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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 JUNE 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)
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NEVADA 36-3855489
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
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670 ALMANOR AVENUE, SUNNYVALE, CA 94086
(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 JULY 31, 2000: 13,569,061
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HYSEQ, INC.
FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 2000
TABLE OF CONTENTS
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PAGE
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Part I Financial Information
Item 1. Financial Statements (unaudited)
Condensed Consolidated Balance Sheets as of June 30, 2000
and December 31, 1999....................................... 3
Condensed Consolidated Statements of Operations for the
Three and Six Months Ended June 30, 2000 and 1999........... 4
Condensed Consolidated Statements of Cash Flows for the
Six Months Ended June 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................................................ 12
Part II Other Information
Item 1. Legal Proceedings.......................................... 13
Item 2. Change in Securities and Use of Proceeds................... 14
Item 3. Defaults Upon Senior Securities............................ 14
Item 4. Submission of Matters to a Vote of Security Holders........ 14
Item 5. Other Information.......................................... 15
Item 6. Exhibits and Reports on Form 8-K........................... 15
Signature.................................................................... 16
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ITEM 1. FINANCIAL STATEMENTS
HYSEQ, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
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JUNE 30, DECEMBER 31,
2000 1999
-------- ------------
(UNAUDITED)
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ASSETS
Current Assets:
Cash and cash equivalents $ 14,657 $ 13,675
Short-term investments 7,732 16,962
Accounts receivable 1,623 1,250
Other current assets 631 1,111
-------- --------
Total Current Assets 24,643 32,998
Cash on deposit 2,106 2,106
Equipment, leasehold improvements and capitalized
software, net 11,000 8,427
Patents, licenses and other assets, net 468 1,833
-------- --------
Total Assets $ 38,217 $ 45,364
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 2,712 $ 1,473
Accrued professional fees 740 1,778
Other current liabilities 767 580
Deferred revenue 7,480 5,000
Current portion of capital lease and loan obligations 2,474 2,090
-------- --------
Total Current Liabilities 14,173 10,921
Non-current portion of capital lease and loan obligations 5,928 5,221
-------- --------
Total Liabilities 20,101 16,142
-------- --------
Commitments and contingencies -- --
Stockholders' Equity:
Preferred stock, par value $0.001; 8,000,000 shares
authorized; none issued and outstanding as of
June 30, 2000 and December 31, 1999 -- --
Common stock, par value $0.001; 100,000,000 shares
authorized; 13,565,351 and 13,083,242 issued and
outstanding as of June 30, 2000 and December 31,
1999, respectively 13 13
Additional Paid-in Capital 79,254 82,450
Notes receivable from stockholders -- (3,503)
Deferred stock compensation (23) (37)
Accumulated other comprehensive loss (17) (32)
Accumulated deficit (61,111) (49,669)
-------- --------
Total stockholders' equity 18,116 29,222
-------- --------
Total liabilities and stockholders' equity $ 38,217 $ 45,364
======== ========
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See accompanying notes to condensed consolidated financial statements.
3
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HYSEQ, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)
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THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------- ---------------------
2000 1999 2000 1999
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Contract revenues $ 3,574 $ 1,043 $ 5,379 $ 3,795
-------- -------- -------- --------
Operating expenses:
Research and development 6,425 4,152 12,213 9,754
General and administrative 2,480 1,773 5,070 3,961
-------- -------- -------- --------
Total operating expenses 8,905 5,925 17,283 13,715
-------- -------- -------- --------
Loss from operations (5,331) (4,882) (11,904) (9,920)
======== ======== ======== ========
Interest income and other income 420 505 869 1,106
Interest expense (201) (157) (408) (322)
-------- -------- -------- --------
Net loss $ (5,112) $ (4,534) $(11,443) $ (9,136)
======== ======== ======== ========
Basic and diluted net loss per share $ (0.38) $ (0.35) $ (0.86) $ (0.70)
======== ======== ======== ========
Shares used in computing basic &
diluted net loss per share 13,335 12,996 13,245 12,982
======== ======== ======== ========
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See accompanying notes to condensed consolidated financial statements.
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HYSEQ, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
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<CAPTION>
SIX MONTHS ENDED JUNE 30,
-------------------------
2000 1999
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NET CASH USED IN OPERATING ACTIVITIES $ (5,532) $ (9,959)
-------- --------
Cash flow from investing activities:
Purchases of property and equipment (4,438) (2,172)
Purchases of short-term investments -- (11,422)
Maturities of short-term investments 9,233 18,800
Proceeds from sales of fixed assets 9 --
-------- --------
NET CASH PROVIDED BY INVESTING ACTIVITIES 4,804 5,206
-------- --------
Cash flow from financing activities:
Proceeds from financing loan 1,960 1,211
Payments on capital lease and loan obligations (870) (671)
Repurchases of common stock from stockholder -- (115)
Proceeds from issuance of common stock 620 77
-------- --------
NET CASH PROVIDED BY FINANCING ACTIVITIES 1,710 502
-------- --------
Net increase (decrease) in cash and cash equivalents 982 (4,251)
Cash and cash equivalents at beginning of period 13,675 21,555
-------- --------
Cash and cash equivalents at end of period $ 14,657 $ 17,304
======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
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HYSEQ, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 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 June 30,
2000, the statements of operations for the three and six months ended June 30,
2000 and 1999, and the statements of cash flows for the six months ended June
30, 2000 and 1999 are unaudited, but include all adjustments (consisting of
normal recurring adjustments) which 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 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 June 30, 2000
is $5.1 million, compared with $4.5 million for the same period a year ago. The
total comprehensive loss for the six months ended June 30, 2000 is $11.4
million, compared with $9.1 million for the same period a year ago.
4. Subsequent Events
On July 24, 2000 the Company entered into an agreement to lease
approximately 59,000 square feet of primarily laboratory and office space in
Sunnyvale, California. Future lease payments under this agreement total
approximately $42.3 million over the eleven-year term which commences August 1,
2000.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
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:
o the amount of research and development we engage in with respect to
our biopharmaceutical product candidates;
o 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;
o our ability to obtain additional funding through placement of
securities and collaborative arrangements;
o the nature, size, timing or termination of our collaborative
arrangements;
o the costs involved in preparing, filing, prosecuting, maintaining and
enforcing our patent claims;
o our competitors may have or obtain patent rights that are superior to
ours;
o changes in government regulation; and
o our competitors' release of successful products into the market.
RESULTS OF OPERATIONS
Contract Revenues
Comparison of Three and Six Months Ended June 30, 2000 and 1999.
Contract revenues were $3.6 million and $5.4 million for the three and six
months ended June 30, 2000, respectively, compared to $1.0 million and $3.8
million for the same periods in 1999. Our contract revenues earned during the
three and six months ended June 30, 2000, respectively, included $2.3 million
and $2.6 million related to our collaboration with American Cyanamid Company,
$1.2 million and $2.5 million related to our collaboration with Chiron
Corporation, which was extended for an additional two year period in May, 2000,
and $0.1 million and $0.2 million related to PE Corporation. The increase in
revenues from the three and six months ended June 30, 1999 to the three and six
months ended June 30, 2000 resulted primarily from work performed under our
collaboration with American Cyanamid. During the second quarter we recognized
$2.4 million of previously deferred revenue and expect to recognize the
remaining $7.5 million of deferred revenue during the second half of 2000.
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.
7
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Operating Expenses
Comparison of the Three and Six Months Ended June 30, 2000 and 1999.
Our total operating expenses, consisting of research and development
expenses and general and administrative expenses, were $8.9 million and $17.3
million for the three and six months ended June 30, 2000, respectively, compared
to $5.9 million and $13.7 million for the same periods in 1999.
Our research and development expenses increased to $6.4 million and $12.2
million during the three and six months ended June 30, 2000, respectively, from
$4.2 million and $9.8 million during the same periods of 1999. This increase was
due primarily to the costs associated with the addition of scientific and
bioinformatic personnel, higher outside contract services, increased supplies
purchases related to our collaborations, and an increase in production
throughput in the gene discovery and complete gene sequencing areas.
Our general and administrative expenses increased to $2.5 million and $5.1
million during the three and six months ended June 30, 2000, respectively, from
$1.8 million and $4.0 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 significantly expand:
o research and development of our biopharmaceutical product candidates;
o complete gene sequencing programs;
o leased facilities;
o development and production of our HyChip biochip; and
o 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, we may be required to delay or
eliminate one or more of our research or development programs. Any such action
could significantly harm our business, financial condition and results of
operations.
Interest Income and Expense
Comparison of the Three and Six Months Ended June 30, 2000 and 1999.
Our net interest income decreased to $0.2 million and $0.5 million during
the three and six months ended June 30, 2000, respectively from $0.3 million and
$0.8 million for the same periods in 1999. The decrease in net interest income
resulted from lower cash and investment balances held by the Company and higher
interest expense from increased financing activities.
Net Loss
Since our inception, we have incurred operating losses, and as of June 30,
2000, we had an accumulated deficit of $61.1 million. The Company incurred a net
loss for the three and six months ended June 30, 2000 of $5.1 million and $11.4
million, respectively, compared to a net loss of $4.5 million and $9.1 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 expand and enforce our intellectual property rights.
8
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LIQUIDITY AND CAPITAL RESOURCES.
Cash and Cash Equivalents, Short-Term Investments, and Cash on Deposit
As of June 30, 2000, we had $24.5 million in cash and short-term
investments, including $22.4 million in cash and cash equivalents and short-term
investments, and $2.1 million in restricted cash on deposit account. These
amounts reflect a net decrease of $8.2 million from the $32.7 million in cash
and cash equivalents, short-term investments and restricted cash on deposit 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 deposit and other interest-bearing
securities. We make our investments in accordance with our investment policy.
The primary objectives of our investment policy 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 has occurred, 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.
Subsequent to the end of the second quarter, the company entered into a new
facilities lease to accommodate a planned expansion of its biopharmaceutical
development efforts. In connection with the execution of this lease in July
2000, the Company paid $2.0 million in advance rent and a security deposit of
$0.4 million. Total lease payments over the eleven-year term of lease are
approximately $42.3 million.
SOURCES AND USES OF CASH
Cash Used in Operating Activities
Comparison of the Six Months Ended June 30, 2000 and 1999.
The amount of net cash used by operating activities decreased to $5.5
million during the six months ended June 30, 2000 from $10.0 million in the same
period of 1999 due primarily to a $7.0 million cash payment received during the
first six months of 2000 under our collaboration agreement with American
Cyanamid, partially offset by recognition of previous deferred revenue related
to American Cyanamid and an increase in accounts receivable from Chiron
Corporation.
Cash Provided by Investing Activities.
Our investing activities, other than purchases and sales of short-term
investments, have consisted primarily of capital expenditures.
Comparison of the Six Months Ended June 30, 2000 and 1999.
Net cash provided by investing activities decreased to $4.8 million during
the six months ended June 30, 2000 from $5.2 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 equipment. During the
first six 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
Comparison of the Six Months Ended June 30, 2000 and 1999.
Net cash provided by financing activities increased to $1.7 million during
the six months ended June 30, 2000 from $0.5 million in the same period of 1999.
The increase was primarily due to higher proceeds from an asset-backed financing
loan draws during 2000 and higher proceeds from employee stock option exercises.
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During the first six 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, and asset-backed financings and investment income. 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 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. Our
future capital requirements and the adequacy of our available funds will depend
on many factors, including, but not limited to:
o continued scientific progress in our research and development
programs;
o our ability to attract additional financing on favorable terms;
o 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;
o our ability to maintain existing and establish additional
collaborative and licensing arrangements, and the financial
commitments involved in such collaborative and licensing arrangements;
o the cost of prosecution and enforcement of our intellectual property
rights;
o expansion of our facilities to support research and development of our
biopharmaceutical candidates;
o progress with preclinical studies and clinical trials;
o the time and cost involved in obtaining regulatory approvals;
o competing technological and market developments;
o our need to develop, acquire or license new technologies or products;
and
o other factors not within our control.
NEW 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.
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial
Statements." This statement gives specific guidance and clarification on the
conditions that must be met before an entity may recognize revenue. The Company
adopted SAB 101 as of December 31, 1999.
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Implementation of SAB 101 will not have a material effect on the Company's
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
is effective on July 1, 2000. Implementation of FIN 44 will not have a material
effect on the Company's results of operations and financial position.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
MARKET RATE RISK
There were no significant changes in the Company's market risk exposures
through the second quarter 2000. For further discussion of the Company's market
risk exposures, refer to Part II, Item 7A., "Quantitative and Qualitative
Disclosures About Market Risk" of the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1999.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On March 3, 1997, the Company brought suit against Affymetrix, Inc. in the
U.S. District Court for the Northern District of California, San Jose Division,
alleging infringement by Affymetrix of the Company's 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, the Company filed an Amended Complaint. On December
9, 1997, the Company filed a second lawsuit against Affymetrix alleging
infringement by Affymetrix of the Company's 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, the Company's patents covering
sequencing-by-hybridization (SBH) technology. Through the lawsuit, the Company
seeks both to enjoin Affymetrix from infringing its 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 the
Company. 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, the Company filed a reply to the counterclaim in which it
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 the Company 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. The Company and Affymetrix submitted their 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. The Company and
Affymetrix are currently engaged in pretrial discovery during which documents
and other written discovery are being exchanged and depositions are being taken.
While the Company believes it has asserted valid claims and has meritorious
defenses to the counterclaims, this litigation is at an early stage and there
can be no assurance that the Company will prevail in these actions.
On August 18, 1998, Affymetrix filed suit against the Company in the U.S.
District Court for the Northern District of California, San Francisco Division,
alleging that the Company infringed two of Affymetrix' 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 claims
construction hearing set for November 29, 2000. The Company believes that
Affymetrix' allegations are without merit and intends 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, the Company 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 the Company's
recently-issued U.S. Patent No. 5,972,619 (the "'619 Patent"). Hyseq also
alleges that Affymetrix' U.S. Patent No. 5,795,716 is invalid because the
subject matter was first invented by Hyseq scientists and is claimed and covered
by Hyseq's '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 Hyseq's '619 Patent. On
December 9, 1999, the Company filed a reply to the counterclaim in which it
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., and a claims construction hearing set for
November 29, 2000.
13
<PAGE> 14
The Company has incurred substantial costs and expended substantial
personnel time in asserting the Company's patent rights and defending its
technology against Affymetrix and may continue to incur such costs in asserting
its patent rights and defending its technology against Affymetrix or others.
There can be no assurance that the Company will be successful in these efforts.
Failure to successfully enforce its 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
The Company held its Annual Meeting of Stockholders on May 23, 2000. At
that meeting, a quorum was present and four proposals were voted upon.
1. The following persons were nominees for election as Class I Directors,
each to hold office for a term as outlined in the proxy statement or until his
successor is duly elected and qualified, and at the Annual Meeting of
Stockholders on May 23, 2000, each such Director received the number of votes
set opposite his respective name and was elected as Class I Directors for the
term set forth in the proxy statement:
<TABLE>
<CAPTION>
NOMINEE FOR AGAINST WITHHELD
------- --- ------- --------
<S> <C> <C> <C>
Robert D. Weist 9,707,353 0 946,691
Lewis S. Gruber 9,423,532 0 1,230,512
</TABLE>
2. The proposal to amend our Amended and Restated Articles of
Incorporation, as amended; to increase the number of authorized shares of common
stock from 50,000,000 to 100,000,000 was approved at the Annual Meeting of
Stockholders on May 23, 2000 by the following votes:
<TABLE>
<CAPTION>
VOTES
-----
<S> <C>
For 9,574,604
Against 1,062,123
Abstain 17,317
</TABLE>
3. The proposal to amend our Non-Employee Director Stock Option Plan was
approved at the Annual Meeting Stockholders on May 23, 2000 by the following
votes:
<TABLE>
<CAPTION>
VOTES
-----
<S> <C>
For 10,375,009
Against 247,670
Abstain 31,365
</TABLE>
4. The proposal to amend our Employee Stock Purchase Plan that increased
the maximum number of shares of common stock available for purchase under the
Plan from 50,000 to 250,000 was approved at the Annual Meeting of Stockholders
on May 23, 2000 by the following vote:
<TABLE>
<CAPTION>
VOTES
-----
<S> <C>
For 10,509,474
Against 121,560
Abstain 23,010
</TABLE>
14
<PAGE> 15
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
<TABLE>
<S> <C>
Exhibit 10.5 Amendment No. 3 to Hyseq, Inc. Non-Employee Director Stock
Option Plan
Exhibit 27.0 Financial Data Schedule
</TABLE>
(b) Reports on Form 8-K
<TABLE>
<S> <C>
DATE OF FILING SUBJECT
-------------- -------
April 14, 2000 Form 8-K, Item 4, Change of Hyseq's certifying accountant,
Ernst & Young LLP.
April 20, 2000 Form 8-K/A, amending Form 8-K, Item 4 filed on April 14,
2000. Change of Hyseq's certifying accountant, Ernst &
Young LLP.
April 24, 2000 Form 8-K, Item 4, Engagement of Hyseq's new certifying
accountant, KPMG LLP.
May 24, 2000 Form 8-K/A2, amending Form 8-K, Item 4 filed on April 14,
2000, Change of Hyseq's certifying accountant, Ernst &
Young LLP.
</TABLE>
15
<PAGE> 16
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
Date: August 14, 2000
16
<PAGE> 17
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
Exhibit 10.5 Amendment No. 3 to Hyseq, Inc. Non-Employee Director Stock
Option Plan
Exhibit 27.0 Financial Data Schedule
</TABLE>
