##### 



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
 FORM 10-Q [X]
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the Quarterly Period Ended April 30, 2004 or [  ]
    
    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.
[X]  Yes  No  [   ] Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the
Exchange Act). [X]  Yes  No  [   ] Common stock, par value $.10 per share: 29,262,307 shares outstanding as of June 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) April 30,
    
    October 31,2004
    
    2003(Unaudited)AssetsCurrent assetsCash and cash equivalents
    
    $
    34,902
    
    
    $
    29,924Short-term investments and marketable securities
    
    
    19,708
    
    
    
    67,047Accounts receivable, net
    
    
    26,227
    
    
    
    20,164Inventories, net
    
    
    25,159
    
    
    
    14,543Other current assets
    
    
    5,318
    
    
    
    6,666Total current assets
    
    
    111,314
    
    
    
    138,344Property, plant and equipment, net
    
    
    203,147
    
    
    
    88,314Goodwill
    
    
    50,430
    
    
    
    50,274Other intangible assets, net
    
    
    29,981
    
    
    
    18,378Other assets
    
    
    1,256
    
    
    
    213Total assets
    
    $
    396,128
    
    
    $
    295,523Liabilities and stockholders equityCurrent liabilitiesAccounts payable
    
    $
    9,731
    
    
    $
    14,988Accrued liabilities
    
    
    17,282
    
    
    
    12,020Current portion of notes payable and other current obligations
    
    
    633
    
    
    
    2,277Current portion of unearned revenue
    
    
    2,173
    
    
    
    2,841Total current liabilities
    
    
    29,819
    
    
    
    32,126Long-term debt under revolving credit facility
    
    
    67,000
    
    
    
    Notes payable and other long-term obligations
    
    
    11,749
    
    
    
    10,441Long-term portion of unearned revenue
    
    
    9,324
    
    
    
    8,992Commitments
    
    
    
    
    
    
    Total liabilities
    
    
    117,892
    
    
    
    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; 29,245,272 and 28,041,323 shares issued and
and outstanding at April 30, 2004 and October 31, 2003, respectively
    
    
    2,925
    
    
    
    2,804Additional paid-in capital
    
    
    380,237
    
    
    
    352,728Accumulated other comprehensive loss
    
    
    (108
    )
    
    
    Accumulated deficit
    
    
    (104,818
    )
    
    
    (111,568
    )Total stockholders equity
    
    
    278,236
    
    
    
    243,964Total liabilities and stockholders equity
    
    $
    396,128
    
    
    $
    295,523See accompanying notes.
 2




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##### 



MARTEK BIOSCIENCES CORPORATION Consolidated Statements of Income  Three months ended April 30,
    
    Six months ended April 30,2004
    
    2003
    
    2004
    
    2003Revenues:Product sales:Nutritional product sales
    
    $
    37,224
    
    
    $
    26,226
    
    
    $
    68,933
    
    
    $
    46,435Other product sales
    
    
    853
    
    
    
    173
    
    
    
    1,249
    
    
    
    462Total product sales
    
    
    38,077
    
    
    
    26,399
    
    
    
    70,182
    
    
    
    46,897Contract manufacturing sales
    
    
    3,733
    
    
    
    
    
    
    
    7,077
    
    
    
    Other revenue
    
    
    110
    
    
    
    48
    
    
    
    236
    
    
    
    95Total revenues
    
    
    41,920
    
    
    
    26,447
    
    
    
    77,495
    
    
    
    46,992Costs and expenses:Cost of product sales
    
    
    24,253
    
    
    
    15,642
    
    
    
    43,778
    
    
    
    27,984Cost of contract manufacturing sales
    
    
    2,928
    
    
    
    
    
    
    
    5,637
    
    
    
    Research and development
    
    
    4,432
    
    
    
    2,657
    
    
    
    8,191
    
    
    
    5,444Selling, general and administrative
    
    
    6,379
    
    
    
    4,161
    
    
    
    12,414
    
    
    
    7,903Restructuring reversal
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (250
    )Other operating expenses
    
    
    654
    
    
    
    1,066
    
    
    
    1,104
    
    
    
    1,066Total costs and expenses
    
    
    38,646
    
    
    
    23,526
    
    
    
    71,124
    
    
    
    42,147Income from operations
    
    
    3,274
    
    
    
    2,921
    
    
    
    6,371
    
    
    
    4,845Other income, net
    
    
    125
    
    
    
    170
    
    
    
    409
    
    
    
    307Income before income tax expense
    
    
    3,399
    
    
    
    3,091
    
    
    
    6,780
    
    
    
    5,152Income tax expense
    
    
    
    
    
    
    
    
    
    
    30
    
    
    
    Net income
    
    $
    3,399
    
    
    $
    3,091
    
    
    $
    6,750
    
    
    $
    5,152Net income per shareBasic
    
    $
    0.12
    
    
    $
    0.13
    
    
    $
    0.23
    
    
    $
    0.22Diluted
    
    $
    0.11
    
    
    $
    0.12
    
    
    $
    0.22
    
    
    $
    0.21Weighted average common shares outstandingBasic
    
    
    29,209,029
    
    
    
    23,933,147
    
    
    
    28,769,839
    
    
    
    23,646,025Diluted
    
    
    31,250,438
    
    
    
    25,413,286
    
    
    
    31,074,675
    
    
    
    25,018,607See accompanying notes.
 3




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##### 



MARTEK BIOSCIENCES CORPORATION Consolidated Statements of Cash Flows  Six Months Ended April 30,2004
    
    2003Operating activities:Net income
    
    $
    6,750
    
    
    $
    5,152Adjustments to reconcile net income to net cash
(used in)/ provided by operating activities:Depreciation and amortization
    
    
    3,454
    
    
    
    2,350Other
    
    
    54
    
    
    
    20Changes in operating assets and liabilities:Accounts receivable
    
    
    (6,063
    )
    
    
    (5,531
    )Inventories
    
    
    (10,616
    )
    
    
    1,714Other assets
    
    
    (57
    )
    
    
    (452
    )Accounts payable
    
    
    (5,257
    )
    
    
    24Accrued liabilities
    
    
    1,154
    
    
    
    851Unearned revenue
    
    
    (336
    )
    
    
    (149
    )Net cash (used in)/provided by operating activities
    
    
    (10,917
    )
    
    
    3,979Investing activities:Purchase of short-term investments and marketable securities
    
    
    (10,300
    )
    
    
    (7,800
    )Proceeds from sale of short-term investments and marketable securities
    
    
    57,639
    
    
    
    2,000Purchase of property, plant and equipment
    
    
    (117,592
    )
    
    
    (13,491
    )Capitalization of intangible and other assets
    
    
    (5,979
    )
    
    
    (260
    )Cash impact of purchase transactions
    
    
    (156
    )
    
    
    776Net cash used in investing activities
    
    
    (76,388
    )
    
    
    (18,775
    )Financing activities:Repayments of notes payable and other
    
    
    (2,336
    )
    
    
    (92
    )Borrowings under revolving credit facility
    
    
    67,000
    
    
    
    Proceeds from the exercise of warrants and options
    
    
    16,259
    
    
    
    6,368Proceeds from the issuance of common stock, net of issuance costs
    
    
    11,360
    
    
    
    83,731Net cash provided by financing activities
    
    
    92,283
    
    
    
    90,007Net increase in cash and cash equivalents
    
    
    4,978
    
    
    
    75,211Cash and cash equivalents at beginning of period
    
    
    29,924
    
    
    
    20,419Cash and cash equivalents at end of period
    
    $
    34,902
    
    
    $
    95,630
 See accompanying notes. 4




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##### 



MARTEK BIOSCIENCES CORPORATION Consolidated Statements of Stockholders Equity  Common Stock
    
    AdditionalPaid-in
    
    AccumulatedOtherComprehensive
    
    AccumulatedShares
    
    Amount
    
    Capital
    
    Loss
    
    Deficit
    
    TotalBalance at October 31, 2003
    
    
    28,041,323
    
    
    $
    2,804
    
    
    $
    352,728
    
    
    $
    
    
    
    $
    (111,568
    )
    
    $
    243,964Issuance of common stock,
net of issuance costs
    
    
    176,885
    
    
    
    18
    
    
    
    11,342
    
    
    
    
    
    
    
    
    
    
    
    11,360Exercise of stock options
and warrants
    
    
    1,027,064
    
    
    
    103
    
    
    
    16,156
    
    
    
    
    
    
    
    
    
    
    
    16,259Amortization of
deferred compensation
    
    
    
    
    
    
    
    
    
    
    11
    
    
    
    
    
    
    
    
    
    
    
    11Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,750
    
    
    
    6,750Other comprehensive loss:Unrealized loss on exchange
rate forward contract
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (108
    )
    
    
    
    
    
    
    (108
    )Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,642Balance at April 30, 2004
    
    
    29,245,272
    
    
    $
    2,925
    
    
    $
    380,237
    
    
    $
    (108
    )
    
    $
    (104,818
    )
    
    $
    278,236
 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 six months ended
April 30, 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 April 30, 2004, the Company had approximately $2.2
million in short-term and $9.3 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 euros. 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, if any, 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 6




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##### 



the market value of a security; and the intent and ability of the Company to
hold the security until the market value recovers. Declines 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. Income TaxesUnder SFAS 109, deferred tax assets and liabilities are determined
based on differences between financial reporting and the tax basis 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. Valuation
allowances are provided against assets, including net operating losses, if it
is anticipated that some or all of the asset may not be realized through future
taxable earnings. As of October 31, 2003, the Company had net operating loss
carryforwards for federal income tax purposes of approximately $169.1 million.
In addition, the Company had a deferred tax asset of approximately $65.8
million as of October 31, 2003, which was, and continues to be, fully reserved
through a valuation allowance since the likelihood of realization of the
benefit cannot be determined. The Company performs regular reviews of the asset
and related valuation allowance, and when and if the likelihood of realization
of the benefit becomes probable, the Company will reverse a portion or all of the
valuation allowance and record an income tax benefit. Comprehensive IncomeComprehensive income is comprised of net earnings and
other comprehensive income, which include 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, as well as changes in the
market value of exchange rate forward contracts 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
    
    Six months endedApril 30,
    
    April 30,In thousands, except per share amounts
    
    2004
    
    2003
    
    2004
    
    2003Net income, as reported
    
    $
    3,399
    
    
    $
    3,091
    
    
    $
    6,750
    
    
    $
    5,152Deduct: Total stock-based employee compensation
expense determined under fair value-based
methods for all awards
    
    
    (4,462
    )
    
    
    (3,584
    )
    
    
    (7,350
    )
    
    
    (7,106
    )Pro forma
net (loss)
    
    $
    (1,063
    )
    
    $
    (493
    )
    
    $
    (600
    )
    
    $
    (1,954
    )Loss per share:Basic - as reported
    
    $
    0.12
    
    
    $
    0.13
    
    
    $
    0.23
    
    
    $
    0.22Basic - pro forma
    
    $
    (0.04
    )
    
    $
    (0.02
    )
    
    $
    (0.02
    )
    
    $
    (0.08
    )Diluted - as reported
    
    $
    0.11
    
    
    $
    0.12
    
    
    $
    0.22
    
    
    $
    0.21Diluted - pro forma
    
    $
        (0.04
    )
    
    $
    (0.02
    )
    
    $
    (0.02
    )
    
    $
    (0.08
    )
 7




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##### 



The effect of applying SFAS No. 123 on pro forma net income and per share
calculations for the three and six months ended April 30, 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 April 30, 2004 and 2003 and six
months ended April 30, 2004 and 2003 were $41.63, $19.93, $41.71 and $18.24, 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 respective periods: Three months ended
    
    Six months endedApril 30,
    
    April 30,2004
    
    2003
    
    2004
    
    2003Expected volatility
    
    
    68.9
    %
    
    
    74.5
    %
    
    
    68.9
    %
    
    
    74.5
    %Risk-free interest rate
    
    
    3.5
    %
    
    
    3.4
    %
    
    
    3.6
    %
    
    
    3.5
    %Expected average life of options
    
    7 years
    
    7 years
    
    7 years
    
    7 yearsExpected dividend yield
    
    
    0.0
    %
    
    
    0.0
    %
    
    
    0.0
    %
    
    
    0.0
    %
 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
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 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 third quarter of fiscal year 2004. 3. DSM Supply and License Agreement In April 2004, the Company entered into a new agreement with DSM Food
Specialties B.V. (DSM) extending the existing relationship between the two
companies involving the production and supply of arachidonic acid (ARA), one of
the Companys nutritional oils that it sells to its infant formula licensees.
Among other things, this agreement provides for the sale to the Company by DSM
of a license related to certain technologies associated with the manufacture of
ARA. This sale involved a license fee totaling $10 million, of which $4 million
was paid upon execution of the agreement, $4 million of which will be paid on
November 1, 2004, and the remaining $2 million of which will be paid by the
Company on November 1, 2005. This agreement also provides for the granting to
DSM by the Company of an exclusive license under certain of the Companys
patents and intellectual property rights for the production by DSM of products
containing ARA that are not for human consumption including animal feed
products. In addition, the agreement with DSM includes provisions surrounding
the potential reimbursement by the Company of start-up costs, as defined,
incurred by DSM during calendar year 2004 in connection with the commencement
of operations and production at DSMs recently acquired Belvidere, New Jersey
facility. Pursuant to the agreement, if the start-up costs exceed a specified
threshold, the Company will reimburse DSM up to a 8




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##### 



maximum of $1 million for actual start-up costs incurred. As of April 30, 2004,
the Company has not expensed any such costs associated with DSMs Belvidere
facility start-up. 4. Acquisition of OmegaTech, Inc. On April 25, 2002, the Company completed its purchase of OmegaTech, Inc., a
DHA-producer located in Boulder, CO. In connection with the purchase, the
Company issued 1,765,728 shares of the Companys common stock in exchange for
all of the outstanding capital stock of OmegaTech. The purchase agreement also
provided for additional stock consideration of up to $40 million, subject to
certain pricing adjustments, if four milestones are met. Two of these
milestones relate to operating results (sales and gross profit margin
objectives by October 2003 and October 2004) and two relate to regulatory and
labeling approvals in the U.S. and Europe. In June 2003, the Commission of the
European Community granted approval of the use for the OmegaTech DHA oil in
certain foods in Europe, meeting the conditions of one of the regulatory
milestones. Accordingly, approximately 358,566 shares of Martek common stock,
valued at approximately $14.2 million, were issued during the third quarter of
fiscal 2003 upon the achievement of this milestone. The payment of this
additional consideration was recorded as goodwill. As of April 30, 2004, the Company does not believe the second regulatory
related milestone has been achieved. In addition, the Company does not believe
the first financial milestone related to sales and gross profit margin for the
eighteen-month period ended October 31, 2003 has been achieved. The
representative of the former OmegaTech stockholders has advised us that he
believes that the common stock issuable with respect to the second regulatory
milestone as well as the first financial milestone should be issued. We
disagree with that conclusion. If this disagreement cannot be resolved, it is
likely that the dispute-resolution procedures contractually provided for will
be utilized. The total Martek common stock that may be issued relating to the
three remaining milestones is subject to a formula that is based on the average
market price of the Companys stock on the dates that the individual milestones
are determined to have been achieved, up to a maximum of 1.9 million shares.
Any contingent consideration paid related to these milestones will be recorded
as goodwill. 5. Short-term Investments and Marketable Securities Available-for-sale securities consist of U.S. government obligations, U.S. agency
obligations and taxable municipal auction rate securities and totaled $19.7
million at April 30, 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
April 30, 2004 and October 31, 2003. In addition, there were no realized gains
or losses during the three and six months ended April 30, 2004 and 2003. 6. Inventories Inventories are stated at the lower of cost or market and are valued using a
weighted average approach that approximates the first-in, first-out method.
Inventories consist of the following: April 30,
    
    October 31,In thousands
    
    2004
    
    2003Finished products
    
    $
    9,209
    
    
    $
    5,168Work in process
    
    
    14,323
    
    
    
    7,801Raw materials
    
    
    2,027
    
    
    
    2,074Total
    
    
    25,559
    
    
    
    15,043Less: inventory reserve
    
    
    (400
    )
    
    
    (500
    )Inventories, net
    
    $
    25,159
    
    
    $
    14,543
 9




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##### 



7. Property, Plant and Equipment Property, plant and equipment consist of the following: April 30,
    
    October 31,In thousands
    
    2004
    
    2003Land
    
    $
    683
    
    
    $
    683Buildings and improvements
    
    
    10,507
    
    
    
    9,817Machinery and equipment
    
    
    60,325
    
    
    
    56,523Furniture and fixtures
    
    
    2,542
    
    
    
    2,442Computer hardware and software
    
    
    1,211
    
    
    
    285Construction-in-progress
    
    
    145,564
    
    
    
    33,533Property, plant and equipment
    
    
    220,832
    
    
    
    103,283Less: accumulated depreciation
    
    
    (17,685
    )
    
    
    (14,969
    )Property, plant and equipment, net
    
    $
    203,147
    
    
    $
    88,314
 The Company periodically evaluates the recoverability of the carrying value of
its long-lived assets based on the criteria established in Statement of
Financial Accounting Standards (SFAS) No. 144, Accounting for the Impairment on
Disposal of Long-Lived Assets. The Company considers historical performance
and anticipated future results in its evaluation of potential impairment.
Accordingly, when indicators of impairment are present, the Company evaluates
the carrying value of these assets in relation to the operating performance of
the business and the undiscounted cash flows expected to result from the use of
these assets. Impairment losses are recognized when the sum of the expected
future cash flows are less than the assets carrying value. No such impairment
losses have been recognized to date. 8. Goodwill and Intangible Assets Intangible assets and related accumulated amortization consist of the
following: As of April 30, 2004
    
    As of October 31, 2003Accumulated
    
    
    
    
    
    
    
    
    
    AccumulatedIn thousands
    
    Gross
    
    Amortization
    
    Net
    
    Gross
    
    Amortization
    
    NetTrademarks
    
    $
    2,034
    
    
    $
    (244
    )
    
    $
    1,790
    
    
    $
    2,030
    
    
    $
    (170
    )
    
    $
    1,860Patents
    
    
    7,155
    
    
    
    (923
    )
    
    
    6,232
    
    
    
    6,013
    
    
    
    (672
    )
    
    
    5,341Core technology
    
    
    1,708
    
    
    
    (171
    )
    
    
    1,537
    
    
    
    1,708
    
    
    
    (114
    )
    
    
    1,594Current products
    
    
    10,676
    
    
    
    (1,449
    )
    
    
    9,227
    
    
    
    10,676
    
    
    
    (1,093
    )
    
    
    9,583Licenses
    
    
    11,195
    
    
    
    
    
    
    
    11,195
    
    
    
    
    
    
    
    
    
    
    
    Goodwill
    
    
    50,430
    
    
    
    
    
    
    
    50,430
    
    
    
    50,274
    
    
    
    
    
    
    
    50,274Total
    
    $
    83,198
    
    
    $
    (2,787
    )
    
    $
    80,411
    
    
    $
    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. Licenses is primarily
comprised of a $10 million license purchased from DSM as part of the new
agreement entered into in April 2004 (see Note 3). The Company recorded
amortization expense on intangible assets of $372,000 and $431,000 for the
three months periods ended April 30, 2004 and 2003, respectively, and $738,000
and $775,000 for the six month periods ended April 30, 2004 and 2003,
respectively. 9. Long-term Debt In May 2004, the Company entered into a $100 million secured revolving credit
facility which amended and expanded the $85 million credit facility established
in January 2004. The revolving credit facility is collateralized by accounts
receivable and inventory and expires in February 2007. The effective interest
rate on the credit facility approximates 3.8% as of April 30, 2004 and is based
on LIBOR and the Companys current leverage ratio. Among other things, it
contains restrictions on future debt, the payment of 10




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##### 



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 liquidity, minimum coverage ratios and maximum
leverage ratios. As of April 30, 2004, the Company is in compliance with all of
these debt covenants and has borrowed $67.0 million under the revolving credit
facility. All borrowings are due at maturity. This credit facility replaced 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, 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. During the three and six months ended April 30, 2004, the Company incurred
interest on borrowings of approximately $238,000 and $370,000, respectively,
and recorded amortization of related debt fees of approximately $50,000 and
$100,000 in the three and six month periods ended April 30, 2004, respectively.
Substantially all of the interest incurred and debt fee amortization recorded was capitalized as part of the cost
of the Companys construction at the Kingstree, SC manufacturing facility. 10. Commitments and Contingencies The Company entered into an agreement to purchase a minimum quantity of certain
material used in DHA production on favorable terms from a third party
manufacturer. The commitment expires on June 30, 2006, with options to extend
by both parties. As of April 30, 2004, the Companys remaining obligation was
approximately $6.0 million, of which the Company has open purchase orders
totaling approximately $1.2 million. In May 2004, the Company amended its existing lease for laboratory and
administrative space at our Columbia, Maryland office to extend the term of the
lease as well as expand our leased space by approximately 15%. The term of the
lease has been extended through January 2011. On March 12, 2003, an explosion occurred at a public wastewater treatment works
in Winchester, KY, resulting in property damage. The Company has entered into
discussions with the Winchester Municipal Utilities Commission and its
insurer as to the Companys financial responsibility, if any, for the property
damage. As of April 30, 2004, the Company has a liability totaling
approximately $300,000 related to any future costs to be incurred in connection
with the explosion that it considers to be probable and reasonably estimable. While we cannot be certain of the outcome, the Company
believes that it will not have a material adverse impact on its financial
condition or results of operations. 11. Stockholders Equity On February 5, 2004, the Company completed an underwritten public offering of
176,885 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 $11.4 million. 11




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##### 



12. Net Income per Share The following table presents the calculation of basic and diluted net income
per share: Three months ended
    
    Six months endedApril 30,
    
    April 30,In thousands, except per share amounts
    
    2004
    
    2003
    
    2004
    
    2003Net income
    
    $
    3,399
    
    
    $
    3,091
    
    
    $
    6,750
    
    
    $
    5,152Weighted average shares outstanding  basic
    
    
    29,209
    
    
    
    23,933
    
    
    
    28,770
    
    
    
    23,646Effect of dilutive potential common shares:Employee stock options
    
    
    1,996
    
    
    
    1,412
    
    
    
    2,260
    
    
    
    1,296Warrants
    
    
    45
    
    
    
    68
    
    
    
    45
    
    
    
    77Total dilutive potential common shares
    
    
    2,041
    
    
    
    1,480
    
    
    
    2,305
    
    
    
    1,373Weighted average shares outstanding  diluted
    
    
    31,250
    
    
    
    25,413
    
    
    
    31,075
    
    
    
    25,019Net income
per share - basic
    
    $
    0.12
    
    
    $
    0.13
    
    
    $
    0.23
    
    
    $
    0.22Net income
per share - diluted
    
    $
    0.11
    
    
    $
    0.12
    
    
    $
    0.22
    
    
    $
    0.21
 Employee stock options to purchase approximately 7,000 shares, 1.7 million
shares, 17,000 shares and 1.6 million shares were outstanding but were not
included in the computation of diluted net income per share for the three
months ended April 30, 2004 and 2003 and the six months ended April 30, 2004
and 2003, respectively 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. 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 the timing and amount of 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);-
    
    expectations regarding the impact of the incident at DSMs Belvidere, NJ
facility; 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, 12




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-
    
    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, 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, American St. George Biological Corporation, International
Nutrition Company and four 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. Mead Johnson Nutritionals, Wyeth, Abbott Laboratories, Nestle,
Royal Numico, Novartis, Laboratorios Ordesa, Maabarot, International Nutrition
Company, American St. George Biological Corporaton, Heinz-Watties and one
company whose identity 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 three 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 and
as of April 30, 2004, our accumulated deficit was approximately $104.8 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 six
months 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 by us and our third-party manufacturers to produce adequate levels of our nutritional oils;
    
    the timing of the completion of construction at our Kingstree facility and related expanded production capabilities;
    
    the timing and extent of production by DSM Food Specialties (DSM) at its recently acquired Belvidere 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 13




---



##### 




    
    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 six months of 2004, we have continued with our extensive
expansion at our recently acquired Kingstree location for the fermentation and
processing of our nutritional oils. We have spent approximately $120 million on
the expansion since the inception of the project and expect the total cost of
the expansion to be between $170 and $180 million when complete. The estimated
total project cost has recently increased by approximately $20 million due to
inefficiencies associated with rapid construction and the decision to add ARA
processing equipment to the South Carolina facility. The first phase of the
expansion is expected to begin production in July 2004 with products available
for sale in the fourth quarter of fiscal 2004. Upon completion of the
second phase in the first quarter of fiscal 2005, Marteks DHA production
capacity should nearly triple over current levels. In February 2004, we offered and sold 176,885 shares of our common stock in an
underwritten public offering. We generated approximately $11.4 million in net
proceeds from the offering. These proceeds will 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 our 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. We are currently working with several food
manufacturers to include DHA in their food products including yogurt, cheese,
nutrition bars, and several other applications. In April 2004, we entered into a new license and supply agreement with Mead
Johnson involving products containing Marteks DHA to be marketed for use by a
targeted population of women. Under the agreement, Mead Johnson has been
granted limited exclusive rights to market Marteks DHA in the form of a
nutritional supplement in North America and parts of Asia specifically for
pregnant and nursing women, subject to the rights reserved for prescription and
a limited number of other existing non-prescription products. The contract has
an initial term expiring in September 2006, and is subject to renewal under
specified circumstances. Under the agreement, Mead Johnson is required to make
minimum purchases from Martek in amounts that are not expected to be material
to Marteks financial results. Also, in April 2004, we entered into a new agreement with DSM extending the
existing relationship between the two companies involving the production and
supply of arachidonic acid (ARA), one of the Companys nutritional oils that it
sells to its infant formula licensees. Among other things, this agreement
provides for the sale to us by DSM of a license related to certain technologies
associated with the manufacture of ARA and provides us with the ability to
produce and sell ARA, to the extent allowed by the overall supply agreement.
This sale involved a license fee totaling $10 million, of which $4 million was
paid upon execution of the agreement, $4 million of which will be paid on
November 1, 2004, and the remaining $2 million of which will be paid by the
Company on November 1, 2005. This agreement also provides for the granting to
DSM by us of an exclusive license under certain of our patents and intellectual
property rights for the production by DSM of products containing ARA that are
not for human consumption, including animal feed products. In May 2004, we amended the existing $85 million credit facility established in
January 2004, and expanded the availability under the facility to $100 million.
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. All proceeds from
borrowings under the credit facility have been and will continue to finance the expansion of our
manufacturing capacity. Also in May 2004, we amended our existing lease for laboratory and
administrative space at our Columbia, Maryland office to extend the term of the
lease as well as expand our leased space by approximately 15%. The term of the
lease has been extended through January 2011. 14




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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 throughout the remainder of fiscal 2004. In the first six months 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 As in fiscal 2003, the demand for our nutritional oils for use in infant
formula products significantly exceeded production capacity during the first
six months of fiscal 2004. These shortfalls have resulted from an acceleration
of such demand over what our customers had projected coupled with a shortage of
ARA production capacity from DSM that began in the first quarter of fiscal 2004.
As customer demand has increased, we have 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. We currently have the production capacity equivalent to approximately $170
million in annual sales. We are now in the process of an extensive expansion at
our Kingstree facility. The first phase of the expansion is expected to begin
production in July 2004 with products available for sale in the fourth quarter
of fiscal 2004. Upon completion of the second phase in the first quarter of
fiscal 2005, our DHA production capacity should nearly triple over current
levels. 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, primarily at its plant in Capua,
Italy. DSM is in the process of adding ARA production capacity in the U.S. by
converting existing facilities in Belvidere, NJ to the production of ARA. We
have begun to receive initial shipments of ARA from the Belvidere facility, but
are still in the process, in conjunction with our infant formula
licensees, of qualifying the plants production before beginning sales of ARA
from this plant. Two events have recently occurred that have affected DSMs ability to produce
sufficient ARA to satisfy our purchase order requirements. First, the
production of ARA by DSM in Capua, Italy was impacted by a nationwide power
failure in Italy in late September 2003. In addition, in May 2004, an incident
occurred at the Belvidere, NJ manufacturing plant of DSM. The incident involved
a fire in an outside dust collection unit and caused a temporary shut-down of
the ARA production line between mid-May and early-June 2004 at the Belvidere
facility. The Italian power outage resulted in a production loss of ARA that
negatively impacted our revenues in the first quarter of fiscal year 2004, and
the production loss of ARA resulting from the fire in Belvidere will cause a
reduction in revenue during the third quarter of fiscal 2004, which commenced
on May 1, 2004, that is currently estimated to be between $7 to $9 million. DSM
has restarted the production line at the Belvidere facility; however, the fire
is now expected to result in 15




---



##### 



a slowing of the pace by which DSM will ramp up further production capacity at
Belvidere, which is likely to reduce the volume of ARA deliveries to us in the
fourth quarter of fiscal 2004 from formerly anticipated levels. Neither the
power outage nor the fire is expected to have a long term effect on DSMs
overall ARA production capacity. Of the total ARA produced by DSM, we
anticipate approximately 30% of such total volumes to be produced at DSMs
Belvidere facility by the end of fiscal 2004 and 65% of such total volumes to
be produced at DSMs Belvidere facility by the end of fiscal 2005. Because DSM
is a third-party manufacturer, however, we have limited control over the timing
and extent of its Capua and Belvidere production volumes. We have attempted to mitigate our reliance on DSMs production capabilities
through certain elements of our new supply agreement with DSM. In connection
with the new agreement, we have licensed the DSM technology associated with ARA
production. Through this license and the overall supply arrangement, we have
the ability to produce, either directly or through another third-party, an
unlimited amount of ARA. The sale of such self-produced ARA is limited,
however, to any amounts ordered by us that DSM is unable to fulfill or,
beginning January 1, 2005, for each calendar year, the greater of (i) 100 tons
of ARA oil (an amount that equals approximately 10% of Marteks current demand
for ARA oil) and (ii) any amounts ordered by us that DSM is unable to fulfill.
DSM and Martek are in the process of transferring technology under the
agreement and we anticipate being capable of producing ARA and holding it for
future sale, to the extent permitted by the supply agreement, in the first half
of fiscal 2005. When combining our current and projected DHA production capabilities in
Winchester and Kingstree with DSMs current and projected ARA production
capabilities in Italy and the U.S., we expect to have total production capacity
equivalent to approximately $275 million to $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 the second half of
2005. If the production expansion in Kingstree does not proceed as planned, if
DSM is not able to scale up production in the U.S. as planned, or if market
demand declines 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 minimum purchase
commitment with CP Kelco that expires on June 30, 2006 with possible annual
renewals. See Liquidity and Capital Resources for further discussion of
purchase commitments. 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 beginning 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 an 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 learned in March 2004 that the federal Environmental Protection
Agency, utilizing personnel from its Criminal Investigation Division, had
contacted persons and had asked 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 have accrued approximately $600,000 as an
estimate of costs that we may incur as a result of this incident, including
approximately $200,000 recorded during the three months ended April 30, 2004.
Through April 30, 2004, we have incurred approximately $278,000 in legal fees
related to the incident, which were applied to the liability. 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 ongoing 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 16




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##### 



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 Revenues The following table presents revenues by category: Three months ended
    
    Six months endedApril 30,
    
    April 30,In thousands
    
    2004
    
    2003
    
    2004
    
    2003Product sales:Nutritional product sales
    
    $
    37,224
    
    
    $
    26,226
    
    
    $
    68,933
    
    
    $
    46,435Other product sales
    
    
    853
    
    
    
    173
    
    
    
    1,249
    
    
    
    462Total product sales
    
    
    38,077
    
    
    
    26,399
    
    
    
    70,182
    
    
    
    46,897Contract manufacturing sales
    
    
    3,733
    
    
    
    
    
    
    
    7,077
    
    
    
    Other revenues
    
    
    110
    
    
    
    48
    
    
    
    236
    
    
    
    95Total revenues
    
    $
    41,920
    
    
    $
    26,447
    
    
    $
    77,495
    
    
    $
    46,992
 Nutritional product sales increased by $11.0 million or 42% in the quarter
ended April 30, 2004 as compared to the quarter ended April 30, 2003 and
increased by $22.5 million or 48% in the six months ended April 30, 2004
compared to the six months ended April 30, 2003. The increases are primarily
due to a continued increase in sales of our oils to both existing and new
infant formula licensees. Substantially all of our product sales in the quarter
and six months ended April 30, 2004 relate to the sale of our oils for use in
infant formulas. Approximately 86% and 85% of our nutritional product sales
during the quarter and six months ended April 30, 2004, respectively were
generated by sales of DHA and ARA to three companies. Approximately 60% of
these sales were to Mead Johnson and the remaining 40% 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 countries in which infant formula containing our oils
is ultimately sold, we estimate that approximately 60% of our sales to
infant formula licensees for the quarter and six months ended April 30, 2004,
relate 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 April 30, 2004, formula
supplemented with Marteks oils had gained approximately 60% 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. Our future sales growth, however, is dependent upon
our ability to expand our production capabilities at our Kingstree facility and
the ability of DSM to successfully complete their start-up phase and achieve
full-scale production at their recently acquired Belvidere facility. Other product sales increased $680,000 or 393% in the three months ended April
30, 2004 as compared to the three months ended April 30, 2003 and increased
$787,000 or 170% in the six months ended April 30, 2004 as compared to the same
period last year due primarily to the additional product revenue recognized by
our recently acquired Kingstree facility. Contract manufacturing sales, totaling $3.7 million and $7.1 million for the
three and six months ended April 30, 2004, respectively, 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 $15.5 million or 59% in
the quarter ended April 30, 2004 as compared to the quarter ended April 30,
2003 and increased by $30.5 million or 65% in the six months ended April 30,
2004 as compared to the same period last year. 17




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##### 



Costs and Expenses The following table presents our operating costs and expenses: Three months ended
    
    Six months endedApril 30,
    
    April 30,In thousands
    
    2004
    
    2003
    
    2004
    
    2003Cost of revenue:Cost of product sales
    
    $
    24,253
    
    
    $
    15,642
    
    
    $
    43,778
    
    
    $
    27,984Cost of contract manufacturing sales
    
    
    2,928
    
    
    
    
    
    
    
    5,637
    
    
    
    Operating expenses:Research and development
    
    
    4,432
    
    
    
    2,657
    
    
    
    8,191
    
    
    
    5,444Selling, general and administrative
    
    
    6,379
    
    
    
    4,161
    
    
    
    12,414
    
    
    
    7,903Restructuring reversal
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (250
    )Other operating expenses
    
    
    654
    
    
    
    1,066
    
    
    
    1,104
    
    
    
    1,066Total costs and expenses
    
    $
    38,646
    
    
    $
    23,526
    
    
    $
    71,124
    
    
    $
    42,147
 Cost of Product SalesDuring the second quarter of 2004, we continued to
satisfy as much customer demand as possible, while, at times, sacrificing cost
efficiencies. As such, our cost of product sales increased as a percentage of
product sales to 64% in the quarter ended April 30, 2004 from 59% in the
quarter ended April 30, 2003 and increased to 62% in the six months ended April
30, 2004 compared to 60% in the corresponding period last year. The increases
resulted from our continued use of air freight to reduce the transit time of
ARA shipments from DSM in Europe to our plant in Kentucky, which resulted in
significantly higher costs (an increase of 3% for both the comparative three and
six month periods). In addition, our cost of ARA has risen from the prior year
periods due to the decline of the U.S. dollar against the euro, the currency in
which we are required to pay DSM for their supply of ARA (an increase
of 2-3% for both the comparative three and six month periods). Increases for the
comparative six month periods were partially offset by insurance proceeds
received by the Company related to a power outage affecting the production of
ARA by DSM in fiscal 2003, which served to decrease cost of product sales as a
percentage of product sales by approximately 2% during the six months ended April 30, 2004. We expect our
gross profit margins to be negatively affected by both factors again in the
third quarter of fiscal 2004, but do anticipate some gross profit margin
improvements next quarter due to efficiencies gained in DHA production. We
expect the negative factors to be largely mitigated by the end of Marteks
fiscal year as a result of significant U.S. ARA production. Cost of Contract Manufacturing SalesCosts of contract manufacturing sales,
totaling $2.9 million and $5.6 million for the three and six months ended April
30, 2004, respectively, are the costs related to the 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 to be phased out over the next few years to allow for
increased fermentation capacity for our DHA and ARA production. Research and DevelopmentOur research and development costs increased by $1.8
million or 67% in the quarter ended April 30, 2004 as compared to the quarter
ended April 30, 2003 and increased by $2.7 million or 50% in the six months
ended April 30, 2004 compared to the six months ended April 30, 2003. The
increases are primarily the result of the commencement of new development
projects, including research to improve our medium to long-term DHA production
cost by increasing our fermentation production yields and developing new
downstream processing techniques, and developing several forms of DHA products
for the food and beverage industry, as well as the long-term development of
plant-based DHA products under the recently initiated collaboration agreement
with SemBioSys. Selling, General and AdministrativeOur selling, general and administrative
costs increased by $2.2 million or 53% in the quarter ended April 30, 2004 as
compared to the corresponding prior year quarter and increased by $4.5 million
or 57% in the six months ended April 30, 2004 as compared to six months ended
April 30, 2003. This increase is primarily related to the hiring of additional
personnel (an increase in costs of $1.3 million and $2.5 for the comparative
three and six month periods, respectively), and increases 18




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##### 



in insurance costs (an increase of $400,000 and $700,000 for the comparative
three and six month periods, respectively), as we continue to grow and expand
to meet the demand for our products. In addition, the increased costs partially
relate to the addition of our new Kingstree, SC facility, which was purchased
in September 2003 (an increase of $700,000 and $1.2 million for the comparative
quarter and six months, respectively). Other Operating ExpensesOther operating expenses totaled $654,000 and $1.1
million in the three and six months ended April 30, 2004, respectively. These
expenditures related primarily to start-up costs, largely training, related to
the expansion at our new Kingstree, SC facility, as well as costs associated
with qualifications of certain third-party manufacturers. We anticipate
continuing to incur these types of expenses for the remainder of fiscal 2004 as
we bring new production facilities on line. Other Income, netOur other income, net, decreased by $45,000 and increased by
$102,000 in the quarter and six months ended April 30, 2004 as compared to the
corresponding prior year periods primarily due to changes in interest income
resulting from varying levels of cash on-hand. See Liquidity and Capital
Resources for further discussion of cash on-hand. Income Tax ExpenseIn the six months ended April 30, 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 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 or
potentially all of the valuation allowance and recognize an income tax benefit. Net IncomeAs a result of the foregoing, we earned $3.4 million of net income
in the quarter ended April 30, 2004 as compared to net income of $3.1 million
in the same period last year and net income of $6.8 million in the six months
ended April 30, 2004 as compared to net income of $5.2 million in the six
months ended April 30, 2003. 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 April 30, 2004, our primary source of liquidity was our cash, cash
equivalents and short-term investments totaling $54.6 million as well as the
unused portion of our revolving credit facility of $33.0 million.Cash, cash
equivalents and short-term investments decreased $42.4 million from October 31,
2003. This decrease was primarily attributable to $117.6 million in capital
expenditures, the majority of which were related to the expansion of the newly
acquired Kingstree facility to increase output of our nutritional oils. In
addition, the Company used cash flow from operations of $10.9 million which
was primarily the result of a buildup of DHA inventory due to our production
improvements. This additional DHA inventory could not be blended with ARA for
sales to infant formula manufacturers because of a shortage of ARA. These cash
outflows were offset by the proceeds from the exercise of stock options and
issuance of common stock which approximated $27.6 million, and borrowings under
the Companys new revolving credit facility, which provided $67.0 million in
cash during the six months ended April 30, 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 $50-60 million over
the next 12 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. To date, we have incurred
interest on borrowings of approximately $370,000 and recorded amortization of
related debt fee of approximately $100,000. Substantially all of the
interest incurred and debt fee amortization recorded was capitalized as part of the cost of our construction. The table below sets forth our contractual obligations at April 30, 2004: 19




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##### 



Less than
    
    
    
    
    
    
    
    
    
    AfterContractual Obligations (in thousands)
    
    Total
    
    1 Year
    
    1 - 3 Years
    
    4 - 5 Years
    
    5 YearsNotes payable
    
    $
    10,290
    
    
    $
    567
    
    
    $
    1,537
    
    
    $
    7,862
    
    
    $
    324Borrowings under revolving credit
facility
    
    
    67,000
    
    
    
    
    
    
    
    67,000
    
    
    
    
    
    
    
    Operating and capital lease obligations
    
    
    4,852
    
    
    
    940
    
    
    
    2,000
    
    
    
    1,379
    
    
    
    533DSM license fee payable
    
    
    6,000
    
    
    
    4,000
    
    
    
    2,000
    
    
    
    
    
    
    
    Unconditional purchase obligation
    
    
    5,981
    
    
    
    2,773
    
    
    
    3,208
    
    
    
    
    
    
    
    Total contractual cash obligations
    
    $
    94,123
    
    
    $
    8,280
    
    
    $
    75,745
    
    
    $
    9,241
    
    
    $
    857
 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 April 2004, we entered into a new agreement with DSM extending the existing
relationship between the two companies involving the production and supply of
ARA, one of the Companys nutritional oils that it sells to its infant formula
licensees. Among other things, this agreement provided for the sale to us by DSM of a license
related to certain technologies associated with the manufacture of ARA. Such
license fee totaled $10 million, of which $4 million was paid upon execution of
the agreement, $4 million of which will be paid on November 1, 2004, and the
remaining $2 million of which will be paid on November 1, 2005. This agreement
also provides for the granting to DSM by us of an exclusive license under
certain of our patents and intellectual property rights for the production by
DSM of products containing ARA that are not for human consumption, including
animal feed products. The agreement with DSM also includes provisions
surrounding the potential reimbursement by us of start-up costs, as defined,
incurred by DSM during calendar year 2004 in connection with the commencement
of operations and production at DSMs Belvidere facility. Pursuant to the
agreement, if the start-up costs exceed a specified threshold, we will
reimburse to DSM up to a maximum of $1 million for actual start-up costs
incurred. As of April 30, 2004, we have not expensed any such costs associated
with DSMs Belvidere facility start-up. In May 2004, we entered into a $100 million secured revolving credit facility
which amended and expanded the $85 million credit facility established in
January 2004. This credit facility replaced a $10 million line of credit, which
had no borrowings under it. 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 liquidity, minimum coverage 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.
We have borrowed $67.0 million under the revolving credit facility in fiscal
2004 under the terms of the agreement. On February 5, 2004, we 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 $11.4 million. The proceeds
from this offering, together with funds on-hand and borrowings under our bank
credit facility, have been used to finance the expansion of our manufacturing
capacity to meet increased demand for our DHA and ARA oils and for various
general corporate purposes. On May 21, 2004 the Company filed a universal shelf registration statement with
the SEC pursuant to which the Company may issue, from time to time, debt
securities, preferred stock, common stock, and warrants to purchase debt
securities, preferred stock, or common stock, in an aggregate amount of up to
$200 million. Once declared effective by the SEC, the shelf registration
statement will enable the Company to raise funds from the offering of any
individual security covered by the shelf registration statement, as well as any
combination thereof, from time to time and through one or more methods of
distribution, subject to market conditions and the Companys capital needs. We believe that the new revolving credit facility, when combined with our cash
and short-term investments of $54.6 million on-hand at April 30, 2004, and
anticipated operating cash flows, will provide us with adequate capital to meet
our obligations for at least the 20




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##### 



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. Item 3. Quantitative and Qualitative Disclosure About Market Risk Beginning in January 2004, purchases of ARA from DSMs plant in Capua, Italy
were denominated in euros, which exposes us to risks related to changes in
exchange rates between the 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. We
estimate that a 5% change in the exchange rate would impact gross margins of
our infant formula products by approximately 2% to 2.5%. Our exposure to these
currency fluctuations is expected to decrease once DSM begins ARA production in
the U.S. at its Belvidere, NJ facility as planned in the spring of 2004. In
April 2004, we began entering into foreign currency cash flow hedges to reduce
the related market risk. 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 periods 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. Aventis S.A. and Nagase & Co. Ltd. are challenging our European patent
covering our DHA-containing oils. At a hearing in October 2000, the Opposition
Division of the European Patent Office (EPO) revoked our patent on the grounds
that it was not novel. We immediately appealed this ruling, and in July 2002 we
received a positive ruling from an Appeal Board of the EPO, setting aside the
prior decision to revoke this patent. Consistent with our request, the patent
has been returned to the Opposition Division for a determination as to whether
it has met the legal requirement of inventive step. A hearing of the
Opposition Division is now scheduled for November 2004. During this process the
patent will remain in full force and effect and its status should not change
during the appeal process. The appeal process may not be completed until some
time in 2006. With respect to our ARA patent issued by the EPO, BASF AG, Friesland
Brands B.V., and Suntory Limited have filed their grounds for opposing this
patent with the Opposition Division of the EPO. The validity of the patent is
unaffected by these filings. An initial hearing at the Opposition Division is
scheduled for November 2004. The opposition process is not expected to be
completed until some time in 2006. With respect to our blended-oil (blend of DHA and ARA oils for use in
various applications, including infant formula) patent issued by the EPO, BASF
AG, Friesland Brands B.V., and Suntory Limited have filed their grounds for
opposing this patent with the 21




---



##### 



Opposition Division of the EPO. The validity of the patent is unaffected by
these filings. A hearing at the Opposition Division is scheduled to be held in
November 2004. The opposition process is not expected to be completed until
sometime in 2006. Prior to our purchase of OmegaTech, Aventis Research and Technologies GmbH
& Co. KG, and Nagase Limited challenged OmegaTechs European patent covering
its DHAcontaining oils. At a hearing in December, 2000, the Opposition
Division of the EPO upheld some of the claims and revoked other claims.
OmegaTech immediately appealed this ruling, as did Aventis. During the appeal
process the patent will remain in full force and effect. The appeal process may
not be completed until sometime in 2006. On September 23, 2003, we filed a patent infringement lawsuit in
the US District Court in Delaware against Nutrinova Inc., Nutrinova Nutrition
Specialties & Food Ingredients GmbH, Celanese Ventures GmbH, and Celanese AG
alleging infringement of two of our U.S. patents. The lawsuit alleges that
Nutrinova and Celanese have been making, using, offering to sell, selling
and/or importing into the United States DHA marketed under the brand name
DHActive that is made by a process and employs compositions that infringe the
patents. On October 24, 2003. Nutrinova and Celanese filed counterclaims
alleging inequitable conduct and invalidity, unenforceability and/or
noninfringement of all our U.S. patents and rights. We filed a second patent
infringement suit involving Nutrinova in Germany on January 16, 2004. Named as
defendants were Nutrinova Nutrition Specialties and Food Ingredients GmbH and
Celanese Ventures GmbH. The complaint alleges infringement of our European
patent relating to DHA-containing oils. A hearing in this case is now scheduled to be held
in December 2004. On May 31, 2002, we received a letter from the staff of the Federal Trade
Commissions Bureau of Consumer Protection, Division of Advertising Practices,
indicating that the staff was conducting an inquiry into our advertising and
promotional activities and promotional activities relating to its DHA and ARA
products. We cooperated with the FTC in the conduct of the inquiry. In April
2004, we received a letter from the FTC indicating that the inquiry had been
closed. In addition, from time to time, Martek is a party to litigation or
administrative proceedings relating to claims arising from its operations in
the normal course of business. Management believes that the ultimate resolution
of any such litigation or administrative proceedings currently pending against
Martek is unlikely, either individually or in the aggregate, to have a material
adverse effect on Marteks results of operations or financial condition. Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity
Securities. None Item 3. Defaults Upon Senior Securities. Not Applicable 22




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##### 



Item 4. Submission of Matters to a Vote of Security Holders. Marteks Annual Meeting of Stockholders was held on March 18, 2004. Following
are descriptions of the matters voted on and the results of such voting: 1. Election of Directors. The following members were elected to Marteks
Board of Directors to hold office for the periods indicated below: Elected UntilAnnual MeetingNominee
    
    To Be Held
    
    In Favor
    
    WithheldDouglas J.
MacMaster, Jr.
    
    
    2007
    
    
    
    24,870,275
    
    
    
    931,656John H. Mahar
    
    
    2007
    
    
    
    24,869,538
    
    
    
    932,393Eugene H. Rotberg
    
    
    2007
    
    
    
    25,220,031
    
    
    
    581,900
 Directors continuing in office: Henry Linsert, Jr.
Jules Blake, Ph.D.
Ann L. Johnson, M.D.
Sandra Panem, Ph.D.
Gordon S. Macklin
Robert J. Flanagan
Dr. Richard J. Radmer
James Beery 2. The proposal to approve the Companys 2004 Stock Incentive Plan was
approved by a vote of 14,095,699 For; 4,149,622 Against; 24,299 Abstain;
7,532,311 Broker Non Votes. Item 5. Other Information. None Item 6. Exhibits and Reports on Form 8-K.  (a)
    
    Exhibits:  10.63
    
    ARA Alliance, Purchase and Production Agreement by and between
Martek Biosciences Corporation and DSM Food Specialties B.V. (filed
herewith).*10.64
    
    Sixth Amendment of Lease, dated May 13, 2004, by and between
M.O.R. CBC LLC and Martek Biosciences Corporation (filed herewith).10.65
    
    First Modification Agreement, effective April 30, 2004, between the
Company and Manufacturers and Traders Trust Company, as Administrative
Agent, Manufacturers and Traders and Trust Company, Bank of
America, N.A., Suntrust Bank, Comerica Bank, Fifth Third Bank, and
Chevy Chase Bank, and Martek Biosciences Corporation (filed herewith).31.1
    
    Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer.31.2
    
    Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer.32.1
    
    Certification of Chief Executive Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.32.2
    
    Certification of Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted 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. 23




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##### 



* Confidential treatment was requested for certain portions of this
agreement. The confidential portions were filed separately with the
Commission.  (b)
    
    Reports on Form 8-K:Form 8-K filed on April 19, 2004 (Items 5 and 7  press release announcing
that Martek has entered into a new agreement with DSM Food Specialities B.V.
(DSM), extending the existing relationship between the two companies involving
the production and supply of arachidonic acid (ARA)).Form 8-K filed on April 13, 2004 (Item 5  press release announcing that
Martek entered into a new license and supply agreement with Mead Johnson
involving products containing Marteks docosahexaenoic acid (DHA) to be
marketed for use by a targeted population of women).Form 8-K furnished on March 10, 2004 (Items 7 and 12  press release
announcing Marteks financial results for the fiscal quarter ended January
31, 2004).Form 8-K filed on February 4, 2004 (Items 5 and 7  press release announcing
the sale by Martek of 176,885 shares of common stock in an underwritten
public offering). 24




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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: June 14, 2004
    /s/ Peter L. BuzyPeter L. Buzy, Chief Financial and Accounting Officer
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