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 September 30, 2001
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 - 30/th/ Drive SE, Bothell, WA 98021-3904
-----------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
(425) 951-1200
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(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 [_]
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common Stock, $0.01 par value 11,501,570
----------------------------------------- ----------------------------------------
(Class) (Outstanding as of November 8, 2001)
SonoSite, Inc.
Quarterly Report on Form 10-Q
For the Quarter Ended September 30, 2001
Table of Contents
Page No.
---------------
PART I FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
Condensed Consolidated Balance Sheets
-- September 30, 2001 and December 31, 2000 ..................................................... 3
Condensed Consolidated Statements of Operations
-- One and three quarters ended September 30, 2001 and 2000 ..................................... 4
Condensed Consolidated Statements of Cash Flows
-- Three quarters ended September 30, 2001 and 2000 ............................................. 5
Notes to Condensed Consolidated Financial Statements ........................................... 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations .......... 10
Item 3. Quantitative and Qualitative Disclosures about Market Risk ..................................... 20
PART II OTHER INFORMATION
Item 1. Legal Proceedings .............................................................................. 21
Item 2. Changes in Securities and Use of Proceeds ...................................................... 21
Item 6. Exhibits and Reports on Form 8-K ............................................................... 21
SIGNATURE ....................................................................................................... 22
2
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements
SonoSite, Inc.
Condensed Consolidated Balance Sheets
(unaudited)
Assets
(In thousands) September 30, December 31,
2001 2000
----------------- -----------------
Current assets:
Cash and cash equivalents $ 34,819 $ 11,067
Short-term investment securities 1,994 18,218
Accounts receivable, less allowance for doubtful
accounts of $709 and $723, respectively 11,741 7,303
Accrued interest receivable 128 330
Inventories 7,916 12,325
Prepaid expenses and other current assets 908 1,070
---------------- ----------------
Total current assets 57,506 50,313
Property and equipment, net 5,513 5,980
Receivable from affiliate 1,027 880
Other assets 899 851
---------------- ----------------
Total assets $ 64,945 $ 58,024
================ ================
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable $ 1,673 $ 5,561
Accrued expenses 3,337 3,684
Current portion of long-term obligations 228 253
Deferred revenue 1,314 281
---------------- ----------------
Total current liabilities 6,552 9,779
Deferred rent 189 121
Long-term obligations, less current portion 219 316
---------------- ----------------
Total liabilities 6,960 10,216
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, 2001 - 11,353,227
As of December 31, 2000 - 9,551,596 114 96
Additional paid-in-capital 133,385 109,195
Accumulated deficit (75,515) (61,492)
Accumulated other comprehensive income 1 9
---------------- ----------------
Total shareholders' equity 57,985 47,808
---------------- ----------------
Total liabilities and shareholders' equity $ 64,945 $ 58,024
================ ================
See accompanying notes to condensed consolidated
financial statements.
3
SonoSite, Inc.
Condensed Consolidated Statements of Operations
(unaudited)
(In thousands, except loss per share) Quarter Ended Three Quarters Ended
September 30, September 30,
2001 2000 2001 2000
--------------- -------------- --------------- ---------------
Sales $ 11,911 $ 8,357 $ 30,357 $ 25,446
Cost of sales 5,167 4,720 15,358 14,387
--------------- -------------- --------------- ---------------
Gross margin 6,744 3,637 14,999 11,059
Operating expenses:
Research and development 3,333 3,097 10,119 8,491
Sales and marketing 4,991 4,642 16,047 11,857
General and administrative 1,053 973 3,139 3,123
--------------- -------------- --------------- ---------------
Total operating expenses 9,377 8,712 29,305 23,471
Other income (loss):
Interest income 438 602 867 1,966
Interest expense (49) (59) (117) (115)
Equity in losses of affiliates (70) (48) (227) (180)
Gain/(loss) on investments 50 -- (240) --
--------------- -------------- --------------- ---------------
Total other income (loss) 369 495 283 1,671
--------------- -------------- --------------- ---------------
Net loss $ (2,264) $ (4,580) $ (14,023) $ (10,741)
=============== ============== =============== ===============
Basic and diluted net loss per share $ (0.21) $ (0.49) $ (1.41) $ (1.15)
=============== ============== =============== ===============
Weighted average common and potential
common shares used in computing net loss
per share 10,629 9,426 9,943 9,327
=============== ============== =============== ===============
See accompanying notes to condensed consolidated
financial statements.
4
SonoSite, Inc.
Condensed Consolidated Statements of Cash Flows
(unaudited)
(In thousands) Three Quarters Ended
September 30,
2001 2000
----------------- -----------------
Operating activities:
Net loss $ (14,023) $ (10,741)
Adjustments to reconcile net loss to net cash used in operating activities:
Loss on investments 240 --
Depreciation and amortization 1,747 1,749
Equity in losses of affiliates 227 180
Changes in operating assets and liabilities:
Increase in accounts receivable (4,438) (2,109)
Increase in receivable from affiliate (262) (427)
Decrease (Increase) in interest receivable 202 (60)
Decrease (Increase) in inventories 4,409 (6,964)
Decrease (Increase) in prepaid expenses and other current assets 463 (343)
Increase in other assets (161) (352)
(Decrease) Increase in accounts payable (3,888) 254
Decrease in accrued expenses (347) (46)
Increase in deferred liabilities 1,101 300
----------------- -----------------
Net cash used in operating activities (14,730) (18,559)
Investing activities:
Purchase of investments (2,624) (38,465)
Proceeds from sales and maturities of investments 18,601 33,000
Purchase of equipment (1,280) (2,004)
Proceeds on sale of equipment -- 37
Investment in affiliate -- (500)
Other assets -- (373)
----------------- -----------------
Net cash provided by (used in) investing activities 14,697 (8,305)
Financing activities:
Repayment of long-term obligations (422) (561)
Net proceeds from sale of common stock 23,175 --
Exercise of stock options 1,032 2,516
----------------- -----------------
Net cash provided by financing activities 23,785 1,955
Net change in cash 23,752 (24,909)
Cash and cash equivalents at beginning of period 11,067 33,252
----------------- -----------------
Cash and cash equivalents at end of period $ 34,819 $ 8,343
================= =================
Supplemental disclosure of cash flow information:
Cash paid for interest $ 42 $ 68
================= =================
Supplemental disclosure of non-cash investing and financing activities:
Assets acquired through debt obligations $ -- $ 519
================= =================
See accompanying notes to condensed consolidated
financial statements.
5
SonoSite, Inc.
Notes to Condensed Consolidated 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 management, all adjustments
necessary (which are of a normal and recurring nature) for a fair presentation
of the results for the interim periods presented. The results of operations for
the quarter ended September 30, 2001 are not necessarily indicative of our
expected results for the entire year ending December 31, 2001 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, 2000, included in our
Annual Report on Form 10-K. Certain amounts reported in previous periods have
been reclassified to conform to current presentation.
Business Overview
SonoSite commenced operations as a division of ATL Ultrasound, Inc., or ATL. We
were formed to develop the design and specifications for a highly portable
ultrasound device and other highly portable ultrasound products for diagnostic
imaging in a multitude of clinical and field settings. On April 6, 1998, we
became an independent, publicly owned company through a tax-free distribution of
one new share of our stock for every three shares of ATL stock held as of that
date. ATL retained no ownership in SonoSite following the spin-off.
We finalized the development and began commercialization of our first products
in 1999, recognizing our initial product sales revenue in September 1999.
Continuing to develop and enhance our products in 2000, we introduced the
SonoHeartTM system for cardiology and the high frequency SonoSite(R) 180 system.
In April 2001, we announced the release of our SonoSite(R) 180PLUS and
SonoHeartTM PLUS systems, both of which include M-mode, Pulsed Wave (PW) Doppler
and Tissue Harmonics Imaging capabilities.
Initially, we sold our products primarily through medical product distributors
worldwide. In February 2000, recognizing the need for and potential of a direct
selling operation, we established a contract direct sales force focused
exclusively on selling our products within the United States. In the first
quarter of 2001, we elected to convert our contract selling force to direct
employees and to expand the number of direct sales people domestically.
Internationally, we continue to address other large potential markets in the
world through our relationship with Olympus in Japan, our joint venture in China
and dedicated distributors in other traditionally large ultrasound markets. In
the first quarter of 2001, we established a subsidiary in the United Kingdom,
SonoSite, Ltd., which sells directly in the United Kingdom.
The condensed consolidated financial statements include the accounts of
SonoSite, Inc., and its wholly-owned subsidiary located in the United Kingdom.
All significant intercompany accounts and transactions have been eliminated in
consolidation.
Financial Instruments
Cash equivalents
Cash and cash equivalents consist of money market and highly liquid debt
instruments with original or remaining maturities at purchase of three months or
less.
Investment securities
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 because the sale of such securities may be required prior to
maturity to implement management strategies or ensure compliance with investment
policy standards. 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 from the sale of available-for-sale
securities, if any, are determined on a specific identification basis.
6
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.
Accounts receivable
In the ordinary course of business, we grant credit to a broad customer base. Of
the accounts receivable balance at September 30, 2001, 57% were receivable from
international parties and 43% were receivable from domestic parties, prior to
any provision for doubtful accounts. Approximately $345,000 of the international
accounts receivable was classified as a long-term other asset. The same
percentages as of December 31, 2000 were 51% international and 49% domestic.
For the quarter ended September 30, 2001, sales revenue was 53% domestic and 47%
international. For the three quarters ended September 30, 2001, sales revenue
was 52% domestic and 48% international. For the quarter ended September 30,
2000, sales revenue was 54% domestic and 46% international. For the three
quarters ended September 30, 2000, sales revenue was 44% domestic and 56%
international.
The following tables present individual customers whose outstanding accounts
receivable balance as a percentage of total accounts receivables and/or sales
revenue as a percentage of total sales revenue exceeded 10%:
Accounts Receivable
September 30, December, 31
2001 2000
------------------ ----------------
Brazilian distributor 11%
Japanese distributor 21%
------------------ ----------------
Totals 21% 11%
================== ================
Sales Revenue
For the Quarter Ended For the Three Quarters Ended
September 30, September 30, September 30, September 30,
2001 2000 2001 2000
---------------- ---------------- ---------------- ----------------
Japanese distributor 20% 18% 16% 32%
United States distributor 12% 17%
---------------- ---------------- ---------------- ----------------
Totals 20% 30% 16% 49%
================ ================ ================ ================
Fair value of financial instruments
The carrying value of our financial instruments, including cash and cash
equivalents, accounts receivable, certain long-term other assets and debt,
approximates fair value. Cash and cash equivalents and accounts receivable
approximate fair value due to their short-term nature. Long-term other assets
and debt approximate fair value as interest rates on these notes approximate
market.
Concentration of credit risk
Financial instruments that potentially subject us to concentrations of credit
risk consist principally of cash equivalents, investments and accounts
receivable.
7
Inventories
Inventories are stated at the lower of cost, on a first-in, first-out method, or
market. Inventories consist of the following (in thousands):
September 30, December 31,
2001 2000
----------------- -----------------
Raw material $ 3,366 $ 4,257
Finished goods 4,550 8,068
----------------- -----------------
Total $ 7,916 $ 12,325
================= =================
Property and equipment
Property and equipment are stated at historical cost, less accumulated
depreciation and amortization. Maintenance and repair costs are expensed as
incurred, with additions and improvements to property and equipment capitalized.
Depreciation and amortization are calculated using the straight-line basis over
estimated useful lives as follows:
Asset Estimated Useful Lives
--------------------------------------- --------------------------------------
Equipment, other than computer 5-7 years
Software 3 years
Computer equipment 3-5 years
Furniture and fixtures 5 years
Leasehold improvements Lesser of estimated useful life or
expected remaining lease term
The carrying value of long-lived assets is evaluated for impairment when events
or changes in circumstances occur, which may indicate the carrying amount of the
asset may not be recoverable. We evaluate the carrying value of the assets by
comparing the estimated future cash flows generated from the use of the asset
and its eventual disposition with the asset's reported net book value.
Accumulated Other Comprehensive Loss
Other comprehensive losses consist entirely of net unrealized losses on
investments.
The following presents the components of comprehensive loss:
For the Quarter Ended For the Three Quarters Ended
September 30, September 30, September 30, September 30,
2001 2000 2001 2000
--------------- -------------- -------------- ---------------
Net loss $ $ (2,264) $ $ (4,580) $ (14,023) $ (10,741)
Unrealized holding gains (losses)
arising during the period -- 79 (248) 48
Less reclassification adjustment for
(gains) losses included in net loss (50) -- 240 --
--------------- -------------- -------------- ---------------
Other comprehensive gain (loss) (50) 79 (8) 48
--------------- -------------- -------------- ---------------
Comprehensive loss $ (2,314) $ $ (4,502) $ (14,030) $ (10,693)
=============== ============== ============== ===============
Net Loss per Share
Basic and diluted net loss per share was computed by dividing the net loss by
the weighted average shares outstanding exclusive of unvested restricted shares.
Outstanding options to purchase our shares and our unvested restricted shares
issued were not included in the computations of diluted net loss per share
because to do so would be antidilutive. As of September 30, 2001, our
outstanding options and unvested restricted shares totaled 2,588,002. As of
September 30, 2000, our outstanding options and unvested restricted shares
totaled 2,120,491.
8
The following is a reconciliation of the numerator and denominator of the basic
loss per share calculations:
(in thousands, except loss per share)
For the Quarter Ended For the Quarter Ended
September 30, 2001 September 30, 2000
------------------------------------ --------------------------------------
Loss Shares LPS Loss Shares LPS
Weighted average shares
outstanding 10,630 9,428
Weighted average unvested
restricted stock (1) (2)
------------ ----------- ----------- ------------ -------------- ----------
Basic and diluted loss per share $ (2,264) 10,629 $ (.21) $ (4,580) 9,426 $ (.49)
============ =========== =========== ============ ============== ==========
(in thousands, except loss per share)
For the Three Quarters Ended For the Three Quarters Ended
September 30, 2001 September 30, 2000
------------------------------------ --------------------------------------
Loss Shares LPS Loss Shares LPS
Weighted average shares
outstanding 9,944 9,329
Weighted average unvested
restricted stock (1) (2)
------------ ----------- ----------- ------------ -------------- ----------
Basic and diluted loss per share $ (14,023) 9,943 $ (1.41) $ (10,741) 9,327 $ (1.15)
============ =========== =========== ============ ============== ==========
Litigation
On July 24, 2001, a complaint was filed against us in U.S. District Court,
Southern District of Texas, Houston Division, by Neutrino Development
Corporation (Neutrino), alleging infringement of U.S. Patent 6,221,021 by
SonoSite as a result of our use, sale and manufacture of the SonoSite 180,
SonoSite 180 PLUS, SonoHeart and SonoHeart PLUS portable ultrasound imaging
devices. The complaint asserts claims for preliminary and permanent injunctive
relief enjoining all alleged acts of infringement, compensatory and enhanced
damages, attorney's fees and costs, and pre- and post-judgment interest. On
August 14, 2001, we filed an answer asserting defenses of both non-infringement
and patent invalidity, and including a counterclaim seeking a declaratory
judgment of non-infringement and invalidity regarding the patent. On October 4,
2001, the court denied a request by Neutrino for preliminary injunctive relief
to prevent us from manufacturing and selling our products for the duration of
the litigation. We believe the we have good and sufficient defenses to the
claims of patent infringement asserted against us by Neutrino and we are
vigorously defending ourselves in this matter.
Financing
On August 8, 2001, we sold 1,666,667 shares of common stock at a price of $15.00
per share to selected institutional and other accredited investors. Gross
proceeds from this private placement were $25.0 million.
Segment Reporting
We currently have one operating segment. Geographic regions are determined by
the shipping destination. Sales revenues by geographic location and segregated
between distributor and direct sales in the United States are as follows:
(in thousands) Quarter Ended September 30, Three Quarters Ended September 30,
2001 2000 2001 2000
--------------- -------------- ------------------ -----------------
United States distributor $ 293 $ 1,676 $ 1,484 $ 6,477
United States direct sales 6,049 2,828 14,097 4,620
--------------- -------------- ------------------ -----------------
Total United States 6,342 4,504 15,581 11,097
Japan 2,429 1,493 4,818 8,220
Europe, Africa and the Middle East 2,240 1,089 6,688 2,908
Canada, South and Latin America 809 873 2,273 1,426
Other Asia (a) 91 398 997 1,795
--------------- -------------- ------------------ -----------------
Total sales revenue $ 11,911 $ 8,357 $ 30,357 $ 25,446
=============== ============== ================== =================
(a) Other Asia includes China, India, Korea, Singapore and Taiwan
9
New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board, or FASB, issued
Statement of Financial Accounting Standards No. 133 (SFAS 133), "Accounting for
Derivative Instruments and Hedging Activities." SFAS 133 establishes accounting
and reporting standards requiring that every derivative instrument, including
certain derivative instruments embedded in other contracts, is recorded in the
balance sheet as either an asset or liability measured at its fair value. The
statement also requires that changes in the derivative instrument's fair value
are recognized in earnings unless specific hedge accounting criteria are met.
This statement became effective for us beginning January 1, 2001. Our adoption
of the standard did not have a material effect on our financial results.
In July 2001, the FASB issued Statement No. 141, Business Combinations, and
Statement No. 142, Goodwill and Other Intangible Assets. Statement 141 requires
that all business combinations are accounted for under a single method - the
purchase method. Use of the pooling-of-interest method is no longer permitted.
Statement 141 requires that the purchase method is used for business
combinations initiated after June 30, 2001. Statement 142 requires that goodwill
no longer is amortized to earnings, but instead is reviewed for impairment. The
amortization of goodwill ceases upon adoption of the Statement, which will be
adopted by the company on January 1, 2002. The adoption of this statement is not
expected to 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 Quarterly Report on Form 10-Q are "forward-looking
statements." Forward-looking statements are based on the opinions and estimates
of our management at the time the statements are made and are subject to risks
and uncertainties that could cause our actual results to differ materially from
those expected or implied by the forward-looking statements. The words
"believe," "expect," "intend," "anticipate" and similar expressions are intended
to identify forward-looking statements, but their absence does not necessarily
mean that the statement is not forward-looking. These statements are not
guaranties of future performance and are subject to known and unknown risks and
uncertainties and are based upon potentially inaccurate assumptions. Factors
that could affect SonoSite's actual results include those described under the
heading "Important Factors That May Affect Our Business, Our Results of
Operations and Our Stock Price" in this Form 10-Q and in our filings from time
to time with the Securities and Exchange Commission. We caution readers not to
place undue reliance upon these forward-looking statements that speak only as to
the date of this report. We undertake no obligation to publicly revise any
forward-looking statements to reflect new information, events or circumstances
after the date of this Form 10-Q or to reflect the occurrence of unanticipated
events.
Overview
SonoSite commenced operations as a division of ATL. We were formed to develop
the design and specifications for a highly portable ultrasound device and other
highly portable ultrasound products for diagnostic imaging in a multitude of
clinical and field settings. On April 6, 1998, we became an independent,
publicly owned company through a tax-free distribution of one new share in our
stock for every three shares of ATL stock held as of that date. ATL retained no
ownership in SonoSite following the spin-off.
We finalized the development and began commercialization of our first products
in 1999 and recognized our initial product sales revenue in September 1999.
Continuing to develop and enhance our products in 2000, we introduced the
SonoHeart system for cardiology and the high frequency SonoSite 180 system. In
April 2001, we announced the release of our SonoSite 180PLUS and SonoHeart PLUS
systems. Both systems contain advanced features that include M-mode, Pulsed Wave
(PW) Doppler and Tissue Harmonics Imaging capabilities.
As of September 30, 2001, our products included our initial platforms and the
SonoSite 180 PLUS and SonoHeart PLUS, which, when used in conjunction with one
of our five transducers, may be used in a variety of applications. Our
transducers include a curved array transducer, the C60, for abdominal imaging
and obstetrics, an intra-cavital transducer, the ICT, for transvaginal and
intra-cavital imaging, a microconvex transducer, the C15, for cardiac imaging, a
linear array transducer, the L38, for use in radiology, surgery, emergency
medicine and vascular imaging and a neonatal transducer, the C11, for pediatric
applications.
Initially, we sold our products primarily through medical product distributors
worldwide. In 2000, we developed and introduced a contract direct sales force to
the United States market to supplement and eventually replace our distributors
in the United States. Recognizing the value of real-world experience, we
utilized sonographers, some of whom had no selling experience, and trained them
to sell our systems. As the year progressed, we saw significant
10
increases in revenue generated by this direct sales group in the United States.
As a result, we hired these sonographers onto our direct sales team in early
2001. Additionally, since the beginning of the year we nearly doubled the number
of sales consultants domestically by adding experienced sales people, bringing
our total of domestic consultants to nearly 50 by the end of September, which is
consistent with our planned number of domestic sales consultants at year end.
Internationally, we continue to address other larger potential markets in the
world through our relationship with Olympus in Japan, our joint venture in China
and dedicated distributors in other traditionally large ultrasound markets. In
the first quarter of 2001, after seeing the success in the United States, we
established a subsidiary in the United Kingdom, SonoSite, Ltd., which sells
directly in the United Kingdom. At the end of September, we had a direct sales
team of 6 in the United Kingdom. We expect to expand our direct selling efforts
to include the other key European markets of Germany, France and Spain in the
fourth quarter.
In the future, our prospects and ability to grow a profitable business will
depend on our ability to effectively market and sell our products to a variety
of customers, both in terms of geography and medical specialty. We identified
those markets where we believe that our products will generate sales and have a
positive impact on the medical industry. These markets include obstetrics and
gynecology, emergency medicine, cardiology, radiology and surgery. In addition,
we believe that our products can be successfully marketed and sold to address
many other medical applications, many of which currently do not use ultrasound.
Since operations began, we have incurred losses. We expect to continue to incur
operating losses unless and until our product sales generate sufficient revenue
to fund our continuing operations. We may be unable to generate sufficient
revenue to fund our operations in future periods.
Results of Operations
Sales
Sales increased to $11.9 million and $30.4 million for the quarter and three
quarters ended September 30, 2001 compared to $8.4 million and $25.4 million for
the quarter and three quarters ended September 30, 2000, an increase of $3.5
million and $5.0 million, over the prior year periods. As a result of the
increase in our domestic direct sales force, our U.S direct sales increased $3.2
million and $9.5 million for the quarter and three quarters ended September 30,
2001. Our overall increase in sales represents a significant growth in the
number of end customer sales, when compared to the three quarters of the prior
year, during which our sales figures primarily reflected large orders to meet
initial distributor demand. Consequently, year-to-date sales to distributors
decreased but were partially offset by the increase in U.S direct sales. Product
revenues are generally recognized at the time of shipment.
The following represents sales revenue by region:
Quarter Ended September 30, Three Quarters Ended September 30,
2001 2000 2001 2000
--------------- -------------- ------------------ -----------------
United States 53% 54% 52% 44%
Japan 20% 18% 16% 32%
Europe, Africa and the Middle East 19% 13% 22% 11%
Canada, South and Latin America 7% 10% 7% 6%
Other Asia (a) 1% 5% 3% 7%
--------------- -------------- ------------------ -----------------
Total sales revenue 100% 100% 100% 100%
=============== ============== ================== =================
(a) Other Asia includes China, India, Korea, Singapore and Taiwan
We anticipate that sales revenue will continue to increase for the balance of
2001 as compared to prior years due to our expanded direct selling efforts,
feature-based pricing and selling programs, new product developments, new
corporate customer agreements and overall expansion of general market awareness
of the company and our products.
11
Gross margin on sales revenue
Gross margin percentages on sales revenue for the quarter and three quarters
ended September 30, 2001 were 57% and 49%. Gross margin percentages on sales
revenue for the quarter and three quarters ended September 30, 2000 were 44% and
43%. The increase in gross margin is due to feature-based pricing, an increase
in domestic direct sales, and internalization of key manufacturing processes.
Prior to October 2000, third parties performed all of our manufacturing. We
anticipate that we will be able to sustain the gross margin percentage on our
product sales in the fourth quarter.
Research and development expenses
Research and development expenses for the quarter and three quarters ended
September 30, 2001 were $3.3 million and $10.1 million. This is an increase of
$200,000 from $3.1 million reported for the quarter ended September 30, 2000 and
an increase of $1.6 million from $8.5 million reported for the three quarters
ended September 30, 2000. Compared with the second quarter and comparative third
quarter, research and development expenses remained relatively stable. The
increase in the comparative three quarters ended September 30 is due to
increased activities surrounding the design, tooling and manufacture of the
SonoSite 180PLUS and SonoHeart PLUS systems and related transducers, which were
released in April 2001. We anticipate that research and development spending
will remain relatively level in future quarters.
Sales and marketing expenses
Sales and marketing expenses for the quarter and three quarters ended September
30, 2001 were $5.0 million and $16.0 million. This is an increase of
approximately $400,000 from $4.6 million reported for the quarter ended
September 30, 2000 and an increase of $4.1 million from $11.9 million reported
for the three quarters ended September 30, 2000. The increase is primarily due
to increases in personnel and personnel-related expenses, launch of the PLUS
systems, our direct sales force expansion and related commissions and continued
advertising and promotion activity to support both our new and existing
products.
We continue to recognize the need to support our existing products and expect
marketing and selling costs to increase in 2001 as we expand our direct selling
efforts and support existing and new products.
General and administrative expenses
General and administrative expenses for the quarter and three quarters ended
September 30, 2001 were $1.1 million and $3.1 million. This is an increase of
$100,000 from the $1.0 million reported for the quarter ended September 30, 2000
and equal to the $3.1 million reported for the three quarters ended September
30, 2000. We anticipate that our general and administrative expenses will remain
relatively level in future quarters.
Other income/loss
Other income for the quarter and three quarters ended September 30, 2001 was
$369,000 and $283,000. This is a decrease of $126,000 from the other income of
$495,000 reported for the quarter ended September 30, 2000 and a decrease of
$1.4 million from the other income of $1.7 million reported for the three
quarters ended September 30, 2000.
For the quarters ended September 30, 2001 and 2000, other income consisted
primarily of interest income of $438,000 and $602,000. The decrease in interest
income for the comparative quarters ending September 30 of approximately
$164,000 is due to our lower average investment balance and lower rates of
return.
For the three quarters ended September 30, 2001, other income consisted
primarily of $867,000 of interest income, that was partially offset by $117,000
of interest expense, $227,000 of losses from equity investments, and $240,000 of
losses on investments. The $240,000 loss on investments recorded in the prior
quarter was due to the decline in market value of a bond from a California
utility that was deemed to be other than temporary. This bond was sold because
it no longer met the criteria of our investment policy. For the three quarters
ended September 30, 2000, other income consisted of $2.0 million of interest
income, which was partially offset by $115,000 of interest expense and $180,000
of losses from equity investments. The decrease in interest income for the
comparative three quarters ending September 30 of approximately $1.4 million was
due to our lower average investment balance and lower rates of return.
12
Liquidity and Capital Resources
In the first three quarters of 2001, our cash and cash equivalents balance
increased by $23.8 million. This increase was the result of $23.8 million
provided by financing activities and $14.7 million provided by investing
activities, which was partially offset by $14.7 million used in operating
activities. Cash provided by financing activities represented the net proceeds
from the sale of common stock of $23.2 million. Cash provided by investing
activities represented the net of proceeds from investment sales and maturities
of $18.6 million, which was offset by cash used to purchase investments of $2.6
million and equipment of $1.3 million. Our operating cash uses consisted of our
net loss of $14.0 million and cash changes in accounts receivable of $4.4
million and accounts payable of $3.9 million, and offset by decreases in
inventory of $4.4 million, increases in deferred liabilities of $1.1 million,
and depreciation and amortization expense of $1.7 million.
During the year ended December 31, 2000 and the three quarters ended September
30, 2001, our primary source of operating capital has been our sales revenue and
cash obtained from public and private capital financing. On August 8, 2001 we
sold 1,666,667 shares of common stock at a price of $15.00 per share to selected
institutional and other accredited investors. Gross proceeds from this private
placement were $25.0 million and net proceeds were approximately $23.1 million.
To support increasing customer demand, we expect our cash requirements to grow
as we increase production, expand our direct selling efforts and targeted
marketing plans, enhance our educational offerings and fund our working capital
needs. We expect increasing sales revenue to mitigate these increased cash
needs. We believe that our existing cash will be sufficient to fund our
operations. However, it is difficult to accurately predict the amount of cash
that we may require. Actual cash needs will depend in part upon factors beyond
our control, such as lower than anticipated revenues, technical obstacles,
market acceptance of our products, competition, disruption in manufacturing or
the supply of raw materials, economic circumstances and cost overruns. If
additional capital is required, we may not be able to obtain adequate financing
on a timely basis, on terms acceptable to us, or at all.
Important Factors That May Affect Our Business, Our Results of Operations and
Our Stock Price
We have a limited history as a stand-alone company.
We commenced operations as a stand-alone company in April 1998. Prior to that,
we operated as a business unit of ATL. We shipped our first products in
September of 1999. Accordingly, we have a limited operating and sales history.
Additionally, we only recently brought manufacturing of our products in-house.
As a result, our prospects for success are difficult to determine. When
evaluating whether to invest in our common stock, you should consider our
business and prospects in light of the risks and uncertainties encountered by
new technology and manufacturing companies.
There are many reasons why we may be unsuccessful in implementing our strategy,
including:
. any inability to manufacture our products with the quality and
in the quantity necessary to achieve profitability;
. our dependence on the market acceptance of a new platform for
ultrasound imaging procedures;
. our inability to achieve market acceptance of our products for
any other reason;
. our reliance on third-party suppliers of material components;
. any failure in our newly developed and implemented in-house
manufacturing operations;
. our need to maintain and expand sales channels;
. 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.
13
We have a history of losses, we expect future losses and we may never be
profitable.
We incurred net losses in each quarter since we started operations and have a
limited history of product sales. As of September 30, 2001, we had an
accumulated deficit of approximately $75.5 million, including approximately
$10.6 million that was accumulated prior to our commencing operations as a
separate company in April 1998. We expect to incur substantial additional
expenses in the future as we continue to conduct research and development
efforts on newer generation products and increase sales and marketing efforts.
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 is unknown.
Our products represent a new platform for ultrasound imaging procedures and we
have sold our products in limited quantities. The market for hand-carried,
high-performance ultrasound devices is new and largely undeveloped. 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.
Current users of ultrasound may resist change to established industry practices
and discourage widespread new users and uses.
Currently, patients requiring an ultrasound examination are generally referred
to a centralized imaging location. Radiologists and other specialized providers
of ultrasound at these locations may have an incentive to discourage market
acceptance of 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-party payers for tests performed using our products. In
addition, while we 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 imaging methods.
Customer training and education may not be available, sufficient or accepted by
new users of ultrasound.
Use of our products will require training for physicians and other health care
providers who currently do not use ultrasound-imaging instruments. The time
required to complete such training might be substantial and could result in a
delay or decrease in market acceptance. We anticipate new users of ultrasound to
provide us with future revenue streams. If new users are not able or willing to
be trained due to time constraints or availability of courses, our ability to
enter new markets will be adversely impacted.
We only recently assumed some of the manufacture and assembly of our products.
In the fourth quarter of 2000, we transitioned the manufacturing operations from
ATL to our own facility and under the control of our employees. In order to make
this transition, we built a series of manufacturing lines and developed our own
manufacturing processes and procedures. The production of our products may be
interrupted, resulting in harm to our business, for any number of reasons,
including line shutdowns, product procurement issues, procedural issues, rework,
quality control issues or yield issues. Additionally, we may be unable to comply
with regulations applicable to manufacturers of ultrasound devices or to
manufacture our products at a cost or in quantities necessary to achieve or
maintain profitability. Any of these risks may prevent us from meeting
production schedules and quality requirements.
14
If our 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 vendors to supply highly specialized parts, such as custom-designed
integrated circuits, cable assemblies and transducer components. These vendors
may experience difficulty in manufacturing these parts or in meeting our high
quality standards. In addition, these parts may have long order lead-times,
which restrict our ability to respond quickly to changing market conditions. If
we are required to switch vendors, the manufacture and delivery of our products
could be interrupted for an extended period. We 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 that 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, cables 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 had little impact. These suppliers may
be unable to meet our future demands or may 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.
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
high-quality products and deliver them in a timely manner. We have a limited
history of product sales. If these early product shipments or new product
releases fail to perform as expected 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, assemble and service our
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;
. effectively and efficiently manufacture and service our
products;
. manage our order fulfillment process;
. manage our inventory;
. train, manage and motivate a growing employee base;
. mitigate our receivables risk; 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.
15
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;
. global economic conditions;
. changes in the component costs;
. success of our direct sales and distribution channels;
. successful development and commercialization of new and
enhanced products;
. timing of new product introductions and product enhancements by
us or our competitors; and
. timing and magnitude of our expenditures.
In addition, we manufacture our products and determine product mix based on
forecasts of sales in future periods. Our forecast in any particular period may
prove inaccurate, which could cause fluctuations in our manufacturing costs and
our operating results. Our future operating results could fall below the
expectations of securities analysts or investors and reduce the market price of
our stock. We believe that there may be some fluctuations caused by year-end
budgetary pressures on our customers, customer buying patterns and the efforts
of our direct 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.
The existing market for ultrasound imaging products is well established and
intensely competitive. In addition, we are seeking to develop new markets for
our hand-carried ultrasound imaging products. In response, we expect competition
to increase as potential and existing competitors begin to enter these new
markets or modify their existing products to compete directly with ours. Our
primary competitors have:
. better name recognition;
. significantly greater financial resources; and
. existing relationships with some of our potential customers.
Our competitors may be able to use their existing relationships to discourage
customers from purchasing our products. In addition, our competitors may be able
to devote greater resources to the development, promotion and sale of new or
existing products, thereby allowing them to respond more quickly to new or
emerging technologies and changes in customer requirements.
We are changing the way we sell our products internationally.
We have historically relied on an indirect sales and distribution network
internationally to sell our products. In the first quarter of 2001, we
established a subsidiary in the United Kingdom, SonoSite, Ltd., which sells
directly in the United Kingdom. We expect to expand our direct distribution
efforts in other key European markets, including Germany, France and Spain in
the fourth quarter. Our future revenue growth will depend in part on our success
in maintaining and expanding our indirect sales and distribution channels in our
current overseas markets while simultaneously managing the transition to direct
sales in certain European markets. This transition may include the revision of
exclusivity provisions within existing distributor agreements in certain
European markets. We currently depend on these foreign distributors to help
promote market acceptance and demand for our products in countries where we do
not have a direct sales force. Many of our foreign distributors are in the
business of distributing other, sometimes competing, medical products. As a
result, our products may not receive the resources
16
and support required within these countries to meet our sales objectives. Our
success is tied closely to the success of these distributors and their ability
to market and sell our products. Inherent in these international markets are
certain risks, including:
. the costs of localizing products for foreign markets;
. 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 and economic strength of the United
States dollar relative to other currencies; and
. delays or failures in obtaining necessary regulatory approvals.
If the distribution channels are negatively impacted by local economies,
unforeseen management issues, political issues, legal issues, or any number of
adverse circumstances, our distributors' willingness to promote and sell our
products may decrease.
As mentioned, we began direct selling of our products in the United Kingdom in
the first quarter of 2001, and we expect to expand our direct selling efforts to
targeted European markets, including Germany, France and Spain, in the fourth
quarter. This expansion requires extensive training and management as well as
increasing administrative activities. We may be unable to train qualified sales
personnel to meet our objectives and they nevertheless may be ultimately
unsuccessful. In addition, costs associated with maintaining and growing a sales
force are difficult to control and manage and consequently may adversely affect
our results. Finally, our direct sales force will face the international market
risks identified above. If we are unable to manage the transition from indirect
to direct distribution in those European markets, our business will suffer.
Our domestic direct selling force is new and efforts to maintain and expand a
qualified sales force at a reasonable cost may not be successful.
We began direct sales of our products in the United States in February 2000 with
a contract sales force comprised of sonographers with little direct sales
experience. We nearly doubled the size of our direct sales force in the United
States by supplementing our sonographers with trained professional sales people
and began direct selling in the United Kingdom in the first quarter of 2001.
This expansion requires extensive training and management as well as increasing
administrative activities. We may be unable to train qualified sales personnel
to meet our objectives. Further, they may be ultimately unsuccessful. In
addition, costs associated with maintaining and growing a sales force are
difficult to control and manage and consequently may adversely affect our
results.
We have limited marketing experience.
As we market our products as a new platform within the established ultrasound
market and promote our products for new users, marketing will be critical to
generate awareness and consequently product sales. To be successful, our
marketing efforts need to identify the potential markets and also identify the
methods to reach and develop these markets. We must also be successful in
generating sales leads and processing these leads effectively to generate
product sales. We may be unsuccessful in creating brand awareness sufficient to
positively impact product sales. In addition, we may be unsuccessful in our
marketing efforts throughout the world. Our marketing efforts also must be
successful in removing barriers in the marketplace, including the efforts of our
competitors to discredit us, the availability and ease of educating users in the
use of our product and the resistance that may be shown by existing ultrasound
users.
If we do not retain key employees and attract additional highly skilled
employees, we will be unsuccessful.
Our future performance will depend largely on the efforts and abilities of our
key technical, marketing, selling and managerial personnel and our ability to
retain them. In particular, we may be unable to attract qualified, highly
skilled personnel into key positions. Our success depends on our ability to
attract and retain additional key personnel in the future. While we do not have
any employment agreements with any of our employees, we do have change in
control agreements with certain management personnel, which prevent them from
working for a competitor within a
17
designated period of time after leaving us. Nevertheless, the loss of any of our
key employees could harm our business, particularly the loss of any of our key
engineering, management or sales personnel. 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 seek to protect our proprietary technology through a
combination of patent, copyright, trade secret and trademark laws. 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 that 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. In addition, the cost of policing or defending our patent, copyright or
trademarks may be prohibitive.
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. Any claim, with or without
merit, that our technology or products infringe upon the technology covered by
these patents or patent applications 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 a 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 performance advantages over competing
medical imaging equipment, such as computed tomography and magnetic resonance
imaging (MRI), 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.
18
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. 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 us. ATL agreed to cover 85% of any such liability, unless the tax is
imposed due to our actions solely or by ATL solely; in which case, we have
agreed with ATL that the party who is solely at fault shall bear all of the tax
liability. We cannot guarantee that ATL would indemnify us or agree that it
caused the liability to be imposed. If we were required to pay all or a portion
of any taxes related to the 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 Food and Drug Administration and comparable international agencies. Our
third-party manufacturers and we are or will be required to:
. undergo rigorous inspections by domestic and international
agencies;
. obtain 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
components required to manufacture our products.
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,
malpractice or warranty claims, including those based on claims that the failure
of one of our products, or our failure to properly train the users of our
products, resulted in a misdiagnosis. The medical instrument industry in general
has been subject to significant medical malpractice and product liability
litigation. We may incur significant liability in the event of such litigation.
Although we maintain product liability and incidental medical malpractice
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 generally 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 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 harm 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. To date, our capital requirements have been met primarily by
the sale of equity, sales revenue and contributions by ATL in connection with
our spin-off. ATL's funding obligations have been met. 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
be unavailable 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 sales and marketing efforts.
19
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 or global economy;
and
. significant sales of our common stock by one or more of our
principal shareholders.
There may be risks associated with the concentration of ownership of our common
stock.
As of November 8, 2001, the State of Wisconsin Investment Board, or SWIB, owned
approximately 17% of the outstanding shares of our common stock. As a result,
SWIB or any other concentrated owner may be able to exert significant influence
over all matters requiring shareholder approval, including the election of
directors, attraction and retention of employees, and approval of significant
corporate transactions that could include certain matters relating to future
financing arrangements or unsolicited tender offers.
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 us, even if doing so would be beneficial to our shareholders. Additionally,
our acquisition 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 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, 2001, our portfolio consisted of $36.8 million of interest
bearing securities with maturities of less than one year. Our intent is to hold
these securities until maturity, but we 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 2001
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 in Hong Kong and a subsidiary in the United Kingdom that maintain
certain accounts in a foreign currency. If the United States dollar were to
uniformly increase in strength by 10% in 2001 relative to the currency of our
affiliate, we believe the impact on our financial results would not be
significant.
20
PART II: OTHER INFORMATION
Item 1. Legal Proceedings
On July 24, 2001, a complaint was filed against us in U.S. District Court,
Southern District of Texas, Houston Division, by Neutrino Development
Corporation (Neutrino), alleging infringement of U.S. Patent 6,221,021 by
SonoSite as a result of our use, sale and manufacture of the SonoSite 180,
SonoSite 180 PLUS, SonoHeart and SonoHeart PLUS portable ultrasound imaging
devices. The complaint asserts claims for preliminary and permanent injunctive
relief enjoining all alleged acts of infringement, compensatory and enhanced
damages, attorneys' fees and costs, and pre- and post-judgment interest. On
August 14, 2001, we filed an answer asserting defenses of both non-infringement
and patent invalidity, and including a counterclaim seeking a declaratory
judgment of non-infringement and invalidity regarding the patent. On October 4,
2001, the court denied a request by Neutrino for preliminary injunctive relief
to prevent us from manufacturing and selling our products for the duration of
the litigation. We believe that we have good and sufficient defenses to the
claims of patent infringement asserted against us by Neutrino and we are
vigorously defending ourselves in this matter.
Item 2. Changes in Securities and Use of Proceeds
(c) Recent Sales of Unregistered Securities
On August 8, 2001, we sold 1,666,667 shares of common stock at a price of $15.00
per share to selected institutional and other accredited investors. Gross
proceeds from this private placement were $25.0 million. In connection with this
sale, we incurred total expenses of approximately $1.9 million, including a
sales commission of $1.75 million to our placement agent for this transaction,
UBS Warburg LLC. This transaction was exempt from Securities Act registration
under Section 4(2) of the Securities Act and Regulation D promulgated under the
Securities Act, on the basis that the transaction did not involve a public
offering and each purchaser was an accredited or sophisticated investor.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
3.1. Amended and Restated Bylaws of SonoSite, Inc.
4.1 Rights Agreement between First Chicago Trust Company and SonoSite,
Inc., dated April 6, 1998 (Incorporated herein by reference to the
designated exhibit included in the Company's Registration Statement on
Form S-1 (Registration No. 333-71457).
4.2 Amendment to Rights Agreement between First Chicago Trust Company and
SonoSite, Inc., dated August 8, 2001.
10.1 SonoSite, Inc. 1998 Option, Stock Appreciation Right, Restricted
Stock, Stock Grant and Performance Unit Plan, as amended and
restated on September 6, 2001.
10.2 SonoSite, Inc. 1998 Nonofficer Employee Stock Option Plan, as amended
and restated on September 6, 2001.
10.3 SonoSite, Inc. Nonemployee Director Stock Option Plan, as amended and
restated on September 6, 2001.
(b) Reports on Form 8-K
We filed a current report on Form 8-K on August 9, 2001 to announce the
completion on August 8, 2001 of our private placement of $25 million of our
common stock.
21
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 13, 2001 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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INDEX TO EXHIBITS
3.1. Amended and Restated Bylaws of SonoSite, Inc.
4.1 Rights Agreement between First Chicago Trust Company and SonoSite, Inc.,
dated April 6, 1998 (Incorporated herein by reference to the designated
exhibit included in the Company's Registration Statement on Form S-1
(Registration No. 333-71457).
4.2 Amendment to Rights Agreement between First Chicago Trust Company and
SonoSite, Inc., dated August 8, 2001.
10.1 SonoSite, Inc. 1998 Option, Stock Appreciation Right, Restricted Stock,
Stock Grant and Performance Unit Plan, as amended and restated on September
6, 2001.
10.2 SonoSite, Inc. 1998 Nonofficer Employee Stock Option Plan, as amended and
restated on September 6, 2001.
10.3 SonoSite, Inc. Nonemployee Director Stock Option Plan, as amended and
restated on September 6, 2001.
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