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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended October 31, 1996 Commission file number: 0-22354
MARTEK BIOSCIENCES CORPORATION
(Exact name of registrant as specified in its charter)
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DELAWARE 52-1399362
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
6480 DOBBIN ROAD, COLUMBIA, MARYLAND 21045
(Address of principal executive offices)
REGISTRANT'S TELEPHONE NUMBER INCLUDING AREA CODE: (410) 740-0081
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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
None None
(Title of class:) (Name of each exchange on which registered:)
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock, $.10 par value
(Title of Class)
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 last 90 days. X Yes No
--- --
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The aggregate market value of Common Stock held by non-affiliates of
Registrant is $315,876,553 (based upon a last sale price of $24.75 per share of
the Common Stock as reported on the NASDAQ National Market System on January
17, 1997). The number of shares of Common Stock outstanding as of January 17,
1997 was 13,520,850.
DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of Registrant's Annual Report to Stockholders for the
fiscal year ended October 31, 1996 are incorporated by reference into Part II
of this Report. Certain portions of the Registrant's Definitive Proxy
Statement for its 1997 Annual Meeting of Stockholders (which is expected to be
filed with the Commission within 120 days after the end of the Registrant's
1996 fiscal year) are incorporated by reference into Part III of this Report.
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PART I
ITEM I. BUSINESS.
OVERVIEW
Martek is a leader in the development and commercialization of high value
products derived from microalgae. Martek's most significant products are
nutritional oils used as ingredients in infant formula and encapsulated for use
as dietary supplements. The Company's nutritional oils are comprised of fatty
acid components which many researchers believe may enhance mental and visual
development in infants and play a pivotal role in brain function throughout
life. Martek has licensed these oils to six infant formula manufacturers,
representing over 40% of the estimated $5 billion worldwide market for infant
formula. Three of these licensees have introduced products containing the
Company's nutritional oils in pre-term infant formula products in five European
countries. Additional applications of the Company's platform technology include
currently marketed products and technologies to assist in drug discovery,
diagnostics and development-stage pharmaceuticals. Martek intends to continue
to exploit the largely untapped commercial opportunities of microalgae. To
that end, the Company maintains a library of more than 2,700 live microalgal
species and a related database, which it believes are among the largest such
resources available worldwide.
Nutritional Oils for Infant Formula, Dietary Supplementation and Other
Applications. Using its proprietary technology, Martek has developed
nutritional oils, which provide two essential fatty acids naturally present in
breast milk that are not available in most infant formulas. The predominant
fatty acid components of these oils, docosahexaenoic acid ("DHA") and
arachidonic acid ("ARA"), are produced from microalgae and fungi using Martek's
proprietary technologies. Studies published by others have indicated that DHA
may be linked to the development and function of the brain and retina. ARA is
a major structural lipid in human tissues. In 1994, the Company received a
U.S. patent covering certain blends of a microbial oil enriched with DHA and a
microbial oil enriched in ARA, as well as the use of such blends in infant
formulas. In 1995, the Company received a U.S. patent covering a process for
making an edible oil containing DHA and the edible oil made by such process as
well as a U.S. patent covering an infant formula comprising a specified edible
oil containing DHA. In 1996 the Company received two additional US patents
covering its nutritional oils technology. The first patent protects
pharmaceutical compositions and dietary supplements comprising a single cell
oil in concentrations of at least 20% DHA in a triglyceride form made using
Martek's method of producing DHA oil. The second patent clarifies that
Martek's patent coverage includes the blending, in infant formula and
nutritional supplements, of microbially derived ARA oil with low
eicosapentaenoic acid ("EPA") fish oils. Fish oil is a potential competitive
source of DHA to Martek's algal-derived DHA oil. This patent will make it more
difficult for low EPA fish oils to be combined with microbial sources of ARA
oils without violating Martek's patent.
Martek has entered into royalty-bearing license agreements with six infant
formula producers, including Mead Johnson & Company (a subsidiary of
Bristol-Myers Squibb Company), American Home Products, Nutricia, Maabarot
Products Ltd. and Novartis Nutrition S.A.(formerly Sandoz), to supply
nutritional oils containing DHA and ARA, for inclusion in their infant formula
products. Nutricia, Wyeth-Ayerst, a subsidiary of American Home Products, and
Novartis are currently marketing pre-term infant formula products containing
Martek's oils in five European countries, including the UK, the Netherlands,
Belgium, Finland, and Spain. The infant formula industry represents over $2
billion in annual wholesale sales in the United States and approximately $5
billion worldwide. Martek is actively pursuing additional licenses with other
infant formula producers throughout the world.
In 1996, Martek developed and initiated sales of its first consumer
products, Neuromins(TM), a DHA dietary supplement, and Neuromins(TM) PL, a DHA
dietary supplement for pregnant and lactating women. Martek has entered into
agreements with Source Naturals, Inc., Solgar Vitamin and Herb Company, and
Leiner Health Products for the packaging and distribution of these products in
retail outlets nationwide.
Martek is also exploring additional applications for DHA, including use in
specialty food products.
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Products for Drug Discovery. Using its core microalgal technology, Martek
has developed and markets a range of products and technologies for use in
molecular structure research and structure-based drug discovery. The Company
markets these products worldwide to many of the largest pharmaceutical
companies and research institutions. These products aid researchers in
expediting new drug discovery by enabling them to determine the 3-dimensional
("3-D") structure of certain proteins in solution and to study characteristics
of the structure and its binding interaction with drugs. Martek also markets a
proprietary cell growth medium, Celtone M, which the Company believes will
enable researchers, for the first time, to determine the 3-D structure of
certain human proteins. A U.S. patent was issued to Martek for its Celtone M
technology in 1995.
Pharmaceuticals. The Company is conducting research with certain
microalgal extracts that have demonstrated in vitro bioactivity as therapeutic
agents. The Company has also developed two novel combinatorial libraries of
small molecules. Both of these libraries have produced active leads in
antifungal and anti-cancer screens. These libraries can also produce molecules
labeled with stable isotopes for rapid elucidation of bound conformations to
accelerate new drug design. Finally, the Company has entered into a supply
agreement with Neuromedica, Inc. for the production of Doprexin(TM), DHA linked
with dopamine, a therapeutic under development by Neuromedica, Inc.
Diagnostics. Martek's newest developmental product is a highly sensitive,
algal-based fluorescent protein complex for labeling molecules, cells and
viruses. These labels are designed to be easy-to-use, low cost, non-toxic
diagnostic tools which may have the sensitivity suited for point-of-care
diagnostics, including cancer and HIV testing. These fluorescent complexes are
also being tested for use in flow cytometry for routine blood screening.
The Company has also been working to develop a family of gastrointestinal
("GI") diagnostic tests that measure the amount of carbon-13, a non-radioactive
stable isotope of carbon, in the carbon dioxide in breath. These breath tests
are simple to administer and are only minimally invasive. Subsequent to the
Company's initial efforts in this area, the U.S. Food and Drug Administration
("FDA") changed its regulatory requirements pertaining to various diagnostics
including Martek's breath tests. As a result of these changes, the cost of
conducting trials has increased significantly. For this reason, Martek elected
to slow further development of its breath diagnostic products. However, in
1995, the Company received a Small Business Innovation Research ("SBIR") grant
for more than $700,000 to finance a clinical study of the Company's carbon-13
galactose liver function tests currently being conducted by the Cleveland
Clinic.
TECHNOLOGY
Martek applies its microalgal expertise and culturing technology to its
expanding library of over 2,700 live microalgal species and related database to
achieve technical and commercial advantages. Certain fundamental and unique
attributes of microalgae allow for the development and production of Martek's
products:
- microalgae are a genetically diverse group of organisms that have a
wide range of physiological and biochemical characteristics; thus,
they naturally produce many different and unusual fats, sugars,
proteins and bioactive compounds that may have commercial
applications, such as the fatty acids that are the principal
ingredients in the Company's nutritional oils and highly sensitive
fluorescent diagnostic products;
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Celtone(R) is a trademark of the Company registered with the U.S. Patent and
Trademark Office.
Neuromins(TM) is a trademark of the Company.
Doprexin(TM) is a trademark of Neuromedica, Inc.
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- microalgae are essentially "microplants," which use simple substances
such as carbon dioxide, water and nitrate to grow. When Martek
substitutes the heavy stable isotope forms of these nutrients,
microalgae will cost-effectively incorporate certain stable isotopes
(carbon-13, deuterium and nitrogen-15) into the various compounds the
microalgae produce. This characteristic provides the basis for
Martek's drug design products; and
- microalgae comprise a large, substantially unexplored group of
organisms, and thus provide a virtually untapped source that can be
screened for a variety of products, including pharmaceuticals.
Martek's scientists have developed novel and proprietary microalgal
culturing technology which allows, for the first time, the routine scale-up of
microalgae of commercial interest. Proprietary closed-system, light-driven
photobioreactors and numerous techniques for maintaining and manipulating
microalgal monocultures form the basis of this culturing technology. Where
possible, and for applications that require large quantities of product (e.g.,
nutritional products), the Company has selected and developed microalgae
capable of growing without light by using nutrient feeds in a manner similar to
bacteria, yeast or fungi. These microalgae can be grown in existing commercial
fermenters using current technology, resulting in economies of scale and
substantially lower production costs.
Martek's product development process involves the following primary steps:
Identification of Appropriate Microalgae. Martek selects specific
microalgae to produce potentially marketable compounds through a
comprehensive process involving in-house algal expertise and experience,
searches of scientific literature and the Company's proprietary microalgal
database, biochemical analyses, and preliminary product-yield experiments.
The Company currently maintains an increasing in-house collection of over
2,700 strains of microalgae, which includes representatives of virtually
all of the significant taxonomic microalgal groups. Equally important is
the Company's proprietary microalgal database, which contains biochemical
and physiological data on the strains in the collection. The Company
believes that its microalgal collection and associated database are among
the largest such resources available in the world. Coupled with the
Company's extensive microalgal expertise, these resources are used to
select organisms for initial testing. Further testing ultimately results
in the selection of production strains.
Modification of Microalgae and Growth Conditions. Martek applies
standard industrial microbiological techniques to microalgae and
manipulates culturing conditions (such as light intensity, temperature and
growth medium composition) to optimize productivity. After selecting
strains with the best yields and growth characteristics, the Company
enhances their production through mutagenesis and natural selection under
biochemical stress. Martek has not used genetic engineering techniques to
develop any of its existing products, but may use these methods for certain
products currently in development.
Culturing Microalgae. Successful exploitation of the unique
characteristics of microalgae is in large measure dependent upon the
availability of large-scale culturing technology. Martek has discovered
and uniquely cultured a microalga capable of producing large amounts of DHA
heterotrophically (i.e., without light) by using organic nutrients.
Heterotrophic culturing of this DHA-producing microalga was previously not
believed to be possible at commercially viable levels. Heterotrophic
microalgae have the advantage of being able to be cultured in conventional
fermenters employed by the food, pharmaceutical and biotechnology
industries. Microalgal fermentation has an advantage over photobioreactor
production because larger-scale production of products such as the
Company's nutritional oils, where the incorporation of high-priced stable
isotopes is not required, can be conducted in existing fermentation
equipment, resulting in lower production costs. Aspects of Martek's
technology for the heterotrophic growth of DHA-producing microalgae are the
subject of a U.S. patent. Similar patent applications have issued in
certain countries and are pending in certain other countries around the
world.
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For many other product applications, the Company uses its proprietary,
light-driven, closed-culture system photobioreactors for microalgal
production. Photobioreactors are closed to the atmosphere and designed to
make the most efficient use of light while keeping contaminating microbes
out of the culture. Using its photobioreactors, Martek is able to culture
isolated microalgal strains without contamination and to manipulate such
strains to influence growth and biochemical makeup, thus efficiently
generating products of interest. For example, for the production of
Martek's drug discovery products, the Company is able to culture certain
microalgae to produce compounds consisting of heavier stable isotopes
rather than the more common forms of atoms by growing microalgae in its
photobioreactors using carbon dioxide, water and/or certain
nitrogen-containing compounds containing the heavier stable isotopes,
carbon-13, deuterium and nitrogen-15. Use of its photobioreactors also
provides Martek a means to conserve and recycle liquid and gaseous
components of the culture, a feature critical for those applications that
involve the use of expensive stable isotopes. Martek's microalgal method
of stable isotope incorporation is significantly less expensive than
alternative microbial or chemical synthesis in many instances.
Martek uses a series of photobioreactors of varying sizes, controls
and methods of operation to achieve culturing consistency. The different
sizes are used primarily for scale-up purposes, from laboratory bench scale
to commercial culturing and manufacturing. Certain aspects of these
photobioreactors are the subject of the Company's patents and patent
applications filed in the United States.
PRODUCTS
AND PRODUCT CANDIDATES
Nutritional Products
Certain microalgae and fungi produce large quantities of oils and fats
containing long-chain, polyunsaturated fatty acids ("PUFAs") that are essential
to human nutrition and health. Studies have indicated that a particular PUFA,
DHA, may be associated with mental and visual development in infants, and plays
a pivotal role in normal brain function throughout life. DHA is the
predominant structural fatty acid in the grey matter of the brain and retinal
tissues in humans and other mammals. Children and adults obtain DHA primarily
from their diets, since humans synthesize only small amounts of DHA. Infants
acquire DHA and ARA, an important structural lipid in human tissues, initially
in utero during pregnancy, and then from their diet via their mother's milk.
DHA and ARA dietary supplementation may be particularly important for premature
and low birth weight infants who may not get their full in utero allotment.
Martek has identified a strain of microalgae which produces an oil rich in
DHA and has developed the means to grow it by fermentation, with a relatively
high oil and DHA content. To supplement its DHA for infant formula, the
Company has similarly isolated and cultured a strain of fungus that produces
large amounts of ARA. DHA and ARA are present in breast milk but are
unavailable in most infant formulas today. When the Company's nutritional oils
are added to infant formula at proper levels, they provide DHA and ARA in
concentrations that closely match those in breast milk without the potential
undesirable characteristics presented by other sources of DHA, such as certain
fish oils.
Martek's nutritional oils contain the fatty acids DHA and ARA, and
beginning in 1992 Martek first realized revenues from license fees related to
its nutritional oils and sale of sample quantities of these oils. In late
1994, one of the Company's licensees launched the first pre-term infant formula
containing Martek's oils in Europe, and in 1995, Martek recognized its first
royalty revenue from sales of this product. Additional product introductions
have continued through 1996. As of early 1997, three of the Company's infant
formula licensees were marketing pre-term infant formula containing Martek's
oils in five countries in Europe including, the UK, the Netherlands, Belgium,
Finland, and Spain.
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Independent studies indicate that the mental development and visual acuity
of infants are positively affected by breast feeding and that breast-fed
infants have higher levels of DHA in their brain tissue and enhanced mental
acuity later in life when compared to those fed infant formula not containing
DHA. Brain development in humans takes place primarily in the last trimester
in utero and in the first 12 months of postnatal life. For a fetus, DHA is
provided through its mother's bloodstream. DHA is generally the most abundant
omega-3 very long-chain PUFA in human milk. Breast-fed infants have been found
to have higher levels of DHA in their brain tissue than those fed infant
formula. There is evidence indicating that for infants who are breast-fed,
mental development and visual acuity are positively affected. This evidence is
from retrospective studies comparing intelligence in breast-fed versus
formula-fed infants and from intervention studies in infants using
DHA-supplemented infant formula.
Compelling data on the healthful attributes of breast milk has prompted a
trend among infant formula manufactures to reformulate their products so that
they more closely approximate breast milk. The following is a representative,
but not an exhaustive, sample of published data indicating that DHA in the diet
may be associated with mental and visual development of infants. None of these
studies were performed by or on behalf of the Company, and the Company is not
aware of any published scientific studies that conclusively demonstrate that
DHA is the only component in human milk that positively affects the mental and
visual development of infants.
- Large-scale retrospective studies in the United Kingdom, New Zealand
and the United States conducted between 1978 and 1992, involving
between 700 and 13,000 patients, have evaluated development of
intelligence in infants, children and adolescents, as a function of
breast feeding versus formula feeding during infancy. These studies
have demonstrated that pre-term infants fed human milk during infancy
exhibited a 5 to 12 point higher intelligence quotient ("IQ") later in
life than similar groups of babies fed conventional formulas. This
difference was also apparent for term infants, although it was not as
large (two to five points). Furthermore, the measured IQ in the term
infants was positively correlated with the duration of breast feeding.
- A recent Dutch study published in The Lancet assessed the neurological
status of 526 children and concluded that the frequency of
neurological abnormalities at nine years of age were twice as high in
formula-fed babies compared to breast-fed babies.
- Two recent studies in the United Kingdom and Australia, using data
from term and pre-term babies that died early in infancy, have
indicated that breast-fed babies had higher levels of DHA in the brain
than formula-fed babies.
- Several studies have indicated that premature infants who lose the
rich placental supply of DHA and ARA are at greater risk for
neurological deficits such as learning disabilities and
social/behavioral problems and have significantly lower IQ scores.
- In published controlled clinical intervention studies with pre-term
infants conducted in the United States, infants fed formula
supplemented with DHA exhibited a more rapid development of mental and
visual acuity than a control group fed standard pre-term infant
formulas. These studies used fish oil as a source of DHA. Certain
fish oils contain certain other PUFAs, such as eicosapentaenoic acid
("EPA") which is present at concentrations that can lead to a reduced
rate of growth in infants. Formulaid does not contain these PUFAs.
- Two published trials comparing the visual acuity of formula-fed babies
demonstrated that when formula was supplemented with DHA significant
improvement in visual acuity was observed even in healthy full-term
babies. The most recent of these trials was conducted with full-term
babies using Martek's oil as its exclusive source of DHA.
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In the November 12, 1994 edition of The Lancet, a scientific journal
published in the UK, scientists concluded that "some components of breast-milk
may have a beneficial effect on brain development. . . arachidonic acid [ARA]
and docosahexaenoic acid [DHA] should be considered as essential nutrients for
infants because they are present in structural lipids in brain and nervous
tissue." Preliminary data submitted to The Society of Pediatric Research in
May, 1994 and a separate study, presented in July 1995 at the Second
International Congress of the International Society for the Study of Fatty
Acids and Lipids, showed that low birth weight infants fed formula supplemented
with Martek's nutritional oils have blood lipid levels of DHA and ARA
comparable to those of breast-fed, low birth weight infants. In addition, the
British Nutrition Foundation ("BNF"), the European Society for Pediatric
Gastroenterology and the Expert Committee on Human Nutrition of the United
Nations Food and Agriculture Organization ("FAO") and World Health Organization
("WHO"), have recommended that these essential fatty acids be included in
pre-term infant formulas at levels found in human milk. The BNF and the
FAO/WHO Committee have gone further to recommend that DHA and ARA also be
included in formulas for term infants as well.
Low levels of DHA have been correlated with changes in disposition,
memory loss, visual and other neurological conditions. Also, in addition to
recommending the inclusion of DHA and ARA in infant formula, the BNF and FAO/WHO
Committees have recognized their importance in pregnancy and lactation. To
address these markets, Martek recently introduced its first consumer products,
Neuromins(TM) DHA dietary supplements and Neuromins(TM) PL DHA dietary
supplements for pregnant and lactating women.
The Company is currently working to develop other DHA delivery methods to
address these markets, including powders, an emulsion and nutritional bars and
drinks. The Company is also researching the use of DHA in enteral products.
Martek believes that its nutritional oils have the following advantages
over other currently available sources of DHA and ARA for use in infant
formula:
- the oils can be blended in a variety of mixtures in precise ratios for
specific applications;
- each of the oils is comprised of a fatty acid blend that has no other
bioactive PUFAs in significant quantities so that desirable PUFAs can
be included and undesirable ones (e.g., EPA) can be excluded;
- the DHA- and ARA-enriched oils are in a triacylglycerol (or
triglyceride) form similar to that found in breast milk and therefore,
easily digested;
- the position of the DHA within the triacylglycerol in Martek's
DHA-containing oil is similar to that in breast milk, but different
from that in fish oils or fish eye-socket oils;
- Martek's oils have a much higher oxidative stability and longer shelf
life than fish oil and are, therefore, amenable to the spray drying
process required for powdered formula;
- the oils can be produced in large quantities under controlled
conditions satisfying regulatory scrutiny; and,
- the Company has received patents protecting the blend of its DHA and
ARA oils, as well as the blend of certain other microbial oils and the
blend of microbial derived ARA oils and low EPA fish oils, that may
compete with Martek's nutritional oils for use in infant formula.
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Products for Drug Discovery
Structure-based drug discovery has recently emerged to improve the
efficiency of new pharmaceutical development. Many drugs work by mimicking the
interaction between two molecules, a ligand and a receptor. Rather than rely
solely on the chance synthesis of an active chemical compound, practitioners of
structure-based drug discovery seek to study the interaction between the ligand
and receptor, and to design a specific drug prototype on the basis of that
interaction. The ability to determine the structures of the ligand, the
receptor, and ideally, the complex between the two, is key to structure-based
drug discovery.
Martek has developed a series of products which enable 3-D structures of
certain proteins of pharmaceutical interest to be determined in solution. Some
of these products are used as growth media which allow for the generation of
proteins incorporating stable isotopes. Others can be used to make
isotopically labeled DNA and RNA. The presence of stable isotopes allows for
the determination of the 3-D structure of these molecules using nuclear
magnetic resonance ("NMR"). Proteins incorporating stable isotopes such as
carbon-13 and/or nitrogen-15 have been obtained by growing micro-organisms,
such as bacteria and yeast, on Martek's media, and the 3-D structures
subsequently deduced from information provided by NMR. In addition,
incorporating deuterium, an NMR "invisible" isotope of hydrogen, into the
protein allows for the structure of either the ligand or the receptor to be
determined while bound to its NMR invisible partner.
The Company markets these products and technologies to pharmaceutical and
structure-based drug discovery companies, universities and research institutes.
Future growth in sales of these products and technologies may depend in large
measure on the future growth of structure-based drug discovery and use of NMR
techniques.
Martek markets the following products for drug discovery:
Celtone M -- The classical technique for determining the 3-D
structures of proteins, X-ray crystallography, is limited in that certain
of the most important protein targets (i.e., glycosylated human proteins),
frequently do not crystallize. Celtone M, Martek's isotopically labeled
mammalian cell growth medium, has enabled determination of the 3-D
structures of glycosylated human proteins through NMR. The Company
believes Celtone M is a proprietary, enabling technology, and, in many
cases, the only way of making glycosylated mammalian proteins in stable
isotope form. By unveiling the structures of these elusive and important
proteins, the drug design process may be expedited against new targets. In
February 1995, a patent was issued to the Company for the composition of
matter and use of Celtone M.
Celtone -- Martek's cell growth medium for bacteria and yeast,
Celtone, has been on the market since 1990 and has been instrumental in
determining the structure of a number of proteins. Celtone is available in
any combination of 2H, 13C and 15N. In June 1994, a patent was issued to
the Company for the composition of matter and method for producing its
Celtone medium.
Glucose -- Carbon-13-glucose is the most widely used reagent for
isotopically labeling bacterial proteins and is Martek's leading product
for drug discovery as measured by annual sales. Glucose is available in
combinations of 2H and 13C.
Nucleic Acids -- Martek has just introduced isotopically labeled
nucleic acids. These are available labeled with any combination of 2H, 13C
and 15N and are used to solve the structures of DNA and RNA, especially
when bound to proteins.
Pharmaceuticals
Because no pharmaceutical has been commercially produced from microalgae to
date, the value of microalgae to the pharmaceutical industry is unknown.
Martek's goal, therefore, is to demonstrate that microalgae can produce
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novel, pharmaceutically active compounds and to seek long-term partnerships for
exploiting pharmaceutical applications. The Company has conducted an in-house
anti-microbial screening program and has accessed the screens and assays of
other organizations. Martek's in-house screening program has resulted in
microalgal extracts that have shown in vitro antifungal activity. Structural
determination of one of these compounds revealed a unique molecule which has
been assessed by the National Cancer Institute ("NCI") and shown to have potent
anti-cancer activity in vitro with specificity to colon cancer cells lines.
Combinatorial Library. Martek has recently developed two new proprietary
technologies capable of generating combinatorial libraries of small, novel
compounds. The first library is made up of small carbohydrate (sugar)
derivatives, which have shown antifungal activity on screening. The second
chemical library has produced compounds which have potent anti-cancer activity
in vitro against breast cancer cell lines. Both libraries can produce
molecules labeled with stable isotopes which provide the ability to quickly
transform sub-optimal leads to optimal ones, thereby establishing a few highly
potent drug candidates for a given targeted disease in a short period of time.
Martek is also exploring neurological applications for DHA. In 1995,
Martek signed an agreement to produce Doprexin, a compound prepared by linking
dopamine to DHA, for Neuromedica, Inc. Doprexin is being developed by
Neuromedica, Inc. for the treatment of tardive dyskinesia, a disorder
characterized by uncontrollable facial and other bodily movements as well as a
reduction in intellectual capacity affecting approximately 600,000 Americans
and for potential use as a therapeutic for weight control. Animal studies have
shown that a purified form of Martek's DHA can act as a carrier to take
dopamine across the blood-brain barrier where it can exert its therapeutic
effect.
Diagnostics
Fluorescent Marker Technology. The newest addition to Martek's product
pipeline is a highly sensitive fluorescent protein complex for labeling
molecules. These labels are easy-to-use, low-cost, non-toxic fluorescent
diagnostic tools that are many times more sensitive than other currently
available fluorescent labels. Preliminary research indicates a wide array of
potential applications, including applications that have not been achievable
with other fluorescent labels. For example, the Company's fluorescent labels
offer a combination of characteristics that may be ideally suited for
conventional research applications and blotting techniques, as well as
point-of-care diagnostics, including testing for cancer. These ultra-high
sensitivity fluorescent markers may also have potential application in flow
cytometry for the detection of certain cells or viruses in routine blood
screening.
Breath Diagnostics. Martek has been working to develop a family of
gastrointestinal diagnostic tests that are based on measuring the amount of
carbon-13, a non-radioactive stable isotope of carbon, in the carbon dioxide in
breath. These breath tests are simple to administer and are only minimally
invasive. Subsequent to the Company's initial efforts in this area, the FDA
changed certain regulatory requirements pertaining to various diagnostics,
including Martek's breath test diagnostics. As a result of these changes, the
cost of conducting further clinical trials of Martek's breath test diagnostics
increased significantly. For this reason, the Company elected to slow further
development of its breath diagnostic products. However, in 1995, the Company
received an SBIR grant for more than $700,000 to finance a clinical study of
the Company's carbon-13 galactose liver function test currently being conducted
by the Cleveland Clinic.
COLLABORATIVE AND LICENSING AGREEMENTS
Martek has entered into licensing agreements with six infant formula
manufacturers, including Mead Johnson & Company (a subsidiary of Bristol-Myers
Squibb Company), American Home Products, Nutricia, Maabarot Products Ltd. and
Novartis Nutrition S.A.(formerly Sandoz), that together comprise over 40% of
the worldwide infant formula market. Under these agreements, Martek received
up-front licensing fees and is entitled to royalties based on sales of infant
formula containing its nutritional oils. These licensees are not required to
include these oils
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in their formulas under the terms of these agreements, and there can be no
assurance that such infant formula manufacturers will include the oils in any
or all of their product lines. In addition, Martek's licensees are free to
include DHA and ARA acquired from other sources. Under the terms of these
licensing agreements, the licensees are responsible for obtaining FDA and all
other necessary regulatory approvals with respect to these nutritional oils.
Under each of its current license agreements, Martek's licensees generally are
obligated to indemnify Martek against product liability claims relating to its
nutritional oils unless they are related to manufacturing impurities in the
oils. In addition to compensation payable to the Company under these
agreements, the Company expects to receive transfer payments for supplies of
its nutritional oils.
Under the terms of several of its current license agreements, Martek is
prohibited from granting a license to any party for the inclusion of its
nutritional oils in infant formula with payment terms that are more favorable
to such licensee than those provided in its agreements with its current
licensees without either the prior written consent of the current licensees or
prospectively offering such new favorable terms to these licensees. This
restriction does not apply to any lump sum payments to Martek pursuant to a
territorially restricted license under which the reduced payment is reasonably
related to the reduced marketing opportunities available under such a
restricted license. In addition, under the terms of several of the agreements,
Martek is prohibited from granting a license to any party for the inclusion of
its nutritional oils with a royalty rate that is more favorable to other
licensees than that provided in these agreements without either the prior
written consent of such licensees or prospectively offering such royalty rate
to these current licensees.
In 1993, Martek entered into an agreement with Columbia University pursuant
to which Columbia University will try to determine the structure of the hCG
protein using Celtone M. The hCG molecule affects fertility by controlling the
attachment of the egg to the uterus. Martek and Columbia University will share
any commercial proceeds resulting from their joint efforts. Martek's share of
any such proceeds will be based upon the successful conclusion of certain
events but will not be less than 75%. In May 1994, the Company initiated
commercialization of Celtone M through a license agreement with Genetics
Institute under which Martek will receive royalties on sales of products
resulting from Genetics Institute's work with Celtone M. In October 1994,
Martek entered into a collaboration with the University of St. Andrews in
Scotland. This collaboration is dedicated to the development of NMR techniques
for the study of large proteins and determining the 3-D structures of certain
human proteins of pharmaceutical interest. Under this agreement, St. Andrews
will provide NMR facilities and expertise in large protein resolution. Martek
will provide funding and pay royalties for certain proprietary products arising
from this research.
In February 1995, Martek signed an agreement to produce Doprexin (a
compound prepared by linking dopamine to DHA) for Neuromedica, Inc. The
agreement calls for Martek to manufacture and supply at least 50% of
Neuromedica's U.S. requirements for Doprexin. Under the terms of the
agreement, Neuromedica, Inc. is responsible for all regulatory matters (other
than GMP issues related to Martek's manufacturing procedures) involved in
receiving FDA approval to market Doprexin.
The Company has also entered into various additional collaborative research
and license agreements. Under these 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 pay royalties upon the sale of certain
products resulting from such collaborations.
COMMERCIAL AND U.S. GOVERNMENT RESEARCH AND DEVELOPMENT CONTRACTS
Martek's technology development has been funded in part by commercial and
federal government contracts. While not expected to be a primary source of
revenue in the future, Martek plans to continue applying for government
contracts and soliciting commercial research and development contracts on a
selective basis when such contracts involve research of future commercial
benefit to the Company.
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<PAGE> 11
As a result of Martek's receiving Small Business Innovation Research
grants, the U.S. Government will have certain rights (the "Government Rights")
in the technology developed with the funding. These rights include a
non-exclusive, paid-up, worldwide license to practice or have practiced such
inventions for any governmental purpose. In addition, the government has the
right to require the Company to grant licenses which may be exclusive under any
of such inventions to a third-party if the government determines that (i)
adequate steps have not been taken to commercialize such inventions, (ii) such
action is necessary to meet public health or safety needs or (iii) such action
is necessary to meet requirements for public use under federal regulations.
The government also has the right to take title to a subject invention if the
Company fails to disclose the invention and elect title within specified time
limits. In addition, the government may acquire title in any country in which
the Company fails to file a patent application within specified time limits.
Federal law requires any licensor of an invention that was partially funded by
federal grants to obtain a covenant from any exclusive licensee to manufacture
products using the invention substantially in the United States. In addition,
the Company's licenses from third parties may also relate to technology
developed with federal funding and therefore may also be subject to Government
Rights.
Costs under U.S. government contracts are subject to audit by the U.S.
government. The Company believes that cost disallowances, if any, arising from
such audits of costs charged to government contracts through October 31, 1996
would not be material to the Company.
MANUFACTURING
Martek manufactures oils rich in DHA and ARA in its fermentation
facility located in Winchester, Kentucky by conventional fermentation
processes. Martek is currently in the process of optimizing production of its
nutritional oils, and believes that a continued optimization effort will be
required for the at least the next two years. The Company presently contracts
with an oil processing plant for certain processing related to production of
its nutritional oils. However, in 1996, the Company constructed a "state of
the art" oil processing plant at its Winchester facility. The oil processing
plant is currently being readied for production in 1997. In March 1995, the
Company acquired the Winchester facility from a subsidiary of ACX Technologies,
Inc. Martek has also entered into an agreement with a third party to produce
its ARA oil, and may enter into additional production agreements with third
parties if demand for the oils requires. The commercial success of its
nutritional oils will depend, in part, on Martek's ability to manufacture these
oils or have them manufactured at a commercially acceptable cost. There can be
no assurance that the Company will be able to successfully optimize production
of its nutritional oils, or continue to comply with applicable regulatory,
including GMP, requirements or that these facilities will be sufficient to meet
the future demand for the oils. Under the terms of several of its infant
formula licenses, Martek's licensees may elect to manufacture these oils
themselves, although the Company believes this is unlikely.
SALES AND MARKETING
The Company currently markets its nutritional oils products and its
products for drug discovery both directly to end users and through
distributors. The Company markets its nutritional oils for use in infant
formula directly to infant formula manufacturers. The Company markets its
Neuromins(TM) DHA dietary supplements directly to end users through its toll
free number (1-800-662-6339) and through distributors. Martek has recently
entered into agreements with Leiner Health Products for the packaging and
distribution of Neuromins(TM) to mass market retail outlets, and with Solgar
Vitamin and Herb Company and Source Naturals for the packaging and distribution
of its Neuromins(TM) DHA capsules to the natural foods markets. In the
aggregate, these distributors have access to approximately 58,000 health food
and mass retail outlets nationwide. In an effort to support the marketing
efforts of the infant formula manufacturers and capsule distributors, Martek
initiated a DHA awareness campaign directed at both the professional and public
sectors in 1996. Martek plans to continue this campaign and also plans to
initiate a public relations, advertising and marketing campaign scheduled to
begin in the second quarter of 1997 that is intended to address the market for
its Neuromins(TM) capsules. There can be no assurance that the Company will be
able to successfully market these nutritional oils products for use in infant
formula or as dietary supplements.
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<PAGE> 12
COMPETITION
The health care and biological sciences industries are characterized by
rapidly evolving technology and intense competition. The Company's competitors
include major pharmaceutical, chemical and specialized biotechnology companies,
many of which have financial, technical and marketing resources significantly
greater than those of the Company. In addition, many specialized biotechnology
companies have formed collaborations with large, established companies to
support research, development and commercialization of products that may be
competitive with those of the Company. Academic institutions, governmental
agencies and other public and private research organizations are also
conducting research activities and seeking patent protection and may
commercialize products competitive with those of the Company on their own or
through joint ventures. The existence of products of which the Company is not
aware, or products that may be developed in the future, may adversely affect
the marketability of products developed by the Company.
The development of a DHA-containing oil low in EPA may provide an
alternative to Martek's DHA oil. Though it is a lower cost product relative to
Martek's DHA, fish oil, including low-EPA fish oil, has odor, stability and
taste characteristics that may limit the usefulness of the oil in food
products. Martek is also aware of the development of microencapsulated low-EPA
fish oil products by several large companies. Though microencapsulation of the
oil resolves much of the odor, stability and taste issues found with fish oil,
a microencapsulated product is significantly more costly than regular fish oil.
In addition, management believes that the combination of either low-EPA fish
oil or microencapsulated fish oil with a microbial source of ARA for use in
infant formula would likely infringe claims of Martek's patents. Martek is
also aware of an early stage company that currently is able to produce DHA from
a strain of fungus containing DHA. Martek believes that this company has
licensed human applications of this fungal-derived DHA to a division of
Monsanto Corporation. The Company is currently unable to evaluate whether this
fungal source of DHA will present a competitive threat to its DHA oil in the
future.
Martek is also aware of several large companies promoting ARA oil. Martek
is currently unable to evaluate whether any of these companies has the ability
to produce ARA oil or whether these companies will present a competitive threat
to Martek's ARA in the future.
Small amounts of ARA can be derived from egg yolk lipids. DHA can also be
found in egg yolks of chickens fed a special diet containing, for example, fish
meal. ARA and DHA derived by this method are currently being added to infant
formula by Milupa, which was acquired by Nutricia in 1995. The Company
believes it is more expensive to produce DHA and ARA using this source than the
Company's process of producing DHA and ARA oils. Furthermore, the addition of
DHA and ARA from egg yolk at levels equivalent to those found in human milk
will result in dietary levels of lecithin and cholesterol in excess of that
found in human milk.
There may be other competitive sources of DHA and ARA that Martek is not
aware of.
Sales of certain of the Company's products for drug discovery, especially
the Company's carbon-13 glucose (a non-proprietary product), have been the
subject of intense competition the past several years. The Company has lowered
its prices of carbon-13 glucose to remain competitive. Martek's primary
competitors for carbon-13 glucose are Isotec, Inc. and Cambridge Isotope Labs,
companies that are also manufacturers of carbon-13, a primary raw material in
the production of carbon-13 glucose. The Company expects competition in the
carbon-13 glucose market will continue to remain strong.
The Company's products for drug discovery compete primarily on the basis of
product performance, proprietary position and price, and Martek expects those
nutritional, diagnostic and pharmaceutical products approved for sale to
compete primarily on the basis of product efficacy, safety, patient
convenience, reliability, price and proprietary position.
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<PAGE> 13
The Company's competitive position will also depend on its ability to
attract and retain qualified scientific and other personnel, develop effective
proprietary products, implement production and marketing plans, obtain patent
protection and secure adequate capital resources.
PATENTS, LICENSES AND PROPRIETARY TECHNOLOGY
The Company's success is dependent in part on its ability to obtain patent
protection for its products, maintain trade secret protection and operate
without infringing the proprietary rights of others. The Company's policy is
to protect aggressively its proprietary technology through patents, where
appropriate, and through trade secrets in other cases. The Company has
obtained over 18 U.S. patents, covering various aspects of its technology,
which will expire on various dates between 2007 and 2014. The Company has
filed, and intends to file, applications for additional patents covering both
products and processes as appropriate. There can be no assurance that any
patent applications filed by, assigned to, or licensed to, the Company will be
granted, that the Company will develop additional products that are patentable
or that any patents issued to or licensed by the Company will provide the
Company with any competitive advantages or adequate protection for inventions.
Moreover, no assurance can be given that any patents issued to or licensed by
the Company will not be challenged, invalidated or circumvented by others.
There can be no assurance that issued patents, or patents that may issue,
will provide protection against competitive products or otherwise be
commercially valuable. Furthermore, patent law relating to the scope of claims
in the fields of health care and biosciences is still evolving, and the
Company's patent rights are subject to this uncertainty. The Company's patent
rights on its products therefore might conflict with the patent rights of
others, whether existing now or in the future. Alternatively, the products of
others could infringe the patent rights of the Company. The defense and
prosecution of patent claims is both costly and time consuming, even if the
outcome were favorable to the Company. An adverse outcome could subject the
Company to significant liabilities to third parties, require disputed rights to
be licensed from third parties or require the Company to cease selling its
products.
The Company has been issued four U.S. patents covering certain aspects of
its DHA and/or ARA oils. The Company has applied for other patents in the
United States covering certain other aspects of its nutritional oils and has
also filed patent applications on a selective basis in other industrialized
countries. The Company is unable to predict, however, whether these patents
will be challenged, invalidated or circumvented by others. Failure by the
Company to obtain adequate patent protection for its nutritional oils would
have a material adverse effect on the Company's ability to gain a competitive
advantage for these oils and may have a material adverse effect on the
Company's results of operations, particularly future sales of its nutritional
oils, future royalties on sales of infant formula containing these oils or
license fees related thereto. In particular, failure to maintain patent
protection would permit competitors of the Company to produce products which
would be directly competitive with its nutritional oils using similar or
identical processes, and it is possible that the infant formula manufacturers
currently under license by the Company or which may be under license in the
future may choose formula ingredients from these competitors if they choose to
include the ingredients in their formulas at all.
The Company's other patents cover its photobioreactor system for culturing
microalgae; certain aspects of Martek's breath test technology; and its Celtone
and Celtone M technology.
The Company also relies on trade secrets and proprietary know-how, which it
seeks to protect in part by confidentiality agreements with its collaborators,
employees and consultants. There can be no assurance that these agreements
will not be breached, that the Company will have adequate remedies for any such
breach or that the Company's trade secrets will not otherwise become known or
be independently developed by competitors.
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<PAGE> 14
GOVERNMENT REGULATION AND PRODUCT TESTING
The Company's products and its manufacturing and research activities are
subject to varying degrees of regulation by a number of government authorities
in the United States and other countries, including the FDA pursuant to the
Federal Food, Drug and Cosmetic Act (the "FDC Act"). The FDA regulates, to
varying degrees and sometimes in very different ways, infant formulas, dietary
supplements, medical foods, enteral and parenteral nutritional products and
diagnostic and pharmaceutical products, including their manufacture and
labeling. Generally, prescription pharmaceuticals and certain types of
diagnostic products are regulated more rigorously than foods, such as dietary
supplements. Infant formulas are special types of food that are regulated more
rigorously than most other types of foods. Federal and state laws, regulations
and policies are always subject to change and depend heavily on administrative
policies and interpretations. There can be no assurance that any changes with
respect to federal and state laws, regulations and policies, and, particularly,
with respect to the FDA or other such regulatory bodies, with possible
retroactive effect, will not have a material adverse effect on the Company.
Martek's infant formula licensees are responsible for obtaining the
requisite regulatory clearances to market their products containing Martek's
oils. To date, none of the Company's infant formula licensees have obtained
the requisite marketing clearances for any of the Company's products that
require such clearances in the United States. Sales of the Company's products
outside the United States are subject to foreign regulatory requirements that
may vary widely from country to country. Pre-term infant products containing
the Company's nutritional oils are currently being marketed outside the US in
five European countries, and Martek understands that its licensees have
received appropriate regulatory clearances to the extent they are required to
market such products in those countries. The time required to obtain
clearances from additional foreign countries and for term infant formulas
containing Martek's oils in foreign countries may be longer or shorter than
that required by the FDA or other such agencies, and clearance or other product
requirements may differ. There can be no assurance that such foreign
clearances or other requirements can be obtained or met on a timely basis, if
at all.
There can be no assurance that DHA and ARA used in medical foods, infant
formulas or enteral nutritional products will not be subject to food additive
regulation under the FDC Act. Additional data also may be needed to support
the use of DHA and ARA in medical foods.
The process of obtaining FDA clearances can be time-consuming and
expensive, and there is no assurance that such clearances will be granted or
that the FDA review process will not involve delays that materially and
adversely affect the testing, marketing and sale of the Company's products.
Moreover, regulatory clearances for products such as medical devices, new
drugs, or new food additives, even if granted, may include significant
limitations on the uses for which such products may be marketed. Additionally,
product clearances could be withdrawn for failure to comply with regulatory
standards. There can be no assurance that any clearances that are required,
once obtained, will not be withdrawn or that compliance with other regulatory
requirements can be maintained.
Many of the Company's products are in research or development phases. The
Company cannot predict all regulatory requirements or issues that may apply to
or arise in connection with the Company's products. Changes in existing laws,
regulations or policies and the adoption of new laws, regulations or policies
could prevent the Company or its licensees or collaborators from, or could
affect the timing of, achieving compliance with regulatory requirements,
including obtaining current and future regulatory clearances, where necessary.
Due to the cost and time commitment associated with the FDA regulatory
process, as well as the Company's lack of experience in obtaining FDA
regulatory clearances, the Company will decide on a product-by-product basis
whether to handle independently relevant clearance and other requirements or to
assign such responsibilities to its licensees or future collaborative partners.
There can be no assurance that the Company, its licensees or collaborators will
be able to obtain such regulatory clearances, if required, on a timely basis or
at all. Delays in receipt of, or failure to receive, such clearances, the loss
of previously received approvals or clearances, or failure to
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<PAGE> 15
comply with existing or future regulatory requirements would have a material
adverse effect on the Company's business, financial condition and results of
operations.
In connection with the Company's decision to manufacture certain of its
products which it markets directly, or licenses to or collaborates with others
to market, it will be required to adhere to applicable current Good
Manufacturing Practices ("GMP") as required by the FDA. GMP regulations
specify component and product testing standards, control quality assurance
requirements, and records and other documentation controls. In general, drug
GMP requirements are more stringent than food GMP requirements although
significant quality control procedures exist for infant formulas. Depending
upon the type of FDA application that is submitted, compliance with relevant
GMP requirements can be onerous and time consuming, and there can be no
assurance that the Company can meet relevant FDA manufacturing requirements,
particularly for scale-up operations involving product marketing applications.
Because the Company is manufacturing its DHA and ARA oils, it will be subject
to GMP and various other requirements applicable to infant formulas and dietary
supplements as well as periodic inspections by the FDA. Further, the Company
has had only limited experience in the area of regulatory compliance with
respect to its products. There can be no assurance that the Company will be
able to continue to manufacture its nutritional oils in accordance with
relevant infant formula and dietary supplement requirements for commercial use.
Ongoing compliance with GMP and other applicable regulatory requirements are
monitored through periodic inspections by state and federal agencies, including
the FDA and comparable agencies in other countries. A determination that the
Company is in violation of such GMP and other regulations could lead to the
imposition of civil penalties, including fines, product recalls or product
seizures, and, in the most egregious cases, criminal sanctions.
Each line of products that is or may be marketed by the Company or its
licensees or collaborators can present unique regulatory problems and risks,
depending on the product type, uses and method of manufacture.
The Federal Dietary Supplement Health and Education Act of 1994 ("DSHEA")
regulates the use and marketing of dietary supplements. The DSHEA sets forth
standards for adulteration of dietary supplements or ingredients thereof,
prescribes detailed requirements for labeling dietary supplements and
establishes GMP requirements for dietary supplements. Martek is currently
marketing a line of DHA dietary supplements, Neuromins(TM) and Neuromins(TM)
PL. In addition, it is researching and developing new applications for its DHA
oil. There can be no assurance that the Company will be able to comply with
the requirements of the DSHEA or any regulations that the FDA may promulgate
thereunder with regards to DHA as a dietary supplement.
For pharmaceutical uses of products derived from microalgae, there can be
no assurance that required clinical testing will be completed successfully
within any specified time period, if at all, with respect to the Company's
products. Additionally, there is no assurance that the Company or its
licensees or collaborators will be able to develop the extensive data needed to
establish the safety and efficacy of these products for approval for drug uses,
or that such drug products will not be subject to regulation as biological
products or as controlled substances, which would affect marketing and other
requirements.
EMPLOYEES
As of October 31, 1996, the Company had 92 full-time employees, of whom 11
had Ph.D.'s. Approximately 43 employees are engaged in research and
development and contract related research and development activities, 32 are
engaged in production or production development related activities and 17 are
in administrative, business development, and sales and marketing positions.
The Company considers relations with its employees to be good. None of the
Company's employees is covered by a collective bargaining agreement.
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<PAGE> 16
ITEM 2. PROPERTIES.
The Company leases an aggregate of approximately 40,000 square feet of
laboratory, manufacturing, technical and administrative space in Columbia,
Maryland, 6,000 square feet of which is currently being subleased. The
Company's lease expires in 1998, but the Company has an option to extend the
lease through 2003 at the expiration of the initial lease term.
The Company produces oils rich in DHA and ARA at its fermentation facility
located in Winchester, Kentucky, using its proprietary technology. The
facility is located on eight acres and occupies approximately 30,000 square
feet holding two 140,000 liter and one 90,000 liter production fermentation
vessels and supporting equipment. In addition, the Company recently completed
construction of an oil processing plant at the Winchester facility which is
being readied for production in 1997. The oil processing plant occupies
approximately 6,000 square feet.
ITEM 3. LEGAL PROCEEDINGS.
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
operation.
The Company is not a party to any material legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were voted upon during the fourth quarter of 1996.
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<PAGE> 17
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The information set forth under the caption "Price Range of Common Stock"
on the inside back cover of the Company's Annual Report to Stockholders for the
fiscal year ended October 31, 1996, portions of which are included herein as
Exhibit 13.01, is hereby incorporated by reference into this Report. Martek
has not declared any cash dividends during the two-year period ending October
31, 1996.
ITEM 6. SELECTED FINANCIAL DATA.
The information set forth under the caption "Selected Financial Data" on
page 6 of the Company's Annual Report to Stockholders for the fiscal year ended
October 31, 1996, portions of which are included herein as Exhibit 13.01, is
hereby incorporated by reference into this Report.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
The information set forth under the caption "Management's Discussion and
Analysis of Financial Condition and Results of Operations" on pages 7 through 9
of the Company's Annual Report to Stockholders for the fiscal year ended
October 31, 1996, portions of which are included herein as Exhibit 13.01, is
hereby incorporated by reference into this Report.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The Company's 1996 Financial Statements and Report of Independent Auditors
by Ernst & Young LLP set forth on pages 10 through 16 of the Company's Annual
Report to Stockholders for the fiscal year ended October 31, 1996, portions of
which are included herein as Exhibit 13.01, are hereby incorporated by
reference into this Report.
Supplementary data regarding quarterly results of operations has been
omitted since it is not applicable.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
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<PAGE> 18
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information concerning the Company's directors and with regard to Item
405 of Regulation S-K to be contained under the caption "Election of Directors"
in the Company's 1997 Proxy Statement is hereby incorporated herein by
reference.
The executive officers and key employees of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
------------------------ ----- ------------------------------------
<S> <C> <C>
Henry Linsert, Jr . . . . 56 Chairman and Chief Executive Officer
Richard J. Radmer, Ph.D . 54 President and Chief Scientific
Officer
Thomas C. Fisher . . . . 50 Senior Vice President, Operations
David J. Kyle, Ph.D . . . 43 Senior Vice President, Head of
Research and Development
Steve Dubin . . . . . . . 43 Chief Financial Officer, General
Counsel, Secretary and Treasurer
Paul W. Behrens, Ph.D . . 40 Director of Physiology
Jonathan Miles Brown, Ph.D 41 Director of Drug Design Products
Lawrence A. Horn . . . . 47 Head, Business Development,
Marketing and Sales
- ----------
</TABLE>
Henry Linsert, Jr. joined Martek as Chairman of the Board in 1988 and
became Chief Executive Officer in 1989. From 1987 to 1988 he was primarily
engaged as President of American Technology Investments Corp. ("ATI"), a
consulting company specializing in the development and financing of early stage
companies in the Mid-Atlantic area. He was President and Chief Executive
Officer of Suburban Capital Corporation, a venture capital subsidiary of Sovran
Financial Corporation (now NationsBank), from 1983 to 1987. Prior to 1983, Mr.
Linsert was Vice President of Inverness Capital Corporation, a small business
investment company, and Vice President of First Virginia Bank. He also served
as a Captain in the U.S. Marine Corps and as an artillery officer in Vietnam.
He received an M.A. in economics from George Washington University and a B.A.
from Duke University. Mr. Linsert is a member of the advisory boards of the
Maryland Industrial Partnership Program of the University of Maryland and the
Johns Hopkins University School of Continuing Studies.
Dr. Richard J. Radmer, a founder of Martek, has served since 1985 as a
director, President and Chief Scientific Officer of the Company. Prior to
1985, he worked for 17 years at Martin Marietta Corp. where he headed the
Biosciences Department which performed research to develop new products from
microalgae, among other activities. He has served as an Adjunct Associate
Professor and Associate Member of the Graduate Faculty at the University of
Maryland. Dr. Radmer received a Ph.D. in biology, an M.S. in botany and a B.S.
in biochemistry from the University of Chicago. He completed his Ph.D. studies
while in residence at Harvard University.
Thomas C. Fisher joined Martek in 1991 and was named Senior Vice President
of Operations in 1992 after 18 years with Merck & Co., Inc. ("Merck") and
Dupont-Merck. Mr. Fisher's latest position was Vice President for Technical
Operations at Dupont-Merck, and in that capacity he was responsible for
world-wide pharmaceutical production, quality control and engineering. During
his tenure at Merck, Mr. Fisher was Director of Biological Manufacturing and
held management positions in sterile operations, development and quality
control. Mr. Fisher received an M.S. in genetics from West Virginia University
and a B.S. in biology from Waynesburg College.
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<PAGE> 19
Steve Dubin joined Martek in 1992 as Chief Financial Officer, Secretary and
Treasurer, and from 1988 to the time he joined Martek on a full-time basis, Mr.
Dubin consulted with Martek on financial and accounting matters. In 1993, Mr.
Dubin also assumed the duties of General Counsel of the Company. Prior to
joining Martek, Mr. Dubin was Chief Financial Officer of the J.L. Wickham Co.,
Inc., a machine tool company, from 1987 to 1992. From 1986 to 1991, Mr. Dubin
was active as Vice President of ATI, a consulting company, of which Mr. Dubin
is a co-founder, specializing in the development and financing of early stage
companies in the Mid-Atlantic area. Prior to 1986, he served as Vice President
of Suburban Capital Corporation, a venture capital subsidiary of Sovran
Financial Corporation (now NationsBank), where he participated in the original
financing of the Company. Mr. Dubin also held a variety of financial
management positions with Suburban Bank. Mr. Dubin is a Certified Public
Accountant and an attorney. He received his J.D. from the National Law Center,
George Washington University and his B.S. in accounting from the University of
Maryland.
Dr. David J. Kyle, a founder of Martek, is currently Senior Vice President,
Head of Research and Development. Prior to joining Martek in 1985, Dr. Kyle
was a research scientist in the Biosciences Department at Martin Marietta Corp.
from 1984 to 1985. He has been a post-doctoral fellow at Michigan State
University, a visiting scientist at the Centre d'Etudes Nucleaires of Saclay,
France, and the Institute of Physical and Chemical Research, Tokyo, Japan. Dr.
Kyle received a Ph.D. in physiology and biochemistry from the University of
Alberta, and a B.S. degree in biology from the University of Victoria.
Dr. Paul W. Behrens, a founder of Martek, has served as Director of
Physiology since 1985 and is responsible for the Company's microalgal-screening
activity and microalgal-physiology expertise. Prior to joining Martek, Dr.
Behrens was a research scientist in the Biosciences Department at Martin
Marietta Laboratories from 1983 to 1985. He received a Ph.D. in physiology and
biochemistry and an M.S. in biology from the University of Maryland. He also
received a B.A. in biology from The Johns Hopkins University.
Dr. Jonathan Miles Brown, who is overseeing the development of Martek's
drug design products, joined Martek in September 1991 following a period as a
consultant with British Biotechnology Ltd. Prior thereto, he was Research and
Development Manager for Oxford Virology plc from 1987 to 1990 where his
responsibilities included market research, preparation of all marketing
documents and protection of intellectual property. Dr. Brown received his
Ph.D. from the University of London where he developed the first synthetic
process for the unambiguous synthesis of long chain oligoribonucleotides. He
is a Chartered Chemist and Member of the Royal Society of Chemistry.
Lawrence A. Horn joined Martek in December 1993 as Director of Business
Development, Marketing and Sales. Prior to joining Martek, Mr. Horn was the
co-founder and co-owner of HKM Corporation, a consulting company specializing
in business development and management in the television, radio and
telecommunications industries. From 1978 to 1985 Mr. Horn was employed as
Senior Vice President and General Counsel with the Public Broadcasting Service.
Prior to that Mr. Horn was employed by the U.S. Securities and Exchange
Commission in the Office of the General Counsel. He was also an Adjunct
Professor of Chinese Law at Georgetown University Law Center. Mr. Horn holds a
J.D. from Columbia University and a B.A. in Chinese Studies from Yale
University.
- 18 -
<PAGE> 20
ITEM 11. EXECUTIVE COMPENSATION.
The information required by this item is hereby incorporated by reference
from the information to be contained under the caption "Compensation" in the
Company's 1997 Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by this item is hereby incorporated by reference
from the information to be contained under the caption "Beneficial Ownership of
Common Stock" in the Company's 1997 Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
None.
- 19 -
<PAGE> 21
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a)(1) Financial Statements
The following Financial Statements of the Company and Report of Independent
Accountants set forth on the pages indicated in the Company's Annual Report to
Stockholders for the year ended October 31, 1996 are incorporated into this
report and are included in response to Item 8 of this Report:
<TABLE>
<CAPTION>
Page Number
in Annual Report
to Stockholders
---------------
<S> <C>
Balance Sheets as of October 31, 1996 and 1995 10
Statements of Operations for the Years Ended October 31, 1996,
1995 and 1994 11
Statements of Stockholders' Equity (Deficiency) for the 11
Years Ended October 31, 1996, 1995 and 1994
Statements of Cash Flows for the Years Ended October 31, 1996, 12
1995 and 1994
Notes to Financial Statements 13
Report of Independent Auditors 16
</TABLE>
(a)(2) Financial Statement Schedules
Financial statement schedules have been omitted since they are either not
required, not applicable, or the information is otherwise included.
(a)(3) Exhibits
<TABLE>
<S> <C>
3.01 Revised Restated Certificate of Incorporation of Registrant.
3.02 Amendment to the Restated Certificate of Incorporation, effective March 14, 1995 (filed as Exhibit 3.1 to the
Company's Registration Statement on Form S-3, File No. 33-89760, filed March 15, 1995, and incorporated
by reference herein ).
3.03 Certificate of Designation, Preferences and Rights of Series A Junior Participating Preferred Stock (filed as
Exhibit 4 to the Company's Form 8-K, File No. 0-22354, filed January 29, 1996, and incorporated by
reference herein ).
3.04 Amended By-laws of Registrant.
3.05 Amendment to By-Laws, effective March 14, 1995 (filed as Exhibit 3.2 to the Company's Registration Statement on
Form S-3, File No. 33-89760, filed March 15, 1995, and incorporated by reference herein ).
4.01 Specimen Stock Certificate for Common Stock.
4.02 Common Stock and Warrant Purchase Agreements, dated May 19, June 1, June 6, and June 8, 1995, by and among the
Company and the Selling Stockholders (filed as Exhibit 4.2
</TABLE>
- 20 -
<PAGE> 22
<TABLE>
<S> <C>
to the Company's Registration Statement on Form S-3, File No. 33-93580, filed June 16, 1995, and incorporated by
reference herein ).
4.03 Warrant No. 1 issued pursuant to Common Stock and Warrant Purchase Agreements and schedule of Warrants (filed
as Exhibit 4.3 to the Company's Registration Statement on Form S-3, File No. 33-93580, filed June 16,
1995, and incorporated by reference herein).
4.04 Form of Rights Agreement dated as of January 24, 1996 between the Company and Registrar and Transfer Company,
as Rights Agent (filed as Exhibit 4 to the Company's Form 8-K, File No. 0-22354, filed January 29, 1996,
and incorporated by reference herein).
10.01 Form Indemnification Agreement for directors.
10.02 1986 Stock Option Plan, as amended.
10.03 1992 Registration Rights Agreement between the Company and Preferred Stockholders.
10.04 Employment Agreement, dated May 4, 1990, between the Company and Henry Linsert, Jr.
10.05 Employment Agreement, dated May 7, 1990, between the Company and Richard J. Radmer.
10.06 Employment Agreement, dated May 7, 1990, between the Company and David J. Kyle.
10.07 Employment Agreement, dated May 7, 1990, between the Company and Paul W. Behrens.
10.08 Form of Proprietary Information, Inventions and Non-Solicitation Agreement.
10.12 Collaborative Research and License Agreement, dated April 30, 1993, as amended June 11, 1993, between the
Company and the Trustees of Columbia University.
10.13 Lease, commencement date October 15, 1992, between the Company and Aetna Life Insurance Company, as modified on
August 5, 1993.
10.14 License Agreement, dated September 10, 1992, between the Company and [*].
10.14A Exhibits to September 10, 1992 License Agreement.[*]
10.15 License Agreement, dated October 28, 1992, between the Company and [*].
10.15A Exhibits to October 28, 1992 License Agreement.[*]
10.16 License Agreement, dated January 28, 1993 between the Company and [*] (Domestic and International Versions).
10.16A Exhibits to January 28, 1993 License Agreements.[*]
10.17 Management Cash Bonus Incentive Plan, dated June 10, 1993.
10.18 Lease Modification Agreement, dated October 14, 1993 between the Company and Aetna Life Insurance Company.
10.19 Letter of Intent, dated January 13, 1995, between the Company and Golden Technologies Corporation (filed as
Exhibit 10.19 to the Company's 1994 Form 10-K, File No. 0-22354, and incorporated by reference herein).
10.20 Second Lease Modification Agreement, dated September 27, 1994, between the Company and Aetna Life Insurance
Company (filed as Exhibit 10.20 to the Company's 1994 Form 10-K, File No. 0-22354, and incorporated by
reference herein).
10.21 Purchase and Sale Agreement, dated February 16, 1995, between the Company and Zeagan, Inc. (filed as Exhibit
4.3 to the Company's Registration Statement on Form S-3, File No. 33-89760, filed March 15, 1995, and
incorporated by reference herein ).
10.22 Directors' Stock Option Plan (filed as Exhibit 4.1(b) to the Company's Registration Statement on Form S-8, File
No. 33-79222, filed May 23, 1994, and incorporated by reference herein).
10.23 Manufacturing Agreement, dated December 31, 1996, between the Company and Royal Gist-
Brocades B.V.[***]**
13.01 Portions of the Annual Report to Stockholders of the Company for the year ended October 31, 1996.** A complete
Annual Report to Stockholders is furnished solely for the information of the Securities and Exchange
Commission and shall not be deemed a "filed" document.
23.01 Manually signed Consent of Ernst & Young LLP, Independent Auditors.**
</TABLE>
- 21 -
<PAGE> 23
<TABLE>
<S> <C>
24.01 Power of Attorney of the Board of Directors (included on signature page of this Report)
</TABLE>
- --------------------------
* Confidential treatment was granted for certain portions of these
agreements.
** Filed herewith. Unless otherwise noted, all other Exhibits are
incorporated by reference as an exhibit to the Registrant's Registration
Statement on Form S-1 (No. 33-68522).
*** Confidential treatment is being requested for certain portions of
this agreement.
(b) Reports on Form 8-K
None
- 22 -
<PAGE> 24
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Company has duly caused this Report to be signed on its behalf
by the undersigned, thereunto duly authorized on January 29, 1997.
MARTEK BIOSCIENCES CORPORATION
By /s/ Henry Linsert, Jr.
-------------------------------------
Henry Linsert, Jr.
Chief Executive Officer
and Director
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below
constitutes and appoints Henry Linsert, Jr. and Steve Dubin, and each of them
individually, as his true and lawful attorneys-in-fact and agents, with full
power of substitution and resubstitution, for him and his name, place and stead
in any and all capacities, to sign the report and any and all amendments to
this report, and to file the same, with all exhibits thereto, and other
documents in connection therewith, with the Securities and Exchange Commission,
granting unto said attorney's-in-fact and agents, full power and authority to
perform each and every act and thing requisite and necessary to be done in and
about the premises, as fully to all intents and purposes as he might or could
do in person, hereby ratifying and confirming all that said attorneys-in-fact
and agents, or their substitutes, may lawfully do or cause to be done by virtue
thereof.
Pursuant to the requirement of the Securities Exchange Act of 1934, this Report
has been signed by the following persons in the capacities and on the date
indicated.
<TABLE>
<CAPTION>
Signatures Title Date
- ---------- ----- ----
<S> <C> <C>
/s/ Henry Linsert, Jr. Chief Executive Officer and January 29, 1997
- ---------------------------- Director (Principal Executive
Henry Linsert, Jr. Officer)
/s/ Steve Dubin Secretary and Treasurer January 29, 1997
- ---------------------------- (Principal Financial and
Steve Dubin Accounting Officer)
/s/ Jules Blake Director January 29, 1997
- ----------------------------
Jules Blake
/s/ Ann L. Johnson Director January 29, 1997
- ----------------------------
Ann L. Johnson
</TABLE>
- 23 -
<PAGE> 25
<TABLE>
<S> <C> <C>
/s/ Douglas J. MacMaster, Jr. Director January 29, 1997
- -----------------------------
Douglas J. MacMaster, Jr.
/s/ John H. Mahar Director January 29, 1997
- ----------------------------
John H. Mahar
/s/ Sandra Panem Director January 29, 1997
- ----------------------------
Sandra Panem
/s/ Richard J. Radmer President and Director January 29, 1997
- ----------------------------
Richard J. Radmer
/s/ Eugene H. Rotberg Director January 29, 1997
- ----------------------------
Eugene H. Rotberg
/s/ William D. Smart Director January 29, 1997
- ----------------------------
William D. Smart
/s/ Bruce E. Elmblad Director January 29, 1997
- ----------------------------
Bruce E. Elmblad
</TABLE>
- 24 -
<PAGE> 26
EXHIBIT INDEX
<TABLE>
<CAPTION>
Seq.
Exhibit Page
Number Description No.
- ------ ----------- ---
<S> <C>
3.01 Revised Restated Certificate of Incorporation of Registrant.
3.02 Amendment to the Restated Certificate of Incorporation, effective March 14, 1995 (filed
as Exhibit 3.1 to the Company's Registration Statement on Form S-3, File No.
33-89760, filed March 15, 1995, and incorporated by reference herein ).
3.03 Certificate of Designation, Preferences and Rights of Series A Junior Participating
Preferred Stock (filed as Exhibit 4 to the Company's Form 8-K, File No. 0-22354,
filed January 29, 1996, and incorporated by reference herein ).
3.04 Amended By-laws of Registrant.
3.05 Amendment to By-Laws, effective March 14, 1995 (filed as Exhibit 3.2 to the Company's
Registration Statement on Form S-3, File No. 33-89760, filed March 15, 1995, and
incorporated by reference herein ).
4.01 Specimen Stock Certificate for Common Stock.
4.02 Common Stock and Warrant Purchase Agreements, dated May 19, June 1, June 6, and June 8,
1995, by and among the Company and the Selling Stockholders (filed as Exhibit 4.2
to the Company's Registration Statement on Form S-3, File No. 33-93580, filed June
16, 1995, and incorporated by reference herein ).
4.03 Warrant No. 1 issued pursuant to Common Stock and Warrant Purchase Agreements and
schedule of Warrants (filed as Exhibit 4.3 to the Company's Registration Statement
on Form S-3, File No. 33-93580, filed June 16, 1995, and incorporated by reference
herein).
4.04 Form of Rights Agreement dated as of January 24, 1996 between the Company and Registrar
and Transfer Company, as Rights Agent (filed as Exhibit 4 to the Company's Form
8-K, File No. 0-22354, filed January 29, 1996, and incorporated by reference
herein).
10.01 Form Indemnification Agreement for directors.
10.02 1986 Stock Option Plan, as amended.
10.03 1992 Registration Rights Agreement between the Company and Preferred Stockholders.
10.04 Employment Agreement, dated May 4, 1990, between the Company and Henry Linsert, Jr.
10.05 Employment Agreement, dated May 7, 1990, between the Company and Richard J. Radmer.
10.06 Employment Agreement, dated May 7, 1990, between the Company and David J. Kyle.
10.07 Employment Agreement, dated May 7, 1990, between the Company and Paul W. Behrens.
10.08 Form of Proprietary Information, Inventions and Non-Solicitation Agreement.
10.12 Collaborative Research and License Agreement, dated April 30, 1993, as amended June 11,
1993, between the Company and the Trustees of Columbia University.
10.13 Lease, commencement date October 15, 1992, between the Company and Aetna Life Insurance
Company, as modified on August 5, 1993.
10.14 License Agreement, dated September 10, 1992, between the Company and [*].
10.14A Exhibits to September 10, 1992 License Agreement.[*]
10.15 License Agreement, dated October 28, 1992, between the Company and [*].
10.15A Exhibits to October 28, 1992 License Agreement.[*]
10.16 License Agreement, dated January 28, 1993 between the Company and [*] (Domestic and
International Versions).
10.16A Exhibits to January 28, 1993 License Agreements.[*]
10.17 Management Cash Bonus Incentive Plan, dated June 10, 1993.
</TABLE>
- 25 -
<PAGE> 27
<TABLE>
<CAPTION>
Seq.
Exhibit Page
Number Description No.
- ------ ----------- ---
<S> <C>
10.18 Lease Modification Agreement, dated October 14, 1993 between the Company and Aetna Life Insurance Company.
10.19 Letter of Intent, dated January 13, 1995, between the Company and Golden Technologies Corporation (filed as
Exhibit 10.19 to the Company's 1994 Form 10-K, File No. 0-22354, and incorporated by reference herein).
10.20 Second Lease Modification Agreement, dated September 27, 1994, between the Company and Aetna Life Insurance
Company (filed as Exhibit 10.20 to the Company's 1994 Form 10-K, File No. 0-22354, and incorporated by
reference herein).
10.21 Purchase and Sale Agreement, dated February 16, 1995, between the Company and Zeagan, Inc. (filed as Exhibit
4.3 to the Company's Registration Statement on Form S-3, File No. 33-89760, filed March 15, 1995, and
incorporated by reference herein ).
10.22 Directors' Stock Option Plan (filed as Exhibit 4.1(b) to the Company's Registration Statement on Form S-8, File
No. 33-79222, filed May 23, 1994, and incorporated by reference herein).
10.23 Manufacturing Agreement, dated December 31, 1996, between the Company and Royal Gist-
Brocades B.V.[***] **
13.01 Portions of the Annual Report to Stockholders of the Company for the year ended October 31, 1996.** A complete
Annual Report to Stockholders is furnished solely for the information of the Securities and Exchange
Commission and shall not be deemed a "filed" document.
23.01 Manually signed Consent of Ernst & Young LLP, Independent Auditors.**
24.01 Power of Attorney of the Board of Directors (included on signature page of this Report)
</TABLE>
- --------------------------
* Confidential treatment was granted for certain portions of these
agreements.
** Filed herewith. Unless otherwise noted, all other Exhibits are
incorporated by reference as an exhibit to the Registrant's Registration
Statement on Form S-1 (No. 33-68522).
*** Confidential treatment is being requested for certain portions of
this agreement.
(b) Reports on Form 8-K
None
-26-
<PAGE> 1
EXHIBIT 10.23
REDACTED VERSION
* = CONFIDENTIAL PORTIONS OMITTED
MARTEK BIOSCIENCES CORPORATION/
GIST-BROCADES B.V.
ARA PURCHASE AND PRODUCTION AGREEMENT
This ARA Purchase Agreement (the "Agreement") is made and entered into
this 31st day of December, 1996 (the "Effective Date") by and between
Gist-Brocades, B.V., a company organized and existing under the laws of the
Netherlands, having its principal place of business at Wateringseweg 1, 2611 XT
Delft, The Netherlands ("GB"), and Martek Biosciences Corporation, a Delaware
corporation having its principal place of business at 6480 Dobbin Road,
Columbia, Maryland 21045 ("Martek"), who, intending to be legally bound, hereby
agree as follows:
1. INTRODUCTION
1.1. Martek owns technology related to the manufacture and use of
arachidonic acid and has certain issued patents and patents pending throughout
the world, claiming (i) certain processes for the manufacture of arachidonic
acid, (ii) certain compounds and (iii) certain applications; Martek
manufactures and sells arachidonic acid to a number of customers for
application in food (including infant formula) products.
1.2. GB owns technology related to the manufacture and use of
arachidonic acid and has patents pending throughout the world, claiming (i)
certain processes for the manufacture of arachidonic acid, (ii) certain
formulations for that product and (iii) certain compounds.
1.3. GB is currently building new production facilities for the
manufacture of arachidonic acid for sale to its customers; the capacity of
these facilities will exceed GB's own requirements for arachidonic acid for
sale to its customers.
1.4. Martek wishes to have GB manufacture arachidonic acid in
accordance with certain specifications as further specified below in Section 2
and GB is willing to supply arachidonic acid conforming to such specifications
to Martek.
1.5. The parties wish to enter into this Agreement to provide for
certain terms under which GB will produce arachidonic acid ordered by Martek,
and Martek will pay for arachidonic acid it orders from GB.
CONFIDENTIAL - 1 -
<PAGE> 2
2. DEFINITIONS
2.1. "ARA" means arachidonic acid-rich trigliceride oil.
2.2. "Confidential Information" shall mean the information
described in SECTION 10 below.
2.3. "Customer Specifications" shall mean specifications for ARA,
other than the Martek Specifications, which are required by specific customers
of Martek and are agreed upon by the Committee (as defined below in Section
4.1); as agreed upon, each order for ARA placed by Martek which is required to
satisfy Customer Specifications shall identify the applicable specifications by
customer name or other unique designation. Customer Specifications shall
always include at least compliance with current good manufacturing practices
(cGMPs) promulgated by FDA and comparable requirements by other governmental
bodies for food ingredients, even if such requirements are not expressly set
forth in any statement of the Customer Specifications.
2.4. "Finished Oil" shall mean oil containing ARA that has been
degummed, refined, bleached and deodorized and meets either Martek
Specifications or Customer Specifications as specified by Martek in accordance
with Section 7.7.
2.5. "GB Costs" shall mean, for each period for which GB supplies a
budget to Martek in accordance with Section 9.1, those expenses of GB related
to production of ARA which are identified in such budget.
2.6. "Martek Specifications" shall mean specifications agreed upon
by the Committee (as defined below in Section 4.1) and to be attached to this
Agreement as an Exhibit, pursuant to which GB shall be required to produce ARA
for all orders by Martek other than those orders which Martek expressly advises
GB are to be produced to satisfy identified Customer Specifications. The
Martek Specifications shall initially be the specifications for crude oil
containing ARA; the Martek Specifications shall always include at least
compliance with current good manufacturing practices (cGMPs) promulgated by FDA
and comparable requirements by other governmental bodies for food ingredients,
even if such requirements are not expressly set forth in any statement of the
Martek Specifications.
2.7. "FDA" shall mean the U.S. Food and Drug Administration.
2.8. "cGMPs" shall specifically mean those FDA regulations
pertaining to food ingredients appearing in the Code of Federal Regulations,
Title 21, Parts 106 and 110 , including FDA guidelines related thereto and
other FDA interpretations thereof.
CONFIDENTIAL - 2 -
<PAGE> 3
2.9. "ARA Patent" shall mean any patent issued under the laws of
any country which claims any of the inventions described and fully supported in
International Patent Publications WO 92/13086 and/or WO 96/21037, attached
hereto as Exhibit B.
2.10. "Oil Blend Patent" shall mean any patent issued under the laws
of any country which claims any of the inventions described and fully supported
in International Patent Publication WO 92/12711, attached hereto as Exhibit C.
2.11. "Unit of ARA" shall mean either (a) that quantity of Finished
Oil containing ARA determined by an assay procedure to be developed by the
Committee, which contains one (1) kilogram of pure ARA or (b) that quantity of
crude oil containing ARA that, after processing, yields Finished Oil containing
ARA determined by an assay procedure to be developed by the Committee, which
contains one (1) kilogram of pure ARA
3. PATENT MATTERS
3.1. Acknowledgment. GB acknowledges that Martek has applications
for ARA Patents and Oil Blend Patents pending in many countries throughout the
world. A listing of the countries in which ARA Patents and Oil Blend Patents
have issued is set forth in Exhibit D. Martek shall notify GB promptly upon
the issuance of any additional ARA Patents or Oil Blend Patents.
3.2. Limited Patent License and Disclaimer. To the extent
necessitated by transfer of crude oil containing ARA to any facility of Martek
or a contractor of Martek for refining of any quantities of ARA for GB, Martek
hereby grants GB a limited license under any pending application for an ARA
Patent to sell the ARA. The license provided through this Section 3.2 is
limited to manufacture and/or sale of ARA under the manufacturing arrangement
described herein and is limited to activities occurring during the pendency of
an application for an ARA Patent before the European Patent Office. The
license does not extend to use of ARA which infringes a claim in an issued ARA
Patent.
3.3. Infringement Determination. If and when an ARA Patent issues
to Martek in a country where GB makes or sells ARA, the parties hereto shall
determine whether or not GB's manufacture and/or sale of ARA infringes such ARA
Patent. If the parties hereto are unable to reach consensus on the question of
whether or not GB's manufacture and/or sale of ARA infringes such ARA Patent,
the matter shall be referred to Patent Arbitration in accordance with Exhibit E
attached hereto. In any country where GB's manufacture or sale of ARA are
determined in accordance with this paragraph to infringe an ARA Patent, GB
agrees to cease such manufacture or sales except as provided in Section 3.4.
CONFIDENTIAL - 3 -
<PAGE> 4
3.4. Subcontractor Appointment. So long as this Agreement has not
been previously terminated, and GB is not in material default on the
performance of its obligations hereunder, on the earliest date on which it is
determined in accordance with Section 3.3 that GB's manufacture and/or sale of
ARA infringes or would infringe an ARA Patent issued by the European Patent
Office, Martek agrees to license and appoint GB as its subcontractor to
manufacture ARA solely for purchase by Martek. Upon appointment as
subcontractor, GB shall be granted a limited retroactive license to manufacture
and sell ARA under the ARA Patent issued by the European Patent Office for the
period prior to issuance of such ARA Patent, subject to the disclaimer set
forth in Section 3.8 below. Martek further agrees that so long as this
Agreement has not then been terminated and GB is not then in material default
on the performance of its obligations hereunder, it shall appoint GB as its
subcontractor to manufacture ARA, solely for purchase by Martek, in any other
country where an ARA Patent issues and it is determined in accordance with
Section 3.3 that GB's manufacture and/or sale of ARA infringes or would
infringe such ARA Patent. Upon such appointment, GB shall be entitled to
continue production of ARA for purchase by Martek on the terms set forth in
this Agreement.
3.5. Validity. While this Agreement is in effect, the parties
agree that any ARA Patent issued under the laws of any country shall be
presumed valid and enforceable unless and until such ARA Patent is held invalid
or unenforceable by a competent court or other competent tribunal from which no
appeal is permitted. While this Agreement is in effect, GB agrees not to
challenge the validity of any ARA Patent directly or indirectly in any country
where such agreement not to challenge is enforceable.
3.6. Infringement of ARA Patents by Third Parties.
a. GB agrees to promptly notify Martek of any infringement of an
ARA Patent by any third party of which GB is or becomes aware.
b. Martek undertakes to use reasonable efforts to abate any
infringement of an ARA Patent by a third party of which Martek has notice, by
any suitable means, including without limitation legal action against the third
party, settlement agreement or otherwise causing cessation of the infringement
by the third party; provided, however, that so long as GB retains Exclusive
Supplier Rights as described in Section 7.1, Martek shall not, without the
prior consent of GB, abate any infringement of an ARA Patent in the United
States or Europe by granting a license to, or entering into a prospective
non-assert agreement with, the infringing party. Martek shall not be required
by this Agreement to pursue abatement activity directed at more than one third
party at the same time. Abatement activity will be under Martek's sole control
and at Martek's expense. GB agrees to provide assistance when required by the
law of any jurisdiction in which an ARA Patent has issued, including without
limitation joining an infringement
CONFIDENTIAL - 4 -
<PAGE> 5
suit as a party. Any assistance required by law from GB, and any voluntary
assistance provided by GB through agreement of the parties, shall be at GB's
expense.
3.7. DISCLAIMER OF LIABILITY REGARDING OIL BLEND PATENTS. IF AND
TO THE EXTENT THAT AN OIL BLEND PATENT ISSUES IN ANY COUNTRY WHERE GB SELLS ARA
TO CUSTOMERS OTHER THAN MARTEK, MARTEK AGREES THAT SUCH SALE BY GB SHALL BE
FREE OF LIABILITY TO MARTEK, AND THAT MARTEK SHALL NOT SUE GB, FOR INDIRECT OR
CONTRIBUTORY INFRINGEMENT OF SUCH OIL BLEND PATENT, PROVIDED THAT GB SHALL
EXPRESSLY DISCLAIM ANY WARRANTIES TO CUSTOMERS THAT USE OF SUCH ARA IS LICENSED
UNDER OR WILL NOT INFRINGE ANY ARA PATENTS OR OIL BLEND PATENTS.
3.8 PATENT WARRANTY DISCLAIMER. THE PARTIES ACKNOWLEDGE THAT GB
IS NOT GRANTED ANY RIGHTS UNDER ANY PATENTS OR PATENT APPLICATIONS FILED IN THE
NAME OF OR ON BEHALF OF MARTEK EXCEPT THOSE SET FORTH IN SECTIONS 3.2, 3.4 and
3.7. MARTEK EXPRESSLY DISCLAIMS ANY WARRANTY TO GB OR ANY THIRD PARTY THAT ANY
SUBLICENSE BY GB OF ITS LIMITED RIGHT TO MAKE AND SELL ARA AS SET FORTH IN
SECTIONS 3.2 AND 3.4 OR ANY USE OF ARA MANUFACTURED BY GB WILL NOT INFRINGE ANY
PROPRIETARY RIGHTS OF MARTEK OR ANY THIRD PARTY, AND GB AGREES THAT IT SHALL
EXPRESSLY DISCLAIM TO ANY GB CUSTOMER WHICH PURCHASES ARA ANY REPRESENTATION
THAT USE OF SUCH ARA WILL NOT INFRINGE THE ARA PATENTS, OIL BLEND PATENTS OR
ANY OTHER PATENT.
4. STEERING COMMITTEE
4.1. Formation. Not later than fifteen (15) days after the
Effective Date, the parties shall form a steering committee (the "Committee")
which shall consist of four (4) members: two (2) appointed by Martek and two
(2) appointed by GB. Each party shall identify one of the team members it has
appointed as its "Leader." In addition to its two (2) members, each party may
send one (1) non-participating, nonvoting observer to each meeting of the
Committee. If either party decides at any time to replace its designated
Leader or its other Committee member, it may do so by written notice to the
other party's Leader.
4.2. Meetings. The Committee shall meet at such times and places
as it may select but, in any event, it shall meet at least once per calendar
quarter, provided that the first such meeting shall be held as soon as
practicable, but in no event later than thirty (30) days after the Effective
Date of this Agreement. Meetings of the Committee shall be in person or by
conference call as the Committee decides.
CONFIDENTIAL - 5 -
<PAGE> 6
4.3. Status Reports. The Leaders shall report to each other
monthly, or as otherwise mutually agreed upon, regarding the status of the
parties' respective obligations under this Agreement, any anticipated problems
(resolved or unresolved), and any indication of delay in fixed or tentative
schedules.
4.4. Agenda. The Committee shall be responsible for overseeing the
collaboration under this Agreement, for monitoring the parties' adherence to
the terms hereof and for agreeing on or determining any matters that are to be
agreed on or determined by the Committee pursuant to this Agreement. In
particular, the Committee shall, in good faith, mutually resolve, among other
things, the following: (a) determining a program to reach agreement on the
Martek Specifications; (b) determining the methods of analysis and the format
for certification of analysis referred to in Section 7.10 below, and following
the dispute settlement procedure referred to in Section 5.2 below; (c)
determining the procedure to agree on Customer Specifications and on the terms
under which GB shall supply Martek and/or Martek's customers with ARA meeting
Customer Specifications; (d) determining the schedule at which GB shall adjust
its manufacturing processes to manufacture ARA in accordance with the Martek
Specifications and Customer Specifications; (e) determining a schedule for
verification by Martek that GB is able to produce ARA which satisfies the
Martek Specifications and the Customer Specifications; (f) determining the
schedule at which GB shall adjust its manufacturing processes to accommodate
changes, which have been agreed upon by the Committee, in the Martek
Specifications or Customer Specifications and any applicable changes to GB
Costs which may result therefrom; (g) selecting the facilities of GB, GB
subcontractors, Martek and/or Martek subcontractors at which various steps in
the ARA manufacturing process will be completed with the goal of achieving the
lowest possible production costs for ARA taking into account all quality
requirements that have to be met; (h) determining the appropriate means for
packaging and shipping ARA ordered by Martek; and (i) periodically reviewing
GB's production processes for ARA with the goal of improving quality and
reducing production costs.
4.5. Improvements. Proposed improvements to the manufacturing
process for ARA shall be submitted to the Committee by the party proposing the
improvement. The Committee may agree that the parties jointly or individually
perform development work aimed at improvement of the manufacturing process for
ARA or may elect not to implement the improvement. If the Committee agrees
that the parties shall develop the work jointly, the parties shall share
equally the research and development costs related to the work at issue, and
the Committee shall agree on development protocols, describing the work to be
carried out by each of the parties in this respect. The proprietary rights in
any improvement to the manufacturing process for ARA which is developed by the
parties jointly and for which they have shared the related research and
development costs shall
CONFIDENTIAL - 6 -
<PAGE> 7
be jointly owned by them and shall be considered jointly owned Confidential
Information. GB Costs shall be reduced to the full extent that GB's actual
cost of production is reduced by any improvement owned solely by Martek, but
shall not be reduced if GB's actual cost of production is reduced by any
improvement owned solely by GB, except as expressly set forth below. Except as
expressly set forth below, in the event that GB's actual cost of production is
reduced by a jointly owned improvement, GB Costs shall be reduced by fifty
percent (50%) of the reduction in GB's actual cost of production. At six (6)
month intervals following the first use of any improvement to the manufacturing
process, regardless of the identity of the owner(s), the parties shall
calculate, for the preceding six (6) months (the "Review Period"), sales of ARA
by GB to Martek as a percentage of aggregate sales of ARA by GB. If during any
Review Period, sales of ARA by GB to Martek represent fifty percent (50%) or
less of aggregate sales of ARA by GB, Martek shall be entitled to a credit
against future purchases of ARA from GB in an amount equal to fifty percent
(50%) of the reduction, due to all the implemented improvements to the
manufacturing process for ARA during the Review Period, in GB's actual cost of
production for the quantities of ARA purchased by Martek during the Review
Period. If during any Review Period, sales of ARA by GB to Martek represent
more than fifty percent (50%) but less than one hundred percent (100%) of
aggregate sales of ARA by GB, Martek shall be entitled to a credit against
future purchases of ARA from GB in an amount equal to a percentage of the
reduction, due to all improvements to the manufacturing process for ARA during
the Review Period, in GB's actual cost of production for the quantities of ARA
purchased by Martek during the Review Period which is equal to the difference
between (a) one hundred percent (100%) and (b) the percentage of aggregate
sales of ARA by GB to Martek. The proprietary rights in any improvement to the
manufacturing process for ARA that is actually implemented in that process and
has been (i) incidentally discovered or developed, or (ii) developed by either
party, or by the parties jointly, without prior submission of a development
proposal to the Committee in accordance herewith shall be jointly owned by the
parties, and shall be considered jointly owned Confidential Information.
5. VERIFICATION OF ARA PRODUCTION QUALITY
5.1. Specifications for ARA. The parties acknowledge that Martek
wishes to have the ability to order ARA from GB that satisfies Martek
Specifications or, as necessary, Customer Specifications. Martek will use all
reasonable efforts to encourage its customers to accept the Martek
Specifications as the base specification for the ARA they purchase.
5.2. Verification of Production. Once the Martek Specifications
and/or the Customer Specifications for any customer have been agreed upon by
the Committee, GB shall deliver to Martek a quantity of ARA prepared to satisfy
the Martek Specifications and quantities of ARA prepared to satisfy the
Customer Specifications for each Martek customer. Such delivery shall
CONFIDENTIAL - 7 -
<PAGE> 8
be made in accordance with a schedule and in quantities and on terms determined
by the Committee, which quantities shall be sufficient in all cases to enable
Martek to verify that the quantities of ARA provided satisfy the applicable
specifications. Martek shall thereupon subject the delivered quantities of ARA
to the testing and analysis procedures agreed upon by the Committee to verify
that the individual quantities satisfy the applicable specifications. If any
quantity of ARA fails to satisfy the applicable specifications, Martek shall so
notify GB. Any dispute between the parties regarding the quality of any ARA
thus supplied shall be resolved in accordance with the procedure set forth in
Exhibit F. In case it is resolved that any quantity of ARA thus supplied by GB
fails to satisfy the applicable specifications, GB shall adjust its
manufacturing process or take other appropriate action and provide a
replacement quantity of ARA for testing and analysis by Martek. The process
shall continue until Martek determines that all quantities of ARA provided by
GB satisfy the applicable specifications.
5.3. Specification Changes. The parties acknowledge and agree that
the Martek Specifications and the Customer Specifications may be subject to
change at any time and from time to time. Martek shall bring any required
changes to the Martek Specifications or the Customer Specifications for any
Martek customer to the attention of the Committee as soon as reasonably
practicable. Upon agreement by the Committee to accept any such required
changes, the Committee shall then determine the terms, including GB Costs and
delivery dates applicable to ARA which will meet the proposed specification
changes. GB agrees to use its best efforts to accommodate any requested
changes at reasonable costs. Upon agreement by the Committee on such terms GB
shall implement the necessary adjustments in accordance therewith, and the
parties shall follow the procedure set forth in SECTION 5.2 for verifying that
quantities of ARA produced by GB satisfy the changed specifications.
6. WARRANTY
6.1. Compliance. GB represents and warrants that it shall obtain
and maintain, and shall ensure that its subcontractors obtain and maintain all
licenses, permits, approvals, clearances and notifications which may be
required in connection with the manufacture and packaging of ARA for Martek and
that the performance of all GB obligations under this Agreement by GB and its
subcontractors shall comply with all applicable laws, rules and regulations of
any government having jurisdiction over such performance, including without
limitation regulations and other requirements regarding cGMPs. GB further
represents and warrants that all quantities of ARA that it supplies to Martek
hereunder shall be manufactured in conformity with, and shall fully satisfy,
the Martek Specifications or the applicable Customer Specifications as
identified to GB in Martek's order.
CONFIDENTIAL - 8 -
<PAGE> 9
6.2. Disclaimer. THE LIMITED WARRANTY SET FORTH HEREIN IS
EXCLUSIVE AND IN LIEU OF, AND GB HEREBY DISCLAIMS, ALL OTHER WARRANTIES
REGARDING THE ARA PRODUCED FOR MARTEK HEREUNDER, EXPRESS AND IMPLIED, INCLUDING
WITHOUT LIMITATION ANY IMPLIED WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A
PARTICULAR PURPOSE.
6.3. Notification and Replacement. If any shipment of ARA supplied
by GB to Martek or, on behalf of Martek, to any Martek customer does not
conform to the applicable specifications, Martek shall promptly give GB written
notice of the nonconformity. Likewise, if GB discovers or has reason to
believe that any shipment of ARA fails to conform to the applicable
specifications, GB shall promptly notify Martek. Any dispute between the
parties regarding the conformity of any shipment of ARA to the applicable
specifications shall be resolved in accordance with the procedure set forth in
Exhibit F. In case it is resolved that any shipment of ARA fails to satisfy
the applicable specifications, GB shall promptly replace the nonconforming
shipment, without charge, with a substitute shipment that satisfies the
applicable specifications. Any nonconforming shipment of ARA shall be returned
to GB at GB's request and expense. In the event that GB is unable to produce a
replacement shipment of ARA that satisfies the applicable specifications within
a reasonable time after receipt of the notice of nonconformity, Martek shall
have no obligation to pay GB for the nonconforming shipment, and if payment has
already been made, Martek shall be entitled to an immediate refund of the price
of the nonconforming shipment.
7. PLANNING, PRODUCTION AND ORDERING TERMS
7.1. Exclusive Supplier Rights. Except as otherwise expressly
provided in Section 7.3, beginning on the later of (a) July 1, 1997 or (b) the
date on which the Committee agrees on the Martek Specifications, and for the
remaining term of this Agreement, GB shall have "Exclusive Supplier Rights."
For so long as GB's Exclusive Supplier Rights remain in effect, Martek agrees
that it shall not order ARA from any other third-party supplier and shall not
itself produce, in any calendar year a quantity of ARA greater than the "Martek
Allocation." For purposes of this Section 7.1, the term "Martek Allocation"
shall mean the lesser of (a) twenty-five percent (25%) of Martek's total sales
of ARA during such year or (b) eight thousand (8,000) Units of ARA; provided,
however, that the Martek Allocation shall in no event be less than two thousand
(2,000) Units of ARA per year The Martek Allocation shall be used as much as
possible to satisfy Customer requirements referred to below in Section 7.2.
7.2. Exceptions to Exclusivity. Until such time as GB shall have
obtained the kosher certification referred to in Section 7.6, Martek shall be
entitled to produce all quantities of ARA that require a kosher certification
CONFIDENTIAL - 9 -
<PAGE> 10
by the Orthodox Union at any Martek facility. In addition, in the event that
any Martek customer requires more than a single supplier of ARA as a condition
for placing one or more orders with Martek, the Martek Allocation referred to
in Section 7.1 above shall be increased if necessary to enable Martek to fill
orders for ARA for which any customer expressly requires an alternative
supplier. In the event such customer is not satisfied with a combination of
Martek and GB as suppliers, Martek shall be free to contract with third parties
to fill any such orders.
GB and Martek acknowledge that in the countries of China and
India, local companies might become interested in purchasing ARA for their
domestic markets (the "China and India Markets"). If such interest
materializes, GB and Martek shall negotiate in good faith a way for both
parties to participate in the China and India Markets in a way that both
parties will equally share in the benefit of selling into the China and India
Markets without Martek jeopardizing its ARA Patent rights and rights in
potential ARA Patents. If the parties fail to reach an agreement on this
matter within two years of the Effective Date, Martek shall be entitled to
produce ARA for the China and India Markets. If Martek produces ARA for the
China and India Markets itself, the sales price of ARA charged by GB for
sale(s) into the China and India Markets shall not be taken into account for
the purpose of setting the maximum ARA sales price pursuant to Section 8.2(b)
herein.
7.3. Termination of Rights. GB's Exclusive Supplier Rights shall
automatically terminate in the event that GB fails to fill any order for ARA
placed by Martek (a) in compliance with the provisions of applicable delivery
instructions submitted by Martek in accordance with this Section 7, (b) with a
shipment that satisfies the specifications identified in the applicable
delivery instructions, and (c) at a price that is not more than ten percent
(10%) higher than the price offered to Martek by any other prospective supplier
of good standing, as reasonably determined by Martek, for similar quantities
and quality. Notwithstanding the foregoing, failure by a shipment to satisfy
the specifications or instructions in the applicable delivery instructions
shall not be grounds for automatic termination of GB's Exclusive Supplier
Rights so long as GB fully complies with Section 6.3 in connection with such
shipment, and no such failure recurs in connection with (A) the next
consecutive order for the same Martek customer (whether ordered for delivery to
Martek or directly to the customer) or (B) more than three (3) orders placed by
Martek (whether ordered for delivery to Martek or directly to the customer)
during any twelve consecutive month period; provided, however, that the Martek
Allocation referenced in Section 7.1 shall be increased by the amount necessary
to enable Martek to fill any order for which a GB shipment has failed to
satisfy the specifications. In the event that GB's Exclusive Supplier Status
is automatically terminated for any reason, Martek shall have the option to
terminate this Agreement in accordance with Section 13.2.
CONFIDENTIAL - 10 -
<PAGE> 11
7.4. Purchase Estimates and Orders. To assist GB in organizing an
adequate supply of ARA to fill Martek's orders, Martek shall submit to GB, on
the first working day of each month, a written firm purchase order setting out
the quantities of ARA Martek will purchase during the month (the "Month")
following the first mentioned month as well the minimum quantities of ARA
Martek will purchase during the two months following the Month.
Simultaneously, Martek will submit to GB a tentative forecast of the quantities
of ARA that Martek expects to order during the three (3) calendar quarters
following the three (3) months referred to above. Except for the quantities of
ARA set out in the firm purchase order for the Month as referred to above,
Martek may order, and GB agrees to timely deliver, quantities of ARA up to one
hundred ten percent (110%) of the minimum quantities set out in the firm
purchase orders for each of the two months following the Month. In the event
the actual quantities of ARA ordered by Martek during the following two months
exceed said one hundred ten percent (110%), GB shall endeavor to manufacture
and supply such additional quantities to Martek and, in doing so, shall use all
inventory and manufacturing capacity which GB is not contractually obligated to
use for the purpose of filling orders for any third party, but shall not be
under any obligation to do so within such two (2) month period. In addition to
any other remedies provided herein, the Martek Allocation as defined in Section
7.1 shall be increased by any quantities of ARA not timely delivered by GB
pursuant to Sections 7.4 and 7.7 herein.
7.5. Maximum GB Capacity. Notwithstanding anything to the contrary
set forth in Section 7.4, if Martek's orders for ARA in any twelve (12) month
period exceed one hundred thousand (100,000) Units of ARA, Martek acknowledges
that GB will have to build additional processing capacity and that Martek's
first orders aggregating in excess of one hundred thousand (100,000) Units of
ARA in any twelve (12) month period (the "First Over Capacity Orders") may be
delayed for up to eighteen (18) months pending the building of additional
capacity by GB. During the period that GB is building such additional capacity
(the "Build-Out Period"), to the extent that GB cannot fill Martek's orders for
ARA, (a) the Martek Allocation referred to in Section 7.1 above shall be
increased as necessary to enable Martek to fill orders for ARA from customers
and/or (b) Martek shall be free to contract with third parties for the
production of ARA, in which case Martek shall transfer (and GB shall provide
Martek any required assistance) to such third party(ies) any technical
information necessary for the production of ARA. Martek agrees that contracts
with any third parties for production of ARA during the Build-Out Period shall
be structured so as not to preclude GB from re-establishing its exclusivity,
based upon the terms of this Agreement, at the end of the Build-Out Period.
7.6. Kosher Certification. GB shall obtain, as soon as
practicable, and shall thereafter maintain and at all times adhere to the
requirements for kosher certification by the Orthodox Union for all facilities
of GB and any GB
CONFIDENTIAL - 11 -
<PAGE> 12
subcontractors that are used to manufacture, produce and/or package any
component(s) of ARA.
7.7. Delivery Instructions. Martek shall submit delivery
instructions to GB for quantities of ARA subject to firm orders placed in
accordance with Section 7.4 above at GB's address written above. Such delivery
instructions, as so placed, shall identify (a) the quantity of ARA required,
(b) specifications which the ARA shall be required to satisfy, (c) the required
delivery date, (d) the address to which the shipment shall be delivered, and
(e) any other applicable shipping instructions. GB shall confirm orders within
five (5) business days after receipt.
7.8. Shipment. During a Month, GB shall deliver quantities of ARA
covered by the firm order for the Month on the later of (a) the last business
day of the month or (b) ten (10) days after receipt of delivery instructions
from Martek. All orders shall be shipped F.O.B. GB's facility. For purposes
hereof, each order shall be deemed to have been "delivered, and risk of loss
with respect to each shipment shall pass from GB to Martek, upon delivery of
the shipment by GB to a carrier agreed upon by the Committee for transport to
the location specified in the Martek order. GB shall retain title to all
shipments of ARA until payment is received, whereupon title shall pass to
Martek or the Martek customer, as applicable.
7.9. Order Fulfillment. Issues relevant to order fulfillment,
including but not limited to the location(s) at which various stages in the
production process for ARA shall occur and methods for packaging and shipment
of ARA, shall be determined by the Committee. Notwithstanding the foregoing,
Martek shall be entitled to know the identity of each facility and
subcontractor which GB may use for production of ARA for Martek, and all
shipments of ARA in fulfillment of Martek's orders shall bear no brand name
other than Martek brand names unless otherwise directed by Martek.
7.10. Certification of Analysis. Promptly on the date of each GB
shipment of ARA ordered by Martek, whether for delivery to Martek or a Martek
customer, GB shall furnish Martek with a certificate of analysis in the form
determined by the Committee and signed by GB's relevant QA/QC officer, which
certifies the actual content of those components of the ARA which are
identified in the Martek Specifications or Customer Specifications, as
applicable.
7.11. Refinement and Extraction. The parties shall enter into a
separate agreement, the "Toll Manufacture Agreement," on terms substantially
similar to those set forth herein, pursuant to which Martek shall refine ARA
from crude oil containing ARA for GB or extract ARA from biomass and refine the
crude oil for GB. The members of the Committee shall comprise the steering
committee referenced in the Toll Manufacture Agreement. Martek hereby grants
an option to GB to purchase Martek's
CONFIDENTIAL - 12 -
<PAGE> 13
blueprints for facilities for the refinement and/or extraction of ARA, in
return for fair and reasonable consideration to be agreed upon by the parties
and amortized monthly over a period of five years as of the sale and delivery
of the blueprints. The foregoing option may be exercised only if the Committee
determines that GB should refine ARA in one or more facilities in Europe, and
the consideration shall be payable only upon termination of this ARA Purchase
Agreement in the unamortized amount remaining at such time.
8. PAYMENTS
8.1. By GB. In consideration of Martek's undertaking to appoint GB
as Martek's subcontractor for the manufacture of ARA as set forth herein, GB
shall pay to Martek the following amounts on the dates provided:
(a) [ * ] shall be paid by GB to Martek upon
the date of execution of this Agreement;
(b) [ * ] shall be paid by GB to Martek
within thirty (30) days after the date of issuance by the European
Patent Office of the first ARA Patent that would be infringed by
continued manufacture, use or sale of ARA by GB; and
(c) [ * ] shall be paid within thirty (30)
days after the date of issuance in the United States of the first ARA
Patent that would be infringed by continued manufacture, use or sale
of ARA by GB.
A payment made by GB pursuant to this Section 8.1 shall be
reimbursable by Martek to GB to the extent of the Reimbursement Percentage set
forth on the next page, only if Martek terminates this Agreement other than (i)
for cause in accordance with Section 13.2 or in accordance with Section
13.3(b), or (ii) by reason of bankruptcy in accordance with its rights as a
bankrupt party under the bankruptcy laws of the United States.
CONFIDENTIAL - 13 -
<PAGE> 14
<TABLE>
<CAPTION>
REIMBURSEMENT
TIME OF TERMINATION BY MARTEK PERCENTAGE
----------------------------- ----------
<S> <C>
During the first year after the due date for the 90%
applicable payment
During the second year after the due date for the 70%
applicable payment
During the third year after the due date for the 50%
applicable payment
During the fourth year after the due date for the 30%
applicable payment
During the fifth year after the due date for the 10%
applicable payment
After the fifth year after the due date for the 0%
applicable payment
</TABLE>
8.2. By Martek. For each shipment of ARA ordered by Martek and
shipped to the address specified in Martek's delivery instructions which
satisfies the specifications identified in Martek's delivery instructions,
Martek shall pay to GB the GB Costs per Unit of ARA for filling such order plus
an additional [ * ] of such GB Costs per Unit of ARA; provided,
however, that in no event shall the total amount paid by Martek for any
shipment of ARA which satisfies the Martek Specifications exceed the lowest of:
(a) for the first [ * ] Units of ARA per [ * ]
month period beginning July 1, 1997, [*] per Unit of ARA; and for all
additional Units of ARA during such period, [ * ]
per Unit of ARA (exclusive in each case of transportation costs and
customs duties), or
(b) for the first [ * ] Units of ARA delivered by GB in
fulfillment of orders by Martek under this Agreement, [* ], and for
any additional Units of ARA delivered by GB in fulfillment of orders
by Martek under this Agreement, a price that is [
*
]; or
CONFIDENTIAL - 14 -
<PAGE> 15
(c) a price per Unit of ARA based on GB Costs that are not more than ten
percent (10%) higher than Martek's cost of production per Unit of ARA,
calculated in a manner identical to the calculation of GB Costs, for
ARA of equivalent quantity and quality.
GB shall invoice Martek for each order no earlier than the date on which such
order is shipped, and Martek shall remit all payments due to GB within
forty-five (45) days following receipt of GB's invoice.
8.3. ARA Price Adjustments. For each shipment of crude oil
containing ARA which Martek is responsible for converting to Finished Oil,
Martek shall determine the quantity of ARA in the Finished Oil in accordance
with the method agreed upon by the Committee as a percentage of the quantity of
ARA in the crude oil (the "Recovery Rate"). GB shall be able to verify the
Recovery Rate as determined by Martek. If the Recovery Rate for any shipment
is less than ninety-five percent (95%), the price paid by Martek to GB per Unit
of ARA shall be increased by One U.S. Dollar (US $1.00) for every one percent
(1%) that the Recovery Rate is less than ninety-five percent (95%). If the
Recovery Rate is less than ninety percent (90%) for more than six thousand
(6,000) Units of ARA recovered by Martek from crude oil shipped by GB during
the twelve (12) month period immediately following Martek's receipt of the
first shipment from GB of crude oil containing ARA or during any subsequent
twelve (12) month period, the price paid by Martek to GB for such crude oil
shall be increased by an additional Two U.S. Dollars (US $2.00) per Unit of ARA
for every one percent (1%) that the Recovery Rate is less than ninety percent
(90%) during such period. If, during the twelve (12) month period immediately
following Martek's receipt from GB of the first shipment of crude oil
containing ARA the Recovery Rate is less than eighty-five percent (85%), GB's
obligation to deliver crude oil to Martek and GB's Exclusive Supplier Rights
shall be suspended, and the parties shall use commercially reasonable efforts
to increase the Recovery Rate, negotiate a change in the prices set forth in
Section 8.2(a) or reach another mutually agreeable procedure for recovery of
ARA from crude oil. GB's obligation to deliver crude oil to Martek and GB's
Exclusive Supplier Rights shall immediately resume upon achievement of a
mutually satisfactory increase in the Recovery Rate, change in the prices set
forth in Section 8.2(a) or other procedure for recovery of ARA from crude oil
within twelve (12) months after Martek first calculated a Recovery Rate of less
than eighty-five percent (85%). If by the end of such twelve (12) month period,
the parties have not achieved a mutually satisfactory increase in the Recovery
Rate, change in the ceiling prices set forth in Section 8.2(a) or other
procedure for recovery of ARA from crude oil, then either party may terminate
this Agreement.
8.4. Ceiling Price Adjustments. The maximum prices per kilogram of
crude oil containing ARA set forth in Section 8.2(a) are subject to increase on
each anniversary (the "Adjustment Date") of the effective date of this
Agreement in accordance with this Section 8.3. On each Adjustment Date, GB
Costs shall be adjusted to reflect (a) any increase in the actual cost of raw
CONFIDENTIAL - 15 -
<PAGE> 16
materials required to produce ARA and (b) a percentage of that portion of the
then-applicable maximum prices attributable to items other than raw materials
which is equal to the percentage increase, if any, in the Consumer Price Index
for the month which is two (2) months prior to the Adjustment Date over the
Consumer Price Index for the corresponding month in the preceding year. For
purposes of this Section 8.3, the term Consumer Price Index shall mean the
"Index Number" for "All Items" for as published in the Revised Consumer Price
Index--Cities (36 mo. avg. 1982-84 = 100) by the Bureau of Labor Statistics of
the U.S. Department of Labor. If the Consumer Price Index for the month two
months prior to the Adjustment Date shall not have the same base period (that
is, the period for which the index is 100) as the index for 1982-84, then
either or both of such indexes shall be adjusted through the use of conversion
factors provided by the Bureau of Labor Statistics so as to be comparable to
each other for the purposes hereof, it being the intention of the parties that
the ceiling prices per kilogram of crude oil containing ARA shall be adjusted
upward to reflect the decreased purchasing power of the United States dollar,
if any, when compared to the purchasing power of the US dollar in 1982-84.
8.5. [
*
]
8.6. Currency. All payments hereunder shall be in made in United
States dollars.
9. REPORTING, RECORD KEEPING AND AUDIT
9.1. Within thirty (30) days after the effective date of this
Agreement and thereafter on January 1 of each year during the remaining term of
this Agreement, GB shall provide Martek with a budget for GB's costs of
production for ARA, determined in good faith in accordance with Exhibit A, for
the twelve (12) month period immediately following the date on which such
budget is to be provided. On September 30 and March 31 of each year during the
term of this Agreement, GB shall deliver to Martek a statement of GB's actual
costs of production of ARA for the periods ending the preceding June 30 and
December 31, respectively. Any difference between budgeted costs and actual
costs for any applicable six (6) month period will be reconciled (by a cash
refund to Martek if budgeted costs exceed actual costs, or by an invoice to
Martek for the additional amount payable if actual costs
CONFIDENTIAL - 16 -
<PAGE> 17
exceed budgeted costs) upon submission of the applicable statement of actual
costs.
9.2. GB shall maintain complete and accurate records of all GB
Costs and of ARA transactions with other customers. Martek shall have the
right, upon reasonable prior written notice, through an independent public
accounting firm reasonably acceptable to GB, to examine GB's books, records and
accounts relating to GB's performance under this Agreement and for the purposes
of verifying the accuracy of GB's statements of actual costs for the production
of ARA. All information regarding GB's business received in any such
examination shall be held in confidence. The expenses of such audits shall be
borne by Martek, and any overpayment by Martek of the amounts GB was entitled
to receive for fulfillment of orders for ARA which is established as a result
of such audit shall be promptly refunded to Martek with interest at the prime
rate per annum, as published bi-weekly in the Wall Street Journal, calculated
from the date(s) of the overpayment until the date of refund in accordance
herewith. If any such audit establishes an aggregate overpayment by Martek
during the period covered by the audit by five percent (5%) or more of the
amounts to which GB was entitled, then Martek shall be reimbursed by GB for the
expenses of the audit.
10. CONFIDENTIAL INFORMATION
The parties acknowledge and agree that each party will be disclosing
confidential information to the other party, including but not limited to, the
Martek Specifications, Customer Specifications, know-how, business strategy,
ideas, concepts and financial information (the "Confidential Information").
Each party agrees that it shall hold the Confidential Information of the other
party in strict confidence, shall not disclose it to others or use it in any
way, commercially or otherwise, except for purposes of performing its
obligations under this Agreement. Each party further agrees to take all action
necessary to protect the confidentiality of the other party's Confidential
Information including, without limitation, (a) implementing and enforcing
operating procedures to minimize the possibility of unauthorized use or copying
of the other party's Confidential Information, and (b) obligating each of its
subcontractors, by written agreement, to protect the other party's Confidential
Information. Notwithstanding this SECTION 10, the term "Confidential
Information" shall not include any information which (i) is or becomes part of
the public domain through no fault of the receiving party, (ii) is obtained by
the receiving party from any third party which is under no obligation to the
disclosing party to protect the confidentiality thereof, or (c) can be
established by the receiving party with reasonable documentary evidence to have
been independently developed by the receiving party without reliance on the
other party's Confidential Information. The parties hereby acknowledge that
Martek and GB, as corporations whose stock
CONFIDENTIAL - 17 -
<PAGE> 18
is publicly traded, may be required by applicable laws to disclose the terms of
this Agreement.
11. LIMITATION OF LIABILITY
EXCEPT FOR THE LIABILITY OF GB UNDER SECTION 12, IN NO EVENT SHALL
EITHER PARTY BE LIABLE TO THE OTHER PARTY FOR LOSS OF PROFITS OR INDIRECT,
SPECIAL, INCIDENTAL OR CONSEQUENTIAL DAMAGES INCURRED BY THE OTHER PARTY AND
ARISING OUT OF OR IN CONNECTION WITH THIS AGREEMENT FOR ANY CAUSE OF ACTION OF
ANY KIND EVEN IF THE OTHER PARTY HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH
DAMAGES.
12. INDEMNIFICATION
GB shall indemnify and hold Martek harmless from and against any and
all liability, damages, loss or expense (including reasonable fees of attorneys
and other professionals) arising from any claim, demand, action or proceeding
initiated by any third party based upon failure by any shipment of ARA to
satisfy the warranty provisions of SECTION 6.1, including without limitation
any claim that any shipment of ARA contained any contaminant or other substance
not included in the applicable specifications.
13. TERM AND TERMINATION
13.1 Term. The term of this Agreement shall commence upon the
effective date hereof and shall remain in effect for ten (10) years from the
Effective Date unless otherwise terminated in accordance with this Section.
This Agreement may be renewed upon mutual consent of the parties; provided
however, that renewal on the same terms, if the parties so consent, shall not
be conditioned upon payment by GB of additional consideration for appointment
as a subcontractor.
13.2 Termination for Cause. This Agreement may be terminated by
either party in the event that the other party has not performed any material
obligation or has otherwise breached any material term of this Agreement or any
other contract or agreement between the parties (a) immediately upon receipt of
written notice thereof if the breach or nonperformance is incapable of cure, or
(b) upon the expiration of thirty (30) days (or any longer cure period
authorized by the nonbreaching party with respect to any individual breach)
after receipt of written notice thereof if the breach or nonperformance is
capable of cure and has not then been cured.
13.3. Termination by Martek. Martek may terminate this Agreement
without prejudice to any other rights or claims it may have in the event of (a)
final determination that both Martek's pending ARA Patent and pending or issued
(as applicable) Oil Blend Patent will not issue or are abandoned,
CONFIDENTIAL - 18 -
<PAGE> 19
withdrawn or otherwise lapse in either the United States or in the countries of
the European Union and the number of Units of ARA sold by Martek is less than
fifty percent (50%) of the total number of combined Units of ARA sold by both
Martek and GB in the United States and the countries of the European Union, in
the aggregate, or (b) GB challenges the validity of, or otherwise opposes any
ARA Patent, pending ARA Patent, Oil Blend Patent or pending Oil Blend Patent
anywhere in the world.
13.4. Termination by GB. GB shall have the right to terminate this
agreement, without liability or obligation to GB in connection with such
termination, (i) in the event that Martek initiates any claim, action or
proceeding against GB based upon an allegation that GB has infringed any ARA
Patent or Oil Blend Patent, or (ii) if and when Martek fails to comply with its
obligations under Section 3.6 above. Nothing herein shall be construed to
release GB from any liability that it may have to Martek in connection with any
alleged infringement.
13.5. Effect of Termination. Upon any termination of this
Agreement, there shall be no further obligation by Martek to purchase ARA from
GB and no further limitation on the suppliers from which Martek may purchase
ARA. In the event that either party terminates this Agreement in accordance
with Section 13.2 by reason of a material default by the other party or in the
event that Martek terminates this Agreement in accordance with Section 13.3(b),
the terminating party shall have an unrestricted royalty-free right and license
to use and sublicense the use of any information and technology related to the
manufacture and production of ARA owned or used by such other party that the
terminating party has become aware of during the term hereof. Notwithstanding
the foregoing, Martek shall have no right or license to use GB-owned
information or technology related to the production of ARA as a result of
termination of this Agreement in accordance with Section 13.2 by reason of a
failure by GB to fill an order placed by Martek for ARA at a price that is not
more than ten percent (10%) higher than the price offered to Martek by another
supplier.
14. TRADEMARKS
14.1. Use. During the term of this Agreement, GB shall use Martek's
brand names and the Martek trade name, solely on Martek's behalf and for
Martek's benefit, on all shipments of ARA by GB, in response to orders and
delivery instructions by Martek, to Martek or any Martek customer, and GB shall
not attach any additional brand names, trademarks, trade names, logos or
designations to any such shipment. GB's use of Martek's brand names and the
Martek trade name shall be in accordance with Martek's policies in effect from
time to time, as communicated by Martek to GB. GB shall not be authorized to
use, and is expressly prohibited from using, any Martek brand name or the
Martek trade name on any shipment of ARA other than a
CONFIDENTIAL - 19 -
<PAGE> 20
shipment subject to an order and delivery instructions submitted to GB by
Martek.
14.2. Ownership. GB has paid no consideration for the use of any
Martek brand name or the Martek trade name, and nothing contained in this
Agreement will give GB any right, title or interest in any of them. GB
acknowledges that Martek owns and retains all rights in the Martek brand names
and the Martek trade name. GB will not at any time during or after this
Agreement assert or claim any interest in any Martek brand name or the Martek
trade name. Upon expiration or termination of this Agreement, GB will
immediately cease all use of the Martek brand names and the Martek trade name.
15. DISPUTES; ARBITRATION
15.1. Disputes Generally. The parties hereby undertake to use good
faith efforts to settle any dispute arising under this Agreement. Failing
settlement, all disputes, including without limitation claims of breach of
contract, fraud in the inducement and negligence shall be finally settled in
accordance with the Rules of Conciliation and Arbitration of the International
Chamber of Commerce. The arbitration shall take place in Baltimore, Maryland
USA, and the parties hereby agree to exclude any right of application or appeal
to the courts in connection with any question of law arising in the course of
the reference or out of the award. Notwithstanding the foregoing, any disputes
with respect to disclosure of any Confidential Information shall not be subject
to this arbitration provision.
15.2. Selection of Arbitrator(s). If the parties hereto fail to
settle any dispute arising under this Agreement within a period of sixty (60)
days after the date on which such dispute arose, each party shall, within sixty
(60) days thereafter, appoint one arbitrator and the two so nominated shall, in
turn, choose a third arbitrator. If the arbitrators chosen by the parties
cannot agree on the choice of the third arbitrator within a period of thirty
(30) days after their nomination, then the third arbitrator shall be appointed
by the American Arbitration Association. If either party fails to appoint its
own arbitrator within the specified period, the arbitrator appointed by the
other party shall be the sole arbitrator. The parties shall use their best
efforts to appoint arbitrators who are knowledgeable in biochemical technology.
15.3. Language; Transcript. The arbitration shall be conducted in
the English language. Relevant documents in other languages shall be
translated into English if the arbitrators so direct. A written transcript in
English of the hearing will be made and furnished to the parties.
15.4. Decision of Arbitrators. The arbitrators will decide in
accordance with the terms of this Agreement and will take into account any
appropriate international trade usages applicable to the transaction. The
CONFIDENTIAL - 20 -
<PAGE> 21
award of the arbitrators will be final and binding upon the parties. Judgment
upon the award may be entered in any court having jurisdiction. An application
may be made to any such court for judicial acceptance of the award and an order
of enforcement.
15.5. Expense of Arbitration. The arbitrators shall determine the
allocation between the parties of expenses incurred in connection with the
arbitration.
16. REGULATORY MATTERS; ACCESS TO ARA PRODUCTION FACILITIES
16.1. Approvals. Each party shall obtain all regulatory approvals,
permits, licenses, clearances and notifications which it is required to have
for manufacture, shipment, sale or use of ARA prior to any such manufacture,
sale or use or shall ensure that such required approvals, permits, licenses,
clearances and notifications are otherwise obtained. Each party shall provide
the other party with all information the other party may reasonably request in
order to obtain or comply with any necessary regulatory approvals, permits,
licenses, clearances and notifications for manufacture, shipment, sale or use
of ARA such as, but not limited to, all information concerning studies
performed by or on behalf of such party in the field of product identification,
characterization and analysis; pathogenicity, toxicity, mutagenicity and
clinical trials.
16.2. Inspection. Upon reasonable notice during regular working
hours, Martek and any Martek customer may inspect the manufacturing facilities
of GB and any subcontractor(s) in order to inspect the manufacture of ARA,
examine samples of ARA, review quality control and manufacturing procedures for
ARA or any other purpose related to this Agreement.
16.3 Manufacturing Changes. GB shall notify the Committee of any
proposed change to any manufacturing procedure for ARA and shall not change the
manufacture of ARA without the prior approval of the Committee.
16.4. Government Communications. GB will promptly provide to Martek
copies of all documents in its possession concerning communications to or from
FDA or prepared by FDA, or to or from or prepared by any other governmental
agency, which bear in any respect on compliance by GB with FDA and other
relevant governmental agency requirements pertaining to the manufacture of ARA
under this Agreement.
17. GENERAL PROVISIONS
17.1. Assignment. Neither this Agreement nor any rights granted
hereby may be assigned by either party without the prior written consent of the
other party, which consent shall not be unreasonably withheld. Any
CONFIDENTIAL - 21 -
<PAGE> 22
attempt by either party to assign any rights, duties or obligations without the
requisite consent of the other party shall be void and without force or effect.
17.2. Modification. This Agreement can only be modified by a
written agreement duly signed by persons authorized to sign agreements on
behalf of Martek and of GB, and variance from the terms and conditions of this
Agreement in any written notification given by either party shall have no force
or effect.
17.3. Severability. If any provision of this Agreement shall be
held to be invalid, illegal or unenforceable for any reason, the validity,
legality and enforceability of the remaining provisions shall not in any way be
affected or impaired thereby.
17.4. Relationship of the Parties. For purposes of this Agreement,
GB and Martek will be and shall act as independent contractors, and neither
party is authorized to act as an agent or partner of, or joint venturer with,
the other party for any purpose. Neither party by virtue of this Agreement
shall have any right, power, or authority to act or create any obligation,
express or implied, on behalf of the other party.
17.5. Notices. All notices shall be in writing and shall be deemed
to be delivered when deposited with a recognized international express courier
service, or when sent by facsimile transmission promptly confirmed by return
transmission. All notices shall be directed to Martek or GB at the respective
addresses first set forth above or to such other address as either party may,
from time to time, designate by notice to the other party.
17.6. Governing Law. This Agreement, and any and all tort claims
that may arise in connection with ARA and any related services, will be
governed by the substantive laws of the State of Maryland. The parties hereby
expressly exclude the applicability of the Convention on Contracts for the
International Sale of Goods and that body of law known as conflicts of laws.
Notwithstanding anything to the contrary herein, issues regarding the scope of
any ARA Patent shall be determined in accordance with the laws of the
jurisdiction in which such ARA Patent has issued.
17.7. Force Majeure. Neither party shall be liable for any damages
or penalty for any delay in performance of, or failure to perform, any
obligation hereunder or for failure to give the other party prior notice
thereof when such delay or failure is due to the elements, acts of God, delays
in transportation, delays in delivery by vendors or other causes beyond that
party's reasonable control.
17.8. No Waivers. No express or implied waiver by either party of
any event of default hereunder shall in any way be, or be construed as, a
waiver of any future or subsequent event of default.
CONFIDENTIAL - 22 -
<PAGE> 23
17.9. Survival. The respective rights and obligations of the
parties under Sections 6, 9, 10, 11, 12, 13.5, 14, 15 and 17 shall survive the
termination of this Agreement.
17.10. Entire Agreement. The parties acknowledge that this
Agreement, together with Exhibits A - F hereto, sets forth the complete,
exclusive and integrated understanding of the parties which supersedes all
proposals or prior agreements, oral or written, and all other prior
communications between the parties relating to the subject matter of this
Agreement.
17.11. Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same document.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date first above written.
MARTEK BIOSCIENCES GIST-BROCADES B.V. (GB)
CORPORATION (MARTEK)
By: By:
------------------------ ---------------------------------
Title: Title:
--------------------- ------------------------------
Date: Date:
---------------------- -------------------------------
CONFIDENTIAL - 23 -
<PAGE> 24
EXHIBIT A
GB COSTS
GB Costs per Unit of ARA = Variable Costs per Unit of ARA + Production Costs
per Unit of ARA, as follows and adjusted as necessary in accordance with
Sections 4.5 and 8.5 of the attached Agreement:
VARIABLE COSTS
Variable Costs shall be determined on the basis of actual consumption taking
actual purchase prices into account.
Variable Costs shall comprise those costs are directly identifiable within a
product, namely:
- - Raw and intermediate materials
- - Packaging
- - Operations performed elsewhere
- - Transport
PRODUCTION COSTS
Production Costs shall be determined on the basis of actual yields and actual
department costs, which are directly or indirectly related to production. Cost
categories include, without limitation, labor, depreciation based on historical
costs, project costs, energy, waste and effluent disposal or treatment,
insurance, local taxes, site service allocations like production staff,
maintenance, purchasing, quality assurance, security services, etc.
The determination of Variable Costs and the allocation of Production Costs to
Units of ARA shall be made according to Generally Accepted Accounting
Principles.
ACCEPTED AND AGREED TO:
MARTEK BIOSCIENCES GIST-BROCADES B.V. (GB)
CORPORATION (MARTEK)
By: By:
----------------------------- ---------------------------------
Title: Title:
-------------------------- ------------------------------
Date: Date:
--------------------------- -------------------------------
CONFIDENTIAL - 1 -
<PAGE> 25
EXHIBIT B
ARA PATENTS
INTERNATIONAL PUBLICATION NO: WO 92/13086
INTERNATIONAL PUBLICATION NO: WO 96/21037
[attached]
ACCEPTED AND AGREED TO:
MARTEK BIOSCIENCES GIST-BROCADES B.V. (GB)
CORPORATION (MARTEK)
By: By:
----------------------------- ---------------------------------
Title: Title:
-------------------------- ------------------------------
Date: Date:
--------------------------- -------------------------------
CONFIDENTIAL - 2 -
<PAGE> 26
EXHIBIT C
OIL BLEND PATENTS
INTERNATIONAL PUBLICATION NO: WO 92/12711
[attached]
ACCEPTED AND AGREED TO:
MARTEK BIOSCIENCES GIST-BROCADES B.V. (GB)
CORPORATION (MARTEK)
By: By:
------------------------------ ---------------------------------
Title: Title:
--------------------------- ------------------------------
Date: Date:
---------------------------- -------------------------------
CONFIDENTIAL - 3 -
<PAGE> 27
EXHIBIT D
COUNTRIES IN WHICH ARA PATENTS AND
OIL BLEND PATENTS HAVE ISSUED
ARA Patents issued in
Australia
Indonesia
Israel
New Zealand
OAPI
South Africa
Sri Lanka
Oil Blend Patents issued in
Australia
Indonesia
Israel
New Zealand
South Africa
Sri Lanka
U.S.A.
ACCEPTED AND AGREED TO:
MARTEK BIOSCIENCES GIST-BROCADES B.V. (GB)
CORPORATION (MARTEK)
By: By:
----------------------------- ---------------------------------
Title: Title:
-------------------------- ------------------------------
Date: Date:
--------------------------- -------------------------------
- 4 -
Confidential
<PAGE> 28
EXHIBIT E
PATENT ARBITRATION PROCEDURE
FOR INFRINGEMENT DETERMINATION
IT IS AGREED by and among Gist-Brocades B.V. (hereinafter referred to
as "GB") and Martek Biosciences Corporation (hereinafter referred to as
"Martek") that the following procedure will be used to resolve certain issues
arising under the Section 3.3 of the AGREEMENT to which this PROCEDURE is
attached.
Article E - I. PURPOSE
The purpose of this PROCEDURE is to provide an arbitration mechanism
by which, at the election of either party, any or all of the following issues
may be submitted to and finally decided by an independent panel of arbitrators:
1. Whether a claim of an issued Martek Patent is infringed by a
GB product, either directly or indirectly.
2. Whether a claim of a Martek Patent issued in a particular
country is drawn to an invention which is described and fully
supported in accordance with laws of that country in the International
Patent Publication attached as Exhibit B hereto.
It is understood and agreed that arbitration pursuant to this Agreement relates
to and is intended to resolve certain issues arising out of this Agreement,
without the burden and expense of litigation. As further provided herein, the
decision of a majority of the arbitrators shall be final and binding on both
parties so long as this Agreement is in effect. Such decision will have no
effect in a dispute outside the scope of this Agreement, e.g. patent
litigation, nor will such decision survive termination of this Agreement except
as the decision affects arbitration under this Agreement.
Subject to the express provisions of this Procedure and those rulings
or determinations made by the arbitrators, the parties shall have the power to
agree upon the form of the patent arbitration proceeding(s) and the rules under
which it shall be conducted.
Article E - II. ARBITRATORS AND GENERAL PROCEDURES
The arbitrators shall be licensed patent practitioners and/or retired
judges knowledgeable as to patent law and practice in the jurisdiction where
the patent has issued. Three (3) neutral arbitrators will hear and decide the
issue(s) as a
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<PAGE> 29
panel, with a majority of the panel having the power to make final rulings and
issue the decision(s).
The panel will be selected by agreement of the parties from a group of
twelve (12) candidates, six (6) of whom shall be proposed by each party by not
later than thirty (30) days following the date a party shall have demanded in
writing the arbitration of the enumerated issue(s). Each party shall then
select two (2) arbitrators from the six (6) proposed by the other party, for a
total of four (4) nominees. The three (3) members of the panel shall than be
chosen by blind draw from the four (4) nominees, with the fourth nominee to be
available, to serve as an arbitrator in the event an arbitrator earlier chosen
is or becomes unable or unwilling to serve. In the event a party shall fail to
(i) submit its list of six (6) nominees, (ii) designate two (2) persons from
the other party's list or (iii) participate in the blind draw, the nonfailing
party shall have the right, by blind draw conducted before not less than three
(3) disinterested witnesses, to draw names from that party's list of six
nominees, the first three (3) of whom shall compose the panel for the
arbitration and the fourth, fifth and sixth of whom shall be available, in
order, to serve as an arbitrator in the event an arbitrator earlier chosen is
or becomes unable or unwilling to serve. Neither party shall knowingly propose
any arbitrator candidate whose impartiality might reasonably be questioned for
any reason.
The arbitrators' compensation shall be agreed upon by the parties and
the arbitrators. The terms of compensation for each of the arbitrators shall
be identical. The fees and expenses of the arbitrators shall be shared equally
between the parties, but each party shall bear its own costs respecting the
preparation and presentation of its case.
All communications between the parties and the arbitrators shall be in
the English language, and furthermore shall be in writing except during an
inter partes hearing and in unusual circumstances requiring oral communication
regarding procedural or scheduling matters. Any oral communication to the
arbitrator(s) shall be promptly confirmed in writing. Copies of all
communications with the arbitrator(s) shall be served by overnight delivery to
the other party. Neither party shall, directly or indirectly, engage in any ex
parte contact with any arbitrator or potential arbitrator prior to the
termination of this proceeding or the rendering of a written decision in this
proceeding.
Each arbitrator shall agree in writing to maintain in confidence the
existence of this proceeding and any non-public information revealed or
furnished to the arbitrator during the proceeding. Each arbitrator shall
further agree that, upon termination of this proceeding or the rendering of a
written decision in this proceeding, he or she shall return to each party the
originals of all materials
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<PAGE> 30
provided to the arbitrator by that party, and shall certify to that party that
no copies thereof have been retained.
The arbitrators shall select a Chairman by majority vote. Upon
consultation with the other arbitrators and the parties, the Chairman shall, at
the earliest practicable date, set the dates for written submissions and the
hearing date and establish any prehearing conferences or procedural schedules
as the panel determines to be necessary and appropriate. The Chairman shall be
the presiding officer of the proceeding(s), with all decisions and
determinations of the parties and the panel to be by a majority of the
arbitrators, unless the parties agree otherwise in writing. It is understood
and agreed that any dispute between the parties which concerns any and all
procedural matters or which is ancillary to the arbitrator's determination of
the enumerated issue in dispute shall be finally determined by the arbitrators
in a timely fashion after providing both parties an opportunity to be heard.
Article E - III. DISCOVERY
The parties agree that adequate information on which to base a
decision will generally be available from public sources, including public
records of patent prosecution, supplemented by information shared between the
parties under this Agreement, and neither of them shall demand further
discovery except upon a showing to the satisfaction of the panel of special
circumstances which exist justifying the requested additional discovery.
Incomplete or insufficient provision by a party of information to be shared
under this Agreement may constitute such special circumstances.
Each party will provide the identity of any expert witnesses, along
with the report, curriculum vita, publication list and the substance of
testimony for each expert not later than 20 days before the hearing in Article
E - VI. Each identified expert witness will be made available for deposition
by the other party upon request. Deposition of other witnesses may be
requested, and will be taken at the discretion of the panel.
In the event a party hereto believes additional discovery with respect
to an issue, including deposition of other witnesses, is necessary in order to
ensure full and fair consideration of such issue by the arbitrators, the
parties shall discuss and consider, in good faith, mutually acceptable methods
of obtaining such discovery. In the event the parties have not agreed to such
discovery by not later than fifteen (15) days following written notice
requesting same, then the party or parties so requesting may submit the matter
to the panel for final determination, with the panel's ruling to issue within
ten (10) days following submission.
It is the mutual intention of the parties that discovery, if any,
shall be limited in nature and scope; shall be conducted expeditiously; shall
have as its sole
7
<PAGE> 31
purpose the obtaining of information that is directly relevant and necessary to
the presentation of the requesting party's case; shall be conducted in a fair,
cooperative and courteous manner; and shall be accomplished primarily if not
exclusively by the voluntary exchange of documents and information. The other
paragraphs of this article shall be interpreted in keeping with the spirit and
intent reflected in this paragraph. Notwithstanding the foregoing, neither
party shall be entitled to use, refer to or submit any document in briefing, at
the hearing, or otherwise, unless that party shall have furnished the document
to the other party not later than ten (10) days prior to said use, reference or
submission.
Any dispute regarding discovery shall be submitted promptly to the
arbitrators for their determination. The parties shall promptly comply with
any decision by the arbitrators. If necessary, any decision by the arbitrators
concerning any procedural matters may be enforced by any court of competent
jurisdiction in the same manner as a final decision of an enumerated issue,
including an order of specific performance.
Article E - IV. BRIEFING
As of the date specified in the procedural schedule, Martek shall
deliver to GB's counsel and to the arbitrators an opening brief, not to exceed
fifty (50) pages, concerning the enumerated issue(s). On that same date, GB
shall deliver to Martek's counsel and to the arbitrators an opening brief, not
to exceed fifty (50) pages, concerning the enumerated issue(s). Each brief
shall be accompanied by an appendix containing any evidentiary materials which
have previously been furnished to the other party pursuant to Article E-III and
which the party wishes to submit to the panel. The pages in Martek's appendix
shall be consecutively numbered 1, 2, 3, etc. The pages in GB's appendix shall
be consecutively numbered A-l, A-2, A-3, etc.
As of the date specified in the procedural schedule, each party shall
deliver to the other party's counsel and to the arbitrators an opposing brief,
not to exceed fifty (50) pages responding to the opening brief of the other
party. Each brief shall be accompanied by an appendix containing evidentiary
materials which have previously been furnished to the other party pursuant to
Article E - III and which have not previously been included in the appendix to
the opening briefs, with each page consecutively numbered as indicated above,
starting with the next number following the last number used in the party's
opening appendix.
As of the date specified in the procedural schedule, each party shall
deliver to the other party's counsel and to the arbitrators a reply brief, not
to exceed twenty-five (25) pages, replying to the opposition brief of the other
party. Each brief shall be accompanied by an appendix containing evidentiary
materials which have previously been furnished to the other party pursuant to
Article E - III and which
8
<PAGE> 32
have not previously been included in the opening or opposing briefs, with each
page consecutively numbered as indicated above, starting with the next number
following the last number used in that party's response appendix.
Each party shall have discretion not to file one or more of the
foregoing briefs, and a party which fails to file by the date specified shall
be conclusively deemed to have fully and finally waived the right to file said
brief(s).
Article E - V. EVIDENTIARY STANDARD
At the hearing, the parties may offer such evidence as is relevant and
material to the dispute and shall produce such additional evidence as the panel
may deem necessary to the determination of the dispute. The failure or refusal
to adduce additional evidence which is within the control of a party may be
taken into account by the panel, in its sole discretion, in rendering its final
decision. It is specifically agreed by the parties that they and the
arbitrators may use and rely upon evidence that would typically be relied upon
by a lawyer rendering an infringement opinion for a client.
Article E - VI. ARBITRATION HEARING
The hearing shall be held at a time and at a place to be selected by
the parties or, failing agreement, by the panel. All proceedings at the
hearing shall be in the English language.
By not later than twenty (20) days prior to the hearing, the parties
shall exchange lists of the names and addresses of all witnesses, together with
the substance of the testimony of each, including any expert witnesses as
provided for in Article E - III above.
At the hearing, each party shall be allotted a total of two and
one-half (2 1/2) hours within which to present all argument and to answer any
questions posed by the arbitrators. Time may be allocated to the required
sequence in any manner as each party elects. Time limits shall be strictly
enforced.
No party shall rely upon any evidentiary material not submitted with
the briefs, although demonstrative exhibits that were not submitted with the
briefs may be used if copies thereof are provided to the other party five (5)
business days before the start of the hearing.
The hearing proceedings shall not be recorded either electronically or
stenographically. Attendance at the hearing shall be limited to persons
entitled to have access to Confidential Information under Article E - VIII
below.
9
<PAGE> 33
Neither party shall be required to authenticate documents or to
present or otherwise rely upon sworn affidavits or statements of any kind, or
upon declarations made under penalty of perjury or otherwise. Unless the
parties otherwise agree, each party shall have the right to present one expert
witness, in person, and the opposing party shall have the right to cross
examine any witness called. The time for cross examination shall be charged to
the cross examining party.
At hearing, counsel may present witnesses and exhibits, read excerpts
from exhibits and reports, and otherwise present the case by means of an
opening statement, evidentiary presentation and final argument. Counsel shall
make only such submission and/or summary of evidence as is consistent with a
good faith belief based upon reasonable investigation that such evidence is
factually true. No statement of counsel may be challenged before the panel on
the basis that no documentary or other evidence is presented in support, but
the weight to be given any statement of counsel may be questioned if and to the
extent no such confirming evidence is presented.
Article E - VII. DECISION
The arbitrators shall render a brief written decision in the English
language respecting their determination of the enumerated issue(s) and deliver
duplicate copies of said decision to the parties by certified mail within
fifteen (15) days of the conclusion of the hearing and shall base its decision
solely upon the evidence before it and consistent with this Agreement. The
decision shall be by a majority of the panel, with each arbitrator who concurs
in the decision so indicating by signing the duplicate originals.
Article E - VIII. CONFIDENTIALITY
If a page or part of a brief, document, or evidentiary material
contains information (i) that is not in the public domain, and (ii) that has
been held in confidence by the producing party, those pages or parts of such
brief, document, or evidentiary material which contain such information may be
designated as containing confidential information by the party contending it is
entitled to protection hereunder (hereinafter "Confidential Information").
Briefs, documents, or evidentiary materials may be designated as containing
Confidential Information by stamping, tagging, or writing the words
"CONFIDENTIAL UNDER ARBITRATION PROCEDURE" on each page or part containing
Confidential Information, prior to the production or service thereof by the
producing party upon the other party. Such designation, or lack thereof, will
not change the status of any Information disclosed in accordance with other
provisions of this Agreement.
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<PAGE> 34
The arbitrators and the parties shall each maintain in confidence the
existence of those proceedings and the opinion(s) of the panel.
Any and all Confidential Information which has been obtained from the
other party during the course of this proceeding shall be maintained
confidential and subject to the following restrictions:
a. It shall be used only for purposes of this proceeding and not
for any business or other purpose whatsoever;
b. It shall not be given, shown, made available to, or
communicated in any way to anyone other than:
(i) the outside attorneys for either party and those
employed in the course of assisting such attorneys, including
paralegals and office personnel;
(ii) attorneys who are employees of one of the parties,
and the paralegals and office personnel employed in the
ordinary course of assisting such attorneys;
(iii) two technical consultants (who may be employees of
the receiving party), each of whom shall be identified to the
producing party at least forty-eight hours in advance of the
first disclosure to him of any Confidential Information of the
producing party;
(iv) the arbitrators and persons employed by any
arbitrator and assisting in this proceeding; and
(v) a reasonable number, not to exceed three (3), of
management level personnel of each party having a need to
know.
The provisions of this Article E - VIII shall not, however, be deemed
to apply to information which was lawfully in the possession of the receiving
party (or its counsel) prior to the disclosure by the producing party;
information which a party (or its counsel) lawfully obtains from a third party
having the right to disclose such information; information which was developed
independently by a party as reflected in written documents; or information that
was in the public domain before the effective date of this Agreement or which
subsequently becomes part of the public domain through no fault of the
receiving party.
Article E - IX. ABSENT PARTY
The arbitration may proceed in the absence of a party that, after due
notice, fails to be present. A written decision on an enumerated issue shall
not be made
11
<PAGE> 35
solely on the basis of a default of a party, but the panel shall require that
the party present submit such available evidence as may be reasonably required
for the making of a final decision.
Article E - X. SERVICE
Any papers, notices or process necessary or proper for the initiation
or completion of arbitration hereunder, or for the entry of enforcement of
judgment on a written decision, may be served upon a party in accordance with
Section 17.5 of this Agreement.
Article E - XI. CHOICE OF LAW
This Procedure shall be governed by the Choice of Law set forth in
Section 17.6 of the attached Agreement.
ACCEPTED AND AGREED TO:
MARTEK BIOSCIENCES GIST-BROCADES B.V. (GB)
CORPORATION (MARTEK)
By: By:
------------------------------ ---------------------------------
Title: Title:
--------------------------- ------------------------------
12
<PAGE> 36
EXHIBIT F
PROCEDURE FOR RESOLUTION
OF ARA QUALITY ISSUES
IT IS AGREED by and among Gist-Brocades B.V. (hereinafter referred to
as "GB") and Martek Biosciences Corporation (hereinafter referred to as
"Martek") that the following procedure will be used to resolve certain issues
arising under the Sections 5.2 and 6.1 of the AGREEMENT to which this PROCEDURE
is attached.
Article F - I. PURPOSE
The purpose of this PROCEDURE is to provide a mechanism by which, at
the election of either party, any dispute regarding whether or not any quantity
of ARA delivered by GB to Martek meets the applicable specifications which have
been agreed upon by the Committee and specified by Martek to GB.
It is understood and agreed that resolution of disputes about ARA quality
pursuant to this PROCEDURE relates to and is intended to resolve certain issues
arising out of the AGREEMENT to which this PROCEDURE is attached, without the
burden and expense of litigation. As further provided herein, the decision of
the third-party analyst (or of a majority of the third-party analysts if the
Committee agrees upon multiple analysts) shall be final and binding on both
parties so long as this Agreement is in effect.
Article F - II. SPECIFICATIONS FOR ARA
The parties acknowledge that the AGREEMENT provides for the
possibility of more than one set of specifications for ARA: "Customer
Specifications" as defined by Section 2.3 of the AGREEMENT and "Martek
Specifications" as defined by Section 2.6 of the AGREEMENT. The Martek
Specifications and any Customer Specifications require approval by the
Committee. Section 7.7 of the Agreement permits Martek to specify which of the
foregoing specifications any particular order for ARA must satisfy.
Article F - III. ROLE OF THE COMMITTEE
Section 4.4 of the Agreement authorizes the Committee to determine
methods of analysis of ARA, including identification of one or more independent
third parties that are to be engaged to analyze quantities of ARA produced by
GB. Pursuant to this PROCEDURE, the Committee shall select and agree upon
alternative third-party analysts, other than those selected by the Committee to
analyze all quantities of ARA produced by GB, who shall be and remain available
to
13
<PAGE> 37
analyze any quantity of ARA with respect to which a dispute arises about
whether the applicable specifications have been met.
Article F - IV. COMMITTEE SELECTIONS
As soon as practicable after the AGREEMENT has been executed, the
Committee shall agree upon (1) the Martek Specifications (and, at Martek's
request, any Customer Specifications), (2) the method of analysis to be used to
determine whether ARA meets applicable specifications and (3) a minimum of
three (3) third-party analysts different from the analysts already selected by
the Committee to analyze all ARA produced GB. The foregoing selections shall
be memorialized, at the Committee's discretion, either by attachment to this
Exhibit F or retention in the Committee's files.
Article F - V. DISPUTE RESOLUTION PROCEDURE
In the event that Martek notifies GB pursuant to Section 5.2 or 6.3 of
failure by any quantity of ARA to conform to the applicable specifications, GB
shall have three (3) business days following receipt of such notice within
which to notify Martek that GB disputes Martek's conclusion. Either party
shall thereupon be entitled to notify each of the two Committee Leaders, by
facsimile transmission and by email of the existence of a dispute as to the
quality of ARA. Not later than the close of business on the day immediately
following the date on which such notice was transmitted to the Committee
Leaders, the Committee shall agree upon the number of alternative analysts to
be used to resolve the dispute, shall request expedited services from the
selected analyst(s) and, upon confirmation by the selected analyst(s) of
acceptance of the offered engagement and the time within which the analysis
will be completed, the Committee shall immediately direct Martek and GB each to
ship to such analyst(s) quantities of ARA from the shipment of disputed
quality. Each selected analyst shall analyze the samples of ARA furnished by
Martek and GB, and shall advise the Committee in writing in the English
language, within the time committed to in connection with acceptance of the
engagement, whether or not the ARA samples provided by Martek meet the
applicable specifications. If the selected analyst(s) determine that the
sample of ARA furnished by GB meets the applicable specifications while the
sample furnished by Martek does not, the selected analyst(s) shall have the
authority to investigate the matter and allocate responsibility for the
deviation from specifications either to Martek or to GB. The decision(s) of
the selected analyst(s) shall be final and binding on the parties. The fees
charged by the selected analyst(s) and the costs for shipping samples of ARA to
such analyst(s) shall be shared equally by Martek and GB.
14
<PAGE> 38
Article F - VI. PROCEDURE DEFAULT
In the event that, for any reason, (a) the Committee has not agreed
upon a method of analysis to be used to determine whether ARA meets applicable
specifications or a minimum of three (3) third-party analysts different from
the analysts engaged to analyze all ARA produced GB, or (b) a sufficient number
of analysts, as determined by the Committee, do not accept the offered
engagement to analyze the ARA of disputed quality, the Committee shall have the
opportunity to complete such selections pr make alternative selections in
sufficient time to engage analyst(s) within the time otherwise required. If,
for any reason, the Committee fails to act within the times periods specified
in Article F - V above or a written opinion is not received within the time
specified by the Committee from each selected analyst who has accepted the
engagement, either party shall be entitled to seek resolution of the dispute in
accordance with the provisions of Section 15 of the AGREEMENT. Such
arbitration proceeding shall be governed by the Choice of Law set forth in
Section 17.6 of the attached AGREEMENT.
ACCEPTED AND AGREED TO:
MARTEK BIOSCIENCES GIST-BROCADES B.V. (GB)
CORPORATION (MARTEK)
By: By:
------------------------------- ---------------------------------
Title: Title:
---------------------------- ------------------------------
15
<PAGE> 1
EXHIBIT 13.01
Martek Biosciences Corporation
Selected Financial Data
<TABLE>
<CAPTION>
Year Ended October 31,
-------------------------------------------------------------
In thousands except per share data 1996 1995 1994 1993 1992
- -----------------------------------------------------------------------------------------------------------------
STATEMENTS OF OPERATIONS DATA
<S> <C> <C> <C> <C> <C>
Revenues
License fees and related revenues $ 2,244 $ 270 $ 1,185 $ 2,107 $ 652
Product sales 933 1,262 1,230 1,522 961
Royalties 11 5 - - -
Research and development contracts and grants 769 662 628 889 1,592
-------- -------- ------- ------- -------
Total revenues 3,957 2,199 3,043 4,518 3,205
Costs and expenses
Cost of product sales 539 652 555 707 494
Research and development 10,294 7,720 5,029 3,604 2,136
Selling, general and administrative 4,134 3,219 3,171 2,661 1,865
-------- -------- ------- ------- -------
Total costs and expenses 14,967 11,591 8,755 6,972 4,495
-------- -------- ------- ------- -------
Loss from operations (11,010) (9,392) (5,712) (2,454) (1,290)
Other income, net 2,096 583 418 142 51
-------- -------- ------- ------- -------
Net loss $ (8,914) $ (8,809) $(5,294) $(2,312) $(1,239)
======== ======== ======= ======= =======
Net loss per share $ (.67) $ (.94) $ (.70) $ (1.86) $ (1.21)
======== ======== ======= ======= =======
Weighted average common shares outstanding 13,281 9,412 7,609 1,476 1,438
======== ======== ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
October 31,
-------------------------------------------------------------
1996 1995 1994 1993 1992
- -----------------------------------------------------------------------------------------------------------------
BALANCE SHEET AND OTHER DATA
<S> <C> <C> <C> <C> <C>
Cash, cash equivalents, short-term investments,
and marketable securities $ 39,392 $ 51,623 $ 10,706 $ 1,952 $ 2,636
Working capital 35,306 49,681 8,944 544 3,122
Total assets 57,123 65,158 13,569 5,015 5,530
Long-term debt 1,199 4,175 - - -
Redeemable convertible preferred stock - - - 7,038 6,698
Accumulated deficit (30,191) (21,277) (12,468) (7,174) (4,862)
Total stockholders' equity (deficiency) 49,416 57,346 10,286 (5,316) (2,856)
Cash dividends declared-common stock - - - - -
</TABLE>
6
<PAGE> 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 OILS 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
REPORT ON FORM 10-K AND ITS S-3 DECLARED EFFECTIVE ON SEPTEMBER 26, 1995.
Since its inception in 1985, Martek has been engaged primarily in the
research and development, manufacturing and sales 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 its nutritional oils containing docosahexaenoic acid
("DHA") and arachidonic acid ("ARA") and sales of sample quantities of these
oils. In 1995, Martek recognized its first product and royalty revenues from
sales of infant formula containing these oils, and in 1996 began to recognize
revenues from the sale of Neuromins(TM), a DHA dietary supplement. Martek
has incurred losses in each year since its inception. At October 31, 1996, the
Company's accumulated deficit was $30,191,000. The Company expects to continue
to expand its research and development effort, optimize oil production and
increase its product marketing activities. As a result, Martek expects its
losses to continue and possibly increase for at least the first half of 1997,
or until significant royalties from sales of infant formula products containing
its oils, and/or sales revenues from Neuromins(TM) are received. In
addition, the Company expects to continue to experience quarter-to-quarter and
year-to-year fluctuations in revenues, expenses and losses, some of which may
be significant. The timing and extent of such fluctuations will depend, in
part, on the timing and receipt of oils-related revenues, if any.
Although three of the Company's licensees have introduced preterm infant
formula products containing Martek's DHA and ARA oils in five European
countries, the Company is not able to predict when, or if, any of these
licensees will expand or introduce new offerings of products containing
Martek's oils. The Company does not believe that broad product introductions of
term infant formulas containing these oils will occur before late 1997, at the
earliest, and cannot predict the timing or extent of further introductions or
expansions of preterm infant formula products containing Martek's oils.
Revenues from preterm uses of Martek's oils will not, alone, significantly
reduce Martek's losses. Future oils-related revenues, and the timing or
likelihood of future profitability, are largely dependent on factors over which
the Company has no control.
RESULTS OF OPERATIONS
Revenues
Revenues declined from $3,043,000 in 1994 to $2,199,000 in 1995, a decrease of
28%. Increases in product sales and government contract revenues in 1995 did
not offset a decrease in license fees and related revenues as compared to
1994. This decrease was primarily due to an anniversary license fee from an
infant formula manufacturer recorded in 1994, which according to the terms of
the agreement, was not repeated in 1995. Revenue in 1996 increased to
$3,957,000, an increase of 80% from 1995 revenues of $2,199,000. The revenue
increase resulted from the recognition of $2,075,000 in license fees during the
first quarter 1996 that were previously recorded as unearned pending the lapse
of certain conditions contained in the related license agreement.
Product sales increased slightly from $1,230,000 in 1994 to $1,262,000 in
1995, an increase of 3%, but decreased in 1996 to $933,000. Product sales
increased in 1995 as a result of initial nutritional product sales which more
than offset a 4% decrease in sales of stable isotope products from 1994. In
1996, despite an increase in nutritional product sales of $138,000, overall
product sales decreased 26% mainly due to lower prices caused by intense price
competition for stable isotope-based products. Martek is continuing its efforts
to strengthen product sales through the development of new proprietary stable
isotope-based products, nutritional products, and fluorescent markers. The
ultimate success of these efforts to increase product sales cannot be
predicted.
Contract and grant revenues increased by 5% in 1995 as compared to 1994;
and increased by 16% in 1996 as compared to 1995. In 1995, increased revenue
from pharmaceutical screening contracts offset declining government contract
revenues. During the fourth quarter of 1995 the Company was awarded over
$1,000,000 in grants for research and development projects. Revenue from these
grants was primarily responsible for the increase in contract and grant revenue
in 1996. The Company expects to continue its effort to secure research and
development contracts and grants. The timing and ultimate success of these
efforts cannot be predicted.
Cost of Product Sales
Cost of product sales increased as a percentage of product sales from 45% in
1994 to 52% in 1995. Cost of product sales increased to 58% in 1996. A
significant factor in these increases from 1994 to 1996 was 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, sales
7
<PAGE> 3
were made at prices below the non-optimized cost of production in an effort to
create demand for these products. As sales volume increases, and manufacturing
efficiencies and optimization occur, the cost of production of nutritional
oils products has the potential to decrease. The Company believes that a
significant continued optimization effort will be required for at least the
next two years. There can be no assurance that the Company will be able to
successfully optimize production of its nutritional oils in order to
manufacture commercial quantities at reasonable cost, or continue to comply
with applicable regulatory requirements, including GMP, or that these
facilities will be sufficient to meet the future demand for the oils. In 1996,
the balance of the increase in cost of sales resulted from price reductions in
the Company's stable isotope-based 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 improve
profit margins. The ultimate impact of these efforts on the cost of sales,
however, cannot be predicted.
Research and Development
Research and Development expenses, including contract-related costs, increased
from $5,029,000 in 1994 to $7,720,000 in 1995, an increase of 54%, and to
$10,294,000 in 1996, an increase of 33% over 1995. Contract-related research
and development costs included in these amounts were $500,000 in 1994, $421,000
in 1995, and $506,000 in 1996. Consistent with the Company's plans, nutritional
oils development costs accounted for a significant portion of the increase in
research and development costs in all periods and resulted from intensified
efforts to meet production and product introduction objectives. To support the
product introductions of preterm infant formula products containing Martek's
oils in the UK, the Netherlands, Belgium, Finland, and Spain, Martek
intensified its commercial scale up and optimization efforts for its oils
products beginning during the latter half of 1994, and continued through 1996.
Costs associated with the nutritional oils development effort comprised nearly
half of the research and development expenses recorded in 1994, and
approximately 75% of research and development expenses for 1995 and 1996.
Research and development costs may increase in the future as the Company
expands its research and development efforts, including the continued
optimization of oils production and in-house oil processing capabilities.
Selling, General and Administrative
Selling, general and administrative ("SG&A") costs rose from $3,171,000 in 1994
to $3,219,000 in 1995, an increase of 2%, and to $4,134,000 in 1996, an
increase of 28% over 1995. SG&A costs decreased as a percentage of total costs
in 1995 and remained constant as a percentage of total costs in 1996 as
compared to 1995. The absolute amount of these expenses has risen each year to
support product sales, expanded licensing and increased research and
development activities. SG&A costs also increased in 1996 due to: costs
associated with a public awareness campaign for DHA and ARA; Neuromins(TM)
marketing costs; and increased insurance and other corporate overhead costs.
SG&A costs are expected to increase at an accelerated rate in the future as the
Company transitions from a development company to one commercializing its
products.
Net Loss
Net losses were $5,294,000 in 1994, $8,809,000 in 1995 and $8,914,000 in 1996.
The increased losses from 1994 to 1996 resulted primarily from an increase in
research and development expenditures related to Martek's DHA and ARA oils and
other product areas. In addition, the 1996 loss was affected by increasing
marketing and public relations costs relating to efforts to commercialize the
Company's oils products. The slight increase in the 1996 loss as compared to
1995 reflects the anniversary license fee recognized in the first quarter of
1996 discussed above. The recognition of this license fee largely offset
increases in expenses in the 1996 period.
Inflation and seasonality of revenues have not had a material impact on the
results of operations of the Company.
Recent Accounting Pronouncements
In October 1995, the Financial Accounting Standards Board issued Statement No.
123, "Accounting for Stock-Based Compensation." SFAS No. 123 allows companies
to either account for stock-based compensation under 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 for fiscal years beginning after December 31, 1995 in
the footnotes to the financial statements as if the measurement provisions of
SFAS No. 123 had been adopted. The Company intends to continue accounting for
its stock based compensation 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
Martek has financed its operations primarily from the issuance and sale of
equity securities, debt financing, revenues received under research and
development contracts and grants, limited product sales and the receipt of
license fees. Since its inception, the Company has raised approximately $19.5
million from private sales of its equity securities, including approximately
$10.7 million from the private placement of equity securities in May and June
1995.
8
<PAGE> 4
The Company has also raised approximately $53.7 million from public sales of
the Company's common stock including $14.2 million from the net proceeds of
Martek's Initial Public Offering ("IPO") which closed in December 1993, and
$39.5 million from the net proceeds of the Company's follow-on offering
("Follow-On Offering") which closed in October 1995. Through October 31, 1996,
Martek has incurred an accumulated deficit of $30,191,000. The Company's
balance of cash and cash equivalents at October 31, 1996 was $8,633,000. In
addition, at October 31, 1996, Martek had $30,759,000 in short-term investments
and marketable securities. These investments and securities consist of U.S.
government securities and are available to meet the future cash needs of the
Company. Cash, cash equivalents, short-term investments and marketable
securities decreased by $12,231,000 in 1996, primarily due to the Company's:
continued operating losses; capital expenditures at its production facility in
Kentucky as described below; and increase of nutritional oils inventory in late
1996 in preparation for potential product demand in 1997.
Capital expenditures of $4,361,000 were made in 1996, a significant
portion of which represents upgrades to the Company's fermentation facility in
Winchester, Kentucky, which was purchased in 1995 and construction of an oil
processing plant at the site. See Note 6 of Notes to Financial Statements. The
Company expects additional capital expenditures of at least $2,000,000 in 1997
as a result of escalating fermentation activity and installation of oil
processing capabilities at the facility. On October 7, 1994, the Company
entered into an equipment line of credit in the amount of $250,000. The line of
credit bore a variable rate of interest on any outstanding balance until
October 7, 1995, at which date it converted into a three year term loan,
bearing an interest rate of 10%. As of October 31, 1996 the Company had $168,000
outstanding under the loan. 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 at its Winchester, Kentucky
plant. The line of credit bears interest at a rate of 9.02%. As of October 31,
1996 the Company had $1,410,000 outstanding under the line of credit.
Martek may require substantial additional funds to continue its research
and development programs, to conduct preclinical and clinical studies and to
commercialize its nutritional oils, 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 infant formula licensees
incorporate Martek's oils 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 including production
development and optimization; 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, the investment in subsequent improvements 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. Plant modifications costing at
least $2,000,000 are expected in 1997. Expenditures beyond 1997 will depend in
part on production capacity needs, the extent of development and implementation
of process improvements and the success of previously implemented improvements.
The Company will also be required to repay or refinance the promissory notes
due in March and September of 1997 in the aggregate principal amount of
$4,000,000 and the interest accrued thereon, associated with the facility
purchase. See Note 6 of Notes to the Financial Statements. The notes are
secured by the fermentation plant but are without recourse otherwise. The
Company plans to seek refinancing for these notes in 1997, but there can be no
assurance that the Company will be able to refinance these notes.
The Company believes its existing capital resources, consisting primarily
of cash, short-term investments and marketable securities will provide adequate
capital for at least the next 18 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 liquidity position over the long 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.
9
<PAGE> 5
Martek Biosciences Corporation
Balance Sheets
<TABLE>
<CAPTION>
October 31,
--------------------------------------
1996 1995
- -----------------------------------------------------------------------------------------------------
ASSETS
<S> <C> <C>
Current assets
Cash and cash equivalents $ 8,633,314 $ 41,038,524
Short-term investments and marketable securities (Note 3) 30,759,352 10,583,908
Accounts receivable 322,111 316,366
Inventories (Notes 2 and 4) 1,841,128 989,373
Prepaid expenses 133,560 196,258
Other current assets 124,750 193,694
------------ ------------
Total current assets 41,814,215 53,318,123
Property, plant and equipment, net (Notes 2 and 5) 15,309,242 11,840,005
------------ ------------
$ 57,123,457 $ 65,158,128
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable $ 641,919 $ 575,259
Accrued liabilities 1,494,801 911,407
Unearned revenue (Note 8) - 2,075,000
Current portion of notes payable 4,371,260 75,322
------------ ------------
Total current liabilities 6,507,980 3,636,988
Long-term portion of notes payable (Note 6) 1,198,926 4,174,678
Commitments and contingencies (Note 7)
Stockholders' equity (Note 9)
Preferred stock, $.01 par value; 4,700,000 and 5,000,000
shares authorized at October 31, 1996 and 1995,
respectively; none issued or outstanding at October 31,
1996 and October 31, 1995 - -
Series A junior participating preferred stock, $.01 par
value; 300,000 shares authorized; none issued or
outstanding at October 31, 1996; none authorized or
outstanding at October 31, 1995 - -
Common stock, $.10 par value; 30,000,000 shares authorized;
13,392,250 and 13,025,419 shares issued and outstanding
at October 31, 1996 and 1995, respectively 1,339,225 1,302,542
Additional paid-in capital 78,268,418 77,321,144
Accumulated deficit (30,191,092) (21,277,224)
------------ ------------
Total stockholders' equity 49,416,551 57,346,462
------------ ------------
$ 57,123,457 $ 65,158,128
============ ============
</TABLE>
See accompanying notes.
10
<PAGE> 6
Martek Biosciences Corporation
Statements of Operations
<TABLE>
<CAPTION>
Year ended October 31,
------------------------------------------------
1996 1995 1994
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
REVENUES (NOTE 2)
License fees and related revenues $ 2,244,409 $ 269,689 $ 1,184,575
Product sales 932,713 1,262,285 1,229,477
Royalties 11,008 5,500 -
Research and development contracts and grants 769,084 661,654 628,453
------------ ----------- -----------
Total revenues 3,957,214 2,199,128 3,042,505
COSTS AND EXPENSES
Cost of product sales 539,482 651,597 554,894
Research and development 10,293,895 7,720,130 5,028,846
Selling, general and administrative 4,134,331 3,219,502 3,171,380
------------ ----------- -----------
Total costs and expenses 14,967,708 11,591,229 8,755,120
------------ ----------- -----------
Loss from operations (11,010,494) (9,392,101) (5,712,615)
OTHER INCOME (EXPENSE)
Miscellaneous income 42,230 34,401 16,392
Interest income 2,459,713 733,917 411,078
Interest expense (405,317) (185,127) (9,113)
------------ ----------- -----------
2,096,626 583,191 418,357
------------ ----------- -----------
Net loss $ (8,913,868) $(8,808,910) $(5,294,258)
============ =========== ===========
Net loss per share (Note 2) $ (.67) $ (.94) $ (.70)
============ =========== ===========
Weighted average common shares outstanding 13,281,429 9,411,894 7,608,603
============ =========== ===========
</TABLE>
See accompanying notes.
Statements of Stockholders' Equity (Deficiency)
<TABLE>
<CAPTION> Additional
Convertible Paid-in
Preferred Stock Common Stock Capital
- ---------------------------------------------------------------------------------------------------------------
Shares Amount Shares Amount
<S> <C> <C> <C> <C> <C>
BALANCE AT OCTOBER 31, 1993 409,624 $ 4,096 1,554,940 $ 155,494 $ 1,698,160
Exercise of stock options and warrants - - 179,175 17,917 240,820
Issuance of common stock
in initial public offering - - 2,300,000 230,000 13,988,839
Conversion of preferred stock (409,624) (4,096) 4,011,259 401,126 6,666,262
Accretion of dividends - - - - (24,863)
Series A & B preferred stock dividends - - 187,317 18,732 (18,732)
Payment of preferred stock cash dividends - - - - (619,636)
Net loss - - - - -
- ---------------------------------------------------------------------------------------------------------------
BALANCE AT OCTOBER 31, 1994 - - 8,232,691 823,269 21,930,850
Exercise of stock options and warrants - - 387,516 38,752 735,173
Issuance of common stock
for plant purchase - - 511,836 51,183 4,916,038
Issuance of common stock in
private placement - - 1,078,376 107,838 10,570,115
Issuance of common stock in
follow-on public offering - - 2,815,000 281,500 39,168,968
Net loss - - - - -
- ---------------------------------------------------------------------------------------------------------------
BALANCE AT OCTOBER 31, 1995 - - 13,025,419 1,302,542 77,321,144
Exercise of stock options and warrants - - 366,831 36,683 947,274
Net loss - - - - -
- ---------------------------------------------------------------------------------------------------------------
BALANCE AT OCTOBER 31, 1996 - $ - 13,392,250 $1,339,225 $78,268,418
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Accumulated
Deficit Total
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
BALANCE AT OCTOBER 31, 1993 $ (7,174,056) $(5,316,306)
Exercise of stock options and warrants - 258,737
Issuance of common stock
in initial public offering - 14,218,839
Conversion of preferred stock - 7,063,292
Accretion of dividends - (24,863)
Series A & B preferred stock dividends - -
Payment of preferred stock cash dividends - (619,636)
Net loss (5,294,258) (5,294,258)
- -------------------------------------------------------------------------------------------------
BALANCE AT OCTOBER 31, 1994 (12,468,314) 10,285,805
Exercise of stock options and warrants - 773,925
Issuance of common stock
for plant purchase - 4,967,221
Issuance of common stock in
private placement - 10,677,953
Issuance of common stock in
follow-on public offering - 39,450,468
Net loss (8,808,910) (8,808,910)
- -------------------------------------------------------------------------------------------------
BALANCE AT OCTOBER 31, 1995 (21,277,224) 57,346,462
Exercise of stock options and warrants - 983,957
Net loss (8,913,868) (8,913,868)
- -------------------------------------------------------------------------------------------------
BALANCE AT OCTOBER 31, 1996 $(30,191,092) $49,416,551
- -------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes.
11
<PAGE> 7
Martek Biosciences Corporation
Statements of Cash Flows
<TABLE>
<CAPTION>
Year ended October 31,
--------------------------------------------------------
1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss $ (8,913,868) $ (8,808,910) $ (5,294,258)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization 893,348 571,068 271,314
Other net (1,130) - -
Changes in assets and liabilities:
Accounts receivable (5,745) (146,389) 57,300
Inventories (851,755) 165,494 (193,124)
Prepaid expenses 62,698 (6,253) 501,499
Other current assets 68,944 (187,222) (2,707)
Accounts payable 66,660 271,469 (233,789)
Accrued liabilities 583,394 31,724 199,812
Unearned revenue (2,075,000) (25,000) 25,000
------------ ------------ ------------
Net cash used in operating activities (10,172,454) (8,134,019) (4,668,953)
INVESTING ACTIVITIES
Purchase of short-term investments and
marketable securities (20,175,444) (1,981,945) (8,601,963)
Purchase of property, plant and equipment (4,361,455) (2,069,077) (434,689)
------------ ------------ ------------
Net cash used in investing activities (24,536,899) (4,051,022) (9,036,652)
FINANCING ACTIVITIES
Borrowings on notes payable 1,539,954 250,000 -
Repayment of notes payable (219,768) - -
Proceeds from the exercise of warrants and
options, and other 983,957 741,147 258,737
Proceeds from the issuance of common stock
in initial public offering - - 14,218,839
Proceeds from the issuance of common
stock in private placement - 10,677,953 -
Proceeds from the issuance of common stock
in follow-on public offering - 39,450,468 -
Payment of cash dividends to preferred stockholders - - (619,636)
------------ ------------ ------------
Net cash provided by financing activities 2,304,143 51,119,568 13,857,940
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents (32,405,210) 38,934,527 152,335
Cash and cash equivalents at beginning of year 41,038,524 2,103,997 1,951,662
------------ ------------ ------------
Cash and cash equivalents at end of year $ 8,633,314 $ 41,038,524 $ 2,103,997
============ ============ ============
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
Purchase of plant $ - $ (9,000,000) $ -
Proceeds from the issuance of common stock in connection
with the plant purchase - 5,000,000 -
Borrowings on notes payable in connection with plant purchase - 4,000,000 -
</TABLE>
See accompanying notes.
12
<PAGE> 8
Martek Biosciences Corporation
Notes to Financial Statements
1. ORGANIZATION
Martek Biosciences Corporation (the "Company") develops, manufactures and
sells products derived from microalgae. The Company is currently selling
nutritional supplements for infant formula and other nutritional product
applications, and products for use in basic structural molecular research and
structure-based drug design. The Company is developing diagnostic products and
pharmaceuticals. A portion of the Company's research and development efforts is
performed under various contracts and grants. The Company sells to a broad
range of companies, academic and research institutions located throughout North
America and Europe.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
CONTRACTS AND GRANTS A significant portion of contract and grant revenues are
derived from Small Business Innovation Research ("SBIR") grants. SBIR grants
are intended to aid small businesses in meeting federal research and
development needs while stimulating technological innovation. In addition, such
grants are used to increase private-sector commercialization of innovations
derived from federal research and development.
As a result of such funding, the U.S. government will have certain rights
in the technology developed with the funding. These rights include a
nonexclusive, paid-up, worldwide license under such inventions for any
governmental purpose. In addition, the government has the right to require the
Company to grant an exclusive license under any of such inventions to a third
party if the government determines (i) adequate steps have not been taken to
commercialize such inventions, (ii) such action is necessary to meet public
health or safety needs, or (iii) such action is necessary to meet requirements
for public use under federal regulations. Federal law requires any licensor of
an invention that was partially funded by federal grants to obtain a covenant
from its exclusive licensee to substantially manufacture products using the
invention in the United States.
The Company's revenue from SBIR research and development contracts and
grants amounted to $609,000 in 1996, $524,000 in 1995 and $610,000 in 1994.
Costs for products, contracts and grants, and research and development are
based on direct costs incurred plus an allocation of indirect costs based on
direct labor and total direct costs. Estimated losses on contracts, if any, are
recorded as they become known.
REVENUE RECOGNITION The Company recognizes revenue on contracts and grants to
the extent of allowable costs incurred plus a proportionate amount of the fee
earned when allowed. Revenue is recognized on product sales when goods are
shipped. Revenue from licensing agreements is recognized when milestones are
met in accordance with the terms of the respective contracts. Revenue
recognized in the accompanying Statements of Operations is not subject to
repayment. Revenue received that is related to future performance under such
contracts is deferred and recognized as revenue when earned.
Approximately 15% in 1996, 24% in 1995 and 20% in 1994 of the Company's
total revenues were generated from U.S. government contracts, subcontracts, and
SBIR grants.
RESEARCH AND DEVELOPMENT Research and development costs are charged to
operations as incurred and include contract and grant-related costs of $506,000
in 1996, $421,000 in 1995 and $500,000 in 1994.
INCOME TAXES Net operating loss carryforwards differ for financial statement
and income tax purposes due principally to revenue recognition methods used for
income tax purposes.
Under Financial Accounting Standards Board Statement No. 109, "Accounting
for Income Taxes," the liability method is used in accounting for income taxes.
Under this method, deferred tax assets and liabilities are determined based on
differences between financial reporting and tax bases of assets and
liabilities, and are measured using the enacted tax rates and laws that will be
in effect when the differences are expected to reverse. Prior to the adoption
of SFAS No. 109, income tax expense was determined using the deferred method.
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 antidilutive. However, pursuant to the requirements of the Securities and
Exchange Commission, common stock, stock dividends, options and warrants to
purchase common stock and redeemable convertible preferred stock issued during
the twelve months immediately preceding the initial filing of the Registration
Statement relating to the initial public offering ("IPO") of December 1, 1993,
were included in the calculation of weighted average shares as if they were
outstanding for all periods presented (using the treasury stock method).
Additionally, accrued dividends on the Company's preferred stock of $35,860
for the year ended October 31, 1994 has been added to the net loss in the
calculation of net loss per share.
INVENTORIES Inventories are valued at the lower of average cost or market and
include appropriate elements of material, labor and indirect costs. Inventories
include products and materials held for sale as well as products and materials
that are also used in the Company's research and development activities.
PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment, including
leasehold improvements, are stated at cost and depreciated or amortized using
the straight-line method, based on useful lives which are twenty years for the
Company's manufacturing plant and generally ten years for machinery and
equipment, five years for furniture and fixtures, and the shorter of the useful
life or the lease term for leasehold improvements. The Company will initiate
13
<PAGE> 9
straight-line depreciation on its newly constructed oil processing plant in
1997 based on a useful life of fifteen years.
Statements of Cash Flows Cash equivalents consist of highly liquid investments
with an original maturity of three months or less and are stated at market
value.
Interest paid by the Company amounted to approximately $133,000 in 1996,
$15,000 in 1995 and $9,000 in 1994. For the years ended October 31, 1996, 1995,
and 1994, the Company paid no income taxes.
3. SHORT-TERM INVESTMENTS AND MARKETABLE SECURITIES
In fiscal 1995, the Company adopted Statement of Financial Accounting
Standards No. 115 ("SFAS 115"), "Accounting for Certain Investments in Debt and
Equity Securities." The adoption was not material to the Company's financial
position or results of operations. The Company has classified all debt and
equity securities as available-for-sale. Available-for-sale securities are
carried at fair value, with material unrealized gains and losses reported as a
separate component of stockholders' equity. Realized gains and losses and
declines in value judged to be other-than-temporary on available-for-sale
securities are included in other income. Available-for-sale securities
consisted of U.S. government obligations totaling $30,759,352 and $10,583,908
for the years ended October 31, 1996 and 1995, respectively. At October 31,
1996 and 1995, the estimated fair value of these securities approximated cost.
4. INVENTORIES
Inventories consisted of the following:
<TABLE>
<CAPTION>
October 31,
1996 1995
- ----------------------------------------------------------------------------
<S> <C> <C>
Finished products $ 875,645 $468,472
Work in process 545,168 272,741
Raw materials 420,315 248,160
---------- --------
$1,841,128 $989,373
========== ========
</TABLE>
5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of the following:
<TABLE>
<CAPTION>
October 31,
1996 1995
- -----------------------------------------------------------------------------
<S> <C> <C>
Land $ 149,860 $ 149,860
Building and improvements 1,738,441 1,736,824
Machinery and equipment 15,026,822 10,923,150
Furniture and fixtures 429,279 242,523
Leasehold improvements 336,119 266,708
----------- -----------
17,680,521 13,319,065
Less accumulated depreciation
and amortization 2,371,279 1,479,060
----------- -----------
$15,309,242 $11,840,005
=========== ===========
</TABLE>
Depreciation expense amounted to $893,000, $571,000 and $271,000 for the
years ended October 31, 1996, 1995 and 1994, respectively.
6. PURCHASE OF PLANT AND NOTES PAYABLE
On March 16, 1995, the Company purchased a fermentation facility located in
Winchester, Kentucky for cash, stock and promissory notes totaling $10 million.
At the closing of the transaction, the Company paid the seller $1 million
in cash and $5 million in common stock (511,836 shares). The Company also
signed a promissory note for $2 million payable on March 16, 1997 (accruing
interest at a rate of 6.66% to be paid at the note's maturity) and another
promissory note for $2 million payable on September 16, 1997 (accruing interest
at a rate of 6.74% to be paid at the note's maturity). The Company uses the
facility to produce oils rich in DHA and ARA using its proprietary technology.
The promissory notes are collateralized by the fermentation plant but are
without recourse otherwise.
7. COMMITMENTS AND CONTINGENCIES
FACILITIES LEASES The Company leases its premises under an operating lease
agreement which expires in October 1998. The lease provides for rent abatement
incentives to the Company. For financial reporting purposes, any such rent
abatement is recognized on a straight-line basis over the life of the lease,
and rent expense recognized in excess of cash rent paid is reflected as accrued
rent. The terms of the lease call for rent escalations of 2% in both October
1996 and 1997. The Company has an option to extend the lease for five
additional years at 95% of the then prevailing fair rental value. Rent expense
was approximately $313,000 in 1996, $286,000 in 1995 and $233,000 in 1994.
Future minimum lease payments under the lease, assuming the Company will
not exercise any additional cancellation or expansion rights it has under the
lease, at October 31, 1996, were as follows:
<TABLE>
<S> <C>
1997 $323,000
1998 329,000
--------
$652,000
========
</TABLE>
SCIENTIFIC RESEARCH COLLABORATIONS 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.
TERM LOAN On October 7, 1994, the Company entered into an equipment line of
credit in the amount of $250,000. The line of credit converted into a
three-year term loan on October 7, 1995, bearing interest at the rate of 10%.
As of October 31, 1996 and 1995, the balance of the term loan was $168,000 and
$250,000, respectively. This loan is collateralized by the equipment purchased
with the proceeds.
LINE OF CREDIT 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
its oil processing facility in Winchester, KY. Draws on the line of credit as
of June 20, 1996 converted to a four year term loan bearing interest at the
rate of 9.02%. As of October 31, 1996, $495,000 of the line was available for
future borrowings and $1,410,000 was outstanding. This loan is collateralized
by the equipment purchased with the proceeds.
SBIR GRANTS The Company had commitments at October 31, 1996 to fund up to $1.7
million of Phase III SBIR technology commercialization expenses, provided the
technology under existing Phase II SBIR grants yields commercial opportunities
favorable to the Company.
14
<PAGE> 10
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 audits of costs charged to government
contracts through October 31, 1996, would not have a material effect on the
financial statements.
Other The Company was not a party to any material legal proceedings.
8. LICENSE AGREEMENTS
The Company has licensed certain technologies and recognized license fee
revenue under various agreements. Potentially refundable license fees are
recorded as unearned revenue and are not recognized as revenue until the
earnings process is complete and amounts are not subject to refund. Under the
terms of one of the agreements, revenues of $2,075,000 previously recorded as
unearned were recognized in the first quarter of 1996. Certain agreements
include royalty payments, which will be based upon a percentage of future
product sales. Royalties in the amount of $11,008 and $5,500 were earned in the
years ended October 31, 1996 and 1995, respectively.
9. CAPITAL ACCOUNTS
STOCK OPTION PLAN Options to purchase common stock under the Company's stock
option plan ("Option Plan") are granted at prices as determined by the Board of
Directors, but shall not be less than the fair market value of the Company's
common stock. The options are qualified and non qualified and vest over a
period of up to five years. The exercise dates and expiration of options (up to
a maximum of ten years from the date of grant) are as determined by the
Company's Board of Directors.
Details of shares under option were as follows:
<TABLE>
<CAPTION>
Number of Option Price
Shares Per Share
- ----------------------------------------------------------------------------
<S> <C> <C>
BALANCE AT OCTOBER 31, 1993 1,465,890 $1-$8
Granted 186,000 $8-$11.88
Exercised (131,350) $1-$8
Forfeited (30,125) $2-$9.625
--------- -------------
BALANCE AT OCTOBER 31, 1994 1,490,415 $1-$11.88
Granted 192,250 $8.38-$13.5
Exercised (221,316) $1-$11.88
Forfeited (19,950) $1.5-$13.5
--------- -------------
BALANCE AT OCTOBER 31, 1995 1,441,399 $1.5-$13.5
Granted 284,600 $18.00-$34.25
Exercised (223,890) $1.5-$20.25
Forfeited (22,150) $2-$34.25
--------- -------------
BALANCE AT OCTOBER 31, 1996 1,479,959 $1.5-$34.25
</TABLE>
At October 31, 1996, 916,927 Option Plan options were exercisable at a
weighted average exercise price of $6.55 per share, and a total of 105,105
shares of common stock were available for future grants under the Option Plan.
The Option Plan expired as of December 31, 1996. The Company will recommend a
new stock option plan for approval by shareholders at its 1997 Shareholder
Meeting.
DIRECTORS' STOCK OPTION PLAN The Company established a Directors' Stock Option
Plan in 1994 ("Directors' Plan"). The Directors' Plan provides for the award of
stock options to nonemployee directors. Options under the Directors' Plan are
granted at the fair market value of the Company's common stock, and are
exercisable six months after grant. After the inception of the Directors' Plan,
new, eligible directors receive options to purchase 7,500 shares of Martek's
common stock upon commencement of service as a director and 3,500 options upon
reelection. A total of 150,000 shares of common stock were initially reserved
for issuance under the Directors' Plan. During 1994, 20,050 options were
granted at an exercise price of $11.25 per share, and during 1995, 30,000
options were granted at an exercise price of $9.50 per share. During 1996,
21,000 options were granted at an exercise price of $32.875 per share. No
options were exercised in 1994 or 1995. In 1996, 9,200 of these options were
exercised at prices ranging from $9.50-$11.25 per share. At October 31, 1996,
61,850 options were outstanding and 78,950 options were available for future
grant under the Directors' Plan.
WARRANTS AND STOCK OPTION AGREEMENTS At October 31, 1993, warrants to purchase
50,025 shares of the Company's common stock were outstanding at a purchase
price of $1.00 per share. The warrants outstanding at October 31, 1993 were all
exercised in March 1994.
In connection with a private placement of the Company's common stock in
1995, warrants were issued to purchase 377,068 additional shares of common
stock at $9.91 and $10.25 per share which were initially exercisable. During
1995, 14,000 shares were exercised under the warrants at a price of $10.25 per
share. During 1996, 8,741 shares were exercised under the warrants at a price
of $10.25 per share. At October 31, 1996, warrants to purchase 354,327 shares
remain outstanding. The warrants expire in May and June 1998.
Prior to 1992, the Company granted 385,000 stock options (275,000 of which
were not included in the Company's Option Plan) at an average exercise price of
$1.50 per share, to a company of which two officers of the Company are
stockholders, and through which they provided consulting services to the
Company prior to 1992. Such officers do not anticipate providing such services
to the Company through such company in the future. During 1994, 20,000 of these
options were exercised at a price of $1.00 per share and during 1995, 150,000
of these options were exercised at a price of $1.50 per share. During 1996,
125,000 of these options were exercised at a price of $1.5045 per share and
22,500 of these options were exercised at a price of $2.00 per share. At
October 31, 1996, 67,500 of these options were outstanding, all of which are
currently exercisable. These options expire in October 1997.
STOCKHOLDER RIGHTS PLAN In January 1996, the Board of Directors adopted a
Stockholder Rights Plan ("Rights Plan") in which preferred stock purchase
rights ("Rights") have been granted as a dividend at the rate of one Right for
each share of the Company's Common Stock held of record at the close of
business on February 7, 1996. Each Right provides the holder the opportunity to
purchase 1/1000th of a share of Series A Junior Participating Preferred Stock
under certain circumstances at a price of $150 per share of such preferred
stock. All rights expire on February 7, 2006.
At the time of adoption of the Rights Plan, the Rights were neither
exercisable nor traded separately from the Common Stock. The Rights will be
exercisable only if a person or group in the future becomes the beneficial
owner of 20% or more of the Common Stock or announces a tender or exchange
offer which would result
15
<PAGE> 11
in its ownership of 20% or more of the Common Stock. Ten days after a public
announcement that a person or group has become the beneficial owner of 20% or
more of the Common Stock, each holder of a Right, other than the acquiring
person, would be entitled to purchase $300 worth of the Common Stock of the
Company for each Right at the exercise price of $150 per Right, which would
effectively enable such Right holders to purchase the Common Stock at one-half
of the then current price.
If the Company is acquired in a merger, or 50% or more of the Company's
assets are sold in one or more related transactions, each Right would entitle
the holder thereof to purchase $300 worth of common stock of the acquiring
company at the exercise price of $150 per Right, which would effectively enable
such Right holders to purchase the acquiring company's common stock at one-half
of the then current market price.
At any time after a person or group of persons becomes the beneficial
owner of 20% or more of the Common Stock, the Board of Directors, on behalf of
all stockholders, may exchange one share of Common Stock for each Right, other
than Rights held by the acquiring person.
The Board of Directors may authorize the redemption of the Rights, at a
redemption price of $.001 per Right, at any time until ten days (as such period
may be extended or shortened by the Board) following the public announcement
that a person or group of persons has acquired beneficial ownership of 20% or
more of the outstanding Common Stock.
10. INCOME TAXES
At October 31, 1996, the Company had net operating loss carry forwards of
approximately $42,100,000 for income tax reporting purposes that expire in
years 2000 through 2011.
Section 382 of the Internal Revenue Code limits the utilization of net
operating losses when ownership changes, as defined by that section, are
greater than 50%. The Company has had significant ownership changes over the
past four years, including an initial public offering of its common stock in
December 1993 and a follow-on offering of its 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
and the amounts used for income tax reporting. Significant components of the
Company's deferred tax liabilities and assets as of October 31, 1996 are as
follows:
<TABLE>
<CAPTION>
October 31,
1996 1995
- ------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax liabilities $ 193,000 $ 122,000
----------- -----------
Deferred tax assets:
Deferred revenues $ - $ 830,000
Write-off of patent 251,000 251,000
Net operating loss
carryforwards 16,847,000 9,294,000
----------- -----------
Total deferred tax assets $17,098,000 $10,375,000
----------- -----------
Net deferred tax assets
before valuation allowance $16,905,000 $10,253,000
=========== ===========
Valuation allowance for net
deferred tax assets $16,905,000 $10,253,000
=========== ===========
Net deferred tax assets $ - $ -
=========== ===========
</TABLE>
11. EMPLOYEE 401(k) PLAN
The Company maintains an employee 401(k) plan. The plan, which covers all
employees 21 years of age or older, stipulates that participating employees may
elect an amount between 1% and 20% of their total compensation to contribute to
the plan, not to exceed the maximum allowable by Internal Revenue Service
regulations. As of October 31, 1996, the Company had not contributed to the
plan.
Report of Independent Auditors
BOARD OF DIRECTORS
MARTEK BIOSCIENCES CORPORATION
We have audited the accompanying balance sheets of Martek Biosciences
Corporation as of October 31, 1996, and 1995, and the related statements of
operations, stockholders' equity (deficiency), and cash flows for each of the
three years in the period ended October 31, 1996. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Martek Biosciences
Corporation at October 31, 1996 and 1995, and the results of its operations
and its cash flows for each of the three years in the period ended October 31,
1996, in conformity with generally accepted accounting principles.
/s/ ERNST & YOUNG LLP
Vienna, Virginia
December 13, 1996
16
<PAGE> 12
Martek Biosciences Corporation
DIRECTORS AND OFFICERS
BOARD OF DIRECTORS
Henry Linsert, Jr.
Chairman, Chief Executive Officer
Richard J. Radmer, Ph.D.
President, Chief Scientific Officer
Jules Blake, Ph.D.
Former Vice President, Corporate
Scientific Affairs of Colgate-Palmolive Co.
Bruce E. Elmblad
President, Venture Investment Advisors
Ann L. Johnson, M.D.
Mills Peninsula Hospital
Psychiatrist/Psychopharmacologist
Douglas J. MacMaster, Jr.
Former Senior Vice President of Merck & Co., Inc.
John H. Mahar
President of Hillside Management
Sandra Panem, Ph. D.
President, Vector Fund Management, L.P.
Eugene H. Rotberg
Former Executive Vice President of
Merrill Lynch & Co. and Treasurer of World Bank
William D. Smart
Former President of Ross Laboratories and
Corporate Vice President of Abbott Laboratories
OFFICERS
Henry Linsert, Jr.
Chairman, Chief Executive Officer
Richard J. Radmer, Ph.D.
President, Chief Scientific Officer
Thomas C. Fisher
Senior Vice President, Operations
Steve Dubin
Chief Financial Officer, General Counsel,
Secretary and Treasurer
David J. Kyle, Ph.D.
Senior Vice President, Head of Research and Development
SCIENTIFIC ADVISORY BOARD
A. S. Clausi
Former Senior V.P. and Chief Research Officer
of General Foods Corp.
Bruce C. Parker, Ph.D.
Professor of Botany at Virginia Polytechnic Institute and
State University of Blacksburg, Virginia
Marvin J. Weinstein, Ph.D.
Former Vice President for Antibiotic Research and
Recombinant DNA Research at Schering Plough Corporation
Phillip P. Toskes, M.D.
Director of the Division of Gastroenterology, Hepatology and
Nutrition at the University of Florida College of Medicine
CORPORATE INFORMATION
HEADQUARTERS
Martek Biosciences Corporation
6480 Dobbin Road
Columbia, Maryland 21045
(410) 740-0081
LEGAL COUNSEL
Hogan & Hartson L.L.P.
Baltimore, MD
INDEPENDENT PUBLIC ACCOUNTANTS
Ernst & Young LLP
Vienna, Virginia
TRANSFER AGENT
Registrar & Transfer Company
10 Commerce Drive
Cranford, New Jersey 07016
(800) 368-5948
STOCK DESCRIPTION AND FORM 10-K
The Company's common stock commenced trading on the NASDAQ National Market
System under the symbol MATK on November 23, 1993. Prior to that date, there
was no established market for the Company's common stock. As of December 31,
1996, there were approximately 193 holders of record of the Company's common
stock. No cash dividends have been paid on the common stock and the Company
does not anticipate paying any cash dividend in the foreseeable future. The
following table sets forth, for the calendar periods indicated, the range of
high and low sale prices for the Company's common stock as reported by NASDAQ:
PRICE RANGE OF COMMON STOCK
<TABLE>
<S> <C> <C>
Fiscal 1995 High Low
- --------------------------------------------------------------------------------------
November 1, 1994 - January 31, 1995 $11 1/2 $8
February 1, 1995 - April 30, 1995 $11 1/4 $8 1/2
May 1, 1995 - July 31, 1995 $15 1/4 $9 1/4
August 1, 1995 - October 31, 1995 $19 3/4 $13
Fiscal 1996 High Low
- --------------------------------------------------------------------------------------
November 1, 1995 - January 31, 1996 $35 1/2 $17 3/4
February 1, 1996 - April 30, 1996 $37 3/4 $28
May 1, 1996 - July 31, 1996 $36 1/2 $18 3/4
August 1, 1996 - October 31, 1996 $32 $19 1/2
</TABLE>
SHAREHOLDERS MAY OBTAIN, AT NO CHARGE, A COPY OF MARTEK BIOSCIENCES
CORPORATION'S 10-K, FILED WITH THE SECURITIES AND EXCHANGE COMMISSION,
BY WRITING TO:
INVESTOR RELATIONS
MARTEK BIOSCIENCES CORPORATION
6480 DOBBIN ROAD
COLUMBIA, MARYLAND 21045
Celtone(R) is a trademark of the Company, registered with the U.S. Patent and
Trademark Office.
Neuromins(TM) is a trademark of the Company.
Doprexin(TM) is a trademark of Neuromedica, Inc.
<PAGE> 1
EXHIBIT 23.01
Consent of Independent Auditors
Board of Directors
Martek Biosciences Corporation
We consent to the incorporation by reference in this Annual Report (Form10-K)of
Martek Biosciences Corporation of our report dated December 13, 1996,included
in the 1996 Annual Report to Shareholders of Martek Biosciences Corporation.
We also consent to the incorporation by reference of our report dated December
13, 1996, with respect to the financial statements of Martek Biosciences
Corporation incorporated by reference in the Annual Report (Form 10-K) for the
year ended October 31, 1996, in the following Registration Statements:
(1) Registration Statement Number 33-79222 on Form S-8, dated May 23,
1994;
(2) Registration Statement Number 33-93580 on Form S-3, dated June
16, 1995.
/s/ Ernst & Young LLP
Vienna, Virginia
January 29, 1997
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