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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, 1997 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. [ ]
The aggregate market value of Common Stock held by non-affiliates of
registrant is $97,564,468 (based upon a last sale price of $9.50 per share of
the Common Stock as reported on the NASDAQ National Market System on January
14, 1998). The number of shares of Common Stock outstanding as of January 14,
1998 was 13,790,759.
DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of Registrant's Annual Report to Stockholders for the
fiscal year ended October 31, 1997 are incorporated by reference into Part II
of this Report. Certain portions of the Registrant's Definitive Proxy
Statement for its 1998 Annual Meeting of Stockholders (which will be filed with
the Commission within 120 days after the end of the Registrant's 1997 fiscal
year) are incorporated by reference into Part III of this Report.
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PART I
ITEM I. BUSINESS.
OVERVIEW
Martek Biosciences Corporation ("Martek") is a leader in the development
and commercialization of high value products derived from microalgae. Martek's
leading 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. Two of these licensees are marketing term
infant formula products containing the Company's oils in Israel and Spain. Four
of these licensees are marketing pre-term infant formula products containing
the Company's oils. In total, infant formula products containing the Company's
oils are being marketed in 24 countries with populations totalling 900 million.
Additional applications of the Company's platform technology include currently
marketed products and technologies to assist in drug discovery and diagnostics.
Martek intends to continue to exploit the largely untapped commercial
opportunities of microalgae. To that end, the Company maintains a library of
more than 2,900 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 that are naturally
present in breast milk but 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,
respectively, 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. With
respect to DHA and ARA, Martek's blended oils provide the closest match to
human milk when added to infant formula. 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 patents. Two more patents were granted in 1997.
One of these protects the production, use and sale of oils rich in ARA (30% or
greater concentration). The Company also has been awarded a number of foreign
patents covering aspects of its nutritional oils.
Martek has entered into royalty-bearing license agreements to utilize its
oils with six infant formula manufacturers, including Mead Johnson & Company (a
subsidiary of Bristol-Myers Squibb Company), American Home Products, Nutricia,
Maabarot Products Ltd. ("Maarbarot") and Novartis Nutrition S.A. ("Novartis").
Nutricia, Wyeth-Ayerst, a subsidiary of American Home Products, Maarbarot, and
Novartis are currently marketing pre-term infant formula products containing
Martek's oils in 24 countries worldwide. In addition, Maarbarot and Novartis
are currently marketing term infant formula products containing Martek's oils
in Israel and Spain, respectively. 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.
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In the latter part of 1996, Martek 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. In 1997, Martek expanded
distribution of Neuromins(TM). Martek has entered into agreements with Source
Naturals, Inc., Solgar Vitamin and Herb Company, Leiner Health Products,
Nature's Way and Neutraceutical Corporation for the packaging and distribution
of these products in retail outlets nationwide, including General Nutrition
Centers (GNC), the nation's largest natural products chain. Neuromins(TM) DHA
is also sold through mail order distributors.
Martek is exploring additional applications for DHA, including use in
specialty food products.
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. The Company has entered into a royalty-bearing license
agreement with Genetics Institute regarding the use of Celtone M. U.S. patents
were issued to Martek for its Celtone M technology in 1995 and 1997.
The Company has also developed novel labelled combinatorial libraries of
small molecules. The Company was issued a patent for this technology in 1997.
These libraries can be produced in a form which is labeled with stable isotopes
for rapid elucidation of bound conformations of these small molecules to their
receptor binding sites. The chemoinformatics associated with the receptor
binding site may be useful for accelerating the design of new drug leads.
Diagnostics. Martek has recently developed a series of proprietary
fluorescent markers that are 100 times brighter than existing fluors and could
provide a sensitivity to diagnostics never before achieved with conventional
fluorescent markers. Martek's new markers provide rapid (taking minutes instead
of hours), sensitive Western and Southern blot tests (protein and gene
determination respectively), and open new possibilities for high sensitivity
viral detection, rapid high throughput screening, and detection of substrates
in the parts per trillion range. The Company recently began to supply these
high sensitivity markers for Western blot tests (protein determination). The
Company has exclusive rights to use of this technology for diagnostic
applications based on a U.S. patent issued in 1997 and pending patent
applications.
TECHNOLOGY
Martek applies its microalgal expertise and culturing technology to its
expanding library of over 2,900 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.
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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 that
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 new products, including pharmaceuticals.
Martek's scientists have developed and patented novel microalgal culturing
systems which allow for 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 than microalgae grown in photobioreactors.
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
2,900 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, for which 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 containing predominantly 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 predominantly 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,
docosahexaenoic acid ("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 from dietary precursors. Infants acquire DHA and
arachidonic acid ("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 isolated and cultured a strain of fungus that produces large
amounts of ARA. DHA and ARA are naturally present in breast milk but are not
added to 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 first realized revenues from license fees related to its nutritional
oils and sale of sample quantities of these oils in 1992. 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 1997. As of early 1998, four of the Company's infant formula
licensees were marketing pre-term infant formula containing Martek's oils in 24
countries worldwide and two licensees were marketing term infant formula in
Israel and Spain.
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
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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 via the placenta and for a nursing
infant, it is provided via breast milk. 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. Recent studies have added to the
expanding body of evidence supporting the importance of DHA and ARA. The
following studies are examples:
- New research was presented in 1997 suggesting that infants deprived of
DHA may be at higher risk of developing schizophrenia later in life.
According to this study, which was published in the British Journal of
Psychiatry, schizophrenics that were not breast-fed during childhood
"had more schizoid and schizotypal traits, and were more poorly
adjusted" than their siblings (who were more likely to have been
breast-fed). In addition, the results showed that patients who were
not breast-fed had a lower mean IQ than breast-fed patients.
- A study sponsored by Mead-Johnson & Company and reported in 1997 found
that pre-term infants fed formulas containing Martek's oils had a 12%
better growth rate than the control group. Another study reported in
1997 and sponsored by Wyeth-Ayerst found that infant formula
supplemented with Martek's oils resulted in a reduction of fungal skin
infections, milk intolerance, nervousness and irritability in pre-term
infants.
- The January 1998 issue of PEDIATRICS (Vol. 101 No. 1 January 1998) in
an article entitled "Breastfeeding and Later Cognitive and Academic
Outcomes" by Horwood and Fergusson (New Zealand), reported that in an
18-year longitudinal study of over 1,000 children, those who were
breast-fed as infants had both better intelligence and greater
academic achievement than those who were infant-formula fed children.
The authors cited the importance of DHA in the neurological
development of children and recommend the need to "develop improved
infant formulas with properties more similar to those of human breast
milk that may lead to improved developmental outcomes in children."
The study indicated that breast-fed babies have a 38% greater
likelihood of completing their high school matriculation than
formula-fed babies even after allowances were made for confounding
social, familial and perinatal factors. Although the study could not
conclude that DHA provided to the breast-fed infants from their
mother's milk was the sole cause of the improved achievement scores,
the authors pointed out recent controlled intervention studies
demonstrating similar outcomes in infants with DHA-supplemented
formulas and concluded that:
"... the weight of evidence clearly favors
the view that exposure to breast-feeding is
associated with small but detectable
increases in childhood cognitive ability and
educational achievement, with it being likely
that these increases reflect the effects of
long chain polyunsaturated fatty acid levels
and, particularly, DHA levels on early
neurodevelopment."
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
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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. 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 introduced Neuromins(TM) PL DHA dietary
supplements for pregnant and lactating women.
Low levels of DHA have been correlated with changes in disposition, memory
loss, visual and other neurological conditions. A link between low levels of
DHA and Alzheimer's, depression, memory loss and Attention-Deficit/Hyperactivity
Disorder (ADHD) was the subject of a 1997 conference on nutrition and the brain
at The New York Hospital-Cornell Medical Center's Nutrition Information Center.
Experts at the conference, "Keeping Your Brain in Shape: New Insights Into
DHA," discussed their research into the relationship between low levels of DHA
and a number of behavioral and neurological conditions that until now have been
thought to be unrelated. In addition to conditions such as Alzheimer's,
depression, memory loss and ADHD, the researchers also noted studies showing a
link between deficient DHA levels and hostility and aggression.
The Company is currently working to develop other DHA delivery methods to
address these markets, including powders, an emulsion and food ingredients.
The Company is also selling DHA for incorporation into 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 are
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 and Technologies 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 has developed a series of novel combinatorial libraries. These
libraries are available for screening by pharmaceutical and drug discovery
companies. Martek has also developed a new method for providing detailed
structural information on molecular interactions through the use of an array of
small, flexible molecules which are labelled with stable isotopes such as
Carbon-13 and Nitrogen-15. In conjunction with NMR analysis, these probes are
being developed to elucidate the bound conformation of these small molecules to
their receptor binding sites. The chemoinformatics associated with the receptor
binding site may be useful for accelerating the design of new drug leads.
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.
In particular, 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.
U.S. patents were issued to the Company for the composition of matter and
use of Celtone M in 1995 and 1997.
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 U.S. 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.
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Nucleic Acids -- Martek has recently developed and sells 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.
Diagnostics
Fluorescent Marker Technology. In 1997, Martek developed a series of
proprietary fluorescent markers ("PBXLs") that are 100 times brighter than
existing fluors and could provide a sensitivity to diagnostics never before
achieved with conventional fluorescent markers. Martek's PBXLs provide rapid
(taking minutes instead of hours), sensitive, Western and Southern blot tests
(protein and gene determination respectively) and the Company recently began to
market these high sensitivity markers for commercially available laser scanning
systems. As a consequence of their high level of sensitivity, Martek's PBXLs
are being tested as a platform technology for new methods of viral detection,
novel high throughput screening approaches, and new diagnostic tests which were
heretofore not practical because of a lack of sensitivity. The Company has
exclusive rights to use of this technology for diagnostic applications based on
a U.S. patent issued in 1997 and pending patent applications.
Martek also markets, under a royalty-bearing license from Stanford
University, a series of phycobiliproteins and conjugated phycobiliproteins
directly to university researchers as well as to pharmaceutical and diagnostics
companies.
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 and Novartis, 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 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 Food and Drug Administration
("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
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<PAGE> 10
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 January 1997, Martek signed an agreement with Royal Gist-Brocades B.V.
("Gist-Brocades") under which Gist-Brocades became Martek's exclusive contract
supplier for nutritional oils containing ARA. As part of this agreement, Martek
will receive guaranteed supplies on advantageous terms and license fees from
Gist-Brocades pending certain patent issuances.
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.
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, 1997
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. The
Company acquired the Winchester facility in 1995 from a subsidiary of ACX
Technologies, Inc. Martek's oils produced in this facility have been certified
kosher by the Orthodox Union. Martek is currently in the process of optimizing
production of its nutritional oils, and believes that a continued optimization
effort will be required for at least the next two years. In 1996, the Company
constructed a "state of the
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<PAGE> 11
art" oil processing plant at its Winchester facility which was put into
production in early 1997. Martek has also entered into an agreement with a
third party, Gist-Brocades, to produce its ARA oil, and may enter into
additional production agreements with third parties if demand for its 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 requirements (including Good
Manufacturing Practices ("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 entered into
agreements with Leiner Health Products for the packaging and distribution of
Neuromins(TM) to mass market retail outlets, and with Nutraceuticals
Corporation, Solgar Vitamin and Herb Company, Source Naturals, and Nature's Way
for the packaging and distribution of its Neuromins(TM) DHA capsules to the
natural foods markets. Neuromins(TM) DHA is currently being marketed in over
5,000 retail stores nationwide, including General Nutrition Center (GNC)
stores. Neuromins(TM) DHA is also marketed through several mail order
distributors. In the aggregate, these distributors have access to
approximately 58,000 health food and mass retail outlets nationwide. Martek has
continued its own DHA awareness campaign in an effort to support the marketing
efforts of its infant formula licensees and capsule distributors. This campaign
will continue and most likely intensify in 1998. 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.
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 and
technologies 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 and technologies competitive with
those of the Company on their own or through joint ventures. The existence of
products and technologies of which the Company is not aware, or products and
technologies that may be developed in the future, may adversely affect the
marketability of products and technologies 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.
Because fish oil is significantly less costly than Martek's DHA oil, fish oil
will present a substantial competitive threat to Martek's Neuromins(TM) DHA.
Published reports, however, have cited a number of fish oils as containing
chemical toxins that are not present in Martek's oils. 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
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<PAGE> 12
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 the degree of competitive threat that this fungal
source of DHA will present 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 of which Martek is
not aware.
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 that 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.
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. Additionally, the
Company, in certain cases, relies on the licences of patents and technology of
third parties. The Company has obtained over 18 U.S. patents, covering various
aspects of its technology, which will expire on various dates between 2007 and
2015. 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
- 11 -
<PAGE> 13
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 seven 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, some of which are pending and some of which have been granted. 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 and certain aspects of Martek's breath test technology; its Celtone
and Celtone M technology; and its combinatorial library 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.
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. Infant formula products containing
the Company's nutritional oils are currently being marketed outside the U.S. in
24 countries worldwide, and Martek understands that its licensees have received
appropriate regulatory clearances to the extent they are required to market
such products in those countries.
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<PAGE> 14
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 relevant clearance and other requirements independently 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 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 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.
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<PAGE> 15
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
and ARA oils. 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 ARA as a dietary supplement or that the
Company will be able to continue to meet such requirements with regard to DHA
as a dietary supplement.
The fluorescent pigment and other products derived from microalgae are
subject to potential regulation by FDA as either medical devices or as a
combination medical device/drug product to the extent that they are used in the
diagnosis, mitigation, treatment, cure or prevention of diseases. Such
classification would subject the products to premarket clearances and/or
regulatory approvals. There can be no assurances that the Company or its
licensees or collaborators would be able to develop the extensive safety and
efficacy data needed to support such FDA premarket clearances and/or regulatory
approvals or that FDA ultimately would authorize the marketing of such products
on a timely basis, if at all.
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, 1997, the Company had 121 full-time employees, of whom 12
had Ph.D.'s. Approximately 46 employees are engaged in research and
development and contract related research and development activities, 52 are
engaged in production or production development related activities and 23 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 2004, but the Company has an option to extend the
lease through 2009 at the expiration of the initial lease.
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 has an oil
processing plant at the Winchester facility which was put into production in
1997. The oil processing plant occupies approximately 6,000 square feet.
ITEM 3. LEGAL PROCEEDINGS.
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 1997.
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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"
and "Stock Description and Form 10-K" on the inside back cover of the Company's
Annual Report to Stockholders for the fiscal year ended October 31, 1997, is
included herein as Exhibit 13.01, and those portions are incorporated by
reference into Part II of this report. Martek has not declared any cash
dividends during the two-year period ending October 31, 1997.
During fiscal 1997, 67,500 shares of common stock were issued by Martek
upon exercise of options held by American Technology Investments, Inc. The
date of these stock option exercises and the respective option exercise prices
are set forth below.
<TABLE>
<CAPTION>
Date # of Shares Per Share Exercise Price
----- ----------- ------------------------
<S> <C> <C>
1/8/97 11,250 $2.00
1/9/97 11,250 $2.00
1/10/97 18,750 $2.00
1/11/97 10,000 $2.00
1/13/97 9,375 $2.00
1/14/97 6,875 $2.00
</TABLE>
These shares were issued by Martek in reliance on the exemption
contained in rule 701 under the Securities Act of 1933, as amended.
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, 1997, is included herein as Exhibit 13.01, and that portion of the
annual report is incorporated by reference into Part II of 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, 1997, is included herein as Exhibit 13.01, and that portion is
incorporated by reference into Part II of this Report.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The Company's 1997 Financial Statements and Report of Independent Auditors
by Ernst & Young LLP set forth on pages 12 through 20 of the Company's Annual
Report to Stockholders for the fiscal year ended October 31, 1997, is included
herein as Exhibit 13.01, and those portions are incorporated by reference into
Part II of this Report.
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<PAGE> 18
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
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<PAGE> 19
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information concerning the Company's directors contained under the
captions "Nominees for Election as a Director For Terms Expiring in 2001" and
"Directors Continuing in Office" and, with regard to Item 405 of Regulation
S-K, the information contained under the caption "Section 16(a) Beneficial
Ownership Reporting Compliance" in the Company's 1998 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 . . . . . . . . . . . . 57 Chairman, Chief Executive Officer and
Director
Richard J. Radmer, Ph.D . . . . . . . . . 55 President, Chief Scientific Officer and
Director
Thomas C. Fisher . . . . . . . . . . . . 51 Senior Vice President, Operations
David J. Kyle, Ph.D . . . . . . . . . . . 44 Senior Vice President, Research and
Development
Jerome C. Keller . . . . . . . . . . . . 55 Senior Vice President, Sales & Marketing
Steve Dubin . . . . . . . . . . . . . . . 44 Chief Financial Officer, General Counsel,
Secretary and Treasurer
Paul W. Behrens, Ph.D . . . . . . . . . . 41 Director of Physiology
Jonathan Miles Brown, Ph.D . . . . . . . 42 Director, Stable Isotope Group
Paul J. Kelley . . . . . . . . . . . . . 44 Vice President of Manufacturing
Ivan Rubin . . . . . . . . . . . . . . . 58 Director Of Business Development and
Strategic Planning
</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.
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> 20
Jerome C. Keller joined Martek in September 1997 as Senior Vice President
of Sales and Marketing. Prior to joining Martek, Mr. Keller had been
consulting after spending a 25-year career at Merck, most recently as Vice
President of Sales from 1986 to 1993. In this position, he was responsible for
all U.S. sales operations, including the direction of a support staff of 4,500
personnel and a sales volume of $4.2 billion. Some of the products introduced
under Mr. Keller included Pepcid, Mefoxin, Primaxin, Vasotec, Mevocor, Zocor,
Proscor and Prilosec. Mr. Keller has a B.S. degree from Duquesne University and
an M.S. degree from the University of Pittsburgh.
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 and 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
Stable Isotope 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.
Paul J. Kelley joined Martek in April 1997 as Vice President of
Manufacturing at the Company's Winchester, Kentucky production plant. Prior to
joining Martek, Mr. Kelley spent four years as the Plant Manager of a
Biotechnology plant in the Pharmaceutical Division of Bayer. Prior to 1993, Mr.
Kelley held several other positions at Bayer, including Production Manager of a
plant in West Germany from 1989 to 1991. Prior to working for Bayer, Mr. Kelley
was the Plant Manager of a facility in the Biotechnology Division of Miles,
Inc. from 1983 to 1989. Mr. Kelley received an M.B.A. from Rutgers Graduate
School of Business and a B.S.C.E. from the New Jersey Institute of Technology.
- 19 -
<PAGE> 21
Ivan Rubin, former Vice President of Business Planning, Development, and
Research for Merck, joined Martek in October 1997 as Director of Business
Development and Strategic Planning. Prior to joining Martek, Mr. Rubin spent 25
years at Merck developing the strategies to position them as the leader in the
pharmaceutical industry. Since leaving Merck in 1993, Mr. Rubin has been the
President of Beta Associates, a consulting firm specializing in strategic
planning and business development in the health care industry. Mr. Rubin is
also on the Board of Directors of Covalent Group, a clinical research company
for the Pharmaceutical and Biotechnology industries. Mr. Rubin received a B.A.
from the University of Buffalo and an M.B.A. from Hofstra University.
- 20 -
<PAGE> 22
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 1998 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 1998 Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
None.
- 21 -
<PAGE> 23
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, 1997 are included in Exhibit 13.01
to this report and are incorporated into Item 8 of this Report:
Balance Sheets as of October 31, 1997 and 1996
Statements of Operations for the Years Ended October 31, 1997,
1996 and 1995
Statements of Stockholders' Equity for the
Years Ended October 31, 1997, 1996 and 1995
Statements of Cash Flows for the Years Ended October 31, 1997,
1996 and 1995
Notes to Financial Statements
Report of Independent Auditors
(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
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).
- 22 -
<PAGE> 24
<TABLE>
<S> <C>
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 1 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.[*] (filed as Exhibit
10.23 to the Company's Annual Report on Form 10-K for the
fiscal year ended October 31, 1996).
10.24 Martek Biosciences Corporation 1997 Stock Option Plan (filed as
Exhibit 4.1(e) to the Company's Registration Statement on
Form S-8, File No. 333-27671, filed May 22, 1997, and
incorporated by reference herein).
10.25 Third Amendment of Lease, dated August 1, 1997 between the Company
and M.O.R Columbia Limited Partnership. **
</TABLE>
- 23 -
<PAGE> 25
<TABLE>
<S> <C>
13.01 Portions of the Annual Report to Stockholders of the Company for
the year ended October 31, 1997.**
23.01 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).**
27.01 Financial Data Schedule.**
</TABLE>
- -------------------------
* Confidential treatment was granted by the Securities and Exchange
Commission for certain portions of these agreements. The confidential portions
were filed separately with the Commission.
** 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).
(b) Reports on Form 8-K
None
- 24 -
<PAGE> 26
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, 1998.
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, 1998
- ---------------------------- Director (Principal Executive
Henry Linsert, Jr. Officer)
/s/ Steve Dubin Secretary and Treasurer January 29, 1998
- ---------------------------- (Principal Financial and
Steve Dubin Accounting Officer)
/s/ Jules Blake Director January 29, 1998
- ----------------------------
Jules Blake
/s/ Ann L. Johnson Director January 29, 1998
- ----------------------------
Ann L. Johnson
</TABLE>
- 25 -
<PAGE> 27
<TABLE>
<S> <C> <C>
/s/ Douglas J. MacMaster, Jr. Director January 29, 1998
- -----------------------------
Douglas J. MacMaster, Jr.
/s/ John H. Mahar Director January 29, 1998
- ----------------------------
John H. Mahar
/s/ Sandra Panem Director January 29, 1998
- ----------------------------
Sandra Panem
/s/ Richard J. Radmer President and Director January 29, 1998
- ----------------------------
Richard J. Radmer
Director January 29, 1998
- ----------------------------
Eugene H. Rotberg
/s/ William D. Smart Director January 29, 1998
- ----------------------------
William D. Smart
/s/ Bruce E. Elmblad Director January 29, 1998
- ----------------------------
Bruce E. Elmblad
</TABLE>
- 26 -
<PAGE> 28
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description
----- -----------
<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 1 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>
- 27 -
<PAGE> 29
<TABLE>
<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 1995 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.[*] (filed as exhibit
10.23 to the Company's Annual Report on Form 10-K for the
fiscal year ended October 31, 1996).
10.24 Martek Biosciences Corporation 1997 Stock Option Plan (filed as
Exhibit 4.1(e) to the Company's Registration Statement on Form
S-8, File No. 333-27671, filed May 22, 1997, and incorporated
by reference herein).
10.25 Third Amendment of Lease, dated August 1, 1997 between the Company
and M.O.R Columbia Limited Partnership. **
13.01 Portions of the Annual Report to Stockholders of the Company for
the year ended October 31, 1997.**
23.01 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).**
27.01 Financial Data Schedule.**
</TABLE>
- -------------------------
* Confidential treatment was granted by the Securities and Exchange
Commission for certain portions of these agreements. The confidential portions
were filed separately with the Commission.
** 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).
- 28 -
<PAGE> 1
EXHIBIT 10.25
THIRD AMENDMENT OF LEASE
THIS THIRD AMENDMENT OF LEASE (this "Amendment") is made this 1 day of
August, 1997 but shall be deemed effective as of June 1, 1997 (the "Effective
Date") by and between M.O.R. COLUMBIA LIMITED PARTNERSHIP, a Maryland limited
partnership ("Landlord") and MARTEK BIOSCIENCES CORPORATION, a Delaware
corporation ("Tenant").
INTRODUCTION
A. Landlord's predecessor in title, Aetna Life Insurance Company,
and Tenant entered into a Lease dated August 15, 1992 (the "Original Lease"),
whereby Tenant agreed to lease twenty-seven thousand one hundred fifty (27,150)
square feet (the "Original Leased Premises") in a building known as Building K
(the "Building") in an office and research and development complex known as
"Columbia Business Center" in Howard County, Maryland. The Original Lease was
amended by a Lease Modification Agreement (the "First Amendment") dated October
14, 1993 and by a Second Lease Modification Agreement (the "Second Amendment")
dated September 22, 1994. The Original Lease, as amended by the First
Amendment and the Second Amendment, is herein collectively referred to as the
"Lease."
B. Pursuant to the various expansion rights of Tenant set forth
in Article 50 of the Lease, Tenant expanded the Original Leased Premises by a
total of twelve thousand five hundred fifty-four (12,554) square feet (the
"Expansion Space") so that, as of this date, Tenant leases a total amount of
space equal to thirty-nine thousand seven hundred four square feet (39,704)
(the "Leased Premises").
C. Pursuant to a Consent to Sublease of Lease by and among
Landlord, Tenant and Fidelity Mortgage and Finance Co. ("Sub-Tenant"), dated
November 4, 1996, Landlord consented to the sublease by Tenant to Sub-Tenant of
six thousand two hundred seventy-one (6,271) square feet of the Leased Premises
(the "Subleased Premises").
D. But for this Amendment, the initial term of the Lease would
expire on October 31, 1998.
E. Pursuant to Article 49 of the Lease, Tenant has an option to
extend the term of the Lease. Landlord and Tenant desire to extend the term of
the Lease for a term ending November 30, 2004.
F. Unless otherwise defined herein or unless the context requires
a contrary meaning, all capitalized terms used in this Amendment shall have the
meanings given to them in the Lease.
NOW, THEREFORE, in consideration of the foregoing Introduction, which
is deemed a substantive part of this Amendment, the covenants of the parties
herein and in the Lease and
<PAGE> 2
other good and valuable consideration, the receipt and adequacy of which are
hereby acknowledged, Landlord and Tenant hereby agree as follows:
1. TERM. The term of the Lease is hereby extended for a term
commencing as of June 1, 1997 (the "Renewal Commencement Date") and terminating
at 11:59 p.m. on November 30, 2004 (the "Renewal Term"), unless otherwise
terminated in accordance with the provisions of the Lease, as amended hereby,
on the same terms and conditions as are set forth in the Lease except as
specifically set forth herein.
2. RENT. As of the Renewal Commencement Date through the Renewal
Term, Tenant shall pay Landlord Basic Annual Rent in equal monthly installments
at the times and otherwise in the manner as set forth in the Lease as follows:
<TABLE>
<CAPTION>
RENEWAL BASIC MONTHLY RENT PER
YEAR ANNUAL RENT INSTALLMENT SQUAREFOOT
---- ----------- ----------- ----------
<S> <C> <C> <C>
June 1, 1997-May 31, 1998 $322,396.48 $26,866.37 $8.12
June 1, 1998-May 31, 1999 $326,763.92 $27,230.33 $8.23
June 1, 1999-May 31, 2000 $369,247.20 $30,770.60 $9.30
June 1, 2000-May 31, 2001 $380,761.36 $31,730.11 $9.59
June 1, 2001-May 31, 2002 $392,275.52 $32,689.63 $9.88
June 1, 2002-May 31, 2003 $404,186.72 $33,682.23 $10.18
June 1, 2003-May 31, 2004 $416,494.96 $34,707.91 $10.49
June 1, 2004-November 30, 2004 $428,803.20 $35,733.60 $10.80
</TABLE>
3. LEASE AMENDMENTS. Sections 49 and 50 of the Lease are hereby
deleted in their entireties and the following new Sections 49, 50 and 51 are
incorporated into the Lease:
"Section 49. Expansion Option.
A. Provided: (i) the Lease is in full force and
effect, (ii) Tenant is not in breach or default (beyond any applicable
cure period) of any monetary provision or material non-monetary
provisions of the Lease at the time of exercising the Expansion Option
(as hereinafter defined), and (iii) Tenant shall have given Landlord
written notice (the "Expansion Notice") at least 120 days prior to the
Expansion Commencement Date (as hereinafter defined) of Tenant's
election to exercise the Expansion Option, Tenant shall have the right
(the "Expansion Option") to lease all or any portion of any then
available space in the Building (the "Expansion Space") as long as the
space remaining in the Building after such expansion is leasable in
the Landlord's reasonable discretion and any cost to demise the
Expansion Space that exceeds Tenant's Expansion Contribution (as
hereinafter
2
<PAGE> 3
defined) is borne by Tenant. The Basic Annual Rent with respect to
the Expansion Space shall be the per square foot rental rate
applicable to the Leased Premises, subject to the same adjustments
during the Renewal Term, or the Additional Term (as defined below), as
the per square foot rental rate applicable to the Leased Premises, and
shall be paid at the times and in the manner as provided with respect
to, and in addition to, the monthly installments of Basic Annual Rent
with respect to the Leased Premises as set forth in the Lease. Tenant
shall have the right to lease and occupy the Expansion Space at any
time prior to May 31, 1998 (the "Expansion Commencement Date").
B. Notwithstanding any other provision hereof,
the following provisions shall apply to the Expansion Option and to
Tenant's lease, if any of the Expansion Space:
(i) Tenant shall not be entitled to exercise the
Expansion Option unless at the date Tenant gives Landlord notice of
such exercise and on the Expansion Commencement Date, Tenant is in
possession of the Leased Premises and Tenant is not in breach or
default (beyond any applicable cure period) of any monetary provision
or material non-monetary provisions of the Lease;
(ii) Tenant's rental of the Expansion Space shall
be for a term commencing on the Expansion Commencement Date, and
continuing through the balance of the Renewal Term (and of any
subsequent renewal term if Tenant shall have exercised its renewal
option pursuant hereto), under and subject to the terms of the Lease,
with the same force and effect as though this Lease had originally
provided for the rental of the Expansion Space.
(iii) Landlord shall contribute Ten Dollars
($10.00) per square foot of the Expansion Space (the "Expansion
Contribution"), for any improvements to be made by Landlord for Tenant
to the Expansion Space. At the Tenant's option, Landlord shall
competitively bid all work to be performed in the Expansion Space or
the Leased Premises in connection with such expansion. Any
improvements to be made shall be performed in accordance with
drawings, plans and specifications prepared by Tenant and approved by
Landlord, such approval shall not be unreasonably withheld or delayed.
All costs in excess of the Expansion Contribution shall be paid by
Tenant within thirty (30) days after receipt of an invoice from
Landlord therefor. In the event that Manekin Corporation is no longer
involved in the ownership or management of the Building, Tenant may
use a reputable contractor of its choice, subject to Landlord's
reasonable approval, to perform tenant improvements in the Expansion
Space or in the Leased Premises.
(iv) From and after the Expansion Commencement
Date, all references in the Lease to the Leased Premises shall refer
to the aggregate of the original Leased Premises and the Expansion
Space and all references to the area or Rentable Area of the Leased
Premises shall, for all purposes of this Lease, be
3
<PAGE> 4
deemed to include both the area of the original Leased Premises and of
the Expansion Space. Tenant's Portion shall be adjusted accordingly
to reflect the leasing of the Expansion Space.
(v) Except as otherwise expressly provided in
this Section 49, from and after the Expansion Commencement Date, all
of the covenants and agreements set forth in the Lease shall apply to
the Expansion Space.
Time is of the essence with respect to Tenant's exercise of
its rights under this Section 49 and Tenant acknowledges that the
Expansion Notice must be in writing and timely sent.
Section 50. Right of First Offer. Tenant shall have the
right of first offer (the "First Offer") to lease any space in the
Building as it becomes available (the "First Offer Space") at a Basic
Annual Rent equal to the price per square foot rental rate Tenant is
then paying with respect to the Leased Premises, subject to the same
adjustments during the Renewal Term, or the Additional Term, as the
per square foot rental rate applicable to the Leased Premises.
Said rent shall be payable in equal monthly installments (and
fractions thereof), at the times and subject to the terms and
conditions as provided with respect to, and in addition to, the
monthly installments of the Basic Annual Rent as set forth in this
Lease.
Tenant's exercise of its First Offer shall be effective only
upon written notification by Tenant to Landlord thereof (the
"Notice"). Such notification must be given to Landlord before the
close of business on the tenth full calendar day after Tenant's
receipt of Landlord's written notification to Tenant of the
availability of the First Offer Space and the terms on which Landlord
intends to offer the First Offer Space for rental (the "Offer"). An
Offer does not include the exercise by another tenant of its right of
renewal, refusal or expansion.
In the event Tenant fails to so notify Landlord within said
ten calendar day period, Landlord shall be free to offer said First
Offer Space to third parties and Tenant shall have no further rights
in such space.
This First Offer is personal to Tenant and shall not be
separated from the Lease or transferred by Tenant independently of the
leasehold interest without the prior written consent of Landlord.
Notwithstanding any other provision hereof, the following
provisions shall apply to the First Offer and to Tenant's lease, if
any, of the First Offer Space:
(i) Tenant shall not be entitled to exercise the
rights accorded to Tenant in the first paragraph, unless at the date
of such exercise or at the date on
4
<PAGE> 5
which Tenant's lease, if any, of the First Offer Space becomes
effective, Tenant is in possession of the Leased Premises and Tenant
is not in breach or default (beyond any applicable cure period) of any
monetary provision or material non-monetary provisions of the Lease;
(ii) Tenant shall have the right to lease and
occupy the First Offer Space commencing on the date set forth in
Landlord's Offer (the "First Offer Space Commencement Date"), and
terminating on the termination of the Renewal Term (or of any
subsequent renewal term if Tenant shall have exercised its renewal
option pursuant hereto), on the same terms, conditions, and provisions
as are in this Lease set forth, except to the extent modified by the
Offer, with the same force and effect as though this Lease had
originally provided for the rental of the Leased Premises and the
First Offer Space;
(iii) Landlord shall contribute for any
improvements to be made by Landlord for Tenant to the First Offer
Space (i) $10.00 per square foot of the First Offer Space if the First
Offer Space Commencement Date is on or before November 30, 2000; and
(ii) $0.17 per square foot of the First Offer Space multiplied by the
number of months remaining in the Renewal Term as of the First Offer
Space Commencement Date, if the First Offer Space Commencement Date is
after November 30, 2000 (either of which is the "Offer Contribution").
Any improvements to be made shall be performed in accordance with
drawings, plans and specifications prepared by Tenant and approved by
Landlord, such approval shall not be unreasonably withheld or delayed.
At Tenant's option, Landlord shall competitively bid all work to be
performed in the First Offer Space or the Leased Premises in
connection with such expansion. All costs in excess of the Offer
Contribution shall be paid by Tenant within thirty (30) days after
receipt of an invoice from Landlord therefor. In the event that
Manekin Corporation is no longer involved in the ownership or
management of the Building, Tenant may use a reputable contractor of
its choice, subject to Landlord's reasonable approval, to perform
tenant improvements in the First Offer Space or the Leased Premises.
(iv) The Lease shall be amended, as may be
appropriate, to reflect the leasing of the First Offer Space; and
(v) This First Offer right is subordinate to any
previously granted rights of any tenant of the Building, including,
without limitation, renewal rights, expansion rights, rights of
refusal and rights of offer, or Landlord's agreement to allow any
existing tenant of the First Offer Space to extend its Lease thereof,
whether or not such right exists currently.
Time is of the essence with respect to Tenant's exercise of
its rights under this Section 50 and Tenant acknowledges that Landlord
requires strict adherence to the requirement that the Notice be timely
made and in writing.
5
<PAGE> 6
Section 51. Renewal Option. Provided (i) this Lease is then
in full force and effect and, (ii) Tenant is not in breach or default
(beyond any applicable cure period) of any monetary or material
non-monetary provisions of this Lease either on the date Tenant elects
to renew or on the date the Additional Term (as defined below)
commences, Tenant shall have the right to renew this Lease for one (1)
renewal term of five (5) years (the "Additional Term"), to commence
immediately following the expiration of the Renewal Term and to end on
November 30, 2009, and to be on the same terms, conditions, and
provisions as are set forth in this Lease with the same force and
effect as though this Lease had originally provided for such an
extended term, save that:
(i) there shall be no further right of renewal,
after the Additional Term, and
(ii) the Basic Annual Rent payable with respect to
the Leased Premises during the Additional Term shall be adjusted to
reflect ninety-five percent (95%) of the prevailing rental rate for
comparable space within the market area of the Building as of the
commencement of the Additional Term (as determined below).
Tenant shall be deemed to have waived the right to exercise
this renewal option unless not less than one hundred eighty (180)
days prior to the date of termination of the Renewal Term, Tenant
shall have notified Landlord in writing of Tenant's election to renew
(the "Renewal Notice"). Landlord shall give Tenant written notice of
the prevailing rental rate within thirty (30) days after Landlord's
receipt of the Renewal Notice (the "Rent Notice"). Tenant may elect
to have the prevailing rent determined as set forth below if it does
not agree with Landlord's determination thereof by giving Landlord
written notice (the "Appraisal Notice") within ten (10) days after
Tenant's receipt of the Rent Notice.
Within five (5) business days after the Landlord receives the
Appraisal Notice from Tenant, Landlord and Tenant shall give written
notice to the other that each, at its own expense, has hired and
appointed a disinterested real estate broker of recognized competence
and professional experience as a broker of comparable commercial and
industrial real estate in the Baltimore-Washington Metropolitan Area.
The two brokers thus appointed shall mutually agree upon the
appointment of a third broker, the cost of which shall be shared
equally by Landlord and Tenant, which broker shall also be a
disinterested person of recognized competence and professional
experience as a broker of comparable commercial and industrial real
estate in the Baltimore-Washington Metropolitan Area. In the event
that the two brokers shall be unable to agree, within ten (10) days
after their appointment, on the appointment of the third broker, then
Tenant shall choose three brokers from whom Landlord shall choose one
who shall serve as the third broker. Landlord shall notify Tenant of
the selection of the third broker within ten (10) days of Tenant's
notice to
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<PAGE> 7
Landlord of the selection of such three brokers from which Landlord is
to choose. The third broker shall as promptly as possible, but in no
event more than thirty (30) days after the date of his selection,
conduct an appraisal of the Building for purposes of determining the
then prevailing rental rate therein, taking into account rent
concessions then being offered in the market area. Upon completion of
his appraisal, the third broker shall immediately give written notice
to the parties hereto stating his determination, and shall furnish to
each party hereto a copy of such determination signed by him which
determination shall be final and binding on the parties.
Time is of the essence with respect to Tenant's exercise of
its rights under this Section 51 and Tenant acknowledges that Landlord
requires strict adherence to the requirement that the Renewal Notice
and Appraisal Notice be timely made and in writing.
4. AMENDMENT. From and after the date hereof, the Lease shall be
amended and in full force and effect in such respects as are set forth in this
Amendment, and all other provisions, terms, conditions and riders of and to the
Lease in all respects shall remain in full force and effect as set forth in the
Lease.
5. REAFFIRMATION. Tenant hereby reaffirms and restates, and
agrees to be bound by the covenants, promises, representations and agreements
set forth in the Lease (except to the extent that they are expressly superseded
by this Amendment) as if made herein.
6. BINDING ON SUCCESSORS. The terms and conditions contained in
this Amendment shall bind and inure to the benefit of Landlord and Tenant, and
their respective heirs, distributees, executors, administrators and other legal
and personal representatives, successors and permitted assigns.
7. AUTHORITY. Tenant represents and warrants to Landlord that
Tenant is a Delaware corporation, duly organized and in good standing and
qualified to transact business in the State of Maryland, and that the name and
address of Tenant's resident agent in Maryland are CSC Lawyers Incorporating,
11 E. Chase Street, Baltimore, Maryland 21202.
8. COMMISSIONS. Tenant represents that Tenant has dealt directly
with, and only with, Manekin Corporation and The Fred Ezra Company as brokers
in connection with this Amendment, and that insofar as Tenant knows, no other
broker negotiated this Amendment or is entitled to any commissions in
connection with it. Landlord agrees to pay the commissions of Manekin
Corporation and The Fred Ezra Company in accordance with its separate agreement
with said brokers. Tenant shall hold Landlord harmless from and indemnify
Landlord for any costs incurred by Landlord arising out of any other brokers'
claim that such broker has assisted Tenant with respect to this Amendment.
7
<PAGE> 8
9. LENDER'S CONSENT. In connection with Landlord's refinancing
of the Project with Allstate Life Insurance Company ("Lender") in December
1995, Tenant, Landlord and Lender entered into a subordination, non-disturbance
and attornment agreement (the "SNDA") and Tenant executed an estoppel
certificate (the "Certificate"). Pursuant to Section 5 of the Certificate and
Section 5 of the SNDA, Tenant acknowledged that Lender would not be bound by
any amendments to the Lease which Lender had not approved. As a result
thereof, this Amendment is specifically contingent on obtaining the Lender's
consent hereto. The parties agree to seek such consent promptly after
execution of this Amendment by Tenant and, unless such consent is granted by
Lender on or before July 31, 1997, this Amendment shall, at Tenant's or
Landlord's option, be null and void and of no further force and effect. In no
event shall this Amendment be binding upon Lender unless and until Lender
consents to its terms.
IN WITNESS WHEREOF, Landlord and Tenant have respectively signed and
sealed this Third Amendment of Lease as of the day and year first above
written, intending to be bound as of the Effective Date.
WITNESS: M.O.R. COLUMBIA LIMITED PARTNERSHIP
By: Manekin Columbia Limited Partnership
By: RA & DM, Inc.
[sig]
By: /s/ R. Colfax Schnorf, Jr. [SEAL]
--------------------------
Name: R. Colfax Schnorf, Jr.
----------------------
Title: Vice President
--------------
LANDLORD
ATTEST: MARTEK BIOSCIENCES CORPORATION
/s/ Patricia L. Francis By: /s/ Henry Linsert, Jr. [SEAL]
- ----------------------- ----------------------
Name: Henry Linsert, Jr.
------------------
Title: CEO
-----------------
Tenant
8
<PAGE> 9
STATE OF MARYLAND, COUNTY/CITY OF HOWARD, TO WIT:
I HEREBY CERTIFY that on this 1st day of August 1997, before me, the
subscriber, a Notary Public of the State of Maryland and County/City of
Baltimore, personally appeared before me R. Colfax Schnorf, Jr., known to me or
satisfactorily proven to be the person whose name is subscribed to the foregoing
instrument, who acknowledged himself/herself to be the Vice President of RA &
DM, Inc., the general partner of Manekin Columbia Limited Partnership, the
general partner of M.O.R. COLUMBIA LIMITED PARTNERSHIP, Landlord and he/she
acknowledged the foregoing Third Amendment of Lease to be the act and deed of
said limited partnership.
WITNESS my hand and notarial seal.
[sig]
------------------
Notary Public
My Commission Expires: 1-22-01
STATE OF MARYLAND,COUNTY/CITY OF HOWARD, TO WIT:
I HEREBY CERTIFY that on this 3rd day of July, 1997, before me, the
subscriber, a Notary Public of the State aforesaid and County/City of Howard,
personally appeared before me Henry Linsert, Jr., known to me or satisfactorily
proven to be the person whose name is subscribed to the foregoing instrument,
who acknowledged herself/himself to be the CEO of MARTEK BIOSCIENCES
CORPORATION, Tenant, and she/he acknowledged the foregoing Third Amendment of
Lease to be the act and deed of said corporation.
WITNESS my hand and notarial seal.
Patricia L. Francis
-------------------
Notary Public
My Commission Expires: 7/31/98
[Lender's Consent Follows]
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<PAGE> 10
Lender signs below for purposes of evidencing its consent to the terms
of the above Third Amendment of Lease.
WITNESS: ALLSTATE LIFE INSURANCE COMPANY
Janice Gregory By: Charles Mires [SEAL]
- --------------- ---------------------
Name: Charles Mires
-------------------
Title: Assistant Vice Pres.
-------------------
[sig] By: Louise Walton [SEAL]
- --------------- -----------------
Name: Louise Walton
----------------
Title: Regional Mgr
----------------
its authorized signatories
Approved as of this 5 day of September, 1997.
10
<PAGE> 1
MARTEK BIOSCIENCES CORPORATION
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
Year Ended October 31,
--------------------------------------------------------------------------
In thousands except per share data 1997 1996 1995 1994(1) 1993(1)
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA
Revenues
Product sales $ 3,566 $ 933 $ 1,262 $ 1,230 $ 1,522
License fees and related revenues 293 2,244 270 1,185 2,107
Royalties 28 11 5 -- --
Research and development contracts and grants 530 769 662 628 889
--------- --------- --------- -------- ---------
Total revenues 4,417 3,957 2,199 3,043 4,518
Costs and expenses
Cost of product sales 2,697 539 652 555 707
Research and development 11,051 10,294 7,720 5,029 3,604
Selling, general and administrative 7,415 4,134 3,219 3,171 2,661
--------- --------- --------- -------- ---------
Total costs and expenses 21,163 14,967 11,591 8,755 6,972
--------- --------- --------- -------- ---------
Loss from operations (16,746) (11,010) (9,392) (5,712) (2,454)
Other income, net 1,349 2,096 583 418 142
--------- --------- --------- -------- ---------
Net loss $ (15,397) $ (8,914) $ (8,809) $ (5,294) $ (2,312)
========= ========= ========= ======== =========
Net loss per share $ (1.14) $ (.67) $ (.94) $ (.70) $ (1.86)
========= ========= ========= ======== =========
Weighted average common shares outstanding 13,559 13,281 9,412 7,609 1,476
========= ========= ========= ======== =========
</TABLE>
(1)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 Company's initial public offering 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.
<TABLE>
<CAPTION>
October 31,
-------------------------------------------------------------------------
1997 1996 1995 1994 1993
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET AND OTHER DATA
Cash, cash equivalents, short-term investments
and marketable securities $ 20,675 $ 39,392 $ 51,623 $ 10,706 $ 1,952
Working capital 21,990 35,306 49,681 8,944 544
Total assets 41,342 57,123 65,158 13,569 5,015
Long-term debt 3,292 1,199 4,175 -- --
Redeemable convertible preferred stock -- -- -- -- 7,038
Accumulated deficit (45,588) (30,191) (21,277) (12,468) (7,174)
Total stockholders' equity (deficiency) 34,687 49,416 57,346 10,286 (5,316)
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: (i) FUTURE REVENUES AND
PRODUCT INTRODUCTIONS; (ii) FUTURE PRODUCTION EFFICIENCIES FOR ITS NUTRITIONAL
OILS PRODUCTS; (iii) FUTURE RESEARCH AND DEVELOPMENT COSTS; AND, (iv) CAPITAL
NEEDS. SUCH STATEMENTS INVOLVE RISKS AND UNCERTAINTIES THAT COULD CAUSE ACTUAL
RESULTS TO DIFFER MATERIALLY 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 late 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,
1997, the Company's accumulated deficit was $45,588,000. 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 1998,
until significant sales of its nutritional oils and Neuromins(TM) DHA products
occur and/or until significant royalties from sales of infant formula products
containing its oils are recognized. 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.
Two of the Company's licensees have introduced term infant formula products
containing Martek's DHA and ARA in Spain and Israel, and three of the Company's
licensees have introduced preterm infant formula products containing Martek's
DHA and ARA in twenty-four countries. Management is not able to predict,
however, when, or if, any of these licensees will expand or introduce new
offerings of products containing Martek's oils. Management does not believe
that broad product introductions of term infant formulas containing these oils
will occur before the middle of 1998, at the earliest. Revenues from preterm
uses of Martek's oils will not, alone, significantly reduce Martek's losses.
Because the extent and timing of future oils-related revenues are largely
dependent upon the Company's licensees, the timing or likelihood of future
profitability is largely dependent on factors over which the Company has no
control.
RESULTS OF OPERATIONS
Revenues
Revenues increased from $2,199,000 in 1995 to $3,957,000 in 1996, an increase
of 80%. This increase resulted from revenue recognition for accounting
purposes, in 1996, of cash received for license fees in 1992 and 1993. These
license fees, in the amount of $2,075,000, were initially recorded as deferred
revenue when received. Revenues in 1997 increased to $4,417,000, an increase of
12% from 1996 revenues of $3,957,000. This increase resulted from a $2,633,000,
or 282%, increase in product sales in 1997 compared to 1996, offset by the
nonrecurrence of the $2,075,000 license fee recognition in 1996 discussed
above.
Product sales decreased from $1,262,000 in 1995 to $933,000 in 1996, but
increased 282% in 1997 to $3,566,000. 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. In 1997, nutritional product sales increased
$1,643,000, or over tenfold, as a result of intense marketing, advertising and
public relations efforts aimed at commercializing the Company's products.
Stable isotope sales more than doubled as a result of increased sales and
marketing efforts and new product introductions.
Contract and grant revenues increased by 16% in 1996 as compared to 1995,
and decreased by 31% in 1997 as compared to 1996. 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. Fewer recent grant awards
resulted in 1997's decrease in contract and grant revenue. Management expects
to continue its efforts 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 52% in
1995 to 58% in 1996 and 76% in 1997. These increases occurred mainly as a
result of the significant contribution and timing of royalty income, low plant
utilization and product mix. Infant formula royalties may comprise up to half
of revenues from oil sold for use in infant formula products. These royalties
are received and recognized as revenue approximately nine months after the
initial sale of oil. Accordingly, royalty revenues are not included in product
sales, thereby mathematically creating a significantly higher cost of goods
sold as a percentage of revenues than would have been the case if royalties
were incorporated into the product price and
7
<PAGE> 3
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS CONTINUED
recognized at the same time as the related product sale. In addition, oil
production cost was high due to the low volume of production in 1996 and 1997,
and because the production process requires further optimization. As sales
volumes increase and manufacturing efficiencies and optimization occur,
Management believes that the cost of production of its nutritional oils
products has the potential to decrease. Management 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 a 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 its oils. The balance of the increase
in cost of sales resulted from price reductions in the Company's drug discovery
products brought about by competition. Management believes that, in the
future, sales of the Company's drug discovery products can be increased at the
same time that production costs can be decreased by allocating expensive raw
materials over a range of new co-products, but the ultimate impact of these
efforts on the cost of sales cannot be predicted.
Research and Development
Research and Development expenses, including contract-related costs, increased
from $7,720,000 in 1995 to $10,294,000 in 1996, an increase of 33%, and to
$11,051,000 in 1997, an increase of 7% over 1996. Contract-related research and
development costs included in these amounts were $421,000 in 1995, $506,000 in
1996, and $509,000 in 1997. 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
introductions of infant formula products containing Martek's oils, the Company
intensified its commercial scale up and optimization efforts for its oils
products beginning during the latter half of 1994. These efforts continued
through 1997. Costs associated with nutritional oils development accounted for
approximately 75% of research and development expenses for 1995 and 1996, and
more than 75% in 1997. Research and development costs may increase in the
future as the Company continues its optimization of large-scale fermentation
and oil production.
Selling, General and Administrative
Selling, general and administrative ("SG&A") costs rose from $3,219,000 in 1995
to $4,134,000 in 1996, an increase of 28%, and to $7,415,000 in 1997, an
increase of 79% over 1996. These costs 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. In
1997, SG&A costs increased primarily as a result of building the Company's
sales and marketing team; advertising costs to promote the Company's products;
and increased costs to promote the public's awareness of DHA. SG&A costs are
expected to continue to increase in the future as the Company transitions from
a development company to one commercializing its products.
Other Income, Net
Other income increased to $2,096,000 in 1996 from $583,000 in 1995, primarily
as a result of interest earned on funds raised by the Company in a public
offering late in 1995. Other income decreased by $747,000 in 1997 to $1,349,000
due to a decrease in the amount of interest earned on the investment of funds
received in the 1995 public offering as a portion of such funds were used to
support Company operations.
Net Loss
As a result of the foregoing, net losses were $8,809,000 in 1995, $8,914,000 in
1996 and $15,397,000 in 1997.
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 the new provisions of SFAS
No. 123 or under the provisions of APB No. 25. If companies elect to account
for stock-based compensation under the provisions of APB No. 25, pro forma
disclosure is required 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 has elected 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 had no impact on the financial
position or results of operations of the Company. See Note 9 of Notes to
Financial Statements for further information.
In February 1997, the Financial Accounting Standards Board issued Statement
No. 128, "Earnings per Share," which is effective for both interim and annual
financial statements for periods ending after December 15, 1997. At that time,
the Company will be required to change the method currently used to compute
earnings per share and to restate all prior periods. Under the new requirements
for calculating primary earnings per share, the dilutive effect of stock
options will be excluded. Statement 128 is not expected to have an impact on
the Company's earnings per share calculation.
Impact of Year 2000
Management is beginning to study the implications of the Year 2000 on its
information systems. However, based on the business risk associated with the
Company's information systems, Management does not anticipate that the Year
2000 will have a significant impact on its information systems or result in a
significant commitment of resources to resolve potential problems associated
with this event.
Liquidity and Capital Resources
Martek has financed its operations primarily from the issuance
8
<PAGE> 4
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 1995. 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 which closed in December 1993, and $39.5
million from the net proceeds of the Company's follow-on offering which closed
in October 1995. Through October 31, 1997, Martek has incurred an accumulated
deficit of $45,588,000. The Company's balance of cash and cash equivalents at
October 31, 1997 was $1,977,000. In addition, at October 31, 1997, Martek had
$18,698,000 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 $18,717,000 in
1997, primarily due to the Company's: continued operating losses; capital
expenditures at its production facility in Kentucky as described below; and an
increase of nutritional oils inventory as demand for the Company's products
grows.
Capital expenditures of $1,881,000 were made in 1997, 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.
Management expects additional capital expenditures of at least $2,000,000 in
1998 as a result of escalating fermentation and oil processing activities 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, 1997 the Company had $84,000 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. 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, 1997 the Company had $1,107,000 outstanding under
the loan. On March 21, 1997, the Company entered into a four-year term loan in
the amount of $4,000,000 to refinance notes payable related to the Company's
1995 purchase of its fermentation facility. See Note 6 of Notes to Financial
Statements. The term loan bears interest at the rate of 8.61% and as of October
31, 1997, the outstanding balance was $3,414,000.
The Company is required to meet certain covenants in relation to its
outstanding term loans. At October 31, 1997, the Company was in compliance with
all such covenants, which require, among other things, minimum cash balances,
net worth and current ratio. It is uncertain, however, if the Company will be
able to continue to meet such covenants in the future. If the Company fails to
meet such covenants, one or all of its loans could be called, which would
adversely impact the Company's capital resources and liquidity.
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 may 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 1998, but will depend, in part, on production
capacity needs, the extent of development and implementation of process
improvements and the success of previously implemented improvements.
Management believes its existing capital resources, consisting primarily of
cash, short-term investments and marketable securities will provide adequate
capital for at least the next 12 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. Management is also likely to pursue other methods of financing
its activities in 1998, 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. There can be no
assurance, however, 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,
-------------------------------------------------
1997 1996
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $ 1,977,027 $ 8,633,314
Short-term investments and marketable securities (Note 3) 18,697,859 30,759,352
Accounts receivable 1,180,691 322,111
Inventories (Notes 2 and 4) 2,905,452 1,841,128
Prepaid expenses 318,270 133,560
Other current assets 272,836 124,750
------------ ------------
Total current assets 25,352,135 41,814,215
Property, plant and equipment, net (Notes 2 and 5) 15,989,432 15,309,242
------------ ------------
$ 41,341,567 $ 57,123,457
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable $ 1,008,107 $ 641,919
Accrued liabilities 1,040,849 1,494,801
Current portion of notes payable 1,313,769 4,371,260
------------ ------------
Total current liabilities 3,362,725 6,507,980
Long-term portion of notes payable (Note 6) 3,292,159 1,198,926
Commitments and contingencies (Note 7)
Stockholders' equity (Note 9)
Preferred stock, $.01 par value; 4,700,000 shares authorized at
October 31, 1997 and 1996; none issued or outstanding at
October 31, 1997 and 1996 -- --
Series A junior participating preferred stock, $.01 par value;
300,000 shares authorized; none issued or outstanding
at October 31, 1997 and 1996 -- --
Common stock, $.10 par value; 30,000,000 shares authorized;
13,673,659 and 13,392,250 shares issued and outstanding at
October 31, 1997 and 1996, respectively 1,367,366 1,339,225
Additional paid-in capital 78,907,450 78,268,418
Accumulated deficit (45,588,133) (30,191,092)
------------ ------------
Total stockholders' equity 34,686,683 49,416,551
------------ ------------
$ 41,341,567 $ 57,123,457
============ ============
</TABLE>
See accompanying notes.
12
<PAGE> 6
MARTEK BIOSCIENCES CORPORATION
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year ended October 31,
--------------------------------------------------------------
1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
REVENUES (NOTES 2 AND 8)
Product sales:
Nutritional product sales $ 1,799,839 $ 156,625 $ 85,900
Other product sales 1,766,148 776,088 1,176,385
------------ -------------- ------------
Total product sales 3,565,987 932,713 1,262,285
License fees and related revenues 292,839 2,244,409 269,689
Royalties 28,475 11,008 5,500
Research and development contracts and grants 529,795 769,084 661,654
------------ -------------- ------------
Total revenues 4,417,096 3,957,214 2,199,128
COSTS AND EXPENSES
Cost of product sales 2,697,050 539,482 651,597
Research and development 11,050,574 10,293,895 7,720,130
Selling, general and administrative 7,415,127 4,134,331 3,219,502
------------ -------------- ------------
Total costs and expenses 21,162,751 14,967,708 11,591,229
------------ -------------- ------------
Loss from operations (16,745,655) (11,010,494) (9,392,101)
OTHER INCOME (EXPENSE)
Miscellaneous income 93,770 42,230 34,401
Interest income 1,682,785 2,459,713 733,917
Interest expense (427,941) (405,317) (185,127)
------------ -------------- ------------
1,348,614 2,096,626 583,191
------------ -------------- ------------
Net loss $(15,397,041) $ (8,913,868) $ (8,808,910)
============ ============== ============
Net loss per share (Note 2) $ (1.14) $ (.67) $ (.94)
============ ============== ============
Weighted average common shares outstanding 13,559,419 13,281,429 9,411,894
============ ============== ============
</TABLE>
See accompanying notes.
13
<PAGE> 7
MARTEK BIOSCIENCES CORPORATION
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Additional
Common Stock Common Stock Paid-in Accumulated
Shares Amount Capital Deficit Total
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BALANCE AT OCTOBER 31, 1994 8,232,691 $ 823,269 $21,930,850 $(12,468,314) $10,285,805
Exercise of stock options and warrants 387,516 38,752 735,173 -- 773,925
Issuance of common stock
for plant purchase 511,836 51,183 4,916,038 -- 4,967,221
Issuance of common stock
in private placement 1,078,376 107,838 10,570,115 -- 10,677,953
Issuance of common stock in
follow-on public offering 2,815,000 281,500 39,168,968 -- 39,450,468
Net loss -- -- -- (8,808,910) (8,808,910)
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE AT OCTOBER 31, 1995 13,025,419 1,302,542 77,321,144 (21,277,224) 57,346,462
Exercise of stock options and warrants 366,831 36,683 947,274 -- 983,957
Net loss -- -- -- (8,913,868) (8,913,868)
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE AT OCTOBER 31, 1996 13,392,250 1,339,225 78,268,418 (30,191,092) 49,416,551
Exercise of stock options 281,409 28,141 639,032 -- 667,173
Net loss -- -- -- (15,397,041) (15,397,041)
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE AT OCTOBER 31, 1997 13,673,659 $1,367,366 $78,907,450 $(45,588,133) $34,686,683
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes.
14
<PAGE> 8
MARTEK BIOSCIENCES CORPORATION
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year ended October 31,
---------------------------------------------------------------
1997 1996 1995
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss $(15,397,041) $ (8,913,868) $ (8,808,910)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization 1,201,179 893,348 571,068
Other net -- (1,130) --
Changes in assets and liabilities:
Accounts receivable (858,580) (5,745) (146,389)
Inventories (1,064,324) (851,755) 165,494
Prepaid expenses (184,710) 62,698 (6,253)
Other current assets (148,086) 68,944 (187,222)
Accounts payable 366,188 66,660 271,469
Accrued liabilities (453,952) 583,394 31,724
Unearned revenue -- (2,075,000) (25,000)
------------ ------------ -------------
Net cash used in operating activities (16,539,326) (10,172,454) (8,134,019)
INVESTING ACTIVITIES
Change in short-term investments and marketable securities 12,061,493 (20,175,444) (1,981,945)
Purchase of property, plant and equipment (1,881,369) (4,361,455) (2,069,077)
------------ ------------ -------------
Net cash provided by (used in) investing activities 10,180,124 (24,536,899) (4,051,022)
FINANCING ACTIVITIES
Borrowings on notes payable 4,000,000 1,539,954 250,000
Repayment of notes payable (4,964,258) (219,768)
Proceeds from the exercise of warrants and options, and other 667,173 983,957 741,147
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
------------ ------------ -------------
Net cash provided by (used in) financing activities (297,085) 2,304,143 51,119,568
------------ ------------ -------------
Net increase (decrease) in cash and cash equivalents (6,656,287) (32,405,210) 38,934,527
Cash and cash equivalents at beginning of year 8,633,314 41,038,524 2,103,997
------------ ------------ -------------
Cash and cash equivalents at end of year $ 1,977,027 $ 8,633,314 $ 41,038,524
============ ============ =============
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.
15
<PAGE> 9
MARTEK BIOSCIENCES CORPORATION
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION
Martek Biosciences Corporation (the "Company") develops, manufactures and sells
products primarily derived from microalgae. The Company is currently selling
nutritional supplements for infant formula and other nutritional product
applications, products for use in basic structural molecular research and
structure-based drug design and diagnostic products. The Company is developing
additional nutritional and diagnostic products as well as pharmaceutical
discovery technologies. 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, and academic and research institutions worldwide.
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 $333,000 in 1997, $609,000 in 1996 and $524,000 in 1995.
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 12% in 1997, 15% in 1996, and 24% in 1995 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 $509,000
in 1997, $506,000 in 1996, and $421,000 in 1995.
ADVERTISING COSTS All advertising costs are expensed when incurred.
Advertising costs expensed for the years ended October 31, 1997, 1996 and 1995
approximated $1,198,000, $38,000 and $3,000, respectively.
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.
FAIR VALUE OF FINANCIAL INSTRUMENTS The Company considers the recorded cost of
its financial assets and liabilities, which consists primarily of cash and cash
equivalents, accounts receivable, accounts payable and long-term debt, to
approximate the fair value of the respective assets and liabilities at October
31, 1997.
STOCK-BASED COMPENSATION During 1997, the Company adopted Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation." SFAS No. 123 allows companies to either account for stock-based
compensation under the new provisions of SFAS No. 123 or under the provisions
of APB No. 25, "Accounting for Stock Issued to Employees." 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 has elected to continue
accounting for its stock-based compensation in accordance with the provisions
of APB No. 25, but will
16
<PAGE> 10
disclose the pro forma effects on net income (loss) as if the fair value of the
options had been expensed. See Note 9 of Notes to Financial Statements for
further information.
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.
In February 1997, the Financial Accounting Standards Board issued Statement
No. 128, "Earnings per Share," which is effective for both interim and annual
financial statements for periods ending after December 15, 1997. At that time,
the Company will be required to change the method currently used to compute
earnings per share and to restate all prior periods. Under the new requirements
for calculating primary earnings per share, the dilutive effect of stock
options will be excluded. Statement 128 is not expected to have an impact on
the Company's earnings per share calculation.
INVENTORIES Inventories are stated at the lower of cost or market including
appropriate elements of material, labor and indirect costs and are valued using
the average cost method. 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 fermentation plant, fifteen years for the Company's oil processing
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.
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 $689,000 in 1997,
$133,000 in 1996, and $15,000 in 1995. For the years ended October 31, 1997,
1996 and 1995 the Company paid no income taxes.
3. SHORT-TERM INVESTMENTS AND MARKETABLE SECURITIES
The Company has classified all debt 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 $18,697,859 and $30,759,352 for the years ended October 31, 1997 and
1996, respectively. At October 31, 1997 and 1996, the estimated fair value of
these securities approximated cost.
4. INVENTORIES
Inventories consisted of the following:
<TABLE>
<CAPTION>
October 31,
1997 1996
- -------------------------------------------------------------
<S> <C> <C>
Finished products $1,661,439 $ 875,645
Work in process 909,932 545,168
Raw materials 334,081 420,315
---------- ----------
$2,905,452 $1,841,128
========== ==========
</TABLE>
5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of the following:
<TABLE>
<CAPTION>
October 31,
1997 1996
- -------------------------------------------------------------
<S> <C>
Land $ 149,860 $ 149,860
Building and improvements 1,742,123 1,738,441
Machinery and equipment 16,666,874 15,026,822
Furniture and fixtures 631,044 429,279
Leasehold improvements 371,989 336,119
----------- -----------
19,561,890 17,680,521
Less accumulated depreciation
and amortization 3,572,458 2,371,279
----------- -----------
$15,989,432 $15,309,242
=========== ===========
</TABLE>
Depreciation expense amounted to $1,201,000, $893,000 and $571,000 for the
years ended October 31, 1997, 1996 and 1995, respectively.
6. 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). On March 24, 1997, the Company
entered into a four-year term loan in the amount of $4,000,000 to refinance
these notes. The term loan bears interest at a rate of 8.61% and, as of October
31, 1997, the outstanding balance was $3,414,000. The Company uses this
facility to produce oils rich in DHA and ARA using its proprietary technology.
The loan is collateralized solely by the fermentation plant.
The Company entered into an equipment line of credit in 1994 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, 1997
and 1996, the balance
17
<PAGE> 11
NOTES TO FINANCIAL STATEMENTS CONTINUED
of the term loan was $84,000 and $168,000, respectively. This loan is
collateralized by the equipment purchased with the proceeds.
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, 1997 and 1996, $1,107,000 and $1,410,000,
respectively, was outstanding. This loan is collateralized by the equipment
purchased with the proceeds.
Future minimum payments on the Company's term loans at October 31, 1997
were as follows:
<TABLE>
<S> <C>
1998 $1,313,769
1999 1,340,919
2000 1,479,333
2001 471,907
----------
$4,605,928
==========
</TABLE>
7. COMMITMENTS AND CONTINGENCIES
FACILITIES LEASES The Company leases its premises under an operating lease
agreement which expires in November 2004. The terms of the lease call for rent
escalations of 13% in June 1999 and 3% annually thereafter. 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 $311,000 in 1997,
$313,000 in 1996 and $286,000 in 1995.
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, 1997, were as follows:
<TABLE>
<S> <C>
1998 $ 324,000
1999 344,000
2000 374,000
2001 386,000
2002 397,000
2003 and after 831,000
----------
$2,656,000
==========
</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 pay
royalties upon the sale of certain products resulting from such collaborations.
SBIR GRANTS The Company had commitments at October 31, 1997 to fund up to $1.5
million of Phase III SBIR technology commercialization expenses, provided the
technology under existing Phase II SBIR grants yields commercial opportunities
favorable to the Company.
Costs under U.S. government contracts are subject to audit by the
appropriate U.S. government agency. Management believes that cost
disallowances, if any, arising from audits of costs charged to government
contracts through October 31, 1997, would not have a material effect on the
financial statements.
LOAN COVENANTS The Company is required to meet certain covenants in relation
to its outstanding term loans. These covenants, which outline minimum cash,
current ratio and net worth requirements, have been met by the Company at
October 31, 1997.
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 1996. Certain agreements include royalty payments,
which are based upon a percentage of product sales. Royalties in the amount of
$28,000, $11,000 and $5,000 were earned in the years ended October 31, 1997,
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 nonqualified 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>
Weighted
Number of Option Average
Shares Price/Share Price/Share
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
BALANCE AT OCTOBER 31, 1994 1,490,415 $1.00-$11.88 $4.70
Granted 192,250 $8.38-$13.50 $10.08
Exercised (221,316) $1.00-$11.88 $1.82
Forfeited (19,950) $1.50-$13.50 $6.03
---------- ------------- ------
BALANCE AT OCTOBER 31, 1995 1,441,399 $1.50-$13.50 $5.85
Granted 284,600 $18.00-$34.25 $31.06
Exercised (223,890) $1.50-$20.25 $2.73
Forfeited (22,150) $2.00-$34.25 $11.24
---------- ------------- ------
BALANCE AT OCTOBER 31, 1996 1,479,959 $1.50-$34.25 $11.08
Granted 586,900 $12.88-$25.00 $16.76
Exercised (281,409) $1.50-$18.00 $2.37
Forfeited (28,170) $8.00-$34.25 $16.01
---------- ------------- ------
BALANCE AT OCTOBER 31, 1997 1,757,280 $2.00-$34.25 $14.29
</TABLE>
At October 31, 1997, 941,160 Option Plan options were exercisable at a
weighted average exercise price of $10.42 per share, and a total of 296,375
shares of common stock were
18
<PAGE> 12
available for future grants under the Option Plan. The weighted average
contractual life for all options outstanding under the Option Plan at October
31, 1997 was 7.4 years. Detailed information on the options outstanding on
October 31, 1997 by price range are set forth below:
<TABLE>
<CAPTION>
Weighted
Weighted Average Weighted
Average Remaining Average
Price Options Exercise Contractual Options Exercise
Range Outstanding Price Life Exercisable Price
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$2.00 172,885 $2.00 4.51 172,885 $2.00
$8.00-$13.63 945,495 $9.84 6.92 632,625 $9.17
$16.50-$25.50 399,050 $19.15 9.28 59,880 $19.36
$32.88-$34.25 229,850 $33.21 8.41 75,770 $33.08
--------- -------
1,747,280 941,160
========= =======
</TABLE>
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 the
Company's common stock upon commencement of service as a director and 5,000
options upon reelection. A total of 150,000 shares of common stock were
initially reserved for issuance under the Directors' Plan. During 1997, 40,000
options were granted at an exercise price of $19.00 per share. During 1996,
21,000 options were granted at an exercise price of $32.875 per share, and
during 1995, 30,000 options were granted at an exercise price of $9.50 per
share. No options were exercised in 1995 or 1997. In 1996, 9,200 of these
options were exercised at prices ranging from $9.50-$11.25 per share. At
October 31, 1997, 101,850 options were outstanding and 38,950 options were
available for future grant under the Directors' Plan. The weighted average
contractual life for all options outstanding under the Directors' Plan at
October 31, 1997 was 8.3 years.
WARRANTS AND STOCK OPTION AGREEMENTS 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
immediately 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. No warrants were
exercised in 1997. At October 31, 1997, 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 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. During
1997, 67,500 of these options were exercised at a price of $2.00 per share.
None of these options were outstanding on October 31, 1997.
PRO FORMA DISCLOSURE The Company applies APB 25 in accounting for its stock
option incentive plan and, accordingly, recognizes compensation expense for the
difference between the fair value of the underlying common stock and the grant
price of the option at the date of the grant. The effects of applying SFAS No.
123 on 1997 and 1996 pro forma net loss and earnings per share as stated below
are not necessarily representative of effects on reported net income and
earnings per share for future years due to such things as the vesting period of
the stock options and the potential for issuance of additional stock options in
future years. Had compensation expense for the Company's stock option incentive
plan been determined based on the estimated fair value at the grant dates for
awards under the plan consistent with the methodology prescribed under SFAS No.
123, the Company's net loss in 1997 and 1996 would have been approximately
$17.7 million and $9.7 million, or $1.31 per share and $.73 per share,
respectively. The weighted average fair value of the options granted during
1997 is estimated at $13.88 per share for options whose exercise price equals
fair market value on the date of the grant, using the Black-Scholes
option-pricing model with the following assumptions: dividend yield 0%,
volatility of 75.3%, risk-free interest rate of 5.5% and average expected life
of approximately 10 years.
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 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
19
<PAGE> 13
NOTES TO FINANCIAL STATEMENTS CONTINUED
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, 1997, the Company had net operating loss carryforwards of
approximately $58,647,000 for income tax reporting purposes that expire in
years 2000 through 2012.
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, 1997 are as
follows:
<TABLE>
<CAPTION>
October 31,
1997 1996
- ---------------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax liabilities $ -- $ 193,000
----------- -----------
Deferred tax assets:
Write-off of patent $ 328,000 $ 251,000
Other deferred tax assets 44,000 --
Net operating loss
carryforwards 23,459,000 16,847,000
----------- -----------
Total deferred tax assets $23,831,000 $17,098,000
----------- -----------
Net deferred tax assets
before valuation allowance $23,831,000 $16,905,000
=========== ===========
Valuation allowance for net
deferred tax assets $23,831,000 $16,905,000
=========== ===========
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 15% of their total compensation to contribute to
the plan, not to exceed the maximum allowable by Internal Revenue Service
regulations. As of October 31, 1997, 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, 1997 and 1996, and the related statements of
operations, stockholders' equity, and cash flows for each of the three years in
the period ended October 31, 1997. 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, 1997 and 1996, and the results of its operations and its cash
flows for each of the three years in the period ended October 31, 1997, in
conformity with generally accepted accounting principles.
Vienna, Virginia /s/ ERNST & YOUNG LLP
December 12, 1997
20
<PAGE> 14
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,
1997, there were approximately 184 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>
<CAPTION>
Fiscal 1996 High Low
- -----------------------------------------------------------
<S> <C> <C>
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>
<TABLE>
<CAPTION>
Fiscal 1997 High Low
- -----------------------------------------------------------
<S> <C> <C>
November 1, 1996 - January 31, 1997 $27 3/4 $17
February 1, 1997 - April 30, 1997 $24 1/2 $14 1/2
May 1, 1997 - July 31, 1997 $17 3/4 $ 8 3/4
August 1, 1997 - October 31, 1997 $16 3/8 $ 9 3/16
</TABLE>
<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 (Form 10-K)
of Martek Biosciences Corporation of our report dated December 12, 1997,
included in the 1997 Annual Report to Shareholders of Martek Biosciences
Corporation.
We also consent to the incorporation by reference of our report dated December
12, 1997, with respect to the financial statements of Martek Biosciences
Corporation incorporated by reference in its Annual Report (Form 10-K) for the
year ended October 31, 1997, 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;
(3) Registration Statement Number 333-27671 on Form S-8, dated May 22, 1997.
/s/ Ernst & Young LLP
Vienna, Virginia
January 26, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> OCT-31-1997
<PERIOD-START> NOV-01-1996
<PERIOD-END> OCT-31-1997
<CASH> 1,977,027
<SECURITIES> 18,697,859
<RECEIVABLES> 1,180,691
<ALLOWANCES> 0
<INVENTORY> 2,905,452
<CURRENT-ASSETS> 25,352,135
<PP&E> 19,561,890
<DEPRECIATION> 3,572,458
<TOTAL-ASSETS> 41,341,567
<CURRENT-LIABILITIES> 3,362,725
<BONDS> 3,292,159
0
0
<COMMON> 1,367,366
<OTHER-SE> 33,319,317
<TOTAL-LIABILITY-AND-EQUITY> 41,341,567
<SALES> 3,565,987
<TOTAL-REVENUES> 4,417,096
<CGS> 2,697,050
<TOTAL-COSTS> 21,162,751
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 427,941
<INCOME-PRETAX> (15,397,041)
<INCOME-TAX> 0
<INCOME-CONTINUING> (15,397,041)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (15,397,041)
<EPS-PRIMARY> (1.14)
<EPS-DILUTED> (1.14)
</TABLE>
