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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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 March 31, 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)
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<S> <C>
Washington 91-1405022
(State or Other Jurisdiction (I.R.S. Employer Identification Number)
of Incorporation or Organization)
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P.O. Box 3020
North Creek Parkway
Bothell, WA 98041-3020
(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 May 9, 2000, there were 9,325,613 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
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Page No.
--------------
Part I Financial Information
Item 1. Financial Statements (unaudited)
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Condensed Balance Sheets -- March 31, 2000 and December 31, 1999.............................. 3
Condensed Statements of Operations -- Quarters ended March 31, 2000 and 1999.................. 4
Condensed Statements of Cash Flows -- Quarters ended March 31, 2000 and 1999.................. 5
Notes to Condensed Financial Statements....................................................... 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations......... 7
Item 3. Quantitative and Qualitative Disclosures about Market Risk.................................... 16
Part II Other Information
Item 6. Exhibits and Reports on Form 8-K.............................................................. 16
Signature..................................................................................... 17
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Part I: Financial Information
Item 1: Financial Statements
SonoSite, Inc.
Condensed Balance Sheets
(unaudited)
Assets
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March 31, December 31,
2000 1999
-------------------- --------------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 3,033,063 $ 33,252,112
Short-term investment securities 26,448,735 16,594,050
Accounts receivable, less allowance for doubtful
accounts of $209,492 and $96,344, respectively 11,302,780 7,856,547
Receivable from affiliate 439,369 400,009
Accrued interest receivable 831,982 484,684
Inventories 3,830,817 1,925,977
Prepaid expenses 757,335 692,489
-------------------- --------------------
Total current assets 46,644,081 61,205,868
Property and equipment, net 5,413,434 4,845,860
Long-term investment securities 14,897,103 3,163,501
Investment in affiliate 357,555 429,843
Other assets 505,436 81,157
-------------------- --------------------
Total assets $ 67,817,609 $ 69,726,229
==================== ====================
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable $ 4,324,213 $ 2,718,276
Accrued expenses 2,012,703 2,483,754
Current portion of long-term obligations 361,828 387,577
Deferred liabilities 202,464 292,787
-------------------- --------------------
Total current liabilities 6,901,208 5,882,394
Long-term obligations, less current portion 35,059 134,696
-------------------- --------------------
Total liabilities 6,936,267 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 March 31, 2000 - 9,286,102
As of December 31, 1999 - 9,209,633 92,861 92,096
Additional paid-in-capital 106,750,434 106,227,784
Deferred stock compensation (28,168) (29,393)
Accumulated deficit (45,764,327) (42,520,588)
Accumulated other comprehensive loss (169,458) (60,760)
-------------------- --------------------
Total shareholders' equity 60,881,342 63,709,139
-------------------- --------------------
Total liabilities and shareholders' equity $ 67,817,609 $ 69,726,229
==================== ====================
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See accompanying notes.
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SonoSite, Inc.
Condensed Statements of Operations
(unaudited)
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Quarters ended,
March 31,
----------------------------------------------
2000 1999
------------------- ----------------------
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Sales revenue $ 7,985,510 $ --
Cost of sales 4,623,919 --
------------------- ----------------------
Gross margin on sales revenue 3,361,591 --
Grant revenue -- 124,506
Operating expenses:
Research and development 2,477,158 3,003,120
Sales and marketing 3,608,255 1,772,917
General and administrative 1,129,087 695,430
------------------- ----------------------
Total operating expenses 7,214,500 5,471,467
Other income, net 609,170 109,480
------------------- ----------------------
Net loss $(3,243,739) $(5,237,481)
=================== ======================
Basic and diluted net loss per share $(0.35) $(1.08)
=================== ======================
Weighted average shares used in computation of
Basic and diluted net loss per share 9,224,910 4,843,598
=================== ======================
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See accompanying notes.
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SonoSite, Inc.
Condensed Statements of Cash Flows
(unaudited)
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<CAPTION>
Quarters Ended
March 31,
------------------------------------------------
2000 1999
---------------------- --------------------
<S> <C> <C>
Operating activities:
Net loss $ (3,243,739) $(5,237,481)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization 587,905 228,021
Equity in loss of affiliate 72,288 --
Amortization of premium on investment securities 9,028 --
Amortization of deferred compensation 1,225 18,942
Changes in operating assets and liabilities:
Increase in accounts receivable (3,446,233) --
Increase in receivable from affiliate (39,360) --
Increase in interest receivable (347,298) --
Increase in inventories (1,904,840) --
Increase in prepaid expenses (64,846) (29,627)
Increase in other assets (424,279) (140,973)
Increase/(decrease) in accounts payable 1,605,937 (90,863)
(Decrease)/increase in accrued expenses (471,051) 341,078
(Decrease)/increase in deferred liabilities (90,323) 4,804
---------------------- --------------------
Net cash used in operating activities (7,755,586) (4,906,099)
Investing activities:
Purchase of investments (26,981,013) --
Proceeds from maturities of investments 5,275,000 --
Purchase of equipment (1,176,473) (637,364)
Disposals of equipment 20,994 --
---------------------- --------------------
Net cash used in investing activities (22,861,492) (637,364)
Financing activities:
Decrease in checks drawn in excess of bank balances -- (601,629)
Repayment of long-term obligations (125,386) (77,947)
Common stock issuance costs (34,985) --
Exercise of stock options 558,400 22,733
Contributions from ATL Ultrasound -- 12,000,000
---------------------- --------------------
Net cash provided by financing activities 398,029 11,343,157
Net change in cash (30,219,049) 5,799,694
Cash and cash equivalents at beginning of period 33,252,112 7,525,762
---------------------- --------------------
Cash and cash equivalents at end of period $ 3,033,063 $13,325,456
====================== ====================
Supplemental disclosure of cash flow information:
Cash paid for interest $ 19,612 $ 53,404
====================== ====================
</TABLE>
See accompanying notes.
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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. The information furnished reflects, in the opinion
of SonoSite, Inc. ("SonoSite") management, all adjustments necessary for a fair
presentation of the results for the interim periods presented. All such
adjustments are of a normal recurring nature. The results of operations for the
quarter ended March 31, 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. ("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 (the "Distribution"). This transaction was effected through a
tax-free dividend distribution of SonoSite's shares to ATL shareholders as of
April 6, 1998 (the "Distribution Date"). 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 the Distribution
Date consists solely 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 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 March 31, 2000, 83% and 17% were
receivable from international and domestic parties, respectively. In addition,
40% and 11% of the total accounts receivable balance outstanding as of March 31,
2000 was from a single Japanese and Italian customer, respectively.
For the quarter ended March 31, 2000, 79% and 21% of sales revenue related to
international and domestic revenue, respectively, of this revenue, two single
customers accounted for 10% or greater of our total sales revenue as follows:
58% located in Japan and 11% located in the United States. Combined total sales
revenue for these two customers was $5.5 million for the quarter ended March 31,
2000.
Accumulated Other Comprehensive Loss
Other comprehensive losses consist entirely of net unrealized losses on
investments for the quarter ended March 31, 2000. For the quarter ended March
31, 2000, SonoSite had an unrealized loss of $108,698. No other
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comprehensive income or loss existed for the quarter ended March 31, 1999.
Therefore comprehensive loss was $3.4 million and $5.2 million for the quarters
ended March 31, 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 March 31, 2000 and 1999, outstanding SonoSite
options and unvested restricted shares issued by ATL through the Distribution
totaled 210,372 and 288,833 and outstanding stock options issued by SonoSite as
of March 31, 2000 and 1999 totaled 1,901,088 and 1,523,015.
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 second quarter 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 do not believe
the impact from the guidance will have a significant impact on our financial
statements.
In March 2000, the Financial Accounting Standards Board issued Interpretation
No. 44 (FIN 44), "Accounting for Certain Transactions Involving Stock
Compensation". FIN 44 clarifies the application of Accounting Principles Board
Opinion No. 25 (APB 25) and is effective July 1, 2000. Specifically, FIN 44
clarifies 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. We do not anticipate the
adoption of FIN 44 will have a material impact 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 information" (as
defined in Section 27A of the Securities Act of 1933, as amended) that involve
risks and uncertainties which may cause actual results to differ materially from
those predicted in the forward-looking statements. Forward-looking statements
can be identified by their use of such verbs as "expects," "anticipates" and
"believes" or similar verbs or conjugations of such verbs. 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 those anticipated by such forward-looking statements. 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, including our Form 10-K for the
year ended December 31, 1999.
Overview
SonoSite, Inc., commenced operations in 1994 as a project of ATL Ultrasound,
Inc. 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
Ultrasound. 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, Inc for every three shares of ATL Ultrasound stock held on April 6,
1998. ATL Ultrasound 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/, and three 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. We may not generate sufficient revenue to fund
our operations in future periods.
7
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Results of operations
Product sales
During the quarter ended March 31, 2000, product revenue was $8.0 million.
Initial shipments of our products commenced in the third quarter of 1999,
therefore, there were no product sales revenues in the first quarter of 1999.
Product sales revenues are generally recognized at the time of shipment. As of
March 31, 2000, our products included two primary platforms, the SonoSite 180
and SonoHeart, and three transducers which may be used in a variety of
applications. Transducers included a curved array transducer (C60), for
abdominal imaging, an intra-cavital transducer (ICT) for transvaginal and intra-
cavital imaging and a microconvex (C15) for cardiac imaging. In future
quarters, we expect to expand our transducer offerings to include a linear
transducer for use in radiology, vascular, emergency medicine and several other
clinical applications. We anticipate that product sales in the second quarter
will be similar to the first quarter and will gradually increase as the year
progresses.
Grant revenues
There were no grant revenues for the quarter ended March 31, 2000. Grant
revenues for the quarter ended March 31, 1999, were $125,000. These revenues
were recognized in accordance with terms of our contract with the Defense
Department and were generally tied to achieving technological milestones. As of
the end of March 1999, we had completed the project work and achieved all
technical milestones under the contract. We expect no future revenues under the
terms of the Defense Department contract.
Cost of sales and gross margin on sales revenue
Sales revenue for the quarter ended March 31, 2000 was $8.0 million. Cost of
sales for the same period was $4.6 million. Gross margin was $3.4 million,
which represented 42% of product sales. As noted, there were no product sales,
cost of sales or gross margin for the first quarter ended March 31, 1999. Since
we began selling product in 1999, we predominantly used distributors world-wide
to sell our product. These distributors received a discount from a direct
selling price. Midway through the first quarter of 2000, we implemented a
contract direct selling force which began selling product directly to end
customers, improving our margins. In addition, early adoption discounts expired
late in 1999. As a result of the higher direct selling price and significant
reduction in discounts offered, we expect margins to improve.
Research and development expenses
Research and development expenses for the quarter ended March 31, 2000 were $2.5
million, a decrease of $500,000 from $3.0 million for the comparable period of
1999. The decrease in research and development expenses was primarily the
result of decreases in initial development and start-up activities surrounding
the design and tooling of our initial products and accessories. Also, in the
first quarter of 2000, certain manufacturing overhead charges, treated as
research and development costs prior to having developed our final product, were
capitalized as a result of our initial product sales. We anticipate that
spending levels in research and development in 2000 will increase in the second
quarter of 2000 as we focus additional resources on efforts to support existing
products, develop and release future products and begin to transition certain
manufacturing related activities in-house.
Sales and marketing expenses
Sales and marketing expenses for the quarter ended March 31, 2000 were $3.6
million, an increase of $1.8 million from $1.8 million in the comparable period
of 1999. The increase was primarily the result of increases in personnel and
personnel-related expenses, increases in consulting, travel and trade show
related expenditures to support existing products and the launch of our
SonoHeart platform and C15 transducer and the addition of our contract direct
sales force midway through the first quarter of 2000. We expect sales and
marketing expenses to increase as we continue promotional activity and support
our worldwide distribution network.
General and administrative expenses
General and administrative expenses for the quarter ended March 31, 2000 were
$1.1 million, an increase of $400,000 from $695,430 for the comparable period in
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 and
information services. In addition, outside service fees relating to legal,
accounting and annual reporting requirements have increased. We intend to add
administrative
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personnel to support these activities and, consequently, expect that general and
administrative expenses will increase indefinitely as a result.
Net loss
Net loss for the quarter ended March 31, 2000 was $3.2 million, a decrease of
$2.0 million from $5.2 million for the comparable period in 1999. The net loss
declined due to the fact that we began selling products and to an increase in
net other income of $500,000. These reductions to our net loss were partially
offset by increases in operating expenses as noted above. We expect to incur
net losses in the near term as we continue to develop the highly portable
imaging markets, continue research and development activity, begin to
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 Ultrasound 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
Ultrasound contributed to our capital all cumulative expenditures made by them
on our business while we were an operating division within ATL Ultrasound, net
of funds received from the U.S. Navy. This book capital contribution totaled
$10.6 million. In addition, ATL Ultrasound contributed $30 million in cash in
two payments; $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 March 31, 2000, cash and cash equivalents totaled $3.5 million, a decrease
of $30.2 million from $33.3 million as of December 31, 1999. This excludes $26.4
million in short-term investment securities and $14.9 million in investment
securities with terms longer than one year as of March 31, 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 investing activity of $22.9 million and operating
expenses of $7.8 million during the first quarter of 2000. While recent
quarterly losses have been reduced, our cash requirements have increased
primarily due to increases in accounts receivable and inventories. We expect
cash requirements in 2000 to increase as a result of our operations, but be
less than in 1999 due to anticipated increases in quarterly revenues that will
generate lower losses and increasing collections on trade receivables.
We believe the existing cash and cash equivalents and funds 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 during the upcoming year, which
will depend in part upon factors beyond our control. These factors include:
lower than anticipated adoption rates of our products, lower revenues on our
existing and new products, technical obstacles, cost overruns in research and
development programs or manufacturing activities and greater than anticipated
administrative expenses. 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.
Year 2000 Information Systems Review and Status
In June, 1998, we began working to address the possible side effects of the
potential inability of computer programs to adequately process date information
after December 31, 1999 (the Year 2000 Issue). Up to the date of this report, we
have not detected or learned of any material failings in our products,
information technology infrastructure or computer systems in performing date
recording and computation accurately in the year 2000 or in accommodating the
leap year for the year 2000. There have been no reported failures of our
products in the field to recognize dates or conduct calculations relating to the
Year 2000 Issue. We have inquired of our vendors and customers, none of whom
have experienced any such failures that would materially affect us. We expect no
further significant expenditures related to the Year 2000 Issue.
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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 Ultrasound. 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 March 31, 2000, we had an accumulated
deficit of approximately $45.8 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 recently released first
generation 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 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 physicians,
including physicians 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 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 they are 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 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-
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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 Ultrasound for manufacturing our products and any interruption or
delay at ATL Ultrasound could harm our business
We have contracts with ATL Ultrasound for manufacturing services for all of our
ultrasound products. These services are critical to 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 will 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. Additionally, ATL Ultrasound has the right to
terminate our manufacturing contract on 180 days' notice.
We intend to assume some or all of the manufacture and assembly of our products
but we have no manufacturing experience or capability
Within the next year, we intend to assume some or all of the manufacture and
assembly of our products. To do so, 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 will also need to effectively manage raw material
inventories to minimize shortages that would disrupt manufacture. We have no
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 high 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. We have only recently
begun to ship our products. If these initial shipments fail to perform as
advertised or if they are perceived as 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.
11
<PAGE>
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 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.
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. 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 sales and distribution network to meet or exceed
annual sales quotas. These factors make it difficult to forecast our revenues
and operating results.
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.
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.
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We have limited sales and marketing experience and rely on an indirect sales and
distribution network 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 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 depend on these distributors to help promote market acceptance and
demand for our products. We began to develop a contract sales force within the
United States midway through the first quarter of 2000. 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 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 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 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, 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.
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;
13
<PAGE>
. 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. 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.
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, as amended. 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.
Under the spinoff agreement with ATL Ultrasound, ATL is required 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 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 spinoff, 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 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;
14
<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;
. 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 entails 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
Ultrasound for all product recalls, returns and defects attributable to
manufacturing. We established 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 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 Ultrasound in
connection with our spinoff and grant revenue from the U.S. Office of Naval
Research under a U.S. Government Defense Advanced Research Projects Agency
grant. ATL Ultrasound 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.
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:
15
<PAGE>
. 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 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 March 31, 2000, our portfolio consisted of $44.4 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 our exposure to the fluctuation in the
exchange rate would not be significant.
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 on form 8-K were filed during the quarter ended March 31, 2000.
16
<PAGE>
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: May 10, 2000 By: /S/ DONALD F. SEATON, III
Donald F. Seaton III
Vice President, Finance and
Chief Financial Officer
(Authorized Officer and Principal
Financial Officer)
17
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