| Before making an investment decision, you should carefully consider the risk factors set forth herein, as well as other information we include in this report and the additional information in the other reports we file with the Securities and Exchange Commission (the “SEC” or the “Commission”) |
| In such case, the trading price of our securities could decline and you could lose all or part of your investment |
| You should be cautioned that the following important factors have affected, and in the future could affect, our actual results |
| There may also be additional factors not discussed in this report that could also affect future results |
| These factors could cause our future financial results to differ materially from those expressed in any forward-looking statements made by us |
| Forward-looking statements may relate to such matters as: • our ability to generate future revenues; • the commercialization of our products; • the expansion and ongoing operation of facilities producing our products; • our ability to produce adequate amounts of our products ourselves or through third-party manufacturers; • the optimization of production costs; and • our ability to enter into future business collaborations and marketing partnerships |
| Forward-looking statements may include words such as “will,” “should,” “could,” “anticipate,” “believe,” “plan,” “estimate,” “expect,” “intend,” and other similar expressions |
| This list does not constitute all factors which you should consider prior to making a decision to invest in our securities |
| You should also not assume that the information contained herein is complete or accurate in all respects after the date of this filing |
| We disclaim any duty to update the statements contained herein |
| A substantial portion of our nutritional oil products sales is made to four of our existing customers under agreements with no minimum purchase requirements |
| If demand by these customers for our nutritional oil products declines, our revenues may materially decline |
| We rely on a substantial portion of our product sales to four of our existing customers |
| Approximately 88prca of our product sales revenue during the year ended October 31, 2005 was generated by sales of DHA and ARA to four customers, Mead Johnson Nutritionals, Abbott Laboratories, Nestle and Wyeth |
| We cannot guarantee that these customers will continue to demand our nutritional products at current or predictable levels |
| None of our license agreements requires our licensees to purchase any minimum amount of products from us now or in the future, and certain of our license agreements allow our licensees to manufacture our products themselves or purchase nutritional oils from other sources |
| We have limited visibility into our customers’ future actual level of demand, notwithstanding our view of consumer demand |
| If demand by any of our significant customers for our nutritional products declines, we may experience a material decline in our revenues |
| We are aware of several products that are currently available, and products under development, that may present a serious competitive threat to our products |
| Our success depends upon achieving and maintaining a superior competitive position in the infant formula and adult nutritional product markets |
| Many potential competitors, which include companies such as BASF AG, Cargill Inc, Suntory Limited, Celanese Corporation, Lonza Group LTD and Nagase & Co |
| Ltd, have substantially greater research and development capabilities, marketing, financial and managerial resources and experience in the industry |
| Some of these competitors are currently offering competing sources of DHA and ARA for use in the adult market and for use in infant formula outside the US If a competitor develops a better product or technology, our competitors’ products gain widespread acceptance, or we lose our patents, the sales of our products may be materially adversely affected and our technologies rendered obsolete |
| We are aware that other sources of DHA and ARA are, or may, be available, any of which could represent a competitive threat that could seriously harm our product sales |
| Specifically: • the Ross Products Division of Abbott Laboratories, a significant Martek licensee and customer, filed a generally recognized as safe notification on January 2, 2002 seeking Food and Drug Administration (“FDA”) concurrence that its fish oil source of DHA and its fungal source of ARA are generally recognized as safe when used as ingredients in infant formula |
| At this time, the notification continues to be under consideration by the FDA; • Reliant Pharmaceuticals launched Omacor, a DHA/ EPA ethyl ester, in the second half of 2005 for treatment of hyperlipidemia |
| Omacor is a lipid-regulating agent which includes both EPA and DHA from fish oil |
| We expect additional studies to expand the approved indications for Omacor |
| • Suntory Limited, Cargill Inc, through a joint venture with a company in China, and other independent Chinese manufacturers are producing and distributing a fungal source of ARA In addition, we are aware that there may be manufacturers in China attempting to produce an algal source of DHA, but we are uncertain of the overall status and commercial potential of these development efforts; 19 _________________________________________________________________ • some infant formulas now on the market outside the United States use DHA derived from other sources, such as fish oil or eggs; • Nutrinova Nutrition Specialties & Food Ingredients GmbH, a wholly-owned subsidiary of Celanese Corporation, has been actively marketing a DHA-rich microalgal oil to the food and beverage and dietary supplement markets in the United States, China and Europe |
| We have filed a patent infringement suit against Nutrinova in both the United States and Germany |
| in Item 1A Risk Factors and in our various other filings with the Securities and Exchange Commission |
| Our forward-looking statements speak only as of the date of this document, and we do not intend to update these statements to reflect events or circumstances that occur after that date |
| We are a leader in the development and commercialization of products derived from microalgae, fungi and other microbes |
| Our leading products are nutritional oils used as ingredients in infant formula and foods and beverages 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 Research has shown that these fatty acids may enhance mental and visual development in infants, that they may play a pivotal role in brain function throughout life, and that they may reduce the risk of cardiovascular disease |
| Low levels of DHA in adults have been linked to a variety of health risks, including Alzheimer’s disease |
| Further research is underway to assess the role of supplementation with our DHA on a variety of health risks |
| Additional applications of our patented technology based upon microalgae include our currently marketed fluorescent detection products that can be used by researchers as an aid in drug discovery and diagnostics |
| In 1992, we realized our first revenues from license fees related to our nutritional oils containing DHA and ARA and sales of sample quantities of these oils |
| In 1995, we recognized our first product and royalty revenues from sales of infant formula containing these oils, and in 1996 we began to realize revenues from the sale of Neuromins^®, a DHA dietary supplement |
| In 1998, we first realized revenues from the sale of our fluorescent detection products |
| In 2001, the FDA completed a favorable review of our generally recognized as safe notification for the use of our DHA and ARA oil blend in specified ratios in infant formula |
| We have entered into license agreements with 21 infant formula manufacturers, who collectively represent approximately 70prca of the estimated dlra8dtta5 to dlra9dtta5 billion worldwide wholesale market for infant formula and nearly 100prca of the estimated dlra3dtta0 to dlra3dtta5 billion US wholesale market for infant formula, including the wholesale value of Women, Infant & Children program (“WIC”) rebates |
| WIC is a federal grant program administered by the states for the benefit of low-income, nutritionally at-risk women, infants and children |
| Our licensees include infant formula market leaders Mead Johnson Nutritionals, Nestle, Abbott Laboratories, Wyeth and Royal Numico, each of whom is selling infant formula fortified with our nutritional oils |
| Our licensees are now selling term infant formula products containing our oils collectively in over 30 countries and pre-term infant formula products containing our oils collectively in over 60 countries around the world |
| Supplemented term infant formulas manufactured by Mead Johnson Nutritionals, Abbott Laboratories, Wyeth and Nestle are currently being sold in the United States |
| 33 _________________________________________________________________ In April 2002, we acquired OmegaTech, Inc |
| (“OmegaTech” or “Martek Boulder”), a low-cost algal DHA producer located in Boulder, Colorado |
| OmegaTech had been in the fermentable DHA business since 1987, and had accumulated over 100 issued and pending patents protecting its DHA technology |
| Its revenues mainly consisted of sales of DHA into the dietary supplement and animal feed markets |
| We acquired OmegaTech to obtain its low-cost DHA oil and related intellectual property for use in the adult supplements market and future use in the food and beverage markets |
| In June 2002, the Australia New Zealand Food Standards Council authorized the use of DHA-S oil for use as a Novel Food ingredient in Australia and New Zealand |
| In June 2003, the European Commission authorized the use of our DHA-S oil and declared that our DHA-S oil may be sold in the European Community as a Novel Food ingredient |
| This Novel Food designation authorizes the use of our DHA-S as an ingredient in certain foods such as certain dairy products, including cheese and yogurt (but not milk-based drinks), spreads and dressings, breakfast cereals, food supplements and dietary foods for special medical purposes in the European Community |
| In February 2004, the FDA completed a favorable review of our GRAS notification for the use of DHA-S in food and beverage applications |
| We are currently selling DHA-S products in the dietary supplement, food and beverage and animal feed markets domestically and internationally |
| In September 2003, we purchased certain assets and assumed certain liabilities of FermPro Manufacturing, LP, which operated a fermentation facility located in Kingstree, South Carolina |
| FermPro provided contract fermentation services and had an experienced workforce of over 100 personnel on a site of over 500 acres with extensive fermentation, recovery, laboratory and warehousing capabilities |
| The addition of the FermPro facility and workforce has enabled us to expand our production capabilities through the existing facility, as well as the significant plant expansion that was completed in fiscal 2005 |
| During the past two years, several new products were launched that contained Martek DHA™, including: • Mead Johnson launched Expecta™ LIPIL^®, a DHA supplement for pregnant and nursing women containing Martek DHA™ |
| • PBM Products launched a beverage containing Martek DHA™ that is formulated for diabetics and people with atypical glucose tolerance |
| • GlaxoSmithKline launched a second powdered drink mix containing Martek DHA™ in India |
| The product, Junior Horlicks, is formulated for a child’s developing brain and nervous system |
| GlaxoSmithKline has previously launched an adult DHA beverage |
| • First Horizon Pharmaceutical^® has recently launched OptiNate™ and Mission Pharmacal will soon launch CITRICAL^® Prenatal + DHA Both of these products are prescription prenatal supplements containing Martek DHA™ |
| • Vincent Foods, LLC has begun offering Oh Mama! |
| nutrition bars containing Martek DHA™, which also target pregnant and nursing women |
| • Several egg producers, including Gold Circle Farms^®, are now offering eggs and liquid eggs using Martek DHA™ |
| These eggs are sold in several grocery store chains in the US and Europe |
| • Priegola has launched Simbi + Omega-3 yogurt with Martek DHA™, which is now available in major supermarket chains throughout Spain and is being marketed to children and adults for its brain health benefits |
| All of these products are expected to generate additional revenue for us during fiscal 2006 |
| For the years ended October 31, 2005, 2004 and 2003, we recognized approximately dlra15dtta3 million, dlra47dtta0 million and dlra16dtta0 million of net income, respectively, and as of October 31, 2005, our accumulated deficit was approximately dlra49dtta2 million |
| Although we anticipate continued growth in annual sales of our nutritional oils, and we have achieved an operating profit in each of the last three fiscal years, 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 timing and extent of future oils-related revenues are largely dependent upon the following factors: • the timing of infant formula market introductions by our licensees both domestically and internationally; • the timing and extent of stocking and destocking of inventory by our licensees, including the potential that licensees will move to “just in time” inventory purchasing now that we have reached a base finished goods inventory level; • the timing and extent of introductions of DHA into various child and/or adult applications; • the continued acceptance of products containing our oils under state-administered reimbursement programs in the US; • the continued acceptance of these products by consumers and continued demand by our customers; • the ability by us, DSM and other third-party manufacturers to produce adequate levels of our nutritional oils on a consistent basis; • our ability to protect against competitive products through our patents; • competition from alternative sources of DHA and ARA; and • agreements with other future third-party collaborators to market our products or develop new products |
| As such, the likelihood, timing and extent of future profitability are largely dependent on factors such as those mentioned above, as well as others, over which we have limited or no control |
| 34 _________________________________________________________________ CRITICAL ACCOUNTING POLICIES AND THE USE OF ESTIMATES The preparation of our consolidated financial statements in conformity with US generally accepted accounting principles 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 our estimates |
| We believe that the following significant accounting policies and assumptions involve a higher degree of judgment and complexity than others |
| Valuation of Long-lived Assets We review our long-lived assets, including fixed assets and certain identified intangibles, for impairment as events or changes in circumstances occur indicating that the carrying amount of the asset may not be recoverable |
| As of October 31, 2005, these long-lived assets had a total net book value of dlra321dtta9 million |
| Included in these long-lived assets are approximately dlra37dtta5 million of qualified production equipment whose use is not currently required due to excess capacity |
| Undiscounted cash flow analyses are used to assess impairment |
| The estimates of future cash flows involve considerable management judgment and are based upon assumptions about expected future operating performance |
| While management believes that its projections are reasonable and that no impairment of these assets exists, different assumptions could affect these evaluations and result in material impairment charges against the carrying value of these assets |
| Revenue Recognition We derive revenue principally from two sources: product sales and contract manufacturing |
| We recognize revenue when persuasive evidence of an arrangement exists, the fee is fixed or determinable, collectibility is probable and the product is shipped thereby transferring title and risk of loss |
| 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 Nodtta 00-21 (“EITF Nodtta 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 and all other conditions for revenue recognition are met |
| Cash received as a prepayment on future product purchases is deferred and recognized as revenue when product is shipped |
| Revenue from product licenses is deferred and recognized on a straight-line basis over the term of the agreement |
| Royalty income is recorded when earned, based on information provided by our licensees |
| Contract manufacturing revenue is recognized when goods are shipped to customers and all other conditions for revenue recognition are met |
| Cash received that is related to future performance under such contracts is deferred and recognized as revenue when earned |
| Deferred Income Taxes We provide for income taxes in accordance with the liability method |
| Under this method, deferred tax assets and liabilities are determined based on differences between the financial reporting bases and the tax bases of assets and liabilities |
| We also recognize deferred tax assets for certain tax net operating loss carryforwards |
| These deferred tax assets and liabilities are measured using the enacted tax rates and laws that will be in effect when such amounts are expected to reverse or be utilized |
| As of October 31, 2005, our total gross deferred tax asset was dlra73dtta5 million |
| The realization of deferred tax assets is contingent upon the generation of future taxable income |
| When appropriate, we recognize a valuation allowance to reduce such deferred tax assets to amounts that are more likely than not to be ultimately realized |
| The calculation of deferred tax assets (including valuation allowances) and liabilities requires management to apply significant judgment related to such factors as the application of complex tax laws, changes in tax laws and the future operations of the Company |
| We review our deferred tax assets on a quarterly basis to determine if a change to our valuation allowance is required based upon these factors |
| As of October 31, 2005, our deferred tax asset valuation allowance was dlra23dtta8 million, which related primarily to certain net operating loss carryforwards whose realization is uncertain |
| Changes in our assessment of the need for a valuation allowance could give rise to a change in such allowance, potentially resulting in material amounts of additional expense or benefit in the period of change |
| Inventory We carry our inventory at the lower of cost or market |
| We regularly review inventory quantities on hand and record a reserve for excess, obsolete and “off-spec” inventory based primarily on an estimated forecast of product demand and the likelihood of consumption in the normal course of manufacturing operations |
| Those reserves are based on significant estimates |
| Our estimates of future product demand or assessments of future consumption may prove to be inaccurate, in which case we may have understated or overstated the provision required |
| Although we make every effort to ensure the accuracy of our forecasts and assessments, any significant unanticipated changes, particularly in demand or competition levels, could have a significant impact on the values of our inventory and our reported operating results |
| Stock-Based Compensation We account for employee stock-based compensation in accordance with the provisions of Accounting Principles Board Opinion Nodtta 25, “Accounting for Stock Issued to Employees” (“APB 25”) and related interpretations, which require us to recognize compensation cost for the excess of the fair value of the stock at the grant date over the exercise price, if any |
| An alternative method of accounting would apply the principles of SFAS Nodtta 123, “Accounting for Stock-Based Compensation” (“SFAS 123”), which require the fair value of the stock option to be recognized at the date of grant and amortized to compensation expense over the stock option’s vesting period |
| No stock-based employee compensation cost for stock options 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-based method in accordance with SFAS 123 |
| See “Recently Issued Accounting Pronouncements |
| ” MANAGEMENT OUTLOOK From fiscal 2003 through early fiscal 2005, the demand for our nutritional oils by our customers for use in infant formula products exceeded production output and capacity and, as such, we limited the orders we accepted for our nutritional oils |
| Some of our customers responded to the shortages and inconsistent supply by building inventory, and we have had difficulty in predicting with certainty our customers’ future ordering in light of limited visibility into our customers’ supply chains and expansion plans |
| To improve visibility into our customers’ planned orders and to better understand the base level of orders required to meet current demand, we have worked closely with our customers to obtain new order projections |
| To 35 _________________________________________________________________ address our production output and capacity issues, we and DSM have added production capacity |
| As a result, we are no longer limiting the orders we accept for nutritional oils, and, furthermore, we have been able to accumulate and expect to maintain DHA and ARA finished goods inventory at levels which no longer constrain revenue growth |
| We believe that the outlook for future revenue growth remains positive, although quarterly results may show significant fluctuations |
| Specifically, we believe that over the next twelve to eighteen months, our infant formula product sales in the US market will continue to grow at a measured pace consistent with the consumer demand growth for fortified infant formula |
| Expansion by our customers into new international markets offers a potentially higher growth rate, but is subject to the timing of the launches |
| We also believe that we will continue to gain market share in existing international markets and new products containing our oils will be launched by licensees |
| In fiscal 2005, approximately 96prca of our product sales revenues related to the sales of our oils for use in infant formula, pregnancy and nursing supplements and toddler products |
| We anticipate increased future sales of our oils for other products such as foods and beverages developed to promote cognitive function and cardiovascular health |
| We expect that the majority of these sales will come through collaborative 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 could ultimately represent a larger potential market than infant formula |
| PRODUCTION We manufacture oils rich in DHA at our fermentation and oil processing facilities located in Winchester, Kentucky and Kingstree, South Carolina |
| As of October 31, 2005, we have completed the extensive expansion at our Kingstree facility for the fermentation and processing of our nutritional oils |
| We have spent approximately dlra188 million on the expansion since the inception of the project in fiscal 2003 |
| Our ARA oils are purchased from DSM as manufactured at its Capua, Italy and Belvidere, New Jersey plants |
| DSM recently completed its expansion of its ARA production capabilities at its Belvidere facility, which has been increasing its quarterly output |
| This has allowed us to build our ARA inventory and we are continuing to build this ARA inventory in the short-term, until the Belvidere facility exhibits more consistent production performance |
| We are now receiving approximately one-half of our ARA from DSM’s Belvidere facility |
| Because DSM is a third-party manufacturer, we do not have full control over the timing and level of its Capua and Belvidere production volumes |
| Annual ARA pricing utilizes a cost-plus arrangement and is based on the prior year’s actual costs incurred adjusted for current year expectations |
| Calendar 2005 ARA purchases have been valued by us based on pricing established through this methodology and invoiced from DSM As part of our April 2004 agreement with DSM, we are required to guarantee the recovery to DSM of certain expansion costs incurred by them |
| Our guarantee to DSM which relates to their phase one expansion and was initially valued at dlra8 million has been eliminated through ARA purchases in the normal course of business |
| In addition, we are in the process of finalizing an amendment to the April 2004 agreement with DSM This amendment, among other things, will establish our guarantee of DSM’s phase two expansion costs |
| This guarantee will have a maximum value of dlra40 million, with such amount being reduced annually through December 31, 2008 based upon ARA purchases in excess of a specified minimum threshold |
| As of December 31, 2005, this phase two proposed guarantee has been reduced to approximately dlra32 million, with this reduction occurring primarily in the second half of 2005 upon completion of DSM’s phase two expansion We have attempted to reduce the risk inherent in having a single supplier, such as DSM, through certain elements of the supply agreement entered into with DSM in April 2004 |
| In connection with this 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 a third party, an unlimited amount of ARA The sale of such self-produced ARA is limited annually, however, to the greater of (i) 100 tons of ARA oil or (ii) any amounts ordered by us that DSM is unable to fulfill |
| During fiscal 2005, we demonstrated the ability to produce limited amounts of ARA in our plants |
| To further improve our overall ARA supply chain, we have directly engaged a US-based provider of certain post-fermentation ARA manufacturing services and have added additional ARA downstream processing capacity at Kingstree |
| Along with our pending ARA extraction capabilities at Kingstree, the addition of the third-party facility provides us with multiple US sites for the full downstream processing of ARA When combining our current DHA production capabilities in Winchester and Kingstree with DSM’s current ARA production capabilities in Italy and the US, we have production capacity for DHA and ARA products in excess of dlra500 million in annualized sales to the infant formula, dietary supplement and food and beverage markets |
| As such, our production capabilities exceed current demand; however, we have the ability to manage production levels and, to a certain extent, control our manufacturing costs |
| Nonetheless, when experiencing excess capacity, we may be unable to produce the required quantities of oil cost-effectively |
| We also have several other contractual agreements with third-party manufacturers to assist in the production of our nutritional oils |
| Among them, we have an agreement for the production of DHA-S biomass that we sell to animal feed companies or process further for use in the adult supplement and food and beverage markets |
| We currently have a minimum purchase commitment under this agreement that expires on June 30, 2006 |
| As of October 31, 2005, our remaining obligation was approximately dlra1dtta8 million |
| We do not anticipate extending this third-party arrangement due to the recent refinement and scale-up of our internal production capabilities for DHA-S at both our Winchester, Kentucky and Kingstree, South Carolina facilities |
| The commercial success of our nutritional oils will depend, in part, on our ability to manufacture these oils or have them manufactured at large scale on a continuous basis and at a commercially acceptable cost |
| Our success will also be somewhat dependent on our ability to align our production with customer demand |
| If market demand subsides due to our inability to meet demand for our products, our results could be negatively impacted |
| There can also be no assurance that we will be able to successfully optimize production of our nutritional oils, or continue to comply with applicable regulatory requirements, including GMP requirements |
| Under the terms of several of our infant formula licenses, our licensees may elect to 36 _________________________________________________________________ manufacture these oils themselves |
| We are currently unaware of any of our licensees producing our oils or preparing to produce our oils, and estimate that it would take a licensee a minimum of one year to implement a process for making our oils |
| ACQUISITIONS AND DISPOSITIONS In September 2003, we purchased, through a wholly-owned subsidiary, certain assets and assumed certain liabilities of FermPro, which operated a fermentation facility located in Kingstree, South Carolina |
| The addition of the FermPro facility added to our production capabilities and has allowed us to establish a second manufacturing facility that now has redundant capabilities |
| The purchase price of the assets acquired and liabilities assumed included a payment of approximately dlra12dtta2 million, comprised of dlra5dtta4 million in cash, 124cmam788 shares of our common stock valued at approximately dlra5dtta6 million, and approximately dlra1dtta2 million in acquisition-related fees and expenses |
| In addition, a dlra10 million note was assumed as part of the transaction |
| The results of operations of FermPro have been included in the accompanying consolidated statements of income from the date of the acquisition |
| The purchase price has been allocated to the assumed assets and liabilities of FermPro based on their relative fair values |
| In April 2002, we completed our acquisition of OmegaTech for approximately dlra54dtta1 million |
| Approximately dlra49dtta3 million of the purchase price was related to the value of 1cmam765cmam728 shares of our common stock (dlra1dtta5 million of which related to OmegaTech transaction costs paid by us), approximately dlra2dtta1 million was for our acquisition-related fees and expenses, and approximately dlra2dtta7 million was related to the fair value of 154cmam589 vested OmegaTech stock options that were assumed as part of the transaction |
| The merger agreement also provides for additional stock consideration of up to dlra40 million, subject to certain pricing adjustments, if certain 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 approvals in the US and Europe |
| One of the regulatory approval milestones related to the granting of Novel Foods approval in Europe for the OmegaTech DHA-S oil |
| In June 2003, the European Commission granted approval of the use of this oil in certain foods in the European Community, meeting the conditions of this regulatory milestone |
| Accordingly, approximately 358cmam566 shares of Martek common stock, with a fair market value of approximately dlra14dtta2 million, were issued during the third quarter of fiscal 2003 |
| The payment of this additional consideration was recorded as goodwill |
| As of October 31, 2005, we do not believe the second regulatory milestone has been achieved |
| In addition, we do not believe that either financial milestone related to sales and gross profit margin for the periods ended October 31, 2004 and 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 financial milestone related to the period ended October 31, 2003 should be issued |
| Martek disagrees with that conclusion |