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Proc-Type: 2001,MIC-CLEAR
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<SEC-DOCUMENT>0000950133-01-000213.txt : 20010130
<SEC-HEADER>0000950133-01-000213.hdr.sgml : 20010130
ACCESSION NUMBER: 0000950133-01-000213
CONFORMED SUBMISSION TYPE: 10-K405
PUBLIC DOCUMENT COUNT: 6
CONFORMED PERIOD OF REPORT: 20001031
FILED AS OF DATE: 20010129
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: MARTEK BIOSCIENCES CORP
CENTRAL INDEX KEY: 0000892025
STANDARD INDUSTRIAL CLASSIFICATION: BIOLOGICAL PRODUCTS (NO DIAGNOSTIC SUBSTANCES) [2836]
IRS NUMBER: 521399362
STATE OF INCORPORATION: DE
FISCAL YEAR END: 1031
FILING VALUES:
FORM TYPE: 10-K405
SEC ACT:
SEC FILE NUMBER: 000-22354
FILM NUMBER: 1517960
BUSINESS ADDRESS:
STREET 1: 6480 DOBBIN RD
CITY: COLUMBIA
STATE: MD
ZIP: 21045
BUSINESS PHONE: 4107400081
MAIL ADDRESS:
STREET 1: 6480 DOBBIN RD
CITY: COLUMBIA
STATE: MD
ZIP: 21045
</SEC-HEADER>
<DOCUMENT>
<TYPE>10-K405
<SEQUENCE>1
<FILENAME>w44736e10-k405.txt
<DESCRIPTION>ANNUAL REPORT
<TEXT>
<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-K
------------------------
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED OCTOBER 31, 2000
COMMISSION FILE NUMBER: 0-22354
------------------------
MARTEK BIOSCIENCES CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
------------------------
<TABLE>
<S> <C>
DELAWARE 52-1399362
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
</TABLE>
6480 DOBBIN ROAD, COLUMBIA, MARYLAND 21045
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
REGISTRANT'S TELEPHONE NUMBER INCLUDING AREA CODE: (410) 740-0081
------------------------
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
<TABLE>
<S> <C>
NONE NONE
(TITLE OF CLASS:) (NAME OF EACH EXCHANGE ON WHICH REGISTERED:)
</TABLE>
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 the
registrant is $250,191,545 (based upon a last sale price of $17.19 per share of
the Common Stock as reported on the NASDAQ National Market System on January 12,
2001. The number of shares of Common Stock outstanding as of January 12, 2001
was 17,808,919.
DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of Registrant's Annual Report to Stockholders for the
fiscal year ended October 31, 2000 are incorporated by reference into Part II of
this Report. Certain portions of the Registrant's Definitive Proxy Statement for
its 2001 Annual Meeting of Stockholders (which will be filed with the commission
within 120 days after the end of the Registrant's 2000 fiscal year) are
incorporated by reference into Part III of this Report.
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<PAGE> 2
PART I
ITEM I. BUSINESS.
OVERVIEW
Martek Biosciences Corporation ("We", "Martek" or "the Company") is a
leader in the development and commercialization of products derived from
microalgae. Our leading products are nutritional oils used as ingredients in
infant formula and foods, and as ingredients in, and encapsulated for use as,
dietary supplements. Our nutritional oils are comprised of fatty acid
components, primarily docosahexaenoic acid, commonly known as DHA, and
arachidonic acid, commonly known as ARA, which many researchers believe may
enhance mental and visual development in formula-fed infants and play a pivotal
role in brain function throughout life. Low levels of DHA in adults have also
been linked to a variety of health risks, including cardiovascular problems,
cancer, and various neurological and visual disorders, although the precise
relationship between DHA supplementation and these diseases has yet to be fully
assessed. We have licensed our nutritional oils to seven infant formula
manufacturers, representing over 60% of the estimated $6 billion worldwide
market for infant formula. Five of these licensees are marketing term infant
formula products containing our oils in over 70 countries. Additional
applications of our patented technology based upon microalgae include currently
marketed products and technologies that can be used by researchers as an aid in
drug discovery and diagnostics. We intend to continue to exploit the largely
untapped commercial opportunities of microalgae. To that end, we maintain a
library of more than 3,300 live microalgal species and a related database, which
we believe are among the largest such resources available anywhere in the world.
PRODUCTS AND PRODUCT CANDIDATES
NUTRITIONAL OILS FOR INFANT FORMULA, DIETARY SUPPLEMENTATION AND OTHER
APPLICATIONS. Certain microalgae and fungi produce large quantities of oils and
fats containing long-chain, polyunsaturated fatty acids, known as PUFA's, that
are important to human nutrition and health. We have identified a strain of
microalgae which produces an oil rich in DHA and have developed the means to
grow it by fermentation, with a relatively high oil and DHA content. In
addition, we have isolated and cultured a strain of fungus that produces large
amounts of ARA.
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. 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. For a nursing infant, it is provided via breast milk. DHA is generally
the most abundant omega-3 long-chain PUFA in human 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. Although these fatty
acids are naturally present in breast milk, they are not added to most infant
formulas today. Our blended oils containing DHA and ARA provide the closest
available match, with regard to the molecular form of these fatty acids, to the
DHA and ARA in human milk when added to infant formula.
Independent studies have indicated 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. This evidence is from retrospective studies comparing intelligence in
breast-fed versus formula-fed infants and from intervention studies in infants
using DHA/ARA-supplemented infant formula.
Although there are some studies which dispute the benefit of DHA and ARA in
the infant diet, the following are examples of some of the studies which have
found a benefit:
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<PAGE> 3
- A study reported by investigators at Baylor College of Medicine in
November, 2000, supported the importance of DHA supplementation during
breast-feeding by showing that breast-fed, 30 month-old children whose
mother took a DHA supplement for four months after delivery scored a mean
of eight points higher on a standard test of psychomotor development than
infants whose mother received a placebo.
- Research published from an NIH sponsored study in the March 2000 issue of
Developmental Medicine and Child Neurology showed a significant
improvement in mental development in term infants given a commercially
available infant formula supplemented with our DHA and ARA compared to
infants fed the same non-supplemented formula. In the double-blind study,
infants fed the diet supplemented with our oils showed, at 18 months of
age, a mean increase of 7 points on the Mental Development Index
("MDI")of the Bayley Scales of Infant Development II. Researchers
reported that "these data support a long-term cognitive advantage of
infant dietary DHA supply during the first 4 months of life. The
significant correlations...support the hypothesis that early dietary
supply of DHA was a significant determinant of improved performance on
the MDI." Although there are different sources of DHA and ARA, these
findings re-affirmed the beneficial effects of adding Martek's pure
source of pre-formed DHA and ARA to infant formulas at the levels
evaluated by the researchers.
- 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 our 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 recommended the need to "develop improved infant formulas with
properties more similar to those of human breast milk that may lead to
improved developmental outcomes in children." The study indicated that
breast-fed babies have a 38% greater likelihood of completing their high
school matriculation than formula-fed babies even after allowances were
made for confounding social, familial and perinatal factors. Although the
study could not conclude that DHA provided to the breast-fed infants from
their mother's milk was the sole cause of the improved achievement
scores, the authors pointed out recent controlled intervention studies
demonstrating similar outcomes in infants with DHA-supplemented formulas
and concluded that:
". . . the weight of evidence clearly favors the view that exposure
to breast-feeding is associated with small but detectable increases
in childhood cognitive ability and educational achievement, with it
being likely that these increases reflect the effects of long chain
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<PAGE> 4
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 United Kingdom, 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, we introduced Neuromins(R) PL, which is a DHA dietary supplement
specifically designed for pregnant and lactating women.
Investigators at universities around the world and at other research
centers, such as the National Institutes of Health, have observed a relationship
between low levels of DHA and a variety of health risks, including increased
cardiovascular problems, cystic fibrosis, cancer, and various neurological and
visual disorders. We are currently trying to establish what contribution, if
any, supplementation with our oils will make in addressing these problems. We
have recently begun sponsoring studies to further investigate the potential
benefit of DHA supplementation on cardiovascular health and breast cancer, and
we, as well as others, are conducting research regarding the impact of DHA
supplementation on cystic fibrosis and certain visual and neurological
disorders.
We are also, along with our customers, developing other DHA delivery
methods to address these potential new markets, including powders, an emulsion,
use as a food ingredient, and use as a pharmaceutical.
We believe that our 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 do not have the odor, stability, taste characteristics, or
potential impurities that may limit the usefulness of fish oil;
- 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., eicosapentaenoic acid ("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
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<PAGE> 5
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 strict regulatory scrutiny.
We have received numerous patents protecting our nutritional products
technology, including the fermentation methods of producing our DHA and ARA
oils, as well as the blending of DHA and ARA oils for use in infant formula.
In 1994, we received a U.S. patent covering certain blends of a microbial
oil enriched with DHA and a microbial oil enriched with ARA, as well as the use
of such blends in infant formulas. In 1995, we 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 we received two additional U.S.
patents covering our 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 our
method of producing DHA oil. The second patent clarifies that our patent
coverage includes the blending, in infant formula and nutritional supplements,
of microbially derived ARA oil with low 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 our 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 our
DHA-rich algal biomass. DHA-rich algal biomass is the raw product of the DHA
fermentation process and represents an inexpensive source of DHA that may
potentially be a low cost product itself. We also have been awarded a number of
foreign patents covering various aspects of our nutritional oils, including
European patents covering our DHA and ARA-rich oils.
We first realized revenues from license fees related to our nutritional
oils and sale of sample quantities of these oils in 1992. In late 1994, one of
our licensees launched the first pre-term infant formula containing our oils in
Europe, and in 1995, we recognized our first royalty revenue from sales of this
product. Additional product introductions have continued through 2000.
Currently, five of our infant formula licensees are marketing term infant
formula products containing our oils in fourteen countries and pre-term infant
formula containing the our oils in over 70 countries worldwide. In the latter
part of 1996, we initiated sales of our first consumer products, Neuromins(R), a
DHA dietary supplement, and Neuromins(R) PL, a DHA dietary supplement for
pregnant and lactating women. Since then, we have expanded distribution of our
Neuromins(R) DHA. We have 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, Eckerd's, Lucky's, Savon and Vitamin Shoppe stores. Neuromins(R) DHA is
also sold through mail order distributors and a multi-level marketer.
In 1999, we began selling bulk DHA oil and powder for additional
applications, including inclusion in children's chewables and nutritional drinks
and adult combination supplements which not only include our DHA but other
ingredients such as Gingko and St. Johns Wort. We are continuing to explore
additional applications for DHA, including use in pharmaceuticals, functional
foods and animal feeds. Our sales and royalties on nutritional oils for infant
formula were approximately $900,000 in 1998, $1.4 million in 1999, and $5
million in 2000. In addition, our sales of nutritional oils for adult
supplements and food additives totaled approximately $1.5 million in each of
1998 and 1999, and $2 million in 2000.
PRODUCTS FOR DRUG DISCOVERY. Structure-based drug discovery has recently
emerged to improve the efficiency of new pharmaceutical development. Many drugs
work by mimicking the interaction between two molecules, a ligand and a
receptor. Rather than rely solely on the chance 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
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<PAGE> 6
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.
We have developed a series of products which enable researchers to
determine the 3-D structures of certain molecules of pharmaceutical interest.
Some of these products are used as growth media which allow for the generation
of proteins incorporating stable isotopes. Others can be used to make
isotopically labeled DNA and RNA. The presence of stable isotopes allows for the
determination of the 3-D structure of these molecules using nuclear magnetic
resonance ("NMR") technology. Proteins incorporating stable isotopes such as
carbon-13 and/or nitrogen-15 have been obtained by growing micro-organisms, such
as bacteria, yeast, insect cells or mammalian cells on our 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.
We market 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.
Our 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., human proteins with sugar
attached) frequently do not crystallize. Celtone M, our isotopically
labeled mammalian cell growth medium, has enabled determination of the 3-D
structures of glycosylated human proteins through NMR. We believe that
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. We were issued
U.S. patents for the composition of matter and use of Celtone M in 1995,
1997 and 1998, and currently have an ongoing royalty-bearing license
agreement with Genetics Institute regarding the use of Celtone (R)M.
Celtone(R) -- Our 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 deuterium, carbon-13 and nitrogen-15. In June 1994, we were
issued a U.S. patent for the composition of matter and method for producing
our Celtone medium.
Glucose -- Carbon-13-glucose is the most widely used reagent for
isotopically labeling bacterial proteins. Glucose is available in
combinations of deuterium and carbon-13.
Nucleic Acids -- We sell isotopically labeled nucleic acid
derivatives. These are available labeled with any combination of deuterium,
carbon-13 and nitrogen-15 and are used to solve the structures of DNA and
RNA, especially when bound to proteins.
Fast-Track Technology - We are 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. In 2000, we were issued a composition of matter patent on
our "Fast Track" technology.
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Our sales of isotope products for drug discovery totaled less than $2
million in each of 1998, 1999 and 2000.
DIAGNOSTICS. Our 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. We have identified, isolated
and now market powerful fluorescent dyes (phycobiliproteins) from various algae
for use in applications that require high sensitivity. 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. PBXL(TM) dyes are large, intensely fluorescent combinations
of phycobiliproteins that provide extreme sensitivity with ease of use that is
unmatched by other common dyes or detection systems. 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:
- - the detection of receptors or small molecules at 100-fold lower
concentrations;
- - detection with the same level of sensitivity but in 100-fold smaller
volumes; and
- - detection with the same level of sensitivity but using much lower cost
equipment.
Our fluorescent products include the following:
Phycobiliproteins -- Classical direct fluorescent detection dyes, which we
have produced for several years and fill an existing market in protein detection
and flow cytometry. In 1999, we introduced our own brand of improved fluorescent
dyes (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 permeabilized cells and are used for internal
detection of markers in cells which could be used for discovering diseases, and
in flow cytometry and Fluorescence In Situ Hybridization (FISH). Different
CryptoFluor(TM) dyes have different fluorescence emission wavelengths and,
therefore, provide the possibility of multi-colored 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. Our 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, we began beta-testing PBXL-based Western blot
detection kits and our proprietary XLExpress(TM) Rapid Labeling system which
allows individual researchers to label their own molecules with the PBXL dye of
their choice in a simple and convenient format.
In 1999, our PBXL(TM) dyes also showed potential utility in gene detection
and drug discovery formats. We have exclusively in-licensed the rights to the
PBXL(TM) technology based on a U.S. Patent issued in 1997 and several pending
applications. Our CryptoFluor(TM) dyes have the advantage of smaller size
compared to the standard phycobiliproteins, and provide additional colors for
multi-color tests. In 1998, we began marketing some of our fluorescent detection
products through partnerships with Intergen(R) Company and Kirkegaard and Perry
Laboratories. In 1999, we began distributing the PBXL(TM) based products through
Chemdex(R),an internet supplier of scientific products. Our sales of diagnostic
products was less than $200,000 in each of 1998, 1999, and 2000.
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ALGAL GENOMICS. Microalgae are microplants and, as such, have many
biochemical pathways and genes in common with higher plants. They offer the
further advantage of having the genetic material required for the production of
certain compounds, DHA for example, that are not present in higher plants.
Consequently, we believe 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 our
scientists. Gene sequencing from several different and distinct algal species is
also underway and many new genes have been identified from several different
species.
We have combined our understanding of heterotrophic (without light) and
autotrophic (with light) growth of microalgae with our proprietary technology in
microalgal transformation to convert an otherwise autotrophic species of
microalgae into one capable of growing heterotrophically. We believe that this
represents the first time such a transformation has ever been made. Our 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 us 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. To date, we have received no revenues from our algal
genomics technology.
TECHNOLOGY
We apply our microalgal expertise and culturing technology to our 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 our products:
- microalgae are a genetically diverse kingdom 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 our nutritional oils,
and highly sensitive fluorescent diagnostic products;
- microalgae are essentially "microplants" which use simple substances such
as carbon dioxide, water and nitrate to grow. When we substitute 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 our drug design
products; and
- microalgae comprise a large, substantially unexplored group of organisms,
and thus provide a virtually untapped genetic resource that can be
screened for a variety of new products, including pharmaceuticals.
- ---------------
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.
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.
SureLight APC(TM) is a trademark of the Company.
XLExpress(TM) is a trademark of the Company.
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Our 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), we have
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.
Our product development process involves the following primary steps:
Identification of Appropriate Microalgae. We select specific
microalgae to produce potentially marketable compounds through a
comprehensive process involving in-house algal expertise and experience,
searches of scientific literature and our proprietary microalgal database,
biochemical analyses, and preliminary product-yield experiments. We
currently maintain 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 our
proprietary microalgal database, which contains biochemical and
physiological data on the strains in the collection. We believe that our
microalgal collection and associated database are among the largest such
resources available in the world. Coupled with our 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. We apply standard
industrial microbiological techniques to microalgae and manipulate
culturing conditions (such as light intensity, temperature and growth
medium composition) to optimize productivity. After selecting strains with
the best yields and growth characteristics, we enhance their production
through mutagenesis and natural selection under biochemical stress. We have
not used genetic engineering techniques to develop any of our 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. We have 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 our 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 our technology for the heterotrophic growth of
DHA-producing microalgae are the subject of several U.S. patents. Similar
patents have issued in certain countries and are pending in certain other
countries around the world.
For many other product applications, we use our 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 our photobioreactors, we are 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
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our drug discovery products, we are 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 our
photobioreactors using carbon dioxide, water and/or certain
nitrogen-containing compounds containing predominantly heavier stable
isotopes, carbon-13, deuterium and nitrogen-15. Use of our photobioreactors
also provides us 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. Our microalgal method of
stable isotope incorporation is significantly less expensive than
alternative microbial or chemical synthesis in many instances.
We use 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.
COLLABORATIVE AND LICENSING AGREEMENTS
We have entered into licensing agreements with seven infant formula
manufacturers, including Mead Johnson & Company (a subsidiary of Bristol-Myers
Squibb Company), American Home Products (Wyeth-Ayerst division), Abbott
Laboratories, Numico, Maabarot and Novartis, that together comprise over 60% of
the worldwide infant formula market. We have one additional licensing agreement
with an infant formula manufacturer and and have contractually agreed not to
disclose the licensee's name. The undisclosed infant formula manufacturer has
less than 3% of the world-wide market for infant formula and has not purchased
products from us to date. Under these agreements, we received up-front licensing
fees and are entitled to royalties based on sales of infant formula containing
our nutritional oils. These licensees are not required to include our oils in
their formulas under the terms of these agreements, and there can be no
assurance that such infant formula manufacturers will include our oils in any or
all of their product lines. Each of these royalty-bearing license agreements
calls for us to provide to the licensees our nutritional oils at a transfer
price and receive a royalty from the licensee upon the final sale of infant
formula containing the oils. Licensees have the right to buy other sources of
DHA and ARA oils provided they still make royalty payments to us upon the sale
of the final infant formula product containing the oils. The license agreements
have terms exceeding 20 years, contain no future funding commitments on our part
or the part of the licensees, and may be terminated by the licensee upon proper
notification. 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 our current license agreements, our licensees generally are obligated to
indemnify us against product liability claims relating to our nutritional oils
unless they are related to manufacturing impurities in the oils. In addition to
compensation payable to us under these agreements, we expect to receive transfer
payments to the extent we supply nutritional oils to our licensees.
The infant formula industry represents over $2 billion in annual wholesale
sales in the United States and approximately $6 billion worldwide. Our current
licensees cover over 60% of the worldwide infant formula market. To date,
however, their introductions of products containing our oils have penetrated
less than 2% into this market. We are actively pursuing licenses with other
infant formula producers throughout the world to continue penetrating these
markets. We anticipate that 100% penetration into the worldwide infant formula
market could bring us in excess of $300 million in annual revenues. Our sales
and royalties from infant formula licensees were approximately $900,000 in 1998,
$1.4 million in 1999, and $5 million in 2000. American Home Products, an infant
formula licensee, accounted for approximately 12% of our total product sales and
royalties in 1998, 18% in 1999 and 33% in 2000.
Under the terms of several of our current license agreements, we are
prohibited from granting a license to any party for the inclusion of our
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nutritional oils in infant formula with payment terms or royalty rates that are
more favorable to such licensee than those provided in our agreements with our
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 us 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 1993, we entered into an agreement with Columbia University pursuant to
which Columbia University will try to determine the structure of the human
chorionic gonadotropin, known as hCG, protein using Celtone(R) M. The hCG
molecule affects fertility by controlling the attachment of the egg to the
uterus. We will share any commercial proceeds resulting from this joint venture
with Columbia University. Our 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, we initiated commercialization of Celtone(R) M through a license agreement
with Genetics Institute under which we will receive royalties on sales of
products resulting from Genetics Institute's work with Celtone(R) M. In October
1994, we 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. We will provide funding
and pay royalties for certain proprietary products arising from this research.
In January 1997, we entered into an agreement with DSM Food Specialties
("DSM", formerly Royal Gist-Brocades B.V.) under which they became our exclusive
contract supplier for nutritional oils containing ARA. DSM is a multi-billion
dollar international group of companies that is active worldwide in the fields
of life science, product performance materials and chemicals. As part of this
agreement, we recognized approximately $1.1. million in license fee revenue in
1998 and will receive guaranteed supplies of oil rich in ARA on advantageous
terms. At October 31, 2000 we had outstanding inventory purchase commitments to
DSM totaling approximately $4 million.
We market certain of our 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.
We have also entered into various additional collaborative research and
license agreements. Under these agreements, we are required to fund
research or to collaborate on the development of potential products. Existing
agreements have committed us to fund up to approximately $100,000 for future
development activities. Certain of these agreements also commit us to make
payments upon the occurrence of certain milestones and pay royalties upon the
sale of certain products resulting from such collaborations.
COMMERCIAL AND U.S. GOVERNMENT RESEARCH AND
DEVELOPMENT CONTRACTS
Our 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, we plan to continue applying for government contracts and
soliciting commercial research and development contracts on a
selective basis when such contracts involve research that may bring us future
commercial benefit.
As a result of us receiving Small Business Innovation Research grants, the
U.S. Government will have certain rights (the "Government Rights")in
the technology that we developed with the funding. These rights include a
non-exclusive, paid-up, worldwide license to practice or have practiced such
inventions
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for any governmental purpose. In addition, the government has the right to
require us to grant licenses which may be exclusive under any of such inventions
to a third-party if the government determines that:
- - adequate steps have not been taken to commercialize such inventions;
- - such action is necessary to meet public health or safety needs; or
- - 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
we fail to disclose the invention and elect title within specified time limits.
In addition, the government may acquire title in any country in which we fail to
file a patent application within specified time limits. Federal law requires any
licensor of an invention that was partially funded by federal grants to obtain a
covenant from any exclusive licensee to manufacture products using the invention
substantially in the United States. In addition, our 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. We believe that cost disallowances, if any, arising from such audits
of costs charged to government contracts through October 31, 2000 will not be
material.
MANUFACTURING
We manufacture oils rich in DHA at our fermentation facility located in
Winchester, Kentucky, by conventional fermentation processes. We acquired the
Winchester facility in 1995 from a subsidiary of ACX Technologies, Inc. The oils
that we produce in this facility have been certified kosher by the Orthodox
Union and certified Halal by the Islamic Food and Nutrition Council of America.
We are currently in the process of optimizing the production of our nutritional
oils, and believe that a continued optimization effort will be required for at
least the next two years. In 1996, we constructed a "state of the art" oil
processing plant at our Winchester facility which was put into production in
early 1997. We have also entered into an agreement with a third party, DSM, to
produce our ARA oil, and may enter into additional production agreements with
other third parties if demand for our oil requires such additional output. We
believe that, along with DSM, we can increase our production to meet
approximately 20% to 30% of the world-wide infant formula market demand for DHA
and ARA-rich oils. Our ability, however, to maintain commercial production at
these levels at our plant has not yet been successfully tested. As a precaution,
we have developed plans to expand our existing facilities to accommodate
increased production. In order to double our capacity at our current facility,
it would cost as much as $20 million, which would require us to raise
significant amounts of capital. We have also conducted DHA production trials
with third party manufacturers. However, we do not currently have a third party
manufacturing agreement in place to supply us with DHA-containing oil. The
commercial success of our nutritional oils will depend, in part, on our ability
to manufacture these oils or have them manufactured at a commercially acceptable
cost. There can be no assurance that we will be able to successfully optimize
production of our nutritional oils, or continue to comply with applicable
regulatory requirements (including Good Manufacturing Practices ("GMP")
requirements) or that we will be able to successfully obtain sufficient
facilities to meet the future demand for the oils. Under the terms of several of
our infant formula licenses, our licensees may elect to manufacture these oils
themselves. We are currently unaware of any of our licensees producing our oils
or preparing to produce our oils, and estimate that it would take a licensee at
least one year or more to develop their own process of making our oils.
SOURCES OF SUPPLY
Our raw material suppliers for production of nutritional oils include major
chemical companies and food ingredient suppliers. We have identified
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several sources for each of our major ingredients and have never had problems
obtaining adequate quantities of any of these materials. Crude ARA oil is
provided to us by DSM, a third-party processor. DSM, through a fermentation
process, produces a fungal biomass rich in ARA oil, which is then sent to a
sub-contractor for extraction of the oil. After extraction, the crude ARA oil is
sent to our Winchester, Kentucky, production facility for final processing. If
DSM fails to supply us with required amounts under the contract, we would not be
able to meet our customers' demands. In this case, we would either have to
manufacture the ARA containing oil at our plant, which would reduce our DHA
containing oil production capacity, or enter into other third party manufacturer
supply agreements. Although we feel that DSM can fill our ARA needs for at least
the next several years, there is no guarantee the DSM will be able to adequately
supply all of our ARA needs in the long-term. Additional capacity may need to be
obtained, either within DSM or at another facility.
For us to produce many of our products for drug discovery, we require
carbon-13 gas. The market supply of carbon-13 gas is very limited, and several
of the large suppliers of this gas also compete with us in the sale of carbon-13
labeled isotope products. In an effort to alleviate these problems, we have
focused recent efforts on producing more refined products that have higher
market values and do not require as much carbon-13 gas consumption to produce.
Additionally, we have limited the manufacturing and selling of less refined
products with lower market values that utilize high levels of carbon-13 gas.
RESEARCH AND DEVELOPMENT
Research and development expenses, including contract-related costs, were
$9,787,000 in 1998, $10,309,000 in 1999, and $12,517,000 in 2000.
Contract-related research and development costs included in these amounts were
$446,000 in 1998, $464,000 in 1999, and $527,000 in 2000. Consistent with our
plans, nutritional oils development costs accounted for over 75% of all research
and development costs, as a result of our continued development efforts to
refine our production process and lower our DHA production cost. Our research
and development costs may increase in the future as we evaluate new technologies
and continue efforts to optimize the efficiency of our large scale fermentation
and oil extraction processes.
SALES AND MARKETING
We currently market our products both directly to end users and through
distributors. We market our nutritional oils for use in infant formula directly
to infant formula manufacturers. We market our Neuromins(R) DHA dietary
supplements primarily through distributors and directly to end users through our
toll free number (1-800-662-6339). We have 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 our 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, Eckerd's, Lucky's, Savon
and Vitamin Shoppe. 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. We have continued our own
DHA awareness campaign in an effort to support the marketing efforts of our
infant formula licensees and capsule distributors. This campaign will continue
and could intensify in 2001. There can be no assurance that we will be able to
successfully market our nutritional oils products for use in infant formula or
as dietary supplements.
We market our products for drug discovery directly to large pharmaceutical
companies and research institutions such as the National Institutes of Health.
We market our diagnostic products directly to large pharmaceutical and research
institutions and through distribution agreements with Intergen (R) Company and
Kirkegaard & Perry Laboratories.
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COMPETITION
The health care and biological sciences industries are characterized by
rapidly evolving technology and intense competition. Our competitors include
major pharmaceutical, chemical and specialized biotechnology companies, many of
which have financial, technical and marketing resources significantly greater
than us. 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 our products and technologies. 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 our products on their
own or through joint ventures. The existence of products and technologies of
which we are not aware, or products and technologies that may be developed in
the future, may adversely affect the marketability of products and technologies
that we have developed.
The development of a DHA-containing fish oil provides an alternative to our
DHA oil for infant formula applications. Though it is a lower cost product
relative to our DHA, fish oil has odor, stability and taste characteristics that
may limit the usefulness of the oil in food products. We are also aware of the
development of microencapsulated 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 non-microencapsulated fish oil is significantly less costly than
our DHA oil, fish oil will present a substantial competitive threat to our
Neuromins(R) DHA. Published reports, however, have cited a number of fish oils
as containing chemical toxins that are not present in our oils. In addition, we
believe that the combination of either fish oil or microencapsulated fish oil
with a microbial source of ARA for use in infant formula would likely infringe
claims of our patents. We are also aware that OmegaTech, Inc., an early stage
company, is able to produce DHA from a strain of algae containing DHA and is
currently marketing this product as an adult nutritional supplement. We are
currently unable to evaluate the degree of competitive threat that this fungal
source of DHA will present to our DHA oil in the future.
We are also aware of several large companies promoting ARA oil. We are
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
our 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 when 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. We believe that it is more
expensive to produce DHA and ARA using this source than our 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 far in excess of that found in human milk.
There may be other competitive sources of DHA and ARA of which we are not
aware. The fact that many of the companies mentioned above are larger, more
experienced and better capitalized than us raises the significant risk that
these companies may be able to use their resources to develop cheaper sources of
DHA and ARA in the future than our current technology permits.
Sales of certain of our isotope products for drug discovery, especially our
carbon-13 labeled glucose (a non-proprietary product), are the subject of
intense competition. Our primary competitors for
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carbon-13 glucose in the U.S. 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. We are also aware of Silantes, a German
company, that is currently marketing isotope products in Europe. In an effort to
compete better with these companies in the reagents market, we have focused
recent efforts on producing new, carbon-13 labeled media that have demonstrated
better performance and competitive pricing then carbon-13 labeled glucose. We
expect that competition in the carbon-13 glucose market will continue to remain
strong in 2001, and as a result, may limit the manufacturing and selling of
these products in favor of higher performing media.
In the area of diagnostics for drug discovery, our major competitors
consist of life science reagent suppliers such as Amersham Pharmacia, Molecular
Probes, Prozyme and Cyanotech.
Our products for drug discovery compete primarily on the basis of product
efficacy, safety, patient convenience, reliability, price and proprietary
position.
Our competitive position will also depend on our 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
Our success is dependent in part 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, where appropriate, and
through trade secrets in other cases. Additionally, in certain cases, we rely on
the licenses of patents and technology of third parties. We have obtained
approximately 25 U.S. patents, covering various aspects of our technology, which
will expire on various dates between 2007 and 2017. We have filed, and intend to
file, applications for additional patents covering both our products and
processes as appropriate. There can be no assurance that:
- - any patent applications filed by, assigned to, or licensed to us will be
granted;
- - we will develop additional products that are patentable;
- - any patents issued to or licensed by us will provide us with any
competitive advantages or adequate protection for inventions;
- - any patents issued to or licensed by us will not be challenged, invalidated
or circumvented by others; or
- - 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 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 are both costly and time consuming,
even if the outcome is ultimately in our favor. An adverse outcome could subject
us to significant liabilities to third parties, require disputed rights to be
licensed from third parties or require us to cease selling the affected
products.
We have been issued 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 and 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
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to predict, however, whether these patents will be challenged, invalidated or
circumvented by others. OmegaTech, Inc., Monsanto Corporation, Aventis S.A. and
Nagase & Co. Ltd. are challenging our European patent covering our
DHA-containing oils. At a hearing in October, 2000, a division of the European
Patent Office revoked our patent on the grounds that it is too broad. We
immediately appealed this ruling, and as a result, our patent was reinstated and
it will remain in effect during the appeal process, which may take up to two
years.
If we fail to obtain maintain patent protection for our nutritional oils,
it would have a material adverse effect on our ability to gain a competitive
advantage for these oils and may have a material adverse effect on our results
of operations, particularly future sales of our nutritional oils, future
royalties on sales of infant formula containing these oils or license fees
related thereto. In particular, if we fail to maintain patent protection, it
would permit our competitors to produce products that would be directly
competitive with our nutritional oils using similar or identical processes, and
it is possible that our current infant formula manufacturers under license or
those 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.
Our other patents cover our photobioreactor system for culturing microalgae
and certain aspects of our breath test technology; our Celtone(R) and Celtone(R)
M technology, and our "Fast Track" technology.
We also rely on trade secrets and proprietary know-how, which we seek to
protect in part by confidentiality agreements with our collaborators, employees
and consultants. There can be no assurance that these agreements will not be
breached, that we will have adequate remedies for any such breach or that our
trade secrets will not otherwise become known or be independently developed by
competitors.
GOVERNMENT REGULATION AND PRODUCT TESTING
Our products and our manufacturing and research activities are subject to
varying degrees of regulation by a number of state and federal regulatory
authorities in the United States, including the FDA pursuant to the Federal
Food, Drug and Cosmetic Act (the "FDC Act"). The products developed by us are
subject to potential regulation by FDA as food ingredients, dietary supplements,
drugs and/or medical devices. The regulatory status of the product is largely
determined by its intended use.
Drugs and medical devices generally may not be marketed without first
obtaining FDA authorization to do so. New infant formulas also are subject to
premarket notification requirements. Although there are no premarket
authorization requirements for whole foods per se, there are premarket approval
requirements for food additives. Specifically exempt from the food additive
definition and, therefore, the premarket approval requirements, are generally
recognized as safe ("GRAS") food ingredients. Dietary supplements for the most
part are not subject to premarket authorization requirements, although there is
a premarket notification requirement for certain new dietary ingredients that
were not marketed as dietary supplements prior to October 1994. FDA has
established detailed good manufacturing practice (GMP), labeling and other
requirements for drugs, medical devices, infant formulas, foods and dietary
supplements. The requirements for drugs, medical devices and infant formulas
generally are much more stringent than the requirements for foods and dietary
supplements.
Our infant formula licensees are responsible for obtaining the requisite
regulatory clearances to market their products containing our oils. Sales of our
products outside the United States are subject to foreign regulatory
requirements that may vary widely from country to country. Five of our infant
formula licensees have obtained the regulatory approval, where required, to sell
term or pre-term infant formula supplemented with our oils in over 70 countries.
No company has yet launched an infant formula containing our oils in the United
States.
We believe that our DHA and ARA are GRAS when used as ingredients in infant
formulas and, as such, are exempt from the premarket approval requirements for
food
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additives. In February 2000, we filed a GRAS Notification with the FDA for the
use of our DHA and ARA in infant formula. We believe that the FDA review of the
GRAS notification should ultimately have a favorable outcome, but this review
likely will not be completed for at least another three to six months. In
addition, each of our licensees must file an infant formula premarket
notification and meet the statutory and regulatory requirements established for
such notifications before launching an infant formula in the United States that
contains our oils. There can be no assurance that:
- - the FDA will take the position that DHA and ARA are GRAS ingredients and,
therefore, exempt from the definition of food additives;
- - the FDA will complete its review of the GRAS notification in the next three
to six months;
- - a licensee will pursue the necessary regulatory steps to market an infant
formula containing our DHA and ARA in the U.S.;
- - a licensee's infant formula premarket notification will provide sufficient
data to support the marketing of an infant formula containing our DHA and
ARA; or
- - the regulatory process will not involve significantly longer delays that
may materially and adversely affect the timing and introduction of infant
formulas containing our products.
The Federal Dietary Supplement Health and Education Act of 1994
("DSHEA") regulates the use and marketing of 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. We believe that our DHA and ARA are not subject to
premarket notification requirements when marketed for use as dietary
supplements. There can be no assurance that the FDA would agree that a premarket
notification is not required or that we will be able to comply with the
requirements of DSHEA or any regulations that the FDA may promulgate thereunder.
Our 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 Martek or our licensees or
collaborators would be able to develop the extensive safety and efficacy data
needed to support such FDA premarket authorizations 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 our products.
Additionally, there is no assurance that Martek or our 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.
Many of our products are in research or development phases. We cannot
predict all of the regulatory requirements or issues that may apply to or arise
in connection with our products. Changes in existing laws, regulations or
policies and the adoption of new laws, regulations or policies could prevent us
or our licensees or collaborators from complying with such requirements.
Due to the cost and time commitment associated with the FDA regulatory
process, as well as our lack of experience in obtaining FDA regulatory
clearances, we will decide on a product-by-product basis whether to handle
relevant clearance and other requirements independently or to assign such
responsibilities to our licensees or future collaborative partners. There can be
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<PAGE> 18
no assurance that Martek or our 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 our
business, financial condition and results of operations.
In connection with our decision to manufacture certain of our products, we
will be required to adhere to applicable current GMP requirements as required by
the FDA. GMP regulations specify component and product testing standards,
control quality assurance requirements, and records and other documentation
controls. The GMP requirements for foods, infant formulas, drugs and medical
devices vary widely. As the manufacturer of DHA and ARA that are marketed as
dietary supplements and that presumably one day will be sold as ingredients in
infant formulas sold in the United States, we are subject to GMP and various
other requirements applicable to infant formulas and dietary supplements. There
can be 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. 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 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, and, in the most egregious
cases, criminal sanctions.
EMPLOYEES
As of October 31, 2000, we had 134 full-time employees, of whom 17 had
Ph.D.s. Approximately 49 employees are engaged in research and development and
contract related research and development activities, 56 are engaged in
production or production development related activities and 29 are in
administrative, business development, and sales and marketing positions. We
consider relations with our employees to be good. None of our employees are
covered by a collective bargaining agreement.
DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information concerning our directors contained under the captions
"Nominees for Election as a Director for Terms Expiring in 2004" 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 our 2001 Proxy Statement is hereby incorporated herein
by reference.
Our executive officers are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Henry Linsert, Jr. 60 Chairman, Chief Executive Officer and Director
Richard J. Radmer, Ph.D. 58 President, Chief Scientific Officer and
Director
Thomas C. Fisher 54 Senior Vice President, Operations
David J. Kyle, Ph.D. 47 Senior Vice President, Research and Development
Jerome C. Keller 58 Senior Vice President, Sales & Marketing
George P. Barker 61 Senior Vice President,
General Counsel and Secretary
Peter L. Buzy 41 Chief Financial Officer and Treasurer
</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., a
18
<PAGE> 19
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.
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.
George P. Barker joined Martek in June 2000 as Senior Vice President,
General Counsel and Secretary. Prior to joining Martek, Mr. Barker was Senior
Vice President of Howard County General Hospital, Inc. - a member of Johns
Hopkins Medicine and its affiliate Howard County Health Services, Inc. In these
positions, Mr. Barker had both legal and business responsibilities. From 1982 to
1991, Mr. Barker was Senior Vice President for Development, General Counsel and
Secretary of The Enterprise Development Company, a real estate development
company located in Columbia, Maryland. Prior to 1982, Mr. Barker held positions
as a partner of a Baltimore, Maryland, law firm and Associate General Counsel
and Assistant Secretary of The Rouse Company, a real estate development company
also located in Columbia, Maryland. Mr. Barker has an A.B. degree from Princeton
University and a LL.B. degree from Columbia University.
Peter L. Buzy joined Martek in March 1998 as Chief Financial Officer. Prior
to joining Martek, Mr. Buzy spent 13 years with the accounting 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 to 1996, and as such has played a vital
role in advising the
19
<PAGE> 20
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.
ITEM 2. PROPERTIES.
We lease 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. Our lease expires in 2004,
but we have an option to extend the lease through 2009 at the expiration of the
initial lease.
We produce oils rich in DHA and ARA at our fermentation facility located in
Winchester, Kentucky, using our 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, we have 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 our currently outstanding term loan.
ITEM 3. LEGAL PROCEEDINGS.
OmegaTech, Inc., Monsanto Corporation, Aventis S.A. and Nagase & Co. Ltd.
are challenging our European patent covering our DHA-containing oils. At a
hearing in October, 2000, a division of the European Patent Office revoked our
patent on the grounds that it is too broad. We immediately appealed this
ruling, and as a result, our patent was reinstated and it will remain in effect
during the appeal process, which may take up to two years.
We are 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 2000.
20
<PAGE> 21
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 our Annual
Report to Stockholders for the fiscal year ended October 31, 2000, is included
herein as Exhibit 13.01, and those portions are incorporated by reference into
Part II of this report. We have not declared any cash dividends during the
two-year period ending October 31, 2000.
ITEM 6. SELECTED FINANCIAL DATA.
The information set forth under the caption "Selected Financial Data" on
page 6 of our Annual Report to Stockholders for the fiscal year ended October
31, 2000, 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, 2000, 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 2000 Financial Statements and Report of Independent Auditors
by Ernst & Young LLP set forth on pages 11 through 20 of our Annual Report to
Stockholders for the fiscal year ended October 31, 2000, 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> 22
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Information relating to our Directors and Executive Officers 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 our
2001 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 our 2001 Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
None.
22
<PAGE> 23
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a)(1) Financial Statements
The following Financial Statements and Report of Independent Auditors set
forth on the pages indicated in our Annual Report to Stockholders for the year
ended October 31, 2000 are included in Exhibit 13.01 to this report and are
incorporated into Item 8 of this Report:
<TABLE>
Page(s)in Company's Annual
Report to Stockholders
----------------------
<S> <C>
Balance Sheets as of October 31, 2000 and 1999 11
Statements of Operations for the Years Ended 12
October 31, 2000, 1999 and 1998
Statements of Stockholders' Equity for the
Years Ended October 31, 2000, 1999 and 1998 13
Statements of Cash Flows for the Years Ended
October 31, 2000, 1999 and 1998 14
Notes to Financial Statements 15 - 20
Report of Independent Auditors 20
</TABLE>
(a)(2) Financial Statement Schedules
Financial statement schedules have been omitted since they are either not
required, not applicable, or the information is otherwise included in the
financial statements.
(a)(3) Exhibits
<TABLE>
<S> <C>
3.01 Revised Restated Certificate of Incorporation of Registrant.
3.02 Amendment to the Restated Certificate of Incorporation,
effective March 14, 1995 (filed as Exhibit 3.1 to the
Company's Registration Statement on Form S-3, File No.
33-89760, filed March 15, 1995, and incorporated by
reference herein).
3.03 Certificate of Designation, Preferences and Rights of Series
A Junior Participating Preferred Stock (filed as Exhibit 4
to the Company's Form 8-K, File No. 0-22354, filed January
29, 1996, and incorporated by reference herein).
3.04 Amended By-Laws of Registrant.
3.05 Amendment to By-Laws, effective March 14, 1995 (filed as
Exhibit 3.2 to the Company's Registration Statement on
Form S-3, File No. 33-89760, filed March 15, 1995, and
incorporated by reference herein).
4.01 Specimen Stock Certificate for Common Stock.
4.02 Common Stock and Warrant Purchase Agreements, dated May 19,
June 1, June 6, and June 8, 1995, by and among the
Company and the Selling Stockholders (filed as Exhibit
4.2 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
</TABLE>
23
<PAGE> 24
<TABLE>
<S> <C>
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 Bestuurcentrum Der Verenigde Bedrijven Nutricia
B.V.*
10.14A Exhibits to September 10, 1992 License Agreement between the
Company and Bestuurcentrum Der Verenigde Bedrijven Nutricia
B.V.*
10.15 License Agreement, dated October 28, 1992, between the
Company and Mead Johnson & Company.*
10.15A Exhibits to October 28, 1992 License Agreement between the
Company and Mead Johnson & Company.*
10.16 License Agreement, dated January 28, 1993 between the
Company and American Home Products Corporation
represented by the Wyeth-Ayerst Division (Domestic
Version) and American Home Products Corporation
represented by its agent Wyeth-Ayerst International
(International Version).*
10.16A Exhibits to January 28, 1993 License Agreements between
the Company and American Home Products Corporation
represented by the Wyeth-Ayerst Division (Domestic
Version) and American Home Products Corporation
represented by its agent Wyeth-Ayerst International
(International Version).*
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
</TABLE>
24
<PAGE> 25
<TABLE>
<S> <C>
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. 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).
10.30 License Agreement, dated March 31, 2000 between the
Company and Abbott Laboratories * (filed as exhibit
10.30 to the Company's quarterly report on Form 10-Q for
the quarter ended April 30, 2000, and incorporated by
reference herein).
10.31 Employment Agreement, dated June 1, 2000 between the
Company and George P. Barker.**
13.01 Portions of the Annual Report to Stockholders of the Company
for the year ended October 31, 2000.**
23.01 Consent of Ernst & Young LLP, Independent Auditors.**
24.01 Power of Attorney of the Board of Directors (included
on the 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 litigation reform act
of 1995.**
</TABLE>
* Confidential treatment was granted by the Securities and Exchange Commission
for certain portions of these agreements. The confidential portions were
filed separately with the Commission.
** Filed herewith. Unless otherwise noted, all other Exhibits are incorporated
by reference as an Exhibit to the Registrant's Registration Statement on
Form S-1 (No. 33-68522).
(b) Reports on Form 8-K
None
25
<PAGE> 26
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Company has duly caused this Report to be signed on its behalf
by the undersigned, thereunto duly authorized on January 26, 2001.
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 Peter L. Buzy, 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 attorneys-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 26, 2001
- ------------------------ Director (Principal Executive
Henry Linsert, Jr. Officer)
/s/Peter L. Buzy Principal Financial and January 26, 2001
- ------------------------ Accounting Officer
Peter L. Buzy
/s/ Jules Blake Director January 26, 2001
- ------------------------
Jules Blake
/s/ Ann L. Johnson Director January 26, 2001
- ------------------------
Ann L. Johnson
/s/ Gordon S. Macklin Director January 26, 2001
- ------------------------
Gordon S. Macklin
/s/ Douglas J. MacMaster, Jr. Director January 26, 2001
- -----------------------------
Douglas J. MacMaster, Jr
/s/ John H. Mahar Director January 26, 2001
- ------------------------
John H. Mahar
</TABLE>
26
<PAGE> 27
<TABLE>
<S> <C> <C>
/s/ Sandra Panem Director January 26, 2001
- ------------------------
Sandra Panem
/s/ Richard J. Radmer President and Director January 26, 2001
- ------------------------
Richard J. Radmer
/s/ Eugene J. Rotberg Director January 26, 2001
- ------------------------
Eugene H. Rotberg
/s/ William D. Smart Director January 26, 2001
- ------------------------
William D. Smart
</TABLE>
27
<PAGE> 28
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
3.01 Revised Restated Certificate of Incorporation of Registrant.
3.02 Amendment to the Restated Certificate of Incorporation,
effective March 14, 1995 (filed as Exhibit 3.1 to the
Company's Registration Statement on Form S-3, File No.
33-89760, filed March 15, 1995, and incorporated by
reference herein ).
3.03 Certificate of Designation, Preferences and Rights of Series A Junior
Participating Preferred Stock (filed as Exhibit 4 to the Company's
Form 8-K, File No. 0-22354, filed January 29, 1996, and incorporated
by reference herein).
3.04 Amended By-Laws of Registrant.
3.05 Amendment to By-Laws, effective March 14, 1995 (filed as Exhibit 3.2
to the Company's Registration Statement on Form S-3, File No.
33-89760, filed March 15, 1995, and incorporated by reference herein).
4.01 Specimen Stock Certificate for Common Stock.
4.02 Common Stock and Warrant Purchase Agreements, dated May 19,
June 1, June 6, and June 8, 1995, by and among the Company and the
Selling Stockholders (filed as Exhibit 4.2 to the Company's
Registration Statement on Form S-3, File No. 33-93580, filed June 16,
1995, and incorporated by reference herein ).
4.03 Warrant No. 1 issued pursuant to Common Stock and Warrant
Purchase Agreements and Schedule of Warrants (filed as
Exhibit 4.3 to the Company's Registration Statement on Form
S-3, File No. 33-93580, filed June 16, 1995, and
incorporated by reference herein).
4.04 Form of Rights Agreement dated as of January 24, 1996 between the
Company and Registrar and Transfer Company, as Rights Agent (filed as
Exhibit 1 to the Company's Form 8-K, File No. 0-22354, filed January
29, 1996, and incorporated by reference herein).
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
</TABLE>
28
<PAGE> 29
<TABLE>
<S> <C>
August 5, 1993.
10.14 License Agreement, dated September 10, 1992, between the
Company and Bestuurcentrum Der Verenigde Bedrijven Nutricia
B.V.*
10.14A Exhibits to September 10, 1992 License Agreement between the
Company and Bestuurcentrum Der Verenigde Bedrijven Nutricia
B.V.*
10.15 License Agreement, dated October 28, 1992, between the Company and
Mead Johnson & Company.*
10.15A Exhibits to October 28, 1992 License Agreement between the Company and
Mead Johnson & Company.*
10.16 License Agreement, dated January 28, 1993 between the Company and
American Home Products Corporation represented by the Wyeth-Ayerst
Division (Domestic Version) and American Home Products Corporation
represented by its agent Wyeth-Ayerst International (International
Version).*
10.16A Exhibits to January 28, 1993 License Agreements between the Company
and American Home Products Corporation represented by the Wyeth-Ayerst
Division (Domestic Version) and American Home Products Corporation
represented by its agent Wyeth-Ayerst International (International
Version).*
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).
</TABLE>
29
<PAGE> 30
<TABLE>
<S> <C>
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).
10.30 License Agreement, dated March 31, 2000 between the Company and
Abbott Laboratories * (filed as exhibit 10.30 to the Company's
quarterly report on Form 10-Q for the quarter ended April 30, 2000,
and incorporated by reference herein).
10.31 Employment Agreement, dated June 1, 2000 between the
Company and George P. Barker.**
13.01 Portions of the Annual Report to Stockholders of the Company for the
year ended October 31, 2000.**
23.01 Consent of Ernst & Young LLP, Independent Auditors.**
24.01 Power of Attorney of the Board of Directors (included on the 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 litigation 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).
30
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.31
<SEQUENCE>2
<FILENAME>w44736ex10-31.txt
<DESCRIPTION>EMPLOYMENT AGREEMENT
<TEXT>
<PAGE> 1
EXHIBIT 10.31
EMPLOYMENT AGREEMENT
THIS AGREEMENT, made and entered into this 1st day of June, 2000, by and between
Martek Biosciences Corporation, a Delaware corporation having its principle
office at 6480 Dobbin Road, Columbia, MD 21045 (the "Company") and George P.
Barker, an individual residing at 10313 Wilde Lake Terrace, Columbia, Maryland
21044 (the "Executive").
WHEREAS, the Company desires to employ the Executive as its Senior Vice
President and General Counsel; and
WHEREAS, the Executive is skilled in areas of law and business development
relevant to the Company's business and desires to enter into employment with the
Company;
NOW THEREFORE, the Company and Executive, in consideration of the premises and
of the respective mutual promises and agreements contained herein, agree with
each other as follows:
1. Definitions.
1.1 Change in Control. Shall be deemed to occur where the Company
has merged or consolidated with or into any other corporation, firm or business
entity or has sold or transferred substantially all of its assets to another
corporation, firm or business entity or has sold fifty percent or more of the
equity investment and voting control in the Company in any twelve month period
other than through a public or private offering of the Company's securities
whereby the primary goal of the new owners of the Company's stock is investment
appreciation or income and not control of the Company.
1.2 Cause. Shall be defined as those situations where the Executive
has breached this Agreement in any material respect, which breach is not cured
by the Executive or is not capable of being cured within thirty days after
written notice of such breach is delivered to Executive, or where the Executive
has engaged in willful and material failure to perform his duties as an employee
of the Company. Cause shall also include the Executive's
Page 1 of 5
<PAGE> 2
conviction of a criminal offense (other than minor traffic violations) or an act
of moral turpitude, and the Executive's failure to act in the best interests of
the Company or to follow a reasonable direction from the Company's Board of
Directors, which direction is not cured by the Executive or is not capable of
being cured by the Executive within thirty (30) days after written notice is
delivered to the Executive
1.3 Disability. Disability shall mean the Executive's inability to
perform the essential functions of his job for a continuous period of not less
than one hundred eighty (180) days.
2. Term. The term of this Agreement shall be for a period of three
years commencing on the date the Executive begins his employment with the
Company (the "Initial Employment Date") unless earlier terminated as hereinafter
provided. Such Initial Employment Date shall commence on or before June 19,
2000.
3. Position and Duties. The Company hereby employs the Executive
and the Executive agrees to work for the Company as its Senior Vice President
and General Counsel during the term of this Agreement, such title however shall
be subject to change at the discretion of the Company's Board of Directors. The
Executive agrees to devote his full time, attention and efforts to the business
and affairs of the Company during the term of this Agreement, and hereby
confirms that he is under no contractual commitments inconsistent with his
obligations as set forth in this Agreement, and that during the term of this
Agreement, he will not render or perform services for any other corporation,
firm, entity or person which are inconsistent with the provisions of this
Agreement. During the term of this Agreement, the Executive agrees to perform
such reasonable employment duties as the Chief Executive Officer or Board of
Directors of the Company may assign to him from time to time.
4. Compensation.
4.1 Base Salary. During the first year of this Agreement, the
Company will pay the Executive a base salary of $167,000.00 per annum, payable
in its normal pay increments in force from time to time (semi-monthly
installments as of the date of this Agreement) for all the services to be
rendered by the Executive under this Agreement. The compensation payab1e to the
Executive during each subsequent year during the term of
Page 2 of 5
<PAGE> 3
this Agreement shall be as mutually agreed to by the Company and Executive prior
to the commencement of each contract year.
4.2 Incentive Compensation. In addition to the base salary described
in Section 4.1 above, the Executive shall be eligible, in the discretion of the
Company's Board of Directors, to participate in any incentive compensation plans
which may be established by the Board of Directors of the Company from time to
time.
4.3 Stock Option. The Company shall grant the Executive an option to
purchase fifty thousand (50,000) shares of the Company's common stock, under the
Company's Stock Option Plan, effective on the Executive's Initial Employment
Date. The price per share of stock pursuant to such option will be the closing
price of the Company's common stock as of the common stock's last trading date
prior to the Initial Employment Date. Such stock option shall be subject to the
terms of a separate stock option agreement, but such separate agreement shall
call for the term of the options to be for ten years and for twenty percent
(20%) of the options to vest on the date that is six months after the Initial
Employment Date, an additiona1 twenty percent (20%) of the options to vest on
the date that is one year after the Initial Employment Date, an additional
twenty percent (20%) of the options to vest on the date that is two years after
the Initial Employment Date, an additional twenty percent (20%) of the options
to vest on the date that is three years after the Initial Employment Date and
the balance to vest on the date that is four years after the Initial Employment
Date. To the extent that the terms of the separate stock option agreement are in
conflict, in matters other than the stock option vesting period, with the terms
set forth herein, the terms of the separate stock option agreement shall govern.
4.4 Participation in Benefit Plans. The Executive shall also be
entitled to participate in all employee benefit plans or programs in place from
time to time (including the Company's Paid Time Off Program which, at the date
of this Agreement, provides twenty-seven (27) paid days off, including vacation
days, sick days, holidays and all other days off, during the first year of the
Executive's employment with the Company) to the extent that his position, title,
tenure, salary, age, health and other qualifications make him eligible to
participate.
Page 3 of 5
<PAGE> 4
5.0 Termination. Either party may terminate this Agreement by giving
the other party thirty days advance written notice of its intent to terminate.
If the Company terminates this Agreement for reasons other than for Cause as is
defined herein or due to the death or Disability of the Executive, the Company
shall pay the Executive, within thirty (30) days of the effective date of such
termination a "Severance Fee," as additional compensation, equal to twelve (12)
months base salary except that any such Severance Fee shall be reduced by one
twelfth (1/12) for each month that the length of the Agreement, prior to the
effective date of the termination, exceeds twelve (12). Notwithstanding the
above, in the case that a Change of Control has taken effect, and this
Agreement is terminated by the successor organization, such Severance Fee shall
be equal to twelve (12) months base salary. In addition, notwithstanding the
above, the Executive shall be entitled to the payment of a Severance Fee equal
to twelve (12) months base salary if the Executive decides to resign from the
combined or acquired entity due to the occurrence of any of the following: (i)
any downgrading of the Executive's position; (ii) a substantial diminution in
the Executive's duties; (iii) the Executive not being or functioning as the
Senior Vice President and General Counsel of the combined entity; or (iv) the
Executive's decision to refuse a relocation requested by the successor
organization.
6.0 Assignment. The Executive shall not be permitted to assign this
Agreement. The Company shall have the right to assign this agreement to its
successors or assigns and all covenants and agreements hereunder shall enure to
the benefit of and be enforceable by or against its said successors or assigns.
The terms "successor" and "assign" shall include any corporation, firm or other
business entity with or into which the Company may merge or consolidate, or to
which the Company may sell or transfer all or substantially all of its assets,
or of which fifty percent (50%) or more of the equity investment and of the
voting control is owned, directly or indirectly, by or is in common ownership
with, the Company. After any such assignment by the Company, the Company shall
be discharged from all further liability hereunder and such assignee shall
thereafter be deemed to be the Company for the purposes of all provisions of
this Agreement.
7.0 Miscellaneous.
Page 4 of 5
<PAGE> 5
7.1 Governing Law. This Agreement is made under and shall be
governed by and construed in accordance with the laws of the State of Maryland.
7.2 Entire Agreement, Amendments and No Waiver. This Agreement
constitutes the entire understanding of the parties with respect to the subject
matter hereof and supersedes any and all prior understandings written or oral.
This Agreement may not be changed, modified, or discharged orally, but only by
an instrument in writing signed by the parties The invalidity or
unenforceability of any provisions hereof shall in no way affect the validity or
enforceability of any other provision. If any provision of this Agreement is so
broad as to be unenforceable, such provision shall be interpreted to be only so
broad as is enforceable. No express or implied waiver by either party hereto of
any event of default hereunder shall in any way be, or be construed as, a waiver
of any future or subsequent event of default.
IN WITNESS WHEREOF, the Company has hereunto signed its name by its Chief
Executive Officer, and the Executive has signed his name, all as of the day and
year first above written.
MARTEK BIOSCIENCES CORPORATION
BY: /s/ HENRY LINSERT, JR.
-------------------------------------
Name: Henry Linsert, Jr.
Title: Chief Executive Officer
GEORGE P. BARKER
/s/ GEORGE P. BARKER
- ------------------------------------------
Executive
Page 5 of 5
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-13.01
<SEQUENCE>3
<FILENAME>w44736ex13-01.txt
<DESCRIPTION>PORTIONS OF THE ANNUAL REPORT
<TEXT>
<PAGE> 1
- --------------------------------------------------------------------------------
MARTEK BIOSCIENCES CORPORATION
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
Year Ended October 31,
----------------------------------------------------------
In thousands except per share data 2000 1999 1998 1997 1996
- -------------------------------------------------------------------------------------------------------
STATEMENTS OF OPERATIONS DATA
Revenues
<S> <C> <C> <C> <C> <C>
Product sales and royalties $ 8,726 $ 5,744 $ 5,241 $ 3,594 $ 944
Research and development contracts and
grants 879 383 484 530 769
License fees and other revenues 72 6 1,165 293 2,244
-------- -------- -------- -------- --------
Total revenues 9,677 6,133 6,890 4,417 3,957
Costs and expenses
Cost of product sales and royalties 7,092 4,209 3,856 2,697 539
Research and development 12,517 10,309 9,787 11,051 10,294
Selling, general and administrative 6,942 6,822 7,360 7,415 4,134
-------- -------- -------- -------- --------
Total costs and expenses 26,551 21,340 21,003 21,163 14,967
-------- -------- -------- -------- --------
Loss from operations (16,874) (15,207) (14,113) (16,746) (11,010)
Other income, net 1,147 359 652 1,349 2,096
-------- -------- -------- -------- --------
Net loss $(15,727) $(14,848) $(13,461) $(15,397) $ (8,914)
======== ======== ======== ======== ========
Net loss per share, basic and diluted $ (.91) $ (.95) $ (.94) $ (1.14) $ (.67)
======== ======== ======== ======== ========
Weighted average common shares
outstanding 17,335 15,581 14,330 13,559 13,281
======== ======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
October 31,
------------------------------------------------------------------
2000 1999 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET AND OTHER DATA
Cash, cash equivalents, short-term
investments and marketable securities $ 19,264 $ 16,331 $ 17,657 $ 20,674 $ 39,392
Working capital 21,266 20,162 21,011 21,988 35,306
Total assets 45,442 39,145 40,747 41,340 57,123
Long-term debt -- 472 1,951 3,292 1,199
Accumulated deficit (89,625) (73,898) (59,049) (45,588) (30,191)
Total stockholders' equity 35,455 35,172 35,294 34,686 49,417
Cash dividends declared--common stock -- -- -- -- --
</TABLE>
6 ----------------------------------------------------------------------------
<PAGE> 2
- --------------------------------------------------------------------------------
MANAGEMENT'S
DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
IN 1998 THE SEC ADOPTED NEW RULES REQUIRING PUBLIC COMPANIES LIKE MARTEK
TO WRITE CERTAIN DOCUMENTS IN PLAIN ENGLISH. EVEN THOUGH THE SEC DOES NOT
REQUIRE US TO PRESENT OUR MANAGEMENT'S DISCUSSION AND ANALYSIS IN PLAIN ENGLISH,
WE HAVE DECIDED TO DO SO. OUR GOAL IS TO DESCRIBE AND ANALYZE OUR FINANCIAL
STATEMENTS IN LANGUAGE THAT ALLOWS YOU TO UNDERSTAND THEM MORE EASILY.
CAUTIONARY NOTE
This Management's Discussion and Analysis of Financial Condition and Results of
Operations contains forward-looking statements concerning our business and
operations, including, among other things, statements concerning our:
- expectations regarding future product introductions,
distribution, sales, applications and potential marketing partnerships;
- expectations regarding sales and royalties by and from our formula
licensees;
- expectations regarding FDA approval of our oils for inclusion in U.S.
infant formula;
- expectations regarding future efficiencies in manufacturing processes and
the cost of production of our nutritional oils;
- expectations regarding future research and development costs; and
- expectations regarding additional capital expenditures needed in relation
to our fermentation and oil processing activities.
Forward-looking statements include those statements containing words such as:
- "will,"
- "should,"
- "could,"
- "anticipate,"
- "believe,"
- "plan,"
- "estimate,"
- "expect,"
- "intend," and other similar expressions.
All of these forward-looking statements involve risks and uncertainties.
They are all made pursuant to the safe harbor provisions of the Private
Securities Litigation Reform Act of 1995. We wish to caution you that our actual
results may differ significantly from the results we discuss in our
forward-looking statements. We discuss the risks that could cause such
differences in this report as well as in our various filings with the Securities
and Exchange Commission ("SEC").
GENERAL
Martek Biosciences Corporation ("we," "Martek" or "the Company") was founded in
1985. We are leaders in the development and commercialization of products
derived from microalgae. Our leading products are nutritional oils used as
ingredients in infant formula and foods, and as ingredients in, and encapsulated
for use as, dietary supplements. Our nutritional oils are comprised of fatty
acid components, primarily docosahexaenoic acid, commonly known as DHA, and
arachidonic acid, commonly known as ARA. Many researchers believe that these
fatty acids may enhance mental and visual development in infants, and play a
pivotal role in brain function throughout life. Low levels of DHA in adults have
also been linked with a variety of health risks, including cardiovascular
problems, cancer, and various neurological and visual disorders. Additional
applications of our patented technology based upon microalgae include our algal
genomics technology and our currently marketed stable isotope and fluorescent
detection products and technologies that can be used by researchers as an aid in
drug discovery and diagnostics. In 1989, we began to realize revenues from sales
of our stable isotope products. In 1992, we realized our first revenues from
license fees related to our nutritional oils containing DHA and ARA and sales of
sample quantities of these oils. In 1995, we recognized our first product and
royalty revenues from sales of infant formula containing these oils, and in
1996, we began to realize revenues from the sale of Neuromins(R), a DHA dietary
supplement. In 1998, we first realized revenues from the sale of our new
phycobilisome fluorescent detection products. We currently have license
agreements with seven infant formula manufacturers representing over 60% of the
estimated $6 billion worldwide market for infant formula. Five of these
licensees are now marketing term infant formula products containing our oils in
fourteen countries and pre-term infant formula products containing our oils in
over 70 countries around the world.
We have incurred losses in each year since our inception. At October 31,
2000, our accumulated deficit was $89,625,000. We expect to continue our
development, production optimization and product marketing activities and as a
result, expect our losses to continue for at least the next year, or until
significant sales of our nutritional oils and Neuromins(R) DHA products occur
and/or until significant royalties from sales of infant formula products
containing our oils are recognized. In addition, we expect 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. The extent and timing of future oils-related revenues are
largely dependent upon:
- FDA and other regulatory approvals for products containing our oils;
- market introductions of products by our licensees; and/or
- ----------------------------------------------------------------------------- 7
<PAGE> 3
- --------------------------------------------------------------------------------
Management's Discussion and Analysis of Financial Condition and Results of
Operations (continued)
- agreements with other future third-party collaborators. Because of this,
the timing or likelihood of future profitability is largely dependent on
factors over which we have no control.
MANAGEMENT OUTLOOK AND REGULATORY ISSUES
We believe that while quarterly results may show fluctuations in product sales,
the outlook for future revenue growth remains positive and that fiscal 2001
sales will surpass prior year levels. Specifically, we believe that for fiscal
2001 as a whole, term infant formulas containing our oils will be introduced in
additional countries and sales and royalties from our nutritional oils will
continue to grow.
Five of our infant formula licensees have obtained the regulatory approval,
where required, to sell infant formula supplemented with our oils in over 70
countries for term or pre-term infant formula products. No company has yet
launched an infant formula containing our oils in the United States.
We believe that our DHA and ARA are GRAS when used as ingredients in infant
formulas and, as such, are exempt from the pre-market approval requirements for
food additives. In February 2000, we filed a GRAS Notification with the FDA for
the use of our DHA and ARA in infant formula. We believe that the FDA review of
the GRAS Notification should ultimately have a favorable outcome, but this
review likely will not be completed for at least another three to six months.
In addition, each of our licensees must file an infant formula pre-market
notification and meet the statutory and regulatory requirements established for
such notifications before launching an infant formula in the United States that
contains our oils. There can be no assurance that:
- the FDA will take the position that DHA and ARA are GRAS ingredients and,
therefore, exempt from the definition of food additives;
- the FDA will complete its review of the GRAS Notification in the next three
to six months;
- a licensee will pursue the necessary regulatory steps to market an infant
formula containing our DHA and ARA in the U.S.;
- a licensee's infant formula pre-market notification will provide sufficient
data to support the marketing of an infant formula containing our DHA and
ARA; or
- the regulatory process will not involve significantly longer delays that
may materially and adversely affect the timing and introduction of infant
formulas containing our products.
Notwithstanding this continued uncertainty in the U.S. regulatory picture,
we anticipate that during the next twelve months, infant formula products
containing our oils will continue to be introduced in various countries around
the world and overall product sales, including sales from infant formula related
products, will increase over the prior year.
RESULTS OF OPERATIONS
REVENUES Our revenues decreased from $6,890,000 in 1998 to $6,133,000 in 1999, a
decrease of 11%, mainly due to the non-recurrence of a $1,125,000 license fee
which was recognized in 1998. In 2000, our revenues increased to $9,677,000, or
58% over 1999, primarily due to increased nutritional product sales and
royalties.
Our total product sales and royalties increased $503,000 in 1999 over 1998,
and increased an additional $2,982,000 or 52%, in 2000 over 1999. Our sales of
nutritional products increased by $381,000 or 14% in 1999 over 1998 and
increased an additional $2,780,000 or 88% in 2000. Our royalties on sales of
infant formula products increased from $391,000 in 1998 to $394,000 in 1999, an
increase of 1%, and increased to $948,000, or 141%, in 2000. The increase in
our nutritional product sales and royalties is primarily due to increased sales
of oil to infant formula licensees. Our licensees launched premium term infant
formulas with our oils in seven additional countries in 2000, including Mexico
and China. We are optimistic that as market acceptance of these products grows,
more term infant formula launches will occur in additional countries around the
world.
Our sales of stable isotopes and other products increased $119,000, or 6% in
1999 over 1998 and decreased by $352,000, or 16% in 2000 compared to 1999. The
decrease in 2000 is primarily due a change in our focus to higher margin
isotopes, de-emphasizing sales of low margin reagent products in markets where
prices have declined due to strong competition.
Our revenues from research and development work decreased from $484,000 in
1998 to $383,000 in 1999, a decrease of 21%, and increased to $879,000 in 2000,
an increase of 129% compared to 1999. The decrease in 1999 was due to fewer
grants outstanding under which we are receiving funding. In 2000, our research
and development revenues increased primarily as a result of approximately
$650,000 in revenues from a third-party development project during the second
and third quarter at our Winchester plant.
Our revenues from license fees and other sources decreased $1,159,000 in
1999 compared to 1998, mainly due to the non-recurrence of a license fee of
$1,125,000 that was recognized in 1998, and increased $66,000 in 2000 over 1999
due primarily to license fees recognized from our license agreement with Abbott
Laboratories, which was entered into on March 31, 2000.
COST OF PRODUCT SALES AND ROYALTIES Our cost of product sales and royalties
decreased to 73% of product sales and royalties in 1999, down from 74% in 1998,
and increased to 81% in 2000. These fluctuations are primarily due to the mix of
sales. Our cost of sales will increase when there is a higher percentage of
sales to infant formula licensees where future royalties will be received. Under
these royalty-bearing arrangements we sell product to our licensees at a low
initial transfer price, and there is an approximate three-to-four-month delay
after this initial sale of oil until royalties are received and recognized as
revenue. This creates a significantly higher cost of goods sold as a percentage
of revenues from product sales and royalties than
8 ----------------------------------------------------------------------------
<PAGE> 4
would be the case if we were to incorporate these royalties into the product
price and recognize the revenue at the time we initially sell product. We are
currently in the process of offering all of our infant formula licensees an
all-inclusive flat price for bulk oil, which would incorporate a slightly
discounted royalty up-front into our sales price. The overall economics of an
all-inclusive price closely match those of our existing royalty bearing
arrangements; however, the all-inclusive flat price eliminates margin
fluctuations that result from the delayed impact of royalty revenues. Had all of
our sales to licensees during 2000 been made using all-inclusive pricing, our
revenues would have been approximately $1,900,000 higher, resulting in a cost of
product sales and royalties of approximately 73% of revenues from product sales
and royalties.
Our high cost of product sales and royalties reflects the fact that our
current inventory was manufactured during a period when we had not yet realized
production efficiencies due to the low volume of production and because we have
not yet optimized our production process. We believe that, in the future, as our
sales volumes increase and manufacturing efficiencies and economies of scale are
realized, our costs to produce DHA-rich oils and our costs to purchase ARA-rich
oils from our third-party supplier will decrease, resulting in a positive impact
on our gross profit margins.
RESEARCH AND DEVELOPMENT Our research and development costs increased by
$522,000, or 5%, in 1999 and further increased $2,208,000 or 21% in 2000. The
majority of these increases relate to the continuing refinement of our
fermentation and oil extraction processes and other R&D efforts related to
production of our oils at our Winchester plant. In addition, our research and
development costs for 2000 were impacted by approximately $420,000 of expenses
incurred relating to a third-party development project at our Winchester plant
during the second and third quarters. We believe that as sales volumes increase
and production optimization occurs, our development costs at our Winchester
plant will decrease, reducing our overall R&D expenditures.
SELLING, GENERAL AND ADMINISTRATIVE Our selling, general and administrative
expenses decreased by $538,000, or 7%, in 1999 compared to 1998, and increased
by $120,000 or 2%, in 2000 compared to 1999. These fluctuations are mainly due
to the timing of our various corporate administrative expenditures and sales and
marketing activities.
OTHER INCOME, NET Our net income from other sources decreased from $652,000 in
1998 to $359,000 in 1999, and increased to $1,147,000 in 2000. These
fluctuations are primarily due to the amount of interest earned on our
investments, which increased in 2000 due to our high average balance of cash
and short-term investments compared to prior years. We were able to maintain a
high level of interest-bearing investments in 2000 as a result of cash raised
in our February 2000 private placement as well as cash we received during the
year from warrant and option exercises.
NET LOSS As a result of the foregoing, our net loss increased from $13,461,000
in 1998 to $14,848,000 in 1999, an increase of 10%, and increased to $15,727,000
in 2000, an increase of 6% over 1999.
RECENTLY ISSUED ACCOUNTING GUIDANCE In June 1998, the FASB issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities," which requires
companies to recognize all derivative financial instruments as either assets or
liabilities on the balance sheet and measure those instruments at fair value.
This Statement is effective for fiscal years beginning after June 15, 2000.
Adoption of this standard is not expected to have a significant impact on our
financial position, results of operations, cash flows, or the presentation of
our disclosures.
In December 1999, the Staff of the SEC issued Staff Accounting Bulletin
No. 101, "Revenue Recognition in Financial Statements" ("SAB 101"). SAB 101
summarizes certain of the Staff's views in applying generally accepted
accounting principles to revenue recognition in the financial statements,
including recognition of non-refundable license fees received upon entering into
licensing arrangements. Adoption of SAB 101 has not had a material impact on our
revenue recognition policies or on prior revenue generating transactions, and
will not have a material impact on our future financial position, cash flows or
results of operations.
COLLABORATIVE AND LICENSING AGREEMENTS
We have entered into licensing agreements with seven infant formula
manufacturers, including Abbott Laboratories, Mead Johnson & Company (a
subsidiary of Bristol-Myers Squibb Company), American Home Products
(Wyeth-Ayerst division), Numico, Maabarot and Novartis, that together comprise
over 85% of the U.S. and 60% of the worldwide infant formula markets. We have
contractually agreed not to disclose the name of our seventh licensee, an infant
formula manufacturer with less than 3% of the worldwide market who has yet to
purchase any products from us. Under all of these agreements, we received
up-front license fees, will receive a transfer price on sales of our oils to our
licensees and will receive ongoing royalties based on our licensees' sales of
infant formula products containing our oils. The agreements have terms exceeding
20 years, contain no future funding commitments on our part or that of our
licensees, and may be terminated by our licensees upon proper notification. We
recognized royalty revenues relating to our license agreements of $948,000 in
2000, $394,000 in 1999, and $391,000 in 1998.
Pursuant to our most recent license agreement with Abbott Laboratories
entered into on March 31, 2000, we received total consideration of $4.5 million,
which represents license fees and royalty prepayments. We recorded these
non-refundable payments as unearned revenue at October 31, 2000, and will
recognize the license fees as revenue on a straight-line basis over the
twenty-five-year term of the agreement. We will recognize the non-refundable
royalty prepayment, as well as potential ongoing royalties, as revenue when
products are introduced by
- ---------------------------------------------------------------------------- 9
<PAGE> 5
- --------------------------------------------------------------------------------
Management's Discussion and Analysis of Financial Condition and Results of
Operations (continued)
Abbott in accordance with the terms of the agreement. The license agreement may
be terminated by Abbott upon proper notification subsequent to the first
anniversary of the date upon which Abbott has made all payments to us in
accordance with the agreement. We recognized approximately $70,000 in license
fee revenue and no royalty revenues from this agreement during fiscal year 2000.
MANUFACTURING, SUPPLY AND PURCHASE AGREEMENTS
In January, 1997, we entered into an agreement with DSM Food Specialties ("DSM,"
formerly Royal Gist-Brocades B.V.) under which they became our exclusive
contract supplier for nutritional oils containing ARA. DSM is a multi-billion
dollar international group of companies that is active worldwide in the fields
of life science, product performance materials and chemicals. At October 31,
2000 we had outstanding inventory purchase commitments to DSM totaling
approximately $4 million. During DSM's production start-up period, when our
purchases of ARA-rich oils were relatively low, our agreement with them provided
for maximum sales-price levels to us. Depending on the value of oil that we
purchase from them in future periods, our cost of ARA should decrease, provided
that they recover approximately $1-$2 million in certain start-up and
development costs that they incurred in 1997 through 1999.
LIQUIDITY AND CAPITAL RESOURCES
We have financed our operations primarily from:
- the issuance and sale of equity securities;
- product sales and receipt of license fees;
- the exercise of stock options and warrants;
- debt financing; and
- revenues received under research and development contracts and grants.
Since our inception, we have raised approximately $125 million from public
and private sales of our equity securities, as well as option and warrant
exercises. We raised approximately $13.8 million in a private placement of stock
in May, 1999 and $10.25 million in February, 2000 related to a 1998 equity
funding commitment.
Through October 31, 2000, we have incurred an accumulated deficit of
$89,625,000. Our balance of cash and cash equivalents at October 31, 2000 was
$2,682,000. In addition, at October 31, 2000, we had $16,582,000 in short-term
investments and marketable securities. These investments and securities, which
consist of U.S. Government securities with average maturities of less than six
months, are available to meet our future cash needs. Our cash, cash equivalents,
short-term investments and marketable securities increased $2,933,000 in 2000,
primarily due to the funds received from the private placement of our common
stock and warrants in February 2000.
In the future we will require substantial additional funds to:
- continue our research and development programs;
- conduct pre-clinical and clinical studies;
- maintain compliance with our loan covenants; and
- commercialize our nutritional oils, Neuromins(R) DHA, and our other
products under development.
The ultimate amount of funding that we will require will depend, in part,
on whether we seek independently, or with other parties through collaborative
agreements, to develop, manufacture and market our products. Our capital
requirements will 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 pre-clinical and clinical studies;
- the time and costs of obtaining regulatory clearances for our products that
are subject to such clearances;
- the costs involved in filing, protecting and enforcing patent claims;
- competing technological and market developments;
- the cost of capital expenditures at our manufacturing facilities;
- the cost of acquiring additional and/or operating existing manufacturing
facilities for our various products and potential products (depending on
which products we decide to manufacture and continue to manufacture
ourselves); and
- the costs of marketing and commercializing our products.
The continued development and optimization of our production facility has
had, and will continue to have, a material effect upon our liquidity and capital
resources. We expect additional plant modifications costing at least $1.5
million in fiscal 2001. Plant expenditures beyond 2001 will depend in part on
our production capacity needs, and the extent of development and implementation
of process improvements.
We believe that our existing capital resources will provide us adequate
capital for at least the next 12 months. However, we believe that additional
funds will be needed in the longer term to continue our research and
development, manufacturing and marketing efforts. We intend to seek additional
funding through:
- equity issuances;
- asset-based borrowing;
- product sales and license fee arrangements;
- additional lease financing;
- collaborative arrangements with partners; and/or
- commercial and government research and development contracts and grants.
We can offer no assurance that such financing alternatives will be available
to us on terms that would be acceptable, if at all.
10 ---------------------------------------------------------------------------
<PAGE> 6
MARTEK BIOSCIENCES CORPORATION BALANCE SHEETS
<TABLE>
<CAPTION>
October 31,
--------------------------------------
2000 1999
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $ 2,682,013 $ 1,180,098
Short-term investments and marketable securities (Note 3) 16,581,699 15,151,210
Accounts receivable 2,520,148 1,646,148
Inventories (Note 4) 5,125,872 5,216,265
Other current assets 1,883,321 470,728
------------ ------------
Total current assets 28,793,053 23,664,449
Property, plant and equipment, net (Note 5) 16,146,306 15,468,836
Other assets, net 502,747 12,044
------------ ------------
$ 45,442,106 $ 39,145,329
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable $ 948,505 $ 693,464
Accrued liabilities 3,979,244 1,328,950
Current portion of notes payable (Note 6) 471,907 1,479,333
Current portion of unearned revenue (Note 8) 2,127,571 --
------------ ------------
Total current liabilities 7,527,227 3,501,747
Long-term portion of notes payable (Note 6) -- 471,907
Long-term portion of unearned revenue (Note 8) 2,460,209 --
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;
17,806,079 and 16,492,229 shares issued and outstanding at
October 31, 2000 and 1999, respectively 1,780,608 1,649,223
Additional paid-in capital 123,474,556 107,446,950
Deferred compensation (173,156) --
Accumulated other comprehensive loss (Note 3) (2,388) (26,942)
Accumulated deficit (89,624,950) (73,897,556)
------------ ------------
Total stockholders' equity 35,454,670 35,171,675
------------ ------------
$ 45,442,106 $ 39,145,329
============ ============
</TABLE>
See accompanying notes.
- --------------------------------------------------------------------------- 11
<PAGE> 7
- --------------------------------------------------------------------------------
MARTEK BIOSCIENCES CORPORATION
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year ended October 31,
-------------------------------------------------------------
2000 1999 1998
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
REVENUES (NOTE 8)
Product sales and royalties:
Nutritional product sales $ 5,923,583 $ 3,143,512 $ 2,762,844
Stable isotope and other product sales 1,854,195 2,206,133 2,086,791
Royalties 947,851 394,003 391,215
------------ ------------ ------------
Total product sales and royalties 8,725,629 5,743,648 5,240,850
Research and development contracts and grants 879,294 383,415 483,948
License fees and other revenues 72,050 6,000 1,165,000
------------ ------------ ------------
Total revenues 9,676,973 6,133,063 6,889,798
COSTS AND EXPENSES
Cost of product sales and royalties 7,091,700 4,208,488 3,855,675
Research and development 12,517,063 10,309,452 9,786,829
Selling, general and administrative 6,942,383 6,822,440 7,360,019
------------ ------------ ------------
Total costs and expenses 26,551,146 21,340,380 21,002,523
------------ ------------ ------------
Loss from operations (16,874,173) (15,207,317) (14,112,725)
OTHER INCOME (EXPENSE)
Miscellaneous income 99,634 132,358 96,021
Interest income 1,240,535 806,238 1,076,587
Interest expense (193,390) (579,387) (521,198)
------------ ------------ ------------
1,146,779 359,209 651,410
------------ ------------ ------------
Net loss $ (15,727,394) $ (14,848,108) $ (13,461,315)
============ ============ ============
Net loss per share, basic and diluted $ (.91) $ (.95) $ (.94)
============ ============ ============
Weighted average common shares outstanding 17,335,403 15,580,791 14,329,825
============ ============ ============
</TABLE>
See accompanying notes.
12 ---------------------------------------------------------------------------
<PAGE> 8
- --------------------------------------------------------------------------------
MARTEK BIOSCIENCES CORPORATION
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Additional
Common Stock Common Stock Paid-in Deferred
Shares Amount Capital Compensation
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
BALANCE AT OCTOBER 31, 1997 13,673,659 $1,367,366 $ 78,907,450 --
Issuance of common
stock and warrants
in private placement,
net of issuance costs 655,563 65,556 9,944,000 --
Exercise of stock options
and warrants 550,212 55,021 3,991,809 --
Net loss -- -- -- --
Other comprehensive
income:
Unrealized gain
on investments -- -- -- --
Comprehensive loss
- -----------------------------------------------------------------------------------------------------
BALANCE AT OCTOBER 31, 1998 14,879,434 1,487,943 92,843,259 --
Issuance of common
stock and warrants
in private placement,
net of issuance costs 1,528,935 152,894 13,592,001 --
Exercise of stock options
and other 83,860 8,386 1,011,690 --
Net loss -- -- -- --
Other comprehensive
income:
Unrealized loss
on investments -- -- -- --
Comprehensive loss
- -----------------------------------------------------------------------------------------------------
BALANCE AT OCTOBER 31, 1999 16,492,229 1,649,223 107,446,950 --
Issuance of common
stock and warrants
in private placement,
net of issuance costs 845,652 84,565 10,127,932 --
Exercise of stock options,
warrants and other 468,198 46,820 5,553,804 --
Deferred compensation
on stock options -- -- 345,870 (345,870)
Amortization of
deferred compensation -- -- -- 172,714
Net loss -- -- -- --
Other comprehensive
income:
Unrealized gain
on investments -- -- -- --
Comprehensive loss
- -----------------------------------------------------------------------------------------------------
BALANCE AT OCTOBER 31, 2000 17,806,079 $1,780,608 $123,474,556 $(173,156)
- -----------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Accumulated
Other
Comprehensive Accumulated
Income (Loss) Deficit Total
- --------------------------------------------------------------------------------------
<S> <C> <C> <C>
BALANCE AT OCTOBER 31, 1997 $ (1,129) $(45,588,133) $ 34,685,554
Issuance of common
stock and warrants
in private placement,
net of issuance costs -- -- 10,009,556
Exercise of stock options
and warrants -- -- 4,046,830
Net loss -- (13,461,315) (13,461,315)
Other comprehensive
income:
Unrealized gain
on investments 13,104 -- 13,104
------------
Comprehensive loss (13,448,211)
- --------------------------------------------------------------------------------------
BALANCE AT OCTOBER 31, 1998 11,975 (59,049,448) 35,293,729
Issuance of common
stock and warrants
in private placement,
net of issuance costs -- -- 13,744,895
Exercise of stock options
and other -- -- 1,020,076
Net loss -- (14,848,108) (14,848,108)
Other comprehensive
income:
Unrealized loss
on investments (38,917) -- (38,917)
------------
Comprehensive loss (14,887,025)
- --------------------------------------------------------------------------------------
BALANCE AT OCTOBER 31, 1999 (26,942) (73,897,556) 35,171,675
Issuance of common
stock and warrants
in private placement,
net of issuance costs -- -- 10,212,497
Exercise of stock options,
warrants and other -- -- 5,600,624
Deferred compensation
on stock options -- -- --
Amortization of
deferred compensation -- -- 172,714
Net loss -- (15,727,394) (15,727,394)
Other comprehensive
income:
Unrealized gain
on investments 24,554 -- 24,554
------------
Comprehensive loss (15,702,840)
- --------------------------------------------------------------------------------------
BALANCE AT OCTOBER 31, 2000 $ (2,388) $(89,624,950) $ 35,454,670
- --------------------------------------------------------------------------------------
</TABLE>
See accompanying notes.
- --------------------------------------------------------------------------- 13
<PAGE> 9
- --------------------------------------------------------------------------------
MARTEK BIOSCIENCES CORPORATION
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year ended October 31,
-----------------------------------------------------
2000 1999 1998
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss $(15,727,394) $(14,848,108) $(13,461,315)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization 1,558,571 1,461,159 1,368,789
Other non-cash items 434,169 348,600 174,300
Changes in operating assets and liabilities:
Accounts receivable (874,000) (309,880) (155,577)
Inventories 90,393 (214,275) (2,096,538)
Other assets (1,910,233) 36,601 71,733
Accounts payable 255,041 97,820 (412,463)
Accrued liabilities 2,650,294 (237,002) 525,103
Unearned revenue 4,587,780 -- --
------------ ------------ ------------
Net cash used in operating activities (8,935,379) (13,665,085) (13,985,968)
INVESTING ACTIVITIES
Purchase of short-term investments and
marketable securities (26,970,935) (21,175,362) (27,979,091)
Proceeds from sale of short-term investments
and marketable securities 25,565,000 19,144,160 33,530,000
Purchase of property, plant and equipment (2,229,104) (696,946) (1,612,406)
------------ ------------ ------------
Net cash (used in) provided by investing activities (3,635,039) (2,728,148) 3,938,503
FINANCING ACTIVITIES
Repayment of notes payable (1,479,333) (1,340,919) (1,313,769)
Proceeds from the exercise of warrants and options 5,339,169 671,476 3,872,530
Proceeds from the issuance of
common stock and warrants in private placement 10,212,497 13,744,895 10,009,556
------------ ------------ ------------
Net cash provided by financing activities 14,072,333 13,075,452 12,568,317
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents 1,501,915 (3,317,781) 2,520,852
Cash and cash equivalents at beginning of year 1,180,098 4,497,879 1,977,027
------------ ------------ ------------
Cash and cash equivalents at end of year $ 2,682,013 $ 1,180,098 $ 4,497,879
============ ============ ============
</TABLE>
See accompanying notes.
14 ---------------------------------------------------------------------------
<PAGE> 10
- --------------------------------------------------------------------------------
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 that (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 $185,000 in 2000, $101,000 in 1999 and $255,000 in 1998.
Costs for products, contracts and grants, and research and development
are based on direct costs incurred plus an allocation of indirect costs, which
include such items as utilities, insurance and administrative labor and
supplies. Total allocated indirect costs for the years ended October 31, 2000,
1999 and 1998 were $124,000, $154,000 and $103,000, respectively. Estimated
losses on contracts, if any, are recorded as they become known.
SEGMENT INFORMATION The Company currently operates in one business segment, that
being the development and commercialization of novel products from microalgae.
The Company is managed and operated as one business. The entire business is
comprehensively managed by a single management team that reports to the Chief
Executive Officer. The Company does not operate separate lines of business or
separate business entities with respect to its products or product candidates.
Accordingly, the Company does not accumulate discrete financial information with
respect to separate product areas and does not have separately reportable
segments as defined by SFAS No. 131, "Disclosure about Segments of an Enterprise
and Related Information."
REVENUE RECOGNITION Revenues on cost reimbursement and fixed price contracts are
generally recognized on the percentage of completion method of accounting as
costs are incurred. Revenue is recognized on product sales when goods are
shipped. Revenue from licensing agreements is recognized generally over the term
of the agreement, or in certain circumstances, when milestones are met. 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. At October 31,
2000, the Company had approximately $2.1 million in short-term and $2.5 million
in long-term unearned revenue relating to third-party license agreements.
Approximately 2% in 2000, 6% in 1999 and 6% in 1998 of the Company's
total revenues were generated from U.S. government contracts, subcontracts and
SBIR grants.
FOREIGN CURRENCY TRANSACTIONS Foreign currency transactions are translated into
U.S. dollars at prevailing rates. Gains or losses resulting from foreign
currency transactions are included in current period income or loss as incurred.
Currently, all material transactions of the Company are denominated in U.S.
dollars, and the Company has not entered into any material transactions that are
denominated in foreign currencies.
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's reserve for uncollectable
accounts at October 31, 2000 and 1999 was not material. 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
- --------------------------------------------------------------------------- 15
<PAGE> 11
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
Company's efforts to monitor its exposure for credit losses and maintain
allowances for anticipated losses. One customer accounted for approximately 30%
of the Company's sales for fiscal 2000 and 15% for the years ended October 31,
1999 and 1998.
RESEARCH AND DEVELOPMENT Research and development costs are charged to
operations as incurred and include contract and grant-related costs of $527,000
in 2000, $464,000 in 1999 and $446,000 in 1998.
ADVERTISING COSTS All advertising costs are expensed when incurred. Advertising
costs expensed for the years ended October 31, 2000, 1999 and 1998 approximated
$1,223,000, $1,650,000 and $1,765,000, respectively.
INCOME TAXES Net operating loss carryforwards differ for financial statement and
income tax purposes due principally to revenue recognition methods used for
income tax purposes. Under the liability method, deferred tax assets and
liabilities are determined based on differences between financial reporting and
tax bases of assets and liabilities, and are measured using the enacted tax
rates and laws that will be in effect when the differences are expected to
reverse.
FAIR VALUE OF FINANCIAL INSTRUMENTS The Company considers the recorded cost of
its financial assets and liabilities, which consists primarily of cash and cash
equivalents, 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, 2000.
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.
COMPREHENSIVE INCOME (LOSS) Under SFAS No. 130, the Company is required to
display comprehensive income (loss) and its components as part of the financial
statements. Comprehensive income (loss) is comprised of net earnings (loss) and
other comprehensive income (loss), which includes certain changes in equity that
are excluded from net income (loss). The Company includes unrealized holding
gains and losses on available-for-sale securities in other comprehensive income
(loss).
INVENTORIES Inventories are stated at the lower of cost or market, reflect
appropriate reserves for potential obsolete, slow-moving or otherwise impaired
material, and include appropriate elements of material, labor and indirect costs
and are valued using a weighted average approach that approximates the first-in,
first-out method. The Company analyzes both historical and projected sales
volumes and, when needed, reserves for questionable inventory that is either
obsolete, slow moving or impaired. Inventories include products and materials
held for sale as well as products and materials that can alternatively be used
in the Company's research and development activities. Inventories identified for
research and development activities are expensed in the period in which such
inventories are designated for such use.
OTHER ASSETS Other assets consist primarily of capitalized patent costs of
approximately $465,000. These costs are amortized over the remaining life of the
related patents. Patent-related amortization expense was approximately $7,000 in
2000 and accumulated patent amortization totalled $7,000 at October 31, 2000.
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.
IMPAIRMENT OF LONG-LIVED ASSETS The Company reviews long-lived assets and
certain identifiable intangibles for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future undiscounted net cash
flows expected to be generated by the asset. Recoverability measurement and
estimating of undiscounted cash flows is done at the lowest possible level for
which there are identifiable assets. If such assets are considered to be
impaired, the impairment to be recognized is measured by the amount by which the
carrying amount of assets exceed the fair value of the assets. Assets to be
disposed of are reported at the lower of the carrying amount or fair value less
costs to sell. To date, the Company has not incurred any impairment expenses.
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 $197,000 in 2000,
$408,000 in 1999 and $349,000 in 1998. For the years ended October 31, 2000,
1999 and 1998 the Company paid no income taxes.
RECLASSIFICATION Certain amounts in the prior years' financial
16 ---------------------------------------------------------------------------
<PAGE> 12
- --------------------------------------------------------------------------------
statements have been reclassified to conform to the 2000 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 specific identification and have
average maturities of less than six months. Unrealized gains and losses on these
securities are reported as accumulated other comprehensive income (loss), which
is a separate component of stockholders' equity. The amount of unrealized
holding loss on these available-for-sale securities was $2,388 and $26,942 at
October 31, 2000 and 1999, respectively. Realized gains and losses and declines
in value judged to be other-than-temporary on available-for-sale securities are
included in other income, based on the specific identification method. There
were no realized gains or losses recorded for the years ended October 31, 2000,
1999, or 1998. Available-for-sale securities consisted of U.S. government
obligations totaling $16,581,699 and $15,151,210 for the years ended October 31,
2000 and 1999, respectively. At October 31, 2000 and 1999, the estimated fair
value of these securities approximated cost.
4. INVENTORIES
Inventories consisted of the following:
<TABLE>
<CAPTION>
October 31,
2000 1999
- -----------------------------------------------------------------------
<S> <C> <C>
Finished products $3,849,817 $2,443,051
Work in process 1,035,496 2,683,477
Raw materials 520,559 326,737
Less inventory reserve (280,000) (237,000)
----------- -----------
$5,125,872 $5,216,265
=========== ===========
</TABLE>
5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of the following:
<TABLE>
<CAPTION>
October 31,
2000 1999
- -----------------------------------------------------------------------
<S> <C> <C>
Land $ 149,860 $ 149,860
Building and improvements 1,742,123 1,742,123
Machinery and equipment 20,879,114 18,847,913
Furniture and fixtures 833,163 734,360
Leasehold improvements 496,086 396,986
----------- -----------
24,100,346 21,871,242
Less accumulated depreciation
and amortization 7,954,040 6,402,406
----------- -----------
$16,146,306 $15,468,836
=========== ===========
</TABLE>
Depreciation and amortization expense amounted to $1,552,000, $1,461,000
and $1,369,000 for the years ended October 31, 2000, 1999 and 1998,
respectively.
6. NOTES PAYABLE
At October 31, 2000, the Company had an outstanding term loan with a balance due
of $471,907. The term loan bears interest at a rate of 8.61% and is
collateralized solely by the Company's Winchester fermentation facility. A
second term loan, which was used to finance the Company's Winchester extraction
facility, was paid down in full in July 2000.
Future minimum payments on the Company's outstanding term loan total
$471,907 and are payable in fiscal 2001.
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 $403,000 in 2000, $372,000 in 1999 and $329,000 in 1998. The
Company received sublease income of approximately $98,000, $122,000 and $75,000
for the years ended October 31, 2000, 1999 and 1998, respectively. 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, 2000, were as follows:
<TABLE>
<S> <C>
2001 $ 416,000
2002 429,000
2003 441,000
2004 and after 455,000
----------
$1,741,000
==========
</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. Existing agreements have committed the Company to fund up to
approximately $100,000 for such future development activities. 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, 2000 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, 2000, 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 loan. These covenants, which outline minimum cash, current
ratio and net worth requirements, have all been met by the Company at October
31, 2000.
PURCHASE COMMITMENTS The Company currently contracts with a third-party supplier
to produce its arachidonic acid oil.
- --------------------------------------------------------------------------- 17
<PAGE> 13
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
At October 31, 2000, the Company had outstanding inventory purchase commitments
to this supplier totalling approximately $4 million.
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. Non-refundable license fees are
recorded as unearned revenue and amortized on a straight-line basis over the
term of the agreement. During 2000, the Company received license fee payments of
approximately $4.6 million, of which approximately $72,000 was recognized as
license fee revenue, and the remainder recorded as unearned revenue at October
31, 2000. Certain agreements include royalty payments, which are based upon a
percentage of product sales. Royalties in the amount of $948,000, $394,000 and
$391,000 were earned in the years ended October 31, 2000, 1999 and 1998,
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 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, which was drawn down by
the Company in February 2000. 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. The cost of
approximately $350,000 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. With the exception of the
two-year funding commitment, there were no future performance obligations on
behalf of the Company or the investors in connection with the 1998 private
placement.
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. There were no future performance obligations on
behalf of the Company or the investors in connection with the 1999 private
placement.
On February 8, 2000, the Company exercised its option to close a $10.25
million private financing in which 845,652 shares of the Company's common stock
and warrants to purchase 253,695 shares of common stock were issued to a group
of accredited investors pursuant to a 1998 private placement funding commitment.
The stock was issued at a thirty-day average trading price of $12.12 per share.
The warrants are exercisable for a period of three years from date of issuance
at $14.55 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.
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, 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-$9.63 $ 6.75
Exercised (83,860) $8.00-$9.88 $ 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
Granted 939,550 $8.00-$23.25 $ 13.74
Exercised (242,295) $6.25-$18.00 $ 9.94
Forfeited (52,455) $6.25-$34.25 $ 15.27
---------- ------------ ---------
BALANCE AT OCTOBER 31, 2000 2,812,860 $6.25-$34.25 $ 13.40
</TABLE>
Details of exercisable options were as follows:
<TABLE>
<CAPTION>
Exercisable Weighted Average
Options Exercise Price
- -------------------------------------------------------------------------
<S> <C> <C>
October 31, 1998 1,040,020 $13.32
October 31, 1999 1,099,400 14.99
October 31, 2000 1,388,970 14.80
</TABLE>
The Company issued 31,000 options to non-employees during the year ended
October 31, 2000. These options have vesting periods of between 0-24 months. The
fair value of these options has been recorded as deferred compensation and is
being amortized over the performance period, which is generally 12 months. Under
variable plan accounting, the value of the unvested options will be re-measured
and recognized in income at each reporting date until fully vested.
A total of 707,905 shares of common stock were available for future
grants under the Option Plan at October 31, 2000. The weighted average
contractual life for all options outstanding under the Option Plan at October
31, 2000 was 7.8 years.
18 ---------------------------------------------------------------------------
<PAGE> 14
- --------------------------------------------------------------------------------
Detailed information on the options outstanding on October 31, 2000 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>
$ 6.25-9.88 930,820 $ 7.14 7.91 395,810 $ 7.35
$10.25-14.44 1,117,690 $12.28 8.17 547,530 $12.38
$15.50-25.50 581,650 $19.41 7.69 271,770 $18.86
$32.88-34.25 182,700 $33.06 5.40 173,860 $33.03
--------- ---------
2,812,860 1,388,970
========= =========
</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, 2000, 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, 2000 was 5.8 years. No
awards were made under the Director's Plan after 1998. During 2000, 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 2000 and 1999 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 2000, 1999 and 1998 would have been approximately
$21.4 million, $18.9 million and $17.2 million, or $1.24, $1.22 and $1.20 per
share, respectively. The weighted average fair value of the options granted
during 2000 is estimated at $9.50 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 66.3%, 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.
10. INCOME TAXES
At October 31, 2000, the Company had net operating loss carryforwards of
approximately $105,599,000 for income tax reporting purposes that expire in
years 2001 through 2020. The tax benefit of approximately $17,033,000 of net
operating losses related to stock options will be credited to equity when the
benefit is realized through utilization of the net operating loss carryforwards.
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 $42,239,000 and $35,309,000 at October 31, 2000 and 1999,
respectively.
- --------------------------------------------------------------------------- 19
<PAGE> 15
- -------------------------------------------------------------------------------
Notes to Financial Statements (continued)
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,
2000 and 1999.
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, 2000, the Company had not contributed to the
plan.
12. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Quarterly financial information for fiscal 2000 and 1999 is presented in the
following table:
(In thousands, except per share data)
<TABLE>
<CAPTION>
1st 2nd 3rd 4th
Quarter Quarter Quarter Quarter
- ---------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
2000
Total revenues $ 1,791 $ 2,368 $ 2,449 $ 3,070
Loss from operations (3,887) (4,422) (4,149) (4,416)
Net loss (3,783) (4,101) (3,789) (4,055)
Net loss per share,
basic and diluted (0.23) (0.24) (0.21) (0.23)
1999
Total revenues $ 1,553 $ 1,500 $ 1,318 $ 1,763
Loss from operations (3,706) (3,661) (3,722) (4,117)
Net loss (3,623) (3,620) (3,620) (3,984)
Net loss per share,
basic and diluted (0.24) (0.24) (0.23) (0.24)
</TABLE>
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, 2000 and 1999, and the related statements of
operations, stockholders' equity, and cash flows for each of the three years in
the period ended October 31, 2000. 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, 2000 and 1999, and the results of its operations and its cash
flows for each of the three years in the period ended October 31, 2000, in
conformity with accounting principles generally accepted in the United States.
/s/ ERNST & YOUNG LLP
McLean, Virginia
December 8, 2000
Neuromins(R) is a registered trademark of the Company.
(C) 2001 Martek Biosciences Corporation.
All rights reserved.
20 ---------------------------------------------------------------------------
<PAGE> 16
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
George P. Barker
Senior Vice President, 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, 2000,
there were approximately 170 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 1999 High Low
- -------------------------------------------------------------------------
<S> <C> <C>
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
Fiscal 2000 High Low
- -------------------------------------------------------------------------
November 1, 1999 - January 31, 2000 $15 3/8 $ 7 3/8
February 1, 2000 - April 30, 2000 $32 $11
May 1, 2000 - July 31, 2000 $24 1/2 $13 7/8
August 1, 2000 - October 31, 2000 $24 7/8 $15 3/4
</TABLE>
SHAREHOLDERS MAY OBTAIN, AT NO CHARGE, A COPY OF MARTEK BIOSCIENCES
CORPORATION'S FORM 10-K, FILED WITH THE SECURITIES AND EXCHANGE COMMISSION, AT
THE COMPANY'S WEBSITE WWW.MARTEKBIO.COM OR BY WRITING TO:
INVESTOR RELATIONS
MARTEK BIOSCIENCES CORPORATION
6480 DOBBIN ROAD
COLUMBIA, MD 21045
<PAGE> 17
[MARTEK LOGO]
Martek Biosciences Corporation
6480 Dobbin Road, Columbia, Maryland 21045
410.740.0081
Call toll-free for product ordering
information: 1.800.662.6339
www.martekbio.com
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-23.01
<SEQUENCE>4
<FILENAME>w44736ex23-01.txt
<DESCRIPTION>CONSENT OF ERNST & YOUNG LLP
<TEXT>
<PAGE> 1
Exhibit 23.01
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in this Annual Report (Form 10-K)
of Martek Biosciences Corporation of our report dated December 8, 2000, included
in the 2000 Annual Report to Shareholders of Martek Biosciences Corporation.
We also consent to the incorporation by reference of our report dated December
8, 2000, 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, 2000, 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 333-46949 on Form S-8, dated
February 26, 1998
(5) Registration Statement Number 333-53803 on Form S-3, dated June 18,
1998
(6) Registration Statement Number 333-81739 on Form S-3, dated July 14,
1999
(7) Registration Statement Number 333-84317 on Form S-8, dated August 2,
1999
(8) Registration Statement Number 333-34460 on Form S-3, dated November
13, 2000
(9) Registration Statement Number 333-52298 on Form S-8, dated December
20, 2000
/s/ Ernst & Young LLP
McLean, Virginia
January 26, 2001
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-27.01
<SEQUENCE>5
<FILENAME>w44736ex27-01.txt
<DESCRIPTION>FINANCIAL DATA SCHEDULE
<TEXT>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> OCT-31-2000
<PERIOD-START> NOV-01-1999
<PERIOD-END> OCT-31-2000
<CASH> 3,682,013
<SECURITIES> 16,581,600
<RECEIVABLES> 2,546,974
<ALLOWANCES> 26,826
<INVENTORY> 5,125,872
<CURRENT-ASSETS> 28,793,053
<PP&E> 24,100,346
<DEPRECIATION> 7,954,040
<TOTAL-ASSETS> 45,442,106
<CURRENT-LIABILITIES> 7,527,227
<BONDS> 0
<PREFERRED-MANDATORY> 0
<PREFERRED> 0
<COMMON> 1,780,608
<OTHER-SE> 33,674,062
<TOTAL-LIABILITY-AND-EQUITY> 45,442,106
<SALES> 7,777,778
<TOTAL-REVENUES> 9,676,973
<CGS> 7,091,700
<TOTAL-COSTS> 26,551,146
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 193,390
<INCOME-PRETAX> (15,727,394)
<INCOME-TAX> 0
<INCOME-CONTINUING> (15,727,394)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (15,727,394)
<EPS-BASIC> (.91)
<EPS-DILUTED> (.91)
</TABLE>
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-99.1
<SEQUENCE>6
<FILENAME>w44736ex99-1.txt
<DESCRIPTION>CAUTIONARY STATEMENTS
<TEXT>
<PAGE> 1
EXHIBIT 99.1
CAUTIONARY STATEMENTS FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF
THE PRIVATE SECURITIES LITIGATION 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.
WE HAVE EXPERIENCED NET OPERATING LOSSES SINCE OUR INCEPTION, ARE LIKELY TO
CONTINUE TO EXPERIENCE NET OPERATING LOSSES IN THE SHORT TERM, AND MAY NEVER
BECOME PROFITABLE.
We have experienced net operating losses since our inception. As of October
31, 2000, we have an accumulated deficit of $89,625,000. Until we realize
significant revenues from our nutritional products, we expect to continue to
experience net operating losses. Our balance of cash and cash equivalents at
October 31, 2000 was $2,682,000 and, as of October 31, 2000, we had $16,582,000
in short term investments and marketable securities. We must achieve sustained
profitability to generate the cash necessary to be a viable business in the long
term, and at this time we have not yet generated a sustained source of revenues
to achieve this.
IF OUR INFANT FORMULA LICENSEES DO NOT INTRODUCE PRODUCTS CONTAINING OUR
NUTRITIONAL OILS IN THE UNITED STATES OR BROADEN THEIR USE OF OUR NUTRITIONAL
OILS IN THEIR PRODUCTS OVERSEAS, WE MAY NOT BE ABLE TO REACH REVENUE LEVELS THAT
WOULD MAKE US PROFITABLE.
Nutritional product sales and royalties are likely to be our main source of
revenues in the future. Although we sell some of our nutritional oils into the
adult nutritional products market, approximately two-thirds of our current
nutritional product revenues come from our license agreements with infant
formula manufacturers. As such, we depend on the licensees' sales of products
that include our nutritional oils. Although some of our licensees have included
our nutritional oils in some of their products outside the United States, we
cannot predict whether any licensee will introduce infant formula products
containing our nutritional oils in the United States, broaden their use of our
nutritional oils overseas, or whether any of our other licensees will
incorporate our nutritional oils into their products. Until these events occur
and we recognize significant revenues as a result of increased product
introductions, we do not expect to be profitable from the sale of nutritional
oils to our licensees.
1
<PAGE> 2
Ultimately our success in the infant formula industry depends on growing
acceptance of our nutritional oils as necessary or beneficial additives to
infant formulas. Notwithstanding existing clinical results that have
demonstrated the beneficial effects of adding our nutritional oils to infant
formula, some experts in the field of infant nutrition do not believe that our
nutritional oils are necessary or that they provide any long-term beneficial
effects. Many of these experts recommend that mothers breastfeed rather than use
infant formulas whether or not they contain our nutritional oils. Some experts
also believe that infant formula without our oils contains sufficient precursor
fats that infants can convert into DHA and ARA as needed. In addition, some
physicians are unimpressed by studies showing that infant formulas fortified
with our oils improve infants' cognitive ability at early ages, suggesting that
these results may not carryover to improved results later in life. Due to these
differences in opinion, we are subject to the risk that the use of DHA and ARA
in infant formula may never gain widespread acceptance.
IF ADDITIONAL POSITIVE CLINICAL RESULTS ARE NOT OBTAINED, WE MAY NOT BE ABLE TO
DEVELOP A PROFITABLE MARKET FOR OUR NUTRITIONAL OILS OUTSIDE OF THE INFANT
FORMULA MARKET.
Approximately 20% of our current nutritional product revenues come from
sales of our nutritional oils to distributors and directly to consumers in the
adult supplement market. Investigators at universities and other research
centers, such as the National Institutes of Health, have observed a relationship
between low levels of DHA and a variety of health risks, including increased
cardiovascular problems, cystic fibrosis, cancer, and neurological and visual
disorders. We are currently trying to establish what contribution, if any,
supplementation with our oils will make in addressing these problems. Although
clinical data is not required to market nutritional supplements to consumers or
distributors outside of the infant formula market, we believe that further
clinical studies are needed to validate the benefits of DHA supplementation.
Accordingly, we have recently begun sponsoring studies to further investigate
the potential benefit of DHA supplementation on cardiovascular health and breast
cancer, and we, as well as others, are conducting research regarding the impact
of DHA supplementation on cystic fibrosis and visual and neurological disorders.
Unless these studies, which are more extensive then earlier pilot studies,
establish the positive impact of DHA supplementation, we may only have a limited
adult nutritional supplement market opportunity.
EVEN IF OUR PRODUCTS DO OBTAIN WIDESPREAD ACCEPTANCE, WE MAY NOT BE ABLE TO
PRICE THE PRODUCTS AT A LEVEL THAT WOULD ALLOW US TO BE PROFITABLE.
Infant formula pricing is very competitive and the market is very sensitive
to product price changes. Because the inclusion of our oils into infant formula
may add 10% to 20% to the retail cost of standard infant formula, there is the
risk that our licensees may never be able to sell supplemented products at a
price that will allow them to gain broad market acceptance while at the same
time be profitable. Although our current contracts with licensees outline
product pricing and royalty rates, we cannot predict whether these pricing
structures will allow our licensees to be competitive in the future. If we have
to reduce our prices, we may not be able to sell products at a price that would
enable us to be profitable. We are currently negotiating flat-rate pricing with
our infant formula licensees and have agreed to accept flat-rate pricing
purchase orders from our licensees in the interim until formal agreements are
finalized. We do not believe that this change is material to investors as the
economics of flat-rate pricing will be similar to our current economics, with
the current transfer price and royalty combined into one price with a slight
discount. Although either our current pricing structure or the flat-rate pricing
structure will enable us to achieve profitability if our products receive
widespread acceptance, we cannot predict whether either of these pricing
structures will enable our licensees to achieve success marketing these
products. None of our license agreements requires our licensees to purchase any
minimum amount of products from us now or in the future and all of our license
agreements allow our licensees to manufacture our products themselves or
purchase nutritional oils from other sources.
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IF WE ARE UNABLE TO INCREASE OUR PRODUCTION CAPACITY OR ENTER INTO FAVORABLE
AGREEMENTS WITH THIRD PARTIES TO PRODUCE OUR OILS, OUR CUSTOMERS MAY NOT BE ABLE
TO OBTAIN A SUFFICIENT SUPPLY OF DHA AND ARA AT A COMMERCIALLY REASONABLE PRICE
TO GAIN A BROAD ACCEPTANCE OF THESE PRODUCTS AND OUR FUTURE REVENUES FROM THESE
PRODUCTS MAY BE LIMITED.
To meet our customers' projected demand for our nutritional oils, we have
developed a process for the large-scale production of our oils at our
Winchester, Kentucky manufacturing plant. We estimate the world-wide infant
formula market to be approximately $6 billion. If our licensees were to
penetrate 100% of this market with DHA and ARA supplemented formulas, we
estimate that we would receive approximately $300 million in revenues annually
from these sales. To date, our licensees have penetrated less than 2% of the
world-wide infant formula market. While our current production level in our
plant is sufficient to meet this current demand, if demand increases beyond our
current production capabilities, we may be unable to produce the required
quantities of oil cost effectively. Although our licensees have a right to
manufacture DHA and ARA, we are not aware of any of our licensees doing so or
preparing to do so. We estimate that it may take a licensee approximately one
year or more to develop their process of making our oils. Accordingly, if we are
unable to meet demand, our licensees may not be able to manufacture product for
themselves for at least one year. We believe that we can increase production to
supply approximately 20% to 30% of the world-wide infant formula market with
additional capital expenditures. However, our ability to maintain commercial
production at those levels at our plant has not been successfully tested. As a
precaution, we have developed plans to expand our existing facilities to
accommodate increased production. In order to double our capacity at our current
facility, it would cost as much as $20 million, which would require us to raise
significant amounts of capital. We have also conducted DHA production trials
with third party manufacturers. However, we do not currently have a third party
manufacturing agreement in place to supply us with DHA-containing oil. If we are
unable to cost effectively manufacture our DHA-containing oils at our plant, or
we are unable to enter into a favorable third party manufacturing agreement or
our licensees are unable to find alternative sources for our DHA-containing
oils, our licensees may not be able to meet future demand and our revenues may
be limited in the future.
Although we are able to produce ARA-containing oil at our Winchester plant,
we have entered into an agreement with a third party manufacturer, DSM Food
Specialties, to supply our ARA-containing oil. If DSM Food Specialties fails to
supply us with required amounts under the contract, we would not be able to meet
our customers' demands. In this case, we would have to either manufacture the
ARA-containing oil at our plant, which would reduce our DHA-containing oil
production capacity, or enter into other third party manufacturer supply
agreements. If we are unable to find alternative supply sources or are unable to
cost effectively manufacture the ARA-containing oil in our Winchester plant, our
licensees may not be able to meet future product demand and our future revenue
from sales of ARA-containing oils may be limited.
BECAUSE WE ARE STILL IN THE EARLY STAGES OF PRODUCT DEVELOPMENT, WE WILL NEED
SIGNIFICANT ADDITIONAL CAPITAL TO CONTINUE OUR RESEARCH AND DEVELOPMENT, CONDUCT
PRODUCT TESTING, INCLUDING PRECLINICAL AND CLINICAL TRIALS, AND MANUFACTURE AND
MARKET OUR PRODUCTS.
We have a number of products that are in the early stages of research and
development, product testing, manufacturing or marketing. Although we receive
revenues from sales of infant formula containing our nutritional oils, our
dietary supplement Neuromins(R), our stable isotope products, and some other
products, the aggregate revenue from these products is currently insufficient to
internally fund our product development, manufacturing and marketing needs.
Therefore, we will continue to require additional outside sources of funding. We
estimate that we will need approximately $30-40 million over the next several
years to fund our research and development, product testing, manufacturing, and
marketing at budgeted levels. Additionally, if our business grows, these needs
will increase.
To continue to fund our growth, we will pursue various sources of funding,
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which may include equity issuances, asset based borrowing, lease financing, and
collaborative arrangements with partners. Our existing term loan, which has a
current balance at December 31, 2000 of approximately $285,000, requires us to
meet certain debt covenants, which include maintaining a cash, cash equivalents
and marketable securities balance of at least $12 million and meeting certain
debt/equity and other ratios. Because additional debt financing arrangements
would have to comply with these financial covenants, we may not be able to
secure additional debt financing on terms acceptable to us. Additionally,
funding from other sources may not be available, or may not be available on
terms that would be commercially acceptable or permit us to continue the planned
commercialization of our products or to expand our production capacity. If we
obtain funds through collaborative or strategic partners, these partners may
require us to give them technology or product rights, including patents, that
could ultimately diminish our value. If we cannot secure adequate funding, we
may need to scale back our research, development, manufacturing, and
commercialization programs which may have a materially adverse affect on our
future business.
THE MARKET PRICE OF OUR COMMON STOCK MAY EXPERIENCE A HIGH LEVEL OF VOLATILITY
DUE TO FACTORS SUCH AS ITS RELATIVE ILLIQUIDITY, THE VOLATILITY IN THE MARKET
FOR BIOTECHNOLOGY STOCKS GENERALLY, AND THE EFFECT OF SHORT TERM EVENTS LIKE
PRODUCT LAUNCHES AND LICENSE ANNOUNCEMENTS.
We are a public emerging growth company in the biosciences sector. As
frequently occurs among these companies, the market price for our common stock
may experience a high level of volatility. During the fifty-two week period
ending October 31, 2000, our common stock price has traded between $7.375 and
$32.00. During the fifty-two week period ending October 31, 1999, our common
stock price ranged from $5.50 to $10.625. The following are examples of items
that may significantly impact the market price for our common stock:
- announcements of technical innovations, new commercial products, new
license arrangements or strategic partnerships by us or our competitors;
- patent or other intellectual property disputes;
- quarterly fluctuations in our results of operations;
- regulatory developments concerning our products and our competitors'
products; and
- general market conditions for emerging growth companies and bioscience
companies.
Because we may experience a high level of volatility in our common stock,
you should not invest in our stock unless you are prepared to handle a
significant loss of your capital. At any given time, you may not be able to sell
your shares at a price you think is acceptable.
The market liquidity for our stock is very low. As of December 31, 2000, we
had 17,808,919 shares of common stock outstanding. Since our initial public
offering of common stock on November 23, 1993, the average daily trading volume
in our common stock as reported on the NASDAQ National market has been 149,045
shares. The average trading volume in our common stock during the fifty-two week
period ending October 31, 2000 was 97,091 shares. The average trading volume in
our common stock during the fifty-two week period ending October 31, 1999 was
56,708 shares. Although a more active trading market may develop in the future,
the limited market liquidity for our stock may effect your ability to sell and
the price at which you are able to sell your shares of common stock.
IF SIGNIFICANT SHARES ELIGIBLE FOR FUTURE SALE ARE SOLD OR REGISTRATION RIGHTS
ARE EXERCISED, THE RESULT MAY DEPRESS OUR STOCK PRICE BY INCREASING THE SUPPLY
OF OUR SHARES IN THE MARKET AT A TIME WHEN DEMAND MAY BE LIMITED.
Because we continue to require additional outside sources of capital to
finance, among other things, our research and development, product testing, and
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the manufacturing or marketing of our products, we may need to raise additional
capital through the sale of equity securities. As of December 31, 2000, we had
17,808,919 shares of common stock outstanding, stock options outstanding to
purchase an aggregate of 2,856,270 shares of common stock at various exercise
prices ranging from $6.25 to $34.25 per share, and warrants outstanding to
purchase up to 734,391 shares of common stock at exercise prices between $7.51
and $18.76. To the extent that these options and warrants for our common stock
are exercised, the increase in the number of our outstanding shares of common
stock may adversely affect the price for our common stock. This could hurt our
ability to raise capital through the sale of equity securities. Additionally,
some of our stockholders who bought shares or warrants from us in private
placements have registration rights. If the stockholders were to exercise their
registration rights when we are seeking to raise capital by selling stock in a
registered offering, the result could effectively prevent us from doing so.
IF OUR LICENSEES DO NOT RECEIVE NECESSARY REGULATORY APPROVALS FOR THE USE OF
OUR NUTRITIONAL SUPPLEMENTS IN INFANT FORMULAS, THEY WILL NOT BE ABLE TO MARKET
FORMULA CONTAINING OUR PRODUCTS.
Many of our products and the manufacturing and marketing of these products
are subject to extensive regulation by the FDA and similar regulatory
authorities in other countries depending on the product type and method of
manufacture. For example, the FDA regulates, to varying degrees and sometimes in
very different ways, infant formulas, dietary supplements, foods, medical foods,
animal feed and pharmaceutical products.
To date, infant formula containing our nutritional oils has not received
regulatory approval in the United States. As a result of prior filings for this
approval by our licensees, the FDA has raised questions pertaining to the
results of animal studies relating to DHA and ARA concerning the slightly
enlarged livers and spleens of the laboratory rats who consumed large quantities
of these oils in the studies. We, along with our licensees, are in the process
of responding to the FDA to address these questions. As part of this process,
during February 2000, we filed a "generally recognized as safe" ("GRAS")
notification with the FDA for the use of our DHA and ARA nutritional oils in our
licensees' infant formula. If the FDA review results in a favorable outcome,
each of our infant formula licensees will need to obtain a separate FDA
authorization before marketing an infant formula with our sources of DHA and
ARA.
There can be no assurance that our GRAS notification, the final
determination of which may take a minimum of three to six additional months from
the effective date of the filing of this Form 10-K, will have a favorable
outcome, and even if it does, there can be no assurance that our licensees will
be able to obtain the FDA approval to market an infant formula containing our
products in the United States. If we are unable to obtain these approvals, or if
approvals are delayed, our ability to successfully market products directly and
through our licensees, and to generate revenues from infant formula product
sales or royalties, would be impaired.
OUR CURRENT PATENTS MAY NOT BE ABLE TO PROVIDE PROTECTION AGAINST COMPETITIVE
PRODUCTS AND WE MAY BE UNABLE TO PROTECT OUR INTELLECTUAL PROPERTY PORTFOLIO IN
THE FUTURE.
European and U.S. patent authorities have not adopted a consistent policy
regarding the breadth of claims allowed for health and bioscience patents. Our
issued patents, or patents that we may obtain in the future, may not afford
adequate protection against competitors with competing technology because
governmental agencies may revoke our patents for being too broad or may limit
the scope of our patents. If this happens, companies may be able to produce
products using our previously patented technology. We may also incur substantial
costs in the future in defending our patents.
OmegaTech, Inc., Monsanto Corporation, Aventis S.A. and Nagase & Co. Ltd.
are challenging our European patent covering our DHA-containing oils. At a
hearing in October, 2000, a division of the European Patent Office revoked our
patent on the grounds that it is too broad. We immediately appealed this ruling,
and
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as a result, our patent was reinstated and it will remain in effect during the
appeal process, which may take up to two years. If the revocation is upheld upon
our appeal, or any other challenges to our patents are successful, our
competitors may be able to produce our products and, as a result we may
experience decreases in the future sales of our nutritional oils, decreases in
the revenues on sales of infant formula containing our oils and decreases in
license fees related to our oils. Although our revenues may decrease under our
license agreements, the revocation of our European DHA patent will not terminate
any of our license agreements.
WE ARE AWARE OF SEVERAL PRODUCTS THAT ARE CURRENTLY AVAILABLE, AND PRODUCTS
UNDER DEVELOPMENT, THAT MAY PRESENT A SERIOUS COMPETITIVE THREAT TO OUR
PRODUCTS.
Our success depends upon achieving and maintaining a superior competitive
position in infant formula and adult nutritional product markets. Many of our
competitors including BASF, F. Hoffman-LaRoche Ltd., OmegaTech, Inc., Monsanto
Corporation, Aventis S.A. and Nagase & Co. Ltd. have substantially greater
research and development capabilities, marketing, financial and managerial
resources and experience in the industry. If a competitor develops a better
product or technology, our products or technologies may be rendered obsolete.
We believe that, to date, we have developed the most efficient production
method and purest forms of DHA and ARA oils; however, we are aware that other
methods of producing DHA and ARA are available. Although no company has yet
received approval to market these products in infant formula in the United
States, some infant formulas and other products now on the market outside the
United States use oils derived from other sources, such as fish or eggs. We are
aware of the development of a DHA-containing fish oil which provides an
alternative to our DHA oil for infant formula applications. Although it is a
lower cost product relative to our DHA, fish oil has odor, stability and taste
characteristics that may limit its usefulness. Only a very small percentage of
currently marketed supplemented infant formulas contains DHA and ARA that have
not been produced by us. Currently, fish oil based products dominate the adult
DHA supplement market. We are aware of the development of microencapsulated fish
oil products by several large companies, including BASF and F. Hoffman-LaRoche
Ltd. Although 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 our DHA oil, fish oil presents a substantial
competitive threat to our Neuromins(R) DHA. None of these companies has yet
received approval to include DHA derived from fish oil or eggs in infant formula
within the United States; however, some of these companies have received
approval to include DHA derived from fish oil in infant formula in Asia and DHA
and ARA derived from eggs in infant formula in Europe.
We are also aware that OmegaTech, Inc., an early stage company, is able to
produce DHA from a strain of algae and is presently marketing this product as
an adult nutritional supplement. OmegaTech, Inc. is currently challenging our
European DHA patent and, if their challenge is upheld on appeal a barrier to
their ability to compete with us would be eliminated. We are currently unable to
evaluate the degree of competitive threat that this fungal source of DHA will
present to our DHA oil in the future.
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