and will besubstantially identical in form to the surrendered certificate, and (ifapplicable) dividends will accrue on the 1981 Preferred Stock represented bysuch new certificate from the date to which dividends have been fully paid onsuch 1981 Preferred Stock represented by the surrendered certificate. 2. Replacement. Upon receipt of evidence reasonably satisfactoryto the Corporation (an affidavit of the registered holder will be satisfactory)of the ownership and the loss, theft, destruction or mutilation of anycertificate evidencing one or more Shares of 1981 Preferred Stock, and in thecase of any such loss, theft or destruction, upon receipt of loss bond or otherindemnity reasonably satisfactory to the Corporation (provided that if theholder is an institution its own agreement will be satisfactory), theCorporation will (at its expense) execute and deliver in lieu of suchcertificate a new certificate representing the number of shares represented bysuch lost, stolen, destroyed or mutilated certificate, and (if applicable)dividends will accrue on the 1981 Preferred Stock represented by such newcertificate from the date to which dividends have been fully -24-paid on such 1981 Preferred Stock represented by the lost, stolen, destroyed ormutilated certificate. 3. Definitions. "Bankruptcy Code" means the federal bankruptcy code, as amended, orany similar federal law then in force. "Common Stock" means, for purposes of subdivision IV, collectively, the Class A Common, the Class B Common and any capital stock of any class of theCorporation hereafter authorized which is not limited to a fixed sum orpercentage of par or stated value in respect to the rights of the holdersthereof to participate in dividends or in the distribution of assets upon anyliquidation, dissolution or winding up of the Corporation. "Common Stock Deemed Outstanding" means, at any given time, thenumber of shares of Common Stock actually outstanding at such time, plus thenumber of shares of Common Stock deemed to be outstanding pursuant to part 2 ofsubdivision IV, plus the shares of Common Stock obtainable upon con version ofthe Class B Preferred and the Class C Preferred outstanding at such time. "Junior Securities" means any equity securities of any kind (but notincluding any debt securities convertible into equity securities) which theCorporation or any Subsidiary at any time issues or is authorized to issue otherthan the Preferred Stock. "Liquidation Value" of any Share of Class A Preferred as of anyparticular date will be equal to the sum of $10 plus any unpaid dividends onsuch Share added to the Liquidation Value of such Share on any DividendReference Date and not thereafter paid; and, in the event of any liquidation,dissolution or winding up of the Corporation or the redemption of such Share,unpaid dividends on such Share will be added to the Liquidation Value of suchShare on the payment date in any liquidation, dissolution or winding up or onthe Redemption Date, as the case may be, accrued to the close of business onsuch payment date or Redemption Date. "Liquidation Value" of any Share of Class B Preferred as of anyparticular date will be equal to the sum of $83.75; provided that in the eventof any liquidation, dissolution or winding up of the Corporation or theredemption of any such Share, unpaid dividends on such Share will be added tothe Liquidation Value of such Share on the payment date in any liquidation,dissolution or winding up or on the -25-Redemption Date, as the case may be, accrued to the close of business on suchpayment date or Redemption Date. "Liquidation Value" of any Share of Class C Preferred as of anyparticular date will be $83.75. "Market Price" of any security means the average of the closingprices of such security's sales on all securities exchanges on which suchsecurity may at the time be listed, or, if there have been no sales on any suchexchange on any day, the average of the highest bid and lowest asked prices onall such exchanges at the end of such day, or, if on any day such security isnot so listed, the average of the representative bid and asked prices quoted inthe NASDAQ System as of 4:00 P.M., New York time, or, if on any day suchsecurity is not quoted in the NASDAQ System, the average of the high and low bidand asked prices on such day in the domestic over-the-counter market asreported by the National Quotation Bureau, Incorporated, or any similarsuccessor organization, in each such case averaged over a period of 21 daysconsisting of the day as of which "Market Price" is being determined and the 20consecutive business days prior to such day. If at any time such security is notlisted on any securities exchange or quoted in the NASDAQ System or theover-the-counter market, the "Market Price" will be the fair value thereofdetermined jointly by the Corporation and the holders of a majority of the 1981Convertible Preferred Stock (based upon the aggregate Liquidation Valuethereof). If such parties are unable to reach agreement, such fair value will bedetermined by appraisers jointly selected by the Corporation and the holders ofa majority of the 1981 Convertible Preferred Stock (based upon the aggregateLiquidation Value thereof). "Material Subsidiary" means any Subsidiary with respect to which theCorporation has directly or indirectly invested, loaned, advanced or guaranteed the obligations of, an aggregate amount exceeding $500,000. "Non-Voting Common" means shares of the Corporation's authorized butunissued Class B Common; provided that if there is a change such that thesecurities issuable upon conversion of the Class B Preferred are issued by anentity other than the Corporation or there is a change in the class ofsecurities so issuable then the term "Non-Voting Common" will mean one share ofthe security issuable upon conversion of the Class B Preferred if such securityis issuable in shares, or will mean the smallest unit in which such security isissuable if such security is not issuable in shares. -26- "Offset Share": a holder of 1981 Convertible Preferred Stock will bedeemed to hold one Offset Share for each Share converted by such holder pursuantto this Article FOURTH at any time prior to such Share's Redemption Date and foreach Share otherwise acquired by the Corporation from such holder other than ina redemption, and an Offset Share will cease to be an Offset Share when it isapplied to reduce the number of Shares to be redeemed in any Redemption. Whenany holder transfers any portion of such holder's outstanding Shares to anyother Person, the transferor will be deemed to have transferred to thetransferee an equal portion of the transferor's Offset Shares, unless theparties to such transaction otherwise agree in a writing deposited with thesecretary of the Corporation at the time of such transfer. "Person" means an individual, a partnership, a corporation, a trust,a joint venture, an unincorporated organization and a government or anydepartment or agency thereof. "Exchange Agreement" means the Exchange Agreement by and among theCorporation and certain persons, pursuant to which such persons acquired theClass A Preferred, the Class B Preferred and the Class C Preferred, as suchagreement may from time to time be amended in accordance with its terms. "Purchase Price" of the Class B Preferred equals $83.75 per Share. "Redemption Date" as to any Share means the date specified in thenotice of any redemption at the Corporation's option or the applicable datespecified herein in the case of any other redemption; provided that no such datewill be a Redemption Date unless the applicable Redemption Price is actuallypaid in full on such date, and if not so paid in full, the Redemption Date willbe the date on which such Redemption Price is fully paid. If the notice ofredemption has been duly given and if on or before the date specified in suchnotice the funds necessary for such redemption have been reserved and set asideby the Corporation so as to be and continue to be available therefor, then,notwithstanding that any certificate for Shares so called for redemption has notbeen surrendered for cancellation, after the close of business on such date ofredemption, the Shares so called for redemption will no longer be deemedoutstanding, the dividends thereon shall cease to accrue, and all rights withrespect to Shares so called for redemption, including the rights, if any, toreceive notice and to vote, will forthwith after the close of business on suchredemption date cease, -27-except only the right of the holders thereof to receive the amount payable uponredemption thereof, without interest. "Subsidiary" means any corporation of which the shares of stockhaving a majority of the general voting power in electing the board of directorsare, at the time as of which any determination is being made, owned by theCorporation either directly or indirectly through Subsidiaries. "Voting Common" means shares of the Corporation's authorized but unissued Class A Common; provided that if there is a change such that thesecurities issuable upon conversion of the Class C Preferred are issued by anentity other than the Corporation or there is a change in the class ofsecurities so issuable then the term "Voting Common" will mean one share of thesecurity issuable upon conversion of the Class C Preferred if such security isissuable in shares, or will mean the smallest unit in which such security isissuable if such security is not issuable in shares. 4. Amendment and Waiver. No amendment, modification or waiverwill be binding or effective with respect to any provision of (i) subdivision Iwithout the prior written consent of the holders of a majority of the Class APreferred and Class B Preferred outstanding at the time such action is taken,(ii) parts 1 or 2 of subdivision III without the prior written consent of theholders of a majority of the Class A Preferred outstanding at the time suchaction is taken, (iii) part 3 of subdivision III without the prior writtenconsent of the holders of a majority of the Class B Preferred outstanding at thetime such action is taken, (iv) subdivision IV without the prior written consentof the holders of a majority of the 1981 Convertible Preferred Stock outstandingat the time such action is taken, (v) subdivision V without the prior writtenconsent of the holders of a majority of the Class C Preferred outstanding at thetime such action is taken, or (vi) subdivision II or VI without the priorwritten consent of the holders of a majority of the 1981 Preferred Stockoutstanding at the time such action is taken; provided that no such action willchange (a) the rate at which or the manner in which dividends on the Class APreferred or the Class B Preferred accrue or the times at which such dividendsbecome payable without the prior written consent of the holders of at least 90%of the Class A Preferred and the Class B Preferred then outstanding, (b) theamount payable on redemption of the 1981 Preferred Stock or the times at whichredemption of 1981 Preferred Stock is to take place without the prior writtenconsent of the holders of at least 90% of the 1981 Preferred Stock thenoutstanding, (c) the Conversion Price of the 1981 Convertible Preferred Stock orthe number -28-of shares or the class of stock into which the 1981 Convertible Preferred Stockis convertible without the prior written consent of the holders of at least 90%of the 1981 Convertible Preferred Stock then outstanding, or (d) the percentagerequired to approve any change described in clauses (a), (b) and (c) abovewithout the prior written consent of the holders of at least 90% of the Class '.Preferred and the Class B Preferred (in the case of (a)), the 1981 PreferredStock (in the case of (b)) or the 1981 Convertible Preferred Stock (in the caseof (c)) then outstanding. For purposes of this part 4, the consent of theholders of the requisite percentage of 1981 Preferred Stock or any class orclasses thereof will be determined upon the basis of the aggregate LiquidationValue of the class or classes of 1981 Preferred Stock in question. 5. Generally Accepted Accounting Principles. When any accountingdetermination or calculation is required to be made hereunder, suchdetermination or calculation (unless otherwise provided) will be made inaccordance with generally accepted accounting principles, consistently applied,except that if because of a change in generally accepted accounting principlesthe Corporation would have to alter a previously utilized accounting method orpolicy in order to remain in compliance with generally accepted accountingprinciples, such determination or calculation will continue to be made inaccordance with the Corporation's previous accounting methods and policiesunless the Corporation has obtained the prior written consent of the holders ofa majority of the 1981 Preferred Stock then outstanding (based upon theaggregate Liquidation Value thereof). 6. Notices. All notices referred to herein, except as otherwiseexpressly provided, will be made by registered or certified mail, return receiptrequested, postage prepaid, and will be deemed to have been given when somailed. SECTION B. COMMON STOCK Except as otherwise provided herein, all shares of Class A Commonand Class B Common will be identical and will entitle the holders thereof to thesame rights and privileges. 1. Voting Rights. Except as otherwise required by law, the ClassA Common will be entitled to one vote per share on all matters to be voted on bythe Corporation's stockholders and will vote as a single class on all suchmatters together with the Class C Preferred and Class D -29-Preferred as provided herein and the holders of Class B Common will have noright to vote on any matters to be voted on by the Corporation's stockholders.Under no circumstances, however, shall holders of the Class A Common, in theircapacity as such, have the right to participate in the class vote of any otherclass of securities, including but not limited to the vote of the holders ofClass D Preferred to elect, as a class, directors, as provided in Section C,subdivision IV. Subject to any required consent of the holders of any class orclasses of the Preferred Stock then outstanding, the authorized amount of sharesof Class A Common may, without a separate class or series vote, be increased ordecreased from time to time by the affirmative vote of the holders of a majorityof the stock of the Corporation entitled to vote thereon. 2. Dividends. When and as dividends are declared thereon, whetherpayable in cash, property or securities of the Corporation, the holders of ClassA Common and the holders of Class B Common will be entitled to share equally,share for share, in such dividends; provided that if dividends are declaredwhich are payable in shares of Class A Common or Class B Common, dividends willbe declared which are payable at the same rate on both classes of stock, and thedividends payable in shares of Class A Common will be payable to holders ofClass A Common and the dividends payable in shares of Class B Common will bepayable to holders of Class B Common. No dividend on any share of Common Stockmay be declared or paid, however, unless all dividends due on the 1981 PreferredStock shall have been paid and unless all dividends due on the Class D Preferredshall have been provided for as set forth in Section C, subdivision II.1;provided, however, dividends payable in shares of Common Stock or securitiesconvertible into or rights to acquire Common Stock may be paid. 3. Conversion. 3A. Conversion of Class B Common. Each record holder of Class BCommon is entitled at any time to convert any or all of the shares of suchholder's Class B Common into the same number of shares of Class A Common;provided that no holder of Class B Common is entitled to convert any share orshares of Class B Common to the extent that, as a result of such conversion,such holder or its affiliates would directly or indirectly own, control or havepower to vote a greater quantity of securities of any kind issued by theCorporation than such holder and its affiliates are permitted to own, control orhave power to vote under any law or under any regulation, rule or otherrequirement of any governmental -30-authority at any time applicable to such holder and its affiliates. 3B. Conversion Procedure. (i) Each conversion of shares of Class B Common into shares of Class A Common will be effected by the surrender of the certificate or certificates representing the shares to be converted at the principal office of the Corporation at any time during normal business hours, together with a written notice by the holder of such Class B Common stating that such holder desires to convert the shares, or a stated number of the shares, of Class B Common represented by such certificate or certificates into Class A Common and that upon such conversion such holder and its affiliates will not directly or indirectly own, control or have the power to vote a greater quantity of securities of any kind issued by the Corporation than such holder and its affiliates are permitted to own, control or have the power to vote under any applicable law, regulation, rule or other governmental requirement (and such statement will obligate the Corporation to issue such Class A Common). Such conversion will be deemed to have been effected as of the close of business on the date on which such certificate or certificates have been surrendered and such notice has been received, and at such time the rights of the holder of the converted Class B Common as such holder will cease and the person or persons in whose name or names the certificate or certificates for shares of Class A Common are to be issued upon such conversion will be deemed to have become the holder or holders of record of the shares of Class A Common represented thereby. (ii) Promptly after such surrender and the receipt of such written notice, the Corporation will issue and deliver in accordance with the surrendering holder's instructions (a) the certificate or certificates for the Class A Common issuable upon such conversion and (b) a certificate representing any Class B Common which was represented by the certificate or certificates delivered to the Corporation in connection with such conversion but which was not converted. (iii) If the Corporation in any manner subdivides or combines the outstanding shares of one class of Common Stock, the outstanding shares of the other class of Common Stock will be proportionately subdivided or combined. -31- (iv) The issuance of certificates for Class A Common upon conversion of Class B Common will be made without charge to the holders of such shares for any issuance tax in respect thereof or other cost incurred by the Corporation in connection with such conversion and the related issuance of Class A Common. (v) The Corporation will not close its books against the transfer of Class B Common or of Class A Common issued or issuable upon conversion of Class B Common in any manner which would interfere with the timely conversion of Class B Common. 4. Registration of Transfer. The Corporation will keep at itsprincipal office (or such other place as the Corporation reasonably designates)a register for the registration of shares of Common Stock. Upon the surrenderof any certificate representing shares of any class of Common Stock at suchplace, the Corporation will, at the request of the registered holder of suchcertificate, execute and deliver a new certificate or certificates in exchangetherefor representing in the aggregate the number of shares of such classrepresented by the surrendered certificate, and the Corporation forthwith willcancel such surrendered certificate. Each such new certificate will beregistered in such name and will represent such number of shares of such classas is requested by the holder of the surrendered certificate and will besubstantially identical in form to the surrendered certificate. The issuance ofnew certificates will be made without charge to the holders of the surrenderedcertificates for any issuance tax in respect thereof or other cost incurred bythe Corporation in connection with such issuance. 5. Replacement. Upon receipt of evidence reasonably satisfactoryto the Corporation (an affidavit of the registered holder will be satisfactory)of the ownership and the loss, theft, destruction or mutilation of anycertificate evidencing one or more shares of any class of Common Stock, and inthe case of any such loss, theft or destruction, upon receipt of indemnityreasonably satisfactory to the Corporation (provided that if the holder is afinancial institution its own agreement will be satisfactory), or, in the case of any such mutilation upon surrender of such certificate, the Corporation will(at its expense) execute and deliver in lieu of such certificate a newcertificate of like kind representing the number of shares of such classrepresented by such lost, stolen, destroyed or mutilated certificate and datedthe date of such lost, stolen, destroyed or mutilated certificate. -32- SECTION C. CLASS D PREFERRED STOCKI. Issuance in Series and Limitations as to Variations Between Series: 1. Designation and Number of Shares. The Class D Preferred shall beissuable in two series, designated and comprising the numbers of Shares, asfollows: (i) Class D 8% Convertible Preferred Stock-Series 1, par value $.10 per share (the "Class D-1 Preferred") comprised of 45,681 Shares and no more; and (ii) Class D 8% Convertible Preferred Stock-Series 2, par value $.10 per share (the "Class D-2 Preferred") comprised of 27,408 Shares and no more; 2. Issuance of Class D-2 Preferred. Shares of Class D-2 Preferred shallbe deemed to be and shall be automatically issued upon the occurrence of theSecond Closing under the Note and Stock Purchase Agreements in discharge of theobligations under the Short-Term Promissory Notes-Series 1 at the rate of oneshare of Class D-2 Preferred for each $210 principal amount of such Notes, asprovided in each such Short-Term Promissory Note-Series 1 and in the Note andstock Purchase Agreements. 3. Limitations as to Variations. The Class D-l Preferred and theClass D-2 Preferred (collectively referred to as the "Class D Preferred") shallrank equally with each other and shall be identical in all respects, except asprovided in subdivision VIII.1A. below with respect to initial Conversion Priceand except with respect to date of issue.II. Dividends. 1. General Obligation. When and as the first cash dividend, if any, isdeclared or paid by the board of directors of the Corporation on Common Stock ineach calendar year, the board of directors shall declare and the Corporationshall pay a dividend at the rate of 8% per annum of the Liquidation Value of theClass D Preferred to the holders thereof as provided in this part II; provided,however, if dividends as declared on the Common Stock and on the Class DPreferred are not permitted under applicable law, dividends declared on theCommon Stock shall be reduced so that dividends on the Class D Preferred may bepaid. Each such dividend on the Class D Preferred shall be due and payable nolater than the date on which the dividend on the -33-Common Stock giving rise to such dividend on the Class D Preferred is payable(whether or not the board of directors of the Corporation have declared adividend on the Class D Preferred); provided, however, that no more than onesuch 8% dividend shall be paid in any calendar year irrespective of the numberof cash dividends which may be declared in such year. 2. Distribution of Partial Dividend Payments. If at any time theCorporation pays less than the total amount of dividends then due and payablewith respect to the Class D Preferred, such payment will be distributed amongthe holders of such class so that an equal amount will be paid with respect toeach outstanding Share. No dividend due on the Class C Preferred may be paid until all amounts then due on the Class D Preferred shall have been paid (exceptfor the Purchase Rights which the holders of Class C Preferred are entitled toacquire pursuant to part 4 of subdivision IV of Section A). No dividend due onthe Common Stock may be paid until all amounts then due on the Class DPreferred, as well as any amounts that initially would become due on the Class DPreferred upon the payment to holders of Common Stock, shall have been paid,provided, however, dividends payable in shares of Common Stock or securitiesconvertible into or rights to acquire Common Stock may be paid.III. Voting Rights. Except as otherwise provided by law, the Class D Preferred will beentitled to vote with the Class A Common and Class C Preferred, voting togetheras a single class, on all matters to be voted on by the Corporation'sstockholders, with each Share of Class D Preferred entitled to the number ofvotes equal to the number of shares of Voting Common obtainable upon conversionof such Share of Class D Preferred, calculated as of the date of the recorddate,for each vote. In addition, the Class D Preferred shall be entitled to voteas a class on matters as to which they are entitled to a class vote underapplicable law; provided further that the rights of the Class D Preferred as aclass may not be diminished in any way without the approval of 51% of the sharesof Class D Preferred.IV. Class D Directors. In addition to such voting rights as are described in subdivisionIII, so long as (i) the Corporation shall not have any class of Common Stockregistered under Section 12 of the Securities Exchange Act of 1934 and (ii) thetotal number of votes to which the holders of the Class D Preferred then -34-outstanding shall be entitled exceeds 17% of the total number of votes which maybe cast generally for the election of Directors, then the holders of the Class DPreferred outstanding shall have the right, as a class, to nominate, elect andmaintain in office two Directors to the board of directors of the Corporation;provided, however, that if at any time the board of directors shall be or shallbe authorized to be composed of more than 10 directors the holders of the ClassD Preferred outstanding shall have the right, as a class, to nominate and electa number of additional Directors no greater than necessary to bring thepercentage of authorized Directors chosen by the holders of the Class DPreferred pursuant to this subdivision IV to at least 20%. The term of office ofany Director elected pursuant to the preceding sentence shall not extend beyondthe first to occur of the events specified in clauses (i) and (ii) of suchpreceding sentence. In any election of directors pursuant to this subdivision IV(and not in an election of directors generally), each holder of Class DPreferred shall be entitled to as many votes as shall equal (x) the number ofvotes which (except for the provision as to voting set forth in this sentence)such holder would be entitled to cast for the election of directors generallyWith respect to the shares of Class D Preferred held by such holder multipliedby (y) the number of directors to be elected pursuant to this subdivision IV,and such holder may cast the resulting number of votes for a single director ordistribute them among the number of directors to be voted for, or for any two ormore of such directors as the holder may see fit.V. Liquidation. 1. Upon any liquidation, dissolution or winding up of theCorporation, each holder of Class D Preferred will be entitled to be paid,before any distribution or payment is made upon the 1981 Preferred Stock or anyJunior Securities, an amount in cash equal to the aggregate Liquidation Value ofall Shares held by such holder, and the holders of Class D Preferred will not beentitled to any further payment. If the net assets of the Corporation shall beinsufficient to permit the payment to holders of all outstanding shares of allclasses of Preferred Stock of the full amounts to which they are entitled, thenthe assets of the Corporation shall be distributed (i) first to the holders of the Class D Preferred, until such holders are paid the aggregate amount whichthey are entitled to be paid, or, if the assets to be distributed areinsufficient for such purpose, the entire assets to be distributed will bedistributed ratably among such holders based upon the aggregate LiquidationValue of -35-the Class D Preferred held by each such holder, and (ii) second, the balance (ifany) will be distributed among the holders of all outstanding shares ofPreferred Stock other than the Class D Preferred in accordance with theprovisions of Section A hereof. The Corporation will mail written notice of suchliquidation, dissolution or winding up, not less than 60 days prior to thepayment date stated therein, to each record holder of Class D Preferred. Neitherthe consolidation or merger of the Corporation into or with any othercorporation or corporations, nor the sale or transfer by the Corporation of allor any part of its assets, nor the reduction of the capital stock of theCorporation, will be deemed to be a liquidation, dissolution or winding up ofthe Corporation within the meaning of this subdivision V. 2. Notwithstanding the foregoing, if at any time any Class DPreferred shall have been outstanding for at least three years, is registeredunder Section 12 of the Securities Exchange Act of 1934, and the Class A Commonor other security into which the Class D Preferred shall be convertible hastraded on a national securities exchange or NASDAQ on each of 20 consecutivedays at a price per share of at least 170% of the then-applicable ConversionPrice, then the Class D Preferred shall from such time be pari passu with theClass A Preferred with respect to liquidation preferences, and the rights ofholders of shares of Class D Preferred with respect to liquidation shall be thesame as if such shares were shares of Class A Preferred.VI. Redemptions 1. Scheduled Redemptions. 1A. The Corporation will redeem 25% of the original total numberof Shares of Class D Preferred issued on the First Closing Date, each of theDelayed First Closing Dates, if any, and the Second Closing Date, if any, orsuch lesser number then outstanding on June 30 of each year, commencing in 1995and ending in 1998 (the "Class D Scheduled Redemption Dates") at a price pershare equal to the Redemption Price as defined in subdivision VI.3A. 1B. If any Shares of Class D Preferred are converted pursuant tosubdivision VIII other than in a situation described in the immediatelyfollowing sentence, the number of Shares of Class D Preferred thereafter to beredeemed pursuant to subdivision VI.1A. on each subsequent Class D ScheduledRedemption Date shall be reduced in the same proportion as the number of Sharesof Class D Preferred outstanding immediately prior to such conversion is reduced -36-by the conversion pursuant to subdivision VIII. If a notice of redemptionpursuant to subdivision VI.3B. has been given and thereafter any Share or Sharesof Class D Preferred to which such notice relates shall have been converted intoCommon Stock pursuant to Section VIII prior to the Redemption Date to which suchnotice relates, such Share or Shares shall, for the purposes of subdivisionVI.1A. hereof, be deemed to have been redeemed to the extent so converted. 2. Optional Redemptions. The Corporation may not redeem at its optionany Shares of Class D Preferred prior to June 30, 1990. The Corporation may, atany time on or after June 30, 1990, at its option, upon notice as provided insubdivision VI.3B., on the date specified in such notice, redeem as a whole, butnot in part, all of the shares of Class D Preferred then outstanding at thefollowing prices per Share (expressed as a percentage of the Redemption Price, as defined in subdivision VI.3A.), together with due and payable but unpaiddividends, if any, to the Redemption Date (as defined in subdivision VI.B.): Redemption to be made during the 12-monthperiod beginning June 30 Percentage------------------------ ---------- 1990 140% 1991 130 1992 120 1993 110 1994 105 1995 105 1996 105 thereafter 100 3. General Terms of Scheduled and Optional Redemptions. 3A. Redemption Price. For each Share of Class D Preferred which isto be redeemed, the Corporation will be obligated on the Redemption Date to payto the holder thereof an amount in cash equal to the respective LiquidationValue of such Share (the "Redemption Price"). If the funds of the Corporationlegally available for redemption of Shares of the Class D Preferred on anyRedemption Date are insufficient to redeem the total number of Shares to beredeemed on such date, those funds which are legally available will be used toredeem the maximum possible number of Shares pro rata among the holders of theShares to be redeemed and the amount equal to the Redemption Price of the Sharesthat have not been redeemed because of such insufficiency of funds shall remain -37-due and payable and shall be deemed to increase at a rate of 15% per annum untilsuch Shares have been redeemed. At any time thereafter when additional funds ofthe Corporation are legally available for the redemption of Shares of Class DPreferred, such funds will immediately be used to redeem the balance of theShares which the Corporation has become obligated to redeem on any RedemptionDate but which it has not redeemed including the deemed increase in RedemptionPrice set forth in the last preceding sentence. No dividends may be paid on theCommon Stock so long as there remains due and payable any amount with respect tothe Class D Preferred, provided, however, dividends payable in shares of CommonStock or securities convertible into or rights to acquire Common Stock may bepaid. 3B. Notice of Redemption. The Corporation will mail written noticeof each redemption of Class D Preferred to each record holder of Class DPreferred not more than 60 days nor less than 30 days prior to the date on whichsuch redemption is to be made (the "Redemption Date"), in each case specifyingsuch date, the aggregate number of Shares to be redeemed on such date, thenumber of Shares held by such holder to be redeemed on such date, the RedemptionPrice and the dividend due and payable, if any, applicable to such redemption.Each such notice shall be accompanied by an Officers' Certificate certifyingthat the conditions of subdivision VI.1 or VI.2 have been fulfilled inconnection with such redemption and specifying the particulars of suchfulfillment. Upon mailing any notice of redemption which relates to aredemption at the Corporation's option, the Corporation will become obligated toredeem all of the Shares of Class D Preferred then outstanding. In the event ofa scheduled redemption, if fewer than the total number of Shares represented byany certificate are redeemed, a new certificate representing the number ofunredeemed Shares will be issued to the holder thereof without cost to suchholder promptly upon the surrender of the certificate representing the redeemedShares. 3C. Determination of the Number of Each Holder's Shares to be Redeemed Pursuant to Scheduled Redemptions. The number of Shares of Class DPreferred to be redeemed from each holder thereof in scheduled redemptionshereunder will be the number of whole Shares, as nearly as practicable to thenearest Share, determined by multiplying the total number of Shares of Class DPreferred to be redeemed times a fraction, the numerator of which will be thetotal number of Shares of Class D Preferred then held by such holder and thedenominator of which will be the total number of Shares of Class D Preferredthen outstanding, provided, however on the -38-last Class D Scheduled Redemption Date, all shares of Class D Preferred shall beredeemed. 3D. Certain Consequences of Redemption. If the notice ofredemption has been duly given and if and only if on or before the datespecified in such notice the funds necessary for such redemption have beenreserved and set aside by the Corporation so as to be and continue to beavailable therefor, then, notwithstanding that any certificate for Shares socalled for redemption has not been surrendered for cancellation, after theclose of business on such date of redemption, the Shares so called forredemption will no longer be deemed outstanding, and all rights with respect toShares so called for redemption, including the rights, if any, to receive noticeand to vote, will forthwith after the close of business on such redemption datecease, except only the right of the holders thereof to receive the amountpayable upon redemption thereof, without interest. 3E. Redeemed or Otherwise Acquired Shares. Any Shares of Class DPreferred which are redeemed or otherwise acquired by the Corporation will becancelled and will not be reissued, sold or transferred. 3F. Other Redemptions or Acquisitions. Neither the Corporation norany Subsidiary will redeem or otherwise acquire any Class D Preferred, except asexpressly authorized herein or pursuant to a purchase offer made to all holdersof Class D Preferred, pro rata, based upon the number of Shares held by eachholder, but no such purchase shall modify the mandatory redemption obligationsunder subdivision VI.1A.VII. Events of Noncompliance. 1. Definition. 1A. An Event of Noncompliance will be deemed to have occurred if: (i) the Corporation fails to pay on any date the full amount ofdividends then due and payable on the Class D Preferred, whether or not suchpayment is legally permissible or the Corporation fails to make any redemptionpayment with respect to the Class D Preferred which it is obligated to make,whether or not such payment is legally permissible; (ii) the Corporation breaches or otherwise fails to perform orotherwise observe any covenant or agreement set forth in Section 12.12 of theNote and Stock Purchase Agreements or the Corporation fails to make anyprepayment which -39-it is obligated to make as set forth in Section 10 of the Note and StockPurchase Agreements; (iii) the Corporation breaches or otherwise fails to perform orotherwise observe any covenant or agreement set forth in Sections 12.1, 12.2,12.4, 12.7(a) and (b) insofar as subsections 12.7(a) and (b) relate to theCorporation or CasChem, of the Note and Stock Purchase Agreements or the Corporation or CasChem fails to preserve and keep in full force and effect itscorporate existence; (iv) the Corporation breaches or otherwise fails to perform orobserve any other covenant or agreement set forth in this Section C of thisRestated Certificate of Incorporation, in the Note and Stock PurchaseAgreements, in the Notes or in the Registration Rights Agreement; (v) any material representation or warranty contained in the Noteand Stock Purchase Agreements or required to be furnished to any Purchaser ofClass 0 Preferred pursuant to the Note and Stock Purchase Agreements on orbefore the date of issuance of the Class D Preferred is false or misleading inany material respect on the date made or furnished; (vi) any written information furnished by the Corporation or anySubsidiary to any holder of Class D Preferred pursuant to the Note and StockPurchase Agreements after the date of issuance of the Class D Preferred is, tothe Corporation's or such Subsidiary's knowledge after due inquiry, false ormisleading in any material respect on the date made or furnished; (vii) the Corporation or any Subsidiary makes an assignment for thebenefit of creditors or admits in writing its inability to pay its debtsgenerally as they become due; or an order, judgment or decree is enteredadjudicating the Corporation or any Subsidiary bankrupt or insolvent under theBankruptcy Code or the Corporation or any Subsidiary is a debtor-in-possessionunder the Bankruptcy Code; or any order for relief with respect to theCorporation or any Subsidiary is entered under the Bankruptcy Code; or theCorporation or any Subsidiary petitions or applies to any tribunal for theappointment of a custodian, trustee, receiver or liquidator of the Corporationor any Subsidiary or of any substantial part of the assets of the Corporation orany Subsidiary, or commences any proceeding (other than a proceeding for thevoluntary liquidation and dissolution of a Subsidiary) relating to theCorporation or any Subsidiary under any bankruptcy, reorganization, arrangement,insolvency, -40-readjustment of debt, dissolution or liquidation law of any jurisdiction; or anysuch petition or application is filed, or any such proceeding is commenced,against the Corporation or any Subsidiary and either (a) the Corporation or anysuch Subsidiary by any act indicates its approval thereof, consent thereto oracquiescence therein or (b) such petition, application or proceeding is notdismissed within 60 days; (viii) a judgment in excess of $500,000 is rendered against theCorporation or any Subsidiary and, within 60 days after entry thereof, suchjudgment is not discharged or execution thereof stayed pending appeal, or within60 days after the expiration of any such stay, such judgment is not discharged;or (ix) the Corporation or any Subsidiary defaults in the performanceof any obligation, if the effect of such default is to cause an amount exceeding$500,000 to become due prior to its stated maturity, or to permit the holder orholders of such obligation to cause an amount exceeding $500,000 to become dueprior to its stated maturity. 1B. An Event of Noncompliance will not be deemed to have occurredwith respect to the matters described in subdivision VII.1A.(iv) or VII.1A.(v)if the Corporation establishes that (a) in the case of subdivision VII.1A.(iv),the particular Event of Noncompliance has not been caused by knowing orpurposeful conduct by the Corporation or any Subsidiary and the Corporation hasexercised, and continues to exercise, best efforts expeditiously to cure theEvent of Noncompliance (if cure is possible), (b) in the case of subdivisionVII.1A.(v), the particular Event of Noncompliance has not been caused by aknowing or willful misstatement or misrepresentation on the part of theCorporation, (c) in the case of both such subdivisions, the Event of Noncmpliance is not material to the Corporation's financial condition, opera-tions, assets, or business prospects, and (d) in the case of both suchsubdivisions, the Event of Noncompliance is not material to any holder'sinvestment in the Class D Preferred. 2. Consequence of Certain Events of Noncompliance. 2A. If an Event of Noncompliance of the type described insubdivision VII. 1A.(ii), (iii) or (iv) has occurred and continued for a periodof 30 days or any other Event of Noncompliance has occurred, the dividend rateon the Class D Preferred will increase immediately by an increment of 0.5X perannum and dividends shall automatically accrue and shall cumulatively accrue.Thereafter, until such time -41-as no Event of Noncompliance exists, the dividend rate on the Class D Preferredwill increase automatically at the end of each succeeding 90-day period by anadditional increment of 0.5% per annum (but in no event will the dividend rateexceed lO% per annum). Any increase of the dividend rate resulting from theoperation of this subdivision will terminate as of the close of business on thedate on which no Event of Noncompliance exists, subject to subsequent increasespursuant to this subdivision provided, however, dividends shall continue toaccrue automatically (at 8% per annum) and shall cumulatively accrue until 12months after such Event of Noncompliance shall have been removed and all unpaiddividends due and payable shall have been paid. 2B. If Events of Noncompliance exist for an aggregate of 365days (whether or not such days are successive), the Conversion Price of theClass D Preferred will be reduced immediately by 10% of the Conversion Price ineffect immediately prior to such adjustment. Notwithstanding the foregoing,if no Events of Noncompliance exist for a period of 365 successive days,previous days in which Events of Noncompliance existed will not be counted indetermining such adjustment. In no event will the Conversion Price adjustment berescinded, and in no event will there be more than one Conversion Priceadjustment pursuant to this subdivision. 2C. So long as an Event of Noncompliance of the type described insubdivision VII.A1,(i), (ii) or (iii) has occurred and is continuing, nodividends on the 1981 Preferred Stock shall be declared (except for dividendspayable in shares of Common Stock or securities convertible into or rights toacquire Common Stock) and the Corporation shall not redeem any shares of 1981Preferred stock. So long as an Event of Noncompliance of the type described insubdivision VII.1A.(i) or (ii) has occurred and is continuing, no dividends onthe 1981 Preferred Stock shall be paid (except for dividends payable in sharesof Common Stock or securities convertible into rights to acquire Common Stock).If, prior to the payment of a dividend on the 1981 Preferred Stock, an Event ofNoncompliance of the type described in subdivision VII.lA.(iii) has occurred,and if such dividend, on the 1981 Preferred Stock had been declared pursuant tothe terms and conditions of the 1981 Preferred Stock and such dividend ispayable within 30 days of such declaration, such dividend may be paid providedthat such payment is made within 30 days of such declaration. In addition, solong as the Corporation breaches or otherwise fails to perform or observe thoseprovisions of Section 3.1 or 3.2 of the Registration Rights Agreement requiringthe Corporation to file registration statements, governing the number ofregistration rights -42-granted, or otherwise requiring the Corporation to include in a registrationstatement the Common Stock issuable on conversion of Class D Preferred, theCorporation shall not redeem any shares of 1981 Preferred Stock. 2D. If an Event of Noncompliance exists, each holder of Class D Preferred will also have any other rights which such holder may have beenafforded under any contract or agreement at any time and any other rights whichsuch holder may have pursuant to applicable law.VIII. Conversions. 1. Conversion Procedure. 1A. At any time up to two days prior to the Redemption Date ofany Share of Class D Preferred, the holder thereof may convert all or anyportion of such holder's Shares of Class D Preferred into a number of shares ofthe Class A Common computed by multiplying the number of Shares to be convertedby $165 if no Class D-2 Preferred have been issued, or by $210 if the Class D-2Preferred have been issued pursuant to the terms of the Note and Stock PurchaseAgreements, and dividing the result by the Conversion Price then in effect;provided, however, that no Class D-1 Preferred may be converted until theearlier of the date of issuance of the Class D-2 Preferred and the CosanTermination Date. 1B. Each conversion of Class D Preferred will be deemed to havebeen effected as of the close of business on the date on which the certificateor certificates representing the Class D Preferred to be converted have beensurrendered at the principal office of the Corporation. At such time as suchconversion has been effected, the rights of such holder of such Class DPreferred as such holder will cease and the Person or Persons in whose name ornames any certificate or certificates for shares of Class A Common are to beissued upon such conversion will be deemed to have become the holder or holdersof record of the shares of Class A Common represented thereby; provided,however, a conversion of Class D Preferred within 10 days after the receipt by aholder of notice of a declaration by the board of directors of the Corporationof a cash dividend on Common Stock will be deemed to have been effected one dayprior to the record date for such cash dividend on Common Stock, provided,further that the Class D Preferred so deemed to have been converted shall not beentitled to any dividend on such Class D Preferred resulting from thedeclaration or payment of such cash dividend on the Common Stock. -43- 1C. As soon as possible after a conversion has been effected, theCorporation will deliver to the converting holder: (a) a certificate or certificates representing the number of shares of Class A Common issuable by reason of such conversion in such name or names and such denomination or denominations as the converting holder has specified; (b) payment in an amount equal to all due and payable dividends with respect to each Share of Class D Preferred converted, which have not been paid prior thereto, plus the amount payable under subdivision VIII.1E. below with respect to such conversion; and (c) a certificate representing any Shares of Class D Preferred which were represented by the certificate or certificates delivered to the Corporation in connection with such conversion but which were not converted. 1D. If for any reason the Corporation is unable to pay any due andpayable dividends on the Class D Preferred being converted, the Corporation willpay such dividends plus an amount equal to 15% per annum of such unpaiddividends, calculated from the date on which payment was due and payable to thedate of payment, to the converting holder as soon thereafter as funds of theCorporation are legally available for such payment. At the request of any suchconverting holder, the Corporation will provide such holder with writtenevidence of its obligation to such holder. No dividends may be paid on theCommon Stock so long as there remain due and payable any dividends or interestwith respect to the Class D Preferred, provided, however, dividends payable in shares of Common Stock or securities convertible into or rights to acquireCommon Stock may be paid. 1E. If any fractional interest in a share of Common Stock would,except for the provisions of this subdivision VIII.1E., be deliverable uponany conversion, the Corporation, in lieu of delivering the fractional sharetherefor, will pay an amount equal to the Conversion Price of such fractionalinterest as of the date of conversion; provided that if for any reason theCorporation is unable to pay the Conversion Price of any such fractionalinterest, the Corporation will issue such fractional share upon theconversion. -44- 1F. The issuance of certificates for shares of Common Stock uponconversion of Class D Preferred will be made without charge to the holders ofsuch Class D Preferred for any issuance tax in respect thereof or other costincurred by the Corporation in connection with such conversion and the relatedissuance of shares of Common Stock. 1G. The Corporation will not close its books against the transferof Class D Preferred or of Common Stock issued or issuable upon conversion ofClass D Preferred in any manner which interferes with the timely conversion ofClass D Preferred. 2. Conversion Price. The Conversion Price for the Class D-1 Preferredshall initially be $165, and shall be adjusted at the date the Class D-2Preferred shall have been issued by the Corporation, at which time theConversion Price for the Class D-1 Preferred shall become $210; if no Class D-2Preferred shall have been issued by the Corporation on or before December 31,1985 (or such later date as indicated in writing by the holders of at least 50%in principal amount of the Short-Term Promissory Notes, as defined below), suchadjustment to the Class D-1 Preferred shall no longer be applicable. TheConversion Price for the Class D-2 Preferred shall initially be $210. In orderto prevent dilution of the conversion rights granted under this subdivision, theConversion Price of Class D Preferred will be subject to adjustment from time totime pursuant to this subdivision VIII. 3. Adjustment of Conversion Price for Diluting Issues, etc. 3A. Formula Adjustments. (i) Issuance of Additional Shares of Common Stock. In case theCorporation shall at any time or from time to time after the date of theissuance of the Class D-1 Preferred issue or sell, or be deemed under anyprovision of this subdivision VIII to have issued or sold, any additional sharesof Common Stock (except for issuances excluded pursuant to subdivisionVIII.3H.) whether or not subsequently reacquired or retired by the Corporation,without consideration or for a consideration per share which shall be lessthan the Conversion Price in effect immediately prior to such issue or sale,then and in each such case, the Conversion Price in effect immediately prior tosuch issue or sale shall be reduced, effective concurrently with such issue orsale, -45-to a price (calculated to the nearest cent) determined by dividing, (a) an amount equal to the sum of (1) the aggregate number of shares of Common Stock outstanding immediately prior to such issue and sale, including, without duplication, those deemed to have been issued under any provision of subdivision VIII, and including, without duplication, the shares of Common Stock into which the Class B Preferred and Class C Preferred may be converted, multiplied by the then existing Conversion Price, and (2) the consideration, if any, received by the Corporation upon such issue or sale, by (b) the aggregate number of shares of Common Stock of all classes outstanding immediately after such issue or sale, including, without duplication, those deemed to have been issued under any provision of subdivision VIII and including, without duplication, the shares of Common Stock into which the Class B Preferred and Class C Preferred may be converted.For all purposes of this clause VIII.3A.(i), the provisions of the followingsubdivisions VIII.3B. through VIII.3G. shall be applicable. (ii) Liquidating Dividends. If Group declares a dividend upon theCommon Stock payable other than in shares of Common stock or other than out ofearnings or earned surplus (determined in accordance with GAAP, consistentlyapplied) (a "Liquidating Dividend"), then Group will pay to the holders of ClassD Preferred at the time of payment of a Liquidating Dividend an amount equal tothe aggregate value of all Liquidating Dividends which would have been paid. Onthe Common Stock issuable on conversion of Class D Preferred had such Class DPreferred been converted immediately prior to the date on which a record istaken for such Liquidating Dividend, or, if no record is taken, the date as ofwhich the record holders of Common Stock entitled to such dividends are to bedetermined. For purposes of this subsection (ii), a dividend other than in cashwill not be considered payable out of earnings or earned surplus regardless ofwhether or not earnings or earned surplus are charged an amount equal to thefair value of such dividend. 3B. Options. In case at any time or from time to time theCorporation shall (whether directly or by assumption in a merger or otherwise)grant, issue or sell any Options, -46-whether or not such Options are immediately exercisable, then the maximum numberof shares of Common Stock issuable upon the exercise of such Options (orissuable upon the conversion of any Convertible Securities issuable pursuant tosuch Options), without regard to any provision for subsequent adjustment of suchnumber, shall be deemed to be outstanding and to have been issued immediatelyafter the opening of business on the date of the grant of such Options. 3C. Convertible Securities. In case at any time or from time totime the Corporation shall (whether directly or by assumption in a merger orotherwise) issue or sell any Convertible Securities (other than any ConvertibleSecurity issued pursuant to an Option and the shares of Common Stock issuableupon the conversion of which have been or are to be deemed issued pursuant tosubdivision VIII.3B.), whether or not such Convertible Securities areimmediately convertible or exchangeable into Common Stock, then the maximumnumber of shares of Common Stock issuable upon the conversion or exchange ofsuch Convertible Securities without regard to any provision for subsequentadjustment of such number shall be deemed to be outstanding and to have beenissued immediately after the opening of business on the date of the issuance orsale of such Convertible Securities. 3D. Treatment of Expired Options and Unexercised ConvertibleSecurities. Upon the expiration of any Option or the termination of any right toconvert or exchange any Convertible Securities without the exercise of suchOption or right, the Conversion Price then in effect hereunder will be adjustedto the Conversion Price which would have been in effect at the time of suchexpiration or termination had such Option or Covertible Securities, to theextent outstanding immediately prior to such expiration or termination, neverbeen issued. 3E. Stock Dividends, Subdivisions, etc. In case at any time orfrom time to time after the date of the issuance of the Class D Preferred theCorporation shall (i) declare or pay any dividend or make any other distribution upon any capital stock of the Corporation which is payable in Common Stock orConvertible Securities, or (ii) effect a subdivision of the outstanding sharesof Common Stock into a greater number of shares of Common Stock (byreclassification or otherwise than by payment of a dividend in Common Stock),then, in any such event, the total number of additional shares of Common Stock,or (in the case of any such dividend or distribution payable in ConvertibleSecurities) Convertible Securities issuable in payment of such dividend ordistribution or to give effect to such sub- -47-division shall be deemed to have been issued immediately after the close ofbusiness on the record date (or other date) for the determination of holders ofany class of securities in connection with such dividend, distribution, orsubdivision. 3F. Determination of Consideration. (i) Cash Consideration. In case of the issuance of shares ofCommon Stock for a consideration part or all of which shall be cash, the amountof the cash consideration therefor shall be deemed to be the amount of cashreceived by the Corporation for such shares (or, if such shares of Common Stockare offered by the Corporation for subscription, the subscription price, or, ifsuch shares of Common Stock are sold to underwriters or dealers for publicoffering without a subscription offering, the initial public offering price);after deducting therefrom (in cases other than issuances involving anunderwritten public offering or a shelf registration on customary terms) anyexpenses incurred in connection therewith other than any compensation ordiscount in the sale, underwriting or purchase thereof by underwriters ordealers or others performing similar services. The consideration for shares ofCommon Stock deemed to have been issued under subdivision (ii) or (iii) of thissubdivision shall be deemed to have been received by the Corporation at the timesuch shares of Common Stock are deemed to have been issued. (ii) Consideration other than Cash. In case of the issuance(otherwise than as a dividend or other distribution on any class of capitalstock of the Corporation or upon conversion or exchange of any ConvertibleSecurities or upon any exercise of any Options) of shares of Common Stock for aconsideration part or all of which shall be other than cash, the amount of theconsideration therefor other than cash shall be the fair value thereof asdetermined by the board of directors of the Corporation, irrespective of theaccounting treatment thereof. The reclassification of securities other thanCommon Stock into securities including Common Stock shall be deemed to involvethe issuance for a consideration other than cash of such Common Stock on thedate fixed for the determination of security holders entitled to receive suchCommon Stock. (iii) Options and Convertible Securities. In case of the issuance ofshares of Common Stock deemed to occur under subdivisions (38) or (3C) withrespect to the conversion or exchange of any Convertible Securities (otherthan Notes or Class D Preferred) or the exercise of any Options of theCorporation, the amount of the consideration received by -48-the Corporation for such shares of Common Stock shall be deemed to be the totalof (a) the amount of the consideration, if any, received by the Corporationupon the issuance of such Convertible Securities or the grant of such Options,as the case may be, plus (b) the minimum amount of the consideration, if any,other than the consideration received for such Convertible Securities orOptions, received or deemed to be received by the Corporation (except onadjustment of interest or dividends) upon such conversion, exchange or exercisewithout regard to any provision for adjustment of such consideration. Indetermining the amount of the consideration received by the Corporation upon the issuance of such Convertible Securities or the grant of such Options, as thecase may be, (x) except as otherwise provided in the following clauses (y) and(z), the amount of the consideration in cash and other than cash shall bedetermined pursuant to subdivisions VIII.3F(i), and VIII.3F(ii). (in each caseas if all references therein to "shares of Common Stock", "shares" or "CommonStock" were references to such Convertible Securities or Options), (y) anysuch Convertible Securities or Options issued by way of dividend or otherdistribution on any class of capital stock of the Corporation shall be deemedto have been issued without consideration, and (z) if securities of the sameclass or series of a class as such Convertible Securities or Options were issuedor granted for different amounts of consideration, or if some were issued for noconsideration, then the amount of the consideration received by the Corporationupon the issuance or grant of each of the securities of such class or series, asthe case may be, shall be deemed to be the mean average amount of theconsideration received by the Corporation upon the issuance of all thesecurities of such class or series, as the case may be. Any ConvertibleSecurities issued or any Option granted as a dividend or other distribution onany class of capital stock of the Corporation shall be deemed to have beenissued or granted immediately after the opening of business on the date fixedfor the determination of stockholders entitled to receive such dividend or otherdistribution and without consideration. (iv) Stock Dividends, etc. In case shares of Common Stock aredeemed to have been issued pursuant to subdivision VIII.3E., relating to stockdividends and subdivisions, such shares shall be deemed to have been issuedwithout consideration. 3G. Treasury Shares The number of shares of Common Stockoutstanding at any given time shall not include shares owned or held by or forthe account of the Corporation, and the disposition of any such shares shallbe consid- -49-ered an issue or sale of Common Stock for the purposes of this subdivisionVIII.3. 3H. Certain Issues Excepted. Anything in this subdivision VIII tothe contrary notwithstanding, the Corporation shall not be required to make anyadjustment of the Conversion Price in respect of any of the following (withoutduplication): (i) the issuance, exchange or transfer of the Notes or the issuance of Common Stock upon conversion of the Notes; (ii) the issuance, exchange or transfer of the Class D Preferred or the issuance of Common Stock upon conversion of the Class D Preferred; (iii) shares of Common Stock previously deemed to have been issued pursuant to subdivision VIII.3B. or VIII.3C.; (iv) the issuance of up to 8,000 shares of Common Stock in connection, with the employment of any Person by the Corporation or any Subsidiary including the issuance of options or rights with respect thereto; and (v) the issuance of shares of Common Stock and other securities upon the conversion of the Corporation's Class B Common, Class B Preferred and Class C Preferred in accordance with the terms in existence and applicable to such conversion on the date hereof. 3I. Determination of Consideration Under Certain Circumstances.Anything herein to the contrary notwithstanding, in case at any time after thedate hereof the Corporation shall issue any shares of Common Stock orConvertible Securities, or any rights or options to purchase any such CommonStock or Convertible Securities, in connection with the acquisition by the Corporation or a Subsidiary of the stock or assets of any other corporation orthe merger of any other corporation into the Corporation or a Subsidiary (or themerger of a Subsidiary into another corporation which thereby becomes aSubsidiary) under circumstances where on the date of the issuance of such sharesof Common Stock or Convertible Securities or such rights or options theconsideration per share received for such Common Stock or deemed to have beenreceived for the Common Stock into which such Convertible Securities or suchrights or options are -50-convertible is less than an amount equal to the then Conversion Price, but onthe date the number of shares of Common Stock or Convertible Securities (or inthe case of Convertible Securities other than stock, the aggregate principalamount of Convertible Securities) or the number of such rights or options (orthe terms by which such number shall be determined) was approved by the Board ofthe Corporation (as evidenced by a resolution thereof) the considerationreceived per share for such Common Stock or deemed to have been received for theCommon Stock into which such Convertible Securities or such rights or optionsare convertible or for which they are exercisable would not have been less thanan amount equal to the Conversion Price thereof, such shares of Common Stockshall not be deemed to have been issued for less than an amount equal to theConversion Price. 4. Other Securities. In case any Other Securities shall be issued or shall become subjectto issue upon the conversion or exchange of any stock (or Other Securities) ofthe Corporation (or any issuer of Other Securities or any other Person referredto in subdivision VIII.5.) or to subscription, purchase or other acquisitionpursuant to any Convertible Securities or Options issued by the Corporation (orany other issuer or Person) for a consideration such as to dilute the conversionrights of the holders of the Class D Preferred, the computations, adjustmentsand readjustments provided for in this subdivision VIII with respect to theConversion Price shall be made as nearly as possible in the manner so providedand applied to determine the amount of Other Securities from time to timereceivable upon the conversion of the Class D Preferred, so as to protect theholders of the Class D Preferred against the effects of such dilution. 5. Adjustments for Consolidation, Merger, Sale of Assets, Reorganization, etc. 5A. General Provisions. In case at any time the Corporation shallbe a party to any transaction (including, without limitation, a merger,consolidation, sale of all or substantially all of the Corporation's assets orrecapitalization of the Common Stock) in which the previously outstandingCommon Stock shall be changed into or exchanged for different securities ofthe Corporation, common stock or other securities of another corporation orinterests in a noncorporate entity or other property (including cash) or anycombination of any of the foregoing (each such transaction being hereinafterreferred to as a "Transaction", the date of -51-the consummation of the Transaction being hereinafter referred to as the"Consummation Date"), the Corporation (in the case of a recapitalization of theCommon Stock) or such other corporation or entity (in each other case) beinghereinafter referred to as the "Acquiring Company", and the common stock (orequivalent equity interests) of the Acquiring Company being hereinafterreferred to as the "Acquirer's Common Stock"), then, as a condition to theconsummation of the Transaction, lawful and adequate provisions shall be made sothat, upon the basis and the terms and in the manner provided in subdivisionVIII, each holder of Shares of Class D Preferred, upon the conversion thereof atany time after the consummation of the Transaction, shall be entitled to receive, in lieu of the Stock or Other Securities issuable upon such conversionprior to such consummation, the stock and other securities, cash and property towhich such holder would have been entitled upon the consummation of theTransaction if such holder had converted such Shares of Class D Preferredimmediately prior thereto (subject to adjustments from and after theConsummation Date as nearly equivalent as possible to the adjustments providedfor in this subdivision VIII). 5B. Marketable Stock. The Corporation will not enter into or be aparty to any Transaction following the consummation of which any holder ofShares of Class D Preferred would be entitled in accordance with the foregoingprovisions of this subdivision VIII.5. to receive Acquirer's Common Stock orother securities of the Acquiring Company upon conversion of such Shares ofClass D Preferred unless, immediately following the consummation thereof on theConsummation Date, all of the following requirements are fulfilled as to theAcquiring Company: (i) its common stock is listed on the New York Stock Exchange or the American Stock Exchange and such common stock continues to meet the requirements for listing thereon, and (ii) it is required to file, and in each of its three fiscal years immediately preceding the Consummation Date has filed, reports with the Commission pursuant to Section 13 or 15(d) of the Exchange Act. 5C. Assumption of Obligations. Notwithstanding anything containedin this Certificate of Incorporation to the contrary, the Corporation will noteffect any transaction unless, prior to the consummation thereof, eachcorporation or entity (other than the Corporation) which may be required todeliver any stock, securities, cash or property upon the -52-conversion of any Shares of Class D Preferred as provided herein shall assume,by written instrument delivered to the holder of such Shares of Class DPreferred, the obligation to deliver to such holder such shares of stock,securities, cash or property as, an accordance with the foregoing provisions,such holder may be entitled to receive, and such corporation or entity shallhave similarly delivered to such holder an opinion of counsel for suchcorporation or entity, which counsel shall be reasonably satisfactory to suchholder, stating that such Shares of Class D Preferred shall thereaftercontinue in full force and effect and the terms hereof (including, withoutlimitation, all of the provisions of subdivision VIII shall be applicable to thestock, securities, cash or property which such corporation or entity may berequired to deliver upon the exercise hereof. 6. Adjustments for Combinations, etc. In case the outstanding shares of Common Stock shall be combined orconsolidated, by reclassification or otherwise, into a lesser number of sharesof Common Stock, the Conversion Price in effect immediately prior to suchcombination or consolidation shall, concurrently with the effectiveness of suchcombination or consolidation, be proportionately increased. 7. Notice of Adjustments of Conversion Price. Whenever the Conversion Price is adjusted as provided in subdivisionVIII, the Corporation shall promptly (and, in any event, not later than thethirtieth day following the occurrence of the event requiring such adjustment)compute the adjusted Conversion Price in accordance with subdivision VIII andshall prepare a report setting forth such adjustment and showing in detail themethod of calculation and the facts upon which such adjustment is based,including a statement of (i) the consideration received or to be received bythe Corporation for any additional shares of Common Stock issued or sold ordeemed to have been issued, (ii) the number of shares of Common Stockoutstanding or deemed to be outstanding, and (iii) the Conversion Price in effect immediately prior to such issue or sale and as adjusted on accounttherefor and, upon the request of any holder of the Shares of Class D Preferred,shall cause certified public accountants of recognized national standing (whichmay be the regular auditors of the Corporation) selected by the Corporation toverify such computation and report, if not previously verified at the request ofany holder. The Corporation will promptly (and, in any event, not later thansuch thirtieth day) furnish a -53-copy of each such report and such verification to the holder of any Shares ofClass D Preferred, and will, upon the written request at any reasonable time ofthe holder of any Shares of Class D Preferred, furnish to such holder a likereport setting forth the Conversion Price at the time in effect and showing howit was calculated. The Corporation will also keep copies of all such reports andsuch verifications at its principal office, and will cause the same to beavailable for inspection at such office during normal business hours by theholder of any Shares of Class D Preferred or any prospective purchaser of anyNote designated by the holder of such Shares of Class D Preferred. 8. Notice of Certain Corporate Action. In case: (i) the Corporation shall declare a dividend (or any other distribution) on its Common Stock payable otherwise than in cash out of its earned surplus or at an annualized rate in excess of 120% of the annualized rate of the last cash dividend theretofore paid; or (ii) the Corporation shall authorize the granting to the holders of its Common Stock of rights or warrants to subscribe for or purchase any shares of capital stock of any class or of any other rights; or (iii) of any reclassification of the Common Stock of the Corporation (other than a subdivision or combination of its outstanding shares of Common Stock), any capital reorganization of the Corporation or of any consolidation or merger to which the Corporation is a party, or of the sale or transfer, of all or substantially all of the assets of the Corporation; or (iv) of the voluntary or involuntary dissolution, liquidation or winding up of the Corporation;the Corporation shall at least 10 business days prior to the applicable recorddate hereinafter specified give to each holder of any Shares of Class DPreferred an Officers' Certificate stating (a) the date on which a record isto be taken for the purpose of such dividend, distribution, rights or warrants,or, if a record is not to be taken, the date as of which the holders of CommonStock of record to be entitled to such dividend, distribution, rights orwarrants are to be -54-determined, or (b) the date on which such reclassification, reorganization,consolidation, merger, sale, transfer, dissolution, liquidation or winding upis expected to become effective, and the date as of which it is expected thatholders of Common Stock of record shall be entitled to exchange their shares ofCommon Stock for securities or other property deliverable upon suchreclassification, recapitalization, consolidation, merger, sale, transfer,dissolution, liquidation or winding up. 9. Other Dilutive Events. In case any event shall occur as to which the other provisions of subdivision VIII are not strictly applicable but in respect of which the failureto make any adjustment would not in the opinion of any holders of at least 20%in the aggregate of the number of shares of Class D Preferred at the timeoutstanding or in the opinion of the Corporation fairly protect the conversionrights granted by subdivision VIII in accordance with the essential intent andprinciples hereof, then, in each such case, upon the written request of suchholder or holders or on its own motion, the Corporation shall appoint a firm ofindependent certified public accountants of recognized national standing(which may be the regular auditors of the Corporation), which shall give theiropinion as to the adjustment, if any, on a basis consistent with the essentialintent and principles established in subdivision VIII, necessary to preserve,without dilution, such conversion rights. Upon receipt of such opinion, theCorporation will promptly mail a copy thereof to the holder of any Shares ofClass D Preferred and shall make the adjustments or increases described therein. 10. No Dilution or Impairment. The Corporation will not, by amendment of this Certificate ofIncorporation or through any consolidation, merger, reorganization, transfer ofassets, dissolution, issue or sale of securities or any other voluntary action,avoid or seek to avoid the observance or performance of any of the terms to beobserved or performed hereunder by the Corporation, but will at all times ingood faith assist in the carrying out of all such terms and in the taking of allsuch action as may be necessary or appropriate in order to protect theconversion rights granted by subdivision VIII against dilution or otherimpairment. Without limiting the generality of the foregoing, the Corporation(i) will not permit the par value of any shares of stock at the time re-ceivable upon the conversion of any Shares of Class D Preferred to exceed theConversion Price then in effect, -55-(ii) will take all such action as may be necessary or appropriate in orderthat the Corporation may validly and legally issue fully paid and nonassessableshares of Stock upon any conversion of the Class D Preferred, (iii) will nottake any action which results in any adjustment of the Conversion Price if thetotal number of shares of Common Stock (or Other Securities) issuable after theaction upon the conversion of all of the Shares of Class D Preferred wouldexceed the total number of shares of Common Stock (or Other Securities) thenauthorized by the Corporation's certificate of incorporation and available forthe purpose of issue upon such exercise, and (iv) except as provided herein willnot issue any capital stock of any class which is preferred or pari passu as todividends or as to the distribution of assets upon voluntary or involuntarydissolution, liquidation or winding up. 11. De Minimis Adjustments of Conversion Price; Optional Reductions. Notwithstanding any other provision of subdivision VIII to thecontrary, no single adjustment in the Conversion Price otherwise requiredhereunder shall be required unless such adjustment would require an increase ordecrease of at least 1/2 of 1% in such price; provided, however, that anyadjustments which by reason of this subdivision VIII.11 are not required to bemade shall be carried forward and shall be taken into account in any subsequentadjustment and shall be taken into account upon the conversion of any Shares ofClass D Preferred; and provided, further, that adjustments shall be required andmade in accordance with the provisions of subdivision VIII (other than thissubdivision 11) not later than such time as may be required in order to preservethe tax-free nature of a distribution to the holders of Common Stock. Anythingin subdivision VIII to the contrary notwithstanding, the Corporation shall beentitled to make such reductions in the Conversion Price, in addition to thoseotherwise required by subdivision VIII, as it in its sole discretion shalldetermine to be advisable in order that any stock dividend, subdivision ofshares, distribution of rights to purchase stock or securities, or distributionof securities convertible into or exchangeable for stock hereafter made by theCorporation to its stockholders shall not be taxable. 12. Continuing Obligation of the Corporation. The Corporation will, at the time of conversion of any Shares ofClass D Preferred in full or in part, upon the request of any holder thereof,acknowledge in writing its continuing obligation to afford such holder anyrights (in- -56-cluding, without limitation, any right of registration of the shares of Stock orOther Securities issued upon such conversion) to which such holder shallcontinue to be entitled after such conversion in accordance with the provisionsof this Certificate of Incorporation; provided, however, that if any such holdershall fail to make any such request, such failure shall not affect thecontinuing obligation of the Corporation to afford to such holder all suchrights. 13. Mandatory Conversions of Class D Preferred. Notwithstanding anything to the contrary contained in this SectionC, at such time as (i) the Corporation shall have participated in a publicoffering or offerings of the Common Stock, in which the aggregate price to thepublic of the securities sold shall have been at least $10,000,000, (ii) theCommon Stock was sold to the public at the most recent such offering at a priceexceeding the Conversion Price then in effect by not less than 50%, and (iii)the outstanding shares of Class B Preferred and Class C Preferred, if any, aresubject to mandatory conversion upon conversion of the Class D Preferredpursuant to this subdivision VIII.13, then all outstanding Shares of Class DPreferred, if any, will, without any action on the part of the Corporation orthe holders thereof, be immediately converted into shares of Class A Common inaccordance with the terms of this Section C, and thereafter no Shares of Class DPreferred will be outstanding and any holder of a certificate of Shares of ClassD Preferred will be deemed to be the holder of the number of Shares of Class ACommon into which the Shares of Class D Preferred represented by suchcertificate were converted pursuant to this subdivision VIII.13.IX. Transfer, Exchange and Replacement of Certificates for Class D Preferred. 1. The Corporation will keep at its principal office a registerfor the registration of Class D Preferred. Upon surrender at such office of anycertificate representing Shares of Class D Preferred for conversion or forregistration of exchange or (subject to compliance with the applicableprovisions of the Registration Rights Agreement) transfer, the Corporation willissue, at its expense, one or more new certificates, in such denomination ordenominations as may be requested, for the same aggregate number of Sharesrepresented by the certificate so surrendered and registered as such holder mayrequest; provided, however, that no such transfer shall be in violation of theSecurities Act of 1933, as amended. Any certificate representing any Shares ofClass -57-D Preferred surrendered for registration or transfer shall be duly endorsed, oraccompanied by a written instrument of transfer duly executed by the holder ofsuch certificate or his attorney duly authorized in writing. 2. The Corporation will pay all costs of all deliveries ofcertificates representing any Shares of Class D Preferred from the office of theholder thereof to the office of the Corporation to be surrendered pursuant tothis subdivision IX.2. (including the cost of insurance against loss or theft inan amount satisfactory to such holder) upon any exchange provided for herein.Upon receipt of evidence reasonably satisfactory to the Corporation of theownership of and the loss, theft, destruction or mutilation of any certificaterepresenting any shares of Class D Preferred and, in the case of such loss,theft, destruction or mutilation of any certificate representing any Shares of Class D Preferred, upon delivery of an indemnity bond in such reasonable amountas the Corporation may determine (or in the case of any Shares of Class DPreferred held by the original owner or its nominee, of an unsecured indemnityagreement from such owner or nominee holding such Shares), or in the case of anysuch mutilation, upon the surrender of such certificate for cancellation at theprincipal office of the Corporation, the Corporation, at its expense, willexecute and deliver, in lieu thereof, a new certificate of like tenor and for anequal number of Shares of Class D Preferred.X. Definitions. "Class D Scheduled Redemption Dates" has the meaning assigned insubdivision VI.1A. "Convertible Securities" means any evidence of indebtedness, sharesof capital stock (other than Class A Common) or other securities directly orindirectly convertible into or exchangeable for Class A Common or any stockinto which such Class A Common shall have been changed or any stock resultingfrom any capital reorganization or reclassification of such Class A Common. "Conversion Price" of any Share of Class D Preferred means the sumof $210 (or $165 if no Class D-2 Preferred shall have been issued) as adjustedby the provisions of subdivision VIII of this Section C. "Cosan Purchase Certificate" means the Certificate substantially inthe form of Exhibit H to the Note and Stock Purchase Agreements. -58- "Delayed First Closing Dates" means, collectively, each date uponwhich shares of Class D-1 Preferred shall have been issued pursuant to the Noteand Stock Purchase Agreements subsequent to the First Closing Date. "Escrow Agreement" means the Escrow Agreement as defined in the Noteand Stock Purchase Agreements. "Event of Noncompliance" has the meaning assigned in subdivisionVII. "First Closing Date" means the initial date upon which shares ofClass D-1 Preferred shall have been issued pursuant to the Note and StockPurchase Agreements. "GAAP" means generally accepted accounting principles as set forthin the opinions of the Accounting Principles Board of the American Institute ofCertified Public Accountants and in statements by the Financial AccountingStandards Board or in such opinions and statements of such other entities asshall be approved by a significant segment of the accounting profession. "Junior Securities" has the meaning assigned in subdivision VI.3. ofSection A hereof. "Liquidating Dividend" has the meaning assigned in subdivisionVIII,3A.(ii). "Liquidation Value" as to any Share of Class D Preferred as of anyparticular date will be equal to the sum of $210 plus any due and payable butunpaid dividends on such Share. "NASDAQ" means the NASDAQ interdealer quotation system maintained bythe National Association of Securities Dealers, Inc., or any successor compositereporting service. "Note and Stock Purchase Agreements" means the Note and StockPurchase Agreements between the Corporation, and each of a group of investorsand in connection with which the Corporation adopted this Restated Certificateof Incorporation and agreed to issue the Class D Preferred. "Notes" means the 9% Convertible Subordinated Notes due June 30,1997, issued by the Corporation pursuant to the Note and Stock PurchaseAgreements. "Officers' Certificate" means a certificate executed on behalf ofthe Corporation by the Chairman of the -59-Board of Directors (if an officer) or its President or one of its VicePresidents and its Vice President-Finance or Treasurer or one of its AssistantTreasurers. "Options" means rights, options or warrants to subscribe for,purchase or otherwise acquire either Class A Common or Convertible Securities. "Other Securities" means any stock (other than Common Stock) andother securities of the Corporation or any other person (corporate or otherwise)which the holders of the Class D Preferred at any time shall be entitled toreceive, or shall have received, upon the conversion of the Class D Preferred,in lieu of or in addition to Common Stock, or which at any time shall beissuable or shall have been issued in exchange for or in replacement of CommonStock or such other securities pursuant to the Note and Stock PurchaseAgreements. "Redemption Date" has the meaning assigned in subdivision VI.3B. "Redemption Price" has the meaning assigned in subdivision VI.3A. "Registration Rights Agreement" means the Registration RightsAgreement contemplated by the Note and Stock Purchase Agreements between theCorporation and the initial purchasers of Class D Preferred or securitiesconvertible into Class D Preferred. "Second Closing" has the meaning assigned in the Note and StockPurchase Agreements. "Short-Term Promissory Notes" and "Short-Term PromissoryNotes-Series 1" have the meanings assigned in the Note and Stock PurchaseAgreements. "Subsidiary" has the meaning assigned in the Note and Stock PurchaseAgreements.XI. Notices. All notices referred to herein, except as otherwise provided, willbe made by registered or certified mail, return receipt requested, postageprepaid, and will be deemed to have been given when so mailed. -60- SECTION D. SERIES PREFERRED STOCK The Series Preferred Stock may be issued from time to time by theBoard of Directors as snares of one or more series. Subject to the provisionshereof and the limitations prescribed by law, the Board of Directors isexpressly authorized, prior to issuance, by adopting resolutions providing forthe issuance of, or providing for a change in the number of, shares of anyparticular series and, if and to the extent from time to time required by law,by filing a certificate pursuant to the General Corporation Law (or other lawhereafter in effect relating to the same or substantially similar subjectmatter), to establish or change the number of shares to be included in each such series and to fix the designation and relative powers, preferences and rightsand the qualifications and limitations or restrictions thereof relating to theshares of each such series. The authority of the Board of Directors with respectto each series shall include, but not be limited to, determination of thefollowing: (a) the distinctive serial designation of such series and the number of shares constituting such series (provided that the aggregate number of shares constituting all series of Series Preferred Stock shall not exceed Five Million (5,000,000)); (b) the annual dividend rate on shares of such series, whether dividends shall be cumulative and, if so, from which date or dates; (c) whether the shares of such series shall be redeemable and, if so, the terms and conditions of such redemption, including the date or dates upon and after which such shares shall be redeemable, and the amount per share payable in case of redemption, which amount may vary under different conditions and at different redemption dates; (d) the obligation, if any, of the Corporation to retire shares of such series pursuant to a sinking fund; (e) whether shares of such series shall be convertible into, or exchangeable for, shares of stock of any other class or classes and, if so, the terms and conditions of such conversion or exchange, including the price or prices or the rate or rates of conversion or exchange and the terms of adjustment, if any; -61- (f) whether the shares of such series shall have voting rights, in addition to the voting rights provided by law, and, if so, the terms of such voting rights; (g) the rights of the shares of such series in the event of voluntary or involuntary liquidation, dissolution or winding up of the Corporation; and (h) any other relative rights, powers, preferences, qualifications, limitations or restrictions thereof relating to such series. The shares of Series Preferred Stock of any one series shall beidentical with each other in all respects except as to the dates from and afterwhich dividends thereon shall cumulate, if cumulative. The number of authorized shares of Series Preferred Stock may beincreased or decreased by the affirmative vote of the holders of a majority ofthe stock of the Corporation entitled to vote without the separate vote ofholders of Series Preferred Stock as a class. FIFTH: The Corporation is to have perpetual existence. SIXTH: (a) Except as otherwise fixed by or pursuant to theprovisions of Article FOURTH hereof relating to the rights of the holders of anyclass or series of stock having a preference over the Common Stock as todividends or upon liquidation to elect additional directors under specifiedcircumstances, the number of the directors of the Corporation shall be fixedfrom time to time by or pursuant to the By-Laws of the Corporation. Thedirectors, other than those who may be elected by the holders of any class orseries of stock having a preference over the Common Stock as to dividends orupon liquidation, shall be classified, with respect to the time for which they severally hold office, into three classes, as nearly equal in number aspossible, as shall be provided in the manner specified in the By-Laws of theCorporation, one class to hold office initially for a term expiring at theannual meeting of stockholders to be held in 1988, another class to hold officeinitially for a term expiring at the annual meeting of stockholders in 1989,and another class to hold office initially for a term expiring at the annualmeeting of stockholders to be held in 1990, with the members of each class tohold office until their successors are elected and qualified. At each annualmeeting of the stockholders of the Corporation, the -62-successors of the class of directors whose term expires at that meeting shall beelected to hold office for a term expiring at the annual meeting of stockholdersheld in the third year following the year of their election. (b) Advance notice of stockholder nominations for the election of directors shall be given in the manner provided in the By-Laws of the Corporation. (c) Except as otherwise provided for or fixed by or pursuant to the provisions of Article FOURTH hereof relating to the rights of the holders of any class or series of stock having a preference over the Common Stock as to dividends or upon liquidation to elect directors under specified circumstances, newly created directorships resulting from any increase in the number of directors and any vacancies on the Board of Directors resulting from death, resignation, disqualification, removal or other cause shall be filled solely by the affirmative vote of a majority of the directors or the sole director then remaining in office, even though less than a quorum of the Board of Directors. Any director elected in accordance with the preceding sentence shall hold office for the remainder of the full term of the class of directors in which the new directorship was created or the vacancy occurred and until such director's successor shall have been elected and qualified. If the number of directors is changed, any increase or decrease shall be apportioned among the classes by the Board of Directors so as to maintain the number of directors in each class as nearly equal as possible. No decrease in the number of directors constituting the Board of Directors shall shorten the term of any incumbent director. (d) Subject to the rights of any class or series of stock having a preference over the Common Stock as to dividends or upon liquidation to elect directors under specified circumstances, any director may be removed from office, but only for cause and only by the affirmative vote of the holders of at least two-thirds of the combined voting power of the then outstanding shares of stock entitled to vote generally in the election of directors, voting together as a single class. (e) Any action required or permitted to be taken by the stockholders of the Corporation must be -63-3686C effected at a duly called annual or special meeting of such holders and may not be effected by any consent in writing by such holders. Except as otherwise required by law and subject to the rights of the holders of any class or series of stock having a preference over the Common Stock as to dividends or upon liquidation, special meetings of stockholders of the Corporation may be called only by the Chairman of the Board or President or the Board of Directors pursuant to a resolution approved by a majority of the entire Board of Directors or as otherwise provided in the By-Laws of the Corporation. (f) In furtherance and not in the limitation of the powers conferred by statute, the Board of Directors is expressly authorized to make, alter, amend or repeal the By-Laws of the Corporation, but the stockholders may adopt additional By-Laws and may amend or repeal By-Laws whether or not adopted by them provided that the affirmative vote of the holders of at least two-thirds of the combined voting power of the then outstanding shares of stock entitled to vote generally in the election of directors, voting together as a single class, is required for any such adoption of additional By-Laws, amendment or repeal. (g) Notwithstanding any other provision of this Certificate of Incorporation or the By-Laws of the Corporation (and notwithstanding the fact that a lesser percentage may be specified by law, the Certificate of Incorporation or the By-Laws of the Corporation), the affirmative vote of the holders of at least two-thirds of the voting power of all the shares of the Corporation entitled to vote generally in the election of directors, voting together as a single class, shall be required to alter, amend or repeal this Article SIXTH or to adopt any provision inconsistent herewith. SEVENTH: Meetings of stockholders may be held within or without theState of Delaware, as the By-Laws may provide. The books of the Corporation maybe kept (subject to any provisions contained in the statutes) outside the Stateof Delaware at such place or places as may be designated from time to time bythe Board of Directors in the By-Laws of the Corporation. Elections ofdirectors need not be by written ballot unless the By-Laws of the Corporation soprovide. EIGHTH; The Corporation shall, to the fullest extent authorizedshall by Section 145 of the General Corporation Law of the -64-3686CState of Delaware, as the same exists or may hereafter be amended (but in thecase of any such amendment, other than one mandating lesser indemnification,only to the extent that such amendment permits the Corporation to providebroader indemnification than said law permitted the Corporation to provide priorto such amendment) indemnify all persons whom it may indemnify pursuant thereto. NINTH: The Corporation reserves the right to amend, alter change orrepeal any provisions contained in this Certificate of Incorporation, in themanner now or hereafter prescribed by statute, and all rights conferred uponstockholders herein are granted subject to this reservation. TENTH: No director of the Corporation shall be personally liable tothe Corporation or its stockholders for monetary damages for breach of fiduciaryduty as a director, except for liability (i) for any breach of such director'sduty of loyalty to the Corporation or its stockholders, (ii) for acts oromissions not in good faith or which involve intentional misconduct or aknowing violation of law, (iii) under Section 174 of the General Corporation Lawof the State of Delaware, or (iv) for any transaction from which such directorderived any improper personal benefit. Any repeal or modification of the foregoing paragraph by thestockholders of the Corporation shall not adversely affect any right orprotection of a director of the Corporation existing at the time of such repealor modification. 4. This Restated Certificate of Incorporation was duly adopted ata special meeting of the stockholders by the stockholders entitled to votethereon, in accordance with the applicable provisions of Sections 242 and 245of the General Corporation Law of the State of Delaware. IN WITNESS WHEREOF, said Combrex Corporation has caused itscorporate seal to be hereunto affixed and this Certificate to be signed by CyrilC. Baldwin, Jr., its President, and attested by Irving Needleman, itsSecretary, this 16th day of September, 1987. Cambrex Corporation By /s/ John P. Lynch --------------------------- VICE PRESIDENTATTEST:By /s/ Irving Needleman ------------------------- Secretary -65- 8703070030 [ILLEGIBLE] FILED 10 AM NOV 3 1987 [ILLEGIBLE] CERTIFICATE OF RETIREMENT OF STOCK CAMBREX CORPORATION, a corporation organized and existing under TheGeneral Corporation Law of the State of Delaware, DOES HEREBY CERTIFY: FIRST: That at a meeting of the Board of Directors of Cambrex Corporation,a resolution was duly adopted retiring shares of the capital stock of saidcorporation, which were issued but not outstanding, to the extent hereinafterset forth, and which retired shares had capital applied in connection with theiracquisition. SECOND: The shares of capital stock of the corporation, which areretired, are identified as being Four Hundred Thousand (400,000) shares of theClass A 8.25% Cumulative Preferred Stock with a par value of ten cents ($0.10)per share. THIRD: That the Restated Certificate of Incorporation of the corporationprohibits the reissue of the shares of Class A 8.25% Cumulative Preferred Stockwhen so retired and that the shares so retired constitute all the authorizedshares of Class A 8.25% Cumulative Preferred Stock and pursuant to theprovisions of section 243 of the General Corporation Law of the State ofDelaware, upon the effective date of the filing ofthis certificate as therein provided, the Restated Certificate of Incorporationof said corporation shall be amended so as to effect a reduction in theauthorized number of shares of the corporation by the elimination therefrom ofall reference to said Class A 8.25% Cumulative Preferred Stock, comprising FourHundred Thousand (400,000) shares of the par value of ten cents ($0.10) each. IN WITNESS WHEREOF, said Cambrex Corporation has caused this certificateto be signed by John P. Lynch, its Vice President, and attested by Irving Needleman, its secretary, this 27th day of October, 1987. CAMBREX CORPORATION By /s/ John P. Lynch --------------------------- Vice PresidentATTEST:By /s/ Irving Needleman ------------------------- Secretary 2 87030700312812K FILED [ILLEGIBLE] Nov 3 1987 [ILLEGIBLE] SECRETARY OF STATE CERTIFICATE OF RETIREMENT OF STOCK CAMBREX CORPORATION, a corporation organized and existing under TheGeneral Corporation Law of the State of Delaware, DOES HEREBY CERTIFY: FIRST: That at a meeting of the Board of Directors of Cambrex Corporation,a resolution was duly adopted retiring shares of the capital stock of saidcorporation, which were issued but not outstanding, to the extent hereinafterset forth, and which retired shares had no capital applied to theiracquisition. SECOND: The shares of capital stock of the corporation, which areretired, are identified as being Forty Thousand Five Hundred Ninety-Seven(40,597) shares of the Class B 8.25% Cumulative Convertible Preferred Stock witha par value of ten cents ($0.10) per share. THIRD: That the Restated Certificate of Incorporation of the corporationprohibits the reissue of the shares of Class B 8.25% Cumulative ConvertiblePreferred Stock when so retired and that the shares so retired constitute allthe authorized shares of Class B 8.25% Cumulative Convertible Preferred Stock;and pursuant to the provisions of section 243 of the General Corporation Law ofthe State of Delaware, upon2812Kthe effective date of the filing of this certificate as therein provided, theRestated Certificate of Incorporation of said corporation shall be amended soas to effect a reduction in the authorized number of shares of the corporationby the elimination therefrom of all reference to said Class B 8.25% CumulativeConvertible Preferred Stock, comprising Forty Thousand Five Hundred Ninety-Seven(40,597) shares of the par value of ten cents ($0.10) each. IN WITNESS WHEREOF, said Cambrex Corporation has caused this certificateto be signed by John P. Lynch, its Vice President, and attested by IrvingNeedleman, its secretary, this 27th day of October, 1987. CAMBREX CORPORATION By /s/ John P. Lynch --------------------- Vice PresidentATTEST:By /s/ Irving Needleman ------------------------- Secretary -2-2812K 8703070032 FILED [ILLEGIBLE] Nov 3 1987 [ILLEGIBLE] SECRETARY OF STATE CERTIFICATE OF RETIREMENT OF STOCK CAMBREX CORPORATION, a corporation organized and existing under TheGeneral Corporation Law of the State of Delaware, DOES HEREBY CERTIFY: FIRST: That at a meeting of the Board of Directors of Cambrex Corporation,a resolution was duly adopted retiring shares of the capital stock of saidcorporation, which were issued but not outstanding, to the extent hereinafterset forth, and which retired shares had no capital applied to their acquisition. SECOND: The shares of capital stock of the corporation, which areretired, are identified as being nineteen Thousand Four Hundred Three (19,403)shares of the Class C Convertible Preferred Stock with a par value of tencents ($0.10) per share. THIRD: That the Restated Certificate of Incorporation of the corporationprohibits the reissue of the shares of Class C Convertible Preferred Stock whenso retired and that the shares so retired constitute all the authorized sharesof Class C Convertible Preferred Stock; and pursuant to the provisions ofsection 243 of the General Corporation Law of the2812KState of Delaware, upon the effective date of the filing of this certificate astherein provided, the Restated Certificate of Incorporation of said corporationshall be amended so as to effect a reduction in the authorized number of sharesof the corporation by the elimination therefrom of all reference to said Class CConvertible Preferred Stock, comprising Nineteen Thousand four Hundred Three(19,403) shares of the par value of ten cents ($0.10) each. IN WITNESS WHEREOF, said Canbrex Corporation has caused this certificateto be signed by John P. Lynch its Vice President and attested by IrvingNeedleman, its secretary, this 27th day of October, 1987. CAMBREX CORPORATION By /s/ John P. Lynch --------------------------- Vice PresidentATTEST: By /s/ Irving Needleman ------------------------- Secretary -2- 8703070033 [ILLEGIBLE] SECRETARY OF STATE2812K CERTIFICATE OF RETIREMENT OF STOCK CANBREX CORPORATION,a corporation organiged and existing under The GeneralCorporation Law of the State of Delaware; DOES HEREBY CERTIFY: FIRST: That at a meeting of the Board of Directors of Caibrex Corporation,a resolution was duly adopted retiring shares of the capital stock of saidcorporation, which were issued but not outstanding, to the extent hereinafterset forth, and which retired shares had no capital applied to their acquisition* SECOND: The shares of capital stock of the corporation, which are retired,are identified as being Seventy-Three Thousand Eighty-Nine (73,089) shares ofthe Class D Convertible Preferred Stock with a par value of ten cents ($0.10)per share, THIRD: That the Restated Certificate of Incorporation of the corporationprohibits the reissue of the shares of Class D Convertible Preferred Stock whenso retired and that the shares so retired constitute all the authorized sharesof Class D Convertible Preferred Stock and pursuant to the provisions of section243 of the General Corporation Law of the State of Delaware, upon the effectivedate of the filing of2812Kthis certificate as therein provided, the Restated Certificate of Incorporationof said corporation shall be amended so as to effect a reduction in theauthorized number of shares of the corporation by the elimination therefrom ofall reference to said Class D Convertible Preferred Stock, comprisingSeventy-Three Thousand Eighty-Nine (73,089) shares of the par value of ten cents($0.10) each. IN WITNESS WHEREOF, said Cambrex Corporation has caused this certificateto be signed by John P. Lynch, its Vice President, and attested by IrvingNeedleman, its secretary, this 27th day of October, 1987. CAMBREX CORPORATION By /s/ John P. Lynch --------------------------- Vice PresidentATTEST:By /s/ Irving Needleman ------------------------- Secretary -2- STATE OF DELAWARE SECRETARY OF STATE DIVISION OF CORPORATIONS FILED 12:00 PM06/12/1996 960171193 - 2018808 CERTIFICATE OF DESIGNATION OF SERIES E JUNIOR PARTICIPATING CUMULATIVE PREFERRED STOCK Par Value $1.00 Per Share of CAMBREX CORPORATION Pursuant to Section 151 of the General Corporation Law of the State of Delaware We, Steven M. Klosk, Vice President - Administration, and Peter E.Thauer, Esq., Vice President - Law and Environment, General counsel andSecretary, of Cambrex Corporation, a corporation organized and existing underthe General Corporation Law of the State of Delaware (the "Corporation"), inaccordance with the provisions of Section 103 thereof, DO HEREBY CERTIFY: That pursuant to the authority conferred upon the Board of Directorsby the Restated Certificate of Incorporation of the Corporation, as amended,the said Board of Directors on May 23, 1996, by the affirmative vote of at leasta majority of the members of the Board of Directors, adopted the followingresolution creating a series of one hundred thousand (100,000) shares of SeriesE Junior Participating Cumulative Preferred Stock, par value $1.00 per share: RESOLVED, that pursuant to the authority vested in the Board ofDirectors of this Corporation in accordance with the provisions of its RestatedCertificate of Incorporation (the "Restated Certificate"), a series of SeriesPreferred Stock of the Corporation be, and it herebyis, created, and that the designation and amount thereof and the voting powers,preferences and relative participating, optional and other special rights of theshares of such series, and the qualifications, limitations or restrictionsthereof are as follows: Section 1. Designation and Amount. The shares of such series shall be designated as Series E Junior Participating Cumulative Preferred Stock, par value $1.00 per share(the "Junior Preferred Stock") and the number of shares constituting such seriesshall be one hundred thousand (100,000). Such number of shares may be increasedor decreased by resolution of the Board of Directors; provided, that nodecrease shall reduce the number of shares of Junior Preferred Stock to a numberless than the number of shares reserved for issuance upon the exercise of :outstanding options, rights or warrants or upon the conversion of anyoutstanding securities issued by the Corporation convertible into JuniorPreferred Stock. Section 2. Dividends and Distributions. (A) Subject to the rights of the holders of any shares of any series of preferred stock (or any similar stock) ranking prior and superior to the Junior Preferred Stock with respect to dividends, the holders of shares of Junior Preferred Stock, in preference to the holders of Common Stock, and of any other junior stock which may be outstanding, shall be entitled to receive, when, as and if declared by the Board of Directors out of funds legally available for the purpose, quarterly dividends payable in cash on the first day of January, April, July and October in each year (each such date being referred to herein as a "Quarterly Dividend Payment Date"), commencing on the first Quarterly Dividend Payment Date after the first issuance of a share or fraction of a share of Junior Preferred Stock, in an amount per share (rounded to the nearest cent) equal to the greater of (a) $2.50 per share ($10.00 per annum), or (b) subject to the provision for adjustment hereinafter set forth, 100 times the aggregate per share amount of all cash dividends, and 100 times the aggregate per share amount (payable in kind) of all non-cash dividends or other distributions, other than a dividend payable in shares of Common Stock or a subdivision of the outstanding shares of Common stock (by reclassification or otherwise), declared on the Common Stock since the immediately preceding Quarterly Dividend 2 Payment Date, or, with respect to the first Quarterly Dividend Payment Date, since the first issuance of any share or fraction of a share of Junior Preferred Stock. In the event the Corporation shall at any time declare or pay any dividend on Common Stock payable in shares Common Stock, or effect a subdivision or combination or consolidation of the outstanding shares of Common Stock (by reclassification or otherwise than by payment of a dividend in shares of Common Stock) into a greater or lesser number of shares of Common Stock, then in each such case the amount to which holders of shares of Junior Preferred Stock were entitled immediately prior to such event under clause (b) of the preceding sentence shall be adjusted by multiplying such amount by a fraction, the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. (B) The Corporation shall declare a dividend or distribution on the Junior Preferred Stock as provided in paragraph (A) of this Section immediately after it declares a dividend or distribution on the Common Stock (other than a dividend payable in shares of Common Stock); provided that, in the event no dividend or distribution shall have been declared on the Common Stock during the period between any Quarterly Dividend Payment Date and the next subsequent Quarterly Dividend Payment Date, a dividend of $2,50 per share ($10.00 per annum) on the Junior Preferred Stock shall nevertheless be payable on such subsequent Quarterly Dividend Payment Date. (C) Dividends shall begin to accrue and be cumulative on outstanding shares of Junior Preferred Stock from the Quarterly Dividend Payment Date next preceding the date of issue of such shares of Junior Preferred Stock, unless the date of issue of such shares is prior to the record date for the first Quarterly Dividend Payment Date, in which case dividends or such shares shall begin to accrue from the date of issue of such shares, or unless the date of issue is a Quarterly Dividend Payment Date or is a date after the record date for the determination of holders of shares of Junior Preferred Stock entitled to receive a quarterly dividend and before such Quarterly Dividend Payment Date, in either of which events such dividends shall begin to accrue and be cumulative from such Quarterly 3 Dividend Payment Date. Accrued but unpaid dividends shall accumulate but shall not bear interest. Dividends paid on the shares of Junior Preferred Stock in an amount less than the total amount of such dividends at the time accrued and payable on such shares shall be allocated pro rate on a share-by-share basis among all such shares at the time outstanding. The Board of Directors may fix a record date for the determination holders of holders shares of Junior Preferred Stock entitled to receive payment of a dividend or distribution declared thereon, which record date shall be not more than 60 days prior to the date fixed for the payment thereof. Section 3. Voting Rights. The holders of shares of Junior Preferred Stock shall have thefollowing voting rights. (A) Subject to the provisions for adjustment as hereinafter set forth, each share of Junior Preferred Stock shall entitle the holder thereof to 100 votes and each one one-hundredth of a share of Junior Preferred Stock shall entitle the holder thereof to one vote) on all matters submitted to a vote of the stockholders of the Corporation. In the event the Corporation shall at any time declare or pay any dividend on Common Stock payable in shares of Common Stock or effect a subdivision or combination or consolidation of the outstanding shares of Common Stock (by classification or otherwise than by payment of a dividend in shares of Common Stock) into a greater or lesser number of shares of Common Stock, then in each such case the number of votes per share to which holders of shares of Junior Preferred Stock were entitled immediately prior to such event shall be adjusted by multiplying such number by a fraction, the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. (B) Except as otherwise provided herein, in the Restated Certificate, in any other certificate of designation creating a series of preferred stock or any similar stock, or by law, the holders of shares of Junior Preferred Stock and the holders of shares of Common Stock and any other capital stock of the Corporation having general voting rights shall vote to- 4 gether as one class on all matters submitted to a vote of stockholders of the Corporation. (C) If at any time the Corporation shall not have declared and paid all accrued and unpaid dividends on the Junior Preferred Stock as provided in Section 2 hereof for four consecutive Quarterly Dividend Payment Dates, then, in addition to any voting rights provided for in paragraphs (A) and (B), the holders of the Junior Preferred Stock shall have the exclusive right, voting separately as class, to elect two directors on the Board of Directors of the Corporation (such directors, the "Preferred Directors"). The right of the holders of the Junior Preferred Stock to elect the Preferred Directors shall continue until all such accrued and unpaid dividends shall have been paid. At such time, the terms of any of the Preferred Directors shall terminate. At any time when the holders of the Junior Preferred Stock shall have thus become entitled to elect Preferred Directors, a special meeting of shareholders shall be called for the purpose of electing such Preferred Directors, to be held within 30 days after the right of the holders of the Junior Preferred Stock to elect such Preferred Directors shall arise, upon notice given in the manner provided by law or the by-laws of the Corporation for giving notice of a special meeting of shareholders (provided, however, that such a special meeting shall not be called if the annual meeting of shareholders is to convene within said 30 days). At any such special meeting or at any annual meeting at which the holders of the Junior Preferred Stock shall be entitled to elect Preferred Directors, the holders of a majority of the then outstanding Junior Preferred Stock present in person or by proxy shall be sufficient to constitute a quorum for the election of such directors. The persons elected by the holders of the Junior Preferred Stock at any meeting in accordance with the terms of the preceding sentence shall become directors on the date of such election. Section 4. Certain Restrictions. (A) Whenever quarterly dividends or other dividends ordistributions payable on the Junior Preferred Stock as provided in Section 2 arein arrears, thereafter and until all accrued and unpaid dividends and distributions, whether or not declared, on shares of Junior Preferred Stockoutstanding shall have been paid in full, the Corporation shall not: 5 (i) declare or pay dividends or, make any other distributions on any shares or stock ranking junior (either as to dividends or upon liquidation, dissolution or winding-up) to the Junior Preferred Stock; (ii) declare or pay dividends, or make any other distributions, on any shares of stock ranking on a parity (either as to dividends or upon liquidation, dissolution or winding-up) with the Junior Preferred Stock except dividends paid ratably on the Junior Preferred Stock, and all such parity stock on which dividends are payable or in arrears in proportion to the total amounts to which the holders of all such shares are then entitled; (iii) redeem or purchase or otherwise acquire for consideration shares of any stock ranking on a parity (either as to dividends or upon liquidation, dissolution or winding-up) with the Junior Preferred Stock, provided that the corporation may at any time redeem, purchase or otherwise acquire shares of any such parity stock in exchange for shares of any stock of the Corporation ranking junior (either as to dividends or upon dissolution, liquidation or winding-up) to the Junior Preferred Stock; or (iv) purchase or otherwise acquire for consideration any shares of Junior Preferred Stock, or any shares of stock ranking on a parity (either as to dividends or upon liquidation, dissolution or winding-up) with the Junior Preferred Stock, except in accordance with a purchase offer made in writing or by publication (as determined by the Board of Directors) to all holders of such shares upon such terms as the Board of Directors, after consideration of the respective annual dividend rates and other relative rights and preferences of the respective series classes, shall determine in good faith will result in fair and equitable treatment among the respective series or classes. (B) The Corporation shall not permit any subsidiary of theCorporation to purchase or otherwise acquire for consideration any shares ofstock of the Corporation unless the Corporation could, under paragraph (A)ofthis Section 4, purchase or otherwise acquire such shares at such time and insuch manner. 6 Section 5. Reacquired Shares. Any shares of Junior Preferred Stock purchased or otherwise acquiredby the Corporation in any manner whatsoever, shall be retired and canceledpromptly after the acquisition thereof. All such shares shall upon theircancellation become authorized but unissued shares of Series Preferred Stock,without designation as to series, and may be reissued as part of a new seriesof Series Preferred Stock to be created by resolution or resolutions of theBoard of Directors, subject to the conditions and restrictions on issuance setforth herein, in the Restated Certificate, in any other certificate ofdesignation creating a series of preferred stock or any similar stock or asotherwise, required by law. Section 6. Liquidation, Dissolution or winding-Up. Upon any voluntary or involuntary liquidation, dissolution orwinding-up of the Corporation, no distribution shall be made (A) to the holdersof shares of stock ranking junior (either as to dividends or upon liquidation,dissolution or winding-up) to the Junior Preferred Stock unless prior thereto, the holders of shares of Junior Preferred Stock shall have received the higherof (i) $10.00 per share, plus an amount equal to accrued and unpaid dividendsand distributions thereon, whether or not declared, to the date of such payment,or (ii) an aggregate amount per share, subject to the provision for adjustmenthereinafter set forth, equal to 100 times the aggregate amount to be distributedper share to holders of Common Stock; nor shall any distribution be made (B) tothe holders of stock ranking on a parity (either as to dividends or uponliquidation, dissolution or winding-up) with the Junior Preferred Stock,except distributions made ratably on the Junior Preferred Stock and all othersuch parity stock in proportion to the total amounts to which the holders of allsuch shares are entitled upon such liquidation, dissolution or winding-up. Inthe event the Corporation shall at any time declare or pay any dividend onCommon Stock payable in shares of Common Stock, or effect a subdivision orcombination or consolidation of the outstanding shares of Common Stock (byreclassification or otherwise than by payment of a dividend in shares of CommonStock) into a greater or lesser number of shares of Common Stock, then in eachsuch case the aggregate amount to which holders of shares of Junior PreferredStock are entitled immediately prior to such event under the provision in clause(A) of the preceding sentence shall be 7adjusted by multiplying such amount by a fraction the numerator of which is thenumber of shares of Common Stock outstanding immediately after such event andthe denominator of which is the number of shares of Common Stock that wereoutstanding immediately prior to such event. Section 7. Consolidation, Merger, etc. In case the Corporation shall enter into any consolidation, merger,combination or other transaction in which the shares of Common Stock areexchanged for or changed into other stock or securities, cash and/or any otherproperty, or otherwise changed, then in any such case each share of JuniorPreferred Stock shall at the same time be similarly exchanged or changed into anamount per share (subject to the provision for adjustment hereinafter set forth)equal to 100 times the aggregate amount of stock, securities, cash and/or anyother property (payable in kind), as the case may be, into which or for whicheach share of Common Stock is changed or exchanged. In the event the Corporationshall at any time declare or pay any dividend on Common Stock payable in sharesof Common Stock, or effect a subdivision or combination or consolidation of theoutstanding shares of Common Stock (by reclassification or otherwise than bypayment of a dividend in shares of Common Stock) into a greater or lesser numberof shares of Common Stock, then in each such case the amount set forth in thepreceding sentence with respect to the exchange or change of shares of JuniorPreferred Stock shall be adjusted by multiplying such amount by a fraction thenumerator of which is the number of shares of Common Stock outstandingimmediately after such event and the denominator of which is the number ofshares of Common Stock that were outstanding immediately prior to such event. Section 8. No Redemption. The shares of Junior Preferred Stock shall not be redeemable. Section 9. Rank. Unless otherwise provided in the Restated Certificate or acertificate of designation relating to a subsequent series of preferred stockof the Corporation, the Junior Preferred Stock shall rank junior to all otherseries of the Corporation's preferred stock as to the payment of dividends andthe distribution of assets on liquidation, 8dissolution or winding-up, and senior to the Common Stock of the Corporation. Section 10. Amendment. The Restated Certificate, as amended and restated, shall not beamended in any manner which would materially alter or change the powers,preferences or special rights of the Junior Preferred Stock so as to affect themadversely without the affirmative vote of the holders of at least two-thirds ofthe outstanding shares of Junior Preferred Stock, voting together as a singleseries. Section 11. Fractional Shares. Junior Preferred Stock may be issued in fractions of a share (in oneone-hundredths (1/100) of a share and integral multiples thereof) which shallentitle the holder, in proportion to such holder's fractional shares, toexercise voting rights, receive dividends, participate in distributions and tohave the benefit of all other rights of holders of Junior Preferred Stock. 9 IN WITNESS WHEREOF, this certificate of Designation is executed onbehalf of the Corporation by its Vice President and attested by its Secretarythis fifth day of June, 1996. /s/ Steven M. Klosk ------------------------------- Vice President - AdministrationATTEST:/s/ Peter E. Thauer------------------------Vice President - Law andEnvironment, GeneralCounsel and Secretary 10 STATE OF DELAWARE SECRETARY OF STATE DIVISION OF CORPORATIONS FILED 02:00 PM 11/01/1999 991462983 - 2018808 CERTIFICATE OF AMENDMENT OF CERTIFICATE OF INCORPORATION OF CAMBREX CORPORATION Pursuant to Section 242 of the General Corporation Law of the State of Delaware CAMBREX CORPORATION (the "Corporation"), a corporation organized andexisting under the General Corporation Law of the State of Delaware (the"General Corporation Law"), hereby certifies as follows: FIRST: That the Board of Directors of the Corporation, at a meetingof its members, duly adopted a resolution setting forth the following proposedamendment to the Certificate of Incorporation of the Corporation and declaringsuch amendment to be advisable: 1. The Certificate of Incorporation of the Corporation is herebyamended by the amendment of the first paragraph of ARTICLE FOURTH thereof toread in its entirety as follows: FOURTH: The total number of shares of all classes of stock which the Corporation shall have the authority to issue is 66,263,835 shares, consisting of 400,000 shares of Class A 8.25% Cumulative Preferred Stock, par value $.10 per share (the "Class A Preferred"), 40,597 shares of Class B8.25% Cumulative Convertible Preferred Stock, par value $.10 per share (the "Class B Preferred"), 19,403 shares of Class C Convertible Preferred Stock, par value $.10 per share (the "Class C Preferred"), 73,089 shares of Class D 8% Convertible Preferred Stock, par value $.10 per share (the "Class D Preferred"), 5,000,000 shares of Series Preferred Stock, par value $.10 per share (the "Series Preferred Stock"), 730,746 shares of Nonvoting Common Stock, par value $.10 per share (the "Nonvoting Common"), and 60,000,000 shares of Common Stock, par value $.10 per share (the "Voting Common"). The Class B Preferred and the Class C Preferred are referred to herein collectively as the "1981 Convertible Preferred Stock"; the 1981 Convertible Preferred Stock and the Class A Preferred are referred to herein collectively as the "1981 Preferred Stock"; the 1981 Preferred Stock and the Class D Preferred are referred to herein collectively as the "Preferred Stock"; and the Voting Common and the Nonvoting Common are referred to herein collectively as the "Common Stock". A share of Preferred Stock will be referred to herein as a "Share". The Voting Common is also referred to herein as the "Class A Common" and the Non-voting Common is also referred to herein as the "Class B Common". Unless otherwise provided, other capitalized terms used in Section A of this Article FOURTH are defined in subdivision VI thereof, other capitalized terms used in Section C of this Article FOURTH are defined in subdivision VIII thereof and definitions set forth in any Section of this Article FOURTH apply only to capitalized terms used in such Section. All cross-references in each Section of this Article FOURTH refer to other parts, paragraphs and subdivisions in such Section unless otherwise indicated. SECOND: That at a special meeting and vote of the stockholders of theCorporation called and held in accordance with Section 222 of the GeneralCorporation Law on April 28,1998, a majority of the outstanding stock entitledto vote thereon has voted in favor of the foregoing amendment. THIRD: The Amendment to the Certificate of Incorporation of theCorporation set forth in paragraph FIRST above was duly adopted in accordancewith the provisions of Section 242 of the General Corporation Law. 2 IN WITNESS WHEREOF, I, the undersigned Steven M. Klosk, being theExecutive Vice President - Administration, for the purpose of amending theCertificate of Incorporation of the Corporation pursuant to Section 242 of theGeneral Corporation Law of the State of Delaware, do make and file thisCertificate, hereby declaring and certifying that the facts herein stated aretrue, and accordingly have hereunto set my hand, this 30th day of October, 1999.[Corporate Seal] /s/ Steven M. Klosk -------------------------- Executive Vice President - Administration ATTEST: /s/ Peter E. Thauer-----------------------------Senior Vice President-General Counsel and Secretary 3 STATE OF DELAWARE SECRETARY OF STATEDIVISION OF CORPORATIONSFILED 02:01 PM 11/01/1999 991462987 - 2018808 CERTIFICATE OF CORRECTION OF CERTIFICATE OF DESIGNATION OF CAMBREX CORPORATION Pursuant to Section 103(f) of the General Corporation Law of the State of Delaware We, Steven M. Klosk, Executive Vice President - Administration, and PeterE. Thauer, Esq. Vice President Law and Environment, General Counsel andSecretary, of Cambrex Corporation, a corporation organized and existing underthe General Corporation Law of the State of Delaware (the "Corporation"), inaccordance with the provisions of Section 103 thereof, DO HEREBY CERTIFY: 1 That the heading of the Certificate of Designation of Series EJunior Participating Cumulative Preferred Stock of the Corporation, filed June12,1996 (the "Certificate of Designation), is hereby corrected by changing thepar value of such series of Preferred Stock designated therein to ten cents ($.10) per share and shall read in its entirety as follows: "CERTIFICATE OF DESIGNATION OF SERIES E JUNIOR PARTICIPATING CUMULATIVE PREFERRED STOCK Par Value $.10 Per Share". 2. That the first paragraph of the Certificate of Designation ishereby corrected to conform with the correction described in paragraph 1 aboveand shall read in its entirety as follows: "That pursuant to the authority conferred upon the Board of Directors by the Restated Certificate of Incorporation of the Corporation, as amended, the said Board of Directors on May 23, 1996, by the affirmative vote of at least a majority of the members of the Board of Directors, adopted the following resolution creating a series of one hundred thousand (100,000) shares of Series E Junior Participating Cumulative Preferred Stock, par value $.10 per share:". 3. That Section 1 of the Certificate of Designation is herebycorrected to conform with the correction described in paragraph 1 above to readin its entirety as follows: "Section 1. Designation and Amount. The shares of such series shall be designated as Series E JuniorParticipating Cumulative Preferred Stock, par value $.10 per share (the "JuniorPreferred Stock") and the number of shares constituting such series shall be onehundred thousand (100,000). Such number of shares may be increased or decreasedby resolution of the Board of Directors; provided, that no decrease shall reduce the number of shares of Junior Preferred Stock to a number less than the numberof shares reserved for issuance upon the exercise of outstanding options, rightsor warrants or upon the conversion of any outstanding securities issued by theCorporation convertible into Junior Preferred Stock." 2 IN WITNESS WHEREOF, this Certificate of Correction is executed on behalfof the Corporation by its Executive Vice President and attested by its Secretarythis 30th day of October, 1999. /s/ Steven M. Klosk ----------------------------------------- Executive Vice President - AdministrationATTEST:/s/ Peter E. Thauer----------------------Vice President-Law andEnvironment, GeneralCounsel and Secretary 3 STATE OF DELAWARE SECRETARY OF STATE [ILLEGIBLE] DIVISION OF CORPORATIONS FILED 02:02 PM 11/01/1999 991462994 - 2018808 CERTIFICATE OF DESIGNATION OF SERIES E JUNIOR PARTICIPATING CUMULATIVE PREFERRED STOCK Par Value $.10 Per Share of CAMBREX CORPORATION Pursuant to Section 151 of the General Corporation Law of the State of Delaware We, Steven M. Klosk, Executive Vice President - Administration, and PeterE. Thauer, Esq., Vice President - Law and Environment, General Counsel andSecretary, of Cambrex Corporation, a corporation organized and existing underthe General Corporation Law of the State of Delaware (the "Corporation"), inaccordance with the provisions of Section 103 thereof, DO HEREBY CERTIFY: That pursuant to the authority conferred upon the Board of Directors bythe Restated Certificate of Incorporation of the Corporation, as amended, thesaid Board of Directors, by the affirmative vote of at least a majority of themembers of the Board of Directors, increased the number of designated shares ofSeries E Junior Participating Cumulative Preferred Stock, par value $.10 pershare, to three hundred thousand (300,000) IN WITNESS WHEREOF, this Certificate of [ILLEGIBLE] is executed on behalfof the Corporation by its Vice President and attested by its Secretary this 30thday of October, 1999. /s/ Steven M. Klosk ----------------------- Executive Vice President- AdministrationATTEST:/s/ Peter E. Thauer------------------------Vice President - Law andEnvironment, GeneralCounsel and Secretary 2 . . . EXHIBIT 10.21 CAMBREX CORPORATION ANNUAL REPORT ON FORM 10-K REVISED SCHEDULE OF PARTIES NAME TITLE DATE OF AGREEMENT---- ----- ----------------- Peter E. Thauer...................... Senior Vice President, Law and 08/28/89 Environment, General Counsel and Corporate SecretaryJames A. Mack........................ Executive Chairman of the Board 02/01/90Steven M. Klosk...................... Executive Vice President, 10/21/92 AdministrationThomas N. Bird....................... Vice President, Corporate Development 07/23/99Luke M. Beshar....................... Executive Vice President and Chief 12/05/02 Financial OfficerGary L. Mossman...................... Executive Vice President and Chief 01/23/03 Operating OfficerN. David Eansor...................... President, Bioproducts Business Unit 10/23/03John R. Leone........................ President and Chief Executive Officer 08/23/04Edward Robinson...................... Executive Vice President -- Europe, 10/23/03 Pharma and Biopharmaceutical Business Unit . . . 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 REGISTERED PUBLIC ACCOUNTING FIRM We hereby consent to the incorporation by reference in the RegistrationStatements on Form S-8 (File Nos. 333-57404, 333-22017, 33-21374, 33-37791,33-81780, and 33-81782) of Cambrex Corporation of our report dated March 31,2005 relating to the financial statements, financial statement schedule,management's assessment of the effectiveness of internal control over financialreporting and the effectiveness of internal control over financial reporting,which appears in this Form 10-K. PRICEWATERHOUSECOOPERS LLP Florham Park, New JerseyMarch 31, 2005 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 John R. Leone 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 31st day of March 2005. /s/ JAMES A. MACK------------------------------------------------------- James A. Mack Executive 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, M.D.------------------------------------------------------- Rosina B. Dixon, M.D. Director /s/ ROY W. HALEY------------------------------------------------------- Roy W. Haley Director /s/ KATHRYN RUDIE HARRIGAN, PHD------------------------------------------------------- Kathryn Rudie Harrigan, PhD Director /s/ LEON J. HENDRIX, JR.------------------------------------------------------- Leon J. Hendrix, Jr. Director /s/ JOHN R. LEONE------------------------------------------------------- John R. Leone President and Chief Executive Officer /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, John R. Leone, certify that: 1. I have reviewed this annual report on Form 10-K of Cambrex Corporation; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the periods in which this annual report is being prepared; b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. /s/ JOHN R. LEONE -------------------------------------- John R. Leone, President and Chief Executive Officer Date: March 31, 2005 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 report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f))for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. /s/ LUKE M. BESHAR -------------------------------------- Luke M. Beshar Executive Vice President and Chief Financial Officer Date: March 31, 2005 EXHIBIT 32.1 CAMBREX CORPORATION CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 (18 U.S.C. SECTION 1350) In connection with the Annual Report of Cambrex Corporation (the "Company") onForm 10-K for the period ending December 31, 2004, as filed with the Securitiesand Exchange Commission on the date hereof (the "Report"), I, John R. Leone,President and Chief Executive Officer of the Company, certify, pursuant toSection 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350), that: 1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 ; and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ JOHN R. LEONE -------------------------------------- John R. Leone, President and Chief Executive Officer Dated: March 31, 2005 EXHIBIT 32.2 CAMBREX CORPORATION CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 (18 U.S.C. SECTION 1350) In connection with the Annual Report of Cambrex Corporation (the "Company") onForm 10-K for the period ending December 31, 2004, as filed with the Securitiesand Exchange Commission on the date hereof (the "Report"), I, Luke M. Beshar,Executive Vice President and Chief Financial Officer of the Company, certify,pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section1350), that: 1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ LUKE M. BESHAR -------------------------------------- Luke M. Beshar Executive Vice President and Chief Financial Officer Dated: March 31, 2005

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