##### 



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549 FORM 10-Q þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 For the Quarterly Period Ended January 31, 2004 or o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 For the Transition Period From __ to __   COMMISSION FILE NUMBER 0-22354
 MARTEK BIOSCIENCES CORPORATION   Delaware
    
    52-1399362(State of Incorporation)
    
    (IRS Employer Identification No.)
 6480 Dobbin Road, Columbia, Maryland 21045
(Address of principal executive offices) Registrants telephone number including area code:   (410) 740-0081 None
(Former name, former address and former fiscal year, if changed since last report)   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 past 90 days. þ Yes o No Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). þ Yes o No Common stock, par value $.10 per share: 29,213,136 shares outstanding as of March 1, 2004




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##### 



PART I  FINANCIAL INFORMATION
Item 1. Financial Statements
MARTEK BIOSCIENCES CORPORATION Consolidated Balance Sheets
($ in thousands, except share and per share data) January 31,
    
    October 31,2004
    
    2003(Unaudited)AssetsCurrent assetsCash and cash equivalents
    
    $
    38,472
    
    
    $
    29,924Short-term investments and marketable securities
    
    
    26,111
    
    
    
    67,047Accounts receivable, net
    
    
    23,695
    
    
    
    20,164Inventories, net
    
    
    18,448
    
    
    
    14,543Other current assets
    
    
    7,173
    
    
    
    6,666Total current assets
    
    
    113,899
    
    
    
    138,344Property, plant and equipment, net
    
    
    142,946
    
    
    
    88,314Goodwill
    
    
    50,341
    
    
    
    50,274Other intangible assets, net
    
    
    18,402
    
    
    
    18,378Other assets
    
    
    642
    
    
    
    213Total assets
    
    $
    326,230
    
    
    $
    295,523Liabilities and stockholders equityCurrent liabilitiesAccounts payable
    
    $
    11,219
    
    
    $
    14,988Accrued liabilities
    
    
    10,206
    
    
    
    12,020Current portion of notes payable and other current obligations
    
    
    650
    
    
    
    2,277Current portion of unearned revenue
    
    
    2,193
    
    
    
    2,841Total current liabilities
    
    
    24,268
    
    
    
    32,126Long-term debt under revolving credit facility
    
    
    20,000
    
    
    
    Notes payable and other long-term obligations
    
    
    9,882
    
    
    
    10,441Long-term portion of unearned revenue
    
    
    9,232
    
    
    
    8,992Commitments
    
    
    
    
    
    
    Total liabilities
    
    
    63,382
    
    
    
    51,559Stockholders equityPreferred 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; 100,000,000 shares
authorized; 29,029,621 and 28,041,323 shares issued and
and outstanding at January 31, 2004 and October 31, 2003,
respectively
    
    
    2,903
    
    
    
    2,804Additional paid-in capital
    
    
    368,162
    
    
    
    352,728Accumulated deficit
    
    
    (108,217
    )
    
    
    (111,568
    )Total stockholders equity
    
    
    262,848
    
    
    
    243,964Total liabilities and stockholders equity
    
    $
    326,230
    
    
    $
    295,523
 See accompanying notes. 2




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##### 



MARTEK BIOSCIENCES CORPORATION
Consolidated Statements of Income
(Unaudited  $ in thousands, except share and per share data) Three months ended January 31,2004
    
    2003Revenues:Product sales:Nutritional product sales
    
    $
    31,709
    
    
    $
    20,209Other product sales
    
    
    396
    
    
    
    289Total product sales
    
    
    32,105
    
    
    
    20,498Contract manufacturing sales
    
    
    3,344
    
    
    
    Other revenue
    
    
    126
    
    
    
    47Total revenues
    
    
    35,575
    
    
    
    20,545Costs and expenses:Cost of product sales
    
    
    19,525
    
    
    
    12,342Cost of contract manufacturing sales
    
    
    2,709
    
    
    
    Research and development
    
    
    3,759
    
    
    
    2,787Selling, general and administrative
    
    
    6,035
    
    
    
    3,742Restructuring reversal
    
    
    
    
    
    
    (250
    )Other operating expenses
    
    
    450
    
    
    
    Total costs and expenses
    
    
    32,478
    
    
    
    18,621Income from operations
    
    
    3,097
    
    
    
    1,924Other income, net
    
    
    284
    
    
    
    137Income before income taxes
    
    
    3,381
    
    
    
    2,061Income tax expense
    
    
    30
    
    
    
    Net income
    
    $
    3,351
    
    
    $
    2,061Net income per share:Basic
    
    $
    0.12
    
    
    $
    0.09Diluted
    
    $
    0.11
    
    
    $
    0.08Weighted average common shares outstanding:Basic
    
    
    28,330,649
    
    
    
    23,368,266Diluted
    
    
    30,898,912
    
    
    
    24,662,609
 See accompanying notes. 3




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##### 



MARTEK BIOSCIENCES CORPORATION
Consolidated Statements of Cash Flows
(Unaudited  $ in thousands) Three Months Ended January 31,2004
    
    2003Operating activities:Net income
    
    $
    3,351
    
    
    $
    2,061Adjustments to reconcile net income to net cash
(used in) provided by operating activities:Depreciation and amortization
    
    
    1,725
    
    
    
    1,060Changes in operating assets and liabilities:Accounts receivable
    
    
    (3,531
    )
    
    
    (2,424
    )Inventories
    
    
    (3,905
    )
    
    
    (987
    )Other assets
    
    
    481
    
    
    
    (599
    )Accounts payable
    
    
    (3,769
    )
    
    
    943Accrued liabilities
    
    
    (1,685
    )
    
    
    2,487Unearned revenue
    
    
    (408
    )
    
    
    117Net cash (used in) provided by operating activities
    
    
    (7,741
    )
    
    
    2,658Investing activities:Purchase of short-term investments and marketable securities
    
    
    (10,300
    )
    
    
    Proceeds from sale of short-term investments and
marketable securities
    
    
    51,236
    
    
    
    2,000Purchase of property, plant and equipment
    
    
    (55,991
    )
    
    
    (6,370
    )Capitalization of intangible and other assets
    
    
    (1,874
    )
    
    
    (200
    )Net cash used in investing activities
    
    
    (16,929
    )
    
    
    (4,570
    )Financing activities:Repayment of notes payable and capital leases
    
    
    (2,315
    )
    
    
    (45
    )Borrowings under revolving credit facility
    
    
    20,000
    
    
    
    Proceeds from the exercise of stock options
    
    
    15,533
    
    
    
    2,618Net cash provided by financing activities
    
    
    33,218
    
    
    
    2,573Net increase in cash and cash equivalents
    
    
    8,548
    
    
    
    661Cash and cash equivalents at beginning of period
    
    
    29,924
    
    
    
    20,419Cash and cash equivalents at end of period
    
    $
    38,472
    
    
    $
    21,080
 See accompanying notes. 4




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##### 



MARTEK BIOSCIENCES CORPORATION
Consolidated Statements of Stockholders Equity
(Unaudited  $ in thousands) Common Stock
    
    AdditionalPaid-in
    
    AccumulatedShares
    
    Amount
    
    Capital
    
    Deficit
    
    TotalBalance at October 31, 2003
    
    
    28,041,323
    
    
    $
    2,804
    
    
    $
    352,728
    
    
    $
    (111,568
    )
    
    $
    243,964Exercise of stock options
    
    
    988,298
    
    
    
    99
    
    
    
    15,434
    
    
    
    
    
    
    
    15,533Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,351
    
    
    
    3,351Balance at January 31, 2004
    
    
    29,029,621
    
    
    $
    2,903
    
    
    $
    368,162
    
    
    $
    (108,217
    )
    
    $
    262,848
 See accompanying notes. 5




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##### 



MARTEK BIOSCIENCES CORPORATION Notes to Consolidated Financial Statements (Unaudited) 1. Basis of Presentation and Significant Accounting Policies Basis of PresentationThe accompanying unaudited consolidated financial
statements of Martek Biosciences Corporation and its wholly owned subsidiaries
(the Company) have been prepared in accordance with accounting principles
generally accepted in the United States for interim financial information and
with the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by accounting principles generally accepted in the United States for complete
financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation have been included. Operating results for the quarter ended
January 31, 2004 are not necessarily indicative of the results that may be
expected for the year ending October 31, 2004. For further information, refer
to the consolidated financial statements and footnotes thereto included in
Martek Biosciences Corporations Annual Report on Form 10-K for the year ended
October 31, 2003. ConsolidationThe consolidated financial statements include the accounts of
Martek Biosciences Corporation and its wholly owned subsidiaries, Martek
Biosciences Boulder Corporation (Martek Boulder) and Martek Biosciences
Kingstree Corporation (Martek Kingstree), after elimination of all
significant intercompany balances and transactions. Use of EstimatesThe 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 and
disclosure of contingent 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. Revenue RecognitionThe Company recognizes revenue when persuasive evidence of
an arrangement exists, delivery has occurred, the fee is fixed or determinable,
and collectibility is probable. Typical infant formula license contracts
include an upfront license fee, a prepayment of product sales and established
pricing on future product sales. In accordance with Emerging Issues Task Force
No. 00-21 (EITF No. 00-21), Revenue Arrangements with Multiple Deliverables,
the consideration from these contracts is allocated based on the relative fair
values of the separate elements. Revenue is recognized on product sales when
goods are shipped. Cash received as a payment on future purchases is deferred
and recognized as revenue when the related shipments are made. Revenue from
product licenses is deferred and recognized on a straight-line basis over the
term of the agreement. At January 31, 2004, the Company had approximately $2.2
million in short-term and $9.2 million in long-term unearned revenue relating
to third-party license agreements and prepayments on product purchases. Contract manufacturing revenue is recognized when goods are shipped to
customers and all other conditions for revenue recognition are met. Revenue
recognized is not subject to repayment. Cash received that is related to future
performance under such contracts is deferred and recognized as revenue when
earned. Foreign Currency TransactionsForeign 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 as incurred. All
material transactions of the Company are denominated in U.S. dollars with the
exception of purchases of ARA from DSM Food Specialties (DSM) Capua, Italy
plant, which effective January 2004, are denominated in euros. Short-Term Investments and Marketable SecuritiesThe Company has classified all
short-term investments and marketable securities as available-for-sale.
Available-for-sale securities are carried at fair value and consist of U.S.
government obligations, U.S. agency obligations and taxable municipal auction
rate securities with average maturities of less than one year. Unrealized gains
or losses on these securities are reported as accumulated other comprehensive
income, which is a separate component of stockholders equity. Realized gains
and losses and declines in value judged to be other than temporary are included
in other income, based on the specific identification method. The Company periodically evaluates whether any declines in the fair value of
investments are other than temporary. This evaluation consists of a review of
several factors, including but not limited to: length of time and extent that
a security has been in an unrealized loss position; the existence of an event
that would impair the issuers future earnings potential; the near term
prospects for recovery of the market value of a security; and the intent and
ability of the Company to hold the security until the market value recovers.
Declines 6




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##### 



in value below cost for debt securities where it is considered probable that
all contractual terms of the security will be satisfied, the decline is due
primarily to changes in interest rates (and not because of increased credit
risk), and where the Company intends and has the ability to hold the investment
for a period of time sufficient to allow a market recovery, are not assumed to
be other than temporary. If management determines that such an impairment
exists, the carrying value of the investment will be reduced to the current
fair value of the investment and the Company will recognize a charge in the
consolidated statements of income equal to the amount of the carrying value
reduction. Comprehensive IncomeComprehensive income is comprised of net earnings and
other comprehensive income, which includes certain changes in equity that are
excluded from net income. The Company includes unrealized holding gains and
losses on available-for-sale securities, if any, in other comprehensive income
on its Consolidated Statements of Stockholders Equity. Stock-Based CompensationThe Company accounts for its employee stock option
plans using the intrinsic value method under the provisions of APB No. 25,
"Accounting for Stock Issued to Employees, and related Interpretations. No
stock-based employee compensation cost is reflected in net income, as all
options granted under the plans had an exercise price equal to the market value
of the underlying common stock on the date of grant. Stock-based compensation
for non-employees is accounted for using the fair value method in accordance
with Statement of Financial Accounting Standards No. 123 (SFAS No. 123). The
Company has adopted the disclosures outlined in SFAS No. 123, Accounting for
Stock-Based Compensation, as amended by SFAS No. 148, Accounting for
Stock-Based Compensation  Transition and Disclosure an Amendment of FASB
Statement No. 123. The following table illustrates the effect on net income and earnings per share
as if the Company had applied the fair value recognition provisions of SFAS No.
123, as amended by SFAS No. 148,to stock-based employee compensation: Three months ended January 31,In thousands, except per share amounts
    
    2004
    
    2003Net income, as reported
    
    $
    3,351
    
    
    $
    2,061Deduct: Total stock-based employee compensation
expense determined under fair value-based
methods for all awards
    
    
    (2,888
    )
    
    
    (3,522
    )Pro forma net income (loss)
    
    $
    463
    
    
    $
    (1,461
    )Earnings (loss) per share:Basic  as reported
    
    $
    0.12
    
    
    $
    0.09Basic  pro forma
    
    $
    0.02
    
    
    $
    (0.06
    )Diluted  as reported
    
    $
    0.11
    
    
    $
    0.08Diluted  pro forma
    
    $
    0.01
    
    
    $
    (0.06
    )
 The effect of applying SFAS No. 123 on pro forma net income and per share
calculations for the three months ended January 31, 2004, as stated above, is
not necessarily representative of the effect 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. The weighted average fair market values of the options at the date of grant for
options granted during the three months ended January 31, 2004 and 2003 were
$43.56 and $14.06, respectively. The fair market value of each option grant is
estimated on the date of grant using the Black Scholes option pricing model
with the following weighted average assumptions for the three months ended
January 31, 2004 and 2003: Three months ended January 31,2004
    
    2003Expected volatility
    
    
    69.8
    %
    
    
    74.6
    %Risk-free interest rate
    
    
    3.7
    %
    
    
    3.6
    %Expected average life of options
    
    7 years
    
    7 yearsExpected dividend yield
    
    
    0.0
    %
    
    
    0.0
    %
 7




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##### 



Net Income Per ShareBasic net income per share is computed using the weighted
average number of common shares outstanding during the period. Diluted net
income per share is computed using the weighted average number of common shares
outstanding, giving effect to stock options and warrants using the treasury
stock method. ReclassificationCertain amounts in the prior periods financial statements
have been reclassified to conform to the current period presentation. 2. Acquisition of FermPro Manufacturing, LP On September 5, 2003, Martek Biosciences Kingstree Corporation (Martek
Kingstree) was created as a wholly-owned subsidiary of Martek to purchase
certain assets and assume certain liabilities of FermPro Manufacturing, LP
(FermPro), which operated a fermentation facility located in Kingstree, SC.
The purchase price of the assets acquired and liabilities assumed included a
payment of approximately $12.1 million, comprised of $5.4 million in cash,
124,788 shares of the Companys common stock valued at approximately $5.6
million, and approximately $1.1 million in acquisition-related fees and
expenses. In addition, a $10 million note was assumed as part of the
transaction. The acquisition has been accounted for as a purchase in accordance with SFAS
No. 141, and accordingly, the results of operations of FermPro have been included
in the accompanying consolidated statements of income from the date of the
acquisition. In accordance with SFAS No. 142, the purchase price has been allocated
to the assets and liabilities of FermPro based on their relative fair value.
The allocation of the purchase price is preliminary and subject to revision
based on the final determination of fair values that is anticipated to be
completed during the Companys second quarter of fiscal year 2004. 3. Short-term Investments and Marketable Securities Available-for-sale securities consist of U.S. government obligations, agency obligations
and taxable municipal auction rate securities and totaled $26.1 million at
January 31, 2004 and $67.0 million at October 31, 2003. There were no
unrealized holding gains or losses on these available-for-sale securities as of
January 31, 2004 and October 31, 2003. In addition, there were no realized
gains or losses recorded for the three months ended January 31, 2004 and
January 31, 2003. 4. Inventories Inventories consist of the following: January 31,
    
    October 31,In thousands
    
    2004
    
    2003Finished products
    
    $
    7,545
    
    
    $
    5,207Work in process
    
    
    8,435
    
    
    
    7,801Raw materials
    
    
    2,791
    
    
    
    2,074Inventories
    
    
    18,771
    
    
    
    15,082Less: inventory reserve
    
    
    (323
    )
    
    
    (539
    )Inventories, net
    
    $
    18,448
    
    
    $
    14,543
 5. Property, Plant and Equipment Property, plant and equipment consist of the following: 8




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##### 



January 31,
    
    October 31,In thousands
    
    2004
    
    2003Land
    
    $
    683
    
    
    $
    683Buildings and improvements
    
    
    9,858
    
    
    
    9,817Machinery and equipment
    
    
    57,649
    
    
    
    56,523Furniture and fixtures
    
    
    2,492
    
    
    
    2,442Computers and software
    
    
    823
    
    
    
    285Construction-in-progress
    
    
    87,769
    
    
    
    33,533Property, plant and equipment
    
    
    159,274
    
    
    
    103,283Less: accumulated depreciation
    
    
    (16,328
    )
    
    
    (14,969
    )Property, plant and equipment, net
    
    $
    142,946
    
    
    $
    88,314
 6. Goodwill and Intangible Assets Intangible assets and related accumulated amortization consist of the
following: As of January 31, 2004
    
    As of October 31, 2003Accumulated
    
    
    
    
    
    
    
    
    
    AccumulatedIn thousands
    Gross
    Amortization
    Net
    
    Gross
    Amortization
    NetTrademarks
    
    $
    2,031
    
    
    $
    (208
    )
    
    $
    1,823
    
    
    $
    2,030
    
    
    $
    (170
    )
    
    $
    1,860Patents
    
    
    6,402
    
    
    
    (794
    )
    
    
    5,608
    
    
    
    6,013
    
    
    
    (672
    )
    
    
    5,341Core technology
    
    
    1,708
    
    
    
    (142
    )
    
    
    1,566
    
    
    
    1,708
    
    
    
    (114
    )
    
    
    1,594Current products
    
    
    10,676
    
    
    
    (1,271
    )
    
    
    9,405
    
    
    
    10,676
    
    
    
    (1,093
    )
    
    
    9,583Goodwill
    
    
    50,341
    
    
    
    
    
    
    
    50,341
    
    
    
    50,274
    
    
    
    
    
    
    
    50,274Total
    
    $
    71,158
    
    
    $
    (2,415
    )
    
    $
    68,743
    
    
    $
    70,701
    
    
    $
    (2,049
    )
    
    $
    68,652
 Core technology and current products relate to the value assigned to the
products purchased as part of the OmegaTech acquisition. The Company recorded
amortization expense on intangible assets of $366,000 and $414,000 for the
three months ended January 31, 2004 and 2003, respectively. 7. Long-term Debt On January 26, 2004, the Company entered into an $85 million secured revolving
credit facility that expires in February 2007. The effective interest rate on
the credit facility approximates 3.4% as of January 31, 2004 and is based on
LIBOR and the Companys current leverage ratio. The new revolving credit
facility is collateralized by accounts receivable and inventory. Among other
things, it contains restrictions on future debt, the payment of dividends and
the further encumbrance of assets. In addition, the credit facility requires
that the Company complies with specified financial ratios and tests, including
minimum coverage and liquidity ratios and maximum leverage ratios. As of
January 31, 2004, the Company is in compliance with all of these debt covenants
and has borrowed $20 million under the revolving credit facility. All
borrowings are due at maturity. This new credit facility replaces the $10
million secured working capital line of credit established in February 2003.
The Company did not have any borrowings under the previous working capital line
of credit. In connection with the purchase of certain assets and the assumption of certain
liabilities of FermPro Manufacturing, LP (FermPro), the Company assumed a $10
million secured note. The note was amended on January 26, 2004 and is now an
unsecured obligation of the Company with a maturity date of December 31, 2008.
The note has a stated interest rate of 5% and principal is amortized over a
20-year period with the balance due at maturity. Payments through December 31,
2003 were comprised of interest only. Also, as part of the FermPro acquisition,
the Company assumed a long-term note of approximately $400,000, due in 2023
with a 7% stated interest rate. In connection with the purchase of OmegaTech, Inc. (OmegaTech), the Company
assumed an obligation to pay a minimum of $7.0 million over an eight year
period associated with an agreement with a third party relating to human and
animal applications for 9




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##### 



OmegaTechs DHA. On December 20, 2002 the Company signed an amendment to this
agreement under which the Company paid $500,000 and signed a non-interest
bearing promissory note for $3.25 million in exchange for the discharge of all
future obligations under the agreement. The first payment under the note of
$1.0 million was paid in August of 2003 and the remainder was paid in December
of 2003. During the three months ended January 31, 2004, interest cost incurred totaled
approximately $130,000, all of which was capitalized as part of the cost of the
Companys construction at the Kingstree, SC manufacturing facility. 8. Commitments As a result of the acquisition of OmegaTech, Inc., the Company is subject to a
prior commitment to purchase a minimum quantity of DHA biomass on favorable
terms from a third party manufacturer. The four and one-half year commitment
expires on June 30, 2006. As of January 31, 2004, the Companys remaining
obligation was approximately $6.5 million, of which the Company has open
purchase orders totaling approximately $700,000. 9. Net Income per Share The following table presents the calculation of basic and diluted net income
per share: Three months ended January 31,In thousands, except per share amounts
    2004
    2003Net income
    
    $
    3,351
    
    
    $
    2,061Weighted average shares outstanding  basic
    
    
    28,331
    
    
    
    23,368Effect of dilutive potential common shares:Employee stock options
    
    
    2,524
    
    
    
    1,219Warrants
    
    
    44
    
    
    
    76Total dilutive potential common shares
    
    
    2,568
    
    
    
    1,295Weighted average shares outstanding  diluted
    
    
    30,899
    
    
    
    24,663Net income per share  basic
    
    $
    0.12
    
    
    $
    0.09Net income per share  diluted
    
    $
    0.11
    
    
    $
    0.08
 Employee stock options to purchase approximately 86,500 shares and 1.5 million
shares for the period ended January 31, 2004 and 2003, respectively, were
outstanding but were not included in the computation of diluted net income per
share because the exercise price of the stock options was greater than the
average share price of the Companys stock for the quarter, and, therefore, the
effect would have been antidilutive. 10. Subsequent Event  On February 5, 2004, the Company completed an underwritten public offering of
76,885 shares of common stock at a price of $65.59 per share pursuant to a
shelf registration. Net proceeds to the Company, after deducting underwriters
fees and estimated expenses, amounted to approximately $11.2 million. 10




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Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations 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 the following:  -
    
    expectations regarding future revenue growth, product introductions,
growth in nutritional product sales, margin and productivity improvements
and potential collaborations and acquisitions;-
    
    expectations regarding sales to and by our infant formula licensees;-
    
    expectations regarding marketing of our oils by our infant formula
licensees;-
    
    expectations regarding future efficiencies in manufacturing processes and
the cost of production of our nutritional oils;-
    
    expectations regarding future purchases of third-party manufactured oils
and expansion of third-party manufacturing facilities;-
    
    expectations regarding production capacity and our ability to meet future
demands for our DHA and ARA oils;-
    
    expectations regarding future research and development costs;-
    
    expectations regarding the integration of the former FermPro
Manufacturing, LP (FermPro) facility with Martek;-
    
    expectations regarding our expansion at our Kingstree, SC facility
(formerly FermPro); 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 Exhibit
99.1 to this report incorporated by reference into this Form 10-Q under the
caption Risk Factors, and in our various other filings with the Securities
and Exchange Commission. Our forward looking-statements speak only as of the
date of this document, and we do not intend to update these statements to
reflect events or circumstances that occur after that date. General Martek was founded in 1985. We are 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. 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. Research is underway to assess what impact, if
any, supplementation with our DHA will have on these health risks. Additional
applications of our patented technology based upon microalgae include our algal
genomics technology and our currently marketed fluorescent detection products
and technologies that can be used by researchers as an aid in drug discovery
and diagnostics. We currently have license agreements with fifteen infant formula manufacturers,
including Mead Johnson Nutritionals, Wyeth, Abbott Laboratories, Nestle, Royal
Numico N.V. (formerly Nutricia), Novartis, Maabarot, Heinz-Watties,
Laboratorios Ordesa and six companies whose identities we have agreed not to
disclose at this time. Collectively, these companies represent more than 70% of
the estimated $8.5 to $9.5 billion worldwide wholesale market for infant
formula and 100% of the estimated $3.0 to $3.5 billion U.S. wholesale market
for infant formula, including the wholesale value of Women, Infant & Children
program (W.I.C.) rebates. W.I.C. is a federal grant program administered by
the states for the benefit of low income, nutritionally at-risk women, infants
and children. 11




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Mead Johnson Nutritionals, Wyeth, Abbott Laboratories, Nestle, Royal Numico,
Novartis, Laboratorios Ordesa, Maabarot and two companies whose identities we
have agreed not to disclose at this time are now marketing term infant formula
products containing our oils in over 30 countries and pre-term infant formula
products containing our oils in over 60 countries around the world. The five
licensees that are not currently marketing term infant formula products
containing our oils represent less than 5% of the estimated worldwide wholesale
market for infant formula. Supplemented term infant formulas manufactured by
Mead Johnson Nutritionals, Abbott Laboratories, Wyeth and Nestle are currently
being marketed in the United States. Prior to fiscal 2003, we incurred losses in each year since our inception. For
the fiscal quarter ended January 31, 2004, we recognized approximately $3.4
million in net income and at January 31, 2004, our accumulated deficit was
approximately $108.2 million. Although we anticipate significant continued
growth in sales of our nutritional oils, and we achieved an operating profit in
fiscal 2003 and in the first quarter of fiscal 2004, we may continue to
experience quarter-to-quarter and year-to-year fluctuations in our future
operating results, 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 the following factors:  
    
    the ability to produce adequate levels of our nutritional oils by us and our third-party manufacturers;
    
    the timing of the construction at our new Kingstree facility;
    
    the timing of the start of production by DSM Food Specialties (DSM) at its new Bevidere facility;
    
    the timing of infant formula market introductions by our licensees;
    
    the timing and extent of introductions of DHA into various child and/or adult applications;
    
    the timing and extent of acceptance of products containing our oils
under state-administered reimbursement programs in the U.S.;
    
    the acceptance of these products by consumers;
    
    competition from alternative sources of DHA and ARA; and
    
    agreements with other future third-party collaborators to market our products or develop new products. As such, the likelihood, timing and extent of future profitability are largely
dependent on factors such as those mentioned above, as well as others, over
which we have limited or no control. Overview During our first fiscal quarter in 2004, we have continued with our extensive
expansion at our recently acquired Kingstree location for the fermentation and
processing of our nutritional oils. We spent approximately $56 million during
the first quarter. We expect the expansion to cost $150  $160 million when
complete. The estimated total project cost has recently increased by
approximately $20 million due to accelerated timing and a revised scope to
include additional equipment to further increase our oil processing capacity.
The first phase of the expansion is expected to begin production in mid fiscal
2004 and once all phases are complete, our production capacity is expected to
triple over the next 12-18 months. On January 26, 2004, we entered into a new $85 million revolving credit
facility, replacing our $10 million revolving line of credit. Funds borrowed
under the new credit facility are secured by inventory and receivables and we
have agreed not to encumber our other assets, except for certain permitted
liens. The new credit facility is scheduled to expire on February 1, 2007. We
plan to use the proceeds from any borrowings under the credit facility to
finance the expansion of our manufacturing capacity. In February 2004, we offered and sold approximately 177,000 shares of our
common stock in an underwritten public offering. We generated approximately
$11.2 million in net proceeds from the offering, which we received subsequent
to the end of the first quarter. These proceeds are also expected to assist in
financing the expansion of our manufacturing capacity as well as be used for
general corporate purposes. Also in February 2004, the U.S. Food and Drug Administration (FDA) completed
a favorable review of the Companys generally recognized as safe (GRAS)
notification for use of our DHASCO-S oil in food and beverage applications.
Although our oils could be sold for applications previously, GRAS status
provides further indication of food safety following an extensive review of
safety and clinical data regarding the DHASCO-S oil and supports the
affirmation of an independent panel of expert physicians, scientists and
toxicologists that the DHASCO-S oil is GRAS for use in food products. 12




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Management Outlook We believe that the outlook for future revenue growth continues to be positive,
although quarterly results may show fluctuations. Specifically, we believe that
for fiscal 2004, current term infant formula products containing our oils will
continue to gain market share in existing markets, new products will be added
in those markets, and term infant formulas containing our oils will also be
introduced in additional countries. As we have discussed, to date, ten of our
infant formula licensees have obtained the regulatory approval, where required,
to sell term infant formula products containing our oils in over 30 countries
and pre-term infant formula products containing our oils in over 60 countries
around the world. Supplemented term infant formulas manufactured by four of our
licensees are currently being marketed in the United States and we expect these
sales to increase in fiscal 2004. In the first quarter of fiscal 2004, approximately 89% of our revenues related
to the sales of our oils for use in infant formula products. We anticipate
increased future sales of our oils for other products such as products
developed for pregnant and nursing mothers, cardiovascular health, and the food
and beverage market. We expect that the majority of these sales will come
through partnering relationships with larger companies in the nutritional and
food and beverage markets. We anticipate that over the next few years these
sales will expand and represent a much larger potential market than infant
formula. We have an aggressive growth plan that includes substantial additional
investments in our manufacturing facilities. To accommodate our growth plan, we
will need to continue to improve our operational and financial information
systems and controls, expand our management team, continue to attract and
retain new employees, accurately anticipate demand for our products and
effectively bring on line and integrate new production capacity. In addition,
we will rely on third-party manufacturers to effectively bring on line and
integrate new production capacity. All of these factors present numerous
challenges and could result in unanticipated costs and delays in product
manufacture. Production The demand for our nutritional oils for use in infant formula products
significantly exceeded our customers initial forecasts in the first quarter of
fiscal 2004, as in fiscal 2003, resulting in customer orders in excess of our
planned production. Although we produced significantly more nutritional oils
than our customers initial projections, accelerated market demand coupled with
a power outage at DSMs Capua, Italy plant, has caused a production shortfall
for the quarter ended January 31, 2004. As demand increased in 2003, we
requested that our customers provide us with longer lead-times in order to fill
their orders. Even with the longer lead-times and increased production each
quarter, we continue to limit the orders we accept for our nutritional oils. Including the expansion at our Winchester facility, which was completed in
2003, we currently have the production capacity equivalent to approximately
$140  $150 million in annual sales of our nutritional oils. We are now in the
process of an extensive expansion at our Kingstree facility. The expanded
Kingstree facility should begin initial production in mid-fiscal 2004 and
should more than triple our production capacity in phases over the next 12-18
months. We also believe that production optimization efforts will continue at
our plants for the next several years as new technologies and additional algal
strains are tested to further increase output and reduce costs. Our ARA oil is currently produced by DSM at its plant in Capua, Italy. DSM
recently completed expansion of these facilities and is in the process of
adding U.S. production by converting existing facilities in Belvidere, NJ to
the production of ARA. We expect to begin receiving ARA from the Belvidere
facility in the Spring of 2004; however, because DSM is a third-party
manufacturer, we have limited control over the progress of its production
timing. ARA is further processed at our plant in Winchester and we plan to
begin similar ARA processing at our Kingstree facility in mid-fiscal 2004 as
well. The production of ARA by DSM was impacted by a nationwide power failure in
Italy in late September 2003. The Italian power outage resulted in a production
loss of ARA that negatively impacted our revenues in the first quarter of
fiscal year 2004. In addition to the impact on revenue, the production
inefficiencies incurred as a result of the restart of production by DSM in
Capua led to increased costs of ARA in the first quarter of fiscal year 2004.
Increased shipping and freight costs were also incurred to reduce the delivery
time for ARA that was produced subsequent to the power failure. Our cost of ARA is also experiencing upward pressure due to the decline of the
U.S. dollar against the euro. To date, cost savings from production
efficiencies at DSMs Capua, Italy plant have largely offset the impact of the
declining dollar/ euro exchange rate. We expect continued decreases in the cost
of ARA production from DSM; however a portion, or all, of the production
savings may be 13




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offset by further weakness in the U.S. dollar against the euro. Our exposure to
currency fluctuations should decrease once DSM begins ARA production in the U.S
at their Belvidere facility as planned in the Spring of 2004. When combined with DSMs expanded production, we plan to have production
capacity equivalent to approximately $300 million in annualized sales of our
nutritional oils by the end of fiscal 2004 and equivalent to approximately $500
million in annualized sales of our nutritional oils by mid-fiscal 2005. If the
production expansion in Kingstree does not proceed as planned, if DSM is not
able to start production in the U.S. as planned, or if market demand subsides
due to our inability to meet demand for our products, our financial results may
be negatively impacted. Our DHA-S oil, which is currently used in the adult supplement market and
animal feed market, is currently produced by third-party contract manufacturers
including C.P. Kelco U.S. Inc. (CP Kelco). We have a four and one-half year
minimum purchase commitment with CP Kelco that expires on June 30, 2006 with
possible annual renewal. Our commitment for calendar year 2004 totals
approximately $2.4 million and our minimum commitment for the six month period
ending June 30, 2005 totals approximately $1.4 million. The remaining commitment
of $2.7 million relates to the twelve month period ended June 30, 2006. On March 12, 2003, an explosion occurred at a public wastewater treatment works
in Winchester, KY, resulting in property damage. On April 8, 2003, we received
a report from the state fire marshal that concluded that the incident resulted
from the introduction of n-hexane into the local sewer system. We use n-hexane
in the production process for our DHA oil. The state fire marshal report did
not rule out other possible contributors to the incident. Although n-hexane was
found at the site of the incident, there may have been other contributing
factors, including the presence of other flammable substances that were not
discharged from our plant. Production at our facility has not been negatively
impacted by these events. We have entered into discussions with the Winchester
Municipal Utilities Commission (WMU) and its insurer as to our financial
responsibility, if any, for property damage. We are expecting that we will
begin to receive and will analyze information from the utility and its insurer
concerning the details of the incident. On March 9, 2004, we entered into a
agreement with the city of Winchester, WMU, and WMUs insurer to extend any
applicable statute of limitations and allow the parties to continue discussing
this matter. In addition, we have learned that the federal Environmental
Protection Agency, utilizing personnel from its Criminal Investigation
Division, is contacting persons and asking questions relating to the explosion
at the wastewater treatment plant and n-hexane. We have been advised by EPA
representatives that this questioning is preliminary in nature and that there
are no pending formal proceedings. We accrued $400,000 in the quarter ended
April 30, 2003 to account for an estimate of costs that we may incur as a
result of this incident. Through the end of the first quarter of fiscal year
2004 we have incurred approximately $192,000 in legal fees related to the
incident, which were applied to the liability. In addition to any potential
liabilities for property damage, this incident resulted in the delay of the
issuance of certain permits required for the expansion of our existing
Winchester plant and was a consideration in our decision to begin immediate
expansion at our Kingstree, SC plant. While we cannot be certain of the
ultimate outcome of our discussions with WMU and its insurer or the EPA
activity, we believe that they will not have a material adverse impact on our
production, financial condition or results of operations. Critical Accounting Policies and the Use of Estimates The preparation of our consolidated financial statements in conformity with
accounting principles generally accepted in the U.S. requires management to
make estimates and assumptions that affect the amounts reported in our
consolidated financial statements and accompanying notes. On an on going basis,
we evaluate our estimates and judgments, which are based on historical and
anticipated results and trends and on various other assumptions that we believe
are reasonable under the circumstances, including assumptions as to future
events. By their nature, estimates are subject to an inherent degree of
uncertainty and, as such, actual results may differ from our estimates. We
discuss accounting policies and assumptions that involve a higher degree of
judgment and complexity than others in our Managements Discussion and Analysis
in our Annual Report to shareholders on Form 10-K for the year ended October
31, 2003. Results of Operations RevenuesNutritional product sales increased by $11.5 million or 57% in the
quarter ended January 31, 2004 as compared to the quarter ended January 31,
2003. The increase is primarily due to increased sales of our oils to both
existing and new infant formula licensees. Substantially all of our product
sales in the quarter ended January 31, 2004 relate to the sale of our oils for
use in infant formulas. Over 85% of our nutritional product sales during the
first quarter of fiscal 2004 were generated by sales of DHA and ARA to three
companies. Approximately 50% of these sales were to Mead Johnson and the
remaining 50% were to Wyeth and Abbott combined. Collectively, these three
companies are currently manufacturing term infant formulas supplemented with
our oils for sale in the U.S., and in over 30 countries around the world.
Although we are not given precise information by our customers as to the 14




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countries in which infant formula containing our oils is ultimately sold, we
estimate that approximately 50-60% of our sales to infant formula licensees for
the first quarter ended January 31, 2004, relates to sales in the U.S. The
first infant formulas containing our oils were introduced in the U.S. in
February 2002 and, as of January 31, 2004, formula supplemented with Marteks
oils had gained greater than 45% penetration in the U.S. infant formula market.
We anticipate sales of nutritional products will continue to grow as infant
formulas containing our oils are introduced by new licensees and by current
licensees in additional countries. We also anticipate that sales of our
nutritional oils will continue to grow in countries where our oils are
currently sold. Other product sales increased $107,000 or 37% in the three months ended January
31, 2004 as compared to the three months ended January 31, 2003 due primarily
to the additional product revenue recognized by our recently acquired Kingstree
facility. Contract manufacturing sales, totaling approximately $3.3 million, relate to
fermentation work performed for various third parties at our Kingstree, SC
facility, which was acquired by the Company in the fourth quarter of fiscal
2003. Contract manufacturing sales are expected to decrease in the future as
this business is phased out over the next few years to allow for increased
fermentation capacity for our DHA and ARA production. As a result of the above, total revenues increased by $15.0 million or 73% in
the quarter ended January 31, 2004 as compared to the quarter ended January 31,
2003. Cost of Product SalesDuring the quarter, we made a decision that customer
demand requirements would be met to the fullest extent possible despite the
potential negative effects on gross profit margins caused by production
inefficiencies or high freight costs. As such, our cost of product sales
increased as a percentage of product sales to 62% in the quarter ended January
31, 2004 from 60% in the quarter ended January 31, 2003 due to higher ARA costs
from DSM, Marteks third party manufacturer of ARA oil in Capua, Italy. The
cost of ARA was negatively impacted during the quarter by the nationwide power
outage in Italy in late September 2003, as well as DSMs use of certain less
efficient fermenters to make ARA. In addition, we increased our use of air
freight to reduce the transit time of ARA shipments from DSMs plant in Europe
to our plant in Kentucky, which resulted in higher costs. The increased costs,
however, were partially offset by approximately $1.3 million of insurance
proceeds related to the power outage. DSM is expected to begin ARA production
in the U.S. in mid-fiscal 2004, which should improve gross profit margins
beginning in the third quarter of fiscal 2004 and mitigate factors that could
impact the production at any one plant. Research and DevelopmentOur research and development costs increased $972,000
or 35% in the quarter ended January 31, 2004 as compared to the quarter ended
January 31, 2003. The increase is primarily the result of the additional
resources directed toward improving the quality and stability of our products,
as well as research related to increasing our production yields and reducing
waste at our manufacturing facilities. In addition, costs were incurred in the
development of products in the food and beverage industry and the commencement
of work related to collaboration agreements. Selling, General and AdministrativeOur selling, general and administrative
costs increased by $2.3 million or 61% in the quarter ended January 31, 2004 as
compared to the same period last year. This increase is primarily related to
the hiring of additional personnel, increases in legal fees and increases in
insurance as we continue to grow and expand to meet the demand for our
products. In addition, the increased costs relate to the addition of our new
Kingstree, SC facility, which was purchased in September 2003. Other Operating ExpensesOther operating expenses totaled $450,000 in the
quarter ended January 31, 2004. These expenditures related primarily to
start-up costs surrounding the expansion at our new Kingstree, SC facility. The
start-up costs include costs related to the training of new personnel hired to
run the expanded facility as well as trial fermentation runs in connection with
the build-up and validation of new equipment into our production process. In
addition, these expenditures include costs related to production trials of our
DHA-S oil for food and beverage products. We anticipate that we will continue
to incur these types of expenses for the remainder of fiscal 2004. Other Income, netOur other income, net increased by approximately $147,000 or
107% in the quarter ended January 31, 2004 as compared to the quarter ending
January 31, 2003 primarily due to increased interest income resulting from
higher cash on-hand. The primary reason for this increase was the additional
interest income related to the increased cash on-hand from the April 2003
common stock offering and cash flows from operations. Income Tax ExpenseIn the quarter ended January 31, 2004, we recorded
approximately $30,000 of state income tax expense. As of October 31, 2003, we
had net operating loss carryforwards for federal income tax purposes of
approximately $169.1 million. In addition, we had a deferred tax asset of
approximately $65.8 million as of October 31, 2003 which was and continues to
be fully 15




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reserved through a valuation allowance since the likelihood of realization of
the benefit cannot be determined. When and if the likelihood of realization of
the benefit becomes probable, we will reverse a portion of the valuation
allowance and recognize a gain. Net IncomeAs a result of the foregoing, we earned approximately $3.4 million
of net income in the quarter ended January 31, 2004 as compared to net income
of $2.1 million in the same period last year. Liquidity and Capital Resources We have financed our operations primarily from the following sources:  
    
    proceeds from the sale of equity securities,
    
    product sales and receipt of license fees,
    
    cash received from the exercise of stock option and warrants, and
    
    debt financing. At January 31, 2004, our primary source of liquidity was our cash, cash
equivalents and short-term investments totaling $64.6 million.Cash, cash
equivalents and short-term investments decreased approximately $32.4 million
from October 31, 2003. This decrease was primarily attributable to
approximately $56.0 million in capital expenditures mostly related to the
construction at our Kingstree, SC facility. In addition, the Company used cash
flow from operations of $7.7 million primarily in connection with an increase
in DHA inventory due to production improvement by the Company and a shortage of
ARA to blend with the DHA to finish the product. These cash outflows were partially offset by the
proceeds from the exercise of options which approximated $15.5 million, and
borrowings under the Companys new revolving credit facility, which provided
$20.0 million in cash during the three months ended January 31, 2004. The expansion of our production facility in Kingstree, SC and to a lesser
degree, production improvements at our facility in Winchester, KY, have and
will continue to have a material effect upon our liquidity and capital
resources in fiscal 2004. We expect to spend approximately $70-80 million over
the next 12 to 18 months in plant and equipment to complete the expansion to
increase output at these facilities. This amount represents our current best
estimate given the aggressive nature of the project as we try to scale up
production as quickly as possible. Throughout the construction period all
interest incurred on borrowings will be capitalized. The table below sets forth our contractual obligations at January 31, 2004: In thousandsLess than
    
    
    
    
    
    
    
    
    
    AfterContractual Obligation
    
    Total
    
    1 Year
    
    1 - 3 Years
    
    4 - 5 Years
    
    5 YearsNotes payable
    
    $
    10,418
    
    
    $
    567
    
    
    $
    1,536
    
    
    $
    7,987
    
    
    $
    328Borrowings under revolving credit
facility
    
    
    20,000
    
    
    
    
    
    
    
    20,000
    
    
    
    
    
    
    
    Operating and capital lease obligations
    
    
    891
    
    
    
    767
    
    
    
    124
    
    
    
    
    
    
    
    Unconditional purchase obligation
    
    
    6,525
    
    
    
    2,629
    
    
    
    3,896
    
    
    
    
    
    
    
    Total contractual cash obligations
    
    $
    37,834
    
    
    $
    3,963
    
    
    $
    25,556
    
    
    $
    7,987
    
    
    $
    328
 In December 2002, we signed a promissory note as part of a settlement of a
royalty agreement that had been assumed in the purchase of OmegaTech. The
Company paid $500,000 and signed a promissory note for approximately $3.3
million in exchange for the discharge of all future royalty agreement
obligations, which totaled more than $7 million. The first $1 million payment
under the note was paid in 2003, and the remainder of $2.3 million paid in
December of 2003. As part of the acquisition of FermPro, we assumed a $10 million note with a
stated interest rate of 5%. The note was amended on January 26, 2004 and is now
an unsecured obligation of the Company with a maturity date of December 31,
2008. Principal is amortized over a 20-year period, with the balance due at
maturity date. Payments through December 31, 2003 were comprised of interest
only. Also as part of the FermPro acquisition, we assumed a long-term note of
approximately $400,000 due in 2023 with a 7% stated interest rate. In January 2004, we entered into a three-year $85 million secured revolving
credit facility agreement with a group of banks, replacing a $10 million line
of credit, which had no borrowings under it. The new revolving credit facility
is collateralized by accounts 16




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receivable and inventory. Among other things, it contains restrictions on
future debt, the payment of dividends and the further encumbrance of assets. In
addition, the credit facility requires that the Company complies with specified
financial ratios and tests, including minimum coverage and liquidity ratios and
maximum leverage ratios. We do not believe that these covenants restrict our
ability to carry out our current business plan and that we are in compliance
with all of these debt covenants. The Company borrowed $20 million under the
revolving credit facility in the first quarter of fiscal 2004 under the terms
of the agreement. The effective interest rate on the credit facility
approximates 3.4% as of January 31, 2004 and is based on LIBOR and our
current leverage ratio. On February 5, 2004, the Company completed an underwritten public offering of
176,885 shares of our common stock at a price of $65.59 per share pursuant to a
shelf registration. Net proceeds to the Company, after deducting underwriters
fees and estimated expenses, amounted to approximately $11.2 million. We expect
to use the proceeds from this offering, together with funds on-hand and
borrowings under our revolving credit facility, to finance the expansion of our
manufacturing capacity to meet increased demand for our DHA and ARA oils and
for various general corporate purposes. We believe that the new revolving credit facility, when combined with our cash
and short-term investments of $64.6 million on-hand at January 31, 2004,
proceeds from the February 2004 underwritten public offering and anticipated
operating cash flows will provide us with adequate capital to meet our
obligations for at least the next 12 to 18 months. If we determine that
additional production capacity is needed to meet anticipated demand beyond
2005, we may need to raise more capital in the form of equity securities or
debt, or a combination of equity and debt. Off-Balance Sheet Arrangements We do not engage in any off-balance sheet financing arrangements. In
particular, we do not have any interest in entities referred to as variable
interest entities, which include special purpose entities and structured
finance entities. 17




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Item 3. Quantitative and Qualitative Disclosure About Market Risk Beginning in January 2004, purchases
of ARA from DSM's plant in Capua, Italy are denominated in euros, which
exposes the Company to risks related to changes in exchange rates between
U.S. dollar and the euro. Fluctuations between the U.S. dollar and the euro
will impact our cost of ARA oil and gross margins. A 5% change in the
exchange rate would impact gross margins of our infant formula products by
approximately 1.5% to 2.0%. Our exposure to these currency fluctuations is
expected to decrease once DSM begins ARA production in the U.S. at their
Belvidere, NJ facility as planned in the Spring of 2004. Item 4. Controls and Procedures  a)
    
    Evaluation of disclosure controls and proceduresThe Chief Executive
Officer and the Chief Financial Officer of Martek Biosciences
Corporation have evaluated the effectiveness of the design and operation
of the our disclosure controls and procedures (as defined under Rules
13a-15(e) and 15d-15(e)) of the Securities Exchange Act of 1934, as
amended (the Exchange Act), as required by paragraph (b) of Rules
13a-15 and 15d-15 under the Exchange Act, and have concluded as of the
end of the period covered by this report that the disclosure controls
and procedures were effective.b)
    
    Changes in internal controlsDuring the quarterly period covered by
this report, there were no changes in our internal controls over
financial reporting in connection with the evaluation required by
paragraph (d) of Rules 13a-15 or 15d-15 under the Exchange Act that
occurred during Marteks last fiscal quarter that materially affect or
is reasonably likely to materially affect the internal controls over
financial reporting. PART II  OTHER INFORMATION Item 1. Legal Proceedings. See Legal Proceedings included in the Companys Form 10-K for the year ended October 31, 2003. Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities. None Item 3. Defaults Upon Senior Securities. Not Applicable Item 4. Submission of Matters to a Vote of Security Holders. Not Applicable Item 5. Other Information. None Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits:  31.1
    
    Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 18




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31.2
    
    Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.32.1
    
    Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.32.2
    
    Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.99.1
    
    Cautionary Statements for purposes of the safe harbor provisions
of the Private Securities Litigation Reform Act of 1995.  (b)
    
    Reports on Form 8-K:Form 8-K furnished on March 10, 2004 (Items 7 and 12  press release
announcing its financial results for the fiscal quarter ended January 31,
2004).Form 8-K filed on February 3, 2004 (Items 5 and 7  press release announcing
the sale by Martek of 176,885 shares of common stock in an underwritten
public offering).Form 8-K furnished on December 22, 2003 (Item 12  the transcripts to the
Companys December 16, 2003 conference call related to its financial results
for the fiscal quarter and fiscal year ended October 31, 2003).Form 8-K furnished on December 16, 2003 (Items 7 and 12  press release
announcing its financial results for the fiscal quarter and fiscal year ended
October 31, 2003). 19




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SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized. MARTEK BIOSCIENCES CORPORATION
(Registrant)  Date: March 16, 2004
    
    /s/ Peter L. BuzyPeter L. Buzy, Chief Financial and Accounting Officer
 20