MARTEK BIOSCIENCES CORP
10-Q, 1996-09-16
BIOLOGICAL PRODUCTS, (NO DIAGNOSTIC SUBSTANCES)
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<PAGE>   1


                                 UNITED STATES

                       SECURITIES AND EXCHANGE COMMISSION

                           Washington, D.C.  20549

- --------------------------------------------------------------------------------

                                   FORM 10-Q

      / X /      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934

                  For the Quarterly Period Ended July 31, 1996

                                       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 000-22354

                         MARTEK BIOSCIENCES CORPORATION
             (Exact name of registrant as specified in its charter)



            Delaware                                    52-1399362
     (State of Incorporation)                 (IRS Employer Identification No.)

                  6480 DOBBIN ROAD, COLUMBIA, MARYLAND  21045
                    (Address of principal executive offices)

      REGISTRANT'S TELEPHONE NUMBER INCLUDING AREA CODE:    (410)740-0081

                                      None
            (Former name, former address and former fiscal year,
                        if changed since last report)

            -------------------------------------------------------

         Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.     X   Yes       No
                                            -----     -----  

     Common stock, par value $.10 per share:  13,383,000 shares outstanding
                            as of September 9, 1996

                                  Page 1 of 12
<PAGE>   2
                         PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

                         MARTEK BIOSCIENCES CORPORATION

                                 Balance Sheets
                                ($ in thousands)
<TABLE>
<CAPTION>
==================================================================================================================
                                                                               July 31,           October 31,
                                                                                 1996                 1995
==================================================================================================================
                                                                              (Unaudited)
<S>                                                                           <C>                  <C>
ASSETS:
Current assets:
   Cash and cash equivalents                                                         $11,010              $41,039
   Short-term investments and marketable securities                                   31,421               10,584
   Accounts receivable                                                                   170                  316
   Inventories (Note 4)                                                                1,488                  989
   Prepaid expenses                                                                      264                  196
   Other current assets                                                                  191                  194
                                                                                 ------------          -----------
Total current assets                                                                  44,544               53,318
Property, plant and equipment, net                                                    14,939               11,840
                                                                                 ------------          -----------
                                                                                     $59,483              $65,158
                                                                                 ============          ===========


LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities:
   Accounts payable                                                                     $376                 $575
   Accrued liabilities                                                                 1,125                  912
   Unearned revenue                                                                      ---                2,075
   Current portion of notes payable                                                    2,384                   75
                                                                                 ------------          -----------
Total current liabilities                                                              3,885                3,637
Long-term portion of notes payable                                                     3,299                4,175
Commitments and contingencies (Note 2)
Stockholders' equity:
   Preferred stock, $.01 par value, 5,000,000
            shares authorized; none issued or outstanding.                               ---                  ---
   Common stock, $.10 par value; 30,000,000  shares
            authorized at July 31, 1996 and at October 31, 1995;
            13,379,450 and 13,025,419 shares issued at July 31, 1996
            and October 31, 1995, respectively.                                        1,338                1,302
   Additional paid-in capital                                                         78,171               77,321
   Accumulated deficit                                                              (27,210)             (21,277)
                                                                                 ------------          -----------
   Total stockholders' equity                                                         52,299               57,346
                                                                                 ------------          -----------
                                                                                     $59,483              $65,158
                                                                                 ============          ===========
</TABLE>

See accompanying notes.





                                 Page 2 of 12
<PAGE>   3
                         MARTEK BIOSCIENCES CORPORATION

                            Statements of Operations
              (Unaudited - $ in thousands, except per share data)

<TABLE>
<CAPTION>
                                                  Three months ended July 31,      Nine months ended July 31,
==============================================================================================================
                                                         1996            1995          1996         1995
==============================================================================================================
<S>                                                    <C>             <C>          <C>           <C>
Revenues:
   License fees and related revenues                       $ 12             $ 46        $ 2,244        $ 200
   Product sales                                            197              178            663          869
   Royalties                                                  1                0              7            0
   Research and development contracts and grants            212              103            596          466
                                                       ---------       ---------    ------------  -----------
Total revenues                                              422              327          3,510        1,535
Costs and expenses:
   Cost of product sales                                    134               82            390          392
   Research and development                               2,496            1,994          7,564        5,706
   Selling, general and administrative                    1,159              758          3,191        2,387
                                                       ---------       ---------    ------------  -----------
Total costs and expenses                                  3,789            2,834         11,145        8,485
                                                       ---------       ---------    ------------  -----------
Loss from operations                                     (3,367)          (2,507)        (7,635)      (6,950)
Other income (expense):
   Miscellaneous income                                      13               15             42           20
   Interest income                                          600              162          1,911          378
   Interest expense                                        (105)             (71)          (251)        (110)
                                                       ---------       ---------    ------------  -----------
Total other income, net                                     508              106          1,702          288
                                                       ---------       ---------    ------------  -----------

Net loss                                                ($2,859)         ($2,401)       ($5,933)     ($6,662)
- -------------------------------------------------------------------------------------------------------------

Net loss per share (Note 5)                              ($0.22)          ($0.24)        ($0.45)      ($0.75)
- -------------------------------------------------------------------------------------------------------------

Weighted average common shares outstanding           13,369,968        9,737,923     13,246,324    8,840,463
- -------------------------------------------------------------------------------------------------------------
</TABLE>




See accompanying notes.





                                  Page 3 of 12
<PAGE>   4
                         MARTEK BIOSCIENCES CORPORATION

                            Statements of Cash Flows
                          (Unaudited - $ in thousands)

<TABLE>
<CAPTION>
                                                                                Nine months ended July 31,
=============================================================================================================
                                                                              1996                       1995
=============================================================================================================
<S>                                                                  <C>                             <C>
OPERATING ACTIVITIES:
  Net loss                                                                ($5,933)                   ($6,662)
  Adjustments to reconcile net loss to net cash
   used in operating activities:
   Depreciation and amortization                                              666                        375
   Changes in assets and liabilities:
    Accounts receivable                                                       146                        (47)
    Inventories                                                              (499)                        77
    Prepaid expenses                                                          (68)                      (245)
    Other current assets                                                        2                        (13)
    Accounts payable                                                         (199)                       543
    Accrued liabilities                                                       228                        (70)
    Unearned revenue                                                       (2,075)                         3
                                                                   ----------------               ------------
  Net cash used in operating activities                                    (7,732)                    (6,039)

INVESTING ACTIVITIES:
   Change in short-term investments and marketable securities             (20,837)                    (3,832)
   Purchase of property, plant and equipment                               (3,765)                    (1,541)
                                                                   ----------------               ------------
  Net cash used in investing activities                                   (24,602)                    (5,373)

FINANCING ACTIVITIES:
   Proceeds from the exercise of warrants and options, and other              885                        593
   Proceeds from the issuance of common stock in the
    private placement                                                         ---                     10,741
   Proceeds from notes payable net of principal payments                    1,420                        105
                                                                   ----------------               ------------
  Net cash provided by financing activities                                 2,305                     11,439
                                                                   ----------------               ------------

  Net increase in cash and cash equivalents                               (30,029)                        27
  Cash and cash equivalents at beginning of year                           41,039                      2,104
                                                                   ----------------               ------------

  Cash and cash equivalents at end of period                              $11,010                     $2,131
- -------------------------------------------------------------------------------------------------------------

Supplemental schedule of non-cash investing and
financing activities:
   Purchase of plant                                                      $   ---                    ($9,000)
   Proceeds from the issuance of common stock
    in connection with the plant purchase                                     ---                      5,000
   Notes payable in connection with plant purchase                        $   ---                     $4,000
- -------------------------------------------------------------------------------------------------------------
</TABLE>

See accompanying notes.





                                  Page 4 of 12
<PAGE>   5
                        MARTEK BIOSCIENCES CORPORATION

                       Statement of Stockholders' Equity
               (Unaudited - $ in thousands, except share data)


<TABLE>
<CAPTION>

                                                                    Additional          Accumulated
                                        Common Stock            Paid-In Capital           Deficit               Total
                                    ---------  ----------       ---------------         -----------           ----------
                                     Shares      Amounts
<S>                                 <C>                         <C>                     <C>                   <C>
BALANCE AT
OCTOBER 31, 1995                   $13,025,419   $1,302             $77,321              ($21,277)              $57,346
- ------------------------------------------------------------------------------------------------------------------------

Exercise of stock options             354,031       36                 850                  ---                    886

Net loss                                 ---        ---                 ---                (5,933)              $(5,933)
- ------------------------------------------------------------------------------------------------------------------------


BALANCE AT
JULY 31, 1996                      $13,379,450   $1,338             $78,171              ($27,210)              $52,299
- ------------------------------------------------------------------------------------------------------------------------

</TABLE>

See accompanying notes.








                                 Page 5 of 12
<PAGE>   6

Notes to Financial Statements (Unaudited)


1.  Basis of Presentation

The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Article 10 of Regulation
S-X.  Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements.  In the opinion of management, all adjustments (consisting of
normal recurring accruals) considered necessary for a fair presentation have
been included.  Operating results for the quarter and nine months ended July
31, 1996 are not necessarily indicative of the results that may be expected for
the year ended October 31, 1996.  For further information, refer to the
financial statements and footnotes thereto included in Martek Biosciences
Corporation's annual report on Form 10-K for the year ended October 31, 1995.

2.  Commitment and Contingencies

The Company had commitments at July 31, 1996 to fund up to $1.7 million of
Phase III Small Business Innovation Research ("SBIR") technology
commercialization expenses, provided the technology under existing Phase II
SBIR grants yields commercial opportunities favorable to the Company.

Costs under U.S. Government contracts are subject to audit by the appropriate
U.S. Government agency.  Management believes that cost disallowances, if any,
arising from such audits of costs charged to government contracts through July
31, 1996, would not have a material effect on the financial statements.

Under the terms of one of the Company's license agreements, $2,075,000 received
as license fees prior to July 31, 1996 was recorded as unearned revenue pending
the lapse of the licensee's right to terminate its license agreement and
receive a refund of any license fees paid thereunder.  This right to terminate
the agreement and receive a refund lapsed in December 1995, and the revenue
previously recorded as unearned was recognized during the first quarter of
1996.  See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."

The Company has entered into various collaborative research and license 
agreements.  Under the agreements, the Company is required to fund research or
to collaborate on the development of potential products.  Certain of these
agreements also  commit the Company to make payments upon the occurrence of
certain milestones, and royalties upon the sale  of certain products resulting
from such collaborations.  Future minimum payments required under these
agreements, exclusive of milestone and royalty payments, are immaterial for the
balance of the year ending October 31, 1996.

On June 20, 1996, the Company entered into an equipment line of credit in the
amount of $2,000,000 to finance a portion of the construction of the oil
processing facility in Winchester, KY.  The line of credit bears interest at a
rate of 9.02%.  As of July 31, 1996, the Company had $1,482,000 outstanding
under the line of credit.

3.  Income Taxes

At July 31, 1996, the Company has net operating loss carryforwards of
approximately $39,000,000 for income tax purposes that expire in years 2000
through 2010.

Section 382 of the Internal Revenue Code limits the utilization of net
operating losses when ownership

                                  Page 6 of 12
<PAGE>   7
changes, as defined by that section, are greater than 50 percent.  The Company
has had significant ownership changes over the past three years, including an
initial public offering of its common stock in December 1993 and a follow-on
public offering of its common stock in October 1995, which may have caused
these limitations to apply.

Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes.  Significant components
of the Company's deferred tax assets as of July 31, 1996 are as follows:



<TABLE>
<CAPTION>
       <S>                                                  <C>
          Deferred tax assets:
           Write-off of patent                                  251,000
           Net operating loss carryforwards                  15,482,000
                                                            ------------
             Total deferred tax assets                      $15,733,000
                                                            ============
           Valuation allowance for net
             deferred tax assets                           ($15,733,000)
                                                            ============
           Net deferred tax assets                          $       --- 
                                                            ============
</TABLE>


4.  Inventories

<TABLE>
<S>                                                       <C>               <C>
Inventories consist of the following:                
                                                             July 31,       October 31,
                                                              1996              1995
                                                           ----------       -----------
                          Finished products                  $731,422          $468,472
                          Work in process                     525,424           272,741
                          Raw materials                       231,515           248,160
                                                              -------          --------
                                                           $1,488,361          $989,373
                                                           ==========          ========
</TABLE>

Inventories include products and materials held for sale as well as products
and materials that could alternatively be used in the Company's research and
development activities.

5.  Net loss per share

Net loss per share is computed using the weighted average number of shares of
common stock outstanding during the period.  Common equivalent shares from
stock options and warrants are excluded as their effect is anti-dilutive.





                                 Page 7 of 12
<PAGE>   8
ITEM  2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS


General

THIS MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS CONTAINS FORWARD-LOOKING STATEMENTS CONCERNING THE COMPANY'S
BUSINESS AND OPERATIONS, INCLUDING STATEMENTS ABOUT FUTURE PRODUCTION
EFFICIENCIES FOR ITS NUTRITIONAL OIL PRODUCTS.  SUCH STATEMENTS INVOLVE RISKS
AND UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS TO DIFFER DUE TO A VARIETY OF
RISK FACTORS SET FORTH HEREIN AND FROM TIME TO TIME IN THE COMPANY'S FILINGS
WITH THE SECURITIES AND EXCHANGE COMMISSION, INCLUDING BUT NOT LIMITED TO ITS
RECENTLY FILED REPORT ON FORM 10-K AND ITS FORM S-3 DECLARED EFFECTIVE ON
SEPTEMBER 26, 1995.

Since its inception in 1985, Martek has been engaged primarily in the research
and development of products derived from microalgae.  In 1989,  the Company
began the commercial production and sale of its products for drug design.  In
1992, Martek began to realize revenues from license fees related to
Formulaid(R) and sales of sample quantities of Formulaid(R).  In 1995, Martek
recognized its first royalty revenue from sales of infant formula containing
Formulaid(R).  In 1996 Martek began to realize revenues from the sales of
Neuromins(TM), a dietary supplement of docosahexaenoic acid (DHA).  Martek has
incurred net losses in each year since its inception.  At July 31, 1996, the
Company's accumulated deficit was $27,210,000.  Martek expects its annual
losses to continue and possibly increase through at least the first half of
fiscal 1997, or until significant royalties from sales of products containing
Formulaid(R) are received, as it expands its research and development efforts,
optimizes Formulaid(R)  production, and increases its product marketing
activities.  In addition, the Company expects to experience quarter-to-quarter
and year-to-year fluctuations in revenues, expenses and losses, some of which
could be significant.  The timing and extent of such fluctuations will depend,
in part, on the timing and receipt of Formulaid(R)-related revenues, if any,
and the timing and extent of funding of clinical studies on the Company's
potential products.

The Company is not able to predict when, or if, any of the Company's
Formulaid(R) licensees will introduce or expand their offerings of products
containing Formulaid(R).  The Company does not believe that broad product
introductions of term infant formulas containing Formulaid(R) will occur before
1997, at the earliest, and cannot predict the timing or extent of further
Formulaid(R)-containing pre-term infant formula product launches or expansions.
Although one of the Company's licensees has introduced a pre-term infant
formula containing Formulaid(R) in two European countries, the Company is still
unable to predict whether this licensee will broaden its use of, or continue to
use, Formulaid(R), or if Formulaid(R) will be used by any of the Company's
other licensees for their formula products.  Accordingly, future revenues from
Formulaid(R), and the timing or likelihood of future profitability, are largely
dependent on factors over which the Company has no control.


Results of Operations - Comparison of Quarters and Nine Months Ended July 31,
1996 and 1995

Revenues for the quarter ended July 31, 1996, were $422,000, a 29% increase
from revenues of $327,000 for the same period in 1995.  For the quarter, the
improvement in revenues is due primarily to increased activity on several
government contracts.  Revenues for the nine-month period ended July 31, 1996
were $3,510,000, an increase of $1,975,000, or 129%, from the same period in
1995.  This increase resulted from the recognition of $2,075,000 in license
fees during the first quarter of 1996 that were previously recorded as unearned
pending the lapse of certain conditions contained in the related license
agreement.



                                  Page 8 of 12
<PAGE>   9
Product sales during the third quarter ended July 31, 1996 increased by 11%
from the same period in 1995 due primarily to increased sales of  Formulaid(R)
and start up sales of Neuromins(TM), which more than offset a slight decrease
in sales of carbon-13 products.  For the nine-month period, product sales
decreased 24% due to lower prices caused by continued competition for carbon-13
products.  Revenues from research and development contracts and grants
increased by 106% in the third quarter of 1996 and 29% during the nine months
ended July 31, 1996 when compared with the third quarter and nine months ended
July 31, 1995, respectively.

Cost of product sales increased to 68% of revenues from product sales for the
third quarter of 1996 from 46% for the third quarter of 1995.  For the
nine-month period ended July 31, 1996 cost of product sales increased to 59% of
revenues from product sales from 45% for the same period in 1995.  These
increases resulted partially from the cost of sales of Martek's nutritional
oils.  Initial sales of these oils occurred in 1995.  Sales of these oils
during 1995 and 1996 were made at or below cost in certain cases in an effort
to encourage demand for these products.  As sales volume increases, and
manufacturing efficiencies and optimization occurs, the cost of production of
the nutritional oils products has the potential to decrease.  The balance of
the increase in cost of sales resulted from price reductions in the Company's
carbon-13 drug design products brought about by competition for these products.
The Company is working to decrease its production costs and develop new,
proprietary products in an effort to reduce its costs of sales.  The  ultimate
impact of these efforts on cost of sales, however, cannot be predicted.

R&D costs increased significantly, consistent with the Company's efforts to
optimize oil production quickly and develop an in-house oil processing
capability.  R&D costs increased by $502,000, or 25%, in the third quarter of
1996 and $1,858,000, or 33%, during the nine months ended July 31, 1996 over
the third quarter and nine months ended July 31, 1995, respectively.  Research
and development costs were also increased for the nine month period as the
result of a program to qualify additional manufacturing sources for Martek's
nutritional oils.  Production development and other oils-related development
costs comprised over 75% of research and development expenses for the first
nine months of 1996.

Selling, general and administrative expenses increased by $401,000, or 53%,
during the third quarter of 1996 and $804,000, or 34%, in the nine months ended
July 31, 1996 over the third quarter and nine months ended July 31, 1995,
respectively.  These costs increased primarily due to:  costs associated with a
public awareness campaign for DHA; other Formulaid(R) and Neuromins(TM)
marketing costs; and increased insurance and other corporate overhead costs.
Other income was $402,000 higher during the third quarter of 1996 than in the
third quarter of 1995 and $1,414,000 higher in the first nine months of 1996
than in the first nine months of 1995 mainly due to interest earned on the
investment of funds received in the Company's 1995 public offering.

Net loss for the third quarter of 1996 was $2,859,000, or $.22 per share,
compared to a net loss of $2,401,000, or $.24 for the same period in 1995.
This increase in net loss resulted from increased research and development,
marketing and public relations campaign expenses primarily  relating to efforts
to commercialize Formulaid(R).  A net loss of $5,933,000, or $.45 per share for
the nine-month period ended July 31, 1996, was a decrease from a net loss of
$6,662,000, or $.75 per share, for the same period in 1995.  This decrease
reflects the anniversary license fee recognized in the first quarter of 1996
which more than offset increased research and development expenses in the 1996
period.

Recent Accounting Pronouncements

In October 1995, the Financial Accounting Standards Board issued SFAS No. 123,
"Accounting for Stock-Based Compensation."  SFAS No. 123 allows companies to
either account for stock-based




                                  Page 9 of 12
<PAGE>   10
compensation under the new provisions of  SFAS No. 123 or under the provisions
of APB No. 25.  If companies elect to account for stock-based compensation
under the provisions of APB No. 25, pro forma disclosure is required in the
footnotes to the financial statement as if the measurement provisions of  SFAS
123 had been adopted.  The Company intends to continue accounting for its
stock-based compensations in accordance with the provisions of APB No. 25.  As
such, the adoption of  SFAS No. 123 will not impact the financial position of
the Company.

Liquidity and Capital Resources

Cash, cash equivalents, short-term investments and marketable securities
decreased by $9,192,000 in the first nine months of 1996 resulting in a cash
balance of $11,010,000 and a balance of  $31,421,000 in short-term investments
and marketable securities at July 31, 1996.   Capital acquisitions of  $747,000
and $3,765,000 were made in the third quarter and first nine months of 1996,
respectively, a significant portion of which represents upgrades to the
Company's fermentation facility in Winchester, Kentucky and construction of an
oil processing plant at the site.  The Company expects additional capital
expenditures of at least $2,000,000 as a result of escalating fermentation
activity and  installation of oil processing capabilities at the facility.

Martek may require substantial additional funds to continue its research and
development  programs, to conduct preclinical and clinical studies and to
commercialize Formulaid(R), Neuromins(TM) and its other products under
development.  The ultimate levels of these expenditures will depend, in part,
on whether the Company seeks independently, or with other parties through
collaborative agreements, to develop, manufacture and market its products.  The
capital requirements of Martek will depend, among other things, on one or more
of the following factors:  the speed at which Martek's Formulaid(R) licensees
incorporate Formulaid(R)into their term infant formula products;  the progress
of preclinical and clinical studies; the time and costs of obtaining regulatory
clearance for those products subject to regulatory clearance; the costs
involved in filing, protecting and enforcing patents and other intellectual
property rights; competing technological and market developments; the costs of
manufacturing facilities for those products the Company chooses to manufacture
itself; the costs of commercializing its products; and the extent of future
facilities expansion and collaborative partnerships.  The Company's 1995
purchase of a fermentation facility has had, and will continue to have, a
material effect upon Martek's liquidity and capital resources.  In addition to
the $1.0 million in cash used to close the transaction and the addition of oil
processing capabilities, additional capital expenditures will be needed to
modify the plant to meet the needs of Martek's production processes and to run
the plant prior to the time demand for the Company's nutritional oils grows to
fill plant capacity.  The extent of plant modifications cannot be predicted.
The Company will also be required to repay or refinance promissory notes due in
March and September of 1997 in the aggregate principal amount of $4,000,000 and
interest accrued thereon, associated with the facility purchase.  The notes are
secured by the fermentation plant but are without recourse otherwise.  There
can be no assurance that the Company will be able to repay or refinance these
notes.

The Company believes its existing capital resources, consisting
primarily of cash, short-term investments, marketable securities and $1.5
million from a line of credit used to finance a portion of the construction of
the oil processing facility, will provide adequate capital, for at least the
next 21 months.   However, due to the Company's expectations of growth and the
rapidly changing nature of the markets in which it competes, no prediction can
be made with certainty of the Company's need for additional capital or its
likely liquidity position over a longer term.  The Company intends to seek
additional funding through commercial and government research and development
contracts and grants, product sales and license fee arrangements.  The Company
may pursue other methods of financing its activities, including asset-based
borrowing, equity issuances, additional lease financing and collaborative
arrangements with partners if such  methods are available to the Company and on
favorable terms.  Should the Company need to raise additional funds, there can
be no assurance that such funds will be available to the Company on acceptable
terms, if at all.



                                 Page 10 of 12
<PAGE>   11
                          PART II - OTHER INFORMATION


ITEM 1.  LEGAL PROCEEDINGS.

As previously reported in the Company's annual report on Form 10-K for its
fiscal year ended October 31, 1995, and in the Company's reports on Form 10-Q
for the first and second quarters of fiscal 1996, on November 29, 1995 Martek
received a letter from the United States Environmental Protection Agency
("EPA") notifying Martek of potential liability under the Comprehensive
Environmental Response, Compensation and Liability Act in connection with the
cleanup of the RAMP Industries Site in Denver, Colorado.  EPA has stated that
to date it has incurred $2.1 million in costs in connection with the cleanup of
the site, but that at this time it is unable to estimate total cleanup costs.
EPA has informally indicated that based on its initial review, it believes that
Martek is responsible for less than .02% of the waste at the RAMP Site.
Martek's  own review indicates that its contribution to the site, if any, may
be a lower percentage.  EPA has stated that it intends to enter into a "de
minimis" settlement with smaller contributors based on a waste-in list it is
currently compiling.  Martek believes that the impact of any settlement will be
immaterial to its financial condition and results of operations.

The Company is not a party to any other legal proceedings.


ITEM 2.  CHANGES IN SECURITIES.

None

ITEM 3.  DEFAULTS UPON SENIOR SECURITIES.

Not Applicable

ITEM 4.  SUBMISSION OF MATTER TO A VOTE OF SECURITY HOLDERS.

None

ITEM 5.  OTHER INFORMATION.

None

ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits: None

(b) Reports on Form 8-K: None





                                 Page 11 of 12
<PAGE>   12
                                   SIGNATURES




Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.



                                   MARTEK BIOSCIENCES CORPORATION
                                   ------------------------------
                                             (Registrant)





Date:  September 13, 1996                             /s/ Steve Dubin   
       ------------------------               --------------------------------
                                              Steve Dubin, Chief Financial and 
                                              Accounting Officer





                                 Page 12 of 12

<TABLE> <S> <C>

<ARTICLE> 5
       
<S>                             <C>
<PERIOD-TYPE>                   3-MOS
<FISCAL-YEAR-END>                          OCT-31-1996
<PERIOD-START>                             MAY-01-1996
<PERIOD-END>                               JUL-31-1996
<CASH>                                      11,010,000
<SECURITIES>                                31,421,000
<RECEIVABLES>                                  170,000
<ALLOWANCES>                                         0
<INVENTORY>                                  1,488,000
<CURRENT-ASSETS>                            44,544,000
<PP&E>                                      17,084,000
<DEPRECIATION>                               2,145,000
<TOTAL-ASSETS>                              59,483,000
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