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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, 1999 Commission file number: 0-22354
MARTEK BIOSCIENCES CORPORATION
(Exact name of registrant as specified in its charter)
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DELAWARE 52-1399362
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
6480 DOBBIN ROAD, COLUMBIA, MARYLAND 21045
(Address of principal executive offices)
REGISTRANT'S TELEPHONE NUMBER INCLUDING AREA CODE: (410) 740-0081
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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
None None
(Title of class:) (Name of each exchange on which registered:)
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock, $.10 par value
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the last 90 days. X Yes No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The aggregate market value of Common Stock held by non-affiliates of
registrant is $161,449,892 (based upon a last sale price of $12.0625 per share
of the Common Stock as reported on the NASDAQ National Market System on January
14, 2000). The number of shares of Common Stock outstanding as of January 14,
2000 was 16,517,364.
DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of Registrant's Annual Report to Stockholders for the
fiscal year ended October 31, 1999 are incorporated by reference into Part II of
this Report. Certain portions of the Registrant's Definitive Proxy Statement for
its 2000 Annual Meeting of Stockholders (which will be filed with the Commission
within 120 days after the end of the Registrant's 1999 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" or "the Company") 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 foods, and as ingredients in, and encapsulated for use as,
dietary supplements. The Company's nutritional oils are comprised of fatty acid
components, primarily docosahexaenoic acid ("DHA") and arachidonic acid ("ARA"),
which many researchers believe may enhance mental and visual development in
infants and play a pivotal role in brain function throughout life. Low levels of
DHA in adults has also been linked to a variety of health risks, including
cardiovascular problems, cancer, and various neurological and visual disorders.
Martek has licensed its nutritional oils to six infant formula manufacturers,
representing over 40% of the estimated $6 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 over 60 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 3,300 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 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, DHA and 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, and various neurological and visual disorders. Further
research is underway to explore the impact of DHA supplementation in these and
other areas. ARA is a major structural lipid in human tissues. Martek's blended
oils containing DHA and ARA provide the closest available match, with regard to
molecular form of these fatty acids, to the DHA and ARA in 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 U.S. 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
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countries and pre-term infant formula products containing the Company's oils in
over 60 countries worldwide. More than one company is marketing supplemented
term infant formulas in Spain, Australia and New Zealand. The infant formula
industry represents over $2 billion in annual wholesale sales in the United
States and approximately $6 billion worldwide. Martek is actively pursuing
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(R), a DHA dietary supplement, and Neuromins(R) PL, a DHA
dietary supplement for pregnant and lactating women. Since then, Martek has
expanded distribution of its Neuromins(R) 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(R) DHA is also sold through
mail order distributors and a multi-level marketer. In 1999, American Home
Products accounted for approximately 15% of Martek's sales.
In 1999, Martek began selling bulk DHA oil and powder for additional
applications, including inclusion in childrens chewables and nutritional drinks
and adult combination supplements which not only include Martek's DHA but other
ingredients such as Gingko and St. Johns Wort. Martek is continuing to explore
additional applications for DHA, including use in pharmaceuticals, functional
foods and animal and aquaculture feeds.
Aquaculture. Larval fish, crustaceans (shrimp) and mollusks (oysters and
clams), like humans, require certain long chain polyunsaturated fatty acids such
as DHA and ARA for optimal growth and health. The Company has leveraged it
capabilities in these areas with joint activities at aquaculture research and
production facilities around the world to develop new high value enrichment
feeds for this industry. In 1999, the Company began beta-testing its proprietary
AquaGrow(R) line of enrichment feeds at several sites around the world.
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(R) M. U.S. patents were issued to Martek for its Celtone(R) M technology
in 1995, 1997 and 1998. The Company is currently working on developing a
proprietary fast-track protein labeling system which would, by using advanced
nuclear magnetic resonance ("NMR") technology, enable researchers to determine
the structure and movement of pharmaceutical target binding sites in
significantly reduced time. This technology could greatly reduce the time needed
to understand a given target/drug candidate interaction and thereby speed up the
rejection of unsuitable compounds and reduce the overall time needed to develop
new pharmaceuticals.
The Company has also developed and been issued a U.S. patent covering a
proprietary library of small flexible probe molecules, the Reconnaissance
Probe(TM) Library, which can be labeled with stable isotopes for use to
specifically interrogate the binding sites of receptor molecules. If successful,
such information could be critical for the screening of virtual chemical
libraries, and could also be used to quickly eliminate false positive leads from
libraries already screened.
Diagnostics. Martek identifies, isolates, and markets powerful
fluorescent dyes (phycobiliproteins) from various algae for use in applications
that require high sensitivity detection. Martek has also developed proprietary
positions around certain polymeric forms of the phycobiliproteins (PBXL(TM)
dyes) that provide extreme sensitivity with ease of use that is unmatched by
other common dyes or detection systems. These dyes provide 100 times the
sensitivity
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of common direct fluorescent dyes while retaining the simple detection possible
with direct fluorescence. PBXL(TM) dyes are being developed for use in western
blot detection kits for instrumented systems and have potential for southern and
northern blotting applications. In 1999, the PBXL(TM) dyes also shown potential
in DNA array formats as well as in high throughput screening systems utilizing
phage as well as time resolved fluorescence formats. The Company has exclusively
in-licensed the rights to the PBXL(TM) technology based on a US Patent issued in
1997 and several pending applications. The Company's CryptoFluor(TM) dyes have
the advantage of smaller size compared to the standard phycobiliproteins, and
provide additional wavelengths for multiplexed assays. In cooperation with
Intergen(R), the Company's marketing partner for these dyes, the CryptoFluor(TM)
dyes are finding a number of new research and diagnostic applications. In 1998,
Martek began marketing some of its fluorescent detection products through
partnerships with Intergen(R) Company and Kirkegaard and Perry Laboratories. In
1999, Martek began distributing the PBXL(TM) based products through Chemdex(R),
an internet supplier of scientific products.
Algal Genomics. Microalgae are microplants and, as such, have many
biochemical pathways and genes in common with higher plants. They offer the
further advantage, however, of having the genetic material required for the
production of certain compounds (e.g., DHA and EPA) that are not present in
higher plants. Consequently, Martek believes that microalgae represent a
valuable gene pool for modern agricultural biotechnology. Gene coding for
enzymes in microalgal fatty acid biosynthesis have been identified, isolated and
characterized by Martek scientists. Gene sequencing from several different and
distinct algal species is also underway and many new genes have been identified
from several different species.
Martek has utilized its understanding of heterotrophic (without light)
and autotrophic (with light) growth of microalgae, and its proprietary
technology in microalgal transformation, to convert an otherwise
photoautotrophic species of microalgae, into one capable of growing
heterotrophically. Martek believes that this represents the first time such a
transformation has ever been made. Martek's Trophic Conversion(TM) technology is
the subject of several patent applications and opens the door to the commercial
heterotrophic production (growth via fermentation) of algal species that could
only be grown previously using a photobioreactor system. The favorable
production economics associated with fermentation compared to those of the
photobioreactor will allow the Company to pursue new algal products not
previously believed to be economically feasible and potentially represents a
means to commercially exploit a greater portion of the kingdom of microalgae.
TECHNOLOGY
Martek applies its microalgal expertise and culturing technology to its
expanding library of over 3,300 live microalgal species and related database to
achieve technical and commercial advantages. Certain fundamental and unique
attributes of microalgae allow for the development and production of Martek's
products:
- microalgae are a genetically diverse group of organisms that have
a wide range of physiological and biochemical characteristics;
thus, they naturally produce many different and unusual fats,
sugars, proteins and bioactive compounds that may have commercial
applications, such as the fatty acids that are the principal
ingredients in the Company's nutritional oils, and highly
sensitive fluorescent diagnostic products;
<TABLE>
<S> <C>
- -------------------------------------------------------------------------------------------------------------
Celtone(R) is a trademark of the Company registered with the U.S. Patent and Trademark Office.
Neuromins(R) is a trademark of the Company registered with the U.S. Patent and Trademark Office.
Aquagrow(R) is a trademark of the Company registered with the U.S. Patent and Trademark Office.
PBXL(TM) is a trademark of the Company.
CryptoFluor(TM) is a trademark of the Company.
Trophic Conversion(TM) is a trademark of the Company.
Reconnaissance Probe(TM) is a trademark of the Company.
SureLight APC(TM) is a trademark of the Company.
</TABLE>
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XLExpress(TM) is a trademark of the Company.
- 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 3,300 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 by using organic nutrients. Heterotrophic culturing
of this DHA-producing microalga was previously not believed to be
possible at commercially viable levels. Heterotrophic microalgae have the
advantage of being able to be cultured in conventional fermenters
employed by the food, pharmaceutical and biotechnology industries.
Microalgal fermentation has an advantage over photobioreactor production
(i.e. with light) 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
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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 U.S. patents.
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 important
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, and various neurological and visual disorders. Further research is
underway to explore the impact of DHA supplementation in these and other areas.
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. These fatty acids are
naturally present in breast milk, but are not added to most infant formulas
today.
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 also present in high levels in egg yolk phospholipids and
various fish oils. There have been over 30 clinical studies during the past 10
years evaluating the impact of DHA and ARA supplementation on infants. Although
certain recent studies using egg yolk phospholipids and fish oil sources of DHA
and ARA have shown minimal impact on infant cognitive development, the majority
of these studies, including a recent study using Martek's nutritional oils, have
demonstrated that these fatty acids have a significant impact on early cognitive
and visual development in infants. Martek's oils also do not possess potentially
undesirable fatty acids found in fish oil sources of DHA.
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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 1999. Currently, four of the Company's infant formula
licensees are marketing term infant formula products containing Martek's oils in
seven countries and pre-term infant formula containing the Company's oils in
over 60 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.
There are numerous studies which support the importance of DHA and ARA in
the infant diet. Although there are some studies which have not supported such a
benefit, the following are examples of some of the studies which have found a
benefit:
- - In 1999, a meta-analysis of over 20 published reports concluded that
infants deprived of the nutrients in breast milk are likely to have a
lower IQ, lower educational achievement, and poorer social adjustment
than breast-fed infants. The nutritional benefits of breast-feeding were
associated with at least a 3.2 point difference in cognitive development
compared to formula feeding, and the longer the baby was breast fed, the
greater the increase in cognitive developmental benefit.
- - 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.
- - 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 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 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(R) PL DHA
dietary supplements for pregnant and lactating women.
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, along with its customers, to develop
other DHA delivery methods to address these markets, including powders, an
emulsion, use as a food ingredient, and use as a pharmaceutical.
Martek believes that its nutritional oils and Neuromins(R) capsules have
the following advantages over other currently available sources of DHA and ARA
for use in infant formula, as food ingredients, or as nutritional supplements:
- 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 triglyceride form similar
to that found in breast milk and are therefore easily digested;
- the position of the DHA within the triglyceride 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; and
- the oils can be produced in large quantities under controlled
conditions satisfying regulatory scrutiny.
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The Company has also 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 NMR technology.
Proteins incorporating stable isotopes such as carbon-13 and/or nitrogen-15 have
been obtained by growing micro-organisms, such as bacteria and yeast, on
Martek's media, and the 3-D structures subsequently deduced from information
provided by NMR. In addition, incorporating deuterium, an NMR "invisible"
isotope of hydrogen, into the protein allows for the structure of either the
ligand or the receptor to be determined while bound to its NMR invisible
partner.
The Company markets these products and technologies to pharmaceutical and
structure-based drug discovery companies, universities and research institutes.
Future growth in sales of these products and technologies may depend in large
measure on the future growth of structure-based drug discovery and use of NMR
techniques.
Martek's drug discovery products and technologies include the following:
Celtone(R) 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(R) -- 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.
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Fast-Track Technology - Martek is currently working on developing
a proprietary fast-track labeling system which would, by using advanced
NMR technology, enable researchers to determine the structure and
movement of pharmaceutical target binding sites in significantly reduced
time. This technology could greatly reduce the time needed to understand
a given target/drug candidate interaction and thereby speed up the
rejection of unsuitable compounds and reduce the overall time needed to
develop new pharmaceuticals.
Martek's patented Reconnaissance Probe(TM) Technology provides an
accelerated way to obtain accurate structural information about a receptor's
binding site and the interaction between a receptor and its ligand.
Reconnaissance probes are small, flexible molecules in which the atoms are
labeled with NMR "visible" isotopes. When bound to the selected receptor it is
possible that the "docked" conformation of the probe can be determined and, in
theory, through the proper alignment of a series of superimposed, docked
structures, the geometric constraints of the receptor binding site can be
established. The detailed chemoinformatic map that would be produced could then
be used to design a focused library of new compounds (leads) designed
specifically to the molecular constraints of the receptor.
Diagnostics
Products and Technologies for Fluorescence Detection. Martek's
fluorescence technology is a sensitive and direct method for detection of a
specific binding event. That event could be a receptor mediated binding, cell
based binding, antibody driven binding, or essentially any event where one
entity recognizes another. Because of environmental concerns with the use of
radioactivity as a sensitive method of detection, higher sensitivity detection
technologies are in demand. The main advantages of fluorescence as a method of
detection is that it is direct, fast, and relatively simple in that it does not
require enzymatic steps for signal amplification or prolonged development times
for signal measurement. The phycobiliproteins fulfill that role well but cannot
match the detection sensitivity of chemiluminescent methods. The PBXL(TM) dye
technology was developed to attain those sensitivities. A 100-fold improvement
in sensitivity has been demonstrated with the PBXL dyes over existing direct
fluorescent dyes, and multiple new applications are now accessible by simple,
direct fluorescence. Such increased sensitivity allows: 1) the detection of
receptors or small molecules at 100-fold lower concentrations; 2) detection with
the same level of sensitivity but in 100-fold smaller volumes; and 3) detection
with the same level of sensitivity but using much lower cost equipment.
Martek's fluorescent products include the following:
Phycobiliproteins - Classical direct fluorescent detection dyes, which
have been produced by Martek for several years and fill an existing market in
immunodetection and flow cytometry. In 1999, the Company introduced its own
versions of chemically cross-linked allophycocyain (XL-APC and
SureLight-APC(TM)) to be used for time resolved fluorescence applications in the
high throughput screening market.
CryptoFluor(TM) dyes - A product line of small molecular weight, yet high
intensity phycobiliproteins isolated from an unusual group of microalgae. These
dyes are capable of entering permeablilized cells and are used for internal
epitope detection in flow cytometry and Fluorescence In Situ Hybridization
(FISH). Different CryptoFluor(TM) dyes have different fluorescence emission
wavelengths and, therefore, provide the possibility of multiplexing assays. They
have also been used in fluorescence microscopy and fluorescence energy transfer
applications.
PBXL(TM) dyes - A proprietary line of ultrasensitive dyes which provide a
very large signal per binding event. The PBXL dyes have demonstrated an
increased sensitivity compared to other direct detection dyes in all
applications evaluated thus far. They provide sensitivity similar to
enzymatically amplified or radioactive detection systems but with fewer steps,
generating more rapid results at lower costs. These dyes have been used in
immunodiagnostic detection, DNA arrays, flow cytometry, western blotting and
other applications. In 1999, Martek began beta-testing PBXL-based Western blot
detection kits and its proprietary XLExpress(TM) Rapid Labeling system
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which allows individual researchers to label their own molecules with the PBXL
dye of their choice in a simple and convenient format.
Aquaculture Technology
Aquaculture is a fast growing industry in Southeast Asia, Australia and
Europe. Martek's primary library of over 3,300 live microalgal species and its
large scale systems for the production of microalgae formed the basis for the
development of a new product line of high-value aquaculture feeds (AquaGrow(R)).
Just like the requirement of human infants for DHA and ARA early in development,
larval fish, mollusks (oysters and clams) and crustaceans (shrimp) also require
these important fatty acids in their early development. In the natural
developmental process, these marine species ordinarily have access to the
primary sources of these materials (i.e., microalgae), but with the development
of intensive aquaculture practices, these fatty acids need to be provided in
large quantities at high concentration for high density fish culture.
Since 1997, Martek has been part of an Israeli/US bi-national consortium
(the Aquaculture Technology Joint Venture) to develop new high value aquaculture
feeds. New enrichment feeds based on Martek's proprietary DHA and ARA technology
were developed and tested in aquaculture facilities worldwide. As a result of
the initial successes in new product development, Martek began beta-testing the
AquaGrow(R) line of enrichment feeds for rotifers and artemia. These zooplankton
are used as direct feeds to provide larval fish (e.g. Seabream, Turbot, Halibut,
etc.) with the DHA and ARA enrichment required for rapid growth. Research
articles and papers presented in 1999 by the Center of Marine Biotechnology at
the University of Maryland and others have described significant improvements in
DHA content of artemia and rotifers when fed Martek's AquaGrow(R) products
compared to other enrichment feeds. Furthermore, they have shown that this
results in improved growth rates and fish quality as well as a reduction in
production losses due to stress and disease of the fish.
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, 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
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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(R) 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(R) 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(R) M. In October
1994, Martek entered into a collaboration with the University of St. Andrews in
Scotland (which has now been assigned to Leeds University). 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, Leeds University 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 DSM Food Specialties
("DSM", formerly Royal Gist-Brocades B.V.) under which DSM 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 DSM on advantageous terms.
The Company markets certain of its fluorescent detection products under a
royalty-bearing license from Stanford University and certain fluorescent
detection products under an exclusive royalty-bearing license from a private
inventor.
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. One such collaboration, with the
U.S.-Israel Science and Technology Foundation ("USISTF"), commits Martek to
remit a royalty of 3% on all sales of aquaculture products related to the
research collaboration between the Company and USISTF.
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
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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, 1999
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, DSM, 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 products 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(R) 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(R) 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(R) DHA
capsules to the natural foods markets. Neuromins(R) DHA is currently being
marketed in over 10,000 retail stores nationwide, including Safeway, Vitamin
World and General Nutrition Center (GNC) stores. Neuromins(R) 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 could intensify in 2000.
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
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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 fish 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(R) 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, Inc.,
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, but are not in
the same molecular form as found in breast milk. 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.
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 in 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. In an effort to compete better with these
companies in the reagents market, Martek has focused recent efforts on producing
new, carbon-13 labeled media that has demonstrated better performance and
competitive pricing with carbon-13 labeled glucose. The Company expects that
competition in the carbon-13 glucose market will continue to remain strong in
2000, and as a result, may limit the manufacturing and selling of these products
in favor of its new, higher performance media.
The Company's products for drug discovery compete primarily on the basis
of product performance, proprietary position and price, and Martek expects those
nutritional, diagnostic and pharmaceutical products approved for sale to compete
primarily on the basis of product efficacy, safety, patient convenience,
reliability, price and proprietary position.
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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
affected products.
The Company has been issued seven U.S. patents covering certain aspects
of its DHA and/or ARA oils. The Company has applied for other patents in the
United States covering certain other aspects of its nutritional oils and has
also filed patent applications on a selective basis in other industrialized
countries, some of which are pending and some of which have been granted. The
Company is unable to predict, however, whether these patents will be challenged,
invalidated or circumvented by others. Failure by the Company to obtain adequate
patent protection for its nutritional oils would have a material adverse effect
on the Company's ability to gain a competitive advantage for these oils and may
have a material adverse effect on the Company's results of operations,
particularly future sales of its nutritional oils, future royalties on sales of
infant formula containing these oils or license fees related thereto. In
particular, failure to maintain patent protection would permit competitors of
the Company to produce products which would be directly competitive with its
nutritional oils using similar or identical processes, and it is possible that
the infant formula manufacturers currently under license by the Company or which
may be under license in the future may choose formula ingredients from these
competitors if they choose to include the ingredients in their formulas at all.
The Company's other patents cover its photobioreactor system for
culturing microalgae and certain aspects of Martek's breath test technology; its
Celtone(R) and Celtone(R) 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.
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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 60 countries for term or pre-term infant formula products. The Company
and its licensees are in the process of responding 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 FDA approval should ultimately be
obtained, it is management's belief that this process will take a minimum of six
to twelve additional months. 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 additional
clearances needed for new introductions of Martek's oils in 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.
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
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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(R) and Neuromins(R) PL.
In addition, it is researching and developing new applications for its DHA and
ARA oils. There can be no assurance that the Company will be able to comply with
the requirements of the DSHEA or any regulations that the FDA may promulgate
thereunder with regards to ARA as a dietary supplement or that the Company will
be able to continue to meet such requirements with regard to DHA as a dietary
supplement.
The fluorescent pigment and other products derived from microalgae are
subject to potential regulation by FDA as either medical devices or as a
combination medical device/drug product to the extent that they are used in the
diagnosis, mitigation, treatment, cure or prevention of diseases. Such
classification would subject the products to premarket clearances and/or
regulatory approvals. There can be no assurances that the Company or its
licensees or collaborators would be able to develop the extensive safety and
efficacy data needed to support such FDA premarket clearances and/or regulatory
approvals or that FDA ultimately would authorize the marketing of such products
on a timely basis, if at all.
For pharmaceutical uses of products derived from microalgae, there can be
no assurance that required clinical testing will be completed successfully
within any specified time period, if at all, with respect to the Company's
products. Additionally, there is no assurance that the Company or its licensees
or collaborators will be able to develop the extensive data needed to establish
the safety and efficacy of these products for approval for drug uses, or that
such drug products will not be subject to regulation as biological products or
as controlled substances, which would affect marketing and other requirements.
EMPLOYEES
As of October 31, 1999, the Company had 118 full-time employees, of whom
15 had Ph.D.'s. Approximately 38 employees are engaged in research and
development and contract related research and development activities, 55 are
engaged in production or production development related activities and 25 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.
- 16 -
<PAGE> 18
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 2003" 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 2000 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....................... 59 Chairman, Chief Executive Officer and Director
Richard J. Radmer, Ph.D................. 57 President, Chief Scientific Officer and Director
Thomas C. Fisher........................ 53 Senior Vice President, Operations
David J. Kyle, Ph.D..................... 46 Senior Vice President, Research and Development
Jerome C. Keller........................ 57 Senior Vice President, Sales & Marketing
Steve Dubin............................. 46 Senior Vice President, Business Development,
General Counsel, and Secretary
Peter L. Buzy........................... 40 Chief Financial Officer and Treasurer
Paul W. Behrens, Ph.D................... 43 Director of Physiology
Jonathan Miles Brown, Ph.D.............. 44 Director, Stable Isotope Group
Paul J. Kelley.......................... 46 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 Bank of America), 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 and as President and Chief Scientific Officer of the Company. Prior to
1985, he worked for 17 years at Martin Marietta Corp. where he headed the
Biosciences Department which performed research to develop new products from
microalgae, among other activities. He has served as an Adjunct Associate
Professor and Associate Member of the Graduate Faculty at the University of
Maryland. Dr. Radmer received a Ph.D. in biology, an M.S. in botany and a B.S.
in biochemistry from the University of Chicago. He completed his Ph.D. studies
while in residence at Harvard University.
Thomas C. Fisher joined Martek in 1991 and was named Senior Vice
President of Operations in 1992 after 18 years with Merck & Co., Inc. ("Merck")
and Dupont-Merck. Mr. Fisher's last 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.
- 17 -
<PAGE> 19
Dr. David J. Kyle, a founder of Martek, is currently Senior Vice
President, Head of Research and Development. Prior to co-founding 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 M.S. degree from the University of Pittsburgh and a
B.S. degree from Duquesne University.
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 was 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 Bank of America), 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, aquaculture product development and microalgal-physiology expertise.
Prior to joining Martek, Dr. Behrens was a research scientist in the Biosciences
Department at Martin Marietta Corp. 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.
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
- 18 -
<PAGE> 20
at Bayer, including Production Manager of a plant in West Germany from 1989 to
1991. Prior to working for Bayer, Mr. Kelley was the Plant Manager of a facility
in the Biotechnology Division of Miles, Inc. from 1983 to 1989. Mr. Kelley
received an M.B.A. from Rutgers Graduate School of Business and a B.S.C.E. from
the New Jersey Institute of Technology.
- 19 -
<PAGE> 21
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 1999.
- 20 -
<PAGE> 22
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, 1999, 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, 1999.
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, 1999, 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 10
of the Company's Annual Report to Stockholders for the fiscal year ended October
31, 1999, 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
Quantitative and qualitative disclosures regarding market risk are not
required because the underlying risk items are not material.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The Company's 1999 Financial Statements and Report of Independent
Auditors by Ernst & Young LLP set forth on pages 11 through 19 of the Company's
Annual Report to Stockholders for the fiscal year ended October 31, 1999, 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.
- 21 -
<PAGE> 23
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".
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 2000 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 2000 Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
None.
- 22 -
<PAGE> 24
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, 1999 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, 1999 and 1998 11
Statements of Operations for the Years Ended October 31, 1999,
1998 and 1997 12
Statements of Stockholders' Equity for the
Years Ended October 31, 1999, 1998 and 1997 13
Statements of Cash Flows for the Years Ended October 31, 1999,
1998 and 1997 14
Notes to Financial Statements 15 - 19
Report of Independent Auditors 19
</TABLE>
(a)(2) Financial Statement Schedules
Financial statement schedules have been omitted since they are either not
required, not applicable, or the information is otherwise included.
(a)(3) Exhibits
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
- 23 -
<PAGE> 25
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).
4.05 Form of First Amendment to Rights Agreement between the Company
and Registrar and Transfer Company, as Rights Agent (filed as
Exhibit 99.1 to the Company's Form 8-K, File No. 0-22354, filed
November 9, 1998 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 DSM Food Specialties (formerly 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).
- 24 -
<PAGE> 26
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. 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 (filed as
exhibit 10.26 to the Company's 1998 Form 10-K, File No. 22354,
and incorporated by reference herein).
10.27 Employment Agreement, dated January 16, 1998, between the Company
and Peter L. Buzy (filed as exhibit 10.27 to the Company's 1998
Form 10-K, File No. 22354, and Incorporated by reference
herein).
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).
10.29 Common Stock and Warrant Purchase Agreement, dated May 28, 1999,
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
June 9, 1999 and incorporated by reference herein).
13.01 Portions of the Annual Report to Stockholders of the Company for
the year ended October 31, 1999.**
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.**
- -------------------
* 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
- 25 -
<PAGE> 27
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 27, 2000.
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 27, 2000
- ------------------------------------ Director (Principal Executive
Henry Linsert, Jr. Officer)
/s/Peter L. Buzy Principal Financial and January 27, 2000
- ------------------------------------ Accounting Officer
Peter L. Buzy
/s/ Jules Blake Director January 27, 2000
- ------------------------------------
Jules Blake
/s/ Ann L. Johnson Director January 27, 2000
- ------------------------------------
Ann L. Johnson
</TABLE>
- 26 -
<PAGE> 28
<TABLE>
<S> <C> <C>
/s/ Gordon S. Macklin Director January 27, 2000
- ------------------------------------
Gordon S. Macklin
/s/ Douglas J. MacMaster, Jr. Director January 27, 2000
- ------------------------------------
Douglas J. MacMaster, Jr.
/s/ John H. Mahar Director January 27, 2000
- ------------------------------------
John H. Mahar
/s/ Sandra Panem Director January 27, 2000
- ------------------------------------
Sandra Panem
/s/ Richard J. Radmer President and Director January 27, 2000
- ------------------------------------
Richard J. Radmer
/s/ Eugene J. Rotberg Director January 27, 2000
- ------------------------------------
Eugene H. Rotberg
/s/ William D. Smart Director January 27, 2000
- ------------------------------------
William D. Smart
</TABLE>
- 27 -
<PAGE> 29
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).
4.05 Form of First Amendment to Rights Agreement between the Company
and Registrar and Transfer Company, as Rights Agent (filed as
Exhibit 99.1 to the Company's Form 8-K, File No. 0-22354, filed
November 9, 1998 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).
</TABLE>
- 28 -
<PAGE> 30
<TABLE>
<S> <C>
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 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 DSM Food Specialties (formerly 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 (filed as
exhibit 10.26 to the Company's 1998 Form 10-K, File No. 22354,
and incorporated by reference herein).
10.27 Employment Agreement, dated January 16, 1998, between the Company
and Peter L. Buzy (filed as exhibit 10.27 to the Company's 1998
Form 10-K, File No. 22354, and Incorporated by reference
herein).
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).
10.29 Common Stock and Warrant Purchase Agreement, dated May 28, 1999,
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
June 9, 1999 and incorporated by reference herein).
13.01 Portions of the Annual Report to Stockholders of the Company for
the year ended October 31, 1999.**
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).
- 29 -
<PAGE> 1
EXHIBIT 13.01
Annual Report 1999
[MARTEK SCIENCE FOR LIFE LOGO]
<PAGE> 2
LETTER TO SHAREHOLDERS
[PHOTO]
DEAR MARTEK STOCKHOLDER,
The good news for 1999 is that the Company worked hard and made significant
progress. The bad news is that 1999 progress did not translate into 1999
financial results. I believe, however, it did set the stage for a 2000
commercial liftoff. In this year's CEO letter, I will describe how.
For those of you new to the Company, a brief background of Martek's major
lipid products is useful to put 1999 and 2000 into context. Over the past eight
years, Martek has developed production methods and intellectual property for
two unusual fatty acids, docosahexaenoic acid (DHA) and arachidonic acid (ARA)
from an alga and fungus, respectively. These fatty acids are found in cell
membranes throughout the body, but are concentrated in the brain, central
nervous system, retina and heart. Humans are not usually deficient in
arachidonic acid because of the large amount of dietary precursors obtained
from vegetable oil, which are then synthesized into ARA. Humans get DHA in two
ways. As with ARA, they can synthesize DHA from certain precursor fatty acids
found in the diet, but not efficiently; or, preferably, they receive dietary
DHA directly from fish, eggs and organ meats. However, dietary DHA consumption
in developed societies has dropped dramatically over the last 50 years.
Use of DHA and ARA to improve infant mental development and health
problems represent a new way of thinking about nutrition and pharmacology. DHA
uses span from prevention to therapeutics and can be delivered via foods,
supplements and pharmaceuticals. DHA and ARA together are "good fats" for
infant mental development and adult mental health. DHA by itself is beneficial
for reducing hypertension, elevating high-density cholesterol, lowering
triglycerides and, possibly, for reducing heartbeat arrhythmia. In a completely
unrelated area, animal studies published in 1999 indicated that highly purified
DHA may be a therapeutic for cystic fibrosis, by correcting a fatty acid
imbalance found in intestinal villi and the pancreas. Also, in the area of
cancer research, recent animal studies have shown that DHA reduced metastasis
and tumor growth in breast cancer in direct proportion to the amount of dietary
DHA intake. From a wide range of studies, DHA seems to be associated with a
variety of beneficial effects for humans. Its mode of action, however, is still
not fully understood. But over time, as more is understood, I believe that DHA
will be an essential dietary requirement for infants and highly recommended for
large numbers of children and adults worldwide, especially to compensate for
the drop in DHA consumption.
That certain fats such as DHA do good things, and do more than merely
provide energy and lead to weight gain, is generally known only by nutritional
lipid research scientists (a relatively small group), and is largely unknown to
medical practitioners, nutritionists and the public. This lack of awareness has
to be rectified before a mass market for DHA is realized. Similar to other
vitamin marketing efforts, a major and sustained education effort will be
required, necessitating the financial and marketing resources of a large
corporate partner. For this reason, Company management spent significant effort
in 1999 soliciting certain large companies to partner with Martek to accomplish
this task. I believe that this effort will begin to pay off in 2000.
In 1999, the Company continued to work with existing licensees and
distributors to use and sell more DHA/ARA. This meant working with its infant
formula licensees to expand marketing of their formula containing Martek oils
around the world, as well as to support their clinical and regulatory
activities. As a result, numerous introductions of full-term formula should be
made in 2000 throughout the world. In early 2000, evidence of an improved IQ of
6 points is expected to
2
<PAGE> 3
be reported by a National Institute of Health funded study in a well respected,
peer reviewed journal. Publicity from this study should assist the upcoming
2000 introductions of the DHA/ARA-containing infant formulas.
1999 demonstrated that Martek's oils were good for the infant formula
business as well as for infants. Parents in several countries, representing
different cultures, "voted with their money," preferring to pay more to provide
their children with the best nutritional start, other than breast milk, when it
comes to brain and eye development. Premium infant formula with Martek's
DHA/ARA increased in sales and provided a higher profit-per-can to formula
manufacturers. I believe that, as the formula industry realizes the customer
satisfaction and financial benefits of Martek's DHA/ARA oils, it will
accelerate their introduction.
Regulatory issues concerning Martek's oils mainly involved the U.S. Around
the world, Martek's oils are on the market in infant formula in over 60
countries in compliance with regulatory requirements. Formula containing these
oils have been approved after being subjected to extensive review in the U.K.,
the Netherlands and, most recently, France. In 1999, Martek became actively
involved in the FDA regulatory process for the first time in the U.S., joining
in efforts previously started by its U.S. licensees. As part of this process, a
board of leading toxicologists convened by the Company determined, after an
exhaustive and lengthy review of safety studies and pertinent literature, that
Martek's oils should be generally regarded as safe (GRAS) for use in infant
formula. Based on the board's findings, I believe that good progress will be
made on U.S. infant formula regulatory issues this coming year.
Major steps were also made in reducing DHA production costs in 1999. A
more productive strain of DHA-containing algae was developed, in addition to
more efficient, large-scale manufacturing processes. With this progress, I
believe that Martek's high-quality DHA will be provided at prices capable of
supporting significant increases in future demand while supporting reasonable
profit margins. Ultimately, the Company's objective is to produce its DHA at a
cost similar to that found in fish oil, but with the quality of a highly
reliable process, using good manufacturing practices (GMP). 1999 R&D
expenditures on DHA production were significant and were largely responsible
for the magnitude of FY99's financial losses. These expenditures, however,
produced results that should benefit DHA sales and margins for many years.
The Company also raised $14 million in additional equity capital in 1999
that provided funds to continue unimpeded progress during the past year.
Other areas of the Company progressed as well. The stable isotopes group
increased sales and shipments even in light of declining prices for certain of
its major products. This group also significantly furthered development of
technology that may reduce a major bottleneck facing the drug discovery
process: the time and difficulty of finding the three-dimensional structure of
receptor site proteins necessary to understanding how drug candidates interact
with such proteins.
Martek's algal genomics group worked on identifying the genes that some
day may allow DHA to be incorporated into common vegetable oils. The group also
developed key intellectual property for future genetic transformation of algae.
The year 2000 should be liftoff, and the beginnings of the commercial
realization that we have been working for over the past years. I look forward
to reporting to you on this progress next year.
Sincerely,
/s/ Henry Linsert, Jr.
Henry Linsert, Jr.
Chairman and CEO
3
<PAGE> 4
PRODUCTS AND TECHNOLOGIES
NUTRITIONAL PRODUCTS
Certain microalgae and fungi produce rare long-chain, polyunsaturated fatty
acids that are essential components in cell membranes of the human central
nervous system. Studies have indicated that one of these fatty acids in
particular, called docosahexaenoic acid ("DHA"), plays a beneficial role in the
development of the eyes and central nervous system in newborns and may play a
role in promoting mental and cardiovascular health. Conversely, recent research
has also linked low levels of DHA to a variety of health risks in adults,
including increased cardiovascular problems, cancer, and various neurological
and visual disorders.
Martek has identified and developed a fermentable strain of microalga
which produces a patented oil rich in DHA. It has done the same for a fungus
that produces an oil rich in arachidonic acid ("ARA"), another important fatty
acid found in the brain and in breast milk. The Company has also patented the
blending of these two oils for use in supplements, foods and infant formulas.
Brain development in humans takes place primarily in the last trimester in
utero and the first twelve months of postnatal life. For a fetus, DHA and ARA
are naturally provided by its mother via the placenta, and for infants, DHA and
ARA are provided by mother's milk. Studies have shown that breast-fed infants
have higher levels of DHA in their brain tissue and improved mental development
and visual acuity than those fed infant formula. Other studies have shown that
low birth-weight infants fed formulas supplemented with Martek's oils have
blood lipid levels of DHA and ARA comparable to those of breast-fed, low
birth-weight infants. In addition, Martek's DHA/ARA oils have had other
positive effects on infants, including reduced skin infection, milk
intolerance, nervousness and irritability, and improved growth.
Although there are some studies which dispute the benefit of DHA and ARA
in infant formula, numerous other studies support the importance of DHA and ARA
in infant nutrition. An 18-year-long New Zealand study of 1,000 children
published in 1998, found that those who were breast-fed as infants had both
better intelligence and greater academic achievement than those who were
formula-fed. The study's authors cited DHA as the most likely breast milk
component providing this benefit. Research published in 1998 and sponsored by
Mead Johnson and NIH concluded that DHA and ARA appeared necessary for optimal
brain and eye development, with formula-fed infants having a deficiency
equivalent to about one line on an eye chart. Additional studies released
during 1998 showed the importance of DHA in improving infant cognitive behavior
and protecting them from non-insulin dependent diabetes, obesity, hypertension,
and other diseases associated with impaired glucose metabolism. In 1999, a
meta-analysis of over 20 published reports concluded that infants deprived of
the nutrients in breast milk are likely to have lower IQ, lower educational
achievement, and poorer social adjustment than breast-fed infants. The
nutritional benefits of breast-feeding were associated with at least a
3.2-point difference in cognitive development compared to formula feeding, and
the longer the baby was breast-fed, the greater the increase in cognitive
developmental benefit. This data is consistent with prior research and adds to
the growing evidence supporting the importance of Martek's oils, not only for
pre-term infants but for full-term infants as well.
Martek's blended DHA/ARA oils provide the closest match, with regard to
molecular form of these fatty acids, to human milk when added to infant
formula. Martek's oils do not contain certain fatty acids found in other
sources of DHA that may be harmful to infants. Martek's oils also provide DHA
and ARA that are bioavailable by quickly passing through the stomach and
intestines into the blood.
Supplementation of DHA and ARA has not been just a Martek story. The
British Nutrition Foundation, and the Expert Committee on Human Nutrition of
the United Nations Food and Agriculture Organization and the World Health
Organization (FAO/WHO) recommend that DHA and ARA be included in all infant
formulas.
In addition to recommending the inclusion of DHA and ARA in infant
formula, the FAO/WHO Committee has also recognized their importance in
pregnancy and lactation. Because of this importance and because of diet changes
leading to lower DHA intake, dietary supplementation of DHA by mothers, both
pregnant and lactating, can provide the optimum amount of DHA to growing
fetuses and infants.
On the business front, Martek has entered into royalty-bearing license
agreements to utilize its oils in infant formula with six infant formula
manufacturers who, in the aggregate, represent over 40% of the world's infant
formula market. Martek's licensees include Mead Johnson & Company, American
Home Products Corporation, Royal Numico N.V. (formerly Nutricia), Novartis
Nutrition S.A. and Maabarot Products, Ltd. During 1999, there were
introductions of infant formula containing Martek's oils in almost a dozen
additional countries. Formulas containing Martek's oils are now available in
more than 60 countries worldwide, including France, The Netherlands, Spain and
the United Kingdom.
Additional research continues to be published demonstrating the importance
of DHA throughout life. Studies have linked low levels of DHA to specific
disorders including changes in disposition, memory loss, visual and other
neurological conditions. Research is underway to explore the impact of DHA
supplementation in these and other areas. In 1998, the National Institutes of
Health held a symposium to
4
<PAGE> 5
discuss the latest research covering a wide range of potential applications
including cancer, depression, infant development, cardiovascular, and other
areas.
Martek began selling its DHA oil in the form of Neuromins(R) DHA capsules
as a nutritional supplement in 1997. Today, Neuromins(R) DHA nutritional
supplements are sold in approximately 10,000 nutritional and health products
stores nationwide under the Leiner Health Products, Natrol Inc., Nature's Way,
Nutraceutical's Solaray(R) brand, Solgar Vitamin and Herb Company and Source
Naturals brands. In addition, Neuromins(R) DHA supplements are sold at Vitamin
World stores and under the private label of Safeway.
PRODUCTS FOR PHARMACEUTICAL RESEARCH
New pharmaceutical development is extremely costly. Costs to successfully
develop a new pharmaceutical can reach one-half billion dollars.
Structure-based drug design is being used to expedite new drug discovery
timescales and is based on understanding how a drug interacts with its receptor
at the molecular level. With this binding site information, researchers can
then design an efficacious drug much faster than by randomly screening millions
of candidate drug molecules.
To support structure-based drug design efforts, Martek has developed a
series of stable isotope (carbon 13, nitrogen 15, and deuterium) products
(amino acids and sugars) for sale to the pharmaceutical research industry which
enable the three-dimensional structures of certain proteins of pharmaceutical
interest to be determined using nuclear magnetic resonance ("NMR") technology.
These stable isotopically labeled products are used as growth media for
recombinant organisms which, in turn, generate proteins incorporating stable
isotopes from the growth media fed to them. Martek is a leader in the
development and sale of specialty stable isotope biochemical reagents with
non-proprietary as well as proprietary research products. Recently, the Company
successfully introduced several high-end proprietary products such as
isotopically labeled nucleic acid derivatives used to solve the structures of
DNA and RNA, especially when bound to proteins.
The Company is also developing a proprietary fast-track protein labeling
system which would, by using advanced NMR technology, enable researchers to see
the structure and movement of pharmaceutical target binding sites in
significantly reduced time. This technology could greatly reduce the time
needed to understand a given target/drug candidate interaction and thereby
speed up the rejection of unsuitable compounds and reduce the overall time
needed to develop new pharmaceuticals.
DIAGNOSTICS
Martek has developed a series of proprietary and non-proprietary fluorescent
markers. The sensitivity of these products can be as much as 1000 times that of
fluorescein, the most commonly used fluorescent dye. These products have been
designed for use in a wide array of diagnostic and research applications. A
number of significant advantages are associated with these products, including
ease of use and added stability while also being non-toxic and non-radioactive.
Additionally, these products generally require less complex and expensive
processes for their use. These advantages set Martek's products apart and make
them unique to the market. Martek markets some of its products in this area
through partnerships with Intergen(R) Company and Kirkegaard & Perry
Laboratories.
5
<PAGE> 6
MARTEK BIOSCIENCES CORPORATION
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
Year Ended October 31,
----------------------------------------------------------------------
In thousands except per share data 1999 1998 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA
Revenues
Product sales $ 5,350 $ 4,850 $ 3,566 $ 933 $ 1,262
License fees and other revenues 6 1,165 293 2,244 270
Royalties 394 391 28 11 5
Research and development contracts and grants 383 484 530 769 662
-------- -------- -------- -------- --------
Total revenues 6,133 6,890 4,417 3,957 2,199
Costs and expenses
Cost of product sales 4,209 3,856 2,697 539 652
Research and development 10,309 9,787 11,051 10,294 7,720
Selling, general and administrative 6,822 7,360 7,415 4,134 3,219
-------- -------- -------- -------- --------
Total costs and expenses 21,340 21,003 21,163 14,967 11,591
-------- -------- -------- -------- --------
Loss from operations (15,207) (14,113) (16,746) (11,010) (9,392)
Other income, net 359 652 1,349 2,096 583
-------- -------- -------- -------- --------
Net loss $ (14,848) $ (13,461) $ (15,397) $ (8,914) $ (8,809)
======== ======== ======== ======== ========
Net loss per share, basic and diluted $ (.95) $ (.94) $ (1.14) $ (.67) $ (.94)
======== ======== ======== ======== ========
Weighted average common shares outstanding 15,581 14,330 13,559 13,281 9,412
======== ======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
October 31,
---------------------------------------------------------------------
1999 1998 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET AND OTHER DATA
Cash, cash equivalents, short-term investments
and marketable securities $ 16,358 $ 17,645 $ 20,675 $ 39,392 $ 51,623
Working capital 20,202 21,000 21,990 35,306 49,681
Total assets 39,172 40,736 41,342 57,123 65,158
Long-term debt 472 1,951 3,292 1,199 4,175
Accumulated deficit (73,898) (59,049) (45,588) (30,191) (21,277)
Total stockholders' equity 35,199 35,282 34,687 49,416 57,346
Cash dividends declared--common stock -- -- -- -- --
</TABLE>
6
<PAGE> 7
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 other things, statements concerning:
(1) expectations regarding future revenue growth, product introductions,
distribution, sales, applications and potential marketing partnerships; (2)
expectations regarding sales and royalties by and from formula licensees; (3)
expectations regarding FDA approval of the Company's oils for inclusion in U.S.
infant formula; (4) expectations regarding future efficiencies in manufacturing
processes and the cost of production of the Company's nutritional oils; (5)
expectations regarding future research and development costs; (6) Year 2000
business risks; and (7) 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. The Company's products include: (1) specialty, nutritional oils
for infant formula, nutritional supplements and food ingredients that may play
a beneficial role in promoting mental and cardiovascular health, and in the
development of the eyes and central nervous system in newborns; (2) stable
isotope products 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 realized its first 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(R), a DHA dietary supplement. In 1998, Martek first realized
revenues from the sale of its new phycobilisome fluorescent detection products.
Martek has incurred losses in each year since its inception. At October
31, 1999, the Company's accumulated deficit was $73,898,000. 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(R) 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 and/or other future third-party collaborators, the timing or
likelihood of future profitability is largely dependent on factors over which
the Company has no control.
MANAGEMENT OUTLOOK AND REGULATORY ISSUES
Management believes that while quarterly results may show fluctuations in
product sales, the outlook for future revenue growth remains positive and that
fiscal 2000 sales will surpass prior year levels. Specifically, Management
believes that for fiscal 2000 as a whole: (1) term infant formula containing
Martek's oils will be introduced in additional countries; (2) sales and
royalties related to the Company's nutritional oils will continue to grow; and
(3) sales of new high value products from the Company's stable isotope group
will increase.
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
7
<PAGE> 8
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
accurately predict when, or if, 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 60 countries for term or pre-term infant formula products, including,
most recently, approval by the French Scientific Committee for Foods for
pre-term and term infant formula. The Company and its licensees are in the
process of responding 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 FDA approval should ultimately be obtained, it is Management's
belief that this process will take a minimum of six to twelve additional months.
There is also 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 in
the U.S., 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 during the next twelve months, new
infant formula products containing Martek's oils will continue to be introduced
around the world and overall product sales, including sales from infant formula
related products, will increase over the prior year.
RESULTS OF OPERATIONS
REVENUES Revenues increased from $4,417,000 in 1997 to $6,890,000 in 1998, an
increase of 56%, mainly as a result of a $1,284,000 increase in product sales in
1998 over 1997, 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. Revenues in 1999 decreased to
$6,133,000, or 11%, mainly due to the non-recurrence of the $1,125,000 license
fee recognized in 1998.
Nutritional product sales increased $963,000 in 1998 over 1997 and an
additional $381,000 in 1999 over 1998. The increase of 54% in 1998 and 14% in
1999 was the result of the expanded market penetration of infant formula
products, including term introductions, containing the Company's oils, as well
as expanded distribution of Neuromins(R) into mainstream markets.
The expansion of infant formula containing Martek's oils has grown steadily
in the last several years, and these products are now in over 60 countries
worldwide. The resulting growth in product sales has been less dramatic,
however, as many of these introductions have been pre-term infant formula
products for low birth weight infants. While pre-term product introductions are
important because they show the commitment by the Company's licensees to obtain
regulatory approval and also show acceptance in the health care community for
these products, these introductions usually generate minimal revenues due to the
small markets for low birth weight infant formula products. However, to date,
two of Martek's licensees have introduced specialty infant formula products
containing Martek's oils for full-term infants in a total of seven countries.
These products have much greater revenue generating potential, and Management is
optimistic that as market acceptance of these products grows, more term infant
formula launches will occur in additional countries around the world.
Stable isotope and other product sales increased $321,000 in 1998, or 18%,
as a result of increased sales and marketing efforts, and increased an
additional $119,000, or 6%, in 1999, primarily the result of increased sales of
high-value products including the Company's fluorescent detection products,
offset somewhat by competition in the reagents market. This competition may
continue and negatively impact stable isotope sales in fiscal 2000.
Royalty revenues increased by $363,000, or thirteen-fold, in 1998 and
increased an additional $3,000, or 1%, in 1999, due to the increased volume of
infant formula sales by licensees. Although royalty revenues may continue to
fluctuate based on the timing of sales to licensees, Management anticipates that
royalty revenues will grow at a more rapid rate in fiscal 2000 as sales of
nutritional oils to licensees grows. Contract and grant revenues decreased by
$46,000 in 1998 and further decreased by $101,000 in 1999 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 76% in 1997 to 80% in
1998, and decreased to 79% in 1999. These fluctuations resulted primarily from a
change in the mix of product sales. Cost of product sales will increase when the
mix includes higher volumes of sales to infant formula licensees, or bulk oil
sales for encapsulation by others or for use as food ingredients. Infant formula
royalties may ultimately 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 has
remained 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 the cost of production will
decrease. Management believes that significant optimization efforts will be
required for at least the next year to realize these increases in efficiency.
Cost of sales has also been impacted by certain price reductions brought
about by competition, primarily in the Company's low-end stable isotope drug
discovery products.
8
<PAGE> 9
The Company offset these price reductions in part by sales of high-end
proprietary products in late 1998 and 1999. 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, decreased from $11,051,000 in 1997 to $9,787,000 in
1998, a decrease of 11%, and increased to $10,309,000 in 1999, an increase of 5%
compared to 1998. Contract-related research and development costs included in
these amounts were $509,000 in 1997, $446,000 in 1998, and $464,000 in 1999.
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 and
lower its DHA production cost. Research and development costs may increase in
the future as the Company evaluates new technologies and continues efforts to
optimize the efficiency of its large scale fermentation and oil extraction
processes.
SELLING, GENERAL AND ADMINISTRATIVE Selling, general and administrative costs
decreased from $7,415,000 in 1997 to $7,360,000 in 1998, a decrease of 1%, and
decreased to $6,822,000 in 1999, a decrease of 7% from 1998. These costs
decreased primarily due to lower marketing expenses due to the timing of various
advertising and promotional campaigns for the Company's products. These costs
may increase in the future as the Company expands the sales and marketing
efforts related to its products.
OTHER INCOME, NET Other income decreased from $1,349,000 in 1997 to $652,000 in
1998, and to $359,000 in 1999, 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 As a result of the above, net losses decreased from $15,397,000 in 1997
to $13,461,000 in 1998, a decrease of 13%, and increased to $14,848,000 in 1999,
an increase of 10% compared to 1998.
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. This Statement is effective for the annual reporting of
companies with fiscal years beginning after December 15, 1997. Adoption of SFAS
No. 130 has had no impact on the reporting of the Company, as the Company has no
significant items related to comprehensive income. The FASB also recently 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. This Statement is effective for
the annual reporting of companies with fiscal years beginning after December 15,
1997. Adoption of this standard has had no significant impact on the Company's
financial position, results of operations, cash flows, or 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 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 the oil production
facilities in Winchester, Kentucky. Management has completed this evaluation and
subsequent implementation, and believes that the business risk associated with
this equipment is minimal. Management believes that its compliance work on the
Company's information and non-information technology systems is completed;
however, if significant, new, non-compliance issues are identified, the process
may be delayed and the Company's operations and financial condition may be
materially adversely affected.
Additionally, Martek's third party relationships are being reviewed to
assess their Year 2000 status and potential impact on the Company. Where
potential business risk has been identified, additional information has been
requested from certain third parties to obtain assurance that they are Year 2000
compliant. To date, the Company's third party suppliers have represented that
they are Year 2000 compliant or are in the process of becoming compliant by
December 31, 1999. Although Management has identified multiple suppliers for
most of the goods and services purchased from third parties, there can be no
guaranty that the failure of any individual supplier to adequately address the
Year 2000 issue for the products or services that they provide to the Company
will not have a material adverse impact on the Company's operations and
financial results.
Management believes that the worst possible problem that could arise from a
Year 2000 computer failure would be a loss of power at its Kentucky plant. This
could result in production downtime and the potential loss of inventory.
Contingency plans, including the transport of any product subject to temperature
spoilage to an outside facility, have been made to reduce the impact on the
Company from such a failure. As such, we believe that the disruption from such
an event could be rectified in a maximum of five business days, and cause total
losses to the Company of less than $100,000.
Through October 31, 1999, the Company has incurred less than $100,000 in
costs associated with Year 2000 issues. Approximately 50% of these costs have
been related to system analysis work and 50% related to software and hardware
upgrades. These efforts have
9
<PAGE> 10
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
had minimal impact on other information technology projects that are in process.
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 $107 million from public and private sales of its equity
securities, as well as option and warrant exercises. Recent fundraising efforts
include approximately $10.25 million raised from a private placement of stock in
1998 and $13.8 million from a private placement in May, 1999. The 1998 private
placement investors 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 1998 initial issuance
price of $15.63.
Through October 31, 1999, Martek has incurred an accumulated deficit of
$73,898,000. The Company's balance of cash, cash equivalents, short-term
investments and marketable securities at October 31, 1999 was $16,358,000. The
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 $1,287,000 in 1999,
primarily due to the Company's continued operating losses, partially offset by
the additional funds raised in the private placement of common stock which
closed in May, 1999 (see Note 9 of Notes to the Financial Statements).
Capital expenditures of $697,000 were made in 1999, 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 $1,000,000 in 2000 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, 1999, the Company had $413,000 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 the Financial
Statements). The term loan bears interest at the rate of 8.61% and, as of
October 31, 1999, the outstanding balance was $1,538,000. The Company was in
compliance with all of the covenants related to these loans at October 31, 1999,
including a covenant requiring a minimum cash balance of at least $12,000,000.
Martek will require substantial additional funds in the future to continue
its research and development programs, to conduct preclinical and clinical
studies to maintain compliance with its loan covenants, and to commercialize its
nutritional oils, Neuromins(R), and its other products under development. The
ultimate levels of funding required will depend, in part, on whether the Company
seeks independently, or with other parties through collaborative agreements, to
develop, manufacture and market its products. The capital requirements of Martek
will also 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 $1,000,000 are expected in fiscal 2000.
Expenditures beyond fiscal 2000 will depend, in part, on production capacity
needs, and the extent of development and implementation of process improvements.
Management believes that 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, Management
believes that additional funds will be needed in the longer term to continue the
Company's research and development, manufacturing and marketing efforts.
Management intends to seek additional funding through commercial and government
research and development contracts and grants, product sales and license fee
arrangements, asset-based borrowing, equity issuances, additional lease
financing and/or collaborative arrangements with partners if such methods are
available to the Company and on favorable terms. There can be no assurance that
such funds will be available to the Company on acceptable terms, if at all.
10
<PAGE> 11
MARTEK BIOSCIENCES CORPORATION
BALANCE SHEETS
<TABLE>
<CAPTION>
October 31,
--------------------------------------
1999 1998
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $ 1,180,098 $ 4,497,879
Short-term investments and marketable securities (Note 3) 15,178,152 13,146,950
Accounts receivable 1,646,148 1,336,268
Inventories (Notes 2 and 4) 5,216,265 5,001,990
Other current assets 482,772 519,373
------------ ------------
Total current assets 23,703,435 24,502,460
Property, plant and equipment, net (Notes 2 and 5) 15,468,836 16,233,049
------------ ------------
$ 39,172,271 $ 40,735,509
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable $ 693,464 $ 595,644
Accrued liabilities 1,328,950 1,565,952
Current portion of notes payable (Note 6) 1,479,333 1,340,919
------------ ------------
Total current liabilities 3,501,747 3,502,515
Long-term portion of notes payable (Note 6) 471,907 1,951,240
Commitments (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;
16,492,229 and 14,879,434 shares issued and outstanding at
October 31, 1999 and 1998, respectively 1,649,223 1,487,943
Additional paid-in capital 107,446,950 92,843,259
Accumulated deficit (73,897,556) (59,049,448)
------------ ------------
Total stockholders' equity 35,198,617 35,281,754
------------ ------------
$ 39,172,271 $ 40,735,509
============ ============
</TABLE>
See accompanying notes.
11
<PAGE> 12
MARTEK BIOSCIENCES CORPORATION
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year ended October 31,
---------------------------------------------------------------
1999 1998 1997
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
REVENUES (NOTES 2 AND 8)
Product sales:
Nutritional product sales $ 3,143,512 $ 2,762,844 $ 1,799,839
Stable isotope and other product sales 2,206,133 2,086,791 1,766,148
------------ ------------ ------------
Total product sales 5,349,645 4,849,635 3,565,987
License fees and other revenues 6,000 1,165,000 292,839
Royalties 394,003 391,215 28,475
Research and development contracts and grants 383,415 483,948 529,795
------------ ------------ ------------
Total revenues 6,133,063 6,889,798 4,417,096
COSTS AND EXPENSES
Cost of product sales 4,208,488 3,855,675 2,697,050
Research and development 10,309,452 9,786,829 11,050,574
Selling, general and administrative 6,822,440 7,360,019 7,415,127
------------ ------------ ------------
Total costs and expenses 21,340,380 21,002,523 21,162,751
------------ ------------ ------------
Loss from operations (15,207,317) (14,112,725) (16,745,655)
OTHER INCOME (EXPENSE)
Miscellaneous income 132,358 96,021 93,770
Interest income 806,238 1,076,587 1,682,785
Interest expense (579,387) (521,198) (427,941)
------------ ------------ ------------
359,209 651,410 1,348,614
------------ ------------ ------------
Net loss $ (14,848,108) $ (13,461,315) $ (15,397,041)
============ ============ ============
Net loss per share, basic and diluted (Note 2) $ (.95) $ (.94) $ (1.14)
============ ============ ============
Weighted average common shares outstanding 15,580,791 14,329,825 13,559,419
============ ============ ============
</TABLE>
See accompanying notes.
12
<PAGE> 13
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, 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, net of issuance costs 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
Issuance of common stock
in private placement, net of issuance costs 1,528,935 152,894 13,592,001 -- 13,744,895
Exercise of stock options and other 83,860 8,386 1,011,690 -- 1,020,076
Net loss -- -- -- (14,848,108) (14,848,108)
- --------------------------------------------------------------------------------------------------------------------------------
BALANCE AT OCTOBER 31, 1999 16,492,229 $1,649,223 $107,446,950 $(73,897,556) $35,198,617
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes.
13
<PAGE> 14
MARTEK BIOSCIENCES CORPORATION
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year ended October 31,
------------------------------------------------------------
1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss $(14,848,108) $(13,461,315) $(15,397,041)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization 1,461,159 1,368,789 1,201,179
Other non-cash items 348,600 174,300 --
Changes in operating assets and liabilities:
Accounts receivable (309,880) (155,577) (858,580)
Inventories (214,275) (2,096,538) (1,064,324)
Other current assets 36,601 71,733 (332,796)
Accounts payable 97,820 (412,463) 366,188
Accrued liabilities (237,002) 525,103 (453,952)
------------ ------------ ------------
Net cash used in operating activities (13,665,085) (13,985,968) (16,539,326)
INVESTING ACTIVITIES
Change in short-term investments and marketable securities (2,031,202) 5,550,909 12,061,493
Purchase of property, plant and equipment (696,946) (1,612,406) (1,881,369)
------------ ------------ ------------
Net cash provided by (used in) investing activities (2,728,148) 3,938,503 10,180,124
FINANCING ACTIVITIES
Borrowings on notes payable -- -- 4,000,000
Repayment of notes payable (1,340,919) (1,313,769) (4,964,258)
Proceeds from the exercise of warrants and options 671,476 3,872,530 667,173
Proceeds from the issuance of
common stock and warrants in private placement 13,744,895 10,009,556 --
------------ ------------ ------------
Net cash provided by (used in) financing activities 13,075,452 12,568,317 (297,085)
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents (3,317,781) 2,520,852 (6,656,287)
Cash and cash equivalents at beginning of year 4,497,879 1,977,027 8,633,314
------------ ------------ ------------
Cash and cash equivalents at end of year $ 1,180,098 $ 4,497,879 $ 1,977,027
============ ============ ============
</TABLE>
See accompanying notes.
14
<PAGE> 15
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 $101,098 in 1999, $255,000 in 1998, and $333,000 in 1997.
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 1999, 6% in 1998 and 12% in 1997 of the Company's
total revenues were generated from U.S. government contracts, subcontracts, and
SBIR grants.
CONCENTRATION OF CREDIT RISK AND SIGNIFICANT CUSTOMERS Financial instruments,
which potentially subject the Company to concentrations of credit risk, consist
principally of accounts receivable. The Company grants credit to customers
based on evaluations of their financial condition, generally without requiring
collateral. Concentrations of credit risk with respect to accounts receivable
are present due to the small number of customers comprising the Company's
customer base. However, the credit risk is reduced through the Company's
efforts to monitor its exposure for credit losses and maintain allowances for
anticipated losses. One customer accounted for approximately 15% of the
Company's sales for the years ended October 31, 1999, 1998 and 1997.
RESEARCH AND DEVELOPMENT Research and development costs are charged to
operations as incurred and include contract and grant-related costs of $464,000
in 1999, $446,000 in 1998 and $509,000 in 1997 .
ADVERTISING COSTS All advertising costs are expensed when incurred. Advertising
costs expensed for the years ended October 31, 1999, 1998 and 1997 approximated
$1,650,000, $1,765,000 and $1,198,000, 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
15
<PAGE> 16
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
and cash equivalents, short-term investments and marketable securities,
accounts receivable, accounts payable and long-term debt, to approximate the
fair value of the respective assets and liabilities at October 31, 1999.
STOCK-BASED COMPENSATION The Company has 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.
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 $408,000 in 1999,
$349,000 in 1998 and $689,000 in 1997. For the years ended October 31, 1999,
1998 and 1997 the Company paid no income taxes.
RECLASSIFICATION Certain amounts in the prior years' financial statements have
been reclassified to conform to the 1999 presentation.
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 $15,178,152 and $13,146,950 for the years ended October 31, 1999 and
1998, respectively. At October 31, 1999 and 1998, the estimated fair value of
these securities approximated cost.
4. INVENTORIES
Inventories consisted of the following:
<TABLE>
<CAPTION>
October 31,
1999 1998
- ------------------------------------------------------------
<S> <C> <C>
Finished products $2,206,051 $1,406,053
Work in process 2,683,477 3,343,911
Raw materials 326,737 252,026
----------- -----------
$5,216,265 $5,001,990
=========== ===========
</TABLE>
5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of the following:
<TABLE>
<CAPTION>
October 31,
1999 1998
- ------------------------------------------------------------
<S> <C> <C>
Land $ 149,860 $ 149,860
Building and improvements 1,742,123 1,742,123
Machinery and equipment 18,847,913 18,220,885
Furniture and fixtures 734,360 664,442
Leasehold improvements 396,986 396,986
----------- -----------
21,871,242 21,174,296
Less accumulated depreciation
and amortization 6,402,406 4,941,247
----------- -----------
$ 15,468,836 $ 16,233,049
=========== ===========
</TABLE>
Depreciation expense amounted to $1,461,000, $1,369,000 and $1,201,000 for
the years ended October 31, 1999, 1998 and 1997, 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, 1999, the outstanding
balance was $1,538,000. 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, 1999 the outstanding balance was $413,000. This loan is
collateralized by the equipment purchased with the proceeds.
16
<PAGE> 17
Future minimum payments on the Company's term loans at October 31, 1999
were as follows:
<TABLE>
<S> <C>
2000 $1,479,333
2001 471,907
----------
$1,951,240
==========
</TABLE>
7. COMMITMENTS
FACILITIES LEASES The Company leases its premises under an operating lease
agreement which expires in November 2004. The terms of the lease call for
annual rent escalations of 3%. 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 $371,577 in 1999, $329,000 in 1998 and $311,000 in
1997. Future minimum lease payments under the lease, assuming the Company will
not exercise any additional cancellation or expansion rights it has under the
lease, at October 31, 1999, were as follows:
<TABLE>
<S> <C>
2000 $ 403,000
2001 416,000
2002 429,000
2003 441,000
2004 and after 455,000
----------
$2,144,000
==========
</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, 1999 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, 1999, 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, 1999.
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. 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 $394,000, $391,000
and $28,000 were earned in the years ended October 31, 1999, 1998 and 1997,
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 exercisable for a period of three
years from the 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. This commitment,
which expires on April 27, 2000, can be drawn upon at the discretion of the
Company, subject to certain conditions, which includes 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
issued warrants to purchase up to 51,250 shares of common stock on April 27,
1999 at $7.51 per share and is obligated to again issue warrants to purchase up
to 51,250 shares of common stock at the end of year two if the Company does not
utilize the additional funding by such date. 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, 1999.
On May 28, 1999, 1,528,935 shares of the Company's common stock, and
warrants to purchase 458,679 shares of common stock were issued in a private
placement, resulting in net proceeds to the Company of approximately $13.7
million. The stock was issued at a thirty-day average trading price of $9.03
per share. The warrants are exercisable for a period of three years from date
of issuance at $10.84 per share.
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 on the date of grant. The options are qualified and nonqualified
and generally 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
determined by the Company's Board of Directors.
17
<PAGE> 18
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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, 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
Granted 859,450 $6.25-$9.625 $6.75
Exercised (83,860) $8.00-$9.875 $8.01
Forfeited (380,400) $6.25-$34.25 $9.60
---------- ------------- --------
BALANCE AT OCTOBER 31, 1999 2,168,060 $6.25-$34.25 $13.16
</TABLE>
At October 31, 1999, 1,099,400 options were exercisable at a weighted
average exercise price of $14.99 per share, and a total of 596,500 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, 1999 was 7.9 years.
Detailed information on the options outstanding on October 31, 1999 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>
$6.25-9.88 1,024,510 $7.20 8.74 360,260 $7.70
$10.25-14.44 581,350 $12.65 7.36 398,030 $12.44
$15.50-25.50 375,500 $18.72 7.42 200,690 $18.88
$32.88-34.25 186,700 $33.08 6.40 140,420 $33.04
--------- ---------
2,168,060 1,099,400
========= =========
</TABLE>
DIRECTORS' STOCK OPTION PLAN In 1994, the Company established a Directors'
Stock Option Plan ("Directors' Plan"). The Directors' Plan provided for the
award of stock options to nonemployee directors. At October 31, 1999, 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, 1999 was 6.8
years. No awards were made under the Director's Plan after 1998. During 1999,
Directors of the Company received option grants under the Company's Option
Plan.
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 1999 and 1998 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 1999, 1998 and 1997 would have been
approximately $18.9 million, $17.2 million and $17.7 million, or $1.22, $1.20
and $1.31 per share, respectively. The weighted average fair value of the
options granted during 1999 is estimated at $5.91 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 87.5%, risk-free interest rate of 5.5% and average
expected life of approximately 7 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.
18
<PAGE> 19
10. INCOME TAXES
At October 31, 1999, the Company had net operating loss carryforwards of
approximately $88,272,000 for income tax reporting purposes that expire in
years 2000 through 2019.
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 six
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 $35,309,000 and $29,889,000 at October 31, 1999 and 1998,
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, 1999 and 1998.
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, 1999, 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, 1999 and 1998, and the related statements of
operations, stockholders' equity, and cash flows for each of the three years in
the period ended October 31, 1999. 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 auditing standards generally
accepted in the United States. 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, 1999 and 1998, and the results of its operations and its cash
flows for each of the three years in the period ended October 31, 1999, in
conformity with accounting principles generally accepted in the United States.
McLean, Virginia
December 14, 1999
/s/ Ernst & Young LLP
19
<PAGE> 20
BOARD OF DIRECTORS
Henry Linsert, Jr.
Chairman and Chief Executive Officer
Richard J. Radmer, Ph.D.
President and Chief Scientific Officer
Jules Blake, Ph.D.
Former Vice President, Corporate
Scientific Affairs of Colgate-Palmolive Co.
Ann L. Johnson, M.D.
Mills Peninsula Hospital
Psychiatrist/Psychopharmacologist
Gordon S. Macklin
Former Chairman of Hambrecht & Quist Group
Former President of the
National Association of Securities Dealers, Inc.
Douglas J. MacMaster, Jr.
Former Senior Vice President of Merck & Co., Inc.
John H. Mahar
President of Hillside Management
Sandra Panem, Ph.D.
Former President of Vector Fund Management, L.P.
Eugene H. Rotberg
Former Executive Vice President of
Merrill Lynch & Co. and Treasurer of World Bank
William D. Smart
Former President of Ross Laboratories and
Corporate Vice President of Abbott Laboratories
EXECUTIVE OFFICERS
Henry Linsert, Jr.
Chairman and Chief Executive Officer
Richard J. Radmer, Ph.D.
President and Chief Scientific Officer
Peter L. Buzy
Chief Financial Officer and Treasurer
Steve Dubin
Senior Vice President, Business Development,
General Counsel and Secretary
Thomas C. Fisher
Senior Vice President, Operations
Jerome C. Keller
Senior Vice President, Sales and Marketing
David J. Kyle, Ph.D.
Senior Vice President, Research and Development
CORPORATE INFORMATION
HEADQUARTERS
Martek Biosciences Corporation
6480 Dobbin Road
Columbia, Maryland 21045
410.740.0081
LEGAL COUNSEL
Hogan & Hartson L.L.P.
Baltimore, Maryland
INDEPENDENT AUDITORS
Ernst & Young LLP
McLean, Virginia
TRANSFER AGENT
Registrar & Transfer Company
10 Commerce Drive
Cranford, New Jersey 07016
800.368.5948
STOCK DESCRIPTION AND FORM 10-K
The Company's common stock commenced trading on the NASDAQ National Market
System under the symbol MATK on November 23, 1993. Prior to that date, there
was no established market for the Company's common stock. As of December 31,
1999, there were approximately 189 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 1998 High Low
- --------------------------------------------------------------
<S> <C> <C>
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
Fiscal 1999 High Low
- --------------------------------------------------------------
November 1, 1998 - January 31, 1999 $ 8 7/8 $ 7 3/16
February 1, 1999 - April 30, 1999 $ 8 $ 5 1/2
May 1, 1999 - July 31, 1999 $10 5/8 $ 8 1/8
August 1, 1999 - October 31, 1999 $10 7/16 $ 5 5/8
</TABLE>
SHAREHOLDERS MAY OBTAIN, AT NO CHARGE, A COPY OF MARTEK BIOSCIENCES
CORPORATION'S 10-K, FILED WITH THE SECURITIES AND EXCHANGE COMMISSION, BY
WRITING TO:
INVESTOR RELATIONS
MARTEK BIOSCIENCES CORPORATION
6480 DOBBIN ROAD
COLUMBIA, MD 21045
20
<PAGE> 1
Exhibit 23.01
CONSENT OF INDEPENDENT AUDITORS
Board of Directors
Martek Biosciences Corporation
We consent to the incorporation by reference in this Annual Report (Form 10-K)
of Martek Biosciences Corporation of our report dated December 14, 1999,
included in the 1999 Annual Report to Shareholders of Martek Biosciences
Corporation.
We also consent to the incorporation by reference of our report dated December
14, 1999, 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, 1999, 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.
(5) Registration Statement Number 333-81739 on Form S-3, dated July 14, 1999.
McLean, Virginia
January 27, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> OCT-31-1999
<PERIOD-START> NOV-01-1998
<PERIOD-END> OCT-31-1999
<CASH> 1,180,098
<SECURITIES> 15,178,152
<RECEIVABLES> 1,656,148
<ALLOWANCES> 10,000
<INVENTORY> 5,216,265
<CURRENT-ASSETS> 23,703,435
<PP&E> 21,871,242
<DEPRECIATION> 6,402,406
<TOTAL-ASSETS> 39,172,271
<CURRENT-LIABILITIES> 3,501,747
<BONDS> 471,907
0
0
<COMMON> 1,649,223
<OTHER-SE> 33,549,394
<TOTAL-LIABILITY-AND-EQUITY> 39,172,271
<SALES> 5,349,645
<TOTAL-REVENUES> 6,133,063
<CGS> 4,208,488
<TOTAL-COSTS> 21,340,380
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 579,387
<INCOME-PRETAX> (14,848,108)
<INCOME-TAX> 0
<INCOME-CONTINUING> (14,848,108)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (14,848,108)
<EPS-BASIC> (.95)
<EPS-DILUTED> (.95)
</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;
- - the optimization of production costs; and
- - our ability to enter into future business collaborations and marketing
partnerships.
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.
- 30 -
<PAGE> 2
We expect to receive most of our future revenues from 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 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. In 1995, we recognized our first
product and royalty revenues from sales of infant formula containing our DHA and
ARA. In 1996, we began to realize revenues from the sale of Neuromins(R), a DHA
dietary supplement.
Need for Additional Capital. Additional funds will be required to:
- - enable us to continue our research and development activities;
- - conduct preclinical and clinical studies; and
- - manufacture and market our products.
Management is likely to pursue various financing alternatives to obtain these
funds, including:
- - asset-based borrowing;
- - equity issuances;
- - additional lease financing; and/or
- - collaborative arrangements with partners.
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);
- - the costs of marketing and commercializing our products; and
- - our ability to attract partners to help market and/or manufacture 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 debt covenants; and/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,
if possible.
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.
- 31 -
<PAGE> 3
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 introduce
products containing our oils in the U.S., or will broaden its use of our oils
overseas or whether our oils 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 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. For example, our continuing
ability to generate nutritional oil-related revenues depends on our ability to
enter into agreements with additional licensees and/or marketing partners. 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 yet 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.
- 32 -
<PAGE> 4
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; and
- - 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.
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;
- - 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;
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- - the risk that authorities may ban an ingredient used in such products,
including our nutritional oils, limit its use or declare it unhealthful;
and/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
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 60
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 responding, with the help of our licensees, to certain
questions raised by the FDA in connection with evaluating our oils for inclusion
in U.S. infant formula. We feel that the process of obtaining FDA approval will
take at least another six to twelve months. 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.
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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 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(R) and
Neuromins(R)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 detection 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; and
- - 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
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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.
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 detection 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. We are currently pursuing a long-term
marketing partnership with a large nutritional products and/or pharmaceutical
company to promote our non-infant formula nutritional oil products. There is no
assurance that we will be able to establish an effective sales or marketing
force, establish additional third-party sales and marketing arrangements, or
close a large-scale marketing partnership. Even if we are able to achieve any of
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
limited experience and 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
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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.
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, among other things, 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;
- - period-to-period fluctuations in financial results; and
- - our ability to enter into collaborations with third parties to market our
products.
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 the outstanding stock options and warrants described below are
exercised, the percentage ownership of certain of our stockholders will be
diluted). As of January 14, 2000, we had 16,517,364 outstanding shares of common
stock, substantially all of which are available for sale in the public
marketplace. As of January 14, 2000, there were also outstanding stock options
to purchase an aggregate of 2,222,725 shares of common stock at various exercise
prices ranging from $6.25 to $34.25 per share. There have also been warrants
issued in connection with the Common Stock and Warrant Purchase Agreements dated
April 27, 1998 and May 28, 1999 totalling 706,599 shares at exercise prices
between $7.51 and $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 April 27, 1998
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
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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 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 this
evaluation and subsequent implementation, and believe that the business risk
associated with this equipment is minimal. Additionally, our third party
relationships have been reviewed to assess their Year 2000 status and potential
impact on our operations. We have completed this review and, where potential
business risk has been identified, have asked for additional information from
certain third parties to obtain assurance that they are Year 2000 compliant. To
date, our suppliers have represented to us that they are Year 2000 compliant or
will be compliant by Decemer 31, 1999. Although we have several suppliers for
most of our goods and services, there can be no assurance that Year 2000 issues
will not have a material adverse impact on our operations and financial results.
We believe that the worst possible problem that could arise from a
Year 2000 computer failure would be a loss of power at our Kentucky plant. This
could result in production downtime, and could cause us to lose material. We
have made contingency plans to reduce the impact of such a problem on our
operations. One such plan would include the movement of our material to an
outside facility to prevent spoilage. We think that the overall impact from such
a failure would be corrected in less than five business days and cost us less
than $100,000.
Through October 31, 1999, we have incurred less than $100,000 in
costs related to Year 2000 issues. Approximately 50% of these costs have been
related to system analysis work and 50% related to software and hardware
upgrades. Our efforts in these areas have not had a major impact on our other
information technology projects.
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 to 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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