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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
/x/ Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934.
For the quarterly period ended September 30, 2000
OR
/ / Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934.
For the transition period from to
COMMISSION FILE NUMBER 0-23791
SONOSITE, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
WASHINGTON 91-1405022
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER IDENTIFICATION NUMBER)
OF INCORPORATION OR ORGANIZATION)
21919 - 30th Drive SE
Bothell, WA 98021-3904
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(425) 951-1200
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
----------
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes /X/ No / /
As of November 6, 2000, there were 9,583,599 shares of the registrant's $.01 par
value Common Stock outstanding.
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SONOSITE, INC.
QUARTERLY REPORT ON FORM 10-Q
TABLE OF CONTENTS
<TABLE>
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Page No.
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Part I Financial Information
Item 1. Financial Statements (unaudited)
Condensed Balance Sheets--September 30, 2000 and December 31, 1999............................. 3
Condensed Statements of Operations--Quarter and three quarters ended September 30, 2000 and
1999........................................................................................... 4
Condensed Statements of Cash Flows--Three quarters ended September 30, 2000 and 1999........... 5
Notes to Condensed Financial Statements........................................................ 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.......... 8
Item 3. Quantitative and Qualitative Disclosures about Market Risk..................................... 17
Part II Other Information
Item 6. Exhibits and Reports on Form 8-K............................................................... 18
Signature...................................................................................... 19
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PART I: FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
SONOSITE, INC.
CONDENSED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
ASSETS
SEPTEMBER 30, DECEMBER 31,
2000 1999
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<S> <C> <C>
Current assets:
Cash and cash equivalents $ 8,342,947 $ 33,252,112
Short-term investment securities 23,204,082 16,594,050
Accounts receivable, less allowance for doubtful
accounts of $307,488 and $96,344, respectively 9,965,862 7,856,547
Receivable from related parties 892,657 400,009
Accrued interest receivable 544,286 484,684
Inventories 8,889,976 1,925,977
Prepaid expenses and other assets 1,035,787 692,489
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Total current assets 52,875,597 61,205,868
Property and equipment, net 6,360,085 4,845,860
Long-term investment securities 1,996,914 3,163,501
Investment in affiliates 683,598 429,843
Other assets 805,796 81,157
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Total assets $ 62,721,990 $ 69,726,229
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,972,552 $ 2,718,276
Accrued expenses 2,437,897 2,483,754
Current portion of long-term obligations 396,833 387,577
Deferred liabilities 592,641 292,787
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Total current liabilities 6,399,923 5,882,394
Long-term obligations, less current portion 770,456 134,696
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Total liabilities 7,170,379 6,017,090
Commitments and contingencies
Shareholders' equity:
Preferred stock, $1.00 par value
Authorized shares - 6,000,000
Issued and outstanding shares - none -- --
Common stock, $.01 par value:
Authorized shares - 50,000,000
Issued and outstanding shares:
As of September 30, 2000 - 9,492,172
As of December 31, 1999 - 9,209,633 94,922 92,096
Additional paid-in-capital 108,741,325 106,227,784
Deferred stock compensation (10,618) (29,393)
Accumulated deficit (53,261,307) (42,520,588)
Accumulated other comprehensive loss (12,711) (60,760)
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Total shareholders' equity 55,551,611 63,709,139
============= =============
Total liabilities and shareholders' equity $ 62,721,990 $ 69,726,229
============= =============
</TABLE>
SEE ACCOMPANYING NOTES.
3
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SONOSITE, INC.
CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
QUARTER ENDED THREE QUARTERS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2000 1999 2000 1999
----------- ----------- ------------ ------------
<S> <C> <C> <C> <C>
Sales revenue $ 8,311,347 $ 745,438 $ 25,330,507 $ 745,438
Cost of sales 4,674,473 507,571 14,271,651 507,571
----------- ----------- ------------ ------------
Gross margin on sales revenue 3,636,874 237,867 11,058,856 237,867
Grant revenue -- -- -- 124,506
Operating expenses:
Research and development 3,096,329 4,072,731 8,491,374 11,139,820
Sales and marketing 4,642,158 2,187,057 11,857,163 6,687,916
General and administrative 972,966 573,977 3,122,455 1,785,825
----------- ----------- ------------ ------------
Total operating expenses 8,711,453 6,833,765 23,470,992 19,613,561
Other income, net 494,802 342,304 1,671,417 849,262
----------- ----------- ------------ ------------
Net loss $(4,579,777) $(6,253,594) $(10,740,719) $(18,401,926)
=========== =========== ============ ============
Basic and diluted net loss per share $ (0.49) $ (0.79) $ (1.15) $ (2.80)
=========== =========== ============ ============
Weighted average shares used in
computation of basic and diluted
net loss per share 9,426,020 7,883,109 9,326,673 6,574,365
=========== =========== ============ ============
</TABLE>
SEE ACCOMPANYING NOTES.
4
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SONOSITE, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE QUARTERS ENDED
SEPTEMBER 30,
------------------------------
2000 1999
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<S> <C> <C>
Operating activities:
Net loss $(10,740,719) $(18,401,926)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 1,658,711 928,932
Equity in loss of affiliates 246,245 --
Amortization of premium on investment securities 69,895 --
Amortization of deferred compensation 18,775 262,506
Changes in operating assets and liabilities:
Increase in accounts receivable (2,109,315) (726,863)
Increase in receivable from related parties (492,648) --
Increase in interest receivable (59,602) --
Increase in inventories (6,963,999) (1,646,841)
Increase in prepaid expenses (343,298) (235,789)
Increase in other assets (351,752) --
Increase in accounts payable 254,276 682,385
(Decrease)/increase in accrued expenses (45,857) 494,133
Increase in deferred liabilities 299,854 2,751
------------ ------------
Net cash used in operating activities (18,559,434) (18,640,712)
Investing activities:
Purchase of investments (38,465,183) (38,008,661)
Proceeds from maturities of investments 32,999,892 5,345,000
Purchase of equipment (2,004,025) (2,091,040)
Proceeds on sale of equipment 37,142 --
Investment in affiliate (500,000) --
Other assets (372,887) (17,819)
------------ ------------
Net cash used in investing activities (8,305,061) (34,772,520)
Financing activities:
Decrease in checks drawn in excess of bank balances -- (601,629)
Repayment of long-term obligations (561,037) (235,674)
Proceeds from sale of common stock, net of issuance costs -- 35,526,255
Exercise of stock options 2,516,367 226,503
Contributions from ATL Ultrasound -- 12,000,000
------------ ------------
Net cash provided by financing activities 1,955,330 46,915,455
Net change in cash (24,909,165) (6,497,777)
Cash and cash equivalents at beginning of period 33,252,112 7,525,762
============ ============
Cash and cash equivalents at end of period $ 8,342,947 $ 1,027,985
============ ============
Supplemental disclosure of cash flow information:
Cash paid for interest $ 67,739 $ 101,420
============ ============
Supplemental disclosure of non-cash investing and financing activities:
Assets acquired through long-term obligations $ 1,206,053 $ --
============ ============
Unrealized gain/(loss) on investment $ 48,049 $ (52,670)
============ ============
</TABLE>
SEE ACCOMPANYING NOTES.
5
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SONOSITE, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
INTERIM FINANCIAL INFORMATION
The information contained herein has been prepared in accordance with
instructions for Form 10-Q and Article 10 of Regulation S-X. The information
furnished reflects, in the opinion of SonoSite, Inc. management, all adjustments
necessary (which are of a normal and reoccurring nature) for a fair presentation
of the results for the interim periods presented. The results of operations for
the quarter and three quarters ended September 30, 2000 are not necessarily
indicative of our results to be expected for the entire year ending December 31,
2000 or for any other fiscal period. These financial statements do not include
all disclosures required by generally accepted accounting principles. For a
presentation including all disclosures required by generally accepted accounting
principles, these financial statements should be read in conjunction with the
audited financial statements for the year ended December 31, 1999, included in
our Annual Report on Form 10-K.
SonoSite began operations in 1994 as a project of ATL Ultrasound, Inc., or ATL.
The project was chartered to develop the design and specifications for a
hand-carried ultrasound device. From inception 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 SonoSite as an independent
publicly owned company. This transaction was effected through a tax-free
dividend distribution of SonoSite's shares to ATL shareholders as of April 6,
1998. ATL shareholders received one share of SonoSite common stock for every
three shares of ATL common stock held. In addition, ATL option holders were
granted one option to purchase SonoSite shares for every six options to purchase
ATL shares.
The financial statement information for periods subsequent to SonoSite's
spin-off as an independent company on April 6, 1998 consists entirely of
SonoSite's activity as a separate company.
INVESTMENTS
Investment securities consist of high-grade corporate debt. While our intent is
to hold our securities until maturity, we classified all securities as
available-for-sale, as the sale of such securities may be required prior to
maturity to implement management strategies. These securities are carried at
fair value, with the unrealized gains and losses reported as a component of
other comprehensive income or loss until realized. Realized gains and losses, if
any, from the sale of available-for-sale securities are determined on a specific
identification basis.
A decline in market value of any available-for-sale security below cost that is
determined to be other than temporary results in a revaluation of its carrying
amount to fair value. The impairment is charged to earnings and a new cost basis
for the security is established. Premiums and discounts are amortized or
accreted over the life of the related security as an adjustment to yield using
the effective interest method. Interest income is recognized when earned.
CONCENTRATIONS
In the ordinary course of business, we grant credit to a broad customer base. Of
the accounts receivable balance as of September 30, 2000, 52% and 48% were
receivable from domestic and international parties, respectively. In addition,
17% of the total accounts receivable balance outstanding as of September 30,
2000 was from a single Japanese customer.
For the quarter ended September 30, 2000, 55% and 45% of sales revenue related
to domestic and international revenue, respectively. Of this revenue, two single
customers accounted for 10% or greater of our total sales revenue as follows:
12% located in the United States and 18% located in Japan. Combined total sales
revenue for these two customers was $2.5 million for the quarter ended September
30, 2000.
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For the three quarters ended September 30, 2000, 44% and 56% of sales revenue
related to domestic and international revenue, respectively. Of this revenue,
two single customers accounted for 10% or greater of our total sales revenue as
follows: 17% located in the United States and 32% located in Japan. Combined
total sales revenue for these two customers was $12.5 million for the three
quarters ended September 30, 2000.
INVENTORIES
Inventories are stated at the lower of standard cost, which approximates actual
cost on a first-in, first-out method, or market. Inventories as of September 30
consist of the following:
2000 1999
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Raw material $ 644,714 $ 407,307
Finished goods 8,245,262 1,518,670
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Total $8,889,976 $1,925,977
========== ==========
ACCUMULATED OTHER COMPREHENSIVE LOSS
Other comprehensive losses consist entirely of net unrealized losses on
investments for the quarter and three quarters ended September 30, 2000. For the
quarter and three quarters ended September 30, 2000, we had an unrealized gain
of $79,000 and $48,000, respectively. For the quarter and three quarters ended
September 30, 1999, we had an unrealized gain of $40,000 and an unrealized loss
of $53,000, respectively. Comprehensive loss was $4.5 million and $6.3 million
for the quarters ended September 30, 2000 and 1999, respectively, and $10.7
million and $18.5 million for the three quarters ended September 30, 2000 and
1999, respectively.
NET LOSS PER SHARE
Basic and diluted net loss per share were computed by dividing the net loss by
the weighted average shares outstanding.
Options to purchase SonoSite shares and unvested restricted SonoSite shares were
not included in the computations of diluted net loss per share because to do so
would be antidilutive. As of September 30, 2000 and 1999, outstanding SonoSite
options and unvested restricted shares, both issued by ATL in the dividend
distribution that effected the spin-off, totaled 167,238 and 244,994 and
outstanding stock options issued by SonoSite as of September 30, 2000 and 1999
totaled 1,957,203 and 1,884,015.
NEW ACCOUNTING PRONOUNCEMENTS
In December 1999, the Securities and Exchange Commission (SEC) released Staff
Accounting Bulletin No. 101 (SAB 101), "Revenue Recognition in Financial
Statements", which must be applied in the fourth quarter of 2000. SAB 101
provides guidance on revenue recognition and the SEC staff's views on the
application of accounting principles to selected revenue recognition issues. We
presently do not believe the impact from the guidance will have a significant
effect on our financial statements.
In July we implemented the Financial Accounting Standards Board Interpretation
No. 44 (FIN 44), "Accounting for Certain Transactions Involving Stock
Compensation." FIN 44 clarified the application of Accounting Principles Board
Opinion No. 25 (APB 25). Specifically, FIN 44 clarified the definition of
"employee" for purposes of applying APB 25, the accounting consequence of
various modifications to the terms of a previously fixed stock option or award,
and the accounting for an exchange of stock compensation awards in a business
combination. There was no impact on our financial statements as a result of the
implementation.
In July 2000, the Emerging Issues Task Force issued a conclusion on Issue No.
00-10 (EITF 00-10), "Accounting for Shipping and Handling Fees and Costs," which
must be applied in the fourth quarter of 2000. EITF 00-10 requires that amounts
billed to a customer for shipping and handling costs be classified as revenue.
We currently net
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amounts billed to customers for shipping and handling against the related costs
incurred and are evaluating the impact that the implementation of EITF 00-10
will have on our financial statements.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Certain statements in this Form 10-Q contain forward-looking statements.
Forward-looking statements provide our current expectations or forecast of
future events. Our operations involve risks and uncertainties, which may cause
actual results to differ materially from those predicted in the forward-looking
statements. If any of our assumptions on which the statements are based prove
incorrect or should unanticipated circumstances arise, our actual results could
materially differ from historical and expected results. Consequently, no
forward-looking statements can be guaranteed and our actual results may differ
materially. The differences could be caused by a number of factors or
combination of factors, including, but not limited to, the "Important Factors
That May Affect Our Business, Our Results of Operations and Our Stock Price"
described herein and in our Securities and Exchange Commission filings from time
to time. We undertake no obligation to update any forward-looking statements,
whether as a result of new information, future events or otherwise.
OVERVIEW
SonoSite commenced operations in 1994 as a project of ATL. We were chartered to
develop the design and specifications for a highly portable ultrasound device
and other highly portable ultrasound products for potential use for diagnostic
imaging in a multitude of clinical and field settings. From the time we started
on this project until we became an independent company, we were organized as a
separate division within ATL. On February 2, 1998, the ATL 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 in SonoSite for every three shares of ATL stock held on April 6, 1998.
In addition, ATL option holders were granted one option to purchase SonoSite
shares for every six options to purchase ATL shares. ATL retained no ownership
in SonoSite following the spin-off.
We finalized the development and commercialization of our first products in
1999, recognizing our initial product sales in September 1999. Our products are
comprised of two highly portable imaging platforms, the SonoSite 180(TM) and
SonoHeart(TM), which may be used with four transducers.
Since we started operations, we have incurred losses. We expect to continue to
incur operating losses until our product sales generate sufficient revenue to
fund our continuing operations. However, we may not generate sufficient revenue
to fund our operations in future periods.
RESULTS OF OPERATIONS
PRODUCT SALES
During the quarter and three quarters ended September 30, 2000, product revenue
was $8.3 million and $25.3 million. This is an increase of $7.6 million and
$24.6 million over the quarter and three quarters ended September 30, 1999, both
of which had minimal product revenue of $700,000 due to our initial product
shipments not occurring until September 1999. Product revenues are generally
recognized at the time of shipment. As of September 30, 2000, our products
included two platforms, the SonoSite 180 and SonoHeart, which, when used in
conjunction with one of our four transducers, may be used in a variety of
applications. Our transducers include a curved array transducer (C60), for
abdominal imaging, an intra-cavital transducer (ICT) for transvaginal and
intra-cavital imaging, a microconvex (C15) for cardiac imaging and a linear
array (L38) for use in radiology, emergency medicine and vascular imaging. In
future quarters, we expect to expand our transducer offerings to include a
neonatal transducer for use in pediatric applications. We anticipate that
product revenues in the fourth quarter will increase over the third quarter.
GRANT REVENUE
There was no grant revenue for the three quarters ended September 30, 2000.
There also was no grant revenue for the quarter ended September 30, 1999. For
the three quarters ended September 30, 1999, grant revenue was $125,000. This
revenue was recognized in accordance with terms of our contract with the Defense
Department and was generally tied to achieving technological milestones. As of
the end of March 1999, we had completed the
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project work and achieved all technical milestones under the contract. We expect
no future revenue under the terms of the Defense Department contract.
COST OF SALES AND GROSS MARGIN ON SALES REVENUE
Cost of sales for the quarter and three quarters ended September 30, 2000, were
$4.7 million and $14.3 million. This is an increase of $4.2 million and $13.8
million over the comparable periods in 1999. The increase is due to the fact
that our initial product shipments, which were minimal, began in September of
1999.
Gross margins for the same periods were $3.6 million and $11.1 million, each
representing 44% of sales revenue during the period. This is an increase of $3.4
million and $10.8 million over the comparable periods of 1999 when our gross
margin dollars were considerably less due to our initial shipments not occurring
until September.
We utilize distributors world-wide to sell our products and implemented a
contract direct selling force midway through the first quarter of 2000 in the
United States (in addition to our U.S. distributors). The gross margin earned
from our direct sales is higher than that received from distributor sales and
therefore as the number and percentage of direct sales increase, we expect our
margins to improve, provided product cost levels are maintained or decreased.
During the current quarter, the direct sales volume and percentage of sales
increased as anticipated, however, our product costs also increased as a result
of negative production volume variances caused by underutilization of our
productive resources. We anticipate that our direct sales will continue to
increase both in number and as a percentage of total revenue. However, we do not
expect significant increases in margins due to negative production variances
associated with production downtime during our transition of our manufacturing
lines from ATL Ultrasound to our own facility, which we expect to occur in the
fourth quarter.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses for the quarter and three quarters ended
September 30, 2000 were $3.1 million and $8.5 million. This is a decrease of
$1.0 million from the $4.1 million reported for the comparable third quarter of
1999 and a decrease of $2.6 million from the $11.1 million reported for the
three quarters ended September 30, 1999. The decrease in research and
development expenses was primarily the result of decreases in initial
development and start-up activities surrounding the design, tooling and
manufacture of our initial products and accessories. Coinciding with our initial
product shipments in September 1999, we began to include, as part of our product
costs, certain manufacturing overhead charges. Prior to our initial product
sales, these costs were charged to research and development expenses. We
anticipate that spending levels in research and development will increase in the
fourth quarter as we focus additional resources on efforts to develop and
release future products.
SALES AND MARKETING EXPENSES
Sales and marketing expenses for the quarter and three quarters ended September
30, 2000 were $4.6 million and $11.9 million. This is an increase of $2.4
million from the $2.2 million reported for the third quarter of 1999 and an
increase of $5.2 million from the $6.7 million reported for the three quarters
ended September 30, 1999. The increase was primarily the result of increases in
personnel and personnel-related expenses, including our contract direct sales
force and related commissions, and increases in advertising and promotion
activity to support existing products and continued market segment introductions
of our high-frequency system and linear transducer. We expect sales and
marketing expenses to increase as we continue promotional activity and market
research, expand our contract direct sales force, increase revenues generated
from the direct sales force and support our worldwide distribution network.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses for the quarter and three quarters ended
September 30, 2000 were $1.0 million and $3.1 million. This is an increase of
$399,000 from $574,000 reported for the third quarter of 1999 and an increase of
$1.3 million from $1.8 million reported for the three quarters ended September
30, 1999. The increase was primarily the result of additional personnel being
added to support the growing development, marketing and distribution functions,
including accounting and finance, investor relations, human resources,
facilities and
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information services. In addition, outside service fees relating to legal,
accounting and annual reporting requirements have increased. We intend to add
administrative personnel to support those activities mentioned above. As a
result, we expect that general and administrative expenses will increase in
those areas.
NET LOSS
Net losses for the quarter and three quarters ended September 30, 2000 were $4.6
million and $10.7 million. This is a decrease of $1.7 million from $6.3 million
reported for the third quarter of 1999 and a decrease of $7.7 million from $18.4
million reported for the three quarters ended September 30, 1999. The net loss
decrease during the third quarter and three quarters ended September 30, 2000
was almost entirely related to the gross margin received on product sales thus
far in 2000. These reductions to our net loss were partially offset by a net
increase in operating expenses discussed above. We expect to incur net losses in
the near term as we continue to develop the highly portable imaging markets,
enhance our selling network, expand our direct selling network into Europe,
continue research and development activity, internalize manufacturing
operations, support current and future customer needs and continue to provide
necessary administrative support for increased activities throughout SonoSite.
LIQUIDITY AND CAPITAL RESOURCES
Our capital requirements have been funded by $64.7 million raised through sales
of common stock, together with the $30 million from ATL received in connection
with our spin-off and development grants of $4.9 million from the Department of
the Navy through an award via the Advanced Research Projects Agency.
On April 6, 1998, the day we became an independent public company, ATL
contributed to our capital all cumulative expenditures made by them on our
business while we were an operating division within ATL, net of funds received
from the U.S. Navy. This book capital contribution totaled $10.6 million. In
addition, ATL contributed $30 million in cash, $18 million in April of 1998 and
$12 million in January of 1999.
During 1999, we raised additional cash through two equity offerings. In April
1999, we raised net proceeds of $35.4 million through the public issuance of
2,990,000 shares of our common stock. In November 1999, we raised additional net
proceeds of $29.3 million through the private placement of 1,250,000 shares of
our common stock.
As of September 30, 2000, cash and cash equivalents totaled $8.3 million, a
decrease of $25.0 million from $33.3 million as of December 31, 1999. This
excludes $23.2 million in short-term investment securities and $2.0 million in
investment securities with terms longer than one year as of September 30, 2000.
As of December 31, 1999, $16.6 million in short-term investment securities and
$3.2 million in investment securities with terms longer than one year were
excluded from the cash and cash equivalent balance. The decrease in cash and
cash equivalents is primarily the result of operating activities of $18.6
million and investing activities of $8.3 million. The cash used in operating
activities is primarily comprised of our net loss and increases in inventory and
accounts receivable balances. The cash used in investing activities is primarily
related to purchases of investments exceeding sales and acquisition of capital
equipment. Our cash requirements have remained significant primarily due to our
operating losses and increases in accounts receivable and inventories. Although
we anticipate losses to decrease, inventory levels to decline, and accounts
receivable balances to increase only moderately as sales revenue is generated,
we expect to continue our negative cash flow throughout the year to fund ongoing
operations and increase our direct European presence.
We believe the existing cash and cash equivalents and capital available to us
through lease financing and other sources of debt financing should be sufficient
to fund our operations through 2002. However, it is difficult to accurately
predict the amount of cash that we may require to fund operations, which will
depend in part upon factors beyond our control. These factors include product
adoption rates, revenues on our existing and new products, technical obstacles
and actual expenses associated with research and development programs,
manufacturing activities and administrative programs. If we require additional
capital, there can be no assurance that adequate financing will be available to
us on a timely basis, on favorable terms, or at all.
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IMPORTANT FACTORS THAT MAY AFFECT OUR BUSINESS, OUR RESULTS OF OPERATIONS AND
OUR STOCK PRICE
WE HAVE A LIMITED OPERATING HISTORY AND THERE ARE NUMEROUS REASONS WHY WE MAY
NOT BE SUCCESSFUL
We commenced operations as a separate company in April 1998. Prior to that, we
operated as a business unit of ATL. We shipped our first products in September
1999. Accordingly, we have a limited operating history and our prospects for
success are difficult to determine. You should consider our business and
prospects in light of the risks and uncertainties encountered by new technology
companies in making investment decisions about our common stock. There are many
reasons why we may be unsuccessful in implementing our strategy, including:
- any inability to manufacture our products with the quality and quantity
necessary to achieve profitability;
- our dependence on the market acceptance of a new platform for imaging
procedures;
- our inability to achieve market acceptance of our products for any other
reason;
- our reliance on third-party manufacturing of our products;
- our need to maintain and expand distribution networks;
- our need to obtain governmental approvals in key foreign markets;
- 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 A HISTORY OF LOSSES, WE EXPECT FUTURE LOSSES AND WE MAY NEVER BE
PROFITABLE
We have incurred net losses in each quarter since we started operations and have
only recently begun product sales. As of September 30, 2000, we had an
accumulated deficit of approximately $53.3 million, including approximately
$10.3 million that accumulated before we commenced operations as a separate
company in April 1998. We expect to incur substantial additional expenses in the
future as we continue to conduct research and development efforts on newer
generation products and increase sales and marketing efforts on our current
products. We will need to generate significant additional 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.
DEMAND FOR OUR PRODUCTS MAY FLUCTUATE, IS SUBJECT TO NUMEROUS UNCERTAINTIES AND
MAY NOT SUPPORT A PROFITABLE BUSINESS
Our products represent a new platform for imaging procedures, ultrasound in
particular, and we have only sold our products in limited quantities. The market
for hand-carried, high-performance ultrasound imaging devices is new and largely
untested. We do not know the rate at which physicians, emergency medical
personnel or other healthcare providers will adopt our products or the rate at
which they will purchase them in the future. Acceptance of our products by
medical professionals, including physicians and other medical professionals who
do not 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 medical professionals who currently do not
use ultrasonic imaging instruments. The time and cost 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 they are preferable to other means of obtaining an
ultrasound examination and that the benefits to the patient and physician
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outweigh the costs of purchasing our products. This determination will depend on
our products' image quality, cost-effectiveness, ease of use, reliability and
portability. Furthermore, acceptance of our products by physicians and other
healthcare providers may be more difficult if they are unable to obtain adequate
reimbursement from third-party payors for tests performed using our products. In
addition, while we have priced our products to be competitive in the marketplace
for lower-end ultrasound machines, our pricing policies could limit market
acceptance compared to competing products or alternative testing methods.
WE RELY ON ATL FACILITIES AND RESOURCES FOR SOME OF OUR PRODUCT MANUFACTURING
AND ANY INTERRUPTION OR DELAY AT ATL COULD HARM OUR BUSINESS
We have contracts with ATL for manufacturing services for some of our ultrasound
products. These services are critical to our ability to deliver our products to
customers. ATL may be unable to provide all the manufacturing capacity we will
need to meet our planned objectives. Although we believe that we will ultimately
be successful in transitioning sources for the services provided by ATL
elsewhere, we may lose future sales and incur additional expenses as a result of
any interruption or delay by ATL in manufacturing our products.
WE ASSUMED SOME OF THE MANUFACTURE AND ASSEMBLY OF OUR PRODUCTS BUT WE HAVE
LIMITED MANUFACTURING EXPERIENCE OR CAPABILITY
We assumed some and will continue to assume additional manufacture and assembly
of our products. 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 will also need to effectively manage raw material inventories to
minimize shortages that would disrupt manufacture. We have limited experience
with manufacturing and assembly and we may be unable to successfully meet these
challenges.
IF OUR THIRD-PARTY VENDORS FAIL TO SUPPLY US WITH THE HIGHLY SPECIALIZED PARTS
AND OTHER COMPONENTS WE NEED FOR OUR PRODUCTS, WE WILL BE UNABLE TO EFFECTIVELY
SHIP OUR PRODUCTS
We depend on third-party vendors to supply highly specialized parts, such as
custom-designed integrated circuits and some transducer components. These
vendors may experience difficulty in manufacturing these parts, or in meeting
our quality standards. In addition, these parts generally have long order
lead-times that 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 also rely on
third party vendors to supply essential parts and components that are in high
demand in other industries such as electronics manufacturing and
telecommunications equipment manufacturing. Our ability to manufacture and
deliver products in a timely manner could be harmed if these vendors fail to
maintain an adequate supply of these components.
WE DEPEND ON SINGLE-SOURCE VENDORS FOR SOME OF OUR COMPONENTS WHICH MAY BE
DIFFICULT AND COSTLY TO REPLACE
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 generally produced
our components with acceptable quality, quantity and cost in the past, they have
experienced periodic problems that have caused us delays in production. To date
these problems have not been material. These suppliers may be unable to meet our
future demands or may continue to experience quality and specification problems
which might cause us to experience delays, incur additional costs and possibly
miss customer deliveries. 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.
OUR FUTURE SUCCESS COULD BE IMPAIRED IF THE PERCEPTION OF OUR PRODUCTS IS BASED
ON ANY EARLY PERFORMANCE PROBLEMS
We will not succeed unless the marketplace is confident that we can provide
quality products and deliver them in a timely manner. Our product is still
relatively new and if they fail to perform as advertised or if they are
perceived as
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being difficult to use or causing discomfort to patients, the public image of
our products may be impaired. Public perception may also be impaired if we fail
to deliver our products in a timely manner due to difficulties with our
suppliers and vendors or due to our inability to efficiently manufacture and
assemble products in-house. A tarnished reputation could result in the failure
of our products to gain market acceptance even after any quality or delivery
problems are resolved.
WE MAY BE UNABLE TO MANAGE OUR GROWTH, WHICH COULD STRAIN OUR RESOURCES AND
IMPAIR OUR ABILITY TO DELIVER OUR PRODUCTS
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.
OUR QUARTERLY OPERATING RESULTS ARE UNCERTAIN AND MAY FLUCTUATE SIGNIFICANTLY,
WHICH COULD IMPAIR THE VALUE OF YOUR INVESTMENT
Our future operating results will depend on numerous factors, many of which we
do not control. Changes in any or all of these factors could cause our operating
results to fluctuate and increase the volatility of our stock. Some of these
factors are
- demand for our products;
- product and price competition;
- changes in the costs of components;
- success of our indirect sales and contract sales force;
- 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.
In addition, we base our manufacturing orders on forecasts of sales in future
periods and intend to continue to do so in the future. 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.
THE MARKET FOR ULTRASOUND IMAGING PRODUCTS IS HIGHLY COMPETITIVE AND WE MAY BE
UNABLE TO COMPETE EFFECTIVELY
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. We expect competition to increase
as potential and existing competitors begin to enter these new markets 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.
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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 HAVE LIMITED SALES AND MARKETING EXPERIENCE AND RELY ON AN INDIRECT SALES AND
DISTRIBUTION NETWORK AND A CONTRACT DIRECT SALES FORCE TO SELL OUR PRODUCTS,
WHICH WE MAY BE UNABLE TO SUCCESSFULLY MAINTAIN OR REPLACE
We have limited sales and distribution capabilities and have established an
indirect sales and distribution network and contract direct sales force to sell
our products domestically and internationally. Our future revenue growth will
depend in large part on our success in maintaining and expanding these sales
channels. We depend on these distributors to help promote market acceptance and
demand for our products. We established our contract sales force within the
United States midway through the first quarter of 2000 and expect to establish a
direct sales force in selected European markets. We may elect to develop
additional direct sales and distribution capabilities in the future or we may be
required to do so if we fail to maintain or expand our existing third-party
distribution network. Additional development of our distribution capabilities
will 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.
Many of our third-party distributors are 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 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 DO NOT RETAIN KEY EMPLOYEES AND ATTRACT ADDITIONAL HIGHLY SKILLED
EMPLOYEES, WE WILL NOT BE SUCCESSFUL
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 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, WHICH
COULD HARM OUR BUSINESS
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 result in issued
patents. 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 our technology, particularly in countries
where the laws may not protect our proprietary rights as fully as in the United
States.
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OUR PRODUCTS MAY INFRINGE ON THE INTELLECTUAL PROPERTY RIGHTS OF OTHERS, WHICH
COULD SUBJECT US TO SIGNIFICANT LIABILITY
Many of our competitors in the ultrasound imaging business hold issued patents
and have filed, or may file, patent applications. Our competitors may claim our
technology or products infringe upon the technology covered by these patents or
patent 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;
- require us to enter into royalty or licensing agreements;
- prevent us from manufacturing or selling some or all of our products; or
- result in our liability to one or more of these competitors.
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.
OUR PRODUCTS MAY BECOME OBSOLETE
Our competitors may develop and market ultrasound products that render our
products obsolete or noncompetitive. 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. 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.
WE MAY INCUR TAX LIABILITY IN CONNECTION WITH OUR SPIN-OFF FROM ATL
Our spin-off was treated by ATL as a tax-free spin-off under Section 355 of the
Internal Revenue Code of 1986, as amended. However, if ATL were to recognize
taxable gain from the spin-off, the Internal Revenue Service could impose that
liability on any member of the ATL consolidated group as constituted prior to
the spin-off, including SonoSite. Under the spin-off agreement with ATL, ATL is
required to cover 85% of any such liability (unless the tax is imposed due to
the actions by ATL solely or SonoSite solely, in which case ATL and SonoSite
have agreed that the party who is solely at fault shall bear all of the tax
liability). We cannot guarantee that ATL will honor its obligation to 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 spin-off, our business would be
adversely affected.
GOVERNMENTAL REGULATION OF OUR BUSINESS COULD PREVENT US FROM INTRODUCING NEW
PRODUCTS IN A TIMELY MANNER
All of our planned products and our manufacturing activities and the
manufacturing activities of our third-party medical device manufacturers are
subject to extensive regulation by a number of governmental agencies, including
the U.S. Food and Drug Administration and comparable international agencies. We
and such third-party manufacturers are or 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. Our
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third-party medical device manufacturers may also be subject to the same
sanctions and, as a result, may be unable to supply our products.
WE NEED TO ESTABLISH INTERNATIONAL MARKETS FOR OUR PRODUCTS AND OUR PROSPECTS OF
DOING SO SUCCESSFULLY ARE UNCERTAIN
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;
- longer accounts receivable collection periods and greater difficulty in
accounts receivable collection, as compared to those experienced in the
United States;
- reduced protection for intellectual property rights in some countries;
- fluctuations in the value of the U.S. dollar relative to other currencies;
and
- delays or failures in obtaining necessary regulatory approvals.
WE MAY FACE PRODUCT LIABILITY AND WARRANTY CLAIMS WHICH COULD RESULT IN
SIGNIFICANT COSTS
The sale and support of our products entail the risk of product liability or
warranty claims, such as those based on 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. Our products 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 for
all product recalls, returns and defects attributable to manufacturing. We
established accruals 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 AND OUR PROSPECTS OF OBTAINING SUCH FUNDING ARE UNCERTAIN
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 the sale of equity, contributions by ATL in connection with our
spin-off and grant revenue from the U.S. Office of Naval Research under a U.S.
Government Defense Advanced Research Projects Agency grant. ATL has met all of
its funding obligations and we expect any future grant revenue 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.
ACCOUNTING RULES AND REGULATIONS MAY CHANGE
Generally Accepted Accounting Principles are continuously being evaluated as
business transactions become more complex. Future guidance surrounding
accounting treatment of what today is considered proper and acceptable may
change and may cause us to reevaluate certain accounting methods utilized and
estimates made. We cannot foresee areas where change may occur. These changes
could have a negative impact on our financial results, which could negatively
impact the value of our common stock.
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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.
OUR RESTATED ARTICLES OF INCORPORATION, OUR BYLAWS, WASHINGTON LAW AND SOME OF
OUR AGREEMENTS CONTAIN PROVISIONS THAT COULD DISCOURAGE A TAKEOVER THAT MAY BE
BENEFICIAL TO SHAREHOLDERS
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 requiring a significant cash
payment to ATL upon a change in control of SonoSite;
- a shareholder rights agreement; and
- acceleration provisions in benefit plans and change-in-control agreements
with all of our employees.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risk relating to changes in interest rates, which could
adversely affect the value of our investments in marketable securities or
increase interest expense on outstanding obligations.
As of September 30, 2000, our portfolio consisted of $25.2 million of interest
bearing securities with maturities of less than two years. Our intent is to hold
these securities until maturity, but have classified them as available-for-sale
in the event of liquidation or unanticipated cash needs. The interest bearing
securities are subject to interest rate risk and will fall in value if market
interest rates increase. We believe that the impact on the fair market value of
our securities and related earnings for the remainder of 2000 from a
hypothetical 10% increase in market interest rates would not have a material
impact on either the investment portfolio or our obligations.
We distribute much of our product internationally through international
distributors. Although virtually all transactions currently are transacted using
United States dollars, economic and political risk exist within these
international markets which we cannot control. In addition, we have an affiliate
that maintains certain accounts in a foreign currency. If the United States
dollar were to uniformly increase in strength by 10% in 2000 relative to the
currency of our affiliate, we believe the impact on our financial results would
not be significant.
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PART II: OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits
Exhibit 27 Financial Data Schedule
b) Reports on Form 8-K
No reports were filed on form 8-K during the quarter ended September 30,
2000.
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SIGNATURE
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SonoSite, Inc.
(Registrant)
Dated: November 10, 2000 By: /S/ MICHAEL J. SCHUH
MICHAEL J. SCHUH
VICE PRESIDENT, FINANCE AND
CHIEF FINANCIAL OFFICER
(AUTHORIZED OFFICER AND PRINCIPAL
FINANCIAL OFFICER)
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