<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2000
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ___________ TO ___________
Commission File Number 0-22873
HYSEQ, INC.
(Exact name of Registrant as specified in its charter)
NEVADA 36-3855489
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
670 ALMANOR AVENUE, SUNNYVALE, CA 94085
(Address of principal executive offices, including zip code)
408-524-8100
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Sections 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.
Yes [X] No [ ]
COMMON STOCK OUTSTANDING ON OCTOBER 31, 2000: 13,682,704
<PAGE> 2
HYSEQ, INC.
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 2000
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Part I Financial Information
Item 1. Financial Statements (unaudited)
Condensed Consolidated Balance Sheets as of September 30, 2000 and December 31, 1999...................... 3
Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2000
and 1999................................................................................................... 4
Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2000 and 1999...... 5
Notes to Condensed Consolidated Financial Statements....................................................... 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations...................... 7
Item 3. Quantitative and Qualitative Disclosures about Market Risk................................................. 10
Part II Other Information
Item 1. Legal Proceedings.......................................................................................... 11
Item 2. Change in Securities and Use of Proceeds................................................................... 12
Item 3. Defaults Upon Senior Securities............................................................................ 12
Item 4. Submission of Matters to a Vote of Security Holders........................................................ 12
Item 5. Other Information.......................................................................................... 12
Item 6. Exhibits and Reports on Form 8-K........................................................................... 12
Signature................................................................................................................... 13
Exhibit Index............................................................................................................... 14
</TABLE>
2
<PAGE> 3
ITEM 1. FINANCIAL STATEMENTS
HYSEQ, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------- -------------
(UNAUDITED)
ASSETS
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 11,843 $ 13,675
Short-term investments 1,470 16,962
Accounts receivable 115 1,250
Other current assets 2,533 1,111
------------- -------------
Total Current Assets 15,961 32,998
Cash on deposit 2,106 2,106
Equipment, leasehold improvements and capitalized
software, net 12,058 8,427
Patents, licenses and other assets, net 1,102 1,833
------------- -------------
Total Assets $ 31,227 $ 45,364
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 2,480 $ 1,473
Accrued professional fees 987 1,778
Other current liabilities 966 580
Deferred revenue 4,409 5,000
Current portion of capital lease and loan obligations 2,454 2,090
------------- -------------
Total Current Liabilities 11,296 10,921
Non-current portion of capital lease and loan obligations 5,333 5,221
------------- -------------
Total Liabilities 16,629 16,142
------------- -------------
Commitments and contingencies -- --
Stockholders' Equity:
Preferred stock, par value $0.001; 8,000,000 shares
authorized; none issued and outstanding at
September 30, 2000 and December 31, 1999 -- --
Common stock, par value $0.001; 100,000,000 shares
authorized; 13,681,355 and 13,083,242 issued and
outstanding at September 30, 2000 and December 31,
1999, respectively 14 13
Additional paid-in capital 79,837 82,450
Notes receivable from stockholders -- (3,503)
Deferred stock compensation (16) (37)
Accumulated other comprehensive loss (10) (32)
Accumulated deficit (65,227) (49,669)
------------- -------------
Total stockholders' equity 14,598 29,222
------------- -------------
Total liabilities and stockholders' equity $ 31,227 $ 45,364
============= =============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
<PAGE> 4
HYSEQ, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------- ---------------------------
2000 1999 2000 1999
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Contract revenues $ 5,936 $ 1,490 $ 11,315 $ 5,285
---------- ---------- ---------- ----------
Operating expenses:
Research and development 7,910 4,389 20,122 14,143
General and administrative 2,225 1,757 7,296 5,718
---------- ---------- ---------- ----------
Total operating expenses 10,135 6,146 27,418 19,861
---------- ---------- ---------- ----------
Loss from operations (4,199) (4,656) (16,103) (14,576)
========== ========== ========== ==========
Interest and other income 312 497 1,181 1,603
Interest expense (229) (173) (636) (495)
---------- ---------- ---------- ----------
Net loss $ (4,116) $ (4,332) $ (15,558) $ (13,468)
========== ========== ========== ==========
Basic and diluted net loss per share $ (0.30) $ (0.33) $ (1.16) $ (1.04)
========== ========== ========== ==========
Shares used in computing basic and
diluted net loss per share 13,616 13,016 13,369 12,993
========== ========== ========== ==========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<PAGE> 5
HYSEQ, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
--------------------------------
2000 1999
------------ ------------
<S> <C> <C>
NET CASH USED IN OPERATING ACTIVITIES $ (12,634) $ (13,849)
------------ ------------
Cash flow from investing activities:
Purchases of property and equipment (6,400) (3,967)
Purchases of short-term investments -- (11,421)
Maturities of short-term investments 15,514 22,800
Proceeds from sales of fixed assets 9 --
------------ ------------
NET CASH PROVIDED BY INVESTING ACTIVITIES 9,123 7,412
------------ ------------
Cash flow from financing activities:
Proceeds from financing loan 2073 2,317
Payments on capital lease and loan obligations (1,597) (1,069)
Repurchases of common stock from stockholder -- (115)
Proceeds from issuance of common stock 1,203 118
------------ ------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 1,679 1,251
------------ ------------
Net decrease in cash and cash equivalents (1,832) (5,186)
Cash and cash equivalents at beginning of period 13,675 21,555
------------ ------------
Cash and cash equivalents at end of period $ 11,843 $ 16,369
============ ============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
<PAGE> 6
HYSEQ, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2000 (Unaudited)
1. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles 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 generally accepted accounting principles for complete
financial statements. The condensed consolidated balance sheet as of September
30, 2000, the statements of operations for the three and nine months ended
September 30, 2000 and 1999, and the statements of cash flows for the nine
months ended September 30, 2000 and 1999 are unaudited, but include all
adjustments (consisting of normal recurring adjustments) which Hyseq, Inc. (the
Company) considers necessary for a fair presentation of the financial position,
operating results and cash flows for the periods presented. The condensed
consolidated balance sheet as of December 31, 1999 is derived from the Company's
audited financial statements. The condensed consolidated financial statements
include the accounts of the Company's wholly owned subsidiaries. The results of
operations for the interim periods shown herein are not necessarily indicative
of operating results expected for the entire year.
2. Notes Receivable from Stockholders
In December 1996, a former officer of the Company purchased 161,280 shares
of common stock at $4.17 per share for a total purchase price of approximately
$0.7 million. Simultaneously with the purchase of such stock, the officer
borrowed from the Company approximately $0.7 million as evidenced by a
promissory note that bore interest at 3% per annum, matured in December 2001,
and was secured by and with recourse only to the 161,280 shares. In March 1997,
the Company sold an additional 179,712 shares of common stock for $6.51 per
share to this officer in exchange for a second promissory note with terms
similar to the one previously described. In January 2000, this former officer
repaid these two promissory notes, which were recorded as a reduction to
stockholders' equity, plus accrued interest totaling $2,003,624. The notes were
repaid by surrendering to the Company approximately 56,000 shares of common
stock that were cancelled.
Also in December 1996, another officer, who is also a director, of the
Company exercised options to purchase 48,000 shares of common stock at an
exercise price of $1.56 per share and exercised warrants to purchase 144,000
shares of common stock at $2.90 per share. Simultaneously with the exercises,
the officer borrowed from the Company approximately $0.5 million, as evidenced
by a promissory note that bore interest at 3% per annum, matured in December
2001, and was secured by and with recourse only to 118,080 shares. In March
1997, the Company sold a total of 179,712 shares of common stock for $6.51 per
share to this officer of the Company in exchange for a second promissory note
with terms similar to those described above. In February 2000, this officer and
director repaid these two promissory notes, which were recorded as a reduction
to stockholders' equity, plus accrued interest totaling $1,811,208. The notes
were repaid by surrendering to the Company approximately 15,000 shares of common
stock that were cancelled.
3. Comprehensive Loss
The Company's comprehensive loss for the three months ended September 30,
2000 is $4.1 million, compared with $4.3 million for the same period a year ago.
The total comprehensive loss for the nine months ended September 30, 2000 is
$15.6 million, compared with $13.5 million for the same period a year ago. Total
comprehensive loss includes net loss and unrealized gains and losses on
marketable securities.
4. Subsequent Events
Subsequent to the end of the third quarter 2000, we received a commitment
from our Chairman and Chief Executive Officer to provide a line of credit of up
to $20.0 million in aggregate principal amount, available for draw down through
November 29, 2002. Amounts outstanding under the line of credit bear interest at
prime plus 1% and are payable in 48 equal monthly installments beginning upon
the expiration date of November 30, 2002. Any notes issued pursuant to such line
of credit may be converted at our option into shares of our common stock at fair
market value on the day the Company elects such conversion.
6
<PAGE> 7
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 as that term is defined in the
Private Securities Litigation Reform Act of 1995. Forward-looking statements may
be identified by words including "anticipate," "believe," "intends,"
"estimates," "expect," "should," "may," "potential" and similar expressions.
Such statements are based on our management's current expectations and involve
risks and uncertainties. Actual results and performance could differ materially
from those projected in the forward-looking statements as a result of many
factors discussed herein. Actual results and performance could also differ
materially from time to time from those projected in our filings with the
Securities and Exchange Commission. The factors causing such differences may
include, but are not limited to, the following:
- the amount of research and development we engage in for identifying new
biopharmaceutical product candidates and for conducting research and
preclining studies on candidates in our pipeline;
- the amount of research and development we engage in with respect to, and
the level of production of, our HyChip biochip and other
sequencing-by-hybridization (SBH) products;
- our ability to obtain additional funding through placement of securities
and collaborative arrangements;
- changes in the status of our collaborative arrangements such as
extension or termination of agreements, changes in the scope of a
collaboration or failure to meet milestones or delivery requirements;
- the costs involved in expanding and enforcing our intellectual property
rights, including our patent litigation with Affymetrix;
- our competitors may have, or may obtain, patent rights that are superior
to our patent rights, including those that cover our
biopharmaceutical products candidates; and
- changes in government regulation.
RESULTS OF OPERATIONS
Contract Revenues
Comparison of the Three and Nine months Ended September 30, 2000 and 1999.
Contract revenues were $5.9 million and $11.3 million for the three and nine
months ended September 30, 2000, compared to $1.5 million and $5.3 million for
the same periods in 1999. Our contract revenues earned during the three and nine
months ended September 30, 2000, included $5.2 million and $7.8 million related
to our collaboration with BASF Aktiengesellschaft (which acquired American
Cyanamid Company), $0.5 million and $3.0 million related to our collaboration
with Chiron Corporation which was extended for an additional two year period in
May 2000, $0.1 million and $0.3 million related to PE Corporation, and $0.1
million and $0.2 million related to Kirin Brewery Co., Ltd. Revenues during the
three and nine months ended September 30, 2000 compared to the three and nine
months ended September 30, 1999 increased primarily as a result of work
performed under our collaboration with BASF. During the third quarter of 2000 we
reached the maximum required processing rate under our contract with BASF, which
we expect to maintain through the term of the contract.
Our revenues typically vary from quarter to quarter and may result in
significant fluctuations in our operating results from year to year. In the
future, we may not be able to maintain existing collaborations, obtain
additional collaboration partners or obtain revenue from other sources. The
failure to maintain existing collaborations or the inability to enter into
additional collaborative arrangements or obtain revenues from other sources
could have a material adverse effect on our revenues and operating results.
Operating Expenses
Comparison of the Three and Nine months Ended September 30, 2000 and 1999.
Our total operating expenses, consisting of research and development
expenses and general and administrative expenses, were $10.1 million and $27.4
million for the three and nine months ended September 30, 2000 compared to $6.1
million and $19.9 million for the same periods in 1999.
7
<PAGE> 8
Our research and development expenses increased to $7.9 million and $20.1
million during the three and nine months ended September 30, 2000, respectively,
from $4.4 million and $14.1 million during the same periods of 1999. This
increase in our research and development expenses was primarily attributable to
the costs associated with the addition of scientific and bioinformatic
personnel, higher outside contract services, increased supplies purchases
related to our collaborations, an increase in production throughput in our gene
discovery and complete gene sequencing programs, and an addition of new leased
space for laboratory and office expansion during the third quarter which is
expected to be occupied during 2001.
Our general and administrative expenses increased to $2.2 million and $7.3
million during the three and nine months ended September 30, 2000, from $1.8
million and $5.7 million during the same periods of 1999. This increase was due
primarily to higher legal expenses, other outside services, and increased
staffing and salary expenses.
We expect operating expenses to increase during the remainder of 2000 as we
plan to continue:
- research and development of our biopharmaceutical product candidates;
- complete gene sequencing programs;
- build-out of our leased facilities;
- development and production of our HyChip biochip; and
- efforts related to expanding and enforcing our intellectual property
rights, including expenses related to our patent litigation with
Affymetrix.
The magnitude of the increases in our operating expenses will be
significantly affected by our ability to secure adequate sources of external
financing or additional sources of revenue. If we do not obtain adequate
financing or revenue in a timely manner, this could significantly harm our
business, financial condition and results of operations, and may require us to
delay or eliminate one or more of our research or development programs.
Interest Income and Expense
Comparison of the Three and Nine Months Ended September 30, 2000 and 1999.
Our net interest income decreased to $0.1 million and $0.5 million during
the three and nine months ended September 30, 2000, from $0.3 million and $1.1
million for the same periods in 1999. The decrease in net interest income
resulted from our lower cash and investment balances and higher interest expense
from increased financing activities.
Net Loss
Since our inception, we have incurred operating losses, and as of September
30, 2000, we had an accumulated deficit of $65.2 million. We incurred a net loss
of $4.1 million and $15.6 million for the three and nine months ended September
30, 2000, compared to a net loss of $4.3 million and $13.5 million in the same
periods of 1999. We expect to continue to incur significant operating losses,
which may increase substantially as we expand research and development of our
biopharmaceutical product candidates and other operations, and as we continue to
expand and enforce our intellectual property rights.
LIQUIDITY AND CAPITAL RESOURCES
Cash and Cash Equivalents, Short-Term Investments, and Cash on Deposit
As of September 30, 2000, we had $13.3 million in cash and cash equivalents
and short-term investments. These amounts reflect a net decrease of $17.3
million from the $30.6 million in cash and cash equivalents and short-term
investments we had as of December 31, 1999.
All of our investments in marketable securities are considered
available-for-sale and as such are classified as short-term investments. We
currently hold our cash equivalents and investments in investment-grade
commercial paper, bank certificates of
8
<PAGE> 9
deposit and other interest-bearing securities. We make our investments in
accordance with our investment policy, the primary objectives of which are
liquidity, safety of principal and diversity of investments.
In addition, we have $2.1 million in restricted cash on deposit as security
for a $2.0 million letter of credit in conjunction with a facility lease.
Provided that no event of default under the lease occurs, the letter of credit
and the cash collateralizing it will be reduced by $0.5 million per year
commencing in 2001. The cash on deposit at any time in conjunction with this
letter of credit is restricted and cannot be withdrawn. We control the
investment of the cash and receive the interest earned thereon.
At the end of the second quarter, we entered into a new facilities lease to
accommodate a planned expansion of our biopharmaceutical development efforts. In
connection with the execution of this lease, we paid $2.0 million in advance
rent and a security deposit of $0.4 million. The advance rent and security
deposit are accounted for as a prepaid asset and as other assets, respectively.
Lease payments over the eleven-year term of lease total approximately $42.0
million.
Cash Used in Operating Activities
The amount of net cash used by operating activities decreased to $12.6
million during the nine months ended September 30, 2000 from $13.8 million in
the same period of 1999 due primarily to a $7.0 million cash payment we received
during the first nine months of 2000 under our collaboration agreement with
BASF. We recorded a decrease in accounts receivable, partially offset by
recognition of previous deferred revenue related to our collaboration with BASF.
Cash Provided by Investing Activities
Our investing activities, other than purchases and sales of short-term
investments, have consisted primarily of capital expenditures.
Net cash provided by investing activities decreased to $4.7 million during
the nine months ended September 30, 2000 from $7.4 million in the same period of
1999. The decrease was primarily due to our higher net redemptions of short-term
investments, partially offset by increased purchases of capital equipment.
During the first nine months of 2000 all of our short-term investments were
reinvested upon maturity into commercial paper with maturities of less than 90
days.
Cash Provided by Financing Activities
Net cash provided by financing activities increased to $1.7 million during
the nine months ended September 30, 2000 from $1.3 million in the same period of
1999. The increase was primarily due to higher proceeds from employee stock
option exercises.
During the first nine months of 2000, we utilized the balance of a $5.0
million asset-backed financing commitment obtained in 1999. We are currently
evaluating our future needs for equipment financing and may seek to obtain
additional equipment financing. There is no assurance that in the future we will
be able to secure new equipment financing on favorable terms, if at all.
We have financed our operations since inception through private and public
sales of our stock, revenue from research and development collaborations,
grants, asset-backed financings and investment income. Subsequent to the end of
the third quarter 2000, we received a commitment from our Chairman and Chief
Executive Officer to provide a line of credit of up to $20.0 million in
aggregate principal amount, available for draw down through November 29, 2002.
Amounts outstanding under the line of credit bear interest at prime plus 1% and
are payable in 48 equal monthly installments beginning upon the expiration date
of November 30, 2002. Any notes issued pursuant to such line of credit may be
converted at our option into shares of our common stock at fair market value on
the day we elect such conversion. We anticipate that existing capital resources
and anticipated cash from existing collaborative partners will be sufficient to
support our biopharmaceutical research and development and other operations
including HyChip biochip development and production into 2001. Our estimate of
the time period for which existing and anticipated cash funds will be adequate
to fund our operations is a forward-looking estimate subject to risks and
uncertainty. Actual results may differ substantially. If we do not obtain
adequate financing or revenue in a timely manner, this could significantly harm
our business, financial condition and results of operations, and may require us
to delay or eliminate one or more of our research or development programs. Our
future capital requirements and the adequacy of our available funds will depend
on many factors, including, but not limited to:
- continued scientific progress in our research and development programs;
- our ability to attract additional financing on favorable terms;
9
<PAGE> 10
- the magnitude and scope of our research and development programs,
including our development of biopharmaceutical product candidates, our
complete gene sequencing programs, and our HyChip biochip and other SBH
products;
- our ability to maintain existing and establish additional collaborative
and licensing arrangements, and the financial commitments involved in
such collaborative and licensing arrangements;
- the cost of expanding and enforcing our intellectual property rights,
including our patent litigation with Affymetrix;
- expansion of our facilities to support research and development of our
biopharmaceutical product candidates;
- progress with research and preclinical studies on our biopharmaceutical
product candidates;
- the time and cost involved in obtaining regulatory approvals;
- competing technological and market developments;
- our need to develop, acquire or license new technologies or products;
and
- other factors not within our control.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133"), which establishes accounting
and reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. In
accordance with SFAS 133, an entity is required to recognize all derivatives as
either assets or liabilities in the statement of financial position and measure
those instruments at fair value. SFAS 133 requires that changes in the
derivative's fair value be recognized currently in earnings unless specific
hedge accounting criteria are met. Special accounting for qualifying hedges
allows a derivative's gains and losses to offset related results on the hedged
item in the income statement and requires that a company formally document,
designate and assess the effectiveness of transactions that receive hedge
accounting. SFAS 133, as amended by SFAS 137 and 138, shall be effective for all
fiscal quarters of all fiscal years beginning after June 15, 2000.
Implementation of SFAS 133, as amended, will not have a material effect on the
Company's results of operations or financial position as the Company holds no
derivative instruments.
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial
Statements." This bulletin provides specific guidance and clarification on the
conditions that must be met before an entity may recognize revenue. We adopted
SAB 101 as of December 31, 1999. Implementation of SAB 101 did not have a
material effect on our results of operations or financial position.
In March 2000, the FASB issued Interpretation No. 44 ("FIN 44") of
Accounting Principals Board No. 25 ("APB 25"), which clarifies the application
of APB 25 as it relates to (i) the definition of employee for purposes of
applying APB 25, (ii) the criteria for determining whether a plan qualifies as a
noncompensatory plan, (iii) the accounting consequence of various modifications
to the terms of a previously fixed stock option or award and (iv) the accounting
for an exchange of stock compensation awards in a business combination. FIN 44
was effective on July 1, 2000. Implementation of FIN 44 did not have a material
effect on our results of operations and financial position.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
MARKET RATE RISK
There were no significant changes in our market risk exposures through the
third quarter 2000. For further discussion of our market risk exposures, refer
to Part II, Item 7A., "Quantitative and Qualitative Disclosures About Market
Risk" of our Annual Report on Form 10-K for the fiscal year ended December 31,
1999.
10
<PAGE> 11
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On March 3, 1997, we sued Affymetrix, Inc. in the U.S. District Court for
the Northern District of California, San Jose Division, alleging infringement by
Affymetrix of our U.S. Patent Nos. 5,202,231 and 5,525,464 (Hyseq, Inc. v.
Affymetrix, Inc., Case No. C 97-20188 RMW (PVT)) ("Hyseq I"). On May 5, 1997, we
filed an Amended Complaint. On December 9, 1997, we filed a second lawsuit
against Affymetrix alleging infringement by Affymetrix of our U.S. Patent No.
5,695,940 (Hyseq, Inc. v. Affymetrix, Inc., Case No. C-97 4469 THE) ("Hyseq
II"). On April 22, 1998 the two cases were consolidated before Judge Ronald M.
Whyte.
The consolidated suits allege that Affymetrix willfully infringed, and
continues to infringe, our patents covering sequencing-by-hybridization (SBH)
technology. Through the lawsuit, we seek both to enjoin Affymetrix from
infringing our patents covering SBH technology and an award of monetary damages
for Affymetrix' past infringement. On May 19, 1997, Affymetrix filed an Answer
and Affirmative Defenses to the First Amended Complaint in Hyseq I and also
filed a counterclaim against us. The counterclaim seeks a declaratory judgment
of invalidity and non-infringement with respect to the two patents asserted in
Hyseq I. On September 9, 1997, we filed a reply to the counterclaim in which we
denied the allegations of invalidity and non-infringement. A similar answer and
counterclaim was filed by Affymetrix in Hyseq II on December 28, 1997, and a
similar reply to the counterclaim was filed by us on January 29, 1998. On August
1, 1997 (Hyseq I), and on March 28, 1998 (Hyseq II), initial case management
conferences were held in each case in which the Court entered a pre-trial
schedule. The Court held a claims construction hearing on November 17 and 18,
1998 in Hyseq I and II. On July 12, 1999, Affymetrix filed an amended answer and
counterclaim alleging the additional defense that the patents were obtained
through inequitable conduct. On October 27, 1999, the Court issued a Claims
Construction Order construing terms in the claims of the patents-in-suit and
inviting the parties to submit briefs setting forth any perceived errors or
inconsistencies in the Order. Affymetrix and we submitted our briefs on December
17 and 27, 1999, respectively. On January 7, 2000, the Court held a further Case
Management Conference. On February 22, 2000, the Court received oral argument
from the parties regarding the Claims Construction Order. On July 27, 2000, the
Court issued a modified Claims Construction Order. Affymetrix and we are
currently engaged in pretrial discovery during which documents and other written
discovery are being exchanged and depositions are being taken. While we believe
we have asserted valid claims and have meritorious defenses to the
counterclaims, this litigation is at an early stage and there can be no
assurance that we will prevail in these actions.
On August 18, 1998, Affymetrix filed suit against us in the U.S. District
Court for the Northern District of California, San Francisco Division, alleging
that we infringed two of Affymetrix's U.S. patents, No. 5,795,716 and 5,744,305
(Affymetrix, Inc. v. Hyseq, Inc., Case No. C 98-13192). Affymetrix filed an
amended complaint on September 1, 1998 alleging infringement of its U.S. Patent
No. 5,800,992. The case was reassigned to Judge Jeremy Fogel in the San Jose
Division. At the time of the assignment to Judge Fogel, the case was also
renumbered as Case No. C 99-21163 JF (MEJ). A Case Management Conference before
Judge Fogel was held on July 10, 2000, and a claim construction hearing is set
for November 29 and 30, 2000. We believe that Affymetrix's allegations are
without merit and we intend to vigorously defend the action. However, the
litigation is at a very early stage and it is impossible to predict the ultimate
outcome of this matter.
On October 26, 1999, we filed a third lawsuit against Affymetrix in the U.S.
District Court for the Northern District of California, San Francisco Division
(Hyseq, Inc. v. Affymetrix, Inc., Case No. C-99 4735 MJJ) ("Hyseq III"),
alleging infringement by Affymetrix of our recently-issued U.S. Patent No.
5,972,619 (the "'619 Patent"). We also allege that Affymetrix's U.S. Patent No.
5,795,716 is invalid because the subject matter was first invented by our
scientists and is claimed and covered by our '619 Patent. Affymetrix filed an
answer and counterclaim on November 15, 1999. The counterclaim seeks a
declaratory judgment of invalidity, unenforceability and non-infringement with
respect to us '619 Patent. On December 9, 1999, we filed a reply to the
counterclaim in which we denied the allegations of invalidity, unenforceability,
and non-infringement. Subsequently, Hyseq III was reassigned to Judge Fogel and
was given Case No. C-00-20050 JF/PVT. A Case Management Conference was held on
July 10, 2000 along with Affymetrix, Inc. v. Hyseq, Inc. On September 6, 2000,
we filed a motion seeking the Court's permission to supplement our complaint in
Hyseq III to add a claim for infringement by Affymetrix of our U.S. Patent No.
6,018,041 (the "`041 patent"), which issued to us on January 25, 2000. On
November 2, 2000, Judge Fogel granted our motion. On October 12, 2000,
Affymetrix filed an Ex Parte application before Judges Fogel and Whyte
requesting reassignment of our infringement claims under the `619 patent from
Judge Fogel to Judge Whyte. On November 2, 2000, Judges Fogel and Whyte
reassigned our infringement claims against Affymetrix under the `619 patent (as
well as our
11
<PAGE> 12
infringement claims against Affymetrix under the `041 patent) to Judge Whyte,
and ordered that the claim construction of the `619 patent claims would proceed
before Judge Whyte.
We have incurred substantial costs and expended substantial personnel time
in asserting our patent rights and defending our technology against Affymetrix
and may continue to incur such costs in asserting our patent rights and
defending our technology against Affymetrix or others. There can be no assurance
that we will be successful in these efforts. Failure to successfully enforce our
patent rights or the loss of these patent rights covering SBH technology could
remove a legal obstacle to competitors in designing platforms with similar
competitive advantages.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 13.0 Annual Report
Exhibit 27.0 Financial Data Schedule
(b) Reports on Form 8-K
None.
12
<PAGE> 13
SIGNATURE
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.
Hyseq, Inc. (Registrant)
By: /s/ MARK E. GITTER
------------------------------------
Mark E. Gitter
Chief Financial Officer (Duly
Authorized Officer and Principal
Financial Officer
Date: November 13, 2000
13
<PAGE> 14
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Exhibit Title
------- -------------
<S> <C>
13.0 Item 7A "Qualitative and Quantitative Disclosures
About Market Risk", incorporated by reference to
Registrant's Annual Report on Form 10-K
(Registration No. 000-22873) for the Year Ended
December 31, 1999
27.0 Financial Data Schedule
</TABLE>
