<PAGE>
As filed with the Securities and Exchange Commission on March 23, 1999
Registration No. 333-74157
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933
---------------
SONOSITE, INC.
(Exact name of registrant as specified in its charter)
---------------
<TABLE>
<S> <C> <C>
Washington 3841 91-1405022
(State or other (Primary Standard (I.R.S. Employer
jurisdiction Industrial Identification Number)
of incorporation or Classification Code Number)
organization)
</TABLE>
19807 North Creek Parkway, Suite 200
Bothell, Washington 98011-8214
(425) 951-1200
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
Kevin M. Goodwin
President and Chief Executive Officer
SONOSITE, INC.
19807 North Creek Parkway, Suite 200
Bothell, Washington 98011-8214
(425) 951-1200
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
Copies to:
<TABLE>
<S> <C>
Stephen M. Graham Rodd M. Schreiber
Perkins Coie llp Skadden, Arps, Slate, Meagher & Flom
1201 Third Avenue, 48th Floor (Illinois)
Seattle, Washington 98101-3099 333 West Wacker Drive, Suite 100
(206) 583-8888 Chicago, Illinois 60606-1285
(312) 407-0700
</TABLE>
Approximate date of commencement of proposed sale to the public:
As soon as practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act of 1933, check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act of 1933, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
---------------
The registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the registrant
shall file a further amendment which specifically states that this
Registration Statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act of 1933 or until this Registration
Statement shall become effective on such date as the Commission, acting
pursuant to said Section 8(a), may determine.
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<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this prospectus is not complete and may be changed. We may +
+not sell these securities until the registration statement filed with the +
+Securities and Exchange Commission is effective. This prospectus is not an +
+offer to sell these securities, and it is not soliciting an offer to buy +
+these securities in any state where the offer or sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED MARCH 23, 1999
[SONOSITE LOGO]
2,500,000 Shares
Common Stock
- --------------------------------------------------------------------------------
SonoSite, Inc. is offering 2,500,000 shares of its common stock. Our common
stock is traded on the Nasdaq National Market under the symbol "SONO." On March
19, 1999, the last reported sale price for the common stock on the Nasdaq
National Market was $13.125 per share. See "Price Range of Common Stock."
- --------------------------------------------------------------------------------
Investing in the common stock involves risks. See "Risk Factors" beginning on
page 5.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Per
Share Total
------- ------
<S> <C> <C>
Public offering price............................................ $ $
Underwriting discounts and commissions........................... $ $
Proceeds to SonoSite............................................. $ $
</TABLE>
- --------------------------------------------------------------------------------
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if
this prospectus is truthful or complete. Any representation to the contrary is
a criminal offense.
------------
SonoSite, Inc. has granted the underwriters the right to purchase up to 375,000
additional shares of common stock to cover any over-allotments.
------------
Vector Securities International, Inc. Prudential Securities
Prospectus dated , 1999
<PAGE>
[Inside front cover of prospectus]
"SonoSite" appears as a banner at the top of the page, above a color photograph
of one of SonoSite's ultrasound devices with an abdominal transducer attached to
it, with a pair of gloves lying next to the device for scale. On the right side
of the photograph is a column of four icons in a box introduced at the top of
the column by the words, "Initial target markets" followed by a colon. These
icons represent product suites based on the SonoSite Leap product platform and
are color versions of the four icons that appear on page 25 of the prospectus.
From top to bottom of the column, the target markets referred to by the icons
are "Gynecology & Obstetrics," "Emergency Medicine," "Cardiology" and "Body
Imaging."
A caption at the bottom of the page states, "Our first hand-carried devices,
based on our SonoSite Leap platform, will weigh less than six pounds and
generate high-quality images comparable to those produced by larger, more
expensive ultrasound machines. We expect our devices to expand access to
high-quality ultrasound imaging and make it available as a diagnostic tool to
physicians at the point of care."
<PAGE>
PROSPECTUS SUMMARY
This summary highlights information contained elsewhere in this prospectus.
Because this is only a summary, it does not contain all of the information that
may be important to you. You should read the entire prospectus carefully. You
should consider the information under "Risk Factors" and in our financial
statements and the notes relating to these financial statements, together with
the information included elsewhere in this prospectus, before deciding to
invest in our common stock.
Our Business
We are the leader in the design and development of miniaturized, high-
performance, digital ultrasound imaging devices. Our first hand-carried
devices, based on our SonoSite Leap platform, will weigh less than six pounds
and generate high-quality images comparable to those produced by larger
ultrasound machines which cost several times that of our device. We expect our
devices to expand access to high-quality ultrasound imaging as we target the
replacement market for lower-priced ultrasound machines characterized by low-
quality images. As a result of their small size, ease of use and affordability,
we also expect our devices will make high-quality ultrasound imaging available
as a diagnostic tool to physicians at the point of care, enabling physicians to
bring ultrasound directly to the patient, instead of referring them to an
ultrasound specialist. Our devices should enable physicians to use ultrasound
imaging more frequently to diagnose patients earlier, allowing patients to
avoid the "waiting trauma" effect associated with delayed diagnosis. Our first
product suite will target gynecologists and obstetricians who currently use
ultrasound imaging within a well-established reimbursement framework.
We began as the hand-held ultrasound device division of ATL Ultrasound,
Inc., a leader in the development of high-end, digital ultrasound technology.
We were spun off as a separate company in April 1998 to focus on the further
development and commercialization of miniaturized, high-performance, digital
ultrasound imaging devices.
The SonoSite Leap product platform will consist of a hand-carried display
unit that incorporates an integrated color display and control panel, together
with an application-specific transducer. We plan to offer our products as
suites that are tailored to specific clinical applications. We expect to launch
the SonoSite Leap platform later this year, with suites initially targeted at
gynecologists, obstetricians and emergency medicine physicians. Beginning next
year, we plan to expand the SonoSite Leap platform offerings to include product
suites targeted at cardiologists and whole body ultrasound imaging specialists.
We received Section 510(k) clearance in May 1998 for a prototype of our
SonoSite Leap platform and have applied for Section 510(k) clearance for the
commercial version of this platform.
Our SonoSite Leap platform incorporates our proprietary technology in
custom-designed computer chips, manufacturing process technology and ergonomic
and design engineering advances. We plan to enhance the utility and
effectiveness of our product suites by offering innovative accessories,
including the SmartStand, which will facilitate use of our devices in a
convenient manner in virtually any clinical setting. We also plan to provide
training in the product operation and clinical interpretation necessary to
enable physicians who do not currently use ultrasound imaging to be fully
competent in both the fundamental operation of our products and in the clinical
interpretation required to use them effectively.
Initially, we will target our products at current users of ultrasound
imaging who purchase lower-end ultrasound machines and would be attracted to
the high image quality and low cost of our products. We estimate that this
segment represents approximately 22% of the $2.5 billion annual worldwide
market for all ultrasound imaging devices. Just as personal computers expanded
the power of computing beyond the mainframe computer and computer technicians,
our miniaturized devices should expand the use of high-quality ultrasound
imaging beyond the centralized facility and radiology specialists to front-line
physicians and new clinical settings. We believe that these new users will
include physicians and emergency personnel who will be attracted to the size
and portability of our products, as well as physicians who usually refer
ultrasound examinations to imaging centers because the cost of owning a higher-
image quality ultrasound device is prohibitive. We intend to sell and
distribute our products through third-party distributors. Within the United
States, we have entered into exclusive agreements with PSS World Medical, Inc.
and Diagnostic Imaging, Inc. Internationally, we have entered into agreements
with distributors covering more than 50 countries.
3
<PAGE>
The Offering
<TABLE>
<C> <S>
Common stock offered................................ 2,500,000 shares
Common stock to be outstanding after this offering.. 7,372,193 shares(1)
Use of proceeds..................................... For operating expenses,
including product
development and sales and
marketing, as well as for
working capital and other
general corporate
purposes.
Nasdaq National Market symbol....................... SONO
</TABLE>
Summary Financial Data
(in thousands, except per share data)
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------
1996 1997 1998
------- ------- -----------
<S> <C> <C> <C>
Statement of Operations Data:
Grant revenues.................................. $ 1,029 $ 2,948 $ 973
Total operating expenses........................ 2,793 8,942 14,498
Net loss........................................ (1,764) (5,994) (13,025)
Basic and diluted net loss per share(2)......... $ (0.38) $ (1.28) $ (2.72)
Shares used in computation of basic and diluted
net loss per share(2).......................... 4,633 4,684 4,796
<CAPTION>
December 31, 1998
--------------------
As
Actual Adjusted(3)
------- -----------
<S> <C> <C> <C>
Balance Sheet Data:
Cash and cash equivalents............................... $ 7,526 $ 37,467
Working capital(4)...................................... 16,934 46,875
Total assets............................................ 23,290 53,231
Long-term obligations, less current portion............. 481 481
Total shareholders' equity.............................. 19,833 49,774
</TABLE>
- --------
(1) Based on shares outstanding on December 31, 1998. Excludes 1,547,818 shares
of common stock issuable upon exercise of options outstanding under our
stock option and compensation plans, 270,453 of which were distributed to
ATL Ultrasound option holders in connection with the spinoff. See
"Management--Employee Benefit Plans and Agreements" and Notes 2 and 5 of
Notes to the Financial Statements.
(2) See Note 2 of Notes to the Financial Statements for information regarding
the determination of basic and diluted net loss per share amounts.
(3) As adjusted to give effect to the receipt and application of the estimated
net proceeds from the sale of 2,500,000 shares of common stock offered by
this prospectus at an assumed public offering price of $13.125 per share.
See "Use of Proceeds" and "Capitalization."
(4) Includes a receivable from ATL Ultrasound of $12.0 million, which was paid
on January 15, 1999.
----------------
Our principal executive offices are located at 19807 North Creek Parkway,
Suite 200, Bothell, Washington 98011-8214 and our telephone number is (425)
951-1200. In this prospectus, "SonoSite," "we," "us" and "our" refer to
SonoSite, Inc. We have applied for registration in the United States of the
mark "SonoSite" and our logo. Except where we state otherwise, the information
we present in this prospectus does not take into account the possible issuance
of additional shares of common stock to the underwriters to cover over-
allotments.
4
<PAGE>
RISK FACTORS
In addition to the other information contained in this prospectus, you
should carefully read and consider the following risk factors before purchasing
our common stock. The risks and uncertainties described below are not the only
ones facing our company. Additional risks and uncertainties not presently known
to us or that we currently deem immaterial may also impair our business
operations.
If any of the following risks actually occur, our business, financial
condition or results of operations could be materially adversely affected. In
such case, the trading price of our common stock could decline, and you may
lose all or part of your investment.
This prospectus also contains forward-looking statements that involve risks
and uncertainties. Our actual results could differ materially from those
anticipated in the forward-looking statements as a result of certain factors,
including the risks described below and elsewhere in this prospectus.
We Have a Limited Operating History
We commenced operations as a separate company in April 1998. Prior to that,
we operated as a business unit of ATL Ultrasound. Accordingly, we have a
limited operating history. You should consider our business and prospects in
light of the risks and uncertainties encountered by development-stage
technology companies in evaluating whether to invest in our common stock. There
are many reasons why we may not be successful in implementing our strategy,
including:
. any inability to complete the design and manufacture of our products;
. any inability to achieve market acceptance of our products;
. our dependence on a new platform for ultrasound imaging procedures;
. our reliance on third-party manufacturing of our products;
. our need to maintain and expand distribution networks;
. any loss of key personnel;
. any inability to respond effectively to competitive pressures;
. any inability to manage rapid growth and expanding operations; and
. any failure to comply with governmental regulations.
We Have Incurred Losses and Expect Future Losses
As a development-stage company, we have incurred net losses in each quarter
since we started operations. As of December 31, 1998, we had an accumulated
deficit of approximately $20.9 million, including approximately $10.3 million
that was accumulated prior to our commencing operations as a separate company
in April 1998. We expect to incur substantial additional expenses in the future
as we attempt to complete the development of our products and introduce our
products into the market. As a result, we will need to generate significant
revenues in the future before we will be able to achieve and maintain
profitability. Our business strategies may not be successful and we may not be
profitable in any future period. If we do become profitable, we cannot be
certain that we can sustain or increase profitability on a quarterly or annual
basis.
Physicians and Other Healthcare Providers May Not Purchase Our Products
The products we are developing represent a new platform for ultrasound
imaging procedures and we have not sold any of our products commercially. The
market for hand-carried, high-performance ultrasound devices is new and
untested. We do not know if physicians or other healthcare providers will
accept our products or purchase them when available. Acceptance of our products
by physicians, including physicians who do not
5
<PAGE>
currently use ultrasound, is essential to our success and may require us to
overcome resistance to a new platform for ultrasound imaging. Use of our
products will require training for physicians who currently do not use
ultrasound imaging instruments. The time required to complete such training may
be substantial and could result in a delay or decrease in market acceptance.
Currently, patients requiring an ultrasound examination are generally referred
to a centralized testing location. Radiologists and other specialized providers
of ultrasound at these locations may have an incentive to discourage market
acceptance for our products in order to maintain these referrals.
Physicians and other healthcare providers will not purchase our products
unless they determine that it is preferable to other means of obtaining an
ultrasound examination and that the benefits to the patient and physician
outweigh the costs of purchasing our products. This determination will depend
on our products' image quality, cost effectiveness, ease of use, reliability,
portability and level of third-party reimbursement. Acceptance of our products
by physicians and other healthcare providers may be more difficult if they are
not able to obtain adequate reimbursement from third-party payors for tests
performed using our products. In addition, we have not yet determined the
pricing for our products. Our pricing policies could limit market acceptance
compared to competing products or alternative testing methods.
We Rely on ATL Ultrasound for Manufacturing Our Products and for Engineering
Services
We depend on our relationship with ATL Ultrasound. We have contracts with
ATL Ultrasound for manufacturing and engineering services. These services are
critical to the success of our product development efforts and our ability to
deliver our products to customers. ATL Ultrasound may be unable to provide all
the manufacturing capacity we will need to meet our planned objectives.
Although we believe that we could ultimately develop alternative sources for
the services provided by ATL Ultrasound, we may lose future sales and incur
additional expenses as a result of any interruption or delay by ATL Ultrasound
in manufacturing our products or in providing engineering services.
Additionally, ATL Ultrasound has the right to terminate our engineering service
agreement on 90 days' notice.
We Have No Manufacturing Experience or Capability
In the future, we intend to assume some or all of the manufacture and
assembly of our products. If we do, we will be required to develop our own
manufacturing capability. We may be unable to comply with regulations
applicable to manufacturers of ultrasound devices or manufacture our products
at a cost or in quantities necessary to achieve or maintain profitability. In
addition to compliance with regulatory requirements, we may encounter
difficulties in scaling up production of our products, including problems
involving manufacturing yields, quality control and assurance and shortages of
qualified personnel. We may be unable to successfully meet these challenges.
We Rely on Third-Party Vendors to Supply Highly Specialized Components for Our
Products
We depend on third-party vendors to supply highly specialized parts, such as
custom-designed computer chips and some transducer components. These vendors
may experience difficulty in manufacturing these parts, or in meeting our high
quality standards. In addition, these parts generally have long order lead
times which restrict our ability to respond quickly to changing market
conditions. If we are required to switch vendors, the manufacture and delivery
of our products could be interrupted for an extended period.
We Depend on Single-Source Vendors for Some of Our Components
We depend on single-source vendors for some key components for our products,
including custom-designed integrated circuits, image displays, batteries,
capacitors and transformers. There are relatively few alternative sources of
supply for some of these components. While these vendors have produced our
components with acceptable quality, quantity and cost in the past, they may be
unable to meet our future demands. Establishing additional or replacement
suppliers for these components may take a substantial amount of time. If we
have to switch to a replacement vendor, the manufacture and delivery of our
products could be interrupted for an extended period.
6
<PAGE>
We May Experience Difficulties Managing Our Growth
We expect significant growth in all areas of operations as we develop and
market our products. We will need to add personnel and expand our
capabilities, which may strain our existing management, operational, financial
and other resources. To compete effectively and manage future growth, we must:
. accurately forecast demand for our products;
. train, manage and motivate a growing employee base; and
. improve existing operational, financial and management information
systems.
We may be unable to complete necessary improvements to our systems,
procedures and controls to support our future operations in a timely manner.
In addition, we may be unable to attract or retain required personnel and our
management may be unable to develop the additional expertise required to
manage any future growth.
Future Operating Results Are Uncertain and Likely to Fluctuate
Our future operating results will depend on numerous factors, many of which
we do not control, including:
. demand for our products;
. product and price competition;
. changes in the costs of components;
. success of our indirect sales and distribution channels;
. successful development and commercialization of new and enhanced products
on a timely basis;
. timing of new product introductions and product enhancements by us or our
competitors; and
. timing and magnitude of our expenditures.
Changes in any or all of these factors could cause our operating results to
fluctuate. In addition, we intend to have our products manufactured based on
forecasts of sales in future periods. Our forecast in any particular period
may prove inaccurate, which could cause fluctuations in our manufacturing
costs and our operating results. Our future operating results could fall below
the expectations of securities analysts or investors and reduce the market
price of our stock. We believe that there may be some fluctuations caused by
year-end budgetary pressures on our customers, customer buying patterns and
the efforts of our indirect sales and distribution network to meet or exceed
annual sales quotas. These factors make it difficult to forecast our revenues
and operating results. Fluctuations in our operating results may increase the
volatility of our stock price.
Our Products May Become Obsolete
Our competitors may develop and market ultrasound products that render our
products obsolete or non-competitive. In addition, although diagnostic
ultrasound imaging products may have price and/or performance advantages over
competing medical imaging equipment, such as computed tomography and magnetic
resonance imaging, any price or performance advantages may not continue. For
example, our products could become obsolete or unmarketable if other products
utilizing new technologies are introduced or new industry standards emerge. As
a result, the life cycles of our products are difficult to estimate. To be
successful, we will need to continually enhance our products and to design,
develop and market new products that successfully respond to any competitive
developments. In addition, because our products are based on a single
platform, we may be more vulnerable to adverse events affecting the healthcare
industry generally, and the medical ultrasound market specifically, than we
would be if we offered products based on more than one platform.
7
<PAGE>
The Market for Ultrasound Imaging Products Is Highly Competitive
The existing market for ultrasound imaging products is well established and
intensely competitive. In addition, we are seeking to develop new markets for
our hand-carried ultrasound imaging products. In response, we expect
competition to increase as potential and existing competitors begin to enter
these new markets and/or modify their existing products to compete directly
with ours. Our primary competitors have:
. better name recognition;
. significantly greater financial resources; and
. existing relationships with some of our potential customers.
Our competitors may be able to use their existing relationships to
discourage customers from purchasing our products. In addition, our competitors
may be able to devote greater resources to the development, promotion and sale
of new or existing products, thereby allowing them to respond more quickly to
new or emerging technologies and changes in customer requirements.
We May Be Unable to Maintain and Expand Our Indirect Sales and Distribution
Networks
We have established an indirect sales and distribution network to sell our
products domestically and internationally. Our future revenue growth will
depend in large part on our success in maintaining and expanding these indirect
sales and distribution channels. We will depend on these distributors to help
promote market acceptance and demand for our products. However, many of these
distributors will be in the business of distributing other, sometimes
competing, medical products. As a result, our products may not receive the
resources and support required within this network to meet our sales
objectives.
We intend to manage our third-party distribution network with several sales
directors. These sales directors will need a high level of technical expertise
and knowledge regarding our products' capabilities and ultrasound imaging
products in general and their use. We face intense competition for qualified
sales directors and may be unable to attract and retain such personnel, which
would adversely affect our ability to expand and maintain our third-party
distribution network.
If we fail to maintain or expand our third-party distribution network, we
will need to develop our own distribution capabilities, which would be
expensive and time-consuming. We may be unable to develop our own distribution
capabilities in a timely manner, if at all, which would have an adverse effect
on our ability to sell our products.
We Depend on Key Employees and the Availability of Highly Skilled Employees
Our future performance will depend largely on the efforts and abilities of
our key technical, marketing and managerial personnel and our ability to retain
them. Our success depends on our ability to attract and retain additional key
personnel in the future. The loss of any of our key employees could adversely
affect our business, particularly the loss of any of our key engineering
personnel. We do not have any employment agreements with any of our employees.
We do not maintain key person insurance on any of our employees.
We May Be Unable to Adequately Protect Our Intellectual Property Rights
Our success and ability to compete depend on our licensed and internally
developed technology. We protect our proprietary technology through a
combination of patent, copyright, trade secret and trademark law. We also enter
into confidentiality or license agreements with our employees, consultants and
corporate partners, and generally control access to, and the distribution of,
our product designs, documentation and other proprietary information, as well
as the designs, documentation and other information we license from others.
Despite our efforts to protect these proprietary rights, unauthorized parties
may copy, develop independently or otherwise obtain and use our products or
technology.
We cannot be sure that our pending patent applications will be issued. In
addition, our issued patents or pending applications may be challenged or
circumvented by our competitors. Policing unauthorized use of our intellectual
property will be difficult and we cannot be certain that we will be able to
prevent misappropriation of
8
<PAGE>
our technology, particularly in countries where the laws may not protect our
proprietary rights as fully as in the United States.
Our Products May Infringe on the Intellectual Property Rights of Others
Many of our competitors in the ultrasound imaging business have filed, or
may file, patent applications. Our competitors may claim our technology or
products infringe upon the technology covered by these applications. Any such
claims, with or without merit, could:
. be time-consuming to defend;
. result in costly litigation;
. divert management's attention and resources;
. cause product shipment delays; or
. require us to enter into royalty or licensing agreements.
Any required royalty or licensing agreements may not be available to us on
acceptable terms, if at all. If a third party makes a successful claim of
patent infringement against us, we may be unable to license the infringed or
similar technology on acceptable terms, if at all. In addition, we could be
prevented from manufacturing or selling some or all of our products and/or be
liable to a third-party patent holder.
We May Incur Tax Liability in Connection with our Spinoff from ATL Ultrasound
Our spinoff was treated by ATL Ultrasound as a tax-free spinoff under
Section 355 of the Internal Revenue Code of 1986. However, if ATL Ultrasound
were to recognize taxable gain from the spinoff, the Internal Revenue Service
could impose that liability on any member of the ATL Ultrasound consolidated
group as constituted prior to the spinoff, including SonoSite. ATL Ultrasound
has agreed to cover 85% of any such liability (unless the tax is imposed due to
the actions by ATL Ultrasound solely or SonoSite solely, in which case ATL
Ultrasound and SonoSite have agreed that the party who is solely at fault shall
bear all of the tax liability). We cannot guarantee that ATL Ultrasound would
indemnify us or agree that it caused the liability to be imposed. If we were
required to pay all or a portion of any taxes related to the spinoff, our
business would be adversely affected.
We Are Subject to Substantial Governmental Regulation
All of our planned products and manufacturing activities are subject to
extensive regulation by a number of governmental agencies, including the U.S.
Food and Drug Administration and comparable international agencies. We will be
required to:
. undergo rigorous inspections by domestic and international agencies;
. obtain the prior approval of these agencies before we can market and sell
our products; and
. satisfy content requirements for all of our sales and promotional
materials.
Compliance with the regulations of these agencies may delay or prevent us
from introducing new or improved products. We may be subject to sanctions,
including the temporary or permanent suspension of operations, product recalls
and marketing restrictions, if we fail to comply with the laws and regulations
pertaining to our business.
We Face Risks From Expansion of Our International Operations
Our current business strategy depends on our ability to establish
international markets for our products. We will need to devote significant
management attention and financial resources to obtain any necessary foreign
governmental approvals. International sales are subject to inherent risks,
including:
. the costs of localizing products for foreign markets;
9
<PAGE>
. longer receivables collection periods and greater difficulty in
receivables collection, as compared to those experienced in the United
States;
. reduced protection for intellectual property rights in some countries;
and
. fluctuations in the value of the U.S. dollar relative to other
currencies.
We May Face Product Liability and Warranty Claims
The sale and support of our products entails the risk of product liability
or warranty claims, based upon claims that the failure of one of our products
resulted in a misdiagnosis. The medical instrument industry in general has been
subject to significant medical malpractice litigation. We may incur significant
liability in the event of such litigation. Although we maintain product
liability insurance, we cannot be sure that this coverage is adequate or that
it will continue to be available on acceptable terms, if at all.
We also may face warranty exposure, which could adversely affect our
operating results. We anticipate that our products will carry a one-year
warranty against defects in materials and workmanship. We will be responsible
for all claims, actions, damages, liens, liabilities, costs and expenses under
our manufacturing contract with ATL Ultrasound for all product recalls, returns
and defects attributable to manufacturing. We intend to establish reserves for
the liability associated with product warranties. However, any unforeseen
warranty exposure could adversely affect our operating results.
We May Require Additional Funding to Satisfy Our Future Capital Expenditure
Needs
Our future revenues may not be sufficient to support the expenses of our
operations and the expansion of our business. We may therefore need additional
equity or debt capital to finance our operations as we develop our products and
expand our sales internationally. To date, our capital requirements have been
met primarily by contributions by ATL Ultrasound in connection with our spinoff
and by grant revenue from the U.S. Office of Naval Research under a U.S.
Government Defense Advanced Research Projects Agency grant. ATL Ultrasound's
funding obligations have been met and any future grant revenue is expected to
be immaterial. As such, if we need additional financing we would need to
explore other sources of financing, including public equity or debt offerings,
private placements of equity or debt and collaborative or other arrangements
with corporate partners. Financing may not be available when needed or may not
be available on acceptable terms. If we are unable to obtain financing, we may
be required to delay, reduce or eliminate some or all of our research and
development and/or sales and marketing efforts.
Our Stock Price Has Been and Is Likely to Continue to Be Volatile
The market price for our common stock and for securities of medical
technology companies generally has been volatile in the past and is likely to
continue to be volatile in the future. If you decide to purchase our shares,
you may not be able to resell them at or above the price you paid due to a
number of factors, including:
. actual or anticipated variations in quarterly operating results;
. the loss of significant orders;
. changes in earnings estimates by analysts;
. announcements of technological innovations or new products by our
competitors;
. changes in the structure of the healthcare financing and payment systems;
. general conditions in the medical industry; and
. significant sales of our common stock by one or more of our principal
shareholders.
10
<PAGE>
Our Restated Articles of Incorporation, Our Bylaws, Washington Law and Some of
Our Agreements Contain Provisions That Could Discourage a Takeover
There are provisions in our restated articles of incorporation, our bylaws
and Washington law that make it more difficult for a third party to obtain
control of SonoSite, even if doing so would be beneficial to our shareholders.
Additionally, the acquisition of SonoSite may be made more difficult or
expensive by the following:
. a provision in our license agreement with ATL Ultrasound requiring a
significant cash payment to ATL Ultrasound upon a change in control of
SonoSite;
. a shareholder rights agreement; and
. acceleration provisions in benefit plans and change-in-control agreements
with some of our employees.
We Face "Year 2000" Risks
Many currently installed computer systems are not capable of distinguishing
21st century dates from 20th century dates. As a result, beginning on January
1, 2000, computer systems and software used by many companies and organizations
in a wide variety of industries will produce erroneous results, or fail, unless
they are modified or upgraded to process date information correctly. Based on
our design process and assessment to date, we believe the current versions of
our products are "Year 2000 compliant"--that is, they are capable of adequately
distinguishing 21st century dates from 20th century dates.
Our greatest potential exposure with respect to the Year 2000 problem stems
from the possibility that some computer systems used by us and third parties
with whom we do business will be unable to distinguish 21st century dates from
20th century dates, which may significantly delay or limit our ability to
market our products.
FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements that are based on our
current expectations, assumptions, estimates and projections about us and our
industry. When used in this prospectus, the words "expects," "anticipates,"
"estimates" and "intends" and similar expressions are intended to identify
forward-looking statements. These statements include, but are not limited to,
statements under the captions "Risk Factors," "Use of Proceeds," "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Business" and elsewhere in this prospectus concerning, among other things:
. our ability to develop, introduce and market our products in a timely
manner;
. market acceptance of our products;
. the ability of ATL Ultrasound to manufacture our products;
. our ability to maintain our relationship with ATL Ultrasound;
. our ability to provide sufficient support to our indirect sales and
distribution network;
. the adequacy of our capital resources;
. future fluctuations in our operating results;
. our future capital expenditures and cash resources; and
. the use of the net proceeds from this offering.
These forward-looking statements are subject to risks and uncertainties that
could cause actual results to differ materially from those projected. The
cautionary statements made in this prospectus should be read as being
applicable to all related forward-looking statements wherever they appear in
this prospectus. We assume no obligation to update such forward-looking
statements publicly for any reason, or to update the reasons actual results
could differ materially from those anticipated in such forward-looking
statements, even if new information becomes available in the future.
11
<PAGE>
USE OF PROCEEDS
We expect to receive approximately $29.9 million in net proceeds from the
sale of the 2,500,000 shares of common stock in this offering (approximately
$34.5 million if the underwriters exercise their over-allotment option in
full), assuming a public offering price of $13.125 per share, after deducting
underwriting commissions and discounts and estimated offering expenses payable
by SonoSite.
We intend to use the net proceeds from this offering primarily for operating
expenses, including product development expenses and increased sales and
marketing expenses associated with the anticipated commercial launch of our
products. Any remaining proceeds will be used for working capital and other
general corporate purposes. The amounts that we actually spend for each of
these purposes will vary significantly depending on a number of factors,
including the amount of cash we generate from operations and the progress of
our product development efforts. As a result, we will retain broad discretion
in the allocation of the net proceeds from this offering. Pending the uses
described above, we will invest the net proceeds in short-term, interest-
bearing, investment-grade securities.
PRICE RANGE OF COMMON STOCK
Our common stock is traded on the Nasdaq National Market under the symbol
"SONO." The following table sets forth the high and low sale prices per share
of our common stock on the Nasdaq National Market as reported for the periods
indicated since April 7, 1998, the date our common stock began trading. These
prices reflect inter-dealer prices, without retail mark-up or commission.
<TABLE>
<CAPTION>
High Low
------ -----
<S> <C> <C>
1998
Second Quarter (from April 7, 1998)....................... $14.00 $6.13
Third Quarter............................................. 8.13 4.50
Fourth Quarter............................................ 13.75 5.88
1999
First Quarter (through March 19, 1999).................... $14.50 $9.75
</TABLE>
On March 19, 1999, the reported last sale price of our common stock on the
Nasdaq National Market was $13.125 per share. As of December 31, 1998, there
were 5,766 shareholders of record of our common stock. This figure does not
include the number of shareholders whose shares are held of record by a broker
or clearing agency, but does include each such brokerage house or clearing
agency as one holder of record.
DIVIDEND POLICY
We have never paid cash dividends on our common stock. We currently intend
to retain any future earnings to fund the development and growth of our
business. Therefore, we do not currently anticipate paying any cash dividends
in the foreseeable future.
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<PAGE>
CAPITALIZATION
The following table sets forth (1) our actual capitalization as of December
31, 1998 and (2) our capitalization as adjusted to give effect to the sale of
2,500,000 shares of common stock in this offering at an assumed public offering
price of $13.125 per share (less underwriting discounts and commissions and
estimated offering expenses we expect to pay in connection with this offering).
You should read this table in conjunction with our financial statements and the
notes relating to these financial statements included elsewhere in this
prospectus.
<TABLE>
<CAPTION>
December 31, 1998
---------------------
As
Actual Adjusted(1)
-------- -----------
(in thousands)
<S> <C> <C>
Long-term obligations, less current portion.............. $ 481 $ 481
Shareholders' equity:
Preferred stock, $1.00 par value per share; 6,000,000
shares authorized; no shares issued or outstanding..... -- --
Common stock, $0.01 par value per share; 50,000,000
shares authorized; 4,872,193 shares issued and
outstanding, actual; 7,372,193 shares issued and
outstanding, as adjusted(2)............................ 49 74
Additional paid-in capital.............................. 40,693 70,609
Deficit accumulated during the development stage........ (20,909) (20,909)
-------- --------
Total shareholders' equity............................. 19,833 49,774
-------- --------
Total capitalization................................. $ 20,314 $ 50,255
======== ========
</TABLE>
- --------
(1) As adjusted to give effect to the receipt and application of the estimated
net proceeds from the sale of 2,500,000 shares offered by this prospectus.
(2) Excludes 1,547,818 shares of common stock issuable upon exercise of options
outstanding under our stock option and compensation plans at a weighted
average exercise price of $6.95 per share, 270,453 of which were
distributed to ATL Ultrasound option holders in connection with the
spinoff. See "Management--Employee Benefit Plans and Agreements" and Notes
2 and 5 of Notes to the Financial Statements.
13
<PAGE>
DILUTION
If you invest in our common stock, your interest will be diluted by an
amount equal to the difference between the public offering price per share of
our common stock and the net tangible book value per share of our common stock
after this offering. We calculate net tangible book value per share by dividing
the net tangible book value (total assets less intangible assets and total
liabilities) by the number of outstanding shares of common stock.
Our net tangible book value at December 31, 1998 was $19.8 million, or $4.07
per share of common stock. After giving effect to the sale of the 2,500,000
shares of common stock in this offering at an assumed public offering price of
$13.125 per share (less underwriting discounts and commissions and estimated
offering expenses we expect to pay in connection with this offering), our net
tangible book value at December 31, 1998 would have been $49.8 million, or
$6.75 per share. This represents an immediate increase in net tangible book
value of $2.68 per share to existing shareholders and an immediate dilution of
$6.38 per share to new investors, or approximately 49% of the assumed offering
price of $13.125 per share. The following table illustrates this per share
dilution:
<TABLE>
<S> <C> <C>
Assumed public offering price per share......................... $13.13
Net tangible book value per share at December 31, 1998........ $4.07
Increase per share attributable to new investors.............. 2.68
-----
Net tangible book value per share after this offering........... 6.75
------
Dilution per share to new investors............................. $ 6.38
======
</TABLE>
At December 31, 1998, we had a total of 1,547,818 shares of common stock
subject to outstanding options with a weighted average exercise price of $6.95
per share, 270,453 of which were distributed to ATL Ultrasound option holders
in connection with the spinoff. We also have a total of 547,635 shares of
common stock available for future grant under our stock option and compensation
plans, 504,635 of which are reserved for stock option grants to our nonofficer
employees. In addition, our Board has approved an amendment to our Amended and
Restated 1998 Option, Stock Appreciation Right, Restricted Stock, Stock Grant
and Performance Unit Plan to increase the number of shares of common stock
issuable under the plan by 500,000, subject to approval by our shareholders. To
the extent the option holders exercise outstanding options, or any options we
grant in the future, there will be further dilution to new investors.
14
<PAGE>
SELECTED FINANCIAL DATA
The tables that follow present portions of our financial statements and
should be read in conjunction with our financial statements and the notes
relating to these financial statements, as well as "Management's Discussion and
Analysis of Financial Condition and Results of Operations" included elsewhere
in this prospectus.
The statement of operations data set forth below for the years ended
December 31, 1995, 1996, 1997 and 1998 and the balance sheet data as of
December 31, 1996, 1997 and 1998, are derived from our financial statements,
which have been audited by KPMG LLP, independent auditors. The financial
statements, and the report on the financial statements, as of December 31, 1997
and 1998 and for each of the years in the three-year period ended December 31,
1998, are included elsewhere in this prospectus. The statement of operations
data set forth below for the period from February 1994 through December 31,
1994 is derived from our unaudited financial statements.
The financial information for periods prior to April 6, 1998 represents the
results of the hand-held ultrasound division of ATL Ultrasound. Financial
information for subsequent periods consists of SonoSite's activity as a
separate company. Historical results are not necessarily indicative of future
results.
<TABLE>
<CAPTION>
February 1994
through Years Ended December 31,
December 31, ----------------------------------
1994 1995 1996 1997 1998
------------- ------ ------- ------- --------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Grant revenues.............. $ -- $ -- $ 1,029 $ 2,948 $ 973
Operating expenses:
Research and development... 39 75 2,576 7,064 9,474
Sales and marketing........ -- -- -- 1,268 3,120
General and
administrative............ 2 9 217 610 1,904
------ ------ ------- ------- --------
Total operating expenses.. 41 84 2,793 8,942 14,498
Interest income............. -- -- -- -- 541
Interest expense............ -- -- -- -- 41
------ ------ ------- ------- --------
Net loss.................... $ (41) $ (84) $(1,764) $(5,994) $(13,025)
====== ====== ======= ======= ========
Basic and diluted net loss
per share(1)............... $(0.01) $(0.02) $ (0.38) $ (1.28) $ (2.72)
====== ====== ======= ======= ========
Shares used in computation
of basic and diluted net
loss per share(1).......... 4,393 4,409 4,633 4,684 4,796
====== ====== ======= ======= ========
<CAPTION>
December 31,
--------------------------
1996 1997 1998
------- ------- --------
(in thousands)
<S> <C> <C> <C> <C> <C>
Balance Sheet Data(2):
Cash and cash equivalents........................ $ -- $ -- $ 7,526
Working capital (deficiency)(3).................. (53) (170) 16,934
Total assets..................................... 157 410 23,290
Long-term obligations, less current portion...... -- -- 481
Total shareholders' equity....................... 104 240 19,833
</TABLE>
- --------
(1) See Note 2 of Notes to the Financial Statements for information regarding
the determination of basic and diluted net loss per share amounts.
(2) Balance sheet data prior to 1996 is not meaningful.
(3) The amount reported for December 31, 1998 includes a receivable from ATL
Ultrasound of $12.0 million, which was paid on January 15, 1999.
15
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
"Selected Financial Data" and our financial statements and the notes relating
to these financial statements included elsewhere in this prospectus.
Overview
SonoSite, a development-stage enterprise, commenced operations in 1994 as a
project of ATL Ultrasound. We were formed to develop the design and
specifications for miniaturized ultrasound products for diagnostic imaging in a
variety of clinical settings. From the time we started on this project until we
became an independent company on April 6, 1998, we were organized as a separate
division within ATL Ultrasound. On February 2, 1998, the ATL Ultrasound board
of directors approved a plan to spin off our division as an independent,
publicly owned company. This transaction was completed through the tax-free
distribution of one new share of SonoSite common stock for every three shares
of ATL Ultrasound common stock held on April 6, 1998, and options to purchase
one share of SonoSite common stock for every six shares of ATL Ultrasound
common stock subject to outstanding options on April 6, 1998. ATL Ultrasound
retained no ownership in us following the spinoff. In an unrelated event,
Philips Medical Products Division of Philips Electronics, B.V. of the
Netherlands acquired ATL Ultrasound later in 1998.
To date, our capital requirements have been met primarily by contributions
from ATL Ultrasound in connection with our spinoff and by funding from the U.S.
Office of Naval Research under a U.S. Government Defense Advanced Research
Projects Agency grant. ATL Ultrasound's funding obligations have been met and
any future grant revenue is expected to be immaterial. Future revenues will
depend on product and accessory sales, which we do not anticipate until the
latter part of 1999 at the earliest. At that time, we expect to have completed
product development activities on our initial product platform and to be in a
position to commence customer delivery of our initial ultrasound devices and
accessories. We will continue to incur operating losses until our product sales
generate sufficient revenue to fund our continuing operations. We may not
generate sufficient revenue to fund our operations in future periods.
Results of Operations
Years ended December 31, 1998, 1997 and 1996
Grant Revenues. We have received grant revenues from a contract with the
U.S. Office of Naval Research that have been generally tied to the achievement
of technological milestones. Grant revenues in 1998 were $973,000, compared to
$2.9 million in 1997 and $1.0 million in 1996. We anticipated the changes in
grant revenues from year to year since the changes in revenues are due to our
achieving varying levels of technological milestones as specified in the
contract. As of June 30, 1998, we had completed most of the project work and
achieved most of the technological milestones established in the contract. As a
result, as of that date we had received substantially all of the payments
agreed to in the contract.
Research and Development Expense. Research and development expense for 1998
was $9.5 million, compared to $7.1 million for 1997 and $2.6 million for 1996.
The increase in research and development expense from year to year is due
primarily to additional personnel and personnel-related expenses and product
development expenses, including Application Specific Integrated Circuit tools
and masks used to develop our custom-designed computer chips, production-parts
tooling expenses and increases in engineering services payments to ATL
Ultrasound. We anticipate that spending levels in research and development in
1999 will increase as we complete development, design validation and
verification of our first product platform and commence manufacturing activity
of our initial products.
Sales and Marketing Expense. Sales and marketing expense for 1998 was $3.1
million, compared to $1.3 million in 1997. We had no sales and marketing
activities or expenses in 1996 or earlier periods. The
16
<PAGE>
increase in sales and marketing expense is a result of increases in sales and
marketing personnel and increases in consulting and travel expenditures in 1998
compared to 1997. We plan to add sales and marketing personnel, add to our
sales infrastructure and undertake significant outside promotional and
communications agency activities in the upcoming quarters. These activities are
in anticipation of the introduction of our initial products. We expect that
selling and marketing expense will increase significantly as a result of the
above.
General and Administrative Expense. General and administrative expense in
1998 was $1.9 million, versus $610,000 in 1997 and $218,000 in 1996. The
increase in general and administrative expense resulted primarily from an
increase in personnel in the general management, administration, finance,
accounting, information service and human resources functions. We added these
employees in anticipation and as a result of our becoming an independent
publicly owned company. We will add administrative personnel and infrastructure
in 1999. We therefore anticipate that general and administrative expense will
increase during 1999.
Net Loss. Net loss for 1998 was $13.0 million, up significantly from $6.0
million in 1997 and $1.8 million in 1996. These increases are due to the
increases in expenses, as noted above, in combination with the reduction in
grant revenues in the 1997 to 1998 period. We expect to incur significant net
losses in the near term as our expenses increase in advance of the commercial
launch of our initial products.
Liquidity and Capital Resources
On April 6, 1998, the day we became an independent public company, ATL
Ultrasound contributed $18.0 million in cash and was obligated, without
contingency, to contribute an additional $12.0 million in cash on January 15,
1999. That payment was received on schedule. The $30.0 million cash transfer
from ATL Ultrasound, development grant revenues from the U.S. Office of Naval
Research of $4.9 million and lease financing of $1.1 million have funded our
capital requirements. As of December 31, 1998, cash and cash equivalents
totaled $7.5 million. Our cash requirements have increased in recent quarters
due to continued product development activities, accelerated marketing and
distribution development activities, and maintenance of the management and
administrative infrastructure necessary to function effectively as an
independent publicly owned company. As described above, our cash requirements
are expected to continue to increase in 1999.
We believe that our existing cash and cash equivalents, including the $12.0
million in cash received from ATL Ultrasound in January 1999 and available
lease financing, together with the net proceeds from this offering and interest
on these proceeds, in addition to anticipated product revenue, should be
sufficient to fund our operations at least through 2000. However, it is
difficult to accurately predict the amount of cash that we may require in the
future. The amount required will depend, in part, upon factors beyond our
control. Capital requirements could exceed our estimates as a result of a
variety of factors. These factors include technical obstacles, delays in
product development or introduction, cost overruns in research and development
programs or establishing manufacturing activities, greater than anticipated
administrative expenses or lower than anticipated customer demand or revenues
after product introduction. From time to time, we may seek additional financing
from various sources. Adequate financing may not be available on a timely
basis, on favorable terms, or at all. If we are unable to meet our cash needs,
we will be required to significantly alter our operating plans. Activities that
may be affected could include our research and development programs, overall
spending levels, marketing initiatives or product introductions. We also may be
required to seek to obtain funds through arrangements with collaborative
partners or others that may require us to relinquish rights to aspects of our
technology or products.
Year 2000 Compliance
Many computer programs have been written using two, rather than four, digits
to define the applicable year. Unless corrected, those systems that have time-
sensitive software may recognize a date using "00" as the year 1900 rather than
the year 2000, potentially resulting in system failures or miscalculations.
This problem
17
<PAGE>
has been dubbed the "Year 2000 Problem." The Year 2000 Problem is complex and
pervasive in the general economy, as virtually every computer operation will be
affected in some way by the rollover of the two-digit year value to 00.
We have conducted a review of our existing information technology
infrastructure and computer systems. Based on representations made by our
software and hardware suppliers, we believe that our existing information
technology infrastructure and computer systems are year 2000 compliant. We are
developing a list of other vendors to contact, making Internet contacts,
preparing hard-copy communications and reviewing services and systems to
provide a detailed and accurate database of contacts that we make and responses
we receive.
We are also conducting a review of our products in development. We believe
that these products will be year 2000 compliant due to the design process
employed in their specifications and development. As one of the functional
requirements of our products, we state that they will "perform date recording
and computations accurately through and beyond the year 2000 and accommodate
the leap year for the year 2000 and beyond." We also state as one of the
functional requirements that "there will be no system hardware or software
failures due to the year 2000."
In assessing our overall risks related to the Year 2000 Problem, we believe
our greatest potential exposures involve development activities relating to our
products. Additional areas of risk include equipment and materials that will be
used in manufacturing our products and accessories, vendors providing
distribution functions, and software and hardware support for these and other
administrative functions. If the Year 2000 Problem exists in these areas, it
could significantly delay or eliminate our ability to bring our products to
market, which would have a material adverse effect on our business. Because
these areas of risk involve third parties, over whom we have little or no
control, a contingency plan for these risks does not exist and we cannot assure
you that we will be able to develop one. We are not able to estimate the full
cost, if any, of correcting any potential Year 2000 Problems at this time. Full
estimated costs, if any, will not be known until we complete the survey and
review all responses received from vendors. To date, we have not incurred any
material costs directly associated with our Year 2000 compliance efforts.
18
<PAGE>
BUSINESS
Overview
SonoSite is the leader in the design and development of miniaturized, high-
performance, digital ultrasound imaging devices. Our first hand-carried
devices, based on our SonoSite Leap platform, will weigh less than six pounds
and generate high-quality images comparable to those produced by larger, more
expensive ultrasound machines. We expect our devices to expand access to high-
quality ultrasound imaging as we target the replacement market for lower-priced
ultrasound machines characterized by low-quality images. In addition, our
devices will make high-quality ultrasound imaging available as a diagnostic
tool to physicians at the point of care, enabling physicians to bring
ultrasound directly to the patient, instead of referring them to an ultrasound
specialist. Our first product suite will target gynecologists and obstetricians
who currently use ultrasound imaging within a well-established reimbursement
framework.
We received Section 510(k) clearance for a prototype of our SonoSite Leap
platform in May 1998. We have applied for Section 510(k) clearance for the
commercial version of our SonoSite Leap product platform and expect to launch
our first product suite prior to the end of 1999 following receipt of this
approval. Subsequent product suites based on the SonoSite Leap platform will
target markets for emergency medicine, cardiology and whole body ultrasound
imaging.
Physicians utilize ultrasound imaging as an effective tool for the
noninvasive visual examination of soft tissue. However, they do not have
immediate point-of-care access to high-quality ultrasound imaging due to the
cost, size and complexity of existing high-quality ultrasound machines. These
machines are typically operated in centralized locations by specialists who
produce ultrasound images on a referral basis. We intend to put the power of
high-quality ultrasound imaging directly in the hands of the front-line
physicians who currently utilize ultrasound as part of their diagnostic
procedures but either outsource ultrasound imaging or are required to rely on
lower-quality ultrasound imaging performed at the point of care. We believe our
product suites will offer the following advantages:
. easy-to-use, affordable high-quality ultrasound imaging at the point of
care;
. physicians can use ultrasound imaging more frequently to identify earlier
those patients requiring more comprehensive diagnostic procedures or
specialist intervention;
. physicians can improve patient healthcare by beginning any required
treatments earlier;
. patients will not experience the "waiting trauma" effect associated with
the delay in obtaining ultrasound image results conducted on a referral
basis; and
. for patients with symptoms, physicians can utilize existing reimbursement
codes.
Just as personal computers expanded the power of computing beyond the mainframe
computer and computer technicians, we believe our devices will expand the use
of high-quality ultrasound imaging beyond the centralized facility and
radiology specialists to front-line physicians and new clinical settings.
According to industry sources, the annual worldwide market for all
ultrasound imaging devices is approximately $2.5 billion. Initially, we will
target our product suites at current users of ultrasound imaging who purchase
lower-end ultrasound machines and would be attracted to the high image quality
and low cost of our products. We estimate that this segment represents
approximately 22% of the existing market, or $540 million annually. In
addition, our product suites should be attractive to physicians, such as
cardiologists and emergency care physicians, who seek portable ultrasound
imaging with high image quality. Our product suites should also be attractive
to physicians, such as gynecologists, internists and pediatricians, who
currently outsource ultrasound imaging because existing high-performance
devices are too costly and difficult to use.
19
<PAGE>
In anticipation of the commercial launch of our initial product suites, we
have built a worldwide sales and distribution network. We have entered into
agreements with each of PSS World Medical, Inc. and its subsidiary, Diagnostic
Imaging, Inc., for domestic distribution of our products. Internationally, we
have entered into distribution agreements covering more than 50 countries.
We were formerly the hand-held ultrasound device division of ATL Ultrasound,
a leader in high-end, digital ultrasound machines. We were spun off as a
separate company in April 1998 to focus on further development and
commercialization of high-performance, miniaturized ultrasound devices. Our
products are based on research and development begun at ATL Ultrasound. Most of
the key engineers responsible for the development of our technology at ATL
Ultrasound have joined SonoSite. Under an agreement with ATL Ultrasound, we
have exclusive rights through 2003, which become nonexclusive thereafter, to
use all applicable ATL Ultrasound technology in the area of miniaturized
digital ultrasound imaging. In addition, ATL Ultrasound has agreed to
manufacture our products through 2003; however, we may assume some of the
manufacture of our products prior to that time.
Industry Background
The Use of Ultrasound Imaging
Medical imaging has been an important element of medical diagnosis since the
introduction of X-ray technology. As imaging technology has advanced in recent
decades, applications of medical imaging have expanded to address increasingly
complex disease states and conditions involving soft tissues and internal body
organs. While X-ray technology is the dominant method used for visual analysis
of hard tissue, such as bone material, the most widely used imaging methods for
visual analysis of soft tissues and organs include computed tomography (CT),
magnetic resonance imaging (MRI), nuclear medicine, X-ray angiography and
ultrasound. Each method of soft tissue imaging requires specialized equipment
and has different patterns of use and applications. A physician selects the
soft tissue imaging method to be used based on a variety of factors, including:
. the particular disease state or condition to be studied;
. the status of the patient;
. image quality; and
. the cost of the procedure.
Ultrasound was introduced for medical imaging purposes in the late 1950s as
a safe and noninvasive method to provide real-time, dynamic images of most
major soft tissues and organs. Initially, physicians used ultrasound imaging to
assess the general shape, size and structure of internal soft tissues and
organs. Obstetricians were among the first physicians outside of radiologists
to adopt widespread use of ultrasound imaging. As advances in technology
improved the image quality of ultrasound devices, the use of ultrasound imaging
expanded to other clinical applications, including examinations for
gynecological abnormalities.
Ultrasound systems use low-power, high-frequency sound waves emitted by a
transducer to produce soft tissue images. The physician places the transducer
on the skin or in a body cavity near the targeted area. Tissues and fluids
reflect these sound waves and the transducer detects these reflections. Based
on these reflections, the ultrasound system's beamformer organizes the sound
waves and produces an image for visual examination, using digital or analog
signal processing or a combination of the two. Digital signal processing
technology allows an ultrasound device to process with greater signal fidelity.
As such, digital ultrasound machines produce higher resolution images than
analog and analog/digital ultrasound machines.
Standard ultrasound imaging produces a two-dimensional image that physicians
use to diagnose and monitor disease states and conditions by analyzing the
relative shading of tissues or organs. This is known as grayscale imaging, or
two-dimensional (2D) imaging when used in cardiology applications. Power
Doppler
20
<PAGE>
allows physicians to use ultrasound imaging to detect the presence of blood
flow through the body. Color Doppler ultrasound imaging expands standard
ultrasound imaging further to enable physicians to image the direction and
velocity of blood flow.
Physicians currently use ultrasound imaging in a variety of clinical
applications. In addition to obstetric and gynecological applications,
ultrasound imaging is increasingly used in cardiac imaging. Ultrasound imaging
for cardiac function indications, otherwise known as echocardiography, provides
the physician an enhanced real-time image of the internal heart structure,
including the valves and chambers. The physician uses this image to diagnose
coronary artery disease, valvular disease and congenital heart defects. In
vascular medicine, physicians determine the presence of a disease state or
condition using color Doppler ultrasound to image blood flow in soft tissues,
organs and the vascular system.
According to industry estimates, in the United States approximately 63.5
million ultrasound imaging procedures were conducted in 1997; approximately 73%
were conducted in centralized imaging centers on a referral basis.
Approximately 85% of all ultrasound imaging procedures in the United States
were conducted by radiology specialists, cardiologists and gynecologists and
obstetricians.
Limitations of Current Ultrasound Technology
Current users of ultrasound imaging face a tradeoff between image quality on
the one hand and price and portability on the other. High-performance machines
are based on digital signal processing technology and provide a high-quality
image, but they require a large capital investment of greater than $100,000,
plus significant operating costs. These ultrasound machines typically weigh
approximately 200-300 pounds and require specially trained technologists to
operate them. Ultrasound machines based on the less precise analog/digital
hybrid imaging technology are less expensive, but they typically produce lower-
quality images. They are not easily portable and cost from $30,000 to $100,000.
"Luggable" analog ultrasound machines are even less expensive, but they also
produce lower-quality images that limit their diagnostic utility.
Advances in technology have greatly improved the image quality of ultrasound
systems and substantially increased their diagnostic utility, resulting in the
growth in the use of ultrasound. However, high-quality images currently are
typically produced by large, high-performance, digital ultrasound systems.
Because of the high cost, size and complexity of these systems, ultrasound
imaging is generally performed in diagnostic imaging centers and radiology
departments in hospitals. These imaging centers typically have several high-
performance ultrasound systems operated by a team of specially trained
technologists and radiology specialists who interpret the ultrasound images.
Patients requiring ultrasound imaging are generally referred to these centers.
The physicians who make these referrals lose reimbursement income and
relinquish control of their patients during primary diagnosis. The patient must
schedule a separate appointment for the ultrasound imaging procedure, travel to
the diagnostic center and experience the "waiting trauma" effect caused by the
uncertainty of a delayed primary diagnosis.
We believe patient care would be improved significantly if high-quality
ultrasound imaging were readily available at the point of care. Primary
diagnosis, and thus the beginning of any required treatment, would be more
immediate. In addition, physicians could easily and more frequently monitor
patient progress during subsequent office visits, readily obtaining the
information necessary to enable more timely adjustments to treatment. Patient
care also would be improved significantly if high-quality ultrasound imaging
were available in settings where the use of high-end ultrasound systems
generally is not feasible due to their high cost, complexity of operation and
limited portability. These unserved or underserved settings include emergency
rooms and vehicles, athletic arenas, battlefields, rural areas and even the
patients' bedsides.
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The SonoSite Solution
In much the same way that today's personal computers provide the computing
power of earlier-generation mainframe computers, we are designing our product
suites to achieve the high performance of existing, larger ultrasound machines
on a hand-carried platform. Our product suites feature high-quality, digitally
formed imaging comparable to that generated by larger, significantly more
expensive, ultrasound machines in a hand-carried device that is easy to use.
Our product suites are designed to offer the following advantages to physicians
and their patients:
<TABLE>
<C> <S>
High-Quality Our product suites break out of the traditional
Ultrasound Imaging in continuum of ultrasound systems where cost and size
an Affordable Hand- are directly related to image quality. We possess
Carried Device proprietary technology in three important areas: (1)
custom-designed computer chips that achieve high
performance while enabling reduced size and power
consumption, (2) process technology that allows the
production of transducers with performance comparable
to high-performance devices at significantly reduced
costs, and (3) ergonomic and design-engineering
advances that enable physicians to use our product
suites with little effort and training and to
integrate our product suites into their existing
workflow.
Substantial Value for For current diagnostic ultrasound procedures with
Existing Users of established third-party reimbursement codes, our
Ultrasound Imaging product suites will provide a low-cost, high-quality
alternative. For example, our first product suite, the
SonoSite Gynecology and Obstetrics Suite, targets the
gynecologists and obstetricians who together currently
perform or refer 12.3 million ultrasound procedures
annually in the United States, typically performed
with large, expensive ultrasound machines.
Substantial The combination of image quality, portability, ease of
Opportunity to Expand use and affordability of our products will also allow
Uses of Ultrasound physicians to perform established ultrasound
Imaging examinations more routinely. The SonoSite Cardiology
Suite will be used by cardiologists, who we believe
can use our device to conduct echocardiography more
frequently to increase the efficiency of primary
diagnosis. Our products will also facilitate the use
of ultrasound in other clinical settings that can
benefit from point-of-care imaging, such as emergency
medicine and internal medicine.
Improved Patient Care Our product suites will enable physicians to deliver
Through Earlier more immediate primary diagnoses by avoiding the delay
Diagnosis associated with the referral of ultrasound imaging
procedures. The more immediate primary diagnosis in
turn results in earlier detection and treatment cycles
when appropriate. In addition, the reduced time to
diagnosis will substantially reduce the "waiting
trauma" effect resulting from the delay in obtaining
ultrasound imaging results.
Superior Efficiency for Our product suites will enable physicians and
Healthcare Providers healthcare providers to (1) more efficiently use
downstream ultrasound referral services, (2) shorten
patient care cycle times, and (3) increase the quality
of patient care. Front-line physicians can use our
products to reduce the number of patients
unnecessarily referred for additional testing.
Healthcare organizations can use our product suites to
increase their diagnostic imaging capacity at low
incremental cost, without expanding existing
facilities and personnel. As a result, these
organizations will be able to more efficiently use
existing personnel responsible for the delivery of
ultrasound services.
</TABLE>
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Strategy
Our objective is to maintain our position as the leader in the design and
development of miniaturized, high-performance, digital ultrasound imaging
devices and to successfully commercialize their use. To achieve this objective,
we have developed a strategy with the following key elements:
<TABLE>
<C> <S>
Capitalize on Our We intend to build on the significant technological
Technology Advantage lead we have achieved in developing miniaturized,
high-performance, digital ultrasound imaging devices.
Our proprietary technology is the subject of two
issued and two pending patents. We intend to utilize
our advantage in combining ultrasound performance,
size and cost to develop additional, innovative
products for new and existing markets and
applications.
Position Our Products We intend to penetrate existing markets by positioning
as a Superior Value our product suites as a superior value alternative to
Alternative to Existing machines that lack high image quality and higher-
Ultrasound Products priced machines that lack portability and ease of use.
To facilitate early and rapid market acceptance, we
will target our initial product suites for traditional
use within existing clinical applications for
ultrasound imaging, including:
. gynecology and obstetrics;
. cardiology; and
. radiology.
Offer Customized We will offer a customized education program to teach
Education to Increase physicians not currently utilizing ultrasound imaging
Users of Ultrasound the various clinical applications of our products. We
Imaging intend to work with clinical opinion leaders to
demonstrate and communicate the efficacy and cost-
effectiveness of our ultrasound technology. We intend
to target physicians who can benefit from our
products, including:
. emergency medicine physicians;
. general practitioners;
. sports orthopedists;
. general and specialty surgeons; and
. gastroenterologists.
Establish Strategic We intend to form strategic partnerships with
Partnerships in Key companies in established leadership positions and with
Clinical Segments distribution channels in clinical segments where our
products and proprietary technology may benefit new
users. These clinical segments may include surgery,
cardiology, emergency medicine and gastroenterology.
Utilize ATL Ultrasound We will use ATL Ultrasound to initially manufacture
Manufacturing our products. This relationship enables us to benefit
Expertise from ATL Ultrasound's established ultrasound
production experience and manufacturing facilities
that comply with International Standards Organization
(ISO) requirements. This arrangement will also
significantly reduce risks and capital costs usually
encountered during the start-up phase of a new
manufacturing facility.
Leverage Third-Party We have established alliances with leading independent
Distribution medical equipment distributors. We intend to utilize
Capabilities their expertise to reach both customary purchasers of
ultrasound systems and a wide variety of medical
practitioners who do not currently use ultrasound
imaging.
</TABLE>
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Our Product Suites
SonoSite Leap Product Platform
General Specifications. The SonoSite Leap product platform is comprised of a
hand-carried display unit consisting of an integrated color display and control
panel, together with the application-specific transducer. Products based on
this platform will be able to store images in memory and allow simulated stored
real-time motion images, a diagnostic capability that is used in many
ultrasound examinations. Products based on the SonoSite Leap platform will
provide 2D and power Doppler imaging and a proprietary auto-focus capability
which enables the user to quickly complete the ultrasound examination. These
products can be powered by conventional alternating current or by a
rechargeable lithium ion battery.
Ultrasound Signal Processing and Display Unit. Our hand-carried display unit
will weigh less than five pounds and measure 13 inches long, 7.5 inches wide
and 2.5 inches high. The display unit houses four custom-designed computer
chips and circuitry with digital signal processing. The real-time images
generated by the display unit can be transmitted to industry-standard monitors
and printers or shown on the five-inch articulated high-resolution liquid
crystal display panel integrated in the display unit. Imaging functions are
controlled through a small alphanumeric keyboard immediately below the display
panel and a navigational trackball. We use injection molded plastic for the
outer shell of the display unit. We designed the display unit to be durable,
visually appealing and easy to handle.
Transducers. We will offer a variety of transducers specific to particular
clinical applications. Initially, we will offer an abdominal transducer and a
transvaginal transducer. The abdominal transducer will be a curved array
broadband transducer for general abdominal and obstetrics applications. The
transvaginal transducer will be a broadband transducer for gynecological
ultrasound scanning. Each transducer will be produced through a proprietary
manufacturing process. Transducers are attached to the display unit by a cable.
We are currently developing transducers for additional clinical applications.
Within the next 12 months, we anticipate releasing a transducer unit capable of
imaging internal organs between the ribs and a linear array unit that will have
utility for the radiologist and internist in shallow ultrasound imaging
applications.
SmartStand
To enhance the utility and efficiency of our product suites, we are
developing the SmartStand. The SmartStand is designed to:
. provide storage of our products when not in use and a stand for our
products when they are in use;
. recharge the battery in the base unit;
. provide enhanced interface capabilities between our products and third-
party output devices, such as printers and storage devices; and
. be portable and minimize space requirements.
Customized Education and Training
We intend to provide training in the product operation and clinical
interpretation necessary to enable physicians who do not currently use
ultrasound to be fully competent in both the fundamental operation of our
products and in the clinical skills required to use them effectively. We
anticipate that renowned ultrasound physicians will deliver a focused offering
of educational curricula. Utilizing leading-edge multimedia technology, we plan
to deliver innovative programs in multiple languages for (1) ultrasound
knowledge assessments, (2) product operation training, and (3) Continuing
Medical Education (CME) accredited clinical education.
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Product Suites
Products based on the SonoSite Leap platform will be offered in suites
consisting of a display unit, transducers and other essential accessories. We
have designed our product suites to target the following clinical applications:
<TABLE>
<CAPTION>
Product Expected
Suite Clinical Segment Launch Date
- -------------------------------------------------------------------------------
<C> <S> <C>
[Gynecology The SonoSite Gynecology and Obstetrics Suite of Fourth
& Obstetrics products and accessories will offer a convenient, Quarter
icon] effective means of incorporating ultrasound in of
gynecologic and obstetric office examinations. It 1999
will include both the abdominal and transvaginal
transducers for both currently reimbursable
routine and symptomatic imaging procedures.
Gynecology
& Obstetrics
- -------------------------------------------------------------------------------
[Emergency The SonoSite Emergency Medicine Suite of products Fourth
Medicine and accessories will provide the capability to Quarter
icon] perform high-quality ultrasound imaging at trauma of
scenes or in emergency transport vehicles or 1999
facilities. The portability, high-image quality
and battery power of this product suite enables
trauma-scene diagnosis and patient triage that are
not currently available.
Emergency
Medicine
- -------------------------------------------------------------------------------
[Cardiology The SonoSite Cardiology Suite of products and First
icon] accessories will augment the cardiologist's Half
current use of ultrasound imaging to aid in the of
rapid assessment of conditions or symptoms in an 2000
office or hospital setting. The initial product
suite will provide 2D imaging of the heart and
will later be enhanced to include color flow
mapping capability and image quality improvements.
Cardiology
- -------------------------------------------------------------------------------
[Body The SonoSite Body Imaging Suite of products and First
Imaging accessories will allow the radiologist to go Half
icon] directly to the patient to provide ultrasound of
imaging services with a full complement of 2000
specially designed transducers and functional
capabilities.
Body Imaging
</TABLE>
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Additional Product Development
We intend to continue to invest heavily in further research and development,
focused on (1) expansion of the SonoSite Leap product platform to product
suites targeted at additional clinical applications, (2) further enhancing
image quality, and (3) further reducing the size and manufacturing costs of our
products. By accomplishing these objectives, we hope to both extend the range
of our current product platform and develop other, potentially smaller product
platforms for our ultrasound imaging technology, in order to further expand the
use of ultrasound imaging and our products.
Technology
Our product development efforts have enabled us to achieve the performance
of a large, high-quality ultrasound imaging system in a smaller, less expensive
device that is easy to use. Our proprietary technology is the subject of two
issued and two pending patents. The key components in our technology platform
include the following:
Custom-Designed Computer Chips. We have built on extensive ATL Ultrasound
experience in high-end digital ultrasound and Application Specific Integrated
Circuit (ASIC) technology to develop four proprietary custom-designed computer
chips that implement most of the functions required in a completely digital
ultrasound imaging system. We have made significant advances in the integration
of ultrasound functions onto customized chip designs, including the integration
of a complete ultrasound beamformer onto a single computer chip. Our
proprietary chip technology allows our products to share many of the
architectural and signal-processing attributes of a high-end ultrasound imaging
system in a significantly smaller device.
Transducers. Using proprietary technology, we have developed high-
performance transducers. We have designed our display units to also utilize
transducers manufactured by a variety of third-party suppliers, increasing the
versatility of our platform.
Modular Design. Our products are being developed in a building-block
fashion, which allows us to develop future products based on a single platform,
with each product possessing specific attributes for particular clinical
applications. This modular design enables us to integrate new technological
advances into our platform by modifying only a part of the platform, rather
than the entire platform itself.
Human Factors Engineering. We have conducted research regarding the utility
of our products and their use in clinical settings. Based on these
observations, we have designed our products to be compatible with a variety of
printing, recording and support devices. We are developing the SmartStand and
the SonoCase in response to the particular needs of physicians who will use our
products.
Development Infrastructure. We possess a sophisticated infrastructure to
facilitate rapid development of new high-performance products and features.
Specific features of this infrastructure include:
. Advanced acoustic beam simulation. We have developed the ability to
simulate the emission, propagation, reflection and reception of simulated
acoustic waves in a Computer Aided Design (CAD) environment. This allows
us to evaluate the characteristics of acoustic waveforms and to test
various product configurations and transducer geometrics without having
to produce physical prototypes.
. Transducer finite element modeling. We use sophisticated finite element
modeling techniques to model the detailed physical characteristics and
acoustic performance of selected transducer designs. This enables rapid
product development, changes and improvements without having to produce
hardware prototypes.
. Fully integrated system simulation. We use advanced engineering CAD tools
to assess the performance of a proposed ultrasound system solution
relative to its design targets. Based on this assessment, we can rapidly
simulate design revisions to attain targeted performance levels.
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. High-speed ASIC behavioral modeling. We have developed sophisticated,
proprietary engineering design software to simulate the architecture and
performance of our custom computer chip designs. We are able to test and
debug our computer chip designs before committing to their manufacture,
which reduces development time and the cost of materials.
. Object-oriented system and software. We utilize sophisticated system and
software development practices that include the use of object-oriented
building blocks to eliminate time and cost during software development
and to allow for more robust and reusable software designs.
Research and Development
Product development activities have comprised the majority of our activities
and expenditures since we were formed as a division within ATL Ultrasound. We
continue to conduct extensive research, development and engineering activities
and, as of December 31, 1998, we employed 37 engineers and support staff
dedicated to the technical development of our hand-carried ultrasound products.
The majority of these individuals joined us from ATL Ultrasound. We expect
research and development expenditures to increase during 1999 in anticipation
of the commercial launch of the SonoSite Leap product platform and as we begin
to manufacture products based on that platform. We invested $9.5 million, $7.1
million and $2.6 million in research and development for the years ended
December 31, 1998, 1997 and 1996, respectively.
Sales, Marketing and Distribution
We intend to sell and distribute our product suites through third-party
distributors. We also intend to establish strategic partnerships in certain
clinical segments. We plan to compete in all the major clinical and geographic
segments of the existing ultrasound imaging market by reaching a diverse
customer base, including physicians in private practice, hospitals, clinics,
private and governmental institutions and healthcare agencies. We will support
our domestic third-party distribution network with a small staff of territory
sales directors.
Within the United States, we have entered into an agreement with PSS World
Medical, Inc. under which they will serve as our exclusive third-party
distributor in the private practice segment. PSS World Medical serves more than
100,000 clients nationwide. In addition, we have entered into an agreement with
Diagnostic Imaging, Inc., a subsidiary of PSS World Medical, under which they
will serve as our exclusive U.S. distributor for hospitals and diagnostic
imaging centers. Under our agreement with Diagnostic Imaging, we have reserved
the right to sell directly to hospitals, diagnostic imaging centers and other
institutional providers. As a result, we will have the flexibility we need to
manage our domestic sales organization and respond to changes in this market
over time.
Internationally, we have entered into agreements with distributors covering
more than 50 countries. We intend to rely exclusively on these distributors for
overseas sales, focusing primarily on Japan, members of the European Community
and other developed countries, coordinated by our own sales directors in Europe
and Asia.
Manufacturing
Agreement With ATL Ultrasound. All our products will initially be
manufactured by ATL Ultrasound under an OEM supply agreement. Under this
agreement, ATL Ultrasound has agreed to manufacture many of our product
components and assemble our final products for distribution through 2003.
However, we intend to assume the manufacture of some components, including
transducers, prior to 2003. ATL Ultrasound has agreed to manufacture and
assemble our products in accordance with its own standard of care for the
manufacture of its own products. As a result, we believe our products will be
of the highest quality and produced in accordance with federal good
manufacturing practices and International Standards Organization (ISO)
standards. During the term of the agreement, our products will be produced by
ATL Ultrasound on its campus in Bothell, Washington. All equipment and other
capital assets used by ATL Ultrasound exclusively in the manufacture of
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our products have been purchased by us and are owned by us. As a result, all or
some of these assets will be transferred to us if we assume production of our
products or they may be used by a new third-party manufacturer.
Suppliers. We depend on other vendors to provide components for our
products, such as the high-resolution color displays, certain transducers,
batteries and our custom-designed computer chips. A number of these components
have limited or single sources of supply. For example, VLSI Technology and
Harris Semiconductor supply us with the custom-designed computer chips that are
integral to the functionality of our products. We believe that we could
ultimately develop alternate sources for all of our product components, but
that sales could be lost or deferred as a result of doing so. In addition,
these components generally have long order lead times, restricting our ability
to respond quickly to changing market conditions.
Patents, Trademarks and Licenses
We are committed to developing and protecting our intellectual property. We
file patent applications to protect innovative technology, inventions and
innovative improvements that are significant to the development of our
business. We have filed a number of patent applications in the United States
and other countries directed to proprietary technology used in our hand-carried
ultrasound devices. We hold two patents directed to our technology. In March
1998, we received our first patent (U.S. patent No. 5,722,412), which is
directed to hand-carried ultrasound systems with digital signal processing that
weigh less than 10 pounds. This patent expires on June 28, 2016. In October
1998, we received our second patent (U.S. patent No. 5,817,024), which is
directed to hand-held ultrasonic devices and integrated circuits that
incorporate analog-to-digital conversion circuitry and ultrasound beamforming
capability on the same integrated circuit. This second patent also expires on
June 28, 2016. We also have an exclusive license from ATL Ultrasound through
April 5, 2003, which becomes nonexclusive thereafter, to use specified ATL
Ultrasound technology in existence at the time of our spinoff, such as ASIC
technology in the products we are developing. Under this license, we also have
the right to use further advances made by ATL Ultrasound that have been made by
them prior to April 5, 2001.
We intend to register the trademarks and trade names through which we will
conduct our business in the United States and abroad. To date, we have applied
for registration in the United States of the mark "SonoSite" and our logo.
We also intend to seek protection for the software contained in our
ultrasound products under patent, copyright, and trade secret laws where, in
our judgment, significant advantage may be obtained from such protection.
Patent, copyright and trade secret protection is subject to limitations and
uncertainties and may not provide us any significant competitive advantage.
We do not know of any infringement by our products on any intellectual
property rights of others, nor have we received notice from any third party of
any claimed infringement. We are unaware of any competitive products that
infringe on our intellectual property rights.
Competition
The existing medical imaging industry in general, and the existing
ultrasound market specifically, is very competitive. The primary bases of
competition are image quality, price and ease of use. Our products will be
competing with existing ultrasound systems offered by a number of established
companies and their international affiliates. These companies include Acuson
Corporation, Aloka Co., Ltd., ATL Ultrasound, ESAOTE S.p.A., General Electric
Company, Hewlett-Packard Company, Hitachi Corporation, Medison Co., Siemens
Medical Systems, Inc. and Toshiba Medical Systems, Inc. All these competitors
have significantly greater financial and other resources than we do. In
addition, they also generally compete with more than one type of medical
imaging device and are already established in many of the market segments and
countries that we intend to enter. While we believe that our products provide
high-quality images and advanced capabilities and features, the products
offered to date by these competitors in some cases include features and
capabilities that we are not currently able to offer. Any established or new
competitor may introduce new systems or
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<PAGE>
upgrades to existing systems that are equal to or superior to our products in
terms of quality or performance. We therefore cannot assure you that our
products will be competitive with existing or future products or that we will
be able to develop competitive products in the future.
A number of companies offer portable ultrasound systems, typically in the
form of analog desktop units resembling tabletop television sets. In addition,
we believe that there are at least two other companies developing ultrasound
systems constructed around a laptop computer. There are also a number of groups
that are being, or have been, funded by government grants to develop small
ultrasound devices that could directly compete with our products. We also
anticipate that other companies may be planning to develop highly portable
devices to address the market opportunity that we believe exists for hand-
carried ultrasonic imaging products. New product offerings in recent years have
made the ultrasound market increasingly competitive, as customers can choose
from a broad range of ultrasound products. The breadth of new products from
many companies appears to have lengthened the time required for customers to
make decisions to purchase, since customers have many products to consider
before making a purchase decision. In addition to portability, we compete
primarily on the basis of the major clinical benefits of the imaging
performance, versatility, reliability, upgradability, ease of use and price. We
believe these factors will allow us to be competitive. However, we cannot
assure you that this will be the case.
Governmental Regulation
Our products are subject to extensive regulation by numerous governmental
authorities, principally the U.S. Food and Drug Administration, as well as
numerous state and foreign agencies. We need to obtain clearance of our
products by the U.S. Food and Drug Administration before we can begin marketing
the products in the United States. Similar approvals are also required before
we can begin marketing our products in most other countries. Our products are
also subject to various domestic and foreign electrical safety and emission
standards. The U.S. Food and Drug Administration has broad regulatory powers
with respect to preclinical and clinical testing of new medical products and
the manufacturing, marketing and advertising of medical products. The
manufacture of our products will be subject to U.S. Food and Drug
Administration regulations governing registration of manufacturing facilities
and compliance with the U.S. Food and Drug Administration's Quality System
Regulations. The U.S. Food and Drug Administration has adopted the ISO
standards as the basis for its Quality System Regulations for the United
States, and these standards went into full effect for U.S. manufacturers of
medical devices in June 1998. We will also be subject to periodic on-site
inspection from the U.S. Food and Drug Administration for compliance with such
regulations.
The U.S. Food and Drug Administration requires that all medical devices
introduced to the market be preceded either by a premarket notification
clearance order under Section 510(k) of the Federal Food, Drug & Cosmetics Act
or an approved premarket approval application. A Section 510(k) premarket
notification clearance order indicates U.S. Food and Drug Administration
agreement with an applicant's determination that the product for which
clearance has been sought is substantially equivalent to medical devices on the
market prior to 1976 or has subsequently received clearance. The U.S. Food and
Drug Administration requires a premarket approval when it has determined that a
company must submit clinical trial data and manufacturing quality assurance
information to prove that a product is safe and effective for its labeled
indications. The process of obtaining Section 510(k) clearance through the
U.S. Food and Drug Administration is targeted at 30 days but typically can take
up to nine months, while the premarket approval process typically lasts more
than a year.
We received Section 510(k) clearance for a prototype of our SonoSite Leap
platform in May 1998 for 10 clinical applications, based upon substantial
equivalence to current ultrasound products being marketed by ATL Ultrasound.
Based on advances we have made since that approval, we have applied for a new
Section 510(k) clearance for the commercial version of the SonoSite Leap
product platform that covers enhanced performance features and one additional
clinical application. We believe that any future generation hand-carried
ultrasound product platforms will also require only Section 510(k) clearance.
We design our products to comply with
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applicable electrical safety standards, such as those of Underwriters
Laboratories and non-U.S. safety standards authorities.
In order to market our product suites in those countries that are members of
the European Union and the European Free Trade Association, we must obtain the
conformite europeenne (CE) mark for these product suites. In addition to basic
directives applicable to all products, our products are subject to the Medical
Device Directive which requires us to receive a certification from an approved
body that our product meets certain quality and safety standards. Examples of
these standards include ISO 9001-1994 requirements and European Norm (EN)
46001-1997 requirements. We have applied for approval to affix the CE mark to
our products and expect to receive approval in the third quarter of 1999. We
will rely on ATL Ultrasound and their ISO-compliant manufacturing procedures to
meet the ISO requirements for our products. We expect to comply with all EN
certification requirements for our products. Individual members of the European
Union and European Free Trade Association and other local governmental
authorities in Europe may also require further premarket approvals for our
products.
Several countries have, in recent years, changed the electronic emission
requirement that must be met by ultrasound equipment. We cannot assure you that
we will be able to continue to respond to these continually changing regulatory
requirements in a timely manner. Our regulatory compliance programs are being
developed to encompass verification of our compliance with domestic and
international standards for medical device design, manufacture, installation
and servicing.
While we anticipate receiving needed approvals in time for our current plans
for product introduction, the process of obtaining regulatory approvals can be
lengthy, expensive and uncertain. Failure to obtain the necessary clearances
and approvals will delay marketing of our products. Failure to comply with U.S.
Food and Drug Administration regulations and ISO quality requirements could
result in sanctions being imposed, including shutting down our operations,
restricting our marketing efforts or recalling our products. We cannot assure
you that we will be able to obtain necessary regulatory approvals in the
future. Delays or failures to receive such approvals, the loss of previously
obtained approvals or failure to comply with regulatory requirements could have
a material adverse effect on our business.
Reimbursement
Physicians may seek reimbursement from third-party payors for all or some of
the services they provide while using our products. In the United States, the
third-party payors include Medicare, Medicaid and private health insurance
plans. Reimbursement from these organizations is subject to the regulations and
policies of governmental agencies and other third-party payors. For example,
the Medicare program, which reimburses hospitals and physicians for services
provided to a significant percentage of hospital patients, places certain
limitations on the methods and levels of reimbursement of hospitals for
procedure costs and for capital expenditures made to purchase equipment, such
as the products we intend to sell. Currently, reimbursement is authorized for a
number of the uses of our hand-carried ultrasound devices but not for all
planned procedures for which our devices may be suitable.
The Medicare program also limits the level of reimbursement to physicians
for diagnostic tests. The state-administered Medicaid programs and private
payors also place limitations on the reimbursement of both facilities and
physicians for services provided in connection with diagnostic and clinical
procedures. Reduced governmental expenditures in the United States and many
other countries continue to put pressure on diagnostic procedure reimbursement.
We cannot predict what changes may be forthcoming in these policies and
procedures, or the effect of any such changes on our business.
Third-party payors worldwide, including governmental agencies, are under
increasing pressure to contain medical costs. Limits on reimbursement or other
cost-containment measures imposed by third-party payors may adversely affect
the financial condition and ability of hospitals and other users to purchase
products, such as ours, by reducing funds available for capital expenditures or
otherwise. We cannot forecast what additional
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legislation or regulation, if any, relating to the healthcare industry or
third-party reimbursement may be enacted in the future or what effect such
legislation or regulation would have on us.
Employees
As of December 31, 1998, we had 61 full-time employees. Of these employees,
37 were engaged in research and product development activities, 12 in sales and
marketing activities and 12 in administrative capacities. We have never had a
work stoppage and no employees are covered by collective bargaining agreements.
We believe our employee relations are good.
Facilities
Our principal offices are in approximately 20,000 square feet of leased
space in Bothell, Washington. These facilities include approximately 5,000
square feet used for research and laboratory space with the remainder used for
administrative offices. The facilities are leased through July 2003 with
options to renew for two three-year terms. We believe that these facilities
will be adequate to meet our needs through 1999 and that we will be able to
find additional space for manufacturing and research and administrative offices
as needed, without an adverse impact on our operations.
Legal Proceedings
There are no suits or claims pending against us, nor are we aware of any
threatened suits or claims.
31
<PAGE>
MANAGEMENT
Executive Officers, Key Employee and Directors
Our executive officers, key employee and directors and their ages and
positions as of December 31, 1998, are as follows:
<TABLE>
<CAPTION>
Name Age Position
- ------------------------------- --- -------------------------------------------
<S> <C> <C>
Kirby L. Cramer................ 62 Chairman of the Board of Directors
Kevin M. Goodwin............... 41 President, Chief Executive Officer and
Director
Allen W. Guisinger............. 56 Vice President--Global Education and
Strategic Partnerships
David H. Gusdorf............... 44 Vice President--Marketing
Jens U. Quistgaard, Ph.D....... 35 Vice President--Product Development and
Operations
Donald F. (Guy) Seaton III..... 41 Vice President--Business Development, Chief
Financial Officer, Secretary and Treasurer
Douglas W. Tefft............... 52 Vice President--Global Distribution
Juin-Jet Hwang, Ph.D. ......... 51 Chief Technology Officer
Edward V. Fritzky(1)........... 48 Director
Steven R. Goldstein, M.D.(1)... 48 Director
William G. Parzybok, Jr.(2).... 56 Director
Jeffrey Pfeffer, Ph.D.(2)...... 52 Director
Dennis A. Sarti, M.D.(2)....... 56 Director
Jacques Souquet, Ph.D.(1)...... 51 Director
</TABLE>
- --------
(1) Member of the Audit Committee.
(2) Member of the Compensation Committee.
Kirby L. Cramer has served as our Chairman of the Board of Directors since
April 1998. Since 1991, Mr. Cramer has served as Chairman Emeritus of Hazleton
Laboratories Corporation, a contract biological and chemical research
laboratory, which was acquired by Corning Incorporated in 1987. Since 1993 he
has also served as Chairman of Northwestern Trust Company. From 1987 to 1991,
Mr. Cramer served as Chairman of Hazleton Laboratories Corporation. From 1968
to 1987, Mr. Cramer served as Chief Executive Officer of Hazleton Laboratories
Corporation. In addition to the above, Mr. Cramer is a member of the boards of
directors of Immunex Corporation, Unilab Corporation, The Commerce Bank of
Washington, N.A., Landec Corporation and Ragen Mackenzie Group Incorporated.
Mr. Cramer holds a B.A. degree from Northwestern University and an M.B.A.
degree from the University of Washington, and is a graduate of the Harvard
Business School's Advanced Management Program.
Kevin M. Goodwin has served as our President, Chief Executive Officer and a
director since April 1998. From February 1997 to April 1998, Mr. Goodwin served
as Vice President and General Manager of ATL Ultrasound's Hand Held Systems
Business Group. From August 1991 to February 1997, Mr. Goodwin served as Vice
President and General Manager of ATL Ultrasound's businesses in Asia, the
Pacific and Latin America. From 1987 to August 1991, Mr. Goodwin served in a
variety of sales positions at ATL Ultrasound. From 1980 to 1987, Mr. Goodwin
served in various management positions with American Hospital Supply, Picker
International and Baxter Healthcare Corporation. Mr. Goodwin holds a degree in
business administration from Monmouth College, with an emphasis on hospital
management, and attended the Executive Program at the Stanford Graduate School
of Business.
Allen W. Guisinger has served as our Vice President--Global Education and
Strategic Partnerships since November 1998. From January 1993 to November 1998,
he operated Marketek Professional Services, a strategic consulting business for
high-technology companies, during which time he served as a consultant for ATL
Ultrasound and SonoSite. From January 1986 to December 1992, he served as Vice
President of Sales and Marketing of ATL Ultrasound, except during 1990, when he
served as President of ATL Ultrasound. From December 1982 to January 1985, he
served as Director of Marketing of Johnson & Johnson Ultrasound, a
32
<PAGE>
subsidiary of Johnson & Johnson. From December 1981 to November 1982, he served
as Senior Product Manager for ADR, Inc., an ultrasound equipment manufacturer.
Mr. Guisinger holds a B.S. degree from Kansas State University and an M.B.A.
degree from City University in Seattle, Washington.
David H. Gusdorf has served as our Vice President--Marketing since May 1998.
From July 1996 to April 1998, Mr. Gusdorf served as Vice President of Worldwide
Marketing of Chiron Diagnostics, Inc., a critical care diagnostics company.
From January 1990 to July 1996, Mr. Gusdorf worked for Johnson & Johnson,
during which time he served as Director of Marketing. He holds B.A. and M.B.A.
degrees from San Jose State University.
Jens U. Quistgaard, Ph.D., has served as our Vice President--Product
Development and Operations since April 1998. From February 1997 to April 1998,
Dr. Quistgaard served as Executive Director of Product Generation of ATL
Ultrasound's Hand Held Systems Business Group. From July 1995 to January 1997,
Dr. Quistgaard served as Chief of the Senior Technology Staff of ATL
Ultrasound. He joined ATL Ultrasound in 1990 as a senior engineer. Dr.
Quistgaard holds a B.S. degree in mathematics and computational sciences from
Stanford University, and a Ph.D. degree in electrical engineering from the
University of Washington.
Donald F. (Guy) Seaton III has served as our Vice President--Business
Development, Chief Financial Officer and Treasurer since June 1998 and
Secretary since December 1998. From April 1994 to June 1998, Mr. Seaton served
as Vice President, Finance, Chief Financial Officer and Secretary of InControl,
Inc., a developer of implantable atrial defibrillators. From January 1993 to
March 1994, Mr. Seaton worked for Interpoint Corporation, a microelectronics
company, serving as Vice President of Business Development and Administration
from January to March 1994. Mr. Seaton holds a B.A. degree from Stanford
University and an M.B.A. degree from the University of Chicago.
Douglas W. Tefft has served as our Vice President--Global Distribution since
May 1998. From December 1991 to May 1998, Mr. Tefft served as Director of Latin
American Operations of ATL Ultrasound. From October 1988 to December 1991, Mr.
Tefft served as Director of Finance of ATL Ultrasound. He holds B.A. and M.B.A.
degrees from the University of Washington.
Juin-Jet Hwang, Ph.D., has served as our Chief Technology Officer since
April 1998. From October 1995 to April 1998, Dr. Hwang served as Chief
Scientist of the Hand Held Systems Business Group at ATL Ultrasound. From 1985
to October 1995, he served in a variety of positions with ATL Ultrasound. Dr.
Hwang holds a B.S. degree from Chen Kung University, an M.S. degree from the
National Taiwan University and a Ph.D. degree from the University of Tennessee.
Edward V. Fritzky has served as a director of SonoSite since April 1998. Mr.
Fritzky has served as Chairman of the Board and Chief Executive Officer of
Immunex Corporation, a biotechnology company, since January 1994. From 1992 to
1994, he served as President of Lederle Laboratories, a division of American
Cyanamid Company. Mr. Fritzky was Vice President of Lederle Laboratories from
1989 to 1992. Prior to joining Lederle Laboratories, he was an executive at
Searle Pharmaceuticals, Inc., a subsidiary of the Monsanto Company. During his
tenure at Searle, Mr. Fritzky was Vice President, Marketing for the United
States and later President and General Manager of Searle Canada, Inc. and Lorex
Pharmaceuticals, a joint venture company. Mr. Fritzky also serves on the board
of directors of Geron Corporation, a biopharmaceutical company. Mr. Fritzky
holds a B.A. degree from Duquesne University and is a graduate of the Advanced
Executive Program at the J.L. Kellogg Graduate School of Management at
Northwestern University.
Steven R. Goldstein, M.D., has served as a director of SonoSite since April
1998. Since July 1995, he has served as Professor of Obstetrics and Gynecology
at New York University School of Medicine. Since July 1980, Dr. Goldstein has
held various positions as a doctor of Obstetrics and Gynecology at New York
University Medical Center, serving as Director of Gynecological Ultrasound
since 1994, and as Co-director of Bone Densitometry for the Department of
Obstetrics and Gynecology since 1997. Dr. Goldstein holds an M.D. degree from
New York University School of Medicine and completed his residency in
Obstetrics and Gynecology at New York University-affiliated hospitals in 1980.
33
<PAGE>
William G. Parzybok, Jr., has served as a director of SonoSite since May
1998. From February 1991 to July 1998, Mr. Parzybok was Chairman of the Board
and Chief Executive Officer of Fluke Corporation, a manufacturer of electronic
test and measurement instruments. From 1988 to 1991, he served as Vice
President and General Manager of the Engineering Applications Group of Hewlett-
Packard Company, a computer products manufacturer. Mr. Parzybok is a director
of Penford Corporation and WRQ, Inc. Mr. Parzybok holds B.S. and M.S. degrees
from Colorado State University.
Jeffrey Pfeffer, Ph.D., has served as a director of SonoSite since April
1998. He is the Thomas D. Dee Professor of Organizational Behavior at the
Graduate School of Business at Stanford University, where he has been a faculty
member since 1979. He has also served on the faculty at the University of
Illinois and the University of California at Berkeley, and has served as the
Thomas Henry Carroll-Ford Foundation Visiting Professor of Business
Administration at Harvard Business School. Dr. Pfeffer is a member of the
boards of directors and compensation committees of Portola Packaging, Inc. and
Resumix, Inc. Dr. Pfeffer holds B.S. and M.S. degrees from Carnegie Mellon
University and a Ph.D. degree from Stanford University.
Dennis A. Sarti, M.D., has served as a director of SonoSite since July 1998.
Since October 1993, Dr. Sarti, a radiologist, has served as Chairman of the
Department of Medical Imaging at St. John's Health Center in Santa Monica,
California. Since April 1994, he has also served as director of the Technology
Steering Committee for St. John's Health Center. From July 1978 to July 1986,
Dr. Sarti served as the Director of Diagnostic Ultrasound at the U.C.L.A.
School of Medicine. Dr. Sarti holds a B.S. degree from St. Vincent's College
and an M.D. degree from the University of Pittsburgh School of Medicine.
Jacques Souquet, Ph.D., has served as a director of SonoSite since March
1998. Dr. Souquet has served as Chief Technology Officer and Senior Vice
President for Product Generation of ATL Ultrasound since June 1993. From March
1989 to June 1993, Dr. Souquet served as Director of Strategic Marketing and
Product Planning and Vice President for Product Generation of ATL Ultrasound.
He joined ATL Ultrasound in August 1981 as a principal scientist in the
cardiology division. Dr. Souquet received a High Engineering Degree from Ecole
Superieure d'Electricite of Paris, France, a Ph.D. degree from Orsay University
of France in the field of optical memory, and a second Ph.D. degree from
Stanford University in the field of new acoustic imaging techniques for medical
ultrasound applications and nondestructive testing.
There are no family relationships among any of our directors or executive
officers. All directors hold office until the next annual meeting of our
shareholders and until their successors have been elected and qualified or
until their earlier resignation or removal. Executive officers are appointed to
serve at the discretion of our Board of Directors.
Committees of the Board of Directors
The Compensation Committee currently consists of Mr. Parzybok (chairman),
Dr. Pfeffer and Dr. Sarti. The Compensation Committee's responsibilities
include:
. establishing salaries, incentives and other forms of compensation for our
directors and officers;
. administering our incentive compensation and benefits plans; and
. recommending policies relating to such incentive compensation and
benefits plans.
The Audit Committee consists of Mr. Fritzky (chairman), Dr. Souquet and Dr.
Goldstein. The Audit Committee's responsibilities include:
. facilitating our relationship with independent auditors;
. reviewing and assessing the performance of our accounting and finance
personnel;
. communicating to the Board the results of work performed by and issues
raised by our independent auditors and legal counsel; and
. evaluating our management of assets and reviewing policies relating to
asset management.
34
<PAGE>
Director Compensation
Directors who are employees of SonoSite do not receive any fee for their
services as directors. Directors who are not employees of SonoSite are paid an
annual retainer of $16,000, plus $1,000 for each sequence of Board of Directors
and committee meetings attended. Any nonemployee director serving as Chairman
of the Board is paid an additional $75,000 per year. Each nonemployee director
not serving as our Chairman of the Board receives an option to purchase 10,000
shares of our common stock on the date of his or her first Board meeting upon
first election to our Board, and a subsequent annual stock option grant to
purchase 5,000 shares of our common stock. Any nonemployee director serving as
Chairman of the Board receives an option to purchase 25,000 shares of our
common stock upon first election to the position of Chairman of the Board, and
a subsequent annual stock option grant to purchase 10,000 shares of our common
stock for each successive year of service in this position. See "--Employee
Benefit Plans and Agreements." We also reimburse directors for reasonable
expenses they incur in attending meetings of the Board.
Director and Officer Indemnification and Liability
Our restated articles of incorporation limit the liability of directors to
the fullest extent permitted by the Washington Business Corporation Act as it
currently exists or as it may be amended in the future. Consequently, subject
to this Act, no director shall be personally liable to us or to our
shareholders for monetary damages resulting from his or her conduct as a
director of SonoSite, except liability for
. acts or omissions involving intentional misconduct or knowing violations
of law;
. unlawful distributions; or
. transactions from which the director personally receives a benefit in
money, property or services to which the director is not legally
entitled.
Our restated articles also provide that we shall indemnify any individual
made a party to a proceeding because that individual is or was a director or
officer of SonoSite and shall advance or reimburse reasonable expenses incurred
by such individual in advance of the final disposition of the proceeding to the
full extent permitted by applicable law. Any repeal of or modification to our
restated articles may not adversely affect any right of a director of SonoSite
who is or was a director at the time of such repeal or modification. To the
extent the provisions of our restated articles provide for indemnification of
directors for liabilities arising under the Securities Act of 1933, as amended,
those provisions are, in the opinion of the Securities and Exchange Commission,
against public policy as expressed in the Securities Act and they are therefore
unenforceable.
We also maintain a liability insurance policy which provides that our
directors and officers may be indemnified against liability they may incur for
serving in their capacities as directors and officers of SonoSite. We believe
that the limitation of liability provision and indemnification provisions in
our restated articles, together with our liability insurance policy, will
facilitate our ability to continue to attract and retain qualified individuals
to serve as directors and officers of SonoSite.
Compensation Committee Interlocks and Insider Participation
None of our executive officers serves as a member of the compensation
committee or board of directors of any entity that has an executive officer
serving as a member of our Compensation Committee or Board.
35
<PAGE>
Executive Compensation
Summary Compensation Table. The following table sets forth information
regarding compensation paid to our Chief Executive Officer and our three other
most highly compensated executive officers for the year ended December 31, 1998
(the named executive officers).
Summary Compensation Table
<TABLE>
<CAPTION>
Annual Long-Term
Compensation Compensation Awards
------------------ -------------------
Common Stock
Name and Principal Underlying All Other
Position Salary($) Bonus($) Options(#) Compensation($)
- ------------------------ --------- -------- ------------------- ---------------
<S> <C> <C> <C> <C>
Kevin M. Goodwin(1)..... $160,096 -- 152,082 $4,503
President and Chief
Executive Officer
David H. Gusdorf(2)..... 104,615 $5,000 60,000 4,831
Vice President--
Marketing
Jens U. Quistgaard(3)... 106,731 -- 85,137 5,476
Vice President--Product
Development and
Operations
Donald F. (Guy) Seaton
III(4)................. 100,385 -- 75,000 3,784
Vice President--
Business Development,
Chief Financial
Officer, Treasurer and
Secretary
</TABLE>
- --------
(1) Salary represents compensation received from SonoSite from April 6, 1998.
All Other Compensation represents $3,830 in employer-matching contributions
made to the SonoSite 401(k) Retirement Savings Plan and group term life
premiums of $673 paid by SonoSite.
(2) Salary represents compensation received from SonoSite from May 11, 1998.
All Other Compensation represents $4,606 in employer-matching contributions
made to the SonoSite 401(k) Retirement Savings Plan and group term life
premiums of $225 paid by SonoSite.
(3) Salary represents compensation received from SonoSite from April 6, 1998.
All Other Compensation represents $4,803 in employer-matching contributions
made to the SonoSite 401(k) Retirement Savings Plan and group term life
premiums of $673 paid by SonoSite.
(4) Salary represents compensation received from SonoSite from June 1, 1998.
All Other Compensation represents $3,514 in employer-matching contributions
made to the SonoSite 401(k) Retirement Savings Plan and group term life
premiums of $270 paid by SonoSite.
36
<PAGE>
Option Grants in Last Fiscal Year. The following table sets forth
information regarding stock options granted to our named executive officers
during the year ended December 31, 1998.
<TABLE>
<CAPTION>
Individual Grants Potential Realizable
------------------------------------------- Value at Assumed
Number of % of Total Annual Rates of Stock
Securities Options Exercise Price Appreciation
Underlying Granted to Price for Option Term(2)(3)
Options Employees Per Expiration ---------------------
Name Granted(#) in 1998(1) Share($) Date 5%($) 10%($)
- ------------------------ ---------- ---------- -------- ---------- ---------------------
<S> <C> <C> <C> <C> <C> <C>
Kevin M. Goodwin........ 100,000 8.4% $6.9375 06/08/08 $ 436,296 $ 1,105,659
50,000 4.2% 6.9375 06/08/08 218,148 552,829
416(4) * 3.3640 05/05/04 880 2,230
416(4) * 3.3910 02/17/05 887 2,248
1,250(4) 0.1% 6.9440 05/08/06 5,459 13,834
David H. Gusdorf........ 60,000 5.1% 6.9375 06/08/08 261,777 663,395
Jens U. Quistgaard...... 85,000 7.2% 6.9375 06/08/08 370,851 939,810
37(4) * 5.0730 01/08/06 118 299
100(4) * 6.9440 05/08/06 437 1,107
Donald F. (Guy) Seaton
III.................... 75,000 6.3% 6.9375 06/08/08 327,222 829,244
</TABLE>
- --------
* Less than 0.1%.
(1) Based on a total of 1,184,430 options granted to employees during 1998.
(2) The assumed rates of appreciation are prescribed by the Securities and
Exchange Commission for illustrative purposes only and are not intended to
forecast or predict future stock prices.
(3) The increase in the market value of the holdings of all of our
shareholders, over a 10-year period based on 4,872,193 shares of common
stock issued and outstanding as of December 31, 1998, at assumed annual
rates of appreciation of 5% and 10% from a base price of $10.38 per share
(the closing market price as of December 31, 1998), would be $31,789,996
and $80,562,091, respectively.
(4) These grants were made pursuant to option adjustments in connection with
the spinoff from ATL Ultrasound. See "--Employee Benefit Plans and
Agreements--Adjustment Plan."
Option Exercises and Year-End Values. The following table sets forth
information as of December 31, 1998 regarding in-the-money SonoSite options
held by the named executive officers in 1998. None of our named executive
officers exercised stock options in 1998.
<TABLE>
<CAPTION>
Number of
Securities Underlying Value of Unexercised
Unexercised Options at In-The-Money Options at
December 31, 1998(#) December 31, 1998($)(1)
------------------------- -------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
- -------------------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Kevin M. Goodwin.......... 832 151,250 $4,344 $521,392
David H. Gusdorf.......... -- 60,000 -- 206,250
Jens U. Quistgaard........ 62 85,075 235 292,492
Donald F. (Guy) Seaton
III...................... -- 75,000 -- 257,813
</TABLE>
- --------
(1) Amounts represent the aggregate number of the outstanding options
multiplied by the difference between the closing price of our common stock
as reported on the Nasdaq National Market on December 31, 1998 ($10.38 per
share), minus the exercise price of such options.
37
<PAGE>
Employee Benefit Plans
Amended and Restated 1998 Option, Stock Appreciation Right, Restricted
Stock, Stock Grant and Performance Unit Plan. We have adopted the Amended and
Restated 1998 Option, Stock Appreciation Right, Restricted Stock, Stock Grant
and Performance Unit Plan to attract and retain the services of employees,
consultants, directors and independent contractors selected by our Compensation
Committee and to encourage such persons to acquire and maintain stock ownership
in SonoSite. Options, stock appreciation rights, stock grants and performance
units may be issued under the plan.
We have reserved 1,000,000 shares of our common stock for issuance under the
plan. Our Board has approved an increase of 500,000 shares of common stock for
issuance under the plan, subject to shareholder approval. As of December 31,
1998, options to purchase 997,000 shares of common stock were outstanding under
the plan with exercise prices ranging from $4.94 to $10.00 per share and no
options had been exercised. As of December 31, 1998, the only type of awards
issued under the plan has been options. Each option expires no more than ten
years after the date of grant.
The plan is administered by our Compensation Committee, which has the
authority to select the individuals to receive awards and to establish the
terms and conditions of each award. In the event of certain corporate
transactions, participants have the right to exercise their options, whether or
not the vesting requirements of the option have been met. In lieu of this
right, participants have the right, subject to some limitations, to elect,
within 90 days after a corporate transaction, to receive in cash the difference
between the option's value (as defined in the plan) and the option's exercise
price. The Compensation Committee will make proportionate adjustments to the
aggregate number of shares issuable under the plan and to outstanding awards in
the event of stock splits or other capital adjustments.
1998 Nonofficer Employee Stock Option Plan. We have adopted the 1998
Nonofficer Employee Stock Option Plan. Under this plan, nonqualified stock
options may be granted to our nonofficer employees. Nonqualified stock options
are options that are not intended to qualify as "incentive stock options" under
Section 422 of the Internal Revenue Code.
The Compensation Committee administers the plan and has the authority to
select individuals to receive options under the plan and to determine the terms
and conditions of each option granted, including the number of shares subject
to an option, the option's exercise price (which must be at least equal to the
fair market value of the common stock on the date of grant), the vesting
provisions and the option term. Each option expires no more than ten years
after the date of grant. Our Board may also designate a senior executive
officer who can grant options under the plan, within limits set by the Board.
Our Board has reserved a total of 600,000 shares of common stock for
issuance under the plan. As of December 31, 1998, options to purchase 95,365
shares of common stock were outstanding with exercise prices ranging from
$10.00 to $12.78 per share and no options had been exercised.
In the event of certain corporate transactions described in the plan,
including a merger, reorganization or sale of substantially all our assets,
participants will have the right to exercise their options during the remaining
term of the option, whether or not the vesting requirements of the option have
been met. In lieu of this right, participants have the right, subject to some
limitations, to elect, within 90 days after a corporate transaction, to receive
in cash the difference between the option's value (as defined in the plan) and
the option's exercise price. The Compensation Committee will appropriately
adjust the aggregate number of shares issuable under the plan and all
outstanding options in the event of stock splits or other capital adjustments.
Nonemployee Director Stock Option Plan. We have adopted the Nonemployee
Director Stock Option Plan to attract and retain the services of experienced
and knowledgeable nonemployee directors and to provide
38
<PAGE>
an incentive for such directors to increase their proprietary interests in our
long-term success and progress. The plan authorizes a total of 125,000 shares
of our common stock for stock option grants, subject to certain adjustments for
reclassifications, reorganizations and similar corporate transactions. As of
December 31, 1998, options to purchase 85,000 shares of our common stock were
outstanding under the plan with exercise prices ranging from $6.94 to $7.11 per
share, and no options had been exercised. Once we have granted options for all
the shares authorized under this plan, all future option grants to directors
will be made under the Amended and Restated 1998 Option, Stock Appreciation
Right, Restricted Stock, Stock Grant and Performance Unit Plan, subject to the
same terms and conditions as this plan. The plan is administered by our Board,
which may amend, terminate or suspend the plan at any time, subject to
applicable law.
Under the plan, each nonemployee director automatically receives an option
to purchase 10,000 shares of our common stock on the date of his or her first
SonoSite Board meeting. Each nonemployee director thereafter receives an option
to purchase 5,000 shares of our common stock on the anniversary date of the
initial grant for as long as the director serves on our Board. In lieu of these
grants, a nonemployee director elected as Chairman of the Board will receive,
upon his or her initial election to this position, an option to purchase 25,000
shares of our common stock. The Chairman will thereafter automatically receive
an option to purchase 10,000 shares of our common stock on the anniversary date
of the first Chairman grant as long as the director serves in that position.
All options have an exercise price equal to the fair market value of the
common stock on the date of grant. Options vest 12 months after the date of
grant, assuming a director's continued service on our Board during this time.
Options expire on the tenth anniversary of the date of grant, subject to
earlier termination if a director ceases to be a director.
Immediately prior to certain corporate transactions, including a merger,
consolidation, liquidation or similar reorganization of SonoSite, an option
granted under the plan may be exercised regardless of whether the vesting
schedule for the option has been satisfied.
Management Incentive Compensation Plan. We have adopted the Management
Incentive Compensation Plan as an additional incentive for certain officers and
other employees selected by our Compensation Committee. Our Compensation
Committee administers this plan. The Compensation Committee has authority to
determine the total amount available for awards under this plan, the eligible
employees to receive awards, and the amount, terms, form and time of payment of
each award. As of December 31, 1998, options to purchase 100,000 shares had
been issued under this plan and no options had been exercised. No additional
shares remain available for issuance under this plan.
Awards may be made in cash, common stock or stock options, as determined by
our Compensation Committee. Awards granted may be paid immediately, or in up to
20 annual installments on a deferred basis, all as determined by the
Compensation Committee. Although final authority to determine how and when an
award is to be paid rests entirely with the Compensation Committee, the
Compensation Committee may permit eligible employees, not later than six months
prior to the end of any fiscal year, to express their preferences as to the
form and timing of awards to be granted by the Compensation Committee with
respect to such year.
Adjustment Plan. We adopted the Adjustment Plan to administer restricted
stock awards and stock option grants for our common stock in connection with
our spinoff from ATL Ultrasound. Pursuant to the spinoff and in connection with
an employee benefits agreement with ATL Ultrasound, each outstanding
unexercised option to purchase ATL Ultrasound common stock held by ATL
Ultrasound option holders on March 30, 1998, was adjusted to provide options to
purchase our common stock and ATL Ultrasound common stock. These option
adjustments were intended to provide each optionee with the same "intrinsic
value" in the adjusted options as represented by the original ATL Ultrasound
stock options immediately prior to April 6,
39
<PAGE>
1998. The number of shares covered by such adjusted options and the respective
option exercise prices were based upon:
. the exercise price of the original ATL Ultrasound options;
. the relative market prices of SonoSite and ATL Ultrasound common stock
immediately before and after April 6, 1998; and
. an adjustment ratio of one SonoSite stock option for every six shares
covered by the original ATL Ultrasound stock options.
Also in connection with the spinoff, each holder of ATL Ultrasound
restricted stock awards that were outstanding as of the close of business on
March 30, 1998 was entitled to participate in the distribution of SonoSite
common stock in connection with the spinoff even though such award had not yet
vested. Accordingly, each holder of restricted ATL Ultrasound restricted stock
awards received an award of three shares of restricted SonoSite common stock
for every one share of restricted ATL Ultrasound common stock.
The Adjustment Plan covers these issuances of options and awards of
restricted stock. As of December 31, 1998, options to purchase 270,453 shares
of our common stock were outstanding under this plan, with exercise prices
ranging from $1.64 to $9.82 per share, and options for 2,015 shares had been
exercised. As of December 31, 1998, there were 60,930 shares of unvested
restricted stock subject to this plan. Only individuals who held ATL Ultrasound
options or restricted stock at the time of the spinoff received options or
restricted stock under this plan. The terms of this plan are substantially the
same as those of the ATL Ultrasound 1992 Option, Restricted Stock, Stock Grant,
Stock Appreciation Right and Performance Unit Plan and the ATL Ultrasound 1992
Nonofficer Employee Stock Plan, the plans under which substantially all of the
adjusted ATL Ultrasound options were granted. No additional options will be
granted, and no additional restricted stock awards will be made, under the
Adjustment Plan.
The plan is administered by our Compensation Committee, which has the
authority to interpret and make the rules and determinations necessary for the
plan's administration. The exercise price for options may be paid in cash or,
if the Compensation Committee permits, in shares of our common stock previously
held by an optionee or through a broker-assisted cashless exercise. In the
event of certain corporate transactions, optionees will have the right to
exercise their options, whether or not the vesting requirements of the options
have been met. In lieu of this, after a change in control, certain optionees
may elect to receive in cash the difference between the value of the common
stock (as defined in the plan) and the option's exercise price. The
Compensation Committee will proportionately adjust the number of shares subject
to outstanding awards in the event of stock splits or other capital
adjustments.
401(k) Retirement Savings Plan. We maintain a 401(k) Retirement Savings Plan
to provide eligible employees with a tax preferential savings and investment
program. Eligible employees may contribute up to 16% of their base compensation
and commissions to this plan on a before-tax or after-tax basis. Pre-tax
contributions are limited to $10,000 per calendar year (or any greater amount
permitted by Section 402(g) of the Internal Revenue Code). We match 100% on the
first 3% of an employee's contributions, and 50% on the next 3% of
contributions. Matching contributions vest at the rate of 20% per year of
service. For vesting purposes, an employee who formerly worked for ATL
Ultrasound receives credit for years of service with ATL Ultrasound. Funds
contributed by each employee are invested, at the employee's election, in one
or several diversified equity funds, a fixed income fund, or a combination of
these types of funds. Merrill Lynch Trust Company is the administrator and
trustee of this plan.
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<PAGE>
Change-in-Control Agreements
We have entered into change-in-control agreements with Messrs. Goodwin,
Guisinger, Gusdorf, Seaton and Tefft and Dr. Quistgaard, our executive
officers. These agreements, which are substantially similar to each other,
provide that, in the event of a change in control of SonoSite, the executive
will receive an annual base salary that is no less than the annual base salary
in effect immediately before the change in control, and an annual bonus equal
to at least the average of the three annual bonuses paid to the executive in
the three years prior to the change in control. The agreements also provide
that the executive will be entitled to continue participating in our employee
benefits plans and welfare benefits plans or programs if there is a change in
control. The agreements also generally provide that we must make severance
payments following and as a result of a change in control equal to two times
the sum of the executive's annual base salary in effect at the time of a change
in control. We must also make an additional payment equal to the executive's
bonus for the fiscal year ended immediately prior to the change in control, or,
if no bonus was paid in the prior year, an additional payment of 10% of base
salary. The agreements also provide for payments to the executive if the
executive suffers a disability while employed by us, and provides for payments
to the executive's estate if the executive dies while employed by us. We have
entered into substantially similar agreements with several of our key
engineers.
41
<PAGE>
CERTAIN TRANSACTIONS
Relationship With ATL Ultrasound
One of our directors, Jacques Souquet, is currently an executive officer of
ATL Ultrasound. In connection with our spinoff from ATL Ultrasound, ATL
Ultrasound made a capital contribution of its cumulative advances to us of
approximately $10.6 million and agreed to contribute $30.0 million of cash to
us for working capital and other purposes. ATL Ultrasound made this
contribution in two payments. The first payment of $18.0 million was made on
April 6, 1998, and the second payment of $12.0 million was made on January 15,
1999. Also in connection with the spinoff, we entered into the following
agreements with ATL Ultrasound that govern our relationship and provide for the
allocation of certain liabilities and obligations arising from periods prior to
the spinoff:
Distribution Agreement. We entered into a distribution agreement with ATL
Ultrasound, which generally provides for the manner of effecting the spinoff
transaction, and addresses certain indemnification rights and procedures,
access to books and records, tax liabilities, noncompetition and
confidentiality obligations and insurance matters. Under this agreement, we
agreed to carry out the remaining responsibilities of ATL Ultrasound under its
collaborative and development agreement with the U.S. Office of Naval Research.
Technology Transfer and License Agreement. We have entered into a technology
transfer and license agreement with ATL Ultrasound, as amended, under which we
take ownership of certain handheld ultrasound technology developed by ATL
Ultrasound, including patent rights that have been established or are being
pursued for that technology. We also receive a nonexclusive license to use any
other ATL Ultrasound technology in existence or developed during the period
ending three years after April 6, 1998 in its handheld ultrasound products.
This license bears a royalty equivalent to a percentage of the worldwide net
revenues from the sales of specified handheld ultrasound products that use ATL
technology. A lump-sum payment in the amount of $150 million is due to ATL
Ultrasound as a license fee if we are acquired by another entity during the
five-year period beginning April 6, 1998. If, during the next ensuing three-
year period, we are acquired by an entity engaged in the medical diagnostic
imaging business (with some exceptions), a lump-sum license fee of $75 million
is due to ATL Ultrasound.
The technology transfer and license agreement includes a cross-license with
ATL Ultrasound whereby ATL Ultrasound has the right to use certain SonoSite
technology in existence or developed before April 6, 2001. We have also agreed
with ATL Ultrasound that, until April 6, 2003, we will not use specified ATL
Ultrasound technology to develop, manufacture or sell certain ultrasound
devices weighing more than 15 pounds, and ATL Ultrasound will not develop,
manufacture or sell certain ultrasound devices that weigh 15 pounds or less.
After April 6, 2003, each party's ongoing obligation with respect to the
technology of the other will be to respect the patent and copyright rights of
the other, although we will retain a license to use the previously licensed ATL
Ultrasound technology for ultrasound devices weighing 15 pounds or less, and
ATL Ultrasound will retain a license to use our previously licensed technology
for ultrasound devices weighing over 15 pounds.
OEM Supply Agreement. We entered into an OEM supply agreement with ATL
Ultrasound, as amended, under which we have the option to have handheld
ultrasound products and subassemblies manufactured exclusively for us by ATL
Ultrasound in accordance with our specifications for a period of up to five
years from April 6, 1998. Upon mutual agreement on production timing and costs,
ATL Ultrasound will supply us with the specified items at ATL Ultrasound's cost
during an initial period following April 6, 1998, and at ATL Ultrasound's cost
plus a premium after the initial period through the fifth year. We will bear
any nonrecurring engineering costs and capital expenditures associated with
such manufacture. We have the right to terminate this agreement upon 180 days'
notice, in which case ATL Ultrasound will assist us in the transfer of the
manufacturing function to us or another supplier designated by us.
Service Agreements. To ensure an orderly transition following the spinoff,
ATL Ultrasound has agreed to provide to us at our expense for limited periods
of time ranging up to five years, but only as may be
42
<PAGE>
requested by us, a number of services, including financial, human resource,
engineering, information, facilities and regulatory services. Pursuant to an
engineering service agreement, we pay ATL Ultrasound for engineering services
rendered in amounts which are intended to compensate ATL Ultrasound for its
out-of-pocket expenses (including the salaries, benefit and overhead expenses
of the ATL Ultrasound employees providing such services) and for a markup of
20%. We also pay for capital equipment to supply the engineering services
requested by us, and take ownership of such capital equipment at the cessation
of ATL Ultrasound's provision of the engineering services. ATL Ultrasound may
adjust such prices periodically in line with its own periodic redetermination
of the cost to ATL Ultrasound of such services. We may discontinue any of the
engineering services covered by the engineering service agreement on 90 days'
prior written notice to ATL Ultrasound. Also, in the event of any dispute over
the engineering services or the manner in which they are performed by ATL
Ultrasound, we may terminate the engineering service agreement. ATL Ultrasound
has the right in certain circumstances to terminate the engineering service
agreement on 90 days' notice. ATL Ultrasound is offering these services for
five years following April 6, 1998. Engineering services after the fifth year
will be at the mutual consent of ATL Ultrasound and SonoSite. In addition, ATL
Ultrasound has agreed to provide other services, such as regulatory support and
advisory services, on substantially similar terms as the engineering service
agreement.
Employee Benefits Agreement. We entered into an employee benefits agreement
with ATL Ultrasound to provide for the adjustment of existing ATL Ultrasound
stock options, restricted stock awards and other employee benefits and to
address other employee and employee benefits matters in connection with the
spinoff from ATL Ultrasound. As of December 31, 1998, minimum services were
required under this agreement.
Change-in-Control Agreements With Our Executive Officers
We have entered into change-in-control agreements with Messrs. Goodwin,
Guisinger, Gusdorf, Seaton and Tefft, and Dr. Quistgaard, our executive
officers.
We believe that the transactions described above were made on terms no less
favorable to us than could have been obtained from unaffiliated third parties.
Any future transactions between us and our officers, directors, principal
shareholders and their affiliates will be subject to approval by a majority of
our Board of Directors, including a majority of our independent and
disinterested directors, and will be on terms that we believe are no less
favorable to us than would be available from independent third parties.
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<PAGE>
PRINCIPAL SHAREHOLDERS
The following table summarizes information regarding the beneficial
ownership of our outstanding common stock as of December 31, 1998 for (1) each
person or group that we know owns more than 5% of our common stock, (2) each of
our directors, (3) each of our executive officers, and (4) all of our directors
and executive officers as a group.
Beneficial ownership is determined in accordance with rules of the
Securities and Exchange Commission and include shares over which the indicated
beneficial owner exercises voting and/or investment power. Shares of common
stock subject to options currently exercisable or exercisable within 60 days
are deemed outstanding for computing the percentage ownership of the person
holding the options but are not deemed outstanding for computing the percentage
ownership of any other person. Except as otherwise indicated, we believe the
beneficial owners of the common stock listed below, based on information
furnished by them, have sole voting and investment power with respect to the
number of shares listed opposite their names. The following officers and
directors can be reached at our principal offices.
<TABLE>
<CAPTION>
Percent of Shares
Beneficially Owned
--------------------
Number of Shares Prior to After
Name and Address of Beneficial Owner Beneficially Owned Offering Offering
- ------------------------------------ ------------------ --------- ---------
<S> <C> <C> <C>
WM Advisors, Inc.(1) ................. 539,671 11.1% 7.3%
1201 Third Avenue, Suite 1400
Seattle, WA 98101
Wisconsin Investment Board(2) ........ 422,944 8.7 5.7
121 East Wilson Street
Madison, WI 53702
Kirby L. Cramer(3).................... 31,832 * *
Jacques Souquet, Ph.D.(4) ............ 22,011 * *
Dennis A. Sarti, M.D.(5).............. 20,000 * *
Douglas W. Tefft(6)................... 16,469 * *
Kevin M. Goodwin(7)................... 13,248 * *
Jeffrey Pfeffer, Ph.D.(8) ............ 5,800 * *
Allen W. Guisinger(9)................. 4,500 * *
Donald F. (Guy) Seaton III............ 4,000 * *
William G. Parzybok, Jr............... 3,000 * *
Edward V. Fritzky..................... 1,000 * *
Jens U. Quistgaard, Ph.D.(10)......... 74 * *
Steven R. Goldstein, M.D.............. 33 * *
David H. Gusdorf...................... -- -- --
All directors and executive officers
as a group
(13 persons)(11)..................... 121,967 2.5% 1.7%
</TABLE>
- --------
* Less than one percent.
(1) Based on publicly available information as of January 5, 1999.
(2) Based on publicly available information as of February 1, 1999.
(3) Includes 2,832 shares subject to options exercisable within 60 days of
December 31, 1998.
(4) Includes 6,288 shares subject to options exercisable within 60 days of
December 31, 1998.
(5) Represents 20,000 shares held by Dr. Sarti indirectly through a 401(k)
plan. Dr. Sarti and his spouse share voting and dispositive power over
these shares.
(6) Includes 1,082 shares subject to options exercisable within 60 days of
December 31, 1998.
(7) Includes 1,248 shares subject to options exercisable within 60 days of
December 31, 1998.
(8) Mr. Pfeffer and his spouse share voting and dispositive power over these
shares.
(9) Includes 500 shares subject to options exercisable within 60 days of
December 31, 1998.
(10) Represents 74 shares subject to options exercisable within 60 days of
December 31, 1998.
(11) Includes 12,024 shares subject to options exercisable within 60 days of
December 31, 1998.
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<PAGE>
DESCRIPTION OF CAPITAL STOCK
We are authorized to issue up to 50,000,000 shares of common stock, $0.01
par value per share, and 6,000,000 shares of preferred stock, $1.00 par value
per share. The following summary of certain provisions of the common stock and
preferred stock highlights certain provisions of our restated articles of
incorporation and certain provisions of applicable law. The summary is not
complete and may not contain all the information you should consider before
investing in our common stock. You should read carefully our restated articles,
which are included as an exhibit to the Registration Statement, of which this
prospectus is a part.
Common Stock
As of December 31, 1998, there were 5,766 shareholders of record of our
common stock, and 4,872,193 shares of common stock were issued and outstanding.
The holders of common stock are entitled to one vote per share on all matters
to be voted on by the shareholders. Subject to preferences of any outstanding
shares of preferred stock, the holders of common stock are entitled to receive
ratably any dividends the Board of Directors declares out of funds legally
available for the payment of dividends. If we are liquidated, dissolved or
wound up, the holders of common stock are entitled to share pro rata all assets
remaining after payment of liabilities and liquidation preferences of any
outstanding shares of preferred stock. Holders of common stock have no
preemptive rights or rights to convert their common stock into any other
securities. There are no redemption or sinking fund provisions applicable to
the common stock. All outstanding shares of common stock are fully paid and
nonassessable, and the shares of common stock to be issued following this
offering will be fully paid and nonassessable.
Preferred Stock
Our Board is authorized to issue shares of preferred stock in one or more
series and to set the number of shares constituting any such series, the voting
powers, if any, and the designations, preferences and relative, participating,
optional or special rights, and qualifications, limitations or restrictions,
including the rate or rates at which dividends will be payable; whether and on
what terms the shares constituting any series will be redeemable, subject to
sinking fund provisions, or convertible or exchangeable into other securities
of SonoSite; and the liquidation preferences, if any, of such series, without
any further vote or action by the shareholders. Thus, any series may, if so
determined by our Board of Directors, have full voting rights with our common
stock or limited voting rights, be convertible into or exchangeable for our
common stock or another security of SonoSite, be redeemable, carry the right to
specified participating dividends, which may be fixed or adjustable and which
may be cumulative, and have such other relative rights, preferences and
limitations as our Board may determine. Issuance of authorized but unissued
shares of our common stock or preferred stock (including upon conversion of any
convertible preferred stock) could cause a dilution of the book value of our
common stock and (in the case of our common stock and preferred stock with
voting rights) would dilute the voting power of our then-current shareholders.
We do not anticipate that any shares of preferred stock will be outstanding at
the time of this offering.
Series A Participating Cumulative Preferred Stock
Our Board has created a series of preferred stock designated Series A
Participating Cumulative Preferred Stock, par value $1.00 per share
(participating preferred shares). The number of shares that currently
constitute this series is 500,000. Pursuant to a Rights Agreement dated as of
April 6, 1998 that we entered into with First Chicago Trust Company of New
York, holders of shares of our common stock hold rights to purchase
participating preferred shares, exercisable only in certain circumstances.
These rights have certain antitakeover effects. They will cause substantial
dilution to a person or group that attempts to acquire us without conditioning
the offer on substantially all these rights being acquired, and generally will
make a hostile takeover attempt prohibitively expensive for the potential
acquiror. The rights will not interfere with any merger or other business
combination approved by our Board because our Board may, at its option, at any
time prior to an attempted takeover, as described below, redeem all, but not
less than all, of the then outstanding rights at the price of $.01 per right.
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<PAGE>
These rights, when they become exercisable as described below, entitle the
registered holder to purchase one one-hundredth of a share of participating
preferred shares at a purchase price of $36.80, which is subject to adjustment
as provided in the rights agreement. The participating preferred shares
issuable upon exercise of these rights are not redeemable. Initially, these
rights are not exercisable and are transferable only with our common stock. In
addition, until the rights become exercisable, expire or are redeemed, all
further issuances of our common stock, including common stock issuable upon the
exercise of outstanding options, include issuances of these rights. The rights
have no voting rights or dividends rights until they are exercised.
Upon exercise of the rights, each participating preferred share is entitled
to a minimum preferential quarterly dividend payment of $0.01 per share, but
will be entitled to an aggregate dividend of 100 times the dividend declared
per share of our common stock, if any. In the event of dissolution, liquidation
or winding up of SonoSite, whether voluntary or involuntary, the holders of
these shares will be entitled to a minimum preferential payment of $0.01 per
share, but will be entitled to an aggregate preferential payment of 100 times
the payment made per share of our common stock. Each participating preferred
share will have 100 votes, voting together with our common stock. In the event
of any merger, business combination, consolidation or other transaction in
which our common stock is exchanged, each participating preferred share will be
entitled to receive 100 times the amount received per share of our common
stock. Because of the nature of these dividend, liquidation and voting rights,
the value of the one one-hundredth interest in a participating preferred share
issuable upon exercise of such rights should approximate the value of one share
of our common stock. Customary antidilution provisions protect that
relationship in the event of certain changes in our common stock and the
participating preferred shares.
Until the earlier of (1) such time that we learn that a person or group
(including any affiliate or associate of such person or group) has acquired, or
has obtained the right to acquire, beneficial ownership of 15% or more of our
outstanding common stock and (2) such date, if any, as may be designated by our
Board following the commencement of, or first public disclosure of an intent to
commence, a tender or exchange offer for our outstanding common stock which
could result in the offeror becoming the beneficial owner of 15% or more of our
outstanding common stock, the rights will be evidenced by the certificates for
our common stock registered in the names of the holders of common stock (which
certificates for our common stock will also be deemed to be right certificates)
and not by separate right certificates.
If a person or group of persons attempts to acquire us, the rights will
entitle each holder of a right (other than those held by the person or group
attempting to acquire us, or their affiliates or associates) to purchase, for
the purchase price of $36.80, that number of one one-hundredths of a
participating preferred share equivalent to the number of shares of our common
stock which at the time of the transaction would have a market value of $73.60.
Any rights that are at any time beneficially owned by the potential acquiror
(or any affiliate or associate of the potential acquiror) will be null and void
and nontransferable and any holder of any such right will be unable to exercise
or transfer any such right. In the event of such a takeover attempt, our Board
may elect to exchange each right (other than rights that have become null and
void and nontransferable as described above) for consideration for each right
consisting of one-half of the securities that would be issuable at such time
upon the exercise of one right pursuant to the terms of the Rights Agreement,
and without payment of the purchase price of $36.80.
If a publicly traded corporation acquires us in a merger or other business
combination or acquires 50% or more of our assets, each right will entitle its
holder to purchase, for the purchase price of $36.80, that number of common
shares of this publicly traded corporation which at the time of the transaction
would have a market value of $73.60. If a company that is not publicly traded
acquires us in a merger or other business combination or acquires 50% or more
of our assets, each right will entitle its holder to purchase, for $36.80, at
such holder's option,
. that number of shares of the surviving corporation in the transaction
(which surviving corporation could be SonoSite) which at the time of the
transaction would have a book value of twice the purchase price,
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<PAGE>
. that number of shares of such entity which at the time of the transaction
would have a book value of twice the purchase price or
. if such entity has an affiliate that has publicly traded common shares,
that number of common shares of such affiliate which at the time of the
transaction would have a market value of $73.60.
At any time before an attempted takeover, as described above, our Board may
redeem the rights in whole, but not in part, at a price (in cash or common
stock or other securities of SonoSite) of $.01 per right, subject to adjustment
and to certain exceptions as provided in the Rights Agreement. The rights will
expire on April 5, 2008 unless earlier redeemed or canceled by our Board.
Antitakeover Effects of Provisions of our Restated Articles of Incorporation
and Bylaws
Certain provisions of our restated articles of incorporation and our bylaws
may have the effect of delaying, deferring or preventing a change in control of
SonoSite. As noted above, our Board of Directors, without shareholder approval,
has the authority under our restated articles of incorporation to issue
preferred stock with rights superior to the rights of the holders of common
stock. As a result, preferred stock could be issued quickly and easily, could
adversely affect the rights of holders of common stock and could be issued with
terms calculated to delay or prevent a change in control of SonoSite or make
removal of management more difficult. Also, under our restated articles and
bylaws, our shareholders may call a special meeting only upon the request of
holders of at least two-thirds of the outstanding shares. In addition, our
bylaws establish advance notice procedures with respect to shareholder
proposals and the nomination of candidates for election as directors, other
than nominations made by or at the direction of our Board or a committee of the
Board. Finally, as discussed above, we have authorized a class of preferred
stock, pursuant to a shareholder rights agreement, which could have the effect
of making a hostile takeover attempt prohibitively expensive for the potential
acquiror.
Antitakeover Effects of Washington Law
Washington law imposes restrictions on certain transactions between a
corporation and certain significant shareholders. Chapter 23B.19 of the
Washington Business Corporation Act prohibits a "target corporation," with some
exceptions, from engaging in certain significant business transactions with a
person or group of persons that beneficially owns 10% or more of the voting
securities of the target corporation (an Acquiring Person) for a period of five
years after such acquisition, unless the transaction or acquisition of shares
is approved by a majority of the members of the target corporation's board of
directors prior to the time of acquisition. Such prohibited transactions
include, among other things,
. a merger or consolidation with, disposition of assets to, or issuance or
redemption of stock to or from, the Acquiring Person;
. termination of 5% or more of the employees of the target corporation as a
result of the Acquiring Person's acquisition of 10% or more of the
shares; or
. allowing the Acquiring Person to receive any disproportionate benefit as
a shareholder.
After the five-year period, a "significant business transaction" may occur,
as long as it complies with certain "fair price" provisions of the statute. A
corporation may not "opt out" of this statute. This provision may have the
effect of delaying, deferring or preventing a change in control of SonoSite.
Transfer Agent and Registrar
The Transfer Agent and Registrar for our common stock is First Chicago Trust
Company of New York, 525 Washington Boulevard, 9th Floor, Jersey City, New
Jersey 07310.
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<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
We cannot provide any assurances that a significant public market for the
common stock will develop or be sustained after this offering. Future sales of
substantial amounts of common stock in the public market, or the possibility of
such sales occurring, could adversely affect prevailing market prices for the
common stock or our future ability to raise capital through an offering of
equity securities.
Upon completion of this offering and based upon shares outstanding as of
December 31, 1998, we will have outstanding 7,372,193 shares of common stock,
assuming no exercise of the underwriters' over-allotment option and no exercise
of outstanding options after December 31, 1998. Of these shares, 7,207,070
shares, including the 2,500,000 shares that we expect to sell in this offering,
will be freely tradable in the public market without restriction under the
Securities Act of 1933, as amended, unless such shares are held by "affiliates"
of SonoSite, as that term is defined in Rule 144 under the Securities Act. The
remaining 165,123 shares are subject to lock-up agreements or subject to the
vesting provisions of restricted stock awards, or both.
Pursuant to the lock-up agreements, all our executive officers and
directors, who collectively hold an aggregate of 109,943 shares of common
stock, have agreed that they will not, without the prior written consent of
Vector Securities International, Inc., offer, sell, contract to sell, grant any
option to purchase or otherwise dispose of any such shares for a period of 180
days from the date of this prospectus, subject to limited exceptions. In
addition, we have agreed with Vector Securities International, Inc. that we
will not offer, sell or otherwise dispose of shares of our common stock for 180
days from the date of this prospectus, subject to limited exceptions.
Following the expiration of the 180-day lock-up period, the 109,943 shares
held by our executive officers and directors will be available for sale in the
public market, subject to Rule 144 and also subject in some instances to the
vesting provisions of restricted stock awards. Also, any additional shares
issued to our officers and directors upon exercise of stock option grants will
also be available for sale in the public market after the expiration of the
lock-up period, subject to Rule 144. In general, under Rule 144 an affiliate
(such as any of our executive officers and directors) who has beneficially
owned restricted shares for at least one year (including the holding period of
any prior owner who is not one of our affiliates) would be entitled to sell,
within any three-month period, a number of shares that does not exceed the
greater of
. 1% of the then-outstanding shares of common stock (approximately 73,700
shares immediately after this offering) and
. the average weekly trading volume of the common stock during the four
calendar weeks preceding the filing of a Form 144 with respect to such
sale.
Sales under Rule 144 are also subject to certain manner of sale and notice
requirements and to the availability of current public information about us.
We have filed registration statements on Form S-8 registering an aggregate
of 2,175,000 shares of common stock subject to outstanding options or
restricted stock awards or reserved for future issuance under our compensation
plans. As of December 31, 1998, options to purchase a total of 1,547,818 shares
were outstanding (270,453 of which were subject to outstanding options
distributed to ATL Ultrasound option holders in connection with the spinoff),
and there were 60,930 shares subject to unvested restricted stock awards.
Common stock issued upon exercise of outstanding stock options or that becomes
vested pursuant to restricted stock awards is available for immediate resale in
the open market, subject to the restrictions discussed above.
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<PAGE>
UNDERWRITING
Subject to the terms and conditions of the underwriting agreement, the
underwriters named below, for whom Vector Securities International, Inc. and
Prudential Securities Incorporated are acting as representatives, have
severally agreed to purchase, and we have agreed to sell to the underwriters,
the following respective number of shares of common stock:
<TABLE>
<CAPTION>
Underwriters Number of Shares
------------ ----------------
<S> <C>
Vector Securities International, Inc.........................
Prudential Securities Incorporated...........................
---------
Total.................................................... 2,500,000
=========
</TABLE>
The underwriting agreement makes the obligations of the underwriters subject
to a number of conditions, including the absence of any material adverse change
in our business and the receipt of certificates, opinions and letters from us,
our counsel and our experts. If any of the shares are purchased, the
underwriters must purchase all shares of common stock being offered. If any
underwriter defaults in its obligation to purchase shares, and the aggregate
obligations of the defaulting underwriters do not exceed 10% of the shares
offered, some or all of the remaining underwriters must assume the obligations
of the defaulting underwriters.
The underwriters propose to offer the shares of common stock directly to the
public at the offering price set forth on the cover page of this prospectus.
They propose to offer shares to dealers at that price less a concession not in
excess of $ per share. The underwriters may allow to selected dealers and
the dealers may reallow a concession not in excess of $ per share to other
dealers. After the public offering of the shares, the offering price and other
selling terms may be changed by the representatives of the underwriters.
We have granted to the underwriters an option, exercisable no later than 30
days after the date of this prospectus, to purchase up to 375,000 additional
shares of common stock at the public offering price, less underwriting
discounts and commissions. The underwriters may exercise this option solely for
the purpose of covering over-allotments, if any, in connection with this
offering. Subject to a number of conditions, if this option is exercised, each
underwriter must purchase approximately the same percentage of over-allotment
shares as the number of shares set forth next to each underwriter's name in the
preceding table bears to the total number of shares listed in this table. We
must sell these shares to the underwriters if the option is exercised.
The following table summarizes the compensation we will pay to the
underwriters:
<TABLE>
<CAPTION>
Per Without With
Share Over-Allotment Over-Allotment
------ -------------- --------------
<S> <C> <C> <C>
Total underwriting discounts and
commissions......................... $ $ $
</TABLE>
In connection with this offering, the underwriters may engage in
transactions that stabilize, maintain or otherwise affect the price of the
common stock. Specifically, the underwriters may sell shares in excess of the
offering size, creating a syndicate short position. In addition, the
underwriters may bid for and purchase shares of common stock in the open market
to cover syndicate short positions or to stabilize the price of the common
stock. Finally, the underwriting syndicate may reclaim selling concessions from
syndicate members in this offering if the syndicate repurchases previously
distributed common stock in syndicated covering transactions, in stabilization
transactions or otherwise. Any of these activities may stabilize or maintain
the market price of the common stock above independent market levels. The
underwriters are not required to engage in these activities, and may end any of
these activities at any time.
49
<PAGE>
The representatives of the underwriters have advised us that the
underwriters do not intend to confirm sales to any accounts over which they
exercise discretionary authority.
We have agreed to indemnify the underwriters against certain liabilities,
including liabilities under the Securities Act of 1933, as amended, or to
contribute to payments the underwriters may be required to make with respect to
these liabilities.
The executive officers and directors of SonoSite have agreed that they will
not, without the prior written consent of Vector Securities International,
Inc., offer, sell or otherwise dispose of: (1) any shares of our common stock;
(2) options or warrants to acquire shares of our common stock; or (3)
securities exchangeable for or convertible into shares of our common stock
owned by them for a period of 180 days after the date of this prospectus,
subject to certain exceptions. We have agreed not to offer, sell or otherwise
dispose of any of the above types of securities for a period of 180 days from
the date of this prospectus, subject to certain exceptions. See "Shares
Eligible for Future Sale."
In general, the rules of the Securities and Exchange Commission will
prohibit the underwriters from making a market in our common stock during the
"cooling off" period immediately preceding the commencement of sales in the
offering. The Commission has, however, adopted exemptions from these rules that
permit passive market making under certain conditions. These rules permit an
underwriter to continue to make a market subject to the conditions, among
others, that its bid not exceed the highest bid by a market maker not connected
with the offering and that its net purchases on any one trading day not exceed
prescribed limits. Pursuant to these exemptions, certain underwriters, selling
group members (if any) or their respective affiliates intend to engage in
passive market making in our common stock during the cooling off period.
50
<PAGE>
LEGAL MATTERS
Certain legal matters will be passed on for SonoSite by Perkins Coie LLP,
Seattle, Washington. Certain legal matters will be passed on for the
underwriters by Skadden, Arps, Slate, Meagher & Flom (Illinois), Chicago,
Illinois.
EXPERTS
Our financial statements as of December 31, 1997 and 1998, and for each of
the years in the three-year period ended December 31, 1998 and for the period
from February 1994 (inception) to December 31, 1998 have been included in this
prospectus and the related registration statement in reliance upon the report
of KPMG LLP, independent auditors, appearing elsewhere in this prospectus, and
upon the authority of KPMG LLP as experts in accounting and auditing.
ADDITIONAL INFORMATION
We have filed with the Securities and Exchange Commission a registration
statement on Form S-1. This prospectus, which forms a part of the registration
statement, does not contain all the information included in the registration
statement. Certain information is omitted and you should refer to the
registration statement and its exhibits. With respect to references made in
this prospectus to any contract or other document of SonoSite, such references
are not necessarily complete and you should refer to the exhibits attached to
the registration statement relating to this prospectus for copies of certain
contracts or documents referred to in this prospectus. You may review a copy of
the registration statement, including exhibits and schedules filed with the
registration statement, at the Commission's public reference facilities in Room
1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and at
the regional offices of the Commission located at 7 World Trade Center, Suite
1300, New York, New York 10048, and Citicorp Center, 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661. You may also obtain copies of such
materials from the Public Reference Section of the Commission, Room 1024,
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed
rates. The Commission maintains a Web site (http://www.sec.gov) that contains
reports, proxy and information statements and other information regarding
registrants, such as SonoSite, that file electronically with the Commission.
51
<PAGE>
INDEX TO THE FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
SONOSITE, INC.
Independent Auditors' Report............................................... F-2
Balance Sheets............................................................. F-3
Statements of Operations................................................... F-4
Statements of Cash Flows................................................... F-5
Statements of Shareholders' Equity......................................... F-6
Notes to the Financial Statements.......................................... F-7
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders,
SonoSite, Inc.
We have audited the accompanying balance sheets of SonoSite, Inc. (a
development stage enterprise) as of December 31, 1997 and 1998, and the related
statements of operations, cash flows and shareholders' equity for each of the
years in the three-year period ended December 31, 1998 and for the period from
February 1994 (inception) through December 31, 1998. These financial statements
are the responsibility of SonoSite, Inc.'s management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of SonoSite, Inc. (a
development stage enterprise) as of December 31, 1997 and 1998, and the results
of its operations and its cash flows for each of the years in the three-year
period ended December 31, 1998 and for the period from February 1994
(inception) through December 31, 1998, in conformity with generally accepted
accounting principles.
KPMG LLP
Seattle, Washington
January 27, 1999
F-2
<PAGE>
SonoSite, Inc.
(A Development Stage Enterprise)
Balance Sheets
<TABLE>
<CAPTION>
At December 31,
-------------------------
1997 1998
----------- ------------
<S> <C> <C>
Assets
Current assets
Cash and cash equivalents.......................... $ -- $ 7,525,762
Receivable from ATL Ultrasound..................... -- 12,000,000
Prepaid expenses and other current assets.......... -- 304,599
----------- ------------
Total current assets................................. -- 19,830,361
Property and equipment, net.......................... 409,967 3,379,815
Other assets......................................... -- 80,057
----------- ------------
Total assets......................................... $ 409,967 $ 23,290,233
=========== ============
Liabilities
Current liabilities
Checks drawn in excess of bank balances............ $ -- $ 601,629
Accounts payable................................... -- 781,999
Accrued expenses................................... 169,839 1,123,948
Current portion of long-term obligations........... -- 388,795
----------- ------------
Total current liabilities............................ 169,839 2,896,371
Deferred rent........................................ -- 79,923
Long-term obligations, less current portion.......... -- 480,964
----------- ------------
Total liabilities.................................... 169,839 3,457,258
Commitments and contingencies
Shareholders' Equity
Preferred stock, $1.00 par value:
Authorized shares -- 6,000,000
Issued and outstanding shares -- None............ -- --
Common stock, $0.01 par value
Shares authorized -- 50,000,000
Issued and outstanding shares --
As of December 31, 1997 -- None
As of December 31, 1998 -- 4,872,193........... -- 48,722
Additional paid-in capital......................... -- 40,693,195
Net advances from ATL Ultrasound................... 8,124,018 --
Deficit accumulated during the development stage... (7,883,890) (20,908,942)
----------- ------------
Total shareholders' equity........................... 240,128 19,832,975
----------- ------------
Total liabilities and shareholders' equity........... $ 409,967 $ 23,290,233
=========== ============
</TABLE>
See accompanying notes to the financial statements
F-3
<PAGE>
SonoSite, Inc.
(A Development Stage Enterprise)
Statements of Operations
<TABLE>
<CAPTION>
February
1994
(inception)
For the Years Ended December 31, through
-------------------------------------- December 31,
1996 1997 1998 1998
----------- ----------- ------------ ------------
<S> <C> <C> <C> <C>
Grant revenues.......... $ 1,028,895 $ 2,947,700 $ 973,107 $ 4,949,702
Operating expenses:
Research and
development.......... 2,575,719 7,063,842 9,474,074 19,227,489
Sales and marketing... -- 1,268,272 3,120,238 4,388,510
General and
administrative....... 217,635 610,037 1,903,883 2,742,681
----------- ----------- ------------ ------------
Total operating
expenses............... 2,793,354 8,942,151 14,498,195 26,358,680
Interest income......... -- -- 541,100 541,100
Interest expense........ -- -- 41,064 41,064
----------- ----------- ------------ ------------
Net loss................ $(1,764,459) $(5,994,451) $(13,025,052) $(20,908,942)
=========== =========== ============ ============
Basic and diluted net
loss per share......... $ (0.38) $ (1.28) $ (2.72)
=========== =========== ============
Shares used in computing
basic and diluted net
loss per share......... 4,633,333 4,683,667 4,796,264
=========== =========== ============
</TABLE>
See accompanying notes to the financial statements
F-4
<PAGE>
SonoSite, Inc.
(A Development Stage Enterprise)
Statements of Cash Flows
<TABLE>
<CAPTION>
February
1994
(inception)
For the Years Ended December 31, through
-------------------------------------- December 31,
1996 1997 1998 1998
----------- ----------- ------------ ------------
<S> <C> <C> <C> <C>
Operating activities:
Net loss................ $(1,764,459) $(5,994,451) $(13,025,052) $(20,908,942)
Adjustments to reconcile
net loss to net cash
used in operating
activities:
Depreciation and
amortization......... 23,964 110,698 410,613 545,275
Amortization of
deferred stock
compensation......... -- -- 58,914 58,914
Changes in operating
assets and liabilities:
Increase in prepaid
expenses and other
current assets....... -- -- (304,599) (304,599)
Increase in accounts
payable.............. -- -- 781,999 781,999
Increase in accrued
expenses............. 52,854 116,985 954,109 1,123,948
Increase in deferred
rent................. -- -- 79,923 79,923
----------- ----------- ------------ ------------
Net cash used in
operating
activities......... (1,687,641) (5,766,768) (11,044,093) (18,623,482)
Investing activities:
Purchase of
equipment............ (180,667) (363,962) (2,320,468) (2,865,097)
Increase in deposits.. -- -- (80,057) (80,057)
----------- ----------- ------------ ------------
Net cash used in
investing
activities......... (180,667) (363,962) (2,400,525) (2,945,154)
Financing activities:
Increase in checks
drawn in excess of
bank balances........ -- -- 601,629 601,629
Repayment of long-term
obligations.......... -- -- (190,234) (190,234)
Exercise of stock
options.............. -- -- 6,728 6,728
Contributions from ATL
Ultrasound........... 1,868,308 6,130,730 20,552,257 28,676,275
----------- ----------- ------------ ------------
Net cash provided by
financing
activities......... 1,868,308 6,130,730 20,970,380 29,094,398
Net change in cash...... -- -- 7,525,762 7,525,762
Cash and cash
equivalents at
beginning of period.... -- -- -- --
----------- ----------- ------------ ------------
Cash and cash
equivalents at end of
period................. $ -- $ -- $ 7,525,762 $ 7,525,762
=========== =========== ============ ============
Supplemental disclosure
of cash flow
information:
Cash paid for interest.. $ -- $ -- $ 41,064 $ 41,064
=========== =========== ============ ============
Supplemental disclosure
of non-cash investing
and financing
activities:
Equipment acquired
through long-term
obligations............ $ -- $ -- $ 1,059,993 $ 1,059,993
=========== =========== ============ ============
Contribution recorded as
a receivable from ATL
Ultrasound............. $ -- $ -- $ 12,000,000 $ 12,000,000
=========== =========== ============ ============
</TABLE>
See accompanying notes to the financial statements
F-5
<PAGE>
SonoSite, Inc.
(A Development Stage Enterprise)
Statements of Shareholders' Equity
<TABLE>
<CAPTION>
Deficit
Accumulated
Additional During the Net Advances Total
Common Paid-in Development from ATL Shareholders'
Stock Capital Stage Ultrasound Equity
------- ----------- ------------ ------------ -------------
<S> <C> <C> <C> <C> <C>
Balance at February 1994
(inception)............ $ -- $ -- $ -- $ -- $ --
Net advances from ATL
Ultrasound............. -- -- -- 41,429 41,429
Net loss................ -- -- (41,429) -- (41,429)
------- ----------- ------------ ------------ ------------
Balance at December 31,
1994................... -- -- (41,429) 41,429 --
Net advances from ATL
Ultrasound............. -- -- -- 83,551 83,551
Net loss................ -- -- (83,551) -- (83,551)
------- ----------- ------------ ------------ ------------
Balance at December 31,
1995................... -- -- (124,980) 124,980 --
Net advances from ATL
Ultrasound............. -- -- -- 1,868,308 1,868,308
Net loss................ -- -- (1,764,459) -- (1,764,459)
------- ----------- ------------ ------------ ------------
Balance at December 31,
1996................... -- -- (1,889,439) 1,993,288 103,849
Net advances from ATL
Ultrasound............. -- -- -- 6,130,730 6,130,730
Net loss................ -- -- (5,994,451) -- (5,994,451)
------- ----------- ------------ ------------ ------------
Balance at December 31,
1997................... -- -- (7,883,890) 8,124,018 240,128
Net advances from ATL
Ultrasound from January
1, 1998 through
April 6, 1998.......... -- -- -- 2,491,086 2,491,086
Issuance of 4,870,178
common shares.......... 48,702 40,627,573 -- (10,615,104) 30,061,171
Exercise of 2,015 stock
options................ 20 6,708 -- -- 6,728
Amortization of deferred
stock compensation of
$214,550............... -- 58,914 -- -- 58,914
Net loss................ -- -- (13,025,052) -- (13,025,052)
------- ----------- ------------ ------------ ------------
Balance at December 31,
1998................... $48,722 $40,693,195 $(20,908,942) $ -- $ 19,832,975
======= =========== ============ ============ ============
</TABLE>
See accompanying notes to the financial statements
F-6
<PAGE>
SonoSite, Inc.
(A Development Stage Enterprise)
Notes to the Financial Statements
1. Business Overview
SonoSite, Inc. ("SONO" or the "Company"), a development stage enterprise,
began operations in 1994 as a project of ATL Ultrasound, Inc. ("ATL"). The
project was chartered to develop the design and specifications for a hand-
carried ultrasound device. During the period from inception (February 1994)
through April 6, 1998, the project was organized as a separate division of ATL.
On February 2, 1998, the ATL Board of Directors approved a plan to spin off
SONO as an independent, publicly owned company. This transaction was effected
through a tax-free dividend distribution of SONO's shares to ATL shareholders
(the "Distribution") as of April 6, 1998 (the "Distribution Date"). ATL
shareholders received one share of SONO common stock for each three shares of
ATL common stock held. In addition, ATL option holders were granted one option
to purchase SONO shares for every six options to purchase ATL shares. In
connection with the Distribution, SONO received $18.0 million in cash from ATL,
net advances made by ATL through the Distribution Date, and an agreement by ATL
to contribute an additional $12.0 million in cash on January 15, 1999 to SONO,
all as a contribution of capital.
SONO, as an independent public company, continues to use its technology to
develop and design hand-carried, diagnostic ultrasound devices for use by
physicians in private practice, hospitals, clinics, private and governmental
institutions and healthcare agencies. In addition, the Company is establishing
distribution and selling networks and education and marketing programs to
support the hand-carried ultrasound devices developed. SONO's future growth
will largely depend on its ability to market and sell hand-carried ultrasound
products. To date, the Company has not generated revenue from product sales.
Since inception, funding from ATL and the U.S. Navy has been used to finance
the development of SONO's technologies. U.S. Navy funding was received as part
of a development contract ("Development Contract") with the Office of Naval
Research. The Development Contract involved a consortium of collaborators,
including the University of Washington, Harris Semiconductor and VLSI
Technology, Inc. The Application Specific Integrated Circuits ("ASICs")
developed as part of the collaboration are essential to SONO developing a
commercial hand-carried ultrasound device and SONO is relying on VLSI
Technology, Inc. and Harris Semiconductor to manufacture ASICs which
incorporate technology of the consortium. The Company expects to continue to
incur operating losses unless and until the hand-carried product sales generate
sufficient revenue to fund its continuing operations.
2. Summary of Significant Accounting Policies
Basis of presentation
The financial statement information for periods prior to the Distribution
Date represents the combination of the handheld ultrasound division of ATL and
the corporate entity, SonoSite, Inc.
Such information has been derived from the historical books and records of
ATL and reflects the assets, liabilities, revenues and expenses of SONO, as it
was operated as a division of ATL, at historical cost. Financial statement
information for subsequent periods consists solely of SONO's activity as a
separate company.
For periods prior to the Distribution Date, the statement of operations
included allocations for facilities and certain support services, such as
engineering overhead, administration, accounting, finance, human resources and
regulatory functions. These allocations were based on estimates of personnel
time and effort spent by ATL on behalf of SONO. Management believes these
allocations were made on a reasonable basis. Subsequent to the Distribution
Date, items noted above were incorporated into agreements with ATL and charges
were based upon actual time spent by ATL on behalf of SONO. Refer to Note 3.
F-7
<PAGE>
SonoSite, Inc.
(A Development Stage Enterprise)
Notes to the Financial Statements--(Continued)
The portion of SONO's financing requirements funded by ATL prior to the
Distribution Date are shown as net advances from ATL in shareholders' equity.
Activity in the net advances from ATL equity account relates to net cash
received from ATL through intercompany advances to fund SONO's operating
deficits. ATL did not acquire additional financing to fund these advances and
no interest has been charged to SONO.
The financial information included herein is not necessarily indicative of
the financial position, results of operations or cash flows of SONO in the
future or what the financial position, results of operations or cash flows
would have been if SONO had been a separate, independent public company during
all periods presented.
Cash and cash equivalents
Cash and cash equivalents consist of money market instruments with original
maturities of three months or less. Cash equivalents are entirely held in money
market funds with Provident Institutional Funds.
Property and equipment
Property and equipment are stated at cost, less accumulated depreciation and
amortization. The costs of significant additions and improvements to property
and equipment are capitalized. Maintenance and repair costs are expensed as
incurred.
Depreciation and amortization are calculated using the straight-line basis
over the estimated useful lives as follows:
<TABLE>
<CAPTION>
Useful Life
-----------------------------------
<S> <C>
Furniture and fixtures................... 5 years
Computer equipment....................... 3 - 5 years
Software................................. 3 years
Equipment, other than computer........... 5 - 10 years
Leasehold improvements................... Lesser of the lease term or 5 years
</TABLE>
Equipment held under capital leases are amortized using the straight-line
method over the shorter of the lease term or the estimated useful life of the
underlying asset.
For long-lived assets, including property and equipment, the Company
evaluates the carrying value of the assets by comparing the estimated future
cash flows generated from the use of the asset and its eventual disposition
with the assets' reported net book value. The carrying value of assets is
evaluated for impairment when events or changes in circumstances occur which
may indicate the carrying amount of the asset may not be recoverable.
Property and equipment as of December 31 consist of the following:
<TABLE>
<CAPTION>
1997 1998
--------- ----------
<S> <C> <C>
Furniture and fixtures............................... $ 172,025 $ 368,170
Computer equipment................................... 321,299 957,664
Software............................................. 51,305 1,403,195
Equipment, other than computer....................... -- 914,176
Leasehold improvements............................... -- 281,885
--------- ----------
544,629 3,925,090
Less -- Accumulated depreciation and amortization.... (134,662) (545,275)
--------- ----------
Total.............................................. $ 409,967 $3,379,815
========= ==========
</TABLE>
F-8
<PAGE>
SonoSite, Inc.
(A Development Stage Enterprise)
Notes to the Financial Statements--(Continued)
Included above are assets acquired under capital leases at December 31, 1998
as follows:
<TABLE>
<S> <C>
Software....................................................... $ 991,814
Equipment, other than computer................................. 68,179
----------
1,059,993
Less -- Accumulated amortization............................... (123,837)
----------
Total........................................................ $ 936,156
==========
</TABLE>
As of December 31, 1997, there were no capital leases.
Revenue
Revenue since inception of the Company consists of grant revenue under a
United States Government Defense Advanced Research Projects Administrative
(DARPA) grant (the "Development Contract"). Grant revenue is recognized
consistent with the terms of the Development Contract and is generally tied to
the achievement of technological milestones, the majority of which were
achieved by the second quarter of 1998. Revenue recognition has been limited to
amounts representing assured realization of contractual funding.
SONO has not generated revenue from product sales and there can be no
assurances that there will be sufficient revenue generated from future product
sales to fund the Company's operations.
Research and development
Research and development costs are expensed as incurred.
Income taxes
Deferred income taxes are provided based on the estimated future tax effects
of temporary differences between financial statement carrying amounts of
existing assets and liabilities and their respective tax bases and operating
loss and tax credit carryforwards arising subsequent to the Distribution Date.
Deferred tax assets and liabilities are measured using enacted tax rates
that are expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. The effect on
deferred tax assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date. A valuation allowance is
established when necessary to reduce deferred tax assets to the amount, if any,
expected to be realized.
SONO was not a separate taxpayer prior to the Distribution Date. During this
period, it was the Company's policy to record its tax expenses and benefits as
if it were a separate taxpayer and consequently due to its development stage
status and its cumulative losses since inception, no current or deferred tax
benefit was reported.
Stock-based compensation
SONO applies the principles of APB Opinion No. 25 (APB 25), "Accounting for
Stock Issued to Employees" and related interpretations when measuring
compensation costs for its employee stock option
F-9
<PAGE>
SonoSite, Inc.
(A Development Stage Enterprise)
Notes to the Financial Statements--(Continued)
plans. Pro forma net loss and net loss per share are presented as if
compensation cost had been determined in accordance with Statement of Financial
Accounting Standard No. 123 (FAS 123), "Accounting for Stock-Based
Compensation".
Net loss per share
Basic and diluted net loss per share was computed by dividing the net loss
by the weighted average shares outstanding.
Weighted average shares outstanding represent weighted average shares of
SONO common shares outstanding from the Distribution Date forward and for the
periods prior to the Distribution Date, weighted average shares outstanding
represent ATL weighted average shares as adjusted for the exchange ratio
established on the Distribution Date of one SONO share for every three shares
of ATL. All periods presented have been restated to reflect this distribution.
Options to purchase SONO shares and unvested restricted SONO shares issued
by ATL and options issued by SONO after the Distribution, which were
outstanding, were not included in the computations of diluted net loss per
share because to do so would be antidilutive. As of December 31, 1998,
outstanding SONO options and unvested restricted shares issued by ATL through
the Distribution totaled 270,453 and 60,930, respectively, and outstanding
options issued by SONO totaled 1,277,365. As of December 31, 1997, outstanding
ATL issued options and unvested restricted shares totaled 307,833 and 51,788,
respectively. As of December 31, 1996, outstanding ATL issued options and
unvested restricted shares totaled 359,667 and 38,242, respectively. The ATL
issued and outstanding options as of December 31, 1997 and 1996 were adjusted
for the exchange ratio of one SONO option for every six options of ATL and the
restricted stock was adjusted for the exchange ratio of one SONO restricted
share for every three restricted shares of ATL.
The following is a reconciliation of the numerator and denominator of the
basic loss per share calculations:
<TABLE>
<CAPTION>
1996 1997 1998
----------------------- ----------------------- ------------------------
(in thousands, except Loss Shares LPS Loss Shares LPS Loss Shares LPS
LPS) ------- ------ ------ ------- ------ ------ -------- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Weighted average shares
outstanding............ 4,675 4,726 4,853
Weighted average
unvested restricted
stock.................. (42) (42) (57)
------- ----- ------ ------- ----- ------ -------- ----- ------
Basic and diluted loss
per share.............. $(1,764) 4,633 $(0.38) $(5,994) 4,684 $(1.28) $(13,025) 4,796 $(2.72)
======= ===== ====== ======= ===== ====== ======== ===== ======
</TABLE>
Use of estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Financial instruments
The Company has financial instruments consisting of cash and cash
equivalents, receivable from ATL and accounts payable. The fair value of these
financial instruments approximates their carrying amount due to their short-
term nature.
F-10
<PAGE>
SonoSite, Inc.
(A Development Stage Enterprise)
Notes to the Financial Statements--(Continued)
Reclassification of prior period balances
Certain amounts reported in previous years have been reclassified to
conform to the 1998 presentation.
Liquidity
As of December 31, 1998, the Company had cash and cash equivalents of $7.5
million. In addition, the Company collected its additional $12.0 million
receivable from ATL on January 15, 1999. SONO expects its cash needs to
increase in future periods as it continues to fund its research and
development activity and increases spending to accommodate its manufacturing,
distribution, education and marketing plans. The Company believes that its
existing cash will be sufficient to fund its operations through the third
quarter of 1999. Within this period, the Company will seek additional funding,
through public or private sources, to meet its future requirements. There can
be no assurance such funds will be available as needed or on terms that are
acceptable to the Company. If the Company is unable to obtain sufficient funds
to satisfy its cash requirements, the Company will be forced to delay, reduce
or eliminate some or all of its research and development activities, planned
clinical trials and manufacturing and administrative programs, or dispose of
assets or technology.
3. Agreements with ATL
The Company has entered into several agreements with ATL effective as of
the Distribution Date. These agreements were negotiated between the CEO of
SONO and the CEO of ATL. ATL was assisted in these discussions by ATL's in-
house counsel. Outside counsel was obtained for SONO by ATL in connection with
the Distribution. SONO and ATL consider the terms of these agreements
competitive with the cost of obtaining such rights and services in arm's
length negotiations with third parties. The following is a summary of the
significant agreements:
Service Agreement
SONO and ATL have an agreement pursuant to which ATL provides certain
engineering design and development services to SONO in exchange for payment of
actual expenses incurred, including an overhead component, plus a markup on
the actual expense and overhead costs for these services. ATL has also agreed
to provide to SONO, at SONO's request and expense, services for limited
periods of time ranging up to five years, including financial, human resource,
engineering, information, facilities and regulatory services. Termination of
any of these services may occur with 90 days' prior written notice by either
party.
OEM Supply Agreement
ATL has agreed to manufacture highly portable ultrasound devices
exclusively for SONO for a period up to five years. In return for the
manufacturing services, SONO has agreed to compensate ATL for manufacturing
expenses incurred, including, but not limited to, indirect and direct labor,
materials and nonrecurring engineering expenses, plus a markup, until SONO
notifies ATL that the product is within ninety days of final production status
("start-up phase"). After the start-up phase is complete, or if SONO elects,
until final product production begins, the manufacturing expenses will be
factored into a cost model, based upon material and labor, at a rate of ATL's
cost per unit plus a markup percentage. This agreement may be terminated for
any of the following reasons: unremedied material default by either party,
acquisition of or by a competitor without written consent of the other party,
insolvency, or no product purchase orders for a period of six months after
SONO's initial product order. In addition, SONO may terminate this agreement
without cause upon 180 days written notice or ATL may terminate this agreement
after the exclusive five-year period without cause upon 180 days written
notice.
F-11
<PAGE>
SonoSite, Inc.
(A Development Stage Enterprise)
Notes to the Financial Statements--(Continued)
Technology Transfer and License Agreement
SONO and ATL have agreed to a Technology Transfer and License Agreement
pursuant to which SONO owns certain highly portable ultrasound technology
developed while it was a division of ATL and has access to certain ATL
technology which is necessary or useful in the development and manufacture of
highly portable ultrasound products. Under this agreement, SONO has taken
ownership of the technology developed as part of the DARPA Development Contract
and also patent rights which have been established or are being pursued for
that technology. In addition, SONO received a nonexclusive license to use any
other ATL technology in existence or developed during the period ending three
years after the Distribution Date in its handheld ultrasound products.
This license bears a royalty equivalent to a percentage of the net sales of
handheld ultrasound products under fifteen pounds that use ATL technology. The
license will become paid-in-full by a lump-sum payment which is due ATL if SONO
ceases to be an independent stand-alone company during the eight year period
following the Distribution Date. The lump-sum payment is $150 million during
the five years following the Distribution Date and $75 million for the next
three years.
SONO and ATL have also entered into a cross-license agreement whereby SONO
has the right to use technology developed by ATL during the three year period
following the Distribution Date in its handheld products and ATL has the right
to use developments of SONO made during the same period in its full-size
ultrasound system products. SONO and ATL have also agreed that SONO will not
engage in full-size ultrasound business and ATL will not engage in the handheld
ultrasound device business for five years following the Distribution Date.
After this five year period, each party's ongoing obligation with respect to
the technology of the other will be to respect the patent and copyright rights
of the other, although SONO will retain a license to use the previously-
licensed ATL technology in handheld systems and ATL will retain a license to
use the previously licensed SONO technology in full-size ultrasound systems.
From the Distribution Date, April 6, 1998, through December 31, 1998, SONO
has incurred expenses relating to work performed by ATL totaling $2.2 million.
In addition, as of December 31, 1998, included in accounts payable are amounts
owed to ATL totaling $523,000.
4. Accrued Expenses
Accrued expenses as of December 31 include the following:
<TABLE>
<CAPTION>
1997 1998
-------- ----------
<S> <C> <C>
Payroll and related................................... $169,839 $ 480,580
Research and development tooling...................... -- 350,820
Outside services...................................... -- 142,550
Other................................................. -- 149,998
-------- ----------
Total............................................... $169,839 $1,123,948
======== ==========
</TABLE>
5. Shareholders' Equity
Stock option plans
At December 31, 1998, SONO had the following stock compensation plans: the
1998 Nonofficer Employee Stock Option Plan ("1998 NOE Plan"), the 1998 Option,
Stock Appreciation Right, Restricted
F-12
<PAGE>
SonoSite, Inc.
(A Development Stage Enterprise)
Notes to the Financial Statements--(Continued)
Stock, Stock Grant and Performance Unit Plan ("1998 Plan"), the Nonemployee
Director Stock Option Plan ("Director Plan"), the Management Incentive
Compensation Plan ("MIC Plan") and the Adjustment Plan. SONO accounts for
employee stock options under provisions of APB 25 and therefore, to the extent
the fair value of the underlying stock is equal to or less than the exercise
price, no compensation expense is recognized for employee stock option grants.
As of December 31, 1998, 27,500 options had been issued to nonemployees.
This resulted in net deferred compensation of $156,000 as of December 31, 1998
and compensation expense of $59,000 for the year ended 1998. There was no
similar charge to SONO for the period prior to the Distribution Date.
Prior to the Distribution Date, all option information represents the
outstanding and issued options of ATL. Financial data presented relating to
option grants represents the exchange ratio calculated as one SONO option for
every six ATL options outstanding. This exchange ratio provides the basis for
the pro forma presentation for 1996 and 1997.
If the Company had accounted for the costs relating to all option grants
under the provisions of FAS 123, the Company's net loss and net loss per share
would have been the following pro forma amounts:
<TABLE>
<CAPTION>
1996 1997 1998
------ ------ -------
(in thousands, except
per share data)
<S> <C> <C> <C>
Net loss:
As reported..................................... $1,764 $5,994 $13,025
Pro forma....................................... $1,860 $6,141 $14,946
Basic and diluted net loss per share:
As reported..................................... $(0.38) $(1.28) $ (2.72)
Pro forma....................................... $(0.40) $(1.31) $ (3.12)
</TABLE>
Pro forma compensation expense is recognized for the fair value of each
option estimated on the date of grant using the Black-Scholes multiple option
pricing model. The following assumptions were used for option grants in 1996,
1997 and 1998, respectively: expected volatility 33%, 39% and 67%; risk-free
interest rates 6.7%, 6.3% and 4.8%; expected terms of 4.25, 4.25 and 9.16
years; and zero dividend yield. The preceding assumptions for 1996 and 1997
were based on facts and circumstances directly related to ATL.
Under the 1998 NOE Plan, 1998 Plan, and MIC Plan, 1,700,000 total shares of
common stock are authorized primarily for issuance upon exercise of stock
options at prices equal to the fair market value of the Company's common shares
at the date of grant. As of December 31, 1998, 507,635 shares were available
for grant under the aforementioned plans. Stock options are exercisable at 25%
each year over a four-year vesting period and have a ten-year term from the
grant date.
Under the Director Plan, 125,000 shares of common stock are authorized for
the issuance of stock options at prices equal to the fair market value of the
Company's common shares at the date of grant. Option grants under the Director
Plan occurred during the months of June and July 1998. At December 31, 1998,
40,000 shares were available for grant under this Plan. Stock options are
exercisable and vest in full one year following their grant date provided the
optionee has continued to serve as a SONO Director. Each option expires on the
earlier of ten years from the grant date or ninety days following the
termination of a director's service as a SONO Director.
SONO also has an Adjustment Plan, which includes options granted in
connection with the dividend distribution occurring on April 6, 1998. As part
of the Distribution, existing ATL option holders received one
F-13
<PAGE>
SonoSite, Inc.
(A Development Stage Enterprise)
Notes to the Financial Statements--(Continued)
SONO option for every six ATL options held. There was no change to the
intrinsic value of the option grant, ratio of exercise price to market value,
vesting provisions or option period as a result of the Distribution. Total
options to purchase shares outstanding under this plan as of December 31, 1998
are 270,453.
Also as a result of the Distribution, restricted shares totaling 38,242,
51,788 and 60,930, as determined using the exchange ratio of one SONO
restricted share for every three ATL restricted shares, were outstanding as of
December 31, 1996, 1997 and 1998, respectively.
Summary of stock option activity
Prior to the Distribution Date, SONO had no stock option plans specifically
identified as SONO plans. All stock options granted through that date were part
of ATL options and therefore shares and weighted average exercise prices as of
December 31, 1996 and 1997 are not included in the disclosure herein because it
would not be meaningful. The following table presents summary stock option
activity for the year ended December 31, 1998:
<TABLE>
<CAPTION>
Weighted average
Shares exercise price
------ ----------------
(Shares presented in
thousands)
<S> <C> <C>
Outstanding, beginning of year.................... -- --
Adjustment Plan grants.......................... 289 $5.39
Non-Adjustment Plan grants...................... 1,290 $7.28
Exercised....................................... (2) $3.34
Cancelled....................................... (29) $6.56
-----
Outstanding, end of year.......................... 1,548 $6.95
Exercisable, end of year.......................... 185
Weighted average fair value of options granted
(excludes Adjustment Plan)....................... $5.58
</TABLE>
The following is a summary of stock options outstanding:
<TABLE>
<CAPTION>
Options outstanding Options exercisable
----------------------------------- -----------------------
Weighted
average Weighted Weighted
Number remaining average Number average
Range of outstanding contractual exercise exercisable exercise
exercise prices (in thousands) life price (in thousands) price
--------------- -------------- ----------- -------- -------------- --------
<S> <C> <C> <C> <C> <C>
$ 1.64 - $ 6.89 260 6.35 $4.67 147 $3.70
$ 6.94 - $ 6.94 1,026 9.34 $6.94 20 $6.94
$ 6.97 - $12.78 262 9.57 $9.26 18 $8.52
----- ---
1,548 8.88 $6.95 185 $4.52
===== ===
</TABLE>
Stock Purchase Rights
On April 6, 1998, SONO and first Chicago Trust Company of New York entered
into a Rights Agreement. The Rights Agreement has certain antitakeover effects
which will cause substantial dilution to a person or
F-14
<PAGE>
SonoSite, Inc.
(A Development Stage Enterprise)
Notes to the Financial Statements--(Continued)
group that attempts to acquire SONO, however, it will not interfere with any
merger or other business combination approved by the SONO Board of Directors
("Board").
Under the terms of the Rights Agreement, holders of SONO common stock also
hold Rights exercisable in certain circumstances discussed below. Holders of
these Rights may purchase 1/100th of a share of Series A Participating
Cumulative Preferred Stock, par value of $1.00, at a price equal to four times
the average high and low sales prices of SONO common stock quoted on the Nasdaq
National Market for each of the ten trading days commencing on the sixth
trading day following April 6, 1998. Circumstances under which these Rights are
exercisable involve acquisition or knowledge of expected acquisition or tender
of 15% or more of the outstanding SONO common stock. In addition, the Board may
redeem all, but not part, of the Rights outstanding for consideration in cash
or common stock at a price equal to $.01 per Right.
Separate certificates for Rights will not be distributed. SONO common stock
certificates serve as evidence of the Rights. Prior to exercise of the Rights
and in accordance with the terms of the Rights Agreement, the Rights have no
voting or dividend value. If the Rights are not exercised prior to April 5,
2008, they expire with no consideration for the expiration being provided to
the holder of the Right.
6. Income Taxes
For income tax purposes, SONO's results through the Distribution Date were
included in the consolidated Federal income tax return of ATL and, accordingly,
the net operating loss generated prior to the Distribution Date will not be
available to SONO for use in periods subsequent to the Distribution Date. For
the period from the Distribution Date through December 31, 1998, SONO has
accumulated a net operating loss carryforward of approximately $10.3 million.
Utilization of this carryforward expires in 2018.
Because SONO is a development stage enterprise and has incurred losses since
its inception, a valuation allowance entirely offsetting deferred tax assets
has been established, thereby eliminating any deferred tax benefit for the year
ended December 31, 1998.
The tax effects of temporary differences and carryforwards that give rise to
significant portions of the deferred tax assets and deferred tax liabilities at
December 31, 1998 are as follows:
<TABLE>
<CAPTION>
(in thousands)
<S> <C>
Deferred tax assets
Net operating loss carryforwards.......................... $ 3,508
Other..................................................... 75
-------
Gross deferred tax assets................................... 3,583
Valuation allowance......................................... (3,583)
-------
Net deferred tax assets..................................... $ --
=======
</TABLE>
As of December 31, 1997, tax effects of temporary differences, which
individually and in aggregate were not significant, as SONO's net operating
losses were included in ATL, were entirely offset by a valuation allowance.
7. Employee Benefit Plans
401(k) Retirement Savings Plan ("401k Plan")
All employees of SONO are eligible to participate in the 401k Plan. Terms of
the 401k Plan permit an employee to contribute up to a maximum of 16% of an
employee's annual compensation on a post-tax or
F-15
<PAGE>
SonoSite, Inc.
(A Development Stage Enterprise)
Notes to the Financial Statements--(Continued)
pretax basis, up to the maximum permissible by the Internal Revenue Service
(IRS) during any plan year. Contributions exceeding the IRS limitation may be
made only on a post-tax basis. SONO matches each employee's contribution in
increments equivalent to 100% for the first 3% and 50% for the second 3% of the
contribution. For the year ended December 31, 1998, the Company contributed
$98,000 to the 401k Plan in accordance with the Plan's terms. Employees
immediately vest in the contributions the employee makes. Vesting in SONO's
contribution on behalf of the employee occurs at equal increments at the end of
the first five years of an employee's service with the Company or ATL.
8. Commitments and contingencies
Operating leases
The Company leases office space and certain equipment under noncancelable
operating leases. Future minimum payments under these leases as of December 31,
1998 are as follows:
<TABLE>
<S> <C>
1999............................................................ $ 294,442
2000............................................................ 305,907
2001............................................................ 318,660
2002............................................................ 312,694
2003............................................................ 183,554
Thereafter...................................................... --
----------
$1,415,257
==========
</TABLE>
Prior to November 1998, SONO utilized facility space within ATL and was
charged rent expense for the space occupied. Subsequently, SONO vacated the ATL
facility and moved into a separate facility. Rent expense for the year-ended
December 31, 1998 was $243,000, which represents ATL charges of $128,000 and
the current location charges of $115,000. The Company did not incur any rent
expense prior to the Distribution Date as its operations were in ATL's owned
facility. In addition, rent expense for the year ended 1998 is not indicative
of future rent expense as SONO no longer occupies the shared ATL space.
Capital lease obligations
The Company has entered into certain long-term obligations to finance the
purchase of capital equipment as part of its normal business operations. Terms
of the obligations range from eighteen to thirty-six months and have interest
rates ranging between 12% and 16%. Obligations are secured by underlying
assets. The following is a summary of the capital lease obligations and future
minimum payments under capital lease obligations as of December 31, 1998:
<TABLE>
<S> <C>
1999........................................................... $ 476,198
2000........................................................... 443,488
2001........................................................... 139,567
----------
Total lease payments........................................... 1,059,253
Less amount representing interest.............................. (189,494)
----------
Present value of net minimum capital lease payments............ 869,759
Less -- current portion........................................ (388,795)
----------
Long-term obligations -- excluding current portion............. $ 480,964
==========
</TABLE>
F-16
<PAGE>
SonoSite, Inc.
(A Development Stage Enterprise)
Notes to the Financial Statements--(Continued)
Other Commitments
As part of the Company's agreements with ATL, ATL may procure resources and
material expected to be used for the manufacture of SONO products in accordance
with a production schedule provided by SONO. In the event these items are not
used in the quantities submitted as part of the production schedule or material
becomes obsolete as a result of production timing, SONO would be responsible
for compensating ATL for these procurements.
Contingencies
SONO is a development stage enterprise and has obtained Section 510(k)
clearance for a prototype of its initial product from the U.S. Food and Drug
Administration ("FDA"). SONO has applied for Section 510(k) clearance from the
FDA for the commercial version of its initial product. However, there is no
guarantee the FDA will grant Section 510(k) clearance on this pending or any
future applications. Additionally, international sales and distribution are
dependent upon the Company obtaining approvals from certain foreign regulatory
agencies. There are no guarantees that such approvals will be attained on a
timely basis, if at all.
9. Segment Reporting
SONO currently has no revenue from operations. All revenue to date is
related to the DARPA project. Expenses incurred to date are reported according
to their expense category. No further segment segregation is considered
meaningful at this point in time.
10. Subsequent Event
Receipt of $12.0 million from ATL Ultrasound
On January 15, 1999, SONO received $12.0 million cash in accordance with the
Distribution Agreement between the Company and ATL. No further funding from ATL
in connection with the Distribution is provided for.
F-17
<PAGE>
[Inside back cover of prospectus]
"SonoSite" appears as a banner across the bottom of the page, below a color
picture of one of SonoSite's ultrasound devices, with a curved array transducer
attached to the device. A border around the picture contains information
regarding SonoSite's devices. At the top left hand corner of the border is text
introduced by the heading, "Compact dimensions" followed by a colon. On separate
lines, below the heading, the text reads "13 inches H", "7.5 inches W", "2.5
inches D" and "5.2 lbs with one transducer". At the top right hand corner of the
border is text introduced by the heading, "Imaging Modes" followed by a colon.
On separate lines, below the heading, the text reads "2D", "Power Doppler" and
"Proprietary Auto-Focus Capability". At the bottom right hand corner of the
border is text introduced by the heading, "Market applications" followed by a
colon. On separate lines, below the heading, the text reads "Gynecology",
"Obstetrics", "Emergency Medicine", "Cardiology" and "Whole Body Imaging". At
the bottom left hand corner of the border is text introduced by the heading,
"Transducers" followed by a colon. On separate lines, below the heading, the
text reads, "Curved array for general purpose obstetrical and whole body imaging
applications." and "Transvaginal broadband array for gynecological
applications."
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Prospectus dated , 1999
[SONOSITE LOGO]
2,500,000 Shares
Common Stock
Vector Securities International, Inc. Prudential Securities
- -------------------------------------------------------------------------------
Table of Contents
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary...................... 3
Risk Factors............................ 5
Forward-Looking Statements.............. 11
Use of Proceeds......................... 12
Price Range of Common Stock............. 12
Dividend Policy......................... 12
Capitalization.......................... 13
Dilution................................ 14
Selected Financial Data................. 15
Management's Discussion and Analysis of
Financial Condition and Results of
Operations............................. 16
Business................................ 19
Management.............................. 32
Certain Transactions.................... 42
Principal Shareholders.................. 44
Description of Capital Stock............ 45
Shares Eligible for Future Sale......... 48
</TABLE>
<TABLE>
<CAPTION>
Page
----
<S> <C>
Underwriting............................. 49
Legal Matters............................ 51
Experts.................................. 51
Additional Information................... 51
Index to the Financial Statements........ F-1
</TABLE>
---------------
We have not authorized any dealer, salesperson or other person to provide any
information or to represent anything not contained in this prospectus. You
must not rely on any unauthorized information or representations. This
prospectus is not an offer to sell or solicitation of an offer to buy these
shares of common stock in jurisdictions where it is unlawful to do so. The
information contained in this prospectus is accurate only as of the date of
this prospectus.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution
The following table sets forth the costs and expenses, other than the
underwriting discount and commissions, payable by the registrant in connection
with the sale of the common stock being registered hereby. All amounts shown
are estimates, except the Securities and Exchange Commission registration fee,
the NASD filing fee and the Nasdaq National Market notification fee.
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee................ $ 9,392
NASD filing fee.................................................... 4,166
Nasdaq National Market notification fee............................ 17,500
Blue Sky fees and expenses......................................... 15,000
Printing and engraving expenses.................................... 150,000
Legal fees and expenses............................................ 200,000
Accounting fees and expenses....................................... 100,000
Transfer Agent and Registrar fees.................................. 10,000
Miscellaneous expenses............................................. 68,942
--------
Total............................................................ $575,000
========
</TABLE>
Item 14. Indemnification of Directors and Officers
Sections 23B.08.500 through 23B.08.600 of the Washington Business
Corporation Act (the "WBCA") authorize a court to award, or a corporation's
board of directors to grant, indemnification to directors and officers on terms
sufficiently broad to permit indemnification under certain circumstances for
liabilities arising under the Securities Act of 1933, as amended. Article VI of
the registrant's restated articles of incorporation (Exhibit 3.1 to this
registration statement) provides for indemnification of the registrant's
directors, officers, employees and agents to the maximum extent permitted by
Washington law. The directors and officers of the registrant also may be
indemnified against liability they may incur for serving in that capacity
pursuant to a liability insurance policy maintained by the registrant for such
purpose.
Section 23B.08.320 of the WBCA authorizes a corporation to limit a
director's liability to the corporation or its shareholders for monetary
damages for acts or omissions as a director, except in certain circumstances
involving intentional misconduct, knowing violations of law or illegal
corporate loans or distributions, or any transaction from which the director
personally receives a benefit in money, property or services to which the
director is not legally entitled. Article V of the registrant's restated
articles contains provisions implementing, to the fullest extent permitted by
Washington law, such limitations on a director's liability to the registrant
and its shareholders.
The underwriting agreement will provide for indemnification by the
underwriters of the registrant and its executive officers and directors, and by
the registrant of the underwriters, for certain liabilities, including
liabilities arising under the Securities Act, in connection with matters
specifically provided in writing by the underwriters for inclusion in this
registration statement.
Item 15. Recent Sales of Unregistered Securities
None.
II-1
<PAGE>
Item 16. Exhibits and Financial Statement Schedules
(a) Exhibits
<TABLE>
<CAPTION>
Number Description
------- -----------
<C> <S>
1.1* Form of Underwriting Agreement
3.1+ Restated Articles of Incorporation of the registrant
3.2** Certificate of Designation of Series A Participating Cumulative
Preferred Stock
3.3** Bylaws of the registrant
4.1+ Rights Agreement between First Chicago Trust Company and the
registrant, dated April 6, 1998
5.1* Opinion of Perkins Coie llp as to the legality of the shares
10.1+ Amended and Restated 1998 Option, Stock Appreciation Right, Restricted
Stock, Stock Grant and Performance Unit Plan
10.2+ Terms of Stock Option Grant Program for Nonemployee Directors under
the SonoSite, Inc. 1998 Option, Stock Appreciation Right, Restricted
Stock, Stock Grant and Performance Unit Plan
10.3*** 1998 Nonofficer Employee Stock Option Plan
10.4** Nonemployee Director Stock Option Plan
10.5*** Management Incentive Compensation Plan
10.6** Adjustment Plan
10.7+ Form of Senior Management Employment Agreement between the registrant
and each of Kevin M. Goodwin, Allen W. Guisinger, David H. Gusdorf,
Jens U. Quistgaard, Ph.D., Donald F. Seaton III and Douglas W. Tefft
10.8+ Distribution Agreement between ATL Ultrasound, Inc. and the
registrant, effective as of April 6, 1998
10.9+ Technology Transfer and License Agreement between ATL Ultrasound, Inc.
and the registrant, effective as of April 6, 1998, as amended
10.10+ OEM Supply Agreement between ATL Ultrasound, Inc. and the registrant,
effective as of April 6, 1998, as amended
10.11+ Employee Benefits Agreement between ATL Ultrasound, Inc. and the
registrant, effective as of April 6, 1998
10.12+ Service Agreement between ATL Ultrasound, Inc. and the registrant,
effective as of April 6, 1998
10.13+ Lease Agreement between TMT-Bothell, LLC and the registrant, dated May
9, 1998
23.1 Consent of KPMG llp, independent auditors
23.2* Consent of Perkins Coie llp (contained in the opinion filed as Exhibit
5.1 hereto)
24.1+ Power of Attorney (contained on signature page)
24.2 Power of Attorney for Jacques Souquet
27.1+ Financial Data Schedule
</TABLE>
- --------
* To be filed by amendment.
** Incorporated by reference to the designated exhibit included in the
registrant's registration statement on Form 10 (SEC File No. 000-23791).
*** Incorporated by reference to the designated exhibit included in the
registrant's annual report on Form 10-K for the year ended December 31,
1998 (SEC File No. 000-23791).
+ Previously filed.
(b) Financial Statement Schedules
All schedules are omitted because they are inapplicable or the requested
information is shown in the Financial Statements of the registrant or related
notes thereto.
II-2
<PAGE>
Item 17. Undertakings
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
registrant pursuant to the provisions described in Item 14, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question of
whether such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act, the
information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of
this registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act,
each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall
be deemed to be the initial bona fide offering thereof.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
registrant has duly caused this Amendment No. 1 to Registration Statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of Bothell, State of Washington, on the 19th day of March, 1999.
SONOSITE, INC.
/s/ Kevin M. Goodwin
By: _________________________________
Kevin M. Goodwin
President and Chief Executive
Officer
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Amendment No. 1 to Registration Statement has been signed by the following
persons in the capacities indicated below on the 19th day of March, 1999.
<TABLE>
<CAPTION>
Signature Title
--------- -----
<S> <C>
*Kirby L. Cramer Chairman of the Board
____________________________________
Kirby L. Cramer
/s/ Kevin M. Goodwin President, Chief Executive Officer and Director
____________________________________ (Principal Executive Officer)
Kevin M. Goodwin
/s/ Donald F. Seaton III Vice President-Business Development, Chief
____________________________________ Financial Officer, Secretary and Treasurer
Donald F. Seaton III (Principal Financial and Accounting Officer)
*Edward V. Fritzky Director
____________________________________
Edward V. Fritzky
*Steven R. Goldstein, M.D. Director
____________________________________
Steven R. Goldstein, M.D.
*William G. Parzybok. Jr. Director
____________________________________
William G. Parzybok. Jr.
*Jeffrey Pfeffer, Ph.D. Director
____________________________________
Jeffrey Pfeffer, Ph.D.
*Dennis A. Sarti, M.D. Director
____________________________________
Dennis A. Sarti, M.D.
/s/ Jacques Souquet Director
____________________________________
Jacques Souquet
/s/ Donald F. Seaton III
*By: _______________________________
Donald F. Seaton III
Attorney-in-Fact
</TABLE>
II-4
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Number Description
------ -----------
<C> <S>
1.1* Form of Underwriting Agreement
3.1+ Restated Articles of Incorporation of the registrant
3.2** Certificate of Designation of Series A Participating Cumulative
Preferred Stock
3.3** Bylaws of the registrant
4.1+ Rights Agreement between First Chicago Trust Company and the
registrant, dated April 6, 1998
5.1* Opinion of Perkins Coie LLP as to the legality of the shares
10.1+ Amended and Restated 1998 Option, Stock Appreciation Right, Restricted
Stock, Stock Grant and Performance Unit Plan
10.2+ Terms of Stock Option Grant Program for Nonemployee Directors under
the SonoSite, Inc. 1998 Option, Stock Appreciation Right, Restricted
Stock, Stock Grant and Performance Unit Plan
10.3*** 1998 Nonofficer Employee Stock Option Plan
10.4** Nonemployee Director Stock Option Plan
10.5*** Management Incentive Compensation Plan
10.6** Adjustment Plan
10.7+ Form of Senior Management Employment Agreement between the registrant
and each of Kevin M. Goodwin, Allen W. Guisinger, David H. Gusdorf,
Jens U. Quistgaard, Ph.D., Donald F. Seaton III and Douglas W. Tefft.
10.8+ Distribution Agreement between ATL Ultrasound, Inc. and the
registrant, effective as of April 6, 1998
10.9+ Technology Transfer and License Agreement between ATL Ultrasound, Inc.
and the registrant, effective as of April 6, 1998, as amended
10.10+ OEM Supply Agreement between ATL Ultrasound, Inc. and the registrant,
effective as of April 6, 1998, as amended
10.11+ Employee Benefits Agreement between ATL Ultrasound, Inc. and the
registrant, effective as of April 6, 1998
10.12+ Service Agreement between ATL Ultrasound, Inc. and the registrant,
effective as of April 6, 1998
10.13+ Lease Agreement between TMT-Bothell, LLC and the registrant, dated May
9, 1998
23.1 Consent of KPMG LLP, independent auditors
23.2* Consent of Perkins Coie LLP (contained in the opinion filed as Exhibit
5.1 hereto)
24.1+ Power of Attorney
24.2 Power of Attorney for Jacques Souquet
27.1+ Financial Data Schedule
</TABLE>
- --------
* To be filed by amendment.
** Incorporated by reference to the designated exhibit included in the
registrant's registration statement on Form 10 (SEC File No. 000- 23791).
*** Incorporated by reference to the designated exhibit included in the
registrant's annual report on Form 10-K for the year ended December 31,
1998 (SEC File No. 000-23791).
+ Previously filed.
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
SonoSite, Inc.:
We consent to the use of our report included herein and to the reference to our
firm under the heading "Experts" and "Selected Financial Data" in the
prospectus.
/s/ KPMG LLP
Seattle, Washington
March 22, 1999
<PAGE>
Exhibit 24.2
POWER OF ATTORNEY
The undersigned, Jacques Souquet, hereby authorizes and appoints Kevin M.
Goodwin and Donald F. Seaton III, and each of them, with full power of
substitution and resubstitution and full power to act without the other, as his
true and lawful attorney-in-fact and agent to act in his name, place and stead
and to execute in the name and on behalf of him, individually and in each
capacity stated below, and to file, any and all amendments to this Registration
Statement, including any and all post-effective amendments and amendments
thereto and any registration statement relating to the same offering as this
Registration Statement that is to be effective upon filing pursuant to Rule
462(b) under the Securities Act of 1933, as amended, and to file the same, with
all exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in fact and
agents, and each of them, full power and authority to do and perform each and
every act and thing, ratifying and confirming all that said attorneys-in-fact
and agents or any of them or their or his substitute or substitutes may
lawfully do or cause to be done by virtue thereof.
Dated: March 19, 1999
/s/ Jacques Souquet
_____________________________________
Jacques Souquet
