SONOSITE INC - 10-Q Quarterly Report

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, 2003

	OR

o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

	For the transition period from to _____________ to ____________

Commission file number 0-23791

SONOSITE, INC.
(Exact name of registrant as specified in its charter)


Washington		91-1405022
(State or Other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification Number)

21919 30th Drive SE, Bothell, WA		98021-3904
(Address of Principal Executive Offices)		(Zip Code)

(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 o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes x No o

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		14,225,136
(Class)		(Outstanding as of May 12, 2003)

SonoSite, Inc.

Quarterly Report on Form 10-Q
For the Three Months Ended March 31, 2003

Table of Contents


		Page No.

PART I	FINANCIAL INFORMATION

Item 1.	Financial Statements (unaudited)

	Condensed Consolidated Balance Sheets—March 31, 2003 and December 31, 2002	3

	Condensed Consolidated Statements of Operations—Three Months Ended March 31, 2003 and 2002	4

	Condensed Consolidated Statements of Cash Flows—Three Months Ended March 31, 2003 and 2002	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	25

Item 4.	Controls and Procedures	25

PART II	OTHER INFORMATION

Item 1.	Legal Proceedings	26

Item 6.	Exhibits and Reports on Form 8-K	26

SIGNATURE		27

PART I: FINANCIAL INFORMATION

Item 1. Financial Statements

SonoSite, Inc.

Condensed Consolidated Balance Sheets
(unaudited)


			March 31, 2003			December 31, 2002

			(In thousands, except share data)
Assets
Current assets:
	Cash and cash equivalents		$	25,636		$	26,381
	Short-term investment securities			23,170			10,019
	Accounts receivable, less allowance for doubtful accounts of $866 and $832			16,731			20,101
	Inventories			13,389			11,787
	Prepaid expenses and other current assets			1,006			1,339

Total current assets				79,932			69,627
Property and equipment, net				5,727			6,092
Investment securities				16,110			29,421
Other assets				690			737

Total assets			$	102,459		$	105,877

Liabilities and Shareholders’ Equity
Current liabilities:
	Accounts payable		$	2,803		$	4,310
	Accrued expenses			5,384			5,404
	Current portion of long-term obligations			141			136
	Deferred revenue			3,317			3,072

Total current liabilities				11,645			12,922
Deferred rent				270			253
Long-term obligations, less current portion				51			88

Total liabilities				11,966			13,263

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, 2003—14,216,512
		As of December 31, 2002—14,195,280		142			142
	Additional paid-in-capital			177,151			177,007
	Accumulated deficit			(88,196	)		(85,632	)
	Accumulated other comprehensive income			1,396			1,097

Total shareholders’ equity				90,493			92,614

Total liabilities and shareholders’ equity			$	102,459		$	105,877

See accompanying notes to condensed consolidated financial statements.

SonoSite, Inc.

Condensed Consolidated Statements of Operations
(unaudited)


		Three Months Ended March 31,

		2003			2002

			(In thousands, except loss per share)
Revenue		$	17,158		$	12,843
Cost of revenue			6,367			5,395

Gross margin			10,791			7,448

Operating expenses:
	Research and development		2,833			3,248
	Sales and marketing		8,890			6,331
	General and administrative		2,005			1,525

Total operating expenses			13,728			11,104

Other income (expense):
	Interest income		270			122
	Interest expense		(7	)		(8	)
	Other income (expense)		110			(129	)

Total other income (expense)			373			(15	)

Net loss		$	(2,564	)	$	(3,671	)

Basic and diluted net loss per share		$	(0.18	)	$	(0.32	)

Weighted average common and potential common shares used in computing net loss per share			14,206			11,372

See accompanying notes to condensed consolidated financial statements.

SonoSite, Inc.

Condensed Consolidated Statements of Cash Flows
(unaudited)


			Three Months Ended March 31,

			2003			2002

				(In thousands)
Operating activities:
Net loss			$	(2,564	)	$	(3,671	)
	Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
		Depreciation and amortization		601			576
		Equity in losses of affiliates		—			134
		Net gain on investments		(17	)		—
		Amortization of premiums on investment securities		176			—
	Changes in operating assets and liabilities:
		Accounts receivable		3,438			2,475
		Receivable from affiliate		—			34
		Inventories		(1,563	)		(184	)
		Prepaid expenses and other assets		380			109
		Accounts payable		(1,511	)		1,246
		Accrued expenses		(27	)		(156	)
		Deferred liabilities		266			285

Net cash provided by (used in) operating activities				(821	)		848

Investing activities:
	Purchase of investments			(6,115	)		—
	Proceeds from sales/maturities of investments			6,095			—
	Purchase of property and equipment			(236	)		(326	)

Net cash used in investing activities				(256	)		(326	)

Financing activities:
	Exercise of stock options			144			82
	Repayment of long-term obligations			(32	)		(31	)
	Cash used for offering costs			—			(15	)

Net cash provided by financing activities				112			36

Effect of exchange rate changes on cash and cash equivalents				220			(10	)

Net change in cash and cash equivalents				(745	)		548
Cash and cash equivalents at beginning of period				26,381			33,116

Cash and cash equivalents at end of period			$	25,636		$	33,664

Supplemental disclosure of cash flow information:
	Cash paid for interest		$	7		$	8

Supplemental disclosure of non-cash investing and financing activities:
	Unrealized loss on investments		$	(4	)	$	—

	Offering costs included in accounts payable and accrued expenses		$	—		$	479

See accompanying notes to condensed consolidated financial statements.

SonoSite, Inc.

Notes to Condensed Consolidated Financial Statements
(unaudited)

Interim Financial Information

Basis of Presentation

The information contained herein has been prepared in accordance with instructions for Form 10-Q and Article 10 of Regulation S-X. The information furnished reflects, in the opinion of SonoSite, Inc. management, all adjustments necessary (which are of a normal and recurring nature) for a fair presentation of the results for the interim periods presented. The results of operations for the three months ended March 31, 2003 are not necessarily indicative of our expected results for the entire year ending December 31, 2003 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, 2002, included in our Annual Report on Form 10-K. Certain amounts reported in previous periods have been reclassified to conform to current presentation.

Stock-based Compensation

At March 31, 2003, we had five stock-based employee compensation plans. We account for those plans under the intrinsic value method in accordance with the provisions of Accounting Principles Board (APB) Opinion No. 25, “Accounting for Stock Issued to Employees.” Accordingly, compensation cost related to stock option grants to employees has been recognized only to the extent that the fair market value of the stock exceeds the exercise price of the stock option at the date of the grant. The following table illustrates the effect on net loss and net loss per share if we had applied the fair value recognition provisions of SFAS No. 123, “Accounting for Stock-Based Compensation,” to stock-based employee compensation (in thousands, except per share data):


		Three Months Ended March 31,

		2003			2002

Net loss, as reported		$	(2,564	)	$	(3,671	)
Less: Stock-based employee compensation expense determined under fair value based method			(1,400	)		(1,968	)

Pro forma net loss		$	(3,964	)	$	(5,639	)

Basic and diluted net loss per share:
	As reported	$	(0.18	)	$	(0.32	)

	Pro forma	$	(0.28	)	$	(0.50	)

Financial Instruments

Cash Equivalents

Cash equivalents consist of money market accounts with major U.S. banks 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 U.S. government or corporate debt. While our intent is to hold our securities until maturity, we classify all securities as available-for-sale, as the sale of such securities may be required prior to maturity to implement management strategies. These securities are carried at fair value, with the unrealized gains and losses reported as a component of other comprehensive income (loss) until realized. Realized gains and losses from the sale of available-for-sale securities, if any, 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.

Accounts Receivable

In the ordinary course of business, we grant credit to a broad customer base. Of the accounts receivable balance at March 31, 2003, 49% and 51% were receivable from international and domestic parties, prior to any allowance for doubtful accounts. The same percentages as of December 31, 2002 were 51% and 49% prior to any allowance for doubtful accounts.

For the three months ended March 31, 2003, revenue was 57% domestic and 43% international, compared to 51% domestic and 49% international for the three months ended March 31, 2002.

The following table presents individual customers whose outstanding receivable balance as a percentage of total trade receivables and/or revenue as a percentage of total revenue exceeded 10%:


Accounts Receivable:
	March 31, 2003		December 31, 2002

Japanese distributor			12	%
U.S. direct customer	12	%	12	%

Totals	12	%	24	%


Revenue:
	Three Months Ended March 31,
	2003		2002

Japanese distributor			11	%

We maintain allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. When we determine that amounts owed from customers are uncollectible, such amounts are charged off against the allowances for doubtful accounts. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required.

Fair value of financial instruments

The carrying value of our financial instruments, including cash and cash equivalents, accounts receivable, accounts payable, certain long-term other assets and debt, approximates fair value. Cash and cash equivalents, accounts receivable and ac