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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, 1998 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:
<TABLE>
<S> <C>
None None
(Title of class:) (Name of each exchange on which registered:)
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SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock, $.10 par value
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the last 90 days. X Yes No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The aggregate market value of Common Stock held by non-affiliates of
registrant is $95,573,135 (based upon a last sale price of $8.75 per share of
the Common Stock as reported on the NASDAQ National Market System on January
15, 1999). The number of shares of Common Stock outstanding as of January 15,
1999 was 14,909,954.
DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of Registrant's Annual Report to Stockholders for the
fiscal year ended October 31, 1998 are incorporated by reference into Part II
of this Report. Certain portions of the Registrant's Definitive Proxy Statement
for its 1999 Annual Meeting of Stockholders (which will be filed with the
Commission within 120 days after the end of the Registrant's 1998 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. Four of these
licensees are marketing term infant formula products containing Martek's oils
in seven countries and pre-term infant formula products containing the
Company's oils in 50 countries. 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 3,000 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 play a vital role in the development and
function of the brain and retina. Recent research has linked low levels of DHA
to a variety of health risks, including increased cardiovascular problems,
Cystic Fibrosis, cancer rates, and various neurological and visual disorders.
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 U.S. 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 patents were
granted in 1997, one of which protects the production, use and sale of oils
rich in ARA (30% or greater concentration). In 1998 a U.S. patent was issued
protecting the Company's DHA-rich algal biomass, an inexpensive source of DHA
which may potentially be a low cost product itself. The Company also has been
awarded a number of foreign patents covering various 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,
Royal Numico N.V. ("Numico", formerly Nutricia), Maabarot Products Ltd.
("Maarbarot") and Novartis Nutrition S.A. ("Novartis"). Numico, Wyeth-Ayerst (a
subsidiary of American Home Products), Maarbarot, and Novartis are currently
marketing term infant formula products containing Martek's oils in seven
countries and pre-term infant formula products containing the Company's oils in
50 countries worldwide. Competing supplemented infant formulas are now being
marketed in Spain, Australia and New Zealand. The infant formula industry
represents over $2 billion in annual wholesale sales in the United States and
approximately $5
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billion worldwide. Martek is actively pursuing additional licenses with other
infant formula producers throughout the world to continue penetrating these
markets.
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 and
1998, Martek expanded distribution of its Neuromins(TM) DHA. Martek has entered
into agreements with Natrol, Inc., 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 Safeway, Vitamin World, and 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 and animal feeds.
Products for Drug Discovery. Using its core microalgal technology,
Martek has developed and markets a range of products and technologies for use
in structure based drug discovery, molecular structure and metabolic research.
The Company markets these products worldwide to many of the world's 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 molecules in solution and to study
characteristics of the structure and its binding interaction with drugs. Martek
also markets a proprietary cell growth medium, Celtone(R)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, 1997 and 1998.
The Company has also developed novel labelled combinatorial libraries
of small molecules. Martek's technology involves the production and use of
libraries of small, flexible, stable isotopically labeled molecules for use as
probes (Reconnaissance Probes) of the binding site of any receptor. Used in
conjunction with Nuclear Magnetic Resonance (NMR) Spectroscopy, these probes
have the potential to provide precise data about binding site topography of a
receptor-site protein for which little other structural information need be
known. Based on this critical information, focused libraries of new drug leads
can then be quickly made to fit the identified binding pocket of the
receptor-site protein. Martek was issued a patent in 1998 covering the
preparation and use of these labelled Reconnaissance Probe Libraries for new
drug development.
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. During 1998, Martek began marketing some of its products in this
area through partenerships with Intergen(R) Company, Kirkegaard & Perry
Laboratories, and Amersham Pharmacia Biotech.
TECHNOLOGY
Martek applies its microalgal expertise and culturing technology to its
expanding library of over 3,000 live microalgal species and related database to
achieve technical and commercial advantages. Certain fundamental and
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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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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;
- 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 3,000 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
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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 several U.S.
patents. Similar patent applications have issued in certain countries
and are pending in certain other countries around the world.
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 play a pivotal role in normal brain function
throughout life. Recent research has linked low levels of DHA to a variety of
health risks, including increased cardiovascular problems, Cystic Fibrosis,
cancer rates, and various neurological and visual disorders. 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.
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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 1998. As of early 1999, four of the Company's infant
formula licensees were marketing term infant formula products containing
Martek's oils in seven countries and pre-term infant formula containing the
Company's oils in 50 countries worldwide.
Independent studies indicate that the mental development and visual
acuity of infants are positively affected by breast feeding and that breast-fed
infants have higher levels of DHA in their brain tissue and enhanced mental
acuity later in life when compared to those fed infant formula not containing
DHA. Brain development in humans takes place primarily in the last trimester in
utero and in the first 12 months of postnatal life. For a fetus, DHA is
provided through its mother's bloodstream via the placenta and for a nursing
infant, it is provided via breast milk. DHA is generally the most abundant
omega-3 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 manufacturers 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:
- - A National Institutes of Health (NIH) sponsored study published in the
August 1998 edition of Pediatric Research concluded that early dietary
intake of preformed DHA and ARA appears necessary for optimal
development of the brain and eye. The study reported that healthy,
full-term infants fed formula supplemented with Martek's oils had
visual development results consistent with breast-fed infants, but
those fed a standard formula without DHA and ARA had a deficiency of
about "one line on an eye chart". The study also indicated that infant
formula without preformed DHA and ARA may put infants at risk for DHA
deficiency, and suggested that the availability of dietary DHA during
the critical developmental period may lead to persistent changes in the
underlying neural structure and/or function of infants.
- - Research was published in 1998 linking DHA to glucose metabolism. The
study, which was published in Metabolism, suggested that providing
infants with DHA may protect them from noninsulin-dependent diabetes,
obesity, hypertension and other diseases associated with impaired
glucose metabolism. The study also suggested that the ability of
infants to utilize glucose, the body's primary source of energy, may
depend on whether they are well nourished with DHA.
- - 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:
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"... 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 1997, research was presented 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 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.
In the November 12, 1994 edition of The Lancet, a scientific journal
published in the UK, scientists concluded that "some components of breast-milk
may have a beneficial effect on brain development. . . arachidonic acid [ARA]
and docosahexaenoic acid [DHA] should be considered as essential nutrients for
infants because they are present in structural lipids in brain and nervous
tissue." Preliminary data submitted to The Society of Pediatric Research in May
1994 and a separate study, presented in July 1995 at the Second International
Congress of the International Society for the Study of Fatty Acids and Lipids,
showed that low birth weight infants fed formula supplemented with Martek's
nutritional oils have blood lipid levels of DHA and ARA comparable to those of
breast-fed, low birth weight infants. In addition, the British Nutrition
Foundation ("BNF"), the European Society for Pediatric Gastroenterology and the
Expert Committee on Human Nutrition of the United Nations Food and Agriculture
Organization ("FAO") and World Health Organization ("WHO"), have recommended
that these essential fatty acids be included in pre-term infant formulas at
levels found in human milk. The BNF and the FAO/WHO Committee have gone further
to recommend that DHA and ARA also be included in formulas for term infants as
well. 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.
Recent research has also linked low levels of DHA to a variety of
health risks, including increased cardiovascular problems, Cystic Fibrosis,
cancer rates, and various neurological and visual disorders. One recent study
at the American Health Foundation in New York reported that Martek's
Neuromins(TM) DHA suppressed human breast cancer metastasis in mice. The study
concluded that a relatively modest dietary manipulation is capable of
significantly slowing breast cancer progression in vivo and suggested a
specific role for DHA as a clinically utilizable adjuvant therapy.
In response to increasing information on the importance of omega-3
fatty acids and DHA in psychiatric health, the National Institutes of Health
sponsored a symposium of experts in 1998 to discuss the latest research in this
field. The focus of the conference was neurological and behavioral disorders;
infant nutrition, visual disorders and cardiovascular benefits were also
discussed. The need for intervention studies was discussed to further
investigate potential benefits in these areas.
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.
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Martek believes that its nutritional oils and Neuromins(TM) capsules
have the following advantages over other currently available sources of DHA and
ARA for use in infant formula or as an adult supplement:
- 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 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.
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 identification 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 molecules 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. In 1998, Martek was granted a U.S. patent covering this technology and
the Company signed a research collaboration agreement with SmithKline Beecham
involving this technology.
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The Company markets these products and technologies to pharmaceutical
and structure-based drug discovery companies, universities and research
institutes. Future growth in sales of these products and technologies may
depend in large measure on the future growth of structure-based drug discovery
and use of NMR techniques.
Martek's drug discovery products include the following:
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, 1997 and
1998.
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. Glucose is available in
combinations of 2H and 13C.
Nucleic Acids -- Martek sells isotopically labeled nucleic acid
derivatives. 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(TM)") 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(TM) 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(TM) 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 is the exclusive licensor of this technology for diagnostic
applications that are the subject of a U.S. patent issued in 1997 and pending
patent applications. During 1998, Martek began marketing certain of its
PBXL(TM) products in this area through partenerships with Intergen(R) Company,
Kirkegaard & Perry Laboratories, and Amersham Pharmacia Biotech.
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, Numico, Maabarot and Novartis, that
together comprise over 40% of the worldwide infant formula market. Under these
agreements,
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<PAGE> 10
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 to the extent it
supplies nutritional oils to its licensees.
Under the terms of several of its current license agreements, Martek is
prohibited from granting a license to any party for the inclusion of its
nutritional oils in infant formula with payment terms that are more favorable
to such licensee than those provided in its agreements with its current
licensees without either the prior written consent of the current licensees or
prospectively offering such new favorable terms to these licensees. This
restriction does not apply to any lump sum payments to Martek pursuant to a
territorially restricted license under which the reduced payment is reasonably
related to the reduced marketing opportunities available under such a
restricted license. In addition, under the terms of several of the agreements,
Martek is prohibited from granting a license to any party for the inclusion of
its nutritional oils with a royalty rate that is more favorable to other
licensees than that provided in these agreements without either the prior
written consent of such licensees or prospectively offering such royalty rate
to these current licensees.
In 1993, Martek entered into an agreement with Columbia University
pursuant to which Columbia University will try to determine the structure of
the hCG protein using Celtone M. The hCG molecule affects fertility by
controlling the attachment of the egg to the uterus. Martek and Columbia
University will share any commercial proceeds resulting from their joint
efforts. Martek's share of any such proceeds will be based upon the successful
conclusion of certain events but will not be less than 75%. In May 1994, the
Company initiated commercialization of Celtone M through a license agreement
with Genetics Institute under which Martek will receive royalties on sales of
products resulting from Genetics Institute's work with Celtone M. In October
1994, Martek entered into a collaboration with the University of St. Andrews in
Scotland. This collaboration is dedicated to the development of NMR techniques
for the study of large proteins and determining the 3-D structures of certain
human proteins of pharmaceutical interest. Under this agreement, St. Andrews
will provide NMR facilities and expertise in large protein resolution. Martek
will provide funding and pay royalties for certain proprietary products arising
from this research.
In 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 recognized license fee revenue in January, 1998 and will
receive guaranteed supplies of oil rich in ARA from Gist-Brocades on
advantageous terms.
In May 1998, Martek entered into a research collaboration agreement
with SmithKline Beecham Corporation (SB) for the use of the Company's
proprietary Reconnaissance Probe Technology to "map" the binding sites where
drugs interact with receptor-site proteins of key interest to SB's research
program.
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.
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<PAGE> 11
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, 1998
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 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 primarily through distributors and
directly to end users through its toll free number (1-800-662-6339). Martek has
entered into agreements with Natrol, Inc., and 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.
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Neuromins(TM) DHA is currently being marketed in over 6,000 retail stores
nationwide, including Safeway, Vitamin World and 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 1999. 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 provides an
alternative to Martek's DHA oil for infant formula applications. 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,
including BASF and F. Hoffman-LaRoche LTD. 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 Martek's patents. Martek is also aware that Omegatech, an
early stage company, is currently able to produce DHA from a strain of fungus
containing DHA. Martek believes that Omegatech 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 Numico 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.
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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 approximately 25 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 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
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<PAGE> 14
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. Sales of the Company's products outside the United States are subject to
foreign regulatory requirements that may vary widely from country to country.
Four of the Company's infant formula licensees have obtained the regulatory
approval, where required, to sell infant formula supplemented with Martek's
oils in over 50 countries for term or pre-term infant formula products. The
Company and its licensees are in the process of preparing to respond to certain
questions raised by the FDA in connection with evaluating Martek's oils for
inclusion in U.S. infant formula. While management believes that approval
should ultimately be obtained, there is no assurance that the Company and its
licensees will be able to adequately respond to the FDA's questions, that the
licensees will continue to press forward, that clearances will in fact be
granted, that the process will not involve significant delays that may
materially and adversely affect the timing and extent of potential future
introductions of the Company's products, or that once and if approval is
obtained, a licensee will actually market a U.S. infant formula product
containing the Company's oils. There also can be no assurance that clearances
needed for introductions of Martek's oils in additional foreign countries can
be obtained 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.
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.
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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 is subject to GMP and various other requirements applicable to
infant formulas and dietary supplements as well as periodic inspections by the
FDA. Further, the Company has had only limited experience in the area of
regulatory compliance with respect to its products. There can be no assurance
that the Company will be able to continue to manufacture its nutritional oils
in accordance with relevant infant formula and dietary supplement requirements
for commercial use. Ongoing compliance with GMP and other applicable regulatory
requirements are monitored through periodic inspections by state and federal
agencies, including the FDA and comparable agencies in other countries. A
determination that the Company is in violation of such GMP and other
regulations could lead to the imposition of civil penalties, including fines,
product recalls or product seizures, and, in the most egregious cases, criminal
sanctions.
Each line of products that is or may be marketed by the Company or its
licensees or collaborators can present unique regulatory problems and risks,
depending on the product type, uses and method of manufacture.
The Federal Dietary Supplement Health and Education Act of 1994
("DSHEA") regulates the use and marketing of dietary supplements. The DSHEA
sets forth standards for adulteration of dietary supplements or ingredients
thereof, prescribes detailed requirements for labeling dietary supplements and
establishes GMP requirements for dietary supplements. Martek is currently
marketing a line of DHA dietary supplements, Neuromins(TM) and Neuromins(TM)
PL. In addition, it is researching and developing new applications for its DHA
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
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<PAGE> 16
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, 1998, the Company had 121 full-time employees, of
whom 13 had Ph.D.'s. Approximately 41 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 28 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.
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 2002" 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 1999 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.................. 58 Chairman, Chief Executive Officer and Director
Richard J. Radmer, Ph.D............ 56 President, Chief Scientific Officer and Director
Thomas C. Fisher................... 52 Senior Vice President, Operations
David J. Kyle, Ph.D................ 45 Senior Vice President, Research and Development
Jerome C. Keller................... 56 Senior Vice President, Sales & Marketing
Steve Dubin........................ 45 Senior Vice President, Business Development, General Counsel,
and Secretary
Peter L. Buzy...................... 39 Chief Financial Officer and Treasurer
Paul W. Behrens, Ph.D.............. 42 Director of Physiology
Jonathan Miles Brown, Ph.D......... 43 Director, Stable Isotope Group
Paul J. Kelley .................... 45 Vice President of Manufacturing
</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
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<PAGE> 17
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.
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.
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
a M.S. degree from the University of Pittsburgh.
Steve Dubin is currently Senior Vice President of Business Development,
General Counsel and Secretary. Mr. Dubin joined Martek in 1992 as Chief
Financial Officer and from 1988 to the time he joined Martek on a full-time
basis, Mr. Dubin consulted with the Company on financial and accounting
matters. 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.
Peter L. Buzy joined Martek in March 1998 as Chief Financial Officer.
Prior to joining Martek, Mr. Buzy spent 13 years with the accounting and
consulting firm of Ernst & Young LLP, most recently as an audit partner in the
Northern Virginia High Technology/Life Sciences Practice. Mr. Buzy was a
member of the Ernst & Young audit team servicing Martek from 1986 - 1996, and
as such has played a vital role in advising the Company on various technical
accounting and finance related issues. Mr. Buzy is a Certified Public
Accountant and a member of the American Institute of Certified Public
Accountants. He received his B.S. in accounting from Salisbury State
University.
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 a M.S. in biology from the University of Maryland. He also
received a B.A. in biology from The Johns Hopkins University.
- 16 -
<PAGE> 18
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.
- 17 -
<PAGE> 19
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 and occupies approximately 6,000 square feet. The fermentation facility
and certain equipment in the oil processing plant are collateral for the
Company's currently outstanding term loans.
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 1998.
- 18 -
<PAGE> 20
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,
1998, 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, 1998.
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, 1998, 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, 1998, 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 material.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The Company's 1998 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, 1998, is
included herein as Exhibit 13.01, and those portions are incorporated by
reference into Part II of this Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
- 19 -
<PAGE> 21
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Information relating to the Directors and Executive Officers of the
Company is set forth in Part I of this report under the caption Item I -
Business "Directors and Executive Officers of the Registrant" and is
incorporated by reference herein.
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 1999 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 1999 Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
None.
- 20 -
<PAGE> 22
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 Auditors set forth on the pages indicated in the Company's Annual
Report to Stockholders for the year ended October 31, 1998 are included in
Exhibit 13.01 to this report and are incorporated into Item 8 of this Report:
<TABLE>
<CAPTION>
Page(s) in Company's Annual
Report to Stockholders
----------------------
<S> <C>
Balance Sheets as of October 31, 1998 and 1997 12
Statements of Operations for the Years Ended October 31, 1998,
1997 and 1996 13
Statements of Stockholders' Equity for the
Years Ended October 31, 1998, 1997 and 1996 14
Statements of Cash Flows for the Years Ended October 31, 1998,
1997 and 1996 15
Notes to Financial Statements 16 - 20
Report of Independent Auditors 20
</TABLE>
(a)(2) Financial Statement Schedules
Financial statement schedules have been omitted since they are either
not required, not applicable, or the information is otherwise included.
<TABLE>
<CAPTION>
(a)(3) Exhibits
--------
<S> <C>
3.01 Revised Restated Certificate of Incorporation of
Registrant.
3.02 Amendment to the Restated Certificate of Incorporation, effective March 14, 1995 (filed as
Exhibit 3.1 to the Company's Registration Statement on Form S-3, File No. 33-89760,
filed March 15, 1995, and incorporated by reference herein ).
3.03 Certificate of Designation, Preferences and Rights of Series A Junior Participating
Preferred Stock (filed as Exhibit 4 to the Company's Form 8-K, File No. 0-22354,
filed January 29, 1996, and incorporated by reference herein ).
3.04 Amended By-Laws of Registrant.
3.05 Amendment to By-Laws, effective March 14, 1995 (filed as Exhibit 3.2 to the Company's
Registration Statement on Form S-3, File No. 33-89760, filed March 15, 1995, and
incorporated by reference herein ).
4.01 Specimen Stock Certificate for Common Stock.
4.02 Common Stock and Warrant Purchase Agreements, dated May 19, June 1, June 6, and June
8, 1995, by and among the Company and the Selling Stockholders (filed as Exhibit 4.2
</TABLE>
- 21 -
<PAGE> 23
<TABLE>
<S> <C>
to the Company's Registration Statement on Form S-3, File No. 33-93580, filed June
16, 1995, and incorporated by reference herein ).
4.03 Warrant No. 1 issued pursuant to Common Stock and Warrant Purchase Agreements and
Schedule of Warrants (filed as Exhibit 4.3 to the Company's Registration Statement
on Form S-3, File No. 33-93580, filed June 16, 1995, and incorporated by reference
herein).
4.04 Form of Rights Agreement dated as of January 24, 1996 between the Company and
Registrar and Transfer Company, as Rights Agent (filed as Exhibit 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).
</TABLE>
- 22 -
<PAGE> 24
<TABLE>
<S> <C>
10.25 Third Amendment of Lease, dated August 1, 1997 between the Company and M.O.R
Columbia Limited Partnership (filed as exhibit 10.25 to the Company's 1997
10-K, File No. 000-22354, and incorporated by reference herein).
10.26 Fourth Amendment of Lease, dated August 5, 1998 between the Company and M.O.R
Columbia Limited Partnership. **
10.27 Employment Agreement, dated January 16, 1998, between the Company and Peter L.
Buzy.**
10.28 Common Stock and Warrant Purchase Agreement, dated April 27, 1998, by and among the
Company and the Selling Stockholders (filed as exhibit 99.2 to the Company's Form
8-K, File No. 22354, dated April 27, 1998 and incorporated by reference herein).
13.01 Portions of the Annual Report to Stockholders of the Company for the year ended
October 31, 1998.**
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.**
99.1 Cautionary Statements for purposes of the "safe harbor" provisions of the private securities
reform act of 1995.**
</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
- 23 -
<PAGE> 25
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, 1999.
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, 1999
- ----------------------------------------------- Director (Principal Executive
Henry Linsert, Jr. Officer)
/s/Peter L. Buzy Principal Financial and January 29, 1999
- ----------------------------------------------- Accounting Officer
Peter L. Buzy
/s/ Jules Blake Director January 29, 1999
- -----------------------------------------------
Jules Blake
/s/ Ann L. Johnson Director January 29, 1999
- -----------------------------------------------
Ann L. Johnson
</TABLE>
- 24 -
<PAGE> 26
<TABLE>
<S> <C> <C>
/s/ Douglas J. MacMaster, Jr. Director January 29, 1999
- -----------------------------------------------
Douglas J. MacMaster, Jr.
/s/ John H. Mahar Director January 29, 1999
- -----------------------------------------------
John H. Mahar
/s/ Sandra Panem Director January 29, 1999
- -----------------------------------------------
Sandra Panem
/s/ Richard J. Radmer President and Director January 29, 1999
- -----------------------------------------------
Richard J. Radmer
/s/ Eugene J. Rotberg Director January 29, 1999
- -----------------------------------------------
Eugene H. Rotberg
/s/ William D. Smart Director January 29, 1999
- -----------------------------------------------
William D. Smart
/s/ Gordon S. Macklin Director January 29, 1999
- -----------------------------------------------
Gordon S. Macklin
</TABLE>
- 25 -
<PAGE> 27
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>
- 26 -
<PAGE> 28
<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 (filed as exhibit 10.25 to the Company's 1997
10-K, File No. 000-22354, and incorporated by reference herein).
10.26 Fourth Amendment of Lease, dated August 5, 1998 between the Company and M.O.R
Columbia Limited Partnership. **
10.27 Employment Agreement, dated January 16, 1998, between the Company and Peter L.
Buzy.**
10.28 Common Stock and Warrant Purchase Agreement, dated April 27, 1998, by and among the
Company and the Selling Stockholders (filed as exhibit 99.2 to the Company's
Form 8-K, File No. 22354, dated April 27, 1998 and incorporated by reference herein).
13.01 Portions of the Annual Report to Stockholders of the Company for the year ended
October 31, 1998.**
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.**
99.1 Cautionary Statements for purposes of the "safe harbor" provisions of the private securities
reform act of 1995.**
</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).
- 27 -
<PAGE> 1
FOURTH AMENDMENT OF LEASE
THIS FOURTH AMENDMENT OF LEASE (this "Amendment") is made this _____ day
of 5th Aug., 1998 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; by a Second Lease Modification Agreement (the "Second Amendment")
dated September 22, 1994; and by a Third Amendment of Lease (the "Third
Amendment") dated August 1, 1997. The Original Lease, as amended by the First
Amendment, the Second Amendment, and the Third 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 the area now leased by Tenant comprises thirty-nine
thousand seven hundred four (39,704) square feet (the "Existing 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 Existing Premises
(the "Subleased Premises").
D. Pursuant to Article 49 of the Lease, Tenant exercised its option to
extend the term of the Lease until November 30, 2004.
E. Tenant desires to exercise Tenant's right of first offer and further
expand the Existing Premises and to modify and amend certain other terms of the
Lease as set forth below.
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.
<PAGE> 2
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 other good and valuable consideration, the receipt
and adequacy of which are hereby acknowledged, Landlord and Tenant hereby agree
as follows:
1. SECOND EXPANSION SPACE. From and after the Expansion Date (as
defined below) Landlord shall lease unto Tenant and Tenant shall rent from
Landlord, in addition to the Existing Premises, that portion of the Building
containing three thousand one hundred twenty-five (3,125) rentable square feet
(the "Second Expansion Space") and more particularly described on Exhibit A.
attached hereto and incorporated herein. The "Expansion Date" shall be the date
on which Landlord delivers the Second Expansion Space to Tenant with the work
described in Section 2 below completed, which date Landlord estimates will be
July 15, 1998.
2. TENANT IMPROVEMENTS. Landlord agrees to finish the Second Expansion
Space with materials of the type and quality standardly used in the Building,
all in accordance with the plans and specifications attached hereto as Exhibit
B and incorporated by reference herein. Landlord shall contribute $31,250.00
("Landlord's Contribution") toward the cost of such improvements. Any costs in
excess of Landlord's Contribution shall be paid by Tenant within 30 days of
receipt of an invoice therfor from Landlord.
3. LEASED PREMISES. From and after the Expansion Date, all references
to the square footage of the Leased Premises set forth in the Lease shall be
deleted and in place therof shall be inserted the number of forty-two thousand
eight hundred twenty-nine (42,829), so that the "Leased Premises" shall
comprise the Original Leased Premises, the Expansion Space and the Second
Expansion Space.
4. BASIC ANNUAL RENT FOR THE LEASED PREMISES. Commencing on the
Expansion Date and continuing throughout the Term (i.e., through November 30,
2004), Tenant agrees to pay Basic Annual Rent with respect to the Leased
Premises in equal monthly installments at the times and otherwise in the manner
as set forth in the Lease as follows:
<TABLE>
<CAPTION>
MONTHLY RENT PER
LEASE TERM BASIC ANNUAL RENT INSTALLMENT SQUARE FOOT
- ---------- ----------------- ----------- -----------
<S> <C> <C> <C>
Expansion Date-May 31, 1999 $352,482.67 $29,373.56 $ 8.23
June 1, 1999-May 31, 2000 $398,309.70 $33,192.48 $ 9.30
June 1, 2000-May 31, 2001 $410,730.11 $34,227.51 $ 9.59
June 1, 2001-May 31, 2002 $423,150.52 $35,262.54 $ 9.88
June 1, 2002-May 31, 2003 $435,999.22 $36,333.27 $10.18
June 1, 2003-May 31, 2004 $449,276.21 $37,439.68 $10.49
June 1, 2004-November 30, 2004 $462,553.20 $38,546.10 $10.80
</TABLE>
5. 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.
2
<PAGE> 3
6. 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.
7. 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.
8. 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.
IN WITNESS WHEREOF, Landlord and Tenant have respectively signed and
sealed this Fourth Amendment of Lease as of the day and year first above
written.
WITNESS: M.O.R. COLUMBIA LIMITED PARTNERSHIP
By: Manekin Columbia Limited Partnership
By: RA & DM, Inc.
/s/ MARGART LARSON By: /s/ LOUIS LA PENNA (SEAL)
- ------------------- ---------------------------------
Name: LOUIS LA PENNA
---------------------------------
Title: VP Treasurer
--------------------------------
LANDLORD
ATTEST: MARTEK BIOSCIENCES CORPORATION
/s/ [SIG] By: /s/ PETER L. BUZY (SEAL)
- ------------------- --------------------------------
Name: Peter L. Buzy
--------------------------------
Title: Chief Financial Officer
-------------------------------
Tenant
3
<PAGE> 4
STATE OF MARYLAND, COUNTY/CITY OF Howard, TO WIT:
I HEREBY CERTIFY that on this 6th day of August, 1998, before me, the
subscriber, a Notary Public of the State of Maryland and County/City of Anne
Arundel, personally appeared before before me Louis La Penna, 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 VP/Treasurer
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 Fourth Amendment of Lease to be the act and deed of
said limited partnership.
WITNESS my hand and notarial seal.
Maryanne D. Kommeyer, Notary
Anne Arundel Coutny
[SEAL] State of Maryland
My Commission Expires July 1, 2001 /s/ MARYANNE D. KOMMEYER
------------------------------
Notary Public
My Commission Expires: 7-1-01
-------------------------
STATE OF Maryland, COUNTY/CITY OF Howard, TO WIT:
I HEREBY CERTIFY that on this 5th day of August, 1998, before me, the
subscriber, a Notary Public of the State aforesaid and County/City of Howard,
personally appeared before me Peter L. Buzy, 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 Chief
Financial Officer of MARTEK BIOSCIENCES CORPORATION, Tenant, and she/he
acknowledged the foregoing Fourth Amendment of Lease to be the act and deed of
said corporation.
WITNESS my hand and notarial seal.
/s/ [SIG]
------------------------------
Notary Public
My Commission Expires: July 1, 2000
-------------
4
<PAGE> 1
EXHIBIT 10.27
EMPLOYMENT AGREEMENT
THIS AGREEMENT, made and entered into this 16th day of January, 1998, by and
between Martek Biosciences Corporation, a Delaware corporation having its
principle office at 6480 Dobbin Road, Columbia, MD 21045 (the "Company") and
Peter L. Buzy, residing at 21496 Hearthstone Ct., Ashburn, VA 20148 (the
"Executive").
WHEREAS, the Company desires to employ the Executive as its Chief Financial
Officer; and
WHEREAS, the Executive is skilled in the financial areas relevant to the
Company's business and desires to enter into employment with the Company;
NOW THEREFORE, the Company and Executive, in consideration of the premises and
of the respective mutual promises and agreements contained herein, agree with
each other as follows:
1. Definitions.
1.1 Change in Control. Shall be deemed to occur where the Company has
merged or consolidated with or into any other corporation, firm or business
entity or has sold or transferred substantially all of its assets to another
corporation, firm or business entity or has sold fifty percent or more of the
equity investment and voting control in the Company in any twelve month period
other than through a public or private offering of the Company's securities
whereby the primary goal of the new owners of the Company's stock is investment
appreciation or income and not control of the Company.
1.2 Cause. Shall be defined as those situations where the Executive has
breached this Agreement in any material respect, which breach is not cured by
the Executive or is not capable of being cured within thirty days after written
notice of such breach is delivered to Executive, or where the Executive has
engaged in willful and material failure to perform his duties as an employee of
the Company. Cause shall also include the Executive's
Page 1 of 6
<PAGE> 2
conviction of a criminal offense (other than minor traffic violations) or an act
of moral turpitude, and the Executive's failure to act in the best interests of
the Company or to follow a reasonable direction from the Company's Board of
Directors, which direction is not cured by the Executive or is not capable of
being cured by the Executive within thirty (30) days after written notice is
delivered to the Executive.
1.3 Disability. Disability shall mean the Executive's inability to
perform the essential functions of his job for a continuous period of not less
than 180 days.
2. Term. The term of this Agreement shall be for a period of three years
commencing on the date the Executive begins his employment with the Company (the
"Initial Employment Date") unless earlier terminated as hereinafter provided.
Such Initial Employment Date shall commence on or before March 1, 1998.
3. Position and Duties. The Company hereby employs the Executive and the
Executive agrees to work for the Company as its Chief Financial Officer during
the term of this Agreement. The Executive agrees to devote his full time,
attention and efforts to the business and affairs of the Company during the term
of this Agreement, and hereby confirms that he is under no contractual
commitments inconsistent with his obligations as set forth in this Agreement,
and that during the term of this Agreement, he will not render or perform
services for any other corporation, firm, entity or person which are
inconsistent with the provisions of this Agreement. During the term of this
Agreement, the Executive agrees to perform such reasonable employment duties as
the Chief Executive Officer or Board of Directors of the Company may assign to
him from time to time. The Executive also agrees to serve, for any period for
which he is elected, as an officer of the Company; provided, however, that the
Executive shall not be entitled to any additional compensation for serving as an
officer of the Company. Notwithstanding the above, the Executive shall be
permitted to work less than full time for the Company prior to March 15, 1998,
but shall be compensated on a pro-rata basis for any such period of less than
full time work.
4. Compensation.
Page 2 of 6
<PAGE> 3
4.1 Base Salary. During the first year of this Agreement, the Company
will pay the Executive a base salary of $140,000.00 per annum, payable in its
normal pay increments in force from time to time (semi-monthly installments as
of the date of this Agreement) for all the services to be rendered by the
Executive under this Agreement. The compensation payable to the Executive during
each subsequent year during the term of this Agreement shall be as mutually
agreed to by the Company and Executive prior to the commencement of each
contract year.
4.2 Incentive Compensation. In addition to the base salary described in
Section 4.1 above, the Executive shall be eligible, in the discretion of the
Company's Board of Directors, to participate in any incentive compensation plans
which may be established by the Board of Directors of the Company from time to
time.
4.3 Stock Option. The Company shall grant the Executive an option to
purchase 50,000 shares of the Company's common stock, under the Company's Stock
Option Plan, effective on the Executive's Initial Employment Date. Such stock
option shall be subject to the terms of a separate stock option agreement, but
such separate agreement shall call for the term of the options to be for ten
years and for 20% of the options to vest on the date that is six months after
the Initial Employment Date, an additional 20% of the options to vest on the
date that is one year after the Initial Employment Date, an additional 20% of
the options to vest on the date that is two years after the Initial Employment
Date, an additional 20% of the options to vest on the date that is three years
after the Initial Employment Date and the balance to vest on the date that is
four years after the Initial Employment Date. To the extent that the terms of
the separate stock option agreement are in conflict, in matters other than the
stock option vesting period, with the terms set forth herein, the terms of the
separate stock option agreement shall govern.
4.4 Participation in Benefit Plans. The Executive shall also be entitled
to participate in all employee benefit plans or programs in place from time to
time (including the Company's Paid Time Off Program which, at the date of this
Agreement, provides twenty-seven paid days off, including vacation days, sick
days, holidays and all other days off, during the first year of the Executive's
employment with the Company) to the extent that his position, title, tenure,
salary, age, health and other qualifications make him eligible to participate.
Page 3 of 6
<PAGE> 4
4.5 Relocation Expenses. The Company will reimburse the Executive for up
to an aggregate of $65,000.00 in relocation expenses incurred by the Executive
in order to move closer to the Company's offices. Such relocation expenses shall
include up to $21,000.00 in loss, prior to sales costs, of value of the
Executive's current home, up to $32,000.00 in costs of selling the Executive's
current home, up to $4,500.00 in moving costs and other out-of-pocket costs, up
to $10,000 in closing costs on the Executive's new home, and $3,500.00 of
miscellaneous costs. If the Executive does not incur a loss on the sale of
Executive's current home and also incurs less than $32,000.00 in costs of
selling Executive's current home, the difference between the actual costs
incurred in selling executive's current home and $32,000.00 shall be applied
towards closing costs and or loan initiation costs related to Executive's new
home. Except as noted above, reimbursable relocation costs shall not include any
loan initiation costs or finance points on the Executive's mortgage loan for his
new home. All reimbursable relocation costs, except for the $3,500.00 of
miscellaneous costs specified above, shall be reimbursed to the Executive by the
Company within thirty days of providing appropriate expense verification to the
Company. The $3,500.00 of miscellaneous expenses shall be paid to the Executive
within sixty days of the Initial Employment Date.
4.6 Other Expenses. The Company will pay or reimburse the executive for
all reasonable out-of-pocket expenses incurred by him in the performance of his
duties under this Agreement, subject to the presentment of appropriate vouchers
in accordance with the Company's normal policies for expense verification.
5.0 Termination. Either party may terminate this Agreement by giving the
other party thirty days advance written notice of its intent to terminate. If
the Company terminates this Agreement for reasons other than for Cause as is
defined herein or due to the death or Disability of the Executive, the Company
shall pay the Executive, within thirty days of the effective date of such
termination, a "Severance Fee," as additional compensation, equal to twelve
months base salary except that any such Severance Fee shall be reduced by one
twelfth for each month that the length of the Agreement, prior to the effective
date of the termination, exceeds twenty-four. In the case that a Change of
Control has taken effect, and this Agreement is terminated by the successor
organization, such Severance Fee shall be increased by fifty percent. In
addition, solely for
Page 4 of 6
<PAGE> 5
purposes of paying and calculating a Severance Fee in the case of a Change in
Control, any downgrading of the Executive's position, resulting in the Executive
not being the Chief Financial Officer of the combined entity (regardless of
whether the Executive remains in the employ of the combined entity) or the
Executive's decision to refuse a requested relocation shall be considered to be
a termination of this Agreement.
6.0 Assignment. The Executive shall not be permitted to assign this
Agreement. The Company shall have the right to assign this agreement to its
successors or assigns and all covenants and agreements hereunder shall enure to
the benefit of and be enforceable by or against its said successors or assigns.
The terms "successor" and "assign" shall include any corporation, firm or other
business entity with or into which the Company may merge or consolidate, or to
which the Company may sell or transfer all or substantially all of its assets,
or of which fifty percent or more of the equity investment and of the voting
control is owned, directly or indirectly, by or is in common ownership with, the
Company. After any such assignment by the Company, the Company shall be
discharged from all further liability hereunder and such assignee shall
thereafter be deemed to be the Company for the purposes of all provisions of
this Agreement.
7.0 Miscellaneous.
7.1 Governing Law. This Agreement is made under and shall be governed by
and construed in accordance with the laws of the State of Maryland.
7.2 Entire Agreement. Amendments and No Waiver. This Agreement
constitutes the entire understanding of the parties with respect to the subject
matter hereof and supersedes any and all prior understandings written or oral.
This Agreement may not be changed, modified, or discharged orally, but only by
an instrument in writing signed by the parties. The invalidity or
unenforceability of any provisions hereof shall in no way affect the validity or
enforceability of any other provision. If any provision of this Agreement is so
broad as to be unenforceable, such provision shall be interpreted to be only so
broad as is enforceable. No express or implied waiver by either party hereto of
any event of default hereunder shall in any way be, or be construed as, a waiver
of any future or subsequent event of default.
Page 5 of 6
<PAGE> 6
IN WITNESS WHEREOF, the Company has hereunto signed its name by its Chief
Executive Officer, and the Executive has signed his name, all as of the day and
year first above written.
MARTEK BIOSCIENCES CORPORATION
BY: [sig]
---------------------------
Name: Henry Linsert, Jr.
Title: Chief Executive Officer
PETER L. BUZY
[sig]
- -------------------------------
Executive
Page 6 of 6
<PAGE> 1
MARTEK BIOSCIENCES CORPORATION SELECTED FINANCIAL DATA EXHIBIT 13.01
<TABLE>
<CAPTION>
Year Ended October 31,
-----------------------------------------------------------------------------
In thousands except per share data 1998 1997 1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA
Revenues
Product sales $ 4,850 $ 3,566 $ 933 $ 1,262 $ 1,230
License fees and related revenues 1,165 293 2,244 270 1,185
Royalties 391 28 11 5 --
Research and development contracts and grants 484 530 769 662 628
-------- -------- -------- -------- --------
Total revenues 6,890 4,417 3,957 2,199 3,043
Costs and expenses
Cost of product sales 3,856 2,697 539 652 555
Research and development 9,787 11,051 10,294 7,720 5,029
Selling, general and administrative 7,360 7,415 4,134 3,219 3,171
-------- -------- -------- -------- --------
Total costs and expenses 21,003 21,163 14,967 11,591 8,755
-------- -------- -------- -------- --------
Loss from operations (14,113) (16,746) (11,010) (9,392) (5,712)
Other income, net 652 1,349 2,096 583 418
-------- -------- -------- -------- --------
Net loss $(13,461) $(15,397) $ (8,914) $ (8,809) $ (5,294)
======== ======== ======== ======== ========
Net loss per share $ (.94) $ (1.14) $ (.67) $ (.94) $ (.70)
======== ======== ======== ======== ========
Weighted average common shares outstanding 14,330 13,559 13,281 9,412 7,609
======== ======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
October 31,
-----------------------------------------------------------------------------
1998 1997 1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET AND OTHER DATA
Cash, cash equivalents, short-term investments
and marketable securities $ 17,645 $ 20,675 $ 39,392 $ 51,623 $ 10,706
Working capital 21,000 21,990 35,306 49,681 8,944
Total assets 40,736 41,342 57,123 65,158 13,569
Long-term debt 1,951 3,292 1,199 4,175 --
Accumulated deficit (59,049) (45,588) (30,191) (21,277) (12,468)
Total stockholders' equity 35,282 34,687 49,416 57,346 10,286
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, among others, statements concerning: (1) expectations
regarding future product introductions, distribution, sales, applications and
potential marketing partnerships; (2) expectations regarding sales and royalties
by and from formula licensees; (3) expectations regarding future efficiencies in
manufacturing processes and the cost of production of the Company's nutritional
oils; (4) future research and development costs; (5) Year 2000 business risks;
and (6) expectations regarding additional capital expenditures needed in
relation to fermentation and oil processing activities. Forward-looking
statements include those statements containing such words as "will," "should,"
"could," "anticipate," "believe," "plan," "estimate," "expect," "intend," and
other similar expressions. Such statements involve risks and uncertainties and
actual results may differ materially due to a variety of risk factors set forth
from time to time in the Company's filings with the Securities and Exchange
Commission.
Martek, founded in 1985, is a leader in the development and
commercialization of high value products derived from microalgae, including
nutritional products, pharmaceutical research and development tools and
diagnostics. Martek develops, manufactures and sells products from microalgae.
The Company's products include: (1) specialty, edible oils for infant formula,
nutritional supplements and food ingredients that play a beneficial role in
promoting mental and cardiovascular health, and in the development of the eyes
and central nervous system in newborns; (2) high-value reagents and technologies
to visualize molecular interactions for drug discovery and development; and (3)
new, powerful fluorescent markers for diagnostics, rapid miniaturized screening
and gene and protein detection. In 1989, Martek began to realize revenues from
sales of its stable isotope products. In 1992, Martek began to realize revenues
from license fees related to its nutritional oils containing docosahexaenoic
acid ("DHA") and arachidonic acid ("ARA") and sales of sample quantities of
these oils. In 1995, Martek recognized its first product and royalty revenues
from sales of infant formula containing these oils, and in 1996, Martek began to
realize revenues from the sale of Neuromins(TM), a DHA dietary supplement. In
1998, Martek first realized revenues from the sale of its new phycobilisome
pigment products.
Martek has incurred losses in each year since its inception. At October
31, 1998, the Company's accumulated deficit was $59,049,000. The Company expects
to continue its development, production optimization and product marketing
activities and, as a result, expects losses to continue for at least the next
year, or 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. 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.
MANAGEMENT OUTLOOK & REGULATORY ISSUES
Management believes that while quarterly results may show fluctuations in
product sales, the outlook for future revenue growth remains positive and that
sales in 1999 will surpass prior year levels. Specifically, Management believes
that for fiscal 1999: (1) infant formula containing Martek's oils will be
introduced in additional countries; (2) sales and royalties from the Company's
infant formula licensees will continue to grow; (3) distribution of the
Company's Neuromins(TM) DHA products will expand; (4) sales of new, high value
products from the Company's stable isotope group will increase; and (5) sales of
diagnostic products will grow.
Management believes that recent scientific evidence supports the
contention that humans throughout life will benefit from DHA supplementation.
This could represent a far larger market for DHA than the market for infants. To
realize this market, the Company is pursuing a long-term marketing partnership
with a large nutritional products and/or pharmaceutical company to promote
Martek's non-infant formula nutritional oil products. Because of this objective,
certain shorter-term marketing arrangements of lesser scope have been avoided,
thus modestly sacrificing short-term product sales. Management believes that
broad introductions of infant formula containing Martek's nutritional oils
and/or a strategic alliance with a large scale nutritional products and/or
pharmaceutical company will occur in the future. However, Management is unable
to accurately predict when such events will occur.
Four of the Company's infant formula licensees have obtained the
regulatory approval, where required, to sell infant formula supplemented with
Martek's oils in over 50 countries for term or pre-term infant formula products.
The Company and its licensees are in the process of preparing to respond to
certain questions raised by the FDA in connection with evaluating Martek's oils
for inclusion in U.S. infant formula. While Management believes that approval
should ultimately be obtained, there is no assurance that the Company and its
licensees will be able to adequately respond to the FDA's questions, that the
licensees will continue to press forward, that clearances will in fact be
granted, that the process will not involve significant delays that may
materially and adversely affect the timing and extent of potential future
introductions of the Company's products, or that once and if approval is
obtained, a licensee will actually market a U.S. infant formula product
containing the Company's oils. Nevertheless, Management anticipates that in
fiscal 1999 infant formula products containing Martek's oils will continue to be
introduced in additional countries around the world and overall product sales,
including sales from infant formula related products, will increase over prior
years.
7
<PAGE> 3
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS CONTINUED
RESULTS OF OPERATIONS
REVENUES Revenues increased from $3,957,000 in 1996 to $4,417,000 in 1997, an
increase of 12%, mainly as a result of a $2,633,000 increase in product sales in
1997 over 1996, offset somewhat by a nonrecurring license fee of $2,075,000
which was recognized in 1996. Revenues in 1998 increased to $6,890,000, or 56%
compared to 1997, mainly due to an increase in product sales of $1,284,000,
coupled with an increase in license fees and related revenues of $872,000, which
was primarily due to the recognition of a $1,125,000 licensing fee associated
with a pre-1998 arrangement.
Nutritional product sales increased $1,643,000 in 1997 over 1996 and an
additional $963,000 in 1998 over 1997. The increase of 1049% in 1997 was mainly
the result of increased sales of Neuromins(TM) DHA products brought about by
intense marketing, advertising and public awareness efforts aimed at
commercializing these products. In 1998, nutritional product sales increased 54%
compared to 1997 as a result of expanded market penetration of infant formula
products, including term introductions, containing the Company's oils, as well
as expanded distribution of Neuromins(TM) into mainstream markets which occurred
late in 1998. Stable isotope and other product sales increased $990,000 in 1997,
or 128%, as a result of increased sales and marketing efforts and increased an
additional $321,000, or 18%, in 1998, primarily the result of new high-value
product introductions late in the year and initial sales of the Company's
phycobilisome pigment products.
Royalty revenues more than doubled in 1997 and increased by $363,000, or
thirteen-fold, in 1998 due to the increased volume of infant formula sales by
licensees. Contract and grant revenues decreased by $239,000 in 1997 and further
decreased by $46,000 in 1998 due to fewer grants outstanding under which the
Company is receiving funding. 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 from 58% in 1996 to 76% in
1997, and 80% in 1998. These increases resulted primarily from the cost of sales
of Martek's nutritional oils which represent an increasingly higher percentage
of the product mix. Infant formula royalties may comprise up to half of revenues
from oil sold for such purposes. Since royalty revenues are not included in
product sales, this creates a significantly higher cost of goods sold as a
percentage of revenues than would be the case if royalties were incorporated
into the product price and recognized at the same time as the product sale. In
addition, oil production cost was high due to the current low volume of
production and because of ongoing process optimization. As sales volumes
increase, and manufacturing efficiencies and optimization occurs, Management
believes that production costs will decrease. Management believes that
significant optimization efforts will be required for at least the next year to
realize these increases in efficiency.
The balance of the increase in cost of sales resulted from certain price
reductions primarily in the Company's low-end stable isotope drug discovery
products brought about by competition, offset in part by sales of high-end
proprietary products primarily in the third and fourth quarters of 1998.
Management believes that, in the future, sales of the Company's stable isotope
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
high-value products, but the ultimate impact of these efforts on cost of sales
cannot be reasonably predicted at this time.
RESEARCH AND DEVELOPMENT Research and development expenses, including
contract-related costs, increased from $10,294,000 in 1996 to $11,051,000 in
1997, an increase of 7%, and decreased to $9,787,000 in 1998, a decrease of 11%
compared to 1997. Contract-related research and development costs included in
these amounts were $506,000 in 1996, $509,000 in 1997, and $446,000 in 1998.
Consistent with the Company's plans, nutritional oils development costs
accounted for over 75% of all research and development costs as a result of the
Company's continued development efforts to refine its production process.
Research and development costs may increase in the future as the Company
continues to optimize the efficiency of its large-scale fermentation and oil
extraction process.
SELLING, GENERAL AND ADMINISTRATIVE Selling, general and administrative costs
increased from $4,134,000 in 1996 to $7,415,000 in 1997, an increase of 79%, and
decreased to $7,360,000 in 1998, a decrease of 1% from 1997. These costs
increased in 1997 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. These advertising and
promotional costs continued in 1998 and are expected to continue and possibly
increase in the future as the Company expands the sales and marketing efforts
related to its products.
OTHER INCOME, Net Other income decreased from $2,097,000 in 1996 to $1,349,000
in 1997, and to $651,000 in 1998, primarily due to a lower amount of interest
earned on the investment of funds as these funds are used to support Company
operations.
NET LOSS Net losses increased from $8,914,000 in 1996 to $15,397,000 in 1997, an
increase of 73%, and decreased to $13,461,000 in 1998, a drop of 13% compared to
1997.
RECENT ACCOUNTING PRONOUNCEMENTS In June 1997, the FASB issued SFAS No. 130,
"Reporting Comprehensive Income," which requires companies to report by major
components and in total, the change in its net assets during the period from
non-owner sources. The FASB also issued SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information," which establishes annual and
interim reporting standards for a company's operating segments and related
disclosures about its products, services, geographic areas and major customers.
Both Statements are effective for fiscal years beginning after December 15,
1997. It is not anticipated that adoption of these standards will impact the
Company's financial position, results of operations, cash flows, or
significantly change the presentation of its disclosures.
IMPACT OF YEAR 2000 The Company uses a number of computer software programs and
operating systems in its internal operations, including applications used in
financial business systems and various administrative functions. Management
believes that the business risk associated with these internal information
systems is minimal and has completed more than
8
<PAGE> 4
90% of its Year 2000 compliance implementation work on them. The Company is also
evaluating its non-information technology systems, including the various
equipment in operation at its oil production facilities in Winchester, Kentucky.
Management has completed more than 75% of this evaluation and subsequent
implementation, and believes that the business risk associated with this
equipment is minimal. Additionally, Martek's third party relationships are being
reviewed to assess their Year 2000 status and potential impact on the Company.
The Company has completed approximately 75% of this review and, where potential
business risk has been identified, is requesting additional information from
certain third parties to obtain assurance that they are Year 2000 compliant.
Based on currently available information, Management believes that total
costs associated with Year 2000 issues will be less than $200,000, and that it
will be able to manage the Year 2000 transition without any material adverse
effect on the Company's operations, liquidity or capital resources. However,
there can be no assurance that Year 2000 issues will not require a significant
commitment of resources to resolve potential problems.
LIQUIDITY AND CAPITAL RESOURCES Martek has financed its operations primarily
from the issuance and sale of equity securities, debt financing, revenues
received under research and development contracts and grants, product sales and
receipt of license fees. Since its inception, the Company has raised
approximately $84 million from private and public sales of its equity
securities, including approximately $10 million from a private placement in
1998. The 1998 private placement investors have also agreed to a two-year
funding commitment to provide up to an additional $10.25 million in financing in
the form of common stock and warrants, at the discretion of the Company, subject
to certain conditions, which include the stock price being within twenty percent
of the initial issuance price of $15.63. Through October 31, 1998 Martek has
incurred an accumulated deficit of $59,049,000. The Company's balance of cash
and cash equivalents at October 31, 1998 was $4,498,000. In addition, at October
31, 1998, Martek had $13,147,000 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
$3,030,000 in 1998, 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 in anticipation of further
commercial introductions of the Company's products, partially offset by funds
raised in the Company's 1998 private equity financing.
Capital expenditures of $1,612,000 were made in 1998, a significant
portion of which represents upgrades to the Company's fermentation and oil
processing facilities in Winchester, Kentucky. Management expects additional
capital expenditures of at least $1,500,000 in 1999 as fermentation and oil
processing activities increase and production optimization efforts continue. 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, 1998, the Company had $776,000
outstanding under this 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, 1998, the outstanding balance was $2,516,000.
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) DHA, 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 and
its ability to attract collaborators where it so desires. The capital
requirements of Martek will depend, among other things, on one or more of the
following factors: growth in the Company's infant formula and nutritional
product sales; the extent and progress of its research and development programs;
the progress of preclinical and clinical studies; the time and costs of
obtaining regulatory clearances for those products subject to such clearances;
the costs involved in filing, protecting and enforcing patent claims; competing
technological and market developments; the cost of capital expenditures at the
Company's manufacturing facilities; the cost of acquiring additional and/or
operating existing manufacturing facilities for its various products and
potential products (depending on which products the Company decides to
manufacture and continues to manufacture itself); and the costs of marketing and
commercializing the Company's products. The continued development and
optimization of the Company's production facility has had, and will continue to
have, a material effect upon Martek's liquidity and capital resources.
Additional plant modifications costing at least $1,500,000 are expected in 1999.
Expenditures beyond 1999 will depend in part on production capacity needs, and
the extent of development and implementation of process 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, license fee arrangements
and equity financing, if required. Should the Company need to raise additional
funds, there can be no assurance that such funds will be available to the
Company on acceptable terms, if at all.
9
<PAGE> 5
MARTEK BIOSCIENCES CORPORATION Balance Sheets
<TABLE>
<CAPTION>
October 31,
---------------------------------------------
1998 1997
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $ 4,497,879 $ 1,977,027
Short-term investments and marketable securities (Note 3) 13,146,950 18,697,859
Accounts receivable 1,336,268 1,180,691
Inventories (Notes 2 and 4) 5,001,990 2,905,452
Prepaid expenses 423,650 318,270
Other current assets 95,723 272,836
------------ ------------
Total current assets 24,502,460 25,352,135
Property, plant and equipment, net (Notes 2 and 5) 16,233,049 15,989,432
------------ ------------
$ 40,735,509 $ 41,341,567
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable $ 595,644 $ 1,008,107
Accrued liabilities 1,565,952 1,040,849
Current portion of notes payable 1,340,919 1,313,769
------------ ------------
Total current liabilities 3,502,515 3,362,725
Long-term portion of notes payable (Note 6) 1,951,240 3,292,159
Commitments and contingencies (Note 7)
Stockholders' equity (Note 9)
Preferred stock, $.01 par value; 4,700,000 shares authorized;
none issued or outstanding -- --
Series A junior participating preferred stock, $.01 par value;
300,000 shares authorized; none issued or outstanding -- --
Common stock, $.10 par value; 30,000,000 shares authorized;
14,879,434 and 13,673,659 shares issued and outstanding at
October 31, 1998 and 1997, respectively 1,487,943 1,367,366
Additional paid-in capital 92,843,259 78,907,450
Accumulated deficit (59,049,448) (45,588,133)
------------ ------------
Total stockholders' equity 35,281,754 34,686,683
------------ ------------
$ 40,735,509 $ 41,341,567
============ ============
</TABLE>
See accompanying notes.
12
<PAGE> 6
MARTEK BIOSCIENCES CORPORATION STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year ended October 31,
-------------------------------------------------------------
1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
REVENUES (NOTES 2 AND 8)
Product sales:
Nutritional product sales $ 2,762,844 $ 1,799,839 $ 156,625
Stable isotope and other product sales 2,086,791 1,766,148 776,088
------------ ------------ ------------
Total product sales 4,849,635 3,565,987 932,713
License fees and related revenues 1,165,000 292,839 2,244,409
Royalties 391,215 28,475 11,008
Research and development contracts and grants 483,948 529,795 769,084
------------ ------------ ------------
Total revenues 6,889,798 4,417,096 3,957,214
COSTS AND EXPENSES
Cost of product sales 3,855,675 2,697,050 539,482
Research and development 9,786,829 11,050,574 10,293,895
Selling, general and administrative 7,360,019 7,415,127 4,134,331
------------ ------------ ------------
Total costs and expenses 21,002,523 21,162,751 14,967,708
------------ ------------ ------------
Loss from operations (14,112,725) (16,745,655) (11,010,494)
OTHER INCOME (EXPENSE)
Miscellaneous income 96,021 93,770 42,230
Interest income 1,076,587 1,682,785 2,459,713
Interest expense (521,198) (427,941) (405,317)
------------ ------------ ------------
651,410 1,348,614 2,096,626
------------ ------------ ------------
Net loss $(13,461,315) $(15,397,041) $ (8,913,868)
============ ============ ============
Net loss per share (Note 2) $ (.94) $ (1.14) $ (.67)
============ ============ ============
Weighted average common shares outstanding 14,329,825 13,559,419 13,281,429
============ ============ ============
</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, 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
Issuance of common stock and warrants
in private placement 655,563 65,556 9,944,000 -- 10,009,556
Exercise of stock options and warrants 550,212 55,021 3,991,809 -- 4,046,830
Net loss -- -- -- (13,461,315) (13,461,315)
- -----------------------------------------------------------------------------------------------------------------------------
BALANCE AT OCTOBER 31, 1998 14,879,434 $1,487,943 $92,843,259 $(59,049,448) $ 35,281,754
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes.
14
<PAGE> 8
MARTEK BIOSCIENCES CORPORATION STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year ended October 31,
--------------------------------------------------
1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss $(13,461,315) $(15,397,041) $ (8,913,868)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization 1,368,789 1,201,179 893,348
Other net -- -- (1,130)
Changes in assets and liabilities:
Accounts receivable (155,577) (858,580) (5,745)
Inventories (2,096,538) (1,064,324) (851,755)
Prepaid expenses (105,380) (184,710) 62,698
Other current assets 177,113 (148,086) 68,944
Accounts payable (412,463) 366,188 66,660
Accrued liabilities 525,103 (453,952) 583,394
Unearned revenue -- -- (2,075,000)
------------ ------------ ------------
Net cash used in operating activities (14,160,268) (16,539,326) (10,172,454)
INVESTING ACTIVITIES
Change in short-term investments and marketable securities 5,550,909 12,061,493 (20,175,444)
Purchase of property, plant and equipment (1,612,406) (1,881,369) (4,361,455)
------------ ------------ ------------
Net cash provided by (used in) investing activities 3,938,503 10,180,124 (24,536,899)
FINANCING ACTIVITIES
Borrowings on notes payable -- 4,000,000 1,539,954
Repayment of notes payable (1,313,769) (4,964,258) (219,768)
Proceeds from the exercise of warrants and options, and other 4,046,830 667,173 983,957
Proceeds from the issuance of
common stock and warrants in private placement 10,009,556 -- --
------------ ------------ ------------
Net cash provided by (used in) financing activities 12,742,617 (297,085) 2,304,143
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents 2,520,852 (6,656,287) (32,405,210)
Cash and cash equivalents at beginning of year 1,977,027 8,633,314 41,038,524
------------ ------------ ------------
Cash and cash equivalents at end of year $ 4,497,879 $ 1,977,027 $ 8,633,314
============ ============ ============
</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 (1) adequate steps have not been taken to
commercialize such inventions, (2) such action is necessary to meet public
health or safety needs, or (3) 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 $255,000 in 1998, $333,000 in 1997 and $609,000 in 1996.
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 6% in 1998, 12% in 1997 and 15% in 1996 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 $446,000
in 1998, $509,000 in 1997 and $506,000 in 1996 .
ADVERTISING COSTS All advertising costs are expensed when incurred. Advertising
costs expensed for the years ended October 31, 1998, 1997, and 1996 approximated
$1,765,000, $1,198,000, and $38,000, 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 the liability 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, 1998.
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." The Company has elected to continue
accounting for its stock-based compensation in accordance with the provisions of
APB No. 25, but will 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.
16
<PAGE> 10
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, 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 $349,000 in 1998,
$689,000 in 1997, and $133,000 in 1996. For the years ended October 31, 1998,
1997 and 1996 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 $13,146,950 and $18,697,859 for the years ended October 31, 1998 and
1997, respectively. At October 31, 1998 and 1997, the estimated fair value of
these securities approximated cost.
4. INVENTORIES
Inventories consisted of the following:
<TABLE>
<CAPTION>
October 31,
1998 1997
- -----------------------------------------------------------------------
<S> <C> <C>
Finished products $1,406,053 $1,661,439
Work in process 3,343,911 909,932
Raw materials 252,026 334,081
----------- -----------
$5,001,990 $2,905,452
=========== ===========
</TABLE>
5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of the following:
<TABLE>
<CAPTION>
October 31,
1998 1997
- ----------------------------------------------------------------------
<S> <C> <C>
Land $ 149,860 $ 149,860
Building and improvements 1,742,123 1,742,123
Machinery and equipment 18,220,885 16,666,874
Furniture and fixtures 664,442 631,044
Leasehold improvements 396,986 371,989
----------- -----------
21,174,296 19,561,890
Less accumulated depreciation
and amortization 4,941,247 3,572,458
----------- -----------
$16,233,049 $15,989,432
=========== ===========
</TABLE>
Depreciation expense amounted to $1,369,000, $1,201,000, and $893,000 for
the years ended October 31, 1998, 1997 and 1996, respectively.
6. NOTES PAYABLE
In March 1997, the Company entered into a four-year term loan in the amount of
$4,000,000 to refinance the debt associated with the purchase of its
fermentation facility located in Winchester, Kentucky. The term loan bears
interest at a rate of 8.61% and, as of October 31, 1998, the outstanding balance
was $2,516,000. The loan is collateralized solely by the fermentation plant.
In June 1996, the Company entered into a four-year term loan in the amount
of $1,540,000, bearing interest at the rate of 9.02% to finance a portion of the
construction of its oil processing facility in Winchester, Kentucky. As of
October 31, 1998 the outstanding balance was $776,000. This loan is
collateralized by the equipment purchased with the proceeds.
Future minimum payments on the Company's term loans at October 31, 1998
were as follows:
<TABLE>
<S> <C>
1999 $1,340,919
2000 1,479,333
2001 471,907
----------
$3,292,159
==========
</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 $329,000 in 1998,
$311,000 in 1997, and $313,000 in 1996. Future minimum lease payments under the
lease, assuming the Company will not exercise any additional cancellation
17
<PAGE> 11
NOTES TO FINANCIAL STATEMENTS CONTINUED
or expansion rights it has under the lease, at October 31, 1998, were as
follows:
<TABLE>
<S> <C>
1999 372,000
2000 403,000
2001 416,000
2002 429,000
2003 and after 896,000
----------
$2,516,000
==========
</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, 1998 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, 1998, 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,
1998.
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. In 1998, the Company recognized a license fee
of $1,125,000 associated with a pre-1998 arrangement. Certain agreements
include royalty payments, which are based upon a percentage of product sales.
Royalties in the amount of $391,000, $28,000, and $11,000 were earned in the
years ended October 31, 1998, 1997 and 1996, respectively.
9. CAPITAL ACCOUNTS
PRIVATE PLACEMENT of Common Stock On April 27, 1998, 655,563 shares of the
Company's common stock and warrants to purchase 196,670 shares of common stock
were issued in a private placement resulting in net proceeds to the Company of
approximately $10 million. The warrants are currently outstanding and are
exercisable for a period of three years from date of issuance at a price of
$18.76. The investors have also agreed to a two-year funding commitment to
provide up to an additional $10.25 million in financing in the form of common
stock and warrants, at the discretion of the Company, subject to certain
conditions, which include the stock price being within twenty percent of the
initial issuance price of $15.63. In consideration for the additional $10.25
million two-year funding commitment, the Company is obligated to issue the
investors additional warrants to purchase up to 51,250 shares of common stock at
each of the first two anniversaries of the private placement if the Company does
not utilize the additional funding by such dates. The cost associated with the
additional warrants has been calculated using the Black-Scholes option pricing
model and is included in interest expense for the year ended October 31, 1998.
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, 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
Granted 340,750 $8.63-$15.50 $13.07
Exercised (195,785) $2.00-$13.50 $2.78
Forfeited (129,375) $2.00-$34.25 $19.97
---------- ------------- --------
BALANCE AT OCTOBER 31, 1998 1,772,870 $8.00-$34.25 $14.90
</TABLE>
At October 31, 1998, 1,040,020 options were exercisable at a weighted
average exercise price of $13.32 per share, and a total of 575,000 shares of
common stock were available for future grants under the Option Plan. The
weighted average contractual life for all options outstanding under the Option
Plan at October 31, 1998 was 7.2 years.
18
<PAGE> 12
Detailed information on the options outstanding on October 31, 1998 by
price range are set forth below:
<TABLE>
<CAPTION>
Weighted
Weighted Average Weighted
Average Remaining Average
Price Options Exercise Contractual Shares Exercise
Range Outstanding Price Life Exercisable Price
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$8.00-9.88 587,320 $8.48 5.21 517,720 $ 8.36
$10.25-14.44 602,100 $12.60 8.37 282,450 $12.16
$15.50-25.50 393,750 $18.74 8.40 130,870 $19.00
$32.88-34.25 199,700 $33.15 7.41 108,980 $33.08
--------- ---------
1,782,870 1,040,020
========= =========
</TABLE>
DIRECTORS' STOCK OPTION PLAN In 1994, the Company established a Directors' Stock
Option Plan ("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 received 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 1998, 38,950
options were granted at an exercise price of $14.44 per share. 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 and during
1995, 30,000 options were granted at an exercise price of $9.50 per share. No
options were exercised in 1995, 1997 or 1998. In 1996, 9,200 of these options
were exercised at prices ranging from $9.50-$11.25 per share. At October 31,
1998, 140,800 options were outstanding and no additional 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, 1998
was 7.8 years.
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 1998 and 1997 pro forma net loss and per share calculations 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 1998, 1997 and 1996 would have been approximately
$17.2 million, $17.7 million and $9.7 million, or $1.20, $1.31 and $.73 per
share, respectively. The weighted average fair value of the options granted
during 1998 is estimated at $10.99 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 79.1%, 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 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, 1998, the Company had net operating loss carryforwards of
approximately $73,871,000 for income tax
19
<PAGE> 13
NOTES TO FINANCIAL STATEMENTS CONTINUED
reporting purposes that expire in years 2000 through 2018.
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 five
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. The Company's
total net deferred tax assets, which resulted primarily from net operating
losses, were $29,889,000 and $23,831,000 at October 31, 1998 and 1997,
respectively. Because of the uncertainty with the ultimate realization of these
net deferred tax assets, they were fully reserved for by a valuation allowance
at October 31, 1998 and 1997.
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, 1998, 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, 1998 and 1997, and the related statements of
operations, stockholders' equity, and cash flows for each of the three years in
the period ended October 31, 1998. 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, 1998 and 1997, and the results of its operations and its cash
flows for each of the three years in the period ended October 31, 1998, in
conformity with generally accepted accounting principles.
Vienna, Virginia
December 11, 1998
/s/ ERNST & YOUNG LLP
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, 1998,
there were approximately 193 holders of record of the Company's common stock. No
cash dividends have been paid on the common stock and the Company does not
anticipate paying any cash dividend in the foreseeable future. The following
table sets forth, for the calendar periods indicated, the range of high and low
sale prices for the Company's common stock as reported by NASDAQ:
Price Range of Common Stock
<TABLE>
<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
Fiscal 1998 High Low
- ---------------------------------------------------------------------------
November 1, 1997 - January 31, 1998 $12 $ 7 1/2
February 1, 1998 - April 30, 1998 $18 3/4 $ 9 1/2
May 1, 1998 - July 31, 1998 $16 1/4 $ 8
August 1, 1998 - October 31, 1998 $13 5/8 $ 5 3/8
</TABLE>
<PAGE> 1
Exhibit 23.01
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in this Annual Report (Form 10-K)
of Martek Biosciences Corporation of our report dated December 11, 1998,
included in the 1998 Annual Report to Shareholders of Martek Biosciences
Corporation.
We also consent to the incorporation by reference of our report dated December
11, 1998, with respect to the financial statements of Martek Biosciences
Corporation incorporated by reference in the Annual Report (Form 10-K) for the
year ended October 31, 1998, 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.
(4) Registration Statement Number 333-53803 on Form S-3, dated June 18, 1998.
/s/ Ernst & Young LLP
Vienna, Virginia
January 26, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> OCT-31-1998
<PERIOD-START> NOV-01-1997
<PERIOD-END> OCT-31-1998
<CASH> 4,497,879
<SECURITIES> 13,146,950
<RECEIVABLES> 1,346,268
<ALLOWANCES> 10,000
<INVENTORY> 5,001,990
<CURRENT-ASSETS> 24,502,460
<PP&E> 21,174,296
<DEPRECIATION> 4,941,247
<TOTAL-ASSETS> 40,735,509
<CURRENT-LIABILITIES> 3,502,515
<BONDS> 1,951,240
0
0
<COMMON> 1,487,943
<OTHER-SE> 33,793,811
<TOTAL-LIABILITY-AND-EQUITY> 40,735,509
<SALES> 4,849,635
<TOTAL-REVENUES> 6,889,798
<CGS> 3,855,675
<TOTAL-COSTS> 21,002,523
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 521,198
<INCOME-PRETAX> (13,461,315)
<INCOME-TAX> 0
<INCOME-CONTINUING> (13,461,315)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (13,461,315)
<EPS-PRIMARY> (.94)
<EPS-DILUTED> (.94)
</TABLE>
<PAGE> 1
EXHIBIT 99.1
CAUTIONARY STATEMENTS FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS
OF THE PRIVATE SECURITIES REFORM ACT OF 1995
We desire to take advantage of the "safe harbor" provisions of the
Private Securities Litigation Reform Act of 1995. Many of the following
important factors discussed below have been discussed in our prior SEC filings.
You should be cautioned that the following important factors have affected, and
in the future could affect, our actual results. There may also be additional
factors not discussed in this report that could also affect future results.
These factors could cause our future financial results to differ materially from
those expressed in any forward-looking statements made by us. Forward-looking
statements may relate to such matters as:
- - Our ability to generate future revenues;
- - The potential commercialization of our products; and
- - The optimization of production costs.
Forward-looking statements may include words such as "will," "should," "could,"
"anticipate," "believe," "plan," "estimate," "expect," "intend," and other
similar expressions. This list does not constitute all factors which you should
consider prior to making an investment decision in our securities. You should
also not assume that the information contained herein is complete or accurate in
all respects after the date of this filing. We disclaim any duty to update the
statements contained herein.
History of Operating Losses; Uncertainty of Future Financial Results. We
have experienced net operating losses since our inception. We expect such losses
to continue until significant sales of our nutritional oils occur and/or until
significant royalties from sales of infant formula products containing our oils
are recognized. We expect to have quarter-to-quarter and year-to-year
fluctuations in revenues, expenses and losses, some of which could be
significant. Future financial results will be affected by, among other things,
the following factors:
- - our ability to complete successfully the commercialization and cost
optimization of our products;
- - the willingness and ability of infant formula licensees to incorporate
our product into their infant formula products;
- - the willingness of potential strategic partners to market our products;
- - growth in revenues from our nutritional oils;
- - growth in revenues from sales of our products for use in molecular
structure research and structure-based drug design;
- - the progress of our research and development programs;
- - the progress of our preclinical and clinical product studies;
- - the time, costs and ability of obtaining regulatory approvals for those
products subject to such approval;
- - our ability to protect our proprietary rights;
- - the costs of protecting our patent claims;
- - competing technological and market developments;
- - manufacturing costs associated with our various products and potential
products; and
- - the costs of commercializing and marketing our products.
Early Stage of the Company and its Products. Martek was founded in 1985.
Certain of our products require substantial additional research and development.
Some require laboratory and clinical testing and regulatory approval. In
addition, although we anticipate the introduction of new products over the next
several years, some of our potential products, especially in the area of
pharmaceuticals, are not expected to become commercially available for many
years, if at all. There is no assurance that:
- - we will successfully complete our product development efforts;
- - we will obtain required regulatory approvals on a timely basis or at all;
- - we will be capable of manufacturing our products in commercial quantities
at a reasonable cost; or
- - any new products, if introduced, will achieve market acceptance.
We expect to receive most of our future revenues from direct sales of products,
royalty income and licensing fees. A portion of our revenues to date has come
from research and development contracts (primarily from the federal government)
and federal
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<PAGE> 2
government grants. We first realized revenues from our products for use in
molecular structure research and structure-based drug design in 1989. We
recognized revenues from license fees and sales of sample quantities of
nutritional and diagnostic products in 1992.
Need for Additional Capital. Substantial expenditures will be required to:
- - enable us to continue our research and development activities;
- - conduct preclinical and clinical studies; and
- - manufacture and market our products.
The level of expenditures required for these activities will depend in part on
the extent to which we develop, manufacture and market our products
independently or with other companies through collaborative arrangements. Our
future capital requirements will also depend, among other things, on one or more
of the following factors:
- - growth in our infant formula and nutritional product sales;
- - the extent and progress of our research and development programs;
- - the progress of preclinical and clinical studies;
- - the time and costs of obtaining regulatory clearances for those products
subject to such clearances;
- - the costs involved in filing, protecting and enforcing patent claims;
- - competing technological and market developments;
- - the cost of capital expenditures at our manufacturing facilities;
- - the cost of acquiring additional and/or operating existing manufacturing
facilities for our various products and potential products (depending on
which products we decide to manufacture and continue to manufacture
ourselves); and
- - the costs of marketing and commercializing our products.
There is no assurance that funding to carry on these activities will be
available at all or on favorable terms to permit successful commercialization of
our products. We have only limited debt financing arrangements. These
arrangements require us to meet certain financial covenants related to our
outstanding term loans. There is no assurance that we will be able to:
- - continue such arrangements;
- - continue to comply with bank covenants; or
- - establish additional debt financing arrangements on satisfactory terms, if
at all.
If adequate funds are not available, we may be required to:
- - curtail one or more of our research and development programs;
- - curtail manufacturing and commercialization programs; and/or
- - obtain funds through arrangements with collaborative partners or others.
These arrangements may require us to relinquish certain technology or product
rights including patent and other intellectual property rights.
Dependence on Third Parties; Reliance on Future Collaborations. Future
revenues from our nutritional oils are largely dependent on factors over which
we will have no control. To date, a portion of our revenues has consisted of
license fees and anniversary payments received from infant formula manufacturers
which have licensed our nutritional oils. Under these agreements, we are
entitled to receive royalty payments based on the licensees' sales of products
including our nutritional oils. These licensees will be responsible for
performing all clinical testing on, obtaining regulatory approvals for and
marketing products containing our nutritional oils. These licensees are not
required to use our nutritional oils in any of their products. They are also not
restricted under the licensing agreements from obtaining docosahexaenoic acid
("DHA") or arachidonic acid ("ARA") from other sources for use in their infant
formula products. Although some of our licensees have introduced infant formula
products containing our nutritional oils overseas, we cannot predict whether any
licensee will broaden its use of our oils or whether they will be used by any of
our other licensees in their infant formula products.
Our strategy for the development, clinical testing, manufacturing and
commercialization of certain of our products includes entering into various
collaborations with corporate partners, licensors, licensees and others. In
1997, we entered into a supply agreement with a third party manufacturer for its
ARA-containing oil. Although we are able to produce ARA oil in our Kentucky
manufacturing plant, a halt in supply from this third party ARA oil manufacturer
could adversely impact our ability to
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<PAGE> 3
meet product demand in the short-run. It could also adversely impact our ability
to meet product demand in the long-run if this source of ARA oil could not be
replaced. There is no assurance that we will negotiate other collaborative
arrangements in the future on acceptable terms, if at all, or that such
collaborative arrangements will be beneficial to our operations. If we cannot
establish such arrangements, we may face increased capital requirements to
undertake such activities at our own expense. As a result, we could encounter
significant delays in introducing our products into certain markets. This could
also adversely affect the development, manufacture, marketing and sale of
products in such markets. In particular, our continuing ability to generate
nutritional oil-related revenues depends on our ability to enter into agreements
with additional licensees. Some of our nutritional oil licensing agreements
contain provisions which will not allow us to enter into future agreements
containing payment terms more favorable than those granted to current licensees.
Such provisions may restrict our ability to negotiate with potential infant
formula licensees.
Dependence on Major Customers. Our dependence on sizable product orders
from infant formula licensees and other marketing partners will make the
relationship with each customer critically important to our business. While we
have detailed contracts with each of our major customers, changes to product
pricing, royalty rates and delivery timetables may be required to meet their
demands and expectations. There is no assurance that we will be able to manage
our licensees and other customer relationships successfully. Our major customers
are large and complex and the launch cycles of new products are typically long
and unpredictable. This requires us to make considerable early investments in
account management and other efforts without the assurance of future revenues.
There is no assurance that we will be able to convert these investments into
significant revenue generating relationships.
Significant Technological Change and Competition. We operate in rapidly
evolving fields. Competition from larger, more experienced and better
capitalized companies has been and will continue to be intense. There is no
assurance that developments by others will not render our products or
technologies obsolete or noncompetitive, or that we will keep pace with new
technological developments. Currently, DHA-containing fish oils provide
alternative sources of DHA, and we are aware of another company which produces
DHA from fungal sources. In addition, DHA and ARA have been derived from egg
yolk lipids, and we are currently aware of several European infant formula
manufacturers that are adding DHA derived from egg yolk lipids and/or fish oil
to their infant formula. We have obtained seven U.S. patents and a number of
patents outside the U.S. covering certain aspects of our nutritional oils to
date. We have additional patent applications pending covering certain aspects of
these DHA- and ARA-containing oils. However, we have not been awarded any
European patents relating to our ARA-containing oil. Accordingly, competitors
may be able to produce, sell and use ARA in Europe until patents are issued or
have been invalidated using similar or identical processes to those used by us.
Generally, however, they are prohibited from manufacturing, using or selling
materials where patents have been issued. Competitors may be able to produce,
sell and use DHA- and/or ARA-containing oils in countries where we have not
applied for patent protection. In addition, competitors may produce certain DHA-
and ARA-containing oils that are not covered by our patents. We are aware of
several other companies offering ARA-containing oils for sale. In addition,
there is no assurance that other sources of DHA and ARA, the two primary
components of our nutritional oils, will not become commercially viable.
Uncertainty Regarding Patents and Proprietary Technology. Our success
depends on our ability to:
- - obtain patent protection for our products;
- - maintain trade secret protection; and
- - operate without infringing the proprietary rights of others.
Our policy is to aggressively protect our proprietary technology through patents
and, in some cases, trade secrets. Additionally, in certain cases we rely on the
licenses of patents and technology of third parties. We have obtained
approximately 25 U.S. patents covering various aspects of our technology. These
patents will expire on various dates between 2007 and 2015. We have filed, and
intend to continue to file, applications for additional patents covering both
products and processes as appropriate. There is no assurance that
- - the relevant authorities will grant any patent applications filed by,
assigned to, or licensed to, us;
- - we will develop additional products that are patentable; or
- - any patents issued to or licensed by us will provide us with any
competitive advantages or adequate protection for inventions.
Moreover, there is no assurance that any patents issued to or licensed by us
will not be challenged, invalidated or circumvented by others.
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<PAGE> 4
There is no assurance that issued patents, or patents that may issue,
will provide protection against competitive products or otherwise be
commercially valuable. Furthermore, since patent laws relating to the scope of
claims in the fields of health care and biosciences are still evolving, our
patent rights are subject to this uncertainty. Our patent rights on our products
therefore might conflict with the patent rights of others, whether existing now
or in the future. Alternatively, the products of others could infringe our
patent rights. The defense and prosecution of patent claims is both costly and
time consuming, even if the outcome were favorable to us. An adverse outcome
could:
- - subject us to significant liabilities to third parties;
- - require disputed rights to be licensed from third parties; and/or
- - require us to cease selling our products.
We have obtained seven U.S. patents covering certain aspects of our DHA
and/or ARA oils. We have applied for other patents in the United States covering
certain other aspects of our nutritional oils. We have also filed patent
applications on a selective basis in other industrialized countries, some of
which are pending and some of which have been granted. We are unable to predict,
however, whether these patents will be challenged, invalidated or circumvented
by others. Failure to obtain adequate patent protection for our nutritional oils
would have a material adverse affect on our results of operations. This could
particularly affect:
- - future sales of our nutritional oils;
- - future royalties on sales of infant formula containing our oils; and
- - future license fees related to our oils.
In particular, failure to maintain patent protection could permit our
competitors to produce products which could directly compete with our
nutritional oils using similar or identical processes. It is also possible that
the infant formula manufacturers currently under license by us or potential
future licensees may choose formula ingredients from these competitors if they
choose to include the ingredients in their formulas at all.
Other patents that we have cover:
- - our photobioreactor system which is used for culturing microalgae and
certain aspects of our breath test technology;
- - our Celtone and Celtone M technology; and
- - our combinatorial library technology.
We also rely on trade secrets and proprietary know-how, which we protect
in part by confidentiality agreements with our collaborators, employees and
consultants. There is no assurance that:
- - other parties to these agreements will not breach them;
- - we will have adequate remedies for any such breach; or
- - competitors will not otherwise learn of or independently develop our trade
secrets.
Risks Associated with Infant Formula and Nutritional Products Industries.
To the extent that our nutritional oils are included in infant formula or in
nutritional products for consumer use, we are subject to the risks generally
associated with these industries. These risks include, among others:
- - product tampering or production defects which may require a recall or may
reduce the demand for such products;
- - the risk that authorities may ban an ingredient used in such products,
including our nutritional oils, limit its use or declare it unhealthful; or
- - sales of infant formula may decline or authorities may limit or discontinue
use of our nutritional oils due to perceived health concerns, adverse
publicity or other reasons beyond our control.
Potential Difficulty in Obtaining FDA and other Government Approvals. A
number of government authorities in the United States and other countries
regulate our products and our manufacturing and research activities. This
includes 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.
Their regulatory authority includes the manufacture and labeling of such
products. Generally, authorities regulate prescription pharmaceuticals and
certain types of diagnostic products 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
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<PAGE> 5
policies and interpretations. There is no assurance that any changes to federal
and state laws will not have a material adverse effect on the company.
Our infant formula licensees are responsible for obtaining the requisite
regulatory clearances to market their products containing our oils. To date,
none of our infant formula licensees have obtained the necessary approval to
sell an infant formula product containing our oils in the United States. Sales
of our products outside the United States are subject to foreign regulatory
requirements that may vary widely from country to country. Term infant formula
products containing our nutritional oils are currently being marketed outside
the U.S. in seven countries. Pre-term infant formula products containing our
oils are currently being marketed outside the U.S. in over 50 countries. We
understand that our licensees have received appropriate regulatory clearances as
needed to market products containing our oils in those countries.
The time required to obtain clearances from additional foreign countries
may vary. It may be longer or shorter than that required by the FDA. There is no
assurance that additional foreign clearances can be obtained or met on a timely
basis, if at all.
We are preparing, with the help of our licensees, to respond to certain
questions raised by the FDA in connection with evaluating our oils for inclusion
in U.S. infant formula. There is no assurance that:
- - we will be able to, with the assistance of our licensees, adequately
respond to the FDA's questions;
- - our licensees will continue to press forward;
- - the FDA will in fact grant clearances the process will not involve
significant delays;
- - potential delays will not materially and adversely affect the timing and
extent of potential future introductions of our products; or
- - once and if approval is obtained, a licensee will actually market a U.S.
infant formula product containing our oils.
There is no assurance that the FDC Act will not impose food additive
regulation on DHA and ARA used in medical foods, infant formulas or enteral
nutritional products. Use of DHA and ARA in medical foods may also require
additional supportive data.
The process of obtaining FDA clearances can be time-consuming and
expensive. There is no assurance that the FDA will grant such clearances. The
FDA review process may involve delays that may materially and adversely affect
the testing, marketing and sale of our products. Moreover, regulatory clearances
for products such as medical devices, new drugs, or new food additives, even if
granted, may include significant limitations on their uses. Additionally, the
FDA could withdraw product clearances for failure to comply with regulatory
standards. There is 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 our products are in research and development phases. We cannot
predict all regulatory requirements or issues that may apply to or arise in
connection with our products. Changes in existing laws, regulations or policies
or the adoption of new laws, regulations or policies could prevent us or our
licensees or collaborators from achieving compliance with regulatory
requirements. Such changes could also affect the timing of achieving such
clearances.
Since the FDA regulatory process may be costly and time consuming, we
will decide on a product-by-product basis whether to handle their requirements
independently or to assign such responsibilities to our licensees or future
collaborative partners. There is no assurance that we will be able to obtain
such regulatory clearances, if required, on a timely basis or at all. If such
clearances are delayed or not achieved at all, it may adversely effect our
business, financial condition and results of operations. If we lose previously
received approvals or clearances, or fail to comply with existing or future
regulatory requirements, it would have a similar adverse effect.
We are currently required to meet FDA Good Manufacturing Practices
("GMP") requirements as applicable to infant formula and dietary supplements.
GMP regulations specify component and product testing standards, control quality
assurance requirements, and records and other documentation controls. Depending
upon the type of FDA application that is submitted, compliance with relevant GMP
requirements can be difficult and time consuming. If we continue to manufacture
our own products we will continue to fall under the GMP requirements of the FDA.
It may even be necessary in the future to meet more stringent drug GMP
requirements. There is no assurance that we can meet relevant FDA manufacturing
requirements, particularly for scale-up operations involving product marketing
applications. Further, we have only limited experience in the area of regulatory
compliance with respect to our products. There is no assurance that we will be
able to continue to
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<PAGE> 6
manufacture our nutritional oils in accordance with relevant infant formula and
dietary supplement requirements for commercial use. State and federal agencies,
including the FDA and comparable agencies in other countries, conduct periodic
inspections to monitor ongoing compliance with GMP and other applicable
regulatory requirements. A determination that we are in violation of such GMP
and other regulations could lead to the imposition of civil penalties, including
fines, product recalls or product seizures. In situations where serious
violations are noted, criminal sanctions may be imposed.
Each line of products that is or may be marketed by us or our
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;
- - prescribes detailed requirements for labeling dietary supplements; and
- - establishes GMP requirements for dietary supplements.
We are currently marketing a line of DHA dietary supplements, Neuromins(TM) and
Neuromins(TM)PL. In addition, we are researching and developing new applications
for our DHA and ARA oils. There is no assurance that we will be able to comply
with the requirements of the DSHEA or any other regulations that the FDA may
promulgate regarding DHA or ARA use as a dietary supplement.
Our fluorescent pigments and other products derived from microalgae are
subject to potential regulation by the 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. This
classification subjects these products to premarket clearances and/or regulatory
approvals. There is no assurances that:
- - we or our collaborators will be able to develop the extensive safety and
efficacy data needed to support FDA premarket clearances and/or regulatory
approvals for these products; or
- - the 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 is no
assurance that required clinical testing of our products will be completed
successfully within any specified time period, if at all. Additionally, there is
no assurance that:
- - we will be able to develop the extensive data needed to establish the
safety and efficacy of our products for approval for drug uses; or
- - authorities will not begin to regulate these drug products as biological
products or as controlled substances, which would affect marketing and
other requirements.
Limited Manufacturing and Sales and Marketing Experience and
Capabilities. We have limited experience operating our manufacturing facility.
In 1995, we acquired a fermentation plant in Winchester, Kentucky to manufacture
our nutritional oils. During 1996, we completed the construction of an oil
extraction and refining facility in this plant. There is no assurance that we
will be able to scale-up or successfully optimize production of our nutritional
oils. There is also no assurance that these production facilities will be
sufficient to meet future demand for our products. If we do not develop adequate
manufacturing capability or contract for manufacturing on acceptable terms, we
may not be able to commercialize some of our current or planned products. Or, if
we are able to adequately manufacture them, commercialization of the products
may be significantly delayed. In addition, we have only limited experience
managing operations at a remote geographic location. Managing a remote
manufacturing plant may place a substantial strain on our managerial resources.
We believe that our Winchester, Kentucky plant will be able to produce
our nutritional DHA oil in sufficient quantity to meet near-term demand.
Nevertheless, because demand for our nutritional DHA oil is based on factors
beyond our control, we are unable to predict whether we have sufficient
manufacturing capacity to meet any such future demand. During 1997, we entered
into a supply agreement with one of the world's largest fermentation companies
to provide ARA oil. In addition, we have conducted DHA production trials with
third-party manufacturers to prepare for future DHA oil demand in excess of our
current plant capacity. Although we believe that we will be able to use third
party manufacturing for our DHA oil if demand requires, there is no assurance
that we will be able to do so successfully. The failure to meet demand for our
nutritional oils could encourage our infant formula licensees and other
nutritional product customers to look for alternative manufacturing sources.
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We currently do not have the capability to manufacture therapeutic and
diagnostic products in accordance with GMP requirements. Should we decide to
manufacture and scale-up the production of future diagnostic and pharmaceutical
products, we would incur substantial start-up expenses, we would need to expand
our facilities, and we would have to hire additional personnel.
We market infant formula oils and nutritional supplements primarily
through distributors, and to a lesser extent, directly to consumers. We market
our products for use in molecular structure research and structure-based drug
design, and fluorescent pigments both directly to end users and through
distributors. Other nutritional products and products that we develop in the
diagnostic and pharmaceutical areas will require us to form corporate alliances
with companies capable of marketing such products and/or develop our own sales
and marketing force. There is no assurance that we will be able to establish an
effective sales or marketing force or establish additional third-party sales and
marketing arrangements. Even if we are able to achieve the above, the cost may
be prohibitive.
No Clinical and Limited Regulatory Compliance Capabilities. We have
limited experience and capabilities in the area of product testing. We have no
experience and limited capabilities in the area of regulatory compliance with
respect to our products. We will have to expend significant sums of money to
acquire and expand such capabilities. We may need to reach collaborative
arrangements with third parties to provide these capabilities or contract with
third parties to provide these capabilities. These capabilities will be
important to us for the successful commercialization of our existing and
potential future nutritional, human diagnostic and pharmaceutical products.
We will depend on our current licensees to obtain any required regulatory
clearances for our nutritional oils which they will use as infant formula
ingredients. Although we believe that our infant formula licensees will perform
required testing and obtain any required regulatory clearances, we cannot
control the timing or the resources that they will devote to these activities.
We may, in the future, decide to seek FDA clearances ourselves for our
nutritional oils or other nutritional products, if such clearances are required.
In the area of human diagnostics, we have not yet decided whether to develop
in-house capability, contract with third parties, seek collaborative
arrangements with partners or use a combination of the three to test our product
candidates and obtain any required regulatory clearances. If we were to
manufacture these diagnostic products for certain uses, it would be subject to
applicable regulatory requirements. For potential pharmaceutical products, we
will likely contract with third parties and seek collaborative arrangements. In
any case, these activities may require the devotion of substantial resources and
a significant portion of our time. There is no assurance that we can effectively
test and obtain regulatory clearances for our products. Delays in testing or
obtaining such regulatory clearances may result in delay in or the inability to
commercialize the affected product. See "--Dependence on Third Parties; Reliance
on Future Collaborations."
Exposure to Product Liability Claims. We face an inherent business risk
of exposure to product liability claims alleging that the use of our technology
or products resulted in adverse effects. Such risk exists in the conduct of
clinical studies and even with respect to those products, if any, that receive
regulatory clearances for commercial sale. There is no assurance that our
current level of product and clinical study liability insurance together with
indemnification rights under our infant formula license agreements and other
collaborative arrangements will be adequate to protect us from this exposure. It
is uncertain whether we will be able to obtain increased levels of insurance as
we grow. There is no assurance that this level of insurance would be
economically practical or that we would be able to renew our current or future
policies. A product liability claim or recall in excess of insured amounts or
amounts recoverable under applicable contractual arrangements could adversely
affect our business, financial condition and future prospects.
Dependence Upon Key Personnel. We are highly dependent on the principal
members of our management, production, sales and marketing and scientific staff.
The loss of certain key management and scientific employees could have a
material adverse effect on our operations. In addition, we believe that our
future success will depend in large part upon our ability to attract and retain
highly skilled scientific, managerial and marketing personnel. We face
competition for such personnel from other companies, research and academic
institutions, government entities and other organizations. There is no assurance
that we will be successful in hiring or retaining the personnel we require for
continued growth.
Limited Availability of Certain Supplies. The availability of carbon-13
and nitrogen-15 is critical for production of our products for use in drug
design. Although the current supplies of these items are adequate for our
near-term needs, they may not be adequate if the demand for our products for use
in drug design and/or breath test diagnosis were to grow significantly.
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Possible Volatility of Stock Price; Limited Liquidity; Absence of
Dividends. The market price of our common stock may experience a high level of
volatility, as frequently occurs with publicly traded emerging growth companies
and biosciences companies. The market price of our stock may be significantly
impacted by:
- - announcements of technological innovations or new commercial products by
us or our competitors;
- - developments or disputes concerning patent or proprietary rights;
- - publicity regarding actual or potential medical results relating to
products under development by us or our competitors;
- - general regulatory developments affecting our products in both the United
States and foreign countries;
- - market conditions for emerging growth companies and biosciences companies
and economic and other internal and external factors; and
- - period-to-period fluctuations in financial results.
Since our initial public offering of common stock on November 23, 1993, the
average daily trading volume in the common stock as reported on the Nasdaq
National Market has been relatively low. There is no assurance that a more
active trading market will develop in the future. We have never declared or paid
any cash dividends on our common stock and do not intend to do so for the
foreseeable future.
Risks Relative to Anti-Takeover Devices. Our Board of Directors is
divided into three classes with each class of directors being elected to
three-year terms on a rotating basis. As such, only one-third of the members of
the Board of Directors stand for election every year. We have adopted a
stockholder rights plan which may have the effect of deterring hostile or
coercive attempts to acquire the company. The plan does this through the
distribution of rights to stockholders enabling those stockholders to acquire
shares of our common stock, or that of an acquiror, at a substantial discount to
the public market price should any person or group acquire more than 20% of the
common stock without approval of the Board of Directors under certain
circumstances. We have reserved 300,000 shares of Series A Junior Participating
Preferred Stock for issuance in connection with the Stockholder Rights Plan. We
are authorized to issue an additional 4,700,000 shares of preferred stock in one
or more series, having terms fixed by the Board of Directors, without a
stockholder vote. While the Board of Directors has no current intentions or
plans to issue any preferred stock, issuance of these shares could also be used
as an anti-takeover device.
Shares Eligible for Future Sale; Registration Rights. To the extent
that these outstanding stock options and warrants are exercised, the percentage
ownership of certain of our stockholders will be diluted. As of January 15,
1999, we had 14,909,954 outstanding shares of common stock, substantially all of
which are available for sale in the public marketplace. As of January 15, 1999,
there were also outstanding stock options to purchase an aggregate of 1,763,650
shares of common stock at various exercise prices ranging from $8.00 to $34.25
per share. There were also warrants issued in connection with the Common Stock
Warrant and Purchase Agreement dated April 27, 1998 to purchase 196,670 shares
of common stock at an exercise price of $18.76 per share. If we elect to sell
all the shares of common stock and warrants which have not been sold pursuant to
the purchase agreement but which, under certain circumstances, the selling
stockholders are irrevocably obligated to purchase, there would be up to an
additional outstanding 819,454 shares of common stock and 245,836 warrants, with
exercise prices ranging from $15.01 to $18.76 per share. Shares of common stock
which may be issued under outstanding options and warrants will be available for
sale in the public markets. In addition, certain holders of the common stock
have certain demand and piggyback registration rights pursuant to a registration
rights agreement between Martek and these holders. No prediction can be made as
to the effect, if any, that sales of shares of common stock or the availability
of such shares for sale will have on the market prices of the common stock
prevailing from time to time. The possibility that substantial amounts of common
stock may be sold in the public market may adversely affect prevailing market
prices for the common stock. This could impair our ability to raise capital
through the sale of equity securities. Further, if we were required to include
shares, through exercise of the outstanding piggyback registration rights, in a
company-initiated registration, the sale of such shares could have a material
adverse effect on our ability to raise additional capital.
Risks Relating to Year 2000 Compliance. We use a number of computer
software programs and operating systems in our internal operations. These
include applications used in financial business systems and various
administrative functions. We believe that the business risk associated with
these internal information systems is minimal. We have completed more than 90%
of our "Year 2000" compliance implementation work on them. We are also
evaluating our non-information technology systems, including the various
equipment in operation at our oil production facilities in Winchester, Kentucky.
We have completed more than 75% of this evaluation and subsequent
implementation, and believe that the business risk associated with this
equipment is minimal. Additionally, our third party relationships are being
reviewed to assess their Year 2000 status and potential impact on our
operations. We have completed approximately 75% of this review and, where
potential business risk has been identified, are requesting additional
information from certain third parties to obtain assurance that they are Year
2000 compliant.
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Based on currently available information, we believe that total costs
associated with Year 2000 issues will be less than $200,000, and that we will be
able manage the Year 2000 transition without any material adverse effect on our
operations, liquidity or capital resources. However, there is no assurance that
Year 2000 issues will not require a significant commitment of resources to
resolve potential problems.
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